e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 26, 2009
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 1-4298
COHU, INC.
(Exact name of registrant as specified in its charter)
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| Delaware
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95-1934119 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.) |
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12367 Crosthwaite Circle, Poway, California
(Address of principal executive offices)
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92064-6817
(Zip Code) |
Registrant’s telephone number, including area code (858) 848-8100
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
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| Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
As of September 26, 2009 the Registrant had 23,445,170 shares of its $1.00 par value common
stock outstanding.
COHU, INC.
INDEX
FORM 10-Q
September 26, 2009
Item 1.
COHU, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
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September 26, |
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December 27, |
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2009 |
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2008 * |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
39,024 |
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$ |
30,194 |
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Short-term investments |
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48,249 |
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58,191 |
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Accounts receivable, less allowance for bad debts of $1,534 in 2009 and $1,610 in 2008 |
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34,898 |
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31,945 |
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Inventories: |
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Raw materials and purchased parts |
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26,135 |
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27,557 |
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Work in process |
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13,566 |
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14,159 |
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Finished goods |
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11,501 |
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11,598 |
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51,202 |
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53,314 |
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Deferred income taxes |
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4,318 |
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16,270 |
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Other current assets |
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5,731 |
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9,350 |
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Total current assets |
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183,422 |
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199,264 |
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Property, plant and equipment, at cost: |
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Land and land improvements |
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12,033 |
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11,824 |
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Buildings and building improvements |
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29,501 |
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28,341 |
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Machinery and equipment |
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36,460 |
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33,522 |
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77,994 |
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73,687 |
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Less accumulated depreciation and amortization |
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(39,453 |
) |
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(34,258 |
) |
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Net property, plant and equipment |
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38,541 |
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39,429 |
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Deferred income taxes |
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— |
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2,307 |
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Goodwill |
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62,492 |
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60,820 |
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Intangible assets, net of accumulated amortization of $10,146 in 2009 and $5,200 in 2008 |
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37,776 |
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40,993 |
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Other assets |
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1,407 |
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1,356 |
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$ |
323,638 |
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$ |
344,169 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
16,482 |
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$ |
11,720 |
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Accrued compensation and benefits |
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9,374 |
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9,867 |
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Accrued warranty |
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3,698 |
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4,924 |
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Customer advances |
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1,276 |
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2,636 |
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Deferred profit |
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5,134 |
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4,434 |
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Income taxes payable |
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1,859 |
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1,282 |
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Other accrued liabilities |
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9,435 |
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8,812 |
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Total current liabilities |
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47,258 |
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43,675 |
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Other accrued liabilities |
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3,501 |
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3,499 |
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Deferred income taxes |
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14,394 |
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11,456 |
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Commitments and contingencies |
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Stockholders’ equity: |
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Preferred stock, $1 par value; 1,000 shares authorized, none issued |
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— |
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— |
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Common stock, $1 par value; 60,000 shares authorized, 23,445
shares issued and outstanding in 2009 and 23,344 shares in 2008 |
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23,445 |
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23,344 |
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Paid-in capital |
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63,647 |
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61,076 |
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Retained earnings |
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160,835 |
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193,985 |
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Accumulated other comprehensive income |
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10,558 |
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7,134 |
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Total stockholders’ equity |
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258,485 |
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285,539 |
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$ |
323,638 |
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$ |
344,169 |
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| * |
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Derived from December 27, 2008 audited financial statements. |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
COHU, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
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Three Months Ended |
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Nine Months Ended |
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September 26, |
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September 27, |
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September 26, |
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September 27, |
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2009 |
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2008 |
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2009 |
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2008 |
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Net sales |
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$ |
44,062 |
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$ |
48,016 |
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$ |
119,068 |
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$ |
158,258 |
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Cost and expenses: |
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Cost of sales |
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27,845 |
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30,458 |
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83,128 |
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101,453 |
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Research and
development |
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8,284 |
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9,140 |
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24,022 |
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29,582 |
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Selling,
general and
administrative |
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8,731 |
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9,693 |
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26,431 |
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27,652 |
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44,860 |
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49,291 |
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133,581 |
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158,687 |
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Loss from operations |
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(798 |
) |
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(1,275 |
) |
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(14,513 |
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(429 |
) |
Interest and other, net |
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302 |
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1,391 |
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1,128 |
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4,282 |
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Income (loss) before
income taxes |
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(496 |
) |
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116 |
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(13,385 |
) |
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3,853 |
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Income tax provision
(benefit) |
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(425 |
) |
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79 |
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15,553 |
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1,690 |
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Net income (loss) |
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$ |
(71 |
) |
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$ |
37 |
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$ |
(28,938 |
) |
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$ |
2,163 |
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Income (loss) per share: |
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Basic |
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$ |
(0.00 |
) |
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$ |
0.00 |
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$ |
(1.24 |
) |
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$ |
0.09 |
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Diluted |
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$ |
(0.00 |
) |
|
$ |
0.00 |
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$ |
(1.24 |
) |
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$ |
0.09 |
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Weighted average shares
used in
computing income
(loss) per share: |
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Basic |
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23,429 |
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23,233 |
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23,384 |
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23,142 |
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Diluted |
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23,429 |
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23,477 |
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23,384 |
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23,380 |
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Cash dividends declared
per share |
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$ |
0.06 |
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$ |
0.06 |
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$ |
0.18 |
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$ |
0.18 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
COHU, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
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Nine Months Ended |
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September 26, |
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September 27, |
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2009 |
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2008 |
|
Cash flows from operating activities: |
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Net income (loss) |
|
$ |
(28,938 |
) |
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$ |
2,163 |
|
Adjustments to reconcile net income (loss) to net
cash provided by operating activities: |
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Depreciation and amortization |
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8,526 |
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|
5,086 |
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Share-based compensation expense |
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2,474 |
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|
3,188 |
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Deferred income taxes |
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16,118 |
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|
2,028 |
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Loss on short-term investment |
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— |
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|
350 |
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Increase in other accrued liabilities |
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93 |
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25 |
|
Excess tax deficiencies (benefits) from stock options exercised |
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103 |
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(155 |
) |
Changes in current assets and liabilities, excluding
effects from acquisitions and divestitures: |
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Accounts receivable |
|
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(2,650 |
) |
|
|
11,027 |
|
Inventories |
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1,881 |
|
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|
(6,598 |
) |
Other current assets |
|
|
3,220 |
|
|
|
1,049 |
|
Accounts payable |
|
|
4,628 |
|
|
|
(6,912 |
) |
Customer advances |
|
|
(1,360 |
) |
|
|
(311 |
) |
Deferred profit |
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|
700 |
|
|
|
(84 |
) |
Income taxes payable, including excess stock option exercise benefit |
|
|
474 |
|
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|
(1,607 |
) |
Accrued compensation, warranty and other liabilities |
|
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(1,532 |
) |
|
|
(2,484 |
) |
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Net cash provided by operating activities |
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|
3,737 |
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|
6,765 |
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Cash flows from investing activities, excluding effects from
acquisitions and divestitures: |
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Sales and maturities of short-term investments |
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45,273 |
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|
114,027 |
|
Purchases of short-term investments |
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(34,871 |
) |
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|
(122,517 |
) |
Purchases of property, plant and equipment |
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(1,503 |
) |
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|
(2,088 |
) |
Other |
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(65 |
) |
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(22 |
) |
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Net cash provided by (used in) investing activities |
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8,834 |
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(10,600 |
) |
Cash flows from financing activities: |
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Cash dividends |
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(4,204 |
) |
|
|
(4,159 |
) |
Issuance of stock, net of repurchases |
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|
301 |
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|
1,860 |
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Excess tax
(deficiencies) benefits from stock options exercised |
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(103 |
) |
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155 |
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Net cash used in financing activities |
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(4,006 |
) |
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|
(2,144 |
) |
Effect of exchange rate changes on cash |
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265 |
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|
(132 |
) |
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Net increase (decrease) in cash and cash equivalents |
|
|
8,830 |
|
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|
(6,111 |
) |
Cash and cash equivalents at beginning of period |
|
|
30,194 |
|
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|
77,281 |
|
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Cash and cash equivalents at end of period |
|
$ |
39,024 |
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$ |
71,170 |
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Supplemental disclosure of cash flow information: |
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Cash refunded during the period for: |
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Income taxes |
|
$ |
(4,115 |
) |
|
$ |
(316 |
) |
Inventory capitalized as capital assets |
|
$ |
518 |
|
|
$ |
426 |
|
Dividends declared but not yet paid |
|
$ |
1,407 |
|
|
$ |
1,396 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 26, 2009
| 1. |
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Summary of Significant Accounting Policies |
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Basis of Presentation |
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Our fiscal years are based on a 52- or 53-week period ending on the last Saturday in
December. The condensed consolidated balance sheet at December 27, 2008 has been derived from
our audited financial statements at that date. The interim condensed consolidated financial
statements as of September 26, 2009 (also referred to as “the third quarter of fiscal 2009”
and “the first nine months of fiscal 2009”) and September 27, 2008 (also referred to as “the
third quarter of fiscal 2008” and “the first nine months of 2008”) are unaudited. However,
in management’s opinion, these financial statements reflect all adjustments (consisting only
of normal, recurring items) necessary to provide a fair presentation of our financial
position, results of operations and cash flows for the periods presented. The third quarters
of fiscal 2009 and 2008 were comprised of 13 weeks and the first nine months of fiscal 2009
and 2008 were comprised of 39 weeks, respectively. We have evaluated all subsequent events,
for any financial statement accounting or disclosure impact, through November 3, 2009, the
date our financial statements were issued. |
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Our interim results are not necessarily indicative of the results that should be expected for
the full year. For a better understanding of Cohu, Inc. and our financial statements, we
recommend reading these interim condensed consolidated financial statements in conjunction
with our audited financial statements for the year ended December 27, 2008, which are
included in our 2008 Annual Report on Form 10-K, filed with the U. S. Securities and Exchange
Commission (“SEC”). In the following notes to our interim condensed consolidated financial
statements, Cohu, Inc. is referred to as “Cohu”, “we”, “our” and “us”. |
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Certain prior year balances related to our discontinued metal detection equipment segment
have been reclassified for consistency with the current year presentation. These
reclassifications had no effect on reported results of operations. |
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We are subject to a number of risks and uncertainties that may significantly impact our
future operating results. These risks and uncertainties are discussed under Item 1A. “Risk
Factors” included in this Form 10-Q. As our interim description of risks and uncertainties
only includes any material changes to our annual description, we also recommend reading the
description of the risk factors associated with our business previously disclosed in Item 1A.
of our 2008 Annual Report on Form 10-K. Understanding these risks and uncertainties is
integral to the review of our interim condensed consolidated financial statements. |
| |
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Goodwill, Other Intangible Assets and Long-lived Assets |
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Goodwill and other intangible assets with indefinite useful lives are not amortized, but are
reviewed annually for impairment. Our annual testing date is October 1 and we did not
recognize any goodwill impairment as a result of performing this annual test in 2008. Other
events and changes in circumstances may also require goodwill to be tested for
impairment between annual
measurement dates. While a decline in stock price and market capitalization is not
specifically cited as a goodwill
impairment indicator, a
company’s stock price and market capitalization should be considered in determining whether
it is more likely than not that the fair value of a reporting unit is less than its book
value. The financial and credit market volatility directly impacts our fair value
measurement through our stock price that we use to determine our market capitalization.
During times of volatility, significant judgment must be applied to determine whether stock
price changes are a short-term swing or a longer-term trend. As of September 26, 2009, we do
not believe there have been any events or circumstances that would require us to perform an
interim goodwill impairment review, however, a sustained decline in Cohu’s market
capitalization below book value could lead us to determine, in a future period, that an
interim goodwill impairment review is required and may result in an impairment charge which
could have a significant negative impact on our results of operations.
|
| |
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Separable long-lived assets that have finite lives are amortized over their useful lives and
are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets might not be recoverable. Conditions that would necessitate an
impairment assessment include a significant decline in the observable market value of an
asset, a significant change in the extent or manner in which an asset is used, or any other
significant adverse change that would indicate that the carrying amount of an asset or group
of assets may not be recoverable. |
6
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 26, 2009
| |
|
Share-Based Compensation |
| |
| |
|
Share-based compensation expense related to stock options is recorded based on the fair value
of the award on its grant date which we estimate using the Black-Scholes valuation model.
Share-based compensation expense related to restricted stock unit awards is calculated based
on the market price of our common stock on the grant date, reduced by the present value of
dividends expected to be paid on our common stock prior to vesting of the restricted stock
unit. |
| |
|
Reported share-based compensation is classified, in the condensed consolidated interim
financial statements, as follows (in thousands): |
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|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 26, |
|
|
September 27, |
|
|
September 26, |
|
|
September 27, |
|
| |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Cost of sales |
|
$ |
94 |
|
|
$ |
88 |
|
|
$ |
241 |
|
|
$ |
266 |
|
Research and development |
|
|
351 |
|
|
|
331 |
|
|
|
825 |
|
|
|
951 |
|
Selling, general and administrative |
|
|
479 |
|
|
|
675 |
|
|
|
1,408 |
|
|
|
1,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation |
|
|
924 |
|
|
|
1,094 |
|
|
|
2,474 |
|
|
|
3,188 |
|
Income tax benefit |
|
|
— |
|
|
|
(286 |
) |
|
|
— |
|
|
|
(828 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based
compensation, net of tax |
|
$ |
924 |
|
|
$ |
808 |
|
|
$ |
2,474 |
|
|
$ |
2,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Earnings (Loss) Per Share |
| |
| |
|
Basic earnings (loss) per common share is computed by dividing net income (loss) by the
weighted-average number of common shares outstanding during the reporting period. Diluted earnings
(loss) per share includes the dilutive effect of common shares potentially issuable upon the
exercise of stock options, vesting of outstanding restricted stock units and issuance of stock
under our employee stock purchase plan using the treasury stock method. In loss periods,
potentially dilutive securities are excluded from the per share computations due to their
anti-dilutive effect. For purposes of computing diluted income per share, stock options
with exercise prices that exceed the average fair market value of our common stock for the period
are excluded. For the three and nine months ended September 27, 2008, options to purchase
approximately 1,276,000 and 1,339,000 shares of common stock, respectively, were excluded from the
computation. The following table reconciles the denominators used in computing basic and diluted
income per share (in thousands): |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 26, |
|
|
September 27, |
|
|
September 26, |
|
|
September 27, |
|
| |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Weighted average common shares |
|
|
23,429 |
|
|
|
23,233 |
|
|
|
23,384 |
|
|
|
23,142 |
|
Effect of dilutive stock options |
|
|
— |
|
|
|
244 |
|
|
|
— |
|
|
|
238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,429 |
|
|
|
23,477 |
|
|
|
23,384 |
|
|
|
23,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Revenue Recognition |
| |
| |
|
Our revenue recognition policy is disclosed in Note 1 of the Notes to Consolidated Financial
Statements included in our Annual Report on Form 10-K for the year ended December 27, 2008.
As more fully described in that policy, revenue from products that have not previously
satisfied customer acceptance requirements is recognized upon customer acceptance. The gross
profit on sales that are not recognized is generally recorded as deferred profit and
reflected as a current liability in our consolidated balance sheet. |
| |
|
At September 26, 2009, we had deferred revenue totaling approximately $12.9 million and
deferred profit of $5.1 million. At December 27, 2008, we had deferred revenue totaling
approximately $6.7 million and deferred profit of $4.4 million. |
| |
| |
|
Retiree Medical Benefits |
| |
|
We provide post-retirement health benefits to certain executives and directors under a
noncontributory plan. The net periodic benefit cost incurred during the first nine months of
fiscal 2009 and 2008 was not significant. |
7
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 26, 2009
| |
|
Recently Adopted Accounting Pronouncements |
| |
| |
|
In June 2009, the Financial Accounting Standards Board (“FASB”) issued new accounting
guidance entitled, “The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles – a replacement of FASB Statement No. 162”, which identifies
the sources of accounting principles and the framework for selecting the principles used in
the preparation of financial statements of nongovernmental entities that are presented in
conformity with generally accepted accounting principles (“GAAP”). This new guidance is
effective for financial statements issued for interim and annual periods ending after
September 15, 2009. The adoption of this guidance has changed how we reference various
elements of GAAP when preparing our financial statement disclosures, but did not have an
impact on our financial position, results of operations or cash flows. |
| |
|
In May 2009, the FASB issued new accounting guidance on subsequent events. The objective
of this guidance is to establish general standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial statements are issued or are
available to be issued. This new accounting guidance was effective for interim and annual
periods ending after June 15, 2009. The impact of adopting this new guidance had no effect on
the accompanying condensed consolidated financial statements. See “Basis of Presentation”
above for the related disclosures. |
| |
|
In December 2007, the FASB issued new accounting guidance on business combinations which
establishes principles and requirements for the reporting entity in a business combination,
including recognition and measurement in the financial statements of the identifiable assets
acquired, the liabilities assumed, and any non-controlling interest in the acquiree. This
guidance also establishes disclosure requirements to enable financial statement users to
evaluate the nature and financial effects of the business combination. These changes are
effective on a prospective basis for all business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on or after
December 15, 2008, and interim periods within those fiscal years. This guidance was effective
for our fiscal year beginning in 2009 and we expect that it will have an impact on our
consolidated financial statements, but the nature and magnitude of the specific effects will
depend upon the nature, terms and size of the acquisitions we consummate subsequent to our
adoption of the new guidance. |
| |
|
In February 2008, the FASB issued new accounting guidance on fair value measurements and
disclosures for nonfinancial assets and nonfinancial liabilities disclosed at fair value in
the financial statements on a recurring basis. We applied the provisions of this new guidance
to our financial statement disclosures beginning in the first quarter of 2009. See Note 9,
“Cash and Cash Equivalents and Short-Term Investments,” for additional information. |
| |
| |
|
Recently Issued Accounting Standards |
| |
|
In June 2009, the FASB issued new accounting guidance on consolidation of variable interest
entities, which include: (1) the elimination of the exemption for qualifying special purpose
entities, (2) a new approach for determining who should consolidate a variable-interest
entity, and (3) changes to when it is necessary to reassess who should consolidate a
variable-interest entity. This new guidance is effective as of the beginning of interim and
annual reporting periods that begin after November 15, 2009, which for us would be December
27, 2009, the first day of our 2010 fiscal year and adoption of this new guidance is not
expected to have a material impact on our consolidated financial position or results of
operations. |
| 2. |
|
Strategic Technology Transactions, Goodwill and Other Intangible Assets |
| |
|
On December 9, 2008, our wholly owned semiconductor equipment subsidiary, Delta Design, Inc.,
and certain subsidiaries of Delta acquired all of the outstanding share capital of Rasco
GmbH, Rosenheim Automation Systems Corporation, and certain assets of Rasco Automation Asia
(collectively “Rasco”). The results of Rasco’s operations have been included in our
consolidated financial statements since that date. Rasco, headquartered near Munich, Germany,
designs, manufactures and sells gravity-feed and strip semiconductor test handlers used in
final test operations by semiconductor manufacturers and test subcontractors. |
8
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 26, 2009
| |
|
The purchase price of this acquisition was approximately $81.6 million, and was funded
primarily by cash reserves ($80.0 million), other acquisition costs ($1.6 million) and
certain liabilities assumed ($18.6 million, which includes approximately $8.2 million of
deferred tax liabilities and $3.7 million of contractual obligations to purchase inventory).
The acquisition was considered a business and the total cost of the acquisition was allocated
to the assets acquired and liabilities assumed based on their estimated respective fair
values. The Rasco acquisition resulted in the recognition of goodwill of approximately
$41.3 million. The acquisition was nontaxable and certain of the assets acquired, including
goodwill and intangibles, will generally not be deductible for tax purposes. The goodwill has
been assigned to our semiconductor equipment segment. |
| |
|
During the first quarter of fiscal 2009 we finalized the purchase price allocation with
no adjustments to previously disclosed amounts. The allocation of purchase price to the
acquired assets and assumed liabilities was as follows (in thousands): |
| |
|
|
|
|
Current assets |
|
$ |
14,173 |
|
Fixed assets |
|
|
8,375 |
|
Other assets |
|
|
636 |
|
Intangible assets |
|
|
33,360 |
|
In-process research and development (IPR&D) |
|
|
2,400 |
|
Goodwill |
|
|
41,336 |
|
|
|
|
|
Total assets acquired |
|
|
100,280 |
|
Liabilities assumed |
|
|
(18,643 |
) |
|
|
|
|
Net assets acquired |
|
$ |
81,637 |
|
|
|
|
|
| |
|
Amounts allocated to intangible assets are being amortized on a straight-line basis over
their useful lives of eight years. Fluctuations in the exchange rate of the Euro, the
functional currency of Rasco, impact the U.S. dollar value of the goodwill and intangible
assets in our consolidated financial statements and, as a result, the future gross carrying
value and amortization of the acquired intangible assets will differ from the amounts
presented. |
| |
|
Intangible assets, subject to amortization are as follows: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
September 26, 2009 |
|
|
December 27, 2008 |
|
| |
|
Gross Carrying |
|
|
Accumulated |
|
|
Gross Carrying |
|
|
Accumulated |
|
| (in thousands) |
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amortization |
|
| |
Unigen technology |
|
$ |
7,020 |
|
|
$ |
5,003 |
|
|
$ |
7,020 |
|
|
$ |
3,935 |
|
AVS technology |
|
|
2,411 |
|
|
|
1,492 |
|
|
|
2,309 |
|
|
|
996 |
|
Rasco Technology |
|
|
35,949 |
|
|
|
3,651 |
|
|
|
34,433 |
|
|
|
269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
45,380 |
|
|
$ |
10,146 |
|
|
$ |
43,762 |
|
|
$ |
5,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Amortization expense related to intangible assets was approximately $1.6 million in the
third quarter of fiscal 2009 and $4.6 million in the first nine months of fiscal 2009.
Amortization expense related to intangible assets was approximately $0.5 million in the third
quarter of fiscal 2008 and $1.8 million in the first nine months of fiscal 2008. The amounts
included in the table above for the periods ended September 26, 2009 and December 27, 2008
exclude approximately $2.5 million and $2.4 million, respectively, related to the Rasco trade
name which has an indefinite life and is not being amortized. Changes in the carrying values
of AVS and Rasco intangible assets are a result of the impact of fluctuations in currency
exchange rates. |
| 3. |
|
Employee Stock Benefit Plans |
| |
|
Employee Stock Purchase Plan |
| |
|
The Cohu, Inc. 1997 Employee Stock Purchase Plan (“the Plan”) provides for the issuance of a
maximum of 1,400,000 shares of our common stock. Under the Plan, eligible employees may
purchase shares of common stock through payroll deductions. The price paid for the common
stock is equal to 85% of the fair market value of our common stock on specified dates. At
September 26, 2009, there were 444,730 shares available for issuance under the Plan. |
9
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 26, 2009
| |
|
Stock Options |
| |
| |
|
Under our equity incentive plans, stock options may be granted to employees, consultants and
directors to purchase a fixed number of shares of our common stock at prices not less than
100% of the fair market value at the date of grant. Options generally vest and become
exercisable after one year or in four annual increments beginning one year after the grant
date and expire five to ten years from the grant date. At September 26, 2009,
1,841,657 shares were available for future equity grants under the 2005 Equity Plan. We have
historically issued new shares of our common stock upon share option exercise. |
| |
|
At September 26, 2009 we had 3,213,126 stock options outstanding. These options had a
weighted-average exercise price of $12.88 per share, an aggregate intrinsic value of
approximately $8.1 million and the weighted average remaining contractual term was
approximately 6.6 years. |
| |
|
At September 26, 2009 we had 1,714,317 stock options outstanding that were exercisable.
These options had a weighted-average exercise price of $16.41 per share, an aggregate
intrinsic value of $0.2 million and the weighted average remaining contractual term was
approximately 4.3 years. |
| |
| |
|
Restricted Stock Units |
| |
|
We issue restricted stock units to certain employees and directors. Restricted stock units
vest over either a one-year or a four-year period from the date of grant. Prior to vesting,
restricted stock units do not have dividend equivalent rights, do not have voting rights and
the shares underlying the restricted stock units are not considered issued and outstanding.
Shares of our common stock will be issued on the date the restricted stock units vest. |
| |
|
At September 26, 2009 we had 195,527 restricted stock units outstanding with an aggregate
intrinsic value of approximately $2.7 million and the weighted average remaining vesting
period was approximately 1.8 years. |
| 4. |
|
Comprehensive Income (Loss) |
| |
|
Comprehensive income (loss) represents all non-owner changes in stockholders’ equity and
consists of, on an after-tax basis where applicable, the following (in thousands): |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 26, |
|
|
September 27, |
|
|
September 26, |
|
|
September 27, |
|
| |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net income (loss) |
|
$ |
(71 |
) |
|
$ |
37 |
|
|
$ |
(28,938 |
) |
|
$ |
2,163 |
|
Foreign currency translation adjustment |
|
|
3,765 |
|
|
|
(713 |
) |
|
|
3,050 |
|
|
|
(31 |
) |
Change in unrealized gain/loss on investments |
|
|
8 |
|
|
|
(959 |
) |
|
|
417 |
|
|
|
(938 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
3,702 |
|
|
$ |
(1,635 |
) |
|
$ |
(25,471 |
) |
|
$ |
1,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Our accumulated other comprehensive income balance totaled approximately $10.6 million and
$7.1 million at September 26, 2009 and December 27, 2008, respectively, and was attributed
to, net of income taxes where applicable, unrealized losses and gains on investments and
foreign currency adjustments resulting from the translation of certain accounts into U.S.
dollars where the functional currency is the Euro. |
| |
|
Companies are required to assess whether a valuation allowance should be recorded against
their deferred tax assets (“DTAs”) based on the consideration of all available evidence,
using a “more likely than not” realization standard. The four sources of taxable income that
must be considered in determining whether DTAs will be realized are, (1) future reversals of
existing taxable temporary differences (i.e. offset of gross deferred tax assets against
gross deferred tax liabilities); (2) taxable income in prior carryback years, if carryback is
permitted under the tax law; (3) tax planning strategies and (4) future taxable income
exclusive of reversing temporary differences and carryforwards. |
| |
|
In assessing whether a valuation allowance is required, significant weight is to be given to
evidence that can be objectively verified. We have evaluated our DTAs each reporting period,
including an assessment of our cumulative income or loss over the prior three-year period and
future periods, to determine if a valuation allowance was required. A significant negative
factor in our assessment at June 27, 2009 was the possibility that Cohu may be in a
three-year historical cumulative loss as of the end of the fourth quarter of fiscal 2009, as
highly profitable quarters in the second half of 2006 are removed from the rolling three-year
calculation. This, combined with uncertain near-term market and economic conditions, reduced
our ability to rely on projections of future taxable income in assessing the realization of
our DTAs. |
10
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 26, 2009
| |
|
After a review of the four sources of taxable income described above and after considering
the possibility of being in a three-year cumulative loss in the fourth quarter of 2009, we
recorded an increase in our valuation allowance, with a corresponding charge to our income
tax provision, of approximately $19.6 million in the second quarter of fiscal 2009. Our DTA
valuation allowance at September 26, 2009 was approximately $24 million on gross deferred tax
assets of approximately $29 million. The remaining $5 million of gross deferred tax assets
for which a valuation allowance was not recorded are realizable through future reversals of
existing taxable temporary differences or taxable income in carryback years. As the
realization of DTAs is determined by tax jurisdiction, the significant deferred tax liability
recorded as part of the 2008 acquisition of Rasco GmbH, a German corporation, was not a
source of taxable income in assessing the realization of our DTAs in the U.S. |
| |
|
The income tax provision (benefit) included in the condensed consolidated statements of
operations for the three and nine months ended September 26, 2009 and September 27, 2008 is
based on the estimated annual effective tax rate for the entire year. These estimated
effective tax rates are subject to adjustment in subsequent quarterly periods as our
estimates of pretax income or loss for the year are increased or decreased. The effective
tax rates differ from the U.S. federal statutory rate primarily due to changes in the
valuation allowance and unrecognized tax benefits, state taxes, research and development tax
credits, foreign income taxed at lower rates, interest on unrecognized tax benefits and
provisions of authoritative guidance related to share-based compensation which do not allow
deferred tax benefits to be initially recognized on compensation expense related to incentive
stock options and employee stock purchase plans. |
| |
|
There was no material change to our unrecognized tax benefits and interest accrued related to
unrecognized tax benefits during the period ended September 26, 2009 except for a decrease of
approximately $0.5 million related to the closure of our 2005 U.S. federal income tax return
examination in September, 2009. The Internal Revenue Service is currently conducting a
routine review of our 2008 U.S. federal income tax return. We do not expect that the total
amount of unrecognized tax benefits will significantly change over the next 12 months. |
| |
|
Our reportable segments are business units that offer different products and are managed
separately because each business requires different technology and marketing strategies. Our
three segments are: semiconductor equipment, microwave communications and video cameras. As
discussed in Note 2, in December 2008, we purchased Rasco, which has been included in our
semiconductor equipment segment since that date. |
| |
|
We allocate resources and evaluate the performance of segments based on profit or loss from
operations, excluding interest, corporate expenses and unusual gains or losses. Intersegment
sales were not significant for any period. |
| |
|
Financial information by industry segment is as follows (in thousands): |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 26, |
|
|
September 27, |
|
|
September 26, |
|
|
September 27, |
|
| |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net sales by segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor equipment |
|
$ |
31,845 |
|
|
$ |
38,091 |
|
|
$ |
81,181 |
|
|
$ |
123,685 |
|
Microwave communications |
|
|
8,561 |
|
|
|
5,687 |
|
|
|
25,932 |
|
|
|
21,164 |
|
Video cameras |
|
|
3,656 |
|
|
|
4,238 |
|
|
|
11,955 |
|
|
|
13,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
consolidated
net sales and
net sales for
reportable
segments |
|
$ |
44,062 |
|
|
$ |
48,016 |
|
|
$ |
119,068 |
|
|
$ |
158,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 26, |
|
|
September 27, |
|
|
September 26, |
|
|
September 27, |
|
| |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Segment profit (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor equipment |
|
$ |
(1,244 |
) |
|
$ |
1,179 |
|
|
$ |
(16,033 |
) |
|
$ |
4,462 |
|
Microwave communications |
|
|
1,467 |
|
|
|
(1,325 |
) |
|
|
4,411 |
|
|
|
(909 |
) |
Video cameras |
|
|
99 |
|
|
|
(284 |
) |
|
|
262 |
|
|
|
(836 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) for reportable segments |
|
|
322 |
|
|
|
(430 |
) |
|
|
(11,360 |
) |
|
|
2,717 |
|
Other unallocated amounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate expenses |
|
|
(1,120 |
) |
|
|
(845 |
) |
|
|
(3,153 |
) |
|
|
(3,146 |
) |
Interest and other, net |
|
|
302 |
|
|
|
1,391 |
|
|
|
1,128 |
|
|
|
4,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
(496 |
) |
|
$ |
116 |
|
|
$ |
(13,385 |
) |
|
$ |
3,853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 26, 2009
| |
|
|
|
|
|
|
|
|
| |
|
September 26, |
|
|
December 27, |
|
| |
|
2009 |
|
|
2008 |
|
Total assets by segment: |
|
|
|
|
|
|
|
|
Semiconductor equipment |
|
$ |
209,233 |
|
|
$ |
206,199 |
|
Microwave communications |
|
|
21,154 |
|
|
|
22,793 |
|
Video cameras |
|
|
9,859 |
|
|
|
10,458 |
|
|
|
|
|
|
|
|
Total assets for reportable segments |
|
|
240,246 |
|
|
|
239,450 |
|
Corporate, principally cash and investments and deferred taxes |
|
|
83,392 |
|
|
|
104,719 |
|
|
|
|
|
|
|
|
Total consolidated assets |
|
$ |
323,638 |
|
|
$ |
344,169 |
|
|
|
|
|
|
|
|
| |
|
A small number of customers historically have been responsible for a significant portion of
our consolidated net sales. Two customers of the semiconductor equipment segment accounted
for 24% and 35% of our consolidated net sales for the third quarter and first nine months of
fiscal 2009, respectively. Three customers of the semiconductor equipment segment accounted
for 48% and 50% of our consolidated net sales for the third quarter and first nine months of
fiscal 2008, respectively. |
| |
|
We previously disclosed that in May, 2007 our Broadcast Microwave Services subsidiary (“BMS”)
received a subpoena from a grand jury seated in the Southern District of California,
requesting the production of certain documents related to BMS’ export of microwave
communications equipment. BMS completed production of documents responsive to the request in
September 2007 and has fully cooperated. We also disclosed that on April 30, 2009, BMS
received a letter from the U. S. Department of State requesting that BMS provide certain
information related to their review of this matter. Based upon their review of the
information provided, the U.S. Department of State informed us during the third quarter of
fiscal 2009 that they believe BMS did not obtain the required licenses for the export of
certain products and services. The U. S. Department of State has requested that BMS apply for
commodity jurisdiction rulings to determine if certain other products are subject to export
controls, obtain export licenses as required and engage an independent third party to conduct
an export compliance audit. We are working with the U.S. Department of State to resolve
these issues, however, as of the date of this report, it is premature to assess whether the
ultimate resolution of this matter will have a material adverse effect on our business,
financial position or results of operations. |
| |
|
In addition to the above matter, from time-to-time we are involved in various legal
proceedings, examinations by various tax authorities and claims that have arisen in the
ordinary course of our businesses. Although the outcome of such legal proceedings, claims
and examinations cannot be predicted with certainty, we do not believe any such matters exist
at this time that will have a material adverse effect on our financial position or results of
operations. |
| |
|
Our products are generally sold with warranty periods that range from 12 to 36 months
following sale or installation. Parts and labor are covered under the terms of the warranty
agreement. The warranty provision is based on historical and projected experience by product
and configuration. |
| |
|
Changes in accrued warranty were as follows (in thousands): |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 26, |
|
|
September 27, |
|
|
September 26, |
|
|
September 27, |
|
| |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Balance at beginning of period |
|
$ |
3,777 |
|
|
$ |
5,503 |
|
|
$ |
4,924 |
|
|
$ |
6,760 |
|
Warranty expense accruals |
|
|
846 |
|
|
|
2,116 |
|
|
|
2,562 |
|
|
|
6,461 |
|
Warranty payments |
|
|
(925 |
) |
|
|
(2,501 |
) |
|
|
(3,788 |
) |
|
|
(8,103 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
3,698 |
|
|
$ |
5,118 |
|
|
$ |
3,698 |
|
|
$ |
5,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
From time-to-time, during the ordinary course of business, we provide standby letters of
credit for certain contingent liabilities under contractual arrangements, including customer
contracts. As of September 26, 2009, the maximum potential amount of future payments that
Cohu could be required to make under these standby letters of credit was approximately
$0.3 million. We have not recorded any liability in connection with these guarantee
arrangements beyond that required to appropriately account for the underlying transaction
being guaranteed. We do not believe, based on historical experience and information currently
available, that it is probable that any amounts will be required to be paid under these
arrangements. |
12
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 26, 2009
| 9. |
|
Cash and Cash Equivalents and Short-Term Investments |
| |
|
As of September 26, 2009 and December 27, 2008 our cash, cash equivalents, and short-term
investments primarily consisted of cash, government and government sponsored securities,
money market funds, and other investment grade securities. Such amounts are recorded at fair
value. The following table summarizes, by major security type, our cash, cash equivalents,
and marketable securities (in thousands): |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
September 26, 2009 |
|
| |
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
| |
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
| |
|
Cost |
|
|
Gains |
|
|
Losses (1) |
|
|
Value |
|
Cash |
|
$ |
11,165 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
11,165 |
|
Money market funds |
|
|
25,859 |
|
|
|
— |
|
|
|
— |
|
|
|
25,859 |
|
Bank certificates of
deposit |
|
|
2,500 |
|
|
|
1 |
|
|
|
— |
|
|
|
2,501 |
|
Corporate debt
securities
(2) |
|
|
24,243 |
|
|
|
174 |
|
|
|
(2 |
) |
|
|
24,415 |
|
U.S. Treasury securities |
|
|
3,499 |
|
|
|
12 |
|
|
|
— |
|
|
|
3,511 |
|
Municipal securities |
|
|
9,679 |
|
|
|
18 |
|
|
|
— |
|
|
|
9,697 |
|
Government-sponsered
enterprise securities |
|
|
5,766 |
|
|
|
21 |
|
|
|
— |
|
|
|
5,787 |
|
Asset-backed securities |
|
|
4,431 |
|
|
|
55 |
|
|
|
(148 |
) |
|
|
4,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
87,142 |
|
|
$ |
281 |
|
|
$ |
(150 |
) |
|
$ |
87,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
As of September 26, 2009, the cost and fair value of investments with loss
positions was $3.5 million and $3.4 million, respectively. We evaluated the nature of
these investments, credit worthiness of the issuer and the duration of these impairments
to determine if an other-than-temporary decline in fair value had occurred and concluded
that these losses were temporary. |
| |
| (2) |
|
Corporate debt securities include investments in financial, insurance, and
corporate institutions. No single issuer represents a significant portion of the total
corporate debt securities portfolio. |
| |
|
The authoritative guidance for fair value measurements establishes a valuation hierarchy for
disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes
the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted)
in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for
similar assets and liabilities in active markets or inputs that are observable for the asset
or liability, either directly or indirectly through market corroboration, for substantially
the full term of the financial instrument. Level 3 inputs are unobservable inputs based on
our own assumptions used to measure assets and liabilities at fair value. A financial asset
or liability’s classification within the hierarchy is determined based on the lowest level
input that is significant to the fair value measurement. |
13
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 26, 2009
| |
|
The following table provides the assets carried at fair value measured on a recurring basis
(in thousands): |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fair value measurements at September 26, 2009 using: |
|
| |
|
|
|
|
|
Significant other |
|
|
Significant |
|
|
|
|
| |
|
Quoted prices in |
|
|
observable |
|
|
unobservable |
|
|
Total estimated |
|
| |
|
active markets |
|
|
inputs |
|
|
inputs |
|
|
fair value at |
|
| |
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
September 26, 2009 |
|
Cash |
|
$ |
11,165 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
11,165 |
|
Money market funds |
|
|
25,859 |
|
|
|
— |
|
|
|
— |
|
|
|
25,859 |
|
Bank certificates
of deposit |
|
|
— |
|
|
|
2,501 |
|
|
|
— |
|
|
|
2,501 |
|
Corporate debt
securities |
|
|
— |
|
|
|
24,415 |
|
|
|
— |
|
|
|
24,415 |
|
U.S. Treasury
securities |
|
|
3,511 |
|
|
|
— |
|
|
|
— |
|
|
|
3,511 |
|
Municipal securities |
|
|
— |
|
|
|
9,697 |
|
|
|
— |
|
|
|
9,697 |
|
Government-sponsered
enterprise
securities |
|
|
— |
|
|
|
5,787 |
|
|
|
— |
|
|
|
5,787 |
|
Asset-backed
securities |
|
|
— |
|
|
|
4,338 |
|
|
|
— |
|
|
|
4,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
40,535 |
|
|
$ |
46,738 |
|
|
$ |
— |
|
|
$ |
87,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fair value measurements at December 27, 2008 using: |
|
| |
|
|
|
|
|
Significant other |
|
|
Significant |
|
|
|
|
| |
|
Quoted prices in |
|
|
observable |
|
|
unobservable |
|
|
Total estimated |
|
| |
|
active markets |
|
|
inputs |
|
|
inputs |
|
|
fair value at |
|
| |
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
December 27, 2008 |
|
Cash |
|
$ |
8,893 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
8,893 |
|
Money market funds |
|
|
21,301 |
|
|
|
— |
|
|
|
— |
|
|
|
21,301 |
|
Bank certificates of
deposit |
|
|
— |
|
|
|
3,011 |
|
|
|
— |
|
|
|
3,011 |
|
Corporate debt securities |
|
|
— |
|
|
|
38,121 |
|
|
|
— |
|
|
|
38,121 |
|
Asset-backed securities |
|
|
— |
|
|
|
17,059 |
|
|
|
— |
|
|
|
17,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
30,194 |
|
|
$ |
58,191 |
|
|
$ |
— |
|
|
$ |
88,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
When available, we use quoted market prices to determine the fair value of our investments,
and they are included in Level 1. When quoted market prices are unobservable, we use quotes from
independent pricing vendors based on recent trading activity and other relevant information. These
investments are included in Level 2 and primarily comprise our portfolio of corporate debt
securities, bank certificates of deposit, government-sponsored enterprise, municipal securities and
asset-backed securities.
14
Cohu,
Inc.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
September 26, 2009
This Form 10-Q contains certain forward-looking statements including expectations of market
conditions, challenges and plans, within the meaning of Section 21E of the Securities Exchange Act
of 1934, as amended, and is subject to the Safe Harbor provisions created by that statute. Such
forward-looking statements are based on management’s current expectations and beliefs, including
estimates and projections about our industries and include, but are not limited to, statements
concerning financial position, business strategy, and plans or objectives for future operations.
Forward-looking statements are not guarantees of future performance, and are subject to certain
risks, uncertainties, and assumptions that are difficult to predict and may cause actual results to
differ materially from management’s current expectations. Such risks and uncertainties include
those set forth in this Quarterly Report on Form 10-Q and our 2008 Annual Report on Form 10-K under
the heading “Item 1A. Risk Factors”. The forward-looking statements in this report speak only as
of the time they are made, and do not necessarily reflect management’s outlook at any other point
in time. We undertake no obligation to publicly update any forward-looking statements, whether as
a result of new information, future events, or for any other reason, however, readers should
carefully review the risk factors set forth in other reports or documents we file from time to time
with the SEC after the date of this Quarterly Report.
OVERVIEW
Cohu operates in three business segments. Our primary business is the development, manufacture,
sale and servicing of test handling, burn-in related equipment and thermal sub-systems for the
global semiconductor industry through our wholly-owned subsidiaries, Delta Design, Inc. and Rasco
GmbH. This business is significantly dependent on capital expenditures by semiconductor
manufacturers and test subcontractors, which in turn is dependent on the current and anticipated
market demand for semiconductors that is subject to cyclical trends. We expect that the
semiconductor equipment industry will continue to be cyclical and volatile in part because consumer
electronics, the principal end market for integrated circuits, is a highly dynamic industry and
demand is difficult to accurately predict. Our other businesses produce mobile microwave
communications equipment (Broadcast Microwave Services, Inc.) and video cameras and accessories
(Cohu Electronics Division).
Like other suppliers of test and assembly (“backend”) semiconductor equipment, our primary business
has been severely impacted by the global recession and the dramatic decrease in consumer and
business confidence that has resulted in lower sales of electronic products and sharply reduced
demand for semiconductors and semiconductor equipment. Orders for backend semiconductor equipment
were weak throughout fiscal 2008 and declined further in the fourth quarter of fiscal 2008 and the
first quarter of fiscal 2009, as the worldwide decline in semiconductor sales created significant
idle production capacity at integrated device manufacturers (IDMs) and test subcontractors. During
this period, orders for device kits, spares and equipment upgrades, while lower than in 2008, were
not as severely impacted as were systems, in part because semiconductor manufacturers frequently
adjust production in response to highly dynamic demand from their customers, particularly for
consumer electronics applications.
During the second and third quarters of fiscal 2009 we saw improvement in semiconductor equipment
orders. According to the global trade organization, Semiconductor Equipment and Materials
International (SEMI), orders for backend semiconductor equipment bottomed out in February 2009 and
have increased every month thereafter. The recent trend is positive but orders still remain
approximately 50% below the last peak levels of 2006.
Operating results in our semiconductor equipment business during the third quarter of fiscal 2009
were better than expected largely as a result of increased orders for systems and device kits,
spares, equipment upgrades and repairs that were received and shipped in the third quarter. Orders
in our semiconductor equipment business increased 41% compared to the second quarter of fiscal 2009
and were broad based across many products and customers. The sudden and sharp increase in demand
was accompanied by short delivery lead times as customers that have resisted adding capacity during
the recession are now struggling to keep pace with delivery requirements to their customers. As a
result, we are under pressure to accelerate our deliveries and are ramping production in our
California factory. Our plan to transfer production of certain handlers to Asia based contract
manufacturers will continue, however we are extending the production of certain products in
California longer than originally planned in order to meet customer delivery requirements.
Exposure related to inventories is common in the semiconductor equipment industry due to the narrow
customer base, the custom nature of the products and inventory and the shortened product life
cycles caused by rapid changes in semiconductor manufacturing technology. Our operating results in
the last three years have been impacted by charges to cost of sales related to excess, obsolete and
lower of cost or market inventory issues. These charges totaled approximately $20.8 million during
the three-year period ended December 27, 2008 (and approximately
15
Cohu, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
September 26, 2009
$4.2 million in the nine-month period ended September 26, 2009) and were primarily the result
of decreases or frequent changes in customer forecasts and, to a lesser extent, changes in our
sales product mix.
Our non-semiconductor equipment businesses comprised approximately 18% of our consolidated revenues
during the last three years (31.8% in the nine-month period ended September 26, 2009). Our
microwave communications business designs, manufactures and sells microwave communications
equipment, antenna systems and associated equipment. These products are used in the transmission
of video, audio and telemetry. Applications for these microwave data-links include unmanned aerial
vehicles (“UAVs”), public safety, security, surveillance and electronic news gathering. Customers
for these products are government agencies, public safety organizations, UAV program contractors,
television broadcasters and other commercial entities. During fiscal 2009 our microwave
communications business has achieved record operating income as a result of higher sales volume and
improved gross margins realized through favorable product mix and product redesign programs
initiated in fiscal 2008 to reduce the cost of certain systems. Additionally, during the third
quarter of fiscal 2009, we closed an outstanding letter of credit that had been issued to the
United Arab Emirates (“UAE”) to ensure our compliance under an equipment supply agreement and
recognized $0.8 million of deferred profit. Demand for our microwave communications equipment,
particularly by public safety and government surveillance related customers, remains strong
although obtaining additional export licenses may delay shipments to certain foreign customers.
Our video camera business was profitable for the third quarter and for the first nine months of
fiscal 2009. This business provides a wide selection of video cameras and related products,
specializing in video solutions for security, surveillance and traffic monitoring. Customers for
these products are distributed among security, surveillance, traffic control/management, scientific
imaging and machine vision.
Our management team uses several performance metrics to manage our businesses. These metrics
mainly focus on near-term forecasts due to the short-term nature of our backlog and include
(i) orders and backlog for the most recently completed quarter and the forecast for the next
quarter; (ii) inventory levels and related excess exposures typically based on the forecast for the
next twelve months; (iii) gross margin and other operating expense trends; (iv) cash flow;
(v) industry data and trends noted in various publicly available sources; and (vi) competitive
factors and information. Due to the short-term nature of our order backlog that historically has
represented about three months of business and the inherent volatility of the semiconductor
equipment business, our past performance is frequently not indicative of future near term operating
results or cash flows.
Application of Critical Accounting Estimates and Policies
Our discussion and analysis of our financial condition and results of operations are based upon our
interim condensed consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The preparation of these
financial statements requires us to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and
liabilities. We base our estimates on historical experience, forecasts and on various other
assumptions that are believed to be reasonable under the circumstances, however actual results may
differ from those estimates under different assumptions or conditions. The methods, estimates and
judgments we use in applying our accounting policies have a significant impact on the results we
report in our financial statements. Some of our accounting policies require us to make difficult
and subjective judgments, often as a result of the need to make estimates of matters that are
inherently uncertain. Our most critical accounting estimates that we believe are the most
important to an investor’s understanding of our financial results and condition and require complex
management judgment include:
| |
• |
|
revenue recognition, including the deferral of revenue on sales to customers, which
impacts our results of operations; |
| |
| |
• |
|
estimation of valuation allowances and accrued liabilities, specifically product warranty,
inventory reserves and allowance for bad debts, which impact gross margin or operating
expenses; |
| |
| |
• |
|
the recognition and measurement of current and deferred income tax assets and liabilities
and the valuation allowance on deferred tax assets, which impact our tax provision; |
| |
| |
• |
|
the assessment of recoverability of long-lived assets including goodwill and other
intangible assets, which primarily impacts gross margin or operating expenses if we are
required to record impairments of assets or accelerate their depreciation; and |
16
Cohu, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
September 26, 2009
| |
• |
|
the valuation and recognition of share-based compensation, which impacts gross margin,
research and development expense, and selling, general and administrative expense. |
Below, we discuss these policies further, as well as the estimates and judgments involved. We also
have other policies that we consider key accounting policies; however, these policies typically do
not require us to make estimates or judgments that are difficult or subjective.
Revenue Recognition: We generally recognize revenue upon shipment and title passage for established
products (i.e., those that have previously satisfied customer acceptance requirements) that provide
for full payment tied to shipment. Revenue for products that have not previously satisfied
customer acceptance requirements or from sales where customer payment dates are not determinable is
recognized upon customer acceptance. For arrangements containing multiple elements, the revenue
relating to the undelivered elements is deferred at estimated fair value until delivery of the
deferred elements.
Accounts Receivable: We maintain an allowance for bad debts for estimated losses resulting from the
inability of our customers to make required payments. If the financial condition of our customers
deteriorates, resulting in an impairment of their ability to make payments, additional allowances
may be required.
Warranty: We provide for the estimated costs of product warranties in the period sales are
recognized. Our warranty obligation estimates are affected by historical product shipment levels,
product performance and material and labor costs incurred in correcting product performance
problems. Should product performance, material usage or labor repair costs differ from our
estimates, revisions to the estimated warranty liability would be required.
Inventory: The valuation of inventory requires us to estimate obsolete or excess inventory as well
as inventory that is not of saleable quality. The determination of obsolete or excess inventory
requires us to estimate the future demand for our products. The demand forecast is a direct input
in the development of our short-term manufacturing plans. We record valuation reserves on our
inventory for estimated excess and obsolete inventory and lower of cost or market concerns equal to
the difference between the cost of inventory and the estimated market value based upon assumptions
about future product demand, market conditions and product selling prices. If future product
demand, market conditions or product selling prices are less than those projected by management or
if continued modifications to products are required to meet specifications or other customer
requirements, increases to inventory reserves may be required which would have a negative impact on
our gross margin.
Income Taxes: We estimate our liability for income taxes based on the various jurisdictions where
we conduct business. This requires us to estimate our (i) current tax exposure; (ii) temporary
differences that result from differing treatment of certain items for tax and accounting purposes
and (iii) unrecognized tax benefits. Temporary differences result in deferred tax assets and
liabilities that are reflected in the consolidated balance sheet. The deferred tax assets are
reduced by a valuation allowance if, based upon all available evidence, it is more likely than not
that some or all of the deferred tax assets will not be realized. Establishing, reducing or
increasing a valuation allowance in an accounting period results in an increase or decrease in tax
expense in the statement of operations. We must make significant judgments to determine the
provision for income taxes, deferred tax assets and liabilities, unrecognized tax benefits and any
valuation allowance to be recorded against deferred tax assets. Our gross deferred tax asset
balance as of September 26, 2009 was approximately $29 million, with a valuation allowance of
approximately $24 million. The deferred tax assets consist primarily of deductible temporary
differences and tax credit and net operating loss carryforwards.
Contingencies: We are subject to certain contingencies that arise in the ordinary course of our
businesses which require us to assess the likelihood that future events will confirm the existence
of a loss or an impairment of an asset. If a loss or asset impairment is probable and the amount
of the loss or impairment is reasonably estimable, we accrue a charge to operations in the period
such conditions become known.
Goodwill, Intangible and Long-Lived Assets: Goodwill and other intangible assets with indefinite
useful lives are not amortized, but are reviewed annually for impairment. Our annual testing date
is October 1 and we did not recognize any goodwill impairment as a result of performing this annual
test in 2008. Other events and changes in circumstances may also require goodwill to be tested for
impairment between annual measurement dates. While a decline in stock price and market
capitalization is not specifically cited as a goodwill impairment indicator, a company’s stock
price and market capitalization should be considered in determining whether it is more likely than
not that the fair value of a reporting unit is less than its book value. The financial and credit
market volatility directly impacts our fair value measurement through our stock price that we use
to determine our market
17
Cohu, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
September 26, 2009
capitalization. During times of volatility, significant judgment must be applied to determine
whether stock price changes are a short-term swing or a longer-term trend. As of September 26,
2009, we do not believe there have been any events or circumstances that would require us to
perform an interim goodwill impairment review, however, a sustained decline in Cohu’s market
capitalization below book value could lead us to determine, in a future period, that an interim
goodwill impairment review is required and may result in an impairment charge which could have a
significant negative impact on our results of operations.
Share-based Compensation: Share-based compensation expense related to stock options is recorded
based on the fair value of the award on its grant date which we estimate using the Black-Scholes
valuation model.
Share-based compensation expense related to restricted stock unit awards is calculated based on the
market price of our common stock on the grant date, reduced by the present value of dividends
expected to be paid on our common stock prior to vesting of the restricted stock unit.
Recently Adopted Accounting Pronouncements: In June 2009, the Financial Accounting
Standards Board (“FASB”) issued new accounting guidance entitled, “The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB
Statement No. 162”, which identifies the sources of accounting principles and the framework for
selecting the principles used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting principles (“GAAP”).
This new guidance is effective for financial statements issued for interim and annual periods
ending after September 15, 2009. The adoption of this guidance has changed how we reference various
elements of GAAP when preparing our financial statement disclosures, but did not have an impact on
our financial position, results of operations or cash flows.
In May 2009, the FASB issued new accounting guidance on subsequent events. The objective of this
guidance is to establish general standards of accounting for and disclosure of events that occur
after the balance sheet date but before financial statements are issued or are available to be
issued. This new accounting guidance was effective for interim and annual periods ending after
June 15, 2009. The impact of adopting this new guidance had no effect on the accompanying condensed
consolidated financial statements. See “Basis of Presentation” above for the related disclosures.
In December 2007, the FASB issued new accounting guidance on business combinations which
establishes principles and requirements for the reporting entity in a business combination,
including recognition and measurement in the financial statements of the identifiable assets
acquired, the liabilities assumed, and any non-controlling interest in the acquiree. This guidance
also establishes disclosure requirements to enable financial statement users to evaluate the nature
and financial effects of the business combination. These changes are effective on a prospective
basis for all business combinations for which the acquisition date is on or after the beginning of
the first annual reporting period beginning on or after December 15, 2008, and interim periods
within those fiscal years. This guidance was effective for our fiscal year beginning in 2009 and we
expect that it will have an impact on our consolidated financial statements, but the nature and
magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions
we consummate subsequent to our adoption of the new guidance.
In February 2008, the FASB issued new accounting guidance on fair value measurements and
disclosures for nonfinancial assets and nonfinancial liabilities disclosed at fair value in the
financial statements on a recurring basis. We applied the provisions of this new guidance to our
financial statement disclosures beginning in the first quarter of 2009. See Note 9, “Cash and Cash
Equivalents and Short Term Investments,” for additional information.
Recently Issued Accounting Standards: In June 2009, the FASB issued new accounting guidance on
consolidation of variable interest entities, which include: (1) the elimination of the exemption
for qualifying special purpose entities, (2) a new approach for determining who should consolidate
a variable-interest entity, and (3) changes to when it is necessary to reassess who should
consolidate a variable-interest entity. This new guidance is effective as of the beginning of
interim and annual reporting periods that begin after November 15, 2009, which for us would be
December 27, 2009, the first day of our 2010 fiscal year and adoption of this new guidance is not
expected to have a material impact on our consolidated financial position or results of operations.
18
Cohu, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
September 26, 2009
RESULTS OF OPERATIONS
The following table summarizes certain operating data as a percentage of net sales:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Nine Months Ended |
| |
|
September 26, |
|
September 27, |
|
September 26, |
|
September 27, |
| |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
| |
|
|
|
|
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales |
|
|
(63.2 |
) |
|
|
(63.4 |
) |
|
|
(69.8 |
) |
|
|
(64.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
36.8 |
|
|
|
36.6 |
|
|
|
30.2 |
|
|
|
35.9 |
|
Research and development |
|
|
(18.8 |
) |
|
|
(19.0 |
) |
|
|
(20.2 |
) |
|
|
(18.7 |
) |
Selling, general and
administrative |
|
|
(19.8 |
) |
|
|
(20.3 |
) |
|
|
(22.2 |
) |
|
|
(17.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(1.8 |
)% |
|
|
(2.7 |
)% |
|
|
(12.2 |
)% |
|
|
(0.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In December, 2008, we purchased Rasco. The results of Rasco’s operations have been included in our
consolidated financial statements since that date.
Third Quarter of Fiscal 2009 Compared to Third Quarter of Fiscal 2008
Net Sales
Our net sales decreased 8.2% to $44.1 million in 2009, compared to net sales of $48.0 million in
2008. Sales of semiconductor equipment in the third quarter of fiscal 2009 decreased 16.4% from
2008 and accounted for 72.3% of consolidated net sales in 2009 versus 79.3% in 2008. As noted in
the “Overview” above, worldwide demand for semiconductors has been dramatically reduced by the
global recession resulting in significant idle capacity for semiconductor manufacturers and lower
demand for semiconductor equipment. During the third quarter of fiscal 2009 we saw better than
expected demand for semiconductor test handlers, device kits, spares, equipment upgrades and
repairs, as our customers adjusted their production to respond to highly dynamic demand from their
customers, many of whom produce consumer electronics.
Sales of microwave communications equipment accounted for 19.4% of consolidated net sales in the
third quarter of fiscal 2009 and increased 50.5% when compared to the same period in fiscal 2008.
The increase in sales of our microwave communications business during the third quarter of fiscal
2009 was attributable to increased product shipments to unmanned air vehicle program contractors.
Sales of video cameras accounted for 8.3% of consolidated net sales in 2009 and decreased
$0.6 million or 13.7% when compared to the same period of fiscal 2008.
Gross Margin
Gross margin consists of net sales less cost of sales. Cost of sales consists primarily of the cost
of materials, assembly and test labor, and overhead from operations. Our gross margin can fluctuate
due to a number of factors, including, but not limited to, the mix of products sold, product
support costs, inventory reserve adjustments, and utilization of manufacturing capacity. Our gross
margin, as a percentage of net sales, increased to 36.8% in 2009 from 36.6% in 2008. During the
third quarter of fiscal 2009, our gross margin was favorably impacted by the recognition of
$0.8 million of deferred profit by our microwave communications equipment business related to its
contract with the UAE. In 2006 we recorded a charge to cost of sales of approximately $4.6 million
for excess and obsolete inventory as a result of a decline in customer forecasts for a burn-in
system, acquired from Unisys’ Unigen operation (“Unigen”). In the third quarter of fiscal 2008 we
sold certain of this inventory and our gross margin was favorably impacted by approximately
$1.3 million.
Our gross margin has been impacted by charges to cost of sales related to excess, obsolete and
lower of cost or market inventory issues. We compute the majority of our excess and obsolete
inventory reserve requirements using a one-year inventory usage forecast. During the third quarter
of fiscal 2009 and 2008, we recorded net charges to cost
of sales of approximately $0.6 million and $0.1 million, respectively, for excess and obsolete
inventory. While we believe our reserves for excess and obsolete inventory and lower of cost or
market concerns are adequate to cover known exposures at September 26, 2009, reductions in customer
forecasts or continued modifications to products, as a result of our failure to meet specifications
or other customer requirements, may result in additional charges to operations that could
negatively impact our gross margin in future periods. Conversely, if our actual inventory usage is
greater than our forecasted usage, our gross margin in future periods may be favorably impacted.
19
Cohu, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
September 26, 2009
Research and Development Expense (“R&D Expense”)
R&D expense consists primarily of salaries and related costs of employees engaged in ongoing
research, product design and development activities, costs of engineering materials and supplies,
and professional consulting expenses. The 2009 expense includes R&D costs associated with Rasco
which was acquired on December 9, 2008. R&D expense as a percentage of net sales was 18.8% in 2009,
compared to 19.0% in 2008, decreasing from $9.1 million in 2008 to $8.3 million in 2009 due
primarily to a $2.3 million decrease from reduced labor and material costs associated with new
product development within our semiconductor equipment business, partially offset by $1.1 million
in incremental R&D expense resulting from the acquisition of Rasco.
Selling, General and Administrative Expense (“SG&A Expense)
SG&A expense consists primarily of salaries and benefit costs of employees, commission expense for
independent sales representatives, product promotion and costs of professional services. The 2009
expense includes SG&A costs associated with Rasco. SG&A expense as a percentage of net sales
decreased to 19.8% in 2009, from 20.3% in 2008. SG&A expense decreased to $8.7 million in 2009
from $9.7 million in 2008 due primarily to lower business volume and actions taken to reduce costs,
partially offset by an increase of $1.4 million in incremental SG&A expense resulting from the
acquisition of Rasco.
Interest and other, net
Interest and other, net was approximately $0.3 million and $1.4 million in the third quarter of
fiscal 2009 and 2008, respectively. Our interest income was lower in 2009 due to a decrease in our
cash and investment balances as a result of the Rasco acquisition which occurred in the fourth
quarter of 2008 and lower short-term interest rates.
Income Taxes
Companies are required to assess whether a valuation allowance should be recorded against their
deferred tax assets (“DTAs”) based on the consideration of all available evidence, using a “more
likely than not” realization standard. The four sources of taxable income that must be considered
in determining whether DTAs will be realized are, (1) future reversals of existing taxable
temporary differences (i.e. offset of gross deferred tax assets against gross deferred tax
liabilities); (2) taxable income in prior carryback years, if carryback is permitted under the tax
law; (3) tax planning strategies and (4) future taxable income exclusive of reversing temporary
differences and carryforwards.
In assessing whether a valuation allowance is required, significant weight is to be given to
evidence that can be objectively verified. We have evaluated our DTAs each reporting period,
including an assessment of our cumulative income or loss over the prior three-year period and
future periods, to determine if a valuation allowance was required. A significant negative factor
in our assessment at June 27, 2009 was the possibility that Cohu may be in a three-year historical
cumulative loss as of the end of the fourth quarter of fiscal 2009, as highly profitable quarters
in the second half of 2006 are removed from the rolling three-year calculation. This, combined with
uncertain near-term market and economic conditions, reduced our ability to rely on projections of
future taxable income in assessing the realization of our DTAs.
After a review of the four sources of taxable income described above and after considering the
possibility of being in a three-year cumulative loss in the fourth quarter of 2009, we recorded an
increase in our valuation allowance, with a corresponding charge to our income tax provision, of
approximately $19.6 million in the second quarter of fiscal 2009. Our DTA valuation allowance at
September 26, 2009 was approximately $24 million on gross deferred tax assets of approximately $29
million. The remaining $5 million of gross deferred tax assets for which a valuation allowance was
not recorded are realizable through future reversals of existing taxable temporary differences or
taxable income in carryback years. As the realization of DTAs is determined by tax jurisdiction,
the significant deferred tax liability recorded as part of the 2008 acquisition of Rasco GmbH, a
German corporation, was not a source of taxable income in assessing the realization of our DTAs in
the U.S.
The income tax provision (benefit) included in the condensed consolidated statements of operations
for the three months ended September 26, 2009 and September 27, 2008 is based on the estimated
annual effective tax rate for the entire year. These estimated effective tax rates are subject to
adjustment in subsequent quarterly periods as our estimates of pretax income or loss for the year
are increased or decreased. The effective tax rates differ from the U.S. federal statutory rate
primarily due to changes in the valuation allowance and unrecognized tax benefits, state taxes,
research and development tax credits, foreign income taxed at lower rates, interest on unrecognized
tax
20
Cohu, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
September 26, 2009
benefits and provisions of authoritative guidance related to share-based compensation which do
not allow deferred tax benefits to be initially recognized on compensation expense related to
incentive stock options and employee stock purchase plans.
There was no material change to our unrecognized tax benefits and interest accrued related to
unrecognized tax benefits during the period ended September 26, 2009 except for a decrease of
approximately $0.5 million related to the closure of our 2005 U.S. federal income tax return
examination in September, 2009. The Internal Revenue Service is currently conducting a routine
review of our 2008 U.S. federal income tax return. We do not expect that the total amount of
unrecognized tax benefits will significantly change over the next 12 months.
As a result of the factors set forth above, our net loss was $71,000 in 2009, compared to net
income of $37,000 in 2008.
First Nine Months of Fiscal 2009 Compared to First Nine Months of Fiscal 2008
Net Sales
Our net sales decreased 24.8% to $119.1 million in 2009, compared to net sales of $158.3 million in
2008. Sales of semiconductor equipment in the first nine months of fiscal 2009 decreased 34.4% from
2008 and accounted for 68.2% of consolidated net sales in 2009 versus 78.2% in 2008. Worldwide
demand for semiconductors has been dramatically reduced by the global recession resulting in
significant idle capacity for semiconductor manufacturers and lower demand for semiconductor
equipment.
Sales of microwave communications equipment accounted for 21.8% of consolidated net sales in 2009
and increased 22.5% when compared to the same period in fiscal 2008. The increase in sales of our
microwave communications business during the first nine months of fiscal 2009 was attributable to
increased product shipments to unmanned air vehicle program contractors and international customers
within the public safety sector.
Sales of video cameras accounted for 10.0% of consolidated net sales in 2009 and decreased
$1.5 million or 10.8% when compared to the same period of fiscal 2008. The primary cause of the
decrease in 2009 sales is delayed funding for certain state and local government projects as a
result of the economic recession. Additionally, video camera sales in the first nine months of
fiscal 2008 benefitted from the recognition of $0.5 million in deferred revenue upon the receipt of
customer acceptance on a contract with a government subcontractor.
Gross Margin
Our gross margin, as a percentage of net sales, decreased to 30.2% in 2009 from 35.9% in 2008.
During the first nine months of fiscal 2009 our gross margin was impacted by (i) the substantial
decrease in the sales volume of our semiconductor equipment segment due to weak business conditions
and (ii) charges to cost of sales of approximately $4.2 million for excess and obsolete inventory.
In 2006 we recorded a charge to cost of sales of approximately $4.6 million for excess and obsolete
inventory as a result of a decline in customer forecasts for a burn-in system, acquired from
Unigen. In the first nine months of fiscal 2008 we sold certain of this inventory and our gross
margin was favorably impacted by approximately $4.5 million.
Research and Development Expense (“R&D Expense”)
R&D expense as a percentage of net sales was 20.2% in 2009, compared to 18.7% in 2008, decreasing
in absolute dollars from $29.6 million in 2008 to $24.0 million in 2009. Decreased R&D expense in
2009 was primarily due to a $8.9 million decrease in labor and material costs associated with new
product development within our semiconductor equipment business partially offset by $3.0 million of
incremental R&D expense resulting from the acquisition of Rasco.
Selling, General and Administrative Expense (“SG&A Expense)
SG&A expense as a percentage of net sales increased to 22.2% in 2009, from 17.5% in 2008. The
increase in SG&A expense as a percentage of net sales is a result of lower sales in 2009. SG&A
expense in absolute dollars
decreased to $26.4 million in 2009 from $27.7 million in 2008 due primarily to lower business
volume and actions taken to reduce costs, partially offset by an increase of $4.6 million in
incremental SG&A expense resulting from the acquisition of Rasco.
21
Cohu, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
September 26, 2009
Interest and other, net
Interest and other, net was approximately $1.1 million and $4.3 million in the first nine months of
fiscal 2009 and 2008, respectively. Our interest income was lower in 2009 due to a decrease in our
cash and investment balances as a result of the Rasco acquisition which occurred in the fourth
quarter of 2008 and lower short-term interest rates. During the first nine months of fiscal 2008
our interest income was negatively impacted by a loss of approximately $0.4 million recorded on our
short-term investment portfolio.
Income Taxes
The income tax provision included in the condensed consolidated statements of operations for the
nine months ended September 26, 2009 and September 27, 2008 is based on the estimated annual
effective tax rate for the entire year. These estimated effective tax rates are subject to
adjustment in subsequent quarterly periods as our estimates of pretax income or loss for the year
are increased or decreased. The effective tax rates differ from the U.S. federal statutory rate
primarily due to changes in the valuation allowance, including the $19.6 million increase in the
valuation allowance recorded in the second quarter of 2009 as described above, and unrecognized tax
benefits, state taxes, research and development tax credits, foreign income taxed at lower rates,
interest on unrecognized tax benefits and provisions of authoritative guidance related to
share-based compensation which do not allow deferred tax benefits to be initially recognized on
compensation expense related to incentive stock options and employee stock purchase plans.
As a result of the factors set forth above, our net loss was $28.9 million in 2009, compared to net
income of $2.2 million in 2008.
LIQUIDITY AND CAPITAL RESOURCES
Our business is dependent on capital expenditures by semiconductor manufacturers and test
subcontractors that are, in turn, dependent on the current and anticipated market demand for
semiconductors. Worldwide demand for semiconductors has been dramatically reduced by the global
recession resulting in significant idle capacity for semiconductor manufacturers and lower demand
for semiconductor equipment. In response to lower demand for our semiconductor equipment, we have
implemented cost reduction programs aimed at aligning our ongoing operating costs with our
currently expected revenues over the near term. These cost management initiatives include
headcount reductions, pay cuts, suspension of the company’s matching contribution to our 401(k)
plan reduced work hours and mandatory time-off. The cyclical and volatile nature of our industry
makes estimates of future revenues, results of operations and net cash flows difficult.
Our primary historical source of liquidity and capital resources has been cash flow generated by
operations. We use cash to fund growth in our operating assets and to fund new products and product
enhancements primarily through research and development.
Liquidity
Working Capital: The following summarizes our cash, cash equivalents, short-term investments and
working capital:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
September 26, |
|
December 27, |
|
|
|
|
|
Percentage |
| (in thousands) |
|
2009 |
|
2008 |
|
Decrease |
|
Change |
| |
Cash, cash
equivalents and
short-term
investments |
|
$ |
87,273 |
|
|
$ |
88,385 |
|
|
$ |
(1,112 |
) |
|
|
(1.3 |
)% |
Working capital |
|
|
136,164 |
|
|
|
155,589 |
|
|
|
(19,425 |
) |
|
|
(12.5 |
)% |
Cash Flows
Operating Activities: Operating cash flows consist of net income (loss), adjusted for non-cash
expenses and changes in operating assets and liabilities. Non-cash items include depreciation and
amortization; non-cash share-based compensation expense and deferred income taxes. Our net cash
provided by operating activities in the nine months ended September 26, 2009 totaled $3.7 million.
Cash provided by operating activities was impacted by changes in
current assets and liabilities and included increases in accounts receivable and accounts payable
of $2.7 million and $4.6 million, respectively, and decreases in inventory, customer advances and
accrued compensation, warranty and other liabilities of $1.9 million, $1.4 million and
$1.5 million, respectively. Accounts receivable increased within our semiconductor equipment
business as a result of shipments of next generation handlers made late in the third quarter of
fiscal 2009. The increase in accounts payable was a result of the timing of cash payments primarily
within
22
Cohu, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
September 26, 2009
our semiconductor equipment business. Inventory decreased primarily due to provisions for
excess and obsolete inventory recorded within our semiconductor equipment segment due to weak
business conditions which were off-set, in part, by inventory purchases made to support the
production of our next generation test handlers. The reduction in customer advances was a result
of product shipments made to customers by our microwave communications equipment business during
the first nine months of 2009 which had been paid for in previous periods. The decrease in accrued
compensation, warranty and other liabilities was primarily a result of decreased warranty accruals
recorded by our semiconductor equipment business as a result of lower business volume which
resulted in fewer system sales.
Investing Activities: Investing cash flows consist primarily of cash used for capital expenditures
in support of our businesses, proceeds from investment maturities, asset disposals and
divestitures, and cash used for purchases of investments and business acquisitions. Our net cash
provided by investing activities in the first nine months of fiscal 2009 totaled $8.8 million and
was primarily the result of $45.3 million in net proceeds from sales and maturities of short-term
investments, offset by $34.9 million in cash used for purchases of short-term investments. We
invest our excess cash, in an attempt to seek the highest available return while preserving
capital, in short-term investments since excess cash is only temporarily available and may be
required for a business-related purpose. Other expenditures in the first nine months of fiscal
2009 included purchases of property, plant and equipment of $1.5 million. The purchases of
property, plant and equipment were primarily made to support activities in our semiconductor
equipment and microwave communications equipment businesses and consisted primarily of equipment
used in engineering, manufacturing and related functions.
Financing Activities: Cash flows from financing activities consist primarily of net proceeds from
the issuance of common stock under our stock option and employee stock purchase plans and cash used
to pay dividends to our stockholders. We issue stock options and maintain an employee stock
purchase plan as components of our overall employee compensation. We paid dividends totaling
$4.2 million, or $0.18 per common share during the first nine months of 2009. Future quarterly
dividends are subject to our cash liquidity, capital availability and periodic determinations by
our Board of Directors that cash dividends are in the best interests of our stockholders.
Capital Resources
We have a secured letter of credit facility (the “Secured Facility”) under which Bank of America,
N.A., has agreed to administer the issuance of letters of credit on behalf of Cohu and our
subsidiaries. The Secured Facility requires us to maintain deposits of cash or other approved
investments, which serve as collateral, in amounts that approximate our outstanding letters of
credit. As of September 26, 2009, we had approximately $0.3 million of standby letters of credit
outstanding.
We expect that we will continue to make capital expenditures to support our business and we
anticipate that present working capital will be sufficient to meet our operating requirements for
at least the next twelve months.
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations: Our significant contractual obligations consist of operating leases that
have not changed materially from those disclosed in our Annual Report on Form 10-K for the year
ended December 27, 2008.
Purchase Commitments: From time to time, we enter into commitments with our vendors to purchase
inventory at fixed prices or in guaranteed quantities. We are not able to determine the aggregate
amount of such purchase orders that represent contractual obligations, as purchase orders may
represent authorizations to purchase rather than binding agreements. Our purchase orders are based
on our current manufacturing needs and are fulfilled by our vendors within relatively short time
horizons. We typically do not have significant agreements for the purchase of raw materials or
other goods specifying minimum quantities or set prices that exceed our expected requirements for
the next three months.
Off-Balance Sheet Arrangements: During the ordinary course of business, we provide standby letters
of credit instruments to certain parties as required. As of September 26, 2009, the maximum
potential amount of future payments that we could be required to make under these standby letters
of credit was approximately $0.3 million.
No liability has been recorded in connection with these arrangements beyond those required to
appropriately account for the underlying transaction being guaranteed. We do not believe, based on
historical experience and information currently available, that it is probable that any amounts
will be required to be paid under these arrangements.
23
|
|
|
| Item 3. |
|
Quantitative and Qualitative Disclosures About Market Risk. |
Interest rate risk.
At September 26, 2009 our investment portfolio includes fixed-income securities with a fair value
of approximately $48.2 million. These securities are subject to interest rate risk and will
decline in value if interest rates increase. Due to the relatively short duration of our investment
portfolio, an immediate ten percent change in interest rates (e.g. 2.00% to 2.20%) would not have a
material impact on our financial condition or results of operations.
Foreign currency exchange risk.
We conduct business on a global basis and, as such, we are potentially exposed to adverse as well
as beneficial movements in foreign currency exchange rates. Except for our subsidiaries located in
Germany, which conduct business in Euros, we generally conduct business, including sales to foreign
customers, in U.S. dollars and as a result we have limited foreign currency exchange rate risk. The
effect of an immediate ten percent change in foreign exchange rates would not have a material
impact on our financial condition or results of operations.
|
|
|
| Item 4. |
|
Controls and Procedures. |
(a) Evaluation of Disclosure Controls and Procedures. Under the supervision and with the
participation of our management, including our principal executive officer and principal financial
officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is
defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as
amended. Based on this evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures were effective as of the end of the period
covered by this quarterly report.
It should be noted that any system of controls, however well designed and operated, can provide
only reasonable, and not absolute, assurance that the objectives of the system are met. In
addition, the design of any control system is based in part upon certain assumptions about the
likelihood of future events. Because of these and other inherent limitations of control systems,
there can be no assurance that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote. Our disclosure controls and procedures are
designed to provide reasonable assurance of achieving their objectives and our principal executive
officer and principal financial officer concluded that our disclosure controls and procedures were
effective at the reasonable assurance level.
(b) Changes in Internal Controls. During the last fiscal quarter, there have been no changes in our
internal control over financial reporting that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
24
Part II OTHER INFORMATION
|
|
|
| Item 1. |
|
Legal Proceedings. |
| |
|
The information set forth above under Note 7 contained in the “Notes to Unaudited
Condensed Consolidated Financial Statements” on Page 12 of this Form 10-Q is
incorporated herein by reference. |
| |
|
The most significant risk factors applicable to Cohu are described in Part I, Item 1A
(Risk Factors) of Cohu’s Annual Report on Form 10-K for the fiscal year ended December
27, 2008 (our “2008 Form 10-K”). There have been no material changes to the risk factors
previously disclosed in our 2008 Form 10-K. |
|
|
|
| Item 2. |
|
Unregistered Sales of Equity Securities and Use of Proceeds. |
| |
|
Recent Sales of Unregistered Securities |
| |
| |
|
None. |
| |
| |
|
Issuer Purchases of Equity Securities |
| |
| |
|
None. |
|
|
|
| Item 3. |
|
Defaults Upon Senior Securities. |
|
|
|
| Item 4. |
|
Submission of Matters to a Vote of Security Holders. |
|
|
|
| Item 5. |
|
Other Information. |
25
| |
|
|
3(i).1
|
|
Amended and Restated Certificate of Incorporation of Cohu, Inc. incorporated herein by
reference to Exhibit 3.1(a) from the Cohu, Inc. Form 10-Q for the quarterly period ended June
30, 1999 |
|
|
|
3(i).2
|
|
Certificate of Amendment of Amended and Restated Certificate of Incorporation of Cohu, Inc.
incorporated herein by reference from the Cohu, Inc. Form S-8 filed with the Securities and
Exchange Commission on June 30, 2000, Exhibit 4.1(a) |
|
|
|
3(ii)
|
|
Amended and Restated Bylaws of Cohu, Inc. incorporated herein by reference to Exhibit 3.2
from the Cohu, Inc. Report on Form 8-K filed with the Securities and Exchange Commission on
December 12, 1996 |
|
|
|
4.1
|
|
Amended and Restated Rights Agreement dated November 10, 2006, between Cohu, Inc. and Mellon
Investor Services LLC, as Rights Agent, incorporated herein by reference from the Cohu, Inc.
Report on Form 8-K filed with the Securities and Exchange Commission on November 13, 2006,
Exhibit 99.1 |
|
|
|
31.1
|
|
Certification pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2
|
|
Certification pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| |
|
|
|
|
| |
COHU, INC. |
|
| |
(Registrant) |
|
| |
| |
|
|
| Date: November 3, 2009 |
/s/ James A. Donahue
|
|
| |
James A. Donahue |
|
| |
President & Chief Executive Officer |
|
| |
| |
|
|
| Date November 3, 2009 |
/s/ Jeffrey D. Jones
|
|
| |
Jeffrey D. Jones |
|
| |
Vice President, Finance & Chief Financial Officer
(Principal Financial and Accounting Officer) |
|
27
EXHIBIT INDEX
| |
|
|
| Exhibit No. |
|
Description |
3(i).1
|
|
Amended and Restated Certificate of Incorporation of Cohu, Inc. incorporated herein by
reference to Exhibit 3.1(a) from the Cohu, Inc. Form 10-Q for the quarterly period ended June
30, 1999 |
|
|
|
3(i).2
|
|
Certificate of Amendment of Amended and Restated Certificate of Incorporation of Cohu, Inc.
incorporated herein by reference from the Cohu, Inc. Form S-8 filed with the Securities and
Exchange Commission on June 30, 2000, Exhibit 4.1(a) |
|
|
|
3(ii)
|
|
Amended and Restated Bylaws of Cohu, Inc. incorporated herein by reference to Exhibit 3.2
from the Cohu, Inc. Report on Form 8-K filed with the Securities and Exchange Commission on
December 12, 1996 |
|
|
|
4.1
|
|
Amended and Restated Rights Agreement dated November 10, 2006, between Cohu, Inc. and Mellon
Investor Services LLC, as Rights Agent, incorporated herein by reference from the Cohu, Inc.
Current Report on Form 8-K filed with the Securities and Exchange Commission on November 13,
2006, Exhibit 99.1 |
|
|
|
31.1
|
|
Certification pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2
|
|
Certification pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |