10-Q 1 cohu20220326_10q.htm FORM 10-Q cohu20220326_10q.htm
0000021535 COHU INC false --12-31 Q1 2022 1 1 1,000 1,000 0 0 1 1 60,000 60,000 49,025 49,025 48,756 48,756 420 207 30 40 5 15 3 10 7 3 1 2 1 10.1 3.4 5.2 1.5 0.9 1 0 1 4 10 0 0 1 4 0.1 1 Derived from December 25, 2021 audited financial statements Corporate debt securities include investments in financial and other corporate institutions. No single issuer represents a significant portion of the total corporate debt securities portfolio. Excludes sublease income of $0.1 million in 2022 and 2023. On June 24, 2021, we completed the sale of our PCB Test business. See Note 12, “Business Divestitures” for additional information. Excludes amortization of $6,696 and $7,101 for the three months ended March 26, 2022 and March 27, 2021, respectively. Finance lease assets are recorded net of accumulated amortization of $0.2 million and $0.1 million as of March 26, 2022 and December 25, 2021, respectively. As of March 26, 2022 and December 25, 2021, the cost and fair value of investments with loss positions were approximately $85.0 million and $57.0 million, respectively. 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Table of Contents



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 26, 2022

OR

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from to

 

Commission file number 001-04298

 

COHU, INC.

(Exact name of registrant as specified in its charter)

 

Delaware 95-1934119

(State or other jurisdiction of

incorporation or organization)

 (I.R.S. Employer Identification No.)

 

12367 Crosthwaite Circle, Poway, California 92064-6817
(Address of principal executive offices) (Zip Code)

 

Registrant's telephone number, including area code (858) 848-8100

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

Trading Symbol(s)

Name of Exchange on Which Registered

Common Stock, $1.00 par value

COHU

The Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑   No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☑      Accelerated filer ☐      Non-accelerated filer ☐

 

Smaller reporting company       Emerging growth company 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐   

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes    No ☑

 

As of April 19, 2022, the Registrant had 48,634,256 shares of its $1.00 par value common stock outstanding.

 



 

 
 

 

COHU, INC.

INDEX

FORM 10-Q

MARCH 26, 2022

 

 

Part I Financial Information Page Number
     
Item 1. Financial Statements:  
     
  Condensed Consolidated Balance Sheets March 26, 2022 (unaudited) and December 25, 2021 3
     
  Condensed Consolidated Statements of Income (unaudited) Three Months Ended March 26, 2022 and March 27, 2021 4
     
  Condensed Consolidated Statements of Comprehensive Income (unaudited) Three Months Ended March 26, 2022 and March 27, 2021 5
     
  Condensed Consolidated Statements of Stockholders’ Equity (unaudited) Three Months Ended March 26, 2022 and March 27, 2021 6
     
  Condensed Consolidated Statements of Cash Flows (unaudited) Three Months Ended March 26, 2022 and March 27, 2021 7
     
  Notes to Unaudited Condensed Consolidated Financial Statements 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 26
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 36
     
Item 4. Controls and Procedures 37
     
Part II Other Information  
     
Item 1. Legal Proceedings 38
     
Item 1A. Risk Factors 38
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 38
     
Item 3. Defaults Upon Senior Securities 39
     
Item 4. Mine Safety Disclosures 39
     
Item 5. Other Information 39
     
Item 6. Exhibits 40
     
Signatures 41

 

 
 

Item 1.

 

COHU, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value amounts)

 

  

March 26,

2022

   

December 25,

2021*

 

 

 

(Unaudited)

     
ASSETS        

Current assets:

        

Cash and cash equivalents

 $267,068  $290,201 

Short-term investments

  91,502   89,704 

Accounts receivable, net

  210,742   192,873 

Inventories

  160,363   161,053 

Prepaid expenses

  21,657   16,194 

Other current assets

  824   768 

Total current assets

  752,156   750,793 
         

Property, plant and equipment, net

  63,912   63,957 

Goodwill

  216,234   219,791 

Intangible assets, net

  166,743   177,320 

Other assets

  19,430   22,123 

Operating lease right of use assets

  24,870   25,060 
  $1,243,345  $1,259,044 
         

LIABILITIES AND STOCKHOLDERS EQUITY

        

Current liabilities:

        

Short-term borrowings

 $2,048  $3,059 

Current installments of long-term debt

  4,310   11,338 

Accounts payable

  85,631   85,230 

Customer advances

  13,277   7,300 

Accrued compensation and benefits

  29,117   39,835 

Deferred profit

  11,001   13,208 

Accrued warranty

  5,981   6,614 

Income taxes payable

  8,845   6,873 

Other accrued liabilities

  16,259   19,002 

Total current liabilities

  176,469   192,459 
         

Long-term debt

  101,959   103,393 

Deferred income taxes

  23,903   25,887 

Noncurrent income tax liabilities

  6,145   6,138 

Accrued retirement benefits

  17,959   18,037 

Long-term lease liabilities

  21,782   22,040 

Other accrued liabilities

  8,231   8,588 
         

Stockholders’ equity

        
Preferred stock, $1 par value; 1,000 shares authorized, none issued  -   - 

Common stock, $1 par value; 60,000 shares authorized, 49,025 shares issued and outstanding in 2022 and 48,756 shares in 2021

  49,025   48,756 

Paid-in capital

  673,034   674,777 

Treasury stock, at cost; 420 shares in 2022 and 207 shares in 2021

  (13,712)  (7,324)

Retained earnings

  215,124   193,555 

Accumulated other comprehensive loss

  (36,574)  (27,262)

Total stockholders’ equity

  886,897   882,502 
  $1,243,345  $1,259,044 

 

* Derived from December 25, 2021 audited financial statements

 

The accompanying notes are an integral part of these statements.

 

 

 

COHU, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(in thousands, except per share amounts)

 

  

Three Months Ended

 
  

March 26,

  

March 27,

 
  

2022

  

2021

 
         

Net sales

 $197,757  $225,488 

Cost and expenses:

        

Cost of sales (1)

  106,601   123,283 

Research and development

  23,106   23,152 

Selling, general and administrative

  31,246   32,624 

Amortization of purchased intangible assets

  8,535   9,244 

Restructuring charges

  576   1,340 

Loss on sale of PCB Test business

  -   115 
   170,064   189,758 

Income from operations

  27,693   35,730 

Other (expense) income:

        

Interest expense

  (981)  (2,575)

Interest income

  111   50 

Foreign transaction gain (loss)

  1,144   (262)

Loss on extinguishment of debt

  (104)  (1,761)

Income from operations before taxes

  27,863   31,182 

Income tax provision

  6,294   3,575 

Net income

 $21,569  $27,607 
         

Income per share:

        

Basic

 $0.44  $0.63 

Diluted

 $0.44  $0.61 
         

Weighted average shares used in computing income per share:

        

Basic

  48,778   43,756 

Diluted

  49,569   45,482 

 

(1)

Excludes amortization of $6,696 and $7,101 for the three months ended March 26, 2022 and March 27, 2021, respectively.

 

The accompanying notes are an integral part of these statements.

 

 

 

COHU, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(in thousands)

 

   

Three Months Ended

 
   

March 26,

   

March 27,

 
   

2022

   

2021

 
                 

Net income

  $ 21,569     $ 27,607  

Other comprehensive loss, net of tax:

               

Foreign currency translation adjustments

    (8,903 )     (10,246 )

Adjustments related to postretirement benefits

    (61 )     (180 )

Change in unrealized gain/loss on investments

    (348 )     (6 )

Other comprehensive loss, net of tax

    (9,312 )     (10,432 )

Comprehensive income

  $ 12,257     $ 17,175  

 

The accompanying notes are an integral part of these statements.
 

 

 

COHU, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


(in thousands, except par value and per share amounts)

 

Three Months Ended March 27, 2021

 

Common

stock

$1 par value

   

Paid-in

capital

   

Retained

earnings

   

Accumulated

other

comprehensive

loss

   

Treasury

stock

   

Total

 

Balance at December 26, 2020

  $ 42,190     $ 448,194     $ 26,230     $ (4,326 )   $ -     $ 512,288  

Net income

    -       -       27,607       -       -       27,607  

Changes in cumulative translation adjustment

    -       -       -       (10,246 )     -       (10,246 )

Adjustments related to postretirement benefits, net of tax

    -       -       -       (180 )     -       (180 )

Changes in unrealized gains and losses on investments, net of tax

    -       -       -       (6 )     -       (6 )

Exercise of stock options

    192       1,730       -       -       -       1,922  

Shares issued for restricted stock units vested

    526       (526 )     -       -       -       -  

Repurchase and retirement of stock

    (190 )     (8,363 )     -       -       -       (8,553 )

Share-based compensation expense

    -       3,523       -       -       -       3,523  

Sale of common stock, net of issuance costs

    5,693       217,426       -       -       -       223,119  

Balance at March 27, 2021

  $ 48,411     $ 661,984     $ 53,837     $ (14,758 )   $ -     $ 749,474  
                                                 

Three Months Ended March 26, 2022

                                               

Balance at December 25, 2021

  $ 48,756     $ 674,777     $ 193,555     $ (27,262 )   $ (7,324 )   $ 882,502  

Net income

    -       -       21,569       -       -       21,569  

Changes in cumulative translation adjustment

    -       -       -       (8,903 )     -       (8,903 )

Adjustments related to postretirement benefits, net of tax

    -       -       -       (61 )     -       (61 )

Changes in unrealized gains and losses on investments, net of tax

    -       -       -       (348 )     -       (348 )

Shares issued for restricted stock units vested

    426       (426 )     -       -       -       -  

Repurchase and retirement of stock

    (157 )     (4,739 )     -       -       -       (4,896 )

Common stock repurchases

    -       -       -       -       (6,388 )     (6,388 )

Share-based compensation expense

    -       3,422       -       -       -       3,422  

Balance at March 26, 2022

  $ 49,025     $ 673,034     $ 215,124     $ (36,574 )   $ (13,712 )   $ 886,897  

 

The accompanying notes are an integral part of these statements.
 

 

 

COHU, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

   

Three Months Ended

 
   

March 26,

2022

   

March 27,

2021

 

Cash flows from operating activities:

               

Net income

  $ 21,569     $ 27,607  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Loss on business divestitures

    -       115  

Loss on extinguishment of debt

    104       1,761  

Gain from sale of property, plant and equipment

    (51 )     (65 )

Depreciation and amortization

    11,667       12,567  

Share-based compensation expense

    3,422       3,523  

Non-cash inventory related charges

    647       1,110  

Deferred income taxes

    397       280  

Changes in accrued retiree medical benefits

    (10 )     (81 )

Changes in other accrued liabilities

    (332 )     (78 )

Changes in other assets

    (128 )     62  

Amortization of cloud-based software implementation costs

    478       370  

Interest capitalized associated with cloud computing implementation

    (26 )     (43 )

Amortization of debt discounts and issuance costs

    94       250  

Changes in assets and liabilities:

               

Customer advances

    6,101       882  

Accounts receivable

    (19,873 )     (47,241 )

Inventories

    (1,123 )     (20,804 )

Other current assets

    (5,675 )     (6,629 )

Accounts payable

    (361 )     28,371  

Deferred profit

    (2,141 )     4,383  

Income taxes payable

    2,257       5,131  

Accrued compensation, warranty and other liabilities

    (15,059 )     (5,457 )

Operating lease right-of-use assets

    1,343       1,556  

Current and long-term operating lease liabilities

    (1,309 )     (1,382 )

Net cash provided by operating activities

    1,991       6,188  

Cash flows from investing activities:

               

Cash received from sale of property, plant and equipment

    57       98  

Purchases of short-term investments

    (45,413 )     (129,736 )

Sales and maturities of short-term investments

    43,250       2,481  

Purchases of property, plant and equipment

    (2,669 )     (2,700 )

Net cash used in investing activities

    (4,775 )     (129,857 )

Cash flows from financing activities:

               

Payments on current and long-term finance lease liabilities

    (44 )     (45 )

Repurchases of common stock, net

    (4,082 )     (5,421 )

Proceeds from revolving line of credit and construction loans

    -       818  

Proceeds received from issuance of common stock, net of fees

    -       223,118  

Repayments of long-term debt

    (9,056 )     (101,922 )

Acquisition of treasury stock

    (5,949 )     -  

Net cash provided by (used in) financing activities

    (19,131 )     116,548  

Effect of exchange rate changes on cash and cash equivalents

    (1,218 )     882  

Net decrease in cash and cash equivalents

    (23,133 )     (6,239 )

Cash and cash equivalents at beginning of period

    290,201       149,358  

Cash and cash equivalents at end of period

  $ 267,068     $ 143,119  

Supplemental disclosure of cash flow information:

               

Cash paid for income taxes

  $ 3,669     $ 279  

Inventory capitalized as property, plant and equipment

  $ 460     $ 455  

Property, plant and equipment purchases included in accounts payable

  $ 1,180     $ 862  

Cash paid for interest

  $ 606     $ 2,532  

 

The accompanying notes are an integral part of these statements.
 

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 26, 2022

 

 

 

1.

Summary of Significant Accounting Policies

 

Basis of Presentation

 

Our fiscal years are based on a 52- or 53-week period ending on the last Saturday in December. Our current fiscal year will end on December 31, 2022 and will be comprised of 53 weeks. The condensed consolidated balance sheet at December 25, 2021, has been derived from our audited financial statements at that date. The interim condensed consolidated financial statements as of March 26, 2022, (also referred to as “the first quarter of fiscal 2022” and “the first three months of fiscal 2022”) and March 27, 2021, (also referred to as “the first quarter of fiscal 2021” and “the first three months of fiscal 2021”) are unaudited. However, in management’s opinion, these financial statements reflect all adjustments (consisting only of normal, recurring items) necessary to provide a fair presentation of our financial position, results of operations and cash flows for the periods presented. The first quarter of fiscal 2022 and 2021 were both comprised of 13 weeks.

 

Our interim results are not necessarily indicative of the results that should be expected for the full year. For a better understanding of Cohu, Inc. and our financial statements, we recommend reading these interim condensed consolidated financial statements in conjunction with our audited financial statements for the year ended December 25, 2021, which are included in our 2021 Annual Report on Form 10-K, filed with the U. S. Securities and Exchange Commission (“SEC”). In the following notes to our interim condensed consolidated financial statements, Cohu, Inc. is referred to as “Cohu”, “we”, “our” and “us”.

 

All significant consolidated transactions and balances have been eliminated in consolidation.

 

Concentration of Credit Risk

 

Financial instruments that potentially subject us to significant credit risk consist principally of cash equivalents, short-term investments and trade accounts receivable. We invest in a variety of financial instruments and, by policy, limit the amount of credit exposure with any one issuer.

 

Our trade accounts receivable are presented net of allowance for credit losses, which is determined in accordance with the guidance provided by Accounting Standards Codification (“ASC”) Topic 326, Financial Instruments-Credit Losses, (“ASC 326”). At March 26, 2022 and December 25, 2021 our allowance for credit losses was $0.2 million and $0.3 million, respectively. Our customers include semiconductor manufacturers and semiconductor test subcontractors and other customers located throughout the world. While we believe that our allowance for credit losses is adequate and represents our best estimate at March 26, 2022, we will continue to monitor customer liquidity and other economic conditions, including the impact of the COVID-19 pandemic, which may result in changes to our estimates regarding expected credit losses.

 

Inventories

 

Inventories are stated at the lower of cost, determined on a first-in, first-out basis, or net realizable value. Cost includes labor, material and overhead costs. Determining net realizable value of inventories involves numerous estimates and judgments including projecting average selling prices and sales volumes for future periods and costs to complete and dispose of inventory. As a result of these analyses, we record a charge to cost of sales in advance of the period when the inventory is sold when estimated net realizable values are below our costs.

 

Inventories by category were as follows (in thousands):

 

  

March 26,

2022

  

December 25,

2021

 

Raw materials and purchased parts

 $90,925  $92,798 

Work in process

  42,417   40,732 

Finished goods

  27,021   27,523 

Total inventories

 $160,363  $161,053 

 

8

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 26, 2022

 

 

Property, Plant and Equipment

 

Depreciation and amortization of property, plant and equipment, both owned and under financing lease, is calculated principally on the straight-line method based on estimated useful lives of thirty to forty years for buildings, five to fifteen years for building improvements and three to ten years for machinery, equipment and software. Land is not depreciated.

 

Property, plant and equipment, at cost, consisted of the following (in thousands):

 

  

March 26,

2022

  

December 25,

2021

 

Land and land improvements

 $7,998  $7,703 

Buildings and building improvements

  30,987   31,711 

Machinery and equipment

  97,883   95,542 
   136,868   134,956 

Less accumulated depreciation and amortization

  (72,956)  (70,999)

Property, plant and equipment, net

 $63,912  $63,957 

 

Cloud-based Enterprise Resource Planning Implementation Costs

 

We have capitalized certain costs associated with the implementation of our new cloud-based Enterprise Resource Planning (“ERP”) system in accordance with ASC Topic 350, IntangiblesGoodwill and Other, (“ASC 350”). Capitalized costs include only external direct costs of materials and services consumed in developing the system and interest costs incurred, when material, while developing the system.

 

Unamortized capitalized cloud computing implementation costs totaled $13.6 million and $13.5 million at March 26, 2022, and December 25, 2021, respectively. These amounts are recorded within other assets in our condensed consolidated balance sheets. The change in the capitalized amount is costs capitalized in the current period, offset by amortization recorded. We began amortizing some of these costs when our new ERP system was placed into service during the first quarter of 2020 and we continue to capitalize costs related to implementation projects that are ongoing. Implementation costs are amortized using the straight-line method over seven years and we recorded $0.5 million and $0.4 million in amortization expense during the three months ended March 26, 2022, and March 27, 2021, respectively.

 

Segment Information

 

We applied the provisions of ASC Topic 280, Segment Reporting, (“ASC 280”), which sets forth a management approach to segment reporting and establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products, major customers and the geographies in which the entity holds material assets and reports revenue. An operating segment is defined as a component that engages in business activities whose operating results are reviewed by the chief operating decision maker and for which discrete financial information is available. We have determined that our three identified operating segments are: Test Handler Group (THG), Semiconductor Tester Group (STG) and Interface Solutions Group (ISG). Our THG, STG and ISG operating segments qualify for aggregation under ASC 280 due to similarities in their customers, their economic characteristics, and the nature of products and services provided. As a result, we report in one segment, Semiconductor Test and Inspection Equipment (“Semiconductor Test & Inspection”). Prior to the sale of our PCB Test Group (PTG) on June 24, 2021, we reported in two segments, Semiconductor Test & Inspection and PCB Test Equipment (“PCB Test”).

 

Goodwill and Indefinite-Lived Intangibles, Other Intangible Assets and Long-lived Assets

 

We evaluate goodwill for impairment annually and when an event occurs or circumstances change that indicate that the carrying value may not be recoverable. We test goodwill for impairment by first comparing the book value of net assets to the fair value of the reporting unit. If the fair value is determined to be less than the book value, a second step is performed to compute the amount of impairment as the difference between the fair value of the reporting unit and its carrying value, not to exceed the carrying value of goodwill. We estimated the fair values of our reporting units primarily using the income approach valuation methodology that includes the discounted cash flow method, taking into consideration the market approach and certain market multiples as a validation of the values derived using the discounted cash flow methodology. Forecasts of future cash flows are based on our best estimate of future net sales and operating expenses, based primarily on customer forecasts, industry trade organization data and general economic conditions. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors.

 

9

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 26, 2022

 

 

We conduct our annual impairment test as of October 1st of each year and have determined there was no impairment as of October 1, 2021, as the estimated fair values of our reporting units and indefinite-lived intangible assets exceeded their carrying values on that date. Other events and changes in circumstances may also require goodwill to be tested for impairment between annual measurement dates.

 

Long-lived assets, other than goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or any other significant adverse change that would indicate that the carrying amount of an asset or group of assets may not be recoverable. For long-lived assets, impairment losses are only recorded if the asset’s carrying amount is not recoverable through its undiscounted, probability-weighted future cash flows. We measure the impairment loss based on the difference between the carrying amount and estimated fair value.

 

During the first quarter of 2022, no events or conditions occurred suggesting an impairment in our goodwill, other intangible assets and long-lived assets.

 

Product Warranty

 

Product warranty costs are accrued in the period sales are recognized. Our products are generally sold with standard warranty periods, which differ by product, ranging from 12 to 36 months. Parts and labor are typically covered under the terms of the warranty agreement. Our warranty expense accruals are based on historical and estimated costs by product and configuration. From time-to-time we offer customers extended warranties beyond the standard warranty period. In those situations, the revenue relating to the extended warranty is deferred at its estimated fair value and recognized on a straight-line basis over the contract period. Costs associated with our extended warranty contracts are expensed as incurred.

 

Restructuring Costs

 

We record restructuring activities including costs for one-time termination benefits in accordance with ASC Topic 420 (“ASC 420”), Exit or Disposal Cost Obligations. The timing of recognition for severance costs accounted for under ASC 420 depends on whether employees are required to render service until they are terminated in order to receive the termination benefits. If employees are required to render service until they are terminated in order to receive the termination benefits, a liability is recognized ratably over the future service period. Otherwise, a liability is recognized when management has committed to a restructuring plan and has communicated those actions to employees. Employee termination benefits covered by existing benefit arrangements are recorded in accordance with ASC Topic 712, Nonretirement Postemployment Benefits. These costs are recognized when management has committed to a restructuring plan and the severance costs are probable and estimable. See Note 4, “Restructuring Charges” for additional information.

 

Debt Issuance Costs

 

We capitalize costs related to the issuance of debt. Debt issuance costs that were directly related to our Term Loan B are presented within noncurrent liabilities as a reduction of long-term debt in our condensed consolidated balance sheets. The amortization of such costs is recognized as interest expense using the effective interest method over the term of the respective debt issue. Amortization related to deferred debt issuance costs and original discount costs was $0.1 million and $0.3 million for the three months ended March 26, 2022 and March 27, 2021, respectively.

 

Foreign Remeasurement and Currency Translation

 

Assets and liabilities of our wholly owned foreign subsidiaries that use the U.S. Dollar as their functional currency are re-measured using exchange rates in effect at the end of the period, except for nonmonetary assets, such as inventories and property, plant and equipment, which are re-measured using historical exchange rates. Revenues and costs are re-measured using average exchange rates for the period, except for costs related to those balance sheet items that are re-measured using historical exchange rates. Gains and losses on foreign currency transactions are recognized as incurred. During the three months ended March 26, 2022, we recognized foreign exchange gains of $1.1 million, in our condensed consolidated statements of income. During the three months ended March 27, 2021, we recognized foreign exchange losses of $0.3 million.

 

10

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 26, 2022

 

 

Certain of our foreign subsidiaries have designated the local currency as their functional currency and, as a result, their assets and liabilities are translated at the rate of exchange at the balance sheet date, while revenue and expenses are translated using the average exchange rate for the period. Cumulative translation adjustments resulting from the translation of the financial statements are included as a separate component of stockholders’ equity.

 

Foreign Exchange Derivative Contracts

 

We operate and sell our products in various global markets. As a result, we are exposed to changes in foreign currency exchange rates. We enter into foreign currency forward contracts with a financial institution to hedge against future movements in foreign exchange rates that affect certain existing U.S. Dollar denominated assets and liabilities held at our subsidiaries whose functional currency is the local currency. For accounting purposes, our foreign currency forward contracts are not designated as hedging instruments and, accordingly, we record the fair value of these contracts as of the end of our reporting period in our condensed consolidated balance sheets with changes in fair value recorded within foreign transaction gain (loss) in our condensed consolidated statements of income for both realized and unrealized gains and losses. See Note 7, “Derivative Financial Instruments” for additional information.

 

Share-Based Compensation

 

We measure and recognize all share-based compensation under the fair value method. Our estimate of share-based compensation expense requires a number of complex and subjective assumptions including our stock price volatility, employee exercise patterns (expected life of the options) and related tax effects. The assumptions used in calculating the fair value of share-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. Although we believe the assumptions and estimates we have made are reasonable and appropriate, changes in assumptions could materially impact our reported financial results.

 

Reported share-based compensation is classified, in the condensed consolidated interim financial statements, as follows (in thousands):

 

  

Three Months Ended

 
  

March 26,

2022

  

March 27,

2021

 

Cost of sales

 $145  $262 

Research and development

  752   781 

Selling, general and administrative

  2,525   2,480 

Total share-based compensation

  3,422   3,523 

Income tax benefit

  (1,626)  (234)

Total share-based compensation, net

 $1,796  $3,289 

 

Income Per Share

 

Basic income per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the reporting period. Diluted income per share includes the dilutive effect of common shares potentially issuable upon the exercise of stock options, vesting of outstanding restricted stock and performance stock units and issuance of stock under our employee stock purchase plan using the treasury stock method. In loss periods, potentially dilutive securities are excluded from the per share computations due to their anti-dilutive effect. For purposes of computing diluted income per share, stock options with exercise prices that exceed the average fair market value of our common stock for the period are excluded. For the three months ended March 26, 2022, approximately 224,000 shares of common stock were excluded from the computation. For the three months ended March 27, 2021, no shares were excluded from the computation. All shares repurchased and held as treasury stock are reflected as a reduction to our basic weighted average shares outstanding based on the trade date of the share repurchase.

 

11

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 26, 2022

 

 

The following table reconciles the denominators used in computing basic and diluted income per share (in thousands):

 

  

Three Months Ended

 
  

March 26,

2022

  

March 27,

2021

 

Weighted average common shares

  48,778   43,756 

Effect of dilutive securities

  791   1,726 
   49,569   45,482 

 

Leases

 

We determine if a contract contains a lease at inception. Operating leases are included in operating lease right of use (“ROU”) assets, current other accrued liabilities, and long-term lease liabilities on our condensed consolidated balance sheets. Finance leases are included in property, plant and equipment, other current accrued liabilities, and long-term lease liabilities on our condensed consolidated balance sheets.

 

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the adoption date or the commencement date for leases entered into after the adoption date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rates for the remaining lease terms based on the information available at the adoption date or commencement date in determining the present value of future payments.

 

The operating lease ROU asset also includes any lease payments made, lease incentives, favorable and unfavorable lease terms recognized in business acquisitions and excludes initial direct costs incurred and variable lease payments. Variable lease payments include estimated payments that are subject to reconciliations throughout the lease term, increases or decreases in the contractual rent payments, as a result of changes in indices or interest rates and tax payments that are based on prevailing rates. Our lease terms may include renewal options to extend the lease when it is reasonably certain that we will exercise those options. In addition, we include purchase option amounts in our calculations when it is reasonably certain that we will exercise those options. Rent expense for minimum payments under operating leases is recognized on a straight-line basis over the term.

 

Leases with an initial term of 12 months or less are not recorded on the balance sheet but recognized in our condensed consolidated statements of income on a straight-line basis over the lease term. We account for lease and non-lease components as a single lease component and include both in our calculation of the ROU assets and lease liabilities.

 

We sublease certain leased assets to third parties, mainly as a result of unused space in our facilities. None of our subleases contain extension options. Variable lease payments in our subleases include tax payments that are based on prevailing rates. We account for lease and non-lease components as a single lease component.

 

Revenue Recognition

 

Our net sales are derived from the sale of products and services and are adjusted for estimated returns and allowances, which historically have been insignificant. We recognize revenue when the obligations under the terms of a contract with our customers are satisfied; generally, this occurs with the transfer of control of our systems, non-system products or services. In circumstances where control is not transferred until destination or acceptance, we defer revenue recognition until such events occur.

 

Revenue for established products that have previously satisfied a customer’s acceptance requirements is generally recognized upon shipment. In cases where a prior history of customer acceptance cannot be demonstrated or from sales where customer payment dates are not determinable and in the case of new products, revenue and cost of sales are deferred until customer acceptance has been received. Our post-shipment obligations typically include installation and standard warranties. The relative standalone selling price of installation related revenue is recognized in the period the installation is performed. Service revenue is recognized over time as we transfer control to our customer for the related contract or upon completion of the services if they are short-term in nature. Spares, contactor and kit revenue is generally recognized upon shipment.

 

Certain of our equipment sales have multiple performance obligations. These arrangements involve the delivery or performance of multiple performance obligations, and transfer of control of performance obligations may occur at different points in time or over different periods of time. For arrangements containing multiple performance obligations, the revenue relating to the undelivered performance obligation is deferred using the relative standalone selling price method utilizing estimated sales prices until satisfaction of the deferred performance obligation.

 

12

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 26, 2022

 

 

Unsatisfied performance obligations primarily represent contracts for products with future delivery dates. At March 26, 2022, we had $7.6 million of revenue expected to be recognized in the future related to performance obligations that were unsatisfied (or partially unsatisfied) for contracts with original expected durations of over one year. As allowed under ASC 606, we have opted to not disclose unsatisfied performance obligations for contracts with original expected durations of less than one year.

 

We generally sell our equipment with a product warranty. The product warranty provides assurance to customers that delivered products are as specified in the contract (an “assurance-type warranty”). Therefore, we account for such product warranties under ASC 460, Guarantees (“ASC 460”), and not as a separate performance obligation.

 

The transaction price reflects our expectations about the consideration we will be entitled to receive from the customer and may include fixed or variable amounts. Fixed consideration primarily includes sales to customers that are known as of the end of the reporting period. Variable consideration includes sales in which the amount of consideration that we will receive is unknown as of the end of a reporting period. Such consideration primarily includes sales made to certain customers with cumulative tier volume discounts offered. Variable consideration arrangements are rare; however, when they occur, we estimate variable consideration as the expected value to which we expect to be entitled. Included in the transaction price estimate are amounts in which it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Variable consideration that does not meet revenue recognition criteria is deferred. 

 

Our contracts are typically less than one year in duration and we have elected to use the practical expedient available in ASC 606 to expense cost to obtain contracts as they are incurred because they would be amortized over less than one year.

 

Accounts receivable represents our unconditional right to receive consideration from our customer. Payments terms do not exceed one year from the invoice date and therefore do not include a significant financing component. To date, there have been no material impairment losses on accounts receivable. There were no material contract assets or contract liabilities recorded on our condensed consolidated balance sheet in any of the periods presented.

 

On shipments where sales are not recognized, gross profit is generally recorded as deferred profit in our condensed consolidated balance sheet representing the difference between the receivable recorded and the inventory shipped. At March 26, 2022, we had deferred revenue totaling approximately $19.4 million, current deferred profit of $11.0 million and deferred profit expected to be recognized after one year included in noncurrent other accrued liabilities of $5.9 million. At December 25, 2021, we had deferred revenue totaling approximately $21.9 million, current deferred profit of $13.2 million and deferred profit expected to be recognized after one year included in noncurrent other accrued liabilities of $6.1 million.

 

13

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 26, 2022

 

 

Net sales of our reportable segments, by type, are as follows (in thousands):

 

  

Three Months Ended

 

Disaggregated Net Sales

 

March 26, 2022

  

March 27, 2021

 

Systems:

        

Semiconductor Test & Inspection

 $117,349  $138,159 

PCB Test

  -   8,620 

Non-systems:

        

Semiconductor Test & Inspection

  80,408   74,247 

PCB Test

  -   4,462 

Total net sales

 $197,757  $225,488 

 

Revenue by geographic area based upon product shipment destination (in thousands):

 

  

Three Months Ended

 

Disaggregated Net Sales

 

March 26, 2022

  

March 27, 2021

 

China

 $38,653  $54,265 

Philippines

  24,385   33,754 

United States

  23,763   20,059 

Malaysia

  20,116   23,259 

Taiwan

  19,808   32,196 

Rest of the World

  71,032   61,955 

Total net sales

 $197,757  $225,488 

 

A small number of customers historically have been responsible for a significant portion of our net sales. Significant customer concentration information, by reportable segment, is as follows:

 

  Three Months Ended 
  

March 26

2022

  

March 27

2021

 
Semiconductor Test & Inspection        
Customers individually accounting for more than 10% of net sales  one   * 
Percentage of net sales  11%   * 
PCB Test        
Customers individually accounting for more than 10% of net sales  N/A   * 
Percentage of net sales  N/A   * 
 

*

No single customer represented more than 10% of consolidated net sales.

 

Accumulated Other Comprehensive Loss

 

Our accumulated other comprehensive loss balance totaled approximately $36.6 million and $27.3 million at March 26, 2022 and December 25, 2021, respectively, and was attributed to all non-owner changes in stockholders’ equity and consists of, on an after-tax basis where applicable, foreign currency adjustments resulting from the translation of certain of our subsidiary accounts where the functional currency is not the U.S. Dollar, unrealized loss on investments and adjustments related to postretirement benefits. Reclassification adjustments from accumulated other comprehensive loss during the three months of fiscal 2022 and 2021 were not significant.

 

Retiree Medical Benefits

 

We provide post-retirement health benefits to certain retired executives, one director (who is a former executive) and their eligible dependents under a noncontributory plan. These benefits are no longer offered to any other retired Cohu employees. The net periodic benefit cost incurred during the three months of fiscal 2022 and 2021 was not significant.

 

14

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 26, 2022

 

 

Business Divestitures

 

On June 24, 2021, we completed the sale of our PCB Test Equipment (“PCB Test”) business, which represented our PCB Test segment. As part of the transaction we also sold certain intellectual property held by our Semiconductor Test & Inspection segment that is utilized by the PCB Test business. See Note 12, “Business Divestitures” for additional information on this transaction.

 

New Accounting Pronouncements

 

There have been no material changes in recently issued or adopted accounting standards from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 25, 2021.

 

 

2.

Goodwill and Purchased Intangible Assets

 

Goodwill and Intangible Assets

 

Changes in the carrying value of goodwill during the year ended December 25, 2021, and the three-month period ended March 26, 2022, by segment, were as follows (in thousands):

 

   

Semiconductor Test

                 
   

& Inspection

   

PCB Test

   

Total

 

Balance, December 26, 2020

  $ 230,724     $ 21,580     $ 252,304  

Sale of PCB Test Business (1)

    -       (21,899 )     (21,899 )

Impact of currency exchange

    (10,933 )     319       (10,614 )

Balance, December 25, 2021

    219,791       -       219,791  

Impact of currency exchange

    (3,557 )     -       (3,557 )

Balance, March 26, 2022

  $ 216,234     $ -     $ 216,234  

 

 

(1)

On June 24, 2021, we completed the sale of our PCB Test business. See Note 12, “Business Divestitures” for additional information.

 

Purchased intangible assets, subject to amortization are as follows (in thousands):

 

   

March 26, 2022

   

December 25, 2021

 
                   

Remaining

                 
                   

Weighted

                 
   

Gross

           

Average

   

Gross

         
   

Carrying

   

Accum.

   

Amort.

   

Carrying

   

Accum.

 
   

Amount

   

Amort.

   

Period (years)

   

Amount

   

Amort.

 

Developed technology

  $ 226,203     $ 110,082       4.3     $ 229,131     $ 104,855  

Customer relationships

    65,123       27,175       7.2       65,916       26,189  

Trade names

    20,607       8,071       7.1       20,877       7,714  

Covenant not-to-compete

    289       151       4.8       308       154  

Total intangible assets

  $ 312,222     $ 145,479             $ 316,232     $ 138,912  

 

Changes in the carrying values of purchased intangible assets presented above are a result of the impact of fluctuation in currency exchange rates and the sale of our PCB Test business.

 

Amortization expense related to intangible assets in the first quarter of fiscal 2022 and 2021 was $8.5 million and $9.2 million, respectively.

 

15

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 26, 2022

 

 

 

3.

Borrowings and Credit Agreements

 

The following table is a summary of our borrowings (in thousands):

 

  

March 26,

  

December 25,

 
  

2022

  

2021

 

Bank Term Loan under Credit Agreement

 $95,255  $103,130 

Bank Term Loans-Kita

  2,819   3,070 

Construction Loan- Cohu GmbH

  9,511   10,045 

Lines of Credit

  2,048   3,059 

Total debt

  109,633   119,304 

Less: financing fees and discount

  (1,316)  (1,514)

Less: current portion

  (6,358)  (14,397)

Total long-term debt

 $101,959  $103,393 

 

Credit Agreement

 

On October 1, 2018, we entered into a Credit Agreement providing for a $350.0 million Term Loan Credit Facility and borrowed the full amount to finance a portion of the Xcerra acquisition. Loans under the Term Loan Credit Facility amortize in equal quarterly installments of 0.25% of the original principal amount, with the balance payable at maturity. All outstanding principal and interest in respect of the Term Loan Credit Facility must be repaid on or before October 1, 2025. The loans under the Term Loan Credit Facility bear interest, at Cohu’s option, at a floating annual rate equal to LIBOR plus a margin of 3.00%. At March 26, 2022, the outstanding loan balance, net of discount and deferred financing costs, was $93.9 million and $3.1 million of the outstanding balance is presented as current installments of long-term debt in our condensed consolidated balance sheets. At December 25, 2021, the outstanding loan balance, net of discount and deferred financing costs, was $101.6 million and $10.1 million of the outstanding balance is presented as current installments of long-term debt in our condensed consolidated balance sheets. As of March 26, 2022, the fair value of the debt was $94.3 million. The measurement of the fair value of debt is based on the average of the bid and ask trading quotes as of March 26, 2022 and is considered a Level 2 fair value measurement.

 

Under the terms of the Credit Agreement, the lender may accelerate the payment terms upon the occurrence of certain events of default set forth therein, which include: the failure of Cohu to make timely payments of amounts due under the Credit Agreement, the failure of Cohu to adhere to the representations and covenants set forth in the Credit Agreement, the failure to provide notice of any event that causes a material adverse effect or to provide other required notices, upon the event that related collateral agreements become ineffective, upon the event that certain legal judgments are entered against Cohu, the insolvency of Cohu, or upon the change of control of Cohu. As of March 26, 2022, we believe no such events of default have occurred.

 

During the first three months of 2022, we prepaid $7.0 million in principal of our Term Loan Credit Facility for $7.0 million in cash. We accounted for the prepayment as a debt extinguishment, which resulted in a loss of $0.1 million reflected in other expense, net, in our condensed consolidated statement of income and a corresponding $0.1 million reduction in debt discounts and deferred financing costs in our condensed consolidated balance sheets. During 2021, we prepaid $200.0 million in principal of our Term Loan Credit Facility for $200.0 million in cash. We accounted for the prepayment as a debt extinguishment, which resulted in a loss of $3.4 million reflected in other expense, net, in our condensed consolidated statement of income and a corresponding $3.4 million reduction in debt discounts and deferred financing costs in our condensed consolidated balance sheets. Approximately $95.3 million in principal of the Term Loan Credit Facility remains outstanding as of March 26, 2022.

 

Kita Term Loans

 

We have a series of term loans with Japanese financial institutions primarily related to the expansion of our facility in Osaka, Japan. The loans are collateralized by the facility and land, carry interest rates ranging from 0.05% to 0.43%, and expire at various dates through 2034. At March 26, 2022, the outstanding loan balance was $2.8 million and $0.2 million of the outstanding balance is presented as current installments of long-term debt in our condensed consolidated balance sheets. At December 25, 2021, the outstanding loan balance was $3.1 million and $0.2 million of the outstanding balance is presented as current installments of long-term debt in our condensed consolidated balance sheets. The fair value of the debt approximates the carrying value at March 26, 2022.

 

16

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 26, 2022

 

 

The term loans are denominated in Japanese Yen and, as a result, amounts disclosed herein will fluctuate because of changes in currency exchange rates.

 

Construction Loans

 

In July 2019 and June 2020, one of our wholly owned subsidiaries located in Germany entered into a series of construction loans (“Loan Facilities”) with a German financial institution providing it with total borrowings of up to €10.1 million. The Loan Facilities were utilized to finance the expansion of our facility in Kolbermoor, Germany and are secured by the land and the existing building on the site. The Loan Facilities bear interest at agreed upon rates based on the facility amounts as discussed below.

 

The first facility totaling €3.4 million has been fully drawn and is payable over 10 years at a fixed annual interest rate of 0.8%. Principal and interest payments are due each quarter over the duration of the facility ending in September 2029. The second facility totaling €5.2 million has been fully drawn and is payable over 15 years at an annual interest rate of 1.05%, which is fixed until April 2027. Principal and interest payments are due each month over the duration of the facility ending in January 2034. The third facility totaling €1.5 million, of which €0.9 million is drawn, is payable over 10 years at an annual interest rate of 1.2%. Principal and interest payments are due each month over the duration of the facility ending in May 2030.

 

At March 26, 2022, total outstanding borrowings under the Loan Facilities was $9.5 million with $1.0 million of the total outstanding balance being presented as current installments of long-term debt in our condensed consolidated balance sheets. At December 25, 2021, total outstanding borrowings under the Loan Facilities was $10.0 million with $1.0 million of the total outstanding balance being presented as current installments of long-term debt in our condensed consolidated balance sheets. The loans are denominated in Euros and, as a result, amounts disclosed herein will fluctuate because of changes in currency exchange rates. The fair value of the debt approximates the carrying value at March 26, 2022.

 

Lines of Credit

 

As a result of our acquisition of Kita, we assumed a series of revolving credit facilities with various financial institutions in Japan. The credit facilities renew monthly and provide Kita with access to working capital totaling up to 960 million Japanese Yen of which 250 million Japanese Yen is drawn. At March 26, 2022, total borrowings outstanding under the revolving lines of credit were $2.0 million. As these credit facility agreements renew monthly, they have been included in short-term borrowings in our condensed consolidated balance sheets.

 

The revolving lines of credit are denominated in Japanese Yen and, as a result, amounts disclosed herein will fluctuate because of changes in currency exchange rates.

 

Our wholly owned subsidiary in Switzerland has one available line of credit which provides borrowings of up to a total of 2.0 million Swiss Francs, a portion of which is reserved for tax guarantees. At March 26, 2022 and December 25, 2021 no amounts were outstanding under this line of credit.

 

 

4.

Restructuring Charges

 

Subsequent to the acquisition of Xcerra on October 1, 2018, during the fourth quarter of 2018, we began a strategic restructuring program designed to reposition our organization and improve our cost structure as part of our targeted integration plan regarding the recently acquired Xcerra (“Integration Program”). As part of the Integration Program we consolidated our global handler and contactor manufacturing operations and closed our manufacturing operations in Penang, Malaysia and Fontana, California in 2019.

 

In the second quarter of 2019, we entered into a social plan (“Plan”) with the German labor organization representing certain of the employees of our wholly owned subsidiary, Multitest elektronische Systeme GmbH, as part of our Integration Program. During the fourth quarter of 2020 we implemented a voluntary program and termination agreements with certain employees of our wholly owned subsidiary, Cohu GmbH. These programs collectively reduced headcount, enabled us to consolidate the facilities of our multiple operations located near Kolbermoor and Rosenheim, Germany, as well as transitioned certain manufacturing to other lower cost regions. The facility consolidations and reduction in force programs were implemented as part of a comprehensive review of our operations and were intended to streamline and reduce our operating cost structure and capitalize on acquisition synergies.

 

17

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 26, 2022

 

 

As a result of the activities described above, we recognized total pretax charges of $0.4 million and $1.7 million for the three months ended March 26, 2022, and March 27, 2021, respectively, that are within the scope of ASC 420, Exit or Disposal Cost Obligations (“ASC 420”). All costs of the Integration Program were, and will be, incurred by our Semiconductor Test & Inspection segment.

 

Costs associated with restructuring activities are presented in our condensed consolidated statements of income as restructuring charges, except for certain costs associated with inventory charges related to the decision to end manufacturing of certain of Xcerra’s semiconductor test handler products, which are classified within cost of sales. Other restructuring costs include expenses for professional fees associated with employee severance, impairments of fixed assets and building close expenses.

 

The following table summarizes the activity within the restructuring related accounts for the Integration Program during the three months ended March 26, 2022 and March 27, 2021 (in thousands):

 

 

Severance and

 

Other Exit

       
 

Other Payroll

 

Costs

 

Total

 

Balance, December 26, 2020

$ 5,826   $ -   $ 5,826  

Costs accrued

  952     388     1,340  

Amounts paid or charged

  (2,444 )   (388 )   (2,832 )

Impact of currency exchange

  (140 )   -     (140 )

Balance, March 27, 2021

$ 4,194   $ -   $ 4,194  
                   

Balance, December 25, 2021

$ 348   $ -   $ 348  

Costs accrued

  (14 )   590     576  

Amounts paid or charged

  (257 )   (169 )   (426 )

Impact of currency exchange

  (2 )   -     (2 )

Balance, March 26, 2022

$ 75   $ 421   $ 496  

 

At March 26, 2022, our total accrual for restructuring related items is reflected within current liabilities of our condensed consolidated balance sheets as these amounts are expected to be paid out within a year. The estimated costs associated with the employee severance and facility consolidation actions will be paid predominantly in cash.

 

 

5.

Financial Instruments Measured at Fair Value

 

Our cash, cash equivalents, and short-term investments consisted primarily of cash and other investment grade securities. We do not hold investment securities for trading purposes. All short-term investments in debt securities are classified as available-for-sale and recorded at fair value. Investment securities are exposed to market risk due to changes in interest rates and credit risk and we monitor credit risk and attempt to mitigate exposure by making high-quality investments and through investment diversification.

 

We assess whether unrealized loss positions on available-for-sale debt securities are due to credit-related factors. The credit-related portion of unrealized losses, and any subsequent improvements, are recorded in earnings through an allowance account. Unrealized gains and losses that are not due to credit-related factors are included in accumulated other comprehensive income (loss). Factors that could indicate an impairment exists include, but are not limited to earnings performance, changes in credit rating or adverse changes in the regulatory or economic environment of the asset. Gross realized gains and losses on sales of short-term investments are included in interest income. Realized gains and losses for the periods presented were not significant.

 

18

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 26, 2022

 

 

Investments that we have classified as short-term, by security type, are as follows (in thousands):

 

   

March 26, 2022

 
           

Gross

   

Gross

   

Estimated

 
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses (1)

   

Value

 

Corporate debt securities (2)

  $ 77,246     $ 1     $ 292     $ 76,955  

U.S. treasury securities

    8,713       -       68       8,645  

Bank certificates of deposit

    4,300       -       10       4,290  

Foreign government security

    884       -       -       884  

Asset-backed securities

    731       -       3       728  
    $ 91,874     $ 1     $ 373     $ 91,502  

 

   

December 25, 2021

 
            Gross    

Gross

   

Estimated

 
    Amortized    

Unrealized

   

Unrealized

   

Fair

 
    Cost    

Gains

   

Losses (1)

   

Value

 

Corporate debt securities (2)

  $ 84,060     $ 2     $ 31     $ 84,031  

U.S. treasury securities

    3,953       -       5       3,948  

Bank certificates of deposit

    800       -       -       800  

Foreign government security

    925       -       -       925  
    $ 89,738     $ 2     $ 36     $ 89,704  

 


 

(1)

As of March 26, 2022 and December 25, 2021, the cost and fair value of investments with loss positions were approximately $85.0 million and $57.0 million, respectively. We evaluated the nature of these investments, credit worthiness of the issuer and the duration of these impairments to determine if an other-than-temporary decline in fair value had occurred and concluded that these losses were temporary and we have the ability and intent to hold these investments to maturity.

 

 

(2)

Corporate debt securities include investments in financial and other corporate institutions. No single issuer represents a significant portion of the total corporate debt securities portfolio.

 

Effective maturities of short-term investments are as follows (in thousands):

 

   

March 26, 2022

   

December 25, 2021

 
   

Amortized

   

Estimated

   

Amortized

   

Estimated

 
   

Cost

   

Fair Value

   

Cost

   

Fair Value

 

Due in one year or less

  $ 75,633     $ 75,468     $ 83,429     $ 83,408  

Due after one year through three years

    16,241       16,034       6,309       6,296  
    $ 91,874     $ 91,502     $ 89,738     $ 89,704  

 

Accounting standards pertaining to fair value measurements establish a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. When available, we use quoted market prices to determine the fair value of our investments, and they are included in Level 1. When quoted market prices are unobservable, we use quotes from independent pricing vendors based on recent trading activity and other relevant information, and they are included in Level 2.

 

19

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 26, 2022

 

 

The following table summarizes, by major security type, our financial instruments that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy (in thousands):

 

   

Fair value measurements at March 26, 2022 using:

 
                           

Total estimated

 
   

Level 1

   

Level 2

   

Level 3

   

fair value

 

Cash

  $ 156,024     $ -     $ -     $ 156,024  

U.S. treasury securities

    -       8,645       -       8,645  

Corporate debt securities

    -       79,951       -       79,951  

Asset-backed securities

    -       728       -       728  

Money market funds

    -       108,048       -       108,048  

Bank certificates of deposit

    -       4,290       -       4,290  

Foreign government security

    -       884       -       884  
    $ 156,024     $ 202,546     $ -     $ 358,570  

 

   

Fair value measurements at December 25, 2021 using:

 
                           

Total estimated

 
   

Level 1

   

Level 2

   

Level 3

   

fair value

 

Cash

  $ 195,297     $ -     $ -     $ 195,297  

Corporate debt securities

    -       86,535       -       86,535  

U.S. treasury securities

    -       3,948       -       3,948  

Money market funds

    -       92,400       -       92,400  

Bank certificates of deposit

    -       800       -       800  

Foreign government security

    -       925       -       925  
    $ 195,297     $ 184,608     $ -     $ 379,905  

 

 

6.

Employee Stock Benefit Plans

 

Our 2005 Equity Incentive Plan (“2005 Plan”) is a broad-based, long-term retention program intended to attract, motivate, and retain talented employees as well as align stockholder and employee interests. Awards that may be granted under the program include, but are not limited to, non-qualified and incentive stock options, restricted stock units, and performance stock units. We settle employee stock option exercises, employee stock purchase plan purchases, and the vesting of restricted stock units, and performance stock units with newly issued common shares. At March 26, 2022, there were 943,106 shares available for future equity grants under the 2005 Plan.

 

Stock Options

 

Stock options may be granted to employees, consultants and non-employee directors to purchase a fixed number of shares of our common stock. The exercise prices of options granted are at least equal to the fair market value of our common stock on the dates of grant and options vest and become exercisable in annual increments that range from one to four years from the date of grant. Stock options granted under the 2005 Plan have a maximum contractual term of ten years. In the three months of fiscal 2022 we did not grant any stock options and we did not issue any shares of our common stock on the exercise of options that were granted previously.

 

At March 26, 2022, we had 12,442 stock options exercisable and outstanding. These options had a weighted-average exercise price of $9.44 per share, an aggregate intrinsic value of approximately $0.3 million and the weighted average remaining contractual term was approximately 1.0 year.

 

Restricted Stock Units

 

We grant restricted stock units (“RSUs”) to certain employees, consultants and directors. RSUs vest in annual increments that range from one to four years from the date of grant. Prior to vesting, RSUs do not have dividend equivalent rights, do not have voting rights and the shares underlying the RSUs are not considered issued and outstanding. New shares of our common stock will be issued on the date the RSUs vest net of the minimum statutory tax withholding requirements to be paid by us on behalf of our employees. As a result, the actual number of shares issued will be fewer than the actual number of RSUs outstanding at March 26, 2022.

 

20

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 26, 2022

 

 

In the first three months of fiscal 2022, we awarded 362,558 RSUs and issued 370,831 shares of our common stock on vesting of previously granted awards and 8,938 shares were forfeited. At March 26, 2022, we had 1,040,597 RSUs outstanding with an aggregate intrinsic value of approximately $32.3 million and the weighted average remaining vesting period was approximately 1.7 years.

 

Performance Stock Units

 

We also grant performance stock units (“PSUs”) to senior executives as a part of our long-term equity compensation program. The number of shares of common stock that will ultimately be issued to settle PSUs granted ranges from 0% to 200% of the number granted and is determined based on certain performance criteria over a three-year measurement period. The performance criteria for the PSUs are based on a combination of our annualized Total Shareholder Return (“TSR”) for the performance period and the relative performance of our TSR compared with the annualized TSR of certain peer companies or index for the performance period. PSUs granted vest 100% on the third anniversary of their grant, assuming achievement of the applicable performance criteria.

 

We estimated the fair value of the PSUs using a Monte Carlo simulation model on the date of grant. Compensation expense is recognized ratably over the explicit service period. New shares of our common stock will be issued on the date the PSUs vest net of the minimum statutory tax withholding requirements to be paid by us on behalf of our employees.

 

In the three months of fiscal 2022, we awarded 150,633 PSUs, we issued 55,009 shares of our common stock on vesting of previously granted awards and 68,975 shares were forfeited. At March 26, 2022, we had 411,139 PSUs outstanding with an aggregate intrinsic value of approximately $12.8 million and the weighted average remaining vesting period was approximately 1.9 years.

 

Employee Stock Purchase Plan

 

The Cohu, Inc. 1997 Employee Stock Purchase Plan (“ESPP”) provides for the issuance of shares of our common stock. Under the ESPP, eligible employees may purchase shares of Cohu common stock through payroll deductions at a price equal to 85 percent of the lower of the fair market value of Cohu common stock at the beginning or end of each 6-month purchase period, subject to certain limits. During the three months of fiscal 2022, no shares of our common stock were sold to our employees under the ESPP leaving 507,353 shares available for future issuance.

 

 

7.

Derivative Financial Instruments

 

Foreign Exchange Derivative Contracts

 

We operate and sell our products in various global markets and, as a result, we are exposed to changes in foreign currency exchange rates. In the fourth quarter of 2020, we began utilizing foreign currency forward contracts to offset future movements in foreign exchange rates that affect certain existing foreign currency denominated assets and liabilities. Under this program, our strategy is to have increases or decreases in our foreign currency exposures mitigated by gains or losses on the foreign currency forward contracts to mitigate the risks and volatility associated with foreign currency transaction gains or losses.

 

We do not use derivative financial instruments for speculative or trading purposes. For accounting purposes, our foreign currency forward contracts are not designated as hedging instruments and, accordingly, we record the fair value of these contracts as of the end of our reporting period in our condensed consolidated balance sheets with changes in fair value recorded within foreign transaction gain (loss) in our condensed consolidated statements of income for both realized and unrealized gains and losses. The cash flows associated with the foreign currency forward contracts are reported in net cash provided by operating activities in our condensed consolidated statements of cash flows.

 

The fair value of our foreign exchange derivative contracts was determined based on current foreign currency exchange rates and forward points. All our foreign exchange derivative contracts outstanding at March 26, 2022 will mature during the second quarter of fiscal 2022.

 

21

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 26, 2022

 

 

The following table provides information about our foreign currency forward contracts outstanding as of March 26, 2022 (in thousands):

 

     

Contract Amount

   

Contract Amount

 

Currency

Contract Position

 

(Local Currency)

   

(U.S. Dollars)

 

Euro

Buy

    35,115     $ 38,700  

Swiss Franc

Buy

    16,747       18,000  

Japanese Yen

Buy

    120,920       1,000  
              $ 57,700  

 

Our foreign currency contracts are classified within Level 2 of the fair value hierarchy as they are valued using pricing models that utilize observable market inputs. The fair values of foreign currency contracts outstanding at March 26, 2022 were immaterial.

 

The location and amount of losses related to non-designated derivative instruments in the condensed consolidated statements of income were as follows (in thousands):

 

     

Three months ended

 

Derivatives not designated

Location of loss

 

March 26,

   

March 27,

 

as hedging instruments

recognized on derivatives

 

2022

   

2021

 

Foreign exchange forward contracts

Foreign transaction loss

  $ (1,410 )   $ (1,515 )

 

 

8.

Equity

 

Common Stock Issuance

 

On March 8, 2021, we closed an underwritten public offering of 4,950,000 shares of our common stock at $41.00 per share. As part of the transaction, the underwriters were also granted a 30-day option to purchase up to an aggregate of 742,500 additional shares of common stock to cover over-allotments which was exercised in full on March 11, 2021. The offering, and the follow-on option to sell additional shares, resulted in net proceeds, after deducting underwriting discounts and commissions and offering expenses, of approximately $223.1 million. All of the shares were sold pursuant to an effective shelf registration statement previously filed with the SEC.

 

Share Repurchase Program

 

On October 28, 2021, we announced that our Board of Directors authorized a $70 million share repurchase program. This share repurchase program was effective as of November 2, 2021 and has no expiration date, and the timing of share repurchases and the number of shares of common stock to be repurchased will depend upon prevailing market conditions and other factors. Repurchases under this program will be made using our existing cash resources and may be commenced or suspended from time-to-time at our discretion without prior notice. Repurchases may be made in the open market, through 10b5-1 programs, or in privately negotiated transactions at prevailing market rates in accordance with federal securities laws. During the three months ended March 26, 2022, we repurchased 213,706 shares of our common stock for $6.4 million to be held as treasury stock. As of March 26, 2022, $56.3 million of shares of our common stock remains available for us to repurchase under our share repurchase program.

 

 

9.

Income Taxes

 

We used the estimated annual effective tax rate (“ETR”) expected to be applicable for the full fiscal year in computing our tax provision. The ETR on income for the three months ended March 26, 2022 was 22.6% and reflects the impact of both new tax regulations and previously-enacted tax regulations now impacting the Company for the first time. New regulations impacting the tax provision include final regulations on foreign tax credits which limit the Company’s ability to claim credits in certain jurisdictions. Previously enacted legislation now impacting the Company include the requirements to capitalize research expenditures and software development costs, and the Company now being subjected to base erosion and anti-abuse tax rules as we exceeded certain revenue thresholds. These impacts were offset by a partial release of our domestic valuation allowance on deferred tax assets to offset tax liabilities on current year earnings and excess benefits relating to stock-based compensation. The ETR on income for the three months ended March 27, 2021 was 11.5% which as not impacted by the aforementioned tax regulations, reflected a partial release of our domestic valuation allowance on deferred tax assets to offset tax liabilities on current year earnings and excess benefits relating to stock-based compensation.

 

22

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 26, 2022

 

 

We conduct business globally and as a result, Cohu or one or more of its subsidiaries files income tax returns in the US and various state and foreign jurisdictions. In the normal course of business, we are subject to examinations by taxing authorities throughout the world and are currently under examination in Germany and Malaysia. We believe our financial statement accruals for income taxes are appropriate.

 

In accordance with the disclosure requirements as described in ASC Topic 740, Income Taxes, we have classified unrecognized tax benefits as non-current income tax liabilities, or a reduction in non-current deferred tax assets, unless expected to be paid within one year. Our continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. There were no material changes to our unrecognized tax benefits and interest accrued related to unrecognized tax benefits during the three months ended March 26, 2022 and March 27, 2021.

 

 

10.

Segment and Geographic Information

 

The summary below presents our reportable segments, Semiconductor Test & Inspection and PCB Test, for the three-month period ended March 27, 2021. Subsequent to the sale of our PCB Test business on June 24, 2021, we have one reportable segment, Semiconductor Test & Inspection. All amounts presented in our condensed consolidated balance sheet as of March 26, 2022 and our condensed consolidated statement of income for the three months ended March 26, 2022 represents the financial position and results of our remaining reportable segment.

 

Financial information by reportable segment is as follows (in thousands):

 

   

Three Months

Ended

 
   

March 27,

 

Net sales by segment:

 

2021

 

Semiconductor Test & Inspection

  $ 212,406  

PCB Test

    13,082  

Total consolidated net sales for reportable segments

  $ 225,488  

Segment profit before tax:

       

Semiconductor Test & Inspection

  $ 36,627  

PCB Test

    2,429  

Profit for reportable segments

    39,056  

Other unallocated amounts:

       

Corporate expenses

    (3,473 )

Loss on sale of PCB Test business

    (115 )

Interest expense

    (2,575 )

Interest income

    50  

Loss on extinguishment of debt

    (1,761 )

Income from operations before taxes

  $ 31,182  

 

For revenues by geography and information on customer concentration, see Note 1, “Summary of Significant Accounting Policies”.

 

 

11.

Leases

 

We lease certain of our facilities, equipment and vehicles under non-cancelable operating and finance leases. Leases with initial terms of 12 months or less are not recorded on the condensed consolidated balance sheet, but we recognize those lease payments in the condensed consolidated statements of income on a straight-line basis over the lease term. Lease and non-lease components are included in the calculation of the ROU asset and lease liabilities.

 

Our leases have remaining lease terms of 1 year to 36 years, some of which include one or more options to extend the leases for up to 25 years. Our lease term includes renewal terms when we are reasonably certain we will exercise the renewal options. We sublease certain leased assets to third parties, mainly as a result of unused space in our facilities.

 

23

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 26, 2022

 

 

Supplemental balance sheet information related to leases was as follows:

 

(in thousands)

Classification