Cohu, Inc.
UNITED STATESPRIVATE
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
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þ |
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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 29, 2007
OR
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o |
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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
(State or other jurisdiction of
incorporation or organization)
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95-1934119
(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) |
Registrants 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 is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
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 29, 2007 the Registrant had 22,996,882 shares of its $1.00 par value common
stock outstanding.
COHU, INC.
INDEX
FORM 10-Q
SEPTEMBER 29, 2007
Item 1.
COHU, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
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September 29, |
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December 30, |
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2007 |
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2006 * |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
40,232 |
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$ |
24,829 |
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Short-term investments |
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116,003 |
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123,087 |
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Accounts receivable, less allowance for doubtful
accounts of $1,700 in 2007 and $1,644 in 2006 |
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47,643 |
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50,088 |
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Inventories: |
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Raw materials and purchased parts |
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22,418 |
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24,394 |
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Work in process |
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9,638 |
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13,820 |
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Finished goods |
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11,673 |
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9,806 |
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43,729 |
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48,020 |
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Deferred income taxes |
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18,199 |
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21,660 |
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Other current assets |
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5,647 |
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5,534 |
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Current assets of discontinued operations |
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28 |
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675 |
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Total current assets |
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271,481 |
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273,893 |
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Property, plant and equipment, at cost: |
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Land and land improvements |
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7,015 |
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6,965 |
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Buildings and building improvements |
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23,405 |
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23,134 |
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Machinery and equipment |
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31,941 |
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28,529 |
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62,361 |
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58,628 |
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Less accumulated depreciation and amortization |
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(32,035 |
) |
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(29,042 |
) |
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Net property, plant and equipment |
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30,326 |
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29,586 |
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Deferred income taxes |
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3,312 |
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2,532 |
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Goodwill |
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16,038 |
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12,898 |
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Intangible assets, net of accumulated amortization
of $4,015 in 2007 and $2,178 in 2006 (Note 3) |
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7,145 |
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6,792 |
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Other assets |
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171 |
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161 |
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Noncurrent assets of discontinued operations |
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471 |
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477 |
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$ |
328,944 |
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$ |
326,339 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
12,609 |
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$ |
7,494 |
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Accrued compensation and benefits |
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10,502 |
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13,509 |
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Accrued warranty |
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5,780 |
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8,118 |
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Customer advances |
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2,966 |
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2,275 |
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Deferred profit |
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4,570 |
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9,841 |
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Income taxes payable |
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393 |
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3,802 |
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Other accrued liabilities |
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4,375 |
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3,018 |
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Current liabilities of discontinued operations |
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156 |
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316 |
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Total current liabilities |
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41,351 |
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48,373 |
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Other accrued liabilities |
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2,546 |
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1,985 |
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Deferred income taxes |
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4,544 |
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4,393 |
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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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Common stock, $1 par value; 60,000 shares authorized, 22,997
shares issued and outstanding in 2007 and 22,700 shares in 2006 |
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22,997 |
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22,700 |
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Paid-in capital |
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53,384 |
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46,825 |
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Retained earnings |
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204,350 |
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202,477 |
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Accumulated other comprehensive loss |
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(228 |
) |
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(414 |
) |
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Total stockholders equity |
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280,503 |
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271,588 |
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$ |
328,944 |
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$ |
326,339 |
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* |
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Derived from December 30, 2006 audited financial statements. |
The accompanying notes are an integral part of these statements.
3
COHU, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(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 29, |
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September 30, |
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September 29, |
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September 30, |
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2007 |
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2006 |
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2007 |
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2006 |
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Net sales |
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$ |
64,490 |
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$ |
74,787 |
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$ |
184,265 |
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$ |
193,499 |
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Cost and expenses: |
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Cost of sales |
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43,885 |
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48,130 |
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124,691 |
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124,862 |
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Research and development |
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9,575 |
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11,267 |
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29,298 |
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28,550 |
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Selling, general and administrative |
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9,861 |
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10,698 |
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27,408 |
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27,984 |
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Gain on sale of facilities |
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(2,963 |
) |
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63,321 |
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70,095 |
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181,397 |
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178,433 |
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Income from operations |
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1,169 |
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4,692 |
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2,868 |
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15,066 |
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Interest income |
|
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2,106 |
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1,764 |
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|
6,286 |
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4,807 |
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Income from continuing operations before
income taxes |
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3,275 |
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6,456 |
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|
9,154 |
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19,873 |
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Income tax provision |
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1,040 |
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|
1,958 |
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3,163 |
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6,598 |
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Income from continuing operations |
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2,235 |
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4,498 |
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5,991 |
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13,275 |
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Discontinued operations (Note 2): |
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Loss from discontinued metal detection
equipment operation, including loss on
sale of $466 and $1,272 for the three and
nine months ended September 30, 2006,
before income taxes, respectively |
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(459 |
) |
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(66 |
) |
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(1,434 |
) |
Income tax benefit |
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(158 |
) |
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(23 |
) |
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(499 |
) |
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Loss from discontinued operations |
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(301 |
) |
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(43 |
) |
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(935 |
) |
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Net income |
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$ |
2,235 |
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$ |
4,197 |
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$ |
5,948 |
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$ |
12,340 |
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Income (loss) per share: |
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Basic: |
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Income from continuing operations |
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$ |
0.10 |
|
|
$ |
0.20 |
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$ |
0.26 |
|
|
$ |
0.59 |
|
Loss from discontinued operations |
|
|
(0.00 |
) |
|
|
(0.01 |
) |
|
|
(0.00 |
) |
|
|
(0.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
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|
Net income |
|
$ |
0.10 |
|
|
$ |
0.19 |
|
|
$ |
0.26 |
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|
$ |
0.55 |
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Diluted: |
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Income from continuing operations |
|
$ |
0.10 |
|
|
$ |
0.19 |
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|
$ |
0.26 |
|
|
$ |
0.58 |
|
Loss from discontinued operations |
|
|
(0.00 |
) |
|
|
(0.01 |
) |
|
|
(0.00 |
) |
|
|
(0.04 |
) |
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Net income |
|
$ |
0.10 |
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|
$ |
0.18 |
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$ |
0.26 |
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$ |
0.54 |
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Weighted average shares used in
computing income (loss) per share: |
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|
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Basic |
|
|
22,945 |
|
|
|
22,609 |
|
|
|
22,830 |
|
|
|
22,563 |
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|
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Diluted |
|
|
23,433 |
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|
|
22,806 |
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|
|
23,282 |
|
|
|
22,892 |
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Cash dividends declared per share |
|
$ |
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 statements.
4
COHU, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
|
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|
|
|
|
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|
|
|
Nine Months Ended |
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|
September 29, |
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September 30, |
|
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|
2007 |
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|
2006 |
|
Cash flows from continuing operating activities: |
|
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|
|
|
|
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|
Net income |
|
$ |
5,948 |
|
|
$ |
12,340 |
|
Loss from discontinued operations |
|
|
43 |
|
|
|
935 |
|
Adjustments to reconcile net income to net
cash provided from continuing operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
5,641 |
|
|
|
4,860 |
|
Gain on sale of facilities |
|
|
|
|
|
|
(2,963 |
) |
Share-based compensation expense |
|
|
3,138 |
|
|
|
2,625 |
|
Deferred income taxes |
|
|
2,096 |
|
|
|
(2,390 |
) |
Increase in other accrued liabilities |
|
|
85 |
|
|
|
71 |
|
Excess tax benefits from stock options exercised |
|
|
(482 |
) |
|
|
(850 |
) |
Changes in current assets and liabilities, excluding
effects from acquisitions and divestitures: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
2,612 |
|
|
|
2,618 |
|
Inventories |
|
|
5,283 |
|
|
|
(9,161 |
) |
Other current assets |
|
|
1,746 |
|
|
|
940 |
|
Accounts payable |
|
|
4,597 |
|
|
|
(3,530 |
) |
Customer advances |
|
|
691 |
|
|
|
(273 |
) |
Deferred profit |
|
|
(5,271 |
) |
|
|
(2,840 |
) |
Income taxes payable, including excess stock option exercise benefit |
|
|
(2,927 |
) |
|
|
2,954 |
|
Accrued compensation, warranty and other liabilities |
|
|
(4,505 |
) |
|
|
(1,705 |
) |
|
|
|
|
|
|
|
Net cash provided from continuing operating activities |
|
|
18,695 |
|
|
|
3,631 |
|
Cash flows from continuing investing activities, excluding effects from
acquisitions and divestitures: |
|
|
|
|
|
|
|
|
Purchases of short-term investments |
|
|
(122,891 |
) |
|
|
(63,097 |
) |
Sales and maturities of short-term investments |
|
|
130,017 |
|
|
|
48,382 |
|
Purchases of property, plant and equipment |
|
|
(1,848 |
) |
|
|
(4,028 |
) |
Cash received from facility sale |
|
|
|
|
|
|
6,239 |
|
Payment for purchase of AVS, net of cash received |
|
|
(8,169 |
) |
|
|
|
|
Payment for purchase of Unigen assets |
|
|
|
|
|
|
(7,700 |
) |
Cash received from disposition of discontinued operations, net |
|
|
|
|
|
|
2,663 |
|
Cash advances to discontinued operations |
|
|
(150 |
) |
|
|
|
|
Other assets |
|
|
(10 |
) |
|
|
40 |
|
|
|
|
|
|
|
|
Net cash used for continuing investing activities |
|
|
(3,051 |
) |
|
|
(17,501 |
) |
Cash flows from continuing financing activities: |
|
|
|
|
|
|
|
|
Issuance of stock, net |
|
|
3,236 |
|
|
|
3,484 |
|
Excess tax benefits from stock options exercised |
|
|
482 |
|
|
|
850 |
|
Cash dividends |
|
|
(4,099 |
) |
|
|
(4,050 |
) |
|
|
|
|
|
|
|
Net cash provided from (used for) continuing financing activities |
|
|
(381 |
) |
|
|
284 |
|
Effect of exchange rate changes on cash |
|
|
140 |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents from continuing
operations |
|
|
15,403 |
|
|
|
(13,586 |
) |
Cash and cash equivalents of continuing operations at beginning of period |
|
|
24,829 |
|
|
|
38,543 |
|
|
|
|
|
|
|
|
Cash and cash equivalents of continuing operations at end of period |
|
$ |
40,232 |
|
|
$ |
24,957 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
5
COHU, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Continued
(Unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 29, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Cash flows from discontinued operations: |
|
|
|
|
|
|
|
|
Cash used for operating activities of discontinued operations |
|
$ |
(150 |
) |
|
$ |
(195 |
) |
Cash used for investing activities of discontinued operations |
|
|
|
|
|
|
(9 |
) |
Cash advances from continuing operations, net |
|
|
150 |
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents of discontinued operations |
|
|
|
|
|
|
(204 |
) |
Cash and cash equivalents of discontinued operations at beginning of period |
|
|
|
|
|
|
204 |
|
|
|
|
|
|
|
|
Cash and cash equivalents of discontinued operations at end of period |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Income taxes, net of refunds |
|
$ |
3,442 |
|
|
$ |
6,217 |
|
Inventory capitalized as capital assets |
|
$ |
1,864 |
|
|
$ |
367 |
|
Dividends declared but not yet paid |
|
$ |
1,380 |
|
|
$ |
1,357 |
|
The accompanying notes are an integral part of these statements.
6
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 29, 2007
1. |
|
Summary of Significant Accounting Policies |
|
|
|
Basis of Presentation |
|
|
|
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 30, 2006 has been derived from our
audited financial statements at that date. The interim condensed consolidated financial
statements as of September 29, 2007 (also referred to as the third quarter of fiscal 2007
and the first nine months of fiscal 2007) and September 30, 2006 (also referred to as the
third quarter of fiscal 2006 and the first nine months of fiscal 2006) are unaudited.
However, in managements 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
quarter of fiscal 2007 and the first nine months of fiscal 2007 were comprised of 13 and 39
weeks, respectively. The third quarter of fiscal 2006 and the first nine months of fiscal 2006
were comprised of 14 and 39 weeks, respectively. |
|
|
|
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 30, 2006, which are included
in our 2006 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. |
|
|
|
Risks and Uncertainties |
|
|
|
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 2006 Annual Report on Form 10-K. Understanding these risks and uncertainties is
integral to the review of our interim condensed consolidated financial statements. |
|
|
|
Discontinued Operations |
|
|
|
On May 12, 2006, we sold our metal detection equipment business, FRL, Incorporated (FRL).
Subsequent to the sale, the operating results of FRL are being presented as discontinued
operations (Note 2) and all prior period financial statements have been reclassified
accordingly. |
|
|
|
Share-Based Compensation |
|
|
|
On January 1, 2006, we adopted the provisions of Financial Accounting Standards Board (FASB)
Statement No. 123 (revised 2004), Share-based Payment, (Statement No. 123R) and SEC Staff
Accounting Bulletin No. 107, (SAB No. 107) requiring the measurement and recognition of all
share-based compensation under the fair value method. 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 based on the provisions prescribed
under Statement No. 123R and SAB No. 107. |
|
|
|
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): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 29, |
|
|
September 30, |
|
|
September 29, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Cost of sales |
|
$ |
119 |
|
|
$ |
114 |
|
|
$ |
347 |
|
|
$ |
280 |
|
Research and development |
|
|
322 |
|
|
|
343 |
|
|
|
937 |
|
|
|
765 |
|
Selling, general and administrative |
|
|
575 |
|
|
|
668 |
|
|
|
1,854 |
|
|
|
1,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation |
|
|
1,016 |
|
|
|
1,125 |
|
|
|
3,138 |
|
|
|
2,625 |
|
Income tax benefit |
|
|
(208 |
) |
|
|
(159 |
) |
|
|
(770 |
) |
|
|
(345 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation, net of tax |
|
$ |
808 |
|
|
$ |
966 |
|
|
$ |
2,368 |
|
|
$ |
2,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 29, 2007
|
|
Income Per Share |
|
|
|
Income per share is computed in accordance with FASB Statement No. 128, Earnings per Share.
Basic income per share is computed using the weighted average number of common shares
outstanding during each period. Diluted income per share includes the dilutive effect of
common shares potentially issuable upon the exercise of stock options utilizing the
treasury stock method. 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 29, 2007, options
to purchase approximately 143,000 and 426,000 shares of common stock, respectively, were
excluded from the computation. For the three and nine months ended September 30, 2006,
options to purchase approximately 1,496,000 and 964,000 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 29, |
|
September 30, |
|
September 29, |
|
September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Weighted average common shares |
|
|
22,945 |
|
|
|
22,609 |
|
|
|
22,830 |
|
|
|
22,563 |
|
Effect of dilutive stock options |
|
|
488 |
|
|
|
197 |
|
|
|
452 |
|
|
|
329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,433 |
|
|
|
22,806 |
|
|
|
23,282 |
|
|
|
22,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 30, 2006. 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 the consolidated balance sheet. |
|
|
|
At September 29, 2007, we had deferred revenue totaling approximately $7.2 million and
deferred profit of $4.6 million. At December 30, 2006, we had deferred revenue totaling
approximately $22.0 million and deferred profit of $9.8 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 2007 and 2006 was not significant. |
|
|
|
Recent Accounting Pronouncements |
|
|
|
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, (Statement No. 159). Statement No. 159
gives entities the option to carry many financial assets and liabilities at fair value,
with changes in fair value recorded in earnings. Statement No. 159, which will be
effective in our first quarter of fiscal 2008, is not expected to have a material impact
on our consolidated financial position or results of operations. |
|
2. |
|
Discontinued Operations |
|
|
|
On May 12, 2006, we sold substantially all the assets of our metal detection equipment
business, FRL. Our decision to sell FRL resulted from managements determination that
this industry segment was no longer a strategic fit within our organization. We are
currently attempting to sell our FRL facility in Los Banos, California and believe the
current fair value of the property is in excess of its $0.5 million carrying value at
September 29, 2007. |
8
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 29, 2007
|
|
A summary of key financial information of our discontinued operations is as follows (in
thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 29, |
|
|
September 30, |
|
|
September 29, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
Net sales |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
$ |
|
|
|
$ |
7 |
|
|
$ |
|
|
|
$ |
(162 |
) |
Loss on sale of metal detection
equipment business |
|
|
|
|
|
|
(466 |
) |
|
|
(66 |
) |
|
|
(1,272 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations |
|
|
|
|
|
|
(459 |
) |
|
|
(66 |
) |
|
|
(1,434 |
) |
Income tax benefit |
|
|
|
|
|
|
(158 |
) |
|
|
(23 |
) |
|
|
(499 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net |
|
$ |
|
|
|
$ |
(301 |
) |
|
$ |
(43 |
) |
|
$ |
(935 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
3. |
|
Acquisitions and Intangible Assets |
|
|
|
Tandberg Television AVS GmbH |
|
|
|
On March 30, 2007, we purchased Tandberg Television AVS GmbH (AVS). The results of AVS
operations have been included in our consolidated financial statements since that date. Pro
forma results of operations have not been presented because the effect of the acquisition was
not material. AVS, located near Frankfurt, Germany, designs, develops, manufactures and sells
digital microwave transmitters, receivers and communications systems. This acquisition expands
our digital microwave communications solutions, especially in high definition broadcast
television and public safety and law enforcement applications. |
|
|
|
The purchase price of this acquisition was approximately $8.2 million, and was funded
primarily by our cash reserves ($8.0 million), other acquisition costs ($0.2 million) and
certain AVS liabilities assumed ($2.3 million). The purchase price allocation is preliminary
and, as a result, adjustments to the amounts noted below may occur. We expect to finalize the
purchase price allocation in the fourth quarter of fiscal 2007. |
|
|
|
The acquisition was considered a business in accordance with EITF 98-3, Determining Whether a
Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business (EITF 98-3),
and the total cost of the acquisition was allocated to the assets acquired and liabilities
assumed based on their estimated respective fair values, subject to adjustment, in accordance
with FASB Statement No. 141, Business Combinations, (Statement No. 141). The acquisition was
nontaxable and certain of the assets acquired, including goodwill and intangibles, are not
expected to be deductible for tax purposes. The goodwill was assigned to our microwave
communications segment. |
|
|
|
The preliminary allocation of purchase price to the acquired assets and assumed liabilities
was as follows (in thousands): |
|
|
|
|
|
Current assets |
|
$ |
4,344 |
|
Fixed assets |
|
|
831 |
|
Intangible assets |
|
|
2,190 |
|
Goodwill |
|
|
3,140 |
|
|
|
|
|
Total assets acquired |
|
|
10,505 |
|
Liabilities assumed |
|
|
(2,336 |
) |
|
|
|
|
Net assets acquired |
|
$ |
8,169 |
|
|
|
|
|
|
|
The purchase price allocation was based on managements preliminary valuation and the
estimates and assumptions used are subject to change. The primary areas of the purchase price
allocation that are not yet finalized relate to deferred income taxes and residual goodwill.
Amounts allocated to intangible assets are being amortized on a straight-line basis over their
estimated useful lives currently estimated at four years. |
9
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 29, 2007
|
|
Unigen Acquisition |
|
|
|
On December 29, 2005, we entered into an exclusive, perpetual, irrevocable, world-wide,
royalty-free license for certain patents with Unisys Corporation (Unisys) for a one-time
cash payment of $5.0 million. On March 16, 2006, we purchased certain intellectual property,
fixed assets, inventory and a customer contract of Unisys Unigen operation (Unigen). The
results of Unigens operations have been included in our consolidated financial statements
since that date. Unigen developed, manufactured and marketed advanced thermal solutions for
use in semiconductor test and burn-in. |
|
|
|
Included in the assets we acquired were the patents licensed from Unisys in December 2005 and,
as a result, these two transactions have been combined for purposes of allocating the total
purchase price to the assets acquired. The purchase price of this acquisition was
approximately $17.2 million, and was funded primarily by our cash reserves ($7.7 million),
cash previously paid in December 2005 for the patent license and a deposit on the acquisition
($5.3 million), other acquisition costs ($0.2 million) and certain Unigen liabilities assumed
($0.1 million). We also recorded a $4.0 million liability for amounts owed to Unisys for
inventory we acquired. The acquisition was considered a business in accordance with EITF 98-3,
and the total cost of the acquisition was allocated to the assets acquired and liabilities
assumed based on their respective fair values in accordance with Statement No. 141. All assets
are expected to be fully deductible for tax purposes. The goodwill was assigned to our
semiconductor equipment segment. |
|
|
|
The allocation of purchase price to the acquired assets and assumed liabilities was as follows (in thousands): |
|
|
|
|
|
Current assets |
|
$ |
5,464 |
|
Fixed assets |
|
|
1,522 |
|
Intangible assets |
|
|
7,020 |
|
Goodwill |
|
|
3,301 |
|
|
|
|
|
Total assets acquired |
|
|
17,307 |
|
Current liabilities assumed |
|
|
(142 |
) |
|
|
|
|
Net assets acquired |
|
$ |
17,165 |
|
|
|
|
|
|
|
Amounts allocated to intangible assets are being amortized on a straight-line basis over their
estimated useful lives currently estimated at five years. Pro forma results of operations
have not been presented because the effect of the acquisition was not material. |
|
|
|
Purchased intangible assets, subject to amortization, were as follows (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 29, 2007 |
|
|
December 30, 2006 |
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Gross Carrying |
|
|
Accumulated |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amortization |
|
|
|
|
Unigen technology |
|
$ |
7,020 |
|
|
$ |
2,162 |
|
|
$ |
7,020 |
|
|
$ |
1,096 |
|
KryoTech technology |
|
|
1,950 |
|
|
|
1,568 |
|
|
|
1,950 |
|
|
|
1,082 |
|
AVS technology |
|
|
2,190 |
|
|
|
285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,160 |
|
|
$ |
4,015 |
|
|
$ |
8,970 |
|
|
$ |
2,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to purchased intangible assets, noted above, was approximately
$0.8 million in the third quarter of fiscal 2007, and approximately $1.8 million in the first
nine months of fiscal 2007. Amortization expense related to purchased intangible
assets was approximately $0.5 million in the third quarter of fiscal 2006, and approximately
$1.2 million in the first nine months of fiscal 2006. As of September 29, 2007, we expect
amortization expense in future periods, to be as follows: remainder of 2007 $655,000; 2008
$2,183,000; 2009 $1,966,000; 2010 $1,966,000; 2011 $375,000. |
|
4. |
|
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 29, 2007, there were 647,265 shares available for issuance
under the Plan. |
10
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 29, 2007
|
|
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 29, 2007, 1,403,742
shares were available for future equity grants under the Cohu, Inc. 2005 Equity Incentive
Plan. We have historically issued new shares of Cohu Common Stock upon share option exercise. |
|
|
|
At September 29, 2007 we had 2,163,735 stock options outstanding. These options had a
weighted-average exercise price of $16.02 per share, an aggregate intrinsic value of
approximately $6.6 million and the weighted average remaining contractual term was
approximately 5.6 years. |
|
|
|
At September 29, 2007 we had 1,521,983 stock options outstanding that were exercisable. These
options had a weighted-average exercise price of $15.75 per share, an aggregate intrinsic
value of approximately $5.1 million and the weighted average remaining contractual term was
approximately 4.9 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 29, 2007 we had 180,813 restricted stock units outstanding with an aggregate
intrinsic value of approximately $3.4 million. |
|
5. |
|
Comprehensive Income |
|
|
|
Comprehensive income 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 29, |
|
|
September 30, |
|
|
September 29, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Income from continuing operations |
|
$ |
2,235 |
|
|
$ |
4,498 |
|
|
$ |
5,991 |
|
|
$ |
13,275 |
|
Loss from discontinued operations |
|
|
|
|
|
|
(301 |
) |
|
|
(43 |
) |
|
|
(935 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
2,235 |
|
|
|
4,197 |
|
|
|
5,948 |
|
|
|
12,340 |
|
Foreign currency translation
adjustment |
|
|
49 |
|
|
|
|
|
|
|
141 |
|
|
|
|
|
Change in unrealized loss on
investments |
|
|
60 |
|
|
|
216 |
|
|
|
26 |
|
|
|
138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
2,344 |
|
|
$ |
4,413 |
|
|
$ |
6,115 |
|
|
$ |
12,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our accumulated other comprehensive loss totaled approximately $0.2 million and $0.4 million
at September 29, 2007 and December 30, 2006, respectively, and was attributed to, net of
income taxes, unrealized losses and gains on investments, adjustments resulting from the
adoption of FASB Statement No. 158, Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans, (an amendment of FASB Statements No. 87, 88, 106, and 132R) and,
beginning in the second quarter of fiscal 2007, foreign currency adjustments resulting from
the translation of certain accounts into U.S. dollars where the functional currency is the
Euro. |
|
6. |
|
Income Taxes |
|
|
|
The income tax provision included in the statements of income for the three and nine months
ended September 29, 2007 and September 30, 2006, 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 for the year are increased or
decreased. The effective tax rates of 34.6% and 33.2%, for the nine months ended September 29,
2007 and September 30, 2006, respectively, differ from the U.S. federal statutory rate
primarily due to state taxes, research and development tax credits, foreign income taxed at
lower rates and export sales and manufacturing activities tax benefits offset by the effects
of Statement No. 123R that does not allow deferred tax benefits to be initially recognized on
compensation expense related to incentive stock options and employee stock purchase plans. |
|
|
|
We have derived significant tax benefits from export sales. As a result of the American Jobs
Creation Act of 2004, the export sales benefit derived from the Extraterritorial Income
Exclusion (ETI) was repealed subject |
11
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 29, 2007
|
|
to a phase-out that limited the full tax benefit to 60%
in 2006 with no benefit in 2007 and subsequent years. The ETI benefit was replaced with a
deduction for domestic manufacturing activities subject to a phase-in beginning in 2005. The
tax benefits we derive from the domestic manufacturing deduction are less than those from ETI. |
|
|
|
We adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement No.109, (FIN 48) on December 31, 2006, the first
day of our 2007 fiscal year. As a result of the adoption of FIN 48, we recognized a decrease
in the liability for unrecognized tax benefits of approximately $423,000, a decrease in
deferred tax assets of approximately $381,000 and a corresponding increase in the December 31,
2006 balance of retained earnings of approximately $42,000. |
|
|
|
Our unrecognized tax benefits, excluding accrued interest, totaled approximately $3.7 million
at December 31, 2006. If these unrecognized tax benefits are ultimately recognized, this
amount, less the related federal benefit for state items of approximately $0.7 million, would
result in a reduction in our income tax expense and effective tax rate. |
|
|
|
We recognize interest accrued related to unrecognized tax benefits in income tax expense.
Cohu had approximately $200,000 accrued for the payment of accrued interest at December 31,
2006. Interest expense accrued in the third quarter and nine months ended September 29, 2007
was approximately $84,000 and $180,000, respectively. |
|
|
|
The Internal Revenue Service (IRS) has examined our income tax returns through 2002, and the
California Franchise Tax Board through 1999. |
|
7. |
|
Industry Segments |
|
|
|
We have three reportable segments as defined by FASB Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information. As discussed in Note 2, in May, 2006, we
sold substantially all the assets of FRL, which comprised our metal detection equipment
segment, and have presented financial information for this segment as discontinued operations.
Our reportable segments are business units that offer different products and are managed
separately because each business requires different technology and marketing strategies. |
|
|
|
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 29, |
|
|
September 30, |
|
|
September 29, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Net sales by segment: |
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor equipment |
|
$ |
56,275 |
|
|
$ |
55,894 |
|
|
$ |
156,830 |
|
|
$ |
160,001 |
|
Television cameras |
|
|
3,943 |
|
|
|
5,321 |
|
|
|
12,039 |
|
|
|
13,566 |
|
Microwave communications |
|
|
4,272 |
|
|
|
13,572 |
|
|
|
15,396 |
|
|
|
19,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated net sales and
net sales for reportable segments |
|
$ |
64,490 |
|
|
$ |
74,787 |
|
|
$ |
184,265 |
|
|
$ |
193,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor equipment |
|
$ |
4,097 |
|
|
$ |
4,204 |
|
|
$ |
9,340 |
|
|
$ |
14,241 |
|
Television cameras |
|
|
(576 |
) |
|
|
237 |
|
|
|
(1,798 |
) |
|
|
(450 |
) |
Microwave communications |
|
|
(1,584 |
) |
|
|
1,460 |
|
|
|
(2,037 |
) |
|
|
1,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit for reportable segments |
|
|
1,937 |
|
|
|
5,901 |
|
|
|
5,505 |
|
|
|
14,904 |
|
Other unallocated amounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of facilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,963 |
|
Corporate expenses |
|
|
(768 |
) |
|
|
(1,209 |
) |
|
|
(2,637 |
) |
|
|
(2,801 |
) |
Interest income |
|
|
2,106 |
|
|
|
1,764 |
|
|
|
6,286 |
|
|
|
4,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes |
|
$ |
3,275 |
|
|
$ |
6,456 |
|
|
$ |
9,154 |
|
|
$ |
19,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 29, 2007
|
|
|
|
|
|
|
|
|
|
|
September 29, |
|
|
December 30, |
|
|
|
2007 |
|
|
2006 |
|
Total assets by segment (in thousands): |
|
|
|
|
|
|
Semiconductor equipment |
|
$ |
115,337 |
|
|
$ |
128,609 |
|
Television cameras |
|
|
9,202 |
|
|
|
10,537 |
|
Microwave communications |
|
|
26,928 |
|
|
|
12,239 |
|
|
|
|
|
|
|
|
Total assets for reportable segments |
|
|
151,467 |
|
|
|
151,385 |
|
Corporate, principally cash and
investments
and deferred taxes |
|
|
176,979 |
|
|
|
173,802 |
|
Discontinued operations |
|
|
498 |
|
|
|
1,152 |
|
|
|
|
|
|
|
|
Total consolidated assets |
|
$ |
328,944 |
|
|
$ |
326,339 |
|
|
|
|
|
|
|
|
|
|
A small number of customers historically have been responsible for a significant portion of
our consolidated net sales. Three customers of the semiconductor equipment segment accounted
for 69% and 65% of our consolidated net sales for the third quarter and first nine months of
fiscal 2007, respectively. Three customers of the semiconductor equipment segment accounted
for 59% and 62% of our consolidated net sales for the third quarter and first nine months of
fiscal 2006, respectively. |
|
8. |
|
Contingencies |
|
|
|
We previously disclosed in our Form 10-Q for the quarter ended June 30, 2007 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 has produced documents
responsive to the request and is fully cooperating. BMS has not been informed that it is a
target of an investigation, and its status is currently unknown. Consequently, as of the date
of this report, it is premature to assess whether this matter will have any impact on the BMS
business 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 our operations. |
|
9. |
|
Guarantees |
|
|
|
Our products are generally sold with a 12-month to 36-month warranty period 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 during the third quarter of fiscal 2007 and 2006 and the first
nine months of fiscal 2007 and 2006 were as follows (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 29, |
|
|
September 30, |
|
|
September 29, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Balance at beginning of
period |
|
$ |
6,661 |
|
|
$ |
6,310 |
|
|
$ |
8,118 |
|
|
$ |
4,560 |
|
Warranty expense accruals |
|
|
1,984 |
|
|
|
2,518 |
|
|
|
5,201 |
|
|
|
9,134 |
|
Warranty payments |
|
|
(2,865 |
) |
|
|
(2,464 |
) |
|
|
(7,689 |
) |
|
|
(7,359 |
) |
Warranty liability assumed |
|
|
|
|
|
|
|
|
|
|
150 |
|
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
5,780 |
|
|
$ |
6,364 |
|
|
$ |
5,780 |
|
|
$ |
6,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From time-to-time, during the ordinary course of business, we provide standby letters of
credit to certain parties. As of September 29, 2007, the maximum potential amount of future
payments that Cohu could be required to make under these standby letters of credit is
approximately $1.3 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. |
13
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 29, 2007
10. |
|
Real Estate Transaction |
|
|
|
On May 5, 2006, we completed the sale of the land and building previously used by our
operations in Littleton, Massachusetts to FPK Realty, LLC. The property was sold for $6.5
million in cash, less related costs, resulting in a net pretax gain of approximately $3.0
million. |
14
Cohu, Inc.
Managements Discussion and Analysis of Financial Condition and Results of Operations
September 29, 2007
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 managements 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 managements current expectations. Such risks and uncertainties include
those set forth in this Quarterly Report on Form 10-Q and our 2006 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 managements 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
Our primary business activity involves the development, manufacture, marketing, sale and servicing
of test handling and burn-in related equipment and thermal sub-systems for the global semiconductor
industry. This business is significantly dependent on capital expenditures by semiconductor
manufacturers and test subcontractors, which in turn are dependent on the current and anticipated
market demand for semiconductors that are subject to significant cyclical changes in demand.
Changes in the semiconductor, electronics, computer and telecommunications industries, as well as
rapidly shifting global economic conditions, have had and will continue to have a significant
impact on our businesses.
Orders for semiconductor equipment declined during both the fourth quarter of fiscal 2006 and the
first quarter of fiscal 2007, reflecting a continuation of the general softness in the back-end
semiconductor equipment industry that began in late 2006. While orders for semiconductor equipment
increased 38.7% ($14.7 million) in the second quarter of fiscal 2007, compared to the first quarter
of fiscal 2007, such orders decreased 20.7% ($10.9 million) in the third quarter of fiscal 2007,
compared to the second quarter of fiscal 2007. We have continued to see a significant decrease in
demand for our thermal handlers that has been only partially offset by increased orders for our
burn-in related thermal sub-system products. Based on current customer forecasts we do not expect
any significant improvement in near term demand for test handlers and we expect this product mix
trend to continue. Our burn-in related thermal sub-system products have significantly lower gross
margins than our thermal test handlers. As a result of this shift in product mix, compared to
fiscal 2005, our gross margin has declined during fiscal 2006 and the first nine months of 2007. We
will continue to focus on reducing product costs and overall spending, while we develop new product
offerings for the test handler and burn-in markets.
Our deferred revenue totaled $7.2 million and $22.0 million at September 29, 2007 and December 30,
2006, respectively. The decrease in deferred revenue is the result of the recognition of revenue
for certain semiconductor equipment product sales, for which customer acceptance was obtained
during 2007.
Our operating results in the last three years have been negatively impacted by charges to cost of
sales related to excess, obsolete and lower of cost or market inventory issues. These charges
totaled approximately $21.7 million during the three-year period ended December 30, 2006 and
approximately $3.5 million during the first nine months of fiscal 2007 and were primarily the
result of decreases in customer forecasts, competitive conditions in the test handler industry and,
to a lesser extent, changes in our sales product mix. During the third quarter of fiscal 2006 we
experienced a decline in customer forecasts for a burn-in system acquired from Unisys that
negatively impacted our forecasted inventory usage and, as a result, we recorded a charge of
approximately $4.6 million in addition to our charges for other products. 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. Increased competition, particularly in the last
several years, has also negatively impacted our gross margins on certain products and we believe it
is likely these conditions will exist for the foreseeable future.
Our other operating costs consist of research and development (R&D) and selling, general and
administrative expenses (SG&A). Both R&D and SG&A expense increased in 2006 and the first
quarter of 2007, due primarily to our purchase of the Unigen business, increased headcount,
increased business volume, investment in product development programs and share-based compensation.
15
Cohu, Inc.
Managements Discussion and Analysis of Financial Condition and Results of Operations
September 29, 2007
Our non-semiconductor equipment businesses have comprised approximately 14% of our revenues during
the three-year period ended December 30, 2006. In an effort to expand our microwave communications
business segment, on March 30, 2007 we acquired AVS to increase our digital microwave
communications solutions, especially in high definition broadcast television and public safety and
law enforcement applications.
Our financial condition is strong with significant cash and short-term investments and no long-term
debt.
Our management team uses several performance metrics to manage our various businesses. These
metrics, which tend to focus on near-term forecasts due to the limited order backlog in our
businesses, include (i) order bookings 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 next twelve months forecast; (iii) gross margin and other operating expense trends; (iv)
industry data and trends noted in various publicly available sources; and (v) 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 operating results
or cash flows.
Application of Critical Accounting Estimates and Policies
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 investors 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 from operations; |
|
|
|
|
estimation of valuation allowances and accrued liabilities, specifically product warranty,
inventory reserves and allowance for doubtful accounts, which impact gross margin or
operating expenses; |
|
|
|
|
the recognition and measurement of current and deferred income tax assets and liabilities,
which impact our tax provision; |
|
|
|
|
the assessment of recoverability of long-lived assets, which primarily impacts gross
margin or operating expenses if we are required to record impairments of assets or accelerate
their depreciation; and |
|
|
|
|
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) for which
full payment is 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 doubtful accounts 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.
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
16
Cohu, Inc.
Managements Discussion and Analysis of Financial Condition and Results of Operations
September 29, 2007
have a negative impact on our gross margin.
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 which would impact our
gross margin.
Contingencies: We previously disclosed in our Form 10-Q for the quarter ended June 30, 2007 that in
May, 2007 our BMS subsidiary 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 has produced documents responsive to the request and is fully
cooperating. BMS has not been informed that it is a target of an investigation, and its status is
currently unknown. Consequently, as of the date of this report, it is premature to assess whether
this matter will have any impact on the BMS business or results of operations.
In addition to the above matter, we are subject to certain contingencies that arise in the ordinary
course of our businesses. In accordance with FASB Statement No. 5, Accounting for Contingencies,
(Statement No. 5) we 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, as defined in
Statement No. 5 and the amount of the loss or impairment is reasonably estimable, we accrue a
charge to operations in the period such conditions become known.
Income Taxes: We estimate our liability for income taxes based on the various jurisdictions where
we conduct business. This requires us to estimate our actual current tax exposure and to assess
temporary differences that result from differing treatment of certain items for tax and accounting
purposes. These differences result in deferred tax assets and liabilities that are reflected in the
consolidated balance sheet. The net deferred tax assets are reduced by a valuation allowance if,
based upon 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, the liability for
unrecognized tax benefits, deferred tax assets and liabilities and any valuation allowance to be
recorded against net deferred tax assets. Our gross deferred tax asset balance as of September 29,
2007 was $26.4 million, with a valuation allowance of $2.6 million for state tax credit and loss
carryforwards. The deferred tax assets consist primarily of deductible temporary differences, tax
credit and net operating loss carryforwards.
Goodwill, Intangible and Long-Lived Assets: Goodwill and intangible assets with indefinite lives
are tested for impairment each year on October 1 or more frequently, if a significant event occurs.
To test goodwill for impairment, we compare the fair value of our reporting units, and, if
necessary, the implied fair value of goodwill, with the corresponding carrying values. If
necessary, we record an impairment charge for any shortfall. Intangible and long-lived assets with
finite lives are tested for impairment when events or a change in circumstances indicate the
carrying value may not be recoverable. Factors that we consider in deciding when to perform an
impairment review include significant under-performance of a business or product line in relation
to expectations, significant negative industry or economic trends and significant changes or
planned changes in our use of the assets. Recoverability of assets that will continue to be used in
our operations is measured by comparing the carrying amount of the asset to our estimate of the
related total future undiscounted net cash flows. If an assets carrying value is not recoverable
through the related undiscounted cash flows, the asset is considered to be impaired. The impairment
is measured by the difference between the asset groupings carrying amount and its fair value,
based on the best information available, including market prices or discounted cash flow analysis.
During fiscal 2006 and the first nine months of fiscal 2007, we have not recorded an impairment of
our goodwill, intangible and long-lived assets.
Share-based Compensation: On January 1, 2006, we adopted the provisions of Statement No. 123R and
SAB No. 107 requiring the measurement and recognition of all share-based compensation under the
fair value method. 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 based on the provisions prescribed under Statement No. 123R and SAB No. 107.
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.
17
Cohu, Inc.
Managements Discussion and Analysis of Financial Condition and Results of Operations
September 29, 2007
Recent Accounting Pronouncements: In February 2007, the FASB issued Statement No. 159. Statement
No. 159 gives entities the option to carry many financial assets and liabilities at fair value,
with changes in fair value recorded in earnings. Statement No. 159, which will be effective in our
first quarter of fiscal 2008, is not expected to have a material impact on our consolidated
financial position or results of operations.
RESULTS OF OPERATIONS
The following table summarizes certain operating data from continuing operations as a percentage of
net sales for the three-month and nine-month periods ended September 29, 2007 and September 30,
2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
September 29, |
|
September 30, |
|
September 29, |
|
September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
|
|
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales |
|
|
(68.0 |
) |
|
|
(64.4 |
) |
|
|
(67.7 |
) |
|
|
(64.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
32.0 |
|
|
|
35.6 |
|
|
|
32.3 |
|
|
|
35.5 |
|
Research and development |
|
|
(14.8 |
) |
|
|
(15.0 |
) |
|
|
(15.9 |
) |
|
|
(14.7 |
) |
Selling, general and
administrative |
|
|
(15.3 |
) |
|
|
(14.3 |
) |
|
|
(14.9 |
) |
|
|
(14.5 |
) |
Gain on sale of facilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
1.9 |
% |
|
|
6.3 |
% |
|
|
1.5 |
% |
|
|
7.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In May, 2006, we sold our metal detection equipment business, FRL. Subsequent to the sale, the
operating results of FRL are being presented as discontinued operations and the consolidated
financial statements for all prior periods have been reclassified accordingly. Unless otherwise
indicated, the discussion and amounts provided in the Results of Operations section and elsewhere
in this Quarterly Report on Form 10-Q relate to continuing operations only.
Third Quarter of Fiscal 2007 Compared to Third Quarter of Fiscal 2006
Net Sales
Our net sales decreased 13.8% to $64.5 million in 2007, compared to net sales of $74.8 million in
2006. Sales of semiconductor equipment in the third quarter of fiscal 2007 increased
0.7% from the comparable 2006 period and accounted for 87.3% of consolidated net sales in 2007
versus 74.7% in 2006. Semiconductor equipment was a lower percentage of consolidated
sales in the third quarter of fiscal 2006 as a result of the recognition of $7.9 million in revenue
from our contract with the United Arab Emirates (UAE) for microwave communications equipment.
Sales of television cameras accounted for 6.1% of net sales in 2007 a decrease of 25.9% when
compared to the same period of fiscal 2006. The primary cause of this decrease in sales is lower
demand for board level cameras from equipment manufacturers and decreased shipments of other
products during the third quarter of fiscal 2007.
Sales of microwave communications equipment accounted for 6.6% of net sales in 2007 a decrease of
68.5% when compared to fiscal 2006. The decrease in sales of our microwave communications business
during the third quarter of fiscal 2007, as compared to the prior year period, was primarily
attributable to the recognition of approximately $7.9 million in revenue associated with our
contract with the UAE which was accepted and paid in the third quarter of fiscal 2006 and decreased
product shipments during the third quarter of fiscal 2007.
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, decreased to 32.0% in 2007 from 35.6% in fiscal 2006. Gross
margin was lower in the third quarter of fiscal 2007 as a result of a change in product mix from
our thermal test handlers to burn-in related thermal sub-system products. Our burn-in related
thermal sub-system products have significantly lower gross margins than our thermal test handlers.
Based on current customer forecasts, we expect this trend to continue and, as a result, our gross
margin will continue to be impacted.
Our gross margin has been impacted by charges to cost of sales related to excess, obsolete and
lower of cost or market inventory issues and in fiscal 2006 higher warranty costs associated with
certain test handlers. We compute
18
Cohu, Inc.
Managements Discussion and Analysis of Financial Condition and Results of Operations
September 29, 2007
the majority of our excess and obsolete inventory reserve requirements using a one-year inventory
usage forecast. During the third quarter of fiscal 2007 and 2006, we recorded net charges to cost
of sales of approximately $1.3 million and $6.8 million, respectively, for excess and obsolete
inventory. Approximately $4.6 million of the charge recorded during the third quarter of fiscal
2006 was a result of a decline in customer forecasts for a burn-in system, acquired from Unisys,
which negatively impacted our forecasted inventory usage. 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 29, 2007, 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.
Research and Development 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. R&D expense as a percentage of net sales was 14.8% in 2007,
compared to 15.0% in 2006, decreasing from $11.3 million in 2006 to $9.6 million in 2007. Decreased
R&D expense in 2007 was primarily a result of decreased labor and material costs within our
semiconductor equipment and television camera businesses of approximately $1.9 million and $0.2
million, respectively, and a shorter accounting period in 2007 (i.e. 13 weeks in 2007 vs. 14 weeks
in 2006), offset by an additional $0.4 million of R&D related costs incurred by our microwave
communications business resulting from the March 2007 acquisition of AVS, and other costs
associated with new product development.
Selling, General and Administrative 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. SG&A
expense as a percentage of net sales increased to 15.3% in 2007, from 14.3% in 2006 while
decreasing from $10.7 million in 2006 to $9.9 million in 2007 due to lower business volume and
lower sales commission expense incurred during the third quarter of fiscal 2007.
Interest Income
Interest income was approximately $2.1 million and $1.8 million in fiscal 2007 and 2006,
respectively. The increase in interest income resulted from an increase in our average cash and
cash equivalents and investment balances and higher interest rates.
Income Taxes
The income tax provision included in the statements of income for the three months ended September
29, 2007 and September 30, 2006, 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 for the year are increased or decreased. The effective
tax rates of 31.8% and 30.3% for the three months ended September 29, 2007 and September 30, 2006,
respectively, differ from the U.S. federal statutory rate primarily due to state taxes, research
and development tax credits, foreign income taxed at lower rates and export sales and manufacturing
activities tax benefits offset by the effects of Statement No. 123R that does not allow deferred
tax benefits to be initially recognized on compensation expense related to incentive stock options
and employee stock purchase plans.
Realization of our deferred tax assets is based upon the weight of available evidence, including
such factors as our recent earnings history and expected future taxable income. We believe that it
is more likely than not that the majority of these assets will be realized; however, ultimate
realization could be negatively impacted by market conditions or other factors not currently known
or anticipated. In accordance with Statement No. 109, net deferred tax assets are reduced by a
valuation allowance if it is more likely than not that some or all of the deferred tax assets will
not be realized. A valuation allowance of approximately $2.6 million and $1.6 million was provided
on deferred tax assets at September 29, 2007 and December 30, 2006, respectively, for state tax
credit and net operating loss carryforwards that, in the opinion of management, are more likely
than not to expire before we can use them.
We adopted the provisions of FIN 48 on December 31, 2006, the first day of our 2007 fiscal year. As
a result of the adoption of FIN 48, we recognized a decrease in the liability for unrecognized tax
benefits of approximately $423,000, a decrease in deferred tax assets of approximately $381,000 and a corresponding increase
in the
19
Cohu, Inc.
Managements Discussion and Analysis of Financial Condition and Results of Operations
September 29, 2007
December 31, 2006 balance of retained earnings of approximately $42,000.
Our unrecognized tax benefits, excluding accrued interest, totaled approximately $3.7 million at
December 31, 2006. If these unrecognized tax benefits are ultimately recognized, this amount, less
the related federal benefit for state items of approximately $0.7 million would result in a
reduction in our income tax expense and effective tax rate.
We recognize interest accrued related to unrecognized tax benefits in income tax expense. We had
approximately $200,000 accrued for the payment of interest at December 31, 2006. Interest expense
accrued in the quarter ended September 29, 2007 was approximately $84,000.
The IRS has examined our income tax returns through 2002, and the California Franchise Tax Board
through 1999.
Other Items
In May, 2006, we sold substantially all the assets of our metal detection equipment business, FRL.
The disposition resulted in a loss of approximately $1.3 million of which $0.5 million was recorded
in the three months ended September 30, 2006.
As a result of the factors set forth above, our income from continuing operations was $2.2 million
in 2007, compared to $4.5 million in 2006. Our net income was $2.2 million in 2007, compared to
$4.2 million in 2006.
First Nine Months of Fiscal 2007 Compared to First Nine Months of Fiscal 2006
Net Sales
Our net sales decreased 4.8% to $184.3 million in the first nine months of fiscal 2007, compared to
net sales of $193.5 million in 2006. Sales of semiconductor equipment in the first
nine months of fiscal 2007 decreased 2.0% from the comparable 2006 period and accounted for 85.1%
of consolidated net sales versus 82.7% in 2006. The primary reasons for the decrease in sales of
our semiconductor equipment business were a generally weak business environment for the back-end
semiconductor equipment industry and reduced demand for thermal test handlers.
Sales of television cameras accounted for 6.5% of net sales in the first nine months of fiscal 2007
a decrease of 11.3% when compared to the same period of 2006. The primary cause of this decrease in
sales is lower demand for board level cameras from equipment manufacturers and decreased shipments
of traffic cameras and other products during the first nine months of fiscal 2007.
Sales of microwave communications equipment accounted for 8.4% of net sales in the first nine
months of fiscal 2007 a decrease of 22.8% when compared to 2006. The decrease in sales of our
microwave communications business during the first nine months of fiscal 2007, as compared to the
prior year period, was primarily attributable to the recognition of approximately $7.9 million in
revenue associated with our contract with the UAE which was accepted and paid in the third quarter
of fiscal 2006.
Gross Margin
Our gross margin, as a percentage of net sales, decreased to 32.3% in the first nine months of
fiscal 2007 from 35.5% in 2006. The decrease was the result of lower margins in our semiconductor
equipment business as a result of a change in product mix as sales of our thermal test handlers
declined and burn-in related thermal sub-system products increased. Our burn-in related thermal
sub-system products have significantly lower gross margins than our thermal test handlers.
Our gross margin has been impacted by charges to cost of sales related to excess, obsolete and
lower of cost or market inventory issues and in the first nine months of fiscal 2006 higher
warranty costs associated with certain test handlers. We compute the majority of our excess and
obsolete inventory reserve requirements using a one-year inventory usage forecast. During the first
nine months of 2007 and 2006, we recorded net charges to cost of sales of approximately $3.5
million and $7.9 million, respectively, for excess and obsolete inventory. Approximately $4.6
million of the charge recorded during the first nine months of fiscal 2006 was a result of a
decline in customer forecasts for a burn-in system, acquired from Unisys, which negatively impacted
our forecasted inventory usage.
Research and Development Expense
R&D expense as a percentage of net sales was 15.9% in 2007, compared to 14.7% in 2006, increasing
from $28.6 million in 2006 to $29.3 million in 2007. Higher R&D expense in 2007 was primarily a
result of increased
20
Cohu, Inc.
Managements Discussion and Analysis of Financial Condition and Results of Operations
September 29, 2007
share-based compensation expense of approximately $0.2 million, and incremental costs within our
semiconductor equipment and microwave communications businesses incurred as a result of our March,
2006 and 2007 acquisitions of Unigen and AVS, respectively.
Selling, General and Administrative Expense
SG&A expense as a percentage of net sales was 14.9% in 2007, compared to 14.5% in 2006, decreasing
from $28.0 million in fiscal 2006 to $27.4 million in 2007. While SG&A expense remained relatively
constant, in total dollars, during the first nine months of fiscal 2007, SG&A costs within our
semiconductor equipment business decreased approximately $1.7 million due to lower sales commission
expense and other expenses resulting from slightly decreased business volume due to generally weak
business conditions in the back-end semiconductor equipment industry. This decrease was offset by
an increase in share based compensation expense of approximately $0.3 million and $1.0 million in
costs incurred by our microwave communications businesses as a result of, among other things,
increased legal expenses and incremental costs incurred as a result of our March, 2007 acquisition
of AVS.
Interest Income
Interest income was approximately $6.3 million and $4.8 million in the first nine months of fiscal
2007 and 2006, respectively. The increase in interest income resulted from an increase in our
average cash and cash equivalents and investment balances and higher interest rates.
Income Taxes
The income tax provision included in the statements of income for the nine months ended September
29, 2007 and September 30, 2006, 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 for the year are increased or decreased. The effective
tax rates of 34.6% and 33.2% for the nine months ended September 29, 2007 and September 30, 2006,
respectively, differ from the U.S. federal statutory rate primarily due to state taxes, research
and development tax credits, foreign income taxed at lower rates and export sales and manufacturing
activities tax benefits offset by the effects of Statement No. 123R that does not allow deferred
tax benefits to be recognized on compensation expense related to incentive stock options and
employee stock purchase plans.
Other Items
In May, 2006, we sold the land and building previously used by our operations in Littleton,
Massachusetts. The property was sold for $6.5 million in cash, less related costs, resulting in a
net pretax gain of approximately $3.0 million which was recognized in the second quarter of fiscal
2006.
In May, 2006, we sold substantially all the assets of our metal detection equipment business, FRL.
The disposition resulted in a loss of approximately $1.3 million that was recorded in the first
nine months of fiscal 2006.
As a result of the factors set forth above, our income from continuing operations was $6.0 million
in fiscal 2007, compared to $13.3 million in fiscal 2006. Our net income was $5.9 million in fiscal
2007, compared to $12.3 million in fiscal 2006.
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. Demand for semiconductors is cyclical and volatile. During the quarter ended
September 29, 2007 and in the past 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 have included consolidating facilities, reductions to headcount and reduced
spending. 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. While we maintain a credit facility, we have not used this as a source of cash and do
not intend to do so. We use cash to fund growth in our operating assets, including accounts
receivable and inventory, and to fund new products and product enhancements primarily through research and development.
21
Cohu, Inc.
Managements Discussion and Analysis of Financial Condition and Results of Operations
September 29, 2007
Liquidity
Working Capital: The following summarizes our cash, cash equivalents, short-term investments and
working capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 29, |
|
December 30, |
|
Increase |
|
Percentage |
(in thousands) |
|
2007 |
|
2006 |
|
(Decrease) |
|
Change |
|
Cash, cash equivalents and short-term investments |
|
$ |
156,235 |
|
|
$ |
147,916 |
|
|
$ |
8,319 |
|
|
|
5.6 |
% |
Working capital |
|
|
230,130 |
|
|
|
225,520 |
|
|
|
4,610 |
|
|
|
2.0 |
% |
Cash Flows
Operating Activities: Cash provided by operating activities is net income adjusted for certain
non-cash items and changes in assets and liabilities. Our net cash flows provided from continuing
operating activities in the first nine months of 2007 totaled $18.7 million. The major components
of cash flows provided by operating activities were net income of $5.9 million, depreciation and
amortization of $5.6 million, non-cash share-based compensation expense of $3.1 million and other
changes in net current assets. The change in current assets and liabilities included a decrease in
accounts receivable and inventories of $2.6 million and $5.3 million, respectively. The decrease in
accounts receivable was primarily due to cash collections made in the first nine months of 2007 and
decreased business volume within our semiconductor equipment business. The decrease in inventory
was a result of decreased order backlog within our semiconductor equipment business and our ongoing
efforts to reduce inventory levels.
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
used by investing activities in the first nine months of 2007 totaled $3.1 million and was
primarily the result of $122.9 million cash used for purchases of short-term investments; offset by
$130.0 million in net proceeds from sales and maturities of short-term investments. Our other
expenditures in the first nine months of fiscal 2007 included the purchase of AVS for $8.2 million
and purchases of property, plant and equipment of $1.8 million. The acquisition of AVS was a
strategic transaction to expand our digital microwave communications solutions, especially in high
definition broadcast television and public safety and law enforcement applications within our
microwave communications equipment business. The purchases of property, plant and equipment were
primarily made to support activities in our semiconductor equipment business and consisted
primarily of equipment used in engineering, manufacturing and related functions.
Financing Activities: Financing cash flows consist primarily of payment of dividends to
stockholders, partially offset by proceeds from sales of shares through employee equity incentive
plans. Our net cash used by financing activities in the first nine months of fiscal 2007 included
$3.2 million received from the issuance of stock upon the exercise of stock options and other
employee equity incentive plans, offset by $4.1 million for the payment of dividends.
Capital Resources
In May, 2007, we renewed our $5.0 million unsecured bank line of credit bearing interest at the
banks prime rate. The line of credit will expire in July, 2008, and requires that we maintain
specified minimum levels of net worth, limits the amount of our capital expenditures and requires
us to meet certain other financial covenants. We are currently in compliance with these covenants.
No borrowings were outstanding at September 29, 2007; however, approximately $1.3 million of the
credit facility was allocated to standby letters of credit at September 29, 2007, leaving the
balance of $3.7 million available for future borrowings.
We expect that we will continue to make capital expenditures to support our business and we
anticipate that present working capital and available borrowings under our line of credit 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 30, 2006.
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
22
Cohu, Inc.
Managements Discussion and Analysis of Financial Condition and Results of Operations
September 29, 2007
binding agreements. Our purchase orders are based on our current manufacturing needs and are
fulfilled by our vendors within relatively short time horizons. We 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 29, 2007, the maximum
potential amount of future payments that we could be required to make under these standby letters
of credit was approximately $1.3 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 29, 2007 our investment portfolio includes fixed-income securities with a fair value
of approximately $116.0 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. 5.00% to 5.50%) would have no
material impact on our financial condition or results of operations.
Foreign currency exchange risk.
Except for our subsidiary based in Germany that conducts 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. Monetary assets and liabilities of our foreign operations are
not significant. 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 third quarter of fiscal 2007, our wholly owned
subsidiary, Broadcast Microwave Services, Inc., completed the implementation of an integrated
finance/accounting and manufacturing software system. The implementation involved changes in
systems that included internal controls, and accordingly, these changes have required changes to
our system of internal controls. We reviewed the system as it was being implemented and the
controls affected by the implementation of the new system and made appropriate changes to affected
internal controls during the implementation process. We believe that the controls as modified are
appropriate and functioning effectively.
24
Part II OTHER INFORMATION
Item 1. Legal Proceedings.
The information set forth above under Note 8 contained in the Notes to Unaudited
Condensed Consolidated Financial Statements on Page 13 of this Form 10-Q is
incorporated herein by reference.
Item 1A. Risk Factors.
The most significant risk factors applicable to Cohu are described in Part I, Item 1A
(Risk Factors) of Cohus Annual Report on Form 10-K for the fiscal year ended December
30, 2006 (our 2006 Form 10-K). There have been no material changes to the risk factors
previously disclosed in our 2006 Form 10-K, except that we have updated such risk
factors as forth below to reflect events occurring since the filing of our 2006 Form
10-K.
Compliance with export regulations may impact sales to foreign customers.
Certain products may require compliance with United States export regulations, and
compliance with such regulations could impact certain sales, and have a material adverse
effect on our operating results. In addition, failure to comply could subject us to
sanctions that could negatively impact our operating results.
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.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
25
Item 6. Exhibits.
|
|
|
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: October 26, 2007 |
/s/ James A. Donahue
|
|
|
James A. Donahue |
|
|
President & Chief Executive Officer |
|
|
|
|
|
Date: October 26, 2007 |
/s/ John H. Allen
|
|
|
John H. Allen |
|
|
Vice President, Finance & Chief Financial 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.
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 |
Exhibit 31.1
Exhibit 31.1
COHU, INC.
SARBANES-OXLEY ACT SECTION 302(a)
CERTIFICATION
I, James A. Donahue, certify that:
|
1. |
|
I have reviewed this Form 10-Q of Cohu, Inc.; |
|
|
2. |
|
Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the
period covered by this report; |
|
|
3. |
|
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
|
|
4. |
|
The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is
being prepared;
(b) Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrants
internal control over financial reporting; and
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5. |
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The registrants other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of the registrants board of directors (or persons
performing the equivalent functions): |
(a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely
affect the registrants ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting.
Date: October 26, 2007
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/s/ James A. Donahue
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James A. Donahue |
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President and Chief Executive Officer |
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Exhibit 31.2
Exhibit 31.2
COHU, INC.
SARBANES-OXLEY ACT SECTION 302(a)
CERTIFICATION
I, John H. Allen, certify that:
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I have reviewed this Form 10-Q of Cohu, Inc.; |
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2. |
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Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the
period covered by this report; |
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3. |
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Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
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4. |
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The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is
being prepared;
(b) Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrants
internal control over financial reporting; and
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5. |
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The registrants other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of the registrants board of directors (or persons
performing the equivalent functions): |
(a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely
affect the registrants ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting.
Date: October 26, 2007
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/s/ John H. Allen
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John H. Allen |
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Vice President Finance & Chief Financial Officer |
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Exhibit 32.1
Exhibit 32.1
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
In connection with the accompanying Quarterly Report of Cohu, Inc. (the Company) on Form
10-Q for the fiscal quarter ended September 29, 2007 (the Report), I, James A. Donahue, President
and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, based on my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
Date: October 26, 2007
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/s/ James A. Donahue
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James A. Donahue, |
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President and Chief Executive Officer |
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Exhibit 32.2
Exhibit 32.2
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
In connection with the accompanying Quarterly Report of Cohu, Inc. (the Company) on Form
10-Q for the fiscal quarter ended September 29, 2007 (the Report), I, John H. Allen, Vice
President Finance & Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, based on my
knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
Date: October 26, 2007
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/s/ John H. Allen
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John H. Allen, |
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Vice President Finance & Chief Financial Officer |
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