e10vq
UNITED STATES
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 27, 2008
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) |
Registrant’s telephone number, including area code (858) 848-8100
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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| Large Accelerated Filer o |
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Accelerated Filer þ |
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Non-Accelerated Filer o
(Do not check if a smaller reporting company) |
|
Smaller reporting company 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 27, 2008 the Registrant had 23,255,700 shares of its $1.00 par value common
stock outstanding.
COHU, INC.
INDEX
FORM 10-Q
September 27, 2008
Item 1.
COHU, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
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|
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September 27, |
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December 29, |
|
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2008 |
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|
2007 * |
|
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|
(Unaudited) |
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|
|
ASSETS |
|
|
|
|
|
|
|
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Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
71,170 |
|
|
$ |
77,281 |
|
Short-term investments |
|
|
100,009 |
|
|
|
92,837 |
|
Accounts receivable, less allowance for doubtful accounts
of $1,803 in 2008 and $1,555 in 2007 |
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34,464 |
|
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|
45,491 |
|
Inventories: |
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|
|
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|
|
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Raw materials and purchased parts |
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24,724 |
|
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22,568 |
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Work in process |
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11,954 |
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9,810 |
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Finished goods |
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11,659 |
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9,787 |
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|
|
|
|
|
|
|
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48,337 |
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42,165 |
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Deferred income taxes |
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|
15,890 |
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|
|
18,832 |
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Other current assets |
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6,094 |
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|
|
7,120 |
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Current assets of discontinued operations |
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5 |
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28 |
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|
|
|
|
|
|
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Total current assets |
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275,969 |
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|
|
283,754 |
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Property, plant and equipment, at cost: |
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Land and land improvements |
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7,052 |
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7,015 |
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Buildings and building improvements |
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23,756 |
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23,538 |
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Machinery and equipment |
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31,803 |
|
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32,312 |
|
|
|
|
|
|
|
|
|
|
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62,611 |
|
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|
62,865 |
|
Less accumulated depreciation and amortization |
|
|
(33,516 |
) |
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|
(33,047 |
) |
|
|
|
|
|
|
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Net property, plant and equipment |
|
|
29,095 |
|
|
|
29,818 |
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Deferred income taxes |
|
|
3,150 |
|
|
|
3,092 |
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Goodwill |
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16,370 |
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|
16,377 |
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Intangible assets, net of accumulated amortization of $6,418
in 2008 and $4,684 in 2007 (Note 3) |
|
|
4,954 |
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|
6,695 |
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Other assets |
|
|
180 |
|
|
|
172 |
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Noncurrent assets of discontinued operations held for sale |
|
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471 |
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|
471 |
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|
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|
|
|
|
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$ |
330,189 |
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$ |
340,379 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
|
$ |
9,738 |
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|
$ |
16,650 |
|
Accrued compensation and benefits |
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|
9,121 |
|
|
|
11,230 |
|
Accrued warranty |
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|
5,118 |
|
|
|
6,760 |
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Customer advances |
|
|
3,050 |
|
|
|
3,361 |
|
Deferred profit |
|
|
4,784 |
|
|
|
4,868 |
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Income taxes payable |
|
|
894 |
|
|
|
2,058 |
|
Other accrued liabilities |
|
|
5,036 |
|
|
|
4,324 |
|
Current liabilities of discontinued operations |
|
|
144 |
|
|
|
158 |
|
|
|
|
|
|
|
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Total current liabilities |
|
|
37,885 |
|
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|
49,409 |
|
Other accrued liabilities |
|
|
3,011 |
|
|
|
3,023 |
|
Deferred income taxes |
|
|
3,593 |
|
|
|
4,479 |
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Commitments and contingencies
|
|
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|
|
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Stockholders’ equity: |
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Preferred stock, $1 par value; 1,000 shares authorized,
none issued |
|
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— |
|
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|
— |
|
Common stock, $1 par value; 60,000 shares authorized, 23,256
shares issued and outstanding in 2008 and 23,045 shares
in 2007 |
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23,256 |
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23,045 |
|
Paid-in capital |
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|
59,932 |
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54,940 |
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Retained earnings |
|
|
202,988 |
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204,997 |
|
Accumulated other comprehensive income (loss) |
|
|
(476 |
) |
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|
486 |
|
|
|
|
|
|
|
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Total stockholders’ equity |
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285,700 |
|
|
|
283,468 |
|
|
|
|
|
|
|
|
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$ |
330,189 |
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|
$ |
340,379 |
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|
|
|
|
|
|
|
|
|
|
| * |
|
Derived from December 29, 2007 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 27, |
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September 29, |
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September 27, |
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September 29, |
|
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|
2008 |
|
|
2007 |
|
|
2008 |
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|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
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Net sales |
|
$ |
48,016 |
|
|
$ |
64,490 |
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|
$ |
158,258 |
|
|
$ |
184,265 |
|
Cost and expenses: |
|
|
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|
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|
|
|
|
|
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Cost of sales |
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|
30,458 |
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43,885 |
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|
|
101,453 |
|
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|
124,691 |
|
Research and development |
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9,140 |
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|
|
9,575 |
|
|
|
29,582 |
|
|
|
29,298 |
|
Selling, general and administrative |
|
|
9,693 |
|
|
|
9,861 |
|
|
|
27,652 |
|
|
|
27,408 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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49,291 |
|
|
|
63,321 |
|
|
|
158,687 |
|
|
|
181,397 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
Income (loss) from operations |
|
|
(1,275 |
) |
|
|
1,169 |
|
|
|
(429 |
) |
|
|
2,868 |
|
Interest and other, net |
|
|
1,391 |
|
|
|
2,106 |
|
|
|
4,282 |
|
|
|
6,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
116 |
|
|
|
3,275 |
|
|
|
3,853 |
|
|
|
9,154 |
|
Income tax provision |
|
|
79 |
|
|
|
1,040 |
|
|
|
1,690 |
|
|
|
3,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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Income from continuing operations |
|
|
37 |
|
|
|
2,235 |
|
|
|
2,163 |
|
|
|
5,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
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Discontinued operations (Note 2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued metal detection equipment
operation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(66 |
) |
Income tax benefit |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(43 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
37 |
|
|
$ |
2,235 |
|
|
$ |
2,163 |
|
|
$ |
5,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.00 |
|
|
$ |
0.10 |
|
|
$ |
0.09 |
|
|
$ |
0.26 |
|
Loss from discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.00 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
0.00 |
|
|
$ |
0.10 |
|
|
$ |
0.09 |
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.00 |
|
|
$ |
0.10 |
|
|
$ |
0.09 |
|
|
$ |
0.26 |
|
Loss from discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.00 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
0.00 |
|
|
$ |
0.10 |
|
|
$ |
0.09 |
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in
computing income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
23,233 |
|
|
|
22,945 |
|
|
|
23,142 |
|
|
|
22,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
23,477 |
|
|
|
23,433 |
|
|
|
23,380 |
|
|
|
23,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Cash dividends declared per share |
|
$ |
0.06 |
|
|
$ |
0.06 |
|
|
$ |
0.18 |
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
4
COHU, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
| |
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended |
|
| |
|
September 27, |
|
|
September 29, |
|
| |
|
2008 |
|
|
2007 |
|
Cash flows from continuing operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,163 |
|
|
$ |
5,948 |
|
Loss from discontinued operations |
|
|
— |
|
|
|
43 |
|
Adjustments to reconcile net income to net
cash provided from continuing operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
5,086 |
|
|
|
5,641 |
|
Share-based compensation expense |
|
|
3,188 |
|
|
|
3,138 |
|
Deferred income taxes |
|
|
2,028 |
|
|
|
2,096 |
|
Loss on short-term investment |
|
|
350 |
|
|
|
— |
|
Increase in other accrued liabilities |
|
|
25 |
|
|
|
85 |
|
Excess tax benefits from stock options exercised |
|
|
(155 |
) |
|
|
(482 |
) |
Changes in current assets and liabilities, excluding
effects from acquisitions and divestitures: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
11,027 |
|
|
|
2,612 |
|
Inventories |
|
|
(6,598 |
) |
|
|
5,283 |
|
Other current assets |
|
|
1,049 |
|
|
|
1,746 |
|
Accounts payable |
|
|
(6,912 |
) |
|
|
4,597 |
|
Customer advances |
|
|
(311 |
) |
|
|
691 |
|
Deferred profit |
|
|
(84 |
) |
|
|
(5,271 |
) |
Income taxes payable, including excess stock option exercise benefit |
|
|
(1,607 |
) |
|
|
(2,927 |
) |
Accrued compensation, warranty and other liabilities |
|
|
(2,484 |
) |
|
|
(4,505 |
) |
|
|
|
|
|
|
|
Net cash provided from continuing operating activities |
|
|
6,765 |
|
|
|
18,695 |
|
Cash flows from continuing investing activities, excluding effects from
acquisitions and divestitures: |
|
|
|
|
|
|
|
|
Purchases of short-term investments |
|
|
(122,517 |
) |
|
|
(122,891 |
) |
Sales and maturities of short-term investments |
|
|
114,027 |
|
|
|
130,017 |
|
Purchases of property, plant and equipment |
|
|
(2,088 |
) |
|
|
(1,848 |
) |
Payment for purchase of AVS, net of cash received |
|
|
— |
|
|
|
(8,169 |
) |
Cash advances to discontinued operations |
|
|
(14 |
) |
|
|
(150 |
) |
Other assets |
|
|
(8 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
|
Net cash used for continuing investing activities |
|
|
(10,600 |
) |
|
|
(3,051 |
) |
Cash flows from continuing financing activities: |
|
|
|
|
|
|
|
|
Issuance of stock, net |
|
|
1,860 |
|
|
|
3,236 |
|
Excess tax benefits from stock options exercised |
|
|
155 |
|
|
|
482 |
|
Cash dividends |
|
|
(4,159 |
) |
|
|
(4,099 |
) |
|
|
|
|
|
|
|
Net cash used for continuing financing activities |
|
|
(2,144 |
) |
|
|
(381 |
) |
Effect of exchange rate changes on cash |
|
|
(132 |
) |
|
|
140 |
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents from continuing
operations |
|
|
(6,111 |
) |
|
|
15,403 |
|
Cash and cash equivalents of continuing operations at beginning of period |
|
|
77,281 |
|
|
|
24,829 |
|
|
|
|
|
|
|
|
Cash and cash equivalents of continuing operations at end of period |
|
$ |
71,170 |
|
|
$ |
40,232 |
|
|
|
|
|
|
|
|
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 27, |
|
|
September 29, |
|
| |
|
2008 |
|
|
2007 |
|
Cash flows from discontinued operations: |
|
|
|
|
|
|
|
|
Cash used for operating activities of discontinued operations |
|
$ |
(14 |
) |
|
$ |
(150 |
) |
Cash used for investing activities of discontinued operations |
|
|
— |
|
|
|
— |
|
Cash advances from continuing operations, net |
|
|
14 |
|
|
|
150 |
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents of discontinued operations |
|
|
— |
|
|
|
— |
|
Cash and cash equivalents of discontinued operations at beginning of
period |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
Cash and cash equivalents of discontinued operations at end of period |
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid (refunded) during the period for: |
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
(316 |
) |
|
$ |
3,442 |
|
Inventory capitalized as capital assets |
|
$ |
426 |
|
|
$ |
1,864 |
|
Dividends declared but not yet paid |
|
$ |
1,396 |
|
|
$ |
1,380 |
|
The accompanying notes are an integral part of these statements.
6
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 27, 2008
| 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 29, 2007 has been derived from our
audited financial statements at that date. The interim condensed consolidated financial
statements as of September 27, 2008 (also referred to as “the third quarter of fiscal 2008”
and “the first nine months of fiscal 2008”) and September 29, 2007 (also referred to as “the
third quarter of fiscal 2007” and “the first nine months of 2007”) are unaudited. However, in
management’s opinion, these financial statements reflect all adjustments (consisting only of
normal, recurring items) necessary to provide a fair presentation of our financial position,
results of operations and cash flows for the periods presented. The third quarters of fiscal
2008 and 2007 were comprised of 13 weeks and the first nine months of fiscal 2008 and 2007
were comprised of 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 29, 2007, which are included
in our 2007 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 2007 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 |
| |
| |
|
Share-based compensation expense related to stock options is recorded based on the fair value
of the award on its grant date which we estimate using the Black-Scholes valuation model. |
| |
| |
|
Share-based compensation expense related to restricted stock unit awards is calculated based
on the market price of our common stock on the grant date, reduced by the present value of
dividends expected to be paid on our common stock prior to vesting of the restricted stock
unit. |
| |
| |
|
Reported share-based compensation is classified, in the condensed consolidated interim
financial statements, as follows (in thousands): |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 27, |
|
|
September 29, |
|
|
September 27, |
|
|
September 29, |
|
| |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Cost of sales |
|
$ |
88 |
|
|
$ |
119 |
|
|
$ |
266 |
|
|
$ |
347 |
|
Research and development |
|
|
331 |
|
|
|
322 |
|
|
|
951 |
|
|
|
937 |
|
Selling, general and administrative |
|
|
675 |
|
|
|
575 |
|
|
|
1,971 |
|
|
|
1,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation |
|
|
1,094 |
|
|
|
1,016 |
|
|
|
3,188 |
|
|
|
3,138 |
|
Income tax benefit |
|
|
(286 |
) |
|
|
(208 |
) |
|
|
(828 |
) |
|
|
(770 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation,
net of tax |
|
$ |
808 |
|
|
$ |
808 |
|
|
$ |
2,360 |
|
|
$ |
2,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
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
|
7
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 27, 2008
|
|
options, vesting of outstanding restricted stock units and issuance of stock under our
employee stock purchase plan using 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. These options could be included
in the calculation in the future if the average market value of our common shares increases
and is greater than the exercise price of these options. For the three and nine months ended
September 27, 2008, options to purchase approximately 1,276,000 and 1,339,000 shares of common
stock, respectively, were excluded from the computation. 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. The following table reconciles the
denominators used in computing basic and diluted income per share (in thousands): |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 27, |
|
|
September 29, |
|
|
September 27, |
|
|
September 29, |
|
| |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Weighted average common shares |
|
|
23,233 |
|
|
|
22,945 |
|
|
|
23,142 |
|
|
|
22,830 |
|
Effect of dilutive stock options |
|
|
244 |
|
|
|
488 |
|
|
|
238 |
|
|
|
452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,477 |
|
|
|
23,433 |
|
|
|
23,380 |
|
|
|
23,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
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 29, 2007. As
more fully described in that policy, revenue from products that have not previously satisfied
customer acceptance requirements is recognized upon customer acceptance. The gross profit on
sales that are not recognized is generally recorded as deferred profit and reflected as a
current liability in our consolidated balance sheet. |
| |
| |
|
At September 27, 2008, we had deferred revenue totaling approximately $7.8 million and
deferred profit of $4.8 million. At December 29, 2007, we had deferred revenue totaling
approximately $9.2 million and deferred profit of $4.9 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 2008 and 2007 was not significant. |
| |
| |
|
Recent Accounting Pronouncements |
| |
| |
|
In December 2007, the FASB issued Statement No. 141(Revised 2007), “Business Combinations”
(“Statement No. 141R”), which establishes principles and requirements for the reporting entity
in a business combination, including recognition and measurement in the financial statements
of the identifiable assets acquired, the liabilities assumed, and any non-controlling interest
in the acquiree. This statement also establishes disclosure requirements to enable financial
statement users to evaluate the nature and financial effects of the business combination.
Statement No. 141R applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning on or after
December 15, 2008, and interim periods within those fiscal years. Statement No. 141R will
become effective for our fiscal year beginning in 2009. We expect Statement No. 141R will
have an impact on our consolidated financial statements when effective, but the nature and
magnitude of the specific effects will depend upon the nature, terms and size of the
acquisitions we consummate after the effective date of the revised standard. |
| |
| |
|
We adopted FASB Statement No. 157, “Fair Value Measurements” (“Statement No. 157”) on
December 30, 2007, the first day of fiscal year 2008. Statement No. 157 defines fair value,
establishes a methodology for measuring fair value, and expands the required disclosure for
fair value measurements. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2,
“Effective Date of FASB Statement No. 157,” which amends Statement No. 157 by delaying its
effective date by one year for non-financial assets and non-financial liabilities, except for
items that are recognized or disclosed at fair value in the financial statements on a
recurring basis. Therefore, beginning on December 30, 2007, this standard applies
prospectively to new fair value measurements of financial instruments and recurring fair value
measurements of non-financial assets and non-financial liabilities. On December 28, 2008, the
beginning of our 2009 fiscal year, the standard will also apply to all other fair value
measurements. See Note 10, “Fair Value Measurements,” for additional information. |
8
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 27, 2008
| |
|
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 expands the use of
fair value measurement by permitting entities to choose to measure many financial instruments
and certain other items at fair value that are not currently required to be measured at fair
value. This statement was effective for us on December 30, 2007, the first day of our 2008
fiscal year. We have not elected to measure any items at fair value under Statement No. 159
and, as a result, Statement No. 159 did not have any impact on our consolidated financial
statements. |
| |
| |
|
In December 2007, the FASB issued Statement No. 160, “Noncontrolling Interests in Consolidated
Financial Statements—an amendment of ARB No. 51” (“Statement No. 160”). Statement No. 160
requires that ownership interests in subsidiaries held by parties other than the parent, and
the amount of consolidated net income, be clearly identified, labeled, and presented in the
consolidated financial statements. It also requires, once a subsidiary is deconsolidated, any
retained noncontrolling equity investment in the former subsidiary be initially measured at
fair value. Sufficient disclosures are required to clearly identify and distinguish between
the interests of the parent and the interests of the noncontrolling owners. It is effective
for fiscal years beginning on or after December 15, 2008 and requires retrospective adoption
of the presentation and disclosure requirements for existing minority interests. All other
requirements shall be applied prospectively. We are currently assessing the impact that
Statement No. 160 may have on our consolidated financial statements upon adoption in fiscal
year 2009. |
| |
| |
|
In March 2008, the FASB issued Statement No. 161, “Disclosures about Derivative Instruments
and Hedging Activities-an amendment of FASB Statement No. 133” (“Statement No. 161”).
Statement No. 161 expands the current disclosure requirements of FASB Statement No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” and requires that companies
must now provide enhanced disclosures on a quarterly basis regarding how and why the entity
uses derivatives, how derivatives and related hedged items are accounted for under FASB
Statement No. 133 and how derivatives and related hedged items affect the company’s financial
position, performance and cash flows. Statement No. 161 is effective prospectively for periods
beginning after November 15, 2008. We are currently assessing the impact that Statement
No. 161 may have on our consolidated financial statements upon our adoption in fiscal year
2009. |
| |
| 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 management’s 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 27, 2008. |
| |
| |
|
A summary of key financial information of our discontinued operations is as follows (in
thousands): |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 27, |
|
|
September 29, |
|
|
September 27, |
|
|
September 29, |
|
| |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net sales |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Loss on sale of metal detection
equipment business |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(66 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(66 |
) |
Income tax benefit |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(43 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 3. |
|
Strategic Technology Transactions, Goodwill and Other Intangible Assets |
| |
| |
|
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
|
9
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 27, 2008
| |
|
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 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” and the total cost of the acquisition was allocated to the
assets acquired and liabilities assumed based on their estimated respective fair values, in
accordance with FASB Statement No. 141, Business Combinations. The acquisition was nontaxable
and certain of the assets acquired, including goodwill and intangibles, will not be deductible
for tax purposes. The goodwill was assigned to our microwave communications segment. |
| |
| |
|
The 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 |
|
Current liabilities assumed |
|
|
(2,336 |
) |
|
|
|
|
Net assets acquired |
|
$ |
8,169 |
|
|
|
|
|
| |
|
Amounts allocated to intangible assets are being amortized on a straight-line basis over their
useful lives of four years. Fluctuations in the exchange rate of the Euro, the functional
currency of AVS, impact the U.S. dollar value of the goodwill and intangible assets in our
consolidated financial statements and, as a result, the future gross carrying value and
amortization of the acquired intangible assets may differ from the amounts presented below. |
| |
| |
|
Intangible assets, subject to amortization, were as follows (in thousands): |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
September 27, 2008 |
|
|
December 29, 2007 |
|
| |
|
Gross Carrying |
|
|
Accumulated |
|
|
Gross Carrying |
|
|
Accumulated |
|
| |
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amortization |
|
Unigen technology |
|
$ |
7,020 |
|
|
$ |
3,582 |
|
|
$ |
7,020 |
|
|
$ |
2,517 |
|
KryoTech technology |
|
|
1,950 |
|
|
|
1,950 |
|
|
|
1,950 |
|
|
|
1,730 |
|
AVS technology |
|
|
2,402 |
|
|
|
886 |
|
|
|
2,409 |
|
|
|
437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,372 |
|
|
$ |
6,418 |
|
|
$ |
11,379 |
|
|
$ |
4,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Amortization expense related to intangible assets was approximately $0.4 million in the third
quarter of fiscal 2008 and $1.7 million in the first nine months of fiscal 2008. Amortization
expense related to intangible assets 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. As of
September 27, 2008, we expect amortization expense in future periods to be as follows: 2008 –
$500,000; 2009 – $2,001,000; 2010 – $2,001,000 and 2011 – $452,000. |
| |
| 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 27, 2008, there were 553,603 shares available for issuance
under the Plan. |
| |
| |
|
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 27, 2008, 1,107,864
shares were available for future equity grants under the Cohu, Inc. 2005 Equity Incentive
Plan. We have historically issued new shares of our common stock upon share option exercise. |
10
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 27, 2008
| |
|
At September 27, 2008 we had 2,156,028 stock options outstanding. These options had a
weighted-average exercise price of $16.05 per share, an aggregate intrinsic value of
approximately $3.0 million and the weighted average remaining contractual term was
approximately 5.3 years. |
| |
| |
|
At September 27, 2008 we had 1,656,420 stock options outstanding that were exercisable. These
options had a weighted-average exercise price of $16.02 per share, an aggregate intrinsic
value of approximately $2.6 million and the weighted average remaining contractual term was
approximately 4.5 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 27, 2008 we had 301,819 restricted stock units outstanding with an aggregate
intrinsic value of approximately $5.1 million and the weighted average remaining recognition
period was approximately 2.7 years. |
| |
| 5. |
|
Comprehensive Income (Loss) |
| |
| |
|
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 27, |
|
|
September 29, |
|
|
September 27, |
|
|
September 29, |
|
| |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Income from continuing operations |
|
$ |
37 |
|
|
$ |
2,235 |
|
|
$ |
2,163 |
|
|
$ |
5,991 |
|
Loss from discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(43 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
37 |
|
|
|
2,235 |
|
|
|
2,163 |
|
|
|
5,948 |
|
Foreign currency translation adjustment |
|
|
(713 |
) |
|
|
49 |
|
|
|
(31 |
) |
|
|
141 |
|
Change in unrealized gain (loss) on
investments |
|
|
(959 |
) |
|
|
60 |
|
|
|
(938 |
) |
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
(1,635 |
) |
|
$ |
2,344 |
|
|
$ |
1,194 |
|
|
$ |
6,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Our accumulated other comprehensive income (loss) totaled approximately $(0.5) million and
$0.5 million at September 27, 2008 and December 29, 2007, respectively, and was attributed to,
net of income taxes where applicable, 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 condensed consolidated statements of income for the
three and nine months ended September 27, 2008 and September 29, 2007 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 68.1% and 31.8%, for the
three months ended September 27, 2008 and September 29, 2007 and 43.9% and 34.6% for the nine
months ended September 27, 2008 and September 29, 2007, 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, manufacturing activities tax benefits and changes in the
valuation allowance on deferred tax assets and the liability for unrecognized tax benefits,
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 and interest expense recorded on unrecognized tax benefits. |
| |
| |
|
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 FASB Statement No. 109,
Accounting for Income Taxes, (“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 $3.0 million and $2.4 million was
provided on deferred tax assets at September 27, |
11
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 27, 2008
|
|
2008 and December 29, 2007, 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. |
| |
| |
|
Our unrecognized tax benefits, excluding accrued interest, totaled approximately $3.9 million
and $4.8 million at September 27, 2008 and December 29, 2007, respectively. If these
unrecognized tax benefits are ultimately recognized, this amount, less the related federal
benefit for state items of approximately $0.9 million and excluding any increase in our
valuation allowance for deferred tax assets, would result in a reduction in our income tax
expense and effective tax rate. The reduction in our unrecognized tax benefits in the first
nine months of fiscal 2008 was primarily due to the expiration of the applicable statute of
limitations. |
| |
| |
|
We recognize interest accrued related to unrecognized tax benefits, net of federal and state
tax benefits, in income tax expense. Cohu had approximately $432,000 and $317,000 accrued for
the payment of interest at September 27, 2008 and December 29, 2007, respectively. |
| |
| |
|
The Internal Revenue Service has examined our income tax returns through 2002, and the
California Franchise Tax Board through 1999. |
| |
| |
|
In October, 2007 the IRS commenced a routine examination of our U.S. income tax return for
2005. This examination is expected to be completed in fiscal 2008. We believe it is reasonably
possible that a portion of our total unrecognized tax benefits will decrease in the next 12
months upon the conclusion of the examination or the lapse of the applicable statute of
limitations. However, it is premature to assess the range or the nature of the reasonably
possible changes to our unrecognized tax benefits. |
| |
| 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 27, |
|
|
September 29, |
|
|
September 27, |
|
|
September 29, |
|
| |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net sales by segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor equipment |
|
$ |
38,091 |
|
|
$ |
56,275 |
|
|
$ |
123,685 |
|
|
$ |
156,830 |
|
Television cameras |
|
|
4,238 |
|
|
|
3,943 |
|
|
|
13,409 |
|
|
|
12,039 |
|
Microwave communications |
|
|
5,687 |
|
|
|
4,272 |
|
|
|
21,164 |
|
|
|
15,396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated net sales and
net sales for reportable segments |
|
$ |
48,016 |
|
|
$ |
64,490 |
|
|
$ |
158,258 |
|
|
$ |
184,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor equipment |
|
$ |
1,179 |
|
|
$ |
4,097 |
|
|
$ |
4,462 |
|
|
$ |
9,340 |
|
Television cameras |
|
|
(284 |
) |
|
|
(576 |
) |
|
|
(836 |
) |
|
|
(1,798 |
) |
Microwave communications |
|
|
(1,325 |
) |
|
|
(1,584 |
) |
|
|
(909 |
) |
|
|
(2,037 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) for reportable segments |
|
|
(430 |
) |
|
|
1,937 |
|
|
|
2,717 |
|
|
|
5,505 |
|
Other unallocated amounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate expenses |
|
|
(845 |
) |
|
|
(768 |
) |
|
|
(3,146 |
) |
|
|
(2,637 |
) |
Interest and other, net |
|
|
1,391 |
|
|
|
2,106 |
|
|
|
4,282 |
|
|
|
6,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes |
|
$ |
116 |
|
|
$ |
3,275 |
|
|
$ |
3,853 |
|
|
$ |
9,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 27, 2008
| |
|
|
|
|
|
|
|
|
| |
|
September 27, |
|
|
December 29, |
|
| Total assets by segment (in thousands): |
|
2008 |
|
|
2007 |
|
Semiconductor equipment |
|
$ |
108,701 |
|
|
$ |
111,787 |
|
Television cameras |
|
|
10,114 |
|
|
|
9,505 |
|
Microwave communications |
|
|
22,570 |
|
|
|
27,704 |
|
|
|
|
|
|
|
|
Total assets for reportable segments |
|
|
141,385 |
|
|
|
148,996 |
|
Corporate, principally cash and investments
and deferred taxes |
|
|
188,329 |
|
|
|
190,885 |
|
Discontinued operations |
|
|
475 |
|
|
|
498 |
|
|
|
|
|
|
|
|
Total consolidated assets |
|
$ |
330,189 |
|
|
$ |
340,379 |
|
|
|
|
|
|
|
|
| |
|
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 48% and 50% of our consolidated net sales for the third quarter and first nine months of
fiscal 2008, respectively. 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. |
| |
| 8. |
|
Contingencies |
| |
| |
|
We previously disclosed that in May, 2007 our Broadcast Microwave Services subsidiary (“BMS”)
received a subpoena from a grand jury seated in the Southern District of California,
requesting the production of certain documents related to BMS’ export of microwave
communications equipment. BMS completed production of documents responsive to the request in
September 2007 and has fully cooperated. BMS has not been informed that it is a target of an
investigation. 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
operations. |
| |
| 9. |
|
Guarantees |
| |
| |
|
Our products are generally sold with warranty periods that range from 12 to 36 months
following sale or installation. Parts and labor are covered under the terms of the warranty
agreement. The warranty provision is based on historical and projected experience by product
and configuration. |
| |
| |
|
Changes in accrued warranty during the third quarter and first nine months of fiscal 2008 and
2007 were as follows (in thousands): |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 27, |
|
|
September 29, |
|
|
September 27, |
|
|
September 29, |
|
| |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Balance at beginning of
period |
|
$ |
5,503 |
|
|
$ |
6,661 |
|
|
$ |
6,760 |
|
|
$ |
8,118 |
|
Warranty expense accruals |
|
|
2,116 |
|
|
|
1,984 |
|
|
|
6,461 |
|
|
|
5,201 |
|
Warranty payments |
|
|
(2,501 |
) |
|
|
(2,865 |
) |
|
|
(8,103 |
) |
|
|
(7,689 |
) |
Warranty liability assumed |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
5,118 |
|
|
$ |
5,780 |
|
|
$ |
5,118 |
|
|
$ |
5,780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
From time-to-time, during the ordinary course of business, we provide standby letters of
credit to certain parties. As of September 27, 2008, the maximum potential amount of
future payments that Cohu could be required to make under these standby letters of credit
was 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 27, 2008
10. Fair Value Measurements
In September 2006, the FASB issued Statement No. 157, which is effective for fiscal years
beginning after November 15, 2007 and for interim periods within those years. This statement
defines fair value, establishes a framework for measuring fair value and expands the related
disclosure requirements. This statement applies under other accounting pronouncements that
require or permit fair value measurements. The statement indicates, among other things, that a
fair value measurement assumes that the transaction to sell an asset or transfer a liability
occurs in the principal market for the asset or liability or, in the absence of a principal
market, the most advantageous market for the asset or liability. Statement No. 157 defines
fair value based upon an exit price model.
We adopted Statement No. 157 on December 30, 2007, with the exception of the application
of the statement to non-recurring nonfinancial assets and nonfinancial liabilities.
Non-recurring nonfinancial assets and nonfinancial liabilities for which we have not applied
the provisions of Statement No. 157 include those measured at fair value in goodwill
impairment testing and those initially measured at fair value in a business combination.
Statement No. 157 establishes a valuation hierarchy for disclosure of the inputs to valuation
used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as
follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets
or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active
markets or inputs that are observable for the asset or liability, either directly or
indirectly through market corroboration, for substantially the full term of the financial
instrument. Level 3 inputs are unobservable inputs based on our own assumptions used to
measure assets and liabilities at fair value. A financial asset or liability’s classification
within the hierarchy is determined based on the lowest level input that is significant to the
fair value measurement.
The following table provides the assets carried at fair value measured on a recurring basis as
of September 27, 2008 (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Fair value measurements at September 27, 2008 using |
|
| |
|
|
|
|
|
|
|
|
|
Significant other |
|
|
Significant |
|
| |
|
Total carrying |
|
|
Quoted prices in |
|
|
observable |
|
|
unobservable |
|
| |
|
value at |
|
|
active markets |
|
|
inputs |
|
|
inputs |
|
| |
|
September 27, 2008 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Short-term investments |
|
$ |
100,009 |
|
|
$ |
— |
|
|
$ |
100,009 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
When available, we use quoted market prices to determine the fair value of our investments,
and they are included in Level 1. When quoted market prices are unobservable, we use quotes
from independent pricing vendors based on recent trading activity and other relevant
information. These investments are included in Level 2 and primarily comprise our portfolio of
corporate debt securities, bank certificates of deposit, government-sponsored enterprise, and
asset-backed securities.
14
Cohu, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
September 27, 2008
This Form 10-Q contains certain forward-looking statements including expectations of market
conditions, challenges and plans, within the meaning of Section 21E of the Securities Exchange Act
of 1934, as amended, and is subject to the Safe Harbor provisions created by that statute. Such
forward-looking statements are based on management’s current expectations and beliefs, including
estimates and projections about our industries and include, but are not limited to, statements
concerning financial position, business strategy, and plans or objectives for future operations.
Forward-looking statements are not guarantees of future performance, and are subject to certain
risks, uncertainties, and assumptions that are difficult to predict and may cause actual results to
differ materially from management’s current expectations. Such risks and uncertainties include
those set forth in this Quarterly Report on Form 10-Q and our 2007 Annual Report on Form 10-K under
the heading “Item 1A. Risk Factors”. The forward-looking statements in this report speak only as
of the time they are made, and do not necessarily reflect management’s outlook at any other point
in time. We undertake no obligation to publicly update any forward-looking statements, whether as
a result of new information, future events, or for any other reason, however, readers should
carefully review the risk factors set forth in other reports or documents we file from time to time
with the SEC after the date of this Quarterly Report.
OVERVIEW
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 trends in demand. We
expect that the semiconductor equipment industry will continue to be cyclical and volatile in part
because consumer electronics, rather than personal computers, are now the principal end market for
integrated circuits. Demand for consumer electronic products is unpredictable and product life
cycles are becoming shorter. Integrated circuit manufacturers are unwilling to absorb the carrying
costs of excess capacity, and as a result, delay placing large orders with equipment suppliers
until business conditions are favorable. 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 the results of operations of our primary business.
As a result of the volatility within the backend semiconductor industry the composition of orders
and revenues of our primary business changed dramatically during fiscal 2007 as orders for thermal
semiconductor test handler and burn-in equipment declined significantly and orders for high speed
semiconductor test handler and thermal sub-systems increased. This shift in product mix and other
factors described herein led to a decline in our gross margin during fiscal 2007.
Conditions in the semiconductor equipment industry were generally weak in 2007 and remained
difficult during the first nine months of fiscal 2008. This already challenging environment for
semiconductor equipment has been further impacted by the global financial crisis. Current
visibility in the backend semiconductor industry is limited to several quarters and, over this time
horizon, we expect business conditions to remain difficult. Through this downturn, we plan to
continue to invest in new product development and key initiatives to improve gross margin and
operating performance that will benefit the results of operations of our primary business when
industry conditions improve.
Our operating results in the last three years have been impacted by charges to cost of sales
related to excess, obsolete and lower of cost or market inventory issues. These charges totaled
approximately $20.7 million during the three-year period ended December 29, 2007 (approximately
$0.6 million in the first nine months of fiscal 2008) 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. 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 non-semiconductor equipment businesses have comprised approximately 15% of our consolidated
revenues during the last three years. During fiscal 2007, our television camera and microwave
communications businesses underperformed and we implemented strategies which we believed would help
improve the profitability of these businesses. These initiatives included the introduction of new
products and a strategic acquisition. During the first nine months of fiscal 2008 the net sales of
our microwave equipment operation have increased, however, the net operating results of this
segment have been negatively impacted by revenue deferrals, a customer requested
15
Cohu, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
September 27, 2008
rescheduling of
product shipment dates and increased professional service costs. While the net operating results
of our television camera business have continued to underperform
during the first nine months of
fiscal 2008, customer interest is strong for new products developed for the high-end security and
surveillance markets and we anticipate that order levels will increase in the future.
Our financial condition is strong with significant cash and short-term investments and no long-term
debt. During the three-year period ended September 27, 2008, total cash and investments increased
from $122.4 million at September 24, 2005 to $171.2 million at September 27, 2008.
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 month’s 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 near term operating
results or cash flows.
Application of Critical Accounting Estimates and Policies
Our discussion and analysis of our financial condition and results of operations are based upon our
interim condensed consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The preparation of these
financial statements requires us to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and
liabilities. We base our estimates on historical experience, forecasts and on various other
assumptions that are believed to be reasonable under the circumstances, however actual results may
differ from those estimates under different assumptions or conditions. The methods, estimates and
judgments we use in applying our accounting policies have a significant impact on the results we
report in our financial statements. Some of our accounting policies require us to make difficult
and subjective judgments, often as a result of the need to make estimates of matters that are
inherently uncertain. Our most critical accounting estimates that we believe are the most important
to an investor’s understanding of our financial results and condition and require complex
management judgment include:
| |
• |
|
revenue recognition, including the deferral of revenue on sales to customers, which
impacts our results 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) that provide
for full payment tied to shipment. Revenue for products that have not previously satisfied
customer acceptance requirements or from sales where customer payment dates are not determinable is
recognized upon customer acceptance. For arrangements containing multiple elements, the revenue
relating to the undelivered elements is deferred at estimated fair value until delivery of the
deferred elements.
16
Cohu, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
September 27, 2008
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.
Warranty: We provide for the estimated costs of product warranties in the period sales are
recognized. Our warranty obligation estimates are affected by historical product shipment levels,
product performance and material and labor costs incurred in correcting product performance
problems. Should product performance, material usage or labor repair costs differ from our
estimates, revisions to the estimated warranty liability would be required.
Inventory: The valuation of inventory requires us to estimate obsolete or excess inventory as well
as inventory that is not of saleable quality. The determination of obsolete or excess inventory
requires us to estimate the future demand for our products. The demand forecast is a direct input
in the development of our short-term manufacturing plans. We record valuation reserves on our
inventory for estimated excess and obsolete inventory and lower of cost or market concerns equal to
the difference between the cost of inventory and the estimated market value based upon assumptions
about future product demand, market conditions and product selling prices. If future product
demand, market conditions or product selling prices are less than those projected by management or
if continued modifications to products are required to meet specifications or other customer
requirements, increases to inventory reserves may be required which would have a negative impact on
our gross margin.
Income Taxes: We estimate our liability for income taxes based on the various jurisdictions where
we conduct business. This requires us to estimate our (i) current tax exposure; (ii) temporary
differences that result from differing treatment of certain items for tax and accounting purposes
and (iii) unrecognized tax benefits. Temporary differences result in deferred tax assets and
liabilities that are reflected in the consolidated balance sheet. The net deferred tax assets are
reduced by a valuation allowance if, based upon all available evidence, it is more likely than not
that some or all of the deferred tax assets will not be realized. Establishing, reducing or
increasing a valuation allowance in an accounting period results in an increase or decrease in tax
expense in the statement of operations. We must make significant judgments to determine the
provision for income taxes, deferred tax assets and liabilities, unrecognized tax benefits and any
valuation allowance to be recorded against net deferred tax assets. Our gross deferred tax asset
balance as of September 27, 2008 was $25.2 million, with a valuation allowance of $3.0 million for
state tax credit and loss carryforwards. The deferred tax assets consist primarily of deductible
temporary differences and tax credit and net operating loss carryforwards.
Contingencies: We are subject to certain contingencies that arise in the ordinary course of our
businesses. 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.
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 asset’s 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 grouping’s carrying amount and its fair value,
based on the best information available, including market prices or discounted cash flow analysis.
During fiscal 2007 and the first nine months of fiscal 2008, we have not recorded an impairment of
our goodwill, intangible and long-lived assets.
17
Cohu, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
September 27, 2008
Share-based Compensation: Share-based compensation expense related to stock options is recorded
based on the fair value of the award on its grant date which we estimate using the Black-Scholes
valuation model.
Share-based compensation expense related to restricted stock unit awards is calculated based on the
market price of our common stock on the grant date, reduced by the present value of dividends
expected to be paid on our common stock prior to vesting of the restricted stock unit.
Recent Accounting Pronouncements: In December 2007, the FASB issued Statement No. 141 (Revised
2007), “Business Combinations” (“Statement No. 141R”), which establishes principles and
requirements for the reporting entity in a business combination, including recognition and
measurement in the financial statements of the identifiable assets acquired, the liabilities
assumed, and any non-controlling interest in the acquiree. This statement also establishes
disclosure requirements to enable financial statement users to evaluate the nature and financial
effects of the business combination. Statement No. 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008, and interim periods within those fiscal
years. Statement No. 141R will become effective for our fiscal year beginning in 2009. We expect
Statement No. 141R will have an impact on our consolidated financial statements when effective, but
the nature and magnitude of the specific effects will depend upon the nature, terms and size of the
acquisitions we consummate after the effective date of the revised standard.
We adopted FASB Statement No. 157, “Fair Value Measurements” (“Statement No. 157”) on December 30,
2007, the first day of fiscal year 2008. Statement No. 157 defines fair value, establishes a
methodology for measuring fair value, and expands the required disclosure for fair value
measurements. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date
of FASB Statement No. 157,” which amends Statement No. 157 by delaying its effective date by one
year for non-financial assets and non-financial liabilities, except for items that are recognized
or disclosed at fair value in the financial statements on a recurring basis. Therefore, beginning
on December 30, 2007, this standard applies prospectively to new fair value measurements of
financial instruments and recurring fair value measurements of non-financial assets and
non-financial liabilities. On December 28, 2008, the beginning of our 2009 fiscal year, the
standard will also apply to all other fair value measurements. See Note 10, “Fair Value
Measurements,” of the notes to unaudited condensed consolidated financial statements included
elsewhere herein for additional information.
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 expands the use of fair value
measurement by permitting entities to choose to measure many financial instruments and certain
other items at fair value that are not currently required to be measured at fair value. This
statement is effective for us on December 30, 2007, the first day of our 2008 fiscal year. We have
not elected to measure any items at fair value under Statement No. 159 and, as a result, Statement
No. 159 did not have any impact on our consolidated financial statements.
In December 2007, the FASB issued Statement No. 160, “Noncontrolling Interests in Consolidated
Financial Statements—an amendment of ARB No. 51” (“Statement No. 160”). Statement No. 160
requires that ownership interests in subsidiaries held by parties other than the parent, and the
amount of consolidated net income, be clearly identified, labeled, and presented in the
consolidated financial statements. It also requires, once a subsidiary is deconsolidated, any
retained noncontrolling equity investment in the former subsidiary be initially measured at fair
value. Sufficient disclosures are required to clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. It is effective for fiscal
years beginning on or after December 15, 2008 and requires retrospective adoption of the
presentation and disclosure requirements for existing minority interests. All other requirements
shall be applied prospectively. We are currently assessing the impact that Statement No. 160 may
have on our consolidated financial statements upon adoption in fiscal year 2009.
In March 2008, the FASB issued Statement No. 161, “Disclosures about Derivative Instruments and
Hedging Activities-an amendment of FASB Statement No. 133” (“Statement No. 161”). Statement No.
161 expands the current disclosure requirements of FASB Statement No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” and requires that companies must now provide
enhanced disclosures on a quarterly basis regarding how and why the entity uses derivatives, how
derivatives and related hedged items are accounted for under FASB Statement No. 133 and how
derivatives and related hedged items affect the company’s financial position, performance and cash
flows. Statement No. 161 is effective prospectively for periods beginning after November 15, 2008.
We are currently assessing the impact that Statement No. 161 may have on our consolidated financial
statements upon our adoption in fiscal year 2009.
18
Cohu, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
September 27, 2008
RESULTS OF OPERATIONS
The following table summarizes certain operating data from continuing operations as a percentage of
net sales for the three- and nine-month periods ended September 27, 2008 and September 29, 2007.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 27, |
|
|
September 29, |
|
|
September 27, |
|
|
September 29, |
|
| |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales |
|
|
(63.4 |
) |
|
|
(68.0 |
) |
|
|
(64.1 |
) |
|
|
(67.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
36.6 |
|
|
|
32.0 |
|
|
|
35.9 |
|
|
|
32.3 |
|
Research and development |
|
|
(19.0 |
) |
|
|
(14.8 |
) |
|
|
(18.7 |
) |
|
|
(15.9 |
) |
Selling, general and administrative |
|
|
(20.3 |
) |
|
|
(15.3 |
) |
|
|
(17.5 |
) |
|
|
(14.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(2.7 |
)% |
|
|
1.9 |
% |
|
|
(0.3 |
)% |
|
|
1.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 2008 Compared to Third Quarter of Fiscal 2007
Net Sales
Our net sales decreased 25.5% to $48.0 million in 2008, compared to net sales of $64.5 million in
2007. Sales of semiconductor equipment in the third quarter of fiscal 2008 decreased 32.3% from the
comparable 2007 period and accounted for 79.3% of consolidated net sales in 2008 versus 87.3% in
2007. The decrease in sales of semiconductor equipment was primarily attributable to a decrease in
thermal sub-systems and handler sales in the third quarter of fiscal 2008 as a result of
challenging business conditions within the semiconductor equipment industry.
Sales of television cameras accounted for 8.8% of consolidated net sales in 2008 and increased 7.5%
when compared to the same period of fiscal 2007. The increase in sales of our television camera
business during the third quarter of fiscal 2008 was primarily generated by demand for our
specialty surveillance camera products and price increases which went into effect in the second
quarter of fiscal 2008.
Sales of microwave communications equipment accounted for 11.9% of consolidated net sales in 2008
and increased 33.1% when compared to the same period in fiscal 2007. The increase in sales of our
microwave communications business during the third quarter of fiscal 2008 was primarily
attributable to higher demand for our products for use in public safety, surveillance and military
applications. Additionally, 2008 sales of our microwave communications equipment business
benefitted from the recognition of approximately $1.3 million in previously deferred revenue.
Gross Margin
Gross margin consists of net sales less cost of sales. Cost of sales consists primarily of the cost
of materials, assembly and test labor, and overhead from operations. Our gross margin can fluctuate
due to a number of factors, including, but not limited to, the mix of products sold, product
support costs, inventory reserve adjustments, and utilization of manufacturing capacity. Our gross
margin, as a percentage of net sales, increased to 36.6% in 2008 from 32.0% in 2007. In 2006 we
recorded a charge to cost of sales of approximately $4.6 million for excess and obsolete inventory
as a result of a decline in customer forecasts for a burn-in system, acquired from Unisys’ Unigen
operation (“Unigen”). In the third quarter of fiscal 2008 we sold certain of this inventory and
our gross margin was favorably impacted by approximately $1.3 million.
Our gross margin has been impacted by charges to cost of sales related to excess, obsolete and
lower of cost or market inventory issues and in fiscal 2007 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 third quarter of fiscal 2008 and
2007, we recorded net charges to cost of sales of approximately $0.1 million and $1.3 million,
respectively, for excess and obsolete inventory. While we believe our reserves for
19
Cohu, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
September 27, 2008
excess and obsolete inventory and lower of cost or market concerns are adequate to cover known exposures at
September 27, 2008, 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 19.0% in 2008,
compared to 14.8% in 2007, decreasing from $9.6 million in 2007 to $9.1 million in 2008. Decreased
R&D expense in 2008 was primarily a result of decreased labor and material costs associated with
new product development within our semiconductor equipment business of approximately $0.5 million.
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 20.3% in 2008, from 15.3% in 2007 decreasing in
absolute dollars from $9.9 million in 2007 to $9.7 million in 2008.
Interest and other, net
Interest and other, net was approximately $1.4 million and $2.1 million in the third quarter of
fiscal 2008 and 2007, respectively. During the third quarter of fiscal 2008 our interest income was
negatively impacted by lower short-term interest rates.
Income Taxes
The income tax provision included in the condensed consolidated statements of income for the three
months ended September 27, 2008 and September 29, 2007 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 68.1% and 31.8%, for the three months ended September 27,
2008 and September 29, 2007, 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,
manufacturing activities tax benefits and changes in the valuation allowance on deferred tax assets
and the liability for unrecognized tax benefits, 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 and interest expense recorded on unrecognized tax
benefits.
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 $3.0 million and $2.4 million was provided
on deferred tax assets at September 27, 2008 and December 29, 2007, 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.
Our unrecognized tax benefits, excluding accrued interest, totaled approximately $3.9 million and
$4.8 million at September 27, 2008 and December 29, 2007, respectively. If these unrecognized tax
benefits are ultimately recognized, this amount, less the related federal benefit for state items
of approximately $0.9 million and excluding any increase in our valuation allowance for deferred
tax assets, would result in a reduction in our income tax expense and effective tax rate. The
reduction in our unrecognized tax benefits in the first nine months of fiscal 2008 was primarily
due to the expiration of the applicable statute of limitations.
We recognize interest accrued related to unrecognized tax benefits, net of federal and state tax
benefits, in income tax expense. Cohu had approximately $432,000 and $317,000 accrued for the
payment of interest at September 27, 2008 and December 29, 2007, respectively.
20
Cohu, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
September 27, 2008
The Internal Revenue Service has examined our income tax returns through 2002, and the California
Franchise Tax Board through 1999.
In October, 2007 the IRS commenced a routine examination of our U.S. income tax return for 2005.
This examination is expected to be completed in fiscal 2008. We believe it is reasonably possible
that a portion of our total unrecognized tax benefits will decrease in the next 12 months upon the
conclusion of the examination or the lapse of the applicable statute of limitations. However, it is
premature to assess the range or the nature of the reasonably possible changes to our unrecognized
tax benefits.
As a result of the factors set forth above, our net income was $37,000 in 2008, compared to $2.2
million in 2007.
First Nine Months of Fiscal 2008 Compared to First Nine Months of Fiscal 2007
Net Sales
Our net sales decreased 14.1% to $158.3 million in 2008, compared to net sales of $184.3 million in
2007. Sales of semiconductor equipment in the first nine months of fiscal 2008 decreased 21.1% from
the comparable 2007 period and accounted for 78.2% of consolidated net sales in 2008 versus 85.1%
in 2007. The decrease in sales of semiconductor equipment was a result of decreased sales of
thermal test handlers, thermal sub-systems products, and high speed test handlers in the first nine
months of fiscal 2008 as a result of weak conditions in the semiconductor equipment industry.
Additionally, 2007 sales of our semiconductor equipment business benefitted from the recognition of
approximately $17.4 million in net deferred revenue related to certain semiconductor equipment
product, on which customer acceptance was obtained in the second quarter of fiscal 2007.
Sales of television cameras accounted for 8.5% of consolidated net sales in 2008 and increased
11.4% when compared to the same period of fiscal 2007. The primary cause of this increase in sales
is a result of the timing of revenue recognition, demand for our specialty surveillance camera
products and price increases.
Sales of microwave communications equipment accounted for 13.3% of consolidated net sales in 2008
and increased 37.5% when compared to the same period in fiscal 2007. The increase in sales of our
microwave communications business during the third quarter of fiscal 2008 was primarily
attributable to demand for our products in surveillance and military applications and approximately
$1.7 million in incremental sales recognized as a result of our March 30, 2007 acquisition of AVS.
Gross Margin
Our gross margin, as a percentage of net sales, increased to 35.9% in 2008 from 32.3% in 2007. Our
gross margin has been impacted by charges to cost of sales related to excess, obsolete, lower of
cost or market inventory issues and 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 2008 and 2007, we recorded net charges to
cost of sales of approximately $0.6 million and $3.5 million, respectively, for excess and obsolete
inventory. In 2006 we recorded a charge to cost of sales of approximately $4.6 million for excess
and obsolete inventory as a result of a decline in customer forecasts for a burn-in system,
acquired from Unigen. In the first nine months of fiscal 2008 we sold certain of this inventory
and our gross margin was favorably impacted by approximately $4.5 million.
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 27, 2008, 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 as a percentage of net sales was 18.7% in 2008, compared to 15.9% in 2007, increasing
from $29.3 million in 2007 to $29.6 million in 2008. Increased R&D expense in 2008 was primarily a
result of increased labor and material costs incurred by our microwave communications business
resulting from the March 2007 acquisition of AVS.
21
Cohu, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
September 27, 2008
Selling, General and Administrative Expense
SG&A expense as a percentage of net sales increased to 17.5% in 2008, from 14.9% in 2007,
increasing from $27.4 million in 2007 to $27.7 million in 2008. This increase in costs is primarily
due to an additional $1.4 million of SG&A related costs incurred by our microwave communications
business resulting from increased business volume, additional headcount, professional service costs
and the March 2007 acquisition of AVS. These increases were offset by decreased costs within our
semiconductor equipment and television camera businesses of approximately $1.1 million and
$0.6 million, respectively. The decrease in costs incurred by our semiconductor equipment business
is a result of decreased sales commissions as a result of decreased business volume. The decrease
in costs incurred by our television camera business was a result of decreased sales and
administrative labor costs and bad debt expense.
Interest and other, net
Interest and other, net was approximately $4.3 million and $6.3 million in the first nine months of
fiscal 2008 and 2007, respectively. During the first nine months of fiscal 2008 our interest income
was negatively impacted by lower short-term interest rates and by a loss of approximately $0.4
million recorded on the sale of short-term investments.
Income Taxes
The income tax provision included in the statements of income for the nine-month periods ended
September 27, 2008 and September 29, 2007 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 43.9% and 34.6%, for the nine months ended September 27, 2008 and September
29, 2007, 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, manufacturing activities
tax benefits and changes in the valuation allowance on deferred tax assets and the liability for
unrecognized tax benefits, 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 and interest expense recorded on unrecognized tax benefits.
As a result of the factors set forth above, our net income was $2.2 million in 2008, compared to
$5.9 million in 2007.
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. We have implemented cost
reduction programs aimed at aligning our ongoing operating costs with our currently expected
revenues over the near term. These cost management initiatives include 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 and to fund new products
and product enhancements primarily through research and development.
Liquidity
Working Capital: The following summarizes our cash, cash equivalents, short-term investments and
working capital:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
September 27, |
|
December 29, |
|
|
|
|
|
Percentage |
| (in thousands) |
|
2008 |
|
2007 |
|
Increase |
|
Change |
| |
Cash, cash equivalents and short-term investments |
|
$ |
171,179 |
|
|
$ |
170,118 |
|
|
$ |
1,061 |
|
|
|
0.6 |
% |
Working capital |
|
|
238,084 |
|
|
|
234,345 |
|
|
|
3,739 |
|
|
|
1.6 |
% |
22
Cohu, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
September 27, 2008
Cash Flows
Operating Activities: Cash generated from operating activities consists of net income, adjusted for
non-cash expenses and changes in operating assets and liabilities. Non-cash items include
depreciation and amortization; non-cash share-based compensation expense and deferred income taxes.
Our net cash flows provided from operating activities in the nine months ended September 27, 2008
totaled $6.8 million. Cash provided by operating activities was impacted by changes in current
assets and liabilities and included decreases in accounts receivable, accounts payable and accrued
compensation and other liabilities of $11.0 million, $6.9 million and $2.5 million, respectively
and an increase in inventory of $6.6 million. The decrease in accounts receivable was primarily
due to cash collections in excess of shipments in the first nine months of fiscal 2008. The
decrease in accounts payable and accrued compensation was a result of the timing of cash payments
primarily within our semiconductor equipment business. The increase in inventory was primarily a
result of purchases made to meet manufacturing requirements for new products developed by our
semiconductor equipment business.
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 for investing activities in the first nine months of fiscal 2008 totaled $10.6 million and was
primarily the result of $122.5 million in cash used for purchases of short-term investments, offset
by $114.0 million in net proceeds from sales and maturities of short-term investments. We invest
our excess cash, in an attempt to seek the highest available return while preserving capital, in
short-term investments since excess cash is only temporarily available and may be required for a
business-related purpose. Other expenditures in the first nine months of fiscal 2008 included
purchases of property, plant and equipment of $2.1 million. The purchases of property, plant and
equipment were primarily made to support activities in our semiconductor equipment and microwave
communications equipment businesses and consisted primarily of equipment used in engineering,
manufacturing and related functions.
Financing Activities: Cash flows from financing activities consist primarily of net proceeds from
the issuance of common stock under our stock option and employee stock purchase plans which totaled
$1.9 million during the first nine months of fiscal 2008. We issue stock options and maintain an
employee stock purchase plan as components of our overall employee compensation. We paid dividends
totaling $4.2 million, or $0.18 per common share, during the first nine months of fiscal 2008. We
intend to continue to pay quarterly dividends subject to capital availability and periodic
determinations by our Board of Directors that cash dividends are in the best interests of our
stockholders.
Capital Resources
In June, 2008, we renewed our $5.0 million unsecured bank line of credit bearing interest at the
bank’s prime rate. The line of credit will expire in July, 2009, 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 27, 2008; however, approximately $1.3 million of the
credit facility was allocated to standby letters of credit at September 27, 2008, 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 29, 2007.
Purchase Commitments: From time to time, we enter into commitments with our vendors to purchase
inventory at fixed prices or in guaranteed quantities. We are not able to determine the aggregate
amount of such purchase orders that represent contractual obligations, as purchase orders may
represent authorizations to purchase rather than binding agreements. Our purchase orders are based
on our current manufacturing needs and are fulfilled by our vendors within relatively short time
horizons. We 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.
23
Cohu, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
September 27, 2008
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 27, 2008, 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.
24
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Interest rate risk.
At September 27, 2008 our investment portfolio includes fixed-income securities with a fair value
of approximately $100.0 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. 3.00% to 3.30%) would not have a
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 last fiscal quarter, there have been no changes in our
internal control over financial reporting that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
25
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 Cohu’s Annual Report on Form 10-K for the fiscal year ended December
29, 2007 (our “2007 Form 10-K”). There have been no material changes to the risk factors
previously disclosed in our 2007 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None.
26
Item 6. Exhibits.
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3(i).1
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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
September 29, 1999 |
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3(i).2
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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 September 29, 2000, Exhibit 4.1(a) |
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3(ii)
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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 |
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4.1
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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 |
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10.1
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Form of Indemnity Agreement entered into by and between Cohu, Inc. and directors Charles A.
Schwan, Harry L. Casari, Robert L. Ciardella and Harold Harrigian and executive officers James
A. Donahue, Jeffrey D. Jones and Thomas L. Green, incorporated herein by reference from the
Cohu, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on
July 28, 2008, Exhibit 10. |
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31.1
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Certification pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 |
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31.2
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Certification pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 |
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32.1
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Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2
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Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
27
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.
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COHU, INC.
(Registrant)
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| Date: October 24, 2008 |
/s/ James A. Donahue
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James A. Donahue |
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President & Chief Executive Officer |
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| Date: October 24, 2008 |
/s/ Jeffrey D. Jones
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Jeffrey D. Jones |
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Vice President, Finance & Chief Financial Officer
(Principal Financial and Accounting Officer) |
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28
EXHIBIT INDEX
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|
|
| 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
September 29, 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 September 29, 2000, Exhibit 4.1(a) |
|
|
|
3(ii)
|
|
Amended and Restated Bylaws of Cohu, Inc. incorporated herein by reference to Exhibit 3.2
from the Cohu, Inc. Report on Form 8-K filed with the Securities and Exchange Commission on
December 12, 1996 |
|
|
|
4.1
|
|
Amended and Restated Rights Agreement dated November 10, 2006, between Cohu, Inc. and Mellon
Investor Services LLC, as Rights Agent, incorporated herein by reference from the Cohu, Inc.
Current Report on Form 8-K filed with the Securities and Exchange Commission on November 13,
2006, Exhibit 99.1 |
|
|
|
10.1
|
|
Form of Indemnity Agreement entered into by and between Cohu, Inc. and directors Charles A.
Schwan, Harry L. Casari, Robert L. Ciardella and Harold Harrigian and executive officers James
A. Donahue, Jeffrey D. Jones and Thomas L. Green, incorporated herein by reference from the
Cohu, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on
July 28, 2008, Exhibit 10.1 |
|
|
|
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 |