Cohu, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter ended September 25, 2021 (13 weeks); year-to-date period comprised 39 weeks. Unaudited results. Cohu supplies semiconductor test and inspection equipment and related consumables and services.
Financial performance and position
- Q3 revenue: $225.1 million, up 49.4% from $150.6 million a year earlier. Net income was $23.7 million ($0.48 diluted EPS), versus a $6.6 million net loss ($0.16 diluted loss per share).
- First nine months: Revenue of $695.4 million, up 60.3%; net income of $146.4 million ($3.04 diluted EPS), versus a $28.7 million net loss ($0.69 diluted loss per share) in 2020.
- Margins and operating results: Gross margin was 42.5% in Q3 versus 42.2%; year to date, 43.5% versus 41.6%. Operating income was $33.7 million in Q3 and $184.0 million year to date. The nine-month result includes a $75.8 million gain on the PCB Test business sale.
- Cash flow: First-nine-month operating cash flow was $70.0 million, compared with $28.0 million in 2020. Investing activities provided $56.7 million and financing activities provided $12.7 million. Operating cash flow included a $65.5 million increase in receivables and a $27.5 million increase in inventories.
- Liquidity: At September 25, cash and cash equivalents were $288.8 million and short-term investments were $76.0 million, totaling $364.8 million. Working capital was $541.4 million. Management said present working capital should cover operating requirements for at least 12 months.
- Debt: Total borrowings were approximately $120.0 million gross ($118.3 million net of discounts and financing costs), down from $325.5 million gross at December 26, 2020. Cohu prepaid $200 million of its term loan during the first nine months; about $103.1 million of term-loan principal remained outstanding.
Material changes versus prior comparable periods
- Revenue growth reflected strong semiconductor demand, particularly automotive xEV and ADAS applications, 5G-related mobility, and testing demand for automotive semiconductors and sensors. The prior-year comparison was affected by COVID-19-related disruptions and movement restrictions in Malaysia and the Philippines.
- Q3 gross margin improved modestly year over year; year-to-date gross margin also increased. However, Cohu cautioned that the 2021 sales mix shift toward test-handler products and away from tester products materially pressured margins.
- On June 24, 2021, Cohu sold its PCB Test business for gross proceeds of $125.1 million and recorded a $75.8 million pretax gain. The sale did not qualify as discontinued operations. Cohu now reports one segment, Semiconductor Test & Inspection.
- A March 2021 public offering of 5,692,500 shares generated $223.1 million in net proceeds and increased shares outstanding. Proceeds, together with sale proceeds, helped fund the $200 million term-loan prepayment.
- Q3 interest expense declined to $1.0 million from $3.0 million, mainly due to lower debt and LIBOR rates. Q3 R&D expense rose to $22.8 million from $20.5 million; SG&A fell to $30.4 million from $31.3 million.
Outlook, risks, contingencies, and unusual items
- No specific revenue or earnings guidance was provided. Management described demand and customer traction for new products as encouraging and remained optimistic about long-term semiconductor market drivers.
- Management highlighted semiconductor-industry cyclicality and volatile customer capital spending. It also warned of rising material, labor, supplier, logistics and energy costs, labor shortages, supply-chain delays, and COVID-19 restrictions, particularly affecting manufacturing and suppliers in Malaysia and the Philippines.
- Two customers together represented 32% of Q3 net sales; no individual customer exceeded 10% of consolidated sales. Verify customer exposure and concentration within the semiconductor test segment.
- Other watch items include inventory and warranty estimates, foreign-exchange exposure, and the transition away from LIBOR. The term loan had a 3.2% interest rate at quarter-end; Cohu said the effect of LIBOR replacement was uncertain.
- Cohu reported ongoing tax examinations in Germany, Malaysia, and the Philippines. It stated that ordinary-course legal matters were not expected to have a material adverse effect. No credit-agreement defaults were reported.
- After quarter-end, on October 28, 2021, the board authorized a $70 million share repurchase program effective November 2, 2021. The company said purchases would depend on market conditions and could be made using existing cash.
- Disclosure controls were assessed as effective. Certain subsidiaries implemented an integrated finance, accounting, and manufacturing software system during the quarter; Cohu said related control changes were functioning effectively.
Important facts for investors to verify
- How much reported year-to-date earnings depended on the one-time PCB Test sale gain, and what earnings look like excluding that gain.
- Whether receivables and inventories convert to cash as expected, given their increases and the gap between net income and operating cash flow.
- Whether semiconductor demand, product mix, and cost inflation support sustainable gross margins.
- The durability of customer demand and exposure to the two customers representing 32% of Q3 sales.
- How Cohu allocates its substantial liquidity among growth investment, debt repayment, and the newly authorized repurchase program.