COHU INC Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-K)

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.



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For the year ended December 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 on June 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 in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. We base our estimates on historical experience, forecasts and on
various other assumptions that are believed to be reasonable under the
circumstances; however actual results may differ from those estimates under
different assumptions or conditions. The methods, estimates and judgments we use
in applying our accounting policies have a significant impact on the results we
report in our financial statements. Some of our accounting policies require us
to make difficult and subjective judgments, often as a result of the need to
make estimates of matters that are inherently uncertain. 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 U.S. tax law as

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.



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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. At December 31, 2022, and December 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 of December 31, 2022, was
approximately $114.5 million, with a valuation allowance of approximately $89.2
million.



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During December 2022, the Organization 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 after January 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") and Interface 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 our PCB Test Group ("PTG") on June 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 of October 1st of each year, and have
determined there was no impairment as of October 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 of
December 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.



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During the first quarter of 2020, the volatility in Cohu's stock price, the
global economic downturn and business interruptions associated with the COVID-19
pandemic led us to determine that there was a triggering event related to
goodwill within all of our identified reporting units and our indefinite-lived
intangible assets. We performed an interim assessment as of March 28, 2020 and
determined that the fair values of our identified reporting units all exceeded
their carrying values and we 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 ended December 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

On June 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 ended June 24, 2021, whereas our results for
the period ended December 26, 2020 include this business for the full twelve
months. Previously, management determined that the fixtures services business,
that was acquired as part of Xcerra, did not align with Cohu's long-term
strategic plan and management divested this business in February 2020. The
operating results of our fixtures business are presented as "discontinued
operations" for the periods ended December 31, 2022, December 25, 2021 and
December 26, 2020. Unless otherwise indicated, the discussion below covers the
comparative results from continuing operations.



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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 the SEC on February 18, 2022, for comparative discussion of our
fiscal years ended December 25, 2021 and December 26, 2020.



2022 Compared to 2021



Net Sales



Cohu'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 on June 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 at December 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.



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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 on June
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 on June 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 on June 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

On June 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 with Xcerra 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 regarding
Xcerra. 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 $4.0 million and $0.2 million in 2022 and 2021, respectively. The increase in interest income year-over-year is a result of increased investments and higher rates.

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 certain U.S. Dollar denominated
assets and liabilities that are held at our subsidiaries whose functional
currency is the local currency. During both 2022 and 2021, the U.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.



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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 in the 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 at December 31, 2022, and December 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 the U.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 $96.8 million in 2022 and $167.3 million in 2021.

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 of December 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 the U.S.,
we may be required to accrue and pay foreign withholding taxes if we repatriate
these funds. Except for working capital requirements in certain jurisdictions,
we provide for all withholding and other residual taxes related to unremitted
earnings of our foreign subsidiaries.



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At December 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 under Cohu GmbH's construction loans, and
$1.9 million outstanding under Kita's lines of credit.



In March 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. On June 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 ended December 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 ended December
25, 2021, filed with the SEC on February 18, 2022, which discussion is
incorporated herein by reference and which is available free of charge on the
SEC's website at www.sec.gov.



Liquidity

Working Capital: The following summarizes our cash, cash equivalents, short-term investments and working capital at December 31, 2022 and December 25, 2021:

                                                                                       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.



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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 on June 24,
2021. The decision to sell our PCB Test business resulted from Cohu 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. In March 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 in Kolbermoor, 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 in Osaka, 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 in Cohu's stock price at the end
of March year over year when the majority of awards vest.



Share Repurchase Program



On October 28, 2021, we announced that our Board of Directors authorized a
$70 million share repurchase program. On October 25, 2022, our Board of
Directors authorized an additional $70 million under the share repurchase
program. This share repurchase program was effective as of November 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 ended
December 31, 2022, we repurchased 1,767,070 shares of our common stock for
$50.7 million to be held as treasury stock. As of December 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.



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Credit Agreement



On October 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 the Xcerra 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 before
October 1, 2025. The loans under the Term Loan Credit Facility bear interest, at
Cohu's option, at a floating annual rate equal to LIBOR plus a margin of 3.00%.
At December 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. At December 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 of December 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 of December 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 of Cohu to make timely payments of amounts due under the
Credit Agreement, the failure of Cohu to adhere to the representations and
covenants set forth in the Credit Agreement, the failure to provide notice of
any event that causes a material adverse effect or to provide other required
notices, upon the event that related collateral agreements become ineffective,
upon the event that certain legal judgments are entered against Cohu, the
insolvency of Cohu, or upon the change of control of Cohu. As of December 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 of December 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 in Osaka, Japan. The loans are collateralized by the facility and land,
carry interest rates ranging from 0.05% to 0.43%, and expire at various dates
through 2034. At December 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. At December
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



In July 2019 and June 2020, one of our wholly owned subsidiaries located in
Germany entered into a series of construction loans ("Loan Facilities") with a
German financial institution providing it with total borrowings of up to
€10.1 million. The Loan Facilities are being utilized to finance the expansion
of our facility in Kolbermoor, Germany and are secured by the land and the
existing building on the site. The Loan Facilities bear interest at agreed upon
rates based on the facility amounts as discussed below.



The first facility totaling €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 in
September 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
until April 2027. Principal and interest payments are due each month over the
duration of the facility ending in January 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 in May 2030.



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At December 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. At
December 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 at December 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 in Japan. The credit facilities
renew monthly and provide Kita with access to working capital totaling up to
960 million Japanese Yen of which 250 million Japanese Yen is drawn. At December
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 Switzerland has one available line of credit which provides it with borrowings of up to a total of 2.0 million Swiss Francs, a portion of which is reserved for tax guarantees. At December 31, 2022 and December 25, 2021, no amounts were outstanding under this line of credit.

We also have a letter of credit facility ("LC Facility") under which Bank of
America, N.A., has agreed to administer the issuance of letters of credit on our
behalf. The LC Facility requires us to maintain deposits of cash or other
approved investments in amounts that approximate our outstanding letters of
credit and contains customary restrictive covenants. In addition, our wholly
owned subsidiary, Xcerra, has arrangements with various financial institutions
for the issuance of letters of credit and bank guarantees. As of December 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 at
December 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
at December 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 $ 125,497 $ 18,286 $ 87,029

  $     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.



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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 December 31, 2022, $0.3 million was outstanding under standby letters of credit.

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