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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-4298
COHU, INC.
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(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)
Registrant's telephone number, including area code 619-277-6700
-----------------------------
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, 1998, the Registrant had 9,735,842 shares of its $1.00 par value
common stock outstanding.
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COHU, INC.
INDEX
FORM 10-Q
JUNE 30, 1998
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets
June 30, 1998 (Unaudited) and December 31, 1997.............................. 3
Condensed Consolidated Statements of Income (Unaudited)
Three and Six Months Ended June 30, 1998 and 1997............................ 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 1998 and 1997...................................... 5
Notes to Unaudited Condensed Consolidated Financial Statements............... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................ 7
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.......................... 11
Item 6. Exhibits and Reports on Form 8-K............................................. 11
Signatures ............................................................................ 12
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COHU, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS JUNE 30, 1998 DECEMBER 31, 1997
-------------- -----------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 48,862 $ 39,736
Short-term investments 8,684 13,814
Accounts receivable, less allowance for doubtful
accounts of $1,737 in 1998 and $1,787 in 1997 38,571 31,934
Inventories:
Raw materials and purchased parts 21,936 21,224
Work in process 11,211 15,657
Finished goods 10,601 8,018
-------------- --------------
43,748 44,899
Deferred income taxes 9,669 9,669
Prepaid expenses 1,414 1,478
-------------- --------------
Total current assets 150,948 141,530
Property, plant and equipment, at cost:
Land and land improvements 2,501 2,501
Buildings and building improvements 12,067 11,906
Machinery and equipment 18,672 17,524
-------------- --------------
33,240 31,931
Less accumulated depreciation and amortization 14,114 12,982
-------------- --------------
Net property, plant and equipment 19,126 18,949
Goodwill, net of accumulated amortization
of $893 in 1998 and $815 in 1997 2,234 2,312
Other assets 90 101
-------------- --------------
$ 172,398 $ 162,892
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,523 $ 16,166
Income taxes payable 4,844 3,421
Other accrued liabilities 15,577 15,742
-------------- --------------
Total current liabilities 30,944 35,329
Accrued retiree medical benefits 1,048 1,004
Deferred income taxes 348 348
Stockholders' equity:
Preferred stock -- --
Common stock 9,736 9,549
Paid in excess of par 10,363 8,677
Retained earnings 119,959 107,985
-------------- --------------
Total stockholders' equity 140,058 126,211
-------------- --------------
$ 172,398 $ 162,892
============== ==============
See accompanying notes.
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COHU, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except per share amounts)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
Net sales $ 55,202 $ 44,642 $ 111,893 $ 79,404
Cost and expenses:
Cost of sales 35,625 25,100 68,992 45,008
Research and development 5,905 4,264 11,306 7,525
Selling, general and administrative 6,239 5,169 12,415 9,986
---------- ---------- ---------- ----------
47,769 34,533 92,713 62,519
---------- ---------- ---------- ----------
Income from operations 7,433 10,109 19,180 16,885
Interest income 780 717 1,549 1,455
---------- ---------- ---------- ----------
Income before income taxes 8,213 10,826 20,729 18,340
Provision for income taxes 2,900 3,900 7,200 6,700
---------- ---------- ---------- ----------
Net income $ 5,313 $ 6,926 $ 13,529 $ 11,640
========== ========== ========== ==========
Earnings per share:
Basic $ .55 $ .74 $ 1.39 $ 1.24
========== ========== ========== ==========
Diluted $ .53 $ .70 $ 1.35 $ 1.18
========== ========== ========== ==========
Weighted average shares used in
computing earnings per share:
Basic 9,726 9,417 9,706 9,383
========== ========== ========== ==========
Diluted 10,012 9,888 10,040 9,845
========== ========== ========== ==========
See accompanying notes.
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COHU, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
SIX MONTHS ENDED
JUNE 30,
1998 1997
---------- ----------
Cash flows from operating activities:
Net income $ 13,529 $ 11,640
Adjustments to reconcile net income to net
cash provided from operating activities:
Depreciation and amortization 1,207 800
Purchase consideration to be paid with stock 361 262
Increase in accrued retiree medical benefits 44 44
Changes in assets and liabilities:
Accounts receivable (6,637) (8,070)
Inventories 1,151 (9,478)
Prepaid expenses 64 59
Accounts payable (5,643) 6,535
Income taxes payable 1,423 2,032
Other accrued liabilities (526) (656)
---------- ----------
Net cash provided from operating activities 4,973 3,168
Cash flows from investing activities:
Purchases of short-term investments (8,084) (18,834)
Maturities of short-term investments 13,214 10,610
Purchases of property, plant, equipment and other assets (1,295) (1,697)
---------- ----------
Net cash provided by (used for) investing activities 3,835 (9,921)
Cash flows from financing activities:
Issuance of stock, net 1,873 731
Cash dividends (1,555) (1,129)
---------- ----------
Net cash provided by (used for) financing activities 318 (398)
---------- ----------
Net increase (decrease) in cash and cash equivalents 9,126 (7,151)
Cash and cash equivalents at beginning of period 39,736 24,660
---------- ----------
Cash and cash equivalents at end of period $ 48,862 $ 17,509
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $ 5,777 $ 4,682
See accompanying notes.
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COHU, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
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, 1998 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, 1997.
2 - EARNINGS PER SHARE
Earnings per share are computed in accordance with 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. Earnings per
share data for the three and six months ended June 30, 1997 have been
adjusted to conform to the provisions of FASB Statement No. 128. The
following table reconciles the denominators used in computing basic and
diluted earnings per share:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
(in thousands) (in thousands)
Weighted average common shares outstanding 9,726 9,417 9,706 9,383
Effect of dilutive stock options 286 471 334 462
---------- ---------- ---------- ----------
10,012 9,888 10,040 9,845
========== ========== ========== ==========
3 - STOCKHOLDERS' EQUITY
On May 12, 1998 the stockholders of the Company approved (i) the adoption
of the Cohu, Inc. 1998 Stock Option Plan providing for the issuance of a
maximum of 450,000 shares of the Company's Common Stock and (ii) an
amendment to the Company's Amended and Restated Certificate of
Incorporation increasing the Company's authorized shares of Common Stock
to 40,000,000.
4 - NEW ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board ("FASB") Statement No. 130, Reporting
Comprehensive Income, requires the disclosure of "Comprehensive Income" in
financial statements. Comprehensive Income includes items such as
unrealized gains on available-for-sale securities that are not included in
net income. FASB No. 130 is effective in 1998 and had no material impact
on the Company's results of operations or related disclosures for the six
months ended June 30, 1998. FASB No. 131, Disclosures about Segments of an
Enterprise and Related Information, requires the disclosure of financial
information on operating segments on the basis used by management in
evaluating segment performance and deciding how to allocate resources.
FASB No. 131 will first be reflected in the Company's 1998 Annual Report.
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COHU, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
JUNE 30, 1998
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 certain risks and uncertainties,
including but not limited to those discussed herein and, in particular, under
the caption "Business Risks and Uncertainties" that could cause actual results
to differ materially from those projected.
RESULTS OF OPERATIONS
SECOND QUARTER 1998 COMPARED TO SECOND QUARTER 1997
Net sales increased 24% to $55.2 million in 1998 compared to net sales of $44.6
million in 1997. Sales of semiconductor test handling equipment in 1998
increased 28% over the 1997 period and accounted for 83% of consolidated net
sales in 1998 versus 80% in 1997. Sales of television cameras and other
equipment decreased 7% while the combined sales of metal detection and microwave
equipment increased 31%. Export sales accounted for 44% of net sales in the
second quarter of 1998 compared to 52% for the year ended December 31, 1997.
Gross margin as a percentage of net sales declined to 35.5% in 1998 versus 43.8%
in 1997 as a result of lower margins in the semiconductor equipment business.
Within the semiconductor equipment segment, margins decreased in 1998 primarily
as a result of changes in product mix, sales price reductions and certain cost
increases. During the second quarter of 1998 the Company shipped a significant
number of its new 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 10.7% in 1998, compared
to 9.6% in 1997, increasing in absolute dollars from $4.3 million to $5.9
million reflecting the Company's increased investment in new product
development, particularly in the semiconductor equipment business. Selling,
general and administrative expense as a percentage of net sales declined to
11.3% in 1998 from 11.6% in 1997 primarily as a result of the increase in
business volume. Interest income was $.8 million in 1998 and $.7 million in
1997. The provision for income taxes expressed as a percentage of pre-tax income
was 35.3% in the second quarter of 1998. As a result of the factors set forth
above, net income decreased from $6.9 million in 1997 to $5.3 million in 1998.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Net sales increased 41% to $111.9 million in 1998 compared to net sales of $79.4
million in 1997. Net sales during the first half of 1997 were negatively
impacted by the semiconductor industry downturn that began in 1996. Sales of
semiconductor test handling equipment in 1998 increased 51% over the 1997 period
and accounted for 84% of consolidated net sales in 1998 versus 78% in 1997.
Sales of television cameras and other equipment decreased 5% while the combined
sales of metal detection and microwave equipment increased 27%. Export sales
accounted for 45% of net sales in the first six months of 1998 compared to 52%
for the year ended December 31, 1997.
Gross margin as a percentage of net sales declined to 38.3% in 1998 versus 43.3%
in 1997 as a result of lower margins in the semiconductor equipment business.
Within the semiconductor equipment segment, margins decreased in 1998 primarily
as a result of changes in product mix, sales price reductions and certain cost
increases. During the second quarter of 1998 the Company shipped a significant
number of its new Enterprise semiconductor test handlers. The gross margins
realized on these sales were lower than the Company's established semiconductor
handler products due to
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COHU, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
JUNE 30, 1998
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997(CONT.)
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 10.1% in 1998, compared to 9.5% in 1997,
increasing in absolute dollars from $7.5 million to $11.3 million reflecting the
Company's increased investment in new product development, particularly in the
semiconductor equipment business. Selling, general and administrative expense as
a percentage of net sales declined to 11.1% in 1998 from 12.6% in 1997 primarily
as a result of the increase in business volume. Interest income was $1.5 million
in 1998 and 1997. The provision for income taxes expressed as a percentage of
pre-tax income was 34.7% in the first six months of 1998. As a result of the
factors set forth above, net income increased from $11.6 million in 1997 to
$13.5 million in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash flows generated from operating activities in the first
six months of 1998 totaled $5 million. The major components of cash flows from
operating activities were net income of $13.5 million an increase in income
taxes payable of $1.4 million and a decrease in inventories of $1.2 million
offset by an increase in accounts receivable of $6.6 million and decreases in
accounts payable and other accrued liabilities totaling $6.2 million. Net cash
provided by investing activities was $3.8 million resulting from maturities of
short-term investments, less purchases, offset by purchases of property, plant
and equipment and other assets of $1.3 million. Net cash provided by financing
activities was $.3 million. Cash provided by financing activities included $1.9
million received from the issuance of stock under stock option and purchase
plans offset by $1.6 million for the payment of dividends. The Company had $10
million available under its new bank line of credit and working capital of $120
million at June 30, 1998. 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 and the remaining
anticipated capital expenditures for 1998 of approximately $3 million.
BUSINESS RISKS AND UNCERTAINTIES
The Company's operating results are substantially dependent on the semiconductor
test handling equipment business conducted through its Delta Design and Daymarc
subsidiaries. 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, 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 downturns such as that
experienced in 1996 and currently in 1998. Reductions in capital equipment
investment by semiconductor manufacturers will adversely affect the Company's
results of operations.
The Company's order backlog declined to $40.6 million at June 30, 1998 from
$53.4 million at March 31, 1998. This reduction in backlog is primarily related
to the Company's semiconductor equipment business. The decline in the Company's
backlog and recent announcements by certain semiconductor and semiconductor
equipment manufacturers indicate there has been a slowdown in demand for certain
semiconductors and related equipment. The projected length and severity of this
slowdown is unknown at this time. In addition, continued DRAM price declines
have negatively impacted the profitability of DRAM manufacturers which may
impact future capital equipment purchases. These and possible other factors are
expected to adversely affect the Company's operating results in the second half
of 1998.
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COHU, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
JUNE 30, 1998
BUSINESS RISKS AND UNCERTAINTIES (CONT.)
During this period of uncertainty in the semiconductor equipment industry the
Company will attempt to keep its production capacity, labor force and other
aspects of its cost structure in line with expected demand. The Company has
reduced the size of its work force and it is likely that the Company will have
further reductions. Cost reduction programs may have a temporary negative impact
on the Company's operations and operating results. Furthermore, no assurance can
be made that such cost reduction programs will be implemented successfully.
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. The
design, development, manufacture and commercial introduction of new
semiconductor test handling equipment is a 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 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 Company has devoted significant resources to
the development, introduction and volume production of two new semiconductor
test handler products that were introduced in the second quarter of 1998. In the
past, the Company has experienced delays in the introduction of new
semiconductor test handlers and difficulties in the early stages of
manufacturing and volume production of such products. The Company has incurred
similar delays and difficulties with the two test handlers introduced in 1998.
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 and introduce new products or enhancements to its existing
products in a timely manner to satisfy customer needs or achieve market
acceptance. Furthermore, there is no assurance that the Company will be able to
convert new test handlers into production on a timely basis and realize
acceptable profit margins on such products.
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 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 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.
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
1997, three customers of the semiconductor equipment business accounted for 42%
of the Company's net sales. The loss of or a significant reduction in
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COHU, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
JUNE 30, 1998
BUSINESS RISKS AND UNCERTAINTIES (CONT.)
orders by these or other significant customers would adversely impact the
Company's 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.
In 1997, 52% of the Company's total net sales were exported to foreign
countries, including 60% of the sales in the semiconductor equipment segment.
The majority of the Company's export sales are made to destinations in Asia.
Currency fluctuations and instability in global financial 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
customers.
Certain computer systems used by the Company may not properly recognize a date
using "00" as the year 2000 (Year 2000). This could result in system/program
failures or logic errors that would disrupt normal business activities. The
Company is in the process of identifying and modifying or replacing computer
systems that potentially subject the Company to risk. In addition, certain
software programs used to operate equipment manufactured and sold by the Company
may not be Year 2000 compliant. The Company is currently evaluating such
software programs to determine if they are Year 2000 ready, and is notifying
customers that plans are being developed to address this issue. The Company has
initiated communications with suppliers to raise their awareness of the Year
2000 issue and to determine the extent to which the Company is vulnerable to
their failure to correct their own Year 2000 issues. The Company cannot
reasonably predict the degree to which its suppliers will be successful in
limiting the potential negative effects of the Year 2000 date-recognition
problem. If computer systems used by the Company or its suppliers, or the
software applications used in equipment manufactured and sold by the Company,
fail or experience significant difficulties, the Company could become involved
in disputes and the Company's results of operations could be materially
affected. At this time, the Company cannot reasonably estimate the cost of its
Year 2000 compliance program.
Due to these 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 1997 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.
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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 12, 1998. At the
meeting the following directors were elected:
DIRECTOR Number of Common Shares Voted
-------- -------------------------------
For Withhold Authority
--------- ------------------
James W. Barnes 8,797,147 70,259
William S. Ivans 8,793,408 73,998
The directors continuing in office until 1999 or 2000 are Harry L.
Casari, Frank W. Davis, Gene E. Leary and Charles A. Schwan.
In addition, the stockholders approved the following proposals:
PROPOSAL
Number of Common Shares Voted
------------------------------------------
For Against Abstain
--------- --------- -------
To approve the Cohu, Inc. 1998
Stock Option Plan 6,768,430 1,969,180 129,796
To approve the amendment to the Cohu, Inc.
Amended and Restated Certificate of Incorporation
to increase authorized shares of Common Stock
to 40,000,000 8,464,830 343,433 59,143
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
3.1(a) - Provisions of the Amended and Restated
Certificate of Incorporation of Cohu, Inc.
10.1 - Credit Agreement dated June 15, 1998 between
Cohu, Inc. and Bank of America National Trust and
Savings Association
10.2 - Employment Agreement between Cohu, Inc. and
James A. Donahue
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, 1998.
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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 24, 1998 /s/ Charles A. Schwan
---------------- -----------------------------------------
Charles A. Schwan
President & Chief Executive Officer
Date: July 24, 1998 /s/ John H. Allen
---------------- -----------------------------------------
John H. Allen
Vice President, Finance & Chief Financial
Officer
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