Cohu (COHU) 10-Q 2001 Q2 Quarterly report

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, 2001

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 Incorporation or Organization)	(I.R.S. Employer Identification No.)

12367 Crosthwaite Circle, Poway, California	92064-6817
(Address of principal executive office)	(Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes    [ X ]      No    [   ]

As of June 30, 2001, the Registrant had 20,458,889 shares of its $1.00 par value common stock outstanding.

TABLE OF CONTENTS

		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
		Quantitative and qualitative disclosures about market risk.
Part II                      OTHER INFORMATION
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K.
SIGNATURES
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 10.3
EXHIBIT 10.4
EXHIBIT 10.5

COHU, INC.
INDEX
FORM 10-Q
JUNE 30, 2001

		Page Number
Part I	Financial Information
Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets (Unaudited) June 30, 2001 and December 31, 2000		3
	Condensed Consolidated Statements of Operations (Unaudited) Three and Six Months Ended    June 30, 2001 and 2000		4
	Condensed Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, 2001    and 2000		5
	Notes to Unaudited Condensed Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		9
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		16
Part II	Other Information
Item 4.	Submission of Matters to a Vote of Security Holders		17
Item 5.	Other Information		17
Item 6.	Exhibits and Reports on Form 8-K		18
Signatures			18

2

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

			June 30, 2001		December 31, 2000
ASSETS
Current assets:
	Cash and cash equivalents		$	83,421	$	79,119
	Short-term investments			17,379		13,468
	Accounts receivable, less allowance for doubtful accounts of $1,515 in 2001 and $2,227 in 2000			20,392		37,164
	Inventories:
		Raw materials and purchased parts		19,635		22,120
		Work in process		12,416		17,133
		Finished goods		6,548		6,786
				38,599		46,039
	Deferred income taxes			13,781		13,781
	Other current assets			5,299		3,145
		Total current assets		178,871		192,716
Property, plant and equipment, at cost:
	Land and land improvements			8,701		2,501
	Buildings and building improvements			32,239		12,795
	Machinery and equipment			22,690		22,138
	Land and building to be acquired			—		21,288
				63,630		58,722
	Less accumulated depreciation and amortization			22,501		20,605
		Net property, plant and equipment		41,129		38,117
Goodwill, net of accumulated amortization of $3,127 in 2001 and $2,549 in 2000				—		578
Other assets				157		84
			$	220,157	$	231,495
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	5,171	$	7,604
	Accrued compensation and benefits			5,543		8,955
	Accrued warranty			3,273		4,916
	Customer advances			1,925		834
	Deferred profit			2,669		5,960
	Other accrued liabilities			6,784		3,864
		Total current liabilities		25,365		32,133
Accrued retiree medical benefits				1,047		1,058
Deferred income taxes				464		464
Commitments
Stockholders’ equity:
	Preferred stock			—		—
	Common stock			20,459		20,313
	Paid in excess of par			10,466		8,957
	Retained earnings			162,356		168,570
		Total stockholders’ equity		193,281		197,840
			$	220,157	$	231,495

See accompanying notes.

3

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

			Three Months Ended					Six Months Ended
			June 30,					June 30,
			2001			2000		2001			2000
						(restated)					(restated)
Net sales			$	29,281		$	86,761	$	72,999		$	159,493
Cost and expenses:
		Cost of sales		21,686			51,700		53,919			95,902
		Research and development		6,637			8,313		15,067			15,068
		Selling, general and administrative		6,706			8,125		13,220			15,264
				35,029			68,138		82,206			126,234
Income (loss) from operations				(5,748	)		18,623		(9,207	)		33,259
Interest income				1,117			1,309		2,434			2,602
Income (loss) before income taxes				(4,631	)		19,932		(6,773	)		35,861
Provision (credit) for income taxes				(1,800	)		7,004		(2,600	)		12,480
Income (loss) before cumulative effect of change in accounting principle				(2,831	)		12,928		(4,173	)		23,381
Cumulative effect of change in accounting principle, net of $1,700 tax benefit				—			—		—			(3,299	)
Net income (loss)			$	(2,831	)	$	12,928	$	(4,173	)	$	20,082
Basic earnings (loss) per share:
	Income (loss) before cumulative effect of change in accounting principle		$	(.14	)	$	.64	$	(.20	)	$	1.16
	Cumulative effect of change in accounting principle			—			—		—			(.16	)
	Net income (loss)		$	(.14	)	$	.64	$	(.20	)	$	1.00
	Weighted average shares used in basic per share calculation			20,417			20,209		20,379			20,130
Diluted earnings (loss) per share:
	Income (loss) before cumulative effect of change in accounting principle		$	(.14	)	$	.61	$	(.20	)	$	1.10	��
	Cumulative effect of change in accounting principle			—			—		—			(.16	)
	Net income (loss)		$	(.14	)	$	.61	$	(.20	)	$	.94
	Weighted average shares used in diluted per share calculation			20,417			21,248		20,379			21,277

See accompanying notes.

4

COHU, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)

				Six Months Ended
				June 30,
				2001			2000
							(restated)
Cash flows from operating activities:
	Net income (loss)			$	(4,173	)	$	20,082
	Adjustments to reconcile net income (loss) to net cash provided from operating activities:
		Depreciation and amortization			2,554			1,620
		Decrease in accrued retiree medical benefits			(11	)		(12	)
		Changes in current assets and liabilities:
			Accounts receivable		16,772			(3,943	)
			Inventories		7,440			366
			Other current assets		(2,154	)		(531	)
			Accounts payable		(2,433	)		(2,419	)
			Income taxes payable		—			(2,074	)
			Customer advances		1,091			(6,994	)
			Deferred profit		(3,291	)		2,955
			Accrued compensation, warranty and other liabilities		(2,135	)		(669	)
			Net cash provided from operating activities		13,660			8,381
Cash flows from investing activities:
	Purchases of short-term investments				(9,122	)		(5,977	)
	Maturities of short-term investments				5,211			16,235
	Purchases of property, plant, equipment and other assets				(5,061	)		(1,428	)
			Net cash provided from (used for) investing activities		(8,972	)		8,830
Cash flows from financing activities:
	Issuance of stock, net				1,655			2,844
	Cash dividends				(2,041	)		(2,020	)
			Net cash provided from (used for) financing activities		(386	)		824
Net increase in cash and cash equivalents					4,302			18,035
Cash and cash equivalents at beginning of period					79,119			55,954
Cash and cash equivalents at end of period				$	83,421		$	73,989
Supplemental disclosure of cash flow information:
	Cash paid (refunded) during the period for:
		Income taxes		$	(156	)	$	14,374

See accompanying notes.

5

COHU, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001

1.	Basis of Presentation
	The accompanying interim financial statements are unaudited but include all adjustments (consisting of normal recurring adjustments) which Cohu, Inc. (the “Company” or “Cohu”) considers necessary for a fair statement of the results for the period. The operating results for the three and six months ended June 30, 2001 are not necessarily indicative of the operating results for the entire year or any future period. These financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2000 and management’s discussion and analysis of financial condition and results of operations included elsewhere herein.
	Cohu adopted Statement of Financial Accounting Standards No. 133,Accounting for Derivative Instruments and Hedging Activities (“Statement No. 133”), on January 1, 2001. Statement No. 133 requires, among other things, that all derivatives be recognized in the balance sheet at fair value and special accounting for hedging activities that meet certain criteria. The Company generally does not hold derivative instruments or engage in hedging activities and as a result the adoption of Statement No. 133 has had no material effect on the Company’s financial condition or results of operations.
2.	Change in Accounting for Revenue Recognition
	In the fourth quarter of 2000 the Company changed its method of revenue recognition for certain semiconductor equipment sales to comply with SEC Staff Accounting Bulletin No. 101,Revenue Recognition in Financial Statements(“SAB 101”). SAB 101 sets forth guidelines on the timing of revenue recognition based on factors such as passage of title, installation, payment and customer acceptance. The cumulative effect adjustment of the change in accounting on prior years through December 31, 1999 was a reduction to income of $3,299,000 (after credit for income taxes of $1,700,000) and is included in income for the six months ended June 30, 2000. The change was effective January 1, 2000 and amounts previously reported for the three and six months ended June 30, 2000 have been restated to reflect the application of SAB 101. The effect of the change on the second quarter of 2000 was to increase net sales $38,000 to $86,761,000 and decrease income before cumulative effect of change in accounting principle $186,000 ($.01 per diluted share) to $12,928,000 ($.61 per diluted share).
3.	Earnings (Loss) Per Share
	Earnings (loss) per share are computed in accordance with Financial Accounting Standards Board (“FASB”) Statement No. 128,Earnings per Share. Basic earnings (loss) 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, stock options with exercise prices that exceed the average fair market value of the Company’s common stock for the period are excluded. For the three and six months ended June 30, 2000, options to purchase approximately 50,000 and 25,000 shares of common stock at average prices of $38.81 and $38.81, respectively, were excluded from the computation. The impact of stock options is excluded for loss periods as they would be antidilutive. The following table reconciles the denominators used in computing basic and diluted earnings (loss) per share:

	Three months ended				Six months ended
	June 30,				June 30,
	2001		2000		2001		2000
	(in thousands)				(in thousands)
Weighted average common shares outstanding		20,417		20,209		20,379		20,130
Effect of dilutive stock options		—		1,039		—		1,147
		20,417		21,248		20,379		21,277

6

COHU, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001

4.	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. Amounts for the three and six months ended June 30, 2000 have been restated for the impact of SAB 101.

				Three months ended						Six months ended
				June 30,						June 30,
				2001			2000			2001			2000
				(in thousands)						(in thousands)
Net sales:
	Semiconductor equipment			$	21,800		$	76,793		$	57,024		$	139,854
	Television cameras				5,048			6,925			10,917			13,417
			Net sales for reportable segments		26,848			83,718			67,941			153,271
	All other				2,433			3,043			5,058			6,222
Total consolidated net sales				$	29,281		$	86,761		$	72,999		$	159,493
Operating profit (loss):
	Semiconductor equipment			$	(4,655	)	$	18,487		$	(8,001	)	$	33,125
	Television cameras				152			699			563			1,105
			Operating profit (loss) for reportable segments		(4,503	)		19,186			(7,438	)		34,230
	All other				(254	)		(4	)		(328	)		103
Total consolidated operating profit (loss)					(4,757	)		19,182			(7,766	)		34,333
Other unallocated amounts:
		Corporate expenses			(485	)		(487	)		(863	)		(930	)
		Interest income			1,117			1,309			2,434			2,602
		Goodwill amortization/write-down			(506	)		(72	)		(578	)		(144	)
Income (loss) before income taxes				$	(4,631	)	$	19,932		$	(6,773	)	$	35,861

			June 30, 2001		December 31, 2000
			(in thousands)
Total assets by segment:
	Semiconductor equipment		$	89,344	$	110,612
	Television cameras			9,705		10,951
		Total assets for reportable segments		99,049		121,563
	All other operating segments			6,731		6,477
	Corporate			114,377		103,455
Total consolidated assets			$	220,157	$	231,495

5.

Real Estate Transactions

On April 16, 2001 the Company sold its land and buildings in San Diego, California to TC Kearny Villa, L.P., an unrelated party, for $12.5 million, excluding commissions and other related expenses. The $12.5 million purchase price included a cash payment of $3.1 million and a $9.4 million, 8% non-recourse note, secured by a deed of trust on the property, due in six months. The note also provides for a 180-day extension option. The Company entered into a three-month leaseback of the property with the buyer. The sale-leaseback transaction has been accounted for as a financing pursuant to FASB No. 98,Accounting for Leases. The $3.1 million cash payment is included in other accrued liabilities at June 30, 2001. The net book value of the land and buildings sold was approximately $4.3 million and is included in similarly titled accounts in the June 30, 2001 balance sheet. The Company will record a pretax gain on the transaction of approximately $7.5 million in the third quarter of 2001, upon the expiration of the leaseback.

7

COHU, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001

	On April 23, 2001 the Company completed the acquisition of a 338,000 square-foot office/industrial building and approximately twenty acres of land in Poway, California (“the Poway Facility”). The purchase price of the Poway Facility was approximately $21.3 million and was funded from the Company’s cash reserves in October 2000. The purchase price has been allocated between land and land improvements and buildings and building improvements in the June 30, 2001 balance sheet. The Company remodeled the Poway Facility at a cost of approximately $3 million and moved its corporate headquarters and the San Diego operations of its Delta Design subsidiary to the Poway Facility in June 2001.
6.	Purchase of Automated Systems Assets
	On July 16, 2001 the Company purchased the assets of the Automated Systems business (“AS”) from Schlumberger Technologies, Inc. for $14.2 million in cash. AS designs, manufactures and sells semiconductor equipment including pick and place test handlers and burn-in board loaders and unloaders. The acquisition will be accounted for as a purchase. While the purchase price allocation is not yet completed, the Company expects a material portion of the purchase price to be allocated to in-process technology resulting in a charge to operations in the third quarter of 2001.

8

COHU, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2001

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. The words “anticipate”, “expect”, “believe”, “plan” 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 “Trends, Risks and Uncertainties” that could cause actual results to differ materially from those projected.

RESULTS OF OPERATIONS

Cohu’s primary business activity involves the development, manufacture, marketing and servicing of test handling equipment for the global semiconductor industry. Demand for Cohu’s products can change significantly from period to period as a result of numerous factors including, but not limited to, changes in global economic conditions, supply and demand for semiconductors, changes in semiconductor manufacturing capacity and processes and competitive product offerings. Due to these and other factors, Cohu’s historical results of operations, including the periods described herein, may not be indicative of future operating results.

Second Quarter 2001 Compared to Second Quarter 2000

In the fourth quarter of 2000, Cohu changed its method of accounting for revenue recognition to comply with SEC Staff Accounting Bulletin No. 101 (“SAB 101”). In accordance with SAB 101, the new method of accounting has been applied retroactively to transactions that occurred prior to 2000. The cumulative effect adjustment of the change in accounting on prior years through December 31, 1999 was a reduction to income of $3.3 million (after credit for income taxes of $1.7 million) and is included in income for the six months ended June 30, 2000.

Cohu was impacted by the downturn in the semiconductor equipment industry that began in late 2000 and as a result our net sales decreased 66% to $29.3 million in 2001 compared to net sales of $86.8 million in 2000. Sales of semiconductor test handling equipment in 2001 decreased 72% from the 2000 period and accounted for 74% of consolidated net sales in 2001 versus 89% in 2000. Sales of television cameras and other equipment accounted for 17% of net sales in 2001 and decreased 27% while the combined sales of metal detection and microwave equipment decreased 20%.

Gross margin as a percentage of net sales decreased to 25.9% in 2001 from 40.4% in 2000 primarily as a result of lower margins in the semiconductor equipment business. Within the semiconductor equipment segment, margins decreased in 2001 primarily as a result of decreased business volume and increased provisions for excess and obsolete inventory. In the quarter ended June 30, 2001, the Company recorded pretax inventory related charges of approximately $4.6 million primarily as a result of changes in customer forecasts. Continued changes to customer forecasts may require additional provisions for excess and obsolete inventories that may negatively impact gross margin in future periods. Research and development expense (“R&D”) as a percentage of net sales was 22.7% in 2001, compared to 9.6% in 2000, decreasing in absolute dollars from $8.3 million in 2000 to $6.6 million in 2001. The decrease in R&D was primarily the result of lower R&D material costs. Selling, general and administrative (“SG&A”) expense as a percentage of net sales increased to 22.9% in 2001 from 9.4% in 2000 primarily as a result of the decrease in business volume. SG&A expense in 2001 includes $.5 million of goodwill amortization offset by a $.4 million reduction in the allowance for doubtful accounts and bad debt expense. Interest income was $1.1 million and $1.3 million in 2001 and 2000, respectively. The provision (credit) for income taxes expressed as a percentage of pre-tax income was (38.9)% in the second quarter of 2001 and 35.1% in 2000. As a result of the factors set forth above, net income was $12.9 million in 2000 compared to a net loss of $2.8 million 2001.

9

COHU, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2001

Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000

Cohu was impacted by the downturn in the semiconductor equipment industry that began in late 2000 and as a result our net sales decreased 54% to $73.0 million in 2001 compared to net sales of $159.5 million in 2000. Sales of semiconductor test handling equipment in 2001 decreased 59% from the 2000 period and accounted for 78% of consolidated net sales in 2001 versus 88% in 2000. Sales of television cameras and other equipment accounted for 15% of net sales in 2001 and decreased 19% while the combined sales of metal detection and microwave equipment also decreased 19%.

Gross margin as a percentage of net sales decreased to 26.1% in 2001 from 39.9% in 2000 primarily as a result of lower margins in the semiconductor equipment business. Within the semiconductor equipment segment, margins decreased in 2001 primarily as a result of decreased business volume and increased provisions for excess and obsolete inventory. In the six months ended June 30, 2001, the Company recorded pretax inventory related charges of approximately $8.8 million primarily as a result of changes in customer forecasts. Continued changes to customer forecasts may require additional provisions for excess and obsolete inventories that may negatively impact gross margin in future periods. Research and development expense as a percentage of net sales was 20.6% in 2001, compared to 9.4% in 2000, while remaining flat on an absolute dollar basis. SG&A expense as a percentage of net sales increased to 18.1% in 2001 from 9.6% in 2000 primarily as a result of the decrease in business volume. SG&A expense in 2001 includes $.6 million of goodwill amortization offset by a $.7 million reduction in the allowance for doubtful accounts and bad debt expense. Interest income was $2.4 million and $2.6 million in 2001 and 2000, respectively. The provision (credit) for income taxes expressed as a percentage of pre-tax income was (38.4)% for the first six months of 2001 and 34.8% in 2000. As a result of the factors set forth above, net income was $20.1 million in 2000 compared to a net loss of $4.2 million in 2001.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s net cash flows provided by operating activities in the first six months of 2001 totaled $13.7 million. The major components of cash flows provided by operating activities were a net loss of $4.2 million offset by the net change in current assets and liabilities totaling $15.3 million. Net cash used for investing activities included $3.9 million for the purchase of short-term investments, less maturities, offset by purchases of property, plant and equipment and other assets of $5.1 million. Net cash used for financing activities was $.4 million. Cash provided by financing activities included $1.7 million received from the issuance of stock upon the exercise of stock options offset by $2.0 million for the payment of dividends. The Company had $10 million available under its bank line of credit and working capital of $153.5 million at June 30, 2001. 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.

TRENDS, RISKS AND UNCERTAINTIES

The semiconductor industry we serve is highly volatile and unpredictable.

Cohu’s operating results are substantially dependent on our semiconductor equipment business. This capital equipment business is in turn highly dependent on the overall strength of the semiconductor industry. Historically, the semiconductor industry has been highly cyclical with recurring periods of oversupply and excess capacity, which often have had a significant effect on the semiconductor industry’s demand for capital equipment, including equipment of the type manufactured and marketed by Cohu. We anticipate that the markets for newer generations of semiconductors and semiconductor equipment may also be subject to similar cycles and severe downturns, such as those experienced in 1996, 1998 and late 2000, continuing into 2001. Reductions in capital equipment investment by semiconductor manufacturers and semiconductor test subcontractors will materially and adversely affect our business, financial position and results of operations. In addition, the volatile and unpredictable nature of

10

COHU, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2001

TRENDS, RISKS AND UNCERTAINTIES (cont.)

semiconductor equipment demand has in the past and may in the future expose us to significant excess and obsolete inventory write-offs and reserve requirements. In the six months ended June 30, 2001, the Company recorded pretax inventory related charges of approximately $8.8 million primarily as a result of changes in customer forecasts.

We have taken and expect to continue to take remedial measures to address the slowdown in the semiconductor equipment industry.

We have taken and expect to continue to take remedial measures to address the recent slowdown in the market for our products. In particular, we have reduced our workforce, frozen hiring, delayed salary increases, reduced senior executives pay, implemented furloughs and reduced our expense budgets. These measures will reduce our expenses in the face of decreased revenues due to decreased or cancelled customer orders. However, each of these measures could have long-term effects on our business by reducing our pool of technical talent, decreasing or slowing improvements in our products, and making it more difficult for us to respond to customers.

We are exposed to risks associated with acquisitions.

Cohu has made, and may in the future make, acquisitions of, or significant investments in, businesses with complementary products, services and/or technologies. In July 2001, Cohu acquired the assets of the Automated Systems business from Schlumberger Technologies, Inc. for $14.2 million in cash. Acquisitions involve numerous risks, including, but not limited to: 1) difficulties and increased costs in connection with integration of the personnel, operations, technologies and products of acquired businesses; 2) diversion of management’s attention from other operational matters; 3) the potential loss of key employees of acquired businesses; 4) lack of synergy, or the inability to realize expected synergies, resulting from the acquisition; 5) failure to commercialize purchased technology; and 6) the impairment of acquired intangible assets as a result of technological advancements or worse-than-expected performance of the acquired business. Mergers and acquisitions are inherently risky and the inability to effectively manage these risks could materially and adversely affect Cohu’s business, financial condition and results of operations.

We have experienced significant increases in our electricity costs and we may be exposed to power shortages.

Cohu is a significant user of electricity. The state of California has deregulated the price of electricity. Deregulation combined with increases in the cost of generating electricity have resulted in a significant rise in Cohu’s electricity costs during the past year. Market forecasts predict significant increases in electricity prices in the future that will result in increased costs to Cohu that could have an adverse impact on our results of operations. In addition, we expect our electricity costs to increase as a result of moving certain of our San Diego operations to a significantly larger facility in nearby Poway, California in June 2001.

Power shortages have caused “blackouts” throughout California and San Diego County. In March 2001, Cohu’s operations were temporarily suspended as a result of a blackout. We currently do not have back-up generators or alternate sources of power in the event of a blackout. Further blackouts could result in our failure to meet customer delivery requirements damaging our reputation and resulting in lost revenue that would have a material adverse impact on our business, results of operations and financial condition.

11

COHU, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2001

TRENDS, RISKS AND UNCERTAINTIES (cont.)

Semiconductor equipment is subject to rapid technological change, product introductions and transitions may result in inventory write-offs and our new product development involves numerous risks and uncertainties.

Semiconductor equipment and processes are subject to rapid technological change. We believe that our future success will depend in part on our ability to enhance existing products and develop new products with improved performance capabilities. We expect to continue to invest heavily in research and development and must manage product transitions successfully, as introductions of new products could adversely impact sales or margins of existing products. In addition, the introduction of new products, by Cohu or by our competitors, the concentration of our revenues in a limited number of large customers, the migration to new IC test handling methodologies and the custom nature of our inventory parts increases the risk that our established products and related inventory may become obsolete resulting in significant excess and obsolete inventory exposure. This increased exposure resulted in significant charges to operations during the third and fourth quarters of 2000 and the first and second quarters of 2001. Future inventory write-offs and increased inventory reserve requirements could have a material adverse impact on our results of operations and financial condition.

The design, development, commercial introduction and manufacture of new semiconductor test handling equipment is an inherently complex process that involves a number of risks and uncertainties. These risks include potential problems in meeting customer performance requirements, integration of the test handler with other suppliers’ equipment and the customers’ manufacturing processes, transitioning from product development to volume manufacturing and the ability of the equipment to satisfy the semiconductor industry’s constantly evolving needs and achieve commercial acceptance at prices that produce satisfactory profit margins. The design and development of new test handling equipment is heavily influenced by changes in integrated circuit (IC) back-end manufacturing processes and IC package design changes. We believe that the rate of change in such processes and IC packages is accelerating. As a result of these changes and other factors, assessing the market potential and commercial viability of new test handling equipment 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. As a result we might not accurately assess the semiconductor industry’s future test handler requirements and fail to 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 material adverse impact on our operations, financial condition and results of operations.

The transition from product development to the manufacture of new semiconductor equipment is a difficult process and delays in product introductions and problems in manufacturing such equipment are common. We have in the past and may in the future experience difficulties in manufacturing and volume production of our new test handlers. In addition, our after sale support and warranty costs have been significantly higher with new test handlers than with our established products. Future technologies, processes and product developments may render our current or future product offerings obsolete and we might not be able to develop, introduce and successfully manufacture new products or make enhancements to our existing products in a timely manner to satisfy customer requirements or achieve market acceptance. Furthermore, we might not realize acceptable profit margins on such products.

12

COHU, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2001

TRENDS, RISKS AND UNCERTAINTIES (cont.)

The semiconductor equipment industry in general, and the test handler market in particular, is highly competitive.

The semiconductor test handler industry is intensely competitive and we face substantial competition from numerous companies throughout the world. Future competition may include companies that do not currently supply test handlers. The Japanese and Korean markets for test handling equipment are large and represent a significant percentage of the worldwide market. During the last five years we have had limited sales to Japanese and Korean customers who have historically purchased test handling equipment from Asian suppliers. Some of our competitors have substantially greater financial, engineering, manufacturing and customer support capabilities and offer more extensive product offerings than Cohu. In addition, there are smaller, emerging semiconductor equipment companies that provide or may provide innovative technology incorporated in products that may compete favorably against those of Cohu. We expect our competitors to continue to improve the design and performance of their current products and introduce new products with improved performance capabilities. Our failure to introduce new products in a timely manner, the introduction by our competitors of products with perceived or actual advantages or disputes over rights of Cohu or our competitors to use certain intellectual property or technology could result in a loss of our competitive position and reduced sales of or margins on our existing products.

A limited number of customers account for a substantial percentage of our net sales.

We rely on a limited number of customers for a substantial percentage of our net sales. In 2000, four customers of the semiconductor equipment segment accounted for 50% (46% in 1999 and 60% in 1998) of our net sales. The loss of or a significant reduction in orders by these or other significant customers as a result of competitive products, market conditions, outsourcing final IC test to test subcontractors that are not our customers or other factors, would adversely impact our financial condition and results of operations. Furthermore, the concentration of our revenues in a limited number of large customers may cause significant fluctuations in our future annual and quarterly operating results.

Our backlog is limited and may not accurately reflect future business activity.

Our order backlog has historically represented approximately three months of revenue and as a result our visibility over future business activity is limited. Our revenues in the quarter ended June 30, 2001 were, however, significantly lower than our backlog at March 31, 2001, due primarily to customer requested changes to delivery schedules. Due to the possibility of customer changes in delivery schedules, cancellation of orders, potential delays in product shipments, difficulties in obtaining inventory parts from suppliers, failure to satisfy customer acceptance requirements and the inability to recognize revenue under new accounting requirements, our backlog as of any point in time may not be representative of actual sales in any future period. Furthermore, all orders are subject to cancellation or rescheduling by the customer with limited penalty. A reduction in backlog during any particular period, such as occurred in the second quarter of 2001 where the Company’s backlog declined to $34.7 million at June 30, 2001, could have a material adverse effect on our business, financial condition and results of operations.

The cyclical nature of the semiconductor equipment industry places enormous demands on our employees, operations and 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

13

COHU, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2001

TRENDS, RISKS AND UNCERTAINTIES (cont.)

demand for semiconductor equipment have a significant impact on our operations. In response to a severe industry downturn in 1998, we reduced our total workforce by approximately 40%. During 1999, we increased our workforce by more than 50% as business conditions in the semiconductor equipment industry and our order backlog improved. In the first six months of 2001, we reduced our workforce approximately 30% as a result of a downturn in the semiconductor equipment industry. If the current industry downturn continues, further workforce reductions will be required. Such radical changes in workforce levels place enormous demands on our employees, operations and infrastructure since newly hired personnel rarely possess the expertise and level of experience of current employees. Additionally, these transitions divert management time and attention from other activities. We have in the past and may in the future experience difficulties, particularly in manufacturing, in training the large number of additions to our workforce. In addition, competition for the employment services of certain personnel, particularly those with technical skills, is intense. The volatility in headcount and business levels, combined with the cyclical nature of the semiconductor industry, may require that we invest substantial amounts in new operational and financial systems, procedures and controls. We may not be able to successfully adjust our systems, facilities and production capacity to meet our customers’ changing requirements. The inability to meet such requirements will have an adverse impact on our business, financial position and results of operations.

We have experienced a significant decline in gravity-feed test handler sales to DRAM customers.

Sales of IC test handlers used in DRAM testing represented a significant percentage of Cohu’s total semiconductor equipment related revenue during the period 1994 through 1998. Due to changes in IC package technology, gravity-feed handlers are no longer suitable for handling many types of DRAMs. As a result, we have seen a significant decline in sales of our gravity-feed test handler products. IC handlers used in DRAM applications account for a significant portion of the worldwide IC handler market.

We are exposed to the risks of operating a global business.

Cohu has operations located in various parts of the world to support our sales and services to the global semiconductor industry. Managing geographically dispersed operations presents difficult challenges associated with, among other things, organizational alignment and infrastructure, communications and information technology, inventory control, customer relationship management and cultural diversities. In addition, maintaining these geographically dispersed locations is expensive. We may not be able to manage our multiple operations in a cost effective and efficient manner. If we are unsuccessful in managing such operations effectively, our business and results of operations will be adversely affected.

Failure of critical suppliers to deliver sufficient quantities of parts in a timely and cost-effective manner could adversely impact our operations.

We use numerous vendors to supply parts, components and subassemblies for the manufacture of our products. It is not always possible to maintain multiple qualified suppliers for all of our parts, components and subassemblies; as a result, certain key parts may be available only from a single supplier or a limited number of suppliers. In addition, suppliers may cease manufacturing certain components that are difficult to replace without significant reengineering of our products. On occasion, Cohu has experienced problems in obtaining adequate and reliable quantities of various parts and components from certain key suppliers. Our results of operations may be materially and adversely impacted if we do not receive sufficient parts to meet our requirements in a timely and cost effective manner.

14

COHU, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2001

TRENDS, RISKS AND UNCERTAINTIES (cont.)

We are exposed to the risk that third parties may violate our proprietary rights or accuse us of infringing upon their proprietary rights.

Cohu relies on patent, copyright, trademark and trade secret laws to establish and maintain proprietary rights in our technology and products. Any of our proprietary rights may be challenged, invalidated or circumvented, and these rights may not provide significant competitive advantages. In addition, from time to time, we receive notices from third parties regarding patent or copyright claims. Any such claims, with or without merit, could be time-consuming to defend, result in costly litigation, divert management’s attention and resources and cause Cohu to incur significant expenses. In the event of a successful claim of infringement against Cohu and our failure or inability to license the infringed technology or to substitute similar non-infringing technology, our business, financial condition and results of operations could be adversely affected.

A majority of our revenues are generated from exports to foreign countries, primarily in Asia, that are subject to economic instability and we compete against a number of Asian test handling equipment suppliers.

During 2000, 63% of our total net sales were exported to foreign countries, including 71% of the sales in the semiconductor equipment segment. The majority of our export sales are made to destinations in Asia. Instability in global economic markets, particularly in Asia, may adversely impact the demand for capital equipment, including equipment of the type manufactured and marketed by Cohu. In addition, we face intense competition from a number of Asian suppliers that have certain advantages over U.S. suppliers, including Cohu. These advantages include, among other things, proximity to customers, favorable tariffs and affiliation with significantly larger organizations. In addition, changes in the amount or price of semiconductors produced in Asia could impact the profitability or capital equipment spending programs of our foreign and domestic customers.

Our non semiconductor equipment businesses have experienced little or no growth over the last five years.

We develop, manufacture and sell products used in closed circuit television, metal detection and microwave radio applications. These products are sold in highly competitive markets and many competitors are segments of large, diversified companies with substantially greater financial, engineering, marketing, manufacturing and customer support capabilities than Cohu. In addition, there are smaller companies that provide or may provide innovative technology incorporated in products that may compete favorably against those of Cohu. We have seen a decline in the operating results of some of these businesses over the last several years and the future prospects for certain of these businesses remain uncertain. We may not be able to continue to compete successfully in these businesses.

New accounting rules may impact the timing of revenue recognition and operating results.

In December 1999, the staff of the Securities and Exchange Commission issued SAB 101,Revenue Recognition in Financial Statements. Cohu adopted SAB 101 in the fourth quarter of 2000 and, as required, changed its method of revenue recognition in certain instances. As a result of this change, a cumulative effect adjustment was recorded in Cohu’s statement of income for the quarter ended March 31, 2000. Further changes in revenue recognition practices resulting from initiatives by the FASB are possible. Such changes could result in additional adjustments to our results of operations that may be reflected in future periods.

15

COHU, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2001

Quantitative and qualitative disclosures about market risk.

     Interest rate risk.

At June 30, 2001, our investment portfolio includes fixed-income securities with a fair value of approximately $87.6 million. These securities are subject to interest rate risk and will decline in value if interest rates increase. Due to the relatively short duration of our investment portfolio, an immediate 10 percent change (e.g. 6.00% to 6.60%) in interest rates would have no material impact on our financial condition or results of operations.

     Foreign currency exchange risk.

We generally conduct business, including sales to foreign customers, in U.S. dollars and as a result we have limited foreign currency exchange rate risk. Monetary assets and liabilities of Cohu’s foreign operations are not significant. The effect of an immediate ten percent change in foreign exchange rates would not have a material impact on our financial condition or results of operations.

Due to all the above and other factors, historical results may not be indicative of results of operations for any future period. In addition, certain matters discussed above are forward-looking statements that are subject to the risks and uncertainties noted herein and the other risks and uncertainties listed from time to time in our filings with the Securities and Exchange Commission, including but not limited to the 2000 Annual Report on Form 10-K, that could cause actual results to differ materially from those projected or forecasted. Cohu undertakes no obligation to update the information, including the forward-looking statements, in this Form 10-Q.

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Part II    OTHER INFORMATION

Item 4.	Submission of Matters to a Vote of Security Holders
	The Annual Meeting of Stockholders was held on May 15, 2001. At the meeting the following directors were elected:

	Number of Common Shares Voted
Director	For		Withhold Authority
James W. Barnes		19,125,730		406,538
James A. Donahue		16,431,361		3,100,907

The directors continuing in office until 2002 or 2003 are Harry L. Casari, Harold Harrigian, Gene E. Leary and Charles A. Schwan.

In addition, the stockholders approved the following proposals:

	Number of Common Shares Voted
							Broker
Proposal	For		Against		Abstain		Non-Votes
To approve an amendment to the Cohu, Inc. 1997 Employee Stock Purchase Plan, increasing the shares of stock subject to the Plan by 400,000		18,664,250		772,731		95,287		0
To approve an amendment to the Cohu, Inc. 1996 Outside Directors Stock Option Plan, increasing the shares of stock subject to the Plan by 100,000 and providing for automatic annual option grants		17,028,867		2,381,121		122,280		0

Item 5.	Other Information
	On July 15, 2001, Frank W. Davis, a member of the Company’s board of directors, died. The Company has no immediate plans to fill Mr. Davis’s seat on the board of directors.

On July 16, 2001 the Company purchased the assets of the Automated Systems business (“AS”) from Schlumberger Technologies, Inc. for $14.2 million in cash. AS designs, manufactures and sells semiconductor equipment including pick and place test handlers and burn-in board loaders and unloaders. The acquisition will be accounted for as a purchase. While the purchase price allocation is not yet completed, the Company expects a material portion of the purchase price to be allocated to in-process technology resulting in a charge to operations in the third quarter of 2001.

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Item 6.	Exhibits and Reports on Form 8-K
	(a)  Exhibits:

3.1	- -	Amended and Restated Certificate of Incorporation of Cohu, Inc. incorporated herein by reference to Exhibit 3.1(a) from the Cohu, Inc. Form 10-Q for the quarterly period ended June 30, 1999
3.1(a)	- -	Certificate of Amendment of Amended and Restated Certificate of Incorporation of Cohu, Inc. incorporated herein by reference from the Cohu, Inc. Form S-8 filed June 30, 2000, Exhibit 4.1(a)
3.2	- -	Amended and Restated Bylaws of Cohu, Inc. incorporated herein by reference to Exhibit 3.2 from the Cohu, Inc. Report on Form 8-K filed with the Securities and Exchange Commission on December 12, 1996
4.1	- -	Rights Agreement dated November 15, 1996, between Cohu, Inc. and Chase Mellon Shareholder Services, L.L.C., incorporated herein by reference to Exhibit 4.1 to the Cohu, Inc. Report on Form 8-K filed with the Securities and Exchange Commission on December 12, 1996
10.1	- -	Amendment No. 3, dated April 26, 2001, to Business Loan Agreement between Cohu, Inc. and Bank of America, N.A.
10.2	- -	Non-Recourse Promissory Note Secured by Deed of Trust between Delta Design, Inc. and T. C. Kearny Villa, L.P., dated April 11, 2001
10.3	- -	Agreement of Purchase and Sale and Joint Escrow Instructions between Cohu, Inc. and T.C. Kearny Villa, L.P., dated April 11, 2001
10.4	- -	Cohu, Inc. 1997 Employee Stock Purchase Plan (as amended)
10.5	- -	Cohu, Inc. 1996 Outside Directors Stock Option Plan (as amended)

(b) Reports on Form 8-K: The Company did not file any reports on Form 8-K during the quarter ended June 30, 2001.

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 30, 2001	/s/ James A. Donahue
		James A. Donahue
		President & Chief Executive Officer
Date:	July 30, 2001	/s/ John H. Allen
		John H. Allen
		Vice President, Finance & Chief Financial Officer

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