Cohu, Inc. — Q1 2020 Form 10-Q
Business context and period. Cohu supplies semiconductor test and inspection equipment, related consumables and services, and printed-circuit-board test systems. This unaudited report covers the 13 weeks ended March 28, 2020, compared with the 13 weeks ended March 30, 2019. Results are from continuing operations unless noted.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Net sales | $138.9 million | $147.8 million | Down 6.0% |
| Gross margin | 40.4% | 36.8% | MD&A presentation; improvement partly reflected no 2019 Xcerra inventory step-up amortization in 2020 |
| Operating loss | $13.6 million | $18.0 million | Improved by $4.4 million; 2020 included $3.9 million impairment |
| Net loss attributable to Cohu | $17.3 million | $22.6 million | Loss per diluted share was $0.42 versus $0.55 |
| Operating cash flow | $17.8 million | $4.7 million | Higher, with material contributions from customer advances and collections of receivables |
| Cash and short-term investments | $172.4 million | $156.1 million at Dec. 28, 2019 | Period-end balance |
| Working capital | $290.1 million | $290.8 million at Dec. 28, 2019 | Down $0.7 million |
| Total indebtedness, net of financing costs and discounts | $353.4 million | — | Included $338.5 million under the Term B Loan |
Material changes versus the prior period
- Sales fell amid COVID-19-related supply interruptions, including government movement restrictions affecting manufacturing in Malaysia and the Philippines. Semiconductor Test & Inspection sales were $128.0 million, down from $136.7 million; PCB Test sales were $10.9 million, versus $11.1 million.
- Gross margin rose as 2020 had no Xcerra inventory step-up amortization, compared with $6.0 million in Q1 2019. 2020 also included $1.2 million of excess and obsolete inventory charges and $1.6 million of charges related to discontinued handler products.
- SG&A declined to $33.4 million from $38.3 million, reflecting cost controls, lower incentive compensation and lower depreciation associated with Xcerra asset step-ups. Interest expense declined to $4.4 million from $5.5 million, primarily due to lower LIBOR.
- The pandemic-related interim impairment review found no goodwill impairment, but led to a $3.9 million impairment of in-process research and development (IPR&D), reflecting delayed product adoption, roadmap changes and a higher discount rate.
- Cohu sold its fixtures services business in February 2020, reporting $3.0 million of net sale proceeds and an immaterial impact on operations.
Outlook, risks and unusual items
- Management said the pandemic and global downturn were expected to negatively affect sales during 2020. Q1 orders strengthened, driven by equipment demand for mobility semiconductors, data centers and PCs, but management withdrew Q1 2020 guidance and cited difficulty providing forward-looking guidance amid uncertainty.
- On May 5, 2020, after quarter-end, the board suspended the quarterly cash dividend, which management expects to save approximately $10 million annually for deleveraging and balance-sheet strength. The company paid $0.06 per share in Q1.
- Management expected available liquidity to meet operating requirements for at least 12 months. Risks include pandemic-related production, logistics and customer delays; semiconductor demand cyclicality; customer concentration; inventory write-downs; foreign-exchange exposure; and substantial debt and related covenants. The Term B Loan matures October 1, 2025, bears floating-rate interest, and was at 4.0% at quarter-end. Cohu reported no credit-agreement defaults.
- The company reported $78.2 million, or 45.6%, of cash and equivalents held by foreign subsidiaries. Its primary credit ratings were B2 from Moody’s and B from S&P; S&P lowered its outlook to B- on March 31, 2020.
- Management cited possible additional impairment charges if conditions or valuation assumptions deteriorate. German tax returns for 2012–2016 were under routine examination; Cohu said it believed its tax accruals were appropriate. It did not believe ordinary-course legal matters would materially affect its financial position or results.
Important facts for investors to verify
- Whether pandemic-related supply constraints, customer order delays or cancellations, and demand weakness persist or reverse.
- Progress in reducing debt, compliance with credit covenants, floating-rate borrowing costs, and the effect of the dividend suspension.
- Whether further impairment or inventory charges are needed as customer forecasts and product-development timelines change.
- Customer concentration and exposure to trade restrictions, foreign currencies, and manufacturing disruptions in Asia.
- Whether operating cash flow remains adequate after considering working-capital movements and the timing of customer advances and receivable collections.