OVERVIEW
Cohu is a leading supplier of semiconductor test and inspection automation systems (handlers), micro-electromechanical system ("MEMS") test modules, test contactors and thermal subsystems, and semiconductor automated test equipment used by global semiconductor 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 the products that incorporate them. Our consumable products are driven by the number of semiconductor devices 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. 28
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For the year endedDecember 31, 2022 , our net sales decreased 8.4% year-over-year to$812.8 million . Although customer test cell utilization rates remain high and we continue to benefit from robust demand for semiconductor test equipment, as compared to the prior year, our net sales declined during 2022 due to lower demand for mobility and 5G-related products as well as the divestiture of our PCB Test business, which contributed$26.8 million in sales during 2021 through its disposition onJune 24, 2021 . Over the past twelve months, consolidated net sales benefitted from growth in our semiconductor test business, and we saw improvements in gross margin due to favorable product mix, and increased insourcing of contactor manufacturing. Also, price increases offset cost increases in our supply chain. Based on the strength of current business conditions and the results from our operations, we have continued to take actions to reduce outstanding principal under our Term Loan Credit Facility through voluntary prepayments and we have also repurchased 1,767,070 shares of our common stock for$50.7 million during 2022. We continue to focus on building a well-balanced and resilient business model. Our long-term market drivers and market strategy remain intact, and we are encouraged by demand across our main market segments, along with customer traction with our new products. We continue to capture new customers and remain optimistic about the long-term prospects for our business due to the increasing ubiquity of semiconductors, the continued 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, industrial and consumer markets.
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 inthe United States of America . The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience, forecasts and on various other assumptions that are believed to be reasonable under the circumstances; however actual results may differ from those estimates under different assumptions or conditions. The methods, estimates and judgments we use in applying our accounting policies have a significant impact on the results we report in our financial statements. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Our critical accounting estimates that we believe are the most important to investors' understanding of our financial results and condition and require complex management judgment include:
? revenue recognition, including the deferral of revenue on sales to customers,
which impacts our results of operations;
? estimation of valuation allowances and accrued liabilities, specifically
inventory reserves, which impact gross margin or operating expenses;
? the recognition and measurement of current and deferred income tax assets and
liabilities, unrecognized tax benefits, the valuation allowance on deferred
tax assets and accounting for the impact of the change to
described herein, which impact our tax provision; and
? the assessment of recoverability of long-lived and indefinite-lived assets
including goodwill and other intangible assets, which primarily impacts gross
margin or operating expenses if we are required to record impairments of assets or accelerate their depreciation. 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. 29
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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 the completion of 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. AtDecember 31, 2022 , andDecember 25, 2021 , we had$7.1 million and$7.7 million of revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) with expected durations of over one year, respectively. As allowed under ASC Topic 606, Revenue from Contracts with Customers ("ASC 606"), we have opted to not disclose unsatisfied performance obligations for contracts with original expected durations of less than one year. We generally sell our equipment with a product warranty. The product warranty provides assurance to customers that delivered products are as specified in the contract (an "assurance-type warranty"). Therefore, we account for such product warranties under ASC Topic 460, Guarantees ("ASC 460"), and not as a separate performance obligation. The transaction price reflects our expectations about the consideration we will be entitled to receive from the customer and may include fixed or variable amounts. Fixed consideration primarily includes sales to customers that are known as of the end of the reporting period. Variable consideration includes sales in which the amount of consideration that we will receive is unknown as of the end of a reporting period. Such consideration primarily includes sales made to certain customers with cumulative tier volume discounts offered. Variable consideration arrangements are rare; however, when they occur, we estimate variable consideration as the expected value to which we expect to be entitled. Included in the transaction price estimate are amounts in which it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. 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 recorded on the 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 consolidated balance sheet representing the difference between the receivable recorded and the inventory shipped. Accounts 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. Our customers include semiconductor manufacturers and semiconductor test subcontractors throughout many areas of the world. While we believe that our allowance for credit losses is adequate and represents our best estimate of future losses we will continue to monitor customer liquidity and other economic conditions, which may result in changes to our estimates. 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 gross deferred tax asset balance as ofDecember 31, 2022 , was approximately$114.5 million , with a valuation allowance of approximately$89.2 million . 30
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DuringDecember 2022 , theOrganization for Economic Cooperation and Development (OECD) announced that it has reached agreement among its 136-member countries that certain multinational enterprises will be subject to a global minimum tax rate of 15%, also known as Pillar Two.South Korea became the first country to enact such global minimum tax rules, which will be effective for fiscal years beginning on or afterJanuary 1, 2024 . These specific actions did not impact our consolidated financial statements in 2022, however, many more countries are expected to issue laws and regulations to conform with this guidance soon. We will continue to monitor the pertinent law changes and regulations to determine the impact they would have on our operating and financial results. Segment Information: We applied the provisions of ASC Topic 280, Segment Reporting ("ASC 280"), which sets forth a management approach to segment reporting and establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products, major customers and the geographies in which the entity holds material assets and reports revenue. An operating segment is defined as a component that engages in business activities whose operating results are reviewed by the chief operating decision maker and for which discrete financial information is available. We have determined that our three identified operating segments are:Test Handler Group ("THG"),Semiconductor Tester Group ("STG") andInterface Solutions Group ("ISG"). 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 one segment, Semiconductor Test and Inspection Equipment ("Semiconductor Test & Inspection"). Prior to the sale of ourPCB Test Group ("PTG") onJune 24, 2021 , we reported in two segments, Semiconductor Test & Inspection and PCB Test Equipment ("PCB Test").Goodwill and Indefinite-Lived Intangibles, Other Intangible Assets and Long-lived Assets: We evaluate goodwill and other indefinite-lived intangible assets, which are solely comprised of in-process research and development ("IPR&D"), for impairment annually and when an event occurs or circumstances change that indicate that the carrying value may not be recoverable. We test goodwill for impairment by first comparing the book value of net assets to the fair value of the reporting unit or asset, in the case of in-process research and development. If the fair value is determined to be less than the book value, a second step is performed to compute the amount of impairment as the difference between the fair value of the reporting unit and it's carrying value of goodwill. We estimated the fair values of our reporting units using a weighting of the income and market approaches. Under the income approach, we use a discounted cash flow methodology to derive an indication of value, which requires management to make significant estimates and assumptions related to forecasted revenues, gross profit margins, operating income margins, working capital cash flow, perpetual growth rates, and long-term discount rates, among others. For the market approach, we use the guideline public company method. Under this method we utilize information from comparable publicly traded companies with similar operating and investment characteristics as the reporting units, to create valuation multiples that are applied to the operating performance metrics of the reporting unit being tested, in order to obtain an indication of value. We then apply a 50/50 weighting to the indicated values from the income and market approaches to derive the fair values of the reporting units. Forecasts of future cash flows are based on our best estimate of future net sales and operating expenses, based primarily on customer forecasts, industry trade organization data and general economic conditions. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. We conduct our annual impairment test as ofOctober 1st of each year, and have determined there was no impairment as ofOctober 1, 2022 , 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 ofDecember 31, 2022 , we do not believe that circumstances have occurred that indicate impairment of our goodwill is more-likely-than-not. In the event we determine that an interim goodwill impairment review is required in a future period, the review may result in an impairment charge, which would have a negative impact on our results of operations. 31
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During the first quarter of 2020, the volatility inCohu's stock price, the global economic downturn and business interruptions associated with the COVID-19 pandemic led us to determine that there was a triggering event related to goodwill within all of our identified reporting units and our indefinite-lived intangible assets. We performed an interim assessment as ofMarch 28, 2020 and 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 million impairment to IPR&D recorded during the first quarter as the carrying value exceeded fair value. During the third quarter of 2020, we became aware of additional delays in customer adoption of the same new products under development leading us to re-evaluate the fair value of these projects and we determined that the carrying value exceeded the fair value and, as a result, we recorded a$7.3 million impairment to IPR&D. For the twelve months endedDecember 26, 2020 total impairments recorded to IPR&D projects was$11.2 million . During the fourth quarter of 2021 we completed and transferred to developed technology our last remaining in-process technology project which was reviewed for impairment as part of this process. Due to a change in forecasted results an impairment charge of$0.1 million was recorded. 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 future cash flows. We measure the impairment loss based on the difference between the carrying amount and estimated fair value. 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. Our estimate of share-based compensation expense requires a number of complex and subjective assumptions and 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. Recent Accounting Pronouncements: 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 Note 1, "Recent Accounting Pronouncements" in Part IV, Item 15(a) of this Form 10-K. RESULTS OF OPERATIONS
Recent Transactions Impacting Results of Operations
OnJune 24, 2021 , we completed the sale of our PCB Test business. Due to the timing of the divestment of this business our results for 2021 include our PCB Test business for the six months endedJune 24, 2021 , whereas our results for the period endedDecember 26, 2020 include this business for the full twelve months. Previously, management determined that the fixtures services business, that was acquired as part ofXcerra , did not align withCohu's long-term strategic plan and management divested this business inFebruary 2020 . The operating results of our fixtures business are presented as "discontinued operations" for the periods endedDecember 31, 2022 ,December 25, 2021 andDecember 26, 2020 . Unless otherwise indicated, the discussion below covers the comparative results from continuing operations. 32
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The following table summarizes certain operating data as a percentage of net sales: 2022 2021 2020 Net sales 100.0 % 100.0 % 100.0 % Cost of sales (52.8 ) (56.4 ) (57.3 ) Gross margin 47.2 43.6 42.7 Research and development (11.4 ) (10.4 ) (13.5 ) Selling, general and administrative (16.2 ) (14.3 ) (20.3 ) Amortization of purchased intangible assets (4.1 ) (4.0 ) (6.1 ) Gain on sale of PCB Test business - 8.0 - Restructuring charges (0.1 ) (0.2 ) (1.2 ) Impairment charges - (0.0 ) (1.8 ) Gain on sale of facilities - - 0.7 Income from operations 15.4 % 22.7 % 0.5 % Please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 in our 2021 Annual Report on Form 10-K, filed with theSEC onFebruary 18, 2022 , for comparative discussion of our fiscal years endedDecember 25, 2021 andDecember 26, 2020 . 2022 Compared to 2021 Net SalesCohu's consolidated net sales decreased 8.4% from$887.2 million in 2021 to$812.8 million in 2022. During 2022, although customer test cell utilization rates remained high and we continued to benefit from robust demand for semiconductor test equipment, as compared to 2021, net sales declined due to lower demand for mobility and 5G-related products as well as the divestiture of our PCB Test business, which contributed$26.8 million in sales during 2021 through its disposition onJune 24, 2021 . During 2021 our net sales were favorably impacted by robust automotive demand, driven by xEV and ADAS technologies, strength in industrial markets, 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.
Gross Margin (exclusive of amortization of acquisition-related intangible assets described below)
Gross margin consists of net sales less cost of sales (excluding the impact of amortization of developed technology). Cost of sales consists primarily of the 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, increases to inventory reserves, the sale of previously reserved inventory and business volume which impacts the utilization of our manufacturing capacity. Our gross margin, as a percentage of net sales, increased to 47.2% in 2022 from 43.6% in 2021. During 2022 our gross margin improved compared to 2021 due to favorable product mix, increased insourcing of contactor manufacturing and foreign currency fluctuations. We compute the majority of our excess and obsolete inventory reserve requirements using inventory usage forecasts. During 2022, we recorded net charges to cost of sales of approximately$7.2 million for excess and obsolete inventory. In 2021, net charges to cost of sales for excess and obsolete inventory were$7.1 million . We believe our reserves for excess and obsolete inventory and lower of cost or net realizable value are adequate to cover known exposures atDecember 31, 2022 . Reductions in customer forecasts, continued modifications to products, our failure to meet specifications or other customer requirements may result in additional charges to operations that could negatively impact our gross margin in future periods. 33
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Research and Development Expense ("R&D Expense")
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. Our future operating results depend, to a considerable extent, on our ability to maintain a competitive advantage in the products we provide, and historically we have maintained our commitment to investing in R&D in order to be able to continue to offer new products to our customers. R&D expense in 2022 was$92.6 million , or 11.4% of net sales, compared to$92.0 million , or 10.4% of net sales in 2021. R&D expense in 2021 includes the results of our PCB Test business, which incurred$1.5 million of costs prior to its disposition onJune 24, 2021 . During 2022 R&D expense increased due to higher spending on labor and materials associated with product development.
Selling, General and Administrative Expense ("SG&A Expense")
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 as a percentage of net sales increased to 16.2% in 2022, from 14.3% in 2021, increasing from$127.0 million in 2021 to$131.4 million in 2022. SG&A expense in 2021 includes the results of our PCB Test business, which incurred$3.3 million of SG&A expense prior to its disposition onJune 24, 2021 . During 2022 SG&A expense has increased due to higher labor and professional services costs.
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$33.2 million and$35.4 million for 2022 and 2021, respectively. The decrease in expense recorded during 2021 was a result of fluctuations in exchange rates and the sale of PCB Test business onJune 24, 2021 as remaining purchased intangible assets that were being amortized were written-off as part of the sale.
Gain on sale of PCB Test Business
OnJune 24, 2021 , we completed the divestment of our PCB Test business which resulted in a gain of$70.8 million in 2021. As part of the transaction we also sold certain intellectual property held by our Semiconductor Test & Inspection segment that is utilized by the PCB Test business. Our decision to sell this non-core business resulted from management's determination that that the PCB test business was no longer a fit within our organization. Restructuring Charges Subsequent to the merger withXcerra in the fourth quarter 2018, we began a strategic restructuring program designed to reposition our organization and improve our cost structure as part of our targeted integration plan regardingXcerra . In connection with the integration plan, we recorded restructuring charges totaling$0.6 million and$1.8 million in 2022 and 2021, respectively. The decrease in expense year-over-year is a result of fewer activities under the restructuring projects.
See Note 4, "Restructuring Charges" in Part IV, Item 15(a) of this Form 10-K for additional information with respect to restructuring charges.
Impairment Charges During the fourth quarter of 2021 we completed and transferred to developed technology our last remaining in-process technology project which we tested for impairment as part of this process. A change in forecasted results of this project led to an impairment charge of$0.1 million being recorded in the fourth quarter of 2021. Interest Expense and Income Interest expense was$4.2 million in 2022 compared to$6.4 million in 2021. The year-over-year decrease in our interest expense resulted from a reduction in the outstanding balance of our Term Loan Credit Facility.
Interest income was
Foreign Transaction Gain (Loss) and Other
We have operations in foreign countries and conduct business in the local currency in these countries. Starting in the fourth quarter of 2020, we began entering into foreign currency forward contracts to hedge against future movements in foreign exchange rates that affect certainU.S. Dollar denominated assets and liabilities that are held at our subsidiaries whose functional currency is the local currency. During both 2022 and 2021, theU.S. Dollar strengthened against the Swiss Franc, Euro and Japanese Yen resulting in foreign currency gains. During 2022 we recognized gains of$1.6 million , net of$5.4 million of losses generated by our foreign currency forward contracts and in 2021 we recognized gains of$0.4 million , net of$3.4 million of losses generated by our foreign currency forward contracts. 34
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See Note 7 "Derivative Financial Instruments" in Part IV, Item 15(a) of this Form 10-K for additional information with respect to our foreign currency forward contracts.
Income Taxes The income tax provision expressed as a percentage of pre-tax income or loss in 2022 and 2021 was 23.6% and 13.0%, respectively. The increase in the provision for income taxes from 2021 to 2022 is primarily related to the changes in our jurisdictional mix of income, offset by lower GILTI inclusion and foreign tax withholdings and other factors. Companies are required to assess whether a valuation allowance should be recorded against their deferred tax assets ("DTAs") based on the consideration of all available evidence, using a "more likely than not" realization standard. The four sources of taxable income that must be considered in determining whether DTAs will be realized are, (1) future reversals of existing taxable temporary differences (i.e. offset of gross deferred tax assets against gross deferred tax liabilities); (2) taxable income in prior carryback years, if carryback is permitted under the tax law; (3) tax planning strategies and (4) future taxable income exclusive of reversing temporary differences and carryforwards. In assessing whether a valuation allowance is required, significant weight is to be given to evidence that can be objectively verified. We have evaluated our DTAs at each reporting period, including an assessment of our cumulative income or loss over the prior three-year period and future periods, to determine if a valuation allowance was required. Based on the evidence available including a lack of sustainable earnings and history of expiring unused NOLs, and tax credits, we continue to maintain our judgement that a previously recorded valuation allowance against substantially of our net deferred tax assets inthe United States is still required. If a change in judgement regarding this valuation allowance were to occur in the future, we will record a potentially material deferred tax benefit, which could result in a favorable impact on the effective tax rate in that period. Our valuation allowance on our DTAs atDecember 31, 2022 , andDecember 25, 2021 , was approximately$89.2 million and$76.3 million , respectively. The remaining gross DTAs for which a valuation allowance was not recorded are realizable primarily through future reversals of existing taxable temporary differences and to a lesser extent future taxable income in certain jurisdictions exclusive of reversing temporary differences and carryforwards. For a full reconciliation of our effective tax rate to theU.S. federal statutory rate and further explanation of our provision for income taxes, see Note 9, "Income Taxes", included in Part IV, Item 15(a) of this Form 10-K, which is incorporated herein by reference. Net Income
As a result of the factors set forth above, our net income was
LIQUIDITY AND CAPITAL RESOURCES
Our 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 operations and we manage our business 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 ofDecember 31, 2022 ,$154.5 million or 40.1% of our cash, cash equivalents and short-term investments was held by our foreign subsidiaries. If these funds are needed for our operations in theU.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. 35
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AtDecember 31, 2022 , our total indebtedness, net of discount and deferred financing costs, was$79.0 million , which included$66.2 million outstanding under the Term Loan Credit Facility,$2.5 million outstanding under Kita's term loans,$8.4 million outstanding underCohu GmbH's construction loans, and$1.9 million outstanding under Kita's lines of credit. InMarch 2021 , we closed an underwritten follow-on public offering totaling 5,692,500 shares of our common stock at$41.00 per share, raising net proceeds of approximately$223.1 million , after deducting underwriting discounts and commissions and offering expenses. We used$100.0 million of the net proceeds of this offering to repay outstanding principal on our Term Loan Credit Facility and we intend to use the rest for general corporate purposes, including to fund future growth initiatives. OnJune 30, 2021 , we prepaid an additional$100.0 million of our Term Loan Credit Facility utilizing a portion of the net proceeds from the sale of our PCB Test business. In 2022, we repurchased 1,767,070 shares of our outstanding common stock for$50.7 million to be held as treasury stock. We believe that our sources of liquidity will be sufficient to satisfy our anticipated cash requirements through at least the next 12 months. Our liquidity could be negatively affected by a decrease in demand for our products. In addition, we may make acquisitions or increase our capital expenditures and may need to raise additional capital through debt or equity financing to provide for greater flexibility to fund these activities. Additional financing may not be available or not available on terms favorable to us. A discussion of cash flows for the year endedDecember 26, 2020 has been omitted from this Annual Report on Form 10-K, but may be found in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," under the heading "Liquidity and Capital Resources" in our Annual Report on Form 10-K for the year endedDecember 25, 2021 , filed with theSEC onFebruary 18, 2022 , which discussion is incorporated herein by reference and which is available free of charge on theSEC's website at www.sec.gov. Liquidity
Working Capital: The following summarizes our cash, cash equivalents, short-term
investments and working capital at
Percentage (in thousands) 2022 2021 Increase Change Cash, cash equivalents and short-term investments$ 385,576 $ 379,905 $ 5,671 1.5 % Working capital$ 603,979 $ 558,334 $ 45,645 8.2 % Cash Flows Operating Activities: Cash provided by operating activities consists of our net income adjusted for non-cash expenses and changes in operating assets and liabilities. These adjustments include impairment charges, 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 the sale of our PCB Test business and property, plant and equipment. Our net cash flows provided by operating activities in 2022 totaled$112.9 million compared to$97.9 million in 2021. Cash provided by operating activities in the current year was a result of an increase in net income as compared to a net loss in the prior year. Cash provided by operating activities was also impacted by changes in current assets and liabilities which included decreases in accounts payable and accounts receivable. The timing of payments to our suppliers resulted in the$33.1 million decrease in accounts payable, and net sales in the fourth quarter of 2022 and the timing of the resulting cash conversion cycle drove the$12.5 million decrease in accounts receivable. Deferred profit decreased$5.0 million as a result of the recognition of revenue that had been previously deferred in accordance with our revenue recognition policy, and accrued compensation, warranty and other liabilities decreased$4.0 million due to lower business volume resulting in lower rates of accrual. Cash provided by operating activities was also impacted by increases in income taxes payable of$20.9 million a result of higher income tax to be paid in certain jurisdictions. During 2022, inventories increased$18.5 million due to purchases from suppliers made in the fourth quarter to fulfill anticipated future shipments of product, and other current assets increased$16.2 million due to income tax prepayments and supplier advance deposits for inventory that will be received over the next twelve months. 36
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Investing Activities: Investing cash flows consist primarily of cash used for capital expenditures in support of our business, purchases of investments, business acquisitions and proceeds from investment maturities, asset disposals and business divestitures. Our net cash used in investing activities in 2022 totaled$67.9 million . In 2022 we used$208.9 million in cash for purchases of short-term investments and generated$155.4 million from 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 in 2022 were$14.8 million and were made to support our operating and development activities. Our net cash provided by investing activities in 2021 totaled$39.9 million . In 2021 we used$12.0 million for additions to property, plant and equipment and we used$204.7 million in cash for purchases of short-term investments and generated$135.5 million from sales and maturities. Our net cash provided by investing activities in 2021 also included the net cash proceeds of$120.9 million from the sale of our PCB Test business onJune 24, 2021 . The decision to sell our PCB Test business resulted fromCohu management's determination that this industry segment was not a fit within our organization and we could utilize the proceeds from the sale business to reduce outstanding debt and invest in growth opportunities in line with our core business strategy. Financing Activities: Financing cash flows consist primarily of net proceeds from the issuance of common stock from an underwritten public offering and under our stock option and employee stock purchase plans and repayments of debt, net of new borrowings. In fiscal 2022, our cash used in financing activities totaled$91.1 million . In fiscal 2021, our cash provided by financing activities totaled$6.5 million . InMarch 2021 , we closed an underwritten public offering totaling 5,692,500 shares of our common stock at$41.00 per share, raising net proceeds of approximately$223.1 million , after deducting underwriting discounts and commissions and offering expenses. Repayments of short-term borrowings and long-term debt during 2022 totaled$38.2 million , which includes$31.7 million of cash prepayments of our Term Loan Credit Facility. During 2021 our repayments totaled$206.1 million and included$200.0 million of cash prepayments of our Term Loan Credit Facility using proceeds from our underwritten public offering and the sale of our PCB Test business to deleverage our balance sheet. In 2021, we received proceeds under a revolving line of credit and construction loan totaling$1.4 million . Proceeds from the construction loan was used to expand our facility inKolbermoor, Germany , enabling us to consolidate the German operations of our Semiconductor Test & Inspection segment. Proceeds from the revolving line of credit are being used to increase the manufacturing capacity of our Semiconductor Test & Inspection segment facility located inOsaka, Japan . During 2022 and 2021, we made payments totaling$50.7 million and$7.3 million , respectively for shares of our common stock repurchased under our share repurchase program to be held as treasury stock. We issue restricted stock units, stock options and maintain an employee stock purchase plan as components of our overall employee compensation. In 2022, 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 shares issued under our employee stock purchase plan and from the exercise of employee stock options was$2.0 million . In 2021, net cash used to settle the minimum statutory tax withholding requirements on behalf of our employees totaled$4.4 million . The decrease in cash used to settle tax withholding requirements between 2022 and 2021 is directly correlated to the decrease inCohu's stock price at the end of March year over year when the majority of awards vest. Share Repurchase Program OnOctober 28, 2021 , we announced that our Board of Directors authorized a$70 million share repurchase program. OnOctober 25, 2022 , our Board of Directors authorized an additional$70 million under the share repurchase program. This share repurchase program was effective as ofNovember 2, 2021 , and has no expiration date. The timing of share repurchases and the number of shares of common stock to be repurchased will depend upon prevailing market conditions and other factors. Repurchases under this program will be made using our existing cash resources and may be commenced or suspended from time-to-time at our discretion without prior notice. Repurchases may be made in the open market, through 10b5-1 programs, or in privately negotiated transactions at prevailing market rates in accordance with federal securities laws. For the year endedDecember 31, 2022 , we repurchased 1,767,070 shares of our common stock for$50.7 million to be held as treasury stock. As ofDecember 31, 2022 , we may purchase up to$82.0 million of shares of our common stock under our share repurchase program. 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. 37
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Table of Contents Credit Agreement OnOctober 1, 2018 , we entered into a Credit Agreement providing for a$350.0 million Term Loan Credit Facility and borrowed the full amount to finance a portion of theXcerra acquisition. Loans under the Term Loan 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 Term Loan Credit Facility must be repaid on or beforeOctober 1, 2025 . The loans under the Term Loan Credit Facility bear interest, atCohu's option, at a floating annual rate equal to LIBOR plus a margin of 3.00%. AtDecember 31, 2022 , the outstanding loan balance, net of discount and deferred financing costs, was$66.2 million and$3.2 million of the outstanding balance is presented as current installments of long-term debt in our consolidated balance sheets. AtDecember 25, 2021 , the outstanding loan balance, net of discount and deferred financing costs, was$101.6 million and$10.1 million of the outstanding balance is presented as current installments of long-term debt in our consolidated balance sheets. As ofDecember 31, 2022 , the fair value of the debt was$66.6 million . The measurement of the fair value of debt is based on the average of the bid and ask trading quotes as ofDecember 31, 2022 and is considered a Level 2 fair value measurement. Under the terms of the Credit Agreement, the lender may accelerate the payment terms upon the occurrence of certain events of default set forth therein, which include: the failure ofCohu to make timely payments of amounts due under the Credit Agreement, the failure ofCohu to adhere to the representations and covenants set forth in the Credit Agreement, the failure to provide notice of any event that causes a material adverse effect or to provide other required notices, upon the event that related collateral agreements become ineffective, upon the event that certain legal judgments are entered againstCohu , the insolvency ofCohu , or upon the change of control ofCohu . As ofDecember 31, 2022 , we believe no such events of default have occurred. During 2022, we prepaid$31.8 million in principal of our Term Loan Credit Facility for$31.7 million in cash. We accounted for the prepayment as a debt extinguishment, which resulted in a loss of$0.3 million reflected in our consolidated statement of operations and a$0.4 million reduction in debt discounts and deferred financing costs in our consolidated balance sheets. During 2021, we repurchased$200.0 million in principal of our Term Loan Credit Facility for$200.0 million in cash. We accounted for the repurchase as a debt extinguishment, which resulted in a loss of$3.4 million reflected in our consolidated statement of operations, as well as a$3.4 million reduction in debt discounts and deferred financing costs in our consolidated balance sheets. Approximately$67.0 million in principal of the Term Loan Credit Facility remains outstanding as ofDecember 31, 2022 . 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 inOsaka, 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. AtDecember 31, 2022 , the outstanding loan balance was$2.5 million and$0.2 million of the outstanding balance is presented as current installments of long-term debt in our consolidated balance sheets. AtDecember 25, 2021 , the outstanding loan balance was$3.1 million and$0.2 million of 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 InJuly 2019 andJune 2020 , one of our wholly owned subsidiaries located inGermany entered into a series of construction loans ("Loan Facilities") with a German financial institution providing it with total borrowings of up to €10.1 million. The Loan Facilities are being utilized to finance the expansion of our facility inKolbermoor, Germany and are secured by the land and the existing building on the site. The Loan Facilities bear interest at agreed upon rates based on the facility amounts as discussed below. The first facility totaling €3.4 million has been fully drawn and is payable over 10 years at a fixed annual interest rate of 0.8%. Principal and interest payments are due each quarter over the duration of the facility ending inSeptember 2029 . The second facility totaling €5.2 million has been fully drawn and is payable over 15 years at an annual interest rate of 1.05%, which is fixed untilApril 2027 . Principal and interest payments are due each month over the duration of the facility ending inJanuary 2034 . The third facility totaling €0.9 million has been fully drawn and is payable over 10 years at an annual interest rate of 1.2%. Principal and interest payments are due each month over the duration of the facility ending inMay 2030 . 38
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AtDecember 31, 2022 , total outstanding borrowings under the Loan Facilities was$8.4 million with$1.0 million of the total outstanding balance being presented as current installments of long-term debt in our consolidated balance sheets. AtDecember 25, 2021 , total outstanding borrowings under the Loan Facilities was$10.0 million with$1.0 million of the total outstanding balance being presented as current installments of long-term debt in our consolidated balance sheets. The loans are denominated in Euros and, as a result, amounts disclosed herein will fluctuate because of changes in currency exchange rates. The fair value of the debt approximates the carrying value atDecember 31, 2022 . Lines of Credit As a result of our acquisition of Kita, we assumed a series of revolving credit facilities with various financial institutions inJapan . The credit facilities renew monthly and provide Kita with access to working capital totaling up to960 million Japanese Yen of which250 million Japanese Yen is drawn. AtDecember 31, 2022 , total borrowings outstanding under the revolving lines of credit were$1.9 million . As these credit facility agreements renew monthly, they have been included in short-term borrowings in our 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 in
We also have a letter of credit facility ("LC Facility") under whichBank 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 ofDecember 31, 2022 ,$0.3 million was outstanding under standby letters of credit and bank guarantees.
We expect that we will continue to make capital expenditures to support our business and we anticipate that present working capital will be sufficient to meet our operating requirements for at least the next twelve months.
Contractual Obligations The following table summarizes our significant contractual obligations atDecember 31, 2022 , and the effect such obligations are expected to have on our liquidity and cash flows in future periods. Amounts excluded include our liability for unrecognized tax benefits that totaled approximately$33.4 million atDecember 31, 2022 . We are currently unable to provide a reasonably reliable estimate of the amount or period(s) the cash settlement of this liability may occur. Fiscal year-end (in thousands) Total 2023 2024-2025 2026-2027 Thereafter
Operating leases (1)$ 29,812 $ 6,197 $ 11,082 $ 4,629 $ 7,904 Finance leases 75 50 22 3 - Bank term loans principal and interest 93,703 10,132 75,925 2,486 5,160 Revolving credit facilities 1,907 1,907 - - -
Total contractual obligations
$ 7,118 $ 13,064
(1) Excludes an insignificant amount of short-term lease obligations.
The table above does not include pension, post-retirement benefit and warranty obligations because it is not certain when these liabilities will be funded. For additional information regarding our pension and post-retirement benefits obligations see Note 6, "Employee Benefit Plans" and for more information on our contractual obligations, see Note 13, "Guarantees" in Part IV, Item 15(a) of this Form 10-K. 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. 39
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Off-Balance Sheet Arrangements. During the ordinary course of business, we
provide standby letters of credit instruments to certain parties as required. As
of
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