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 28, 2020

OR

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

For the transition period from to

Commission file number 001-04298

COHU, INC.

(Exact name of registrant as specified in its charter)

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

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

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

Title of Each Class	Trading Symbol(s)	Name of Exchange on Which Registered
Common Stock, $1.00 par value	COHU	The Nasdaq Stock Market LLC

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

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

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

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

Smaller reporting company ☐      Emerging growth company ☐

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

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

As of April 29, 2020 the Registrant had 41,703,274 shares of its $1.00 par value common stock outstanding.

COHU, INC.

INDEX

FORM 10-Q

MARCH 28, 2020

Part I	Financial Information	Page Number
Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets March 28, 2020 (unaudited) and December 28, 2019	3
	Condensed Consolidated Statements of Operations (unaudited) Three Months Ended March 28, 2020 and March 30, 2019	4
	Condensed Consolidated Statements of Comprehensive Loss (unaudited) Three Months Ended March 28, 2020 and March 30, 2019	5
	Condensed Consolidated Statements of Stockholders’ Equity (unaudited) Three Months Ended March 28, 2020 and March 30, 2019	6
	Condensed Consolidated Statements of Cash Flows (unaudited) Three Months Ended March 28, 2020 and March 30, 2019	7
	Notes to Unaudited Condensed Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
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	53
Item 3.	Defaults Upon Senior Securities	53
Item 4.	Mine Safety Disclosures	53
Item 5.	Other Information	53
Item 6.	Exhibits	54
Signatures		55

Item 1.

COHU, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

	March 28,			December 28,
	2020				2019 *
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	171,474		$	155,194
Short-term investments		901			904
Accounts receivable, net		111,456			127,921
Inventories		134,859			130,706
Assets held for sale		8,346			827
Prepaid expenses		20,765			17,483
Other current assets		5,998			3,158
Current assets of discontinued operations (Note 10)		-			3,503
Total current assets		453,799			439,696
Property, plant and equipment, net		64,688			70,912
Goodwill		237,997			238,669
Intangible assets, net		261,316			275,019
Other assets		21,756			20,030
Operating lease right of use assets		32,599			33,269
Noncurrent assets of discontinued operations (Note 10)		-			115
	$	1,072,155		$	1,077,710
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings	$	3,244		$	3,195
Current installments of long-term debt		3,322			3,322
Accounts payable		53,457			48,697
Customer advances		26,594			12,160
Accrued compensation and benefits		20,837			23,741
Deferred profit		9,313			7,645
Accrued warranty		6,066			5,893
Income taxes payable		11,795			3,894
Other accrued liabilities		29,089			39,739
Current liabilities of discontinued operations (Note 10)		-			599
Total current liabilities		163,717			148,885
Accrued retirement benefits		22,285			21,930
Deferred income taxes		29,297			31,310
Noncurrent income tax liabilities		8,203			8,438
Long-term debt		346,877			346,518
Long-term lease liabilities		28,352			28,877
Other accrued liabilities		8,540			8,656
Noncurrent liabilities of discontinued operations (Note 10)		-			24
Stockholders' equity:
Preferred stock, $1 par value; 1,000 shares authorized, none issued		-			-
Common stock, $1 par value; 60,000 shares authorized, 41,686 shares issued and outstanding in 2020 and 41,395 shares in 2019		41,686			41,395
Paid-in capital		435,402			433,190
Retained earnings		22,755			42,517
Accumulated other comprehensive loss		(34,959	)		(34,030	)
Total stockholders’ equity		464,884			483,072
	$	1,072,155		$	1,077,710

* Derived from December 28, 2019 audited financial statements

The accompanying notes are an integral part of these statements.

3

COHU, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share amounts)

	Three Months Ended
	March 28,			March 30,
	2020			2019
Net sales	$	138,921		$	147,809
Cost and expenses:
Cost of sales (1)		82,837			93,394
Research and development		22,468			22,733
Selling, general and administrative		33,352			38,286
Amortization of purchased intangible assets		9,538			10,019
Restructuring charges		403			1,361
Impairment charges		3,949			-
		152,547			165,793
Loss from operations		(13,626	)		(17,984	)
Other (expense) income:
Interest expense		(4,427	)		(5,507	)
Interest income		147			222
Foreign transaction gain (loss)		(404	)		218
Loss from continuing operations before taxes		(18,310	)		(23,051	)
Income tax benefit		(992	)		(200	)
Loss from continuing operations		(17,318	)		(22,851	)
Income from discontinued operations		42			164
Net loss	$	(17,276	)	$	(22,687	)
Net loss attributable to noncontrolling interest	$	-		$	(44	)
Net loss attributable to Cohu	$	(17,276	)	$	(22,643	)
Income (loss) per share:
Basic:
Loss from continuing operations before noncontrolling interest	$	(0.42	)	$	(0.56	)
Income from discontinued operations		0.00			0.01
Net loss attributable to noncontrolling interest		-			(0.00	)
Net loss attributable to Cohu	$	(0.42	)	$	(0.55	)
Diluted:
Loss from continuing operations before noncontrolling interest	$	(0.42	)	$	(0.56	)
Income from discontinued operations		0.00			0.01
Net loss attributable to noncontrolling interest		-			(0.00	)
Net loss attributable to Cohu	$	(0.42	)	$	(0.55	)
Weighted average shares used in computing income (loss) per share:
Basic		41,502			40,872
Diluted		41,502			40,872
Cash dividends declared per share	$	0.06		$	0.06

(1) Excludes amortization of $7,266 and $7,641 for the three months ended March 28, 2020 and March 30, 2019, respectively. 

The accompanying notes are an integral part of these statements.

4

COHU, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

(in thousands)

	Three Months Ended
	March 28,			March 30,
	2020			2019
Net loss	$	(17,276	)	$	(22,687	)
Net loss attributable to noncontrolling interest		-			(44	)
Net loss attributable to Cohu		(17,276	)		(22,643	)
Other comprehensive loss, net of tax:
Foreign currency translation adjustments		(929	)		(5,262	)
Adjustments related to postretirement benefits		-			474
Other comprehensive loss, net of tax		(929	)		(4,788	)
Other comprehensive loss attributable to noncontrolling interest		-			(4	)
Other comprehensive loss attributable to Cohu		(929	)		(4,784	)
Comprehensive loss		(18,205	)		(27,475	)
Comprehensive loss attributable to noncontrolling interest		-			(48	)
Comprehensive loss attributable to Cohu	$	(18,205	)	$	(27,427	)

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			Noncontrolling
Three Months Ended March 30, 2019	$1 par value			capital			earnings			loss			interest			Total
Balance at December 29, 2018	$	40,763		$	419,690		$	111,670		$	(25,880	)	$	(299	)	$	545,944
Cumulative effect of accounting change (a)		-			-			10,352			-			-			10,352
Net loss		-			-			(22,687	)		-			-			(22,687	)
Changes in cumulative translation adjustment		-			-			-			(5,258	)		(4	)		(5,262	)
Adjustments related to postretirement benefits, net of tax		-			-			-			474			-			474
Changes in unrealized gains and losses on cash dividends - $0.06 per share		-			-			(2,450	)		-			-			(2,450	)
Exercise of stock options		10			68			-			-			-			78
Shares issued for restricted stock units vested		365			(365	)		-			-			-			-
Repurchase and retirement of stock		(123	)		(1,705	)		-			-			-			(1,828	)
Noncontrolling interest		-			-			53			-			(53	)		-
Share-based compensation expense		-			3,693			-			-			-			3,693
Balance at March 30, 2019	$	41,015		$	421,381		$	96,938		$	(30,664	)	$	(356	)	$	528,314
Three Months Ended March 28, 2020
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

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

The accompanying notes are an integral part of these statements.

6

COHU, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

	Three Months Ended
	March 28,			March 30,
	2020			2019
Cash flows from operating activities:
Net loss attributable to Cohu	$	(17,276	)	$	(22,643	)
Net loss attributable to noncontrolling interest		-			(44	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Gain on disposal of discontinued operation		(35	)		-
Impairment charges related to indefinite lived intangibles		3,949			-
Loss on disposal of assets		88			378
Depreciation and amortization		12,956			15,044
Share-based compensation expense		3,611			3,693
Amortization of inventory step-up and inventory related charges		1,603			6,504
Deferred income taxes		(2,706	)		(2,494	)
Increase in accrued retiree medical benefits		254			192
Changes in other accrued liabilities		(106	)		1,589
Changes in other assets		810			313
Interest capitalized associated with cloud computing implementation		(45	)		-
Amortization of debt discounts and issuance costs		290			-
Changes in current assets and liabilities:
Customer advances		14,434			(600	)
Accounts receivable		17,078			17,657
Inventories		(6,067	)		2,475
Other current assets		(5,888	)		(4,022	)
Accounts payable		55			(3,480	)
Deferred profit		1,619			1,374
Income taxes payable		7,454			(2,214	)
Accrued compensation, warranty and other liabilities		(14,313	)		(9,002	)
Operating lease right-of-use assets		1,843			-
Current and long-term operating lease liabilities		(1,795	)		-
Net cash provided by operating activities		17,813			4,720
Cash flows from investing activities:
Net cash received from sale of Fixtures Services business		2,975			-
Cash received from sale of fixed assets		74			5
Purchases of property, plant and equipment		(1,584	)		(3,526	)
Net cash provided by (used in) investing activities		1,465			(3,521	)
Cash flows from financing activities:
Cash dividends paid		(2,483	)		(2,443	)
Issuance (repurchases) of common stock, net		253			(1,750	)
Proceeds from construction loan		1,117			-
Repayments of long-term debt		(1,133	)		(1,098	)
Net cash used in financing activities		(2,246	)		(5,291	)
Effect of exchange rate changes on cash and cash equivalents		(1,488	)		(488	)
Net increase (decrease) in cash and cash equivalents		15,544			(4,580	)
Cash and cash equivalents including discontinued operations at beginning of period		155,930			164,921
Cash and cash equivalents including discontinued operations at end of period		171,474			160,341
Cash held by discontinued operations at end of period (Note 10)		-			(820	)
Cash and cash equivalents from continuing operations at end of period	$	171,474		$	159,521
Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	690		$	3,797
Inventory capitalized as property, plant and equipment	$	238		$	116
Dividends declared but not yet paid	$	2,488		$	2,449
Property, plant and equipment purchases included in accounts payable	$	3,370		$	873
ST Capitalized cloud computing service costs included in accounts payable	$	182		$	329
LT Capitalized cloud computing service costs included in accounts payable	$	1,370		$	1,515
Cash paid for interest	$	7,308		$	5,130

The accompanying notes are an integral part of these statements.

7

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 28, 2020

1. Summary of Significant Accounting Policies

Basis of Presentation

Our fiscal years are based on a 52- or 53-week period ending on the last Saturday in December. The condensed consolidated balance sheet at December 28, 2019, has been derived from our audited financial statements at that date. The interim condensed consolidated financial statements as of March 28, 2020, (also referred to as “the first quarter of fiscal 2020” and “the first three months of fiscal 2020”) and March 30, 2019, (also referred to as “the first quarter of fiscal 2019” and “the first three months of fiscal 2019”) are unaudited. However, in management’s opinion, these financial statements reflect all adjustments (consisting only of normal, recurring items) necessary to provide a fair presentation of our financial position, results of operations and cash flows for the periods presented. The first quarter of fiscal 2020 and 2019 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 28, 2019, which are included in our 2019 Annual Report on Form 10-K, filed with the U. S. Securities and Exchange Commission (“SEC”). In the following notes to our interim condensed consolidated financial statements, Cohu, Inc. is referred to as “Cohu”, “we”, “our” and “us”.

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

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

Reclassifications

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

Concentration of Credit Risk

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

We adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, on December 29, 2019, the first day of our fiscal 2020. The ASU required a cumulative-effect adjustment to the statement of financial position as of the date of adoption. Periods prior to the adoption that are presented for comparative purposes are not adjusted. Based on our analysis of historical and anticipated collections of trade receivables the impact of adoption of Topic 326 was insignificant. Our trade accounts receivable are presented net of allowance for credit losses, which were insignificant at March 28, 2020 and December 28, 2019. 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 28, 2020, we will continue to monitor customer liquidity and other economic conditions, which may result in changes to our estimates regarding collectability.

Inventories

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

8

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 28, 2020

Inventories by category were as follows (in thousands):

	March 28,		December 28,
	2020		2019
Raw materials and purchased parts	$	73,222	$	69,665
Work in process		44,381		46,591
Finished goods		17,256		14,450
Total inventories	$	134,859	$	130,706

Assets Held for Sale

As part of our previously announced strategic restructuring program we are implementing certain facility consolidation actions. We expect to complete the sales of our facilities located in Penang, Malaysia in the second quarter of 2020 and Rosenheim, Germany in the third quarter of 2020. As a result, these facilities are being presented as held for sale at March 28, 2020. See Note 4, “Restructuring Charges” for additional information on this program.

Property, Plant and Equipment

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

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

	March 28,			December 28,
	2020			2019
Land and land improvements	$	8,650		$	11,659
Buildings and building improvements		40,593			41,474
Machinery and equipment		59,029			61,006
		108,272			114,139
Less accumulated depreciation and amortization		(43,584	)		(43,227	)
Property, plant and equipment, net	$	64,688		$	70,912

Segment Information

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

9

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 28, 2020

We conduct our annual impairment test as of October 1st of each year and have determined there was no impairment as of October 1, 2019, as the estimated fair values of our reporting units and indefinite-lived intangible assets exceeded their carrying values on that date. Other events and changes in circumstances may also require goodwill to be tested for impairment between annual measurement dates. While a decline in stock price and market capitalization is not specifically cited as an impairment indicator, a company’s stock price and market capitalization should be considered in determining whether it is more likely than not that the fair value of a reporting unit is less than its book value. The financial and credit market volatility caused by the COVID-19 pandemic directly impacts our fair value measurement through our stock price that we use to determine our market capitalization. During times of volatility, significant judgment must be applied to determine whether stock price changes are a short-term swing or a longer-term trend.

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

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

Long-lived assets, other than goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or any other significant adverse change that would indicate that the carrying amount of an asset or group of assets may not be recoverable. For long-lived assets, impairment losses are only recorded if the asset’s carrying amount is not recoverable through its undiscounted, probability-weighted future cash flows. We measure the impairment loss based on the difference between the carrying amount and estimated fair value. We evaluated the expected undiscounted cashflows of these assets as of March 28, 2020 and determined there was no impairment.

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.

10

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 28, 2020

Debt Issuance Costs

We capitalize costs related to the issuance of debt. Debt issuance costs that were directly related to our Term B Loan are presented within noncurrent liabilities as a reduction of 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 for both the three months ended March 28, 2020 and March 30, 2019.

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 28, 2020, we recognized foreign exchange losses of $0.4 million, in our consolidated statements of operations. During the three months ended March 30, 2019, we recognized foreign exchange gains of $0.2 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.

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 28,			March 30,
	2020			2019
Cost of sales	$	212		$	125
Research and development		833			638
Selling, general and administrative		2,566			2,930
Total share-based compensation		3,611			3,693
Income tax benefit		(172	)		(280	)
Total share-based compensation, net	$	3,439		$	3,413

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 28, 2020, stock options and awards to issue approximately 58,000 shares of common stock were excluded from the computation. For the three months ended March 30, 2019, stock options and awards to issue approximately 393,000 shares of common stock were excluded from the computation.

11

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 28, 2020

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

	Three Months Ended
	March 28,		March 30,
	2020		2019
Weighted average common shares		41,502		40,872
Effect of dilutive securities		-		-
		41,502		40,872

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

Leases

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

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

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

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

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

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 28, 2020

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 28, 2020, we have $9.6 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.

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 28, 2020, we had deferred revenue totaling approximately $18.0 million, current deferred profit of $9.3 million and deferred profit expected to be recognized after one year included in noncurrent other accrued liabilities of $7.1 million. At December 28, 2019, we had deferred revenue totaling approximately $16.1 million, current deferred profit of $7.6 million and deferred profit expected to be recognized after one year included in noncurrent other accrued liabilities of $7.2 million.

13

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 28, 2020

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

	Three Months Ended
Disaggregated Net Sales	March 28, 2020		March 30, 2019
Systems:
Semiconductor Test & Inspection	$	70,539	$	79,940
PCB Test		6,840		6,972
Non-systems:
Semiconductor Test & Inspection		57,474		56,753
PCB Test		4,068		4,144
Total net sales	$	138,921	$	147,809

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

	Three Months Ended
Disaggregated Net Sales	March 28, 2020		March 30, 2019
China	$	30,811	$	23,551
United States		19,078		17,101
Malaysia		15,174		17,714
Taiwan		13,881		14,970
Philippines		10,022		14,541
Rest of the World		49,955		59,932
Total net sales	$	138,921	$	147,809

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 28,			March 30,
	2020			2019
Semiconductor Test & Inspection
Customers individually accounting for more than 10% of net sales		two			one
Percentage of net sales		26	%		11	%
PCB Test
Customers individually accounting for more than 10% of net sales		*			*
Percentage of net sales		*			*

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

Accumulated Other Comprehensive Loss

Our accumulated other comprehensive loss balance totaled approximately $35.0 million and $34.0 million at March 28, 2020 and December 28, 2019, respectively, and was attributed to all non-owner changes in stockholders’ equity and consists of, on an after-tax basis where applicable, foreign currency adjustments resulting from the translation of certain of our subsidiary accounts where the functional currency is not the U.S. Dollar and adjustments related to postretirement benefits. Reclassification adjustments from accumulated other comprehensive loss during the first three months of fiscal 2020 and 2019 were not significant.

Retiree Medical Benefits

We provide post-retirement health benefits to certain retired executives, one director (who is a former executive) and their eligible dependents under a noncontributory plan. These benefits are no longer offered to any other retired Cohu employees. The net periodic benefit cost incurred during the first three months of fiscal 2020 and 2019 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. As a result, the assets of our fixtures business are considered “held for sale” and the operations of our fixtures business are considered “discontinued operations” as of December 28, 2019. See Note 10, “Discontinued Operations” for additional information. Unless otherwise indicated, all amounts herein relate to continuing operations.

14

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 28, 2020

Recently Adopted Accounting Pronouncements 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 was subsequently amended by ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, ASU 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief, ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. ASU 2016-13, as amended, affects trade receivables, financial assets and certain other instruments that are not measured at fair value through net income. The adoption of ASU 2016-13 did not have a material impact on our condensed consolidated financial statements.

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. The adoption of ASU 2018-13 did not have a material impact on our disclosures.

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by eliminating certain exceptions for investments, intraperiod allocations and interim calculations. The new guidance also simplifies aspects of the accounting for franchise taxes, enacted changes in tax laws or rates, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The amendments did not create new accounting requirements. We adopted the standard as of December 29, 2019. The adoption of this standard did not have a significant impact on our consolidated financial statements.

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 disclosures to our consolidated financial statements.

All other newly issued accounting pronouncements not yet effective have been deemed either immaterial or not applicable.

15

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 28, 2020

2. Goodwill and Purchased Intangible Assets

Goodwill and Intangible Assets

Changes in the carrying value of goodwill during the year ended December 28, 2019, and the three-month period ended March 28, 2020, by segment, were as follows (in thousands):

	Semiconductor Test
	& Inspection			PCB Test			Total
Balance, December 30, 2018	$	220,808		$	21,319		$	242,127
Adjustments		2,117			(983	)		1,134
Impairments		(715	)		-			(715	)
Impact of currency exchange		(3,435	)		(442	)		(3,877	)
Balance, December 28, 2019		218,775			19,894			238,669
Impact of currency exchange		(575	)		(97	)		(672	)
Balance, March 28, 2020	$	218,200		$	19,797		$	237,997

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

	March 28, 2020						December 28, 2019
					Remaining
					Weighted
					Average
	Gross				Amort.		Gross
	Carrying		Accum.		Period		Carrying		Accum.
	Amount		Amort.		(in years)		Amount		Amort.
Developed technology	$	228,061	$	57,557		6.4	$	227,619	$	49,805
Customer relationships		71,778		16,332		9.1		72,251		14,824
Trade names		22,704		4,443		9.3		22,612		3,892
Covenant not-to-compete		327		106		6.8		322		96
Total intangible assets	$	322,870	$	78,438			$	322,804	$	68,617

The table above excludes $16.9 million and $20.8 million of in-process technology, at March 28, 2020 and December 28, 2019, 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 2020 no 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.

We evaluate goodwill and other indefinite-lived intangible assets for impairment annually and when an event occurs or circumstances change that indicate that the carrying value may not be recoverable. We previously completed our required annual goodwill and indefinite-lived intangible impairment testing as of October 1, 2019, the first day of our fourth quarter and concluded there were no impairments of goodwill within our reporting units or our indefinite-lived intangible assets.

Other events and changes in circumstances may also require goodwill to be tested for impairment between annual measurement dates. During the first quarter of 2020, the volatility in Cohu’s stock price, the global economic downturn and business interruptions associated with the COVID-19 pandemic led us to determine that there was a triggering event related to goodwill within all of our identified reporting units and our indefinite-lived intangible assets. We performed an interim assessment as of March 28, 2020 and determined that the fair values of our identified reporting units all exceeded their carrying values and we have concluded there were no impairment of goodwill within our reporting units. Anticipated delays in customer adoption of certain new products under development as a result of the COVID-19 pandemic, changes to future project roadmap and an increase in the discount rate used in the developing our interim fair value estimate resulted in a $3.9 million impairment to IPR&D as the carrying value exceeded fair value.

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

16

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 28, 2020

Amortization expense related to intangible assets in the first quarter of fiscal 2020 and 2019 was $9.5 million and $10.0 million, respectively.

3. Borrowings and Credit Agreements

The following table is a summary of our borrowings as of March 28, 2020 and December 28, 2019 (in thousands):

	March 28,			December 28,
	2020			2019
Bank Term Loan under Credit Agreement	$	345,625		$	346,500
Bank Term Loans-Kita		3,745			3,830
Bank Term Loan-Xcerra		1,392			1,475
Construction Loan-Rasco		6,588			5,476
Lines of Credit		3,244			3,195
Total debt		360,594			360,476
Less: financing fees and discount		(7,151	)		(7,441	)
Less: current portion		(6,566	)		(6,517	)
Total long-term debt	$	346,877		$	346,518

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, at a floating annual rate equal to LIBOR plus a margin of 3.00%. At March 28, 2020, the outstanding loan balance, net of discount and deferred financing costs, was $338.5 million and $2.3 million of the outstanding balance is presented as current installments of long-term debt in our condensed consolidated balance sheets at both March 28, 2020 and December 28, 2019. As of March 28, 2020, the fair value of the debt was $259.2 million. The measurement of the fair value of debt is based on the average of the bid and ask trading quotes as of March 28, 2020 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 28, 2020, we believe no such events of default have occurred.

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 0.43%, and expire at various dates through 2034. At March 28, 2020, the outstanding loan balance was $3.7 million and $0.3 million and $0.4 million of the outstanding balance is presented as current installments of long-term debt in our consolidated balance sheets at March 28, 2020 and December 28, 2019, respectively. The fair value of the debt approximates the carrying value at March 28, 2020.

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 March 28, 2020, the outstanding loan balance was $1.4 million and $0.3 million of the outstanding balance is presented as current installments of long-term debt in our consolidated balance sheets at both March 28, 2020 and December 28, 2019. The fair value of the debt approximates the carrying value at March 28, 2020.

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

17

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 28, 2020

Construction Loans

On July 26, 2019, one of our wholly owned subsidiaries located in Germany entered into two construction loans (“Loan Facilities”) with a German financial institution providing total borrowing of €8.6 million. The Loan Facilities have 10-year and 15-year terms, which commenced on August 1, 2019, the initial draw-down date. 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 separate €3.4 million and €5.2 million facility amounts.

On August 1, 2019, the full €3.4 million was drawn under the first facility, which is payable over 10 years at an annual interest rate of 0.8%. Interest payments only 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 2021.

Through March 28, 2020, we drew €2.5 million under the second facility, which is payable over 15 years at an annual interest rate of 1.05%. 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 28, 2020, €2.7 million had not been drawn under the second facility and is expected to be drawn in the first half of 2020.

At March 28, 2020 and December 28, 2019, total outstanding borrowings under the Loan Facilities was $6.6 million and $5.5 million with $0.4 million and $0.3 million of the total outstanding balance being presented as current installments of long-term debt in our 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 28, 2020.

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 $8.9 million. At March 28, 2020, 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 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. At March 28, 2020 and December 28, 2019 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. 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 $2.0 million and $1.4 million for the three months ended March 28, 2020 and March 30, 2019, 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.

18

Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 28, 2020

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 28, 2020 and March 30, 2019 (in thousands):

	Severance and			Other Exit
	Other Payroll			Costs			Total
Balance, December 29, 2018	$	4,026		$	-		$	4,026
Costs accrued		753			608			1,361
Amounts paid or charged		(1,029	)		(608	)		(1,637	)
Impact of currency exchange		4			-			4
Balance, March 30, 2019	$	3,754		$	-		$	3,754
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

At March 28, 2020, 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.

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Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 28, 2020

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

	March 28, 2020
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses (1)		Value
Foreign government security	$	901	$	-	$	-	$	901

	December 28, 2019
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses (1)		Value
Foreign government security	$	904	$	-	$	-	$	904

(1) As of March 28, 2020 and December 28, 2019, there were no investments in our portfolio in a loss position.

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

	March 28, 2020				December 28, 2019
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	901	$	901	$	-	$	-
Due after one year through three years		-		-		904		904
	$	901	$	901	$	904	$	904

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.

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 28, 2020 using:
							Total estimated
	Level 1		Level 2		Level 3		fair value
Cash	$	163,780	$	-	$	-	$	163,780
Money market funds		-		7,694		-		7,694
Foreign government security		-		901		-		901
	$	163,780	$	8,595	$	-	$	172,375

	Fair value measurements at December 28, 2019 using:
							Total estimated
	Level 1		Level 2		Level 3		fair value
Cash	$	147,523	$	-	$	-	$	147,523
Money market funds		-		7,671		-		7,671
Foreign government security		-		904		-		904
	$	147,523	$	8,575	$	-	$	156,098

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Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 28, 2020

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 28, 2020, there were 1,761,388 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 first three months of fiscal 2020 we did not grant any stock options and we issued 22,205 shares of our common stock on the exercise of options that were granted previously.

At March 28, 2020, we had 341,071 stock options exercisable and outstanding. These options had a weighted-average exercise price of $10.09 per share, an aggregate intrinsic value of approximately $1.0 million and the weighted average remaining contractual term was approximately 2.6 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 28, 2020.

In the three months of fiscal 2020 we awarded 622,764 RSUs and we issued 369,132 shares of our common stock on vesting of previously granted awards. At March 28, 2020, we had 1,575,014 RSUs outstanding with an aggregate intrinsic value of approximately $20.6 million and the weighted average remaining vesting period was approximately 1.8 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 in 2020, 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 2020, 2019 2018 and 2017 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. As a result, the actual number of shares issued will be fewer than the actual number outstanding at March 28, 2020.

In the first three months of fiscal 2020, we awarded 200,249 PSUs and we issued 34,080 shares of our common stock on vesting of previously granted awards. At March 28, 2020, we had 465,167 PSUs outstanding with an aggregate intrinsic value of approximately $6.1 million and the weighted average remaining vesting period was approximately 2.2 years.

Employee Stock Purchase Plan

The Cohu, Inc. 1997 Employee Stock Purchase Plan (“ESPP”) provides for the issuance of shares of our common stock. Under the ESPP, eligible employees may purchase shares of Cohu common stock through payroll deductions at a price equal to 85 percent of the lower of the fair market value of Cohu common stock at the beginning or end of each 6-month purchase period, subject to certain limits. During the three months of fiscal 2020, no shares of our common stock were sold to our employees under the ESPP leaving 911,337 shares available for future issuance.

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Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 28, 2020

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 months ended March 28, 2020, we used the actual year-to-date ETR in computing our tax provision, as a reliable estimate of the 2020 annual ETR cannot be made, since relatively small changes in our projected income produce a significant variation in our ETR. The ETR on loss from continuing operations for the three months ended March 28, 2020 and March 30, 2019 was 5.4% and 0.9%, respectively. The tax benefit on loss from continuing operations in 2020 and 2019 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, taxes on unremitted earnings and changes to unrecognized tax benefits.

Our German subsidiaries 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.

During the three-month period ended March 28, 2020, our unrecognized tax benefits decreased by $0.2 million due to expiration of the statute of limitations, foreign currency exchange rate changes, offset by accrued interest. Other than for foreign currency exchange rate changes, there was no material change to our unrecognized tax benefits and related accrued interest and penalties during the three-month period ended March 30, 2019.

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.

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Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 28, 2020

8. Segment and Geographic Information

The summary below presents our current segments, Semiconductor Test & Inspection and PCB Test, for the three-month periods ended March 28, 2020 and March 30, 2019.

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

	Three Months Ended
	March 28,			March 30,
	2020			2019
Net sales by segment:
Semiconductor Test & Inspection	$	128,013		$	136,694
PCB Test		10,908			11,115
Total consolidated net sales for reportable segments	$	138,921		$	147,809
Segment profit (loss) before tax:
Semiconductor Test & Inspection	$	(11,573	)	$	(15,044	)
PCB Test		994			1,019
Profit (loss) for reportable segments		(10,579	)		(14,025	)
Other unallocated amounts:
Corporate expenses		(3,451	)		(3,741	)
Interest expense		(4,427	)		(5,507	)
Interest income		147			222
Loss from continuing operations before taxes	$	(18,310	)	$	(23,051	)

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

	March 28,		December 28,
	2020		2019
Semiconductor Test & Inspection	$	966,562	$	998,756
PCB Test		58,883		56,938
Total assets for reportable segments		1,025,445		1,055,694
Corporate, principally cash and investments		46,710		18,398
Discontinued operations		-		3,618
Total consolidated assets	$	1,072,155	$	1,077,710

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

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Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 28, 2020

9. Leases

We lease certain of our facilities, equipment and vehicles under non-cancelable operating and finance leases. Leases with initial terms with 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 38 years, some of which include one or more options to extend the leases for up to 25 years. Our lease term includes renewal terms when we are reasonably certain we will exercise the renewal options.

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

(in thousands)	Classification	March 28, 2020			December 28, 2019
Assets
Operating lease assets	Operating lease right-of-use assets	$	32,599		$	33,269
Finance lease assets	Property, plant and equipment, net (1)		2,865			2,515
Total lease assets		$	35,464		$	35,784
Liabilities
Current
Operating	Other accrued liabilities	$	5,592		$	5,458
Finance	Other accrued liabilities		2,688			2,574
Noncurrent
Operating	Long-term lease liabilities		28,103			28,877
Finance	Long-term lease liabilities		249			-
Total lease liabilities		$	36,632		$	36,909
Weighted-average remaining lease term (years)
Operating leases			7.7			7.9
Finance leases			0.6			0.5
Weighted-average discount rate
Operating leases			6.3	%		6.3	%
Finance leases			3.9	%		4.5	%

(1) Finance lease assets are recorded net of accumulated amortization of $0.1 million as of March 28, 2020 and December 28, 2019.

The components of lease expense were as follows:

	Three Months Ended
(in thousands)	March 28, 2020			March 30, 2019
Operating leases	$	2,151		$	2,122
Variable lease expense		532			566
Short-term operating leases		19			78
Finance leases
Amortization of leased assets		20			41
Interest on lease liabilities		28			59
Sublease income		(32	)		(36	)
Net lease cost	$	2,718		$	2,830

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Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 28, 2020

Future minimum lease payments at March 28, 2020, are as follows:

	Operating			Finance
(in thousands)	leases (1)			leases			Total
2020	$	5,690		$	2,687		$	8,377
2021		6,536			124			6,660
2022		5,686			124			5,810
2023		4,992			31			5,023
2024		4,679			-			4,679
Thereafter		16,177			-			16,177
Total lease payments		43,760			2,966			46,726
Less: Interest		(10,065	)		(29	)		(10,094	)
Present value of lease liabilities	$	33,695		$	2,937		$	36,632

(1) Excludes sublease income of $0.1 million in both 2020 and 2021.

Supplemental cash flow information related to leases was as follows:

	Three Months Ended
(in thousands)	March 28, 2020		March 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	2,133	$	1,881
Operating cash flows from finance leases	$	28	$	37
Financing cash flows from finance leases	$	9	$	9
Leased assets obtained in exchange for new finance lease liabilities	$	373	$	-
Leased assets obtained in exchange for new operating lease liabilities	$	1,062	$	31,508

10. Discontinued Operations

On October 1, 2018, we acquired a fixtures services business as part of Xcerra. In the fourth quarter of 2018, our management determined that this business did not align with our core business and was not a strategic fit within our organization. As a result, the fixtures services business has been marketed for sale since we acquired Xcerra on October 1, 2018 and it has been presented as discontinued operations. For financial statement purposes, the results of operations for this business have been segregated from those of continuing operations and are presented in our consolidated financial statements as discontinued operations for all periods presented.

In 2019, we recorded a charge of $1.1 million to impair goodwill and purchased intangible assets associated with this operating segment as the estimated fair value less cost to sell exceeded the carrying value. In February 2020, we completed the sale of this business with an immaterial impact to the statement of operations for the three months ended March 28, 2020.

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Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 28, 2020

Balance sheet information for our fixtures services business presented as discontinued operations is summarized as follows (in thousands):

	March 28,		December 28,
	2020		2019
Assets:
Cash and cash equivalents	$	-	$	736
Accounts receivable, net		-		1,316
Inventories		-		1,411
Other current assets		-		40
Total current assets		-		3,503
Property, plant and equipment, net		-		33
Other noncurrent assets		-		82
Total assets	$	-	$	3,618
Liabilities:
Other accrued current liabilities	$	-	$	599
Total current liabilities		-		599
Noncurrent liabilities		-		24
Total liabilities	$	-	$	623

Operating results of our discontinued segment are summarized as follows (in thousands):

	Three Months Ended
	March 28,		March 30,
	2020		2019
Net sales	$	432	$	1,592
Operating income before income taxes	$	11	$	189
Gain on sale of Fixtures business		35		-
Income before taxes		46		189
Income tax provision		4		25
Income, net of tax	$	42	$	164

11. Contingencies

From time-to-time we are involved in various legal proceedings, examinations by various tax authorities and claims that have arisen in the ordinary course of our business. The outcome of any litigation is inherently uncertain. While there can be no assurance, we do not believe at the present time that the resolution of these matters will have a material adverse effect on our assets, financial position or results of operations.

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Cohu, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 28, 2020

12. Guarantees

Product Warranty

Our products are generally sold with warranty periods that range from 12 to 36 months following sale or acceptance. The product warranty promises customers that delivered products are as specified in the contract (an “assurance-type warranty”). Therefore, we account for such product warranties under ASC 460, and not as a separate performance obligation. Parts and labor are covered under the terms of the warranty agreement. The warranty provision is based on historical and projected experience by product and configuration.

Changes in accrued warranty were as follows (in thousands):

	Three Months Ended
	March 28,			March 30,
	2020			2019
Balance at beginning of period	$	6,155		$	8,014
Warranty expense accruals		1,891			1,728
Warranty payments		(1,778	)		(2,654	)
Balance at end of period	$	6,268		$	7,088

Accrued warranty amounts expected to be incurred after one year are included in noncurrent other accrued liabilities in the condensed consolidated balance sheet. These amounts totaled $0.2 million and $0.3 million at March 28, 2020 and December 28, 2019, respectively.

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Cohu, Inc.

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

March 28, 2020

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Form 10-Q contains certain forward-looking statements including expectations of market conditions, challenges and plans, within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and is subject to the Safe Harbor provisions created by that statute. Such forward-looking statements are based on management’s current expectations and beliefs, including estimates and projections about our business and include, but are not limited to, statements concerning financial position, business strategy, and plans or objectives for future operations. Forward-looking statements are not guarantees of future performance, and are subject to certain risks, uncertainties, and assumptions that are difficult to predict and may cause actual results to differ materially from management’s current expectations. Such risks and uncertainties include those set forth in this Quarterly Report on Form 10-Q and our 2019 Annual Report on Form 10-K under the heading “Item 1A. Risk Factors”. The forward-looking statements in this report speak only as of the time they are made, and do not necessarily reflect management’s outlook at any other point in time. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or for any other reason, however, readers should carefully review the risk factors set forth in other reports or documents we file from time to time with the SEC after the date of this Quarterly Report.

OVERVIEW

Cohu is a leading supplier of semiconductor test and inspection handlers, micro-electromechanical system (MEMS) test modules, test contactors and thermal subsystems, semiconductor automated test equipment and bare-board printed circuit board test systems used by global semiconductor and electronics manufacturers and test subcontractors. We offer a wide range of products and services and our revenue from capital equipment products is driven by the capital expenditure budgets and spending patterns of our customers, who often delay or accelerate purchases in reaction to variations in their business. The level of capital expenditures by these companies depends on the current and anticipated market demand for semiconductor devices and PCBs and the products that incorporate them. Our consumable products are driven by the number of semiconductor devices and printed circuit boards that are tested and by the continuous introduction of new products and new technologies by our customers. As a result, our consumable products provide a more stable recurring source of revenue and generally do not have the same degree of cyclicality as our capital equipment products.

For the three months ended March 28, 2020, our consolidated net sales decreased 6.0% to $138.9 million. During the first quarter of 2020 our net sales were impacted by supply disruptions caused by the rapid and global spread of COVID-19. While our long-term market drivers and market strategy remain intact, we believe our sales will be negatively impacted this year by the global economic downturn caused by the COVID-19 pandemic.

During 2019, the global semiconductor market was impacted by the U.S. and China trade war which impacted our customers’ ability to supply product to certain end users. Throughout 2019, customer test cell utilization was below levels that have historically triggered the need for additional capacity. Despite the near-term weakness, we remain optimistic about the long-term prospects for our business due to the increasing ubiquity of semiconductors, the future rollout of 5G networks, the diminishing impact of parallel test, increasing semiconductor complexity, increasing quality demands from semiconductor customers, and continued proliferation of electronics in a variety of products across the automotive, mobility and industrial markets. Our orders in the first quarter of 2020 strengthened, driven by demand for equipment used in testing mobility semiconductor applications, data centers and personal computers. We remain optimistic about our future business prospects and are focused on cross-selling opportunities and supporting our customers’ deployment of 5G RF capabilities on next generation smartphones and we remain focused on growing our sales to semiconductor and electronics manufacturers and test subcontractors.

Application of Critical Accounting Estimates and Policies

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. We base our estimates on historical experience, forecasts and on various other assumptions that are believed to be reasonable under the circumstances, however actual results may differ from those estimates under different assumptions or conditions. The methods, estimates and judgments we use in applying our accounting policies have a significant impact on the results we report in our financial statements. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain.

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Cohu, Inc.

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

March 28, 2020

Our critical accounting estimates that we believe are the most important to an investor’s understanding of our financial results and condition and that require complex management judgment include:

● revenue recognition, including the deferral of revenue on sales to customers, which impacts our results of operations;

● estimation of valuation allowances and accrued liabilities, specifically product warranty, inventory reserves and allowance for bad debts, which impact gross margin or operating expenses;

● the recognition and measurement of current and deferred income tax assets and liabilities, unrecognized tax benefits and the valuation allowance on deferred tax assets, which impact our tax provision;

● the assessment of recoverability of long-lived assets including goodwill and other intangible assets, which primarily impacts gross margin or operating expenses if we are required to record impairments of assets or accelerate their depreciation or amortization; and

● the valuation and recognition of share-based compensation, which impacts gross margin, research and development expense, and selling, general and administrative expense.

Below, we discuss these policies further, as well as the estimates and judgments involved. We also have other policies that we consider key accounting policies; however, these policies typically do not require us to make estimates or judgments that are difficult or subjective.

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