1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-4298 COHU, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 95-1934119 - -------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 5755 KEARNY VILLA ROAD, SAN DIEGO, CALIFORNIA 92123 - -------------------------------------------------------------------------------- (Address of principal executive office) (Zip Code) 858-277-6700 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of June 30, 1999, the Registrant had 9,901,762 shares of its $1.00 par value common stock outstanding.
2 COHU, INC. INDEX FORM 10-Q JUNE 30, 1999 <TABLE> <CAPTION> PART I FINANCIAL INFORMATION PAGE NUMBER Item 1. Financial Statements: <S> <C> <C> Condensed Consolidated Balance Sheets June 30, 1999 (Unaudited) and December 31, 1998...............................................3 Condensed Consolidated Statements of Income (Unaudited) Three and Six Months Ended June 30, 1999 and 1998.............................................4 Condensed Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, 1999 and 1998.......................................................5 Notes to Unaudited Condensed Consolidated Financial Statements................................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................................8 Item 3. Quantitative and Qualitative Disclosures about Market Risk.....................................12 PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders............................................15 Item 5. Other Information..............................................................................15 Item 6. Exhibits and Reports on Form 8-K...............................................................15 Signatures ...............................................................................................16 </TABLE> 2
3 COHU, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) <TABLE> <CAPTION> ASSETS JUNE 30, 1999 DECEMBER 31, 1998 ------------- ----------------- (Unaudited) <S> <C> <C> Current assets: Cash and cash equivalents $ 55,350 $ 74,446 Short-term investments 26,872 12,257 Accounts receivable, less allowance for doubtful accounts of $1,275 in 1999 and $1,338 in 1998 32,049 18,800 Inventories: Raw materials and purchased parts 14,839 12,977 Work in process 16,410 5,927 Finished goods 7,718 6,973 -------- -------- 38,967 25,877 Deferred income taxes 10,477 10,477 Prepaid expenses 1,777 1,541 -------- -------- Total current assets 165,492 143,398 Property, plant and equipment, at cost: Land and land improvements 2,501 2,501 Buildings and building improvements 12,162 12,102 Machinery and equipment 18,402 17,801 -------- -------- 33,065 32,404 Less accumulated depreciation and amortization 15,928 14,791 -------- -------- Net property, plant and equipment 17,137 17,613 Goodwill, net of accumulated amortization of $2,116 in 1999 and $1,972 in 1998 1,011 1,155 Other assets 65 65 -------- -------- $183,705 $162,231 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 12,929 $ 3,016 Income taxes payable 5,106 3,070 Other accrued liabilities 21,100 17,169 -------- -------- Total current liabilities 39,135 23,255 Accrued retiree medical benefits 992 993 Deferred income taxes 520 520 Stockholders' equity: Preferred stock - - Common stock 9,902 9,779 Paid in excess of par 12,153 11,169 Retained earnings 121,003 116,515 -------- -------- Total stockholders' equity 143,058 137,463 -------- -------- $183,705 $162,231 ======== ======== </TABLE> See accompanying notes 3
4 COHU, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in thousands, except per share amounts) <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1999 1998 1999 1998 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net sales $ 43,471 $ 55,202 $ 72,997 $111,893 Cost and expenses: Cost of sales 25,750 35,625 44,914 68,992 Research and development 5,050 5,905 9,347 11,306 Selling, general and administrative 6,154 6,239 11,241 12,415 -------- -------- -------- -------- 36,954 47,769 65,502 92,713 -------- -------- -------- -------- Income from operations 6,517 7,433 7,495 19,180 Interest income 1,053 780 2,166 1,549 -------- -------- -------- -------- Income before income taxes 7,570 8,213 9,661 20,729 Provision for income taxes 2,700 2,900 3,400 7,200 -------- -------- -------- -------- Net income $ 4,870 $ 5,313 $ 6,261 $ 13,529 ======== ======== ======== ======== Earnings per share: Basic $ .49 $ .55 $ .64 $ 1.39 ======== ======== ======== ======== Diluted $ .48 $ .53 $ .62 $ 1.35 ======== ======== ======== ======== Weighted average shares used in computing earnings per share: Basic 9,863 9,726 9,835 9,706 ======== ======== ======== ======== Diluted 10,173 10,012 10,116 10,040 ======== ======== ======== ======== </TABLE> See accompanying notes. 4
5 COHU, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, 1999 1998 -------- -------- <S> <C> <C> Cash flows from operating activities: Net income $ 6,261 $ 13,529 Adjustments to reconcile net income to net cash provided from operating activities: Depreciation and amortization 1,365 1,207 Purchase consideration to be paid with stock - 361 Increase (decrease) in accrued retiree medical benefits (1) 44 Changes in assets and liabilities: Accounts receivable (13,249) (6,637) Inventories (13,090) 1,151 Prepaid expenses (236) 64 Accounts payable 9,913 (5,643) Income taxes payable 2,036 1,423 Other accrued liabilities 3,931 (526) -------- -------- Net cash provided by (used for) operating activities (3,070) 4,973 Cash flows from investing activities: Purchases of short-term investments (20,915) (8,084) Maturities of short-term investments 6,300 13,214 Purchases of property, plant, equipment and other assets (745) (1,295) -------- -------- Net cash provided by (used for) investing activities (15,360) 3,835 Cash flows from financing activities: Issuance of stock, net 1,107 1,873 Cash dividends (1,773) (1,555) -------- -------- Net cash provided by (used for) financing activities (666) 318 -------- -------- Net increase (decrease) in cash and cash equivalents (19,096) 9,126 Cash and cash equivalents at beginning of period 74,446 39,736 -------- -------- Cash and cash equivalents at end of period $ 55,350 $ 48,862 ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes $ 1,364 $ 5,777 </TABLE> See accompanying notes. 5
6 COHU, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 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") considers necessary for a fair statement of the results for the period. The operating results for the three and six months ended June 30, 1999 are not necessarily indicative of the operating results for the entire year or any future period. These financial statements should be read in conjunction with the consolidated financial statements incorporated by reference in the Company's Annual Report on Form 10-K for the year ended December 31, 1998 and management's discussion and analysis of financial condition and results of operations included elsewhere herein. Certain amounts in the December 31, 1998 consolidated balance sheet have been reclassified to conform to the June 30, 1999 presentation. 2. EARNINGS PER SHARE Earnings per share are computed in accordance with Financial Accounting Standards Board ("FASB") Statement No. 128, Earnings per Share. Basic earnings per share are computed using the weighted average number of common shares outstanding during each period. Diluted earnings per share include the dilutive effect of common shares potentially issuable upon the exercise of stock options. For purposes of computing diluted earnings per share, weighted average common share equivalents do not include stock options with an exercise price that exceeds the average fair market value of the Company's common stock for the period. For the three and six months ended June 30, 1999, options to purchase approximately 53,000 and 82,000 shares of common stock at average prices of $40.66 and $36.10, respectively, were excluded from the computation, and for the three and six months ended June 30, 1998, options to purchase approximately 216,000 and 120,000 shares of common stock at average prices of $37.23 and $37.86, respectively, were excluded from the computation. The following table reconciles the denominators used in computing basic and diluted earnings per share: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1999 1998 1999 1998 ------ ------ ------ ------ (in thousands) (in thousands) <S> <C> <C> <C> <C> Weighted average common shares outstanding 9,863 9,726 9,835 9,706 Effect of dilutive stock options 310 286 281 334 ------ ------ ------ ------ 10,173 10,012 10,116 10,040 ====== ====== ====== ====== </TABLE> 6
7 COHU, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 3. SEGMENT AND RELATED INFORMATION The following information is presented pursuant to FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related Information. Intersegment sales were not significant in any period. <TABLE> <CAPTION> Three months ended Six months ended June 30, June 30, 1999 1998 1999 1998 ------- ------- ------- -------- (in thousands) (in thousands) <S> <C> <C> <C> <C> Net sales: Semiconductor equipment $35,382 $45,905 $57,756 $ 93,518 Television cameras 4,944 5,316 9,173 10,712 ------- ------- ------- -------- Net sales for reportable segments 40,326 51,221 66,929 104,230 All other operating segments 3,145 3,981 6,068 7,663 ------- ------- ------- -------- Total consolidated net sales $43,471 $55,202 $72,997 $111,893 ======= ======= ======= ======== Operating profit (loss): Semiconductor equipment $ 7,229 $ 7,412 $ 8,687 $ 18,617 Television cameras 337 599 511 1,208 ------- ------- ------- -------- Operating profit for reportable segments 7,566 8,011 9,198 19,825 All other operating segments (538) (62) (800) 170 ------- ------- ------- -------- Total consolidated operating profit 7,028 7,949 8,398 19,995 Other unallocated amounts: Corporate expenses (439) (477) (759) (736) Interest income 1,053 780 2,166 1,549 Goodwill amortization (72) (39) (144) (79) ------- ------- ------- -------- Income before income taxes $ 7,570 $ 8,213 $ 9,661 $ 20,729 ======= ======= ======= ======== </TABLE> <TABLE> <CAPTION> June 30, 1999 December 31, 1998 ------------- ----------------- (in thousands) <S> <C> <C> Total assets by segment: Semiconductor equipment $ 74,739 $ 50,754 Television cameras 9,493 8,728 -------- -------- Total assets for reportable segments 84,232 59,482 All other operating segments 6,076 7,537 Corporate 93,397 95,212 -------- -------- Total consolidated assets $183,705 $162,231 ======== ======== </TABLE> 7
8 COHU, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS JUNE 30, 1999 This Form 10-Q contains certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and is subject to the Safe Harbor provisions created by that statute. The words "anticipate", "expect", "believe", and similar expressions are intended to identify such statements. Such statements are subject to various risks and uncertainties, including but not limited to those discussed herein and, in particular, under the caption "Business and Market Risks" that could cause actual results to differ materially from those projected. RESULTS OF OPERATIONS SECOND QUARTER 1999 COMPARED TO SECOND QUARTER 1998 Net sales decreased 21% to $43.5 million in 1999 compared to net sales of $55.2 million in 1998. The second quarter of 1998 included a significant amount of revenue from sales of the Company's Enterprise test-in-tray handler. There were no Enterprise handler sales in the 1999 period. Sales of semiconductor test handling equipment in 1999 decreased 23% from the 1998 period and accounted for 81% of consolidated net sales in 1999 versus 83% in 1998. Sales of television cameras and other equipment decreased 7% while the combined sales of metal detection and microwave equipment decreased 21%. Export sales accounted for 67% of net sales in the second quarter of 1999 compared to 44% for the year ended December 31, 1998. Gross margin as a percentage of net sales increased to 40.8% in 1999 from 35.5% in 1998 as a result of higher margins in the semiconductor equipment business. Within the semiconductor equipment segment, margins increased in 1999 primarily as a result of changes in product mix. During the second quarter of 1998 the Company shipped a significant number of its Enterprise semiconductor test handlers. The gross margins realized on these sales were lower than the Company's established semiconductor handler products due to manufacturing inefficiencies incurred in the early stages of producing new equipment and higher estimated warranty costs. Research and development expense as a percentage of net sales was 11.6% in 1999, compared to 10.7% in 1998, decreasing in absolute dollars from $5.9 million to $5.1 million. Selling, general and administrative expense as a percentage of net sales increased to 14.2% in 1999 from 11.3% in 1998 primarily as a result of the decrease in business volume. Interest income increased to $1.1 million in 1999 from $.8 million in 1998 as a result of the increase in average cash and investments. The provision for income taxes expressed as a percentage of pre-tax income was 35.7% in the second quarter of 1999 and 35.3% for the second quarter of 1998. As a result of the factors set forth above, net income decreased from $5.3 million in 1998 to $4.9 million in 1999. SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998 Net sales decreased 35% to $73.0 million in 1999 compared to net sales of $111.9 million in 1998. Net sales during the first half of 1999 were negatively impacted by the semiconductor industry downturn that began in mid 1998. In addition, the second quarter of 1998 included a significant amount of revenue from sales of the Company's Enterprise handler with none in the 1999 period. Sales of semiconductor test handling equipment in 1999 decreased 38% from the 1998 period and accounted for 79% of consolidated net sales in 1999 versus 84% in 1998. Sales of television cameras and other equipment decreased 14% while the combined sales of metal detection and microwave equipment decreased 21%. Export sales accounted for 62% of net sales in the first six months of 1999 compared to 44% for the year ended December 31, 1998. Gross margin as a percentage of net sales was 38.5% in 1999 versus 38.3% in 1998. The gross margin in 1999 was negatively impacted by lower business volume while the 1998 gross margin was adversely impacted by lower margins on sales of the Company's Enterprise test handlers. Research and 8
9 COHU, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS JUNE 30, 1999 SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998 (CONT.) development expense as a percentage of net sales was 12.8% in 1999, compared to 10.1% in 1998, decreasing in absolute dollars from $11.3 million to $9.3 million. Selling, general and administrative expense as a percentage of net sales increased to 15.4% in 1999 from 11.1% in 1998 primarily as a result of the decrease in business volume. Interest income increased to $2.2 million in 1999 from $1.5 million 1998 as a result of the increase in average cash and investments. The provision for income taxes expressed as a percentage of pre-tax income was 35.2% in the first six months of 1999 compared to 34.7% for the first six months of 1998. As a result of the factors set forth above, net income decreased from $13.5 million in 1998 to $6.3 million in 1999. LIQUIDITY AND CAPITAL RESOURCES The Company's net cash flows used for operating activities in the first six months of 1999 totaled $3.1 million. The major components of cash flows used for operating activities were net income of $6.3 million and an increase in accounts payable of $9.9 million offset by increases in inventories and accounts receivable of $13.1 million and of $13.2 million, respectively. Net cash used for investing activities included $14.6 million for the purchase of short-term investments, less maturities, and purchases of property, plant and equipment and other assets of $.7 million. Net cash used for financing activities was $.7 million. Cash used for financing activities included $1.8 million for the payment of dividends, offset by $1.1 million received from the issuance of stock upon the exercise of stock options. The Company had $10 million available under its bank line of credit and working capital of $126.4 million at June 30, 1999. It is anticipated that present working capital and available borrowings under the line of credit will be sufficient to meet the Company's operating requirements for the next twelve months. BUSINESS AND MARKET RISKS INDUSTRY CYCLES The Company's operating results are substantially dependent on its semiconductor equipment business. This capital equipment business is in turn highly dependent on the overall strength of the semiconductor industry. Historically, the semiconductor industry has been highly cyclical with recurring periods of oversupply and excess capacity, which often have had a significant effect on the semiconductor industry's demand for capital equipment, including equipment of the type manufactured and marketed by the Company. The Company believes that the markets for newer generations of semiconductors may also be subject to similar cycles and severe downturns, such as those experienced in 1996 and 1998. Reductions in capital equipment investment by semiconductor manufacturers will adversely affect the Company's financial position and results of operations. RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCTS Semiconductor equipment and processes are subject to rapid technological change. The Company believes that its future success will depend in part on its ability to enhance existing products and develop new products with improved performance capabilities. The Company expects to continue to invest heavily in research and development and must manage product transitions successfully, as introductions of new products could adversely impact sales or margins of existing products. In addition, the introduction of new products increases the risk that existing products will become obsolete resulting in greater excess and obsolete inventory exposure. This increased exposure may result in increased inventory reserve requirements similar to or in excess of those recorded in 1998 that could have a material adverse impact on the Company's financial condition and results of operations. 9
10 COHU, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS JUNE 30, 1999 BUSINESS AND MARKET RISKS (CONT.) The design, development, commercial introduction and manufacture of new semiconductor test handling equipment is an inherently complex process that involves a number of risks and uncertainties. These risks include potential problems in meeting customer performance requirements, integration of the test handler with other suppliers' equipment and the customers' manufacturing processes, transitioning from product development to volume manufacturing and the ability of the equipment to satisfy the semiconductor industry's constantly evolving needs and achieve commercial acceptance at prices that produce satisfactory profit margins. The design and development of new test handling equipment is heavily influenced by changes in integrated circuit (IC) back-end manufacturing processes and IC package design changes. The Company believes that the rate of change in such processes and IC packages is accelerating. As a result of these changes and other factors, assessing the market potential and commercial viability of new test handling products is extremely difficult and subject to a great deal of risk. In addition, not all IC manufacturers employ the same manufacturing processes. Differences in such processes make it difficult to design standard semiconductor test handler products that are capable of achieving broad market acceptance. No assurance can be made that the Company will accurately assess the semiconductor industry's future test handler requirements and design and develop products that meet such requirements and achieve market acceptance. Failure to accurately assess customer requirements and market trends for new semiconductor test handler products may have a materially adverse impact on the Company's operations, financial condition and results of operations. The transition from product development to the manufacture of new semiconductor equipment is a difficult process and delays in product introductions and problems in manufacturing such equipment are common. During 1998 and 1999 the Company experienced difficulties in manufacturing and volume production of its new Enterprise and Castle test handlers. These difficulties, which have been exacerbated by a significant increase in orders for the Castle and the Company's other pick and place handler products, are expected to continue at least through the third quarter of 1999. In addition, after sale support and warranty costs are typically greater with new test handlers than with established products. There can be no assurance that future technologies, processes and product developments will not render the Company's current or future product offerings obsolete or that the Company will be able to develop, introduce and successfully manufacture new products or make enhancements to its existing products in a timely manner to satisfy customer requirements or achieve market acceptance. Furthermore, there is no assurance that the Company will realize acceptable profit margins on such products. BACKLOG The Company's order backlog has risen dramatically from December 31, 1998 primarily as a result of the improved business conditions in the semiconductor equipment industry and strong demand for the Company's new pick and place test handler products. A significant portion of the semiconductor test handling equipment backlog at June 30, 1999 was for new products, including the Castle and Summit test handlers. Due to the possibility of customer changes in delivery schedules, cancellation of orders, potential delays in product shipments and failure to satisfy customer acceptance requirements, the Company's backlog as of any point in time may not be representative of actual sales in any future period. 10
11 COHU, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS JUNE 30, 1999 BUSINESS AND MARKET RISKS (CONT.) No assurance can be given that the Company will successfully resolve these or other issues. All orders are subject to cancellation or rescheduling by the customer with limited penalty. DEMANDS ON INFRASTRUCTURE The semiconductor equipment industry is characterized by dramatic and sometimes volatile changes in demand for its products. Changes in product demand result from a number of factors including the semiconductor industry's ever changing and unpredictable capacity requirements and changes in IC design and packaging. Sudden changes in demand for semiconductor equipment have a significant impact on the operations of the Company and other semiconductor equipment manufacturers. In response to a severe industry downturn in 1998, the Company reduced its total workforce by approximately 40%. During the first six months of 1999, the Company increased its workforce by more than 30% as business conditions in the semiconductor equipment industry and the Company's order backlog improved dramatically. Such radical changes in workforce levels place enormous demands on the Company's operations and infrastructure since newly hired personnel rarely possess the expertise and level of experience of people they replace. The Company has recently experienced difficulties, particularly in manufacturing, in training the large number of additions to its workforce. In addition, competition for the employment services of certain personnel, particularly those with technical skills, is intense. No assurance can be given that the Company will successfully adjust its production capacity to meet customers' changing requirements. The inability to meet such requirements will have an adverse impact on the Company's financial position and results of operations. DECLINE IN GRAVITY-FEED IC TEST HANDLER SALES Sales of gravity-feed IC test handlers used in DRAM testing have represented a significant percentage of the Company's total semiconductor equipment related revenue during the last five years. Due to changes in IC package technology, gravity-feed handlers are no longer suitable for handling many types of DRAMs. As a result, the Company has seen a significant decline in sales of its gravity-feed test handler products. The Company introduced its Enterprise handler in 1998 that employs a handling technique, known as test- in-tray, that is particularly suited for parallel test applications like DRAMs. While the benefits of test-in-tray may be significant and the Company sold a significant number of these handlers in 1998, market acceptance of this product has been very limited and the future use of this technology is uncertain. If the Company is unable to successfully develop and market new products or enhancements to existing products for DRAM applications the Company's results of operations will be adversely impacted. HIGHLY COMPETITIVE INDUSTRY The semiconductor equipment industry is intensely competitive and the Company faces substantial competition from numerous companies throughout the world. Some of these competitors have substantially greater financial, engineering, manufacturing and customer support capabilities and offer more extensive product offerings than the Company. In addition, there are smaller, emerging semiconductor equipment companies that provide or may provide innovative technology incorporated in products that may compete favorably against those of the Company. The Company expects its competitors to continue to improve the design and performance of their current products and to introduce new products with improved 11
12 COHU, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS JUNE 30, 1999 BUSINESS AND MARKET RISKS (CONT.) performance capabilities. Failure to introduce new products in a timely manner, the introduction by competitors of products with perceived or actual advantages or disputes over rights of the Company or its competitors to use certain intellectual property or technology could result in a loss of the Company's competitive position and reduced sales of or margins on existing products. CUSTOMER CONCENTRATION As is common in the semiconductor equipment industry, the Company relies on a limited number of customers for a substantial percentage of its net sales. In 1998, three customers of the semiconductor equipment segment accounted for 51% of the Company's net sales. The loss of or a significant reduction in orders by these or other significant customers would adversely impact the Company's financial condition and results of operations. Furthermore, the concentration of the Company's revenues in a limited number of large customers may cause significant fluctuations in the Company's future annual and quarterly operating results. NON SEMICONDUCTOR EQUIPMENT BUSINESSES The Company develops, manufactures and sells products used in closed circuit television, metal detection and microwave radio applications. These products are sold in highly competitive markets and many competitors are segments of large, diversified companies with substantially greater financial, engineering, marketing, manufacturing and customer support capabilities than the Company. In addition, there are smaller companies that provide or may provide innovative technology incorporated in products that may compete favorably against those of the Company. The Company has seen a significant decline in the operating results of these businesses over the last several years and the future prospects for certain of these businesses remain uncertain. No assurance can be given that the Company will continue to compete successfully in any of these businesses. FOREIGN SALES During the first six months of 1999, 62% of the Company's total net sales were exported to foreign countries, including more than 70% of the sales in the semiconductor equipment segment. The majority of the Company's export sales are made to destinations in Asia. Instability in global economic markets, particularly in Asia, may adversely impact the demand for capital equipment, including equipment of the type manufactured and marketed by the Company. In addition, changes in the amount or price of semiconductors produced in Asia could impact the profitability or capital equipment spending programs of the Company's foreign and domestic customers. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK At June 30, 1999 the Company's investment portfolio includes fixed-income securities of $77 million. These securities are subject to interest rate risk and will decline in value if interest rates increase. Due to the relatively short duration of the Company's investment portfolio, an immediate 10 percent increase in interest rates would have no material impact on the Company's financial condition or results of operations. The Company generally conducts business, including sales to foreign customers, in U. S. dollars and as a result has limited foreign currency exchange rate risk. Monetary assets and liabilities of the Company's 12
13 COHU, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS JUNE 30, 1999 BUSINESS AND MARKET RISKS (CONT.) Singapore and Taiwan operations are not significant. The effect of an immediate 10 percent change in foreign exchange rates would not have a material impact on the Company's financial condition or results of operations. YEAR 2000 RISKS The Company has a Year 2000 ("Y2K") Task Force focusing on four key readiness areas: 1) Internal Infrastructure Readiness, addressing internal hardware and software, including both information technology and non-information technology systems; 2) Product Readiness, addressing product functionality; 3) Supplier Readiness, addressing the preparedness of key suppliers to the Company and 4) Customer Readiness, addressing customer support. For each readiness area, the Company is performing a risk assessment, conducting testing and remediation, developing contingency plans to mitigate unknown risks and communicating with employees, suppliers, customers and other third parties to raise awareness of the Y2K problem. Internal Infrastructure Readiness: The Company, assisted by third parties, has completed an assessment of internal applications and computer hardware. Some software applications have been made Y2K compliant and resources have been assigned to address other applications based on their importance and the time required to make them Y2K compliant. All software remediation is expected to be completed no later than September 1999. The Y2K compliance evaluation of hardware, including hubs, routers, telecommunication equipment, workstations and other items is also expected to be completed by September 1999. In addition to applications and information technology hardware, the Company is in the process of assessing, testing and remediating its non-information technology systems including embedded systems, facilities and other operations. The Company expects to have this work completed by September 1999. Product Readiness: This program focuses on identifying and resolving Y2K issues existing in the Company's products. The program encompasses a number of activities including testing, evaluation, engineering and manufacturing implementation. Customers are being notified of known risk areas and proposed remediation plans. The Company has made Y2K retrofits available to certain customers and expects to have retrofits available for all customers by July 1999. A contingency team will be available after July 1999 to assist those customers experiencing difficulties with the Company's products. Supplier Readiness: This program focuses on minimizing the risks associated with key suppliers. The Company has identified and contacted key suppliers to solicit information on their Y2K readiness. To date, the Company has received responses from the majority of its key suppliers most of whom indicate that they believe products provided to the Company are either Y2K compliant or will be made Y2K complaint on a timely basis. Based on the Company's assessment of each supplier's progress to adequately address the Y2K issue, the Company is developing a supplier action list and contingency plans. Supplier readiness issues that potentially affect the Company's products are expected to be addressed by September 1999. 13
14 COHU, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS JUNE 30, 1999 BUSINESS AND MARKET RISKS (CONT.) Customer Readiness: This program focuses on customer support, including the coordination of retrofit activity and developing contingency plans where appropriate. The Company is currently working with its customers to develop and implement potential retrofit or upgrade programs and offering assistance in making its products Y2K compliant. The Company estimates that total Y2K costs will be approximately $500,000, the great majority of which will be incurred by January 2000. Y2K costs incurred through June 30, 1999 have been charged to operations and have not been material. The Company is continuing its assessments and developing alternatives that will necessitate refinement of this estimate over time. There can be no assurance, however, that there will not be a delay in, or increased costs associated with, the programs described in this section. Since the efforts described above are ongoing, all potential Y2K complications have not yet been identified. Therefore, the potential impact of these complications on the Company's financial condition and results of operations cannot be determined at this time. If computer systems used by the Company or its suppliers, the performance of products provided to the Company by suppliers, or the software applications used in products manufactured and sold by the Company, fail or experience significant difficulties related to Y2K, the Company's results of operations and financial condition could be materially adversely affected. Due to all the above and other factors, historical results may not be indicative of results of operations for any future period. In addition, certain matters discussed above are forward-looking statements that are subject to the risks and uncertainties noted herein and the other risks and uncertainties listed from time to time in the Company's filings with the Securities and Exchange Commission, including but not limited to the 1998 Annual Report on Form 10-K, that could cause actual results to differ materially from those projected or forecasted. The Company undertakes no obligation to update the information, including the forward-looking statements, in this Form 10-Q. 14
15 Part II OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Stockholders was held on May 11, 1999. At the meeting the following directors were elected: <TABLE> <CAPTION> DIRECTOR Number of Common Shares Voted -------- ------------------------------ For Withhold Authority --------- ------------------ <S> <C> <C> Charles A. Schwan 9,167,254 42,068 Gene E. Leary 9,056,531 152,791 </TABLE> The directors continuing in office until 2000 or 2001 are James W. Barnes, Harry L. Casari, Frank W. Davis and Harold Harrigian. ITEM 5. OTHER INFORMATION On July 13, 1999 William S. Ivans, the Chairman of the Board of Directors, was killed in a glider plane accident. On July 15, 1999 the Company's Board of Directors elected Charles A. Schwan as Chairman of the Board succeeding Mr. Ivans. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. <TABLE> <S> <C> <C> (a) Exhibits: 3.1(a) - Amended and Restated Certificate of Incorporation of Cohu, Inc. 10.1 - Amendment No. 1 to Business Loan Agreement dated May 19, 1999 between Cohu, Inc. and Bank of America National Trust and Savings Association 10.2 - Lease Assignment Agreement dated June 25, 1999 by and between Cohu, Inc., Cubic Defense Systems, Inc. and Thomas G. Plein and Diane L. Plein 27.1 - Financial Data Schedule (b) Reports on Form 8-K: The Company did not file any reports on Form 8-K during the quarter ended June 30, 1999. </TABLE> 15
16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COHU, INC. ------------------------------------ (Registrant) Date: July 19, 1999 /s/ Charles A. Schwan -------------------------- ------------------------------------ Charles A. Schwan President & Chief Executive Officer Date: July 19, 1999 /s/ John H. Allen -------------------------- ------------------------------------ John H. Allen Vice President, Finance & Chief Financial Officer 16