Cohu: Discussion and analysis by management of the financial position and operating results
Point 2. Discussion and analysis by management of the financial situation and operating results
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, our industry environment, market growth expectations, 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 2020 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
SECafter the date of this Quarterly Report. This Form 10-Q also contains estimates, projections and other information concerning our industry, our business, and the markets for certain of our products. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market, and other data from reports, research surveys, studies, and similar data prepared by market research firms and other third parties, industry, and general publications, government data, and similar sources. OVERVIEW Cohuis 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 (PCB) 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 abruptly 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 printed circuit boards 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 27, 2021, our net sales increased 62.3% year-over-year to $225.5 million. During 2021 our net sales were favorably impacted by robust automotive demand, driven by xEV and ADAS technologies, and continued mobility expansion with 5G proliferation. Demand for equipment testing 5G, Wi-Fi 6 and Ultra-Wideband devices, data centers, personal computers and automotive semiconductor and sensors were at near record levels. During the first quarter of 2020 our net sales were impacted by disruptions caused by the COVID-19 pandemic and movement control orders implemented by the governments of Malaysiaand the Philippines. These movement control orders resulted in supply disruptions and impacted our ability to ship product at the end of the quarter. Based on improved business conditions and using a portion of the proceeds of the recently completed underwritten public offering, during the first quarter of 2021, we took action to reduce outstanding principal, by $100.0 million, under our Term Loan B debt associated with the financing of the Xcerraacquisition in October 2018. While our total sales for fiscal year 2020 were negatively impacted by the global economic downturn caused by the COVID-19 pandemic, we began seeing strong demand for our products in the second half of 2020 and that strength has continued into the first quarter of 2021. Our long-term market drivers and market strategy remain intact and we are encouraged by positive order momentum across our main market segments, and customer traction with our new products. We remain optimistic about the long-term prospects for our business due to the increasing ubiquity of semiconductors, the future rollout of 5G networks, increasing semiconductor complexity, increasing quality demands from semiconductor customers, increasing test intensity and continued proliferation of electronics in a variety of products across the automotive, mobility and industrial markets. We are focused on cross-selling opportunities and supporting our customers' deployment of 5G RF capabilities on next generation smartphones and growing our sales to semiconductor and electronics manufacturers and test subcontractors. 27
Table of Contents
Cohu, Inc.Management's Discussion and Analysis of Financial Condition and Results of Operations March 27, 2021
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. COVID-19 continues to spread throughout the United Statesand other countries around the world, and the duration and severity of the effects are currently unknown. We base our estimates on historical experience, forecasts and on various other assumptions that are believed to be reasonable under the current 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. 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 deferral of revenue from sales to customers,
that affects our results of operations;
? estimate of provisions for capital losses and accrued liabilities, in particular
product guarantee, inventory reserves and provision for bad debts, which have an impact
gross margin or operating costs;
? the recognition and measurement of current and deferred tax assets and
liabilities, unrecognized tax benefits and valuation allowance
tax assets, which impact our tax provision;
? assessing the recoverability of long-lived assets, including goodwill and
other intangible assets, which mainly impact the gross margin or
charges if we are required to record asset impairments or accelerate
their depreciation or amortization; and
? the valuation and recognition of share-based compensation, which impacts
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 acceptance requirements is generally recognized upon shipment. In cases where a prior history of customer acceptance cannot be demonstrated or from sales where customer payment dates are not determinable and in the case of new products, revenue and cost of sales are deferred until customer acceptance has been received. Our post-shipment obligations typically include installation and standard warranties. The estimated fair value of installation related revenue is recognized in the period the installation is performed. Service revenue is recognized over time as the transfer of control is completed for the related contract or upon completion of the services if they are short-term in nature. Spares, contactor and kit revenue is generally recognized upon shipment. Certain of our equipment sales have multiple performance obligations. These arrangements involve the delivery or performance of multiple performance obligations, and transfer of control of performance obligations may occur at different points in time or over different periods of time. For arrangements containing multiple performance obligations, the revenue relating to the undelivered performance obligation is deferred using the relative standalone selling price method utilizing estimated sales prices until satisfaction of the deferred performance obligation. Unsatisfied performance obligations primarily represent contracts for products with future delivery dates. At
March 27, 2021, we have $8.2 millionof 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 as these contracts have 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. The estimate is based on information available for projected future sales. Variable consideration that does not meet revenue recognition criteria is deferred. Accounts receivable represents our unconditional right to receive consideration from our customer. Payments terms do not exceed one year from the invoice date and therefore do not include a significant financing component. To date, there have been no material impairment losses on accounts receivable. There were no material contract assets or contract liabilities recorded on the condensed consolidated balance sheet in any of the periods presented. On shipments where sales are not recognized, gross profit is generally recorded as deferred profit in our condensed consolidated balance sheet representing the difference between the receivable recorded and the inventory shipped. 28
Table of Contents
Cohu, Inc.Management's Discussion and Analysis of Financial Condition and Results of Operations March 27, 2021Accounts Receivable: We maintain an allowance for credit losses for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers deteriorates, resulting in an impairment of their ability to make payments, additional allowances may be required. We adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, on December 29, 2019the 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. Inventory: The valuation of inventory requires us to estimate obsolete or excess inventory as well as inventory that is not of saleable quality. The determination of obsolete or excess inventory requires us to estimate the future demand for our products. The demand forecast is a direct input in the development of our short-term manufacturing plans. We record valuation reserves on our inventory for estimated excess and obsolete inventory and lower of cost or net realizable value concerns equal to the difference between the cost of inventory and the estimated realizable value based upon assumptions about future product demand, market conditions and product selling prices. If future product demand, market conditions or product selling prices are less than those projected by management or if continued modifications to products are required to meet specifications or other customer requirements, increases to inventory reserves may be required which would have a negative impact on our gross margin. Income Taxes: We estimate our liability for income taxes based on the various jurisdictions where we conduct business. This requires us to estimate our (i) current taxes; (ii) temporary differences that result from differing treatment of certain items for tax and accounting purposes and (iii) unrecognized tax benefits. Temporary differences result in deferred tax assets and liabilities that are reflected in the consolidated balance sheet. The deferred tax assets are reduced by a valuation allowance if, based upon all available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Establishing, reducing or increasing a valuation allowance in an accounting period generally results in an increase or decrease in tax expense in the statement of operations. We must make significant judgments to determine the provision for income taxes, deferred tax assets and liabilities, unrecognized tax benefits and any valuation allowance to be recorded against deferred tax assets. Our deferred tax assets consist primarily of reserves and accruals that are not yet deductible for tax and tax credit and net operating loss carryforwards. 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. After the acquisition of Xcerraon October 1, 2018, we have determined that our four identified operating segments are: Test Handler Group("THG"), Semiconductor Test Group("STG"), Interface Solutions Group("ISG") and PCB Test Group("PTG"). Our THG, STG and ISG operating segments qualify for aggregation under ASC 280 due to similarities in their customers, their economic characteristics, and the nature of products and services provided. As a result, we report in two segments, Semiconductor Test & Inspection and PCB Test. 29
Table of Contents
Cohu, Inc.Management's Discussion and Analysis of Financial Condition and Results of Operations March 27, 2021 Goodwilland 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 of goodwill. We estimated the fair values of our reporting units primarily using the income approach valuation methodology that includes the discounted cash flow method, taking into consideration the market approach and certain market multiples as a validation of the values derived using the discounted cash flow methodology. Forecasts of future cash flows are based on our best estimate of future net sales and operating expenses, based primarily on customer forecasts, industry trade organization data and general economic conditions. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors.
We perform our annual impairment test from
During the first quarter of 2020, the volatility in
Cohu'sstock 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, 2020and determined that the fair values of our identified reporting units all exceeded their carrying values and we concluded there was 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 roadmaps and an increase in the discount rate used in the developing our interim fair value estimate resulted in a $3.9 millionimpairment to IPR&D recorded during the first quarter as the carrying value exceeded fair value. Long-lived assets, other than goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or any other significant adverse change that would indicate that the carrying amount of an asset or group of assets may not be recoverable. For long-lived assets, impairment losses are only recorded if the asset's carrying amount is not recoverable through its undiscounted, probability-weighted future cash flows. We measure the impairment loss based on the difference between the carrying amount and estimated fair value.
During the first quarter of 2021, no event or condition has occurred suggesting an impairment of our goodwill, our indefinite-lived intangible assets, other intangibles and long-lived assets.
Warranty: We provide for the estimated costs of product warranties in the period sales are recognized. Our warranty obligation estimates are affected by historical product shipment levels, product performance and material and labor costs incurred in correcting product performance problems. Should product performance, material usage or labor repair costs differ from our estimates, revisions to the estimated warranty liability would be required. Contingencies: We are subject to certain contingencies that arise in the ordinary course of our businesses which require us to assess the likelihood that future events will confirm the existence of a loss or an impairment of an asset. If a loss or asset impairment is probable and the amount of the loss or impairment is reasonably estimable, we accrue a charge to operations in the period such conditions become known. Share-based Compensation: Share-based compensation expense related to restricted stock unit awards is calculated based on the market price of our common stock on the grant date, reduced by the present value of dividends expected to be paid on our common stock prior to vesting of the restricted stock unit. Share-based compensation on performance stock units with market-based goals is calculated using a Monte Carlo simulation model on the date of the grant. Share-based compensation expense related to stock options is recorded based on the fair value of the award on its grant date, which we estimate using the Black-Scholes valuation model.
Recent accounting positions
For a description of accounting changes and recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see "Recent Accounting Pronouncements", in Note 1 located in Part I, Item 1 of this Form 10-Q. 30
Table of Contents
Cohu, Inc.Management's Discussion and Analysis of Financial Condition and Results of Operations March 27, 2021RESULTS OF OPERATIONS
Recent Transactions Affecting Operating Results
As discussed herein, management determined that the fixtures services business, that was acquired as part of
Xcerra, did not align with Cohu'slong-term strategic plan and management divested this business in the first quarter of 2020. The operations of our fixtures business were considered "discontinued operations" for all periods presented and unless otherwise indicated, the discussion below covers the comparative results from continuing operations. The following table summarizes certain operating data as a percentage of net sales: Three Months Ended March 27, March 28, 2021 2020 Net sales 100.0 % 100.0 % Cost of sales (54.7 )% (59.6 )% Gross margin 45.3 % 40.4 % Research and development (10.3 )% (16.2 )% Selling, general and administrative (14.4 )% (24.0
Amortization of purchased intangible assets (4.1 )% (6.9 )% Restructuring charges (0.6 )% (0.3 )% Impairment charges - % (2.8 )% Income (loss) from operations 15.9 % (9.8 )%
First quarter of fiscal 2021 compared to the first quarter of fiscal 2020
Net SalesOur consolidated net sales increased 62.3% to $225.5 millionin 2021, compared to net sales of $138.9 millionin 2020. During the first three months of 2021 our net sales were favorably impacted by robust automotive demand, driven by xEV and ADAS technologies, and continued mobility expansion with 5G proliferation. Demand for equipment testing 5G, Wi-Fi 6 and Ultra-Wideband devices, data centers, personal computers and automotive semiconductor and sensors were at near record levels. During the first quarter of 2020, our net sales were impacted by disruptions caused by the COVID-19 pandemic and movement control orders implemented by the governments of Malaysiaand the Philippines. These movement control orders resulted in supply disruptions and impacted our ability to ship product at the end of the quarter.
Gross margin (excluding amortization of intangible assets related to the acquisition described below)
Gross margin consists of net sales less cost of sales. Cost of sales consists primarily of the cost of materials, assembly and test labor, and overhead from operations. Our gross margin can fluctuate due to a number of factors, including, but not limited to, the mix of products sold, product support costs, inventory reserve adjustments, and utilization of manufacturing capacity. Our gross margin, as a percentage of net sales, was 45.3% in 2021 and 40.4% in 2020. As compared to the prior year, gross margin in the first quarter of 2021 benefitted from a significant increase in business volume which enabled us to better leverage our fixed costs. Our gross margin can be impacted by charges to cost of sales related to excess, obsolete and lower of cost or net realizable value inventory issues. We compute the majority of our excess and obsolete inventory reserve requirements using a one-year inventory usage forecast. During the first quarter of fiscal 2021 and 2020, we recorded charges to cost of sales of approximately
$0.7 millionand $1.2 millionfor excess and obsolete inventory, respectively. As part of the integration and restructuring activities related to Xcerra, we recorded $0.4 millionand $1.6 millionof inventory related charges related to the decision to end manufacturing of certain semiconductor test handler products in 2021 and 2020, respectively. While we believe our reserves for excess and obsolete inventory and lower of cost or market concerns are adequate to cover known exposures at March 27, 2021, reductions in customer forecasts or continued modifications to products, as a result of our failure to meet specifications or other customer requirements, may result in additional charges to operations that could negatively impact our results of operations and gross margin in future periods. 31
Table of Contents
Cohu, Inc.Management's Discussion and Analysis of Financial Condition and Results of Operations March 27, 2021
Research and development expenses (“R&D expenses”)
R&D expense consists primarily of salaries and related costs of employees engaged in ongoing research, product design and development activities, costs of engineering materials and supplies, and professional consulting expenses. R&D expense was
$23.2 millionor 10.3% of net sales in 2021, compared to $22.5 millionor 16.2% of net sales in 2020. The increase in R&D expense in 2021 was primarily a result of higher labor and material costs associated with development due to the elimination of cost control measures implemented during 2020 in response to the economic uncertainty caused by the COVID-19 pandemic.
Selling, general and administrative costs (“SG&A costs”)
SG&A expense consists primarily of salaries and benefit costs of employees, commission expense for independent sales representatives, product promotion and costs of professional services. SG&A expense was
$32.7 millionor 14.4% of net sales in 2021, compared to $33.4 millionor 24.0% of net sales in 2020. During 2021 SG&A expense benefitted from lower outside sales commissions and reductions in travel and certain other administrative spending as a result of the global restrictions in place due to the COVID-19 pandemic.
Amortization of purchased intangible assets
Amortization of purchased intangibles is the process of expensing the cost of an intangible asset acquired through a business combination over the projected life of the asset. Amortization of acquisition-related intangible assets was
$9.2 millionand $9.5 millionfor the first three months of 2021 and 2020, respectively. The decrease in expense recorded during the current year was a result of fluctuations in exchange rates. Restructuring Charges Subsequent to the acquisition of Xcerraon 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 Xcerra. We recorded restructuring charges, exclusive of the specific inventory related charges described above totaling $1.3 millionand $0.4 millionin 2021 and 2020, respectively. The increase in restructuring charges in 2021 is a result of a voluntary and involuntary reduction in force program we began implementing in the fourth quarter of 2020 at our wholly owned subsidiary, Cohu GmbH. These programs will collectively reduce headcount, enabling us to complete the consolidation of our multiple operations and facilities located near Kolbermoor and Rosenheim, Germany, as well as transition certain manufacturing to other lower cost regions.
See Note 4, “Restructuring costs” in Part I, Item 1 of this Form 10-Q for additional information regarding restructuring costs.
Impairment Charges During the first quarter of 2020, the volatility in
Cohu'sstock 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, 2020and determined that the fair values of our identified reporting units all exceeded their carrying values and, at that time, we concluded there were no impairment of goodwill within our reporting units. During the three months ended March 28, 2020, anticipated delays in customer adoption of certain new products under development as a result of the COVID-19 pandemic, changes to future project roadmap and an increase in the discount rate used in the developing our interim fair value estimate resulted in a $3.9 millionimpairment to IPR&D as the carrying value exceeded fair value. No impairment charges were recorded during the first three months of 2021. Interest Expense and Income Interest expense was $2.6 millionin the first three months of 2021 as compared to $4.4 millionin the corresponding period of 2020. The decrease in interest expense in 2021 resulted from a significant reduction in our Term Loan B debt outstanding as a result of payments made to reduce our outstanding debt and lower LIBOR rates driven by global economic uncertainty caused by the COVID-19 pandemic.
Interest income has been
Table of Contents
Cohu, Inc.Management's Discussion and Analysis of Financial Condition and Results of Operations March 27, 2021Income Taxes For the three months ended March 27, 2021, we used the estimated annual effective tax rate ("ETR") expected to be applicable for the full fiscal year in computing our tax provision. The ETR on income from continuing operations for the three months ended March 27, 2021was 11.5% and reflects a partial release of our domestic valuation allowance on deferred tax assets to offset tax liabilities on current year earnings, and an excess benefit relating to stock-based compensation. For the three months ended March 28, 2020, we determined that a reliable estimate of the annual ETR cannot be made, since relatively small changes in our projected income produce a significant variation in our ETR, and instead used the actual ETR for the year-to-date period to calculate our tax provision. The ETR on loss from continuing operations for the three months ended March 28, 2020was 5.4% and primarily reflected the lack of a tax benefit on our domestic losses as a result of our valuation allowance on deferred tax assets, and non-deductible expenses relating to stock-based compensation. We conduct business globally and as a result, Cohuor one or more of its subsidiaries files income tax returns in the US and various state and foreign jurisdictions. In the normal course of business, we are subject to examinations by taxing authorities throughout the world and are currently under examination in Germany, Malaysiaand Philippines. We believe our financial statement accruals for income taxes are appropriate. In accordance with the disclosure requirements as described in ASC Topic 740, Income Taxes, we have classified unrecognized tax benefits as non-current income tax liabilities, or a reduction in non-current deferred tax assets, unless expected to be paid within one year. Our continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. There were no material changes to our unrecognized tax benefits and interest accrued related to unrecognized tax benefits during the three months ended March 27, 2021and March 28, 2020. 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, 2019and 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.
Profit from continuing operations and net profit
As a result of the factors set out above, our profit from continuing operations and our net profit were
LIQUIDITY AND CAPITAL RESOURCES
Our primary business is dependent on capital expenditures by semiconductor manufacturers and test subcontractors that are, in turn, dependent on the current and anticipated market demand for semiconductors. The seasonal and volatile nature of demand for semiconductor equipment, our primary industry, makes estimates of future revenues, results of operations and net cash flows difficult. Our primary historical source of liquidity and capital resources has been cash flow generated by our operations and we manage our businesses to maximize operating cash flows as our primary source of liquidity. We use cash to fund growth in our operating assets and to fund new products and product enhancements primarily through research and development. As of
March 27, 2021, $77.7 millionor 54.3% of our cash and cash equivalents was held by our foreign subsidiaries. If these funds are needed for our operations in the U.S., we may be required to accrue and pay foreign withholding taxes if we repatriate these funds. Except for working capital requirements in certain jurisdictions, we provide for all withholding and other residual taxes related to unremitted earnings of our foreign subsidiaries. At March 27, 2021, our total indebtedness, net of discount and deferred financing costs, was $220.0 million, which included $201.3 millionoutstanding under the Term Loan B, $3.4 millionoutstanding under Kita's term loans, $10.3 millionoutstanding under Cohu GmbH'sconstruction loan and $5.0 millionoutstanding under Kita's lines of credit. In March 2021, we closed an underwritten public offering totaling 5,692,500 shares of our common stock at $41.00per share, raising net proceeds of approximately $223.1 million, after deducting underwriting discounts and commissions and offering expenses. We used $100.0 millionof the net proceeds of this offering to repay outstanding principal on our term loan facility and we intend to for use the rest for general corporate purposes, including to fund future growth initiatives. 33
Table of Contents
Cohu, Inc.Management's Discussion and Analysis of Financial Condition and Results of Operations March 27, 2021Liquidity
Working Capital: The following summarizes our cash, cash equivalents, short-term investments and working capital:
March 27, December 26, Percentage (in thousands) 2021 2020 Increase Change Cash, cash equivalents and short-term investments
$ 291,045 $ 170,027 $ 121,01871.2 % Working capital $ 467,685 $ 310,593 $ 157,09250.6 % Cash Flows Operating Activities: Operating cash flows for the first three months of fiscal 2021 consisted of our net income, adjusted for non-cash expenses and changes in operating assets and liabilities. These adjustments include depreciation expense on property, plant and equipment, share-based compensation expense, amortization of intangible assets, deferred income taxes, amortization of cloud-based software implementation costs, loss on extinguishment of debt, interest capitalized associated with cloud computing implementation, amortization of debt discounts and issuance costs and gains from sale of property, plant and equipment. Our net cash provided by operating activities in the three months of fiscal 2021 totaled $6.1 million. Net cash provided by operating activities was impacted by changes in current assets and liabilities and included increases in accounts receivable of $47.2 million, inventories of $20.8 million, accounts payable of $28.5 million, deferred profit of $4.4 million, income taxes payable of $5.1 million, other current assets of $6.6 millionand decreases in accrued compensation, warranty and other liabilities of $5.5 million. Our accounts receivable and accounts payable balances increased due to increased business volume in the first quarter of 2021 and the timing of cash collections from customers and payments made by us to our suppliers. The increase in inventory was driven by purchases from suppliers made to fulfill anticipated future shipments of products. The increase in other current assets resulted from advance payments for services that will be utilized throughout 2021. Deferrals of revenue in accordance with our revenue recognition policy resulted in an increase in deferred profit and the increase in income taxes payable is driven by taxable income generated in the first quarter of 2021. Accrued compensation, warranty and other liabilities decreased due to payments of incentive compensation related to the prior year during the first quarter of 2021. Investing Activities: Financing cash flows consist primarily of net proceeds from the issuance of common stock in our March 2021offering, net proceeds from the issuance of common stock under our stock option and employee stock purchase plans, and repayments of debt, net of new borrowings. Net cash used in investing activities in the first three months of fiscal 2021 totaled $129.9 million. During 2021 we used $129.7 millionin cash for purchases of short-term investments and generated $2.5 millionfrom sales and maturities. We invest our excess cash, in an attempt to seek the highest available return while preserving capital, in short-term investments since excess cash may be required for a business-related purpose. Additions to property, plant and equipment of $2.7 millionwere made to support the operating and development activities of our business activities of our Semiconductor Test & Inspection segment. Financing Activities: Financing cash flows consist primarily of net proceeds from the issuance of common stock under our stock option and employee stock purchase plans and repayments of debt, net of new borrowings. In March 2021, we closed an underwritten public offering totaling 5,692,500 shares of our common stock at $41.00per share, raising net proceeds of approximately $223.1 million, after deducting underwriting discounts and commissions and offering expenses. We used $100.0 millionof the net proceeds of this offering to repay outstanding principal on our term loan facility and we intend to for use the rest for general corporate purposes, including to fund future growth initiatives. We issue restricted stock units and stock options and maintain an employee stock purchase plan as components of our overall employee compensation. In the three months of fiscal 2021, cash used to settle the minimum statutory tax withholding requirements on behalf of our employees upon vesting of restricted and performance stock awards, net of proceeds from the exercise of employee stock options was $5.4 million. Repayments of short-term borrowings and long-term debt during the three months of fiscal 2021 totaled $101.9 millionand included a $100.0 millionearly settlement of our Term Loan B debt during the first quarter of 2021 made to deleverage our balance sheet. We received proceeds under a revolving line of credit and construction loan totaling $0.8 million. Proceeds from the construction loan are being used to expand our facility in Kolbermoor, Germany, enabling us to consolidate the German operations of our Semiconductor Test & Inspection segment in 2020. Capital Resources We have access to credit facilitates and other borrowings provided by financial institutions to finance acquisitions, capital expenditures and our operations if needed. A summary of our borrowings and available credit is as follows. 34
Table of Contents
Cohu, Inc.Management's Discussion and Analysis of Financial Condition and Results of Operations March 27, 2021Credit Agreement On October 1, 2018, we entered into a Credit Agreement providing for a $350.0 millionCredit Facility and borrowed the full amount to finance a portion of the Xcerraacquisition. 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'soption in terms of the time-based interest period, at a floating annual rate equal to the selected LIBOR interest period plus a margin of 3.00%. At March 27, 2021, the outstanding loan balance, net of discount and deferred financing costs, was $201.3 millionand $2.7 millionof the outstanding balance is presented as current installments of long-term debt in our condensed consolidated balance sheets. At December 26, 2020, the outstanding loan balance, net of discount and deferred financing costs, was $301.1 millionand $2.4 millionof the outstanding balance is presented as current installments of long-term debt in our condensed consolidated balance sheets. 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 Cohuto make timely payments of amounts due under the Credit Agreement, the failure of Cohuto adhere to the representations and covenants set forth in the Credit Agreement, the failure to provide notice of any event that causes a material adverse effect or to provide other required notices, upon the event that related collateral agreements become ineffective, upon the event that certain legal judgments are entered against Cohu, the insolvency of Cohu, or upon the change of control of Cohu. As of March 27, 2021, we believe no such events of default have occurred. During the first quarter of 2021, we repurchased $100.0 millionin principal of our Term Loan Facility for $100.0 millionin cash. This resulted in a loss of $1.8 millionreflected in other expense in our consolidated statement of operations and a corresponding $1.8 millionreduction in debt discounts and deferred financing costs in our consolidated balance sheets. After the repurchase, approximately $204.9 millionin principal of the Term Loan Facility remains outstanding as of March 27, 2021. 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 27, 2021, the outstanding loan balance was $3.4 millionand $0.3 millionof the outstanding balance is presented as current installments of long-term debt in our consolidated balance sheets. At December 26, 2020, the outstanding loan balance was $3.6 millionand $0.3 millionof the outstanding balance is presented as current installments of long-term debt in our consolidated balance sheets. 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 2019and June 2020, one of our wholly owned subsidiaries located in Germanyentered into a series of construction loans ("Loan Facilities") with a German financial institution providing it with total borrowings of €10.1 million. The Loan Facilities have terms of 10 years and 15 years. The Loan Facilities are being utilized to finance the expansion of our facility in Kolbermoor, Germany, enabling us to combine the operations of multiple subsidiaries in one location as part of our previously announced strategic restructuring program. The Loan Facilities are secured by the land and the existing building on the site and bear interest at agreed upon rates based on the facility amounts as discussed below. In August 2019, the initial €3.4 million was drawn under the first facility, which is payable over 10 years at a fixed annual interest rate of 0.8%. Interest only payments are required to be made each quarter starting in September 2019with principal and interest payments due each quarter starting in the month of December 2021. Principal repayments will be made over 8 years starting at the end of December 2021. As of March 2021, the full €5.2 million was drawn under the second facility, which is payable over 15 years at an annual interest rate of 1.05%, which is fixed until April 2027. Interest only payments are required to be made each month starting in December 2019with principal and interest payments due each month starting in the month of May 2020. Principal repayments will be made over 15 years starting at the end of May 2020. As of March 27, 2021, we have drawn €0.4 million under the third facility, which is payable over 10 years at an annual interest rate of 1.2%, which is fixed until May 2030. Interest payments are required to be made each month starting in March 2021with principal and interest payments due each month starting in the month of May 2021. Principal repayments will be made over 10 years starting at the end of May 2021. 35
Table of Contents
Cohu, Inc.Management's Discussion and Analysis of Financial Condition and Results of Operations March 27, 2021At March 27, 2021and December 26, 2020, total outstanding borrowings under the Loan Facilities was $10.3 millionand $9.9 millionwith $0.8 millionand $0.4 millionof 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. 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 $8.8 million. At March 27, 2021, total borrowings outstanding under the revolving lines of credit were $5.0 million. As these credit facility agreements renew monthly, they have been included in short-term borrowings in our condensed consolidated balance sheets. The revolving lines of credit are denominated in Japanese Yen and, as a result, amounts disclosed herein will fluctuate because of changes in currency exchange rates.
Our wholly owned subsidiary Ismeca has an available line of credit that allows it to borrow up to a total of
We also have a letter of credit facility ("LC Facility") under which
Bank of America, N.A., has agreed to administer the issuance of letters of credit on our behalf. The LC Facility requires us to maintain deposits of cash or other approved investments in amounts that approximate our outstanding letters of credit and contains customary restrictive covenants. In addition, our wholly owned subsidiary, Xcerra, has arrangements with various financial institutions for the issuance of letters of credit and bank guarantees. As of March 27, 2021, $0.8 millionwas outstanding under standby letters of credit and bank guarantees.
We anticipate that we will continue to make capital expenditures to support our operations and we anticipate that the current working capital will be sufficient to meet our operating needs for at least the next twelve months.
Contractual obligations and off-balance sheet arrangements
Contractual Obligations: Our significant contractual obligations consist of liabilities for debt, operating leases, unrecognized tax benefits, pensions, post-retirement benefits and warranties. During the first quarter of 2021, we repaid
$100.0 millionin outstanding principal of our Term Loan Facility. Aside from this repayment, there were no material changes to these obligations outside the ordinary course of business from those disclosed in our Annual Report on Form 10-K for the year ended December 26, 2020. Commitments to contract manufacturers and suppliers: From time to time, we enter into commitments with our vendors and outsourcing partners to purchase inventory at fixed prices or in guaranteed quantities. We are not able to determine the aggregate amount of such purchase orders that represent contractual obligations, as purchase orders may represent authorizations to purchase rather than binding agreements. Our purchase orders are based on our current manufacturing needs and are fulfilled by our vendors within relatively short time horizons. We typically do not have significant agreements for the purchase of raw materials or other goods specifying minimum quantities or set prices that exceed our expected requirements for the next three months.
Off-Balance Sheet Arrangements: In the normal course of business, we provide standby letters of credit to certain parties as required. From
© Edgar online, source