Cohu, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 28, 2014; filed August 7, 2014. Interim financial statements are unaudited. Unless noted, operating results below are for continuing operations; the video camera segment is reported as discontinued operations.
Business context and performance
Cohu’s continuing businesses are semiconductor equipment and microwave communications equipment. Semiconductor equipment is the primary business and is exposed to cyclical semiconductor-industry capital spending. In June 2014, Cohu sold substantially all assets of its video camera segment, Cohu Electronics, which management determined was no longer a strategic fit.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $77.9 million | $62.2 million | $142.7 million | $114.5 million |
| Gross margin | 32.7% | 31.4% | 33.4% | 29.2% |
| Operating income (loss) | $1.0 million | $(4.9) million | $(2.4) million | $(18.0) million |
| Continuing-operations income (loss), net of tax | $0.9 million | $(4.3) million | $(2.4) million | $(16.6) million |
| Net income (loss), including discontinued operations | $4.2 million | $(4.0) million | $0.8 million | $(16.1) million |
| Cash dividends declared per share | $0.06 | $0.06 | $0.12 | $0.12 |
- Revenue and segments: Q2 semiconductor equipment sales were $74.3 million, up 25.2%; microwave communications sales were $3.6 million, up 22.7%. For six months, those segments generated $134.5 million and $8.2 million, up 24.6% and 26.1%, respectively.
- Cash flow: Operating cash used was $1.0 million for the first six months, versus $1.4 million generated in the prior-year period. Investing activities provided $9.7 million, primarily from the video segment sale; financing activities used $2.9 million, including $3.0 million of dividends paid.
- Liquidity: Cash, cash equivalents and short-term investments totaled $58.2 million at June 28, 2014, versus $52.9 million at December 28, 2013. Working capital was $132.7 million, up from $125.8 million. Management said existing working capital should cover operating requirements for at least 12 months.
- Debt and obligations: No borrowings were reported under Ismeca’s available 2.5 million Swiss franc credit lines. The filing reports $0.6 million of standby letters of credit; it identifies no material change in operating-lease obligations.
- Other balance-sheet items: Accounts receivable were $69.6 million and inventory was $61.5 million at quarter-end. Goodwill was $71.1 million and net intangible assets were $41.1 million. Deferred revenue was approximately $15.3 million and deferred profit $8.9 million.
Material changes versus prior periods
- Q2 revenue rose 25.1% year over year; first-half revenue rose 24.7%. Management attributed semiconductor-equipment growth to stronger shipments for automotive, consumer and industrial power applications, discrete components and LEDs.
- Gross margin improved in both comparisons. Management cited the manufacturing transition to Asia and favorable product mix, including higher-margin thermal sub-systems. First-half 2013 margin had also been affected by deferred revenue and Ismeca purchase-accounting inventory step-up amortization.
- Research and development expense declined to $10.2 million in Q2 and $20.7 million for the first half, compared with $11.2 million and $24.1 million. Management cited completed or nearly completed development programs, cost controls and prior headcount reductions.
- Q2 continuing operations returned to a modest profit, but first-half continuing operations remained loss-making. Reported net income also reflects a $4.2 million after-cost gain on the video camera segment disposal in Q2 ($4.1 million for the first half).
- Operating cash flow was negative as receivables and inventory grew with increased shipments and order fulfillment. Receivables increased $11.4 million and inventory increased $6.2 million during the first half, excluding divestiture effects.
Outlook, commentary and risks
- Management reported that semiconductor equipment orders increased 28% sequentially in Q2 and described demand across product lines and customers as improving. It expressed optimism about long-term industry prospects, but provided no quantified revenue, earnings or margin guidance.
- The video camera segment was sold June 6 for $9.5 million cash plus up to $0.5 million contingent consideration, subject to working-capital adjustment. The company received $9.9 million in sale proceeds during the period. Further gain adjustments remain possible; divestiture-related costs were $0.8 million for the first half.
- Cohu’s BMS subsidiary began consolidating German manufacturing, engineering and administrative functions into Poway, California; completion was expected by September 2014. Q2 charges were $0.4 million, with $0.4 million accrued at quarter-end.
- Key risks include semiconductor-market cyclicality and limited demand visibility, customer concentration, intense competition and pricing pressure, inventory obsolescence, manufacturing-transition and supplier execution, and product development and acceptance risks. Three customers represented 38% of Q2 sales, compared with 29% a year earlier; first-half concentration was 37%, versus 19%.
- Other exposures include foreign currency and international operations, government funding dependence in microwave communications, tax uncertainty, and potential impairment of goodwill or intangibles. Management reported no event requiring an interim goodwill impairment review at quarter-end; a sustained decline in market capitalization below book value could prompt one.
- Management said litigation and ordinary-course claims were not expected to have a material adverse effect. The filing also reports effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the Q2 order momentum and 28% sequential order increase persist, and how semiconductor capital spending and customer demand develop.
- Whether increased receivables, inventory and deferred profit convert into cash and recognized revenue; customer-acceptance requirements can delay revenue recognition.
- The final working-capital adjustment and any contingent consideration or other adjustments to the video camera sale gain.
- Progress, costs and operational effects of the Asia manufacturing transition and BMS geographic consolidation.
- Customer concentration, inventory reserve adequacy, and the recoverability of $71.1 million of goodwill and $41.1 million of net intangible assets.
- Cash availability and potential tax consequences of repatriating the $42.8 million held by foreign subsidiaries; management said it intended to reinvest those funds abroad.