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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 June 27, 2020

 

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 

 

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

 

 

 

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 July 28, 2020 the Registrant had 41,862,920 shares of its $1.00 par value common stock outstanding.

 



 

 

 

 

 

COHU, INC.

INDEX

FORM 10-Q

JUNE 27, 2020

 

Part I

Financial Information

Page Number

 

 

 

Item 1.

Financial Statements:

 

 

 

 

 

Condensed Consolidated Balance Sheets June 27, 2020 (unaudited) and December 28, 2019

3

 

 

 

 

Condensed Consolidated Statements of Operations (unaudited) Three and Six Months Ended June 27, 2020 and June 29, 2019

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss (unaudited) Three and Six Months Ended June 27, 2020 and June 29, 2019

5

 

 

 

 

Condensed Consolidated Statements of Stockholder’s Equity (unaudited) Three and Six Months Ended June 27, 2020 and June 29, 2019

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows (unaudited) Six Months Ended June 27, 2020 and June 29, 2019

7

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

8

 

 

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

30

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

41

 

 

 

Item 4.

Controls and Procedures

42

 

 

 

Part II

Other Information

 

 

 

 

Item 1.

Legal Proceedings

43

 

 

 

Item 1A.

Risk Factors

43

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

57

 

 

 

Item 3.

Defaults Upon Senior Securities

57

 

 

 

Item 4.

Mine Safety Disclosures

57

 

 

 

Item 5.

Other Information

57

 

 

 

Item 6.

Exhibits

58

 

 

 

Signatures

59

 

 

 

 

Item 1.

COHU, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

 

  

June 27,

  

December 28,

 
  

2020

  2019 * 
  (Unaudited)     

ASSETS

       

Current assets:

        

Cash and cash equivalents

 $162,728  $155,194 

Short-term investments

  920   904 

Accounts receivable, net

  122,503   127,921 

Inventories

  141,811   130,706 

Assets held for sale

  6,905   827 

Prepaid expenses

  20,430   17,483 

Other current assets

  953   3,158 

Current assets of discontinued operations (Note 10)

  -   3,503 

Total current assets

  456,250   439,696 
         

Property, plant and equipment, net

  65,805   70,912 

Goodwill

  238,950   238,669 

Intangible assets, net

  252,208   275,019 

Other assets

  21,901   20,030 

Operating lease right of use assets

  31,469   33,269 

Noncurrent assets of discontinued operations (Note 10)

  -   115 
  $1,066,583  $1,077,710 
         

LIABILITIES AND STOCKHOLDERS' EQUITY

        

Current liabilities:

        

Short-term borrowings

 $4,665  $3,195 

Current installments of long-term debt

  3,254   3,322 

Accounts payable

  60,012   48,697 

Customer advances

  17,748   12,160 

Accrued compensation and benefits

  25,384   23,741 

Deferred profit

  9,614   7,645 

Accrued warranty

  5,814   5,893 

Income taxes payable

  5,571   3,894 

Other accrued liabilities

  26,979   39,739 

Current liabilities of discontinued operations (Note 10)

  -   599 

Total current liabilities

  159,041   148,885 
         

Accrued retirement benefits

  22,506   21,930 

Deferred income taxes

  27,616   31,310 

Noncurrent income tax liabilities

  6,814   8,438 

Long-term debt

  348,036   346,518 

Long-term lease liabilities

  27,432   28,877 

Other accrued liabilities

  8,380   8,656 

Noncurrent liabilities of discontinued operations (Note 10)

  -   24 
         

Stockholders' equity:

        

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

  -   - 

Common stock, $1 par value; 60,000 shares authorized, 41,862 shares issued and outstanding in 2020 and 41,395 shares in 2019

  41,862   41,395 

Paid-in capital

  439,943   433,190 

Retained earnings

  18,015   42,517 

Accumulated other comprehensive loss

  (33,062)  (34,030)

Total stockholders’ equity

  466,758   483,072 
  $1,066,583  $1,077,710 

 

* Derived from December 28, 2019 audited financial statements

 

The accompanying notes are an integral part of these statements.

 

 

3

 

 

COHU, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share amounts)

 

  

Three Months Ended

  

Six Months Ended

 
  

June 27,

  

June 29,

  

June 27,

  

June 29,

 
  

2020

  

2019

  

2020

  

2019

 
                 

Net sales

 $144,084  $150,011  $283,005  $297,820 

Cost and expenses:

                

Cost of sales (1)

  83,127   87,605   165,964   180,999 

Research and development

  20,424   22,108   42,892   44,841 

Selling, general and administrative

  30,949   36,428   64,301   74,714 

Amortization of purchased intangible assets

  9,527   9,987   19,065   20,006 

Restructuring charges

  585   8,545   988   9,906 

Impairment charges

  -   -   3,949   - 
   144,612   164,673   297,159   330,466 

Loss from operations

  (528)  (14,662)  (14,154)  (32,646)

Other (expense) income:

                

Interest expense

  (3,456)  (5,282)  (7,883)  (10,789)

Interest income

  21   191   168   413 

Foreign transaction loss

  (640)  (546)  (1,044)  (328)

Loss from continuing operations before taxes

  (4,603)  (20,299)  (22,913)  (43,350)

Income tax provision (benefit)

  137   (916)  (855)  (1,116)

Loss from continuing operations

  (4,740)  (19,383)  (22,058)  (42,234)

Income from discontinued operations

  -   24   42   188 

Net loss

 $(4,740) $(19,359) $(22,016) $(42,046)

Net loss attributable to noncontrolling interest

 $-  $(36) $-  $(80)

Net loss attributable to Cohu

 $(4,740) $(19,323) $(22,016) $(41,966)
                 

Loss per share:

                

Basic:

                

Loss from continuing operations before noncontrolling interest

 $(0.11) $(0.47) $(0.53) $(1.03)

Income from discontinued operations

  -   0.00   0.00   0.01 

Net loss attributable to noncontrolling interest

  -   (0.00)  -   (0.00)

Net loss attributable to Cohu

 $(0.11) $(0.47) $(0.53) $(1.02)
                 

Diluted:

                

Loss from continuing operations before noncontrolling interest

 $(0.11) $(0.47) $(0.53) $(1.03)

Income from discontinued operations

  -   0.00   0.00   0.01 

Net loss attributable to noncontrolling interest

  -   (0.00)  -   (0.00)

Net loss attributable to Cohu

 $(0.11) $(0.47) $(0.53) $(1.02)
                 

Weighted average shares used in computing loss per share:

                

Basic

  41,844   41,125   41,673   40,999 

Diluted

  41,844   41,125   41,673   40,999 
                 

Cash dividends declared per share

 $-  $0.06  $0.06  $0.12 

 

(1)

Excludes amortization of $7,256 and $7,625 for the three months ended June 27, 2020, and June 29, 2019, respectively, and $14,522 and $15,266 for the six months ended June 27, 2020, and June 29, 2019, respectively.  

 

The accompanying notes are an integral part of these statements.

 

4

 

 

COHU, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

(in thousands)

 

  

Three Months Ended

  

Six Months Ended

 
  

June 27,

  

June 29,

  

June 27,

  

June 29,

 
  

2020

  

2019

  

2020

  

2019

 
                 

Net loss

 $(4,740) $(19,359) $(22,016) $(42,046)

Net loss attributable to noncontrolling interest

  -   (36)  -   (80)

Net loss attributable to Cohu

  (4,740)  (19,323)  (22,016)  (41,966)

Other comprehensive income (loss), net of tax:

                

Foreign currency translation adjustments

  1,897   3,684   968   (1,578)

Adjustments related to postretirement benefits

  -   (39)  -   435 

Other comprehensive income (loss), net of tax

  1,897   3,645   968   (1,143)

Other comprehensive loss attributable to noncontrolling interest

  -   -   -   (4)

Other comprehensive income (loss) attributable to Cohu

  1,897   3,645   968   (1,139)
                 

Comprehensive loss

  (2,843)  (15,714)  (21,048)  (43,189)

Comprehensive loss attributable to noncontrolling interest

  -   (36)  -   (84)

Comprehensive loss attributable to Cohu

 $(2,843) $(15,678) $(21,048) $(43,105)

 

The accompanying notes are an integral part of these statements.

 

5

 

 

COHU, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

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

 

              

Accumulated

         
  

Common

          

other

         
  

stock

  

Paid-in

  

Retained

  

comprehensive

  

Noncontrolling

     

Three Months Ended June 27, 2020

 

$1 par value

  

capital

  

earnings

  

loss

  

interest

  

Total

 

Balance at March 28, 2020

 $41,686  $435,402  $22,755  $(34,959) $-  $464,884 

Net loss

  -   -   (4,740)  -   -   (4,740)

Changes in cumulative translation adjustment

  -   -   -   1,897   -   1,897 

Shares issued under ESPP

  114   1,488   -   -   -   1,602 

Shares issued for restricted stock units vested

  84   (84)  -   -   -   - 

Repurchase and retirement of stock

  (22)  (266)  -   -   -   (288)

Share-based compensation expense

  -   3,403   -   -   -   3,403 

Balance at June 27, 2020

 $41,862  $439,943  $18,015  $(33,062) $-  $466,758 
                         

Six Months Ended June 27, 2020

                        

Balance at December 28, 2019

 $41,395  $433,190  $42,517  $(34,030) $-  $483,072 

Net loss

  -   -   (22,016)  -   -   (22,016)

Changes in cumulative translation adjustment

  -   -   -   968   -   968 

Cash dividends - $0.06 per share

  -   -   (2,486)  -   -   (2,486)

Exercise of stock options

  22   267   -   -   -   289 

Shares issued under ESPP

  114   1,488   -   -   -   1,602 

Shares issued for restricted stock units vested

  487   (487)  -   -   -   - 

Repurchase and retirement of stock

  (156)  (1,529)  -   -   -   (1,685)

Share-based compensation expense

  -   7,014   -   -   -   7,014 

Balance at June 27, 2020

 $41,862  $439,943  $18,015  $(33,062) $-  $466,758 
                         
                         

Three Months Ended June 29, 2019

                        

Balance at March 30, 2019

 $41,015  $421,381  $96,938  $(30,664) $(356) $528,314 

Net loss

  -   -   (19,359)  -   -   (19,359)

Changes in cumulative translation adjustment

  -   -   -   3,684   -   3,684 

Adjustments related to postretirement benefits, net of tax

  -   -   -   (39)  -   (39)

Cash dividends - $0.06 per share

  -   -   (2,464)  -   -   (2,464)

Exercise of stock options

  5   39   -   -   -   44 

Shares issued under ESPP

  64   743   -   -   -   807 

Shares issued for restricted stock units vested

  29   (29)  -   -   -   - 

Repurchase and retirement of stock

  (13)  (187)  -   -   -   (200)

Share-based compensation expense

  -   3,662   -   -   -   3,662 

Balance at June 29, 2019

 $41,100  $425,609  $75,115  $(27,019) $(356) $514,449 
                         

Six Months Ended June 29, 2019

                        

Balance at December 29, 2018

 $40,763  $419,690  $111,670  $(25,880) $(299) $545,944 

Cumulative effect of accounting change(a)

  -   -   10,352   -   -   10,352 

Net loss

  -   -   (42,046)  -   -   (42,046)

Changes in cumulative translation adjustment

  -   -   -   (1,574)  (4)  (1,578)

Adjustments related to postretirement benefits, net of tax

  -   -   -   435   -   435 

Cash dividends - $0.12 per share

  -   -   (4,914)  -   -   (4,914)

Exercise of stock options

  15   107   -   -   -   122 

Shares issued under ESPP

  64   743   -   -   -   807 

Shares issued for restricted stock units vested

  394   (394)  -   -   -   - 

Repurchase and retirement of stock

  (136)  (1,892)  -   -   -   (2,028)

Noncontrolling interest

  -   -   53   -   (53)  - 

Share-based compensation expense

  -   7,355   -   -   -   7,355 

Balance at June 29, 2019

 $41,100  $425,609  $75,115  $(27,019) $(356) $514,449 

 

 

(a)

Cumulative effect of accounting change relates to our adoption of ASU 2016-02. Please refer to Note 1 of the Condensed Consolidated Financial Statements for further detail on the adoption of this accounting standard.

 

The accompanying notes are an integral part of these statements.

 

6

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

  

Six Months Ended

 
  

June 27,

  

June 29,

 
  

2020

  

2019

 

Cash flows from operating activities:

        

Net loss attributable to Cohu

 $(22,016) $(41,966)

Net loss attributable to noncontrolling interest

  -   (80)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

        

Gain on disposal of discontinued operation

  (35)  - 

Impairment charges related to indefinite lived intangibles

  3,949   - 

Loss on disposal of assets

  112   237 

Depreciation and amortization

  26,038   30,143 

Share-based compensation expense

  7,014   7,355 

Amortization of inventory step-up and inventory related charges

  1,675   5,245 

Deferred income taxes

  (4,855)  (7,460)

Increase in accrued retiree medical benefits

  452   443 

Changes in other accrued liabilities

  (291)  2,693 

Changes in other assets

  1,246   (971)

Amortization of cloud-based software implementation costs

  513   - 

Interest capitalized associated with cloud computing implementation

  (76)  - 

Amortization of debt discounts and issuance costs

  592   546 

Changes in current assets and liabilities:

        

Customer advances

  5,588   (544)

Accounts receivable

  6,439   14,746 

Inventories

  (13,130)  (2,499)

Other current assets

  (359)  (8,609)

Accounts payable

  6,788   4,019 

Deferred profit

  1,934   1,266 

Income taxes payable

  (181)  (4,097)

Accrued compensation, warranty and other liabilities

  (7,994)  (5,240)

Operating lease right-of-use assets

  3,517   - 

Current and long-term operating lease liabilities

  (3,631)  - 

Net cash provided by (used in) operating activities

  13,289   (4,773)

Cash flows from investing activities:

        

Net cash received from sale of fixtures services business

  2,975   - 

Cash received from sale of fixed assets

  2,525   811 

Purchases of property, plant and equipment

  (7,963)  (8,397)

Net cash used in investing activities

  (2,463)  (7,586)

Cash flows from financing activities:

        

Cash dividends paid

  (4,971)  (4,893)

Issuance (repurchases) of common stock, net

  206   (1,099)

Proceeds from revolving line of credit and construction loans

  4,345   - 

Repayments of long-term debt

  (2,162)  (2,611)

Net cash used in financing activities

  (2,582)  (8,603)

Effect of exchange rate changes on cash and cash equivalents

  (1,446)  (195)

Net increase (decrease) in cash and cash equivalents

  6,798   (21,157)

Cash and cash equivalents including discontinued operations at beginning of period

  155,930   164,921 

Cash and cash equivalents including discontinued operations at end of period

  162,728   143,764 

Cash held by discontinued operations at end of period

  -   (750)

Cash and cash equivalents from continuing operations at end of period

 $162,728  $143,014 

Supplemental disclosure of cash flow information:

        

Cash paid for income taxes

 $2,103  $10,690 

Inventory capitalized as property, plant and equipment

 $339  $195 

Dividends declared but not yet paid

 $-  $2,466 

Property, plant and equipment purchases included in accounts payable

 $2,327  $938 

Capitalized cloud computing service costs included in accounts payable

 $2,265  $1,477 

Cash paid for interest

 $10,842  $10,088 

 

The accompanying notes are an integral part of these statements.

 

7

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

June 27, 2020

 

 

 

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. The condensed consolidated balance sheet at December 28, 2019, has been derived from our audited financial statements at that date. The interim condensed consolidated financial statements as of June 27, 2020, (also referred to as “the second quarter of fiscal 2020” and “the first six months of fiscal 2020”) and June 29, 2019, (also referred to as “the second quarter of fiscal 2019” and “the first six months of fiscal 2019”) 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. Both the three- and six-month periods ended June 27, 2020 and June 29, 2019, were comprised of 13 and 26 weeks, respectively.

 

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 28, 2019, which are included in our 2019 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”.

 

On December 28, 2019, we divested our entire 20% interest in ALBS Solutions Sdn Bhd (“ALBS”), our only consolidated variable interest entity (VIE). As a result of the divestment, we no longer had a controlling interest in ALBS and no longer consolidate ALBS as of that date.

 

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

 

Reclassifications

 

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on our reported results of operations, stockholder’s equity or cash flows.

 

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.

 

We adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, on December 29, 2019 the first day of our fiscal 2020. The ASU required a cumulative-effect adjustment to the statement of financial position as of the date of adoption. Periods prior to the adoption that are presented for comparative purposes are not adjusted. Based on our analysis of historical and anticipated collections of trade receivables the impact of adoption of Topic 326 was insignificant. Our trade accounts receivable are presented net of allowance for credit losses, which were insignificant at June 27, 2020 and December 28, 2019. Our customers include semiconductor manufacturers and semiconductor test subcontractors throughout many areas of the world. While we believe that our allowance for credit losses is adequate and represents our best estimate at June 27, 2020, we will continue to monitor customer liquidity and other economic conditions, which may result in changes to our estimates regarding collectability.

 

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.

 

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

June 27, 2020

 

Inventories by category were as follows (in thousands):

 

  

June 27,

  

December 28,

 
  

2020

  

2019

 

Raw materials and purchased parts

 $78,317  $69,665 

Work in process

  45,978   46,591 

Finished goods

  17,516   14,450 

Total inventories

 $141,811  $130,706 

 

Assets Held for Sale

 

As part of our previously announced Xcerra integration plan we are implementing certain facility consolidation actions. We expect to complete the sale of our facility located in Rosenheim, Germany in the third quarter of 2020. As a result, this facility is being presented as held for sale at June 27, 2020. See Note 4, “Restructuring Charges” for additional information on this program.

 

In June 2020, we completed the sale of our facility in Penang Malaysia which resulted in a gain of $27,000 which is included in selling, general and administrative costs in our condensed consolidated statements of operations.

 

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):

 

  

June 27,

  

December 28,

 
  

2020

  

2019

 

Land and land improvements

 $8,724  $11,659 

Buildings and building improvements

  42,467   41,474 

Machinery and equipment

  59,598   61,006 
   110,789   114,139 

Less accumulated depreciation and amortization

  (44,984)  (43,227)

Property, plant and equipment, net

 $65,805  $70,912 

 

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 four identified operating segments are: Test Handler Group (THG), Semiconductor Tester Group (STG), Interface Solutions Group (ISG) and PCB Test Group (PTG). 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 two segments, Semiconductor Test and Inspection Equipment (“Semiconductor Test & Inspection”) and PCB Test Equipment (“PCB Test”).

 

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

June 27, 2020

 

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

 

We evaluate goodwill and other indefinite-lived intangible assets, which are solely comprised of in-process research and development (“IPR&D”), 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 or asset, in the case of in-process research and development. 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.

 

We conduct our annual impairment test as of October 1st of each year, and have determined there was no impairment as of October 1, 2019 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. While a decline in stock price and market capitalization is not specifically cited as an impairment indicator, a company’s stock price and market capitalization should be considered in determining whether it is more likely than not that the fair value of a reporting unit is less than its book value. The financial and credit market volatility caused by the COVID-19 pandemic directly impacts our fair value measurement through our stock price that we use to determine our market capitalization. During times of volatility, significant judgment must be applied to determine whether stock price changes are a short-term swing or a longer-term trend.

 

During the first quarter of 2020, the volatility in Cohu’s stock price, the global economic downturn and business interruptions associated with the COVID-19 pandemic led us to determine that there was a triggering event related to goodwill within all of our identified reporting units and our indefinite-lived intangible assets. We performed an interim assessment as of March 28, 2020 and determined that the fair values of our identified reporting units all exceeded their carrying values and we have concluded there were no impairment of goodwill within our reporting units. Anticipated delays in customer adoption of certain new products under development as a result of the COVID-19 pandemic, changes to future project roadmap and an increase in the discount rate used in the developing our interim fair value estimate resulted in a $3.9 million impairment to IPR&D recorded during the first quarter as the carrying value exceeded fair value. During the second quarter of 2020, we considered changes in market volatility, the improvement in Cohu’s stock price and our actual and expected operating results as compared to the forecasts utilized during our first quarter test noting no events or conditions that suggested a triggering event had occurred.

 

The forecasts utilized in the first quarter interim impairment test were based on known facts and circumstances. We evaluate and consider recent events and uncertain items, as well as related potential implications, as part of our annual and interim assessments and incorporate them into the analyses as appropriate. These facts and circumstances are subject to change and may not be the same as future analyses. In a future period, should we again determine that an interim goodwill and indefinite-lived intangible asset impairment review is required we may be required to book additional impairment charges which could have a significant negative impact on our results of operations.

 

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. We evaluated the expected undiscounted cashflows of these assets as of March 28, 2020 and determined there was no impairment. During the second quarter of 2020, no events or conditions occurred suggesting an impairment in our 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 relative standalone selling price and recognized on a straight-line basis over the contract period. Costs associated with our extended warranty contracts are expensed as incurred.

 

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

June 27, 2020

 

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.

 

Debt Issuance Costs

 

We capitalized costs related to the issuance of debt. Debt issuance costs directly related to our Term B Loan 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 $0.3 million and $0.6 million for the three and six months ended June 27, 2020, respectively. Amortization related to deferred debt issuance costs and original discount costs was $0.3 million and $0.5 million for the three and six months ended June 29, 2019, 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 and six months ended June 27, 2020, we recognized foreign exchange losses of $0.6 million and $1.0 million, respectively, in our condensed consolidated statements of operations. During the three and six months ended June 29, 2019, we recognized foreign exchange losses of $0.5 million and $0.3 million, respectively, in our condensed consolidated statements of operations. 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 foreign currency translation adjustments resulting from the translation of the financial statements are included as a separate component of stockholders’ equity.

 

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.

 

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

June 27, 2020

 

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

 

  

Three Months Ended

  

Six Months Ended

 
  

June 27,

  

June 29,

  

June 27,

  

June 29,

 
  

2020

  

2019

  

2020

  

2019

 

Cost of sales

 $211  $208  $423  $333 

Research and development

  828   776   1,661   1,414 

Selling, general and administrative

  2,364   2,678   4,930   5,608 

Total share-based compensation

  3,403   3,662   7,014   7,355 

Income tax benefit

  (223)  (79)  (395)  (359)

Total share-based compensation, net

 $3,180  $3,583  $6,619  $6,996 

 

Income (Loss) Per Share

 

Basic income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the reporting period. Diluted income (loss) 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 (loss) 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 and six months ended June 27, 2020, stock options and awards to issue approximately 286,000 and 172,000 shares of common stock were excluded from the computation, respectively. For the three and six months ended June 29, 2019, stock options and awards to issue approximately 610,000 and 502,000 shares of common stock were excluded from the computation, respectively.

 

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

 

  

Three Months Ended

  

Six Months Ended

 
  

June 27,

  

June 29,

  

June 27,

  

June 29,

 
  

2020

  

2019

  

2020

  

2019

 

Weighted average common shares

  41,844   41,125   41,673   40,999 

Effect of dilutive securities

  -   -   -   - 
   41,844   41,125   41,673   40,999 

 

Cohu has utilized the “control number” concept in the computation of diluted earnings per share to determine whether potential common stock instruments are dilutive. The control number used is income from continuing operations. The control number concept requires that the same number of potentially dilutive securities applied in computing diluted earnings per share from continuing operations be applied to all other categories of income or loss, regardless of their anti-dilutive effect on such categories.

 

Leases

 

We adopted ASU 2016-02, Leases (Topic 842), as of December 30, 2018, using the optional transition method which allowed us to record existing leases at adoption and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We had previously recorded a sale and operating leaseback transaction in accordance with Topic 840 and as a result of the adoption of the new standard, recognized $10.2 million of deferred gain as an adjustment to retained earnings. In addition, we had previously recognized assets and liabilities related to a build-to-suit designation under Topic 840 and, as a result of the adoption of the new standard, derecognized assets and liabilities of $0.5 million and $0.6 million, respectively, with the difference recorded as an adjustment to retained earnings. The difference between the additional lease assets and lease liabilities, net of the deferred tax impact, was recorded as an adjustment to retained earnings.

 

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.

 

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

June 27, 2020

 

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 operations 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.

 

Unsatisfied performance obligations primarily represent contracts for products with future delivery dates. At June 27, 2020, we have $9.2 million of revenue expected to be recognized in the future related to performance obligations that are 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.

 

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

June 27, 2020

 

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 June 27, 2020, we had deferred revenue totaling approximately $18.6 million, current deferred profit of $9.6 million and deferred profit expected to be recognized after one year included in noncurrent other accrued liabilities of $6.9 million. At December 28, 2019, we had deferred revenue totaling approximately $16.1 million, current deferred profit of $7.6 million and deferred profit expected to be recognized after one year included in noncurrent other accrued liabilities of $7.2 million.

 

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

 

  

Three Months Ended

  

Six Months Ended

 

Disaggregated Net Sales

 

June 27, 2020

  

June 29, 2019

  

June 27, 2020

  

June 29, 2019

 

Systems:

                

Semiconductor Test & Inspection

 $74,011  $76,155  $144,550  $156,095 

PCB Test

  8,109   8,407   14,949   15,379 

Non-systems:

                

Semiconductor Test & Inspection

  57,417   61,424   114,891   118,177 

PCB Test

  4,547   4,025   8,615   8,169 
  $144,084  $150,011  $283,005  $297,820 

 

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

 

  

Three Months Ended

  

Six Months Ended

 

Disaggregated Net Sales

 

June 27, 2020

  

June 29, 2019

  

June 27, 2020

  

June 29, 2019

 

China

 $31,133  $32,738  $61,944  $56,289 

United States

  20,550   19,408   39,628   36,509 

Malaysia

  11,842   16,993   27,016   34,707 

Taiwan

  22,490   17,202   36,371   32,172 

Philippines

  13,288   11,395   23,310   25,936 

Rest of the World

  44,781   52,275   94,736   112,207 

Total net sales

 $144,084  $150,011  $283,005  $297,820 

 

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

June 27, 2020

 

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

  

Six Months Ended

 
  

June 27,

  

June 29,

  

June 27,

  

June 29,

 
  

2020

  

2019

  

2020