Cohu, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 25, 2017. The quarter comprised 12 weeks, compared with 13 weeks in the prior-year period. Financial statements are unaudited.
Business context
Cohu supplies semiconductor test and inspection handlers, MEMS test modules, test contactors and thermal subsystems. It reports one operating segment: semiconductor equipment. Results are exposed to seasonal, cyclical semiconductor-equipment demand.
Financial performance
| Metric | Q1 2017 | Comparable period |
|---|---|---|
| Net sales | $81.1 million | $65.8 million; +23.3% year over year |
| Gross margin | 39.8% | 29.3% |
| Operating income (loss) | $8.0 million | $(1.5) million |
| Net income (loss) | $6.8 million; diluted EPS $0.24 | $(1.7) million; diluted EPS $(0.06) |
| Operating cash flow | $(7.2) million | $(1.5) million |
| Cash and short-term investments | $106.2 million | $128.0 million at Dec. 31, 2016 |
| Working capital | $172.3 million | $176.5 million at Dec. 31, 2016 |
Sales were also up 15% sequentially from Q4 2016, according to management. The year-over-year comparison includes $4.1 million of Kita sales, and the current quarter had one fewer week than the prior-year quarter. Gross margin improvement reflected lower manufacturing costs after shifting volume-handler production to Asia, higher volume and lower inventory charges; it also benefited from $0.6 million less intangible amortization, partly offset by $0.3 million of Kita inventory step-up amortization. Operating expenses increased: R&D was $9.8 million versus $7.7 million, and SG&A was $14.5 million versus $13.1 million.
Liquidity, debt and cash flows
Cash and cash equivalents were $83.8 million, with $22.4 million of short-term investments. The $12.2 million decrease in cash during the quarter reflected operating cash use, the Kita acquisition, capital spending, dividends and other financing activity; investment maturities and sales partly offset investing outflows. Operating cash use was driven largely by increases in accounts receivable ($15.8 million) and inventory ($4.7 million), partly offset by higher accounts payable ($5.4 million).
Following the Kita acquisition, Cohu reported $3.2 million of short-term borrowings and approximately $7.1 million of term loans, or about $10.3 million of total debt. The term loans are secured by Kita’s facility and land, bear interest rates of 0.05%–1.43%, and mature through 2034. Management expected working capital to be sufficient for operating needs for at least 12 months. About $60.4 million of cash and cash equivalents was held by foreign subsidiaries; repatriation could entail U.S. tax.
Material changes, outlook and risks
- Cohu acquired Kita on January 4, 2017, for a stated purchase price of $17.3 million, including estimated contingent consideration. Kita expands Cohu’s spring-probe contact business and contributed $4.1 million of quarterly sales. Purchase-price allocation remained preliminary; up to $3.0 million of additional payments depend on Kita meeting 2017 and 2018 revenue and EBITDA targets.
- Management cited continued demand, particularly for equipment supporting automotive, mobility and IoT semiconductor testing, strong customer test-cell utilization and expected strong demand over the next quarter. It expressed long-term optimism but gave no specific numerical revenue or earnings guidance.
- The company declared a $0.06-per-share quarterly dividend and announced another $0.06 dividend payable July 28, 2017, subject to the Board’s ongoing determinations and liquidity.
- Key risks include semiconductor-industry cyclicality and seasonality, limited market visibility, customer concentration, competition and pricing pressure, product transitions and inventory obsolescence, supplier and overseas-manufacturing risks, acquisition integration, and foreign-currency exposure. One customer accounted for 20% of sales, versus two customers accounting for 32% in the prior-year quarter.
- Foreign-exchange transaction losses were $1.3 million, compared with $0.5 million a year earlier. Cohu reported a 16.7% effective tax rate; domestic tax benefits are constrained by a valuation allowance. Management reported no goodwill impairment indicators at quarter-end and did not believe ordinary-course legal matters would materially adversely affect the company.
Important facts for investors to verify
- How much of sales growth and margin improvement is sustainable, considering the shorter quarter, Kita contribution, production transition and lower inventory charges.
- Whether elevated receivables and inventory convert to cash as expected, and how operating cash flow develops after the quarter’s working-capital outflows.
- The final Kita purchase-price allocation, integration progress, acquired debt and any contingent consideration earned.
- Customer concentration, semiconductor demand trends, and the sensitivity of earnings and equity to foreign-exchange movements.
- The availability and tax implications of foreign-held cash, and the assumptions supporting management’s 12-month liquidity assessment.