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As of March 27, 2021 and December 26, 2020, the cost and fair value of investments with loss positions were approximately $61.6 million and $8.7 million, respectively. We evaluated the nature of these investments, credit worthiness of the issuer and the duration of these impairments to determine if an other-than-temporary decline in fair value had occurred and concluded that these losses were temporary and we have the ability and intent to hold these investments to maturity. 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Table of Contents



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended March 27, 2021

 

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 April 23, 2021 the Registrant had 48,430,429 shares of its $1.00 par value common stock outstanding.

 



 

 

 

 

COHU, INC.

INDEX

FORM 10-Q

MARCH 27, 2021

 

 

    Page Number
Part I  Financial Information  
     
Item 1. Financial Statements:  
     
  Condensed Consolidated Balance Sheets March 27, 2021 (unaudited) and December 26, 2020 3
     
  Condensed Consolidated Statements of Operations (unaudited) Three Months Ended March 27, 2021 and March 28, 2020 4
     
  Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) Three Months Ended March 27, 2021 and March 28, 2020 5
     
  Condensed Consolidated Statements of Stockholders’ Equity (unaudited) Three Months Ended March 27, 2021 and March 28, 2020 6
     
  Condensed Consolidated Statements of Cash Flows (unaudited) Three Months Ended March 27, 2021 and March 28, 2020 7
     
  Notes to Unaudited Condensed Consolidated Financial Statements 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 27
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 36
     
Item 4. Controls and Procedures 38
     
Part II Other Information  
     
Item 1. Legal Proceedings 39
     
Item 1A. Risk Factors 39
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 40
     
Item 3. Defaults Upon Senior Securities 40
     
Item 4. Mine Safety Disclosures 40
     
Item 5. Other Information 40
     
Item 6. Exhibits 41
     
Signatures 42

 

 

 

 

 

Item 1.

COHU, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

 

  

March 27,

  

December 26,

 
  

2021

  2020* 

 

 

(Unaudited)

     
ASSETS        

Current assets:

        

Cash and cash equivalents

 $143,119  $149,358 

Short-term investments

  147,926   20,669 

Accounts receivable, net

  196,755   151,919 

Inventories

  160,871   142,500 

Prepaid expenses

  23,807   18,773 

Other current assets

  3,240   1,827 

Total current assets

  675,718   485,046 
         

Property, plant and equipment, net

  65,776   66,916 

Goodwill

  246,735   252,304 

Intangible assets, net

  221,378   233,685 

Other assets

  19,231   23,192 

Operating lease right of use assets

  29,917   29,203 
  $1,258,755  $1,090,346 
         

LIABILITIES AND STOCKHOLDERS EQUITY

        

Current liabilities:

        

Short-term borrowings

 $5,018  $5,314 

Current installments of long-term debt

  3,833   3,075 

Accounts payable

  97,712   67,923 

Customer advances

  15,010   14,410 

Accrued compensation and benefits

  32,924   34,862 

Deferred profit

  12,955   8,671 

Accrued warranty

  6,570   6,066 

Income taxes payable

  7,586   3,857 

Other accrued liabilities

  26,425   30,275 

Total current liabilities

  208,033   174,453 
         

Long-term debt

  211,182   311,551 

Deferred income taxes

  25,518   28,816 

Noncurrent income tax liabilities

  7,866   6,888 

Accrued retirement benefits

  21,474   21,663 

Long-term lease liabilities

  26,251   25,787 

Other accrued liabilities

  8,957   8,900 
         

Stockholders’ equity

        

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

  -   - 

Common stock, $1 par value; 60,000 shares authorized, 48,411 shares issued and outstanding in 2021 and 42,190 shares in 2020

  48,411   42,190 

Paid-in capital

  661,984   448,194 

Retained earnings

  53,837   26,230 

Accumulated other comprehensive loss

  (14,758)  (4,326)

Total stockholders’ equity

  749,474   512,288 
  $1,258,755  $1,090,346 

 

* Derived from December 26, 2020 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

 
  

March 27,

  

March 28,

 
  

2021

  

2020

 
         

Net sales

 $225,488  $138,921 

Cost and expenses:

        

Cost of sales (1)

  123,283   82,837 

Research and development

  23,152   22,468 

Selling, general and administrative

  32,739   33,352 

Amortization of purchased intangible assets

  9,244   9,538 

Restructuring charges

  1,340   403 

Impairment charges

  -   3,949 
   189,758   152,547 

Income (loss) from operations

  35,730   (13,626)

Other (expense) income:

        

Interest expense

  (2,575)  (4,427)

Interest income

  50   147 

Foreign transaction loss

  (262)  (404)

Loss on extinguishment of debt

  (1,761)  - 

Income (loss) from continuing operations before taxes

  31,182   (18,310)

Income tax provision (benefit)

  3,575   (992)

Income (loss) from continuing operations

  27,607   (17,318)

Income from discontinued operations

  -   42 

Net income (loss)

 $27,607  $(17,276)
         

Income (loss) per share:

        

Basic:

        

Income (loss) from continuing operations

 $0.63  $(0.42)

Income from discontinued operations

  -   0.00 

Net income (loss)

 $0.63  $(0.42)
         

Diluted:

        

Income (loss) from continuing operations

 $0.61  $(0.42)

Income from discontinued operations

  -   0.00 

Net income (loss)

 $0.61  $(0.42)
         

Weighted average shares used in computing income (loss) per share:

        

Basic

  43,756   41,502 

Diluted

  45,482   41,502 
         

Cash dividends declared per share

 $-  $0.06 

 

(1)

Excludes amortization of $7,101 and $7,266 for the three months ended March 27, 2021 and March 28, 2020, respectively.

 

 

The accompanying notes are an integral part of these statements.

 

4

 

 

COHU, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands)

 

  

Three Months Ended

 
  

March 27,

  

March 28,

 
  

2021

  

2020

 
         

Net income (loss)

 $27,607  $(17,276)

Other comprehensive loss, net of tax:

        

Foreign currency translation adjustments

  (10,246)  (929)

Adjustments related to postretirement benefits

  (180)  - 

Change in unrealized gain/loss on investments

  (6)  - 

Other comprehensive loss, net of tax

  (10,432)  (929)

Comprehensive income (loss)

 $17,175  $(18,205)

 

 

The accompanying notes are an integral part of these statements.

 

5

 

 

COHU, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

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

 

              

Accumulated

     
  

Common

          

other

     
  

stock

  

Paid-in

  

Retained

  

comprehensive

     

Three Months Ended March 28, 2020

 

$1 par value

  

capital

  

earnings

  

loss

  

Total

 

Balance at December 28, 2019

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

Net loss

  -   -   (17,276)  -   (17,276)

Changes in cumulative translation adjustment

  -   -   -   (929)  (929)

Cash dividends - $0.06 per share

  -   -   (2,486)  -   (2,486)

Exercise of stock options

  22   267   -   -   289 

Shares issued for restricted stock units vested

  403   (403)  -   -   - 

Repurchase and retirement of stock

  (134)  (1,263)  -   -   (1,397)

Share-based compensation expense

  -   3,611   -   -   3,611 

Balance at March 28, 2020

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

Three Months Ended March 27, 2021

                    

Balance at December 26, 2020

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

Net income

  -   -   27,607   -   27,607 

Changes in cumulative translation adjustment

  -   -   -   (10,246)  (10,246)

Adjustments related to postretirement benefits, net of tax

  -   -   -   (180)  (180)

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

  -   -   -   (6)  (6)

Exercise of stock options

  192   1,730   -   -   1,922 

Shares issued for restricted stock units vested

  526   (526)  -   -   - 

Repurchase and retirement of stock

  (190)  (8,363)  -   -   (8,553)

Share-based compensation expense

  -   3,523   -   -   3,523 

Sale of common stock, net of issuance costs

  5,693   217,426   -   -   223,119 

Balance at March 27, 2021

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

 

 

The accompanying notes are an integral part of these statements.

 

6

 

 

COHU, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

  

Three Months Ended

 
  

March 27,

  

March 28,

 
  

2021

  

2020

 

Cash flows from operating activities:

        

Net income (loss)

 $27,607  $(17,276)

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

        

Gain on disposal of discontinued operation

  -   (35)

Loss on extinguishment of debt

  1,761   - 

Impairment charges related to indefinite lived intangibles

  -   3,949 

(Gain) loss from sale of property, plant and equipment

  (65)  88 

Depreciation and amortization

  12,567   12,956 

Share-based compensation expense

  3,523   3,611 

Non-cash inventory related charges

  1,110   1,603 

Deferred income taxes

  280   (2,706)

Changes in accrued retiree medical benefits

  (81)  254 

Changes in other accrued liabilities

  (78)  (106)

Changes in other assets

  62   605 

Amortization of cloud-based software implementation costs

  370   205 

Interest capitalized associated with cloud computing implementation

  (43)  (45)

Amortization of debt discounts and issuance costs

  250   290 

Changes in assets and liabilities:

        

Customer advances

  882   14,434 

Accounts receivable

  (47,241)  17,078 

Inventories

  (20,804)  (6,067)

Other current assets

  (6,629)  (5,888)

Accounts payable

  28,486   55 

Deferred profit

  4,383   1,619 

Income taxes payable

  5,131   7,454 

Accrued compensation, warranty and other liabilities

  (5,457)  (14,313)

Operating lease right-of-use assets

  1,556   1,843 

Current and long-term operating lease liabilities

  (1,427)  (1,795)

Net cash provided by operating activities

  6,143   17,813 

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

  98   74 

Purchases of short-term investments

  (129,736)  - 

Sales and maturities of short-term investments

  2,481   - 

Purchases of property, plant and equipment

  (2,700)  (1,584)

Net cash provided by (used in) investing activities

  (129,857)  1,465 

Cash flows from financing activities:

        

Cash dividends paid

  -   (2,483)

Issuance (repurchases) of common stock, net

  (5,421)  253 

Proceeds from revolving line of credit and construction loans

  818   1,117 

Proceeds received from issuance of common stock, net of fees

  223,118   - 

Repayments of long-term debt

  (101,922)  (1,133)

Net cash provided by (used in) financing activities

  116,593   (2,246)

Effect of exchange rate changes on cash and cash equivalents

  882   (1,488)

Net increase (decrease) in cash and cash equivalents

  (6,239)  15,544 

Cash and cash equivalents at beginning of period

  149,358   155,930 

Cash and cash equivalents at end of period

 $143,119  $171,474 

Supplemental disclosure of cash flow information:

        

Cash paid for income taxes

 $279  $690 

Inventory capitalized as property, plant and equipment

 $455  $238 

Dividends declared but not yet paid

 $-  $2,488 

Property, plant and equipment purchases included in accounts payable

 $862  $3,370 

Capitalized cloud computing service costs included in accounts payable

 $757  $1,552 

Cash paid for interest

 $2,532  $7,308 

 

 

The accompanying notes are an integral part of these statements.

 

7

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 27, 2021

 

 

 

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 26, 2020, has been derived from our audited financial statements at that date. The interim condensed consolidated financial statements as of March 27, 2021, (also referred to as “the first quarter of fiscal 2021” and “the first three months of fiscal 2021”) and March 28, 2020, (also referred to as “the first quarter of fiscal 2020” and “the first three months of fiscal 2020”) are unaudited. However, in management’s opinion, these financial statements reflect all adjustments (consisting only of normal, recurring items) necessary to provide a fair presentation of our financial position, results of operations and cash flows for the periods presented. The first quarter of fiscal 2021 and 2020 were both comprised of 13 weeks.

 

Our interim results are not necessarily indicative of the results that should be expected for the full year. For a better understanding of Cohu, Inc. and our financial statements, we recommend reading these interim condensed consolidated financial statements in conjunction with our audited financial statements for the year ended December 26, 2020, which are included in our 2020 Annual Report on Form 10-K, filed with the U. S. Securities and Exchange Commission (“SEC”). In the following notes to our interim condensed consolidated financial statements, Cohu, Inc. is referred to as “Cohu”, “we”, “our” and “us”.

 

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

 

Concentration of Credit Risk

 

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

 

Our trade accounts receivable are presented net of allowance for credit losses, which is determined in accordance with the guidance provided by Accounting Standards Codification (“ASC”) Topic 326, Financial Instruments-Credit Losses, (“ASC 326”). At March 27, 2021 and December 26, 2020 our allowance for credit losses was $0.4 million and $0.1 million, respectively. Our customers include semiconductor manufacturers and semiconductor test subcontractors and other customers located throughout the world. While we believe that our allowance for credit losses is adequate and represents our best estimate at March 27, 2021, we will continue to monitor customer liquidity and other economic conditions, including the impact of the COVID-19 pandemic, which may result in changes to our estimates regarding expected credit losses.

 

Inventories

 

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

 

Inventories by category were as follows (in thousands):

 

  

March 27,

  

December 26,

 
  

2021

  

2020

 

Raw materials and purchased parts

 $90,890  $83,755 

Work in process

  54,247   44,315 

Finished goods

  15,734   14,430 

Total inventories

 $160,871  $142,500 

 

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.

 

8

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 27, 2021

 

 

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

 

  

March 27,

  

December 26,

 
  

2021

  

2020

 

Land and land improvements

 $7,934  $8,141 

Buildings and building improvements

  40,247   41,153 

Machinery and equipment

  64,599   65,342 
   112,780   114,636 

Less accumulated depreciation and amortization

  (47,004)  (47,720)

Property, plant and equipment, net

 $65,776  $66,916 

 

Cloud Computing Implementation Costs

 

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

 

Unamortized capitalized cloud computing implementation costs totaled $12.7 million and $13.5 million at March 27, 2021 and December 26, 2020, respectively. These amounts are recorded within other assets in our condensed consolidated balance sheets. The change in the capitalized amount is costs capitalized in the current period, offset by amortization recorded, and an adjustment to accrued costs resulting from renegotiation of our software license that was finalized in the first quarter of 2021. We began amortizing some of these costs when our new ERP system was placed into service during the first quarter of 2020 and we continue to capitalize costs related to implementation projects that are ongoing. Implementation costs are amortized using the straight-line method over seven years and we recorded $0.4 million and $0.2 million in amortization expense during the three months ended March 27, 2021 and March 28, 2020, respectively.

 

Segment Information

 

We applied the provisions of ASC Topic 280, Segment Reporting, (“ASC 280”), which sets forth a management approach to segment reporting and establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products, major customers and the geographies in which the entity holds material assets and reports revenue. An operating segment is defined as a component that engages in business activities whose operating results are reviewed by the chief operating decision maker and for which discrete financial information is available. We have determined that our four identified operating segments are: Test Handler Group (THG), Semiconductor Test 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.

 

We conduct our annual impairment test as of October 1st of each year and have determined there was no impairment as of October 1, 2020, 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.

 

9

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 27, 2021

 

 

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 concluded there were no impairment of goodwill within our reporting units. During the three months ended March 28, 2020, 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 developing our interim fair value estimate resulted in a $3.9 million impairment to IPR&D as the carrying value exceeded fair value.

 

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

 

During the first quarter of 2021, no events or conditions occurred suggesting an impairment in our goodwill, indefinite-lived intangibles, other intangible assets and long-lived assets.

 

Product Warranty

 

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

 

Restructuring Costs

 

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

 

Debt Issuance Costs

 

We capitalize costs related to the issuance of debt. Debt issuance costs that were directly related to our Term Loan B are presented within noncurrent liabilities as a reduction of long-term debt in our condensed consolidated balance sheets. The amortization of such costs is recognized as interest expense using the effective interest method over the term of the respective debt issue. Amortization related to deferred debt issuance costs and original discount costs was $0.3 million for both the three months ended March 27, 2021 and March 28, 2020.

 

10

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 27, 2021

 

 

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. 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. During the three months ended March 27, 2021, we recognized foreign exchange losses of $0.3 million, in our condensed consolidated statements of operations. During the three months ended March 28, 2020, we recognized foreign exchange losses of $0.4 million.

 

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

 

Foreign Exchange Derivative Contracts

 

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

 

Share-Based Compensation

 

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

 

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

 

  

Three Months Ended

 
  

March 27,

  

March 28,

 
  

2021

  

2020

 

Cost of sales

 $262  $212 

Research and development

  781   833 

Selling, general and administrative

  2,480   2,566 

Total share-based compensation

  3,523   3,611 

Income tax benefit

  (234)  (172)

Total share-based compensation, net

 $3,289  $3,439 

 

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 per share, stock options with exercise prices that exceed the average fair market value of our common stock for the period are excluded. For the three months ended March 27, 2021, no stock options and awards were excluded from the computation. For the three months ended March 28, 2020, stock options and awards to issue approximately 58,000 shares of common stock were excluded from the computation.

 

11

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 27, 2021

 

 

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

 

  

Three Months Ended

 
  

March 27,

  

March 28,

 
  

2021

  

2020

 

Weighted average common shares

  43,756   41,502 

Effect of dilutive securities

  1,726   - 
   45,482   41,502 

 

For the three months ended March 28, 2020 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 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.

 

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.

 

12

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 27, 2021

 

 

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 March 27, 2021, we had $8.2 million of revenue expected to be recognized in the future related to performance obligations that were unsatisfied (or partially unsatisfied) for contracts with original expected durations of over one year. As allowed under ASC 606, we have opted to not disclose unsatisfied performance obligations for contracts with original expected durations of less than one year.

 

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

 

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

 

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

 

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

 

On shipments where sales are not recognized, gross profit is generally recorded as deferred profit in our condensed consolidated balance sheet representing the difference between the receivable recorded and the inventory shipped. At March 27, 2021, we had deferred revenue totaling approximately $25.4 million, current deferred profit of $13.0 million and deferred profit expected to be recognized after one year included in noncurrent other accrued liabilities of $6.5 million. At December 26, 2020, we had deferred revenue totaling approximately $17.1 million, current deferred profit of $8.7 million and deferred profit expected to be recognized after one year included in noncurrent other accrued liabilities of $6.7 million.

 

13


 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 27, 2021

 

 

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

 

  

Three Months Ended

 

Disaggregated Net Sales

 

March 27, 2021

  

March 28, 2020

 

Systems:

        

Semiconductor Test & Inspection

 $138,159  $70,539 

PCB Test

  8,620   6,840 

Non-systems:

        

Semiconductor Test & Inspection

  74,247   57,474 

PCB Test

  4,462   4,068 

Total net sales

 $225,488  $138,921 

 

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

 

  

Three Months Ended

 

Disaggregated Net Sales

 

March 27, 2021

  

March 28, 2020

 

China

 $54,265  $30,811 

Philippines

  33,754   10,022 

Taiwan

  32,196   13,881 

Malaysia

  23,259   15,174 

United States

  20,059   19,078 

Rest of the World

  61,955   49,955 

Total net sales

 $225,488  $138,921 

 

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

 

  

Three Months Ended

 
  

March 27,

  

March 28,

 
  

2021

  

2020

 
Semiconductor Test & Inspection        

Customers individually accounting for more than 10% of net sales

  *   two 

Percentage of net sales

  *   26% 

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 $14.8 million and $4.3 million at March 27, 2021 and December 26, 2020, 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 three months of fiscal 2021 and 2020 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 three months of fiscal 2021 and 2020 was not significant.

 

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. See Note 12, “Discontinued Operations” for additional information. Unless otherwise indicated, all amounts herein relate to continuing operations.

 

14

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 27, 2021

 

 

New Accounting Pronouncements

 

There have been no material changes in recently issued or adopted accounting standards from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 26, 2020.

 

 

2.

Goodwill and Purchased Intangible Assets

 

Goodwill and Intangible Assets

 

Changes in the carrying value of goodwill during the year ended December 26, 2020, and the three-month period ended March 27, 2021, by segment, were as follows (in thousands):

 

   

Semiconductor Test

                 
   

& Inspection

   

PCB Test

   

Total

 

Balance, December 28, 2019

  $ 218,775     $ 19,894     $ 238,669  

Impact of currency exchange

    11,949       1,686       13,635  

Balance, December 26, 2020

    230,724       21,580       252,304  

Impact of currency exchange

    (5,109 )     (460 )     (5,569 )

Balance, March 27, 2021

  $ 225,615     $ 21,120     $ 246,735  

 

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

 

   

March 27, 2021

   

December 26, 2020

 
                   

Remaining

                 
                   

Weighted

                 
   

Gross

           

Average

   

Gross

         
   

Carrying

   

Accum.

   

Amort.

   

Carrying

   

Accum.

 
   

Amount

   

Amort.

   

Period (years)

   

Amount

   

Amort.

 

Developed technology

  $ 238,892     $ 88,305       5.3     $ 239,250     $ 83,246  

Customer relationships

    73,691       23,803       8.2       74,933       22,751  

Trade names

    23,245       6,662       8.5       23,756       6,279  

Covenant not-to-compete

    321       137       5.8       340       136  

Total intangible assets

  $ 336,149     $ 118,907             $ 338,279     $ 112,412  

 

The table above excludes $4.1 million and $7.8 million of in-process technology, at March 27, 2021 and December 26, 2020, respectively, which has an indefinite life and is subject to impairment or future amortization as developed technology when the projects are completed. During the first quarter of 2021, $3.7 million of in-process technology was completed and transferred to developed technology. Changes in the carrying values of purchased intangible assets presented above are a result of the impact of fluctuation in currency exchange rates.

 

Amortization expense related to intangible assets in the first quarter of fiscal 2021 and 2020 was $9.2 million and $9.5 million, respectively.

 

15

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 27, 2021

 

 

 

3.

Borrowings and Credit Agreements

 

The following table is a summary of our borrowings as of March 27, 2021 and December 26, 2020 (in thousands):

 

  

March 27,

  

December 26,

 
  

2021

  

2020

 

Bank Term Loan under Credit Agreement

 $204,880  $306,630 

Bank Term Loans-Kita

  3,395   3,662 

Construction Loan- Cohu GmbH

  10,298   9,902 

Lines of Credit

  5,018   5,314 

Total debt

  223,591   325,508 

Less: financing fees and discount

  (3,558)  (5,568)

Less: current portion

  (8,851)  (8,389)

Total long-term debt

 $211,182  $311,551 

 

Credit Agreement

 

On October 1, 2018, we entered into a Credit Agreement providing for a $350.0 million Credit Facility and borrowed the full amount to finance a portion of the Xcerra acquisition. Loans under the Credit Facility amortize in equal quarterly installments of 0.25% of the original principal amount, with the balance payable at maturity. All outstanding principal and interest in respect of the Credit Facility must be repaid on or before October 1, 2025. The loans under the Term Loan Facility bear interest, at Cohu’s option in terms of the time-based interest period, at a floating annual rate equal to the selected LIBOR interest period plus a margin of 3.00%. At March 27, 2021, the outstanding loan balance, net of discount and deferred financing costs, was $201.3 million and $2.7 million of the outstanding balance is presented as current installments of long-term debt in our condensed consolidated balance sheets. At December 26, 2020, the outstanding loan balance, net of discount and deferred financing costs, was $301.1 million and $2.4 million of the outstanding balance is presented as current installments of long-term debt in our condensed consolidated balance sheets. As of March 27, 2021, the fair value of the debt was $204.1 million. The measurement of the fair value of debt is based on the average of the bid and ask trading quotes as of March 27, 2021 and is considered a Level 2 fair value measurement.

 

Under the terms of the Credit Agreement, the lender may accelerate the payment terms upon the occurrence of certain events of default set forth therein, which include: the failure of Cohu to make timely payments of amounts due under the Credit Agreement, the failure of Cohu to adhere to the representations and covenants set forth in the Credit Agreement, the failure to provide notice of any event that causes a material adverse effect or to provide other required notices, upon the event that related collateral agreements become ineffective, upon the event that certain legal judgments are entered against Cohu, the insolvency of Cohu, or upon the change of control of Cohu. As of March 27, 2021, we believe no such events of default have occurred.

 

During the first quarter of 2021, we repurchased $100.0 million in principal of our Term Loan Facility for $100.0 million in cash. This resulted in a loss of $1.8 million reflected in other expense in our condensed consolidated statement of operations and a corresponding $1.8 million reduction in debt discounts and deferred financing costs in our condensed consolidated balance sheets. After the repurchase, approximately $204.9 million in principal of the Term Loan Facility remains outstanding as of March 27, 2021.

 

Kita Term Loans

 

Our wholly owned Kita subsidiary has outstanding term loans from a series of Japanese financial institutions primarily related to the expansion of Kita’s facility in Osaka, Japan. The loans are collateralized by the facility and land, carry interest rates ranging from 0.05% to 0.43%, and expire at various dates through 2034. At March 27, 2021, the outstanding loan balance was $3.4 million and $0.3 million of the outstanding balance is presented as current installments of long-term debt in our condensed consolidated balance sheets. At December 26, 2020, the outstanding loan balance was $3.6 million and $0.3 million of the outstanding balance is presented as current installments of long-term debt in our condensed consolidated balance sheets. The fair value of the debt approximates the carrying value at March 27, 2021.

 

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

 

16

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 27, 2021

 

 

Construction Loans

 

In July 2019 and June 2020, one of our wholly owned subsidiaries located in Germany entered into a series of construction loans (“Loan Facilities”) with a German financial institution providing it with total borrowings of 10.1 million. The Loan Facilities have terms of 10 years and 15 years. The Loan Facilities are being utilized to finance the expansion of our facility in Kolbermoor, Germany, enabling us to combine the operations of multiple subsidiaries in one location as part of our previously announced strategic restructuring program. The Loan Facilities are secured by the land and the existing building on the site and bear interest at agreed upon rates based on the facility amounts as discussed below.

 

In August 2019, the initial 3.4 million was drawn under the first facility, which is payable over 10 years at a fixed annual interest rate of 0.8%. Interest only payments are required to be made each quarter starting in September 2019 with principal and interest payments due each quarter starting in the month of December 2021. Principal repayments will be made over 8 years starting at the end of December 2021.

 

As of March 2021, the full 5.2 million was drawn under the second facility, which is payable over 15 years at an annual interest rate of 1.05%, which is fixed until April 2027. Interest only payments are required to be made each month starting in December 2019 with principal and interest payments due each month starting in the month of May 2020. Principal repayments will be made over 15 years starting at the end of May 2020.

 

As of March 27, 2021, we have drawn 0.4 million under the third facility, which is payable over 10 years at an annual interest rate of 1.2%, which is fixed until May 2030. Interest payments are required to be made each month starting in March 2021 with principal and interest payments due each month starting in the month of May 2021. Principal repayments will be made over 10 years starting at the end of May 2021.

 

At March 27, 2021 and December 26, 2020, total outstanding borrowings under the Loan Facilities was $10.3 million and $9.9 million with $0.8 million and $0.4 million of the total outstanding balance being presented as current installments of long-term debt in our condensed consolidated balance sheets based on contractual due dates, respectively. The loans are denominated in Euros and, as a result, amounts disclosed herein will fluctuate because of changes in currency exchange rates. The fair value of the debt approximates the carrying value at March 27, 2021.

 

Lines of Credit

 

Our wholly owned Kita subsidiary has outstanding revolving credit facilities with various financial institutions in Japan. The credit facilities renew monthly and provide Kita with access to working capital totaling up to $8.8 million. At March 27, 2021, total borrowings outstanding under the revolving lines of credit were $5.0 million. As these credit facility agreements renew monthly, they have been included in short-term borrowings in our condensed consolidated balance sheets.

 

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

 

Our wholly owned Ismeca subsidiary has one available line of credit which provides it with borrowings of up to a total of 2.0 million Swiss Francs, a portion of which is reserved for tax guarantees. At March 27, 2021 and December 26, 2020 no amounts were outstanding under this line of credit.

 

 

4.

Restructuring Charges

 

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

 

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

 

17

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 27, 2021

 

 

As a result of the activities described above, we recognized total pretax charges of $1.7 million and $2.0 million for the three months ended March 27, 2021 and March 28, 2020, respectively, that are within the scope of ASC 420, Exit or Disposal Cost Obligations (“ASC 420”). All costs of the Integration Program were, and are expected to be, incurred by our Semiconductor Test & Inspection segment.

 

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

 

The following table summarizes the activity within the restructuring related accounts for the Integration Program during the three months ended March 27, 2021 and March 28, 2020 (in thousands):

 

  

Severance and

  

Other Exit

     
  

Other Payroll

  

Costs

  

Total

 

Balance, December 28, 2019

 $1,236  $-  $1,236 

Costs accrued

  234   169   403 

Amounts paid or charged

  (1,218)  (169)  (1,387)

Impact of currency exchange

  (33)  -   (33)

Balance, March 28, 2020

 $219  $-  $219 
             

Balance, December 26, 2020

 $5,826  $-  $5,826 

Costs accrued

  952   388   1,340 

Amounts paid or charged

  (2,444)  (388)  (2,832)

Impact of currency exchange

  (140)  -   (140)

Balance, March 27, 2021

 $4,194  $-  $4,194 

 

At March 27, 2021, our total accrual for restructuring related items is reflected within current liabilities of our condensed consolidated balance sheets as these amounts are expected to be paid out within a year. The estimated costs associated with the employee severance and facility consolidation actions will be paid predominantly in cash.

 

 

5.

Financial Instruments Measured at Fair Value

 

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

 

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

 

18

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 27, 2021

 

 

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

 

  

March 27, 2021

 
      

Gross

  

Gross

  

Estimated

 
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses (1)

  

Value

 

Corporate debt securities (2)

 $136,400  $16  $11  $136,405 

U.S. Treasury securities

  7,811   -   -   7,811 

Government-sponsored enterprise securities

  1,999   1   -   2,000 

Bank certificates of deposit

  750   -   -   750 

Foreign government security

  960   -   -   960 
  $147,920  $17  $11  $147,926 

 

  

December 26, 2020

 
      

Gross

  

Gross

  

Estimated

 
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses (1)

  

Value

 

Corporate debt securities (2)

 $14,943  $2  $1  $14,944 

U.S. treasury securities

  2,012   -   -   2,012 

Government-sponsored enterprise securities

  1,998   -   -   1,998 

Bank certificates of deposit

  750   -   -   750 

Foreign government security

  965   -   -   965 
  $20,668  $2  $1  $20,669 

 

 

(1)

As of March 27, 2021 and December 26, 2020, the cost and fair value of investments with loss positions were approximately $61.6 million and $8.7 million, respectively. We evaluated the nature of these investments, credit worthiness of the issuer and the duration of these impairments to determine if an other-than-temporary decline in fair value had occurred and concluded that these losses were temporary and we have the ability and intent to hold these investments to maturity.

 

 

(2)

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

 

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

 

  

March 27, 2021

  

December 26, 2020

 
  

Amortized

  

Estimated

  

Amortized

  

Estimated

 
  

Cost

  

Fair Value

  

Cost

  

Fair Value

 

Due in one year or less

 $146,960  $146,966  $20,668  $20,669 

Due after one year through three years

  960   960   -   - 
  $147,920  $147,926  $20,668  $20,669 

 

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

 

19

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 27, 2021

 

 

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

 

  

Fair value measurements at March 27, 2021 using:

 
              

Total estimated

 
  

Level 1

  

Level 2

  

Level 3

  

fair value

 

Cash

 $115,626  $-  $-  $115,626 

U.S. Treasury securities

  -   7,811   -   7,811 

Corporate debt securities

  -   136,405   -   136,405 

Government-sponsored enterprise securities

  -   2,000   -   2,000 

Money market funds

  -   27,493   -   27,493 

Bank certificates of deposit

  -   750   -   750 

Foreign government security

  -   960   -   960 
  $115,626  $175,419  $-  $291,045 

 

  

Fair value measurements at December 26, 2020 using:

 
              

Total estimated

 
  

Level 1

  

Level 2

  

Level 3

  

fair value

 

Cash

 $128,874  $-  $-  $128,874 

Corporate debt securities

  -   15,694   -   15,694 

U.S. treasury securities

  -   2,012   -   2,012 

Government-sponsored enterprise securities

  -   1,998   -   1,998 

Money market funds

  -   19,734   -   19,734 

Bank certificates of deposit

  -   750   -   750 

Foreign government security

  -   965   -   965 
  $128,874  $41,153  $-  $170,027 

 

 

6.

Employee Stock Benefit Plans

 

Our 2005 Equity Incentive Plan (“2005 Plan”) is a broad-based, long-term retention program intended to attract, motivate, and retain talented employees as well as align stockholder and employee interests. Awards that may be granted under the program include, but are not limited to, non-qualified and incentive stock options, restricted stock units, and performance stock units. We settle employee stock option exercises, employee stock purchase plan purchases, and the vesting of restricted stock units, and performance stock units with newly issued common shares. At March 27, 2021, there were 1,390,895 shares available for future equity grants under the 2005 Plan.

 

Stock Options

 

Stock options may be granted to employees, consultants and non-employee directors to purchase a fixed number of shares of our common stock. The exercise prices of options granted are at least equal to the fair market value of our common stock on the dates of grant and options vest and become exercisable in annual increments that range from one to four years from the date of grant. Stock options granted under the 2005 Plan have a maximum contractual term of ten years. In the three months of fiscal 2021 we did not grant any stock options and we issued 192,432 shares of our common stock on the exercise of options that were granted previously.

 

At March 27, 2021, we had 70,203 stock options exercisable and outstanding. These options had a weighted-average exercise price of $10.04 per share, an aggregate intrinsic value of approximately $2.2 million and the weighted average remaining contractual term was approximately 2.0 years.

 

Restricted Stock Units

 

We grant restricted stock units (“RSUs”) to certain employees, consultants and directors. RSUs vest in annual increments that range from one to four years from the date of grant. Prior to vesting, RSUs do not have dividend equivalent rights, do not have voting rights and the shares underlying the RSUs are not considered issued and outstanding. New shares of our common stock will be issued on the date the RSUs vest net of the minimum statutory tax withholding requirements to be paid by us on behalf of our employees. As a result, the actual number of shares issued will be fewer than the actual number of RSUs outstanding at March 27, 2021.

 

20

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 27, 2021

 

 

In the first three months of fiscal 2021 we awarded 204,449 RSUs, we issued 409,690 shares of our common stock on vesting of previously granted awards and 4,406 shares were forfeited. At March 27, 2021, we had 1,205,125 RSUs outstanding with an aggregate intrinsic value of approximately $49.2 million and the weighted average remaining vesting period was approximately 1.6 years.

 

Performance Stock Units

 

We also grant performance stock units (“PSUs”) to senior executives as a part of our long-term equity compensation program. The number of shares of common stock that will ultimately be issued to settle PSUs granted ranges from 25% to 200% of the number granted and is determined based on certain performance criteria over a three-year measurement period. The performance criteria for the PSUs are based on a combination of our annualized Total Shareholder Return (“TSR”) for the performance period and the relative performance of our TSR compared with the annualized TSR of certain peer companies or index for the performance period. PSUs granted vest 100% on the third anniversary of their grant, assuming achievement of the applicable performance criteria.

 

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

 

In the first three months of fiscal 2021, we awarded 92,719 PSUs, we issued 116,219 shares of our common stock on vesting of previously granted awards and 3,182 shares were forfeited. At March 27, 2021, we had 398,753 PSUs outstanding with an aggregate intrinsic value of approximately $16.3 million and the weighted average remaining vesting period was approximately 1.8 years.

 

Employee Stock Purchase Plan

 

The Cohu, Inc. 1997 Employee Stock Purchase Plan (“ESPP”) provides for the issuance of shares of our common stock. Under the ESPP, eligible employees may purchase shares of Cohu common stock through payroll deductions at a price equal to 85 percent of the lower of the fair market value of Cohu common stock at the beginning or end of each 6-month purchase period, subject to certain limits. During the first three months of fiscal 2021, no shares of our common stock were sold to our employees under the ESPP leaving 668,704 shares available for future issuance.

 

 

7.

Derivative Financial Instruments

 

Foreign Exchange Derivative Contracts

 

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

 

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

 

The fair value of our foreign exchange derivative contracts was determined based on current foreign currency exchange rates and forward points. All our foreign exchange derivative contracts outstanding at March 27, 2021 will mature during the second quarter of fiscal 2021.

 

21

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 27, 2021

 

 

The following table provides information about our foreign currency forward contracts outstanding as of March 27, 2021 (in thousands):

 

   

Contract Amount

  

Contract Amount

 

Currency

Contract Position

 

(Local Currency)

  

(U.S. Dollars)

 

Swiss Franc

Buy

  10,315  $11,000 

Japanese Yen

Buy

  294,354   2,700 

Euro

Buy

  13,275   15,650 

Malaysian Ringgit

Buy

  14,514   3,500 
       $32,850 

 

Our foreign currency contracts are classified within Level 2 of the fair value hierarchy as they are valued using pricing models that utilize observable market inputs. The fair values of foreign currency contracts outstanding at March 27, 2021 were immaterial.

 

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

 

Derivatives Not Designated

Location of Gain (Loss)

 

Three months ended

 

as Hedging Instruments

Recognized on Derivatives

 

March 27, 2021

  

March 28, 2020

 

Foreign exchange forward contracts

Foreign transaction gain (loss)

 $(1,515)  n/a 

 

 

8.

Equity

 

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

 

 

9.

Income Taxes

 

For the three months ended March 27, 2021, we used the estimated annual effective tax rate (“ETR”) expected to be applicable for the full fiscal year in computing our tax provision. The ETR on income from continuing operations for the three months ended March 27, 2021 was 11.5% and reflects a partial release of our domestic valuation allowance on deferred tax assets to offset tax liabilities on current year earnings, and an excess benefit relating to stock-based compensation. For the three months ended March 28, 2020, we determined that a reliable estimate of the annual ETR could not be made, since relatively small changes in our projected income produce a significant variation in our ETR, and instead used the actual ETR for the year-to-date period to calculate our tax provision. The ETR on loss from continuing operations for the three months ended March 28, 2020 was 5.4% and primarily reflected the lack of a tax benefit on our domestic losses as a result of our valuation allowance on deferred tax assets, and non-deductible expenses relating to stock-based compensation.

 

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

 

In accordance with the disclosure requirements as described in ASC Topic 740, Income Taxes, we have classified unrecognized tax benefits as non-current income tax liabilities, or a reduction in non-current deferred tax assets, unless expected to be paid within one year. Our continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. There were no material changes to our unrecognized tax benefits and interest accrued related to unrecognized tax benefits during the three months ended March 27, 2021 and March 28, 2020.

 

22

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 27, 2021

 

 

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (2017 Tax Act). Corporate taxpayers may carryback net operating losses (NOLs) originating during 2018 through 2020 for up to five years, which was not previously allowed under the 2017 Tax Act. The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or 2020. Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest income (30% limit under the 2017 Tax Act) for tax years beginning January 1, 2019 and 2020. The CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through refunds over a period of years, as originally enacted by the 2017 Tax Act.

 

In addition, the CARES Act raises the corporate charitable deduction limit to 25% of taxable income and makes qualified improvement property generally eligible for 15-year cost-recovery and 100% bonus depreciation. The enactment of the CARES Act did not result in any material adjustments to our income tax provision for the three months ended March 28, 2020, or to our net deferred tax assets as of March 28, 2020.

 

 

10.

Segment and Geographic Information

 

The summary below presents our current segments, Semiconductor Test & Inspection and PCB Test, for the three-month periods ended March 27, 2021 and March 28, 2020.

 

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

 

           

Three Months Ended

 
   

March 27,

   

March 28,

 
    2021     2020  
Net sales by segment:                

Semiconductor Test & Inspection

  $ 212,406     $ 128,013  

PCB Test

    13,082       10,908  

Total consolidated net sales for reportable segments

  $ 225,488     $ 138,921  

Segment profit (loss) before tax:

               

Semiconductor Test & Inspection

  $ 36,627     $ (11,573 )

PCB Test

    2,429       994  

Profit (loss) for reportable segments

    39,056       (10,579 )

Other unallocated amounts:

               

Corporate expenses

    (3,588 )     (3,451 )

Interest expense

    (2,575 )     (4,427 )

Interest income

    50       147  

Loss on extinguishment of debt

    (1,761 )     -  

Income (loss) from continuing operations before taxes

  $ 31,182     $ (18,310 )

 

The following table summarizes our total assets by reportable business segment (in thousands):

 

   

March 27,

   

December 26,

 
   

2021

   

2020

 

Semiconductor Test & Inspection

  $ 1,012,182     $ 968,028  

PCB Test

    66,979       66,826  

Total assets for reportable segments

    1,079,161       1,034,854  

Corporate, principally cash and investments

    179,594       55,492  

Total consolidated assets

  $ 1,258,755     $ 1,090,346  

 

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

 

 

11.

Leases

 

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

 

Our leases have remaining lease terms of 1 year to 37 years, some of which include one or more options to extend the leases for up to 25 years. Our lease term includes renewal terms when we are reasonably certain we will exercise the renewal options.

 

23

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 27, 2021

 

 

We sublease certain leased assets to third parties, mainly as a result of unused space in our facilities. Supplemental balance sheet information related to leases was as follows:

 

(in thousands)

Classification

 

March 27, 2021

  

December 26, 2020

 

Assets

         

Operating lease assets

Operating lease right-of-use assets

 $29,917  $29,203 

Finance lease assets

Property, plant and equipment, net (1)

  502   486 

Total lease assets

  $30,419  $29,689 

Liabilities

         

Current

         

Operating

Other accrued liabilities

 $5,490  $5,287 

Finance

Other accrued liabilities

  182   179 

Noncurrent

         

Operating

Long-term lease liabilities

  26,041   25,565 

Finance

Long-term lease liabilities

  210   222 

Total lease liabilities

  $31,923  $31,253 
          
Weighted-average remaining lease term (years)         

Operating leases

   7.1   7.3 

Finance leases

   2.4   2.3 
          
Weighted-average discount rate         

Operating leases

   6.2%  6.3%

Finance leases

   0.6%  0.0%

 

 

(1)

Finance lease assets are recorded net of accumulated amortization of $0.1 million as of March 27, 2021 and December 26, 2020.