Cohu, Inc. — FY 2011 Form 10-K Summary
Business context and period. Cohu designs and sells semiconductor test-handling equipment, microwave communications systems, and video cameras. The fiscal year ended December 31, 2011 and comprised 53 weeks; fiscal 2010 comprised 52 weeks. Semiconductor equipment generated 84.4% of 2011 sales. The fourth quarter of 2011 comprised 14 weeks, compared with 13 weeks in fourth-quarter 2010.
Financial performance
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Net sales | $309.0 million | $322.7 million | Down 4.2% |
| Gross profit / margin | $100.1 million / 32.4% | $110.0 million / 34.1% | Margin down 1.7 percentage points |
| Operating income | $17.3 million | $29.7 million | Down 41.6% |
| Net income | $15.7 million | $24.6 million | Down 36.2% |
| Diluted earnings per share | $0.64 | $1.02 | Down 37.3% |
| Cash from operations | $12.2 million | $19.5 million | Down $7.3 million |
Semiconductor equipment sales were $260.6 million, down 4.7%; microwave communications sales were $30.0 million, down 5.5%; and video camera sales were $18.4 million, up 5.5%. Semiconductor segment profit fell to $20.0 million from $29.7 million; microwave segment profit fell to $1.5 million from $3.7 million; video camera segment profit increased to $0.8 million from $0.6 million.
Fourth-quarter sales were $66.6 million versus $96.9 million in fourth-quarter 2010; net income was $0.7 million versus $9.4 million. The differing quarter lengths should be considered in comparisons. The filing does not provide a clear like-for-like adjustment for the extra week.
Liquidity, cash flow, and debt
- Cash, cash equivalents, and short-term investments totaled $105.0 million at year-end, up from $98.2 million; working capital was $191.9 million, up from $168.7 million.
- Operating cash flow was $12.2 million. Capital expenditures were $1.4 million; dividends paid were $5.8 million ($0.24 per share).
- The balance sheet lists no borrowings or debt. Cohu had $0.6 million of standby letters of credit outstanding. Management said working capital should cover operating needs for at least 12 months.
- $32.1 million of cash was held by foreign subsidiaries; repatriation could trigger U.S. tax. Cohu intended to reinvest these funds abroad.
Changes, outlook, and key risks
- Management attributed weaker semiconductor results in the second half to excess industry inventory, manufacturing overcapacity, slowing demand, and lower equipment utilization. Semiconductor orders fell in the second half; management said industry orders appeared to have reached a possible bottom by year-end, but near-term conditions remained uncertain.
- Consolidated backlog declined to $51.9 million from $99.6 million, principally because of lower semiconductor handler orders. Orders may be cancelled or rescheduled, so backlog is not a reliable forecast of sales.
- Gross margin declined due to lower volume and unfavorable product mix. Inventory charges for excess and obsolete items were $5.8 million, versus $1.7 million in 2010. Management expected continued investment in research and development while controlling costs.
- Intel accounted for 36% of consolidated sales and Texas Instruments for 11%. Customer concentration, semiconductor cyclicality, intense competition and pricing pressure, inventory obsolescence, product execution, and reliance on limited-source suppliers and contract manufacturers are significant risks.
- Management could not conclude that U.S. deferred tax assets were more likely than not to be realized; the valuation allowance was $22.4 million. Goodwill impairment testing identified no impairment as of October 1, 2011, though a sustained decline in market capitalization could prompt future review.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions. The company reported no legal matter believed likely to materially affect financial position or results.
Investor verification points
- Track semiconductor orders, utilization, customer capital spending, and whether backlog stabilizes or converts to shipments.
- Assess inventory growth and reserve adequacy, including the $5.8 million 2011 inventory charge and elevated year-end inventory.
- Monitor margin recovery, segment profitability, and the effect of pricing competition and manufacturing transitions.
- Review Intel and other major-customer exposure, along with the timing and cancellation terms of backlog.
- Follow operating cash conversion, foreign-held cash and repatriation tax implications, and the realizability of deferred tax assets.
- Confirm the effect of the extra week when comparing fourth-quarter results year over year.