Cohu, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter ended June 25, 2016; comparative quarter ended June 27, 2015. Six-month results cover 26 weeks. Unaudited. Cohu supplies semiconductor test and inspection equipment and reports one aggregated semiconductor-equipment segment.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $76.4M | $75.2M | $142.1M | $138.7M |
| Gross margin | 34.9% | 34.2% | 32.5% | 33.1% |
| Operating income | $3.4M | $4.2M | $1.6M | $3.5M |
| Continuing-operations income | $2.7M | $3.9M | $0.8M | $2.2M |
| Net income (loss) | $2.6M | $(0.1)M | $0.7M | $(2.8)M |
| Diluted EPS | $0.10 | $0.00 | $0.03 | $(0.11) |
- Cash flow: First-half operating cash flow was $6.0M, compared with $3.8M a year earlier. Investing used $8.5M, mainly from net purchases of short-term investments; financing used $4.7M, including $3.1M of dividends and share repurchases for employee tax withholding. Cash declined $6.7M to $108.7M.
- Liquidity: Cash, cash equivalents and short-term investments totaled $117.9M at June 25, 2016, versus $117.0M at December 26, 2015. Working capital was $175.1M. The balance sheet reports no borrowings; available subsidiary credit lines of CHF 2.5M were undrawn, and no standby letters of credit were outstanding.
- Other balance-sheet items: Total assets were $347.5M and stockholders’ equity $239.8M. Deferred profit was $6.9M; deferred revenue was approximately $9.9M. Goodwill was $60.8M and net intangible assets $22.1M.
Changes versus prior comparable period
- Q2 sales rose 1.5%; first-half sales rose 2.5%. Management attributed improvement to better semiconductor-industry conditions. Q2 sales also benefited by $3.0M from deferred sales credits that expired, with no associated cost, supporting reported gross margin.
- Q2 gross margin improved 0.7 percentage points, while first-half margin declined 0.6 points. Management cited first-half product mix and higher excess-and-obsolete inventory charges, which were $1.4M versus $1.1M in the prior period.
- Operating income declined in both comparison periods as operating expenses increased. Q2 R&D rose to $8.3M and SG&A to $15.0M; first-half SG&A increased to $28.4M. Higher development costs and professional services, consulting, travel and selling costs contributed.
- First-half net income turned positive from a loss, largely because prior-year results included the BMS divestiture loss. BMS was sold in June 2015 and is reported as discontinued operations. The current-period discontinued-operations loss was $55,000, including a reduction in the estimated contingent sale consideration receivable to $0.4M.
Outlook, commentary and risks
- Management said second-quarter results were better than expected; industry back-end equipment orders increased through Q2 after weakening in February. Customer equipment utilization rose sequentially by a few points to 84%.
- Management cited momentum in automotive and mobile markets and expressed optimism about long-term industry prospects, while emphasizing semiconductor-equipment cyclicality and volatility. The company is pursuing share growth in mobility, automotive and solid-state markets and expansion into test contacting and wafer-level package testing. No numerical revenue or earnings guidance was provided.
- Management expects existing working capital to meet operating requirements for at least 12 months and anticipates continued capital expenditures. It planned to repatriate approximately $16M from Singapore in 2016 without incremental U.S. tax expected; $73.5M of cash and short-term investments was held by foreign subsidiaries, with the remainder intended to stay invested abroad.
- Key risks include volatile semiconductor capital spending, concentrated customers (one customer represented 21.7% of Q2 sales; two represented 32.0% of first-half sales), competition and pricing pressure, inventory obsolescence, product-development and customer-acceptance risks, supplier and manufacturing-transition risks, foreign exchange and tax exposure, and natural-disaster and geopolitical risks.
- The first-half effective tax rate on continuing operations was 56.7%, versus 37.7% a year earlier; management said small changes in projected income make an annual rate unreliable. A $42.5M valuation allowance covered most of the approximately $45.4M gross deferred tax asset.
Important facts for investors to verify
- Whether revenue growth and the 34.9% Q2 gross margin are sustainable without the $3.0M expired-credit benefit.
- Order trends, utilization and customer concentration, including the effect of semiconductor-industry cyclicality on demand and backlog.
- Inventory reserve adequacy, deferred revenue/profit, and the timing of customer acceptance and cash collection.
- Expected tax consequences of foreign cash repatriation, valuation allowances and changes in the earnings mix across jurisdictions.
- Progress and costs of new product programs and the manufacturing transition to Asia; the filing provides no quantified forward earnings guidance.