COHU INC - 10-Q Quarterly Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2003

[ ] 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 (State or other jurisdiction of Incorporation or Organization)		95-1934119 (I.R.S. Employer Identification No.)


12367 Crosthwaite Circle, Poway, California		92064-6817

(Address of principal executive office)		(Zip Code)

Registrant’s telephone number, including area code 858-848-8100

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes [X] No [ ]

As of June 30, 2003 the Registrant had 21,212,354 shares of its $1.00 par value common stock outstanding.

TABLE OF CONTENTS


	Item 1.
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF INCOME
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Item 3. Quantitative and qualitative disclosures about market risk
	Item 4. Controls and procedures
Part II OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K.
SIGNATURES
EXHIBIT INDEX
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

COHU, INC.
INDEX
FORM 10-Q
JUNE 30, 2003


			Page Number

Part I	Financial Information
Item 1.	Financial Statements:
		Condensed Consolidated Balance Sheets (unaudited) June 30, 2003 and December 31, 2002		3
		Condensed Consolidated Statements of Income (unaudited) Three and Six Months Ended June 30, 2003 and 2002		4
		Condensed Consolidated Statements of Cash Flows (unaudited) Six Months Ended June 30, 2003 and 2002		5
		Notes to Unaudited Condensed Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3.	Quantitative and Qualitative Disclosures about Market Risk			24
Item 4.	Controls and Procedures			24
Part II	Other Information
Item 1.	Legal Proceedings			25
Item 4.	Submission of Matters to a Vote of Security Holders			25
Item 5.	Other Information			25
Item 6.	Exhibits and Reports on Form 8-K			26
Signatures				26

Item 1.

COHU, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except par value)


			June 30, 2003		December 31, 2002

ASSETS
Current assets:
	Cash and cash equivalents		$	11,790	$	32,696
	Short-term investments			99,409		74,488
	Accounts receivable, less allowance for doubtful accounts of $1,189 in 2003 and $1,264 in 2002			18,792		18,267
	Inventories:
		Raw materials and purchased parts		12,849		13,414
		Work in process		7,652		6,018
		Finished goods		9,609		4,885

				30,110		24,317
	Deferred income taxes			10,956		10,956
	Other current assets			5,074		5,574

		Total current assets		176,131		166,298
Note receivable				8,978		9,184
Property, plant and equipment, at cost:
	Land and land improvements			7,978		8,942
	Buildings and building improvements			24,879		24,906
	Machinery and equipment			23,727		24,316

				56,584		58,164
	Less accumulated depreciation and amortization			25,355		24,394

		Net property, plant and equipment		31,229		33,770
Goodwill				8,340		8,340
Other intangible assets, net of accumulated amortization of $367 in 2003 and $92 in 2002				1,283		1,558
Other assets				205		2,653

			$	226,166	$	221,803

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	7,814	$	6,387
	Accrued compensation and benefits			5,168		4,667
	Accrued warranty			2,909		2,878
	Customer advances			619		3,218
	Deferred profit			6,177		5,231
	Other accrued liabilities			2,993		3,378

		Total current liabilities		25,680		25,759
Accrued retiree medical benefits				1,133		1,139
Deferred income taxes				4,811		4,811
Commitments and contingencies
Stockholders’ equity:
	Preferred stock, $1 par value; 1,000 shares authorized, none issued			—		—
	Common stock, $1 par value; 60,000 shares authorized, 21,212 shares issued and outstanding in 2003 and 20,864 shares in 2002			21,212		20,864
	Paid in capital			19,475		15,922
	Retained earnings			153,620		152,978
	Accumulated other comprehensive income			235		330

		Total stockholders’ equity		194,542		190,094

			$	226,166	$	221,803

See accompanying notes.

COHU, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except per share amounts)


		Three Months Ended					Six Months Ended
		June 30,					June 30,
		2003			2002		2003			2002

Net sales		$	32,084		$	38,307	$	63,163		$	69,895
Cost and expenses:
	Cost of sales		21,109			22,920		41,805			42,467
	Research and development		5,556			8,387		12,494			15,958
	Selling, general and administrative		6,028			6,400		11,943			12,515

			32,693			37,707		66,242			70,940

Income (loss) from operations			(609	)		600		(3,079	)		(1,045	)
Gain from sale of land			7,873			—		7,873			—
Investment impairment writedown			(2,500	)		—		(2,500	)		—
Interest income			442			722		1,142			1,488

Income before income taxes			5,206			1,322		3,436			443
Income tax provision			1,100			500		700			200

Net income		$	4,106		$	822	$	2,736		$	243

Income per share:
	Basic	$	.19		$	.04	$	.13		$	.01

	Diluted	$	.19		$	.04	$	.13		$	.01

Weighted average shares used in computing income per share:
	Basic		21,098			20,750		21,005			20,685

	Diluted		21,631			21,690		21,457			21,626

Cash dividends declared per share		$	.05		$	.05	$	.10		$	.10

See accompanying notes.

COHU, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands, except per share amounts)


					Six Months Ended
					June 30,
					2003			2002

Cash flows from operating activities:
		Net income			$	2,736		$	243
		Adjustments to reconcile net income to net cash provided from operating activities:
			Depreciation and amortization			2,153			2,174
			Gain from sale of land			(7,873	)		—
			Loss on equipment disposals			126			—
			Investment impairment writedown			2,500			—
			Decrease in accrued retiree medical benefits			(6	)		(5	)
			Changes in current assets and liabilities:
				Accounts receivable		(525	)		(3,269	)
				Inventories		(5,793	)		756
				Other current assets		500			(343	)
				Accounts payable		1,427			2,243
				Customer advances		(2,599	)		530
				Deferred profit		946			2,224
				Accrued compensation, warranty and other liabilities		202			923

				Net cash provided from (used for) operating activities		(6,206	)		5,476
Cash flows from investing activities:
	Purchases of short-term investments					(62,766	)		(17,070	)
	Sales and maturities of short-term investments					37,695			3,049
	Net proceeds from sale of land					8,837			—
	Purchases of property, plant and equipment					(427	)		(622	)
	Payments on note receivable					206			191
	Other assets					(52	)		5

				Net cash used for investing activities		(16,507	)		(14,447	)
Cash flows from financing activities:
	Issuance of stock, net					3,901			2,621
	Cash dividends					(2,094	)		(2,073	)

				Net cash provided from financing activities		1,807			548

Net decrease in cash and cash equivalents						(20,906	)		(8,423	)
Cash and cash equivalents at beginning of period						32,696			65,510

Cash and cash equivalents at end of period					$	11,790		$	57,087

Supplemental disclosure of cash flow information:
	Cash paid (received) during the period for:
			Income taxes, net of refunds		$	(57	)	$	501

See accompanying notes.

COHU, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003

1. Basis of Presentation

The accompanying interim financial statements are unaudited but include all adjustments (consisting of normal recurring adjustments), which Cohu, Inc. (the “Company” or “Cohu”) considers necessary for a fair statement of the results for the period. The operating results for the three and six months ended June 30, 2003, are not necessarily indicative of the operating results for the entire year or any future period. These financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 and management’s discussion and analysis of financial condition and results of operations included elsewhere herein.

Revenue Recognition

Cohu’s revenue recognition policy is disclosed in Note 1 of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. As more fully described in that policy, revenue from products that have not previously satisfied customer acceptance is recognized upon customer acceptance. The gross profit on sales that are not recognized is generally recorded as deferred profit and reflected as a current liability in the consolidated balance sheet.

At June 30, 2003, the Company had deferred revenue totaling approximately $12.5 million and deferred profit of $6.2 million. At December 31, 2002, the Company had deferred revenue totaling approximately $9.8 million and deferred profit of $5.2 million. The increase in deferred revenue and profit is primarily related to the deferral of revenue on certain semiconductor test handler upgrades that have been shipped and installed and are awaiting customer acceptance.

Stock-Based Compensation

Cohu has several stock-based compensation plans that are described more fully in Note 10 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. Cohu accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in the consolidated statements of income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and net income per share if Cohu had applied the fair value recognition provisions of Financial Accounting Standards Board (“FASB”) Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.


		Three months ended						Six months ended
(in thousands, except per share amounts)		2003			2002			2003			2002

Net income, as reported		$	4,106		$	822		$	2,736		$	243
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effect			(755	)		(1,049	)		(1,474	)		(1,867	)

Pro forma net income (loss)		$	3,351		$	(227	)	$	1,262		$	(1,624	)

Net income (loss) per share:
	Basic-as reported	$	.19		$	.04		$	.13		$	.01
	Basic-pro forma	$	.16		$	(.01	)	$	.06		$	(.08	)
	Diluted-as reported	$	.19		$	.04		$	.13		$	.01
	Diluted-pro forma	$	.15		$	(.01	)	$	.06		$	(.08	)

COHU, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003

Recent Accounting Pronouncements

In June, 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities. Statement No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3. The adoption of Statement No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002, including Cohu’s recently announced Columbus, Ohio and Littleton, Massachusetts facilities consolidations.

In November, 2002, the FASB Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company is currently evaluating the effect that the adoption of EITF Issue No. 00-21 will have on its results of operations and financial condition.

In January, 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. FIN 46 provides guidance on: 1) the identification of entities for which control is achieved through means other than through voting rights, known as “variable interest entities” (“VIEs”); and 2) which business enterprise is the primary beneficiary and when it should consolidate the VIE. This new model for consolidation applies to entities: 1) where the equity investors (if any) do not have a controlling financial interest; or 2) whose equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. FIN 46 is effective for all new VIEs created or acquired after January 31, 2003. For VIEs created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003. Certain disclosures are effective immediately. Cohu is in the process of assessing the effect of FIN 46.

In April, 2003, the FASB issued Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement provides clarification on the financial accounting and reporting of derivative instruments and hedging activities and requires contracts with similar characteristics to be accounted for on a comparable basis. Cohu is in the process of assessing the effect of No.149 and does not expect the adoption of it, which will be effective for contracts entered into or modified after June 30, 2003, to have a material effect on its financial condition or results of operations.

In May, 2003, the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement establishes standards on the classification and measurement of financial instruments with characteristics of both liabilities and equity and is effective for financial instruments entered into or modified after May 31, 2003. Cohu does not expect the implementation of this pronouncement to have a material effect on its financial condition or results of operations.

2. Income (Loss) Per Share

Income (loss) per share is computed in accordance with FASB Statement No. 128, Earnings per Share. Basic income (loss) per share is computed using the weighted average number of common shares outstanding during each period. Diluted income (loss) per share includes the dilutive effect of common shares potentially issuable upon the exercise of stock options. For purposes of computing diluted income (loss) per share, stock options with exercise prices that exceed the average fair market value of the Company’s common stock for the period are excluded. For the three and six months ended June 30, 2003 and 2002, options to purchase approximately 287,000 and 294,000 and 42,000 and 43,000 shares of common stock, respectively, were excluded from the computation. The impact of stock options is excluded for loss periods as they would be antidilutive. The following table reconciles the denominators used in computing basic and diluted income per share:

COHU, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

1.		Basis of Presentation

		The accompanying interim financial statements are unaudited but include all adjustments (consisting of normal recurring adjustments), which Cohu, Inc. (the “Company” or “Cohu”) considers necessary for a fair statement of the results for the period. The operating results for the three and six months ended June 30, 2003, are not necessarily indicative of the operating results for the entire year or any future period. These financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 and management’s discussion and analysis of financial condition and results of operations included elsewhere herein.

		Revenue Recognition

		Cohu’s revenue recognition policy is disclosed in Note 1 of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. As more fully described in that policy, revenue from products that have not previously satisfied customer acceptance is recognized upon customer acceptance. The gross profit on sales that are not recognized is generally recorded as deferred profit and reflected as a current liability in the consolidated balance sheet.

		At June 30, 2003, the Company had deferred revenue totaling approximately $12.5 million and deferred profit of $6.2 million. At December 31, 2002, the Company had deferred revenue totaling approximately $9.8 million and deferred profit of $5.2 million. The increase in deferred revenue and profit is primarily related to the deferral of revenue on certain semiconductor test handler upgrades that have been shipped and installed and are awaiting customer acceptance.

		Stock-Based Compensation

		Cohu has several stock-based compensation plans that are described more fully in Note 10 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. Cohu accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in the consolidated statements of income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and net income per share if Cohu had applied the fair value recognition provisions of Financial Accounting Standards Board (“FASB”) Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

		Recent Accounting Pronouncements

		In June, 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities. Statement No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3. The adoption of Statement No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002, including Cohu’s recently announced Columbus, Ohio and Littleton, Massachusetts facilities consolidations.

		In November, 2002, the FASB Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company is currently evaluating the effect that the adoption of EITF Issue No. 00-21 will have on its results of operations and financial condition.

		In January, 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. FIN 46 provides guidance on: 1) the identification of entities for which control is achieved through means other than through voting rights, known as “variable interest entities” (“VIEs”); and 2) which business enterprise is the primary beneficiary and when it should consolidate the VIE. This new model for consolidation applies to entities: 1) where the equity investors (if any) do not have a controlling financial interest; or 2) whose equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. FIN 46 is effective for all new VIEs created or acquired after January 31, 2003. For VIEs created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003. Certain disclosures are effective immediately. Cohu is in the process of assessing the effect of FIN 46.

		In April, 2003, the FASB issued Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement provides clarification on the financial accounting and reporting of derivative instruments and hedging activities and requires contracts with similar characteristics to be accounted for on a comparable basis. Cohu is in the process of assessing the effect of No.149 and does not expect the adoption of it, which will be effective for contracts entered into or modified after June 30, 2003, to have a material effect on its financial condition or results of operations.

		In May, 2003, the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement establishes standards on the classification and measurement of financial instruments with characteristics of both liabilities and equity and is effective for financial instruments entered into or modified after May 31, 2003. Cohu does not expect the implementation of this pronouncement to have a material effect on its financial condition or results of operations.

2.		Income (Loss) Per Share

		Income (loss) per share is computed in accordance with FASB Statement No. 128, Earnings per Share. Basic income (loss) per share is computed using the weighted average number of common shares outstanding during each period. Diluted income (loss) per share includes the dilutive effect of common shares potentially issuable upon the exercise of stock options. For purposes of computing diluted income (loss) per share, stock options with exercise prices that exceed the average fair market value of the Company’s common stock for the period are excluded. For the three and six months ended June 30, 2003 and 2002, options to purchase approximately 287,000 and 294,000 and 42,000 and 43,000 shares of common stock, respectively, were excluded from the computation. The impact of stock options is excluded for loss periods as they would be antidilutive. The following table reconciles the denominators used in computing basic and diluted income per share: