Cohu, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 24, 2017; interim financial statements are unaudited. The 2017 six-month period covered 25 weeks versus 26 weeks in 2016. Cohu supplies semiconductor test and inspection handlers, test contactors and related equipment. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions unless stated otherwise.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First six months 2017 | First six months 2016 |
|---|---|---|---|---|
| Net sales | $93.9 million | $76.4 million | $175.0 million | $142.1 million |
| Gross margin | 39.6% | 35.0% | 39.7% | 32.4% |
| Operating income | $11.6 million | $3.2 million | $19.7 million | $1.7 million |
| Operating margin | 12.3% | 4.2% | 11.3% | 1.2% |
| Income from continuing operations | $10.7 million | $2.5 million | $17.5 million | $0.8 million |
| Net income | $10.4 million | $2.5 million | $17.2 million | $0.8 million |
| Diluted EPS | $0.36 | $0.09 | $0.60 | $0.03 |
- Q2 sales increased 22.9% year over year and 16% sequentially; six-month sales rose 23.1%. Management attributed growth to stronger semiconductor conditions and share gains, particularly in equipment serving automotive, mobility and IoT demand.
- Management cited higher volume and manufacturing-cost improvements from shifting volume-handler production to Asia as key gross-margin drivers. Lower excess and obsolete inventory charges and lower amortization also helped; Kita purchase-accounting inventory step-up amortization partly offset the benefit.
- R&D was $9.5 million in Q2 and $19.2 million for six months. SG&A was $16.0 million and $30.5 million, respectively. Kita contributed $5.0 million of Q2 sales and $9.1 million since acquisition.
- Effective tax rates on continuing operations were 9.1% for Q2 and 12.2% for six months, versus 23.2% and 54.3% in 2016. The filing attributes tax-rate differences principally to deferred-tax-asset valuation allowances, foreign income, state taxes and unrecognized-tax-benefit interest.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was negative $2.8 million, compared with positive $6.0 million in 2016. Cohu cited working-capital investment, including a $23.1 million increase in receivables and $9.6 million increase in inventory, partly offset by a $7.0 million increase in accounts payable.
- Six-month investing cash flow was negative $3.8 million, including $11.7 million paid for Kita net of cash acquired and $2.4 million of capital expenditures. Financing cash flow was positive $0.4 million; Cohu received $4.4 million net from stock issuance and paid $3.2 million in dividends.
- At June 24, cash and cash equivalents were $92.5 million and short-term investments were $21.8 million, totaling $114.3 million, down from $128.0 million at year-end. Working capital was $190.8 million, up from $176.5 million.
- Total borrowings were approximately $9.8 million: $3.2 million in short-term revolving borrowings and $6.7 million in Kita term loans, including $1.4 million current. The term loans are secured by Kita’s facility and land and bear interest of 0.05%–1.43%; revolving facilities renew monthly. Cohu said existing working capital should support operations for at least 12 months.
- Cash from foreign subsidiaries was $64.0 million; Cohu stated it generally intends to reinvest these funds abroad and may incur U.S. taxes if funds are repatriated.
Material changes, outlook and risks
- Kita acquisition: Completed January 4, 2017, for stated consideration of $17.3 million, including $15.0 million cash and $2.3 million estimated contingent consideration. The preliminary allocation included $4.8 million goodwill and $2.0 million amortizable intangibles and was not final. Kita also brought revolving borrowings and term loans.
- Management outlook: Cohu said demand was expected to remain strong over the next quarter and expressed long-term optimism for automotive, mobile and industrial semiconductor markets. No quantified revenue or earnings guidance was provided. Management cautioned that semiconductor equipment demand is seasonal and volatile.
- Customer concentration: One customer represented 20.7% of Q2 sales and 20.4% of six-month sales. One customer exceeded 10% of sales in Q2; two did so in the comparable 2016 six-month period.
- Foreign exchange: Transaction losses were $1.2 million in Q2 and $2.5 million for six months, versus $0.3 million and $0.8 million in 2016. Translation movements increased equity by $7.4 million during the first half. Management disclosed sensitivity of approximately $17.8 million to a hypothetical 10% U.S. dollar movement against relevant currencies.
- Other unusual items: Discontinued operations recorded a $0.3 million loss related to remeasurement of contingent consideration from the 2015 sale of BMS. The filing reported no goodwill impairment indicator as of June 24, 2017. The board approved a $0.06-per-share quarterly dividend payable October 20, 2017, subject to customary conditions.
- Key risks: Semiconductor-industry cyclicality, customer concentration, competitive pricing, product acceptance and inventory obsolescence, supplier and overseas manufacturing exposure, acquisition integration and potential impairment, currency movements, and tax and repatriation uncertainty. Cohu said ordinary-course legal and tax matters were not expected to have a material adverse effect. Disclosure controls were reported effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether strong customer demand and the margin gains from volume and manufacturing changes continue, given industry cyclicality and the absence of quantified guidance.
- Whether receivables and inventory convert to cash as shipments normalize; operating cash flow was negative despite higher earnings.
- Final Kita purchase-price allocation, acquisition integration, contingent payments tied to 2017–2018 targets, and the acquired debt and operating contribution.
- Exposure to the largest customer, foreign-exchange losses, and access to the $64.0 million held overseas if U.S. liquidity needs change.
- Revenue deferrals and customer-acceptance terms: at quarter-end deferred revenue was approximately $8.2 million and deferred profit was $6.3 million.