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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (858) 541-5194
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $1.00 PAR VALUE
PREFERRED STOCK PURCHASE RIGHTS, $1.00 PAR VALUE
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of the
registrant was approximately $831,000,000 as of February 15, 2000. Shares of
common stock held by each officer and director and by each person or group who
owns 5% or more of the outstanding common stock have been excluded in that such
persons or groups may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
As of February 15, 2000, the Registrant had 20,103,019 shares of its $1.00
par value common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part I and Part II incorporate certain information by reference from the
Annual Report to Stockholders for the year ended December 31, 1999. Part III
incorporates certain information by reference from the Proxy Statement for the
2000 Annual Meeting of Stockholders.
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PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K contains certain forward-looking statements
including expectations of market demand, 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. The words
"anticipate", "expect", "believe" and similar expressions are intended to
identify such statements. Such statements are subject to certain risks and
uncertainties, including but not limited to those discussed herein and, in
particular, under the caption "Business and Market Risks" beginning on page 7
that could cause actual results to differ materially from those projected.
A predecessor of Cohu, Inc. ("Cohu") was incorporated under the laws of
California in 1947 as Kalbfell Lab., Inc. and commenced active operations in the
same year. Its name was changed to Kay Lab in 1954. In 1957 Cohu was
reincorporated under the laws of the State of Delaware as Cohu Electronics, Inc.
and in 1972 its name was changed to Cohu, Inc.
Cohu has two reportable segments as defined by FASB Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information. The
semiconductor equipment segment, operated under the Company's wholly owned
subsidiary Delta Design, Inc., designs, manufactures and sells semiconductor
test handling equipment to semiconductor manufacturers throughout the world. The
television camera segment (the "Electronics Division") designs, manufactures and
sells closed circuit television cameras and systems to original equipment
manufacturers, contractors and government agencies. Cohu's other operating
segments include Fisher Research Laboratory, Inc. ("FRL"), a metal detection
business, and Broadcast Microwave Services, Inc. ("BMS"), a microwave radio
equipment company.
Sales by segment, expressed as a percentage of total consolidated net sales, for
the last three years were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
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<S> <C> <C> <C>
Semiconductor equipment 84% 80% 81%
Television cameras 10 12 13
Other 6 8 6
------ ------ ------
100% 100% 100%
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</TABLE>
Additional financial information on industry segments for each of the last three
years is included on pages 2 (Selected Financial Data) and 10 and 11 (Note 7) in
the 1999 Annual Report to Stockholders and is incorporated herein by reference.
SEMICONDUCTOR EQUIPMENT
Effective January 1, 2000, Cohu united its semiconductor equipment operations,
Delta Design (San Diego, CA) and Daymarc (Littleton, MA) under the Delta Design
name. Delta Design ("Delta") is the largest U.S. based and the second largest
worldwide supplier of semiconductor test handling equipment. Delta designs,
manufactures, markets and services a broad range of test handlers, capable of
handling virtually any type of integrated circuit ("IC") package. Test handlers
are electromechanical systems, that are used to automate the IC final test
process. Testing determines the quality and performance of the IC prior to
shipment to customers. While testers are designed for specific IC types, such as
microprocessor, logic, DRAM or mixed signal, handlers are engineered to process
one or more of the various plastic or ceramic packages which protect the
micro-circuitry and provide electrical connection to the printed circuit board
or substrate.
Most test handlers use either gravity-feed or pick-and-place technologies to
process ICs. Delta's systems utilize both pick-and-place handling and
gravity-feed techniques. The IC package type normally determines the appropriate
handling approach. Because gravity-feed handling is simple, reliable and fast,
it is the preferred technique for packages with leads on only two sides,
including the dual-in-line ("DIP") and Small Outline ("SOIC"). ICs with leads on
all four sides, such as the Quad Flat Pack and certain ICs with leads on two
sides, such as the thin small outline package ("TSOP"), are predominately run in
pick-and-place systems. In gravity-
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feed handlers, ICs are unloaded from plastic tubes or metal magazines at the top
of the machine and flow through the system, from top to bottom, propelled along
precision trackwork by the force of gravity. At the output of the handler, the
ICs are sorted and reloaded into tubes or magazines for additional process steps
or for shipment. In pick-and-place systems, ICs are automatically removed from
waffle-like trays, placed in precision transport boats, or carriers, and cycled
through the system. ICs are sorted and reloaded into designated trays, based on
test results.
As a significant portion of IC test is performed at hot and/or cold
temperatures, many of Delta's test handlers are designed to provide a controlled
test environment over the range of -60 degrees C to +160 degrees C. Over the
years, Delta has developed considerable expertise in the design of reliable,
precision mechanisms which operate in these extreme temperatures and in
controlling test temperature during test. As semiconductor manufacturers
continue to reduce the size of ICs while providing higher performance and speed,
test handler manufacturers have faced the additional and substantial challenge
of dissipating large amounts of heat which are generated during the test
process. This heat is capable of damaging or destroying the IC and can also
result in downgrading, when devices fail to operate at full specification during
test. Device yields are extremely important and directly affect the
profitability of the semiconductor manufacturer. In addition to temperature
capability, other key factors in the design of test handlers are equipment
speed, flexibility, parallel test capability and size.
Handlers are complex, electromechanical systems, which are used in high
production environments and many are in service twenty-four hours per day, seven
days a week. Customers continuously strive to increase the utilization of their
production test equipment and expect high reliability from test handlers. The
availability of trained technical support personnel is an important competitive
factor in the marketplace. Delta deploys service engineers worldwide, often
within customer production facilities, who work with customer personnel on
continuous equipment improvement programs.
Equipment flexibility is important to semiconductor manufacturers and Delta's
pick-and-place test handlers may be configured for virtually any semiconductor
package type, through the use of tooling known as package dedication kits. Delta
has a large installed base of pick-and-place test handlers, with over 2,000
systems installed at more than 130 locations worldwide.
The Delta Nitro Flex(TM), available in three models with various levels of
automation, provides hot/cold test capability and broad versatility in IC
package and media (tray or tube) handling. The "Flex" is considered an industry
workhorse and more Flexes have been sold than any other logic pick-and-place
test handler. Through Delta's continuous product improvement process, the
handler has been successfully adapted to meet the evolving needs of IC
manufacturers.
The Model 2040, or RFS(TM), is a fast-index time pick-and-place handler,
designed for high production applications. The handler's large environmental
storage capacity enables uninterrupted operation in short test applications and
parallel testing of up to four devices. The RFS(TM) utilizes a patented
contactor indexing mechanism to achieve an index time of approximately 500
milliseconds.
The Model 1688 is an ambient pick-and-place handler, which uses the same fast
contactor indexing mechanism as the RFS(TM). The handler's small footprint of
only eleven square feet, combined with high speed and dependable operation, make
the 1688 a highly cost effective solution for test applications where
environmental capability is not required.
Delta's Castle handlers incorporate an innovative vertical tray handling system
which provides high input/output automation in an extremely small footprint. The
system is available in both memory and logic configurations. Castle Mx32
provides parallel testing of up to thirty-two devices. Castle Lx offers the same
benchmark small footprint as the Mx32 and a fast index time to maximize test
system utilization.
Delta's newest handler, Summit, is designed to meet the requirements of
manufacturers of advanced microprocessors and other high speed, high power
devices. Summit utilizes chilled fluid to control test temperatures and
dissipate the considerable heat generated by these devices during test.
Delta manufactures three lines of gravity-feed test handlers: the 717 Series,
3000 Series and 4000 Series.
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The 717 Series test handlers accommodate SOIC packages. The small dimensions and
high-speed applications of the SOIC package require a handler with minimal
transition distances, high performance contacting and automation features to
reduce the need for operator intervention. The 717 ambient and tri-temperature
handlers provide index times as low as 350 and 500 milliseconds, respectively.
The systems can be adapted to handle many different package types.
The 3000 Series Handlers are designed for a wide range of gravity feed devices,
including DIPs and SOICs. These handlers may be configured to test 1-32 devices
in parallel and accommodate a wide range of package types at throughput rates up
to 4,200 units per hour ("UPH"). The 3000 Series handlers provide
tri-temperature operation and input/output automation for increased
productivity.
The 4000 Series handlers combine high speed SOIC handling with multi-site
capability. The 4100 is a fully automated, high-speed handler designed for
high-volume, ambient test applications. The system operates at speeds up to
18,000 UPH in dual or quad site configurations.
The Enterprise handler employs a handling technique known as test-in-tray.
Unlike pick-and-place handlers, which remove ICs from trays and process them in
boats, or carriers, Enterprise transports the devices through the handler in the
storage tray, greatly reducing the amount of device handling. Test-in-tray is
particularly suited for parallel test applications. Test-in-tray requires the IC
manufacturer to make certain changes to conventional IC handling and test
processes. While the benefits of test-in-tray may be significant and we sold a
significant number of these handlers in 1998, market acceptance of this product
has been very limited and the future use of this technology is uncertain.
TELEVISION CAMERAS
The Electronics Division of Cohu has been a designer, manufacturer and seller of
closed circuit television ("CCTV") cameras and systems for over 40 years. The
customer base for these products is broadly distributed between machine vision,
scientific imaging and security/surveillance markets. The current product line
represents a comprehensive array of indoor and outdoor CCTV cameras as well as
camera control equipment. To support its camera lines, the Electronics Division
offers a wide selection of accessories including monitors, lenses and camera
test equipment.
OTHER BUSINESSES
FRL designs, manufactures and sells metal detectors and related underground
detection devices for consumer and industrial markets. All products are sold
under the Fisher M-Scope label. Industrial products include pipe and cable
locators, water leak detectors, property marker locators and instruments for
locating reinforcing bars in concrete.
BMS designs, manufactures and sells microwave radio equipment, antenna systems
and associated equipment. These products are used in the transmission of
telemetry, data, video and audio signals. Customers include government test
ranges, law enforcement agencies, unmanned air vehicle programs and television
broadcasters.
CUSTOMERS
SEMICONDUCTOR EQUIPMENT
Our customer base includes companies that manufacture semiconductor devices
primarily for internal use and companies that manufacture devices for sale to
others. Repeat sales to existing customers represent a significant portion of
our sales in this business segment. We believe that our installed customer base
represents a significant competitive advantage.
We rely on a limited number of customers for a substantial percentage of our net
sales. In 1999 Motorola and Texas Instruments accounted for 24% and 12%,
respectively, of our net sales. In 1998 Motorola, Micron Technology and Intel
accounted for 22%, 17% and 12%, respectively, of our net sales. In 1997
Motorola, Intel and Micron Technology represented 17%, 14% and 11%,
respectively, of our net sales. The loss of or a
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significant reduction in orders by these or other significant customers,
including reductions due to market, economic or competitive conditions or the
outsourcing of final IC test to third parties that are not our customers would
adversely affect our financial condition and results of operations.
TELEVISION CAMERAS AND OTHER BUSINESSES
Our customer base in the television cameras industry segment is diverse and
includes government agencies, original equipment manufacturers, contractors and
value-added resellers throughout the world. No single customer of this segment
accounted for 10% or more of our consolidated net sales in 1999, 1998 or 1997.
Our customer base in the other operating businesses (FRL and BMS) is also
diverse and includes government agencies, original equipment manufacturers,
contractors, distributors and consumers throughout the world. No single customer
of either FRL or BMS accounted for 10% or more of our consolidated net sales in
1999, 1998 or 1997.
Contracts, including subcontract work, with U. S. Government agencies accounted
for net sales of $3.4 million, $4.7 million, and $5.3 million in 1999, 1998 and
1997, respectively. Such contracts are frequently subject to termination
provisions at the convenience of the Government.
MARKETING
We market our products worldwide through a combination of direct sales force and
independent sales representatives. In a geographic area where we believe there
is sufficient sales potential, we maintain sales offices staffed with our own
sales personnel. We maintain U.S. sales offices for the semiconductor equipment
business in Santa Clara, California and Austin, Texas. In 1993, a foreign
subsidiary was formed in Singapore to handle the sales and service requirements
of semiconductor manufacturers located in Southeast Asia. In 1995 a branch of
the Singapore sales and service subsidiary was opened in Taipei, Taiwan. The
sales in Europe are derived primarily through sales representatives.
COMPETITION
The semiconductor equipment industry is intensely competitive and is
characterized by rapid technological change and demanding worldwide service
requirements. Significant competitive factors include product performance, price
and reliability, customer support and installed base of products. 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. To remain competitive we believe we will require significant financial
resources to offer a broad range of products, maintain customer support and
service centers worldwide and to invest in research and development of new
products. Failure to introduce new products in a timely manner or the
introduction by competitors of products with perceived or actual advantages
could result in a loss of competitive position and reduced sales of existing
products. No assurance can be given that we will continue to compete
successfully in the U.S. or throughout the world.
Our products in the television cameras segment and other businesses are sold in
highly competitive markets throughout the world, where competition is on the
basis of price, product integration with customer requirements, service and
product quality and reliability. Many of our competitors are divisions or
segments of large, diversified companies with substantially greater financial,
engineering, marketing, manufacturing and customer support capabilities than
Cohu. No assurance can be given that we will continue to compete successfully in
these businesses.
BACKLOG
The dollar amount of our order backlog of as of December 31, 1999 was $72.9
million as compared to $28.1 million at December 31, 1998. Of these amounts,
$62.3 million ($20.8 million in 1998) was in semiconductor test handling
equipment, $8.8 million ($5.3 million in 1998) was in television cameras and
$1.8 million ($2.0
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million in 1998) from FRL and BMS. Virtually all backlog is expected to be
shipped within the next twelve months. Due to the possibility of customer
changes in delivery schedules, cancellation of orders and potential delays in
product shipments, our backlog as of any point in time may not be representative
of actual sales in any future period. All orders are subject to cancellation or
rescheduling by the customer with limited penalty. There is no significant
seasonal aspect to the business of Cohu.
MANUFACTURING AND RAW MATERIALS
Our manufacturing activities take place in San Diego, California (BMS, Delta
Design and the Electronics Division), Littleton, Massachusetts (Delta Design)
and Los Banos, California (FRL). Many of the components and subassemblies are
standard products, although certain items are made to our specifications.
Certain components are obtained or are available from a limited number of
suppliers. We seek to reduce our dependence on sole and limited source
suppliers, however in some cases the complete or partial loss of certain of
these sources could have a negative affect on our operations while we attempted
to locate and qualify replacement suppliers.
PATENTS AND TRADEMARKS
Cohu protects its proprietary technology through various intellectual property
laws. However, we believe that, due to the rapid pace of technological change in
the semiconductor equipment industry, the successful manufacture and sales of
our products generally depend upon our experience, technological know-how,
manufacturing and marketing skills and speed of response to sales opportunities,
rather than on the legal protection afforded to any one or more items of
intellectual property, such as patents, trademarks, copyrights and trade
secrets. In the absence of patent protection we may be vulnerable to competitors
who attempt to copy or imitate our products or processes. Although we believe
our intellectual property has value (and includes trademark rights and trade
names other than Cohu), we have in the past and will in the future take actions
we deem appropriate to protect such property from misappropriation, there can be
no assurance such actions will provide meaningful protection from competition.
Protecting our intellectual property rights or defending against claims brought
by other holders of such rights, either directly against Cohu or against
customers we have agreed to indemnify, would likely be expensive and time
consuming and could have a material adverse affect on our operations.
RESEARCH AND DEVELOPMENT
Certain of the markets served by Cohu, particularly the semiconductor equipment
industry, are characterized by rapid technological change. Research and
development activities are carried on in the various subsidiaries and division
of Cohu and are directed toward development of new products and equipment, as
well as enhancements to existing products and equipment. Total research and
development expenses were $20.5 million in 1999, $20.4 million in 1998 and $17.5
million in 1997. Total dollar expenditures increased primarily due to increased
spending for R & D on semiconductor test handling equipment. There was no
significant customer-sponsored product development during these years.
We work closely with our key customers to make improvements on our existing
products and in the development of new products. 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 of
existing products.
ENVIRONMENTAL LAWS
Compliance with Federal, State and local laws which have been enacted or adopted
regulating the discharge of materials into the environment or otherwise relating
to the protection of the environment has not had a material affect and is not
expected to have a material affect upon the capital expenditures, results of
operations or competitive position of Cohu.
EMPLOYEES
At December 31, 1999 we had approximately 1,300 employees. None of these
employees are covered by collective bargaining agreements. We believe that a
great part of our future success will depend on our
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continued ability to attract and retain qualified employees. Competition for the
services of certain personnel, particularly those with technical skills, is
intense. We consider our relations with our employees to be good.
BUSINESS AND MARKET RISKS
INDUSTRY CYCLES
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 affect 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 financial position and results of operations.
RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCTS
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 increases the risk that existing
products will become obsolete resulting in greater excess and obsolete inventory
exposure. This increased exposure may result in increased inventory reserve
requirements, similar to or in excess of those recorded in 1998, that could have
a material adverse impact on our financial condition and results of operations.
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 products 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. No assurance can be made that we will
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. During 1998 and 1999 we
experienced difficulties in manufacturing and volume production of our new test
handlers. In addition, after sale support and warranty costs are typically
greater with new test handlers than with established products. There can be no
assurance that future technologies, processes and product developments will not
render our current or future product offerings obsolete or that we will 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, there is no assurance
that we will realize acceptable profit margins on such products.
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HIGHLY COMPETITIVE INDUSTRY
The semiconductor equipment industry is intensely competitive and we face
substantial competition from numerous companies throughout the world. 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. Failure to
introduce new products in a timely manner, the introduction by 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
existing products.
CUSTOMER CONCENTRATION
As is common in the semiconductor equipment industry, 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.
BACKLOG
Our order backlog rose significantly during 1999 primarily as a result of the
improved business conditions in the semiconductor equipment industry and strong
demand for our new pick-and-place test handler products. A significant portion
of our semiconductor test handling equipment backlog at December 31, 1999 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 affect on our business,
financial condition and results of operations.
DEMANDS ON 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 and other semiconductor equipment manufacturers. 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. No assurance can be given
that we will continue to successfully adjust our production capacity to meet
customers' changing requirements. The inability to meet such requirements will
have an adverse impact on our financial position and results of operations.
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DECLINE IN GRAVITY-FEED IC TEST HANDLER SALES
Sales of gravity-feed IC test handlers used in DRAM testing have represented a
significant percentage of Cohu's total semiconductor equipment related revenue
during the last five years. 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. We introduced our Enterprise handler in 1998 that employs
a handling technique, known as test-in-tray, that is particularly suited for
parallel test applications like DRAMs. While the benefits of test-in-tray may be
significant and we sold a significant number of these handlers in 1998, market
acceptance of this product has been very limited and the future use of this
technology is uncertain. 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.
DEPENDENCE ON KEY SUPPLIERS
We use numerous vendors to supply parts, components and subassemblies for the
manufacture of our products. While we make reasonable efforts to ensure that
parts are available from multiple suppliers, this is not always possible; as a
result, certain key parts may be obtained 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. There can be no assurance that our results of operations will not
be materially and adversely impacted if we do not receive sufficient parts to
meet our requirements in a timely and cost effective manner.
INTELLECTUAL PROPERTY
Cohu relies on patent, copyright, trademark and trade secret laws to establish
and maintain proprietary rights in our technology and products. However, there
can be no assurance that any of our proprietary rights will not be challenged,
invalidated or circumvented, or that any such rights will 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.
FOREIGN SALES
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, 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.
NON SEMICONDUCTOR EQUIPMENT BUSINESSES
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. No assurance can be given that we will
continue to compete successfully in any of these businesses.
9
<PAGE> 10
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 1999 our investment portfolio includes fixed-income securities
of approximately $66.6 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.
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.
YEAR 2000 RISKS
In prior periods, we discussed the nature and progress of our plans to become
Year 2000 ready. In late 1999, we completed the remediation and testing of our
mission critical systems. Through January 2000, we have experienced no
significant disruptions in mission critical information technology and
non-information technology systems and believe those systems successfully
responded to the Year 2000 date change. Cohu expensed approximately $500,000 in
connection with remediating our systems. We are not aware of any material
problems resulting from Year 2000 issues, either with our products, our internal
systems or the products and services of third parties. We will continue to
monitor our mission critical computer applications and those of our suppliers
and vendors throughout the year 2000.
If significant yet to be identified Year 2000 issues arise, we may experience
significant problems that could have a material adverse affect on our financial
condition and results of operations. Litigation regarding Year 2000 issues is
possible. It is uncertain whether, or to what extent, we may be affected by such
litigation.
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-K.
ITEM 2. PROPERTIES
Certain information concerning Cohu's principal properties at December 31, 1999
identified by business segment is set forth below:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQ. FOOTAGE OWNERSHIP
- -------- ----------- ---------
<S> <C> <C>
Littleton, MA. (1) 102,000 Owned
San Diego, CA. (1) 52,000 Owned
San Diego, CA. (1) 52,000 Owned
San Diego, CA (1) 52,000 Owned
San Diego, CA. (1) 15,000 Leased
San Diego, CA. (2) 57,000 Leased
San Diego, CA. (3) 15,000 Leased
Los Banos, CA. (4) 23,000 Owned
</TABLE>
(1) Semiconductor equipment
(2) Television cameras
(3) BMS
(4) FRL
10
<PAGE> 11
In addition to the locations listed above Cohu leases other properties for sales
and service offices in various locations including Austin, Texas, Santa Clara,
California, Singapore and Taipei, Taiwan. We believe our facilities are suitable
for their respective uses and are adequate for our present needs.
In May 1996 Cohu acquired approximately 12 acres of land in Poway, California.
The land is being held for future expansion needs although no such expansion is
currently contemplated.
ITEM 3. LEGAL PROCEEDINGS
Cohu is not presently a party to any material legal proceedings, other than
ordinary routine litigation incidental to the business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES OF THE REGISTRANT
The following sets forth the names and ages of and the positions and offices
held by all executive officers and significant employees of Cohu as of February
15, 2000. Executive Officers serve at the discretion of the Board of Directors,
until their successors are appointed.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
EXECUTIVE OFFICERS:
Charles A. Schwan 60 Chairman & Chief Executive Officer, Director
James A. Donahue 51 President & Chief Operating Officer, Director
John H. Allen 48 Vice President, Finance & Chief Financial
Officer, Secretary
SIGNIFICANT EMPLOYEES:
James M. Brown 62 President, Cohu Electronics Division
Graham Bunney 44 President, BMS
Roger A. Cimino 52 President, FRL
</TABLE>
Mr. Schwan has been employed by Cohu since 1971 and became President & Chief
Executive Officer on March 1, 1996. Mr. Schwan had been Treasurer since 1972,
Vice President, Finance since 1983 and Executive Vice President & Chief
Operating Officer since September 1995. In July 1999 Mr. Schwan was appointed
Chairman of the Board. Mr. Schwan has been a member of the Board of Directors
since 1990 and served as Secretary from 1988 until September 1995.
Mr. Donahue has been employed by Delta Design since 1978 and has been President
of Delta Design since May 1983. In May 1998 Mr. Donahue was promoted to
President of the Cohu Semiconductor Equipment Group. In October 1999 Mr. Donahue
was named to the position of President & Chief Operating Officer of Cohu, Inc.
and was appointed to Cohu's Board of Directors.
Mr. Allen has been employed by Cohu since June 1995. He was Director of Finance
until September 1995, became Vice President, Finance and Secretary in September
1995 and was appointed Chief Financial Officer in October 1995. Prior to joining
Cohu, Mr. Allen held various positions with Ernst & Young LLP from 1976 until
June 1995 and had been a partner with that firm since 1987.
Mr. Brown has been employed by the Cohu Electronics Division since 1980 and has
been President of that division since 1983.
Mr. Bunney has been employed by BMS since 1985. Mr. Bunney was a project manager
until June 1994, manufacturing manager from June 1994 through January 1996 and
was promoted to President of BMS in January 1996.
11
<PAGE> 12
Mr. Cimino has been employed by FRL since December 1998 and has been President
of FRL since February 1999. Prior to joining FRL Mr. Cimino held various
positions with Cummins Engine Company, Inc. from 1989 until 1998 including Vice
President and General Manager of the Cadec Systems subsidiary from 1993 to 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Information regarding the market prices of Cohu's stock, markets for that stock,
the number of stockholders and dividend information is contained on the inside
back cover of the 1999 Annual Report to Stockholders under " Cohu Stock
Information". Such information is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
"Selected Financial Data" on page 2 of the 1999 Annual Report to Stockholders is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 13 through 16 of the 1999 Annual Report to Stockholders is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information regarding Cohu's market risk is set forth under "Quantitative and
Qualitative Disclosures About Market Risk" on page 16 of the 1999 Annual Report
to Stockholders and on page 10 of this report and is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Cohu, including the report thereon of
Ernst & Young LLP, on pages 6 through 12 and the unaudited Quarterly Financial
Data contained on the inside back cover of the 1999 Annual Report to
Stockholders is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors of Cohu is set forth under "Election Of
Directors" in Cohu's Proxy Statement for the 2000 Annual Meeting of Stockholders
("the Proxy Statement"), which information is incorporated herein by reference.
Information concerning the executive officers of Cohu is included in Part I of
this report. Information in the Proxy Statement under "Section 16(a) Beneficial
Ownership Reporting Compliance" is also incorporated herein by reference.
12
<PAGE> 13
ITEM 11. EXECUTIVE COMPENSATION
Information regarding Cohu's compensation of its executive officers and
directors and certain other information is set forth in the Proxy Statement
under "Board of Directors and Committees", "Compensation of Executive Officers
and Other Information" and "Compensation Committee Interlocks and Insider
Participation" and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is set forth in the Proxy Statement under "Security Ownership Of
Certain Beneficial Owners and Management" and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is set
forth in the Proxy Statement under "Certain Relationships and Related
Transactions" and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The financial statements listed in the accompanying index
to financial statements and financial statement schedules
are incorporated herein by reference as part of this
Annual Report on Form 10-K.
2. Financial Statement Schedules
The financial statement schedule listed in the
accompanying index to financial statements and financial
statement schedules is filed as part of this Annual Report
on Form 10-K.
3. Exhibits
The exhibits listed in the accompanying index to exhibits
are filed or incorporated herein by reference as part of
this Annual Report on Form 10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 1999.
13
<PAGE> 14
COHU, INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
(Item 14(a))
<TABLE>
<CAPTION>
Pages incorporated
from Annual Report
(a) 1. Financial Statements to Stockholders
- --------------------------- ---------------
<S> <C>
Consolidated balance sheets at
December 31, 1999 and 1998 6
Consolidated statements of income for
each of the three years in the
period ended December 31, 1999 7
Consolidated statements of cash flows
for each of the three years in
the period ended December 31, 1999 8
Consolidated statements of stockholders'
equity for each of the three years
in the period ended December 31, 1999 8
Notes to consolidated financial
statements 9 - 12
(a) 2. Financial Statement Schedule 10-K Page
Schedule II - Valuation and Qualifying Accounts 18
</TABLE>
All other schedules are omitted because they are not required, are not
applicable, or because the information required is included in the consolidated
financial statements and the notes thereto.
The consolidated financial statements listed in the above index which are
included in the Annual Report to Stockholders of Cohu, Inc. for the year ended
December 31, 1999 are incorporated herein by reference. With the exception of
the pages listed in the above index and the Items referred to in Items 1, 5, 6,
7, 7A and 8, the 1999 Annual Report to Stockholders is not to be deemed filed as
part of this report.
14
<PAGE> 15
COHU, INC.
INDEX TO EXHIBITS
(Item 14(a) 3)
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of Cohu, Inc.,
incorporated herein by reference from the Cohu Form 10-Q for the
quarter ended June 30, 1999, Exhibit 3.1(a)
3.2 Amended and Restated Bylaws, of Cohu, Inc. incorporated herein by
reference from the Cohu Form 8-K, filed December 12, 1996, Exhibit
3.2
4.1 Rights Agreement dated November 15, 1996, between Cohu, Inc. and
ChaseMellon Shareholder Services, L.L.C, as Rights Agent,
incorporated herein by reference from the Cohu Form 8-K, filed
December 12, 1996, Exhibit 4.1
10.1 Description of Cohu, Inc. Executive Incentive Bonus Plan,
incorporated herein by reference from the Cohu 1990 Form 10-K,
Exhibit 10.3*
10.2 Termination Agreement between Cohu, Inc. and Charles A. Schwan,
incorporated herein by reference from the Cohu 1990 Form 10-K,
Exhibit 10.5*
10.3 The Cohu, Inc. 1992 Stock Option Plan, incorporated herein by
reference from the Cohu Proxy Statement for its 1992 Annual Meeting
of Stockholders*
10.4 The Cohu, Inc. 1994 Stock Option Plan, incorporated herein by
reference from the Cohu Proxy Statement for its 1995 Annual Meeting
of Stockholders*
10.5 The Cohu, Inc. 1996 Stock Option Plan, incorporated herein by
reference from the Cohu Proxy Statement for its 1996 Annual Meeting
of Stockholders*
10.6 Business Loan Agreement between Bank of America National Trust and
Savings Association and Cohu, Inc. dated June 15, 1998, incorporated
herein by reference from the Cohu Form 10-Q for the quarter ended
June 30, 1998, Exhibit 10.1
10.6.1 Amendment No. 1 to Business Loan Agreement dated May 19, 1999 between
Cohu, Inc. and Bank of America National Trust and Savings
Association, incorporated herein by reference from the Cohu Form 10-Q
for the quarter ended June 30, 1999, Exhibit 10.1
10.7 Termination Agreement between Cohu, Inc. and John H. Allen,
incorporated herein by reference from the Cohu 1996 Form 10-K,
Exhibit 10.11*
10.8 The Cohu, Inc. 1996 Outside Directors Stock Option Plan, incorporated
herein by reference from the Cohu 1996 Form 10-K, Exhibit 10.12*
10.9 The Cohu, Inc. 1997 Employee Stock Purchase Plan, incorporated herein
by reference from the Cohu 1996 Form 10-K, Exhibit 10.13*
10.10 The Cohu, Inc. Key Executive Long Term Incentive Plan incorporated
herein by reference from the Cohu 1997 Form 10-K, Exhibit 10.13*
10.11 The Cohu, Inc. 1998 Stock Option Plan incorporated herein by
reference from the Cohu 1997 Form 10-K, Exhibit 10.14*
10.12 Termination Agreement between Cohu, Inc. and James A. Donahue
incorporated herein by reference from the Cohu Form 10-Q for the
quarter ended June 30, 1998, Exhibit 10.2*
</TABLE>
15
<PAGE> 16
COHU, INC.
INDEX TO EXHIBITS
(Item 14(a) 3)
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
10.13 Lease Assignment Agreement dated June 25, 1999 by and between Cohu,
Inc., Cubic Defense Systems, Inc. and Thomas G. Plein and Diane L.
Plein incorporated herein by reference from the Cohu Form 10-Q for
the quarter ended June 30, 1999, Exhibit 10.2.
13 1999 Annual Report to Stockholders (Provided for information only
except as specifically incorporated by reference)
21 Cohu, Inc. has the following wholly owned subsidiaries:
Delta Design, Inc., a Delaware corporation
Fisher Research Laboratory, Inc., a Delaware corporation
Broadcast Microwave Services, Inc., a Delaware corporation
Delta Design (Littleton), Inc., a Delaware corporation
Cohu Foreign Sales Ltd., a Barbados corporation
23 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule
</TABLE>
* Management contract or compensatory plan or arrangement
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 3, 2000 By /s/ Charles A. Schwan
------------------------------------
Charles A. Schwan
Chairman of the Board & Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Charles A. Schwan Chairman of the Board & Chief Executive Officer, March 3, 2000
- -------------------------------- Director (Principal Executive Officer)
Charles A. Schwan
/s/ James A. Donahue President & Chief Operating Officer, March 3, 2000
- ------------------------------- Director
James A. Donahue
/s/ John H. Allen Vice President, Finance & Chief March 3, 2000
- ------------------------------- Financial Officer, Secretary (Principal
John H. Allen Financial & Accounting Officer)
/s/ James W. Barnes Director March 3, 2000
- -------------------------------
James W. Barnes
/s/ Harry L. Casari Director March 3, 2000
- --------------------------------
Harry L. Casari
/s/ Frank W. Davis Director March 3, 2000
- --------------------------------
Frank W. Davis
/s/ Harold Harrigian Director March 3, 2000
- --------------------------------
Harold Harrigian
/s/ Gene E. Leary Director March 3, 2000
- --------------------------------
Gene E. Leary
</TABLE>
17
<PAGE> 18
COHU, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance at Additions Balance at
Beginning Charged Deductions End of
Description of Year to Expense (Write-offs) Year
----------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Year ended December 31, 1997 $ 1,827 $ 148 $ 187 $ 1,788
Year ended December 31, 1998 $ 1,788 $ 147 $ 597 $ 1,338
Year ended December 31, 1999 $ 1,338 $ 823 $ 180 $ 1,981
Reserve for excess and
obsolete inventory:
Year ended December 31, 1997 $ 15,690 $ 1,471 $ 2,067 $ 15,094
Year ended December 31, 1998 $ 15,094 $ 10,583 $ 7,255 $ 18,422
Year ended December 31, 1999 $ 18,422 $ 1,113 $ 3,676 $ 15,859
</TABLE>
18
<PAGE> 1
EXHIBIT 13
- --------------------------------------------------------------------------------
COMPANY PROFILE
Cohu, Inc. ("Cohu") is the largest U.S. based and one of the world's largest
suppliers of test handling equipment used by semiconductor manufacturers in
final test operations. Cohu also manufactures closed circuit television, metal
detection and microwave radio equipment.
FINANCIAL HIGHLIGHTS
(in thousands, except per share data)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
OPERATIONS:
ORDERS $253,571 $144,122
NET SALES 208,780 171,511
NET INCOME 25,926 11,646
EARNINGS PER SHARE*:
BASIC 1.31 .60
DILUTED 1.26 .58
BALANCE SHEET:
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS 81,600 86,703
WORKING CAPITAL 146,050 120,143
TOTAL ASSETS 220,733 162,231
STOCKHOLDERS' EQUITY 162,356 137,463
</TABLE>
* Adjusted for two-for-one stock split effective September 1999
(GRAPH)
<TABLE>
<CAPTION>
YEAR ORDERS SALES NET INCOME STOCKHOLDERS' EQUITY
(in millions) (in millions) (in millions) (in millions)
<S> <C> <C> <C> <C>
1995 189.4 178.8 23.6 72.0
1996 147.9 159.4 24.2 96.3
1997 209.3 187.8 29.2 126.2
1998 144.1 171.5 11.6 137.5
1999 253.6 208.8 25.9 162.4
</TABLE>
FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements, including expectations
of market demand, hallenges 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. The words "anticipate", "expect", "believe"
and similar expressions are intended to identify such statements that are
subject to certain risks and uncertainties, including but not limited to those
discussed under the caption "Business and Market Risks" beginning on page 14 of
this Annual Report, that could cause actual results to differ materially from
those projected. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof.
<PAGE> 2
LETTER TO STOCKHOLDERS:
- --------------------------------------------------------------------------------
Sales for 1999 were a record $208.8 million compared to $171.5 million
for 1998. Net income for 1999 was $25.9 million or $1.26 per share, compared to
$11.6 million or $.58 per share in 1998.
Orders for 1999 were a record $253.6 million compared to $144.1 million
in 1998. Backlog at the end of 1999 was $72.9 million compared to year end 1998
backlog of $28.1 million.
Sales of test handling equipment increased 28% from 1998 levels and
accounted for 84% of 1999 total sales. Sales of television cameras and related
equipment accounted for 10% of sales and metal detection and microwave equipment
contributed 6% of sales.
The record sales and orders in 1999 were due to the strength of the
semiconductor equipment industry and strong demand for Cohu's test handler
products, including our new Castle and Summit handlers.
International sales for 1999 were $132.1 million compared to 1998
international sales of $74.9 million and accounted for 63% of consolidated sales
compared to 44% for the prior year. The largest segment of international sales
is supported by our subsidiary located in Singapore with additional service
personnel located throughout Southeast Asia.
While semiconductor and semiconductor equipment year to year forecasts
are subject to a great deal of inaccuracy, semiconductor content in a wide
variety of products continues to grow resulting in increased demand over the
long-term for semiconductors and related capital equipment. Cohu's objective is
to provide advanced, cost-effective solutions and superior technical support and
services to our customers.
Dividends of $3.6 million or $.18 per share were paid in 1999, the 21st
consecutive year of cash dividend payments and the 13th year in a row in which
dividends were increased.
(PHOTO)
We wish to thank our shareholders and customers for their continued
support and express our appreciation to our employees and suppliers, without
whose extraordinary efforts we could not have achieved our record results.
Sincerely,
Charles A. Schwan
Chairman & Chief Executive Officer
January 27, 2000
- --------------------------------------------------------------------------------
This Annual Report is dedicated to the memory of William Ivans, Cohu's
former Chairman, who was killed in a glider plane accident in July. Bill had
been associated with Cohu for over 40 years and was President and CEO from 1965
to 1983.
- --------------------------------------------------------------------------------
1
<PAGE> 3
SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
(in thousands, except per share data)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31 1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales:
Semiconductor equipment $ 175,140 $ 136,323 $ 152,668 $ 126,236 $ 146,093
Television cameras 21,330 21,001 23,553 22,298 21,570
--------- --------- --------- --------- ---------
Net sales for reportable segments 196,470 157,324 176,221 148,534 167,663
All other 12,310 14,187 11,535 10,819 11,096
--------- --------- --------- --------- ---------
Total consolidated net sales $ 208,780 $ 171,511 $ 187,756 $ 159,353 $ 178,759
========= ========= ========= ========= =========
Operating profit (loss):
Semiconductor equipment $ 35,715 $ 14,213 $ 41,167 $ 35,298 $ 37,704
Television cameras 1,891 1,570 3,056 2,866 2,280
--------- --------- --------- --------- ---------
Operating profit for reportable segments 37,606 15,783 44,223 38,164 39,984
All other (792) (1,094) 159 145 (14)
--------- --------- --------- --------- ---------
Total consolidated operating profit 36,814 14,689 44,382 38,309 39,970
Other unallocated amounts:
Corporate expenses (1,871) (955) (1,337) (1,273) (1,051)
Interest income 4,271 3,469 2,999 1,960 704
Interest expense -- -- -- -- (12)
Goodwill amortization and write-down (288) (1,157) (157) (157) (689)
--------- --------- --------- --------- ---------
Income before income taxes 38,926 16,046 45,887 38,839 38,922
Provision for income taxes 13,000 4,400 16,700 14,600 15,300
--------- --------- --------- --------- ---------
Net income $ 25,926 $ 11,646 $ 29,187 $ 24,239 $ 23,622
========= ========= ========= ========= =========
Earnings per share*:
Basic $ 1.31 $ .60 $ 1.55 $ 1.31 $ 1.32
Diluted 1.26 .58 1.47 1.25 1.23
Cash dividends per share, paid quarterly* $ .18 $ .16 $ .12 $ .10 $ .08
Depreciation and amortization deducted in
arriving at operating profit:
Semiconductor equipment $ 2,303 $ 1,953 $ 1,321 $ 833 $ 620
Television cameras 468 424 420 410 387
All other 235 265 250 253 188
--------- --------- --------- --------- ---------
3,006 2,642 1,991 1,496 1,195
Goodwill amortization 288 157 157 157 689
--------- --------- --------- --------- ---------
$ 3,294 $ 2,799 $ 2,148 $ 1,653 $ 1,884
========= ========= ========= ========= =========
Capital expenditures:
Semiconductor equipment $ 1,828 $ 1,356 $ 3,513 $ 3,586 $ 4,932
Television cameras 452 162 341 294 192
All other 129 208 275 1,256 163
--------- --------- --------- --------- ---------
$ 2,409 $ 1,726 $ 4,129 $ 5,136 $ 5,287
========= ========= ========= ========= =========
AT DECEMBER 31
Total assets by segment:
Semiconductor equipment $ 115,671 $ 50,754 $ 79,978 $ 39,981 $ 48,708
Television cameras 11,758 8,728 10,696 10,573 10,886
--------- --------- --------- --------- ---------
Total assets for reportable segments 127,429 59,482 90,674 50,554 59,594
All other operating segments 5,419 7,537 8,307 7,449 8,240
Corporate 87,885 95,212 63,911 59,923 36,100
--------- --------- --------- --------- ---------
Total consolidated assets $ 220,733 $ 162,231 $ 162,892 $ 117,926 $ 103,934
========= ========= ========= ========= =========
Working capital $ 146,050 $ 120,143 $ 106,201 $ 78,003 $ 57,228
Stockholders' equity 162,356 137,463 126,211 96,272 72,029
</TABLE>
* Adjusted for two-for-one stock split effective September 1999
2
<PAGE> 4
SEMICONDUCTOR TEST HANDLING EQUIPMENT
- --------------------------------------------------------------------------------
Cohu's Delta Design ("Delta") subsidiary is the largest U.S. based and
second largest worldwide supplier of test handling equipment to the
semiconductor industry. Test handlers are electromechanical systems that
automate the testing of integrated circuits (ICs). Testing is an essential part
of the IC manufacturing process. Test handlers, connected to automatic test
equipment (ATE), provide an efficient method for verifying the quality and
characterizing the performance of ICs before shipment to customers.
Delta's handlers are engineered to provide a precisely-controlled test
environment, over the range -60 degrees C to +160 degrees C, as most ICs are
tested at hot or cold temperatures to verify their performance under extreme
operating conditions. Test handlers mainly use gravity-feed or pick-and-place
technologies. In gravity-feed handlers, ICs are unloaded from plastic tubes or
metal magazines at the top of the machine and flow through the system, from top
to bottom, propelled along precision trackwork by the force of gravity. After
being tested, the devices are sorted and reloaded into tubes or magazines for
additional process steps or for shipment. Gravity-feed handling is simple,
reliable and fast and is the preferred technique for devices with leads on only
two sides, such as the dual-in-line (DIP) and small outline (SOIC). ICs with
leads on all four sides, such as the Quad Flat Pack (QFP) and certain ICs with
fragile leads, such as the thin small outline package (TSOP), cannot be
processed in gravity systems. Instead, pick-and-place systems, which handle
devices individually, thereby providing protection for the leads, are used. In
pick-and-place systems, ICs are automatically removed from waffle-like, plastic
trays, placed in precision transport boats, or carriers and processed through
the system. After testing, the devices are sorted and reloaded into designated
trays, based on test results.
Delta offers semiconductor manufacturers a broad line of both
pick-and-place and gravity test handling equipment. The Nitro Flex (Flex) is an
industry workhorse. More Flexes have been sold than any other logic
pick-and-place test handler. Through Delta's continuous product improvement
process, the Flex has been successfully adapted to meet the evolving needs of IC
manufacturers. The Model 2040 RFS(TM) is a fast-index time pick-and-place
handler, designed for high production applications. The RFS(TM) utilizes a
patented contactor indexing mechanism to deliver among the highest throughputs
of any logic pick-and-place handler available today. The Delta 1688 is an
ambient pick-and-place system that uses the same fast contactor indexing
mechanism as the RFS(TM). During 1999, the 1688 gained widespread use among
manufacturers of ICs for the communications and RF markets. Delta's Castle
handlers incorporate a unique tray handling system that provides high
input/output automation in an extremely small footprint, an important factor for
IC manufacturers, who must make efficient use of their manufacturing floorspace.
The system is available in configurations tailored for handling logic or memory
devices. The Castle Mx32, which can test up to 32 devices in parallel, including
chip scale packages (CSPs), is being used in the emerging market for high-speed
memory ICs. Castle Lx, for logic applications, is Delta's next generation logic
handling platform. Delta's newest handler, Summit, is the market leader in
handling advanced microprocessors and other high speed, high power devices.
Summit utilizes an innovative system to control test temperatures and dissipate
the considerable heat generated by these devices during test.
Delta manufactures three lines of gravity test handlers: the 717 Series,
3000 Series and 4000 Series. The 717 handles SOIC devices used by communications
and wireless IC manufacturers and is an industry leader in the growing market
for handling high frequency ICs. The 3000 Series handlers are engineered for
larger ICs and for parallel test applications. Like the Flex handler, the 3287
has been successfully adapted as test requirements and IC packaging have
changed. The 4000 Series, capable of processing up to 18,000 units per hour,
combines the high speed SOIC handling of the 717 Series with the multi-site
capability of the 3000 Series.
In 1998, the semiconductor and semiconductor equipment industries
experienced one of the worst slumps in history. However, business rebounded
sharply in 1999, driven by broad-based growth in semiconductor markets, strong
PC demand and advances in wireless communications. At Delta, with our strong
customer base, including many of the world's largest and fastest growing IC
manufacturers, this meant a rapid and steep increase in orders for our products.
For the first time in Delta's history, orders in 1999 exceeded $200 million. We
3
<PAGE> 5
- --------------------------------------------------------------------------------
increased manufacturing capacity significantly and from Q1 to Q4, the dollar
value and unit volume of shipments more than tripled. To support this growth,
our workforce more than doubled during 1999. Geographically, handler related
sales were distributed 68% in Asia, 29% in North America and 3% to the rest of
the world. The percentage of shipments to Southeast Asia has grown steadily, as
IC manufacturers continue to focus their test expansion in that region. Our
extensive, Southeast Asia service, sales and applications engineering
organization deployed at more than fifteen locations throughout the region,
enables us to provide our customers with unmatched support and is a powerful
competitive advantage.
The semiconductor industry is in a period of accelerated change as
industry experts predict that wireless communications and portable electronics
will surpass PCs to become the primary drivers of semiconductor growth. These
applications require electronics manufacturers to continually shrink the size of
their products. As a result, the semiconductor industry is introducing smaller
IC packages at a faster rate than anytime in its history. ICs, such as CSPs are
highly efficient, as they are only slightly larger than the circuitry packaged
inside. Market forecasters predict that IC unit volumes will grow at a rate of
twenty percent or more for the next several years. Delta is being challenged to
produce systems that can accommodate a wider variety of these new packages, at
higher performance levels, at lower cost and with shorter lead times than ever
before.
(PHOTO)
SUMMIT TEST HANDLER
While these are formidable challenges, Delta has never been in a
stronger position, with solid financials, leading products and a global
infrastructure to meet the requirements of our multinational customers. New
products are in development for our two major markets today - pick-and-place and
gravity. Additionally, we are investing in a new handling approach,
non-singulated test, which we believe will develop into a measurable market
segment within the next several years.
On January 1, 2000, we united our operations, Delta Design (San Diego,
CA) and Daymarc (Littleton, MA) under the Delta Design name. With this
alignment, we can more effectively leverage the significant capabilities and
resources of our organization to meet the needs and expectations of our
customers. For example, as a result of the steep ramp in our handler business,
we successfully transferred production of our Model 1688 pick-and-place handler
from our San Diego plant to our Littleton facility. This move helped maximize
our production output and enabled us to keep pace with unprecedented demand for
our products.
ELECTRONICS DIVISION (TELEVISION CAMERAS)
Cohu's Electronics Division has been a leading American designer and
manufacturer of closed circuit television ("CCTV") cameras and systems for more
than forty years. Our customer base for these products is broadly distributed
between machine vision, scientific imaging and security/surveillance markets.
Cohu's product line represents a comprehensive array of indoor and
outdoor CCTV cameras and camera control equipment. We are most readily
differentiated from the competition by our willingness and ability to create
quality products that solve a customer's unique requirements. Cohu's long
established role in advanced CCTV technology is based on a continuing commitment
to quality, product performance and customer support.
Drawing on their flexibility and reliability, Cohu cameras continue to
find new applications. CCTV
4
<PAGE> 6
- --------------------------------------------------------------------------------
solutions have been created for such diverse requirements as aircraft in-flight
safety and entertainment, explosives detection, border control and underground
pipe inspection. Cohu completed and delivered a major CCTV system consisting of
cameras and video accessories for monitoring petroleum processing in the Middle
East. This project illustrates our ability to design complex video systems that
integrate products and resources from multiple vendors.
Cohu manufactures video cameras for a number of Original Equipment
Manufacturer ("OEM") customers that integrate our components into their
products. The OEM sales team helps customers meet automated assembly challenges.
The rebound of the semiconductor industry is reflected in increased orders for
machine vision components. In addition to standard CCTV cameras, Cohu is capable
of designing and manufacturing custom or special-purpose cameras for process
automation, including pick-and-place, assembly and test and measurement. The
product line includes cameras that are integrated into systems for fluorescing
gel analysis, medical research and x-ray.
Other distribution channels for television products include direct sales
to end users, contractors and value-added resellers. In 1999 Cohu won a number
of contracts for traffic surveillance cameras, including systems in Wisconsin,
Texas and Georgia. Cohu cameras will be used to monitor highways leading to the
2002 Winter Olympic venues near Salt Lake City, Utah. In addition to sales of
standard cameras to state and federal highway departments, Cohu is an OEM
provider to a key manufacturer of wide area detection products for traffic
control.
We continue to pursue opportunities in the international market through
distributors, contractors and OEM accounts. Sales efforts will be focused on
process monitoring, security, large projects and advanced imaging applications.
Cohu has been involved with a number of large-scale construction
projects where specialized design expertise is provided to major engineering
firms. Installations include process monitoring for waste handling, water works
and hazardous material and facility security.
We are registered compliant to ISO-9001 standards, the most rigid of
five levels of standards in the ISO 9000 series. ISO registration is a
competitive advantage in market areas where ISO 9000 is heavily supported, such
as Europe and the Middle East.
In 2000, key markets for Cohu CCTV products are expected to include
applications for transportation, machine vision, microscopy and surveillance.
OTHER BUSINESSES
Fisher Research Laboratory ("FRL") designs, manufactures and sells metal
detectors and other underground detection devices for industrial and consumer
markets.
Industrial products include pipe and cable locators, water leak
detectors, property marker locators and instruments for locating reinforcing
bars in concrete. FRL's XLT-20 water leak detector can detect the sound of
escaping water and pinpoint small leaks in buried pipes to a depth of six feet.
Consumer metal detectors include models for prospectors, relic hunters,
sport divers and weekend treasure hunters. As with the industrial line, FRL's
consumer products have a well earned reputation for quality, performance and
durability. As a result, several of the models designed for hobby use are also
used by law enforcement agencies, archaeologists and professional treasure
salvors.
Broadcast Microwave Services, Inc. ("BMS") manufactures high quality
microwave radio transmitters, receivers, antenna systems and related support
items. These products are used in the transmission of telemetry, data, video and
audio signals. BMS customers include government test ranges, law enforcement
agencies, unmanned air vehicle programs and television broadcasters.
5
<PAGE> 7
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(in thousands, except par value)
<TABLE>
<CAPTION>
December 31,
ASSETS 1999 1998
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 55,954 $ 74,446
Short-term investments 25,646 12,257
Accounts receivable less allowance for doubtful accounts
of $1,981 in 1999 and $1,338 in 1998 52,262 18,800
Inventories:
Raw materials and purchased parts 21,257 12,977
Work in process 18,768 5,927
Finished goods 15,621 6,973
-------- --------
55,646 25,877
Deferred income taxes 11,231 10,477
Prepaid expenses 2,030 1,541
-------- --------
Total current assets 202,769 143,398
Property, plant and equipment, at cost:
Land and land improvements 2,501 2,501
Buildings and building improvements 12,507 12,102
Machinery and equipment 19,849 17,801
-------- --------
34,857 32,404
Less accumulated depreciation and amortization 17,841 14,791
-------- --------
Net property, plant and equipment 17,016 17,613
Goodwill, net of accumulated amortization of $2,260 in 1999 and $1,972 in 1998 867 1,155
Other assets 81 65
-------- --------
$220,733 $162,231
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 13,042 $ 3,016
Income taxes payable 6,778 3,070
Accrued compensation and benefits 7,954 5,369
Accrued warranty 5,738 4,060
Customer advances 18,530 3,978
Other accrued liabilities 4,677 3,762
-------- --------
Total current liabilities 56,719 23,255
Accrued retiree medical benefits 984 993
Deferred income taxes 674 520
Commitments
Stockholders' equity:
Preferred stock, $1 par value; 1,000 shares authorized, none issued -- --
Common stock, $1 par value; 40,000 shares authorized, 19,938 shares
issued and outstanding in 1999 and 9,779 shares in 1998 19,938 9,779
Paid in excess of par 3,539 11,169
Retained earnings 138,879 116,515
-------- --------
Total stockholders' equity 162,356 137,463
-------- --------
$220,733 $162,231
======== ========
</TABLE>
See accompanying notes.
6
<PAGE> 8
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales $208,780 $171,511 $187,756
Cost and expenses:
Cost of sales 126,712 116,427 105,991
Research and development 20,534 20,400 17,513
Selling, general and administrative 26,879 21,107 21,364
Goodwill write-down -- 1,000 --
-------- -------- --------
174,125 158,934 144,868
-------- -------- --------
Income from operations 34,655 12,577 42,888
Interest income 4,271 3,469 2,999
-------- -------- --------
Income before income taxes 38,926 16,046 45,887
Provision for income taxes 13,000 4,400 16,700
-------- -------- --------
Net income $ 25,926 $ 11,646 $ 29,187
======== ======== ========
Earnings per share:
Basic $ 1.31 $ .60 $ 1.55
======== ======== ========
Diluted $ 1.26 $ .58 $ 1.47
======== ======== ========
Weighted average shares used in
computing earnings per share:
Basic 19,763 19,452 18,874
======== ======== ========
Diluted 20,502 19,940 19,900
======== ======== ========
</TABLE>
See accompanying notes.
7
<PAGE> 9
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands) Years ended December 31,
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 25,926 $ 11,646 $ 29,187
Adjustments to reconcile net income to net cash provided
from operating activities:
Depreciation and amortization 3,294 2,799 2,148
Loss on asset write-downs and disposals -- 420 --
Goodwill write-down -- 1,000 --
Purchase consideration paid with stock -- -- 551
Deferred income taxes (600) (636) 204
Increase (decrease) in accrued retiree medical benefits (9) (11) 88
Changes in assets and liabilities:
Accounts receivable (33,462) 13,134 (12,764)
Inventories (29,769) 19,022 (29,317)
Prepaid expenses (489) (63) (312)
Accounts payable 10,026 (13,150) 11,702
Income taxes payable 4,120 49 2,669
Customer advances 14,552 3,978 --
Accrued compensation, warranty and other liabilities 5,178 (2,551) 1,176
-------- -------- --------
Net cash provided from (used for) operating activities (1,233) 35,637 5,332
Cash flows from investing activities:
Purchases of short-term investments (22,429) (21,280) (23,779)
Maturities of short-term investments 9,040 22,837 38,291
Purchases of property, plant and equipment (2,409) (1,726) (4,129)
Other assets (16) 36 (40)
-------- -------- --------
Net cash provided from (used for) investing activities (15,814) (133) 10,343
Cash flows from financing activities:
Issuance of stock, net 2,117 2,322 1,671
Dividends paid (3,562) (3,116) (2,270)
-------- -------- --------
Net cash used for financing activities (1,445) (794) (599)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (18,492) 34,710 15,076
Cash and cash equivalents at beginning of year 74,446 39,736 24,660
-------- -------- --------
Cash and cash equivalents at end of year $ 55,954 $ 74,446 $ 39,736
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes, net of refunds $ 9,480 $ 5,191 $ 13,827
</TABLE>
8 upper half
<PAGE> 10
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
(in thousands, except par value and per share amounts)
<TABLE>
<CAPTION>
Years ended December 31, 1999, 1998 and 1997
-----------------------------------------------------------
Common stock Paid in Retained
$1 par value excess of par earnings Total
------------ ------------- ---------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $ 9,341 $ 5,863 $ 81,068 $ 96,272
Cash dividends - $.12 per share -- -- (2,270) (2,270)
Daymarc acquisition 18 533 -- 551
Repurchase and retirement of stock (3) (67) -- (70)
Exercise of stock options 185 1,350 -- 1,535
Shares issued under employee stock purchase plan 8 198 -- 206
Tax benefit from stock options -- 800 -- 800
Net income -- -- 29,187 29,187
--------- --------- --------- ---------
Balance at December 31, 1997 9,549 8,677 107,985 126,211
Cash dividends - $.16 per share -- -- (3,116) (3,116)
Repurchase and retirement of stock (1) (27) -- (28)
Exercise of stock options 195 1,452 -- 1,647
Shares issued under employee stock purchase plan 36 667 -- 703
Tax benefit from stock options -- 400 -- 400
Net income -- -- 11,646 11,646
--------- --------- --------- ---------
Balance at December 31, 1998 9,779 11,169 116,515 137,463
Two-for-one stock split 9,779 (9,779) -- --
Cash dividends - $.18 per share -- -- (3,562) (3,562)
Repurchase and retirement of stock (23) (349) -- (372)
Exercise of stock options 328 1,503 -- 1,831
Shares issued under employee stock purchase plan 75 583 -- 658
Tax benefit from stock options -- 412 -- 412
Net income -- -- 25,926 25,926
--------- --------- --------- ---------
Balance at December 31, 1999 $ 19,938 $ 3,539 $ 138,879 $ 162,356
========= ========= ========= =========
</TABLE>
See accompanying notes.
8 bottom half
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRESENTATION - The consolidated financial statements include the accounts of
Cohu, Inc. and its wholly-owned subsidiaries (the "Company"). All significant
intercompany accounts and balances have been eliminated in consolidation.
Certain amounts in the December 31, 1998 consolidated balance sheet have been
reclassified to conform to the 1999 presentation.
INVESTMENTS - Highly liquid investments with insigni-ficant interest rate
risk and original maturities of three months or less are classified as cash and
cash equivalents. Investments with maturities greater than three months are
classified as short-term investments. All of the Company's investments are
classified as available-for-sale and are reported at fair value with unrealized
gains and losses, net of tax, recorded in stockholders' equity. Gross unrealized
gains and losses were not significant at December 31, 1999 and 1998. The Company
manages its cash equivalents and short-term investments as a single portfolio of
highly marketable securities, all of which are intended to be available for the
Company's current operations.
CONCENTRATION OF CREDIT RISK - Financial instruments that potentially subject
the Company to significant credit risk consist principally of cash equivalents,
short-term investments and trade accounts receivable. The Company invests in a
variety of financial instruments and by policy limits the amount of credit
exposure with any one issuer. The Company's customers include semiconductor
manufacturers and others located throughout the world. The Company performs
ongoing credit evaluations of its customers and generally requires no
collateral.
INVENTORIES - Inventories are stated at the lower of cost, determined on a
current average or first-in, first-out basis, or market.
LONG-LIVED ASSETS - Depreciation and amortization of property, plant and
equipment is calculated principally on the straight-line method based on
estimated useful lives of five to forty years for buildings and building
improvements and three to ten years for machinery and equipment. Through
December 31, 1998, goodwill was amortized on the straight-line method over
twenty years. Commencing January 1999, goodwill is being amortized over four
years. The carrying amount and useful life of long-lived assets are reviewed if
facts and circumstances suggest there has been impairment. If this review
indicates that long-lived assets will not be recoverable, as determined based on
estimated undiscounted cash flows, the carrying amount and useful life are
reduced.
STOCK SPLIT - On August 19, 1999, the Company's Board of Directors authorized
a two-for-one stock split in the form of a 100% stock dividend that was paid
September 24, 1999, to stockholders of record on September 3, 1999. All per
share and certain share amounts included herein have been restated to reflect
the split.
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. In 1999 and 1998
options to purchase 100,000 and 476,000 shares, respectively, of common stock at
average exercise prices of $18.71 and $16.81, respectively, were excluded from
the diluted computation. The following table reconciles the denominators used in
computing basic and diluted earnings per share:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Weighted average common
shares outstanding 19,763 19,452 18,874
Effect of dilutive
stock options 739 488 1,026
------ ------ ------
20,502 19,940 19,900
====== ====== ======
</TABLE>
REVENUE RECOGNITION - Revenue is generally recognized upon shipment or, in
instances where products are required to meet certain customer requirements,
upon successful completion of such requirements. During 1999 the Company shipped
a significant number of its new Summit test handlers. At December 31, 1999 the
Summit handlers had not met certain customer acceptance requirements. In
accordance with Staff Accounting Bulletin No. 101, revenue on these shipments
will be recognized in 2000 upon customer acceptance. Customer payments received
on these shipments totaling approximately $18.5 million at December 31, 1999
have been recorded as customer advances in the consolidated balance sheet.
Product warranty costs are accrued in the period sales are recognized.
STOCK BASED COMPENSATION - The Company applies APB Opinion No. 25 and related
interpretations in accounting for its stock option and employee stock purchase
plans.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions about the future that affect the amounts reported in the
consolidated financial statements. These estimates include assessing the
collectibility of accounts receivable, usage and recoverability of inventory and
long-lived assets and incurrence of warranty costs. Actual results could differ
from those estimates.
2. 1998 FOURTH QUARTER ADJUSTMENTS
In the fourth quarter of 1998 the Company recorded net pretax charges
for inventory and related reserves of approximately $3,500,000 and a goodwill
write-down of $1,000,000 primarily as a result of changes in customer demand for
certain semiconductor handler products. In addition, the credit for income taxes
in the fourth quarter of 1998 was favorably affected by approximately $1,000,000
as a result of the settlement of tax examinations for earlier years.
9
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
3. INVESTMENTS
Investments at December 31, 1999 and 1998, were as follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998
-------- --------
<S> <C> <C>
Corporate debt securities $ 66,552 $ 79,554
Less amounts classified
as cash equivalents (40,906) (67,297)
-------- --------
Short-term investments $ 25,646 $ 12,257
======== ========
</TABLE>
At December 31, 1999 and 1998 the estimated fair value of the Company's
investments approximated amortized cost. Except for $3,260,000 of investments at
December 31, 1999 that mature in 2001, all investments mature in 2000.
4. LINE OF CREDIT
The Company maintains a $10,000,000 unsecured bank line-of-credit
facility bearing interest at the bank's prime reference rate. The facility
requires compliance with certain financial covenants and expires in May 2000. No
borrowings were outstanding at December 31, 1999 or 1998.
5. INCOME TAXES
Significant components of the provision for income taxes are as
follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal $ 11,734 $ 4,329 $ 14,131
State 1,866 707 2,365
-------- -------- --------
Total current 13,600 5,036 16,496
Deferred:
Federal (674) (478) 189
State 74 (158) 15
-------- -------- --------
Total deferred (600) (636) 204
-------- -------- --------
$ 13,000 $ 4,400 $ 16,700
======== ======== ========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting and tax purposes. Significant components of the Company's deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
(in thousands)
December 31,
Deferred tax assets: 1999 1998
-------- --------
<S> <C> <C>
Reserves and accrued
warranty costs $ 9,850 $ 9,531
Accrued state income taxes 482 203
Accrued employee benefits 1,278 1,164
Other 520 573
-------- --------
Total deferred tax assets 12,130 11,471
-------- --------
Deferred tax liabilities:
Tax over book depreciation 1,573 1,514
-------- --------
Net deferred tax assets $ 10,557 $ 9,957
======== ========
</TABLE>
The reconciliation of income tax computed at the U.S. federal statutory
tax rate to the provision for income taxes is as follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Tax at U.S. statutory rate $ 13,624 $ 5,616 $ 16,060
State income taxes, net of
federal tax benefit 1,261 357 1,547
FSC benefit (1,487) (641) (1,477)
Nondeductible goodwill
and performance-based
consideration expense 101 405 248
Settlement of prior year
tax examinations -- (1,049) --
Other - net (499) (288) 322
-------- -------- --------
$ 13,000 $ 4,400 $ 16,700
======== ======== ========
</TABLE>
6. STOCKHOLDER RIGHTS PLAN
In November 1996 the Company adopted a Stockholder Rights Plan and
declared a dividend distribution of one-half Right ("Right") for each share of
Common Stock, payable to holders of record on December 3, 1996. Under certain
conditions, each Right may be exercised to purchase 1/200 of a share of Series A
Preferred Stock at a purchase price of $45, subject to adjustment. The Rights
are not presently exercisable and will only become exercisable following the
occurrence of certain specified events. If these specified events occur, each
Right will be adjusted to entitle its holder to receive upon exercise Common
Stock having a value equal to two times the exercise price of the Right or each
Right will be adjusted to entitle its holder to receive common stock of the
acquiring company having a value equal to two times the exercise price of the
Right, depending on the circumstances. The Rights expire on November 14, 2006
and may be redeemed by the Company for $0.001 per Right. The Rights do not have
voting or dividend rights and, until they become exercisable, have no dilutive
effect on the earnings per share of the Company.
7. SEGMENT AND RELATED INFORMATION
The Company has two reportable segments as defined by FASB Statement No.
131, Disclosures about Segments of an Enterprise and Related Information. The
Company's reportable segments are business units that offer different products
and are managed separately because each business requires different technology
and marketing strategies. The semiconductor equipment segment designs,
manufactures and sells semiconductor test handling equipment to semiconductor
manufacturers throughout the world and accounted for 84% of net sales in 1999.
The television camera segment designs, manufactures and sells closed circuit
television cameras and systems to original equipment manufacturers, contractors
and government agencies and accounted for 10% of net sales in 1999. The
Company's other operating segments include a metal detection business and a
microwave radio equipment company. Neither of these other segments met any of
the quantitative thresholds for determining reportable segments. Information
regarding industry segments for 1999, 1998, and
10
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
1997 contained in the Selected Financial Data on page 2 is an integral part of
these financial statements.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. The Company
allocates resources and evaluates the performance of segments based on pretax
profit or loss from operations, excluding unusual gains or losses. Intersegment
sales were not significant for any period.
Customers from the semiconductor equipment segment comprising 10% or
greater of the Company's net sales are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Customer A 24% 22% 17%
Customer B 12% 9% 8%
Customer C 7% 12% 14%
Customer D 3% 17% 11%
</TABLE>
Assets located in foreign countries were not significant. Net sales to
customers, attributed to countries based on product shipment destination, were
as follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
United States $ 76,715 $ 96,645 $ 90,820
Singapore 25,616 8,101 11,810
China 21,351 9,035 11,790
Taiwan 19,849 6,301 15,157
Malaysia 18,822 19,222 23,210
Philippines 13,363 19,141 14,736
Other foreign countries 33,064 13,066 20,233
-------- -------- --------
Total $208,780 $171,511 $187,756
======== ======== ========
</TABLE>
8. EMPLOYEE BENEFIT PLANS
RETIREMENT PLANS - The Company has voluntary defined contribution
retirement 401(k) plans whereby it will match contributions up to 4% of employee
compensation. Company contributions to the plans were $1,199,000 in 1999,
$1,179,000 in 1998, and $991,000 in 1997. Certain of the Company's foreign
employees participate in a defined benefit pension plan. The related expense and
benefit obligation of this plan were not significant.
RETIREE MEDICAL BENEFITS - The Company provides post-retirement health
benefits under a noncontributory plan to certain executives and directors. The
net periodic benefit cost was $80,000, $78,000, and $95,000, in 1999, 1998, and
1997, respectively. The Company funds benefits as costs are incurred. Benefits
paid and other changes in the benefit obligation for each of the three years in
the period ended December 31, 1999 were not significant. The weighted average
discount rate used in determining the accumulated post-retirement benefit
obligation was 7.0% in 1999 and 1998, and 7.5% in 1997. Annual rates of increase
of the cost of health benefits were assumed to be approximately 8.25% in 2000.
These rates were then assumed to decrease 0.25% per year to 6% in 2009 and
remain level thereafter. A 1% increase (decrease) in health care cost trend
rates would increase (decrease) the 1999 net periodic benefit cost by
approximately $10,000 ($10,000) and the accumulated post-retirement benefit
obligation as of December 31, 1999 by approximately $140,000 ($100,000).
EMPLOYEE STOCK PURCHASE PLAN - In May 1997 the Company adopted the Cohu,
Inc. 1997 Employee Stock Purchase Plan providing for the issuance of a maximum
of 600,000 shares of the Company's Common Stock. Under the Plan, eligible
employees may purchase shares of common stock through payroll deductions. The
price paid for the common stock is equal to 85% of the fair market value of the
Company's Common Stock on specified dates. In 1999, 1998 and 1997, 74,995,
70,958, and 15,780 shares, respectively, were issued under the Plan.
The estimated weighted average fair value of purchase rights granted in
1999, 1998 and 1997 was $4.39, $4.51 and $5.26, respectively. The fair value of
the purchase rights was estimated using the Black-Scholes option-pricing model
with the following assumptions for 1999, 1998 and 1997; risk-free interest rates
ranging from 4.4% to 5.3%; dividend yield of 1%; expected life of 6 months and
volatility of 54% to 58%.
STOCK OPTIONS - Under the Company's stock option plans, options may be
granted to key employees and outside directors to purchase a fixed number of
shares of the Company's Common Stock at prices not less than 100% of the fair
market value at the date of grant. The Cohu, Inc. 1996 Outside Directors Stock
Option Plan was approved by the Company's stockholders in May 1997. All options
become exercisable one-fourth annually beginning one year after the grant date
and expire 10 years from the grant date. Options to purchase a total of 443,200
shares were granted to employees in exchange for an equal number of canceled
options pursuant to an exchange plan approved by the Board of Directors in
December 1998. The newly granted options have exercise prices equal to the fair
market value on the date of grant and become exercisable over the four-year
period ended December 2002. At December 31, 1999, 255,850 and 120,000 shares
were available for future grants under the employee and outside director plans,
respectively.
The estimated weighted average fair value of options granted during
1999, 1998 and 1997 was $6.04, $6.60, and $7.80, respectively. The fair value of
each option grant was estimated on the grant date using the Black-Scholes
option-pricing model with the following assumptions for 1999, 1998, and 1997:
risk-free interest rates ranging from 4.2% to 6.6%; dividend yield of 1%;
expected life of 4 to 5 years and volatility of 48% to 58%.
Had compensation cost for the Company's stock option and purchase plan
grants from 1995 through 1999 been determined based on the fair value at the
date of grant accounting consistent with FASB Statement No. 123, Accounting for
Stock-Based Compensation, the Company's pro forma net income and earnings per
share would have been as follows:
<TABLE>
<CAPTION>
(in thousands,
except per share) 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Pro forma net income $ 23,593 $ 10,598 $ 28,035
Pro forma earnings per share:
Basic 1.19 .54 1.49
Diluted 1.17 .54 1.42
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. Because the Company's employee stock option and
purchase plans have characteristics significantly different from those of traded
options, in management's opinion, this model does not necessarily provide a
reliable single measure of the fair value of its employee stock option and
purchase plans.
11
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Stock option activity under all option plans was as follows:
<TABLE>
<CAPTION>
(in thousands, except per share data) 1999 1998 1997
--------------------- -------------------- --------------------
WT. AVG. Wt. Avg. Wt. Avg.
SHARES EX. PRICE Shares Ex. Price Shares Ex. Price
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 1,598 $ 9.47 1,714 $ 8.57 1,678 $ 5.64
Granted 816 12.98 806 13.36 468 15.64
Exercised (328) 5.58 (390) 4.22 (370) 4.15
Canceled (175) 11.78 (532) 16.31 (62) 9.36
------ ------ ------ ------ ------ ------
Outstanding, end of year 1,911 $11.42 1,598 $ 9.47 1,714 $ 8.57
====== ====== ====== ====== ====== ======
Options exercisable at year end 559 $ 8.87 610 $ 6.22 682 $ 4.77
====== ====== ====== ====== ====== ======
</TABLE>
Information about stock options outstanding at December 31, 1999 is as follows:
(options in thousands)
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- ---------------------------
Approximate
Number Wt. Avg. Number
Range of Outstanding Remaining Wt. Avg. Exercisable Wt. Avg.
Exercisable Prices at 12/31/99 Life (Years) Ex. Price at 12/31/99 Ex. Price
- ------------------ ----------- ------------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 4.03 - 4.85 121 4.6 $ 4.06 121 $ 4.06
7.69 - 12.07 1,476 8.5 10.72 375 9.16
12.19 - 22.00 303 8.6 17.29 63 16.30
22.88 - 27.50 11 9.8 24.30 -- --
-------- -------- -------- --------
1,911 $ 11.42 559 $ 8.87
======== ======== ======== ========
</TABLE>
9. COMMITMENTS
Rent expense for the years ended December 31, 1999, 1998 and 1997 was
$1,006,000, $731,000 and $510,000, respectively. Future minimum lease payments
at December 31, 1999 are: 2000 - $1,101,000; 2001 - $568,000; 2002 - $366,000;
2003 - $46,000, totaling $2,081,000.
- --------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Cohu, Inc.
We have audited the accompanying consolidated balance sheets of Cohu,
Inc. as of December 31, 1999 and 1998, and the related consolidated statements
of income, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Cohu,
Inc. at December 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
/s/ ERNST & YOUNG LLP
San Diego, California
January 26, 2000
12
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
1999 COMPARED TO 1998
Net sales increased 22% to $208.8 million in 1999 compared to net sales
of $171.5 million in 1998. Sales of semiconductor equipment in 1999 increased
28% compared to 1998 and accounted for 84% of consolidated net sales in 1999
versus 80% in 1998. In 1999 sales of television cameras accounted for 10% of
sales while the combined sales of metal detection and microwave radio equipment
contributed 6% of sales. Export sales accounted for 63% of net sales in 1999
compared to 44% in 1998.
During 1999 we shipped a significant number of our new Summit test
handlers. At December 31, 1999 the Summit handlers had not met certain customer
acceptance requirements. In accordance with Staff Accounting Bulletin No. 101,
revenue on these shipments will be recognized in 2000 upon customer acceptance.
Customer payments received on these shipments totaling approximately $18.5
million at December 31, 1999 have been recorded as customer advances in the
consolidated balance sheet.
Gross margin as a percentage of net sales increased to 39.3% in 1999
versus 32.1% in 1998. Within the semiconductor equipment segment, margins
increased in 1999 primarily as a result of changes in product mix and increased
business volume. The gross margin in 1998 was adversely impacted by lower
margins on sales of our Enterprise test handlers and provisions for excess and
obsolete inventories. Research and development expense as a percentage of net
sales was 9.8% in 1999 compared to 11.9% in 1998, increasing in absolute dollars
from $20.4 million in 1998 to $20.5 million in 1999. Selling, general and
administrative expense as a percentage of net sales increased to 12.9% in 1999
from 12.3% in 1998 primarily as a result of increases in bad debt, commission
and incentive compensation expense. Interest income increased to $4.3 million in
1999 from $3.5 million in 1998 primarily as a result of an increase in average
cash and investments. The provision for income taxes expressed as a percentage
of pre-tax income was 33.4% in 1999 vs. 27.4% in 1998. The effective tax rate in
1998 was favorably affected by the settlement of tax examinations for earlier
years.
1998 COMPARED TO 1997
In 1998 Cohu was affected by the worldwide slowdown in demand for
semiconductor equipment and as a result net sales decreased 9% to $171.5 million
in 1998 compared to net sales of $187.8 million in 1997. Sales of semiconductor
equipment in 1998 decreased 11% compared to 1997 and accounted for 80% of
consolidated net sales in 1998 versus 81% in 1997. In 1998 sales of television
cameras accounted for 12% of sales while the combined sales of metal detection
and microwave radio equipment contributed 8% of sales. Export sales accounted
for 44% of net sales in 1998 compared to 52% in 1997.
Gross margin as a percentage of net sales declined to 32.1% in 1998
versus 43.5% in 1997 primarily due to lower margins in the semiconductor
equipment business. Within the semiconductor equipment segment, margins
decreased in 1998 primarily as a result of provisions for warranty and excess
inventories, changes in product mix, including new handler products that had
significantly lower margins, reduced business volume, sales price reductions and
certain cost increases. Research and development expense as a percentage of net
sales increased to 11.9% in 1998 compared to 9.3% in 1997 as a result of an
increase in new product development efforts in the semiconductor equipment
business. Selling, general and administrative expense as a percentage of net
sales increased to 12.3% in 1998 from 11.4% in 1997 primarily as a result of the
decrease in business volume offset by a reduction in performance-based
compensation expense. Interest income was $3.5 million in 1998 and $3.0 million
in 1997. The provision for income taxes expressed as a percentage of pre-tax
income was 27.4% in 1998 vs. 36.4% in 1997. The decrease in the effective tax
rate was largely attributable to a decline in state income taxes and the
favorable impact of the settlement of tax examinations for earlier years.
In the fourth quarter of 1998 we recorded net pretax charges for
inventory and related reserves of approximately $3.5 million and a goodwill
write-down of $1.0 million primarily as a result of changes in customer demand
for certain semiconductor handler products. The goodwill write-down was based on
an analysis of future estimated undiscounted cash flows. In addition, the credit
for income taxes in the fourth quarter of 1998 was favorably affected by
approximately $1.0 million as a result of the settlement of tax examinations for
earlier years.
LIQUIDITY AND CAPITAL RESOURCES
Cohu's net cash flows used for operating activities in 1999 totaled $1.2
million. The major components of cash flows used for operating activities were
net income of $25.9 million and increases in accounts payable and customer
advances of $10.0 million and $14.6 million, respectively, offset by increases
in accounts receivable and inventories of $33.5 million and $29.8 million,
respectively. The increases in accounts payable, accounts receivable and
inventories were attributable to the increase in sales volume between December
1998 and December 1999. Net cash used for investing activities was $15.8 million
in 1999. Cash used for investing activities included an increase in short-term
investments of $13.4 million and purchases of property, plant and equipment
totaling $2.4 million. Net cash used for financing activities was $1.4 million.
Cash used for financing activities included $3.6 million for the payment of
dividends offset by $2.1 million
13
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
received from the issuance of stock under our stock option and purchase plans.
Cohu had $10 million available under our bank line of credit and working capital
of $146.1 million at December 31, 1999. We anticipate that present working
capital will be sufficient to meet our 2000 operating requirements including any
capital expenditures during 2000.
BUSINESS AND MARKET RISKS
INDUSTRY CYCLES
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 affect 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 financial position and results of operations.
RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCTS
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 increases the risk that existing
products will become obsolete resulting in greater excess and obsolete inventory
exposure. This increased exposure may result in increased inventory reserve
requirements, similar to or in excess of those recorded in 1998, that could have
a material adverse impact on our financial condition and results of operations.
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 products 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. No assurance can be made that we will
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. During
1998 and 1999 we experienced difficulties in manufacturing and volume production
of our new test handlers. In addition, after sale support and warranty costs are
typically greater with new test handlers than with established products. There
can be no assurance that future technologies, processes and product developments
will not render our current or future product offerings obsolete or that we will
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, there is no assurance
that we will realize acceptable profit margins on such products.
HIGHLY COMPETITIVE INDUSTRY
The semiconductor equipment industry is intensely competitive and we face
substantial competition from numerous companies throughout the world. 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,
14
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
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. Failure to introduce new products in a
timely manner, the introduction by 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 existing products.
CUSTOMER CONCENTRATION
As is common in the semiconductor equipment industry, 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.
BACKLOG
Our order backlog rose significantly during 1999 primarily as a result of
the improved business conditions in the semiconductor equipment industry and
strong demand for our new pick-and-place test handler products. A significant
portion of our semiconductor test handling equipment backlog at December 31,
1999 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 affect on
our business, financial condition and results of operations.
DEMANDS ON 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 and other semiconductor equipment
manufacturers. 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. No assurance
can be given that we will continue to successfully adjust our production
capacity to meet customers' changing requirements. The inability to meet such
requirements will have an adverse impact on our financial position and results
of operations.
DECLINE IN GRAVITY-FEED IC TEST HANDLER SALES
Sales of gravity-feed IC test handlers used in DRAM testing have
represented a significant percentage of Cohu's total semiconductor equipment
related revenue during the last five years. 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. We introduced our Enterprise handler in 1998
that employs a handling technique, known as test-in-tray, that is particularly
suited for parallel test applications like DRAMs. While the benefits of
test-in-tray may be significant and we sold a significant number of these
handlers in 1998, market acceptance of this product has been very limited and
the future use of this technology is uncertain. 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.
DEPENDENCE ON KEY SUPPLIERS
We use numerous vendors to supply parts, components and subassemblies
for the manufacture of our products. While we make reasonable efforts to ensure
that parts are available from multiple suppliers, this is not always possible;
as a result, certain key parts may be obtained 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
15
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
products. Cohu has experienced problems in obtaining adequate and reliable
quantities of various parts and components from certain key suppliers. There can
be no assurance that our results of operations will not be materially and
adversely impacted if we do not receive sufficient parts to meet our
requirements in a timely and cost effective manner.
INTELLECTUAL PROPERTY
Cohu relies on patent, copyright, trademark and trade secret laws to
establish and maintain proprietary rights in our technology and products.
However, there can be no assurance that any of our proprietary rights will not
be challenged, invalidated or circumvented, or that any such rights will 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.
FOREIGN SALES
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, 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.
NON SEMICONDUCTOR EQUIPMENT BUSINESSES
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. No assurance can be given that we will
continue to compete successfully in any of these businesses.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 1999 our investment portfolio includes fixed-income
securities of approximately $66.6 million. These securities are subject to
interest rate risk and will decline in value if interest rates increase. Due
tothe 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.
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.
YEAR 2000 RISKS
In prior periods, we discussed the nature and progress of our plans to
become Year 2000 ready. In late 1999, we completed the remediation and testing
of our mission critical systems. Through January 2000, we have experienced no
significant disruptions in mission critical information technology and
non-information technology systems and believe those systems successfully
responded to the Year 2000 date change. Cohu expensed approximately $500,000 in
connection with remediating our systems. We are not aware of any material
problems resulting from Year 2000 issues, either with our products, our internal
systems or the products and services of third parties. We will continue to
monitor our mission critical computer applications and those of our suppliers
and vendors throughout the year 2000.
If significant yet to be identified Year 2000 issues arise, we may
experience significant problems that could have a material adverse affect on our
financial condition and results of operations. Litigation regarding Year 2000
issues is possible. It is uncertain whether, or to what extent, we may be
affected by such litigation.
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 Annual Report.
16
<PAGE> 19
BOARD OF DIRECTORS
CHARLES A. SCHWAN
Chairman of the Board and
Chief Executive Officer,
Cohu, Inc.
JAMES W. BARNES
Retired President and Chief Executive
Officer, Cohu, Inc.
HARRY L. CASARI
Retired Partner
Ernst & Young LLP
FRANK W. DAVIS
Retired President of Convair
Aerospace Division of
General Dynamics
San Diego, California
JAMES A. DONAHUE
President and Chief Operating Officer,
Cohu, Inc.
HAROLD HARRIGIAN
Retired Partner & Director
of Corporate Finance
Crowell, Weedon & Co.
GENE E. LEARY
Retired Executive at
Honeywell, Inc. and
Control Data Corporation
CORPORATE OFFICERS
CHARLES A. SCHWAN
Chairman and Chief Executive Officer
JAMES A. DONAHUE
President and Chief Operating Officer
JOHN H. ALLEN
Vice President, Finance and
Chief Financial Officer, Secretary
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services, L.L.C.
P.O. Box 3315
South Hackensack, NJ 07606-1915
(800) 356-2017
www.chasemellon.com
INDEPENDENT AUDITORS
Ernst & Young LLP
San Diego, California
LEGAL COUNSEL
Gray Cary Ware & Freidenrich LLP
San Diego, California
COHU STOCK INFORMATION
Cohu, Inc. stock is traded on the Nasdaq Stock Market under the symbol "COHU".
Cohu declared cash dividends at the rate of $.045* per share per quarter in 1999
and $.04* per share per quarter in 1998.
The following table sets forth the high and low sales prices as reported on the
Nasdaq Stock Market during the last two years.
<TABLE>
<CAPTION>
1999* 1998*
------------------ ------------------
HIGH LOW High Low
------ ------ ------ ------
<S> <C> <C> <C> <C>
First Quarter $17.22 $10.57 $24.32 $14.07
Second Quarter 18.13 11.25 19.63 11.75
Third Quarter 25.00 17.00 12.44 7.13
Fourth Quarter 31.75 16.50 12.63 6.00
</TABLE>
* Adjusted for two-for-one stock split effective September 1999
At December 31, 1999 Cohu had approximately 10,000 total stockholders including
1,201 holders of record.
A COPY OF COHU'S ANNUAL REPORT ON FORM 10-K FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION FOR 1999 AND OTHER INFORMATION ABOUT COHU IS AVAILABLE
WITHOUT CHARGE BY CONTACTING:
Investor Relations
Cohu, Inc.
5755 Kearny Villa Road
San Diego, CA 92123-1111
(858) 541-5184
or visit our website at www.cohu.com
QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH YEAR
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales: 1999 $ 29,526 $ 43,471 $ 61,728 $ 74,055 $ 208,780
1998 56,691 55,202 34,277 25,341 171,511
Gross profit: 1999 10,362 17,721 24,652 29,333 82,068
1998 23,324 19,577 8,671 3,512* 55,084
Net income (loss): 1999 1,391 4,870 7,482 12,183 25,926
1998 8,216 5,313 466 (2,349)* 11,646
Earnings (loss)
per share**:
Basic 1999 .07 .25 .38 .61 1.31
1998 .42 .27 .02 (.12) .60
Diluted 1999 .07 .24 .36 .58 1.26
1998 .41 .27 .02 (.12) (.58)
</TABLE>
* Impacted by asset write-downs. See Note 2 to Consolidated Financial Statements
** Adjusted for two-for-one stock split effective September 1999
<PAGE> 1
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Cohu, Inc. of our report dated January 26, 2000, included in the 1999 Annual
Report to Stockholders of Cohu, Inc.
Our audit also included the financial statement schedule of Cohu, Inc. listed in
Item 14(a). This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-63818, 33-60735, 333-16293, 333-62803, and 333-27663)
pertaining to the Cohu, Inc. 1992, 1994, 1996 and 1998 Stock Option Plans, 1996
Outside Directors Stock Option Plan and 1997 Employee Stock Purchase Plan of our
report dated January 26, 2000, with respect to the consolidated financial
statements incorporated herein by reference, and our report included in the
preceding paragraph with respect to the financial statement schedule included in
this Annual Report (Form 10-K) of Cohu, Inc.
/s/ ERNST & YOUNG LLP
San Diego, California
March 2, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1999
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 55,954
<SECURITIES> 25,646
<RECEIVABLES> 52,262
<ALLOWANCES> 1,981
<INVENTORY> 55,646
<CURRENT-ASSETS> 202,769
<PP&E> 34,857
<DEPRECIATION> 17,841
<TOTAL-ASSETS> 220,733
<CURRENT-LIABILITIES> 56,719
<BONDS> 0
0
0
<COMMON> 19,938
<OTHER-SE> 142,418
<TOTAL-LIABILITY-AND-EQUITY> 220,733
<SALES> 208,780
<TOTAL-REVENUES> 208,780
<CGS> 126,712
<TOTAL-COSTS> 126,712
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 38,926
<INCOME-TAX> 13,000
<INCOME-CONTINUING> 25,926
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,926
<EPS-BASIC> 1.31<F1>
<EPS-DILUTED> 1.26<F1>
<FN>
<F1>Restated for two-for-one stock split effective September 1999. Prior
financial data schedules have not been restated for the stock split.
</FN>
</TABLE>
