<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 SEPTEMBER 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 September 30, 2000, the Registrant had 20,252,709 shares of its $1.00 par
value common stock outstanding.
<PAGE> 2
COHU, INC.
INDEX
FORM 10-Q
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE NUMBER
-----------
<S> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets (Unaudited)
September 30, 2000 and December 31, 1999.....................................3
Condensed Consolidated Statements of Income (Unaudited)
Three and Nine Months Ended September 30, 2000 and 1999......................4
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 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 5. Other Information.............................................................15
Item 6. Exhibits and Reports on Form 8-K..............................................15
Signatures..............................................................................15
</TABLE>
2
<PAGE> 3
COHU, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 92,318 $ 55,954
Short-term investments 10,240 25,646
Accounts receivable, less allowance for doubtful
accounts of $1,915 in 2000 and $1,981 in 1999 52,874 52,262
Inventories:
Raw materials and purchased parts 22,431 21,257
Work in process 19,055 18,768
Finished goods 7,732 15,621
-------- --------
49,218 55,646
Deferred income taxes 11,231 11,231
Prepaid expenses 2,589 2,030
-------- --------
Total current assets 218,470 202,769
Property, plant and equipment, at cost:
Land and land improvements 2,501 2,501
Buildings and building improvements 12,704 12,507
Machinery and equipment 21,879 19,849
-------- --------
37,084 34,857
Less accumulated depreciation and amortization 20,052 17,841
-------- --------
Net property, plant and equipment 17,032 17,016
Goodwill, net of accumulated amortization
of $2,477 in 2000 and $2,260 in 1999 650 867
Other assets 86 81
-------- --------
$236,238 $220,733
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 13,004 $ 13,042
Income taxes payable 5,248 6,778
Customer advances 274 18,530
Other accrued liabilities 20,924 18,369
-------- --------
Total current liabilities 39,450 56,719
Accrued retiree medical benefits 965 984
Deferred income taxes 674 674
Stockholders' equity:
Preferred stock - -
Common stock 20,253 19,938
Paid in excess of par 6,201 3,539
Retained earnings 168,695 138,879
-------- --------
Total stockholders' equity 195,149 162,356
-------- --------
$236,238 $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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 77,216 $ 61,728 $236,406 $134,725
Cost and expenses:
Cost of sales 46,593 37,076 142,716 81,990
Research and development 9,123 5,798 24,191 15,145
Selling, general and administrative 8,062 8,439 23,326 19,680
-------- -------- -------- --------
63,778 51,313 190,233 116,815
-------- -------- -------- --------
Income from operations 13,438 10,415 46,173 17,910
Interest income 1,574 1,067 4,176 3,233
-------- -------- -------- --------
Income before income taxes 15,012 11,482 50,349 21,143
Provision for income taxes 5,200 4,000 17,500 7,400
-------- -------- -------- --------
Net income $ 9,812 $ 7,482 $ 32,849 $ 13,743
======== ======== ======== ========
Earnings per share:
Basic $ .48 $ .38 $ 1.63 $ .70
======== ======== ======== ========
Diluted $ .47 $ .36 $ 1.55 $ .67
======== ======== ======== ========
Weighted average shares used in
computing earnings per share:
Basic 20,246 19,818 20,169 19,719
======== ======== ======== ========
Diluted 20,910 20,699 21,154 20,387
======== ======== ======== ========
Cash dividends declared per share $ .05 $ .045 $ .15 $ .135
======== ======== ======== ========
</TABLE>
See accompanying notes.
4
<PAGE> 5
COHU, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 32,849 $ 13,743
Adjustments to reconcile net income to net cash provided
from operating activities:
Depreciation and amortization 2,474 2,416
Decrease in accrued retiree medical benefits (19) (3)
Changes in assets and liabilities:
Accounts receivable (612) (25,064)
Inventories 6,428 (25,386)
Prepaid expenses (559) (168)
Accounts payable (38) 11,473
Income taxes payable (1,530) 3,246
Customer advances (18,256) -
Other accrued liabilities 2,555 10,222
-------- --------
Net cash provided by (used for) operating activities 23,292 (9,521)
Cash flows from investing activities:
Purchases of short-term investments (5,977) (19,347)
Maturities of short-term investments 21,383 8,740
Purchases of property, plant, equipment and other assets (2,278) (1,644)
-------- --------
Net cash provided by (used for) investing activities 13,128 (12,251)
Cash flows from financing activities:
Issuance of stock, net 2,977 1,331
Cash dividends (3,033) (2,666)
-------- --------
Net cash used for financing activities (56) (1,335)
-------- --------
Net increase (decrease) in cash and cash equivalents 36,364 (23,107)
Cash and cash equivalents at beginning of period 55,954 74,446
-------- --------
Cash and cash equivalents at end of period $ 92,318 $ 51,339
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $ 19,030 $ 4,154
</TABLE>
See accompanying notes.
5
<PAGE> 6
COHU, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 nine
months ended September 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 months ended September 30, 2000 included $17.3
million of sales of Summit test handlers that were shipped prior to June
30, 2000. Net sales for the nine months ended September 30, 2000 included
$25.6 million of sales of Summit test handlers that were shipped in 1999.
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 ending
December 31, 2000.
In June 1998, the FASB issued Statement No. 133 Accounting for Derivative
Instruments and Hedging Activities. Cohu will adopt Statement No. 133 as
of the beginning of 2001 and such adoption is not expected to have a
material effect on the Company's financial condition or results of
operations.
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 nine months ended September 30, 2000,
options to purchase approximately 153,000 and 68,000 shares of common
stock at average prices of $28.65 and $31.17, respectively, were excluded
from the computation, and for the three and nine months ended September
30, 1999, options to purchase approximately 70,000 and 133,000 shares of
common stock at average prices of $21.75 and $18.70, 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2000 1999 2000 1999
------ ------ ------ ------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 20,246 19,818 20,169 19,719
Effect of dilutive stock options 664 881 985 668
------ ------ ------ ------
20,910 20,699 21,154 20,387
====== ====== ====== ======
</TABLE>
6
<PAGE> 7
COHU, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 Nine months ended
September 30, September 30,
------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Net sales:
Semiconductor equipment $ 67,263 $ 52,992 $ 206,814 $ 110,748
Television cameras 7,134 5,362 20,551 14,535
--------- --------- --------- ---------
Net sales for reportable segments 74,397 58,354 227,365 125,283
All other 2,819 3,374 9,041 9,442
--------- --------- --------- ---------
Total consolidated net sales $ 77,216 $ 61,728 $ 236,406 $ 134,725
========= ========= ========= =========
Operating profit (loss):
Semiconductor equipment $ 13,763 $ 10,628 $ 46,364 $ 19,315
Television cameras 638 299 1,743 810
--------- --------- --------- ---------
Operating profit for reportable segments 14,401 10,927 48,107 20,125
All other (169) 129 (66) (671)
--------- --------- --------- ---------
Total consolidated operating profit 14,232 11,056 48,041 19,454
Other unallocated amounts:
Corporate expenses (722) (569) (1,652) (1,328)
Interest income 1,574 1,067 4,176 3,233
Goodwill amortization (72) (72) (216) (216)
--------- --------- --------- ---------
Income before income taxes $ 15,012 $ 11,482 $ 50,349 $ 21,143
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
(in thousands)
<S> <C> <C>
Total assets by segment:
Semiconductor equipment $106,761 $115,671
Television cameras 11,049 11,758
-------- --------
Total assets for reportable segments 117,810 127,429
All other operating segments 6,178 5,419
Corporate 112,250 87,885
-------- --------
Total consolidated assets $236,238 $220,733
======== ========
</TABLE>
4 - SUBSEQUENT EVENT
On October 27, 2000 the Company agreed to acquire certain real property in
Poway, California consisting of a 338,000 square-foot building on
approximately 20 acres of land. The purchase price of $21.3 million was
funded from the Company's existing cash reserves. The Company plans on
selling its facilities in San Diego, California and moving its corporate
headquarters and the San Diego operations of its Delta Design subsidiary
to the Poway facility in 2001. Poway is a suburb of San Diego and the new
facility is approximately 10 miles from the Company's current San Diego
location.
7
<PAGE> 8
COHU, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SEPTEMBER 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
THIRD QUARTER 2000 COMPARED TO THIRD QUARTER 1999
Net sales increased 25% to $77.2 million in 2000 compared to net sales of $61.7
million in 1999. Sales of semiconductor test handling equipment in 2000
increased 27% from the 1999 period due to the inclusion of sales of the
Company's new Summit handlers and accounted for 87% of consolidated net sales in
2000 versus 86% in 1999. Net sales for the three months ended September 30, 2000
included $17.3 million of sales from the Company's new Summit test handlers that
were shipped prior to June 30, 2000. Sales of television cameras and other
equipment increased 33% while the combined sales of metal detection and
microwave equipment decreased 16%. Export sales accounted for 69% of net sales
in the third quarter of 2000 compared to 63% for the year ended December 31,
1999.
Gross margin as a percentage of net sales was 39.7% in 2000, compared to 39.9%
in 1999. The slight decline in gross margin was primarily the result of
increased provisions for excess inventory in the third quarter of 2000. Research
and development expense as a percentage of net sales was 11.8% in 2000, compared
to 9.4% in 1999, increasing in absolute dollars from $5.8 million to $9.1
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 10.4% in 2000 from 13.7% in 1999
primarily as a result of the increase in business volume and a reduction in bad
debt expense. Interest income increased to $1.6 million in 2000 from $1.1
million in 1999 as a result of an increase in average cash and investment
balances and interest rates. The provision for income taxes expressed as a
percentage of pre-tax income was 34.6% in the third quarter of 2000 and 34.8%
for the third quarter of 1999. As a result of the factors set forth above, net
income increased from $7.5 million in 1999 to $9.8 million in 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
Net sales increased 75% to $236.4 million in 2000 compared to net sales of
$134.7 million in 1999. Net sales during the 1999 period were negatively
impacted by the semiconductor industry downturn that began in mid 1998. Sales of
semiconductor test handling equipment in 2000 increased 87% from the 1999 period
and accounted for 87% of consolidated net sales in 2000 versus 82% in 1999. Net
sales for the nine months ended September 30, 2000 included $25.6 million of
sales from the Company's new Summit test handlers that were shipped in 1999.
Sales of television cameras and other equipment increased 41% while the combined
sales of metal detection and microwave equipment decreased 4%. Export sales
accounted for 63% of net sales for both the first nine months of 2000 and the
year ended December 31, 1999.
8
<PAGE> 9
COHU, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SEPTEMBER 30, 2000
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999 (CONT.)
Gross margin as a percentage of net sales was 39.6% in 2000 versus 39.1% in
1999. The improvement in gross margin was primarily the result of increased
business volume and changes in product mix, offset by increased provisions for
excess inventory. Research and development expense as a percentage of net sales
was 10.2% in 2000, compared to 11.2% in 1999, increasing in absolute dollars
from $15.1 million to $24.2 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
9.9% in 2000 from 14.6% in 1999 primarily as a result of the increase in
business volume. Interest income increased to $4.2 million in 2000 from $3.2
million 1999 as a result of increases in interest rates and average cash and
investment balances. The provision for income taxes expressed as a percentage of
pre-tax income was 34.8% in the first nine months of 2000 compared to 35.0% for
the first nine months of 1999. As a result of the factors set forth above, net
income for the nine month period increased to $32.8 million in 2000 from $13.7
million in 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash flows provided by operating activities in the first nine
months of 2000 totaled $23.3 million. The major components of cash flows
provided by operating activities were net income of $32.8 offset by the net
change in current assets and liabilities totaling $12.0 million. Net cash
provided by investing activities included $15.4 million from maturities of
short-term investments, less purchases, offset by purchases of property, plant
and equipment and other assets of $2.3 million. Cash provided by financing
activities included $3.0 million received from the issuance of stock under stock
option and employee stock purchase plans offset by $3.0 million for the payment
of dividends. The Company had $10 million available under its bank line of
credit and working capital of $179.0 million at September 30, 2000. On October
27, 2000 the Company agreed to acquire certain real property in Poway,
California consisting of a 338,000 square-foot building on approximately 20
acres of land. The purchase price of $21.3 million was funded from the Company's
existing cash reserves. The Company plans on selling its facilities in San
Diego, California and moving its corporate headquarters and the San Diego
operations of its Delta Design subsidiary to the Poway facility in 2001. 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.
9
<PAGE> 10
COHU, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SEPTEMBER 30, 2000
BUSINESS AND MARKET RISKS (CONT.)
NEW ACCOUNTING RULES MAY IMPACT THE TIMING OF REVENUE RECOGNITION AND OPERATING
RESULTS.
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 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 ending 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, the concentration of our revenues in a limited number of large
customers and the custom nature of our inventory parts increases the risk that
our established products and related inventory may become obsolete resulting in
greater excess and obsolete inventory exposure. This increased exposure resulted
in increased inventory reserve requirements during the third quarter of 2000.
Future inventory write-offs and increased reserve requirements 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 as a result
fail to design and develop products that meet
10
<PAGE> 11
COHU, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SEPTEMBER 30, 2000
BUSINESS AND MARKET RISKS (CONT.)
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. 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.
11
<PAGE> 12
COHU, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SEPTEMBER 30, 2000
BUSINESS AND MARKET RISKS (CONT.)
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 equipment backlog at
September 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, such as occurred in the third
quarter of 2000 where the Company's backlog declined to $51.8 million at
September 30, 2000 from $72.9 at December 31, 1999, 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 current
employees. 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 volatility
in 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 our 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 TEST HANDLER SALES TO DRAM
CUSTOMERS.
Sales of 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. IC handlers used in DRAM applications account for a significant
portion of the worldwide IC handler market. If we are unable to successfully
develop and market new products or enhancements to existing products for DRAM
applications our results of operations will be adversely impacted.
12
<PAGE> 13
COHU, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SEPTEMBER 30, 2000
BUSINESS AND MARKET RISKS (CONT.)
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
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 business, 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,
13
<PAGE> 14
COHU, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SEPTEMBER 30, 2000
BUSINESS AND MARKET RISKS (CONT.)
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 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 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 September 30, 2000 our investment portfolio includes fixed-income securities
of approximately $91 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 5. OTHER INFORMATION
On October 27, 2000 the Company agreed to acquire certain real
property in Poway, California consisting of a 338,000 square-foot
building on approximately 20 acres of land. The purchase price of
$21.3 million was funded from the Company's existing cash reserves.
The Company plans on selling its facilities in San Diego, California
and moving its corporate headquarters and the San Diego operations of
its Delta Design subsidiary to the Poway facility in 2001. Poway is a
suburb of San Diego and the new facility is approximately 10 miles
from the Company's current San Diego location.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
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 September 30, 2000.
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: October 30, 2000 /s/ James A. Donahue
------------------------------------
James A. Donahue
President & Chief Executive Officer
Date: October 30, 2000 /s/ John H. Allen
------------------------------------
John H. Allen
Vice President, Finance & Chief
Financial Officer
15
