Cohu, Inc. — Q1 2015 Form 10-Q
Reporting period: 13 weeks ended March 28, 2015; comparative period ended March 29, 2014. Unaudited. Cohu’s continuing businesses are semiconductor equipment and microwave communications equipment. The video camera segment was sold in June 2014 and is presented as discontinued operations.
Financial highlights
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $68.1 million | $64.9 million |
| Gross margin | 32.0% | 34.2% |
| Operating loss | $1.7 million | $3.4 million |
| Continuing-operations net loss | $2.7 million | $3.4 million |
| Net loss per diluted share | $0.11 | $0.13 |
| Operating cash flow | $4.2 million provided | $8.9 million used |
| Capital expenditures | $1.1 million | $0.7 million |
- Sales rose 4.9% year over year. Semiconductor equipment revenue increased 5.4% to $63.4 million; microwave communications revenue decreased 1.6% to $4.6 million.
- Gross margin declined 2.2 percentage points, primarily because of semiconductor product mix. Inventory-obsolescence charges were $0.4 million, versus $1.4 million a year earlier.
- Lower R&D expense ($9.6 million versus $10.6 million) and SG&A expense ($13.8 million versus $15.1 million) helped reduce the operating loss.
- Q1 2015 included a $1.0 million income tax provision despite a pretax loss; the company cited its inability to benefit certain domestic losses and noted that small changes in projected results make its annual effective tax rate unreliable.
Liquidity, balance sheet and cash flow
- At March 28, 2015, cash, cash equivalents and short-term investments totaled $69.7 million, down $2.3 million from year-end 2014. Working capital was $141.2 million, down $5.1 million.
- Cash and cash equivalents were $68.6 million; current assets were $207.9 million and current liabilities were $66.7 million. The filing reports no borrowings; $2.5 million of credit availability at Ismeca was unused.
- Operating cash flow improved to $4.2 million from cash usage of $8.9 million in the prior-year quarter. Management cited collections on receivables and higher accounts payable, partly offset by increased inventory and payment of previously accrued incentive compensation.
- Cash used in financing was $2.8 million, including $1.5 million of dividends and $1.2 million of share repurchases related to employee stock plans. The declared dividend was $0.06 per share.
- Of cash and cash equivalents, $52.2 million was held by foreign subsidiaries; repatriation could trigger U.S. taxes. Cohu said it intended to reinvest these funds abroad and expected working capital to meet operating needs for at least 12 months.
- Foreign-currency translation reduced other comprehensive income and stockholders’ equity by $8.4 million in the quarter. Total assets were $335.5 million and stockholders’ equity was $234.9 million at quarter-end.
Changes, outlook and risks
- Management reported that semiconductor equipment orders increased 53% sequentially in Q1, partly due to a large mobility-product testing order. It described demand across product lines and customers as broad and expressed optimism about long-term industry prospects.
- Management emphasized semiconductor equipment cyclicality and limited visibility. The quarter’s order growth should not be treated as full-year guidance; the filing provides no specific revenue or earnings forecast.
- Key risks include volatile semiconductor capital spending, customer concentration (two customers represented 31% of Q1 2015 sales), competitive pricing and product mix, inventory obsolescence, customer acceptance-related revenue deferrals, and manufacturing-transition and supplier risks.
- Microwave communications depends in part on government-funded programs, which may be delayed, reduced or terminated. Foreign exchange, international operations, tax matters, product quality and warranty costs, and potential impairments are also risks.
- Deferred revenue was approximately $12.0 million and deferred profit $7.7 million at quarter-end, mainly reflecting semiconductor equipment shipments awaiting customer acceptance. Standby letters of credit totaled approximately $0.3 million; management did not consider payment probable. The company said ordinary-course legal matters were not expected to have a material adverse effect.
- A non-cash $5.0 million impairment of microwave communications goodwill and other assets was recorded in Q4 2014. In Q1 2015, the cash-flow statement includes a $0.3 million asset impairment charge. The filing also reports the April 6, 2015 termination of the shareholder rights agreement.
Important facts for investors to verify
- Whether the reported 53% sequential increase in semiconductor equipment orders converts into shipments and revenue, and how much was attributable to the large mobility-related order.
- Whether gross margins recover from the 32.0% level as product mix and manufacturing transition effects change.
- Customer concentration, order timing and customer acceptance conditions, including the conversion of deferred revenue to recognized sales.
- Inventory levels, obsolescence reserves and working-capital cash demands as Cohu builds inventory for expected future shipments.
- The realizability of deferred tax assets and the effect of foreign cash repatriation, currency movements and tax provisions.
- Whether microwave communications performance, supplier and manufacturing risks, or other developments require additional asset impairment or affect liquidity.