Cohu, Inc. (COHU) — 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 28, 2019 (52 weeks). The filing also reports fourth-quarter results. Unless noted, financial results are from continuing operations; the fixtures services business was classified as discontinued operations and sold in February 2020.
Business context
Cohu supplies semiconductor test and inspection equipment, automated test equipment, interface products and services, and bare-board PCB test systems. Its markets are cyclical and depend substantially on customers’ capital spending. The 2019 results include Xcerra for all 12 months, compared with only three months in 2018 following its October 2018 acquisition.
Key financial metrics
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Net sales | $583.3 million | $451.8 million |
| Gross margin | 39.4% | 35.3% |
| Operating loss | $52.3 million | $29.8 million |
| Net loss | $69.7 million | $32.4 million |
| Net loss per share, diluted | $1.69 | $1.01 |
| Cash from operating activities | $17.3 million | $34.4 million |
- Sales increased 29.1%, largely because 2019 included a full year of Xcerra. Xcerra contributed $300.8 million of 2019 sales versus $94.4 million in 2018. Excluding the additional Xcerra contribution, sales declined amid weaker smartphone, automotive semiconductor, China and Taiwan demand.
- The 39.4% gross margin is presented before amortization of acquired developed technology and backlog. The income statement separately records $30.1 million of such amortization in cost of sales.
- R&D expense was $86.1 million, up from $56.4 million; SG&A was $142.9 million, up from $96.8 million. Purchased-intangible amortization was $39.6 million, versus $17.2 million.
- Interest expense rose to $20.6 million from $5.0 million, principally reflecting a full year of acquisition-related borrowing costs.
- At year-end, cash, cash equivalents and short-term investments were $156.1 million; working capital was $290.8 million. Total debt was approximately $353.0 million net of financing discounts and costs. The principal Term B Loan matures October 1, 2025; its reported interest rate was 5.20%.
- Capital expenditures were $18.0 million. The company paid $9.8 million in dividends, or $0.24 per share. The board declared a further $0.06-per-share dividend payable in April 2020, subject to the stated conditions.
- Fourth-quarter 2019 sales were $142.0 million, compared with $170.6 million in fourth-quarter 2018. Fourth-quarter net loss was $17.3 million versus $57.0 million.
Material changes and unusual items
- Reported annual sales growth is not directly comparable because Xcerra was included for different portions of each year. Despite higher reported sales, the company’s net loss widened.
- Xcerra integration and restructuring charges were $16.2 million in 2019, compared with $37.8 million in 2018. The 2019 total included $12.2 million of severance and related costs, $2.7 million of inventory-related charges and $1.3 million of other costs. The company also recorded $39.6 million of acquired-intangible amortization.
- The fixtures services business generated a $1.1 million impairment charge in fourth-quarter 2019 and was sold in February 2020. Its results are presented as discontinued operations.
- Management reported no goodwill impairment in its October 2019 annual test for continuing reporting units. Goodwill and other intangibles remained significant, at $238.7 million and $275.0 million, respectively.
Outlook, commentary and risks
- Management said fourth-quarter orders strengthened, particularly for mobility and automotive-related testing equipment. It expressed optimism about longer-term demand drivers including 5G, semiconductor complexity and increasing quality requirements, but provided no numerical revenue or earnings guidance.
- Management identified weak semiconductor demand, low customer test-cell utilization, trade tensions and export restrictions as near-term challenges. The filing says restrictions involving Huawei disrupted customer activity; certain shipments resumed after review, but future effects remained uncertain.
- The company said existing liquidity should cover anticipated requirements for at least 12 months. It also highlighted debt-service needs, credit-agreement covenants, floating-rate exposure and limits on financial flexibility. Moody’s and S&P ratings were B2 and B, respectively, after rating downgrades in 2019.
- A $93.5 million valuation allowance was recorded against deferred tax assets. The company cited cumulative U.S. pretax losses as evidence that it could not conclude U.S. deferred tax assets were more likely than not realizable. Unrecognized tax benefits were approximately $34.6 million; timing of any cash settlement was not reliably estimable.
- The filing identifies integration execution, customer concentration, competition, inventory obsolescence, sole-source suppliers, foreign exchange, cybersecurity, ERP implementation, and potential goodwill impairment as risks. The company also discussed COVID-19-related disruption and said it could not estimate the potential financial impact.
- Management and the auditor concluded that internal control over financial reporting was effective as of year-end. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- How much of reported growth reflects the full-year Xcerra contribution versus underlying demand, and whether orders and backlog convert to sales as expected.
- Whether operating cash generation improves enough to support debt service, investment and dividends; review debt covenants, interest-rate terms and maturity obligations.
- Whether restructuring delivers expected savings and whether further integration, product-return or customer-pricing costs arise.
- Whether the fixtures services sale was completed on expected terms and whether further impairment or divestiture charges occur.
- How demand, trade/export restrictions and COVID-19 affect customers, suppliers, shipments and Cohu’s China and Taiwan business.
- Whether deferred tax assets are realizable and whether tax examinations or unrecognized tax benefits result in material cash payments.