Cohu(COHU) - 2019 Q4 - Annual Report

Part I Item 1. Business Cohu, Inc. is a leading supplier of semiconductor test and inspection equipment, expanding its market position and product offerings through the acquisition of Xcerra Corporation - On October 1, 2018, Cohu acquired Xcerra Corporation, a global provider of test and handling equipment, which expanded Cohu's market into semiconductor automated test equipment (ATE) and bare board printed circuit board (PCB) test[13] Sales by Reportable Segment (% of Total Net Sales) | Segment | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Semiconductor Test & Inspection | 93% | 98% | 100% | | PCB Test | 7% | 2% | N/A | Sales by Product Line (% of Total Net Sales) | Product Line | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Semiconductor test & inspection systems | 48% | 54% | 56% | | Interface products, spares, kits, and service | 47% | 44% | 44% | | PCB test systems | 5% | 2% | -% | - Intel was a major customer, accounting for 11.1% of consolidated net sales in 2019[28] Consolidated Backlog (in millions) | Date | Semiconductor Test & Inspection | PCB Test | Total | | :--- | :--- | :--- | :--- | | Dec 28, 2019 | $149.9 | $10.5 | $160.4 | | Dec 29, 2018 | $139.8 | $10.6 | $150.4 | Research and Development Expense (in millions) | Year | R&D Expense | Xcerra-related R&D | | :--- | :--- | :--- | | 2019 | $86.1 | $45.4 | | 2018 | $56.4 | $11.6 | | 2017 | $40.7 | N/A | Item 1A. Risk Factors The company identifies significant risks, with a major focus on the challenges and uncertainties stemming from the 2018 acquisition of Xcerra Risks Related to Xcerra Acquisition The company faces significant integration challenges, increased debt, and goodwill impairment risks stemming from the Xcerra acquisition - The company may fail to realize the anticipated benefits and synergies of the Xcerra acquisition due to complex, costly, and time-consuming integration challenges[58][59] - The acquisition was financed in part by a $350.0 million term loan facility, which has increased debt levels, reduced liquidity, and imposed restrictive covenants that limit financial and operational flexibility[66][67] - As a result of the merger, goodwill and other intangibles comprise 47.7% of total assets, with goodwill at approximately $238.7 million, creating a significant risk of impairment charges if anticipated benefits are not realized[78] Operational and Market Risks The company is exposed to semiconductor industry volatility, intense competition, customer concentration, and global trade disruptions - The semiconductor industry is highly seasonal, volatile, and unpredictable, which has led to significant inventory-related charges, including $4.1 million in 2019 and $1.4 million in 2018 for excess and obsolete inventory[102] - The company faces intense competition, particularly in the automated test equipment (ATE) market, which is dominated by two larger companies, potentially impairing Cohu's ability to grow its ATE revenue[107][109] - Global economic and political conditions, including U.S.-China trade tariffs and export restrictions on entities like Huawei, have disrupted customer business and may continue to adversely affect operations and financial results[121][126][128] - A limited number of customers account for a substantial percentage of net sales, and the loss or significant reduction of orders from these customers would have a material adverse impact[129] Other Risks The company faces risks from ERP system implementation, natural disasters, health epidemics, and credit rating downgrades - The company is in the final stages of a global ERP system replacement, a complex project that could adversely affect business operations and financial reporting if not implemented effectively[134] - Operations are vulnerable to natural disasters and health epidemics, with the report specifically mentioning the novel coronavirus (COVID-19) as a potential risk that could disrupt travel, facilities, and supply chains, particularly in Asia[149][150] - Credit ratings were downgraded by Moody's (to B2) and S&P (to B) in late 2019 due to high leverage and a significant decline in operating performance, which could increase future borrowing costs[154] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[158] Item 2. Properties The company lists its principal properties, which are a mix of owned and leased facilities located globally Principal Properties as of December 28, 2019 | Location | Major Activities | Approx. Sq. Ft. | Ownership | | :--- | :--- | :--- | :--- | | Poway, California | Corporate HQ, Sales, R&D, Admin | 147,000 | Leased | | Rosenheim, Germany | Sales, Mfg, R&D, Admin | 216,000 | Owned & Leased | | Kolbermoor, Germany | Sales, Mfg, R&D, Admin | 40,000 | Owned | | Malacca, Malaysia | Sales, Mfg, R&D, Admin | 99,000 | Leased | | Osaka, Japan | Sales, Mfg, R&D, Admin | 67,000 | Owned | - The company is in the process of a facility consolidation plan that will result in the closure of the Rosenheim, Germany facility and its consolidation into the nearby Kolbermoor, Germany facility in 2020[161] Item 3. Legal Proceedings The company is involved in various legal proceedings and claims that have arisen in the ordinary course of business but does not believe their resolution will have a material adverse effect on its financial position or results of operations - The company does not believe that the resolution of current legal proceedings will have a material adverse effect on its assets, financial position, or results of operations[162] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[163] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Cohu's common stock is traded on the Nasdaq Global Select Market under the symbol "COHU", with a history of paying quarterly dividends Cash Dividends Declared Per Share | Period | Fiscal 2019 | Fiscal 2018 | | :--- | :--- | :--- | | First Quarter | $0.06 | $0.06 | | Second Quarter | $0.06 | $0.06 | | Third Quarter | $0.06 | $0.06 | | Fourth Quarter | $0.06 | $0.06 | | Total | $0.24 | $0.24 | - The company did not repurchase any of its equity securities during the fourth quarter of 2019[171] Item 6. Selected Financial Data This section presents a five-year summary of key consolidated financial data, reflecting significant changes due to the Xcerra acquisition Selected Financial Data (in thousands, except per share data) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net sales | $583,329 | $451,768 | $352,704 | $282,084 | $269,654 | | Income (loss) from continuing operations | $(68,995) | $(32,543) | $33,121 | $3,260 | $5,792 | | Net income (loss) attributable to Cohu | $(69,700) | $(32,181) | $32,843 | $3,039 | $250 | | Diluted EPS from continuing operations | $(1.68) | $(1.02) | $1.15 | $0.12 | $0.22 | | Total Consolidated Assets | $1,077,710 | $1,134,002 | $420,457 | $345,512 | $345,346 | | Total Debt | $353,035 | $352,828 | $8,963 | - | - | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 29.1% year-over-year increase in net sales for 2019 to the full-year inclusion of the acquired Xcerra business, despite underlying sales softness Results of Operations Net sales increased due to the Xcerra acquisition, while gross margin improved, but operating expenses and interest expense led to a wider net loss - Consolidated net sales increased 29.1% to $583.3 million in 2019 from $451.8 million in 2018, driven by the inclusion of Xcerra sales for the full twelve months of 2019 ($300.8 million) compared to only three months in 2018 ($94.4 million)[211] - Gross margin as a percentage of net sales increased to 39.4% in 2019 from 35.3% in 2018, primarily due to lower amortization of inventory step-up from the Xcerra acquisition ($6.0 million in 2019 vs. $14.8 million in 2018) and lower inventory charges for discontinued Xcerra products ($2.7 million in 2019 vs. $19.1 million in 2018)[212][213][215] - Operating expenses increased significantly due to the full-year impact of the Xcerra acquisition, with R&D expense rising to $86.1 million from $56.4 million, and SG&A expense increasing to $142.9 million from $96.8 million[216][218] - Interest expense increased to $20.6 million in 2019 from $5.0 million in 2018, primarily due to interest on the Term B Loan used to finance the Xcerra acquisition[225] - The company reported a net loss from continuing operations of $69.0 million in 2019, compared to a loss of $32.5 million in 2018[235] Liquidity and Capital Resources Liquidity is primarily derived from operations and a term loan, with a decrease in operating cash flow and working capital in 2019 - The company's primary sources of liquidity are cash flow from operations and a $350.0 million seven-year Term B Loan facility entered into on October 1, 2018, to finance the Xcerra acquisition[237][239] Working Capital Summary (in thousands) | Metric | Dec 28, 2019 | Dec 29, 2018 | Change | | :--- | :--- | :--- | :--- | | Cash, cash equivalents and short-term investments | $156,098 | $165,020 | $(8,922) | | Working capital | $290,811 | $324,650 | $(33,839) | - Net cash provided by operating activities decreased to $17.3 million in 2019 from $34.4 million in 2018, primarily due to weaker business conditions and the net loss[243] - At December 28, 2019, total indebtedness, net of discount and deferred financing costs, was $353.1 million[240] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks, primarily from interest rate fluctuations and foreign currency exchange rate changes - The company has approximately $343.0 million of long-term debt subject to variable interest rates based on LIBOR, exposing it to interest rate risk[269] - The planned phase-out of LIBOR by the end of 2021 creates uncertainty, as a transition to a new reference rate could result in increased borrowing costs[270] - Significant foreign operations expose the company to currency exchange risk, where a hypothetical 10% devaluation of the U.S. dollar would result in an approximate $41.3 million positive translation adjustment to stockholders' equity[271][273] Item 8. Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for the fiscal year ended December 28, 2019, and the accompanying notes Consolidated Statements of Operations The statements reflect increased net sales and gross profit but also higher operating expenses and interest, resulting in a net loss for 2019 Consolidated Statements of Operations Highlights (in thousands) | Line Item | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net sales | $583,329 | $451,768 | $352,704 | | Gross Profit (Sales - CoS) | $229,829 | $159,308 | $143,407 | | Income (loss) from operations | $(52,328) | $(29,781) | $37,725 | | Income (loss) from continuing operations | $(68,995) | $(32,543) | $33,121 | | Net income (loss) attributable to Cohu | $(69,700) | $(32,181) | $32,843 | Consolidated Balance Sheets The balance sheets show increased total assets, particularly goodwill and intangibles, and substantial long-term debt following the Xcerra acquisition Consolidated Balance Sheet Highlights (in thousands) | Line Item | Dec 28, 2019 | Dec 29, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $155,194 | $164,460 | | Total current assets | $439,696 | $485,239 | | Goodwill | $238,669 | $242,127 | | Intangible assets, net | $275,019 | $318,961 | | Total Assets | $1,077,710 | $1,134,002 | | Long-term debt | $346,518 | $346,041 | | Total Liabilities | $594,638 | $588,058 | | Total Cohu stockholders' equity | $483,072 | $546,243 | Consolidated Statements of Cash Flows Cash flow from operations decreased in 2019, while investing activities were significantly impacted by the Xcerra acquisition in 2018, and financing activities reflect debt management Consolidated Statements of Cash Flows Highlights (in thousands) | Line Item | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $17,269 | $34,437 | $39,750 | | Net cash used in investing activities | $(16,548) | $(322,308) | $(7,044) | | Net cash provided by (used in) financing activities | $(8,183) | $322,105 | $2,145 | | Net increase (decrease) in cash | $(8,991) | $30,635 | $38,241 | Note 2. Business Acquisitions This note details the acquisition of Xcerra Corporation, including the total consideration, financing structure, and the recognition of significant goodwill and intangible assets - Details the acquisition of Xcerra Corporation on October 1, 2018, for a total consideration of approximately $794.4 million, financed with cash, the issuance of 11.8 million shares of Cohu common stock, and $350.0 million from a new credit facility[392][394] - Goodwill of $180.4 million was recorded, attributed to expected synergies, economies of scale, and the assembled workforce, with the acquisition also resulting in $321.2 million of identifiable intangible assets, including developed technology, customer relationships, and in-process R&D[400][410][412] Note 5. Restructuring Charges This note outlines the restructuring program initiated post-acquisition, detailing charges related to employee severance and inventory write-downs - Following the Xcerra acquisition, a strategic restructuring program was initiated, including consolidating manufacturing operations and reducing headcount, particularly in Germany[441] Restructuring Program Charges (in thousands) | Charge Type | 2019 | 2018 | | :--- | :--- | :--- | | Employee severance costs | $12,170 | $17,791 | | Inventory related charges | $2,729 | $19,053 | | Other restructuring costs | $1,314 | $913 | | Total | $16,213 | $37,757 | Note 9. Segment and Geographic Information This note provides a breakdown of net sales by the Semiconductor Test & Inspection and PCB Test segments, as well as by key geographic regions Net Sales by Segment (in thousands) | Segment | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Semiconductor Test & Inspection | $540,878 | $443,276 | $352,704 | | PCB Test | $42,451 | $8,492 | - | | Total | $583,329 | $451,768 | $352,704 | Net Sales by Geography (in thousands) | Country | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | China | $118,213 | $90,255 | $82,474 | | Taiwan | $75,725 | $25,074 | $16,517 | | United States | $71,963 | $61,177 | $38,729 | | Malaysia | $61,826 | $61,793 | $80,102 | | Philippines | $51,683 | $46,421 | $26,268 | | Rest of the World | $203,919 | $167,048 | $108,614 | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[278] Item 9A. Controls and Procedures Based on an evaluation conducted by management, including the CEO and CFO, the company concluded that its disclosure controls and procedures were effective as of December 28, 2019 - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[280] - Management concluded that the company's internal control over financial reporting was effective as of December 28, 2019[282] - Ernst & Young LLP, the independent auditor, provided an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 28, 2019[283][285] Item 9B. Other Information There is no other information to report for this item - None[294] Part III Item 10. Directors, Executive Officers and Corporate Governance Information regarding directors and corporate governance is incorporated by reference from the company's definitive proxy statement to be filed with the SEC - The information required by this item is incorporated by reference to the Company's definitive proxy statement, which will be filed within 120 days after the close of fiscal 2019[296] Item 11. Executive Compensation Information regarding executive compensation is incorporated by reference from the company's definitive proxy statement to be filed with the SEC - Information regarding Executive Compensation is incorporated by reference to the Company's definitive proxy statement[300] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the company's definitive proxy statement to be filed with the SEC - Information regarding Security Ownership is incorporated by reference to the Company's definitive proxy statement[301] Item 13. Certain Relationships and Related Transactions, and Director Independence Information regarding related transactions and director independence is incorporated by reference from the company's definitive proxy statement to be filed with the SEC - Information regarding Certain Relationships and Related Transactions, and Director Independence is incorporated by reference to the Company's definitive proxy statement[302] Item 14. Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the company's definitive proxy statement to be filed with the SEC - Information regarding the Principal Accounting Fees and Services is incorporated by reference to the Company's definitive proxy statement[303] Part IV Item 15. Exhibits, Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Annual Report on Form 10-K - This item contains the list of all financial statements, schedules, and exhibits filed with the Form 10-K[306][308] Item 16. Form 10-K Summary The company has not provided a summary for Form 10-K - None[550]