Cohu, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter ended June 30, 2018; the quarter comprised 13 weeks. The six-month period comprised 26 weeks, versus 25 weeks in the comparable 2017 period. Financial amounts below are in millions of dollars unless stated otherwise; interim results are unaudited.
Business context and results
Cohu supplies semiconductor test and inspection equipment, including handlers, test modules, contactors and thermal subsystems. It reports one semiconductor-equipment segment. Management attributed stronger sales to improved mobility, IoT, automotive and industrial markets, new customers, and inspection-equipment growth.
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net sales | $99.8 | $93.9 | $195.0 | $175.0 |
| Gross margin | 41.6% | 39.6% | 41.6% | 39.7% |
| Operating income | $13.8 | $11.6 | $23.8 | $19.7 |
| Net income | $11.6 | $10.4 | $19.8 | $17.2 |
| Diluted EPS | $0.39 | $0.36 | $0.67 | $0.60 |
Q2 sales rose 6.3%; first-half sales rose 11.4%, although the year-over-year first-half comparison includes one more week in 2018. Gross-margin improvement reflected higher volume and favorable mix; the 2017 comparison also included Kita inventory step-up amortization ($0.5 million in Q2 and $0.8 million for the first half). R&D spending increased to $11.1 million in Q2 and $22.8 million in the first half, reflecting product development. SG&A was $16.7 million and $34.4 million, respectively, including Xcerra transaction costs.
Cash flow, liquidity and debt
First-half operating cash flow was $5.9 million, versus cash use of $2.8 million in 2017. Capital expenditures were $1.9 million; approximate free cash flow (operating cash flow less capital expenditures) was $4.1 million. Working capital was $229.9 million, up $17.7 million from year-end 2017. Cash and equivalents were $127.0 million and short-term investments $23.9 million, totaling $150.9 million; cash and equivalents declined $7.3 million from year-end.
Total debt was approximately $8.4 million: $3.2 million in revolving borrowings and $5.3 million in term loans (rounded; balance-sheet classifications may not sum precisely due to rounding and foreign exchange). Cohu said existing liquidity and expected operating cash flows should meet operating requirements for at least 12 months. Of cash and equivalents, $91.8 million was held by foreign subsidiaries and may incur tax if repatriated. Dividends paid in the first half were $3.5 million ($0.12 per share); a $0.06-per-share quarterly dividend was approved, but future dividends could be reduced or suspended, including in connection with the Xcerra transaction.
Working-capital cash use included a $21.3 million increase in receivables and a $1.4 million increase in inventory, partly offset by a $3.9 million increase in payables. Management linked the receivables increase to higher sequential shipments and cash-conversion timing.
Outlook, significant items and risks
- Management described customer utilization and business conditions as strong, cited momentum in automotive, IoT and industrial markets, and expressed optimism. No quantified revenue or earnings guidance was provided; management cautioned that semiconductor-equipment demand is seasonal and volatile.
- Pending Xcerra acquisition: The announced consideration was $9.00 cash plus 0.2109 Cohu shares per Xcerra share. Stockholder approvals and customary closing conditions remained outstanding; Cohu expected a close in early Q4 2018. Xcerra holders were expected to own about 29% of the combined company. Cohu had incurred $4.1 million of transaction costs in the first half.
- Cohu expected a $350 million term loan to fund part of the transaction, with a bridge facility of up to $100 million if Xcerra cash was unavailable. The filing highlights increased leverage, interest and covenant risks, potential dilution, integration and synergy uncertainties, and potential effects on dividends. Termination fees could be $22.8 million, or $45 million in a specified financing-related failure-to-close circumstance.
- Two putative shareholder class actions concerning Xcerra’s merger proxy were filed in July 2018; Xcerra disputed the allegations. Related litigation could delay or prevent closing. Cohu also cited U.S.-China tariffs and uncertainty as potential risks to costs and demand.
- Revenue standard ASC 606 was adopted in 2018. For the first half, it increased reported sales by $2.7 million and net income by $2.3 million versus amounts without adoption; the comparable 2017 figures were not restated. The adoption also reduced reported deferred profit. Investors should account for this change when assessing growth and earnings comparisons.
- The first-half effective tax rate was 18.9%, versus 12.2% in 2017. Cohu’s Tax Act accounting remained incomplete; future adjustments could affect tax expense. German tax returns for 2012–2016 were under routine examination.
- Q2 included a $3.0 million foreign-exchange transaction gain, compared with a $1.2 million loss in Q2 2017; first-half amounts were a $1.5 million gain versus a $2.5 million loss. Foreign-currency translation reduced equity by $3.0 million in the first half. Cohu also recorded a $0.6 million Q2 mark-to-market charge related to Kita contingent consideration.
- Other risks include customer concentration (one customer represented 11.3% of Q2 sales, versus 20.7% a year earlier), semiconductor cyclicality, inventory obsolescence, competition, supplier dependence and product-development execution. Cohu reported no circumstances indicating likely goodwill impairment at June 30, 2018.
Important facts for investors to verify
- Progress and final terms of the Xcerra vote, closing, financing, total transaction costs, and resulting debt, dilution and dividend policy.
- Underlying sales and earnings trends after adjusting for ASC 606’s impact and the extra week in the first-half comparison.
- Cash conversion, particularly receivables and deferred profit, and the availability of foreign-held cash.
- Tax Act accounting updates, effective tax rate developments and the outcome of the German tax examination.
- Customer concentration, semiconductor demand conditions, tariff exposure, and any merger-related litigation or integration developments.