Cohu, Inc. — Q2 2013 Form 10-Q
Business context and period. This unaudited filing covers the 13 weeks ended June 29, 2013, and the first 26 weeks of fiscal 2013. Cohu operates semiconductor equipment, microwave communications, and video camera businesses. Comparisons are with the corresponding 2012 periods. Unless noted otherwise, financial amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q2 2013 | Q2 2012 | First six months 2013 | First six months 2012 |
|---|---|---|---|---|
| Net sales | $66.7 million | $59.4 million | $122.7 million | $112.7 million |
| Gross margin | 32.2% | 29.7% | 30.2% | 29.5% |
| Operating loss | $4.4 million | $2.1 million | $17.4 million | $5.8 million |
| Net loss | $4.0 million | $2.1 million | $16.1 million | $5.3 million |
| Loss per diluted share | $0.16 | $0.09 | $0.65 | $0.22 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $1.4 million | $5.8 million |
- Q2 sales rose 12.2%; six-month sales rose 8.8%. The semiconductor equipment segment drove the increase, substantially reflecting the Ismeca acquisition. Microwave communications sales fell due to delayed government-related project orders.
- Gross margin improved year over year, but higher R&D and selling, general and administrative expenses more than offset the improvement. For the first six months, R&D was $25.2 million and SG&A was $29.3 million.
- At June 29, cash and cash equivalents were $47.4 million and short-term investments were $6.8 million, down from combined cash and investments of $110.2 million at year-end 2012. Working capital was $136.6 million, versus $184.7 million.
- Six-month investing cash outflow was $54.2 million, principally the $53.5 million net cash payment for Ismeca; capital expenditures were $1.3 million. Financing used $0.8 million, including $1.5 million of dividends. Cash declined by $55.4 million to $47.4 million.
- The filing reports no outstanding borrowings under Ismeca’s 0.5 million Swiss franc credit line. Cohu also had approximately $0.8 million of standby letters of credit. The filing does not report other debt borrowings.
Material changes and unusual items
- Ismeca, acquired December 31, 2012, expanded Cohu’s semiconductor test-handling offerings and added LED equipment exposure. Preliminary purchase price was approximately $84.9 million, including $27.7 million of assumed liabilities; preliminary goodwill was $19.3 million. Purchase-price allocation remained subject to final valuation.
- Semiconductor equipment sales were $59.3 million in Q2, up 22.1%, and $107.9 million for the six months, up 17.0%. Microwave communications sales fell 50.4% in Q2 and 48.2% for the six months. Video camera sales fell 11.0% in Q2 but increased 5.1% for the six months.
- Q2 gross margin included approximately $0.4 million of excess and obsolete inventory charges and a $0.6 million benefit from selling previously reserved inventory. Six-month net inventory charges were approximately $1.6 million, versus $2.8 million in 2012.
- Six-month results also reflected Ismeca-related costs, amortization of acquired intangibles and inventory purchase-accounting step-up adjustments, as well as $0.5 million of costs to transition semiconductor equipment manufacturing to Asia.
- Revenue recognition deferrals increased: at June 29, deferred revenue was approximately $10.4 million and deferred profit was $6.9 million, compared with $3.6 million and $2.1 million, respectively, at year-end.
Outlook, risks and contingencies
- Management reported improving conditions during Q2: semiconductor equipment orders increased 44% sequentially, and management saw signs of stronger semiconductor sales in some markets and higher customer test-floor utilization. Management expressed optimism about long-term industry prospects but gave no quantified revenue or earnings guidance.
- Management expects existing working capital to cover operating requirements for at least the next 12 months. Future dividends remain subject to liquidity, capital availability, and Board approval.
- Key risks include semiconductor-industry cyclicality and limited visibility, intense competition, inventory obsolescence, customer concentration, acquisition integration and potential impairment of goodwill or intangibles, and international, currency, supply-chain, and ERP implementation risks. Two Q2 customers accounted for 27% of sales; one customer represented more than 10% of six-month sales.
- Of $47.4 million in cash, $38.3 million was held by foreign subsidiaries. Cohu intended to reinvest those funds abroad; repatriation could incur U.S. taxes.
- Essai sued Cohu subsidiary Delta Design in May 2013, seeking a declaratory judgment of non-infringement and invalidity concerning a Delta patent. Delta moved to dismiss in July and intended to defend its rights. Management did not then expect a material adverse effect, while noting litigation outcomes are uncertain.
- The company reported no event requiring an interim goodwill impairment review as of June 29. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether improving semiconductor orders translated into sustained sales, margins, and operating cash flow, particularly after the acquisition-related effects.
- How final Ismeca purchase accounting, integration, and acquired goodwill and intangible assets affect future expenses and impairment exposure.
- Whether deferred revenue and profit convert to recognized sales and cash, and whether customer acceptance or payment terms cause further deferrals.
- Trends in liquidity after the acquisition, including foreign-held cash, working capital, customer collections, and the continuation of dividends.
- Developments in delayed microwave project orders, customer concentration, and the Essai patent litigation.