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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 September 26, 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)

 

Delaware95-1934119 
(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 October 28, 2020 the Registrant had 41,965,802 shares of its $1.00 par value common stock outstanding.



 

 

 

 

COHU, INC.

INDEX

FORM 10-Q

SEPTEMBER 26, 2020

 

 

 

Part I  Financial Information Page Number
     

Item 1.

Financial Statements:

 
     

 

Condensed Consolidated Balance Sheets September 26, 2020 (unaudited) and December 28, 2019

3
     

 

Condensed Consolidated Statements of Operations (unaudited) Three and Nine Months Ended September 26, 2020 and September 28, 2019

4
     

 

Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) Three and Nine Months Ended September 26, 2020 and September 28, 2019

5
     

 

Condensed Consolidated Statements of Stockholder’s Equity (unaudited) Three and Nine Months Ended September 26, 2020 and September 28, 2019

6
     

 

Condensed Consolidated Statements of Cash Flows (unaudited) Nine Months Ended September 26, 2020 and September 28, 2019

7
     

 

Notes to Unaudited Condensed Consolidated Financial Statements

8
     

Item 2.

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

28
     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

39

     

Item 4.

Controls and Procedures

40

     

Part II

Other Information

 
     

Item 1.

Legal Proceedings

41

     

Item 1A.

Risk Factors

41

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

55

     

Item 3.

Defaults Upon Senior Securities

55

     

Item 4.

Mine Safety Disclosures

55

     

Item 5.

Other Information

55

     

Item 6.

Exhibits

56

     

Signatures

 

57

 

 

 

 

 

Item 1.

COHU, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

 

  

September 26,

  

December 28,

 
  

2020

   2019 * 

 

 

(Unaudited)

     
ASSETS        

Current assets:

        

Cash and cash equivalents

 $169,926  $155,194 

Short-term investments

  949   904 

Accounts receivable, net

  116,805   127,921 

Inventories

  137,879   130,706 

Assets held for sale

  -   827 

Prepaid expenses

  17,986   17,483 

Other current assets

  1,273   3,158 

Current assets of discontinued operations (Note 10)

  -   3,503 

Total current assets

  444,818   439,696 
         

Property, plant and equipment, net

  64,546   70,912 

Goodwill

  244,341   238,669 

Intangible assets, net

  238,832   275,019 

Other assets

  23,717   20,030 

Operating lease right of use assets

  30,099   33,269 

Noncurrent assets of discontinued operations (Note 10)

  -   115 
  $1,046,353  $1,077,710 
         

LIABILITIES AND STOCKHOLDERS' EQUITY

        

Current liabilities:

        

Short-term borrowings

 $5,209  $3,195 

Current installments of long-term debt

  2,990   3,322 

Accounts payable

  49,366   48,697 

Customer advances

  11,116   12,160 

Accrued compensation and benefits

  32,524   23,741 

Deferred profit

  11,859   7,645 

Accrued warranty

  5,674   5,893 

Income taxes payable

  4,795   3,894 

Other accrued liabilities

  23,370   39,739 

Current liabilities of discontinued operations (Note 10)

  -   599 

Total current liabilities

  146,903   148,885 
         

Accrued retirement benefits

  22,909   21,930 

Deferred income taxes

  28,842   31,310 

Noncurrent income tax liabilities

  6,966   8,438 

Long-term debt

  331,469   346,518 

Long-term lease liabilities

  26,532   28,877 

Other accrued liabilities

  8,123   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, 41,962 shares issued and outstanding in 2020 and 41,395 shares in 2019

  41,962   41,395 

Paid-in capital

  442,648   433,190 

Retained earnings

  11,369   42,517 

Accumulated other comprehensive loss

  (21,370)  (34,030)

Total stockholders’ equity

  474,609   483,072 
  $1,046,353  $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

  

Nine Months Ended

 
  

September 26,

  

September 28,

  

September 26,

  

September 28,

 
  

2020

  

2019

  

2020

  

2019

 
                 

Net sales

 $150,647  $143,498  $433,652  $441,318 

Cost and expenses:

                

Cost of sales (1)

  87,147   84,565   253,111   265,564 

Research and development

  20,497   20,483   63,389   65,324 

Selling, general and administrative

  31,336   33,690   95,664   108,404 

Amortization of purchased intangible assets

  9,783   9,969   28,848   29,975 

Restructuring charges

  412   814   1,400   10,720 

Impairment charges

  7,300   -   11,249   - 

Gain on sale of facilities

  (4,468)  -   (4,495)  - 
   152,007   149,521   449,166   479,987 

Loss from operations

  (1,360)  (6,023)  (15,514)  (38,669)

Other (expense) income:

                

Interest expense

  (3,021)  (5,000)  (10,904)  (15,789)

Interest income

  42   190   210   603 

Foreign transaction gain (loss)

  (1,484)  1,630   (2,528)  1,302 

Gain on extinguishment of debt

  293   -   293   - 

Loss from continuing operations before taxes

  (5,530)  (9,203)  (28,443)  (52,553)

Income tax provision

  1,116   1,277   261   161 

Loss from continuing operations

  (6,646)  (10,480)  (28,704)  (52,714)

Income from discontinued operations

  -   154   42   342 

Net loss

 $(6,646) $(10,326) $(28,662) $(52,372)

Net income attributable to noncontrolling interest

 $-  $142  $-  $62 

Net loss attributable to Cohu

 $(6,646) $(10,468) $(28,662) $(52,434)
                 

Loss per share:

                

Basic:

                

Loss from continuing operations before noncontrolling interest

 $(0.16) $(0.25) $(0.69) $(1.28)

Income from discontinued operations

  -   0.00   0.00   0.00 

Net income attributable to noncontrolling interest

  -   0.00   -   0.00 

Net loss attributable to Cohu

 $(0.16) $(0.25) $(0.69) $(1.28)
                 

Diluted:

                

Loss from continuing operations before noncontrolling interest

 $(0.16) $(0.25) $(0.69) $(1.28)

Income from discontinued operations

  -   0.00   0.00   0.00 

Net income attributable to noncontrolling interest

  -   0.00   -   0.00 

Net loss attributable to Cohu

 $(0.16) $(0.25) $(0.69) $(1.28)
                 

Weighted average shares used in computing loss per share:

                

Basic

  41,947   41,229   41,764   41,075 

Diluted

  41,947   41,229   41,764   41,075 

Cash dividends declared per share

 $-  $0.06  $0.06  $0.18 

 

(1)

Excludes amortization of $7,447 and $7,597 for the three months ended September 26, 2020 and September 28, 2019, respectively, and $21,969 and $22,863 for the nine months ended September 26, 2020 and September 28, 2019, respectively.  

 

 The accompanying notes are an integral part of these statements.

 

4

 

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands)

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 26,

  

September 28,

  

September 26,

  

September 28,

 
  

2020

  

2019

  

2020

  

2019

 
                 

Net loss

 $(6,646) $(10,326) $(28,662) $(52,372)

Net income attributable to noncontrolling interest

  -   142   -   62 

Net loss attributable to Cohu

  (6,646)  (10,468)  (28,662)  (52,434)

Other comprehensive income (loss), net of tax:

                

Foreign currency translation adjustments

  11,692   (13,276)  12,660   (14,854)

Adjustments related to postretirement benefits

  -   35   -   470 

Other comprehensive income (loss), net of tax

  11,692   (13,241)  12,660   (14,384)

Other comprehensive loss attributable to noncontrolling interest

  -   -   -   (4)

Other comprehensive income (loss) attributable to Cohu

  11,692   (13,241)  12,660   (14,380)
                 

Comprehensive income (loss)

  5,046   (23,567)  (16,002)  (66,756)

Comprehensive income attributable to noncontrolling interest

  -   142   -   58 

Comprehensive income (loss) attributable to Cohu

 $5,046  $(23,709) $(16,002) $(66,814)

 

 

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 September 26, 2020

 

$1 par value

  

capital

  

earnings

  

loss

  

interest

  

Total

 

Balance at June 27, 2020

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

Net loss

  -   -   (6,646)  -   -   (6,646)

Changes in cumulative translation adjustment

  -   -   -   11,692   -   11,692 

Exercise of stock options

  6   80   -   -   -   86 

Shares issued for restricted stock units vested

  127   (127)  -   -   -   - 

Repurchase and retirement of stock

  (33)  (547)  -   -   -   (580)

Share-based compensation expense

  -   3,299   -   -   -   3,299 

Balance at September 26, 2020

 $41,962  $442,648  $11,369  $(21,370) $-  $474,609 
                         

Nine Months Ended September 26, 2020

                        

Balance at December 28, 2019

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

Net loss

  -   -   (28,662)  -   -   (28,662)

Changes in cumulative translation adjustment

  -   -   -   12,660   -   12,660 

Cash dividends - $0.06 per share

  -   -   (2,486)  -   -   (2,486)

Exercise of stock options

  28   347   -   -   -   375 

Shares issued under ESPP

  114   1,488   -   -   -   1,602 

Shares issued for restricted stock units vested

  614   (614)  -   -   -   - 

Repurchase and retirement of stock

  (189)  (2,076)  -   -   -   (2,265)

Share-based compensation expense

  -   10,313   -   -   -   10,313 

Balance at September 26, 2020

 $41,962  $442,648  $11,369  $(21,370) $-  $474,609 
                         

Three Months Ended September 28, 2019

                        

Balance at June 29, 2019

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

Net loss

  -   -   (10,326)  -   -   (10,326)

Changes in cumulative translation adjustment

  -   -   -   (13,276)  -   (13,276)

Adjustments related to postretirement benefits, net of tax

  -   -   -   35   -   35 

Cash dividends - $0.06 per share

  -   -   (2,469)  -   -   (2,469)

Exercise of stock options

  22   186   -   -   -   208 

Shares issued for restricted stock units vested

  203   (203)  -   -   -   - 

Repurchase and retirement of stock

  (60)  (670)  -   -   -   (730)

Share-based compensation expense

  -   3,506   -   -   -   3,506 

Balance at September 28, 2019

 $41,265  $428,428  $62,320  $(40,260) $(356) $491,397 
                         

Nine Months Ended September 28, 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

  -   -   (52,372)  -   -   (52,372)

Changes in cumulative translation adjustment

  -   -   -   (14,850)  (4)  (14,854)

Adjustments related to postretirement benefits, net of tax

  -   -   -   470   -   470 

Cash dividends - $0.18 per share

  -   -   (7,383)  -   -   (7,383)

Exercise of stock options

  37   293   -   -   -   330 

Shares issued under ESPP

  64   743   -   -   -   807 

Shares issued for restricted stock units vested

  597   (597)  -   -   -   - 

Repurchase and retirement of stock

  (196)  (2,562)  -   -   -   (2,758)

Noncontrolling interest

  -   -   53   -   (53)  - 

Share-based compensation expense

  -   10,861   -   -   -   10,861 

Balance at September 28, 2019

 $41,265  $428,428  $62,320  $(40,260) $(356) $491,397 

 

 

(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)

 

  

Nine Months Ended

 
  

September 26,

  

September 28,

 
  

2020

  

2019

 

Cash flows from operating activities:

        

Net loss attributable to Cohu

 $(28,662) $(52,434)

Net income attributable to noncontrolling interest

  -   62 

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

        

Gain on disposal of discontinued operation

  (35)  - 

Gain on extinguishment of debt

  (293)  - 

Impairment charges related to indefinite lived intangibles

  11,249   - 

Gain from sale of property, plant and equipment

  (4,328)  (350)

Depreciation and amortization

  39,283   45,353 

Share-based compensation expense

  10,313   10,861 

Amortization of inventory step-up and inventory related charges

  4,281   5,939 

Deferred income taxes

  (5,194)  (7,698)

Increase in accrued retiree medical benefits

  757   281 

Changes in other accrued liabilities

  (601)  3,999 

Changes in other assets

  144   (2,853)

Amortization of cloud-based software implementation costs

  830   - 

Interest capitalized associated with cloud computing implementation

  (95)  (68)

Amortization of debt discounts and issuance costs

  892   826 

Changes in assets and liabilities:

        

Customer advances

  (988)  1,480 

Accounts receivable

  13,028   21,757 

Inventories

  (11,399)  (660)

Other current assets

  2,241   (7,304)

Accounts payable

  (3,475)  (2,804)

Deferred profit

  4,170   1,096 

Income taxes payable

  (1,245)  (3,747)

Accrued compensation, warranty and other liabilities

  (2,631)  (10,298)

Operating lease right-of-use assets

  5,237   - 

Current and long-term operating lease liabilities

  (5,459)  - 

Net cash provided by operating activities

  28,020   3,438 

Cash flows from investing activities:

        

Net cash received from sale of fixtures services business

  2,975   - 

Cash received from sale of property, plant and equipment

  16,982   1,519 

Purchases of property, plant and equipment

  (13,559)  (13,347)

Net cash provided by (used in) investing activities

  6,398   (11,828)

Cash flows from financing activities:

        

Cash dividends paid

  (4,971)  (7,359)

Repurchases of common stock, net

  (220)  (1,212)

Proceeds from revolving line of credit and construction loans

  5,878   3,720 

Repayments of long-term debt

  (20,246)  (3,598)

Net cash used in financing activities

  (19,559)  (8,449)

Effect of exchange rate changes on cash and cash equivalents

  (863)  (1,812)

Net increase (decrease) in cash and cash equivalents

  13,996   (18,651)

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

  169,926   146,270 

Cash held by discontinued operations at end of period

  -   (1,176)

Cash and cash equivalents from continuing operations at end of period

 $169,926  $145,094 

Supplemental disclosure of cash flow information:

        

Cash paid for income taxes

 $5,122  $13,275 

Inventory capitalized as property, plant and equipment

 $827  $261 

Dividends declared but not yet paid

 $-  $2,468 

Property, plant and equipment purchases included in accounts payable

 $1,635  $853 

Capitalized cloud computing service costs included in accounts payable

 $1,923  $2,185 

Cash paid for interest

 $13,615  $14,820 

 

The accompanying notes are an integral part of these statements

 

7

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

September 26, 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 September 26, 2020, (also referred to as “the third quarter of fiscal 2020” and “the first nine months of fiscal 2020”) and September 28, 2019, (also referred to as “the third quarter of fiscal 2019” and “the first nine 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 nine-month periods ended September 26, 2020 and September 28, 2019, were comprised of 13 and 39 weeks, respectively.

 

Our interim results are not necessarily indicative of the results that should be expected for the full year. The condensed consolidated financial statements presented herein reflect estimates and assumptions made by management at September 26, 2020 and for the nine months ended September 26, 2020. 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 September 26, 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 September 26, 2020, 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.

 

 

8

Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 26, 2020

 

Inventories by category were as follows (in thousands):

 

  

September 26,

  

December 28,

 
  

2020

  

2019

 

Raw materials and purchased parts

 $74,639  $69,665 

Work in process

  47,936   46,591 

Finished goods

  15,304   14,450 

Total inventories

 $137,879  $130,706 

 

Gain on Sale of Facilities

 

As part of our previously announced Xcerra integration plan we implemented certain facility consolidation actions. See Note 4, “Restructuring Charges” for additional information on this program. During the third quarter of 2020, we completed the sale of our facility located in Rosenheim, Germany which resulted in a gain of $4.5 million. During the second quarter of 2020, we completed the sale of our facility in Penang Malaysia which resulted in a gain of $27,000. The gain on the sale of our Malaysia facility was previously included in selling, general and administrative costs in our condensed consolidated statements of operations and was reclassified to gain on sale of facilities for the nine months ended September 26, 2020.

 

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):

 

  

September 26,

  

December 28,

 
  

2020

  

2019

 

Land and land improvements

 $7,881  $11,659 

Buildings and building improvements

  41,624   41,474 

Machinery and equipment

  63,577   61,006 
   113,082   114,139 

Less accumulated depreciation and amortization

  (48,536)  (43,227)

Property, plant and equipment, net

 $64,546  $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”).

 

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.

 

9

Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 26, 2020

 

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. See Note 2, “Goodwill and Purchased Intangible Assets” for additional information on our interim assessments during 2020.

 

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 third 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.

 

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 $0.9 million for the three and nine months ended September 26, 2020, respectively. Amortization related to deferred debt issuance costs and original discount costs was $0.3 million and $0.8 million for the three and nine months ended September 28, 2019, respectively.

 

10

Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 26, 2020

 

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 nine months ended September 26, 2020, we recognized foreign exchange losses of $1.5 million and $2.5 million, respectively, in our condensed consolidated statements of operations. During the three and nine months ended September 28, 2019, we recognized foreign exchange gains of $1.6 million and $1.3 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.

 

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. Subsequent to the third quarter of 2020 on October 2, 2020, we entered 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 at our subsidiaries whose functional currency is the local currency. 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 in order to mitigate the risks and volatility associated with foreign currency transaction gains or losses.

 

We do not intend to use derivative financial instruments for speculative or trading purposes. For accounting purposes, our foreign currency forward contracts will not be designated as hedging instruments and, accordingly, we will 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 operations for both realized and unrealized gains and losses.

 

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 our condensed consolidated financial statements, as follows (in thousands):

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 26,

  

September 28,

  

September 26,

  

September 28,

 
  

2020

  

2019

  

2020

  

2019

 

Cost of sales

 $218  $212  $641  $545 

Research and development

  782   820   2,443   2,234 

Selling, general and administrative

  2,299   2,474   7,229   8,082 

Total share-based compensation

  3,299   3,506   10,313   10,861 

Income tax benefit

  (215)  (67)  (610)  (426)

Total share-based compensation, net

 $3,084  $3,439  $9,703  $10,435 

 

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 nine months ended September 26, 2020, stock options and awards to issue approximately 109,000 and 151,000 shares of common stock were excluded from the computation, respectively. For the three and nine months ended September 28, 2019, stock options and awards to issue approximately 459,000 and 487,000 shares of common stock were excluded from the computation, respectively.

 

11

Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 26, 2020

 

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

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 26,

  

September 28,

  

September 26,

  

September 28,

 
  

2020

  

2019

  

2020

  

2019

 

Weighted average common shares

  41,947   41,229   41,764   41,075 

Effect of dilutive securities

  -   -   -   - 
   41,947   41,229   41,764   41,075 

 

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.

 

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.

 

12

Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 26, 2020

 

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 September 26, 2020, we had $8.7 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 September 26, 2020, we had deferred revenue totaling approximately $21.9 million, current deferred profit of $11.9 million and deferred profit expected to be recognized after one year included in noncurrent other accrued liabilities of $6.8 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.

 

13

Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 26, 2020

 

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

 

   

Three Months Ended

  

Nine Months Ended

 

Disaggregated Net Sales

 

September 26,

2020

  

September 28,

2019

  

September 26,

2020

  

September 28,

2019

 

Systems:

                

Semiconductor Test & Inspection

 $70,360  $70,654  $214,910  $226,749 

PCB Test

  8,990   6,853   23,939   22,232 

Non-systems:

                

Semiconductor Test & Inspection

  66,865   62,166   181,756   180,343 

PCB Test

  4,432   3,825   13,047   11,994 
   $150,647  $143,498  $433,652  $441,318 

 

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

 

  

Three Months Ended

  

Nine Months Ended

 

Disaggregated Net Sales

 

September 26,

2020

  

September 28,

2019

  

September 26,

2020

  

September 28,

2019

 

China

 $30,423  $31,076  $92,367  $87,365 

United States

  32,111   21,918   71,739   58,427 

Malaysia

  11,435   12,991   38,451   47,698 

Taiwan

  22,689   20,341   59,060   52,513 

Philippines

  11,860   12,330   35,170   38,266 

Rest of the World

  42,129   44,842   136,865   157,049 

Total net sales

 $150,647  $143,498  $433,652  $441,318 

 

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

  

Nine Months Ended

 
   

September 26,

  

September 28,

  

September 26,

  

September 28,

 
   

2020

  

2019

  

2020

  

2019

 

Semiconductor Test & Inspection

                

Customers individually accounting for more than 10% of net sales

  *   *  

 

one  

 

one 

Percentage of net sales

  *   *   11%   11% 

PCB Test

                

Customers individually accounting for more than 10% of net sales

  *   *   *   * 

Percentage of net sales

  *   *   *   * 

 

 

*

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

 

Accumulated Other Comprehensive Loss

 

Our accumulated other comprehensive loss balance totaled approximately $21.4 million and $34.0 million at September 26, 2020 and December 28, 2019, 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 and adjustments related to postretirement benefits. Reclassification adjustments from accumulated other comprehensive loss during the first nine months of fiscal 2020 and 2019 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 first nine months of fiscal 2020 and 2019 was not significant.

 

14

Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 26, 2020

 

Discontinued Operations

 

Management determined that the fixtures services business, that was acquired as part of Xcerra, did not align with Cohu’s long-term strategic plan and divested this portion of the business in February 2020. As a result, the assets of our fixtures business are considered “held for sale” and the operations of our fixtures business are considered “discontinued operations” as of December 28, 2019. See Note 10, “Discontinued Operations” for additional information. Unless otherwise indicated, all amounts herein relate to continuing operations.

 

Recently Adopted Accounting Pronouncements

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 was subsequently amended by ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, ASU