COHU INC - Quarter Report: 2019 June (Form 10-Q)

 

 

Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

(Mark One)

 

[ √ ]

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

For the quarterly period ended June 29, 2019

OR

[   ]

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

 

Commission file number 001-04298

 

COHU, INC.

(Exact name of registrant as specified in its charter)

 

Delaware	95-1934119
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
12367 Crosthwaite Circle, Poway, California	92064-6817
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code

 

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

 

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

None

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

 

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

 

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

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

Smaller reporting company ☐      Emerging growth company ☐

 

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

 

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

 

As of July 26, 2019 the Registrant had 41,095,618 shares of its $1.00 par value common stock outstanding.

 

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COHU, INC.

INDEX

FORM 10-Q

JUNE 29, 2019

 

 

Part I	Financial Information	Page Number
Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets June 29, 2019 (unaudited) and December 29, 2018	3
	Condensed Consolidated Statements of Operations (unaudited) Three and Six Months Ended June 29, 2019 and June 30, 2018	4
	Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) Three and Six Months Ended June 29, 2019 and June 30, 2018	5
	Condensed Consolidated Statements of Stockholder’s Equity (unaudited) Three and Six Months Ended June 29, 2019 and June 30, 2018	6
	Condensed Consolidated Statements of Cash Flows (unaudited) Six Months Ended June 29, 2019 and June 30, 2018	8
	Notes to Unaudited Condensed Consolidated Financial Statements	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
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	54
Item 3.	Defaults Upon Senior Securities	54
Item 4.	Mine Safety Disclosures	54
Item 5.	Other Information	54
Item 6.	Exhibits	55
Signatures		56

 

 

 

		June 29,				December 29,
		2019				2018 *
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	143,014			$	164,460
Short-term investments			581				560
Accounts receivable, net			134,435				149,276
Inventories			137,229				139,314
Prepaid expenses			22,304				26,206
Other current assets			1,144				1,682
Current assets of discontinued operations (Note 10)			4,100				3,741
Total current assets			442,807				485,239
Property, plant and equipment, net			71,776				74,332
Goodwill			241,466				242,127
Intangible assets, net			297,211				318,961
Other assets			14,955				13,264
Operating lease right of use assets			35,224				-
Noncurrent assets of discontinued operations (Note 10)			65				79
		$	1,103,504			$	1,134,002
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings		$	3,244			$	3,115
Current installments of long-term debt			3,243				3,672
Accounts payable			54,453				48,117
Accrued compensation and benefits			24,820				29,402
Accrued warranty			6,616				7,769
Deferred profit			8,163				6,896
Income taxes payable			6,036				11,055
Other accrued liabilities			39,732				50,045
Current liabilities of discontinued operations (Note 10)			624				518
Total current liabilities			146,931				160,589
Accrued retirement benefits			20,296				19,740
Noncurrent deferred gain on sale of facility			-				8,776
Deferred income taxes			31,691				38,942
Noncurrent income tax liabilities			9,591				9,711
Long-term debt			341,978				346,041
Other accrued liabilities			5,795				4,259
Long-term lease liabilities			32,773				-
Stockholders' equity:
Preferred stock, $1 par value; 1,000 shares authorized, none issued			-				-
Common stock, $1 par value; 60,000 shares authorized, 41,100 shares issued and outstanding in 2019 and 40,763 shares in 2018			41,100				40,763
Paid-in capital			425,609				419,690
Retained earnings			75,115				111,670
Accumulated other comprehensive loss			(27,019	)			(25,880	)
Total Cohu stockholders' equity			514,805				546,243
Noncontrolling interest			(356	)			(299	)
Total equity			514,449				545,944
		$	1,103,504			$	1,134,002

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		Three Months Ended								Six Months Ended
		June 29,				June 30,				June 29,				June 30,
		2019				2018				2019				2018
Net sales		$	150,011			$	99,817			$	297,820			$	194,967
Cost and expenses:
Cost of sales (1)			87,605				57,677				180,999				112,600
Research and development			22,108				11,051				44,841				22,826
Selling, general and administrative			36,428				19,303				74,714				35,089
Amortization of purchased intangible assets			9,987				1,019				20,006				2,093
Restructuring charges			8,545				-				9,906				-
			164,673				89,050				330,466				172,608
Income (loss) from operations			(14,662	)			10,767				(32,646	)			22,359
Other (expense) income:
Interest expense			(5,282	)			(11	)			(10,789	)			(22	)
Interest income			191				329				413				576
Foreign transaction gain (loss) and other			(546	)			3,031				(328	)			1,452
Income (loss) from continuing operations before taxes			(20,299	)			14,116				(43,350	)			24,365
Income tax provision (benefit)			(916	)			2,468				(1,116	)			4,595
Income (loss) from continuing operations			(19,383	)			11,648				(42,234	)			19,770
Income from discontinued operations, net of tax			24				-				188				-
Net income (loss)		$	(19,359	)		$	11,648			$	(42,046	)		$	19,770
Net loss attributable to noncontrolling interest		$	(36	)		$	-			$	(80	)		$	-
Net income (loss) attributable to Cohu		$	(19,323	)		$	11,648			$	(41,966	)		$	19,770
Income (loss) per share:
Basic:
Income (loss) from continuing operations before noncontrolling interest		$	(0.47	)		$	0.40			$	(1.03	)		$	0.69
Income from discontinued operations			0.00				-				0.01				-
Net loss attributable to noncontrolling interest			(0.00	)			-				(0.00	)			-
Net income (loss) attributable to Cohu		$	(0.47	)		$	0.40			$	(1.02	)		$	0.69
Diluted:
Income (loss) from continuing operations before noncontrolling interest		$	(0.47	)		$	0.39			$	(1.03	)		$	0.67
Income from discontinued operations			0.00				-				0.01				-
Net loss attributable to noncontrolling interest			(0.00	)			-				(0.00	)			-
Net income (loss) attributable to Cohu		$	(0.47	)		$	0.39			$	(1.02	)		$	0.67
Weighted average shares used in computing income (loss) per share:
Basic			41,125				28,893				40,999				28,747
Diluted			41,125				29,651				40,999				29,591
Cash dividends declared per share		$	0.06			$	0.06			$	0.12			$	0.12

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		Three Months Ended								Six Months Ended
		June 29,				June 30,				June 29,				June 30,
		2019				2018				2019				2018
Net income (loss)		$	(19,359	)		$	11,648			$	(42,046	)		$	19,770
Net loss attributable to noncontrolling interest			(36	)			-				(80	)			-
Net income (loss) attributable to Cohu			(19,323	)			11,648				(41,966	)			19,770
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments			3,684				(6,814	)			(1,578	)			(2,960	)
Adjustments related to postretirement benefits			(39	)			114				435				41
Change in unrealized gain/loss on investments			-				8				-				(2	)
Other comprehensive income (loss), net of tax			3,645				(6,692	)			(1,143	)			(2,921	)
Other comprehensive loss attributable to noncontrolling interest			-				-				(4	)			-
Other comprehensive income (loss) attributable to Cohu			3,645				(6,692	)			(1,139	)			(2,921	)
Comprehensive income (loss)			(15,714	)			4,956				(43,189	)			16,849
Comprehensive loss attributable to noncontrolling interest			(36	)			-				(84	)			-
Comprehensive income (loss) attributable to Cohu		$	(15,678	)		$	4,956			$	(43,105	)		$	16,849

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														Accumulated
		Common												other
		stock				Paid-in				Retained				comprehensive				Noncontrolling
Three Months Ended June 29, 2019		$1 par value				capital				earnings				loss				interest				Total
Balance at March 30, 2019		$	41,015			$	421,381			$	96,938			$	(30,664	)		$	(356	)		$	528,314
Net loss			-				-				(19,359	)			-				-				(19,359	)
Changes in cumulative translation adjustment			-				-				-				3,684				-				3,684
Adjustments related to postretirement benefits, net of tax			-				-				-				(39	)			-				(39	)
Cash dividends - $0.06 per share			-				-				(2,464	)			-				-				(2,464	)
Exercise of stock options			5				39				-				-				-				44
Shares issued under ESPP			64				743				-				-				-				807
Shares issued for restricted stock units vested			29				(29	)			-				-				-				-
Repurchase and retirement of stock			(13	)			(187	)			-				-				-				(200	)
Share-based compensation expense			-				3,662				-				-				-				3,662
Balance at June 29, 2019		$	41,100			$	425,609			$	75,115			$	(27,019	)		$	(356	)		$	514,449
Six Months Ended June 29, 2019
Balance at December 29, 2018		$	40,763			$	419,690			$	111,670			$	(25,880	)		$	(299	)		$	545,944
Cumulative effect of accounting change			-				-				10,352				-				-				10,352
Net loss			-				-				(42,046	)			-				-				(42,046	)
Changes in cumulative translation adjustment			-				-				-				(1,574	)			(4	)			(1,578	)
Adjustments related to postretirement benefits, net of tax			-				-				-				435				-				435
Cash dividends - $0.12 per share			-				-				(4,914	)			-				-				(4,914	)
Exercise of stock options			15				107				-				-				-				122
Shares issued under ESPP			64				743				-				-				-				807
Shares issued for restricted stock units vested			394				(394	)			-				-				-				-
Repurchase and retirement of stock			(136	)			(1,892	)			-				-				-				(2,028	)
Noncontrolling interest			-				-				53				-				(53	)			-
Share-based compensation expense			-				7,355				-				-				-				7,355
Balance at June 29, 2019		$	41,100			$	425,609			$	75,115			$	(27,019	)		$	(356	)		$	514,449

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														Accumulated
		Common												other
		stock				Paid-in				Retained				comprehensive				Noncontrolling
Three Months Ended June 30, 2018		$1 par value				capital				earnings				loss				interest				Total
Balance at March 31, 2018		$	28,796			$	125,448			$	158,124			$	(14,016	)		$	-			$	298,352
Net income			-				-				11,648				-				-				11,648
Changes in cumulative translation adjustment			-				-				-				(6,814	)			-				(6,814	)
Adjustments related to postretirement benefits, net of tax			-				-				-				114				-				114
Changes in unrealized gains and losses on investments, net of tax			-				-				-				8				-				8
Cash dividends - $0.06 per share			-				-				(1,732	)			-				-				(1,732	)
Exercise of stock options			31				280				-				-				-				311
Shares issued under ESPP			41				721				-				-				-				762
Shares issued for restricted stock units vested			20				(20	)			-				-				-				-
Repurchase and retirement of stock			(5	)			(129	)			-				-				-				(134	)
Share-based compensation expense			-				1,948				-				-				-				1,948
Balance at June 30, 2018		$	28,883			$	128,248			$	168,040			$	(20,708	)		$	-			$	304,463
Six Months Ended June 30, 2018
Balance at December 30, 2017		$	28,489			$	127,663			$	150,726			$	(17,787	)		$	-			$	289,091
Cumulative effect of accounting change			-				-				1,057				-				-				1,057
Net income			-				-				19,770				-				-				19,770
Changes in cumulative translation adjustment			-				-				-				(2,960	)			-				(2,960	)
Adjustments related to postretirement benefits, net of tax			-				-				-				41				-				41
Changes in unrealized gains and losses on investments, net of tax			-				-				-				(2	)			-				(2	)
Cash dividends - $0.12 per share			-				-				(3,513	)			-				-				(3,513	)
Exercise of stock options			50				464				-				-				-				514
Shares issued under ESPP			41				721				-				-				-				762
Shares issued for restricted stock units vested			468				(468	)			-				-				-				-
Repurchase and retirement of stock			(165	)			(3,749	)			-				-				-				(3,914	)
Share-based compensation expense			-				3,617				-				-				-				3,617
Balance at June 30, 2018		$	28,883			$	128,248			$	168,040			$	(20,708	)		$	-			$	304,463

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		Six Months Ended
		June 29,				June 30,
		2019				2018
Cash flows from operating activities:
Net income (loss) attributable to Cohu		$	(41,966	)		$	19,770
Net loss attributable to noncontrolling interest			(80	)			-
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Loss on disposal of assets			237				40
Depreciation and amortization			30,143				4,874
Share-based compensation expense			7,355				3,617
Amortization of inventory step-up and inventory related charges			5,245				-
Deferred income taxes			(7,460	)			486
Increase in accrued retiree medical benefits			443				-
Changes in other accrued liabilities			2,693				(294	)
Changes in other assets			(971	)			(322	)
Amortization of debt discounts and issuance costs			546				-
Adjustment to contingent consideration liability			-				428
Changes in current assets and liabilities, excluding effects from acquisitions:
Accounts receivable			14,746				(21,289	)
Other current assets			(8,609	)			(2,432	)
Inventories			(2,499	)			(1,396	)
Deferred profit			1,266				(3,653	)
Accounts payable			4,019				3,853
Income taxes payable			(4,097	)			1,728
Accrued compensation, warranty and other liabilities			(5,784	)			505
Net cash provided by (used in) operating activities			(4,773	)			5,915
Cash flows from investing activities, excluding effects from acquisitions:
Purchases of property, plant and equipment			(8,397	)			(1,860	)
Purchases of short-term investments			-				(27,374	)
Sales and maturities of short-term investments			-				24,838
Cash received from sale of fixed assets			811				4
Net cash used in investing activities			(7,586	)			(4,392	)
Cash flows from financing activities:
Cash dividends paid			(4,893	)			(3,484	)
Repurchases of common stock, net			(1,099	)			(2,638	)
Payment of contingent consideration for Kita			-				(823	)
Repayments of long-term debt			(2,611	)			(686	)
Net cash used in financing activities			(8,603	)			(7,631	)
Effect of exchange rate changes on cash and cash equivalents			(195	)			(1,170	)
Net decrease in cash and cash equivalents			(21,157	)			(7,278	)
Cash and cash equivalents including discontinued operations at beginning of period			164,921				134,286
Cash and cash equivalents including discontinued operations at end of period			143,764				127,008
Cash held by discontinued operations at end of period (Note 10)			(750	)			-
Cash and cash equivalents from continuing operations at end of the period		$	143,014			$	127,008
Supplemental disclosure of cash flow information:
Cash paid for interest		$	10,088			$	-
Cash paid for income taxes		$	10,690			$	2,608
Inventory capitalized as property, plant and equipment		$	195			$	149
Dividends declared but not yet paid		$	2,466			$	1,733
Property, plant and equipment purchases included in accounts payable		$	938			$	166
Capitalized cloud computing service costs included in accounts payable		$	1,477			$	-

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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 29, 2018, has been derived from our audited financial statements at that date. The interim condensed consolidated financial statements as of June 29, 2019, (also referred to as “the second quarter of fiscal 2019” and “the first six months of fiscal 2019”) and June 30, 2018, (also referred to as “the second quarter of fiscal 2018” and “the first six months of fiscal 2018”) 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 three- and six-month periods ended June 29, 2019, were comprised of 13 and 26 weeks, respectively. The three- and six-month periods ended June 30, 2018, were comprised of 13 and 26 weeks, respectively.

 

Our interim results are not necessarily indicative of the results that should be expected for the full year. For a better understanding of Cohu, Inc. and our financial statements, we recommend reading these interim condensed consolidated financial statements in conjunction with our audited financial statements for the year ended December 29, 2018, which are included in our 2018 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”.

 

The condensed consolidated financial statements include the accounts of Cohu and a variable interest entity (“VIE”) that was acquired as part of our acquisition of Xcerra Corporation (“Xcerra”) and in which we have determined we are the primary beneficiary. The non-controlling interest in ALBS Solutions Sdn Bhd (“ALBS”) represents the 80% equity interest that is not held by Cohu. ALBS is a privately held corporation which provides high-tech semiconductor automation systems to different industrial users. All significant consolidated transactions and balances have been eliminated in consolidation.

 

Principles of Consolidation for Variable Interest Entities

 

We follow ASC Topic 810-10-15 guidance with respect to accounting for VIEs. These entities do not have sufficient equity at risk to finance their activities without additional subordinated financial support from other parties or whose equity investors lack any of the characteristics of a controlling financial interest. A variable interest is an investment or other interest that will absorb portions of a VIE’s expected losses or receive portions of its expected residual returns and are contractual, ownership, or pecuniary in nature and that change with changes in the fair value of the entity’s net assets. A reporting entity is the primary beneficiary of a VIE and must consolidate it when that party has a variable interest, or combination of variable interests, that provides it with a controlling financial interest. A party is deemed to have a controlling financial interest if it meets both of the power and losses/benefits criteria. The power criterion is the ability to direct the activities of the VIE that most significantly impact its economic performance. The losses/benefits criterion is the obligation to absorb losses from, or right to receive benefits from, the VIE that could potentially be significant to the VIE. The VIE model requires an ongoing reconsideration of whether a reporting entity is the primary beneficiary of a VIE due to changes in facts and circumstances.

 

As of June 29, 2019 and December 29, 2018, we consolidated one VIE. Cohu is the primary beneficiary of ALBS which qualifies as a VIE that meets the definition of a business. As such, the assets, liabilities, and noncontrolling interest of ALBS were measured at fair value upon acquisition in accordance with ASC 805, Business Combinations ("ASC 805"). The assets and liabilities and revenues and expenses of this VIE are included in our condensed consolidated financial statements. As of June 29, 2019 and December 29, 2018, the assets and liabilities of ALBS set are immaterial to Cohu and, therefore, not shown separately on our condensed consolidated balance sheets. The third-party equity interest of ALBS is referred to as noncontrolling interest. The portion of net income (loss) attributable to the noncontrolling interest of ALBS is presented as net income (loss) allocated to noncontrolling interests in the condensed consolidated statements of operations and comprehensive loss, and the portion of stockholders' equity of ALBS is presented as noncontrolling interest in the condensed consolidated statements of stockholders' equity.

 

Reclassifications

In conjunction with the acquisition of Xcerra, we assessed the need to realign its financial statement presentation and certain income statement classifications were adjusted with prior periods reclassified to conform with current period presentation. The changes made were as follows:

 

●

Amortization of intangibles previously were presented in cost of sales and SG&A. These amounts are now presented as a separate line item “Amortization of purchased intangibles” within operating expenses.

 

●

Gains and losses associated with foreign currency translation and remeasurement were included within SG&A. These amounts are now presented as “Foreign transaction gain (loss) and other”.

 

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

June 29, 2019

 

A summary of the reclassifications described above and the impact on our condensed consolidated statements of operations is as follows:

 

 

 

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.

 

Trade accounts receivable are presented net of allowance for doubtful accounts of $0.3 million at both June 29, 2019 and December 29, 2018. Our customers include semiconductor manufacturers and semiconductor test subcontractors throughout many areas of the world. While we believe that our allowance for doubtful accounts is adequate and represents our best estimate at June 29, 2019, we will continue to monitor customer liquidity and other economic conditions, which may result in changes to our estimates regarding collectability.

 

Inventories

 

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

 

Inventories by category were as follows (in thousands):

 

 

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.

 

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

June 29, 2019

 

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

 

 

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. Subsequent to the acquisition of Xcerra on October 1, 2018, 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, Other Intangible Assets and Long-lived Assets

 

We evaluate goodwill for impairment annually and when an event occurs or circumstances change that indicate that the carrying value may not be recoverable. We test goodwill for impairment by first comparing the book value of net assets to the fair value of the reporting units. 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 estimated fair value of goodwill and the carrying value. 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.

 

We conduct our annual impairment test as of October 1st of each year, and have determined there was no impairment as of October 1, 2018 as we determined that the estimated fair values of our reporting units 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. As of June 29, 2019, we do not believe that circumstances have occurred that indicate impairment of our goodwill is more-likely-than-not. In the event we determine that an interim goodwill impairment review is required in a future period, the review may result in an impairment charge, which would have a negative impact on our results of operations.

 

We evaluate our indefinite-lived intangible assets associated with in-process research and development by comparing the fair value of each project with its carrying 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.

 

Product Warranty

 

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

 

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

June 29, 2019

 

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 capitalize costs related to the issuance of debt. Debt issuance costs directly related to our Term Loam B are presented as a reduction of current installments of long-term debt and long-term debt in our 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 $0.5 million for the three and six months ended June 29, 2019. We obtained the Term B Loan on October 1, 2018, so there were no debt issuance costs amortized during the three and six months ended June 30, 2018.

 

Foreign Remeasurement and Currency Translation

 

Assets and liabilities of our wholly owned foreign subsidiaries that use the U.S. Dollar as their functional currency are re-measured using exchange rates in effect at the end of the period, except for nonmonetary assets, such as inventories and property, plant and equipment, which are re-measured using historical exchange rates. Revenues and costs are re-measured using average exchange rates for the period, except for costs related to those balance sheet items that are re-measured using historical exchange rates. Gains and losses on foreign currency transactions are recognized as incurred. During the three and six months ended June 29, 2019, we recognized foreign exchange losses of $0.5 million and $0.3 million, respectively, in our condensed consolidated statements of operations. During the three and six months ended June 30, 2018, we recognized foreign exchange gains of $3.0 million and $1.5 million in our condensed consolidated statements of operations, respectively. 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.

 

Share-Based Compensation

 

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

 

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

June 29, 2019

 

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

 

 

Income (Loss) Per Share

 

Basic income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the reporting period. Diluted income (loss) per share includes the dilutive effect of common shares potentially issuable upon the exercise of stock options, vesting of outstanding restricted stock and performance stock units and issuance of stock under our employee stock purchase plan using the treasury stock method. In loss periods, potentially dilutive securities are excluded from the per share computations due to their anti-dilutive effect. For purposes of computing diluted income (loss) per share, stock options with exercise prices that exceed the average fair market value of our common stock for the period are excluded. For the three and six months ended June 29, 2019, stock options and awards to issue approximately 610,000 and 502,000 shares of common stock were excluded from the computation, respectively. For the three and six months ended June 30, 2018, stock options and awards to issue approximately 3,000 and 19,000 shares of common stock were excluded from the computation, respectively.

 

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

 

 

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

 

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

June 29, 2019

 

Leases with an initial term of 12 months or less are not recorded on the balance sheet, but recognized in the 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 liabilities.

 

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

 

Revenue Recognition

 

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

 

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

 

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

 

Unsatisfied performance obligations primarily represent contracts for products with future delivery dates. At June 29, 2019, we have $13.5 million of revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) for contracts with original expected durations of over one year. As allowed under ASC 606, we have opted to not disclose unsatisfied performance obligations for contracts with original expected durations of less than one year.

 

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

 

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.

 

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

June 29, 2019

 

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 the condensed consolidated balance sheet in any of the periods presented.

 

On shipments where sales are not recognized, gross profit is generally recorded as deferred profit in our condensed consolidated balance sheet representing the difference between the receivable recorded and the inventory shipped. At June 29, 2019, we had deferred revenue totaling approximately $16.7 million, current deferred profit of $8.2 million and deferred profit expected to be recognized after one year included in noncurrent other accrued liabilities of $4.3 million. At December 29, 2018, we had deferred revenue totaling approximately $10.8 million, current deferred profit of $6.9 million and deferred profit expected to be recognized after one year included in noncurrent other accrued liabilities of $2.0 million.

 

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

 

 

(1)

After the acquisition of Xcerra on October 1, 2018 we report in two segments, Semiconductor Test & Inspection and PCB Test. Cohu’s historical reported net sales would have been reported in our Semiconductor Test & Inspection segment and have been presented accordingly.

 

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

 

 

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:

 

*

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

 

(1)

After the acquisition of Xcerra on October 1, 2018 we report in two segments, Semiconductor Test & Inspection and PCB Test. Cohu’s historical reported net sales would have been reported in our Semiconductor Test & Inspection segment and have been presented accordingly.

 

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

June 29, 2019

 

Accumulated Other Comprehensive Loss

 

Our accumulated other comprehensive loss balance totaled approximately $27.0 million and $25.9 million at June 29, 2019 and December 29, 2018, 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 six months of fiscal 2019 and 2018 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 six months of fiscal 2019 and 2018 was not significant.

 

Discontinued Operations

 

Management has determined that the fixtures services business, that was acquired as part of Xcerra, does not align with Cohu’s long-term strategic plan and management is in the process of divesting this portion of the business. 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 29, 2018. See Note 10, “Discontinued Operations” for additional information. Unless otherwise indicated, all amounts herein relate to continuing operations.

 

Recent Accounting Pronouncements

 

Recently Adopted Accounting Pronouncements 

 

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 rather than in the earliest period presented. We elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to carryforward the historical lease classification.

 

We made an accounting policy election to not record ROU assets and lease liabilities for leases with an initial term of 12 months or less. We recognized those lease payments in the consolidated statements of operations on a straight-line basis over the lease term. We also made an accounting policy election to use the practical expedient allowed in the standard to not separate lease and non-lease components when calculating the ROU asset and lease liability. Related to adoption of the new standard, we have implemented internal controls and a lease accounting technology system to track the ROU asset and lease liability balances and prepare the related footnote disclosures.

 

Adoption of the new standard resulted in the recording of additional net lease assets and lease liabilities of approximately $30.7 million and $29.9 million, respectively, as of December 30, 2018. 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 standard did not materially impact our consolidated net earnings and had no impact on cash flows.

 

Recently Issued Accounting Pronouncements

 

In August 2018, the FASB issued ASU 2018-14, Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans, which improves defined benefit disclosure requirements by removing disclosures that are not cost beneficial, clarifying disclosures’ specific requirements and adding relevant disclosure requirements. This ASU is effective for fiscal years ending after December 15, 2020 and early adoption is permitted. The amendments in this ASU are required to be applied on a retrospective basis to all periods presented. We are currently assessing and have not yet determined the impact that the adoption of ASU 2018-14 will have on the consolidated financial statements.

 

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

June 29, 2019

 

In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which improves fair value disclosure requirements by removing disclosures that are not cost beneficial, clarifying disclosures’ specific requirements and adding relevant disclosure requirements. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted and an entity can choose to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date. We are currently assessing and have not yet determined the impact that the adoption of ASU 2018-13 will have on the consolidated financial statements.

 

 

2.	Business Acquisitions, Goodwill and Purchased Intangible Assets

 

Xcerra

 

Pursuant to the Agreement and Plan of Merger (the “Merger Agreement”) dated as of May 7, 2018, among Cohu, Xcerra, and Xavier Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary of Cohu (“Merger Sub”), Merger Sub merged with and into Xcerra (the “Merger”), with Xcerra surviving such merger as a wholly owned subsidiary of Cohu. The Merger was effective on October 1, 2018 (“the Effective Time”). At the Effective Time, each share of Xcerra Common Stock issued and outstanding immediately prior to the Effective Time (other than dissenting shares and shares held by Cohu, Merger Sub, Xcerra or any direct or indirect wholly owned subsidiary of Cohu or Xcerra) was converted into the right to receive, in the aggregate for all shares of Xcerra Common Stock, consideration, which totaled approximately $794.4 million as of the Effective Time.

 

Cohu financed the Merger, including all related fees and expenses, with the following: 

 

●

$160.5 million cash from our combined balance sheets;

 

●

The incurrence of $350.0 million from the Credit Facility, as described below;

 

●

The issuance of 11,776,149 shares of Cohu common stock; and

 

●

The issuance of 529,995 converted RSUs to Xcerra employees, of which $0.8 million of the fair value of the converted RSUs was attributed to pre-merger services.

 

On October 1, 2018, Cohu entered into a Credit Agreement with Cohu, as borrower, certain of its subsidiaries as guarantor subsidiaries, the financial institutions party(ies) thereto as may from time to time be lenders, and Deutsche Bank AG New York Branch, as administrative agent and collateral agent, providing for a $350.0 million Credit Facility (the “Credit Facility”), and borrowed the full amount. Loans under the Credit Facility amortize in equal quarterly installments of 0.25% of the original principal amount thereof, with the balance payable at maturity. Subject to certain exceptions and thresholds, the Credit Facility will also require mandatory prepayments in connection with (i) excess cash flow, (ii) non-ordinary course asset sales and other dispositions and (iii) the issuance of certain debt obligations, among other things. Cohu has the right to prepay loans under the Credit Agreement in whole or in part at any time, without premium or penalty. Amounts repaid in respect of loans under the Credit Facility may not be reborrowed. 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, at a floating annual rate equal to LIBOR plus a margin of 3.00%.  The lender(s) may accelerate the payment terms of the Credit Agreement upon the occurrence of certain events of default as 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. Any event that could require us to repay debt prior to its due date could have a material adverse impact on our financial condition and results of operations.

 

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

June 29, 2019

 

Immediately prior to the Effective Time, each Xcerra RSU that was vested was cancelled and the holder received cash and share consideration for the outstanding shares. Each unvested RSU held by employees of Xcerra were assumed by Cohu and converted into an RSU representing the number of whole shares of Cohu common stock based on a conversion formula resulting in the number of assumed RSUs described above.

 

The acquisition method of accounting is based on ASC 805, and uses the fair value concepts defined in ASC 820, Fair Value Measurement (“ASC 820”). The purchase price allocation described herein is preliminary and is based on the information that was available to make estimates of the fair value and may change as further information becomes available and additional analyses are completed. While we believe such information provides a reasonable basis for estimating the fair values, we may obtain more information and evidence during the measurement period that result in changes to the estimated fair value amounts. The measurement period ends on the earlier of one year after the acquisition date or the date we receive the information about the facts and circumstances that existed at the acquisition date. Subsequent adjustments, if necessary, will be recognized during the period in which the amounts are determined. These refinements include: (1) changes in the estimated fair value of certain intangible assets acquired; and (2) changes in deferred tax assets and liabilities related to the fair value estimates.

 

The acquisition was nontaxable to Cohu and certain of the assets acquired, including goodwill and intangibles, will not be deductible for tax purposes. The acquired assets and liabilities of Xcerra were recorded at their respective fair values including an amount for goodwill which represents the purchase price paid in excess of the fair value of net tangible and intangible assets acquired, and is attributable primarily to expected synergies, economies of scale and the assembled workforce of Xcerra. Goodwill has been allocated to our THG, STG, ISG and PTG operating segments.

 

ASC 805 requires, among other things, that most assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. In addition, ASC 805 requires that the consideration transferred be measured at the date the merger is completed at the then-current market price. The market price of the shares of Cohu Common Stock at the Effective Time was $25.10 which was based upon the closing price of shares of Cohu Common Stock on the NASDAQ Global Select Market on Friday, September 28, 2018, the last day of trading prior to the Effective Time.

 

ASC 820 defines the term “fair value” and sets forth the valuation requirements for any asset or liability measured at fair value, expands related disclosure requirements and specifies a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair value measurements. Fair value is defined in ASC 820 as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” This is an exit price concept for the valuation of the asset or liability. In addition, market participants are assumed to be buyers and sellers in the principal (or the most advantageous) market for the asset or liability. Fair value measurements for an asset assume the highest and best use by these market participants. As a result of these standards, Cohu may be required to record the fair value of assets which are not intended to be used or sold and/or to value assets at fair values that do not reflect Cohu’s intended use of those assets. Many of these fair value measurements can be highly subjective, and it is possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts.

 

Under ASC 805, acquisition-related transaction costs (e.g., advisory, legal, investment banking and other professional fees) are not included as a component of consideration transferred but are accounted for as expenses in the periods in which such costs are incurred. Total Merger-related transaction costs, that exclude other costs related to employee termination and restructuring, incurred by Cohu were $0.4 million and $4.1 million in the first six months ended June 29, 2019 and June 30, 2018, respectively.

 

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

June 29, 2019

 

The table below summarizes the preliminary assets acquired and liabilities assumed as of October 1, 2018 (in thousands):

 

 

*

Includes a measurement period adjustment recorded during the three months ended June 29, 2019, as a result of obtaining new facts and circumstances related to certain assets acquired ($1.1 million) and liabilities assumed ($0.4 million) as of the date of acquisition. The net impact of this measurement period adjustment, totaling $0.7 million, was offset against goodwill.

 

We recorded a $19.6 million step-up of inventory to its fair value as of the acquisition date based on the preliminary valuation.

 

The preliminary allocation of the intangible assets subject to amortization is as follows (in thousands):

 

 

Acquired intangible assets reported above are being amortized using the straight-line method over their estimated useful lives which approximates the pattern of how the economic benefit is expected to be used. This includes amounts allocated to customer relationships because of anticipated high customer retention rates that are common in the semiconductor capital equipment industry.

 

The value assigned to developed technology was determined by using the multi-period excess earnings method under the income approach. Developed technology, which comprises products that have reached technological feasibility, includes the products in Xcerra’s product line. The revenue estimates used to value the developed technology were based on estimates of relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by Xcerra and competitors. The estimated cash flows were based on revenues for the developed technology net of operating expenses and net of contributory asset charges. The discount rate utilized to discount the net cash flows of the developed technology to present value was based on the risk associated with the respective cash flows taking into consideration the perceived risk of the technology relative to the other acquired assets, the weighted average cost of capital, the internal rate of return, and the weighted average return on assets.

 

The value assigned to customer relationships was determined by using the with and without method under the income approach, which analyzes the difference in discounted cash flows generated with the customer relationships in place compared to the discounted cash flows generated without the customer relationships in place.

 

In-process research and development (“IPR&D”) represents the estimated fair value assigned to research and development projects acquired in a business combination that have not been completed at the date of acquisition and which have no alternative future use. IPR&D is initially accounted for as an indefinite-lived intangible asset. Once a project reaches technological feasibility amounts capitalized related to the project are reclassified to developed technology and the intangible asset begins to be amortized over its estimated useful life. For the IPR&D, additional research and development will be required to assess technological feasibility.

 

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

June 29, 2019

 

The value assigned to backlog acquired was estimated based upon the contractual nature of the backlog as of October 1, 2018, using the income approach to discount back to present value the cash flows attributable to the backlog.

 

The value assigned to trademarks and trade names was estimated using the relief-from-royalty method of the income approach. This approach is based on the assumption that in lieu of ownership, a company would be willing to pay a royalty in order to exploit the related benefits of this intangible asset.

 

In our preliminary estimate of the fair value of Xcerra’s net assets, Cohu identified leases that appear to be at both favorable and unfavorable rates compared to current market rates. As a result, Cohu has recorded both favorable and unfavorable lease assets, which are being recognized within rent expense over the terms of the related lease.

 

Goodwill and Intangible Assets

 

Changes in the carrying value of goodwill during the year ended December 29, 2018, and the six-month period ended June 29, 2019, by segment, were as follows (in thousands):

 

 

	(1)	After the acquisition of Xcerra on October 1, 2018 we report in two segments, Semiconductor Test & Inspection and PCB Test. Prior year amounts would have been reported in our Semiconductor Test & Inspection segment and have been presented accordingly.
	(2)	Amounts represent adjustments to the preliminary goodwill from the Xcerra acquisition.

 

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

 

 

The table above excludes $33.5 million and $36.3 million of in-process technology, at June 29, 2019 and December 29, 2018, respectively, which has an indefinite life and is subject to impairment or future amortization as developed technology when the projects are completed. During the six months ended June 29, 2019, we completed certain projects previously included in in-process technology and transferred $2.7 million 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.

 

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

June 29, 2019

 

Amortization expense related to intangible assets was approximately $10.0 million in the second quarter of fiscal 2019 and $20.0 million in the first six months of fiscal 2019. Amortization expense related to intangible assets was approximately $1.0 million in the second quarter of fiscal 2018 and $2.1 million in the first six months of fiscal 2018. The increase in amortization expense in the current year is the result of amortization of assets acquired in the Xcerra transaction.

 

 

3.	Borrowings and Credit Agreements

 

The following table is a summary of our borrowings as of June 29, 2019 and December 29, 2018 (in thousands):

 

 

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. 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, at a floating annual rate equal to LIBOR plus a margin of 3.00%. At June 29, 2019, the outstanding loan balance, net of discount and deferred financing costs, was $339.4 million and $2.4 million of the outstanding balance is presented as current installments of long-term debt in our consolidated balance sheets. As of June 29, 2019, the fair value of the debt was $336.1 million. The measurement of the fair value of debt is based on the average of the bid and ask trading quotes as of June 29, 2019 and is considered a Level 2 fair value measurement. See Note 2, “Business Acquisitions, Goodwill and Purchased Intangible Assets” for additional information on the Credit Facility.

 

Kita Term Loans

 

As a result of our acquisition of Kita, we assumed 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 0.45%, and expire at various dates through 2034. At June 29, 2019, the outstanding loan balance was $4.2 million and $0.5 million of the outstanding balance is presented as current installments of long-term debt in our consolidated balance sheets. The fair value of the debt approximates the carrying value at June 29, 2019.

 

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

 

Xcerra Term Loan

 

As a result of our acquisition of Xcerra, we assumed a term loan related to the purchase of Xcerra’s facility in Rosenheim, Germany. The loan is payable over 10 years at an annual interest rate of 2.35%. Principal plus accrued interest is due quarterly over the duration of the term loan ending in March 2024. At June 29, 2019, the outstanding loan balance was $1.7 million and $0.3 million of the outstanding balance is presented as current installments of long-term debt in our consolidated balance sheets. The fair value of the debt approximates the carrying value at June 29, 2019.

 

The term loan is denominated in Euros and, as a result, amounts disclosed herein will fluctuate because of changes in currency exchange rates.

 

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

June 29, 2019

 

Lines of Credit

 

As a result of our acquisition of Kita, we assumed a series of revolving credit facilities with various financial institutions in Japan. The credit facilities renew monthly and provide Kita with access to working capital totaling up to $6.5 million. At June 29, 2019, total borrowings outstanding under the revolving lines of credit were $3.2 million. As these credit facility agreements renew monthly, they have been included in short-term borrowings in our consolidated balance sheet.

 

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. At June 29, 2019, and December 29, 2018., no amounts were outstanding under this line of credit.

 

 

4.	Restructuring Charges

 

Subsequent to the acquisition of Xcerra on October 1^st, 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”). See Note 2, “Business Acquisitions, Goodwill and Purchased Intangible Assets” for additional information regarding the acquisition of Xcerra. As part of the Integration Program we will consolidate our global handler and contactor manufacturing operations and expect to close our manufacturing operations in Penang, Malaysia and Fontana, California by the end of calendar year 2019. Relating to the facility consolidation actions, we notified certain impacted employees of a reduction in force program. 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. The Plan will reduce headcount, enable us to consolidate the facilities of our multiple operations located near Rosenheim, Germany, as well as transition certain manufacturing to other lower cost regions. The facility consolidation 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.

 

As a result of the activities described above, we recognized total pretax charges of $9.9 million for the first six months ended June 29, 2019, 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 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 six months ended June 29, 2019 (in thousands):

 

 

At June 29, 2019, our total accrual for restructuring related items is reflected within current liabilities of our consolidated balance sheets as these amounts are expected to be paid out in 2019. The estimated costs associated with the employee severance and facility consolidation actions will be paid predominantly in cash, with the exception of the amortization of leasehold improvements which is non-cash.

 

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

June 29, 2019

 

 

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 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.

 

Gains and losses on investments are calculated using the specific-identification method and are recognized during the period in which the investment is sold or when an investment experiences an other-than-temporary decline in value. 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.

 

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

 

 

 

 

(1)

As of June 29, 2019 and December 29, 2018, there were no investments in our portfolio in a loss position.

 

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

 

 

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.

 

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

June 29, 2019

 

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):

 

 

 

 

6.	Employee Stock Benefit Plans

 

Our 2005 Equity Incentive Plan (the “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 June 29, 2019, there were 2,500,306 shares available for future equity grants under the 2005 Plan. On May 8, 2019, our stockholders approved amendments to the 2005 Plan which increased the shares of stock available for issuance by 2,000,000 and eliminated a sublimit on the aggregate number of shares that may be issued pursuant to restricted stock, restricted stock units, performance shares or performance unit awards.

 

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 first six months of fiscal 2019 we did not grant any stock options and we issued 14,650 shares of our common stock on the exercise of options that were granted previously.

 

At June 29, 2019, we had 390,276 stock options exercisable and outstanding. These options had a weighted-average exercise price of $10.29 per share, an aggregate intrinsic value of approximately $2.0 million and the weighted average remaining contractual term was approximately 3.2 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 June 29, 2019.

 

In the first six months of fiscal 2019 we awarded 661,621 RSUs and we issued 359,367 shares of our common stock on vesting of previously granted awards. At June 29, 2019, we had 1,539,067 RSUs outstanding with an aggregate intrinsic value of approximately $23.9 million and the weighted average remaining vesting period was approximately 1.5 years.

 

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

June 29, 2019

 

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 in 2019, 2018 and 2017 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 for the performance period. PSUs granted in 2019, 2018 and 2017 vest 100% on the third anniversary of their grant.

 

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. As a result, the actual number of shares issued will be fewer than the actual number outstanding at June 29, 2019.

 

In the first six months of fiscal 2019, we awarded 167,226 PSUs and we issued 34,292 shares of our common stock on vesting of previously granted awards. At June 29, 2019, we had 369,811 PSUs outstanding with an aggregate intrinsic value of approximately $5.7 million and the weighted average remaining vesting period was approximately 1.9 years.

 

Employee Stock Purchase Plan

 

The Cohu, Inc. 1997 Employee Stock Purchase Plan (“the 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 six months of fiscal 2019, 63,998 shares of our common stock were sold to our employees under the ESPP leaving 1,034,612 shares available for future issuance. On May 8, 2019, our stockholders approved an amendment to the ESPP which increased the number of ESPP shares that may be issued by 500,000.

 

 

7.	Income Taxes

 

Ordinarily, interim tax provisions are calculated using the estimated effective tax rate (“ETR”) expected to be applicable for the full fiscal year. However, when a reliable estimate of the annual ETR cannot be made, the actual ETR for the year-to-date period may be the best estimate of the annual ETR. For the three and six months ended June 29, 2019, we used the actual year-to-date ETR in computing our tax provision, as a reliable estimate of the 2019 annual ETR cannot be made, since relatively small changes in our projected income produce a significant variation in our ETR. In computing the tax provision for the three and six months ended June 30, 2018, we used the ETR expected to be applicable for the full fiscal year. The ETR on income or loss from continuing operations for the three months ended June 29, 2019 and June 30, 2018 was 4.5% and 17.5%, respectively, and 2.6% and 18.9% for the six months ended June 29, 2019 and June 30, 2018, respectively. The tax provision on income or loss from continuing operations in 2019 and 2018 differs from the U.S. federal statutory rate primarily due to the lack of a tax benefit on our domestic losses as a result of our valuation allowance on deferred tax assets, foreign income taxed at different rates, changes in our deferred tax asset valuation allowance, state taxes and interest related to unrecognized tax benefits.

 

Our German subsidiary's income tax returns for 2012 to 2016 are currently under routine examination by tax authorities in Germany. We believe our financial statement accruals for income taxes are appropriate.

 

There was no material change to our unrecognized tax benefits and related accrued interest and penalties during the three and six-month periods ended June 29, 2019 and June 30, 2018.

 

 

8.	Segment and Geographic 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. After the acquisition of Xcerra on October 1, 2018, 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 & Inspection and PCB Test. The summary below presents our current segments, Semiconductor Test & Inspection and PCB Test, for the three months ended June 29, 2019 and June 30, 2018.

 

 

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

June 29, 2019

 

Prior to the acquisition of Xcerra on October 1, 2018, historical amounts of Cohu’s semiconductor equipment segment would have been reported in our Semiconductor Test & Inspection segment and have been presented accordingly.

 

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

 

 

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

 

 

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