Cohu, Inc. — Q1 2013 Form 10-Q Summary
Reporting period: 13 weeks ended March 30, 2013; comparison is with the 13 weeks ended March 31, 2012. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where appropriate.
Business context and results
Cohu develops and sells semiconductor test-handling equipment, microwave communications equipment, and video cameras. Semiconductor equipment is its primary business and is exposed to cyclical customer capital spending. Q1 2013 results include Ismeca, acquired on December 31, 2012, and therefore are not fully comparable with the prior-year quarter.
| Metric | Q1 2013 | Q1 2012 | Change / note |
|---|---|---|---|
| Net sales | $56.0 million | $53.3 million | Up 5.1% |
| Gross margin | 27.8% | 29.2% | Down 1.4 percentage points |
| Operating loss | $12.9 million | $3.7 million | Loss widened |
| Net loss | $12.1 million | $3.2 million | Loss per diluted share: $0.49 vs. $0.13 |
| Operating cash flow | $(6.5) million | $0.7 million | Cash used in Q1 2013 |
| Cash and cash equivalents | $41.4 million | $102.8 million at Dec. 29, 2012 | Quarter-end balance |
| Cash, equivalents and short-term investments | $48.7 million | $110.2 million at Dec. 29, 2012 | Down $61.5 million |
| Working capital | $138.6 million | $184.7 million at Dec. 29, 2012 | Down 25.0% |
Revenue, margins, and segment performance
- Semiconductor equipment: Sales were $48.6 million, up 11.2% year over year and 86.7% of consolidated sales; growth included Ismeca. Segment loss was $8.9 million, compared with a $1.7 million loss.
- Microwave communications: Sales were $3.6 million, down 46.3%, primarily due to customer order delays for government-related security and surveillance projects. Segment loss was $2.4 million, versus $0.1 million profit.
- Video cameras: Sales were $3.8 million, up 33.2%, primarily due to traffic-related public infrastructure orders. Segment profit was $0.2 million, versus a $0.6 million loss.
- Gross margin declined amid lower production efficiency, revenue deferrals for certain payment terms, and amortization of Ismeca’s purchase-accounting inventory step-up. Inventory obsolescence charges were $1.8 million, versus $1.3 million.
- R&D rose to $13.5 million from $8.4 million, reflecting Ismeca and increased development spending. SG&A rose to $15.1 million from $10.9 million, including Ismeca costs, $0.5 million of manufacturing-transition costs, and $0.3 million of acquisition costs.
Cash, liquidity, and acquisition
- Investing cash outflow was $53.5 million, primarily the net cash payment for Ismeca. The acquisition’s preliminary purchase price was $84.9 million, funded primarily with $57.1 million of cash and $27.7 million of assumed liabilities. Preliminary goodwill was $19.1 million.
- Cash declined by $61.4 million during the quarter, including acquisition spending, $6.5 million of operating cash use, and a $0.9 million adverse exchange-rate effect. Cash-flow statements report no dividend cash payment in the quarter; $1.5 million of dividends were declared, or $0.06 per share, and $1.478 million was declared but unpaid at quarter end.
- Cohu reported no borrowings outstanding under Ismeca’s 0.5 million Swiss franc credit line. It also had approximately $0.6 million of standby letters of credit; the filing describes a secured facility requiring collateral for letters of credit.
- Management expected existing working capital to fund operating requirements for at least the next 12 months. $32.0 million of cash and equivalents was held by foreign subsidiaries, which Cohu intended to reinvest abroad; repatriation could result in U.S. taxes.
Management outlook, risks, and other notable items
- Management reported signs of improving conditions as the quarter progressed. SEMI-reported back-end equipment orders rose 28% sequentially in March; Cohu’s semiconductor segment orders, including Ismeca, rose 56% sequentially in Q1. Management remained optimistic about long-term industry prospects but noted weak macroeconomic conditions and near-term uncertainty. No formal revenue or earnings guidance was provided.
- Risks include semiconductor-industry cyclicality, limited demand visibility, pricing competition, customer concentration, inventory obsolescence, product-development and customer-acceptance challenges, and acquisition integration and impairment exposure. One semiconductor customer accounted for 20% of Q1 sales; two customers together represented 59% in Q1 2012.
- Goodwill and net purchased intangible assets were $76.3 million and $41.1 million, respectively. Management saw no trigger requiring an interim goodwill impairment review, but a sustained decline in market capitalization below book value could lead to one. Ismeca’s purchase-price allocation remained preliminary, including certain tax, inventory-contract, intangible-asset, and goodwill assessments.
- Other items: foreign-currency translation reduced other comprehensive income by $4.0 million; Cohu recorded approximately $0.4 million of losses on acquired currency derivatives. The filing reports no legal matter expected to have a material adverse effect and no material change in internal control over financial reporting. Management concluded disclosure controls were effective.
Important facts for investors to verify
- How much of semiconductor sales and order growth reflects Ismeca versus underlying business, and whether sequential order improvement converts to shipments and profits.
- Whether gross margin recovers as production levels, revenue deferrals, and Ismeca purchase-accounting effects change.
- Cash consumption, working-capital trends, foreign-held cash and repatriation constraints, and the company’s ability to meet its stated 12-month liquidity outlook.
- Ismeca integration progress and final purchase-price allocation, including potential effects on goodwill, intangibles, deferred taxes, and future amortization or impairment.
- Customer concentration and delayed microwave orders, alongside inventory reserves and the impact of semiconductor-market cyclicality.