Cohu, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 30, 2019 (13 weeks), compared with the three months ended March 31, 2018. Unaudited results. Cohu supplies semiconductor test and inspection equipment, related consumables, and printed-circuit-board test systems. Results include Xcerra, acquired October 1, 2018; its fixtures services business is classified as discontinued operations and is being marketed for sale.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $147.8 million | $95.2 million |
| Gross margin | 36.8% | 42.3% |
| Operating income (loss) | $(18.0) million | $11.6 million |
| Net income (loss) attributable to Cohu | $(22.6) million; $(0.55) per share | $8.1 million; $0.28 per share |
| Operating cash flow | $4.7 million | $(9.3) million |
| Capital expenditures | $3.5 million | $1.1 million |
- Cash and cash equivalents were $159.5 million and short-term investments were $0.6 million at March 30, 2019. Working capital was $306.8 million.
- Total indebtedness, net of financing fees and discounts, was approximately $349.2 million. The $350 million Term B facility matures October 1, 2025, bears interest at LIBOR plus 3.00% (5.90% rate at quarter-end), and is subject to restrictive covenants.
- Cash dividends paid were $2.4 million; the declared quarterly dividend was $0.06 per share. The company cautions that future dividends may be reduced or suspended.
Changes versus the prior comparable period
- Sales rose 55.3%, principally because the quarter included $82.5 million of Xcerra sales. Management said sales excluding the acquired business declined year over year amid weaker demand.
- Reported gross margin fell 5.5 percentage points. Q1 2019 cost of sales included $6.0 million of acquired-inventory step-up amortization and $0.5 million of inventory charges related to discontinuing certain Xcerra handler products.
- Operating expenses increased, including purchased-intangible amortization of $10.0 million versus $1.1 million, R&D of $22.7 million versus $11.8 million, and SG&A of $38.3 million versus $15.8 million. Acquisition-related expenses and the larger combined business contributed to the increases.
- Interest expense increased to $5.5 million from $11,000, primarily due to acquisition financing. The company moved from $8.1 million of net income to a $22.7 million consolidated net loss.
Outlook, management commentary and risks
- Management reported continued semiconductor-market weakness in Q1 2019, citing lower smartphone shipments, weaker automotive semiconductor demand, and softness in China partly associated with U.S.–China trade tensions. Customer test-cell utilization remained below levels that historically prompt additional capacity purchases.
- The filing describes the near-term 2019 semiconductor-industry outlook as slower, and says weakness is expected to continue to adversely affect 2019 results. Management expressed longer-term optimism based on semiconductor proliferation, 5G, increasing device complexity and quality requirements, and electronics growth in automotive, mobility and industrial markets.
- No specific revenue or earnings guidance for the next quarter or full year is provided. Management expected available liquidity to meet operating requirements for at least the next 12 months.
- The Xcerra integration program includes manufacturing consolidation and workforce reductions. Cohu expected to close Penang, Malaysia and Fontana, California operations by year-end 2019. A subsequent German workforce plan notified approximately 105 employees and was expected to generate $7.8–$8.8 million of charges, primarily in Q2 2019.
- Key risks include semiconductor cyclicality and customer concentration; execution, costs and potential disruption from Xcerra integration; debt service, floating interest rates and credit-agreement restrictions; inventory and goodwill/intangible-asset impairment; and foreign exchange, trade and tariff exposure. The filing says no interim goodwill impairment review was considered necessary at March 30, 2019.
- The fixtures services business was reported as discontinued operations and generated $1.6 million of sales and $0.2 million of after-tax income in the quarter. Management expected to complete its sale within 12 months.
- Adoption of the new lease standard added lease right-of-use assets and liabilities to the balance sheet and resulted in a $10.4 million cumulative-effect increase to opening retained earnings; the standard had no material earnings or cash-flow impact.
Important facts for investors to verify
- How much of reported growth and future sales is attributable to Xcerra versus Cohu’s pre-acquisition businesses, and how demand is trending by end market and geography.
- Whether integration savings are achieved on schedule, and the total cash and earnings costs of restructuring, including the announced German plan.
- Debt repayment capacity, floating-rate exposure, covenant compliance and the board’s ability to sustain the dividend.
- The effect of acquired-intangible amortization and inventory step-up on reported margins, and whether inventory reserves or goodwill and intangible valuations require adjustment.
- Progress and timing of the fixtures services divestiture and the transition from the terminated Spirox distribution arrangement in China and Taiwan.