Cohu, Inc. — Q1 2014 Form 10-Q
Business context and period. Cohu reported its unaudited first quarter of fiscal 2014, the 13 weeks ended March 29, 2014, compared with the 13 weeks ended March 30, 2013. Its businesses are semiconductor equipment, microwave communications and video cameras; semiconductor equipment is the largest segment.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Net sales | $68.4 million | $56.0 million; up 22.1% |
| Gross margin | 34.8% | 27.8% |
| Operating loss | $3.4 million | $12.9 million |
| Net loss | $3.3 million; $0.13 per share | $12.1 million; $0.49 per share |
| Operating cash flow | $(8.9) million | $(6.5) million |
| Cash and short-term investments | $41.1 million at quarter-end | $52.9 million at December 28, 2013 |
| Working capital | $124.5 million | $125.8 million at December 28, 2013 |
Q1 investing cash use was $0.5 million, primarily capital expenditures; financing cash use was $2.3 million, including $1.5 million of dividends and $0.8 million of share repurchases. Cash declined $11.6 million during the quarter. The balance sheet reports no outstanding borrowings under the Ismeca credit line; the filing does not show other funded debt. Cohu had $0.7 million of standby letters of credit outstanding.
Changes versus the prior-year quarter
- Semiconductor equipment sales rose 23.8% to $60.2 million; microwave communications sales rose 28.8% to $4.7 million; video camera sales fell 6.2% to $3.6 million.
- Management attributed higher gross margin to product mix, including more thermal sub-systems, and initial benefits from moving semiconductor-equipment manufacturing to Asia. Prior-year margin was also affected by lower production, deferred revenue and Ismeca purchase-accounting inventory amortization.
- Research and development expense declined to $11.2 million from $13.5 million, reflecting completed or nearing-completion development programs and earlier cost reductions. SG&A increased to $16.0 million from $15.1 million and included $0.8 million of manufacturing-transition and severance costs.
- Two customers each exceeded 10% of sales and together represented 26% of Q1 revenue, versus one customer and 20% in the prior-year quarter.
Outlook, risks and unusual items
- Management said semiconductor-equipment order momentum continued from Q4 2013, with orders increasing 9% sequentially in Q1. It cited demand across product lines, including automotive, industrial, consumer, discrete-component and LED markets, and expressed optimism about longer-term industry prospects. This is commentary, not quantified company guidance.
- Cohu expects existing working capital to meet operating requirements for at least 12 months. It reported $34.9 million of cash and equivalents held by foreign subsidiaries, which it intends to reinvest abroad; repatriation could trigger U.S. taxes.
- Key risks include semiconductor-industry cyclicality and limited demand visibility, customer concentration, competition and pricing pressure, inventory obsolescence, execution of the manufacturing transition and ERP implementation, and foreign-market, supplier, currency and government-spending risks.
- Inventory-obsolescence charges were $1.5 million, compared with $1.8 million in Q1 2013. Cohu said it had no impairment indicators requiring an interim goodwill review; goodwill was $71.4 million and net intangible assets were $43.4 million.
- Ordinary-course legal matters and tax examinations were disclosed; management did not believe their resolution would materially adversely affect the company. The filing reported no material change in unrecognized tax benefits and no material impact from newly adopted accounting guidance.
Important facts for investors to verify
- Whether the sequential order growth described by management continued, and how it translated into shipments, revenue and margins.
- Whether the operating cash outflow and inventory and receivables growth reversed as anticipated production ramped.
- Customer concentration and the effect of semiconductor-equipment cyclicality on sales and working capital.
- Execution and costs of the Asia manufacturing transition and ERP implementation, including any further severance or disruption.
- Cash availability and potential tax consequences of repatriating foreign-held funds; future dividend decisions remain subject to the board and liquidity.