|
|
 | | | |
- close
- close
- close
- close
Cohu 10-Q 2010 Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended June 26, 2010
OR
Commission file number 1-4298
COHU, INC.
(Exact name of registrant as specified in its charter)
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
As of June 26, 2010 the Registrant had 23,706,609 shares of its $1.00 par value common stock
outstanding.
COHU, INC.
INDEX FORM 10-Q June 26, 2010
Table of Contents
Item 1.
COHU, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
The accompanying notes are an integral part of these statements.
3
Table of Contents
COHU, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
The accompanying notes are an integral part of these statements.
4
Table of Contents
COHU, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
The accompanying notes are an integral part of these statements.
5
Table of Contents
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
June 26, 2010
6
Table of Contents
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements June 26, 2010
7
Table of Contents
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements June 26, 2010
8
Table of Contents
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements June 26, 2010
9
Table of Contents
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements June 26, 2010
10
Table of Contents
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements June 26, 2010
11
Table of Contents
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements June 26, 2010 Restricted Stock Units
We issue restricted stock units to certain employees and directors. Restricted stock units
vest over either a one-year or a four-year period from the date of grant. Prior to vesting,
restricted stock units do not have dividend equivalent rights, do not have voting rights and
the shares underlying the restricted stock units are not considered issued and outstanding.
Shares of our common stock will be issued on the date the restricted stock units vest.
At June 26, 2010, we had 162,162 restricted stock units outstanding with an aggregate
intrinsic value of approximately $2.2 million and the weighted average remaining vesting
period was approximately 0.7 years.
5. 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 (in thousands):
Our accumulated other comprehensive income (loss) balance totaled approximately $(3.1) million
and $8.7 million at June 26, 2010, and December 26, 2009, respectively, and was attributed to,
net of income taxes where applicable, foreign currency adjustments resulting from the
translation of certain accounts into U.S. dollars where the functional currency is the Euro,
unrealized losses and gains on investments and adjustments related to postretirement benefits.
6. Income Taxes
The income tax provision included in the condensed consolidated statements of operations for
the three and six months ended June 26, 2010 and June 27, 2009, 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 our estimates of pretax income or loss for
the year change. The effective tax rate for the three and six months ended June 26, 2010, was
26.1% and 29.0%, respectively, and differs from the U.S. federal statutory rate primarily due
to our inability to benefit our domestic losses, foreign income taxed at lower rates, state
taxes and interest on unrecognized tax benefits.
In the quarter ended June 27, 2009, we recorded an increase in our valuation allowance on
domestic deferred tax assets, with a corresponding charge to our income tax provision, of
approximately $19.6 million as we were unable to conclude that it was more likely than not
that such assets would be realized. Our deferred tax asset valuation allowance at June 26,
2010 was approximately $25.6 million on gross deferred tax assets of approximately $30.5
million. The remaining $4.9 million of gross deferred tax assets for which a valuation
allowance was not recorded are realizable through future reversals of existing taxable
temporary differences.
In June, 2010 the Internal Revenue Service completed a routine examination of our 2006 to 2008
U.S. income tax returns without any material adjustments. During the second quarter of fiscal
2010 the Internal Revenue Service commenced a routine examination of our 2009 U.S. income tax
return. This examination is substantially complete and is expected to be finalized without any
material adjustments. There was no material change to our unrecognized tax benefits and
interest accrued related to unrecognized tax benefits during the three and six months ended
June 26, 2010.
12
Table of Contents
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements June 26, 2010 7. Industry Segments
Our reportable segments are business units that offer different products and are managed
separately because each business requires different technology and marketing strategies. Our
three segments are: semiconductor equipment, microwave communications and video cameras.
We allocate resources and evaluate the performance of segments based on profit or loss from
operations, excluding interest, corporate expenses and unusual gains or losses. Intersegment
sales were not significant for any period.
Financial information by industry segment is as follows (in thousands):
A small number of customers historically have been responsible for a significant portion of
our consolidated net sales. During the second quarter and first six months of fiscal 2010,
three customers of the semiconductor equipment segment each represented more than 10% of
consolidated net sales and, combined, they accounted for 42% and 49% of our total consolidated
net sales, respectively. During the second quarter and first six months of fiscal 2009, two
customers of the semiconductor equipment segment each represented more than 10% of
consolidated net sales and, combined, they accounted for 39% and 41% of our total consolidated
net sales, respectively.
8. Contingencies
From time-to-time we are involved in various legal proceedings, examinations by various tax
authorities and claims that have arisen in the ordinary course of our businesses. Although
the outcome of such legal proceedings, claims and examinations cannot be predicted with
certainty, we do not believe any such matters exist at this time that will have a material
adverse effect on our financial position or results of operations.
13
Table of Contents
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements June 26, 2010 9. Guarantees
Our products are generally sold with warranty periods that range from 12 to 36 months
following sale or acceptance. Parts and labor are covered under the terms of the warranty
agreement. The warranty provision is based on historical and projected experience by product
and configuration.
Changes in accrued warranty were as follows (in thousands):
From time-to-time, during the ordinary course of business, we provide standby letters of
credit for certain contingent liabilities under contractual arrangements, including customer
contracts. As of June 26, 2010, the maximum potential amount of future payments that Cohu
could be required to make under these standby letters of credit was approximately $0.5
million. We have not recorded any liability in connection with these guarantee arrangements
beyond that required to appropriately account for the underlying transaction being guaranteed.
We do not believe, based on historical experience and information currently available, that it
is probable that any amounts will be required to be paid under these arrangements.
14
Table of Contents
Cohu, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
June 26, 2010 This Form 10-Q contains certain forward-looking statements including expectations of market
conditions, 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. Such
forward-looking statements are based on management’s current expectations and beliefs, including
estimates and projections about our industries and include, but are not limited to, statements
concerning financial position, business strategy, and plans or objectives for future operations.
Forward-looking statements are not guarantees of future performance, and are subject to certain
risks, uncertainties, and assumptions that are difficult to predict and may cause actual results to
differ materially from management’s current expectations. Such risks and uncertainties include
those set forth in this Quarterly Report on Form 10-Q and our 2009 Annual Report on Form 10-K under
the heading “Item 1A. Risk Factors”. The forward-looking statements in this report speak only as
of the time they are made, and do not necessarily reflect management’s outlook at any other point
in time. We undertake no obligation to publicly update any forward-looking statements, whether as
a result of new information, future events, or for any other reason, however, readers should
carefully review the risk factors set forth in other reports or documents we file from time to time
with the SEC after the date of this Quarterly Report.
OVERVIEW
Cohu operates in three business segments. Our primary business is the development, manufacture,
sale and servicing of test handling and burn-in related equipment, and thermal sub-systems for the
global semiconductor industry through our wholly-owned subsidiaries, Delta Design, Inc. and Rasco
GmbH. This business is significantly dependent on capital expenditures by semiconductor
manufacturers and test subcontractors, which in turn is dependent on the current and anticipated
market demand for semiconductors that is subject to cyclical trends. We expect that the
semiconductor equipment industry will continue to be cyclical and volatile in part because consumer
electronics, the principal end market for integrated circuits, is a highly dynamic industry and
demand is difficult to accurately predict. Our other businesses produce mobile microwave
communications equipment (Broadcast Microwave Services, Inc.) and video cameras and accessories
(Cohu Electronics Division).
Operating results for the second quarter of fiscal 2010 in our semiconductor equipment business
were better than our expectations and benefitted from continued improvement in semiconductor sales
and equipment utilization rates in customers’ test facilities that require investment in additional
capacity. Orders have increased sequentially for five consecutive quarters and were at their
highest level in our history during the second quarter. Order demand was broad based across many
products, customers and geographies. The increase in demand has been accompanied by requests for
short delivery lead times as customers resisted adding capacity during the recession. Until our
handler manufacturing transition to Asia based contract manufacturers is complete, we are producing
Matrix and Pyramid test handlers in our Poway plant in order to meet customer delivery
requirements. Gross margin in the second quarter of fiscal 2010 was better than expected as
revenue recognized for Pyramid and Matrix semiconductor test handlers was lower than forecasted.
In the third quarter of fiscal 2010, as the sales of these low margin Poway-manufactured
semiconductor test handlers are recognized our gross margin will be negatively impacted. We expect
incremental improvement in our gross margin in the fourth quarter of fiscal 2010 and first half of
fiscal 2011 after the manufacturing transition to Asia-based subcontractors is completed.
Inventory exposure is common in the semiconductor equipment industry due to the narrow customer
base, the custom nature of the products we provide, and the shortened product life cycles that are
caused by rapid changes in semiconductor manufacturing technology. Our operating results in the
last three years have been impacted by charges to cost of sales related to excess, obsolete and
lower of cost or market inventory issues. These charges totaled approximately $15.2 million during
the three-year period ended December 26, 2009 and were primarily the result of decreases or
frequent changes in customer forecasts and, to a lesser extent, changes in our sales product mix.
Our non-semiconductor equipment businesses comprised approximately 22% of our consolidated revenues
during the last three years (13% for the six-month period ended June 26, 2010). Our microwave
communications business develops, manufactures and sells mobile microwave communications equipment,
antenna systems and associated equipment. These products are used in the transmission of video,
audio, and telemetry. Applications for these microwave data-links include unmanned aerial vehicles
(“UAVs”), public safety, security, surveillance, and electronic news gathering. Customers for
these products are government agencies, public safety organizations, UAV program contractors,
television broadcasters, and other commercial entities. During 2009 our microwave communications
business achieved record operating income as a result of higher sales volume and improved gross
margins realized primarily through product redesign programs initiated in 2008 to reduce the cost
of certain systems. Operating results for the first half of fiscal 2010 are below plan due to the
deferral of revenue associated with a customer’s orders that were shipped during the second quarter
of fiscal 2010. We expect BMS’ results to improve in the second half of fiscal 2010.
15
Table of Contents
Cohu, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations June 26, 2010 Our video camera segment develops, manufactures and sells a wide selection of video cameras and
related products, specializing in video solutions for security, surveillance and traffic
monitoring. Customers for these products are distributed among security, surveillance, traffic
control/management, scientific imaging and machine vision. During the second quarter of fiscal
2010 sales and operating income for our video camera operation were lower than plan due mainly to
customer order delays. We expect the operating results of this segment to improve as there is
strong interest in our new high definition cameras for the traffic and high end security and
surveillance markets.
Our management team uses several performance metrics to manage our businesses. These metrics
mainly focus on near-term forecasts due to the short-term nature of our backlog and include: (i)
orders and backlog for the most recently completed quarter and the forecast for the next quarter,
(ii) inventory levels and related excess exposures typically based on the forecast for the next
twelve months, (iii) gross margin and other operating expense trends, (iv) cash flow, (v) industry
data and trends noted in various publicly available sources, and (vi) competitive factors and
information. Due to the short-term nature of our order backlog that historically has represented
about three months of business and the inherent volatility of the semiconductor equipment business,
our past performance is frequently not indicative of future near term operating results or cash
flows.
Application of Critical Accounting Estimates and Policies
Our discussion and analysis of our financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.
We base our estimates on historical experience, forecasts, and on various other assumptions that
are believed to be reasonable under the circumstances, however actual results may differ from those
estimates under different assumptions or conditions. The methods, estimates and judgments we use
in applying our accounting policies have a significant impact on the results we report in our
financial statements. Some of our accounting policies require us to make difficult and subjective
judgments, often as a result of the need to make estimates of matters that are inherently
uncertain. Our most critical accounting estimates that we believe are the most important to an
investor’s understanding of our financial results and condition and require complex management
judgment include:
Below, we discuss these policies further, as well as the estimates and judgments involved. We also
have other policies that we consider key accounting policies; however, these policies typically do
not require us to make estimates or judgments that are difficult or subjective.
Revenue Recognition: We generally recognize revenue upon shipment and title passage for established
products (i.e., those that have previously satisfied customer acceptance requirements) that provide
for full payment tied to shipment. Revenue for products that have not previously satisfied
customer acceptance requirements or from sales where customer payment dates are not determinable is
recognized upon customer acceptance. For arrangements containing multiple elements, the revenue
relating to the undelivered elements is deferred at estimated fair value until delivery of the
deferred elements.
Accounts Receivable: We maintain an allowance for bad debts for estimated losses resulting from the
inability of our customers to make required payments. If the financial condition of our customers
deteriorates, resulting in an impairment of their ability to make payments, additional allowances
may be required.
16
Table of Contents
Cohu, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations June 26, 2010 Warranty: We provide for the estimated costs of product warranties in the period sales are
recognized. Our warranty obligation estimates are affected by historical product shipment levels,
product performance and material and labor costs incurred in correcting product performance
problems. Should product performance, material usage or labor repair costs differ from our
estimates, revisions to the estimated warranty liability would be required.
Inventory: The valuation of inventory requires us to estimate obsolete or excess inventory as well
as inventory that is not of saleable quality. The determination of obsolete or excess inventory
requires us to estimate the future demand for our products. The demand forecast is a direct input
in the development of our short-term manufacturing plans. We record valuation reserves on our
inventory for estimated excess and obsolete inventory and lower of cost or market concerns equal to
the difference between the cost of inventory and the estimated market value based upon assumptions
about future product demand, market conditions and product selling prices. If future product
demand, market conditions or product selling prices are less than those projected by management or
if continued modifications to products are required to meet specifications or other customer
requirements, increases to inventory reserves may be required which would have a negative impact on
our gross margin.
Income Taxes: We estimate our liability for income taxes based on the various jurisdictions where
we conduct business. This requires us to estimate our (i) current taxes; (ii) temporary
differences that result from differing treatment of certain items for tax and accounting purposes
and (iii) unrecognized tax benefits. Temporary differences result in deferred tax assets and
liabilities that are reflected in the consolidated balance sheet. The deferred tax assets are
reduced by a valuation allowance if, based upon all available evidence, it is more likely than not
that some or all of the deferred tax assets will not be realized. Establishing, reducing or
increasing a valuation allowance in an accounting period generally results in an increase or
decrease in tax expense in the statement of operations. We must make significant judgments to
determine the provision for income taxes, deferred tax assets and liabilities, unrecognized tax
benefits and any valuation allowance to be recorded against deferred tax assets. Our gross
deferred tax asset balance as of June 26, 2010 was approximately $30.5 million, with a valuation
allowance of approximately $25.6 million. Our deferred tax assets consist primarily of reserves
and accruals that are not yet deductible for tax and tax credit and net operating loss
carryforwards.
Goodwill, Purchased Intangible Assets and Other Long-lived Assets: We evaluate goodwill for
impairment annually and when an event occurs or circumstances change that indicate that the
carrying value may not be recoverable. We test goodwill for impairment by first comparing the book
value of net assets to the fair value of the reporting units. If the fair value is determined to
be less than the book value, a second step is performed to compute the amount of impairment as the
difference between the estimated fair value of goodwill and the carrying value. We estimated the
fair values of our reporting units primarily using the income approach valuation methodology that
includes the discounted cash flow method, taking into consideration the market approach and certain
market multiples as a validation of the values derived using the discounted cash flow methodology.
Forecasts of future cash flows are based on our best estimate of future net sales and operating
expenses, based primarily on customer forecasts, industry trade organization data and general
economic conditions. We conduct our annual impairment test as of October 1 of each year, and have
determined there to be no impairment. There were no events or circumstances from the date of our
assessment through June 26, 2010 that would impact this conclusion. In a future period, should an
event occur that leads us to determine that an interim goodwill impairment review is required, the
facts and estimates utilized at that time may differ resulting in an impairment charge which could
have a significant negative impact on our operating results.
Long-lived assets, other than goodwill, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions
that would necessitate an impairment assessment include a significant decline in the observable
market value of an asset, a significant change in the extent or manner in which an asset is used,
or any other significant adverse change that would indicate that the carrying amount of an asset or
group of assets may not be recoverable. For long-lived assets, impairment losses are only recorded
if the asset’s carrying amount is not recoverable through its undiscounted, probability-weighted
future cash flows. We measure the impairment loss based on the difference between the carrying
amount and estimated fair value.
Contingencies: We are subject to certain contingencies that arise in the ordinary course of our
businesses which require us to assess the likelihood that future events will confirm the existence
of a loss or an impairment of an asset. If a loss or asset impairment is probable and the amount
of the loss or impairment is reasonably estimable, we accrue a charge to operations in the period
such conditions become known.
17
Table of Contents
Cohu, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations June 26, 2010 Share-based Compensation: Share-based compensation expense related to stock options is recorded
based on the fair value of the award on its grant date which we estimate using the Black-Scholes
valuation model. Share-based compensation expense related to restricted stock unit awards is
calculated based on the market price of our common stock on the grant date, reduced by the present
value of dividends expected to be paid on our common stock prior to vesting of the restricted stock
unit.
Recent Accounting Pronouncements
For a description of accounting changes and recent accounting pronouncements, including the
expected dates of adoption and estimated effects, if any, on our consolidated financial statements,
see Note 1, “Recent Accounting Pronouncements” in Part I, Item 1 of this Form 10-Q.
RESULTS OF OPERATIONS
The following table summarizes certain operating data as a percentage of net sales:
Second Quarter of Fiscal 2010 Compared to Second Quarter of Fiscal 2009
Net Sales
Our consolidated net sales increased 94.8% to $74.9 million in 2010, compared to net sales of $38.4
million in 2009. Sales of semiconductor equipment in the second quarter of fiscal 2010 were $65.6
million, and increased $40.8 million or 164.9% from 2009 and represented 87.6% of consolidated net
sales in 2010 versus 64.4% in 2009. As noted in the “Overview” above, semiconductor sales have
improved significantly and equipment utilization on customer test floors is high. According to
Semiconductor Equipment and Materials International (SEMI), orders for back-end semiconductor
production equipment have increased for sixteen consecutive months.
Sales of mobile microwave communications equipment in the second quarter of fiscal 2010 were $4.9
million, representing 6.5% of consolidated net sales in 2010, and decreased $4.4 million or 47.2%
when compared to 2009. The decrease in sales of our microwave communications business during the
second quarter of fiscal 2010 was a result of the deferral of revenue associated with a customer’s
orders that were shipped during the second quarter of fiscal 2010.
Sales of video cameras, represented 5.9% of consolidated net sales in 2010, and were $4.4 million
in both the second quarter of fiscal 2010 and 2009.
Gross Margin
Gross margin consists of net sales less cost of sales. Cost of sales consists primarily of the
cost of materials, assembly and test labor, and overhead from operations. Our gross margin can
fluctuate due to a number of factors, including, but not limited to, the mix of products sold,
product support costs, inventory reserve adjustments, and utilization of manufacturing capacity.
Our gross margin, as a percentage of net sales, increased to 36.6% in 2010 from 32.1% in 2009.
While higher than 2009, due to the leverage generated by increased business volume, our gross
margin in 2010 was impacted by higher costs due to the unforecasted production of our new test
handlers in our Poway plant to meet customer delivery requirements and other new product start-up
costs. Gross margin in the second quarter of fiscal 2010 was better than expected as revenue
recognized for Pyramid and Matrix semiconductor test handlers, which have lower margins, was lower
than forecasted. In the third quarter of fiscal 2010, as the sales of these low margin
Poway-manufactured semiconductor test handlers are recognized our gross margin will be negatively
impacted. We expect incremental improvement in our gross margin in the fourth quarter of fiscal
2010 and first half of fiscal 2011 after the manufacturing transition to Asia-based subcontractors
is completed. However, any unforeseen delays would have a negative impact on our operating results
for the reasons described herein.
18
Table of Contents
Cohu, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations June 26, 2010 Our gross margin is impacted by charges to cost of sales related to excess, obsolete and lower of
cost or market inventory issues. We compute the majority of our excess and obsolete inventory
reserve requirements using a one-year inventory usage forecast. During the second quarter of fiscal
2010, we recorded charges to cost of sales of approximately $0.2 million for excess and obsolete
inventory and offsetting these charges our gross margin was favorably impacted by $0.4 million as a
result of the sale of certain inventory which had been previously reserved. During the second
quarter of fiscal 2009, we recorded net charges to cost of sales of approximately $0.6 million, for
excess and obsolete inventory. While we believe our reserves for excess and obsolete inventory and
lower of cost or market concerns are adequate to cover known exposures at June 26, 2010, reductions
in customer forecasts or continued modifications to products, as a result of our failure to meet
specifications or other customer requirements, may result in additional charges to operations that
could negatively impact our gross margin in future periods. Conversely, if our actual inventory
usage is greater than our forecasted usage, our gross margin in future periods may be favorably
impacted.
Research and Development Expense (“R&D Expense”)
R&D expense consists primarily of salaries and related costs of employees engaged in ongoing
research, product design and development activities, costs of engineering materials and supplies,
and professional consulting expenses. R&D expense as a percentage of net sales was 12.0% in 2010,
compared to 20.2% in 2009 as a result of the increase in business volume. R&D expense increased in
absolute dollars to $9.0 million in 2010 from $7.8 million in 2009 due in part to reinstating
employee pay cuts that were in effect during 2009 and increased labor and material costs related to
new product development within our video camera segment.
Selling, General and Administrative Expense (“SG&A Expense)
SG&A expense consists primarily of salaries and benefit costs of employees, commission expense for
independent sales representatives, product promotion and costs of professional services. SG&A
expense as a percentage of net sales decreased to 12.7% in 2010, from 22.6% in 2009 as a result of
the increase in business volume. SG&A expense increased in absolute dollars to $9.5 million in
2010 from $8.7 million in 2009 due primarily to variable selling expenses as a result of increased
sales within our semiconductor equipment segment and reinstating employee pay cuts that were in
effect through 2009.
Interest and other, net
Interest and other, net was approximately $0.1 million and $0.3 million in the second quarter of
fiscal 2010 and 2009, respectively. Our interest income was lower in 2010 due to lower short-term
interest rates.
Income Taxes
The income tax provision included in the condensed consolidated statements of operations for the
three months ended June 26, 2010 and June 27, 2009, 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 our estimates of pretax income or loss for the year change. The
effective tax rate for the three months ended June 26, 2010, was 26.1% and differs from the U.S.
federal statutory rate primarily due to our inability to benefit our domestic losses, foreign
income taxed at lower rates, state taxes and interest on unrecognized tax benefits.
In the quarter ended June 27, 2009, we recorded an increase in our valuation allowance on domestic
deferred tax assets, with a corresponding charge to our income tax provision, of approximately
$19.6 million as we were unable to conclude that it was more likely than not that such assets would
be realized. Our deferred tax asset valuation allowance at June 26, 2010 was approximately $25.6
million on gross deferred tax assets of approximately $30.5 million. The remaining $4.9 million of
gross deferred tax assets for which a valuation allowance was not recorded are realizable through
future reversals of existing taxable temporary differences.
In June, 2010 the Internal Revenue Service completed a routine examination of our 2006 to 2008 U.S.
income tax returns without any material adjustments. During the second quarter of fiscal 2010 the
Internal Revenue Service commenced a routine examination of our 2009 U.S. income tax return. This
examination is substantially complete and is expected to be finalized without any material
adjustments. There was no material change to our unrecognized tax benefits and interest accrued
related to unrecognized tax benefits during the three months ended June 26, 2010.
As a result of the factors set forth above, our net income was $6.7 million in 2010, compared to
net loss of $22.6 million in 2009.
19
Table of Contents
Cohu, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations June 26, 2010 First Six Months of Fiscal 2010 Compared to First Six Months of Fiscal 2009
Net Sales
Our consolidated net sales increased 86.3% to $139.7 million in 2010, compared to net sales of
$75.0 million in 2009. Sales of semiconductor equipment in the first six months of fiscal 2010 were
$121.6 million, and increased $72.2 million or 146.5% from 2009 and represented 87.0% of
consolidated net sales in 2010 versus 65.8% in 2009.
Sales of mobile microwave communications equipment in the first six months of fiscal 2010 were
$10.0 million, representing 7.2% of consolidated net sales in 2010, and decreased $7.3 million or
42.2% when compared to 2009. The decrease in sales of our microwave communications business during
the first six months of fiscal 2010 was attributable to decreased product shipments to unmanned air
vehicle program contractors and the deferral of revenue associated with a customer’s orders that
were shipped during the second quarter of fiscal 2010.
Sales of video cameras in the first six months of fiscal 2010 were $8.1 million, representing 5.8%
of consolidated net sales, and decreased $0.2 million or 3.0% when compared to the same period of
fiscal 2009.
Gross Margin
Our gross margin, as a percentage of net sales, increased to 33.9% in 2010 from 26.3% in 2009.
While higher than 2009, due to the leverage generated by increased business volume, our gross
margin in 2010 was impacted by higher costs due to the unforecasted production of our new test
handlers in our Poway plant to meet customer delivery requirements and other new product start-up
costs. Gross margin in the first six months of fiscal 2010 was better than expected as revenue
recognized for the lower margin Pyramid and Matrix semiconductor test handlers was lower than
forecasted. In the third quarter of fiscal 2010, as the sales of these low margin
Poway-manufactured semiconductor test handlers are recognized our gross margin will be negatively
impacted. We expect incremental improvement in our gross margin in the fourth quarter of fiscal
2010 and first half of fiscal 2011 after the manufacturing transition to Asia-based subcontractors
is completed. However, any unforeseen delays would have a negative impact on our operating results
for the reasons described herein.
During the first six months of fiscal 2009 our gross margin was impacted by (i) the substantial
decrease in the sales volume of our semiconductor equipment segment due to weak business conditions
and (ii) charges to cost of sales of approximately $3.6 million for excess and obsolete inventory.
R&D Expense
R&D expense as a percentage of net sales was 12.6% in 2010, compared to 21.0% in 2009 as a result
of the increase in business volume. R&D expense increased in absolute dollars to $17.7 million in
2010 from $15.7 million in 2009 due in part to reinstating employee pay cuts that were in effect
during 2009 and increased material costs related to product development within both our
semiconductor equipment and video camera segments.
SG&A Expense
SG&A expense as a percentage of net sales decreased to 13.9% in 2010, from 23.6% in 2009 as a
result of the increase in business volume. SG&A expense increased in absolute dollars to $19.4
million in 2010 from $17.7 million in 2009 due primarily to variable selling expenses as a result
of increased sales within our semiconductor equipment segment and reinstating employee pay cuts
that were in effect through 2009.
Interest and other, net
Interest and other, net was approximately $0.3 million and $0.8 million in the first six months of
fiscal 2010 and 2009, respectively. Our interest income was lower in 2010 due to lower short-term
interest rates.
20
Table of Contents
Cohu, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations June 26, 2010 Income Taxes
The income tax provision included in the condensed consolidated statements of operations for the
six months ended June 26, 2010 and June 27, 2009, 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 our estimates of pretax income or loss for the year change. The
effective tax rate for the six months ended June 26, 2010, was 29.0% and differs from the U.S.
federal statutory rate primarily due to our inability to benefit our domestic losses, foreign
income taxed at lower rates, state taxes and interest on unrecognized tax benefits.
There was no material change to our unrecognized tax benefits and interest accrued related to
unrecognized tax benefits during the six months ended June 26, 2010.
As a result of the factors set forth above, our net income was $7.6 million in 2010, compared to
net loss of $28.9 million in 2009.
LIQUIDITY AND CAPITAL RESOURCES
Our business is dependent on capital expenditures by semiconductor manufacturers and test
subcontractors that are, in turn, dependent on the current and anticipated market demand for
semiconductors. The cyclical and volatile nature of semiconductor equipment, our primary industry,
makes estimates of future revenues, results of operations and net cash flows difficult.
Our primary historical source of liquidity and capital resources has been cash flow generated by
our operations and we manage our businesses to maximize operating cash flows as our primary source
of liquidity. We use cash to fund growth in our operating assets and to fund new products and
product enhancements primarily through research and development.
Liquidity
Working Capital: The following summarizes our cash, cash equivalents, short-term investments and
working capital:
Cash Flows
Operating Activities: Operating cash flows consist of net income (loss), adjusted for non-cash
expenses and changes in operating assets and liabilities. Non-cash items include depreciation and
amortization; non-cash share-based compensation expense and deferred income taxes. Our net cash
provided by operating activities in the six months of fiscal 2010
totaled $9.5 million. Cash
provided by operating activities was impacted by changes in current assets and liabilities and
included increases in: accounts receivable of $11.7 million; inventories of $11.2 million; accounts
payable of $3.7 million; deferred profit of $6.4 million; and income tax payable of $6.6 million.
The increases in accounts receivable and inventories were driven primarily by our semiconductor
equipment operations and resulted from increased business volume and inventory purchases made to
support production requirements. Accounts payable increased due to higher business volume and the
timing of cash payments primarily within our semiconductor equipment operations and the increase in
deferred profit was primarily due to the deferral of certain semiconductor test handlers and
microwave communication equipment in accordance with our revenue recognition policy. The increase
in income taxes payable is a result of increased profitability and the timing of tax payments.
Investing Activities: Investing cash flows consist primarily of cash used for capital expenditures
in support of our businesses, proceeds from investment maturities, asset disposals and
divestitures, and cash used for purchases of investments and business acquisitions. Our net cash
used in investing activities in the first six months of fiscal 2010 totaled $4.0 million and was
primarily the result of $29.3 million in cash used for purchases of short-term investments, offset
by $27.3 million in net proceeds from sales and maturities of short-term investments. We invest
our excess cash, in an attempt to seek the highest available return while preserving capital, in
short-term investments since excess cash is only temporarily available and may be required for a
business-related purpose. Other expenditures in the first six months of fiscal 2010 included
purchases of property, plant and equipment of $2.0 million. The purchases of property, plant and
equipment were primarily made to support activities in our semiconductor equipment and microwave
communications equipment businesses and consisted primarily of equipment used in engineering,
manufacturing and related functions.
21
Table of Contents
Cohu, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations June 26, 2010 Financing Activities: Cash flows from financing activities consist primarily of net proceeds from
the issuance of common stock under our stock option and employee stock purchase plans and cash used
to pay dividends to our stockholders. We issue stock options and maintain an employee stock
purchase plan as components of our overall employee compensation. In the first six months of
fiscal 2010, we generated $1.4 million issuing common stock under our employee stock plans and we
paid dividends totaling $2.8 million, or $0.12 per common share. Future quarterly dividends are
subject to our cash liquidity, capital availability and periodic determinations by our Board of
Directors that cash dividends are in the best interests of our stockholders.
Capital Resources
We have a secured letter of credit facility (the “Secured Facility”) under which Bank of America,
N.A., has agreed to administer the issuance of letters of credit on behalf of Cohu and our
subsidiaries. The Secured Facility requires us to maintain deposits of cash or other approved
investments, which serve as collateral, in amounts that approximate our outstanding letters of
credit. As of June 26, 2010, we had approximately $0.5 million of standby letters of credit
outstanding.
We expect that we will continue to make capital expenditures to support our business and we
anticipate that present working capital will be sufficient to meet our operating requirements for
at least the next twelve months.
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations: Our significant contractual obligations consist of operating leases that
have not changed materially from those disclosed in our Annual Report on Form 10-K for the year
ended December 26, 2009.
Purchase Commitments: From time to time, we enter into commitments with our vendors to purchase
inventory at fixed prices or in guaranteed quantities. We are not able to determine the aggregate
amount of such purchase orders that represent contractual obligations, as purchase orders may
represent authorizations to purchase rather than binding agreements. Our purchase orders are based
on our current manufacturing needs and are fulfilled by our vendors within relatively short time
horizons. We typically do not have significant agreements for the purchase of raw materials or
other goods specifying minimum quantities or set prices that exceed our expected requirements for
the next three months.
Off-Balance Sheet Arrangements: During the ordinary course of business, we provide standby letters
of credit instruments to certain parties as required. As of June 26, 2010, the maximum potential
amount of future payments that we could be required to make under these standby letters of credit
was approximately $0.5 million. No liability has been recorded in connection with these
arrangements beyond those required to appropriately account for the underlying transaction being
guaranteed. We do not believe, based on historical experience and information currently available,
that it is probable that any amounts will be required to be paid under these arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Investment and Interest Rate Risk.
At June 26, 2010, our investment portfolio included short-term, fixed-income investment securities
with a fair value of approximately $48.8 million. These securities are subject to interest rate
risk and will likely decline in value if interest rates increase. Our future investment income may
fall short of expectations due to changes in interest rates or we may suffer losses in principal if
we are forced to sell securities that decline in market value due to changes in interest rates. As
we classify our short-term securities as available-for-sale, no gains or losses are recognized due
to changes in interest rates unless such securities are sold prior to maturity or declines in fair
value are determined to be other-than-temporary. Due to the relatively short duration of our
investment portfolio, an immediate ten percent change in interest rates would have no material
impact on our financial condition or results of operations.
We evaluate our investments periodically for possible other-than-temporary impairment by reviewing
factors such as the length of time and extent to which fair value has been below cost basis, the
financial condition of the issuer and our ability and intent to hold the investment for a period of
time sufficient for anticipated recovery of market value. As of June 26, 2010, we evaluated our
investments with loss positions and determined that these losses were temporary.
22
Table of Contents
Cohu, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations June 26, 2010 Foreign currency exchange risk.
We conduct business on a global basis in a number of major international currencies. As such, we
are exposed to adverse as well as beneficial movements in foreign currency exchange rates. The
majority of our sales are denominated in U.S. dollars except for certain of our revenues that are
denominated in Euros. Certain expenses incurred by our non-U.S. operations, such as employee
payroll and benefits as well as some raw materials purchases and other expenses, are denominated
and paid in local currency.
We considered a hypothetical ten percent adverse movement in foreign exchange rates to the
underlying exposures described above and believe that these hypothetical market movements would
have no material impact on our consolidated financial position, results of operations or cash
flows.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures. Under the supervision and with the
participation of our management, including our principal executive officer and principal financial
officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is
defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as
amended. Based on this evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures were effective as of the end of the period
covered by this quarterly report.
It should be noted that any system of controls, however well designed and operated, can provide
only reasonable, and not absolute, assurance that the objectives of the system are met. In
addition, the design of any control system is based in part upon certain assumptions about the
likelihood of future events. Because of these and other inherent limitations of control systems,
there can be no assurance that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote. Our disclosure controls and procedures are
designed to provide reasonable assurance of achieving their objectives and our principal executive
officer and principal financial officer concluded that our disclosure controls and procedures were
effective at the reasonable assurance level.
(b) Changes in Internal Controls. During the last fiscal quarter, there have been no changes in our
internal control over financial reporting that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
23
Table of Contents
Part II OTHER INFORMATION
Item 1. Legal Proceedings.
The information set forth above under Note 8 contained in the “Notes to Unaudited
Condensed Consolidated Financial Statements” on Page 13 of this Form 10-Q is
incorporated herein by reference.
Item 1A. Risk Factors.
The most significant risk factors applicable to Cohu are described in Part I, Item 1A
(Risk Factors) of Cohu’s Annual Report on Form 10-K for the fiscal year ended December
26, 2009 (our “2009 Form 10-K”). There have been no material changes to the risk factors
previously disclosed in our 2009 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. (Removed and Reserved).
Item 5. Other Information.
None.
24
Table of Contents
Item 6. Exhibits.
25
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
26
Table of Contents
EXHIBIT INDEX
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| |||||||
