Cohu, Inc. — Q1 2023 Form 10-Q
Reporting period: 13 weeks ended April 1, 2023; comparative period ended March 26, 2022. Cohu supplies semiconductor test and inspection equipment and related products. Financial statements are unaudited.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $179.4 million | $197.8 million | Down 9.3% |
| Gross margin | 48.1% | 46.1% | Up 2.0 percentage points |
| Operating income | $19.9 million | $27.7 million | Down 28.2% |
| Net income | $15.7 million | $21.6 million | Down 27.3% |
| Diluted EPS | $0.33 | $0.44 | Down $0.11 |
| Cash from operations | $16.5 million | $2.0 million | Up $14.5 million |
Gross margin improvement reflected favorable product mix and increased in-house contactor manufacturing; price increases also helped offset supply-chain cost increases. Operating income declined as lower sales and higher SG&A and intangible amortization more than offset the gross-margin improvement. SG&A rose to $34.2 million from $31.2 million, including $0.4 million of MCT acquisition costs. Inventory charges were $1.9 million versus $0.8 million.
Liquidity, debt and cash flow
- Cash and cash equivalents were $226.6 million and short-term investments were $97.6 million at quarter-end, totaling $324.3 million, down $61.3 million from year-end 2022. Working capital was $564.5 million, down $39.5 million.
- Total debt, net of financing costs and discount, was approximately $44.1 million. Cohu prepaid $34.1 million of term-loan principal; the term loan carried a 7.8% interest rate at April 1. The main term-loan maturity is October 2025.
- Investing activities provided $14.3 million, including investment maturities and sales, and included $26.9 million net cash paid for MCT and $5.1 million of capital expenditures. Financing activities used $47.4 million, mainly for debt repayments, share withholding/repurchases, and treasury-stock purchases.
- Operating cash flow benefited from customer advances and collections, but was partly offset by payments of prior-year incentive compensation and taxes, among other working-capital movements.
Material changes and notable items
- Sales fell year over year, primarily due to weaker demand for automotive, mobility (including 5G-related) and computing applications amid macroeconomic pressures and customer delays in capital spending. Sales also declined 6.1% sequentially, according to management.
- Cohu acquired MCT Worldwide on January 30, 2023, for a preliminary purchase price of $26.8 million. MCT contributed $4.5 million of Q1 sales; its operating impact was described as not material. The purchase-price allocation remains preliminary and includes $12.0 million of acquired intangible assets and $8.8 million of goodwill.
- Cohu began an MCT integration program, planning to consolidate MCT’s Penang manufacturing into its Melaka facility by year-end 2023. Q1 restructuring charges were $0.9 million; $0.2 million remained accrued at quarter-end.
- Two customers each exceeded 10% of sales in Q1 2023; together they represented 24% of sales, compared with one customer at 11% in Q1 2022.
- Cash and cash equivalents included $176.4 million held by foreign subsidiaries. Cohu reported $12.3 million of deposits at Silicon Valley Bank when it failed and said those deposits were fully protected by the FDIC; it is terminating its limited commercial relationship with SVB.
- Management reported no material legal contingencies expected to adversely affect the company. Tax examinations were ongoing in Germany, Malaysia, the Philippines, Singapore and Thailand.
Outlook, commentary and risks
The filing provides no numeric revenue or earnings guidance. Management said long-term market drivers remain intact and expressed optimism about demand across its main markets and customer traction with new products. It expects working capital to be sufficient for operating requirements for at least the next 12 months. Management also emphasized that semiconductor-equipment demand is cyclical and volatile, and that customers may delay or accelerate purchases.
Key risks include macroeconomic and geopolitical conditions, semiconductor customer spending, customer concentration, inventory obsolescence, foreign-exchange movements, and interest-rate exposure. The term loan’s floating rate references LIBOR; the filing notes uncertainty around its transition to replacement benchmarks. Cohu also highlighted risks from instability at financial institutions and deposits exceeding FDIC insurance limits. Management stated disclosure controls were effective and that no material changes to internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether demand weakness in automotive, mobility/5G and computing persists, and how it affects sales, margins and customer orders.
- Whether gross-margin gains from product mix and insourcing are sustainable amid lower volumes, inventory charges and supply-chain costs.
- Progress and costs of the MCT facility consolidation, expected synergies, and final purchase-price allocation.
- Cash deployment, including term-loan prepayments, the remaining $78.5 million share-repurchase authorization, and foreign-held cash availability.
- Customer concentration, inventory levels and reserves, and exposure to floating interest rates and foreign currencies.