UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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
COHU, INC.
(Exact name of registrant as specified in its charter)
| | |
| (State or other jurisdiction of | (I.R.S. Employer Identification No.) |
| incorporation or organization) | |
| | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code (
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Exchange on Which Registered |
| | | The |
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.
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).
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.
Smaller reporting 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
As of October 25, 2023, the Registrant had
FORM 10-Q
SEPTEMBER 30, 2023
| COHU, INC. |
| CONDENSED CONSOLIDATED BALANCE SHEETS |
| (in thousands, except par value amounts) |
| September 30, | December 31, | |||||||
| 2023 | 2022 * | |||||||
| (Unaudited) | ||||||||
| ASSETS |
| |||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Short-term investments | ||||||||
| Accounts receivable, net | ||||||||
| Inventories | ||||||||
| Prepaid expenses | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Other assets | ||||||||
| Operating lease right of use assets | ||||||||
| $ | $ | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Short-term borrowings | $ | $ | ||||||
| Current installments of long-term debt | ||||||||
| Accounts payable | ||||||||
| Customer advances | ||||||||
| Accrued compensation and benefits | ||||||||
| Deferred profit | ||||||||
| Accrued warranty | ||||||||
| Income taxes payable | ||||||||
| Other accrued liabilities | ||||||||
| Total current liabilities | ||||||||
| Long-term debt | ||||||||
| Deferred income taxes | ||||||||
| Noncurrent income tax liabilities | ||||||||
| Accrued retirement benefits | ||||||||
| Long-term lease liabilities | ||||||||
| Other accrued liabilities | ||||||||
| Stockholders’ equity | ||||||||
| Preferred stock, $ par value; shares authorized, issued | ||||||||
| Common stock, $ par value; shares authorized, shares issued and outstanding in 2023 and shares in 2022 | ||||||||
| Paid-in capital | ||||||||
| Treasury stock, at cost; shares in 2023 and shares in 2022 | ( | ) | ( | ) | ||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| $ | $ | |||||||
| * Derived from December 31, 2022 audited financial statements |
The accompanying notes are an integral part of these statements.
| CONDENSED CONSOLIDATED STATEMENTS OF INCOME |
| (Unaudited) |
| (in thousands, except per share amounts) |
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| September 30, |
September 24, |
September 30, |
September 24, |
|||||||||||||
| 2023 |
2022 |
2023 |
2022 |
|||||||||||||
| Net sales |
$ | $ | $ | $ | ||||||||||||
| Cost and expenses: |
||||||||||||||||
| Cost of sales (1) |
||||||||||||||||
| Research and development |
||||||||||||||||
| Selling, general and administrative |
||||||||||||||||
| Amortization of purchased intangible assets |
||||||||||||||||
| Restructuring charges |
||||||||||||||||
| Income from operations |
||||||||||||||||
| Other (expense) income: |
||||||||||||||||
| Interest expense |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Interest income |
||||||||||||||||
| Foreign transaction gain (loss) |
( |
) | ( |
) | ||||||||||||
| Loss on extinguishment of debt |
( |
) | ( |
) | ( |
) | ||||||||||
| Income before taxes |
||||||||||||||||
| Income tax provision |
||||||||||||||||
| Net income |
$ | $ | $ | $ | ||||||||||||
| Income per share: |
||||||||||||||||
| Basic |
$ | $ | $ | $ | ||||||||||||
| Diluted |
$ | $ | $ | $ | ||||||||||||
| Weighted average shares used in computing income per share: |
||||||||||||||||
| Basic |
||||||||||||||||
| Diluted |
||||||||||||||||
| (1) |
Excludes amortization of $6,948 and $6,433 for the three months ended September 30, 2023 and September 24, 2022, respectively, and $20,941 and $19,673 for the nine months ended September 30, 2023 and September 24, 2022, respectively. |
The accompanying notes are an integral part of these statements.
| CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) |
| (Unaudited) |
| (in thousands) |
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| September 30, |
September 24, |
September 30, |
September 24, |
|||||||||||||
| 2023 |
2022 |
2023 |
2022 |
|||||||||||||
| Net income |
$ | $ | $ | $ | ||||||||||||
| Other comprehensive loss, net of tax: |
||||||||||||||||
| Foreign currency translation adjustments |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Adjustments related to postretirement benefits |
( |
) | ( |
) | ( |
) | ||||||||||
| Change in unrealized gain/loss on investments |
( |
) | ( |
) | ||||||||||||
| Other comprehensive loss, net of tax |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Comprehensive income (loss) |
$ | ( |
) | $ | $ | $ | ||||||||||
The accompanying notes are an integral part of these statements.
| CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY |
| (in thousands, except par value and per share amounts) |
| Accumulated |
||||||||||||||||||||||||
| Common |
other |
|||||||||||||||||||||||
| stock |
Paid-in |
Retained |
comprehensive |
Treasury |
||||||||||||||||||||
| Three Months Ended September 30, 2023 |
$1 par value |
capital |
earnings |
loss |
stock |
Total |
||||||||||||||||||
| Balance at July 1, 2023 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||
| Net income |
||||||||||||||||||||||||
| Changes in cumulative translation adjustment |
( |
) | ( |
) | ||||||||||||||||||||
| Adjustments related to postretirement benefits, net of tax |
( |
) | ( |
) | ||||||||||||||||||||
| Changes in unrealized gains and losses on investments, net of tax |
||||||||||||||||||||||||
| Shares issued for restricted stock units vested |
( |
) | ||||||||||||||||||||||
| Repurchase and retirement of stock |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
| Common stock repurchases |
( |
) | ( |
) | ||||||||||||||||||||
| Share-based compensation expense |
||||||||||||||||||||||||
| Balance at September 30, 2023 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||
| Nine Months Ended September 30, 2023 |
||||||||||||||||||||||||
| Balance at December 31, 2022 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||
| Net income |
||||||||||||||||||||||||
| Changes in cumulative translation adjustment |
( |
) | ( |
) | ||||||||||||||||||||
| Adjustments related to postretirement benefits, net of tax |
||||||||||||||||||||||||
| Changes in unrealized gains and losses on investments, net of tax |
||||||||||||||||||||||||
| Shares issued under ESPP |
||||||||||||||||||||||||
| Shares issued for restricted stock units vested |
( |
) | ||||||||||||||||||||||
| Repurchase and retirement of stock |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
| Common stock repurchases |
( |
) | ( |
) | ||||||||||||||||||||
| Share-based compensation expense |
||||||||||||||||||||||||
| Balance at September 30, 2023 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||
| Three Months Ended September 24, 2022 |
||||||||||||||||||||||||
| Balance at June 25, 2022 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||
| Net income |
||||||||||||||||||||||||
| Changes in cumulative translation adjustment |
( |
) | ( |
) | ||||||||||||||||||||
| Adjustments related to postretirement benefits, net of tax |
( |
) | ( |
) | ||||||||||||||||||||
| Changes in unrealized gains and losses on investments, net of tax |
( |
) | ( |
) | ||||||||||||||||||||
| Shares issued for restricted stock units vested |
( |
) | ||||||||||||||||||||||
| Repurchase and retirement of stock |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
| Common stock repurchases |
( |
) | ( |
) | ||||||||||||||||||||
| Share-based compensation expense |
||||||||||||||||||||||||
| Balance at September 24, 2022 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||
| Nine Months Ended September 24, 2022 |
||||||||||||||||||||||||
| Balance at December 25, 2021 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||
| Net income |
||||||||||||||||||||||||
| Changes in cumulative translation adjustment |
( |
) | ( |
) | ||||||||||||||||||||
| Adjustments related to postretirement benefits, net of tax |
( |
) | ( |
) | ||||||||||||||||||||
| Changes in unrealized gains and losses on investments, net of tax |
( |
) | ( |
) | ||||||||||||||||||||
| Exercise of stock options |
||||||||||||||||||||||||
| Shares issued under ESPP |
||||||||||||||||||||||||
| Shares issued for restricted stock units vested |
( |
) | ||||||||||||||||||||||
| Repurchase and retirement of stock |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
| Common stock repurchases |
( |
) | ( |
) | ||||||||||||||||||||
| Share-based compensation expense |
||||||||||||||||||||||||
| Balance at September 24, 2022 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||
The accompanying notes are an integral part of these statements.
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
| (Unaudited) |
| (in thousands) |
| Nine Months Ended |
||||||||
| September 30, |
September 24, |
|||||||
| 2023 |
2022 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net income |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Loss on extinguishment of debt |
||||||||
| Net accretion on investments |
( |
) | ( |
) | ||||
| Gain from sale of property, plant and equipment |
( |
) | ( |
) | ||||
| Depreciation and amortization |
||||||||
| Share-based compensation expense |
||||||||
| Non-cash inventory related charges |
||||||||
| Deferred income taxes |
( |
) | ||||||
| Changes in accrued retiree medical benefits |
( |
) | ( |
) | ||||
| Changes in other accrued liabilities |
( |
) | ( |
) | ||||
| Changes in other assets |
( |
) | ( |
) | ||||
| Amortization of cloud-based software implementation costs |
||||||||
| Interest capitalized associated with cloud computing implementation |
( |
) | ||||||
| Amortization of debt discounts and issuance costs |
||||||||
| Operating lease right-of-use assets |
||||||||
| Changes in assets and liabilities, excluding effects from acquisitions: |
||||||||
| Customer advances |
( |
) | ||||||
| Accounts receivable |
( |
) | ||||||
| Inventories |
( |
) | ||||||
| Other current assets |
( |
) | ( |
) | ||||
| Accounts payable |
( |
) | ( |
) | ||||
| Deferred profit |
( |
) | ( |
) | ||||
| Income taxes payable |
( |
) | ||||||
| Accrued compensation, warranty and other liabilities |
( |
) | ( |
) | ||||
| Current and long-term operating lease liabilities |
( |
) | ( |
) | ||||
| Net cash provided by operating activities |
||||||||
| Cash flows from investing activities, excluding effects from acquisitions: |
||||||||
| Purchases of short-term investments |
( |
) | ( |
) | ||||
| Sales and maturities of short-term investments |
||||||||
| Purchases of property, plant and equipment |
( |
) | ( |
) | ||||
| Cash received from sale of property, plant and equipment |
||||||||
| Payment for purchase of MCT, net of cash received |
( |
) | ||||||
| Net cash provided by (used in) investing activities |
( |
) | ||||||
| Cash flows from financing activities: |
||||||||
| Payments on current and long-term finance lease liabilities |
( |
) | ( |
) | ||||
| Repurchases of common stock, net |
( |
) | ( |
) | ||||
| Repayments of long-term debt |
( |
) | ( |
) | ||||
| Acquisition of treasury stock |
( |
) | ( |
) | ||||
| Net cash used in financing activities |
( |
) | ( |
) | ||||
| Effect of exchange rate changes on cash and cash equivalents |
( |
) | ( |
) | ||||
| Net increase (decrease) in cash and cash equivalents |
( |
) | ||||||
| Cash and cash equivalents at beginning of period |
||||||||
| Cash and cash equivalents at end of period |
$ | $ | ||||||
| Supplemental disclosure of cash flow information: |
||||||||
| Cash paid for income taxes |
$ | $ | ||||||
| Inventory capitalized as property, plant and equipment |
$ | $ | ||||||
| Property, plant and equipment purchases included in accounts payable |
$ | $ | ||||||
| Cash paid for interest |
$ | $ | ||||||
The accompanying notes are an integral part of these statements.
| 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 31, 2022, has been derived from our audited financial statements at that date. The interim condensed consolidated financial statements as of September 30, 2023, (also referred to as “the third quarter of fiscal 2023” and “the first nine months of fiscal 2023”) and September 24, 2022, (also referred to as “the third quarter of fiscal 2022” and “the first nine months of fiscal 2022”) are unaudited. However, in management’s opinion, these financial statements reflect all adjustments (consisting only of normal, recurring items) necessary to provide a fair presentation of our financial position, results of operations and cash flows for the periods presented. Both the three- and nine-month periods ended September 30, 2023 and September 24, 2022 were comprised of 13 and 39 weeks, respectively.
Our interim results are not necessarily indicative of the results that should be expected for the full year. The condensed consolidated financial statements presented herein reflect estimates and assumptions made by management at September 30, 2023 and for the three- and nine-month periods ended September 30, 2023. 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 31, 2022, which are included in our 2022 Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (“SEC”). In the following notes to our interim condensed consolidated financial statements, Cohu, Inc. is referred to as “Cohu”, “we”, “our” and “us”.
All significant consolidated transactions and balances have been eliminated in consolidation.
Concentration of Credit Risk
Financial instruments that potentially subject us to significant credit risk consist principally of cash equivalents, short-term investments and trade accounts receivable. We invest in a variety of financial instruments and, by policy, limit the amount of credit exposure with any one issuer.
Our trade accounts receivable are presented net of allowance for credit losses, which is determined in accordance with the guidance provided by Accounting Standards Codification (“ASC”) Topic 326, Financial Instruments-Credit Losses, (“ASC 326”). At September 30, 2023 and December 31, 2022, our allowance for credit losses was $
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, which occurs when estimated net realizable values are below our costs.
Inventories by category were as follows (in thousands):
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Raw materials and purchased parts | $ | $ | ||||||
| Work in process | ||||||||
| Finished goods | ||||||||
| Total inventories | $ | $ | ||||||
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 to years for buildings, to years for building improvements and to years for machinery, equipment and software. Land is not depreciated.
Property, plant and equipment, at cost, consisted of the following (in thousands):
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Land and land improvements | $ | $ | ||||||
| Buildings and building improvements | ||||||||
| Machinery and equipment | ||||||||
| Less accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Property, plant and equipment, net | $ | $ | ||||||
Cloud-based Enterprise Resource Planning Implementation Costs
We have capitalized certain costs associated with the implementation of our new cloud-based Enterprise Resource Planning (“ERP”) system in accordance with ASC Topic 350, Intangibles—Goodwill and Other, (“ASC 350”). Capitalized costs include only external direct costs of materials and services consumed in developing the system and interest costs incurred, when material, while developing the system.
Unamortized capitalized cloud computing implementation costs totaled $
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
Goodwill and Other Intangible Assets
We evaluate goodwill for impairment annually and when an event occurs or circumstances change that indicate that the carrying value may not be recoverable. We test goodwill for impairment by first comparing the book value of net assets to the fair value of the reporting unit. 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 using a weighting of the income and market approaches. Under the income approach, we use a discounted cash flow methodology to derive an indication of value, which requires management to make significant estimates and assumptions related to forecasted revenues, gross profit margins, operating income margins, working capital cash flow, perpetual growth rates, and long-term discount rates, among others. For the market approach, we use the guideline public company method. Under this method we utilize information from comparable publicly traded companies with similar operating and investment characteristics as the reporting units, to create valuation multiples that are applied to the operating performance metrics of the reporting unit being tested, to obtain an indication of value. We then apply a 50/50 weighting to the indicated values from the income and market approaches to derive the fair values of the reporting units. Forecasts of future cash flows are based on our best estimate of future net sales and operating expenses, based primarily on customer forecasts, industry trade organization data and general economic conditions. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors.
We conduct our annual impairment test as of October 1st of each year and have determined there was
Other intangible assets 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 other intangible assets, impairment losses are only recorded if the asset’s carrying amount is not recoverable through its undiscounted, probability-weighted future cash flows. We measure the impairment loss based on the difference between the carrying amount and estimated fair value.
Product Warranty
Product warranty costs are accrued in the period sales are recognized. Our products are generally sold with standard warranty periods, which differ by product, ranging from
Restructuring Costs
We record restructuring activities including costs for one-time termination benefits in accordance with ASC Topic 420, Exit or Disposal Cost Obligations (“ASC 420”). The timing of recognition for severance costs accounted for under ASC 420 depends on whether employees are required to render service until they are terminated in order to receive the termination benefits. If employees are required to render service until they are terminated in order to receive the termination benefits, a liability is recognized ratably over the future service period. Otherwise, a liability is recognized when management has committed to a restructuring plan and has communicated those actions to employees. Employee termination benefits covered by existing benefit arrangements are recorded in accordance with ASC Topic 712, Nonretirement Postemployment Benefits. These costs are recognized when management has committed to a restructuring plan and the severance costs are probable and estimable. See Note 4, “Restructuring Charges” for additional information.
Debt Issuance Costs
We capitalize costs related to the issuance of debt. Debt issuance costs directly related to our Term Loan Credit Facility are presented within noncurrent liabilities as a reduction of long-term debt in our condensed consolidated balance sheets. The amortization of such costs is recognized as interest expense using the effective interest method over the term of the respective debt issue. Amortization related to deferred debt issuance costs and original discount costs was $
Foreign Remeasurement and Currency Translation
Assets and liabilities of our wholly owned foreign subsidiaries that use the U.S. Dollar as their functional currency are re-measured using exchange rates in effect at the end of the period, except for nonmonetary assets, such as inventories and property, plant and equipment, which are re-measured using historical exchange rates. Revenues and costs are re-measured using average exchange rates for the period, except for costs related to those balance sheet items that are re-measured using historical exchange rates. Gains and losses on foreign currency transactions are recognized as incurred. During the three and nine months ended September 30, 2023, we recognized foreign exchange losses of $
Foreign Exchange Derivative Contracts
We operate and sell our products in various global markets. As a result, we are exposed to changes in foreign currency exchange rates. We enter into foreign currency forward contracts with a financial institution to hedge against future movements in foreign exchange rates that affect certain existing U.S. Dollar denominated assets and liabilities held at our subsidiaries whose functional currency is the local currency. For accounting purposes, our foreign currency forward contracts are not designated as hedging instruments and, accordingly, we record the fair value of these contracts as of the end of our reporting period in our condensed consolidated balance sheets with changes in fair value recorded within foreign transaction gain (loss) in our condensed consolidated statements of income for both realized and unrealized gains and losses. See Note 7, “Derivative Financial Instruments” for additional information.
Share-Based Compensation
We measure and recognize all share-based compensation under the fair value method.
Reported share-based compensation is classified, in our condensed consolidated financial statements, as follows (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 24, | September 30, | September 24, | |||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Cost of sales | $ | $ | $ | $ | ||||||||||||
| Research and development | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Total share-based compensation | ||||||||||||||||
| Income tax benefit | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total share-based compensation, net | $ | $ | $ | $ | ||||||||||||
Income Per Share
Basic income per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the reporting period. Diluted income 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 and nine months ended September 30, 2023, stock options and awards to issue approximately
The following table reconciles the denominators used in computing basic and diluted income per share (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 24, | September 30, | September 24, | |||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Weighted average common shares | ||||||||||||||||
| Effect of dilutive securities | ||||||||||||||||
Leases
We determine if a contract contains a lease at inception. Operating leases are included in operating lease right of use (“ROU”) assets, current other accrued liabilities, and long-term lease liabilities on our condensed consolidated balance sheets. Finance leases are included in property, plant and equipment, other current accrued liabilities, and long-term lease liabilities on our condensed consolidated balance sheets.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the adoption date or the commencement date for leases entered into after the adoption date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rates for the remaining lease terms based on the information available at the adoption date or commencement date in determining the present value of future payments.
The operating lease ROU asset also includes any lease payments made, lease incentives, favorable and unfavorable lease terms recognized in business acquisitions and excludes initial direct costs incurred and variable lease payments. Variable lease payments include estimated payments that are subject to reconciliations throughout the lease term, increases or decreases in the contractual rent payments, as a result of changes in indices or interest rates and tax payments that are based on prevailing rates. Our lease terms may include renewal options to extend the lease when it is reasonably certain that we will exercise those options. In addition, we include purchase option amounts in our calculations when it is reasonably certain that we will exercise those options. Rent expense for minimum payments under operating leases is recognized on a straight-line basis over the term.
Leases with an initial term of 12 months or less are not recorded on the balance sheet but recognized in our condensed consolidated statements of income on a straight-line basis over the lease term. We account for lease and non-lease components as a single lease component and include both in our calculation of the ROU assets and lease liabilities.
We sublease certain leased assets to third parties, mainly as a result of unused space in our facilities. None of our subleases contain extension options. Variable lease payments in our subleases include tax payments that are based on prevailing rates. We account for lease and non-lease components as a single lease component.
Revenue Recognition
Our net sales are derived from the sale of products and services and are adjusted for estimated returns and allowances, which historically have been insignificant. We recognize revenue when the obligations under the terms of a contract with our customers are satisfied; generally, this occurs with the transfer of control of our systems, non-system products or services. In circumstances where control is not transferred until destination or acceptance, we defer revenue recognition until such events occur.
Revenue for established products that have previously satisfied a customer’s acceptance requirements is generally recognized upon shipment. In cases where a prior history of customer acceptance cannot be demonstrated or from sales where customer payment dates are not determinable and in the case of new products, revenue and cost of sales are deferred until customer acceptance has been received. Our post-shipment obligations typically include installation and standard warranties. The relative standalone selling price of installation related revenue is recognized in the period the installation is performed. Service revenue is recognized over time as we transfer control to our customer for the related contract or upon completion of the services if they are short-term in nature. Spares, contactor and kit revenue is generally recognized upon shipment.
Certain of our equipment sales have multiple performance obligations. These arrangements involve the delivery or performance of multiple performance obligations, and transfer of control of performance obligations may occur at different points in time or over different periods of time. For arrangements containing multiple performance obligations, the revenue relating to the undelivered performance obligation is deferred using the relative standalone selling price method utilizing estimated sales prices until satisfaction of the deferred performance obligation.
Unsatisfied performance obligations primarily represent contracts for products with future delivery dates. At September 30, 2023, we had $
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 Topic 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
On shipments where sales are not recognized, gross profit is generally recorded as deferred profit in our condensed consolidated balance sheet representing the difference between the receivable recorded and the inventory shipped. At September 30, 2023, we had deferred revenue totaling approximately $
Net sales by type are as follows (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| Disaggregated Net Sales | September 30, 2023 | September 24, 2022 | September 30, 2023 | September 24, 2022 | ||||||||||||
| Systems | $ | $ | $ | $ | ||||||||||||
| Non-systems | ||||||||||||||||
| Total net sales | $ | $ | $ | $ | ||||||||||||
Revenue by geographic area based upon product shipment destination (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| Disaggregated Net Sales | September 30, 2023 | September 24, 2022 | September 30, 2023 | September 24, 2022 | ||||||||||||
| Malaysia | $ | $ | $ | $ | ||||||||||||
| Philippines | ||||||||||||||||
| China | ||||||||||||||||
| United States | ||||||||||||||||
| Rest of the World | ||||||||||||||||
| Total net sales | $ | $ | $ | $ | ||||||||||||
A small number of customers historically have been responsible for a significant portion of our net sales. Significant customer concentration information is as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 24, | September 30, | September 24, | |||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| 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 $
Retiree Medical Benefits
We provide post-retirement health benefits to certain retired executives, one director (who is a former executive) and their eligible dependents under a noncontributory plan. These benefits are no longer offered to any other retired Cohu employees. The net periodic benefit cost incurred during the first nine months of fiscal 2023 and 2022 was not significant.
New Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASC 848”). ASC 848 provides temporary optional expedients and exceptions to certain U.S. GAAP contract modification requirements for contracts affected by reference rate reform as entities transition away from the London Interbank Offered Rate (“LIBOR”) to alternative reference rates. In December 2022, the FASB issued ASU 2022-06 to defer the sunset date of ASC 848 from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the optional expedients in ASC 848.
Effective June 16, 2023, we adopted ASC 848. Our Term Loan B Credit and Guaranty Agreement is our only contract where interest expense is based on LIBOR. The ICE Benchmark Administration Limited, LIBOR’s administrator, has ceased publishing certain LIBOR settings and is expected to stop publishing the Overnight, 1-month, 3-month, 6-month, and 12-month USD LIBOR U.S. dollar settings in 2023. In anticipation of that cessation, we commenced the transition of our LIBOR-based contract to the Secured Overnight Financing Rate (“SOFR” or “Term SOFR”). The optional expedients under ASC 848 have allowed and will allow us to account for contract modifications as continuations of the existing contract without further reassessments or remeasurements that would otherwise be required under the applicable U.S. GAAP.
| 2. |
Business Acquisitions, Goodwill and Purchased Intangible Assets |
MCT
On January 30, 2023, we completed the acquisition of all the outstanding membership units of MCT Worldwide, LLC. (“MCT”), pursuant to a membership unit purchase agreement dated January 30, 2023, by and among MCT Worldwide, LLC, Arise Acquisition Co., LLC, The Seaport Group LLC Profit Sharing Plan, and Delta Design, Inc., a wholly owned subsidiary of Cohu (the “Acquisition”). MCT is a U.S. based company with its principal manufacturing site in Penang Malaysia. MCT provides automated solutions for the semiconductor industry and designs, manufactures, markets, services and distributes strip test handlers, film frame handlers and laser mark handlers. On January 30, 2023, we made a cash payment totaling approximately $
We have not finalized the purchase price allocation. Accordingly, the preliminary purchase price allocation shown below could materially change as we are still in the process of finalizing the fair values of the tangible and intangible assets acquired and liabilities assumed, and the related income tax effects may still be adjusted as they are finalized during the remainder of the measurement period (which will not exceed 12 months from the acquisition closing date). The transaction was an asset acquisition for tax purposes. Consequently, we will record a stepped-up tax basis in the acquired assets, including goodwill and intangibles. The acquired assets and liabilities of MCT were recorded at their respective fair values including an amount for goodwill representing the difference between the Acquisition consideration and the fair value of the identifiable net assets. During the second quarter of 2023, we settled the working capital adjustment with the sellers resulting in an immaterial change to purchase consideration, current assets and goodwill. There were no changes to intangible assets and we expect to finalize the purchase accounting for MCT in the fourth quarter of 2023.
The table below summarizes the assets acquired and liabilities assumed as of January 30, 2023 (in thousands):
| Current assets, including cash received |
$ | |||
| Property, plant and equipment |
||||
| Other assets |
||||
| Intangible assets |
||||
| Goodwill |
||||
| Total assets acquired |
||||
| Liabilities assumed |
( |
) | ||
| Net assets acquired |
$ |
The preliminary allocation of the intangible assets subject to amortization is as follows (in thousands):
| Estimated Fair Value |
Weighted Average Useful Life (years) |
|||||||
| Developed technology |
$ | |||||||
| Customer relationships |
||||||||
| Product backlog |
||||||||
| Total intangible assets |
$ | |||||||
Acquired intangible assets reported above are being amortized using the straight-line method over their estimated useful lives which approximates the pattern of how the economic benefit is expected to be used. This includes amounts allocated to customer relationships because of anticipated high customer retention rates that are common in the semiconductor capital equipment industry.
The preliminary value assigned to developed technology was determined by using the using the relief from royalty method under the income approach, which included assumptions related to revenue growth rates, royalty rates, and discount rates. Developed technology, which comprises products that have reached technological feasibility, includes the products in MCT’s product line. The revenue estimates used to value the developed technology were based on estimates of relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by MCT and competitors. The estimated after-tax cash flows were based on a hypothetical royalty rate applied to the revenues for the developed technology. The discount rate utilized to discount the net cash flows of the developed technology to present value was based on the risk associated with the respective cash flows taking into consideration the perceived risk of the technology relative to the other acquired assets, the weighted average cost of capital, the internal rate of return, and the weighted average return on assets.
The preliminary value assigned to customer relationships was determined by using the multi-period excess earnings method under the income approach. The estimated cash flows were based on revenues from the existing customers net of operating expenses and net of contributory asset charges. The discount rate utilized to discount the net cash flows of the customer relationships to present value was based on the respective cash flows taking into consideration the perceived risks.
The preliminary value assigned to backlog acquired was estimated based upon the contractual nature of the backlog as of January 30, 2023, using the multi-period excess earnings method under the income approach to discount back to present value the cash flows attributable to the backlog at a discount rate commensurate with the expected risks of the backlog cash flows.
MCT’s results of operations have been included starting January 30, 2023. The impact of MCT on our condensed consolidated statements of income and comprehensive income was not material.
Goodwill and Intangible Assets
Changes in the carrying value of goodwill during the year ended December 31, 2022, and the nine-month period ended September 30, 2023 were as follows (in thousands):
| Goodwill |
||||
| Balance, December 25, 2021 |
$ | |||
| Impact of currency exchange |
( |
) | ||
| Balance, December 31, 2022 |
||||
| Additions |
||||
| Impact of currency exchange |
( |
) | ||
| Balance, September 30, 2023 |
$ | |||
Purchased intangible assets subject to amortization are as follows (in thousands):
| September 30, 2023 |
December 31, 2022 |
|||||||||||||||||||
| Remaining |
||||||||||||||||||||
| Weighted |
||||||||||||||||||||
| Gross |
Average |
Gross |
||||||||||||||||||
| Carrying |
Accum. |
Amort. |
Carrying |
Accum. |
||||||||||||||||
| Amount |
Amort. |
Period (Years) |
Amount |
Amort. |
||||||||||||||||
| Developed technology |
$ | $ | $ | $ | ||||||||||||||||
| Customer relationships |
||||||||||||||||||||
| Trade names |
||||||||||||||||||||
| Covenant not-to-compete |
||||||||||||||||||||
| Total intangible assets |
$ | $ | $ | $ | ||||||||||||||||
Changes in the carrying values of purchased intangible assets presented above are a result of the impact of fluctuation in currency exchange rates and the acquisition of MCT.
Amortization expense related to intangible assets was approximately $
| 3. | Borrowings and Credit Agreements |
The following table is a summary of our borrowings (in thousands):
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Bank Term Loan under Credit Agreement | $ | $ | ||||||
| Bank Term Loans-Kita | ||||||||
| Construction Loan- Cohu GmbH | ||||||||
| Lines of Credit | ||||||||
| Total debt | ||||||||
| Less: financing fees and discount | ( | ) | ( | ) | ||||
| Less: current portion | ( | ) | ( | ) | ||||
| Total long-term debt | $ | $ | ||||||
Credit Agreement
On October 1, 2018, we entered into a Credit Agreement providing for a $
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 September 30, 2023, we believe no such events of default have occurred.
During the first nine months of 2023, we prepaid $
Kita Term Loans
We have a series of term loans with Japanese financial institutions primarily related to the expansion of our facility in Osaka, Japan. The loans are collateralized by the facility and land, carry interest rates ranging from
The term loans are denominated in Japanese Yen and, as a result, amounts disclosed herein will fluctuate because of changes in currency exchange rates.
Construction Loans
In July 2019 and June 2020, one of our wholly owned subsidiaries located in Germany entered into a series of construction loans (“Loan Facilities”) with a German financial institution initially providing it with total borrowings of up to million. In May 2022, one of the construction loans was amended, reducing total borrowings provided under the loans to up to million. The Loan Facilities were utilized to finance the expansion of our facility in Kolbermoor, Germany and are secured by the land and the existing building on the site. The Loan Facilities bear interest at agreed upon rates based on the facility amounts as discussed below.
The first facility totaling million has been fully drawn and is payable over
At September 30, 2023, total outstanding borrowings under the Loan Facilities was $
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
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 subsidiary in Switzerland has line of credit which provides borrowings of up to a total of
| 4. |
Restructuring Charges |
MCT Integration Program
During the first quarter of 2023, we began a strategic restructuring and integration program in connection with the acquisition of MCT (“MCT Integration Program”). See Note 2, “Business Acquisitions, Goodwill and Purchased Intangible Assets” for additional information regarding the acquisition of MCT. As part of this program, we intend to consolidate MCT’s Penang, Malaysia manufacturing operations into Cohu’s Melaka, Malaysia manufacturing operations by the end of 2023. Relating to the facility consolidation actions, we notified certain impacted employees of a reduction in force program and the facility consolidation and reduction in force programs are being implemented as part of a comprehensive review of our operations and are intended to reduce our operating cost structure and capitalize on acquisition synergies.
As a result of the activities described above, we recognized total pretax charges of $
The following table summarizes the activity within the restructuring related accounts for the MCT Integration Program during the first nine months ended September 30, 2023 (in thousands):