Cohu, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter ended September 30, 2017; unaudited. The quarter contained 14 weeks, compared with 13 weeks in Q3 2016, and the nine-month periods each contained 39 weeks. Results are therefore not fully comparable on a weekly basis. Cohu supplies semiconductor test and inspection equipment and reported one operating segment.
Financial performance
| Metric | Q3 2017 | Q3 2016 | First 9 months 2017 | First 9 months 2016 |
|---|---|---|---|---|
| Net sales | $93.7 million | $69.3 million | $268.6 million | $211.4 million |
| Gross margin | 39.4% | 33.6% | 39.6% | 32.8% |
| Operating income | $10.4 million | $0.9 million | $30.1 million | $2.6 million |
| Net income | $8.8 million | $0.2 million | $25.9 million | $1.0 million |
| Diluted EPS | $0.30 | $0.01 | $0.91 | $0.03 |
| Operating cash flow | Not presented quarterly | $23.6 million | $18.5 million |
- Sales increased 35.2% year over year in Q3 and 27.1% for the first nine months. Management said sales were essentially flat sequentially in Q3.
- Management attributed stronger sales to improved semiconductor conditions and market-share gains in test handlers and contactors; demand was driven particularly by automotive, mobility and IoT testing.
- Gross-margin improvement reflected lower manufacturing costs after shifting volume-handler production to Asia, higher volume and fixed-cost leverage, and lower amortization. Kita inventory step-up amortization partly offset these benefits.
- Q3 effective tax rate was 17.3%, versus 86.9% in the prior-year quarter; nine-month rates were 14.0% and 65.8%, respectively. Tax rates were affected by valuation allowances, foreign income, state taxes and other items.
Liquidity, debt and balance sheet
- At September 30, cash and cash equivalents were $122.0 million and short-term investments were $16.3 million, totaling $138.3 million, up 8.0% from year-end 2016. Working capital was $202.4 million, up 14.7%.
- Reported borrowings totaled approximately $9.3 million: $3.1 million in short-term revolving facilities, $1.3 million in current term-loan installments and $4.9 million in long-term debt. Kita’s Japanese facilities account for these borrowings; term loans carry stated rates of 0.05%–0.45% and mature through 2034.
- Operating cash flow was $23.6 million. Working-capital uses included increases of $9.0 million in accounts receivable and $6.7 million in inventory, and a $3.6 million decrease in accounts payable.
- Capital expenditures were $4.7 million. Cash paid for Kita, net of cash received, was $11.7 million. The company paid $4.9 million in dividends and received $7.1 million net from stock issuance and option exercises.
- Management expected current working capital to meet operating requirements for at least the next 12 months. $77.6 million of cash and equivalents was held by foreign subsidiaries; repatriation could trigger U.S. taxes, and the company intended to reinvest these funds abroad.
Material changes and unusual items
- Cohu acquired Kita on January 4, 2017, for a preliminary total purchase price of $15.8 million, including contingent consideration. Kita contributed $5.3 million of Q3 sales and $14.4 million for the first nine months. The purchase-price allocation remained preliminary.
- Kita’s contingent-consideration liability was remeasured, resulting in a $0.7 million Q3 charge to SG&A; Cohu also recorded $1.4 million of inventory step-up amortization in the first nine months.
- Foreign-currency transaction losses were $0.2 million in Q3 and $2.7 million in the first nine months, versus $0.3 million and $1.0 million in the comparable periods. Currency translation increased equity by $10.0 million during the first nine months.
- The 2015 sale of discontinued BMS generated a $0.3 million loss in the first nine months, reflecting an adjustment to contingent consideration.
- Cash dividends declared were $0.06 per share for Q3. After quarter-end, the board approved another $0.06 quarterly dividend, payable January 2, 2018, subject to customary conditions.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management cited strong customer test-cell utilization and momentum in consumer electronics, automotive, mobile and industrial markets, while emphasizing the industry’s seasonality and volatility.
- Management identified semiconductor-equipment spending, customer demand, customer acceptance timing, product transitions, competition, inventory obsolescence, supplier and manufacturing execution, foreign exchange, customer concentration and acquisition integration as significant risks.
- Two customers accounted for 26.5% of Q3 sales; two accounted for 28.5% of nine-month sales. Deferred revenue was approximately $9.9 million and deferred profit $6.7 million at quarter-end.
- Cohu expected to adopt the new revenue-recognition standard in fiscal 2018 using the modified retrospective method. It anticipated generally point-in-time recognition but said customer-acceptance timing could materially affect revenue, deferred profit, cost of sales and operating income; the impact was not yet clear.
- The company reported no material legal-proceeding exposure expected to adversely affect its financial position or results. Disclosure controls were deemed effective; certain subsidiaries implemented finance, accounting and manufacturing software during the quarter.
Key investor verification points
- Assess the effect of the extra week in Q3 and the contribution of Kita when evaluating reported growth and margins.
- Track whether Q3 sales strength and management’s cited market momentum persist, given the industry’s cyclical and seasonal demand.
- Review customer concentration, receivables and inventory growth, and the potential for customer-acceptance deferrals or inventory charges.
- Verify the final Kita purchase-price allocation, contingent payments, integration costs and performance contribution.
- Monitor the revenue-standard transition, foreign-currency exposure, foreign cash repatriation considerations and dividend sustainability.