UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

     (Mark One)

For the quarterly period ended September 30, 2004

OR

Commission file number 1-4298

COHU, INC.

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  [ü]     No  [   ]

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

     As of September 30, 2004 the Registrant had 21,549,369 shares of its $1.00 par value common stock outstanding.

COHU, INC.
INDEX
FORM 10-Q
SEPTEMBER 30, 2004

Item 1.

COHU, INC.

* Derived from December 31, 2003 audited financial statements.

The accompanying notes are an integral part of these statements.

3

COHU, INC.

The accompanying notes are an integral part of these statements.

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COHU, INC.

The accompanying notes are an integral part of these statements.

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COHU, INC.

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. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2003 and management’s discussion and analysis of financial condition and results of operations included elsewhere herein. The operating results for the three and nine months ended September 30, 2004, are not necessarily indicative of the operating results for the entire year or any future period.

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, 2003. 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.

The Company has an $8.5 million contract to provide microwave communications equipment for a border security command center and infrastructure system in the United Arab Emirates. The contract, which utilizes the Company’s most advanced microwave communications technology that has not been previously installed in an application of this size and complexity, requires that 40% of the total contract price be paid after the system has been fully accepted by the customer. As a result of these factors and the inability to make reasonably dependable estimates of progress toward completion and acceptance, the Company will recognize revenue and related costs under this contract in the period the system is accepted by the customer. Through September 30, 2004, the Company had deferred approximately $6.0 million of revenue under this contract.

At September 30, 2004, the Company had total deferred revenue of approximately $22.4 million and deferred profit of $11.1 million. At December 31, 2003, the Company had total deferred revenue of approximately $9.3 million and deferred profit of $4.1 million. The increase in deferred revenue and profit is primarily related to the deferral of revenue on certain new semiconductor test handlers and microwave communications equipment 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, 2003. The Company 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 operations, 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 proforma information presented in the following table illustrates the effect on net income (loss) and net income (loss) 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, as amended by FASB 148, Accounting for Stock-Based Compensation — Transition and Disclosure, to stock-based employee compensation.

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COHU, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004

Retiree Medical Benefits

Cohu provides post-retirement health benefits to certain executives and directors under a noncontributory plan. The net periodic benefit cost during the three and nine month periods ended September 30, 2004 and 2003 was not significant.

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was enacted on December 8, 2003. In accordance with FASB Staff Position (“FSP”) No. FAS 106-1, the accumulated post-retirement benefit obligation and net periodic benefit cost in the consolidated financial statements do not reflect the effects, if any, of the Act. In April 2004, the FASB staff issued FSP FAS 106-2, which supercedes FSP FAS 106-1. FSP FAS 106-2 applies to sponsors of single-employer defined benefit postretirement health care plans for which (a) the employer has concluded that prescription drug benefits available under the plan are “actuarially equivalent” to Medicare Part D and thus qualify for the subsidy under the Act and (b) the expected subsidy will offset or reduce the employer’s share of the cost of the underlying postretirement prescription drug coverage on which the subsidy is based. In general, FSP FAS 106-2 concludes that the plan sponsors should follow FASB Statement No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions, in accounting for the effects of the Act. For employers, including Cohu, that have elected deferral under FSP FAS 106-1, this guidance is effective for the first interim period beginning after June 15, 2004. The effects of the Act are not significant to Cohu and as a result, the adoption of FSP FAS 106-2 in the quarter ended September 30, 2004 did not have a significant impact on the Company’s financial statements.

Recent Accounting Pronouncement

During March 2004, the FASB issued an exposure draft of a new standard entitled Share Based Payment, which would amend SFAS No. 123, Accounting for Stock Based Compensation, and SFAS No. 95, Statement of Cash Flows. Among other items, the new standard would require the expensing, in the financial statements, of stock options issued by the Company. The new standard, as proposed, would be effective for periods beginning after June 15, 2005.

Throughout most of 2004, the FASB has continued to deliberate on different aspects of a new standard, and currently expects to issue a final standard in the fourth quarter 2004. Although the Company has not yet completed an analysis to quantify the exact impact the new standard will have on its future financial performance, the disclosures in Note 1 provide detail as to the Company’s financial performance as if the

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COHU, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004

Company had applied the fair-value based method and recognition provisions of SFAS No. 123 to stock-based employee compensation to the current reporting periods.

2. 2004 Results of Operations

In February 2004, the Company and a foreign sales representative amended a Product Representation Agreement that was originally entered into on April 1, 2003. The amendment reduced the commissions to be paid by the Company to the sales representative on certain previously recorded and future sales. In the quarter ended March 31, 2004, the Company reduced commission expense by $129,000 and $103,000, for commissions previously expensed in 2003 and 2004, respectively. Accordingly, selling, general and administrative expense in the accompanying statement of operations for the nine months ended September 30, 2004 has been reduced by $232,000 as a result of this amendment.

In 2003, the Company recorded a charge to cost of sales of approximately $1,700,000 as a result of inventory market valuation writedowns. In 2004, the Company sold certain of the written down inventory and as a result the Company’s cost of sales and the related gross profit was favorably impacted by approximately $150,000 and $1,200,000 for the three and nine months ended September 30, 2004, respectively.

In 2001 and 2002, the Company accrued approximately $1.2 million for potential customer sales credits and this amount was included in accounts payable at June 30, 2004 and December 31, 2003. The Company accounted for these sales credits in accordance with Emerging Issues Task Force Issue 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products), by recording reductions to revenue equal to the maximum amount of the potential sales credits. During the quarter ended September 30, 2004, these sales credits expired and as a result, the $1.2 million liability was eliminated with a corresponding credit to net sales.

3. 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 per share includes the dilutive effect of common shares potentially issuable upon the exercise of stock options. For purposes of computing diluted income 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 nine months ended September 30, 2004, options to purchase approximately 864,000 and 528,000 shares of common stock were excluded from the computation, respectively. For the nine months ended September 30, 2003, options to purchase approximately 219,000 shares of common stock were excluded from the computation, respectively. The following table reconciles the denominators used in computing basic and diluted income per share:

4. Income Taxes

The income tax provision (benefit) included in the statements of operations for the three and nine months ended September 30, 2004 and 2003, is based on the estimated annual effective tax rate for the entire year. These estimated effective tax rates are subject to adjustment in subsequent quarterly periods as the Company’s estimates of pretax income or loss for the year are increased or decreased. The effective tax rate for the three and nine months ended September 30, 2004 is less than the U.S. federal statutory rate primarily

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COHU, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004

due to the significant deferred tax asset valuation allowance recorded at December 31, 2003.

In accordance with FASB Statement No. 109, Accounting for Income Taxes, net deferred tax assets are reduced by a valuation allowance, if based on all the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. A valuation allowance of $11,704,000 had been provided on deferred tax assets at December 31, 2003, primarily due to uncertainties of realizing net deferred tax assets after considering the impact of income taxes to be generated from future income and certain tax planning strategies. The Company determined that the valuation allowance was required based upon its recent losses, and the likelihood of generating sufficient additional taxable income in future years to obtain benefit from the reversal of temporary differences and net operating loss and tax credit carryforwards.

At September 30, 2004, the Company reassessed the appropriateness of the valuation allowance. We concluded that, despite the improvement in operating results that were significantly better than forecast, it would be premature to reverse the valuation allowance that existed at December 31, 2003 other than to the extent necessary to reduce current tax expense generated by 2004 income. The Company will continue to assess the appropriateness of the valuation allowance in the fourth quarter of 2004. The Company may adjust the allowance if, based on a careful assessment of business prospects and estimates of future income, the Company concludes that all or a portion of the allowance is no longer required. A reduction in the allowance would result in a corresponding credit to income tax expense.

The IRS is conducting a routine examination of Cohu’s consolidated tax returns for the period 2000 through 2002. The Company expects the IRS examination to be completed in 2004. If the examination is concluded in 2004, any adjustments that result from the IRS examination will be reflected in the Company’s 2004 results of operations. The Company believes that such adjustments, if any, are adequately provided for in the consolidated financial statements. A favorable outcome from the examination may result in a credit to income tax expense while an unfavorable outcome may result in an increase to income tax expense in the quarter the examination is concluded.

The Company has derived significant tax benefits from the research credit under Section 41 of the Internal Revenue Code and the Extraterritorial Income Exclusion (ETI). The President signed legislation extending the research credit through December 31, 2005, repealing the ETI regime, which the World Trade Organization (WTO) had ruled an illegal export subsidy, and approved tax relief for U.S. based manufacturing activities. The recently signed legislation repeals the ETI exclusion for transactions entered into after December 31, 2004 subject to a phase-out that would allow the company to claim full ETI benefits in 2004, 80% of the benefits in 2005 and 60% in 2006 and created a deduction for domestic manufacturing activities, with a phased in rate beginning in 2005. It is not currently known the extent that the Company will be able to realize the benefit from the domestic manufacturing deduction in future years and whether the provision could partly or entirely replace the lost ETI benefit.

5. Goodwill, Investments and Other Intangible Assets

In June 2001, the FASB issued Statement No. 142, Goodwill and Other Intangible Assets. Under Statement No. 142, goodwill and other intangible assets with indefinite useful lives are not amortized, but are reviewed annually for impairment or more frequently if impairment indicators arise. Separable intangible assets that have finite lives are amortized over their useful lives. Under Statement No. 142, goodwill and other intangible assets with indefinite useful lives resulting from acquisitions completed after June 30, 2001 are not amortized. At September 30, 2004, the Company had goodwill of $8.3 million that resulted from an acquisition completed in July 2001.

The Company performed the required annual goodwill impairment test as of October 1, 2004. Cohu did not recognize any goodwill impairment as a result of performing this annual test. A future decline in the fair

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COHU, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004

value of Cohu’s semiconductor equipment business may indicate goodwill impairment that could result in a charge to Cohu’s future operating results.

In August 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes Statement No. 121. Statement No. 144 addresses financial accounting and reporting for the impairment of long-lived assets (excluding goodwill) and for long-lived assets to be disposed of. However, Statement No. 144 retains the fundamental provisions of Statement No. 121 for recognition and measurement of the impairment of long-lived assets to be held and used. Cohu adopted Statement No. 144 effective January 1, 2002.

In the fourth quarter of 2002, Cohu entered into a $1,700,000 license agreement for certain intellectual property and know-how from LiveTools Technology SA. The Company is amortizing the intangible asset to expense over the three-year exclusive license period. Accumulated amortization at September 30, 2004 and December 31, 2003, was $1,054,000 and $642,000, respectively. Amortization expense was $138,000 and $412,000 in the three and nine-month periods ended September 30, 2004 and 2003, respectively. The estimated remaining amortization expense in future periods is 2004 — $138,000; 2005 - $458,000.

6. Geographic Consolidation

On April 10, 2003, Cohu announced that its Delta Design, Inc. subsidiary (“Delta”) was relocating its Littleton, Massachusetts operation to its headquarters facility in Poway, California. The consolidation, which will result in approximately 50 of the 65 employees being terminated, was substantially completed in March 2004 and the remaining charges to operations for severance and other payroll costs are expected to be minimal. For the three-month period ended September 30, 2004 the Company recorded charges to operations, totaling $1,000 for severance and one-time termination benefits. These charges are included in cost of sales. For the nine-month period ended September 30, 2004, the Company recorded charges to operations totaling $194,000 for severance and one-time termination benefits. These charges are included in cost of sales ($59,000), research and development ($61,000) and selling, general and administrative expense ($74,000). In the quarter ended September 30, 2003, the Company recorded charges to operations totaling $354,000 for severance and one-time termination benefits. These charges are included in cost of sales ($142,000), research and development ($130,000) and selling, general and administrative expense ($82,000). Charges for the nine-month period ended September 30, 2003 totaled $632,000 and are included in cost of sales ($254,000), research and development ($262,000) and selling, general and administrative expense ($116,000). Cumulative charges to operations for severance and other exit costs for the period April 10, 2003 to September 30, 2004, were $1,062,000.

The following table reconciles amounts accrued and paid under the consolidation plan.

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COHU, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004

In April 2003, Delta completed the relocation of its Columbus, Ohio operations to its facility in Poway, California. The consolidation has reduced costs without impacting the revenue generating activities of Delta. The Company recorded charges to operations in the quarter ended March 31, 2003, totaling $630,000 for severance and one-time termination benefits and $117,000 for contract termination costs primarily related to the leased facility. These charges are included in cost of sales ($47,000), research and development ($570,000) and selling, general and administrative expense ($130,000). Exit-related costs charged to operations subsequent to the quarter ended March 31, 2003 were not significant.

7. Real Estate Transactions

On January 13, 2003, the Company extended the term of a $9.2 million promissory note with TC Kearny Villa, L.P. (“TC”). The 8% non-recourse note was secured by a deed of trust on land and buildings in San Diego, California sold by Cohu to TC in April 2001. The note amendment extended the due date of the note to June 30, 2005 and provided for principal payments, assuming a 20-year amortization schedule, of $206,000 and $223,000 on April 1, 2003 and 2004, respectively. Interest at 8% was to continue to be paid monthly.

In February 2004, the Company and TC entered into an agreement whereby the Company released its beneficial interest in the property securing the note receivable in exchange for full payment of the note and $272,000 of accrued interest. The Company received net cash proceeds from TC totaling $9,250,000 on February 19, 2004. The interest received was recorded as income in 2004.

8. Comprehensive Income (Loss)

Comprehensive income (loss) represents all non-owner changes in stockholders’ equity and consists of, on an after-tax basis where applicable, the following:

Accumulated other comprehensive income (loss) totaled ($70,000) and $24,000 at September 30, 2004 and December 31, 2003, respectively, and was attributed to after-tax unrealized losses and gains on investments.

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COHU, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004

9. Segment and Related Information

The following is a summary of Cohu’s significant accounts and balances by segment, reconciled to consolidated totals. Intersegment sales were not significant in any period.