Cohu, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter ended September 30, 2023 (13 weeks); year-to-date period covers 39 weeks. Comparatives are the corresponding 2022 periods. Cohu supplies semiconductor test and inspection equipment and related products. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | First 9 months 2023 | First 9 months 2022 |
|---|---|---|---|---|
| Net sales | $150.8 | $206.7 | $499.1 | $621.7 |
| Gross margin | 47.0% | 47.4% | 47.5% | 46.7% |
| Operating income | $7.4 | $33.7 | $42.9 | $98.3 |
| Net income | $3.9 | $24.9 | $30.2 | $75.2 |
| Diluted EPS | $0.08 | $0.51 | $0.63 | $1.53 |
| Cash flow from operations | — | $98.8 | $85.3 |
- Q3 gross profit was approximately $70.9 million; the reported gross margin was nearly flat year over year. Nine-month margin improved, which management attributed to favorable product mix and increased in-house contactor manufacturing.
- At September 30, cash and cash equivalents were $293.4 million and short-term investments were $94.2 million, totaling $387.6 million. Working capital was $590.1 million. Cash and investments were broadly level with year-end 2022.
- Total debt, net of financing fees and discounts, was approximately $41.4 million, down from $79.0 million at December 31, 2022. Cohu repaid $34.1 million of term-loan principal during the first nine months. The term loan matures October 2025; its interest rate was 8.9% at quarter-end following transition from LIBOR to SOFR.
- Year-to-date investing cash flow was positive $12.3 million, including net investment maturities and the $26.3 million cash outlay for MCT. Financing used $56.0 million, including debt repayments and share repurchases.
Changes versus comparable periods
- Q3 sales fell 27.0% year over year and 10.7% sequentially. Nine-month sales declined 19.7%. Systems revenue was $73.2 million in Q3 versus $120.7 million a year earlier; non-systems revenue was $77.6 million versus $86.0 million.
- Lower sales materially reduced operating income and earnings. Q3 operating margin fell to 4.9% from 16.3%; nine-month operating margin was 8.6% versus 15.8%. R&D and SG&A were lower or similar in dollars in Q3 but higher as a share of sales.
- Q3 interest income rose to $3.2 million from $1.1 million, reflecting higher rates and investment balances. Nine-month interest income increased to $8.7 million from $1.6 million.
- Operating cash flow improved year over year despite lower earnings, aided in part by a $50.2 million reduction in accounts receivable. Cash flow also reflected decreases in accounts payable and accrued liabilities.
Outlook, management commentary, risks and unusual items
- Management described weaker demand amid macroeconomic and geopolitical uncertainty, with customers reducing costs and delaying capital expenditure. Lower demand affected automotive, industrial, mobility (including 5G-related products), and computing applications. Cohu did not provide specific numerical guidance in the supplied filing text; it said working capital was expected to meet operating needs for at least the next 12 months.
- Management cited AI adoption, increasing semiconductor complexity and test intensity, and customer traction with new products as long-term opportunities, while cautioning that semiconductor equipment demand is cyclical and recovery timing is uncertain.
- Mobility system sales over the 12 months through Q3 were down 56.7% year over year, according to the risk-factor discussion. Customer concentration remains notable: two customers represented 22% of Q3 sales; one represented 13% of nine-month sales.
- Cohu acquired MCT on January 30, 2023, for a purchase price of $26.8 million; MCT contributed $1.4 million of Q3 sales and $8.4 million of nine-month sales. A consolidation of MCT’s Penang manufacturing into Cohu’s Melaka facility and related workforce actions generated $2.0 million of year-to-date restructuring charges. Purchase accounting was preliminary at quarter-end.
- After quarter-end, on October 2, Cohu acquired EQT, a supplier of semiconductor test contactors and consumables, for 66.0 million Singapore dollars, subject to a working-capital adjustment. Cohu reported approximately $0.8 million of related acquisition costs in fiscal 2023.
- Other notable items included $0.4 million of year-to-date loss on debt extinguishment, Q3 foreign transaction loss of $1.2 million, and Q3 foreign-currency translation loss of $10.4 million in other comprehensive income. Cohu also reported $2.0 million of excess and obsolete inventory charges year to date.
- Key risks include semiconductor market and end-market weakness, customer and industry concentration, foreign-exchange movements, interest-rate and investment risk, geopolitical disruption to semiconductor supply chains, and potential errors, privacy concerns or regulation associated with AI. Tax authorities were examining Cohu in Germany, the Philippines, Malaysia, Singapore and Thailand. Management said ordinary-course legal matters were not expected to have a material adverse effect.
- Cohu maintained a valuation allowance against substantially all U.S. net deferred tax assets. It held $184.6 million, or 62.9%, of cash and cash equivalents at foreign subsidiaries, which could incur withholding tax if repatriated. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- Whether demand across mobility, automotive, industrial and computing markets stabilizes, and how that affects orders, sales and factory utilization.
- Whether gross-margin resilience persists as product mix, inventory reserves and manufacturing volumes change.
- The final MCT purchase-price allocation, realized integration savings and progress of the Penang-to-Melaka consolidation; also the financial impact of the EQT acquisition.
- Term-loan repayment and refinancing requirements before its October 2025 maturity, including exposure to the floating SOFR-based rate.
- Customer concentration, foreign-cash repatriation costs, U.S. deferred-tax-asset valuation allowances, and any material developments in tax examinations or other contingencies.