Cohu, Inc. — Form 10-Q Summary
Reporting period: Third quarter ended September 28, 2019 (13 weeks), and first nine months of fiscal 2019 (39 weeks). Comparatives are the corresponding periods ended September 29, 2018. Amounts are in U.S. dollars; financial statement figures are unaudited.
Business context
Cohu supplies semiconductor test and inspection equipment, related consumables and services, and printed circuit board test systems. Results include Xcerra, acquired October 1, 2018; therefore, year-over-year comparisons reflect the acquisition as well as underlying business conditions. The fixtures services business acquired with Xcerra is classified as discontinued operations and is being marketed for sale.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $143.5 million | $86.2 million | $441.3 million | $281.1 million |
| Gross margin | 41.1% | 40.6% | 39.8% | 41.8% |
| Operating income (loss) | $(6.0) million | $7.0 million | $(38.7) million | $29.4 million |
| Net income (loss) attributable to Cohu | $(10.5) million | $4.8 million | $(52.4) million | $24.6 million |
| Diluted earnings (loss) per share | $(0.25) | $0.16 | $(1.28) | $0.83 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $3.4 million | $29.2 million |
- Revenue and segments: Q3 sales rose 66.5%; nine-month sales rose 57.0%. Xcerra contributed $81.3 million of Q3 sales and $238.9 million for the nine-month period. Q3 Semiconductor Test & Inspection sales were $132.8 million and PCB Test sales were $10.7 million; the 2018 comparison did not include a separately reported PCB Test segment.
- Costs and margins: Q3 gross margin improved 0.5 percentage point year over year, while the nine-month margin declined 2.0 points. Nine-month results included $6.0 million of amortized Xcerra inventory step-up and $10.7 million of restructuring charges. Purchased-intangible amortization was $10.0 million in Q3 and $30.0 million year to date, substantially higher following the acquisition.
- Cash flow and investment: Nine-month operating cash flow was $3.4 million. Investing activities used $11.8 million, including $13.3 million of capital expenditures; financing activities used $8.4 million. Cash and cash equivalents declined to $145.1 million from $164.5 million at December 29, 2018. Cash, equivalents and short-term investments totaled $145.7 million.
- Liquidity and debt: Working capital was $292.2 million, down from $324.7 million at year-end 2018. Total debt was $359.0 million before $7.7 million of financing fees and discount; debt net of discount and financing costs was reported by management as $351.3 million. The principal Term B Loan balance was $346.5 million, with a 5.29% effective rate at quarter-end and maturity on October 1, 2025. Q3 interest expense was $5.0 million; nine-month expense was $15.8 million.
- Other balance-sheet items: Total assets were $1.072 billion and total equity was $491.4 million. Goodwill was $235.9 million and net intangible assets were $282.5 million. Operating lease right-of-use assets were $34.1 million, with total lease liabilities of $37.3 million.
Material changes versus prior comparable periods
- Acquisition-driven revenue growth did not translate into profitability: Cohu reported losses in Q3 and year to date, compared with profits in both 2018 periods. Management said sales excluding Xcerra decreased amid weaker end-market demand.
- Operating expenses increased substantially, including R&D, SG&A and intangible amortization, largely because Xcerra was included for the full 2019 periods but not in the 2018 comparisons. Interest expense also rose following acquisition-related borrowing.
- Nine-month operating cash flow fell to $3.4 million from $29.2 million. Cash and working capital also declined from year-end 2018.
- Foreign currency translation reduced equity by $14.9 million in the first nine months of 2019. Retained earnings fell to $62.3 million from $111.7 million.
Outlook, commentary and risks
- Management described semiconductor industry conditions as weak, citing lower smartphone shipments, weaker automotive semiconductor demand, China market softness, trade tensions and the effects of Huawei export restrictions. Customer test-cell utilization remained below levels historically associated with demand for additional capacity.
- Management expected slower electronic-equipment demand and slower global economic growth for the remainder of 2019. It remained optimistic about long-term demand drivers, including 5G, increasing semiconductor complexity and broader use of electronics. The filing provides no numerical revenue or earnings guidance.
- Management said existing working capital was expected to meet operating requirements for at least 12 months. It cautioned that future dividends could be reduced or suspended because of debt, interest costs, business weakness and cash-flow needs. The declared quarterly dividend was $0.06 per share.
- The Xcerra integration and restructuring remain important execution risks. The company planned manufacturing consolidations, including closures in Penang, Malaysia, and Fontana, California, and a German facility consolidation. It had accrued $4.8 million for restructuring at quarter-end.
- Other material risks include high leverage and floating-rate debt, debt covenant restrictions, possible impairment of goodwill or intangibles, inventory obsolescence, customer and supplier concentration, trade and export restrictions, foreign-exchange movements, and the cyclical, volatile semiconductor equipment market. The company reported no circumstances indicating goodwill impairment as of September 28, 2019.
- Management stated disclosure controls were effective at quarter-end and reported no material changes in internal control over financial reporting during the quarter. Routine German tax examinations for 2012–2016 were ongoing; the company said it believed its tax accruals were appropriate. It did not believe ordinary-course legal matters would materially adversely affect the company.
Important facts for investors to verify
- How much of reported sales growth and future performance reflects Xcerra, versus underlying demand and comparable organic trends.
- Whether restructuring delivers expected cost savings without disrupting production, customer relationships or revenue, and whether further integration or product-return costs arise.
- Debt service capacity, covenant headroom, floating-rate exposure and the sustainability of the $0.06 quarterly dividend under continued weak cash generation.
- Whether gross margins, operating cash flow and working capital stabilize, and whether inventory reserves or goodwill and intangible-asset carrying values require further charges.
- The duration and business effects of semiconductor market weakness, China–U.S. trade tensions and Huawei-related export restrictions.