Cohu, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012 (13 weeks), compared with the three months ended March 26, 2011. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted. The interim statements are unaudited.
Business context and results
Cohu operates in semiconductor equipment, microwave communications, and video cameras. Semiconductor equipment is its primary business and is exposed to cyclical customer investment in semiconductor capacity.
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $53.3 | $89.7 |
| Gross margin | 29.2% | 32.1% |
| Operating income (loss) | $(3.7) | $7.6 |
| Net income (loss) | $(3.2) | $6.6 |
| Diluted EPS | $(0.13) | $0.27 |
| Operating cash flow | $0.7 | $7.4 |
| Capital expenditures | $1.0 | $0.2 |
Financial position and liquidity
- At March 31, 2012, cash and cash equivalents were $50.5 million and short-term investments were $53.8 million, totaling $104.3 million, down $0.7 million from December 31, 2011. Working capital was $190.0 million, down $1.9 million.
- Total assets were $356.0 million; stockholders’ equity was $290.2 million. The balance sheet presents no borrowings or other debt.
- Cash decreased $2.8 million during the quarter, ending at $50.5 million. Operating cash flow of $0.7 million and investing outflow of $3.0 million were supplemented by a $0.8 million favorable foreign-exchange effect; financing outflow was $1.2 million.
- The company paid $1.5 million in dividends, or $0.06 per share, matching the prior-year quarterly dividend. Management expected working capital to meet operating requirements for at least the next 12 months.
- $29.4 million of cash and cash equivalents was held by foreign subsidiaries. Cohu said repatriation could require U.S. tax and that it intended to reinvest these funds abroad.
Changes and drivers versus prior year
- Sales fell 40.6%, primarily because semiconductor equipment sales declined 45.0% to $43.7 million amid macroeconomic weakness, elevated chip inventory, and lower customer need for new systems.
- Microwave communications sales declined 3.4% to $6.8 million; video camera sales fell 12.2% to $2.8 million, primarily due to delays in customer orders for traffic infrastructure projects.
- Gross margin fell 2.9 percentage points. Management attributed the decline mainly to lower production volume and related inefficiencies; the company recorded $1.3 million of excess and obsolete inventory charges, versus $1.2 million in the prior-year quarter.
- R&D and SG&A declined in dollars to $8.4 million and $10.9 million, respectively, but increased as a share of sales because of the lower revenue base. Operating results shifted from profit to loss.
- Two semiconductor equipment customers each represented more than 10% of sales and together accounted for 59% of Q1 2012 revenue, versus 52% in Q1 2011.
Outlook, risks, and contingencies
- Management reported that semiconductor industry orders increased sequentially each month in Q1 and Cohu’s semiconductor equipment orders rose 22% sequentially versus Q4 2011. Based on customer forecasts, management expected Cohu orders to increase sequentially in Q2; this was not quantified revenue or earnings guidance.
- Management described industry forecasts for 2012 as mixed, citing excess inventory, manufacturing overcapacity, uncertain demand, and economic weakness. It remained cautious near term but optimistic about long-term industry prospects.
- Key risks include semiconductor industry cyclicality, competition and pricing pressure, product transitions and inventory obsolescence, customer concentration, reliance on suppliers and contract manufacturers, global economic and geopolitical conditions, foreign currency exposure, and potential impairment of goodwill or intangibles.
- Goodwill was $59.1 million and net intangible assets were $21.5 million. Cohu reported no circumstances requiring an interim goodwill impairment review as of March 31, but noted that a sustained decline in market capitalization below book value could prompt one.
- Ordinary-course legal proceedings, tax examinations, and claims were disclosed; Cohu did not believe any would materially adversely affect financial position or results. Standby letters of credit totaled approximately $0.5 million, with no likely payment expected. No material changes to previously disclosed risk factors were reported.
- Management concluded disclosure controls were effective at the reasonable-assurance level; no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Whether the expected sequential Q2 order improvement translated into shipments, revenue, and margin recovery.
- How much customer concentration persists, especially the two customers representing 59% of Q1 sales.
- Whether production underutilization, inventory reserves, or customer forecast changes lead to further margin pressure or write-offs.
- Whether foreign-held cash, investment portfolio risk, or any future impairment review materially changes liquidity or reported results.
- Whether quarterly dividends remain appropriate as operating cash flow and semiconductor demand evolve.