Cohu, Inc. — Q3 2020 Form 10-Q
Reporting period: 13 weeks ended September 26, 2020; year-to-date figures cover 39 weeks. Comparatives are the periods ended September 28, 2019. Financial statements are unaudited. Amounts below are in millions of dollars except per-share data.
Business context and reporting period
Cohu supplies semiconductor test and inspection equipment, related consumables and services, and PCB test systems. Its equipment demand depends on semiconductor and electronics customers’ capital spending; consumables provide a comparatively recurring revenue stream. The company reports two segments: Semiconductor Test & Inspection and PCB Test. The fixtures services business was sold in February 2020 and is reported as discontinued operations.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | First 9 months 2020 | First 9 months 2019 |
|---|---|---|---|---|
| Net sales | $150.6 | $143.5 | $433.7 | $441.3 |
| Gross margin, before purchased-intangible amortization | 42.2% | 41.1% | 41.6% | 39.8% |
| Operating loss | $(1.4) | $(6.0) | $(15.5) | $(38.7) |
| Net loss attributable to Cohu | $(6.6) | $(10.5) | $(28.7) | $(52.4) |
| Loss per share, diluted | $(0.16) | $(0.25) | $(0.69) | $(1.28) |
- Q3 sales increased 5.0% year over year; nine-month sales declined 1.7%. Q3 Semiconductor Test & Inspection sales were $137.2 million and PCB Test sales were $13.4 million.
- Q3 gross margin improved 1.1 percentage points; the nine-month margin improved 1.8 points. Management cited product mix and the absence of prior-year inventory step-up amortization among the factors affecting year-to-date margin.
- Q3 results included $7.3 million of IPR&D impairment and a $4.5 million gain on sale of the Rosenheim facility. Nine-month impairment charges totaled $11.2 million; restructuring charges were $1.4 million versus $10.7 million a year earlier.
- Cash provided by operating activities was $28.0 million for the first nine months, compared with $3.4 million. Investing activities provided $6.4 million, compared with using $11.8 million; financing activities used $19.6 million, compared with $8.4 million.
- At September 26, cash, cash equivalents and short-term investments totaled $170.9 million; working capital was $297.9 million. Total indebtedness, net of discount and deferred financing costs, was $339.7 million. The Term Loan B principal remaining was approximately $327.5 million.
- Cash dividends were suspended indefinitely from May 5, 2020; the company said suspension would save about $10 million annually. It paid $5.0 million in dividends during the first nine months.
Material changes and management commentary
- Management attributed first-nine-month sales pressure to COVID-19-related supply disruptions and weak automotive demand. In Q3, demand strengthened in mobility, data-center, PC, automotive and industrial applications; PCB test orders were described as near record levels.
- Management cited accelerated adoption of the RedDragon RF module for 5G, Wi-Fi 6 and Ultra-Wideband testing, and customer traction for the Neon inspection platform. It reported positive order momentum and expressed optimism about long-term market drivers, while expecting full-year 2020 sales to be negatively affected by the global downturn.
- The company repurchased $16.4 million of Term Loan B principal for $15.8 million cash in August, recording a $0.3 million gain. The Rosenheim facility sale proceeds were also used to repay the related Xcerra term loan.
- Management said existing liquidity and operating cash flows should meet working-capital and cash requirements for at least the next 12 months. The filing provides no numerical forward revenue or earnings guidance in the text presented.
Risks, contingencies and unusual items
- COVID-19 remained a significant risk to operations, suppliers, shipping, product development and customer demand. Malaysia reinstated movement-control orders in October 2020, with supplier delays already reported; further disruptions, order deferrals, collection delays and inventory write-downs were possible.
- Other key risks include semiconductor-market cyclicality, U.S.-China trade and export restrictions, customer concentration, competition, integration of Xcerra, and the possibility of additional intangible-asset impairments. Cohu recorded $11.2 million of IPR&D impairment following delayed customer adoption and product-roadmap changes; management warned that further impairments could materially affect results.
- Debt and floating-rate exposure remain material: the Term Loan B bears interest based on LIBOR or a base rate, and the filing discusses uncertainty around LIBOR’s replacement. Credit ratings were Moody’s B2 and S&P B, with S&P’s outlook previously downgraded to B- in March 2020.
- The company disclosed routine tax examinations in Germany and the Philippines and ordinary-course legal matters; it did not believe their resolution would materially adversely affect the company. It reported no credit-agreement defaults as of September 26, 2020.
- Foreign-currency translation reduced stockholders’ equity by $12.7 million during the first nine months. After quarter-end, on October 2, Cohu entered into foreign-currency forward contracts.
Important facts for investors to verify
- Whether improving Q3 orders and new-product adoption continue, particularly as COVID-19, automotive demand and regional supply disruptions evolve.
- Whether gross-margin gains persist and whether inventory reserves or restructuring/integration costs increase.
- Progress in reducing debt, the company’s ability to service floating-rate borrowings, and any implications from LIBOR transition or credit-rating changes.
- Assumptions supporting the valuation of IPR&D and goodwill, and the risk of additional impairment charges.
- Dividend policy, cash held overseas, and whether management’s stated liquidity runway remains adequate under changing business conditions.