Cohu, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter ended September 28, 2013; the quarter comprised 13 weeks and the first nine months comprised 39 weeks. Financial statements are unaudited. Unless noted, amounts are in millions of dollars.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | First 9 months 2013 | First 9 months 2012 |
|---|---|---|---|---|
| Net sales | $60.0 | $57.7 | $182.6 | $170.4 |
| Gross margin | 24.2% | 31.4% | 28.2% | 30.1% |
| Operating loss | $(12.0) | $(2.6) | $(29.3) | $(8.4) |
| Net loss | $(10.8) | $(1.7) | $(27.0) | $(7.1) |
| Loss per share, diluted | $(0.43) | $(0.07) | $(1.09) | $(0.29) |
| Operating cash flow | Not provided quarterly | $1.9 | $10.8 |
- At September 28, cash and cash equivalents were $46.2 million and short-term investments were $6.6 million, totaling $52.9 million, down $57.4 million from December 29, 2012. Working capital was $128.7 million, down $56.0 million.
- Cash used in investing was $55.3 million, principally the $53.5 million net cash payment for Ismeca. Cash used in financing was $2.1 million, including $3.0 million of dividends paid during the nine-month period.
- Total current assets were $183.9 million and current liabilities $55.2 million. The filing reports no outstanding borrowings under Ismeca’s 0.5 million Swiss franc credit line. Cohu also had approximately $1.0 million of standby letters of credit.
- No debt balance is reported in the supplied balance sheet. Management expected existing working capital to meet operating requirements for at least the next 12 months.
Material changes and operating drivers
- Q3 sales increased 3.8%; nine-month sales increased 7.1%. Semiconductor equipment sales rose 11.5% in Q3 and 15.1% year to date, primarily reflecting the Ismeca acquisition, completed December 31, 2012.
- Microwave communications sales fell 49.3% in Q3 and 48.6% year to date, as government-related security and surveillance customer orders were delayed or pushed out. Video camera sales rose 7.8% in Q3 and 6.0% year to date.
- Profitability deteriorated despite higher sales. Q3 cost of sales included approximately $4.8 million of excess and obsolete inventory charges, mainly semiconductor equipment affected by weakness in the PC market; the comparable 2012 quarter included $2.9 million of net inventory charges. Nine-month 2013 inventory charges were $6.4 million versus $5.6 million.
- For the first nine months, gross margin was also affected by deferred revenue on certain sales, amortization of Ismeca purchase-accounting inventory step-up, and higher operating expenses. R&D and SG&A rose with Ismeca-related costs and product development spending. SG&A also included manufacturing-transition and severance costs.
- Semiconductor equipment orders declined 36% sequentially in Q3, while SEMI-reported back-end equipment orders fell 42%. Management attributed the decline to customer caution about capacity additions amid uncertain markets.
Outlook, risks and unusual items
- Management expressed optimism about long-term semiconductor equipment demand, citing expanding applications, greater IC content in automotive, consumer and industrial uses, and potential adoption of high-brightness LEDs. The filing provides no quantitative revenue or earnings guidance.
- Management’s liquidity expectation is subject to cyclicality and volatility in semiconductor capital spending. Other key exposures include intense competition and pricing pressure, customer concentration, inventory obsolescence, acquisition integration, and foreign currency and international operating risks.
- One customer accounted for 17% of Q3 sales and 18% of nine-month sales, compared with 39% and 41%, respectively, in the prior-year periods. The filing does not identify the customer.
- Ismeca’s preliminary purchase-price allocation was revised in Q3: acquired intangible assets increased to $33.1 million and goodwill decreased to $11.2 million. Certain tax matters remained pending, and further allocation changes could primarily affect goodwill. The revised intangible valuation also added about $0.6 million of Q3 amortization.
- Cohu increased its liability for unrecognized tax benefits by approximately $3.0 million in connection with the Ismeca allocation. The filing also disclosed litigation in which Essai sought a declaration that it did not infringe and that a Delta Design patent was invalid; Delta moved to dismiss and stated it would defend its intellectual property. Management did not expect the described matters to have a material adverse effect, while noting litigation uncertainty.
- Goodwill and net purchased intangible assets were $70.9 million and $46.7 million, respectively. Management reported no event requiring an interim goodwill impairment review as of September 28, but a sustained market-capitalization decline below book value could prompt a review.
- Of cash and cash equivalents, $33.8 million was held by foreign subsidiaries and management intended to reinvest it abroad indefinitely. Repatriation to the U.S. could trigger taxes.
Important facts for investors to verify
- Whether semiconductor orders and customer capacity plans improved after the reported sequential Q3 decline, and how much reported sales growth reflects Ismeca rather than underlying demand.
- Whether inventory reserves, deferred revenue and customer acceptance conditions create further margin or revenue-recognition pressure.
- Ismeca integration performance, remaining purchase-price allocation and tax uncertainties, and the recoverability of goodwill and acquired intangible assets.
- The timing of delayed government-related orders in the microwave segment and the unidentified major customer’s future purchasing levels.
- Cash usage, foreign cash and any future dividend decisions; quarterly dividends were $0.06 per share, subject to board review and liquidity.