Notes to Unaudited Condensed Consolidated Financial Statement
s
June 24, 2017
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, 2016 has been derived from our audited financial statements at that date. The interim condensed consoli
dated financial statements as of June 24, 2017 (also referred to as “the second quarter of fiscal 2017” and “the first six months of fiscal 2017”) and June 25, 2016 (also referred to as “the second quarter of fiscal 2016” and “the first six months of fiscal 2016”) are unaudited. However, in management’s opinion, these financial statements reflect all adjustments (consisting only of normal, recurring items) necessary to provide a fair presentation of our financial position, results of operations and cash flows for the periods presented. The three- and six-month periods ended June 24, 2017 were
comprised of 13 and 25 weeks, respectively. The three- and six-month periods ended June 25, 2016 were
comprised of 13 and 26 weeks, respectively.
Our interim results are not necessarily indicative of the results that should be expected for the full year. For
a better understanding of Cohu, Inc. and our financial statements, we recommend reading these interim condensed consolidated financial statements in conjunction with our audited financial statements for the year ended December 31, 2016, which are included in our 2016 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”.
Certain prior year amounts have been restated as a result of our early adoption of Accounting Standards Update (“ASU”) No. 2016-09, Compensation - Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting
(ASU 2016-09). While the effective date of ASU 2016-09 was for fiscal years beginning after December 15, 2016, earlier adoption was permitted and we elected to adopt ASU 2016-09 during the fourth quarter of fiscal 2016.
As part of our adoption of ASU 2016-09 we elected to eliminate the use of an estimated forfeiture rate and recognize actual forfeitures as they occur. This amendment was adopted on a modified retrospective basis and, as a result, our share-based compensation for the
three- and six-month periods ended June 25, 2016 were revised and were approximately $0.1 million higher and $0.1 million lower in each period, respectively, under the new method, than what was previously reported.
Discontinued Operations
In June 2015, we sold our microwave communications equipment segment, Broadcast Microwave Services, Inc. (“BMS”). See Note 6, “Discontinued Operations” for additional information. Unless otherwise indicated, all amounts herein relate to continuing operations.
Concentration of Credit Risk
Financial instruments that potentially subject us to significant credit risk consist principally of cash equivalents, short-term investments and trade accounts receivable. We invest in a variety of financial instruments and, by policy, limit the amount of credit exposure with any one issuer.
Trade accounts receivable are presented net of allowance for doubtful accounts of $0.1
million at both June 24, 2017 and December 31, 2016. Our customers include semiconductor manufacturers and semiconductor test subcontractors throughout many areas of the world. While we believe that our allowance for doubtful accounts is adequate and represents our best estimate at June 24, 2017, we will continue to monitor customer liquidity and other economic conditions, which may result in changes to our estimates regarding collectability.
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. Based on the provisions of ASC 280, we have determined that our identified 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 one segment, semiconductor equipment and the financial information disclosed herein materially represents all of the financial information related to our semiconductor equipment segment.
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statement
s
June 24, 2017
Goodwill, Other Intangible Assets and
Long-lived Assets
We evaluate goodwill for impairment annually and when an event occurs or circumstances change that indicate that the carrying value may not be recoverable. We test goodwill for impairment by first comparing the book value of net assets to the fair value of the reporting units. If the fair value is determined to be less than the book value, a second step is performed to compute the amount of impairment as the difference between the estimated fair value of goodwill and the carrying value. We estimated the fair values of our reporting units primarily using the income approach valuation methodology that includes the discounted cash flow method, taking into consideration the market approach and certain market multiples as a validation of the values derived using the discounted cash flow methodology. Forecasts of future cash flows are based on our best estimate of future net sales and operating expenses, based primarily on customer forecasts, industry trade organization data and general economic conditions.
We conduct our annual impairment test as of October
1st of each year, and have determined there was no impairment as of October 1, 2016 as we determined that the estimated fair values of our reporting units exceeded their carrying values on that date. Other events and changes in circumstances may also require goodwill to be tested for impairment between annual measurement dates. As of June 24, 2017, we do not believe there have been any events or circumstances that would require us to perform an interim goodwill impairment review. In the event we determine that an interim goodwill impairment review is required in a future period, the review may result in an impairment charge, which would have a negative impact on our results of operations.
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.
Foreign Currency Translation
Assets and liabilities of our wholly owned foreign subsidiaries that use the U.S. Dollar as their functional currency are re-measured using exchange rates in effect at the end of the period, except for nonmonetary assets, such as inventories and property, plant and equipment, which are re-measured using historical exchange rates. Revenues and costs are re-measured using average exchange rates for the period, except for costs related to those balance sheet items that are re-measured using historical exchange rates. Gains and losses on foreign currency transactions are recognized as incurred. During
the three and six months ended June 24, 2017,
we recognized foreign exchange losses of $1.2 million and $2.5 million, respectively, in our consolidated statements of income. During the three and six months
ended June 25, 2016, we recognized approximately $0.3 million and $0.8 million, of foreign exchange losses in our consolidated statements of income, respectively.
Certain of our foreign subsidiaries have designated the local currency as their functional currency and, as a result, their assets and liabilities are translated at the rate of exchange at the balance sheet date, while revenue and expenses are translated using the average exchange rate for the period.
Cumulative translation adjustments resulting from the translation of the financial statements are included as a separate component of stockholders’ equity.
Share-Based Compensation
We measure and recognize all share-based compensation under the fair value method. Our estimate of share-based compensation expense requires a number of complex and subjective assumptions including our stock price volatility, employee exercise patterns (expected life of the options) and related tax effects. The assumptions used in calculating the fair value of share-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. Although we believe the assumptions and estimates we have made are reasonable and appropriate, changes in assumptions could materially impact our reported financial results.
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statement
s
June 24, 2017
Reported share-based compensation is classified, in the condensed consolidated interim financial statements, as follows
(in thousands)
:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 24,
|
|
|
June 25,
|
|
|
June 24,
|
|
|
June 25,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Cost of sales
|
|
$
|
121
|
|
|
$
|
115
|
|
|
$
|
204
|
|
|
$
|
208
|
|
Research and development
|
|
|
262
|
|
|
|
334
|
|
|
|
578
|
|
|
|
628
|
|
Selling, general and administrative
|
|
|
1,376
|
|
|
|
1,347
|
|
|
|
2,694
|
|
|
|
2,697
|
|
Total share-based compensation
|
|
|
1,759
|
|
|
|
1,796
|
|
|
|
3,476
|
|
|
|
3,533
|
|
Income tax benefit
|
|
|
(249
|
)
|
|
|
(73
|
)
|
|
|
(322
|
)
|
|
|
(113
|
)
|
Total share-based compensation, net
|
|
$
|
1,510
|
|
|
$
|
1,723
|
|
|
$
|
3,154
|
|
|
$
|
3,420
|
|
Income (Loss) Per Share
Basic income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the reporting period. Diluted income (loss) per share includes the dilutive effect of common shares potentially issuable upon the exercise of stock options, vesting of outstanding restricted stock and performance stock units and issuance of stock under our employee stock purchase plan using the treasury stock method. In loss periods, potentially dilutive securities are excluded from the per share computations due to their anti-dilutive effect.
For purposes of computing diluted income (loss) per share, stock options with exercise prices that exceed the average fair market value of our common stock for the period are excluded. For the three and six months ended June 24, 2017, options to issue approximately 46,000
and 152,000 shares of common stock were excluded from the computation, respectively. For the three and six months ended June 25, 2016, options to issue approximately 773,000
and 775,000 shares of common stock were excluded from the computation, respectively.
The following table reconciles the denominators used in computing basic and diluted income (loss) per share (
in thousands)
:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 24,
|
|
|
June 25,
|
|
|
June 24,
|
|
|
June 25,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Weighted average common shares
|
|
|
27,708
|
|
|
|
26,711
|
|
|
|
27,343
|
|
|
|
26,514
|
|
Effect of dilutive securities
|
|
|
1,017
|
|
|
|
674
|
|
|
|
1,145
|
|
|
|
876
|
|
|
|
|
28,725
|
|
|
|
27,385
|
|
|
|
28,488
|
|
|
|
27,390
|
|
Cohu has utilized the “control number” concept in the computation of diluted earnings per share to determine whether potential common stock instruments are dilutive. The control number used is income from continuing operations. The control number concept requires that the same number of potentially dilutive securities applied in computing diluted earnings per share from continuing operations be applied to all other categories of income or loss, regardless of their anti-dilutive effect on such categories.
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 there is persuasive evidence of an arrangement, title and risk of loss have passed, delivery has occurred or the services have been rendered, the sales price is fixed or determinable and collection of the related receivable is reasonably assured. Title and risk of loss generally pass to our customers upon shipment. In circumstances where either title or risk of loss pass upon destination or acceptance, we defer revenue recognition until such events occur.
Revenue for established products that have previously satisfied a customer
’s acceptance requirements and provide for full payment tied to shipment is generally recognized upon shipment and passage of title. In certain instances, customer payment terms may provide that a minority portion (e.g. up to 20%) of the equipment purchase price be paid only upon customer acceptance. In those situations, the majority portion (e.g. 80%) of revenue where the contingent payment is tied to shipment and the entire product cost of sale are recognized upon shipment and passage of title and the minority portion of the purchase price related to customer acceptance is deferred and recognized upon receipt of customer acceptance. 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 is 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 ratably over the period of the related contract or upon completion of the services if they are short-term in nature. Spares and kit revenue is generally recognized upon shipment.
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statement
s
June 24, 2017
Certain of our equipment sales are accounted for as multiple-element arrangements. A multiple-element arrangement is a transaction which may involve the delivery or performance of multiple products, services, or rights to use assets, and performance may occur at different points in time or over different periods of time.
For arrangements containing multiple elements, the revenue relating to the undelivered elements is deferred using the relative selling price method utilizing estimated sales prices until delivery of the deferred elements. We limit the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services, future performance obligations or subject to customer-specified return or adjustment.
On shipments where sales are not recognized, gross profit is generally recorded as deferred profit in our consolidated balance sheet representing the difference between the receivable recorded and the inventory shipped.
At June 24, 2017, we had deferred revenue totaling approximately $
8.2
million and deferred profit of $6.3
million. At December 31, 2016, we had deferred revenue totaling approximately $9.3 million and deferred profit of $6.9 million. The periodic change is primarily a result of increases or decreases in deferrals of revenue associated with product shipments made to our customers in accordance with our revenue recognition policy.
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
|
|
|
Six Months Ended
|
|
|
|
June 24,
|
|
|
June 25,
|
|
|
June 24,
|
|
|
June 25,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers individually accounting for more than 10% of net sales
|
|
|
one
|
|
|
|
one
|
|
|
|
one
|
|
|
|
two
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of net sales
|
|
|
20.7%
|
|
|
|
21.7%
|
|
|
|
20.4%
|
|
|
|
32.0%
|
|
Comprehensive Loss
Our accumulated other comprehensive loss balance totaled approximately $20.6
million and $27.9 million at June 24, 2017 and December 31, 2016, respectively, and was attributed to all non-owner changes in stockholders’ equity and consists of, on an after-tax basis where applicable, foreign currency adjustments resulting from the translation of certain of our subsidiary accounts where the functional currency is not the U.S. Dollar
and adjustments related to postretirement benefits. Reclassification adjustments from accumulated other comprehensive income
during the first six months of fiscal 2017 and 2016 were not significant.
Retiree Medical Benefits
We provide post-retirement health benefits to certain executives and directors under a noncontributory plan. The net periodic benefit cost incurred during the first six months of fiscal 2017 and 2016 was not significant.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
–
In July 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-11,
Simplifying the Measurement of Inventory
. Under this guidance, inventory should be measured at the lower of cost and net realizable value. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method.
The adoption of this authoritative guidance did not have a material impact our consolidated financial statements.
Recently Issued Accounting Pronouncements
– In March 2017, the FASB issued ASU No. 2017-07,
Compensation – Retirement Benefits (Topic 715) – Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
, which provides additional guidance on the presentation of net periodic pension and postretirement benefit costs in the income statement and on the components eligible for capitalization. The amendments in this guidance require that an employer report the service cost component of the net periodic benefit costs in the same income statement line item as other compensation costs arising from services rendered by employees during the period. The non-service-cost components of net periodic benefit costs are to be presented in the income statement separately from the service cost components and outside a subtotal of income from operations. The guidance also allows for the capitalization of the service cost components, when applicable (i.e., as a cost of internally manufactured inventory or a self-constructed asset).
The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods; early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The amendments in this guidance are to be applied retrospectively. We are currently assessing the impact this guidance will have on its consolidated financial statements.
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statement
s
June 24, 2017
In January 2017, the FASB issued ASU No. 2017-04,
Simplifying the Test for Goodwill Impairment
. It eliminates Step 2 from the goodwill impairment test and an entity should recognize an impairment charge for the amount by which the carrying amount of goodwill exceeds the reporting unit's fair value, not to exceed the carrying amount of goodwill. This guidance is effective for annual and any interim impairment tests in fiscal years beginning after December 15, 2019. We do not expect this guidance to have any impact on our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01,
Clarifying the Definition of a Business.
It revises the definition of a business and provides a framework to evaluate when an input and a substantive process are present in an acquisition to be considered a business. This guidance is effective for annual periods beginning after December 15, 2017. We do not expect this guidance to have any impact on our consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18,
Restricted Cash.
It requires that amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance is effective for interim and annual reporting periods beginning after December 15, 2017. We do not expect this guidance to have a material impact on our consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15,
Classification of Certain Cash Receipts and Cash Payments.
It provides guidance on eight specific cash flow issues with the objective of reducing the existing diversity in practice in how they are classified in the statement of cash flows. This guidance is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, provided that all of the amendments are adopted in the same period. We do not expect this guidance to have a material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842).
Under this guidance, lessees will be required to recognize a right-of-use asset and a lease liability for all operating leases defined under previous GAAP. This guidance is effective for interim and annual reporting periods beginning after December 15, 2018. The new guidance must be adopted using a modified retrospective transition, and provides for certain practical expedients. We are currently evaluating the impact of this new standard on our financial reporting, but recognizing the lease liabilities and related right-of-use assets will impact our balance sheet.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
(ASU 2014-09), which amends the existing accounting standards for revenue recognition. In August 2015, the FASB issued ASU No. 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
, which delays the effective date of ASU 2014-09 by one year. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. In March 2016, the FASB issued Accounting Standards Update No. 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
(ASU 2016-08) which clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers. The new revenue recognition standard will be effective for us in the first quarter of 2018. We will adopt the new standard effective December 31, 2017, which is the first day of our 2018 fiscal year. The new standard also permits two methods of adoption: retrospectively to each prior reporting period presented (the full retrospective method), or
retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method).
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statement
s
June 24, 2017
We currently anticipate adopting the standard using the modified retrospective method. We are still in the process of completing our analysis on the impact this guidance will have on our consolidated financial statements and related disclosures.
Based on our preliminary review of our customer agreements, we currently expect that our revenue will continue to be recognized at a point in time, generally upon shipment of products to customers, consistent with our current revenue recognition model. In certain instances, when customer payment terms provide that a minority portion (e.g. up to 20%) of the equipment purchase price be paid only upon customer acceptance, recognition of revenue may occur sooner under the new model.
2
.
|
Business Acquisitions,
Goodwill and Other Purchased Intangible Assets
|
Kita
On January 4, 2017, we completed the acquisition of all the outstanding share capital of Kita Manufacturing Co., LTD. and Kita USA, Inc. (together “Kita”) (the “Acquisition”). Kita, headquartered in Osaka, Japan, and with operations in Attleboro, Massachusetts and Kyoto, Japan, designs, manufactures and sells spring probe contacts used in final test contactors, probe cards, PCB test boards and connectors sold to customers worldwide. The acquisition of Kita was a strategic transaction to expand our total available market, extend our market leadership and broaden our product offerings. In connection with the Acquisition, during the first six months ended June 24, 2017 and June 25, 2016 we incurred acquisition related costs, which were expensed as selling, general and administrative costs totaling $0.2
million and $0.4 million, respectively.
The Acquisition has been accounted for in conformity with FASB Accounting Standards Codification 805,
Business Combinations
(“ASC 805”). The purchase price for Kita was funded primarily by cash reserves and consisted of the following
(
in thousands
):
Cash paid to Kita shareholders
|
|
$
|
15,000
|
|
Fair value of contingent consideration
|
|
|
2,251
|
|
Total purchase price
|
|
$
|
17,251
|
|
The contingent consideration represents the estimated fair value of future payments totaling up to $3.0
million we would be required to make as a result of Kita achieving annual revenue and EBITDA targets in 2017 and 2018 as specified in the purchase agreement for the Acquisition. The contingent consideration payable has been classified as level 3 in the fair value hierarchy. See Note 3 “Financial Instruments Measured at Fair Value” for additional information on the three-tier fair value hierarchy.
We have not finalized the purchase price allocation. Accordingly, the preliminary purchase price allocation shown below could materially change as the fair values of the tangible and intangible assets acquired and liabilities assumed and the related income tax effects are finalized during the remainder of the measurement period (which will not exceed 12 months from the Acquisition closing date). The Acquisition was nontaxable to Cohu and certain of the assets acquired, including goodwill and intangibles, will not be deductible for tax purposes. The acquired assets and liabilities of Kita 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.
The table below summarizes the assets acquired and liabilities assumed as of January 4, 2017
(
in thousands
):
Current assets, including cash received
|
|
$
|
10,310
|
|
Property, plant and equipment
|
|
|
12,751
|
|
Other assets
|
|
|
2,291
|
|
Intangible assets subject to amortization
|
|
|
2,000
|
|
Goodwill
|
|
|
4,821
|
|
Total assets acquired
|
|
|
32,173
|
|
Liabilities assumed
|
|
|
(14,922
|
)
|
Net assets acquired
|
|
$
|
17,251
|
|
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statement
s
June 24, 2017
The preliminary allocation of the intangible assets subject to amortization is as follows
(in thousands)
:
|
|
|
|
|
|
Average
|
|
Description
|
|
Estimated
Fair Value
|
|
|
Useful Life
(years)
|
|
Developed technology
|
|
$
|
800
|
|
|
|
8
|
|
Customer relationships
|
|
|
600
|
|
|
|
4
|
|
Product backlog
|
|
|
100
|
|
|
|
1
|
|
Trade names
|
|
|
500
|
|
|
|
5
|
|
|
|
$
|
2,000
|
|
|
|
|
|
The preliminary value assigned to the developed technology was determined by using the multi-period excess earnings method under the income approach. Developed technology, which comprises products that have reached technological feasibility, includes the products in Kita
’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 Kita and its competitors. The estimated cash flows were based on revenues for the developed technology net of operating expenses and net of contributory asset charges. The discount rate utilized to discount the net cash flows of the developed technology to present value was based on the risk associated with the respective cash flows taking into consideration the perceived risk of the technology relative to the other acquired assets, the weighted average cost of capital, the internal rate of return, and the weighted average return on assets.
The value assigned to customer relationships was determined by using the with and without method under the income approach, which analyzes the difference in discounted cash flows generated with the customer relationships in place compared to the discounted cash flows generated without the customer relationships in place.
The value assigned to backlog acquired was estimated based upon the contractual nature of the backlog as of the acquisition date, using the income approach to discount back to present value the cash flows attributable to the backlog.
The value assigned to trade names was estimated using the relief-from-royalty method of the income approach. This approach is based on the assumption that in lieu of ownership, a company would be willing to pay a royalty in order to exploit the related benefits of this intangible asset.
Kita
’s results of operations were included in, but not material to, Cohu’s consolidated statements of income and comprehensive income commencing January 4, 2017 and Kita’s net sales for the
three- and six-month periods ended June 24, 2017 were $5.0 million and $9.1 million, respectively. Prior to the acquisition by Cohu, Kita’s net sales for the three
- and six-month periods ended June 25, 2016 were $4.3 million and $8.6 million, respectively.
Goodwill and Intangible Assets
Changes in the carrying value of goodwill during the year ended December 31, 2016 and the six-month period ended June 24, 2017 were as follows
(
in thousands
):
|
|
Goodwill
|
|
Balance, December 26, 2015
|
|
$
|
60,264
|
|
Impact of currency exchange
|
|
|
(1,415
|
)
|
Balance, December 31, 2016
|
|
|
58,849
|
|
Additions, net
|
|
|
4,821
|
|
Impact of currency exchange
|
|
|
2,368
|
|
Balance, June 24, 2017
|
|
$
|
66,038
|
|
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statement
s
June 24, 2017
Purchased intangible assets, subject to amortization are as follows
(
in thousands
)
:
|
|
June 24, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Average
|
|
|
Gross
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accum.
|
|
|
Amort.
|
|
|
Carrying
|
|
|
Accum.
|
|
|
|
Amount
|
|
|
Amort.
|
|
|
Period (years)
|
|
|
Amount
|
|
|
Amort.
|
|
Developed technology
|
|
$
|
21,009
|
|
|
$
|
11,396
|
|
|
|
3.9
|
|
|
$
|
19,195
|
|
|
$
|
9,597
|
|
Customer relationships
|
|
|
7,983
|
|
|
|
4,348
|
|
|
|
3.6
|
|
|
|
6,996
|
|
|
|
3,644
|
|
Trade names
|
|
|
6,176
|
|
|
|
734
|
|
|
|
12.5
|
|
|
|
5,353
|
|
|
|
468
|
|
Backlog
|
|
|
105
|
|
|
|
53
|
|
|
|
0.5
|
|
|
|
-
|
|
|
|
-
|
|
Total intangible assets
|
|
$
|
35,273
|
|
|
$
|
16,531
|
|
|
|
|
|
|
$
|
31,544
|
|
|
$
|
13,709
|
|
Amortization expense related to intangible assets was approximately $1.0
million in the second quarter of fiscal 2017 and $2.1 million in the first six months of fiscal 2017. Amortization expense related to intangible assets was approximately $1.8 million in the second quarter of fiscal 2016 and $3.6 million in the first six months of fiscal 2016. The year-over-year decrease in amortization is a result of certain intangible assets that became fully amortized in the prior year. Changes in the carrying values of these intangible assets are a result of the impact of fluctuations in currency exchange rates.
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statement
s
June 24, 2017
3.
|
Financial Instruments Measured at Fair Value
|
Our cash, cash equivalents, and short-term investments consisted primarily of cash and other investment grade securities. We do not hold investment securities for trading purposes. All short-term investments are classified as available-for-sale and recorded at fair value. Investment securities are exposed to market risk due to changes in interest rates and credit risk and we monitor credit risk and attempt to mitigate exposure by making high-quality investments and through investment diversification.
Gains and losses on investments are calculated using the specific-identification method and are recognized during the period in which the investment is sold or when an investment experiences an other-than-temporary decline in value. Factors that could indicate an impairment exists include, but are not limited to: earnings performance, changes in credit rating or adverse changes in the regulatory or economic environment of the asset. Gross realized gains and losses on sales of short-term investments are included in interest income. Realized gains and losses for the periods presented were not significant.
Investments that we have classified as short-term, by security type, are as follows
(
in thousands
)
:
|
|
June 24, 2017
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
(1)
|
|
|
Value
|
|
Corporate debt securities
(2)
|
|
$
|
13,707
|
|
|
$
|
1
|
|
|
$
|
4
|
|
|
$
|
13,704
|
|
U.S. Treasury securities
|
|
|
5,197
|
|
|
|
-
|
|
|
|
1
|
|
|
|
5,196
|
|
Bank certificates of deposit
|
|
|
1,294
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,294
|
|
Government-sponsored
enterprise securities
|
|
|
1,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000
|
|
Foreign government security
|
|
|
616
|
|
|
|
-
|
|
|
|
-
|
|
|
|
616
|
|
|
|
$
|
21,814
|
|
|
$
|
1
|
|
|
$
|
5
|
|
|
$
|
21,810
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
(1)
|
|
|
Value
|
|
Corporate debt securities
(2)
|
|
$
|
22,513
|
|
|
$
|
1
|
|
|
$
|
6
|
|
|
$
|
22,508
|
|
Government-sponsored
enterprise securities
|
|
|
8,109
|
|
|
|
-
|
|
|
|
1
|
|
|
|
8,108
|
|
Bank certificates of deposit
|
|
|
750
|
|
|
|
1
|
|
|
|
-
|
|
|
|
751
|
|
Foreign government security
|
|
|
623
|
|
|
|
-
|
|
|
|
-
|
|
|
|
623
|
|
|
|
$
|
31,995
|
|
|
$
|
2
|
|
|
$
|
7
|
|
|
$
|
31,990
|
|
|
(1)
|
As of June 24, 2017, there were $16.6
million of investments in our portfolio in a loss position. As of December 31, 2016, the cost and fair value of investments with loss positions were approximately $26.6 million. We evaluated the nature of these investments, credit worthiness of the issuer and the duration of these impairments to determine if an other-than-temporary decline in fair value had occurred and concluded that these losses were temporary and we have the ability and intent to hold these investments to maturity.
|
|
|
|
|
(2)
|
Corporate debt securities include investments in financial and other corporate institutions. No single issuer represents a significant portion of the total corporate debt securities portfolio.
|
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statement
s
June 24, 2017
Effective maturities of short-term investments are as follows
(in thousands)
:
|
|
June 24, 2017
|
|
|
December 31, 2016
|
|
|
|
Amortized
|
|
|
Estimated
|
|
|
Amortized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
Due in one year or less
|
|
$
|
21,198
|
|
|
$
|
21,194
|
|
|
$
|
31,372
|
|
|
$
|
31,367
|
|
Due after one year through three years
|
|
|
616
|
|
|
|
616
|
|
|
|
623
|
|
|
|
623
|
|
|
|
$
|
21,814
|
|
|
$
|
21,810
|
|
|
$
|
31,995
|
|
|
$
|
31,990
|
|
Accounting standards pertaining to fair value measurements establish a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. When available, we use quoted market prices to determine the fair value of our investments, and they are included in Level 1. When quoted market prices are unobservable, we use quotes from independent pricing vendors based on recent trading activity and other relevant information, and they are included in Level 2.
The following table summarizes, by major security type, our financial instruments that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy
(in thousands)
:
|
|
Fair
value measurements at June 24, 2017 using:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
estimated
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
fair value
|
|
Cash
|
|
$
|
73,734
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
73,734
|
|
U.S. Treasury securities
|
|
|
-
|
|
|
|
5,196
|
|
|
|
-
|
|
|
|
5,196
|
|
Corporate debt securities
|
|
|
-
|
|
|
|
18,202
|
|
|
|
-
|
|
|
|
18,202
|
|
Government-sponsored enterprise securities
|
|
|
-
|
|
|
|
1,000
|
|
|
|
-
|
|
|
|
1,000
|
|
Money market funds
|
|
|
-
|
|
|
|
14,240
|
|
|
|
-
|
|
|
|
14,240
|
|
Bank certificates of deposit
|
|
|
-
|
|
|
|
1,294
|
|
|
|
-
|
|
|
|
1,294
|
|
Foreign government security
|
|
|
-
|
|
|
|
616
|
|
|
|
-
|
|
|
|
616
|
|
|
|
$
|
73,734
|
|
|
$
|
40,548
|
|
|
$
|
-
|
|
|
$
|
114,282
|
|
|
|
Fair
value measurements at December 31, 2016 using:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
estimated
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
fair value
|
|
Cash
|
|
$
|
70,279
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
70,279
|
|
Foreign government security
|
|
|
-
|
|
|
|
623
|
|
|
|
-
|
|
|
|
623
|
|
Corporate debt securities
|
|
|
-
|
|
|
|
24,108
|
|
|
|
-
|
|
|
|
24,108
|
|
Government-sponsored enterprise securities
|
|
|
-
|
|
|
|
8,108
|
|
|
|
-
|
|
|
|
8,108
|
|
Money market funds
|
|
|
-
|
|
|
|
24,166
|
|
|
|
-
|
|
|
|
24,166
|
|
Bank certificates of deposit
|
|
|
-
|
|
|
|
751
|
|
|
|
-
|
|
|
|
751
|
|
|
|
$
|
70,279
|
|
|
$
|
57,756
|
|
|
$
|
-
|
|
|
$
|
128,035
|
|
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statement
s
June 24, 2017
4.
|
Employee Stock Benefit Plans
|
Our 2005 Equity Incentive Plan (the “2005 Plan”) is a broad-based, long-term retention program intended to attract, motivate, and retain talented employees as well as align stockholder and employee interests. Awards that may be granted under the program include, but are not limited to, non-qualified and incentive stock options, restricted stock units, and performance stock units. We settle employee stock option exercises, employee stock purchase plan purchases, and the vesting of restricted stock units, and performance stock units with newly issued common shares. At June 24, 2017, there were 1,458,782
shares available for future equity grants under the 2005 Equity Incentive Plan.
Stock Options
Stock options may be granted to employees, consultants and directors to purchase a fixed number of shares of our common stock. The exercise prices of options granted are at least equal to the fair market value of our common stock on the dates of grant and options vest and become exercisable in annual increments that range from one to four years from the date of grant. Stock options granted under the 2015 Plan have a maximum contractual term of ten years.
In
the first six months of fiscal 2017
we did not grant any stock options and
we issued 612,388 shares of our common stock on the exercise of options that were granted previously.
At June 24, 2017, we had 1,028,779
stock options outstanding. These options had a weighted-average exercise price of $10.04 per share, an aggregate intrinsic value of approximately $7.0 million and the weighted average remaining contractual term was approximately 3.8 years.
At June 24, 2017, we had 1,015,863
stock options outstanding that were exercisable. These options had a weighted-average exercise price of $10.02 per share, an aggregate intrinsic value of $6.9 million and the weighted average remaining contractual term was approximately 3.8 years.
Restricted Stock Units
We grant restricted stock units (“RSUs”) to certain employees, consultants and directors. RSUs vest in annual increments that range from one to four years from the date of grant. Prior to vesting, RSUs do not have dividend equivalent rights, do not have voting rights and the shares underlying the restricted stock units are not considered issued and outstanding. New shares of our common stock will be issued on the date the RSUs vest net of the minimum statutory tax withholding requirements to be paid by us on behalf of our employees. As a result, the actual number of shares issued will be fewer than the actual number of RSUs outstanding at June 24, 2017.
In
the first six months of fiscal 2017 we awarded 339,956 RSUs and we issued 392,624 shares of our common stock on vesting of previously granted awards. At June 24, 2017, we had 1,017,941 restricted stock units outstanding with an aggregate intrinsic value of approximately $17.1 million and the weighted average remaining vesting period was approximately 2.5 years.
Performance Stock Units
We also grant performance stock units (“PSUs”) to senior executives as a part of our long-term equity compensation program. The number of shares of common stock that will ultimately be issued to settle PSUs granted in
2017 and 2016 ranges from 25% to 200% and is determined based on certain performance criteria over a three-year measurement period. For PSUs granted in 2015, the number of shares of common stock issued to settle PSUs granted is determined based on a two-year measurement period. The performance criteria for the PSUs are based on a combination of the Company’s annualized Total Shareholder Return (“TSR”) for the performance period and the relative performance of the Company’s TSR compared with the annualized TSR of certain peer companies for the performance period. PSUs granted in 2017 and 2016 vest 100% on the third anniversary of their grant and PSUs granted in 2015 vest 50% on the second and third anniversary of their grant, respectively.
We estimated the fair value of the PSUs using a Monte Carlo simulation model on the date of grant. Compensation expense is recognized ratably over the derived service period. New shares of our common stock will be issued on the date the PSUs vest net of the minimum statutory tax withholding requirements to be paid by us on behalf of our employees. As a result, the actual number of shares issued will be fewer than the actual number outstanding
at June 24, 2017.
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statement
s
June 24, 2017
In
the first six months of fiscal 2017
, we awarded
185,305 PSUs
and we issued 186,146 shares of our common stock on vesting of previously granted awards. A
t
June 24, 2017, we had 357,333 PSUs outstanding with an aggregate intrinsic value of approximately $6.0 million and the weighted average remaining vesting period was approximately 1.9 years.
Employee Stock Purchase Plan
The Cohu, Inc. 1997 Employee Stock Purchase Plan (“the Plan”) provides for the issuance of shares of our common stock. Under the Plan, eligible employees may purchase shares of Cohu common stock through payroll deductions at a price equal to 85 percent of the lower of the fair market value of Cohu common stock at the beginning or end of each 6-month purchase period, subject to certain limits.
During the
first six months of fiscal 2017, 61,313 shares of our common stock were sold to our employees under the Plan leaving 639,171 shares available for future issuance.
For the three and six months ended June 24, 2017,
we used the estimated 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
June 24, 2017 and June 25, 2016
, was 9.1% and 23.2%, respectively, and
12.2% and 54.3% for the six months ended June 24, 2017 and June 25, 2016
, respectively.
The tax provision on income from continuing operations in 2017 and 2016 differs from the U.S. federal statutory rate primarily due to the lack of a provision (benefit) on our domestic income (losses) as a result of our valuation allowance on deferred tax assets or an anticipated loss for the full year, foreign income taxed at different rates, changes in our deferred tax asset valuation allowance, state taxes and interest related to unrecognized tax benefits.
Other than for foreign currency exchange rate changes and the Kita acquisition, there was no material change to our unrecognized tax benefits and
related accrued interest and penalties during the three- and six-month periods ended June 24, 2017 and June 25, 2016.
6.
|
Discontinued Operations
|
In June 2015, we sold all of the outstanding stock of BMS for $4.9
million in cash and up to $2.5 million of contingent cash consideration. Our decision to sell this non-core business resulted from management’s determination that it was no longer a strategic fit within our organization. As part of the divestiture of BMS we recorded a long-term contingent consideration receivable that has been classified as Level 3 in the fair value hierarchy. See Note 3, “Financial Instruments Measured at Fair Value” for additional information on the three-tier fair value hierarchy.
The contingent consideration represents the estimated fair value of future payments we are due from the buyer should BMS achieve specified annual revenue targets in certain years as specified in the sale agreement. The periodic fair value of the contingent consideration is determined through the use of the Monte Carlo simulation model. Based on updated information the contingent consideration receivable was adjusted in the second quarter of 2017 and is included in the loss from sale of BMS amount below.
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statement
s
June 24, 2017
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 24,
|
|
|
June 25,
|
|
|
June 24,
|
|
|
June 25,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss before income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loss from sale of BMS
|
|
|
(278
|
)
|
|
|
(55
|
)
|
|
|
(278
|
)
|
|
|
(55
|
)
|
Loss before taxes
|
|
|
(278
|
)
|
|
|
(55
|
)
|
|
|
(278
|
)
|
|
|
(55
|
)
|
Income tax provision
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loss, net of tax
|
|
$
|
(278
|
)
|
|
$
|
(55
|
)
|
|
$
|
(278
|
)
|
|
$
|
(55
|
)
|
From time-to-time we are involved in various legal proceedings, examinations by various tax authorities and claims that have arisen in the ordinary course of our business. The outcome of any litigation is inherently uncertain. While there can be no assurance, we do not believe at the present time that the resolution of these matters will have a material adverse effect on our assets, financial position or results of operations.
8.
|
Guarantees and Other Obligations
|
Product Warranty
Our products are generally sold with warranty periods that range from 12 to 36 months following sale or acceptance. Parts and labor are covered under the terms of the warranty agreement. The warranty provision is based on historical and projected experience by product and configuration.
Changes in accrued warranty were as follows
(
in thousands
)
:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 24,
|
|
|
June 25,
|
|
|
June 24,
|
|
|
June 25,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Balance at beginning of period
|
|
$
|
4,945
|
|
|
$
|
5,218
|
|
|
$
|
4,350
|
|
|
$
|
4,886
|
|
Warranty expense accruals
|
|
|
1,990
|
|
|
|
1,446
|
|
|
|
3,726
|
|
|
|
3,266
|
|
Warranty payments
|
|
|
(1,865
|
)
|
|
|
(1,546
|
)
|
|
|
(3,056
|
)
|
|
|
(3,034
|
)
|
Warranty liability assumed
|
|
|
-
|
|
|
|
-
|
|
|
|
50
|
|
|
|
-
|
|
Balance at end of period
|
|
$
|
5,070
|
|
|
$
|
5,118
|
|
|
$
|
5,070
|
|
|
$
|
5,118
|
|
Accrued warranty amounts expected to be incurred after one year are
included in noncurrent other accrued liabilities in the condensed consolidated balance sheet. These amounts total $0.7 million at June 24, 2017 and $0.6 million at December 31, 2016.
Borrowings
Revolving Lines of Credit
As a result of the Acquisition, we assumed a series of revolving credit facilities with various financial institutions in Japan. The credit facilities renew monthly and provide Kita with access to working capital totaling up to $6.3
million. At June 24, 2017, total borrowings outstanding under the revolving lines of credit was $3.2 million. As these credit facility agreements renew monthly, they have been included in short-term borrowings in our condensed consolidated balance sheet. The revolving lines of credit are denominated in Japanese Yen and, as a result, amounts disclosed herein will fluctuate because of changes in currency exchange rates.
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statement
s
June 24, 2017
Term Loans
As a result of the Acquisition we assumed certain term loans from a series of Japanese financial institutions that had an aggregate amount outstanding of $6.7 million as of June 24, 2017 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 1.43%, and expire at various dates through 2034. At June 24, 2017, $1.4 million of the term loans have been included in current installments of long-term debt in our condensed consolidated balance sheet. The term loans are denominated in Japanese Yen and, as a result, amounts disclosed herein will fluctuate because of changes in currency exchange rates.
Lines of Credit
We have two available lines of credit, which provide one of our wholly owned subsidiaries with borrowings up to 2.5
million Swiss Francs. At June 24, 2017 and December 31, 2016, no amounts were outstanding under the lines of credit.
Standby Letters of Credit
During the ordinary course of business, from time-to-time we provide standby letters of credit instruments to certain parties as required. As of June 24, 2017, no amounts were outstanding under standby lines of credit.
Cohu, Inc.