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Note 2 - Business Acquisitions, Goodwill and Purchased Intangible Assets

6 Months Ended

Jul. 01, 2023

Business Combination, Goodwill, and Intangible Assets Disclosure [Text Block]

2. Business Acquisitions, Goodwill and Purchased Intangible Assets

MCT

On January 30, 2023, we completed the acquisition of all the outstanding membership units of MCT Worldwide, LLC. (“MCT”), pursuant to a membership unit purchase agreement dated January 30, 2023, by and among MCT Worldwide, LLC, Arise Acquisition Co., LLC, The Seaport Group LLC Profit Sharing Plan, and Delta Design, Inc., a wholly owned subsidiary of Cohu (“the Acquisition”). MCT is a U.S. based company with its principal manufacturing site in Penang Malaysia. MCT provides automated solutions for the semiconductor industry and designs, manufactures, markets, services and distributes strip test handlers, film frame handlers and laser mark handlers. On January 30, 2023, we made a cash payment totaling approximately $28.0 million for MCT. The Acquisition is a debt free transaction and was subject to a working capital adjustment which was finalized during the second quarter of 2023 resulting in a cash payment of $0.6 million received from the sellers. Taking into consideration the impact of our working capital adjustment and certain acquisition-related costs that were included in the transaction proceeds, the purchase price for MCT is $26.8 million. During the three and six-month period ended July 1, 2023, we incurred acquisition-related costs totaling $0.1 million and $0.4 million, respectively, which were expensed as selling, general and administrative costs. During the prior year period ended June 25, 2022, no acquisition-related costs were incurred. The Acquisition has been accounted for in conformity with ASC Topic 805, Business Combinations, (“ASC 805”).

We have not finalized the purchase price allocation. Accordingly, the preliminary purchase price allocation shown below could materially change as we are still in the process of finalizing the fair values of the tangible and intangible assets acquired and liabilities assumed, and the related income tax effects may still be adjusted as they are finalized during the remainder of the measurement period (which will not exceed 12 months from the acquisition closing date). The transaction was an asset acquisition for tax purposes. Consequently, we will record a stepped-up tax basis in the acquired assets, including goodwill and intangibles. The acquired assets and liabilities of MCT were recorded at their respective fair values including an amount for goodwill representing the difference between the Acquisition consideration and the fair value of the identifiable net assets. During the second quarter of 2023, we settled the working capital adjustment with the sellers resulting in an immaterial change to purchase consideration, current assets and goodwill. There were no changes to intangible assets and we expect to finalize the purchase accounting for MCT in the third quarter of 2023.

The table below summarizes the assets acquired and liabilities assumed as of January 30, 2023 (in thousands):

Current assets, including cash received	$	9,505
Property, plant and equipment		197
Other assets		356
Intangible assets		12,000
Goodwill		8,755
Total assets acquired		30,813
Liabilities assumed		(4,024	)
Net assets acquired	$	26,789

The preliminary allocation of the intangible assets subject to amortization is as follows (in thousands):

	Estimated Fair Value		Weighted Average Useful Life (years)
Developed technology	$	7,500		7.0
Customer relationships		4,000		10.0
Product backlog		500		0.5
Total intangible assets	$	12,000

Acquired intangible assets reported above are being amortized using the straight-line method over their estimated useful lives which approximates the pattern of how the economic benefit is expected to be used. This includes amounts allocated to customer relationships because of anticipated high customer retention rates that are common in the semiconductor capital equipment industry.

The preliminary value assigned to developed technology was determined by using the using the relief from royalty method under the income approach, which included assumptions related to revenue growth rates, royalty rates, and discount rates. Developed technology, which comprises products that have reached technological feasibility, includes the products in MCT’s product line. The revenue estimates used to value the developed technology were based on estimates of relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by MCT and competitors. The estimated after-tax cash flows were based on a hypothetical royalty rate applied to the revenues for the developed technology. The discount rate utilized to discount the net cash flows of the developed technology to present value was based on the risk associated with the respective cash flows taking into consideration the perceived risk of the technology relative to the other acquired assets, the weighted average cost of capital, the internal rate of return, and the weighted average return on assets.

The preliminary value assigned to customer relationships was determined by using the multi-period excess earnings method under the income approach. The estimated cash flows were based on revenues from the existing customers net of operating expenses and net of contributory asset charges. The discount rate utilized to discount the net cash flows of the customer relationships to present value was based on the respective cash flows taking into consideration the perceived risks.

The preliminary value assigned to backlog acquired was estimated based upon the contractual nature of the backlog as of January 30, 2023, using the multi-period excess earnings method under the income approach to discount back to present value the cash flows attributable to the backlog at a discount rate commensurate with the expected risks of the backlog cash flows.

MCT’s results of operations have been included starting January 30, 2023. The impact of MCT on our condensed consolidated statements of income and comprehensive income was not material.

Goodwill and Intangible Assets

Changes in the carrying value of goodwill during the year ended December 31, 2022, and the six-month period ended July 1, 2023 were as follows (in thousands):

	Goodwill
Balance, December 25, 2021	$	219,791
Impact of currency exchange		(6,252	)
Balance, December 31, 2022		213,539
Additions		8,755
Impact of currency exchange		1,997
Balance, July 1, 2023	$	224,291

Purchased intangible assets subject to amortization are as follows (in thousands):

	July 1, 2023						December 31, 2022
					Remaining
					Weighted
	Gross				Average		Gross
	Carrying		Accum.		Amort.		Carrying		Accum.
	Amount		Amort.		Period (Years)		Amount		Amort.
Developed technology	$	233,884	$	144,012		3.7	$	224,253	$	128,938
Customer relationships		69,215		34,219		6.5		64,632		31,015
Trade names		20,667		10,403		5.9		20,461		9,397
Product backlog		500		417		0.1		-		-
Covenant not-to-compete		244		159		3.5		269		161
Total intangible assets	$	324,510	$	189,210			$	309,615	$	169,511

Changes in the carrying values of purchased intangible assets presented above are a result of the impact of fluctuation in currency exchange rates and the acquisition of MCT.

Amortization expense related to intangible assets was approximately $9.0 million in the second quarter of fiscal 2023 and $17.8 million in the first six months of fiscal 2023. Amortization expense related to intangible assets was approximately $8.3 million in the second quarter of fiscal 2022 and $16.9 million in the first six months of fiscal 2022.