Cohu, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 26, 2016 (13 weeks; unaudited), compared with the 13 weeks ended March 28, 2015. Cohu supplies semiconductor test and inspection equipment and related products. Results are presented as one semiconductor-equipment segment. The 2015 comparison excludes Broadcast Microwave Services (BMS), sold in June 2015 and reported as discontinued operations.
Financial performance and liquidity
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q1 2016 | Q1 2015 / prior balance-sheet date |
|---|---|---|
| Net sales | $65.8 | $63.4 |
| Gross margin | 29.6% | 31.8% |
| Operating loss | $(1.7) | $(0.7) |
| Loss from continuing operations | $(1.9); $(0.07) per share | $(1.7); $(0.07) per share |
| Net loss | $(1.9); $(0.07) per share | $(2.7); $(0.11) per share, including BMS discontinued operations |
| Cash from operating activities | $(1.5) | $4.2 |
| Cash and cash equivalents | $104.9 | $115.4 at Dec. 26, 2015 |
| Cash, cash equivalents and short-term investments | $114.5 | $117.0 at Dec. 26, 2015 |
| Working capital | $170.9 | $171.3 at Dec. 26, 2015 |
Gross margin fell as a share of sales, and operating loss widened. Research and development expense was $7.8 million (down from $8.6 million); selling, general and administrative expense was $13.4 million (up from $12.3 million). The income tax provision was $0.2 million despite a pretax loss. Cohu reported no borrowings under its subsidiary’s available 2.5 million Swiss franc credit lines; no other debt balance is identified in the filing. The company reported $26,000 of standby letters of credit.
Investing activities used $8.0 million, principally reflecting $8.9 million of short-term investment purchases, partly offset by investment maturities and sales. Capital expenditures were $0.9 million. Financing activities used $2.0 million, including $1.6 million of dividends. The quarterly dividend was $0.06 per share; the Board subsequently approved another $0.06 dividend payable July 29, 2016, subject to the usual conditions.
Material changes and management commentary
- Sales increased 3.7% year over year. Management attributed the improvement to a rebound in back-end semiconductor equipment demand that began in November 2015 and continued through January 2016.
- Gross margin declined 2.2 percentage points. Management cited unfavorable product mix and higher excess-and-obsolete inventory charges: $0.8 million in Q1 2016 versus $0.3 million in Q1 2015.
- R&D expense decreased as programs concluded or neared completion, cost controls were applied, and a customer cost-sharing arrangement provided $0.6 million of reimbursements. SG&A was affected by $0.5 million of foreign-exchange losses, compared with $0.2 million of gains in the prior-year quarter, and higher share-based compensation.
- Operating cash flow turned negative, affected by increases in receivables ($5.3 million), inventory ($2.5 million) and other current assets ($1.9 million), partially offset by increases in accounts payable ($5.1 million) and deferred profit ($1.8 million). Management linked inventory growth to purchases for anticipated future-quarter shipments.
- Management said semiconductor-equipment orders plateaued and declined in February and March, while Cohu’s equipment utilization at customer test floors rose a few percentage points sequentially to 81%. It cited momentum in automotive and mobile markets and long-term opportunities from growing semiconductor content and industrial applications.
Outlook, risks and unusual items
- No numerical revenue, earnings or margin guidance is provided. Management expected existing working capital to meet operating requirements for at least the next 12 months, while emphasizing the cyclicality and volatility of semiconductor-equipment demand.
- Management is pursuing market-share growth in mobility, automotive and solid-state markets and expansion into test contacting and wafer-level package testing. New-product investment may weigh on results and may not achieve market acceptance.
- Key risks include semiconductor capital-spending cycles, customer concentration, competitive pricing, product transitions and inventory obsolescence, supplier and manufacturing-transition execution, foreign currency exposure, and international operating and tax risks. Two customers accounted for 32% of sales, versus three customers representing 47% in Q1 2015.
- $69.7 million of cash and cash equivalents was held by foreign subsidiaries. Repatriation could trigger U.S. taxes; Cohu said it intended to reinvest these funds abroad indefinitely and had no current repatriation plans.
- Foreign-exchange translation increased equity by $2.5 million in the quarter; Cohu separately reported $0.5 million of foreign-exchange losses in earnings. The prior-year quarter included a $1.0 million after-tax loss from discontinued BMS operations.
- Deferred revenue was approximately $7.3 million and deferred profit $5.6 million at quarter-end, up from approximately $5.0 million and $3.7 million, respectively, at year-end, primarily reflecting shipments for which revenue recognition was deferred. Management stated that legal matters and examinations arising in the ordinary course were not believed to have a material adverse effect; outcomes are inherently uncertain.
Important facts for investors to verify
- Whether the recent equipment-demand slowdown continues and how customer utilization, orders and shipment timing develop.
- Whether gross margins recover, including the effects of product mix, inventory reserves and competitive pricing.
- Conversion of receivables, inventory and deferred-profit balances into cash, and the level of operating cash flow in subsequent quarters.
- Customer concentration and foreign-cash availability, including any tax consequences if repatriated.
- Progress and commercial acceptance of test-contactor and wafer-level package products, and whether related development costs or impairment risks change.