Cognex trimmed expenses. Its profit surge has a bigger driver.

Cognex made substantially more operating profit from a quarter in which sales landed inside its own forecast. Lower expenses helped, but most of the improvement came from earning more after the cost of making and delivering its products.

The machine-vision company reported third-quarter revenue of $313.4 million, up 13% from a year earlier. Operating profit rose to $100.8 million from $57.8 million, lifting operating margin to 32.2% from 20.9%.

Research by Ticker Byline shows that lower operating expenses account for about one-fifth of the $43.1 million increase in operating profit. Higher gross profit accounts for the other four-fifths. The improvement reaches beyond the cost-cutting program.

Our Cognex company profile tracks its financial results, forecasts and pending RealSense acquisition.

More left from each dollar of sales

Gross profit, the amount left after production and related costs, increased by $34.5 million. Gross margin rose to 70.8% from 67.6%. Cognex attributed the improvement to a more profitable sales mix, higher volume and price increases that took effect faster than expected. Together, those gains more than offset higher memory costs.

Operating expenses fell by $8.6 million, or about 7%, even as revenue grew. Cost controls reduced selling and administrative expenses, while research and development spending also declined. That combination allowed more of the higher gross profit to reach the operating-profit line.

Last year's quarter included about $13 million of one-time revenue from a medical-laboratory commercial partnership. Excluding that benefit, Cognex says revenue grew 19%. That measure removes the partnership effect; it still includes the effect of the Japan trading-business disposal.

The surprise was profitability

In August, Cognex forecast third-quarter revenue of $300 million to $320 million and adjusted earnings of $0.50 to $0.54 a share. Actual adjusted earnings of $0.53 were inside that range. Its adjusted EBITDA margin, however, reached 35.5%, above the earlier 35% ceiling. This measure of profitability adds back items including depreciation, amortization and specified adjustments.

Cognex now expects a full-year adjusted EBITDA margin of 31% to 32%, up from 29% to 31%. It raised its annual revenue range to $1.143 billion to $1.163 billion from $1.13 billion to $1.15 billion, and its adjusted earnings forecast to $1.68 to $1.72 a share from $1.64 to $1.68.

Reported net income rose to $84.8 million from $17.7 million. Last year's result included a $33.7 million discrete tax charge, making that increase look more dramatic than the underlying operating improvement. Adjusted net income rose to $89.8 million from $56.1 million.

Stronger cash generation before a large purchase

The profit improvement also brought more cash. Quarterly operating cash flow increased to $106.4 million from $87.5 million. After capital spending, free cash flow was $103.8 million, up from $86.0 million.

Cognex ended the quarter with about $846 million in cash and investments and no debt. It plans to use existing cash and investments for the $500 million RealSense purchase, agreed in September and still expected to close in Q4. RealSense supplies depth-sensing cameras used in robotics. Employee retention payments and share awards are separate from the purchase price.

For Q4, Cognex forecasts revenue of $270 million to $290 million and an adjusted EBITDA margin of 29% to 32%. The next test is how much of the third quarter's stronger profitability it can carry into a quarter with lower expected sales.