COHU, INC.

COHU
Real-time Estimate Quote. Real-time Estimate  - 01/19 11:57:52 am
32.955USD -3.22%

Management's Discussion and Analysis of Financial Condition and Results of Operations September 25, 2021

10/29/2021 | 04:09pm

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations






This Form 10-Q contains certain forward-looking statements including
expectations of market conditions, challenges and plans, within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and is subject
to the Safe Harbor provisions created by that statute. Such forward-looking
statements are based on management's current expectations and beliefs, including
estimates and projections about our business and include, but are not limited
to, statements concerning financial position, business strategy, our industry
environment, market growth expectations, and plans or objectives for future
operations. Forward-looking statements are not guarantees of future performance,
and are subject to certain risks, uncertainties, and assumptions that are
difficult to predict and may cause actual results to differ materially from
management's current expectations. Such risks and uncertainties include those
set forth in this Quarterly Report on Form 10-Q and our 2020 Annual Report on
Form 10-K under the heading "Item 1A. Risk Factors". The forward-looking
statements in this report speak only as of the time they are made, and do not
necessarily reflect management's outlook at any other point in time. We
undertake no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events, or for any other reason,
however, readers should carefully review the risk factors set forth in other
reports or documents we file from time to time with the SEC after the date of
this Quarterly Report. This Form 10-Q also contains estimates, projections and
other information concerning our industry, our business, and the markets for
certain of our products. Information that is based on estimates, forecasts,
projections, market research or similar methodologies is inherently subject to
uncertainties and actual events or circumstances may differ materially from
events and circumstances reflected in this information. Unless otherwise
expressly stated, we obtained this industry, business, market, and other data
from reports, research surveys, studies, and similar data prepared by market
research firms and other third parties, industry, and general publications,
government data, and similar sources.



OVERVIEW



Cohu is a leading supplier of semiconductor test and inspection handlers,
micro-electromechanical system (MEMS) test modules, test contactors and thermal
subsystems, and semiconductor automated test equipment used by global
semiconductor and electronics manufacturers and test subcontractors. We offer a
wide range of products and services and our revenue from capital equipment
products is driven by the capital expenditure budgets and spending patterns of
our customers, who often abruptly delay or accelerate purchases in reaction to
variations in their business. The level of capital expenditures by these
companies depends on the current and anticipated market demand for semiconductor
devices and 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.



On a year-over-year basis, our consolidated net sales increased 60.3% to
$695.4 million in the first nine months of 2021. During 2021 our net sales have
been favorably impacted by robust automotive demand, driven by xEV and ADAS
technologies, and continued mobility expansion with 5G proliferation. Demand for
equipment testing 5G, Wi-Fi 6 and Ultra-Wideband devices, data centers, personal
computers and automotive semiconductor and sensors were at near record levels.
Our net sales during the first nine months of 2020 were impacted by disruptions
caused by the COVID-19 pandemic and movement control orders implemented by the
governments of Malaysia and the Philippines which resulted in supply disruptions
and impacted our ability to ship products to our customers during that period.
Based on improved business conditions, we took actions to reduce outstanding
principal under our Term Loan Credit Facility associated with the financing of
the Xcerra acquisition in October 2018. During the first quarter of 2021, using
a portion of the proceeds from our underwritten public offering, we prepaid
$100 million of the term loan. Subsequently, on June 30, 2021, utilizing a
portion of the gross proceeds from the sale of the PCB Test business, we made an
additional $100 million prepayment of the term loan.



While our total sales for fiscal year 2020 were negatively impacted by the
global economic downturn caused by the COVID-19 pandemic, we began seeing strong
demand for our products in the second half of 2020 and that strength has
continued through the first nine months of 2021. Our long-term market drivers
and market strategy remain intact and we are encouraged by demand across our
main market segments, and customer traction with our new products. We remain
optimistic about the long-term prospects for our business due to the increasing
ubiquity of semiconductors, the future rollout of 5G networks, increasing
semiconductor complexity, increasing quality demands from semiconductor
customers, increasing test intensity and continued proliferation of electronics
in a variety of products across the automotive, mobility, industrial and
consumer markets.



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Cohu, Inc.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
September 25, 2021




Application of Critical Accounting Estimates and Policies






Our discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America
. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosure of contingent assets and
liabilities. COVID-19 continues to spread throughout the United States and other
countries around the world, and the duration and severity of the effects are
currently unknown. We base our estimates on historical experience, forecasts and
on various other assumptions that are believed to be reasonable under the
current circumstances, however actual results may differ from those estimates
under different assumptions or conditions. The methods, estimates and judgments
we use in applying our accounting policies have a significant impact on the
results we report in our financial statements. Some of our accounting policies
require us to make difficult and subjective judgments, often as a result of the
need to make estimates of matters that are inherently uncertain.



Our critical accounting estimates that we believe are the most important to an
investor's understanding of our financial results and condition and that require
complex management judgment include:




? revenue recognition, including the deferral of revenue on sales to customers,



which impacts our results of operations;



? estimation of valuation allowances and accrued liabilities, specifically



product warranty, inventory reserves and allowance for bad debts, which impact



gross margin or operating expenses;



? the recognition and measurement of current and deferred income tax assets and



liabilities, unrecognized tax benefits and the valuation allowance on deferred



tax assets, which impact our tax provision;



? the assessment of recoverability of long-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 or amortization; and



? the valuation and recognition of share-based compensation, which impacts gross



margin, research and development expense, and selling, general and
administrative expense.




Below, we discuss these policies further, as well as the estimates and judgments
involved. We also have other policies that we consider key accounting policies;
however, these policies typically do not require us to make estimates or
judgments that are difficult or subjective.



Revenue Recognition: Our net sales are derived from the sale of products and
services and are adjusted for estimated returns and allowances, which
historically have been insignificant. We recognize revenue when the obligations
under the terms of a contract with our customers are satisfied; generally, this
occurs with the transfer of control of our systems, non-system products or
services. In circumstances where control is not transferred until destination or
acceptance, we defer revenue recognition until such events occur. Revenue for
established products that have previously satisfied a customer's acceptance
requirements is generally recognized upon shipment. In cases where a prior
history of customer acceptance cannot be demonstrated or from sales where
customer payment dates are not determinable and in the case of new products,
revenue and cost of sales are deferred until customer acceptance has been
received. Our post-shipment obligations typically include installation and
standard warranties. The estimated fair value of installation related revenue is
recognized in the period the installation is performed. Service revenue is
recognized over time as the transfer of control is completed for the related
contract or upon completion of the services if they are short-term in nature.
Spares, contactor and kit revenue is generally recognized upon shipment. Certain
of our equipment sales have multiple performance obligations. These arrangements
involve the delivery or performance of multiple performance obligations, and
transfer of control of performance obligations may occur at different points in
time or over different periods of time. For arrangements containing multiple
performance obligations, the revenue relating to the undelivered performance
obligation is deferred using the relative standalone selling price method
utilizing estimated sales prices until satisfaction of the deferred performance
obligation. Unsatisfied performance obligations primarily represent contracts
for products with future delivery dates. At September 25, 2021, we had
$7.8 million of revenue expected to be recognized in the future related to
performance obligations that are unsatisfied (or partially unsatisfied) for
contracts with original expected durations of over one year. As allowed under
ASC 606, we have opted to not disclose unsatisfied performance obligations as
these contracts have original expected durations of less than one year. We
generally sell our equipment with a product warranty. The product warranty
provides assurance to customers that delivered products are as specified in the
contract (an "assurance-type warranty"). Therefore, we account for such product
warranties under ASC 460, and not as a separate performance obligation. The
transaction price reflects our expectations about the consideration we will be
entitled to receive from the customer and may include fixed or variable amounts.
Fixed consideration primarily includes sales to customers that are known as of
the end of the reporting period. Variable consideration includes sales in which
the amount of consideration that we will receive is unknown as of the end of a
reporting period. Such consideration primarily includes sales made to certain
customers with cumulative tier volume discounts offered. Variable consideration
arrangements are rare; however, when they occur, we estimate variable
consideration as the expected value to which we expect to be entitled. Included
in the transaction price estimate are amounts in which it is probable that a
significant reversal of cumulative revenue recognized will not occur when the
uncertainty associated with the variable consideration is subsequently resolved.
The estimate is based on information available for projected future sales.
Variable consideration that does not meet revenue recognition criteria is
deferred. Accounts receivable represents our unconditional right to receive
consideration from our customer. Payments terms do not exceed one year from the
invoice date and therefore do not include a significant financing component. To
date, there have been no material impairment losses on accounts receivable.
There were no material contract assets or contract liabilities recorded on the
condensed consolidated balance sheet in any of the periods presented. On
shipments where sales are not recognized, gross profit is generally recorded as
deferred profit in our condensed consolidated balance sheet representing the
difference between the receivable recorded and the inventory shipped.



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Cohu, Inc.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
September 25, 2021



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.



We adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments, on December 29, 2019 the
first day of our fiscal 2020. The ASU required a cumulative-effect adjustment to
the statement of financial position as of the date of adoption. Periods prior to
the adoption that are presented for comparative purposes are not adjusted. Based
on our analysis of historical and anticipated collections of trade receivables,
the impact of adoption of Topic 326 was insignificant.



Inventory: The valuation of inventory requires us to estimate obsolete or excess
inventory as well as inventory that is not of saleable quality. The
determination of obsolete or excess inventory requires us to estimate the future
demand for our products. The demand forecast is a direct input in the
development of our short-term manufacturing plans. We record valuation reserves
on our inventory for estimated excess and obsolete inventory and lower of cost
or net realizable value concerns equal to the difference between the cost of
inventory and the estimated realizable value based upon assumptions about future
product demand, market conditions and product selling prices. If future product
demand, market conditions or product selling prices are less than those
projected by management or if continued modifications to products are required
to meet specifications or other customer requirements, increases to inventory
reserves may be required which would have a negative impact on our gross margin.



Income Taxes: We estimate our liability for income taxes based on the various
jurisdictions where we conduct business. This requires us to estimate our (i)
current taxes; (ii) temporary differences that result from differing treatment
of certain items for tax and accounting purposes and (iii) unrecognized tax
benefits. Temporary differences result in deferred tax assets and liabilities
that are reflected in the consolidated balance sheet. The deferred tax assets
are reduced by a valuation allowance if, based upon all available evidence, it
is more likely than not that some or all of the deferred tax assets will not be
realized. Establishing, reducing or increasing a valuation allowance in an
accounting period generally results in an increase or decrease in tax expense in
the statement of operations. We must make significant judgments to determine the
provision for income taxes, deferred tax assets and liabilities, unrecognized
tax benefits and any valuation allowance to be recorded against deferred tax
assets. Our deferred tax assets consist primarily of reserves and accruals that
are not yet deductible for tax and tax credit and net operating loss
carryforwards.



Segment Information: We applied the provisions of ASC Topic 280, Segment
Reporting, ("ASC 280"), which sets forth a management approach to segment
reporting and establishes requirements to report selected segment information
quarterly and to report annually entity-wide disclosures about products, major
customers and the geographies in which the entity holds material assets and
reports revenue. An operating segment is defined as a component that engages in
business activities whose operating results are reviewed by the chief operating
decision maker and for which discrete financial information is available. 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").



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Cohu, Inc.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
September 25, 2021



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, in the case of in-process research and
development, the fair value of the asset. If the fair value is determined to be
less than the book value, a second step is performed to compute the amount of
impairment as the difference between the fair value of the reporting unit and
its carrying value of goodwill. We estimated the fair values of our reporting
units primarily using the income approach valuation methodology that includes
the discounted cash flow method, taking into consideration the market approach
and certain market multiples as a validation of the values derived using the
discounted cash flow methodology. Forecasts of future cash flows are based on
our best estimate of future net sales and operating expenses, based primarily on
customer forecasts, industry trade organization data and general economic
conditions. Fair value determinations require considerable judgment and are
sensitive to changes in underlying assumptions and factors.




We conduct our annual impairment test as of October 1st of each year and
determined that there was no impairment as of October 1, 2020, as the estimated
fair values of our reporting units and indefinite-lived intangible assets
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.






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 nine months ended September 26, 2020 total
impairments recorded to IPR&D projects was $11.2 million.



Long-lived assets, other than goodwill, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
assets might not be recoverable. Conditions that would necessitate an impairment
assessment include a significant decline in the observable market value of an
asset, a significant change in the extent or manner in which an asset is used,
or any other significant adverse change that would indicate that the carrying
amount of an asset or group of assets may not be recoverable. For long-lived
assets, impairment losses are only recorded if the asset's carrying amount is
not recoverable through its undiscounted, probability-weighted future cash
flows. We measure the impairment loss based on the difference between the
carrying amount and estimated fair value.




During the third quarter of 2021, no events or conditions occurred suggesting an
impairment in our goodwill, indefinite-lived intangibles, other intangible
assets and long-lived assets.






Warranty: We provide for the estimated costs of product warranties in the period
sales are recognized. Our warranty obligation estimates are affected by
historical product shipment levels, product performance and material and labor
costs incurred in correcting product performance problems. Should product
performance, material usage or labor repair costs differ from our estimates,
revisions to the estimated warranty liability would be required.



Contingencies: We are subject to certain contingencies that arise in the
ordinary course of our businesses which require us to assess the likelihood that
future events will confirm the existence of a loss or an impairment of an asset.
If a loss or asset impairment is probable and the amount of the loss or
impairment is reasonably estimable, we accrue a charge to operations in the
period such conditions become known.



Share-based Compensation: Share-based compensation expense related to restricted
stock unit awards is calculated based on the market price of our common stock on
the grant date, reduced by the present value of dividends expected to be paid on
our common stock prior to vesting of the restricted stock unit. Share-based
compensation on performance stock units with market-based goals is calculated
using a Monte Carlo simulation model on the date of the grant. Share-based
compensation expense related to stock options is recorded based on the fair
value of the award on its grant date, which we estimate using the Black-Scholes
valuation model.



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Cohu, Inc.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
September 25, 2021




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 "Recent Accounting Pronouncements", in
Note 1 located in Part I, Item 1 of this Form 10-Q.



RESULTS OF OPERATIONS




Recent Transactions Impacting Results of Operations






As discussed herein, 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 the first quarter of
2020. The operations of our fixtures business were considered "discontinued
operations" for all periods presented and unless otherwise indicated, the
discussion below covers the comparative results from continuing operations.



On June 24, 2021, we completed the sale of our PCB Test Equipment ("PCB Test")
business, which represented our PCB Test reportable segment. 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 they were no longer a fit within our organization.



The following table summarizes certain operating data as a percentage of net
sales:



Three Months Ended Nine Months Ended
September 25, September 26, September 25, September 26,
2021 2020 2021 2020
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales (57.5 )% (57.8 )% (56.5 )% (58.4 )%
Gross margin 42.5 % 42.2 % 43.5 % 41.6 %
Research and development (10.1 )% (13.6 )% (10.0 )% (14.6 )%
Selling, general and administrative (13.5 )% (20.9 )% (13.7 )% (22.0 )%
Amortization of purchased intangible
assets (3.9 )% (6.5 )% (3.9 )% (6.7 )%
Restructuring charges - % (0.3 )% (0.3 )% (0.3 )%
Impairment charges - % (4.8 )% - % (2.6 )%
Gain on sale of facilities - % 3.0 % - % 1.0 %
Gain on sale of PCB Test business - % - % 10.9 % - %
Income (loss) from operations 15.0 % (0.9 )% 26.5 % (3.6 )%





Third Quarter of Fiscal 2021 Compared to Third Quarter of Fiscal 2020






Net Sales



Our consolidated net sales increased 49.4% to $225.1 million in 2021, compared
to $150.6 million in 2020. During the third quarter of 2021 our net sales were
favorably impacted by the receipt of customer acceptance on significant orders
of semiconductor test handlers and continued robust automotive demand, driven by
xEV and ADAS technologies, and continued mobility expansion with 5G
proliferation. Demand for equipment testing automotive semiconductor and sensors
were at near record levels. During 2020, third quarter net sales were impacted
by disruptions caused by the COVID-19 pandemic and movement control orders
implemented by the governments of Malaysia and the Philippines. These movement
control orders resulted in supply disruptions and impacted our ability to ship
product.




Gross Margin (exclusive of amortization of acquisition-related intangible assets
described below)






Gross margin consists of net sales less cost of sales. Cost of sales consists
primarily of materials, assembly and test labor and overhead from operations.
Our gross margin can fluctuate due to a number of factors, including, but not
limited to, the mix and volume of products sold, product support costs,
material, labor, supplier, logistics and other operating cost increases,
increases to inventory reserves or the sale of previously reserved inventory and
utilization of manufacturing capacity. Our gross margin, as a percentage of net
sales, was 42.5% in 2021 and 42.2% in 2020.



Our gross margin can be impacted by charges to cost of sales related to excess,
obsolete and lower of cost or net realizable value inventory issues. During the
third quarter of 2021 and 2020, we recorded charges to cost of sales of
$0.5 million and $3.6 million for excess and obsolete inventory, respectively.



During the third quarter of 2020 we recorded, $2.6 million of restructuring
related inventory charges as part of the integration of Xcerra. Amounts recorded
in 2021 were not significant. While we believe our reserves for excess and
obsolete inventory and lower of cost or net realizable value concerns are
adequate to cover known exposures at September 25, 2021, reductions in customer
forecasts or continued modifications to products, as a result of our failure to
meet specifications or other customer requirements, may result in additional
charges to operations that could negatively impact our gross margin in future
periods.



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Cohu, Inc.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
September 25, 2021




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. R&D
expense was $22.8 million in 2021 and $20.5 million in 2020 representing 10.1%
and 13.6% of net sales, respectively. The increase in R&D expense in 2021 was
driven by higher labor and material costs associated with product development
and the discontinuation of cost control measures implemented during 2020 in
response to the economic uncertainty caused by the COVID-19 pandemic.




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 was $30.4 million or 13.5% of net
sales in 2021, compared to $31.3 million or 20.9% in 2020. The decrease in SG&A
expense in 2021 resulted from the divestment of our PCB Test business on June
24, 2021
and the elimination of costs associated with this business during the
three months ended September 25, 2021.




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
$8.9 million and $9.8 million in the third quarter of 2021 and 2020,
respectively. The decrease in expense recorded during the current year 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.



Restructuring Charges



Subsequent to the acquisition of Xcerra on October 1, 2018, during the fourth
quarter of 2018, we began a strategic restructuring program designed to
reposition our organization and improve our cost structure as part of our
targeted integration plan regarding Xcerra. In the third quarter of 2021 and
2020, we recorded restructuring charges totaling $31,000 and $0.4 million,
exclusive of the inventory related charges described above, respectively




See Note 4, "Restructuring Charges" in Part I, Item 1 of this Form 10-Q for
additional information with respect to restructuring charges.






Impairment Charges



During the third quarter of 2020, we became aware of additional delays in
customer adoption of certain new products under development that were acquired
from Xcerra as a result of COVID-19 and product road map changes. This change in
facts led 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. We did not record any impairment charges
during the third quarter of 2021.



Gain on Sale of Facilities



As part of our previously announced Xcerra integration plan we implemented
certain facility consolidation actions. During the third quarter of 2020, we
completed the sale of our facility located in Rosenheim, Germany which resulted
in a gain of $4.5 million.




See Note 4, "Restructuring Charges" in Part I, Item 1 of this Form 10-Q for
additional information with respect to our facility consolidation plan.



Gain on Sale of PCB Test Business






On June 24, 2021, we completed the divestment of our PCB Test business. During
the third quarter of 2021 we finalized the net working capital adjustment with
the buyer and made other adjustments that resulted in an additional gain of
$0.1 million for the three months ended September 25, 2021. Our decision to sell
this non-core business resulted from management's determination that that they
were no longer a fit within our organization.



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Cohu, Inc.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
September 25, 2021



Interest Expense and Income



Interest expense was $1.0 million in the third fiscal quarter of 2021 as
compared to $3.0 million in the corresponding period of 2020. The decrease in
interest expense resulted from a reduction in the outstanding balance of our
Term Loan Credit Facility and lower LIBOR rates.




Interest income was $0.1 million and $42,000 in the third fiscal quarter of 2021
and 2020, respectively.






Income Taxes



For the three months ended September 25, 2021, we used the estimated annual
effective tax rate ("ETR") expected to be applicable for the full fiscal year in
computing our tax provision. The ETR on income from continuing operations for
the three months ended September 25, 2021 was 23.7% and reflects a partial
release of our domestic valuation allowance on deferred tax assets to offset tax
liabilities on current year earnings, and an excess benefit relating to
stock-based compensation. For the three months ended September 26, 2020, we
determined that a reliable estimate of the annual ETR could not be made, since
relatively small changes in our projected income produce a significant variation
in our ETR, and instead used the actual ETR for the year-to-date period to
calculate our tax provision. The ETR on loss from continuing operations for the
three months ended September 26, 2020 was (20.2)% and primarily reflected the
lack of a tax benefit on our domestic losses as a result of our valuation
allowance on deferred tax assets, and non-deductible expenses relating to
stock-based compensation.



We conduct business globally and, as a result, Cohu or one or more of its
subsidiaries files income tax returns in the US and various state and foreign
jurisdictions. In the normal course of business, we are subject to examinations
by taxing authorities throughout the world and are currently under examination
in Germany, Malaysia and the Philippines. We believe our financial statement
accruals for income taxes are appropriate.



In accordance with the disclosure requirements as described in ASC Topic 740,
Income Taxes, we have classified unrecognized tax benefits as non-current income
tax liabilities, or a reduction in non-current deferred tax assets, unless
expected to be paid within one year. Our continuing practice is to recognize
interest and/or penalties related to income tax matters in income tax expense.
There were no material changes to our unrecognized tax benefits and interest
accrued related to unrecognized tax benefits during the three months ended
September 25, 2021 and September 26, 2020.




Income (Loss) from Continuing Operations and Net Income (Loss)



As a result of the factors set forth above, both income from continuing
operations and net income were $23.7 million in 2021 and loss from continuing
operations and net loss were both $6.6 million in 2020.



First Nine Months of Fiscal 2021 Compared to First Nine Months of Fiscal 2020






Net Sales



Our consolidated net sales increased 60.3% to $695.4 million in 2021, compared
to $433.7 million in 2020. During the first nine months of 2021 our net sales
were favorably impacted by the robust automotive demand, driven by xEV and ADAS
technologies, and continued mobility expansion with 5G proliferation. Demand for
equipment testing automotive semiconductors and sensors were at near record
levels. During the first nine months of 2020, our net sales were impacted by
disruptions caused by the COVID-19 pandemic and movement control orders
implemented by the governments of Malaysia and the Philippines. These movement
control orders resulted in supply disruptions and impacted our ability to ship
product.




Gross Margin (exclusive of amortization of acquisition-related intangible assets
described below)






Our gross margin, as a percentage of net sales, increased to 43.5% in 2021 from
41.6% in 2020. Our gross margin can fluctuate due to a number of factors,
including, but not limited to, the mix of products sold, product support costs,
material, labor, supplier, logistics and other operating cost increases,
inventory reserve adjustments, and utilization of manufacturing capacity. In the
first nine months of fiscal 2021 and 2020 we recorded charges to cost of sales
of approximately $3.0 million and $5.6 million for excess and obsolete
inventory, respectively.



As part of the integration and restructuring activities of Xcerra, we recorded
inventory charges associated with the decision to end manufacturing of certain
of our semiconductor test handlers. During the first nine months of 2020 we
recorded, $4.3 million of restructuring related inventory charges as part of the
integration of Xcerra. Amounts recorded in the first nine months of 2021 were
not significant.



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Cohu, Inc.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
September 25, 2021



While we believe our reserves for excess and obsolete inventory and lower of
cost or market concerns are adequate to cover known exposures at September 25,
2021
, reductions in customer forecasts or continued modifications to products,
as a result of our failure to meet specifications or other customer
requirements, may result in additional charges to operations that could
negatively impact our results of operations and gross margin in future periods.



R&D Expense



R&D expense was $69.4 million or 10.0% of net sales in 2021, compared to
$63.4 million or 14.6% in 2020. The increase in R&D expense in 2021 was driven
by higher labor and material costs associated with product development and the
discontinuation of cost control measures implemented during 2020 in response to
the economic uncertainty caused by the COVID-19 pandemic.



SG&A Expense




SG&A expense was $95.8 million or 13.7% of net sales in 2021, compared to
$95.7 million or 22.0% in 2020.



Amortization of Purchased Intangible Assets






Amortization of acquisition-related intangible assets was $27.2 million and
$28.8 million for the first nine months of 2021 and 2020, respectively. The
decrease in expense recorded during the current year 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.



Restructuring Charges



We recorded restructuring charges, exclusive of the specific inventory related
charges described above, totaling $2.0 million and $1.4 million in the first
nine months of 2021 and 2020, respectively.




See Note 4, "Restructuring Charges" in Part I, Item 1 of this Form 10-Q for
additional information with respect to restructuring charges.






Impairment Charges



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 have concluded there were no impairments 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
developing our interim fair value estimate resulted in a $3.9 million impairment
to IPR&D as the carrying value exceeded fair value. During the third quarter of
2020, we became aware of additional delays in customer adoption of certain new
products under development that were acquired from Xcerra as a result of
COVID-19 and product road map changes. This change in facts led 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 nine months ended September 26, 2020 total
impairments recorded to IPR&D projects was $11.2 million. We did not record any
impairment charges during the first nine months of 2021.



Gain on Sale of Facilities



As part of our previously announced Xcerra integration plan we implemented
certain facility consolidation actions. During the first nine months of 2020, we
completed the sale of our facilities located in Rosenheim, Germany and Penang,
Malaysia
resulting in a gain of $4.5 million.




See Note 4, "Restructuring Charges" in Part I, Item 1 of this Form 10-Q for
additional information with respect to our facility consolidation plan.



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 $75.8 million for the first nine months of 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 they were no longer a fit within our organization.



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Cohu, Inc.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
September 25, 2021



Interest Expense and Income



Interest expense was $5.4 million in the first nine months of 2021 as compared
to $10.9 million in the corresponding period of 2020. The decrease in interest
expense resulted from lower LIBOR rates as a result of global economic
uncertainty caused by the COVID-19 pandemic and a reduction in the outstanding
balance of our Term Loan Credit Facility.




Interest income was $0.2 million in both the first nine months of 2021 and 2020,
respectively.






Income Taxes



For the nine months ended September 25, 2021, we used the estimated annual
effective tax rate ("ETR") expected to be applicable for the full fiscal year in
computing our tax provision. The ETR on income from continuing operations for
the nine months ended September 25, 2021 was 16.4% and reflects a partial
release of our domestic valuation allowance on deferred tax assets to offset tax
liabilities on current year earnings, and an excess benefit relating to
stock-based compensation. For the nine months ended September 26, 2020, we
determined that a reliable estimate of the annual ETR could not be made, since
relatively small changes in our projected income produce a significant variation
in our ETR, and instead used the actual ETR for the year-to-date period to
calculate our tax provision. The ETR on loss from continuing operations for the
nine months ended September 26, 2020 was (0.9)% and primarily reflected the lack
of a tax benefit on our domestic losses as a result of our valuation allowance
on deferred tax assets, and non-deductible expenses relating to stock-based
compensation.



We conduct business globally and as a result, Cohu or one or more of its
subsidiaries files income tax returns in the US and various state and foreign
jurisdictions. In the normal course of business, we are subject to examinations
by taxing authorities throughout the world and are currently under examination
in Germany, Malaysia and the Philippines. We believe our financial statement
accruals for income taxes are appropriate.



In accordance with the disclosure requirements as described in ASC Topic 740,
Income Taxes, we have classified unrecognized tax benefits as non-current income
tax liabilities, or a reduction in non-current deferred tax assets, unless
expected to be paid within one year. Our continuing practice is to recognize
interest and/or penalties related to income tax matters in income tax expense.
There were no material changes to our unrecognized tax benefits and interest
accrued related to unrecognized tax benefits during the nine months ended
September 25, 2021 and September 26, 2020.




Income (Loss) from Continuing Operations and Net Income (Loss)



As a result of the factors set forth above in 2021, both our income from
continuing operations and net income was $146.4 million. In 2020, our loss from
continuing operations and net loss were both $28.7 million.



LIQUIDITY AND CAPITAL RESOURCES






Our primary business is dependent on capital expenditures by semiconductor
manufacturers and test subcontractors that are, in turn, dependent on the
current and anticipated market demand for semiconductors. The seasonal and
volatile nature of demand for semiconductor equipment, our primary industry,
makes estimates of future revenues, results of operations and net cash flows
difficult.



Our primary historical source of liquidity and capital resources has been cash
flow generated by our operations and we manage our businesses to maximize
operating cash flows as our primary source of liquidity. We use cash to fund
growth in our operating assets and to fund new products and product enhancements
primarily through research and development. As of September 25, 2021,
$180.0 million or 62.3% of our cash and cash equivalents was held by our foreign
subsidiaries. If these funds are needed for our operations in the U.S., we may
be required to accrue and pay foreign withholding taxes if we repatriate these
funds. Except for working capital requirements in certain jurisdictions, we
provide for all withholding and other residual taxes related to unremitted
earnings of our foreign subsidiaries.



At September 25, 2021, our total indebtedness, net of discount and deferred
financing costs, was $118.3 million, which included $101.5 million outstanding
under the Term Loan Credit Facility, $3.2 million outstanding under Kita's term
loans, $10.4 million outstanding under Cohu GmbH's construction loan and
$3.2 million outstanding under Kita's lines of credit. In March 2021, we closed
an underwritten public offering totaling 5,692,500 shares of our common stock at
$41.00 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.



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Cohu, Inc.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
September 25, 2021



Liquidity




Working Capital: The following summarizes our cash, cash equivalents, short-term
investments and working capital:






September 25, December 26, Percentage
(in thousands) 2021 2020 Increase Change
Cash, cash equivalents and short-term
investments $ 364,805 $ 170,027 $ 194,778 114.6 %
Working capital $ 541,355 $ 310,593 $ 230,762 74.3 %




Cash Flows



Operating Activities: Operating cash flows for the first nine months of fiscal
2021 consisted of our net income, adjusted for non-cash expenses and changes in
operating assets and liabilities. These adjustments include depreciation expense
on property, plant and equipment, share-based compensation expense, amortization
of intangible assets, deferred income taxes, amortization of cloud-based
software implementation costs, loss on extinguishment of debt, interest
capitalized associated with cloud computing implementation, amortization of debt
discounts and issuance costs and gains from the sale of our PCB Test business
and property, plant and equipment. Our net cash provided by operating activities
in the first nine months of fiscal 2021 totaled $70.0 million. Net cash provided
by operating activities was impacted by changes in current assets and
liabilities and included increases in accounts receivable of $65.5 million,
accounts payable of $18.3 million, inventories of $27.5 million, income taxes
payable of $16.2 million, accrued compensation, warranty and other liabilities
of $3.1 million, deferred profit of $2.8 million, other current assets of
$1.9 million and a decrease in customer advances of $3.4 million. Our accounts
receivable and accounts payable balances increased due to increased business
volume in the first nine months of 2021 and the timing of cash collections from
customers and payments made by us to our suppliers. The increase in inventory
was driven by purchases from suppliers made to fulfill anticipated future
shipments of products. The increases in income taxes payable and accrued
compensation, warranty and other liabilities were driven by taxable income
generated in the first nine months of 2021 and substantially higher business
volume which have resulted in accruals of warranty and incentive compensation,
respectively. Deferrals of revenue in accordance with our revenue recognition
policy resulted in an increase in deferred profit and the increase in other
current assets resulted from advance payments for services that will be utilized
throughout the next twelve months. The decrease in customer advances was due to
product shipments made during the first nine months of 2021 that had been paid
in advance.



Investing Activities: Investing cash flows consist primarily of cash used for
capital expenditures in support of our business, purchases of investments,
proceeds from investment maturities, business divestitures and asset disposals.
Net cash provided by investing activities in the first nine months of fiscal
2021 totaled $56.7 million. Net cash proceeds from the sale of our PCB Test
business on June 24, 2021 were $120.9 million. 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. In the first nine months of
fiscal 2021 we used $168.9 million of cash for purchases of short-term
investments and generated $113.6 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 of
$8.9 million were made to support the operating and development activities of
our business activities of our Semiconductor Test & Inspection segment.



Financing Activities: Financing cash flows consist primarily of net proceeds
from the issuance of common stock under our stock option and employee stock
purchase plans and repayments of debt, net of new borrowings. In March 2021, we
closed an underwritten public offering totaling 5,692,500 shares of our common
stock at $41.00 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. We
issue restricted stock units and stock options and maintain an employee stock
purchase plan as components of our overall employee compensation. In the first
nine months of fiscal 2021, cash used to settle the minimum statutory tax
withholding requirements on behalf of our employees upon vesting of restricted
and performance stock awards, net of proceeds from the exercise of employee
stock options was $5.8 million. Repayments of short-term borrowings and
long-term debt during the first nine months of fiscal 2021 totaled
$205.9 million and included a $200.0 million prepayment of our Term Loan Credit
Facility during the first nine months of 2021 made to deleverage our balance
sheet. During the first nine months of 2021 we received proceeds under a
revolving line of credit and construction loan totaling $1.3 million. Proceeds
from this construction loan are being used to expand our facility in Kolbermoor,
Germany, enabling us to consolidate the German operations of our Semiconductor
Test & Inspection segment.



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Cohu, Inc.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
September 25, 2021



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.



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 in terms of the time-based interest period, at a floating annual
rate equal to the selected LIBOR interest period plus a margin of 3.00%. At
September 25, 2021, the outstanding loan balance, net of discount and deferred
financing costs, was $101.5 million and $3.1 million of the outstanding balance
is presented as current installments of long-term debt in our condensed
consolidated balance sheets. At December 26, 2020, the outstanding loan balance,
net of discount and deferred financing costs, was $301.1 million and
$2.4 million of the outstanding balance is presented as current installments of
long-term debt in our condensed consolidated balance sheets.



Under the terms of the Credit Agreement, the lender may accelerate the payment
terms upon the occurrence of certain events of default set forth therein, which
include: the failure of Cohu to make timely payments of amounts due under the
Credit Agreement, the failure of Cohu to adhere to the representations and
covenants set forth in the Credit Agreement, the failure to provide notice of
any event that causes a material adverse effect or to provide other required
notices, upon the event that related collateral agreements become ineffective,
upon the event that certain legal judgments are entered against Cohu, the
insolvency of Cohu, or upon the change of control of Cohu. As of September 25,
2021
, we believe no such events of default have occurred.



During the first nine months of 2021, we prepaid $200.0 million in principal of
our Term Loan Credit Facility for $200.0 million in cash. We accounted for the
prepayment as a debt extinguishment, which resulted in a loss of $3.4 million
reflected in other expense in our condensed consolidated statement of operations
and a corresponding $3.4 million reduction in debt discounts and deferred
financing costs in our condensed consolidated balance sheets. In August 2020, we
repurchased $16.4 million in principal of our Term Loan Credit Facility for
$15.8 million in cash. We accounted for the repurchase as a debt extinguishment,
which resulted in a gain of $0.3 million reflected as gain on extinguishment of
debt, in our condensed consolidated statement of operations. Approximately
$103.1 million in principal of the Term Loan Credit Facility remained
outstanding as of September 25, 2021.



Kita Term Loans



We have outstanding term loans from a series of Japanese financial institutions
primarily related to the expansion of our facility in Osaka, Japan. The term
loans are collateralized by the facility and land, carry interest rates ranging
from 0.05% to 0.44%, and expire at various dates through 2034. At September 25,
2021
, the outstanding loan balance was $3.2 million and $0.3 million of the
outstanding balance is presented as current installments of long-term debt in
our consolidated balance sheets. At December 26, 2020, the outstanding loan
balance was $3.6 million and $0.3 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
€1.5 million, of which €0.8 million is drawn, 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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Cohu, Inc.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
September 25, 2021



At September 25, 2021, total outstanding borrowings under the Loan Facilities
was $10.4 million with $0.9 million of the total outstanding balance being
presented as current installments of long-term debt in our condensed
consolidated balance sheets. At December 26, 2020, total outstanding borrowings
under the Loan Facilities was $9.9 million with $0.4 million of the total
outstanding balance being presented as current installments of long-term debt in
our condensed 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 September 25, 2021.



Lines of Credit



Our wholly owned subsidiary in Japan also has outstanding revolving credit
facilities with various financial institutions in Japan. The credit facilities
renew monthly and provide access to working capital totaling up to $8.7 million.
At September 25, 2021, total borrowings outstanding under the revolving lines of
credit were $3.2 million. As these credit facility agreements renew monthly,
they have been included in short-term borrowings in our condensed consolidated
balance sheets.



The revolving lines of credit are denominated in Japanese Yen and, as a result,
amounts disclosed herein will fluctuate because of changes in currency exchange
rates.




Our wholly owned subsidiary in Switzerland has an 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 September 25, 2021 and
December 26, 2020, 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 September 25,
2021
, $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 and Off-Balance Sheet Arrangements






Contractual Obligations: Our significant contractual obligations consist of
liabilities for debt, operating leases, unrecognized tax benefits, pensions,
post-retirement benefits and warranties. During the first nine months of 2021,
we repaid $200.0 million in outstanding principal of our Term Loan Credit
Facility. Aside from the repayment of outstanding principal of our Term Loan
Credit Facility, there were no material changes to these obligations outside the
ordinary course of business from those disclosed in our Annual Report on Form
10-K for the year ended December 26, 2020.



Commitments to contract manufacturers and suppliers: From time to time, we enter
into commitments with our vendors and outsourcing partners to purchase inventory
at fixed prices or in guaranteed quantities. We are not able to determine the
aggregate amount of such purchase orders that represent contractual obligations,
as purchase orders may represent authorizations to purchase rather than binding
agreements. Our purchase orders are based on our current manufacturing needs and
are fulfilled by our vendors within relatively short time horizons. We typically
do not have significant agreements for the purchase of raw materials or other
goods specifying minimum quantities or set prices that exceed our expected
requirements for the next three months.



Off-Balance Sheet Arrangements: During the ordinary course of business, we
provide standby letters of credit instruments to certain parties as required. As
of September 25, 2021, $0.3 million was outstanding under standby letters of
credit.





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