Business context and reporting period
Cohu, Inc. supplies semiconductor test and inspection equipment, related consumables and services, and PCB test systems. This unaudited Form 10-Q covers the 13 weeks ended June 27, 2020, and the first 26 weeks of fiscal 2020; comparisons are with the corresponding 2019 periods. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $144.1 million | $150.0 million | $283.0 million | $297.8 million |
| Gross margin, excluding acquired-intangible amortization | 42.3% | 41.6% | 41.4% | 39.2% |
| Operating loss | $0.5 million | $14.7 million | $14.2 million | $32.6 million |
| Net loss attributable to Cohu | $4.7 million | $19.3 million | $22.0 million | $42.0 million |
| Loss per share, diluted | $0.11 | $0.47 | $0.53 | $1.02 |
For the first half, operating cash flow was $13.3 million, versus cash used of $4.8 million in 2019. Capital expenditures were $8.0 million; cash increased $6.8 million to $162.7 million. Cash, cash equivalents and short-term investments totaled $163.6 million. Working capital was $297.2 million.
At June 27, 2020, total debt was $362.8 million before $6.9 million of financing fees and discount; reported debt net of those costs was approximately $356.0 million. Cash and investments exceeded reported net debt by approximately $192 million. The principal term loan matures October 2025, bears floating-rate interest, and was at 3.2% on the reporting date. Total stockholders’ equity was $466.8 million.
Changes versus the prior comparable period
- Sales declined 4.0% in Q2 and 5.0% in the first half, as COVID-19-related supply disruptions and weaker automotive demand constrained shipments and demand.
- Gross margin improved year over year, aided in the first half by the absence of $6.0 million of acquired-inventory step-up amortization recorded in 2019. The margin also reflects product mix and inventory-related charges.
- Operating losses narrowed, with lower restructuring charges and reduced R&D and SG&A spending. First-half restructuring charges were $1.0 million, compared with $9.9 million in 2019, excluding separately classified inventory-related charges.
- Interest expense fell to $3.5 million in Q2 and $7.9 million in the first half, primarily because LIBOR rates declined.
Outlook, commentary, risks and unusual items
- Management said first-half orders strengthened on demand for equipment serving mobility semiconductors, data centers and PCs, but slowed in Q2 amid COVID-19 impacts. It expects the pandemic-driven global downturn to negatively affect 2020 sales. No specific forward financial guidance values are provided in the supplied filing text; management notes guidance may be withdrawn or not provided amid uncertainty.
- Management expects existing working capital to meet operating requirements for at least the next 12 months. The quarterly dividend was suspended indefinitely on May 5, 2020, with expected annualized cash savings of approximately $10 million, intended in part for debt reduction and balance-sheet strengthening.
- COVID-19 risks include facility restrictions, supply-chain and logistics disruption, higher component and shipping costs, delayed customer orders or acceptance, and possible further impairment or inventory charges. Malaysia and the Philippines factories operated partially under government restrictions during March–May.
- The first-quarter impairment review resulted in a $3.9 million charge to in-process research and development following delayed customer adoption expectations and revised project assumptions. No goodwill impairment was recorded; management reported no second-quarter triggering event.
- U.S. export restrictions affecting Huawei are expected to materially affect related business, particularly ATE; affected direct and indirect annual sales were estimated at less than 5% of Cohu revenue. Management said some lost sales may be offset by demand shifting to other device makers.
- Other key exposures include semiconductor-industry cyclicality, competition, customer concentration, Xcerra integration, significant leverage and floating-rate debt, LIBOR transition, foreign-currency movements, and potential future impairment. The filing reports no known credit-agreement default and no litigation currently expected to materially harm the company.
- Cohu sold its fixtures services business in February 2020 and received $3.0 million net proceeds. It also completed the sale of its Penang, Malaysia facility in June, recording a $27,000 gain. The Rosenheim, Germany facility was classified as held for sale, with a sale expected in Q3 2020.
Most important facts for investors to verify
- Whether COVID-19 supply constraints and weaker automotive demand continued to affect shipments, orders, and margins after quarter-end.
- Liquidity and debt-service capacity, including the floating-rate term loan, covenant headroom, and the planned use of dividend savings for deleveraging.
- Whether reported margin improvement is sustainable after accounting for inventory charges, product mix, and the absence of 2019 inventory step-up costs.
- Progress and costs from Xcerra integration, facility consolidation, the Rosenheim sale, and new-product development.
- Potential additional impairment or inventory write-downs if customer forecasts, market conditions, or product adoption weaken.