Cohu, Inc. — Q3 2015 Form 10-Q
Business context and period. The quarter ended September 26, 2015 (13 weeks); the nine-month period comprised 39 weeks. Cohu supplies semiconductor test and inspection handlers, MEMS test modules, contactors and thermal subsystems. Results are presented for continuing operations unless noted; the mobile microwave business and video camera business are reported as discontinued operations. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $67.5 | $91.6 | $206.2 | $226.0 |
| Gross margin | 33.8% | 36.0% | 33.3% | 34.2% |
| Operating income | $2.3 | $12.0 | $5.7 | $12.1 |
| Income from continuing operations | $1.3 | $10.0 | $3.5 | $9.5 |
| Net income (loss) | $1.1 | $7.5 | $(1.7) | $8.3 |
| Diluted EPS | $0.04 | $0.29 | $(0.06) | $0.32 |
- Q3 sales fell 26.3% year over year; nine-month sales declined 8.8%. Operating margin was 3.4% in Q3 versus 13.1% a year earlier, and 2.8% for the first nine months versus 5.4%.
- For the first nine months, operating cash flow was $24.6 million, compared with $5.0 million in 2014. Investing cash flow was $1.3 million and financing cash flow was $(4.4) million, including $4.6 million of dividends paid. Cash increased $18.4 million to $89.3 million.
- At September 26, cash, cash equivalents and short-term investments totaled $90.7 million; working capital was $143.5 million. The balance sheet lists no debt. No amounts were drawn on Ismeca’s available credit lines; standby letters of credit were approximately $0.2 million.
- Total assets were $332.5 million and stockholders’ equity was $236.3 million. Cash held by foreign subsidiaries was $64.5 million; management intended to reinvest it abroad and noted U.S. tax could arise on repatriation.
Changes, outlook and notable items
- Management attributed weaker sales to a cyclical slowdown in back-end semiconductor equipment demand after customers added substantial test capacity in 2014. Customer utilization was below levels that typically prompt capacity additions. Management viewed the slowdown as a pause, while noting caution tied partly to uncertainty in Europe and China.
- Lower volume reduced operating leverage and contributed to weaker gross margin; product mix also weighed on nine-month margin. Q3 inventory-obsolescence charges were $0.7 million versus $1.2 million; nine-month charges were $1.9 million versus $3.5 million.
- Management remained positive on long-term industry prospects and cited efforts to gain market share and expand into test contactors and wafer-level-package probing. It provided no specific financial guidance. It expected existing working capital to meet operating requirements for at least 12 months.
- The June 2015 sale of BMS generated $5.5 million cash plus up to $2.5 million contingent consideration, subject to working-capital adjustment. The nine-month discontinued-operations loss was $5.2 million, including a $3.2 million loss on sale; Q3 included a further $0.2 million disposal loss. The final working-capital adjustment remained unresolved.
- Cohu agreed to sell its Poway headquarters for $34.3 million; closing was expected in Q4 2015, subject to customary conditions and with no assurance of completion. If completed, Cohu expected to lease part of the facility for ten years.
- Following a September rebranding initiative, Rasco and Ismeca trade names were changed from indefinite-lived to finite-lived assets. Their estimated fair values exceeded carrying values by only 4% and 17%, respectively; management warned adverse valuation assumptions could result in future impairment. Future amortization impact is not quantified in the filing text.
- Foreign-currency translation reduced equity by $9.8 million in the first nine months. A hypothetical 10% move in the U.S. dollar against relevant currencies would produce an approximately $14 million translation adjustment, positive for dollar depreciation and negative for appreciation.
- Two customers accounted for 29% of Q3 sales; one customer accounted for 17% of nine-month sales. The effective tax rate on continuing-operations income was 41.3% for Q3 and 39.1% year to date; management said small changes in projected income made a reliable annual rate estimate unavailable.
Key investor verification points
- Whether semiconductor-equipment demand and customer utilization recovered after the reported market pause, and the resulting effect on orders, sales and margins.
- Whether the Poway property sale closed as expected, the actual proceeds and lease terms, and any resulting accounting effects.
- The final BMS working-capital adjustment and contingent consideration received, and whether further disposal losses or gains were recorded.
- Whether the finite-life trade-name change led to material amortization or impairment, given the limited valuation headroom disclosed.
- Customer concentration, inventory exposure, and the sustainability of operating cash flow, particularly as inventory rose by $5.3 million during the first nine months.
- The accessibility and tax implications of foreign-held cash, and any material changes to the company’s dividend plans or liquidity needs.