Cohu, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 29, 2018 (52 weeks). The filing also reports fourth-quarter results. Unless noted, financial amounts are in U.S. dollars.
Business context and reporting period
Cohu supplies semiconductor test and inspection handlers, automated test equipment, interface products and related services, as well as bare-board printed circuit board (PCB) test systems. On October 1, 2018, Cohu acquired Xcerra, expanding its semiconductor test and contactor businesses and adding semiconductor ATE and PCB test systems. Xcerra’s results are included from the acquisition date. Cohu classified Xcerra’s fixtures services business as held for sale and discontinued operations at year-end.
Key financial metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $451.8 million | $352.7 million |
| Gross margin | 35.3% | 40.7% |
| Operating income (loss) | $(29.8) million | $37.7 million |
| Continuing-operations income (loss) | $(32.5) million | $33.1 million |
| Net income (loss) attributable to Cohu | $(32.2) million; $(1.01) per diluted share | $32.8 million; $1.14 per diluted share |
| Cash provided by operating activities | $34.4 million | $39.8 million |
| Cash, cash equivalents and short-term investments | $165.0 million | $155.6 million |
| Working capital | $324.7 million | $212.2 million |
| Total debt, selected financial data | $352.8 million | $9.0 million |
Sales increased 28.1%, primarily because the acquired Xcerra business contributed $94.4 million from October through year-end. The reported fourth-quarter sales were $170.6 million versus $84.1 million a year earlier; fourth-quarter continuing-operations loss was $57.1 million versus income of $6.9 million.
Operating cash flow was $34.4 million; investing cash outflow was $322.3 million, including $339.1 million paid for Xcerra net of cash received; financing cash inflow was $322.1 million, chiefly from acquisition-related borrowing. The balance sheet reported $346.0 million of long-term debt and $3.1 million of short-term borrowings. The filing also presents debt totals on other bases; see investor verification items below.
Backlog at year-end was $150.4 million, up from $107.6 million: $139.8 million in Semiconductor Test & Inspection and $10.6 million in PCB Test. Backlog may be cancelled or rescheduled and is not a reliable forecast of future sales.
Material changes versus the prior comparable period
- Profitability reversed: Cohu moved from $33.1 million of continuing-operations income in 2017 to a $32.5 million loss in 2018. Gross margin fell 5.4 percentage points to 35.3%.
- The Xcerra acquisition substantially increased scale and balance-sheet complexity. Total assets rose to $1.134 billion from $420.5 million; goodwill was $242.1 million and net intangible assets were $319.0 million at year-end.
- Acquisition-related costs included $9.8 million of transaction costs and $37.8 million of restructuring charges. The latter included employee severance and inventory-related charges; acquisition inventory fair-value step-up also affected cost of sales.
- Research and development expense increased to $56.4 million from $40.7 million; selling, general and administrative expense rose to $96.8 million from $60.7 million, with much of the increase associated with Xcerra.
- Cash and short-term investments increased modestly despite the acquisition, while debt rose sharply. Cohu issued 11.8 million shares for the transaction, diluting existing shareholders.
Outlook, management commentary, risks and unusual items
- Management said demand weakened in the second half of 2018, particularly in mobility and consumer markets and in China and Taiwan, affecting third- and fourth-quarter results. The company expected these conditions to adversely affect 2019 results and said revenue was forecast to decline in first-quarter 2019; no quantified 2019 guidance is provided here.
- Management remained optimistic about longer-term opportunities related to 5G, semiconductor complexity and quality requirements, and electronics growth in automotive, mobility and industrial markets. It planned continued substantial R&D investment.
- The Xcerra integration entails restructuring, facility consolidation, manufacturing transfers and investment in direct sales and service resources in China and Taiwan. Cohu planned to close Penang and Fontana operations by the end of 2019 and consolidate Rosenheim into Kolbermoor in 2020.
- The $350 million Term B facility matures October 1, 2025, carries floating-rate interest (5.49% at year-end) and is secured and subject to restrictive covenants. Management said available liquidity should cover anticipated needs for at least 12 months, but market weakness, higher interest rates, integration costs or covenant limits could constrain flexibility.
- Other material risks include semiconductor-cycle volatility, customer and supplier concentration, competition, tariff and foreign-exchange exposure, integration execution, potential impairment of acquired goodwill and intangibles, and limits on the use of Xcerra tax attributes. Cohu recorded an $84.7 million valuation allowance against deferred tax assets and stated Xcerra tax-loss and credit carryforwards are subject to annual limits.
- Cohu paid $0.24 per share in dividends during 2018 and stated it intended to continue quarterly dividends, subject to available capital, credit-agreement restrictions and Board decisions. The filing does not assure continuation at the current rate.
- The company reported no material adverse effect expected from ordinary-course litigation and tax matters. The independent auditor gave an unqualified opinion on the financial statements and internal controls; management’s and the auditor’s internal-control assessment excluded Xcerra, which represented 24% of total assets and 22% of sales in the periods specified in the filing.
Important facts for investors to verify
- Reconcile the filing’s different debt presentations: selected data lists $352.8 million of total debt, while the borrowing note lists $358.7 million of gross borrowings and $350.1 million net of financing fees and discount; the balance sheet shows $346.0 million of long-term debt plus short-term borrowings.
- Reconcile inventory-related restructuring disclosures: the filing describes $19.1 million of Xcerra end-of-manufacturing inventory charges, while the inventory note reports $10.8 million of 2018 excess-and-obsolete charges, including $9.4 million related to that product.
- Track the Xcerra integration, restructuring cash costs, expected synergies, manufacturing transfers, and staffing of direct sales and service in China and Taiwan.
- Monitor demand, backlog conversion and cancellations, gross-margin recovery, and the impact of expected first-quarter 2019 revenue weakness.
- Assess debt service and covenant headroom, dividend capacity, acquired-asset impairment risk, and realization of deferred tax assets and tax carryforwards.