Business context and reporting period
Cohu, Inc. supplies semiconductor test and inspection handlers, test modules, contactors and thermal subsystems. This unaudited Form 10-Q covers the 13 weeks ended March 31, 2018; the comparable 2017 quarter covered 12 weeks. Results are therefore not fully week-comparable, and interim results are not necessarily indicative of full-year performance.
Key financial metrics
Amounts are in U.S. dollars; financial statement figures are in millions except per-share amounts.
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $95.2 | $81.1 |
| Gross margin | 41.6% | 39.8% |
| Operating income / margin | $10.0 / 10.5% | $8.0 / 9.9% |
| Net income | $8.1 | $6.8 |
| Diluted EPS | $0.28 | $0.24 |
| Operating cash flow | $(9.3) | $(7.2) |
Sales rose 17.3% year over year as reported; net income increased about 20%. Gross margin improved on favorable product mix, higher volume and fixed-cost absorption, and acceptance of the Eclipse XTA. The comparison also reflects $0.3 million of Kita purchase-accounting inventory step-up expense in 2017, with none in 2018. R&D was $11.8 million versus $9.8 million, and SG&A was $17.8 million versus $14.5 million. Foreign-currency transaction losses included in SG&A were $1.6 million versus $1.3 million.
Cash and cash equivalents were $115.1 million at March 31, down from $134.3 million at December 30, 2017; short-term investments were $24.6 million, bringing cash, equivalents and investments to $139.7 million. Working capital was $219.4 million, up from $212.2 million. Operating cash use chiefly reflected a $13.2 million increase in receivables and decreases in deferred profit and accrued compensation, warranty and other liabilities. Investing cash use was $4.3 million and financing cash use was $6.5 million. Capital expenditures were $1.1 million; cash dividends paid were $1.8 million, or $0.06 per share.
Debt at quarter-end included $3.3 million of short-term borrowings and $5.8 million of term loans ($1.3 million current and $4.5 million long-term). Kita’s revolving facilities provide up to $6.6 million and renew monthly; term loans carry rates of 0.05%–0.45% and mature through 2034. A separate Swiss-franc line was undrawn. Cohu reported no material change in contractual obligations from its 2017 Form 10-K.
Material changes, outlook and risks
- Revenue accounting: Cohu adopted ASC 606 on December 31, 2017 using the modified retrospective method; prior-year results were not recast. The company reported that adoption increased Q1 2018 sales by $2.5 million and net income by $2.2 million versus the amounts that would have been reported without adoption. The opening retained-earnings adjustment was $1.1 million. This limits direct comparability with Q1 2017.
- Business commentary: Management cited favorable semiconductor conditions, market-share gains in test handlers and contactors, and demand for thermal subsystems used in mobile processor testing. It said customer test-cell utilization and business conditions remained strong, and expressed optimism about automotive, mobility and industrial markets. It continued investment in new products and expansion into inspection. No specific revenue or earnings guidance was provided.
- Liquidity outlook: Management expected existing working capital to cover operating requirements for at least 12 months. About $79.9 million, or 57% of cash and cash equivalents, was held by foreign subsidiaries; Cohu had accrued $2.4 million of withholding tax that would be payable if certain funds were repatriated.
- Xcerra transaction, subsequent event: On May 7, 2018, Cohu agreed to acquire Xcerra for $9.00 cash plus 0.2109 Cohu share per Xcerra share. The transaction required shareholder, regulatory and other approvals; Cohu expected closing in the second half of 2018. The filing warned of integration, execution, transaction-cost and financing risks, and estimated that newly issued shares would represent approximately 30% of Cohu shares outstanding after the transaction. Cohu expected to incur at least $350 million of additional debt if it closed; financing commitments had been obtained. Termination fees include $22.8 million in specified circumstances and a $45 million fee payable by Cohu under a specified failure-to-close circumstance.
- Other risks and contingencies: Semiconductor-equipment demand is seasonal and cyclical; customer concentration, competition, product transitions, inventory obsolescence, suppliers, foreign exchange and international operations may affect results. One customer represented 12% of Q1 sales, versus 20% in the prior-year quarter. Cohu recorded $0.4 million of excess and obsolete inventory charges versus $0.1 million. The Tax Act accounting remained incomplete, and GILTI tax treatment was still under evaluation. Management did not expect ordinary-course legal matters to have a material adverse effect. No goodwill impairment indicators were identified at quarter-end.
Important facts for investors to verify
- Assess growth and margin trends with the 13-week versus 12-week quarter difference and the ASC 606 impact in mind; verify any comparable-period or later-period recast disclosures.
- Track receivables, deferred profit and operating cash conversion, given the $9.3 million of operating cash used despite positive net income.
- Monitor semiconductor demand, customer concentration, inventory reserves and the sustainability of the margin improvement.
- Review subsequent filings for Xcerra approval and closing status, actual financing and debt terms, final dilution, transaction costs and integration results.
- Follow updates to Tax Act estimates, including GILTI, and foreign-cash repatriation costs.