Cohu, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2019, ended June 29, 2019; comparative periods ended June 30, 2018. Financial statements are unaudited. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
Business context
Cohu supplies semiconductor test and inspection equipment, test handlers, contactors, related products and services, and printed circuit board test systems. Its results depend partly on cyclical customer capital spending; consumables and services provide a more recurring revenue stream. The October 1, 2018 Xcerra acquisition materially expanded the business and changed reported results and segment presentation. The acquired fixtures-services business is classified as discontinued operations and is being marketed for sale.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $150.0 | $99.8 | $297.8 | $195.0 |
| Gross margin | 41.6% | 42.2% | 39.2% | 42.2% |
| Operating income (loss) | $(14.7) | $10.8 | $(32.6) | $22.4 |
| Net income (loss) | $(19.4) | $11.6 | $(42.0) | $19.8 |
| Diluted EPS | $(0.47) | $0.39 | $(1.02) | $0.67 |
| Operating cash flow | Not separately provided | Not separately provided | $(4.8) | $5.9 |
- Reported sales increased 50.3% in Q2 and 52.8% for the first half, principally because acquired Xcerra contributed $75.1 million and $157.6 million, respectively. Cohu said sales excluding Xcerra declined year over year.
- Profitability weakened despite higher reported sales. Expense increases included Xcerra-related costs, purchased-intangible amortization, and integration restructuring. Q2 restructuring charges were $8.5 million; first-half charges were $9.9 million. First-half cost of sales also included $6.0 million of Xcerra inventory step-up amortization.
- Q2 gross margin benefited by $1.3 million from the reversal of supplier-commitment liabilities, partly offset by $0.8 million of additional product discontinuation inventory charges. The filing also describes related first-half inventory effects; investors should consult the detailed reconciliation when assessing normalized margins.
- Interest expense was $5.3 million in Q2 and $10.8 million for the first half, largely reflecting acquisition financing. First-half cash used in investing was $7.6 million, including $8.4 million of capital expenditures; cash used in financing was $8.6 million, including $4.9 million of dividends.
- At June 29, cash and cash equivalents were $143.0 million, short-term investments $0.6 million, and working capital $295.9 million. Cash and short-term investments fell 13% from December 29, 2018.
- Total debt, net of financing fees and discount, was approximately $348.5 million: principally $339.4 million under the Term B facility. The facility matures October 1, 2025, bears floating-rate interest, and was at 5.69% on June 29. Long-term debt on the balance sheet was $342.0 million, with additional current installments and short-term borrowings.
- Stockholders’ equity was $514.4 million. Operating lease liabilities totaled $35.1 million; finance lease liabilities totaled $2.6 million.
Material changes and unusual items
- Xcerra’s acquisition drove a major increase in scale and introduced substantial debt, amortization, integration work and restructuring. Cohu reported $241.5 million of goodwill and $297.2 million of net intangible assets at quarter-end.
- The integration program includes planned consolidation of handler and contactor manufacturing, including expected closures in Penang, Malaysia, and Fontana, California, by year-end 2019; a German social plan also covers headcount reductions, facility consolidation and manufacturing transitions.
- Cohu adopted lease accounting Topic 842 at the start of fiscal 2019, recording operating lease right-of-use assets of $35.2 million and long-term lease liabilities of $32.8 million at quarter-end. Adoption included a $10.2 million deferred-gain adjustment to opening retained earnings and had no material earnings or cash-flow impact.
- The fixtures-services discontinued operation generated $3.3 million of first-half sales and $0.2 million of net income. Its assets were $4.2 million and liabilities $0.6 million at June 29, 2019.
Outlook, management commentary and risks
- Management described semiconductor-market weakness continuing through the first half of 2019, with customer test-cell utilization below levels that historically prompt added capacity. It cited weaker smartphone shipments, automotive semiconductor demand, and China-market softness, including trade tensions and Huawei-related export restrictions. The filing says these trends were expected to continue to adversely affect 2019 results; it provides no quantified revenue or earnings guidance.
- Management remained optimistic about long-term opportunities from 5G, increasing semiconductor complexity and quality requirements, and broader electronics use. It stated that working capital was expected to cover operating requirements for at least the next 12 months.
- In May 2019, Cohu suspended Huawei shipments while reviewing export restrictions, then resumed shipments of certain products determined not to be subject to the relevant rules. The duration and indirect effects of restrictions remained uncertain.
- Key risks include semiconductor-cycle volatility, customer concentration, China/U.S. trade measures, export controls, acquisition integration and synergy execution, product and manufacturing transition issues, competition, foreign exchange, and the potential for inventory or goodwill/intangible impairment.
- Debt service, floating interest rates and credit-agreement covenants may constrain investment and distributions. Management warned that future dividends could be reduced or suspended; the board had approved a $0.06-per-share quarterly dividend payable July 26, 2019.
- Cohu reported routine German tax examinations for 2012–2016 and ordinary-course legal matters, and stated it did not then expect the legal matters to materially adversely affect the company. Disclosure controls were assessed as effective at quarter-end.
Important facts for investors to verify
- How much of reported sales growth and future performance is attributable to Xcerra versus Cohu’s pre-acquisition operations, given management’s disclosure that organic sales declined.
- Whether market weakness, Huawei-related restrictions and China trade conditions persist, and how they affect orders, utilization and customer forecasts.
- Progress, cash costs and timing of restructuring, facility closures, product transitions, and realization of integration savings.
- Debt-service capacity and covenant headroom under the floating-rate Term B facility, particularly if revenue or cash flow weakens; also the sustainability of the dividend.
- Whether margins recover after acquisition-related amortization, inventory step-up and restructuring effects, and whether further inventory charges or impairment reviews become necessary.
- Timing and proceeds of the fixtures-services divestiture and any material changes in the preliminary Xcerra purchase-price allocation.