Cohu Inc (COHU) 2002 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. And welcome to the Cohu Inc. fourth quarter and year end operating results conference call. At this time, all parties are in a listen-only mode. A brief question-and-answer session will follow the presentation. If anyone should require assistance during the conference please press star, zero on your telephone keypad. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. James Donahue, President and CEO of Cohu Inc. Thank you. Mr. Donahue, you may begin.

Thank you, Derrick. And good afternoon, everyone. I am Jim Donahue, President and CEO of Cohu. And John Allen, our CFO, is with me.

If you don’t have a copy yet of our earnings release you can obtain one from our web site or by contacting Cohu Investor Relations at 858-848-8106.

Today, I’ll provide an overview of our results for the quarter and year. John will then take us through the numbers, and I’ll conclude with comments on operations and our view of the business environment looking ahead. I will then take your questions.

But before we do that, John will make the necessary disclaimers covering forward-looking statements, estimates, and other matters that we’ll cover in today’s call. John.

Yeah, Jim. As you indicated, before we go on I must remind you that the company’s discussion this afternoon will include forward-looking statements reflecting management’s current expectations concerning certain aspects of the company’s future business. These statements are based on current information that we have assessed but which by its nature is subject to rapid and even abrupt changes.

Forward-looking statements include our comments regarding the company’s expectations regarding industry conditions, Q1 operations, new product introductions, and any comments we make about the company’s future in response to your questions. Our comments speak only as of today, January 29th, and the company assumes no obligation to update these comments.

The company’s actual results may differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the company’s business which include but are not limited to the cyclical and unpredictable nature of capital expenditures by semiconductor manufacturers, goodwill, investment, and intangible asset write-downs due to impairment testing required by accounting standards, co-usability to convert new products under development into production on a timely basis, support product development, and meet customer delivery and acceptance requirements for next generation equipment, the affect of competitive products, the concentration of revenues in a limited number of customers, inventory write-offs, order cancellations, failure to obtain customer acceptance and recognize revenue, difficulties in integrating acquisitions, and other risks addressed in filings with the SEC including Cohu’s Form 10-K for the year ended December 2001, and our most recently Form 10-Q.

Again, we assume no obligation to update any of the information shared in this conference call. Our comments and responses to any questions will not make reference to any specific customers as we are precluded from disclosing such information by our non-disclosure agreement.

Jim.

Sales for the fourth quarter were slightly better than we expected. Q4 sales were 28m compared to 28.1m for the fourth quarter of last year, of 2001 that is, and 36.8m for the third quarter of 2002. The net loss for the fourth quarter was 566,000 or three cents per share, compared to a net loss of 852,000 or four cents per share for the fourth quarter of 2001, and a net loss of 555,000 or three cents per share for 2002’s third quarter.

Orders during the fourth quarter were 28.1m, compared to 26.8m. That number net of cancellations of 2.5m for the third quarter. Backlog at December 31, 2002 was 30.6m, compared to 30.5m about the same at the end of the third quarter.

For the full year ended December 31st, 2002 sales increased six percent to 134.7m from 126.6m in 2001. The net loss for 2002 was 878,000 or four cents per share, compared to a net loss of 6.5m or 32 cents per share in 2001.

Weak economic conditions coupled with a sharp downturn in the semiconductor equipment industry continued throughout 2002, affecting each of our businesses. Despite the difficult conditions we made near record investments in new product development, and continued to provide our customers with excellent support. We reduced our pre-tax loss by 69 percent, increased our cash to 107m, and maintained a solid debt-free balance sheet.

We’ll never be satisfied when we lose money, but under the extremely challenging business conditions of the past year we think these results reflect the reasonable balance we’ve tried to strike between our long-term strategic objectives and financial performance.

John, if you would now provide some details on our financial performance.

Sure. The semiconductor equipment related revenues for the entire year were approximately 76 percent international and 24 percent domestic. International sales were distributed 83 percent Asia-Pacific, 13 percent the Americas, one percent Europe, and three percent Japan. These percentages were generally consistent with the distribution in Q4.

Gross margin in Q4 was 35.3 percent, versus 33.5 percent in Q3. As we indicated in our Q3 conference call we estimated that our gross margin in Q4 might be slightly higher than the Q3 margin due to the delayed margin affect of FASB 101 revenue recognition.

R&D expense was 8.4m in Q4, versus 8.1m in Q3. The Q4 R&D includes approximately $750,000 of amortization and write-off of intangible assets. Without this write-off R&D in Q4 would have been about $500,000 less than Q3. We expect our R&D spending to remain at about or slightly below the Q4 level without the charges.

SG&A expense was 5.5m in Q4, slightly lower than the 6m in Q3. The lower SG&A in Q4 was primarily due to lower sales and cost savings from plant shutdowns during the holidays.

Interest income increased from 648,000 in Q3 to 1.1m in Q4 as a result of the collection of past due interest on our $9m note receivable. The income tax benefit was favorably impacted by approximately $1m in Q4 as a result of the reversal of tax liabilities established in prior years that were no longer needed. Net loss was computed based on 20.8m weighted average shares. The affect of stock options was excluded in both the quarter and year-to-date calculation as their inclusion would be anti-dilutive.

Moving briefly to the balance sheet, cash and investments decreased 4.5m from 111.7m at September 30 to 107.2m at December 31. The decrease was due primarily to a $2.5m investment in KryoTech in December, and a $1m investment in technology by our BMS Subsidiary.

Net accounts receivable decreased from 20.5m at September 30 to 18.3m at December 31, and represented about 60 DSOs. Inventory decreased from 27.2m at September 30 to 24.3m at December 31. Additions to property, plant, and equipment during the entire 2002 year were approximately 1.7m, and depreciation was approximately 3.7m.

And lastly, deferred profit increased slightly from 4.9m at September 30 to 5.2m at December 31 as a result of revenue deferrals required by FASB 101. This revenue will be recognized upon customer acceptance.

Jim.

During the first two quarters of 2002 in our test handling business orders increased, reaching a peak of 85 systems in the second quarter. However, this increase in business turned-out to be a false start rather than the first steps in a recovery in the semiconductor industry and in our business, and unit orders declined by 54 percent in Q3, and a further 26 percent in Q4, to 29 systems.

For the year orders in our test handling business increased 17 percent, however, which was much better than the two percent increase for our segment reported by semi. For the year unit handler orders were distributed as follows: Summit 30 percent, Castle 32 percent, 1688 17 percent, ETC [Thermal] [ph] Systems 10 percent, and other systems 11 percent.

During the fourth quarter of 2002 we installed the first active thermal control, or ATC upgrades to our Summit handler. ATC increases the power dissipation capability of the handler and enables customers to optimize the speed-grading of the latest, fastest microprocessors. This is quite important since higher speed means a higher ASB.

To further solidify our leadership position in thermal control in December we entered into a strategic relationship, and as John mentioned, we made an investment in KryoTech Incorporated. KryoTech develops, manufactures, and markets advanced thermal solutions for electronic systems and products. We intend to integrate existing KryoTech thermal systems into our test handlers and combine proprietary technologies from our two companies to co-develop advanced thermal control systems for exclusive use by Delta Design.

Also during the fourth quarter we sold and shipped our first Delta Edge handler. This is our latest product designed from the ground up to address customer requirements for lower cost of tests and our need to accomplish that at an acceptable gross margin. The Delta Edge has been in production for several months now and is performing well. We expect to ship additional systems during this quarter to a number of customers for evaluation.

Earlier this month we announced plans to relocate our Columbus, Ohio operation to our headquarters in Poway, California. The transition process is underway and scheduled to be completed during the second quarter, and without disruption to our customers. In addition, this month we also made further headcount reductions in our global test handler business.

Turning briefly to Cohu’s other businesses. Sales of CCTV cameras, closed circuit TV cameras, represented 13 percent of consolidated sales during 2002. Camera sales were down 18 percent from 2001, a result of the downturn in the semiconductor equipment, factory automation markets, and overall weakness in the global economy. Despite the lower volume the camera business was profitable, and this was a good accomplishment on a lower volume.

Metal detection and microwave communications equipment accounted for 10 percent of consolidated sales for 2002. Sales in these operations increased 27 percent year-over-year due primarily to improved sales of our microwave communications products.

Taking a look at the current business environment, as we begin 2003 prevailing sentiment about prospects for the semiconductor equipment industry is nearly identical to what it was a year ago. That is, conditions during the first two quarters will not change much, with an expectation that business will improve during the second half of the year.

In our business, with the exception of two customers who are accounting for a majority of our orders, near-term forecasts from customers continue to be weak or non-existent. Macro economic conditions are mainly negative, and we are among those who believe that business will not improve until uncertainty, especially involving a war with Iraq, is removed.

A substantial portion of our shipments in the first quarter are expected to include new IC test handler products. In particular, the ATC upgrade to Summit that are subject to normal customer acceptance procedures. As is common in the industry the precise timing of customer acceptance is not known, and as a result we are unable to reliably estimate Q1 revenue at this time.

These are certainly the toughest times ever in the semiconductor equipment industry, and it’s simply guesswork to predict when conditions will change. But when business turns around I remain very confident that Cohu is an excellent position to benefit.

And, Derrick, with that we’ll take questions.

Thank you, ladies and gentlemen. At this time, we will be conducting a question-and-answer session. (Caller Instructions.)

Our first question is coming from Martin [Sang] [ph] of Needham and Company. Please proceed with your question, sir.

Yes, hi. I have a question about the restructuring charges, or rather the charges related to inventory. You had $2m for 2002, how much of the $2m was for Q4?

Probably around a half a million dollars, roughly.

Okay. And the amortization and write-offs for intangible assets of .75m?

Correct.

Could you shed some light on what that is about?

Yes. Under current accounting standards you’re forced to evaluate impairment on intangible assets and goodwill. And you – it’s a complicated calculation that you go through, aggregating all intangible assets, or all long-lived assets, as the case may be. And you assess whether over the life of the expected related underlying technology whether you’re going to realize adequate return to support the carrying value of those investments. And so you go through sort of an undiscounted cash flow analysis to assess whether you’re going to recover those assets.

And I think what you’ve seen throughout the year with the uncertainty with a lot of forecasts, particularly for technology companies, you’ve seen a lot of write-off. Again, partly because of the uncertainty in being able to forecast accurately or reliably future revenues, you know, for an extended period of time. And so that’s really -- what we did was, I think, what you’ve seen a lot of companies do, albeit a relatively small number.

Well, back to the inventory charges, if they were non-existent would that basically mean that your gross margins are higher?

Well, sure, because the inventory charges would be reflected in cost of good sold. I think what you see is the inventory charges for 2002 would be probably if you looked at our history somewhat more normal. Obviously, 2001 we had substantially greater charges. But, you know, typically with any company you would see even in strong economic conditions some inventory reserves generally being booked.

Okay. And one last question before I, you know, give others an opportunity to ask, do you have any shipment or revenue guidance for the first quarter?

Well, as Jim indicated in his remarks, and as we indicated in the press release, we have a substantial amount of shipments that we expect to take place in Q1. And the recognition of the revenue related to those shipments is dependent upon customer acceptance, normal customer acceptance procedures.

It is new product, and so at this time it is difficult to project precisely, you know, the day or the week that that acceptance will occur. If it occurs in Q1 then we would recognize the revenue. If it occurs in April, for example, the revenue would have to be deferred under FASB 101 and recognized in Q2.

I think one thing that you can look at that we do disclose historically, and again in this press release, we do disclose our backlog at the end of the quarter which is slightly above 30m. And as we’ve indicated in our public filings, included in our 10-K and 10-Q, historically our backlog has represented about three-months' worth of business. That’s not necessarily a projection for the quarter, but it’s the best piece of information that we have, and that we can disclose to people, for them to you know, glean whatever they can from that data.

Okay, thank you very much.

Thank you.

Thank you.

Thank you. Your next question is coming from Vernon Essi of Adams, Harkness, and Hill. Please proceed with your question, sir.

Thank you. John, wondering if you could just elaborate on some of the line items in the P&L, you know, especially on SG&A, and sort of the details that went into that nice sequential dip? And also, wondering sort of on a go-forward basis what can you expect on taxes? Or was just sort of a year-end situation? And then also, I didn’t understand your explanation for the interest income?

Sure, sure. Yeah, I’ll be happy to go through those, Vern. On the SG&A, as I indicated, we did have two plant shutdowns, at least in primarily at Delta during the quarter, over Thanksgiving, and over Christmas, and New Years. And there were some savings from that. Obviously, we had most of the people using accrued vacation. In addition, obviously, sales were less so you would expect SG&A to be down like somewhat from Q3, because sales were down from 36m to 28m. Those were the primary factors in the reduction in SG&A.

Keep in mind that, you know, as we indicated in our press release several weeks ago, and Jim referred to the consolidation of our Columbus operation, we will be taking certain charges related to severance and other costs in Q1. Some of which will be spread throughout SG&A and other cost categories. And so, we had indicated in the press release several weeks ago that it would be approximately a million dollars.

So if you take that out, you know, I would expect – again, it’s all revenue dependent, right, and we haven’t estimated revenues in the release. But I don’t see anything that would lead me to believe that the SG&A would be dramatically different in Q1.

As far as the – your question about the interest income, we had previously disclosed in our September 10-Q that there were some interest payments that were in arrears on our $9.2m note receivable. That note residing from the sale of our property in 2001. And the amount of interest that was in arrears, I think, was about $300,000. That interest along with the accrued interest that was earned in Q4, a total of about $400,000 was collected in January. And so, that was reflected as income in Q4.

So you can see that the interest income went-up from about $900,000 – excuse me, it was $650,000 in Q3, to $1.1m, and so that increase was primarily attributed to the collection of that past due interest.

And should we expect that to be lower then, of course?

Yes, correct. Yeah, because there was sort of a blip there, because we hadn’t recognized the interest in the prior quarter.

And also, just to touch-back on SG&A, you had expected to be under, given the same sort of revenue, say $30m run rate. It’s fair to assume SG&A should probably be modeled at below $6m then?

Yeah, I would think so, although as I indicated, we have that charge coming through for some of those costs related to Columbus.

But I forget, your third question?

Just taxes?

Oh, sure. Yeah, taxes. Yeah, I think a couple of thing. Yes, you’re correct in that some of what you see in Q4, as we indicated in the footnote related to certain tax liabilities that we had accrued really from prior years, that, you know, were no longer needed. And so, we had to reduce that.

I think the situation where you find yourself in, where you have, you know, relatively modest losses or modest income, for that matter, it is difficult to project sort of a normal tax rate because small items like this have a disproportionately large affect on the effective rate. If you had $30m or $40m of pre-tax loss or income, you know, these kinds of things do not distort your tax rate as much as you do when you have, in our case for the year, $3.5m pre-tax loss.

So it’s extremely difficult to forecast effective rates. Obviously, it’s a function of what you expect your pre-tax to be. And the volumes were, you know, hovering around breakeven, or modest losses if that is the case, then the tax rate is a function of the kind of tax credits you generate in the quarter, which can actually drive your rate, you know, higher when you’re losing money because you add the statutory rate of 35 percent plus the benefit of the credit. And so you could end-up with what looks like an abnormally high rate. So it’s difficult to project effective tax rate.

Understandable. So I mean just in terms of modeling, though, if we’re going out to 2004 modeling?

Sure.

Of material profit, would you be modeling it at 35 percent then?

I think that’s a little bit high. I think because of the R&D credit that we generate I would say you’re probably in the – between 30 and 35, and so a mid-point would be 32.5 probably Vern. That’s probably what I would use today.

Okay. And not to – I am sorry – to belabor on those points, but more importantly, I am wondering on terms of just the business -- you shipped a unit of, at least one unit of the Delta Edge.

Right.

Wondering, you know, you provided the breakouts of the handler split, wondering if you can give us an idea in ’03 how much of the handler percentage of shipments that might represent, the Edge? I know it’s probably not a great answer you’re going to give me, but just bigger than a breadbox? I mean could this be a 20 percent, approaching maybe 35 percent of your handler shipments for ‘03?

I would say, Vern, that you know during the first quarter and into the second quarter, just given the way that the business works, customers are going to be primarily evaluating rather than adding capacity. That could change, I suppose, could change rather suddenly. And in that case, those evaluations might become sales.

But we’re presuming that during, really the first half of the year we’re going to be shipping more evaluation units, that we’ll begin shipping revenue units subject to FASB 101, revenue recognition issues, in the second half. I would think if 20 percent of our unit sales in 2003 were Edge that that would be, you know, that we’d be satisfied with that number.

Just let’s get more granularity on that, but in terms of the fourth quarter, let’s kind of go-out, or maybe even the first quarter of next year, would you expect – where would you expect that mix to be then? Sort of on a run rate basis? I mean higher, I would assume, like a 35-percent range?

Yeah, I think at the – yes, as time goes-on Edge will be a higher percentage, if that’s what you’re asking?

Yes.

And I mean 35 percent, I would say by the end of the year, I mean it wouldn’t surprise me if by the end of the year Edge was 30, 40 percent of shipments.

Okay. And then, just finally kind of to elaborate on the last line of questioning there. The – understandably you’re going to have issues, of when the exact revenue is going to hit with ATC. But can you give us at least an understanding of where you think the orders might come-in for the quarter? Do you expect orders to grow sequentially?

Well, we don’t really comment on orders. We haven’t, and there’s really no – I have no more reason to do so today, you know, given the continuing uncertainty in the business. I mean fundamentally we don’t see that conditions have changed much over the last few quarters, and don’t see them changing much over the next several quarters, either. That’s about as specific as I feel comfortable being.

Okay. And just for clarification the Delta Edge will count as an order in an eval situation?

It’ll count as an order if the customer orders it. In some cases we put evals out without an order from the customer, and so …

And would those show-up as R&D, then?

That would actually just show-up as inventory, a specifically consigned inventory to the customer.

Yes, right.

I’m sorry, that’s what I meant to say.

And back to that tax question, just one last thing, I mean again it’s difficult, I said 32.5, I mean maybe it’s 33, maybe it’s 33.5. But I mean it’s – 35 would probably be the high-water mark based on what I know today.

Okay. Thank you very much.

Great. Sure, thanks Vern.

Thank you. (Caller Instructions.)

Mr. Donahue, I am showing no further questions at this time.

Okay, Derrick. We’d like to thank all for participating in today’s call, and we look forward to speaking with you again at the end of our first quarter at our conference call in April. Thank you very much.

This concludes today’s teleconference. Thank you for your participation.