Cohu, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the 13-week third quarter ended September 27, 2014, and the 39 weeks ended that date; comparisons are with the corresponding 2013 periods. Cohu’s continuing businesses are semiconductor equipment and microwave communications equipment. The video camera segment was sold in June 2014 and is reported as discontinued operations. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial results and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $94.4 | $56.0 | $237.2 | $170.4 |
| Gross margin | 35.1% | 22.7% | 34.1% | 27.1% |
| Operating income (loss) | $9.4 | ($12.4) | $7.0 | ($30.5) |
| Continuing operations income (loss), net of tax | $6.9 | ($11.1) | $4.5 | ($27.7) |
| Net income (loss), including discontinued operations | $7.5 | ($10.8) | $8.3 | ($27.0) |
| Diluted earnings (loss) per share | $0.29 | ($0.43) | $0.32 | ($1.09) |
- Revenue mix: Semiconductor equipment sales were $91.6 million in Q3 and $226.0 million for nine months. Microwave communications sales were $2.9 million and $11.1 million, respectively.
- Cash flow: Operating activities provided $5.0 million in the first nine months, versus $1.9 million in 2013. Investing activities provided $8.6 million, including $9.9 million received from the video camera segment sale. Financing used $3.3 million, including $4.5 million in dividends paid. Cash increased $8.9 million to $60.6 million.
- Liquidity and balance sheet: Cash, cash equivalents and short-term investments totaled $61.7 million at September 27, 2014, versus $52.9 million at year-end 2013. Working capital was $140.6 million, up from $125.8 million. Total assets were $365.4 million and stockholders’ equity was $254.3 million. Accounts receivable increased to $86.5 million from $58.2 million.
- Debt and facilities: The balance sheet lists no debt. No amounts were outstanding under Ismeca’s 2.5 million Swiss franc credit lines; standby letters of credit of approximately $0.5 million were outstanding. The filing says current working capital is expected to cover operating needs for at least 12 months.
- Dividends: $0.06 per share was declared in Q3 and $0.18 per share in the first nine months. Future dividends remain subject to liquidity, capital availability and Board approval.
Material changes versus prior periods
- Q3 sales rose 68.7% year over year; nine-month sales rose 39.1%. Semiconductor equipment drove the increase, with segment sales up 74.7% in Q3 and 41.0% for nine months.
- Gross margin improved substantially, primarily from higher semiconductor-equipment volume and operating leverage, manufacturing and supply-chain transitions to Asia, favorable product mix, and lower inventory-related charges. Q3 excess and obsolete inventory charges were $1.9 million versus $4.7 million; nine-month charges were $4.7 million versus $6.7 million.
- Q3 orders in the semiconductor equipment segment fell approximately 13% from the prior quarter, after order momentum peaked in June. Management said demand continued across product lines, especially handlers serving automotive and industrial markets, discrete components and LEDs.
- Microwave communications segment sales declined 19.8% year over year in Q3, partly because of revenue deferrals and delayed customer orders; nine-month sales increased 9.9%.
- R&D expense fell to $9.7 million in Q3 and $30.4 million for nine months, reflecting completed or nearing-completion development programs and earlier cost reductions. Nine-month SG&A increased to $43.4 million, including $1.7 million of manufacturing-transition and severance costs.
Outlook, commentary, risks and unusual items
- Outlook: No quantitative revenue or earnings guidance is provided. Management described semiconductor equipment demand as cyclical and volatile, noted the Q3 order decline, and expressed optimism about long-term opportunities from greater semiconductor content in automotive, consumer and industrial applications and adoption of high-brightness LEDs.
- Sale of video camera segment: Cohu sold substantially all segment assets on June 6 for $9.5 million cash plus up to $0.5 million contingent consideration, subject to working-capital adjustment. The nine-month discontinued-operations result included a $4.1 million gain on disposal; adjustments to the gain remained possible. The segment’s net income was $3.8 million for nine months.
- Other unusual items: A strong U.S. dollar produced a $1.0 million Q3 foreign-currency translation gain in SG&A, while nine-month other comprehensive loss included an $8.6 million currency translation loss. BMS recorded $0.5 million of nine-month costs for consolidating German operations into Poway; $0.2 million remained accrued at quarter-end.
- Accounting and tax estimates: Deferred revenue was approximately $22.0 million and deferred profit $11.2 million at quarter-end, up from $7.4 million and $6.1 million, respectively, at year-end, primarily due to semiconductor equipment shipment deferrals. The nine-month effective tax rate on continuing operations was 36.2%; management said small changes in projected results can materially change the rate. Gross deferred tax assets were approximately $45.0 million with a $37.1 million valuation allowance.
- Risks and contingencies: Key risks include semiconductor-industry cyclicality, customer concentration, competition and pricing pressure, inventory obsolescence, manufacturing transition and supplier execution, international and currency exposure, ERP implementation, and government-contract timing for the microwave business. Two customers together represented 25% of Q3 sales and 26% of nine-month sales. The company reported ordinary-course legal, tax and other proceedings, but did not believe they would materially adversely affect it. Letters of credit had a maximum potential payment of $0.5 million; management did not consider payment probable.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. Annual impairment testing found no goodwill impairment; estimated fair values exceeded carrying values by about 35% for semiconductor equipment and 17% for microwave communications.
Important facts for investors to verify
- Whether the Q3 order slowdown continued, and how semiconductor-equipment bookings and customer demand developed after September 27.
- Whether the higher sales and margins are sustainable, including the effects of product mix, Asian manufacturing transitions and future inventory charges.
- Collection and working-capital trends: receivables rose sharply, and operating cash flow remained modest relative to reported earnings.
- Revenue and profit deferrals, customer acceptance conditions, and any working-capital adjustment or contingent proceeds related to the video camera sale.
- Customer concentration, tax-rate variability and recoverability of deferred tax assets, goodwill and acquired intangible assets.
- Future dividend decisions, foreign cash availability and any material developments in the disclosed operating, legal, supplier or ERP risks.