Cohu, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2016, ended September 24, 2016. Each period comprised 13 and 39 weeks, respectively. Financial statements are unaudited. Cohu supplies semiconductor test and inspection equipment, modules, contactors and thermal subsystems. The company reports one segment. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $69.3 million | $67.5 million | $211.4 million | $206.2 million |
| Gross margin | 33.5% | 33.8% | 32.8% | 33.3% |
| Operating income | $1.0 million | $2.3 million | $2.6 million | $5.7 million |
| Continuing-operations income | $0.2 million | $1.3 million | $1.0 million | $3.5 million |
| Net income (loss) | $0.3 million | $1.1 million | $1.0 million | $(1.7) million |
| Diluted EPS | $0.01 | $0.04 | $0.04 | $(0.06) |
- Q3 sales rose 2.6% year over year; nine-month sales rose 2.5%. Operating income declined in both comparisons, reflecting higher SG&A and modestly lower gross margin.
- Q3 SG&A was $13.6 million versus $11.9 million; nine-month SG&A was $42.0 million versus $38.0 million. Nine-month R&D was $24.7 million versus $24.9 million.
- The nine-month 2016 gross margin benefited from $3.0 million of expired deferred sales credits with no associated cost, but unfavorable product mix more than offset that benefit. Inventory charges were approximately $1.9 million in each nine-month period.
- Cash and cash equivalents were $109.2 million at quarter-end, versus $115.4 million at December 26, 2015; short-term investments were $19.5 million, versus $1.7 million. Cash, cash equivalents and short-term investments together totaled $128.7 million, up $11.6 million from year-end. Working capital was $177.3 million.
- Nine-month operating cash flow was $18.5 million, compared with $24.6 million in 2015. Investing activities used $19.7 million, principally reflecting purchases of short-term investments; financing activities used $6.1 million, including $4.7 million of dividends. Capital expenditures were $2.8 million.
- No borrowings were outstanding under the subsidiary’s available CHF 2.5 million credit lines; no standby letters of credit were outstanding. The filing reports no material change in contractual obligations. Stockholders’ equity was $241.0 million.
Material changes and unusual items
- Semiconductor equipment orders peaked in June 2016 and declined through Q3; Cohu said its sequential Q3 results were down, while utilization at customers’ test floors was essentially flat.
- Q3 SG&A included $0.3 million of foreign-exchange losses, compared with $1.5 million of gains in Q3 2015. For the first nine months, foreign-exchange losses were $1.0 million versus gains of $1.1 million in 2015. Currency movements also increased accumulated other comprehensive income by $2.7 million year to date.
- Nine-month R&D benefited from $1.6 million of reimbursements under a customer cost-sharing arrangement. Nine-month SG&A included approximately $1.2 million for consulting, training and preparation for a global ERP system.
- Prior-period results include the discontinued Broadcast Microwave Services business, sold in June 2015. Nine-month 2015 included a $2.0 million operating loss and a $3.2 million loss on sale; 2016 discontinued operations included a $0.1 million Q3 gain from a favorable adjustment to contingent consideration. The remaining contingent receivable was valued at $0.5 million.
- At September 24, 2016, deferred revenue was approximately $6.4 million and deferred profit was $5.7 million, compared with $5.0 million and $3.7 million, respectively, at fiscal year-end.
Outlook, risks and contingencies
- Management described the semiconductor equipment market as cyclical and volatile. It cited momentum in automotive and mobile markets and expressed optimism about longer-term industry prospects, while focusing on share growth in mobility, automotive and solid-state markets and expansion into test contacting and wafer-level package test.
- No quantified revenue or earnings guidance was provided. Management expected current working capital to be sufficient for operating requirements for at least the next 12 months. The Board approved a $0.06-per-share dividend payable January 2, 2017; future dividends remain subject to liquidity, capital availability and Board decisions.
- Key risks include semiconductor capital-spending cycles, limited market visibility, customer concentration, competitive pricing, new-product acceptance and development costs, inventory obsolescence, supplier and manufacturing-transition risks, international operations, and foreign-exchange exposure. Three customers represented 37.4% of Q3 sales; two customers represented 30.5% of nine-month sales.
- $65.9 million of cash and short-term investments was held by foreign subsidiaries. Repatriation may trigger U.S. taxes; Cohu said it intended to indefinitely reinvest the remaining foreign funds. A $17 million Singapore repatriation in 2016 did not result in incremental U.S. taxes.
- The continuing-operations tax provision was $1.8 million for the first nine months, on pretax income of $2.8 million; management said a reliable annual effective tax-rate estimate could not be made. The gross deferred tax asset was approximately $45.9 million, with a $42.9 million valuation allowance.
- The filing describes ordinary-course legal, tax and other claims but says management did not believe their resolution would materially adversely affect the company. Disclosure controls were assessed as effective. A new financial consolidation system implementation began during the quarter.
Important facts for investors to verify
- Whether the decline in operating income and margins persists, and how product mix and the semiconductor order cycle affect subsequent results.
- Customer concentration and the contribution of the $3.0 million deferred-sales-credit benefit to reported year-to-date sales and margin.
- Cash generation, the level and liquidity of investments, and potential tax consequences if foreign-held funds are repatriated.
- Progress and costs associated with new products, the manufacturing transition to Asia, and the global ERP implementation.
- Potential effects of deferred customer acceptance, inventory reserves, warranty obligations, foreign exchange, and the contingent consideration receivable.