Cohu, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2018, ended September 29, 2018. The quarter contained 13 weeks versus 14 weeks in the prior-year quarter; nine-month periods each contained 39 weeks. Financial statements are unaudited and exclude Xcerra, acquired on October 1, 2018.
Financial performance
| Metric | Q3 2018 | Q3 2017 | First 9 months 2018 | First 9 months 2017 |
|---|---|---|---|---|
| Net sales | $86.2 million | $93.7 million | $281.1 million | $268.6 million |
| Gross margin | 39.9% | 39.4% | 41.1% | 39.6% |
| Operating income | $6.8 million | $10.4 million | $30.6 million | $30.1 million |
| Net income | $4.8 million | $8.8 million | $24.6 million | $25.9 million |
| Diluted EPS | $0.16 | $0.30 | $0.83 | $0.91 |
- Q3 sales declined 8.0% year over year and 13.6% sequentially. Management attributed the weakness principally to softer semiconductor demand in mobility and IoT.
- Nine-month sales increased 4.7%, supported by automotive, industrial and IoT markets, new handler and contactor customers, and inspection-equipment growth.
- Nine-month operating cash flow was $29.2 million, versus $23.6 million. Investing activities provided $18.3 million, largely reflecting investment maturities net of purchases; financing activities used $9.6 million.
- Cash and cash equivalents were $170.7 million and short-term investments $0.5 million at September 29. Working capital was $232.4 million. Cash and investments totaled $171.2 million, up 10.0% from December 30, 2017.
- Before the Xcerra transaction, debt comprised $3.1 million of short-term borrowings and $4.9 million of term loans, including current installments. The term loans carried rates of 0.05%–0.45%.
- Dividends were $0.06 per share for Q3 and $0.18 per share for the nine months. A $0.06 quarterly dividend was approved for payment in January 2019; future dividends may be reduced or suspended following the merger.
Material changes and unusual items
- Q3 operating income and net income fell year over year despite a modestly higher gross margin. R&D rose to $11.1 million from $9.6 million, reflecting product development spending and the absence of prior-year customer cost reimbursements. Q3 SG&A included $1.0 million of Xcerra transaction costs.
- Nine-month gross margin improved with higher volume, favorable product mix and the Eclipse XTA product; 2017 had included $1.4 million of Kita inventory step-up amortization. Excess and obsolete inventory charges were $1.3 million in 2018 versus $0.5 million in 2017 for the nine-month period.
- The effective tax rate was 32.4% for Q3 and 21.9% year to date, compared with 17.3% and 14.0%. The 2018 rates included approximately $0.6 million of foreign withholding tax accrued in case of repatriation.
- ASC 606 adoption affected reported results: it reduced Q3 sales by $0.7 million and net income by $0.5 million versus prior accounting; for the nine months it increased sales by $2.1 million and net income by $1.7 million. Adoption added $1.1 million to opening retained earnings.
- Foreign currency translation reduced equity by $3.4 million during the first nine months. Management estimated that a hypothetical 10% currency move would create an approximately $12.3 million translation adjustment in either direction.
Acquisition, outlook and risks
- Xcerra: The acquisition closed October 1, 2018. Former Xcerra shareholders received $502.5 million in cash and 11.8 million Cohu shares; approximately 530,000 employee RSUs were assumed. Cohu borrowed the full $350 million under a senior secured term loan and used cash from both companies. Cohu reported that approximately $70.5 million of its cash and short-term investments funded the merger; it estimated combined cash, equivalents and investments after closing and acquisition costs at approximately $147.5 million.
- The seven-year loan bears floating interest at LIBOR plus 3.00%, is secured by substantially all Cohu and guarantor assets, and includes amortization, mandatory prepayment provisions and restrictive covenants. It materially increases leverage and interest-rate exposure.
- Management cited continuing momentum in automotive and industrial semiconductors, while noting mobility-market softness and semiconductor-industry seasonality. The filing refers to weaker fourth-quarter 2018 sales guidance but does not provide a clear guidance value in the supplied text.
- Key risks include semiconductor-cycle volatility, customer concentration, inventory obsolescence, competition and product-development execution, foreign exchange and trade tariffs, and successful integration of Xcerra. Cohu warned that integration costs, disruption, missed synergies, employee or customer losses, and Xcerra underperformance could harm results. It also flagged restrictions on Xcerra tax-attribute use and limits on interest deductibility.
- Management said existing working capital was expected to meet operating requirements for at least twelve months, but that statement preceded the acquisition and related borrowing. Routine German tax examinations were ongoing; management did not expect ordinary-course legal matters to have a material adverse effect. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- Post-merger debt, cash, net leverage, floating-rate interest expense, covenant headroom and debt repayment capacity.
- Actual fourth-quarter performance and subsequent demand trends, especially in mobility, automotive, industrial and IoT markets.
- Xcerra integration costs, realized synergies, customer retention, distributor transition in China and Taiwan, and acquisition accretion versus expectations.
- Revenue and earnings comparability under ASC 606, inventory reserves, customer concentration and cash conversion.
- Final Tax Act accounting, foreign withholding and repatriation taxes, and restrictions on utilization of tax attributes.