<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-4298
COHU, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 95-1934119
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
5755 KEARNY VILLA ROAD, SAN DIEGO, CALIFORNIA 92123-1111
--------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code 858-541-5194
------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of June 30, 2000, the Registrant had 20,237,684 shares of its $1.00 par value
common stock outstanding.
<PAGE> 2
COHU, INC.
INDEX
FORM 10-Q
JUNE 30, 2000
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets (Unaudited)
June 30, 2000 and December 31, 1999......................................... 3
Condensed Consolidated Statements of Income (Unaudited)
Three and Six Months Ended June 30, 2000 and 1999........................... 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 2000 and 1999..................................... 5
Notes to Unaudited Condensed Consolidated Financial Statements.............. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................. 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................... 14
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders........................... 15
Item 5. Other Information............................................................. 15
Item 6. Exhibits and Reports on Form 8-K.............................................. 15
Signatures.............................................................................. 16
</TABLE>
2
<PAGE> 3
COHU, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
ASSETS JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 73,989 $ 55,954
Short-term investments 15,388 25,646
Accounts receivable, less allowance for doubtful
accounts of $1,857 in 2000 and $1,981 in 1999 56,205 52,262
Inventories:
Raw materials and purchased parts 24,183 21,257
Work in process 18,991 18,768
Finished goods 12,106 15,621
-------- --------
55,280 55,646
Deferred income taxes 11,231 11,231
Prepaid expenses 2,561 2,030
-------- --------
Total current assets 214,654 202,769
Property, plant and equipment, at cost:
Land and land improvements 2,501 2,501
Buildings and building improvements 12,610 12,507
Machinery and equipment 21,111 19,849
-------- --------
36,222 34,857
Less accumulated depreciation and amortization 19,251 17,841
-------- --------
Net property, plant and equipment 16,971 17,016
Goodwill, net of accumulated amortization
of $2,405 in 2000 and $2,260 in 1999 722 867
Other assets 79 81
-------- --------
$232,426 $220,733
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,623 $ 13,042
Income taxes payable 4,704 6,778
Customer advances 11,536 18,530
Other accrued liabilities 17,700 18,369
-------- --------
Total current liabilities 44,563 56,719
Accrued retiree medical benefits 972 984
Deferred income taxes 674 674
Stockholders' equity:
Preferred stock - -
Common stock 20,238 19,938
Paid in excess of par 6,083 3,539
Retained earnings 159,896 138,879
-------- --------
Total stockholders' equity 186,217 162,356
-------- --------
$232,426 $220,733
======== ========
</TABLE>
See accompanying notes
3
<PAGE> 4
COHU, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 86,723 $ 43,471 $159,190 $ 72,997
Cost and expenses:
Cost of sales 51,380 25,750 96,123 44,914
Research and development 8,313 5,050 15,068 9,347
Selling, general and administrative 8,125 6,154 15,264 11,241
-------- -------- -------- --------
67,818 36,954 126,455 65,502
-------- -------- -------- --------
Income from operations 18,905 6,517 32,735 7,495
Interest income 1,309 1,053 2,602 2,166
-------- -------- -------- --------
Income before income taxes 20,214 7,570 35,337 9,661
Provision for income taxes 7,100 2,700 12,300 3,400
-------- -------- -------- --------
Net income $ 13,114 $ 4,870 $ 23,037 $ 6,261
======== ======== ======== ========
Earnings per share:
Basic $ .65 $ .25 $ 1.14 $ .32
======== ======== ======== ========
Diluted $ .62 $ .24 $ 1.08 $ .31
======== ======== ======== ========
Weighted average shares used
in computing earnings per share:
Basic 20,209 19,726 20,130 19,670
======== ======== ======== ========
Diluted 21,248 20,346 21,277 20,232
======== ======== ======== ========
</TABLE>
See accompanying notes.
4
<PAGE> 5
COHU, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 23,037 $ 6,261
Adjustments to reconcile net income to net
cash provided from operating activities:
Depreciation and amortization 1,620 1,365
Decrease in accrued retiree medical benefits (12) (1)
Changes in assets and liabilities:
Accounts receivable (3,943) (13,249)
Inventories 366 (13,090)
Prepaid expenses (531) (236)
Accounts payable (2,419) 9,913
Income taxes payable (2,074) 2,036
Customer advances (6,994) -
Other accrued liabilities (669) 3,931
-------- --------
Net cash provided by (used for) operating activities 8,381 (3,070)
Cash flows from investing activities:
Purchases of short-term investments (5,977) (20,915)
Maturities of short-term investments 16,235 6,300
Purchases of property, plant, equipment and other assets (1,428) (745)
-------- --------
Net cash provided by (used for) investing activities 8,830 (15,360)
Cash flows from financing activities:
Issuance of stock, net 2,844 1,107
Cash dividends (2,020) (1,773)
-------- --------
Net cash provided by (used for) financing activities 824 (666)
-------- --------
Net increase (decrease) in cash and cash equivalents 18,035 (19,096)
Cash and cash equivalents at beginning of period 55,954 74,446
-------- --------
Cash and cash equivalents at end of period $ 73,989 $ 55,350
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $ 14,374 $ 1,364
</TABLE>
See accompanying notes.
5
<PAGE> 6
COHU, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
1 - BASIS OF PRESENTATION
The accompanying interim financial statements are unaudited but include
all adjustments (consisting of normal recurring adjustments) which Cohu,
Inc. (the "Company" or "Cohu") considers necessary for a fair statement
of the results for the period. The operating results for the three and
six months ended June 30, 2000 are not necessarily indicative of the
operating results for the entire year or any future period. These
financial statements should be read in conjunction with the consolidated
financial statements incorporated by reference in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999 and
management's discussion and analysis of financial condition and results
of operations included elsewhere herein.
Net sales for the three and six months ended June 30, 2000 included
$17.5 million and $29.3 million, respectively, of sales from the
Company's new Summit test handlers. Through June 30, 2000, additional
Summit handlers with a sales value of $17.3 million had been shipped.
Revenue on these shipments will be recognized subsequent to June 30,
2000 upon customer acceptance, which is expected to occur in the third
quarter of 2000. Customer payments received on these shipments totaled
$11.5 million at June 30, 2000 and have been recorded as customer
advances.
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue
Recognition in Financial Statements. SAB 101 was amended by SAB 101B
which delayed the implementation date of SAB 101 for calendar year end
reporting companies, including Cohu, to the quarter ending December 31,
2000. The Company is currently evaluating SAB 101 and is uncertain as to
what impact, if any, SAB 101 will have on its revenues and results of
operations for the quarter and year ending December 31, 2000 and
subsequent periods. The impact of SAB 101, if any, will be reported as a
change in accounting principle in accordance with APB Opinion No. 20 and
Financial Accounting Standards Board ("FASB") Statement No. 3. This may
result in a significant cumulative effect change in accounting
adjustment that would be reflected in the Company's results of
operations for the quarter and year ended December 31, 2000.
2 - EARNINGS PER SHARE
Earnings per share are computed in accordance with FASB Statement No.
128, Earnings per Share. Basic earnings per share are computed using the
weighted average number of common shares outstanding during each period.
Diluted earnings per share include the dilutive effect of common shares
potentially issuable upon the exercise of stock options. For purposes of
computing diluted earnings per share, weighted average common share
equivalents do not include stock options with an exercise price that
exceeds the average fair market value of the Company's common stock for
the period. For the three and six months ended June 30, 2000, options to
purchase approximately 50,000 and 25,000 shares of common stock at
average prices of $38.81 and $38.81, respectively, were excluded from
the computation, and for the three and six months ended June 30, 1999,
options to purchase approximately 106,000 and 164,000 shares of common
stock at average prices of $20.33 and $18.05, respectively, were
excluded from the computation. The following table reconciles the
denominators used in computing basic and diluted earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
------ ------ ------ ------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 20,209 19,726 20,130 19,670
Effect of dilutive stock options 1,039 620 1,147 562
------ ------ ------ ------
21,248 20,346 21,277 20,232
====== ====== ====== ======
</TABLE>
6
<PAGE> 7
COHU, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
3 - SEGMENT AND RELATED INFORMATION
The following information is presented pursuant to FASB Statement No.
131, Disclosures about Segments of an Enterprise and Related
Information. Intersegment sales were not significant in any period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
--------- --------- --------- ---------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Net sales:
Semiconductor equipment $ 76,755 $ 35,382 $ 139,551 $ 57,756
Television cameras 6,925 4,944 13,417 9,173
--------- --------- --------- ---------
Net sales for reportable segments 83,680 40,326 152,968 66,929
All other 3,043 3,145 6,222 6,068
--------- --------- --------- ---------
Total consolidated net sales $ 86,723 $ 43,471 $ 159,190 $ 72,997
========= ========= ========= =========
Operating profit (loss):
Semiconductor equipment $ 18,769 $ 7,229 $ 32,601 $ 8,687
Television cameras 699 337 1,105 511
--------- --------- --------- ---------
Operating profit for reportable segments 19,468 7,566 33,706 9,198
All other (4) (538) 103 (800)
--------- --------- --------- ---------
Total consolidated operating profit 19,464 7,028 33,809 8,398
Other unallocated amounts:
Corporate expenses (487) (439) (930) (759)
Interest income 1,309 1,053 2,602 2,166
Goodwill amortization (72) (72) (144) (144)
--------- --------- --------- ---------
Income before income taxes $ 20,214 $ 7,570 $ 35,337 $ 9,661
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
(in thousands)
<S> <C> <C>
Total assets by segment:
Semiconductor equipment $114,854 $115,671
Television cameras 11,784 11,758
-------- --------
Total assets for reportable segments 126,638 127,429
All other operating segments 5,718 5,419
Corporate 100,070 87,885
-------- --------
Total consolidated assets $232,426 $220,733
======== ========
</TABLE>
7
<PAGE> 8
COHU, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
JUNE 30, 2000
This Form 10-Q contains certain forward-looking statements 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. The words "anticipate",
"expect", "believe", and similar expressions are intended to identify such
statements. Such statements are subject to various risks and uncertainties,
including but not limited to those discussed herein and, in particular, under
the caption "Business and Market Risks" that could cause actual results to
differ materially from those projected.
RESULTS OF OPERATIONS
SECOND QUARTER 2000 COMPARED TO SECOND QUARTER 1999
Net sales increased 99% to $86.7 million in 2000 compared to net sales of $43.5
million in 1999. Sales of semiconductor test handling equipment in 2000
increased 117% from the 1999 period due to the strength of the global
semiconductor equipment industry and sales of the Company's new Summit handlers
and accounted for 89% of consolidated net sales in 2000 versus 81% in 1999.
Sales of television cameras and other equipment increased 40% while the combined
sales of metal detection and microwave equipment decreased 3%. Export sales
accounted for 70% of net sales in the second quarter of 2000 compared to 63% for
the year ended December 31, 1999.
Net sales for the three months ended June 30, 2000 included $17.5 million of
sales from the Company's new Summit test handlers. Through June 30, 2000,
additional Summit handlers with a sales value of $17.3 million had been shipped.
Revenue on these shipments will be recognized subsequent to June 30, 2000 upon
customer acceptance, which is expected to occur in the third quarter of 2000.
Customer payments received on these shipments totaled $11.5 million at June 30,
2000 and have been recorded as customer advances.
Gross margin as a percentage of net sales was 40.8% in both 2000 and 1999.
Research and development expense as a percentage of net sales was 9.6% in 2000,
compared to 11.6% in 1999, increasing in absolute dollars from $5.1 million to
$8.3 million as a result of increased spending on new product development in the
semiconductor equipment business. Selling, general and administrative expense as
a percentage of net sales decreased to 9.4% in 2000 from 14.2% in 1999 primarily
as a result of the increase in business volume. Interest income increased to
$1.3 million in 2000 from $1.1 million in 1999 as a result of an increase in
interest rates. The provision for income taxes expressed as a percentage of
pre-tax income was 35.1% in the second quarter of 2000 and 35.7% for the second
quarter of 1999. As a result of the factors set forth above, net income
increased from $4.9 million in 1999 to $13.1 million in 2000.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Net sales increased 118% to $159.2 million in 2000 compared to net sales of
$73.0 million in 1999. Net sales during the first half of 1999 were negatively
impacted by the semiconductor industry downturn that began in mid 1998. Sales of
semiconductor test handling equipment in 2000 increased 142% from the 1999
period and accounted for 88% of consolidated net sales in 2000 versus 79% in
1999. Sales of television cameras and other equipment increased 46% while the
combined sales of metal detection and microwave equipment increased 3%. Export
sales accounted for 60% of net sales in the first six months of 2000 compared to
63% for the year ended December 31, 1999.
Net sales for the six months ended June 30, 2000 included $29.3 million of sales
from the Company's new Summit test handlers.
8
<PAGE> 9
COHU, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
JUNE 30, 2000
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
(CONT.)
Gross margin as a percentage of net sales was 39.6% in 2000 versus 38.5% in
1999. The improvement in gross margin was primarily the result of increased
business volume and changes in product mix. Research and development expense as
a percentage of net sales was 9.5% in 2000, compared to 12.8% in 1999,
increasing in absolute dollars from $9.3 million to $15.1 million primarily as a
result of increased spending on new product development in the semiconductor
equipment business. Selling, general and administrative expense as a percentage
of net sales decreased to 9.6% in 2000 from 15.4% in 1999 primarily as a result
of the increase in business volume. Interest income increased to $2.6 million in
2000 from $2.2 million 1999 as a result of increases in interest rates. The
provision for income taxes expressed as a percentage of pre-tax income was 34.8%
in the first six months of 2000 compared to 35.2% for the first six months of
1999. As a result of the factors set forth above, net income increased to $23.0
million in 2000 from $6.3 million in 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash flows provided by operating activities in the first six
months of 2000 totaled $8.4 million. The major components of cash flows provided
by operating activities were net income of $23.0 offset by the net change in
certain current assets and liabilities totaling $16.3 million. Net cash provided
by investing activities included $10.3 million for the purchase of short-term
investments, less maturities, offset by purchases of property, plant and
equipment and other assets of $1.4 million. Net cash provided by financing
activities was $.8 million. Cash provided by financing activities included $2.8
million received from the issuance of stock upon the exercise of stock options
offset by $2.0 million for the payment of dividends. The Company had $10 million
available under its bank line of credit and working capital of $170.1 million at
June 30, 2000. It is anticipated that present working capital and available
borrowings under the line of credit will be sufficient to meet the Company's
operating requirements for the next twelve months.
BUSINESS AND MARKET RISKS
THE SEMICONDUCTOR INDUSTRY WE SERVE IS HIGHLY VOLATILE AND UNPREDICTABLE.
Cohu's operating results are substantially dependent on our semiconductor
equipment business. This capital equipment business is in turn highly dependent
on the overall strength of the semiconductor industry. Historically, the
semiconductor industry has been highly cyclical with recurring periods of
oversupply and excess capacity, which often have had a significant effect on the
semiconductor industry's demand for capital equipment, including equipment of
the type manufactured and marketed by Cohu. We anticipate that the markets for
newer generations of semiconductors may also be subject to similar cycles and
severe downturns, such as those experienced in 1996 and 1998. Reductions in
capital equipment investment by semiconductor manufacturers will adversely
affect our business, financial position and results of operations.
ACCOUNTING RULES MAY IMPACT THE TIMING OF REVENUE RECOGNITION.
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements. SAB 101 was amended by SAB 101B which delayed the implementation
date of SAB 101 for calendar year end reporting companies, including Cohu, to
the quarter ending December 31, 2000. The Company is currently evaluating SAB
101
9
<PAGE> 10
COHU, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
JUNE 30, 2000
BUSINESS AND MARKET RISKS (CONT.)
and is uncertain as to what impact, if any, SAB 101 will have on its revenues
and results of operations for the quarter and year ending December 31, 2000 and
subsequent periods. The impact of SAB 101, if any, will be reported as a change
in accounting principle in accordance with APB Opinion No. 20 and FASB Statement
No. 3. This may result in a significant cumulative effect change in accounting
adjustment that would be reflected in the Company's results of operations for
the quarter and year ended December 31, 2000.
SEMICONDUCTOR EQUIPMENT IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE, PRODUCT
INTRODUCTIONS AND TRANSITIONS MAY RESULT IN INVENTORY WRITE-OFFS AND OUR NEW
PRODUCT DEVELOPMENT INVOLVES NUMEROUS RISKS AND UNCERTAINTIES.
Semiconductor equipment and processes are subject to rapid technological change.
We believe that our future success will depend in part on our ability to enhance
existing products and develop new products with improved performance
capabilities. We expect to continue to invest heavily in research and
development and must manage product transitions successfully, as introductions
of new products could adversely impact sales or margins of existing products. In
addition, the introduction of new products, including the Company's Castle and
Summit handlers, and the concentration of our revenues in a limited number of
large customers increases the risk that our established products may become
obsolete resulting in greater excess and obsolete inventory exposure. This
increased exposure may result in increased inventory write-offs and reserve
requirements in excess of those we recorded in prior years that could have a
material adverse impact on our results of operations and financial condition.
The design, development, commercial introduction and manufacture of new
semiconductor test handling equipment is an inherently complex process that
involves a number of risks and uncertainties. These risks include potential
problems in meeting customer performance requirements, integration of the test
handler with other suppliers' equipment and the customers' manufacturing
processes, transitioning from product development to volume manufacturing and
the ability of the equipment to satisfy the semiconductor industry's constantly
evolving needs and achieve commercial acceptance at prices that produce
satisfactory profit margins. The design and development of new test handling
equipment is heavily influenced by changes in integrated circuit (IC) back-end
manufacturing processes and IC package design changes. We believe that the rate
of change in such processes and IC packages is accelerating. As a result of
these changes and other factors, assessing the market potential and commercial
viability of new test handling equipment is extremely difficult and subject to a
great deal of risk. In addition, not all IC manufacturers employ the same
manufacturing processes. Differences in such processes make it difficult to
design standard semiconductor test handler products that are capable of
achieving broad market acceptance. As a result we might not accurately assess
the semiconductor industry's future test handler requirements and design and
develop products that meet such requirements and achieve market acceptance.
Failure to accurately assess customer requirements and market trends for new
semiconductor test handler products may have a materially adverse impact on our
operations, financial condition and results of operations.
The transition from product development to the manufacture of new semiconductor
equipment is a difficult process and delays in product introductions and
problems in manufacturing such equipment are common.
10
<PAGE> 11
COHU, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
JUNE 30, 2000
BUSINESS AND MARKET RISKS (CONT.)
We have in the past and may in the future experience difficulties in
manufacturing and volume production of our new test handlers. In addition, our
after sale support and warranty costs have been significantly higher with new
test handlers than with our established products. Future technologies, processes
and product developments may render our current or future product offerings
obsolete and we might not be able to develop, introduce and successfully
manufacture new products or make enhancements to our existing products in a
timely manner to satisfy customer requirements or achieve market acceptance.
Furthermore, we might not realize acceptable profit margins on such products.
THE SEMICONDUCTOR EQUIPMENT INDUSTRY IN GENERAL, AND THE TEST HANDLER MARKET IN
PARTICULAR, IS HIGHLY COMPETITIVE.
The semiconductor test handler industry is intensely competitive and we face
substantial competition from numerous companies throughout the world. Future
competition may include companies that do not currently supply test handlers.
While we believe we are the largest U.S. based supplier of semiconductor test
handling equipment, we face substantial competition in the U.S. and throughout
the world. The Japanese and Korean markets for test handling equipment are large
and represent a significant percentage of the worldwide market. During the last
five years we have had limited sales to Japanese and Korean customers who have
historically purchased test handling equipment from Asian suppliers. Some of our
competitors have substantially greater financial, engineering, manufacturing and
customer support capabilities and offer more extensive product offerings than
Cohu. In addition, there are smaller, emerging semiconductor equipment companies
that provide or may provide innovative technology incorporated in products that
may compete favorably against those of Cohu. We expect our competitors to
continue to improve the design and performance of their current products and to
introduce new products with improved performance capabilities. Our failure to
introduce new products in a timely manner, the introduction by our competitors
of products with perceived or actual advantages or disputes over rights of Cohu
or our competitors to use certain intellectual property or technology could
result in a loss of our competitive position and reduced sales of or margins on
our existing products.
A LIMITED NUMBER OF CUSTOMERS ACCOUNT FOR A SUBSTANTIAL PERCENTAGE OF OUR NET
SALES.
We rely on a limited number of customers for a substantial percentage of our net
sales. In 1999, four customers of the semiconductor equipment segment accounted
for 46% (60% in 1998) of our net sales. The loss of or a significant reduction
in orders by these or other significant customers as a result of competitive
products, market conditions, outsourcing final IC test to third parties that are
not our customers or other factors, would adversely impact our financial
condition and results of operations. Furthermore, the concentration of our
revenues in a limited number of large customers may cause significant
fluctuations in our future annual and quarterly operating results.
OUR BACKLOG IS LIMITED AND MAY NOT ACCURATELY REFLECT FUTURE BUSINESS ACTIVITY.
Our order backlog has historically represented approximately three months of
revenue and as a result our visibility over future business activity is limited.
A significant portion of our semiconductor test handling
11
<PAGE> 12
COHU, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
JUNE 30, 2000
BUSINESS AND MARKET RISKS (CONT.)
equipment backlog at June 30, 2000 was for new products, including the Castle
and Summit test handlers. Due to the possibility of customer changes in delivery
schedules, cancellation of orders, potential delays in product shipments,
difficulties in obtaining inventory parts from suppliers and failure to satisfy
customer acceptance requirements, our backlog as of any point in time may not be
representative of actual sales in any future period. Furthermore, all orders are
subject to cancellation or rescheduling by the customer with limited penalty. A
reduction in backlog during any particular period could have a material adverse
effect on our business, financial condition and results of operations.
THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY PLACES ENORMOUS DEMANDS ON OUR
OPERATIONS AND INFRASTRUCTURE.
The semiconductor equipment industry is characterized by dramatic and sometimes
volatile changes in demand for its products. Changes in product demand result
from a number of factors including the semiconductor industry's ever changing
and unpredictable capacity requirements and changes in IC design and packaging.
Sudden changes in demand for semiconductor equipment have a significant impact
on our operations. In response to a severe industry downturn in 1998, we reduced
our total workforce by approximately 40%. During 1999, we increased our
workforce by more than 50% as business conditions in the semiconductor equipment
industry and our order backlog improved. Such radical changes in workforce
levels place enormous demands on our operations and infrastructure since newly
hired personnel rarely possess the expertise and level of experience of people
they replace. We have in the past and may in the future experience difficulties,
particularly in manufacturing, in training the large number of additions to our
workforce. In addition, competition for the employment services of certain
personnel, particularly those with technical skills, is intense. The increased
headcount and business levels, combined with the cyclical nature of the
semiconductor industry, may require that we invest substantial amounts in new
operational and financial systems, procedures and controls and in improved and
expanded facilities. We may not be able to successfully adjust our systems,
facilities and production capacity to meet customers' changing requirements. The
inability to meet such requirements will have an adverse impact on our business,
financial position and results of operations.
WE HAVE EXPERIENCED A SIGNIFICANT DECLINE IN GRAVITY-FEED IC TEST HANDLER SALES.
Sales of gravity-feed IC test handlers used in DRAM testing represented a
significant percentage of Cohu's total semiconductor equipment related revenue
during the period 1994 through 1998. Due to changes in IC package technology,
gravity-feed handlers are no longer suitable for handling many types of DRAMs.
As a result, we have seen a significant decline in sales of our gravity-feed
test handler products. If we are unable to successfully develop and market new
products or enhancements to existing products for DRAM applications our results
of operations will continue to be adversely impacted.
WE ARE EXPOSED TO THE RISKS OF OPERATING A GLOBAL BUSINESS.
Cohu has operations located in various parts of the world to support our sales
and services to the global semiconductor industry. Managing geographically
dispersed operations presents difficult challenges associated with, among other
things, organizational alignment and infrastructure, communications and
12
<PAGE> 13
COHU, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
JUNE 30, 2000
BUSINESS AND MARKET RISKS (CONT.)
information technology, inventory control, customer relationship management and
cultural diversities. In addition, maintaining these geographically dispersed
locations is expensive. We may not be able to manage our multiple operations in
a cost effective and efficient manner. If we are unsuccessful in managing such
operations effectively, our business and results of operations will be adversely
affected.
FAILURE OF CRITICAL SUPPLIERS TO DELIVER SUFFICIENT QUANTITIES OF PARTS IN A
TIMELY AND COST-EFFECTIVE MANNER COULD ADVERSELY IMPACT OUR OPERATIONS.
We use numerous vendors to supply parts, components and subassemblies for the
manufacture of our products. It is not always possible to maintain multiple
qualified suppliers for all of our parts, components and subassemblies; as a
result, certain key parts may be available only from a single supplier or a
limited number of suppliers. In addition, suppliers may cease manufacturing
certain components that are difficult to replace without significant
reengineering of our products. Cohu has experienced problems in obtaining
adequate and reliable quantities of various parts and components from certain
key suppliers. Our results of operations may be materially and adversely
impacted if we do not receive sufficient parts to meet our requirements in a
timely and cost effective manner.
WE ARE EXPOSED TO THE RISK THAT THIRD PARTIES MAY VIOLATE OUR PROPRIETARY RIGHTS
OR ACCUSE US OF INFRINGING UPON THEIR PROPRIETARY RIGHTS.
Cohu relies on patent, copyright, trademark and trade secret laws to establish
and maintain proprietary rights in our technology and products. Any of our
proprietary rights may be challenged, invalidated or circumvented, and these
rights may not provide significant competitive advantages. In addition, from
time to time, we receive notices from third parties regarding patent or
copyright claims. Any such claims, with or without merit, could be
time-consuming to defend, result in costly litigation, divert management's
attention and resources and cause Cohu to incur significant expenses. In the
event of a successful claim of infringement against Cohu and our failure or
inability to license the infringed technology or to substitute similar
non-infringing technology, our financial condition and results of operations
could be adversely affected.
A MAJORITY OF OUR REVENUES ARE GENERATED FROM EXPORTS TO FOREIGN COUNTRIES,
PRIMARILY IN ASIA, THAT ARE SUBJECT TO ECONOMIC INSTABILITY AND WE COMPETE
AGAINST A NUMBER OF ASIAN TEST HANDLING EQUIPMENT SUPPLIERS.
During 1999, 63% of our total net sales were exported to foreign countries,
including 72% of the sales in the semiconductor equipment segment. The majority
of our export sales are made to destinations in Asia. Instability in global
economic markets, particularly in Asia, may adversely impact the demand for
capital equipment, including equipment of the type manufactured and marketed by
Cohu. In addition, we face intense competition from a number of Asian suppliers
that have certain advantages over U.S. suppliers, including Cohu. These
advantages include, among other things, proximity to customers, favorable
tariffs and affiliation with significantly larger organizations. In addition,
changes in the amount or price of semiconductors produced in Asia could impact
the profitability or capital equipment spending programs of
13
<PAGE> 14
COHU, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
JUNE 30, 2000
BUSINESS AND MARKET RISKS (CONT.)
our foreign and domestic customers.
OUR NON SEMICONDUCTOR EQUIPMENT BUSINESSES HAVE EXPERIENCED LITTLE OR NO GROWTH
AND DECLINING PROFITABILITY OVER THE LAST FIVE YEARS.
We develop, manufacture and sell products used in closed circuit television,
metal detection and microwave radio applications. These products are sold in
highly competitive markets and many competitors are segments of large,
diversified companies with substantially greater financial, engineering,
marketing, manufacturing and customer support capabilities than Cohu. In
addition, there are smaller companies that provide or may provide innovative
technology incorporated in products that may compete favorably against those of
Cohu. We have seen a significant decline in the operating results of these
businesses over the last several years and the future prospects for certain of
these businesses remain uncertain. We may not be able to continue to compete
successfully in any of these businesses.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE RISK
At June 30, 2000 our investment portfolio includes fixed-income securities of
approximately $79.7 million. These securities are subject to interest rate risk
and will decline in value if interest rates increase. Due to the relatively
short duration of our investment portfolio, an immediate 10 percent increase in
interest rates would have no material impact on our financial condition or
results of operations.
FOREIGN CURRENCY EXCHANGE RISK.
We generally conduct business, including sales to foreign customers, in U.S.
dollars and as a result have limited foreign currency exchange rate risk.
Monetary assets and liabilities of Cohu's foreign operations are not
significant. The effect of an immediate 10 percent change in foreign exchange
rates would not have a material impact on our financial condition or results of
operations.
Due to all the above and other factors, historical results may not be indicative
of results of operations for any future period. In addition, certain matters
discussed above are forward-looking statements that are subject to the risks and
uncertainties noted herein and the other risks and uncertainties listed from
time to time in our filings with the Securities and Exchange Commission,
including but not limited to the 1999 Annual Report on Form 10-K, that could
cause actual results to differ materially from those projected or forecasted.
Cohu undertakes no obligation to update the information, including the
forward-looking statements, in this Form 10-Q.
14
<PAGE> 15
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on May 16, 2000. At the
meeting the following directors were elected:
<TABLE>
<CAPTION>
DIRECTOR NUMBER OF COMMON SHARES VOTED
FOR WITHHOLD AUTHORITY
---------- -------
<S> <C> <C>
Harry L. Casari 18,353,052 482,653
Frank W. Davis 18,326,658 509,047
Harold Harrigian 18,348,369 487,336
</TABLE>
The directors continuing in office until 2001 or 2002 are James W.
Barnes, James A. Donahue, Gene E. Leary and Charles A. Schwan.
In addition, the stockholders approved the following proposals:
<TABLE>
<CAPTION>
PROPOSAL NUMBER OF COMMON SHARES VOTED
-----------------------------------------------------------------------------
BROKER
FOR AGAINST ABSTAIN NON-VOTES
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
To approve an amendment to the Cohu,
Inc. 1998 Stock Option Plan 12,734,063 6,038,634 63,006 2
To approve an amendment to the Cohu,
Inc. Amended and Restated Certificate
of Incorporation to increase the number
of authorized shares of Common Stock
from 40,000,000 to 60,000,000 17,333,654 1,461,688 40,363 --
</TABLE>
ITEM 5. OTHER INFORMATION
Effective June 30, 2000, Charles A. Schwan retired as Chief Executive
Officer. Mr. Schwan will continue as Chairman of Cohu's Board of
Directors. In a related move, James A. Donahue, previously Cohu's
President & Chief Operating Officer, was promoted to Chief Executive
Officer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
3.1 - Certificate of Amendment of Amended and Restated
Certificate of Incorporation of Cohu, Inc.
incorporated herein by reference from the Cohu Form
S-8 filed June 30, 2000, Exhibit 4.1(a)
10.1 - Amendment No. 2, dated April 28, 2000, to Business
Loan Agreement between Cohu, Inc. and Bank of
America, N.A.
10.2 - Option to extend lease agreement dated June 25, 1999
by and between Cohu, Inc. and Thomas G. Plein and
Diane L. Plein
10.3 - Employment Agreement between Cohu, Inc. and Charles
A. Schwan
10.4 - Cohu, Inc. 1998 Stock Option Plan (as amended)
incorporated herein by reference from the Cohu Form
S-8 filed June 30, 2000, Exhibit 4.4
27.1 - Financial Data Schedule
(b) Reports on Form 8-K: The Company did not file any reports on
Form 8-K during the quarter ended June 30, 2000.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COHU, INC.
---------------------------------------
(Registrant)
Date: July 28, 2000 /s/ James A. Donahue
---------------------- ---------------------------------------
James A. Donahue
President & Chief Executive Officer
Date: July 28, 2000 /s/ John H. Allen
---------------------- ---------------------------------------
John H. Allen
Vice President, Finance & Chief
Financial Officer
16
