Cohu, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 24, 2011 (13 and 39 weeks, respectively); comparisons are to periods ended September 25, 2010. The interim financial statements are unaudited.
Business context and results
Cohu makes semiconductor test-handling equipment, mobile microwave communications equipment, and video cameras. Semiconductor equipment is its primary business and is exposed to cyclical semiconductor-industry capital spending. Management reported slowing industry orders and greater customer caution amid macroeconomic uncertainty.
- Q3 revenue: $71.8 million, down 16.6% year over year. Semiconductor equipment revenue fell 21.2% to $59.4 million; microwave communications rose 21.8% to $7.7 million; video cameras rose 7.6% to $4.7 million.
- First nine months revenue: $242.4 million, up 7.4%. Semiconductor equipment revenue increased 5.8% to $208.5 million; microwave communications increased 26.1% to $20.6 million; video cameras increased 6.9% to $13.3 million.
- Q3 profitability: Gross margin was 32.5%, versus 34.9%; operating income was $2.7 million, versus $8.8 million; net income was $3.4 million, versus $7.6 million. Diluted EPS was $0.14, versus $0.32. The quarter included a $0.6 million income tax benefit.
- First nine months profitability: Gross margin was 32.5%, versus 34.3%; operating income was $16.1 million, versus $19.2 million; net income was $15.0 million, versus $15.2 million. Diluted EPS was $0.61, versus $0.63.
- Cash flow: Nine-month operating cash flow was $6.5 million, down from $11.1 million. Investing activities provided $0.4 million, versus $14.9 million used in the prior period; financing activities used $2.7 million, mainly reflecting $4.3 million of dividends. Cash and cash equivalents increased $5.2 million to $51.1 million.
- Liquidity and balance sheet: Cash, cash equivalents, and short-term investments totaled $101.7 million; working capital was $189.5 million. Total assets were $371.1 million and stockholders’ equity was $292.6 million. The balance sheet presents no debt line item, and the filing does not disclose borrowings.
Material changes and management commentary
- Q3 semiconductor-equipment sales weakened as worldwide demand slowed; SEMI-reported equipment orders declined 30% from Q2 2011. Management described near-term conditions as uncertain, while remaining optimistic about longer-term industry prospects.
- Gross margin declined year over year in both comparison periods. Management attributed Q3 margin performance primarily to product mix; nine-month margin was affected by a discounted large handler order, partly offset by favorable pricing on another product.
- Nine-month excess and obsolete inventory charges were approximately $3.3 million, compared with $0.9 million in 2010. Inventory increased to $84.2 million from $63.2 million at year-end 2010, partly to support forecast shipments.
- Two semiconductor-equipment customers each represented more than 10% of Q3 sales and together accounted for 50% of consolidated revenue; for the first nine months, they accounted for 46%.
- Management said current working capital should meet operating requirements for at least the next 12 months and expected continued capital expenditures. No specific revenue or earnings guidance was provided. Future dividends remain subject to Board review.
Risks, contingencies, and unusual items
- Key exposures include semiconductor-industry cyclicality, customer concentration, customer forecasts and collections, inventory obsolescence, product warranty costs, and foreign-exchange and interest-rate movements.
- Goodwill was $59.5 million. Management reported no trigger requiring an interim impairment review as of September 24, 2011, but said a sustained decline in market capitalization below book value could prompt a review and potentially an impairment charge.
- Deferred tax assets were $27.3 million gross, with a $21.1 million valuation allowance. Effective tax rates were 8.9% for the nine months and (21.7)% for Q3; tax estimates may change in subsequent quarters.
- Standby letters of credit had a maximum potential payment of approximately $0.5 million; management did not consider payment probable. The company reported no legal matters expected to have a material adverse effect and no material changes to previously disclosed risk factors.
- Disclosure controls were deemed effective at the reasonable-assurance level; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether semiconductor-equipment orders and customer demand stabilized after the reported Q3 slowdown.
- Whether elevated inventory converts to shipments as forecast, without further reserve charges or margin pressure.
- Whether revenue and cash generation remain dependent on a small number of semiconductor customers.
- Whether working capital, tax-asset realizability, and goodwill assumptions remain supportable under changing business conditions.
- Whether dividends and planned capital spending remain consistent with operating cash flow and liquidity.