COHU INC annual report, FY2013

Business context and reporting period

Cohu, Inc. filed this Form 10-K for the 52-week fiscal year ended December 28, 2013. It supplies semiconductor test-handling and related equipment, mobile microwave communication systems, and video cameras. Semiconductor equipment represented 86.7% of 2013 sales. Results include a full year of Ismeca, acquired December 31, 2012; 2012 results did not include Ismeca operations.

Financial results and key metrics

Fourth-quarter 2013 sales were $64.7 million, gross profit was $18.9 million, net loss was $6.5 million, and diluted loss per share was $0.26. Fourth-quarter 2012 sales were $50.7 million, gross profit $16.6 million, net loss $5.2 million, and diluted loss per share $0.21.

Year-end cash and cash equivalents were $51.7 million, with $1.2 million of short-term investments, versus $102.8 million and $7.4 million, respectively, a year earlier. Working capital was $125.8 million, down from $184.7 million. Total assets were $345.4 million and stockholders’ equity was $253.2 million. The balance sheet reports no borrowings; a Swiss credit line of CHF 0.5 million was undrawn. Operating lease commitments totaled $4.4 million. Operating cash flow fell, while investing cash use was $51.3 million, primarily reflecting the $53.5 million net cash purchase of Ismeca. Capital expenditures were $3.9 million.

Material changes versus comparable periods

• Sales rose 11.8% year over year, but the increase was principally associated with Ismeca and its $64.4 million of 2013 sales. Semiconductor equipment sales increased 19.5% to $214.5 million; microwave communications sales declined 36.5% to $17.1 million, while video camera sales increased 5.9% to $15.7 million.
• Gross margin declined 2.2 percentage points. Management cited inventory step-up costs and revenue-recognition effects from Ismeca, manufacturing transition and severance costs, product mix, and continuing inventory charges. Excess and obsolete inventory charges were $8.1 million in 2013 versus $8.9 million in 2012.
• Operating expenses increased: R&D rose to $48.6 million from $36.2 million, and SG&A to $57.7 million from $45.9 million. Ismeca contributed materially to both increases.
• Semiconductor equipment segment profit (loss) was a loss of $25.0 million versus a loss of $5.3 million; microwave communications lost $6.1 million versus $0.8 million; video cameras earned $1.3 million versus a $0.1 million loss.
• Backlog increased to $88.4 million from $44.7 million, including semiconductor equipment backlog of $75.4 million versus $30.6 million. The 2013 semiconductor figure includes Ismeca; orders may be canceled or rescheduled.
• Intel accounted for 16% of consolidated sales, down from 39% in 2012. No other customer reached 10% in 2013.

Outlook, commentary, risks and unusual items

Management described back-end semiconductor equipment demand as volatile: the anticipated second-half recovery did not materialize, customer handler utilization remained around 80%, and customers were cautious about adding capacity. It cited improvement late in the year in automotive and industrial power demand and expressed optimism about long-term demand from broader semiconductor applications and LED adoption. The filing provides no specific revenue or earnings guidance. Management expected working capital to meet operating requirements for at least 12 months and intended to continue quarterly dividends, subject to Board review and capital availability.

• Key risks include semiconductor-industry cyclicality, intense competition and pricing pressure, customer concentration, product-transition and inventory-obsolescence exposure, supplier constraints, and limited visibility into orders. Government budget uncertainty and sequestration delayed microwave communications orders.
• Management highlighted the ongoing ERP implementation as a potential source of operational, supply-chain, reporting, and liquidity disruption. Cohu also faces international, currency, tax, regulatory, cybersecurity, and natural-disaster risks.
• The company recorded a $36.1 million valuation allowance against deferred tax assets, citing cumulative U.S. losses; the allowance increased from $24.9 million. Gross unrecognized tax benefits were $10.5 million, with timing of any cash settlement not reliably estimable.
• Goodwill was $71.3 million and net purchased intangible assets were $45.3 million at year-end. The annual goodwill test found no impairment; a sustained decline in market capitalization could prompt reassessment.
• Essai’s patent declaratory-judgment case against Delta was dismissed, with judgment entered for Delta in February 2014. The company said it did not expect the matter to materially affect its financial position or results.
• Ernst & Young issued an unqualified financial-statement opinion and an unqualified opinion on internal control over financial reporting. Management also concluded disclosure controls were effective.

Important facts for investors to verify

1. How much of sales growth and backlog conversion is attributable to Ismeca, and what comparable, organic demand trends show.
2. Whether margins and segment losses improve as acquisition costs, product mix, competitive pricing, and inventory charges evolve.
3. Cash generation and liquidity after the acquisition-related reduction in cash, including the amount of foreign cash and any restrictions or tax costs on repatriation.
4. The progress and cost of ERP implementation, and any effects on internal controls or operations.
5. Future realizability of deferred tax assets, the valuation allowance, and the uncertain-tax-position liability.
6. Dividend sustainability: the filing reports $0.24 per share declared for 2013 but $4.5 million, or $0.18 per share, paid during 2013; verify the timing and reconciliation.