e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended June 24, 2006 |
OR
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o |
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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)
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Delaware
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95-1934119 |
(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
Incorporation or Organization) |
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12367 Crosthwaite Circle, Poway, California
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92064-6817 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code (858) 848-8100
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
As of June 24, 2006 the Registrant had 22,605,277 shares of its $1.00 par value common stock
outstanding.
COHU, INC.
INDEX
FORM 10-Q
JUNE 24, 2006
2
Part I Financial Information
Item 1: Financial Statements
COHU, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
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June 24, 2006 |
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December 31, 2005 * |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
|
$ |
25,831 |
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|
$ |
38,543 |
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Short-term investments |
|
|
113,012 |
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|
|
100,202 |
|
Accounts receivable, less allowance for doubtful
accounts of $1,412 in 2006 and $1,258 in 2005 |
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53,882 |
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46,324 |
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Inventories: |
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Raw materials and purchased parts |
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28,322 |
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23,842 |
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Work in process |
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14,183 |
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11,434 |
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Finished goods |
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9,890 |
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7,153 |
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52,395 |
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42,429 |
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Deferred income taxes |
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21,322 |
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19,775 |
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Other current assets |
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4,974 |
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5,840 |
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Current assets of discontinued operations |
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3,504 |
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Total current assets |
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271,416 |
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256,617 |
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Property, plant and equipment, at cost: |
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Land and land improvements |
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6,964 |
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7,978 |
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Buildings and building improvements |
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22,698 |
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25,130 |
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Machinery and equipment |
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28,019 |
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29,296 |
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57,681 |
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62,404 |
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Less accumulated depreciation and amortization |
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(27,408 |
) |
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(31,517 |
) |
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Net property, plant and equipment |
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30,273 |
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30,887 |
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Deferred income taxes |
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2,301 |
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2,232 |
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Goodwill |
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12,898 |
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9,597 |
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Other intangible assets, net of accumulated amortization
of $2,794 in 2006 and $2,084 in 2005 |
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7,826 |
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6,553 |
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Other assets |
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157 |
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198 |
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Noncurrent assets of discontinued operations |
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487 |
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893 |
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$ |
325,358 |
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$ |
306,977 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
12,574 |
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$ |
7,611 |
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Accrued compensation and benefits |
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9,388 |
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13,189 |
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Accrued warranty |
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6,310 |
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|
4,561 |
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Customer advances |
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2,920 |
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|
2,810 |
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Deferred profit |
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|
17,426 |
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|
13,816 |
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Income taxes payable |
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5,885 |
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3,889 |
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Other accrued liabilities |
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3,375 |
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3,912 |
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Current liabilities of discontinued operations |
|
|
250 |
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|
534 |
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Total current liabilities |
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58,128 |
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50,322 |
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Accrued retiree medical benefits |
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|
1,490 |
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|
1,443 |
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Deferred income taxes |
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4,599 |
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5,087 |
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Commitments and contingencies |
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Stockholders equity: |
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Preferred stock, $1 par value; 1,000 shares authorized, none issued |
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Common stock, $1 par value; 60,000 shares authorized, 22,605
shares issued and outstanding in 2006 and 22,380 shares in 2005 |
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22,605 |
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22,380 |
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Paid-in capital |
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43,153 |
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37,717 |
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Retained earnings |
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195,658 |
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190,225 |
|
Accumulated other comprehensive loss |
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(275 |
) |
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(197 |
) |
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Total stockholders equity |
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261,141 |
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|
250,125 |
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$ |
325,358 |
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$ |
306,977 |
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* |
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Derived from December 31, 2005 audited financial statements. |
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The accompanying notes are an integral part of these statements. |
3
COHU, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except par share amounts)
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Three Months Ended |
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Six Months Ended |
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June 24, |
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June 25, |
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June 24, |
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June 25, |
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2006 |
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2005 |
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2006 |
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2005 |
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Net sales |
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$ |
61,942 |
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$ |
49,679 |
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$ |
118,712 |
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$ |
92,142 |
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Cost and expenses: |
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Cost of sales |
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40,197 |
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30,232 |
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|
76,732 |
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|
55,551 |
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Research and development |
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9,689 |
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6,950 |
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17,283 |
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|
13,458 |
|
Selling, general and administrative |
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8,731 |
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|
7,873 |
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|
|
17,286 |
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|
14,594 |
|
Gain on sale of facilities |
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(2,963 |
) |
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(2,963 |
) |
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55,654 |
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45,055 |
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108,338 |
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83,603 |
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Income from operations |
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|
6,288 |
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4,624 |
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|
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10,374 |
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|
8,539 |
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Interest income |
|
|
1,657 |
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|
890 |
|
|
|
3,043 |
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|
|
1,580 |
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|
|
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|
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|
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Income from continuing operations before income taxes |
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|
7,945 |
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|
5,514 |
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|
|
13,417 |
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|
10,119 |
|
Income tax provision (benefit) |
|
|
2,753 |
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|
(92 |
) |
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|
4,640 |
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(2,001 |
) |
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|
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Income from continuing operations |
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|
5,192 |
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|
5,606 |
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8,777 |
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|
12,120 |
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Discontinued operations (Note 2): |
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Income (loss) from discontinued metal detection equipment
operation, (including loss on sale of $806,000 for
the three months ended June 24, 2006) before income
taxes |
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(726 |
) |
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(23 |
) |
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(975 |
) |
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|
3 |
|
Income tax provision (benefit) |
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|
(254 |
) |
|
|
(8 |
) |
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(341 |
) |
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|
1 |
|
|
|
|
|
|
|
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|
Income (loss) from discontinued operations |
|
|
(472 |
) |
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|
(15 |
) |
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|
(634 |
) |
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2 |
|
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Net income |
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$ |
4,720 |
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|
$ |
5,591 |
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$ |
8,143 |
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$ |
12,122 |
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Income per share: |
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|
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Basic: |
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Income from continuing operations |
|
$ |
0.23 |
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$ |
0.26 |
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|
$ |
0.39 |
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|
$ |
0.56 |
|
Income from discontinued operations |
|
|
(0.02 |
) |
|
|
0.00 |
|
|
|
(0.03 |
) |
|
|
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
0.21 |
|
|
$ |
0.26 |
|
|
$ |
0.36 |
|
|
$ |
0.56 |
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Diluted: |
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Income from continuing operations |
|
$ |
0.23 |
|
|
$ |
0.25 |
|
|
$ |
0.38 |
|
|
$ |
0.55 |
|
Income from discontinued operations |
|
|
(0.02 |
) |
|
|
0.00 |
|
|
|
(0.02 |
) |
|
|
0.00 |
|
|
|
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|
|
|
|
|
|
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Net income |
|
$ |
0.21 |
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|
$ |
0.25 |
|
|
$ |
0.36 |
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|
$ |
0.55 |
|
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Weighted average shares used in
computing income (loss) per share: |
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|
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|
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Basic |
|
|
22,581 |
|
|
|
21,704 |
|
|
|
22,541 |
|
|
|
21,669 |
|
|
|
|
|
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|
|
|
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Diluted |
|
|
22,845 |
|
|
|
22,204 |
|
|
|
22,935 |
|
|
|
22,156 |
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|
|
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|
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Cash dividends declared per share |
|
$ |
0.06 |
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$ |
0.05 |
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$ |
0.12 |
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$ |
0.10 |
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The accompanying notes are an integral part of these statements. |
4
COHU, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
|
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|
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|
Six Months Ended |
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|
June 24, |
|
|
June 25, |
|
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|
2006 |
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|
2005 |
|
Cash flows from continuing operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
8,143 |
|
|
$ |
12,122 |
|
Loss (income) from discontinued operations |
|
|
634 |
|
|
|
(2 |
) |
Adjustments to reconcile net income to net
cash provided from continuing operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
3,301 |
|
|
|
2,483 |
|
Gain on sale of facilities |
|
|
(2,963 |
) |
|
|
|
|
Share-based compensation expense |
|
|
1,500 |
|
|
|
|
|
Deferred income taxes |
|
|
(2,084 |
) |
|
|
(3,221 |
) |
Increase in accrued retiree medical benefits |
|
|
47 |
|
|
|
59 |
|
Excess tax benefits from stock options exercised |
|
|
(825 |
) |
|
|
|
|
Changes in current assets and liabilities, excluding
effects of acquisitions and divestitures: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(5,616 |
) |
|
|
(7,436 |
) |
Inventories |
|
|
(6,813 |
) |
|
|
703 |
|
Refundable income taxes |
|
|
|
|
|
|
812 |
|
Other current assets |
|
|
566 |
|
|
|
(129 |
) |
Accounts payable |
|
|
836 |
|
|
|
467 |
|
Customer advances |
|
|
110 |
|
|
|
(59 |
) |
Deferred profit |
|
|
3,496 |
|
|
|
3,075 |
|
Income taxes payable, including excess stock option exercise benefit |
|
|
2,822 |
|
|
|
86 |
|
Accrued compensation, warranty and other liabilities |
|
|
(2,873 |
) |
|
|
(2,973 |
) |
|
|
|
|
|
|
|
Net cash provided from continuing operating activities |
|
|
281 |
|
|
|
5,987 |
|
Cash flows from investing activities, excluding effects from
acquisitions and divestitures: |
|
|
|
|
|
|
|
|
Purchases of short-term investments |
|
|
(42,662 |
) |
|
|
(56,354 |
) |
Sales and maturities of short-term investments |
|
|
29,754 |
|
|
|
32,689 |
|
Purchases of property, plant and equipment |
|
|
(3,363 |
) |
|
|
(2,205 |
) |
Cash received from facility sale |
|
|
6,239 |
|
|
|
|
|
Payment for purchase of Unigen assets |
|
|
(7,700 |
) |
|
|
|
|
Cash received from disposition of discontinued operations, net |
|
|
3,230 |
|
|
|
|
|
Payment for purchase of KryoTech assets |
|
|
|
|
|
|
(2,863 |
) |
Other assets |
|
|
42 |
|
|
|
145 |
|
|
|
|
|
|
|
|
Net cash used for investing activities |
|
|
(14,460 |
) |
|
|
(28,588 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Issuance of stock, net |
|
|
3,336 |
|
|
|
1,747 |
|
Excess tax benefits from stock options exercised |
|
|
825 |
|
|
|
|
|
Cash dividends |
|
|
(2,694 |
) |
|
|
(2,170 |
) |
|
|
|
|
|
|
|
Net cash provided from (used for) financing activities |
|
|
1,467 |
|
|
|
(423 |
) |
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents from continuing operations |
|
|
(12,712 |
) |
|
|
(23,024 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from discontinued operations: |
|
|
|
|
|
|
|
|
Cash provided from (used for) operating activities of discontinued operations |
|
|
(195 |
) |
|
|
116 |
|
Cash used for investing activities of discontinued operations |
|
|
(9 |
) |
|
|
(60 |
) |
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents from discontinued operations |
|
|
(204 |
) |
|
|
56 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
38,543 |
|
|
|
59,590 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
25,831 |
|
|
$ |
36,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Income taxes, net of refunds |
|
$ |
3,897 |
|
|
$ |
59 |
|
Inventory capitalized as capital assets |
|
$ |
369 |
|
|
$ |
540 |
|
Dividends declared but not yet paid |
|
$ |
1,356 |
|
|
$ |
1,088 |
|
The accompanying notes are an integral part of these statements.
5
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
June 24, 2006
1. |
|
Summary of Significant Accounting Policies |
Interim Basis of Presentation
Our fiscal years are based on a 52- or 53-week period ending on the last Saturday in December.
The condensed consolidated balance sheet at December 31, 2005 has been derived from our
audited financial statements at that date. The condensed consolidated interim financial
statements as of June 24, 2006 and for the three- and six-month periods then ended (also
referred to as the second quarter of fiscal 2006 and the first half of fiscal 2006) and
June 25, 2005 (also referred to as the second quarter of fiscal 2005 and the first half of
fiscal 2005) are unaudited. However, in managements opinion, these financial statements
reflect all adjustments (consisting only of normal, recurring items) necessary to provide a
fair presentation of our financial position, results of operations and cash flows for the
periods presented. Both the second quarter of fiscal 2006 and 2005 were comprised of 13 weeks
and the first half of fiscal 2006 and 2005 were comprised of 25 weeks.
Our interim results are not necessarily indicative of the results that should be expected for
the full year. For a better understanding of Cohu, Inc. and our financial statements, we
recommend reading these condensed consolidated interim financial statements in conjunction
with our audited financial statements for the year ended December 31, 2005, which are included
in our 2005 Annual Report on Form 10-K, filed with the U. S. Securities and Exchange
Commission (SEC). In the following notes to our interim condensed consolidated financial
statements, Cohu, Inc. is referred to as Cohu, we, our and us.
Risks and Uncertainties
We are subject to a number of risks and uncertainties that may significantly impact our future
operating results. These risks and uncertainties are discussed under Item 1A. Risk Factors
included in this Form 10-Q. As our interim description of risks and uncertainties only
includes any material changes to our annual description, we also recommend reading the
description of the risk factors associated with our business previously disclosed in Item 1A.
of our 2005 Annual Report on Form 10-K. Understanding these risks and uncertainties is
integral to the review of our interim condensed consolidated financial statements.
Discontinued Operations
On May 12, 2006, we completed the sale of our metal detection equipment segment, Fisher
Research Laboratory, Inc. (FRL). Effective with the June 24, 2006 financial statements, the
operating results of FRL are presented as discontinued operations (Note 2) and all prior
period financial statements have been reclassified accordingly.
Share-Based Compensation
On January 1, 2006, we adopted the provisions of Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment,
(Statement No. 123R) and SEC Staff Accounting Bulletin No. 107, Share-Based Payment, (SAB
107) requiring the measurement and recognition of all share-based compensation under the fair
value method.
During the first half of fiscal 2006, we began recognizing share-based compensation under
Statement No. 123R for all awards granted during 2006 and for the unvested portion of previous
award grants based on each awards grant date fair value. We implemented Statement No. 123R
using the modified prospective transition method. Under this transition method our financial
statements and related information presented, pertaining to periods prior to our adoption of
Statement No. 123R, have not been adjusted to reflect fair value of share-based compensation
expense.
We estimate the fair value of each share-based award on the grant date using the Black-Scholes
valuation model. To facilitate our adoption of Statement No. 123R, we applied the provisions
of SAB 107 in developing our methodologies to estimate our Black-Scholes model inputs. Option
valuation models, including Black-Scholes, require the input of highly subjective assumptions,
and changes in the assumptions used can materially affect the grant date fair value of an
award. These assumptions include the risk-free rate of interest, expected dividend yield,
expected volatility, and the expected life of the award. The risk-free rate of interest is
based on the U.S. Treasury rates appropriate for the expected term of the award. Expected
dividends are based, primarily, on historical factors related to our common stock. Expected
volatility is based on historic, weekly stock price observations of our common stock during
the period immediately preceding the share-based award grant that is
equal in length to the awards expected term. We believe that historical volatility is the
best estimate of future volatility. Due to a limited amount of historical option exercise
data related to options with a five-year
6
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
June 24, 2006
contractual term, we adopted SAB 107s simplified
method for estimating the expected term of share-based awards granted in the first half of
fiscal 2006. Statement No. 123R also requires that estimated forfeitures be included as a
part of the grant date expense estimate. We used historical data to estimate expected
employee behaviors related to option exercises and forfeitures. Prior to our adoption of
Statement No. 123R, we reduced pro-forma share-based compensation expense, presented in the
notes to our financial statements, for actual forfeitures as they occurred.
The following weighted average assumptions were used to value share-based awards granted:
Employee Stock Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
June 24, |
|
June 25, |
|
June 24, |
|
June 25, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Dividend yield |
|
|
1.5 |
% |
|
|
1.0 |
% |
|
|
1.3 |
% |
|
|
1.0 |
% |
Expected volatility |
|
|
45.0 |
% |
|
|
51.0 |
% |
|
|
46.6 |
% |
|
|
59.2 |
% |
Risk-free interest rate |
|
|
5.0 |
% |
|
|
3.9 |
% |
|
|
4.7 |
% |
|
|
3.7 |
% |
Expected term of options |
|
3.8 years |
|
|
4.0 years |
|
|
3.8 years |
|
|
4.0 years |
|
Weighted-average grant
date fair value per
share |
|
$ |
6.15 |
|
|
$ |
6.99 |
|
|
$ |
7.07 |
|
|
$ |
7.68 |
|
Employee Stock Purchase Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
June 24, |
|
June 25, |
|
June 24, |
|
June 25, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Dividend yield |
|
|
1.5 |
% |
|
|
1.0 |
% |
|
|
1.4 |
% |
|
|
1.0 |
% |
Expected volatility |
|
|
50.7 |
% |
|
|
42.4 |
% |
|
|
45.1 |
% |
|
|
51.2 |
% |
Risk-free interest rate |
|
|
4.8 |
% |
|
|
2.8 |
% |
|
|
4.6 |
% |
|
|
2.4 |
% |
Expected term of options |
|
0.5 years |
|
0.5 years |
|
0.5 years |
|
0.5 years |
Weighted-average grant
date fair value per share |
|
$ |
5.49 |
|
|
$ |
4.00 |
|
|
$ |
5.84 |
|
|
$ |
4.67 |
|
Reported share-based compensation is classified, in the condensed consolidated interim
financial statements, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
June 24, |
|
|
June 25, |
|
|
June 24, |
|
|
June 25, |
|
(in thousands) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
Cost of sales |
|
$ |
76 |
|
|
$ |
|
|
|
$ |
166 |
|
|
$ |
|
|
Research and development |
|
|
195 |
|
|
|
|
|
|
|
422 |
|
|
|
|
|
Selling, general and administrative |
|
|
424 |
|
|
|
|
|
|
|
912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation |
|
|
695 |
|
|
|
|
|
|
|
1,500 |
|
|
|
|
|
Income tax benefit |
|
|
(89 |
) |
|
|
|
|
|
|
(186 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation,
net of tax |
|
$ |
606 |
|
|
$ |
|
|
|
$ |
1,314 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to our adoption of Statement No. 123R, we presented all tax benefits resulting from the
exercise of stock options as operating cash inflows in our consolidated statements of cash
flows, in accordance with the provisions of the Emerging Issues Task Force (EITF) Issue No.
00-15, Classification in the Statement of Cash Flows of the Income Tax Benefit Received by a
Company upon Exercise of a Nonqualified Employee Stock Option. Statement No. 123R requires
the benefit of tax deductions in excess of the compensation cost recognized for those options
to be classified as financing cash inflows rather than operating cash inflows, on a
prospective basis.
At June 24, 2006, excluding a reduction for forfeitures, we had approximately $5.7 million of
pre-tax unrecognized compensation cost related to unvested share-based awards which is
expected to be recognized over a weighted-average period of approximately 2 years.
Prior to the first quarter of fiscal 2006, we accounted for share-based awards to employees
under Accounting
Principles Board Opinion Number 25, Accounting for Stock Issued to
Employees, (APB 25). As
a result of adopting Statement No. 123R diluted net income per share for the second
quarter of fiscal 2006 and the
7
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
June 24, 2006
first
half of fiscal 2006 are $0.03 and $0.06 lower,
respectively, than if we had continued to account for share-based compensation under APB 25.
Under APB 25, no share-based employee compensation cost was reflected in our consolidated
statements of income, as all options granted under our share-based compensation plans had an
exercise price equal to the market value of the underlying common stock on the date of grant.
The pro forma information presented in the following table illustrates the effect on net
income and net income per share if we had applied the fair value recognition provisions of
FASB Statement No. 123, Accounting for Stock-Based Compensation, as amended by FASB Statement
No. 148, Accounting for Stock-Based Compensation Transition and Disclosure, to share-based
employee compensation during 2005:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
(in thousands, except per share amounts) |
|
June 25, 2005 |
|
|
June 25, 2005 |
|
|
Net income, as reported |
|
$ |
5,591 |
|
|
$ |
12,122 |
|
Less: Total share-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effect |
|
|
(1,084 |
) |
|
|
(2,114 |
) |
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
4,507 |
|
|
$ |
10,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per share: |
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
Net income as reported |
|
$ |
0.26 |
|
|
$ |
0.56 |
|
Net income pro forma |
|
$ |
0.21 |
|
|
$ |
0.46 |
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
Net income as reported |
|
$ |
0.25 |
|
|
$ |
0.55 |
|
Net income pro forma |
|
$ |
0.20 |
|
|
$ |
0.45 |
|
Income Per Share
Income per share is computed in accordance with FASB Statement No. 128, Earnings per Share.
Basic income per share is computed using the weighted average number of common shares
outstanding during each period. Diluted income per share includes the dilutive effect of
common shares potentially issuable upon the exercise of stock options utilizing the
treasury stock method. For purposes of computing diluted income per share, stock options
with exercise prices that exceed the average fair market value of our common stock for
the period are excluded. For the three- and six-month periods ended June 24, 2006,
options to purchase approximately 1,218,000 and 698,000 shares of common stock,
respectively, were excluded from the computation. For the three- and six-month periods
ended June 25, 2005, options to purchase approximately 668,000 and 730,000 shares of
common stock, respectively, were excluded from the computation. The following table
reconciles the denominators used in computing basic and diluted income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
(in thousands) |
|
June 24, 2006 |
|
|
June 25, 2005 |
|
|
June 24, 2006 |
|
|
June 25, 2005 |
|
|
Weighted
average common shares outstanding
|
|
|
22,581 |
|
|
|
21,704 |
|
|
|
22,541 |
|
|
|
21,669 |
|
Effect of dilutive stock options |
|
|
264 |
|
|
|
500 |
|
|
|
394 |
|
|
|
487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,845 |
|
|
|
22,204 |
|
|
|
22,935 |
|
|
|
22,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Recognition
Our revenue recognition policy is disclosed in Note 1 of the Notes to Consolidated Financial
Statements included in our Annual Report on Form 10-K for the year ended December 31, 2005.
As more fully described in that policy, revenue from products that have not previously
satisfied customer acceptance is recognized upon customer acceptance. The gross profit on
sales that are not recognized is generally recorded as deferred profit and reflected as a
current liability in the consolidated balance sheet.
In April 2003, our Broadcast Microwave Services subsidiary was awarded an $8.5 million
contract from the United Arab Emirates (UAE) Armed Services to provide microwave
communications equipment for a
command center and infrastructure system for border security. The contract, utilizes our most
advanced microwave communications technology that has not previously been installed in an
application of this size and
8
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
June 24, 2006
complexity, and requires that 40% of the total contract price be
paid after the system has been fully accepted by the customer. As a result of these factors
and the inability to make reasonably dependable estimates of progress toward completion and
acceptance, we will recognize all revenue and related costs under this contract in the period
the system is accepted by the customer. In the fourth quarter of 2005, BMS received
notification that the customer had approved an amendment to the original contract increasing
the total value of the contract to $8.9 million. Under the terms of the amendment BMS will
provide certain additional equipment and services. Through June 24, 2006, we had shipped
inventory with a sales value of $8.9 million and deferred costs of approximately $6.7 million
resulting in deferred profit of approximately $2.2 million under the contract. In addition,
at June 24, 2006 we had unbilled accounts receivable of approximately $3.6 million. We have
also provided the customer with a standby letter of credit which was reduced from $2.6 million
to $1.0 million during the first quarter of fiscal 2006. At June 24, 2006, approximately $1.0
million of this letter of credit may be drawn upon, by the customer, if BMS does not fulfill
the terms of the contract. While customer acceptance and final contract payment has taken
longer than anticipated, we believe that such acceptance and payment will be received.
However, in the event BMS is unable to obtain customer acceptance of the system, the
receivables may need to be written off and the customer might seek a refund of the $5.3
million in payments made under the contract, which could materially impact our results of
operations.
At June 24, 2006, we had deferred revenue totaling approximately $42.6 million and deferred
profit of $17.4 million. At December 31, 2005, we had deferred revenue totaling approximately
$30.7 million and deferred profit of $13.8 million.
Retiree Medical Benefits
We provide post-retirement health benefits to certain executives and directors under a
noncontributory plan. The net periodic benefit cost incurred during the second fiscal quarter
and first half of fiscal 2006 and 2005 was not significant.
Recent Accounting Pronouncements
There have been no material changes to the recent accounting pronouncements as previously
reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005.
2. |
|
Discontinued Operations |
On May 12, 2006, we sold substantially all the assets of our metal detection equipment
segment, FRL. Our decision to sell FRL resulted from managements determination that this
industry segment was no longer a strategic fit within our organization. The sales price was
$3.2 million which is subject to a working capital adjustment and, as a result, adjustments to
the loss on disposal noted below are possible. We expect to finalize the sales price and
related accounting in the third quarter of 2006.
A summary of key financial information of our discontinued operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
(in thousands) |
|
June 24, 2006 |
|
|
June 25, 2005 |
|
|
June 24, 2006 |
|
|
June 25, 2005 |
|
|
Net sales |
|
$ |
875 |
|
|
$ |
2,086 |
|
|
$ |
2,356 |
|
|
$ |
4,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
$ |
80 |
|
|
$ |
(23 |
) |
|
$ |
(169 |
) |
|
$ |
3 |
|
Income tax provision (benefit) |
|
|
28 |
|
|
|
(8 |
) |
|
|
(59 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
52 |
|
|
|
(15 |
) |
|
|
(110 |
) |
|
|
2 |
|
Loss on sale of metal
detection equipment business |
|
|
(806 |
) |
|
|
|
|
|
|
(806 |
) |
|
|
|
|
Income tax benefit |
|
|
(282 |
) |
|
|
|
|
|
|
(282 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on sale of metal
detection business, net |
|
|
(524 |
) |
|
|
|
|
|
|
(524 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net |
|
$ |
(472 |
) |
|
$ |
(15 |
) |
|
$ |
(634 |
) |
|
$ |
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
June 24, 2006
3. |
|
Strategic Technology Transactions and Goodwill |
Unigen Acquisition
On December 29, 2005, we entered into an exclusive, perpetual, irrevocable, world-wide,
royalty-free license for certain patents with Unisys Corporation (Unysis) for a one-time
cash payment of $5.0 million. On March 16, 2006, we purchased certain intellectual property,
fixed assets, inventory and a customer contract of Unisys Unigen operation (Unigen). The
results of Unigens operations have been included in our consolidated financial statements
since that date. Unigen developed, manufactured and marketed advanced thermal solutions for
use in semiconductor test and burn-in.
Included in the assets we acquired were the patents licensed from Unisys in December 2005 and,
as a result, these two transactions have been combined for purposes of allocating the total
purchase price to the assets acquired. The purchase price of this acquisition was
approximately $17.2 million, and was funded primarily by our cash reserves ($7.7 million),
cash previously paid in December 2005 for the patent license and a deposit on the acquisition
($5.3 million), other acquisition costs ($0.2 million) and certain Unigen liabilities assumed
($0.1 million). We also recorded a $4.0 million liability for amounts owed to Unisys for
inventory we acquired. The acquisition was considered a business in accordance with EITF
98-3, Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or
of a Business (EITF 98-3), and the total cost of the acquisition was allocated to the
assets acquired and liabilities assumed based on their respective fair values in accordance
with Statement No. 141. All assets are expected to be fully deductible for tax purposes. The
goodwill was assigned to our semiconductor equipment segment.
The allocation of purchase price to the acquired assets and assumed liabilities was as follows (in thousands):
|
|
|
|
|
Current assets |
|
$ |
5,464 |
|
Fixed assets |
|
|
1,522 |
|
Intangible assets |
|
|
7,020 |
|
Goodwill |
|
|
3,301 |
|
|
|
|
|
Total assets acquired |
|
|
17,307 |
|
Current liabilities assumed |
|
|
(142 |
) |
|
|
|
|
Net assets acquired |
|
$ |
17,165 |
|
|
|
|
|
During the second fiscal quarter of 2006 we finalized the purchase accounting for this
transaction and, as a result, reduced the amount of the purchase price allocated to fixed
assets by $103,000 and increased the amount allocated to intangible assets by $40,000 and
goodwill by $63,000. Amounts allocated to intangible assets are being amortized on a
straight-line basis over their estimated useful lives currently estimated at five years. Pro
forma results of operations have not been presented because the effect of the acquisition was
not material.
KryoTech Acquisition
On May 6, 2005, we purchased substantially all the assets and operations of KryoTech, Inc.
(KryoTech). The results of KryoTechs operations have been included in the consolidated
financial statements since that date. KryoTech, based in West Columbia, South Carolina,
designed, developed manufactured and marketed advanced thermal solutions for electronic
systems and products, including semiconductor equipment. Consummation of the acquisition
terminated our joint development project with KryoTech and eliminated all minimum purchase
obligations.
The purchase price of this acquisition was approximately $3.6 million, and was funded
primarily by our cash reserves ($2.9 million). The purchase price also included the payment of
the outstanding principal balance and accrued interest on the promissory note with KryoTech
($0.5 million), other acquisition costs ($0.2 million) and certain KryoTech liabilities
assumed ($0.5 million). The acquisition was considered a business in accordance with EITF
98-3, and the total cost of the acquisition was allocated to the assets acquired and
liabilities assumed based on their respective fair values in accordance with Statement No.
141. All assets are expected to be fully deductible for tax purposes. The goodwill was
assigned to our semiconductor equipment segment.
10
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
June 24, 2006
The allocation of the purchase price to the acquired assets and assumed liabilities was as
follows (in thousands):
|
|
|
|
|
Current assets |
|
$ |
740 |
|
Fixed assets |
|
|
54 |
|
Intangible assets |
|
|
1,950 |
|
Backlog |
|
|
90 |
|
Goodwill |
|
|
1,257 |
|
|
|
|
|
Total assets acquired |
|
|
4,091 |
|
Current liabilities assumed |
|
|
(461 |
) |
|
|
|
|
Net assets acquired |
|
$ |
3,630 |
|
|
|
|
|
Amounts allocated to other intangible assets are being amortized on a straight-line basis over
their estimated useful lives of three years. Pro forma results of operations have not been
presented because the effect of the acquisition was not material.
Purchased intangible assets, subject to amortization, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
June 24, 2006 |
|
|
December 31, 2005 |
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Gross Carrying |
|
|
Accumulated |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amortization |
|
|
|
|
Unigen technology |
|
$ |
7,020 |
|
|
$ |
386 |
|
|
$ |
|
|
|
$ |
|
|
Patent license |
|
|
|
|
|
|
|
|
|
|
5,037 |
|
|
|
|
|
KryoTech technology |
|
|
1,950 |
|
|
|
758 |
|
|
|
1,950 |
|
|
|
434 |
|
BMS technology |
|
|
1,650 |
|
|
|
1,650 |
|
|
|
1,650 |
|
|
|
1,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,620 |
|
|
$ |
2,794 |
|
|
$ |
8,637 |
|
|
$ |
2,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to purchased and other intangible assets was approximately $0.5
million in the second quarter of fiscal 2006, and approximately $0.7 million in the first six
months of fiscal 2006. Amortization expense related to purchased and other intangible assets
was approximately $0.2 million in the second quarter of fiscal 2005, and approximately $0.4
million in the first six months of fiscal 2005. As of June 24, 2006, we expect amortization
expense in future periods to be as follows: remainder of 2006 $1,022,000; 2007
$2,044,000; 2008 $1,681,000; 2009 $1,422,000; 2010 $1,422,000, 2011 $235,000.
4. |
|
Employee Stock Benefit Plans |
Employee Stock Purchase Plan The Cohu, Inc. 1997 Employee Stock Purchase Plan (the Plan)
provided for the issuance of a maximum of 1,000,000 shares of our Common Stock. Under the
Plan, eligible employees may purchase shares of common stock through payroll deductions. The
price paid for the common stock is equal to 85% of the fair market value of our Common Stock
on specified dates. On May 9, 2006, our stockholders approved amendments extending the life
of the Plan beyond February, 2007 and increasing the number of shares of our Common Stock
issuable under the Plan by 400,000 shares. At June 24, 2006, there were approximately 724,000
shares reserved for issuance under the Plan.
Stock Options Under our stock option plans, options may be granted to employees and outside
directors to purchase a fixed number of shares of our Common Stock at prices not less than
100% of the fair market value at the date of grant. Options generally vest and become
exercisable in one-fourth annual increments beginning one year after the grant date and expire
five to ten years from the grant date. On May 9, 2006, our stockholders approved certain
amendments to the Cohu, Inc. 2005 Equity Incentive Plan (the 2005 Equity Plan). The
amendments increased the number of shares of our Common Stock issuable in connection with
awards granted under the Plan by 1,000,000 shares and increased the number of shares which may
be issued pursuant to restricted stock and performance awards from 500,000 shares to 1,500,000
shares. At June 24, 2006, approximately 1,927,000 shares were available for future equity
awards under the 2005 Equity Plan.
11
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
June 24, 2006
Stock option activity under our share-based compensation plans for the second fiscal quarter
of 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
(in thousands, except per share data) |
|
Shares |
|
Exercise Price |
Outstanding, March 25, 2006 |
|
|
2,321 |
|
|
$ |
15.74 |
|
Granted |
|
|
5 |
|
|
$ |
16.55 |
|
Exercised |
|
|
(21 |
) |
|
$ |
14.13 |
|
Canceled |
|
|
(63 |
) |
|
$ |
16.15 |
|
|
|
|
|
|
|
|
|
|
Outstanding, June 24, 2006 |
|
|
2,242 |
|
|
$ |
15.74 |
|
|
|
|
|
|
|
|
|
|
Options exercisable at June 24, 2006 |
|
|
1,291 |
|
|
$ |
15.37 |
|
Stock option activity under our share-based compensation plans for the first half of fiscal of
2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
(in thousands, except per share data) |
|
Shares |
|
Exercise Price |
Outstanding, January 1, 2006 |
|
|
2,504 |
|
|
$ |
15.66 |
|
Granted |
|
|
12 |
|
|
$ |
18.48 |
|
Exercised |
|
|
(191 |
) |
|
$ |
14.53 |
|
Canceled |
|
|
(83 |
) |
|
$ |
16.40 |
|
|
|
|
|
|
|
|
|
|
Outstanding, June 24, 2006 |
|
|
2,242 |
|
|
$ |
15.74 |
|
|
|
|
|
|
|
|
|
|
Options exercisable at June 24, 2006 |
|
|
1,291 |
|
|
$ |
15.37 |
|
Information about stock options outstanding at June 24, 2006 is as follows (options in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Exercisable |
|
|
Approximate |
|
|
|
|
Weighted Average |
|
Weighted Average |
Range of |
|
Number |
|
Remaining |
|
Exercise |
|
Number |
|
Exercise |
Exercise Prices |
|
Outstanding |
|
Life (Years) |
|
Price |
|
Exercisable |
|
Price |
|
|
|
$7.69 $11.66
|
|
|
246 |
|
|
|
5.3 |
|
|
$ |
11.18 |
|
|
|
170 |
|
|
$ |
10.96 |
|
$12.07 $13.88
|
|
|
393 |
|
|
|
3.5 |
|
|
$ |
13.11 |
|
|
|
381 |
|
|
$ |
13.09 |
|
$14.00 $14.68
|
|
|
232 |
|
|
|
5.9 |
|
|
$ |
14.45 |
|
|
|
199 |
|
|
$ |
14.49 |
|
$15.04 $17.20
|
|
|
634 |
|
|
|
8.4 |
|
|
$ |
15.62 |
|
|
|
122 |
|
|
$ |
15.78 |
|
$17.30 $18.20
|
|
|
295 |
|
|
|
6.4 |
|
|
$ |
17.79 |
|
|
|
215 |
|
|
$ |
17.89 |
|
$18.24 $18.35
|
|
|
299 |
|
|
|
7.5 |
|
|
$ |
18.35 |
|
|
|
121 |
|
|
$ |
18.35 |
|
$18.50 $35.00
|
|
|
134 |
|
|
|
4.3 |
|
|
$ |
22.82 |
|
|
|
74 |
|
|
$ |
23.80 |
|
$38.81 $38.81
|
|
|
9 |
|
|
|
3.7 |
|
|
$ |
38.81 |
|
|
|
9 |
|
|
$ |
38.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,242 |
|
|
|
6.3 |
|
|
$ |
15.74 |
|
|
|
1,291 |
|
|
$ |
15.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of options exercised during the second fiscal quarter of 2006
and the first half of fiscal 2006 was approximately $0.1 million and $2.3 million,
respectively. The aggregate intrinsic value of options outstanding and exercisable at June
24, 2006 was approximately $3.9 million $2.9 million, respectively.
5. |
|
Comprehensive Income |
|
|
|
Comprehensive income represents all non-owner changes in stockholders equity and consists of,
on an after-tax basis where applicable, the following: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
(in thousands) |
|
June 24, 2006 |
|
|
June 25, 2005 |
|
|
June 24, 2006 |
|
|
June 25, 2005 |
|
|
Income from continuing operations |
|
$ |
5,192 |
|
|
$ |
5,606 |
|
|
$ |
8,777 |
|
|
$ |
12,120 |
|
Income (loss) from discontinued
operations |
|
|
(472 |
) |
|
|
(15 |
) |
|
|
(634 |
) |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
4,720 |
|
|
|
5,591 |
|
|
|
8,143 |
|
|
|
12,122 |
|
Change in unrealized loss on
investments |
|
|
(53 |
) |
|
|
90 |
|
|
|
(78 |
) |
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
4,667 |
|
|
$ |
5,681 |
|
|
$ |
8,065 |
|
|
$ |
12,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
June 24, 2006
Accumulated other comprehensive loss totaled approximately $0.3 million and $0.2 million at
June 24, 2006 and December 31, 2005, respectively, and was attributed to after-tax unrealized
losses and gains on investments.
The
income tax provision (benefit) included in the statements of
income for the three and six months
ended June 24, 2006 and June 25, 2005, is based on the estimated annual effective tax rate for
the entire year. These estimated effective tax rates are subject to adjustment in subsequent
quarterly periods as our estimates of pretax income for the year are increased or decreased.
The effective tax rate of 34.6% for the six months ended June 24, 2006 is less than the U.S.
federal statutory rate primarily due to state research and development tax credits and export
sales benefits offset by the effects of Statement No. 123R that does not allow deferred tax
benefits to be recognized on compensation expense related to incentive stock options.
Our income tax benefit in 2005 was, in part, the result of research tax credits and export
sales benefits. In addition, in March 2005, the Internal Revenue Service completed a routine
examination of our consolidated tax returns for the period 2000 through 2002. The examination
resulted in no assessment related to our tax returns as filed. Consequently, approximately
$3.0 million of accrued taxes related to the examined years were reversed with a corresponding
credit to income tax expense in the quarter ended March, 2005.
In accordance with FASB Statement No. 109, Accounting for Income Taxes, (Statement No. 109)
net deferred tax assets are reduced by a valuation allowance if, based on all the available
evidence, it is more likely than not that some or all of the deferred tax assets will not be
realized. A valuation allowance of approximately $1.8 million was provided on deferred tax
assets at June 24, 2006 and December 31, 2005. The amount of deferred tax assets considered
realizable was determined based on (i) taxable income in prior carryback years; (ii) future
reversals of existing taxable temporary differences (i.e. offset gross deferred tax assets
against gross deferred tax liabilities); (iii) tax planning strategies and (iv) future taxable
income, exclusive of reversing temporary differences and carryforwards.
Our business improved significantly in the quarter ended June 25, 2005 with orders increasing
from $44.4 million in the first quarter of 2005 to $71.0 million in the second quarter. This
unanticipated increase in orders caused us to reassess our forecast of 2005 income. In
accordance with Statement No. 109, we reduced the valuation allowance required at June 25,
2005 by approximately $1.7 million as a result of the increase in forecasted 2005 income with
a corresponding credit to income tax expense.
We have derived significant tax benefits from export sales. As a result of the American Jobs
Creation Act of 2004, the export sales benefit derived from the Extraterritorial Income
Exclusion (ETI) was repealed subject to a phase-out that limits the full tax benefit to 60%
in 2006. The ETI benefit was replaced with a deduction for domestic manufacturing activities
subject to a phase-in beginning in 2005. The future tax benefits we derive from the domestic
manufacturing deduction will likely be less than those from ETI.
The federal research credit expired on December 31, 2005. Legislation to retroactively
reinstate the credit is pending in the U.S. Congress; however it had not been enacted and
signed into law as of June 24, 2006. Accordingly, no benefit from the federal research credit
has been included in estimating the 2006 effective tax rate. If Congress retroactively
reinstates the research credit, the effect of the credit will be reflected in the computation
of the annual effective tax rate beginning as of the first period that includes the enactment
date of the legislation.
7. |
|
Geographic Consolidation |
On April 10, 2003, we announced that our Delta Design, Inc. subsidiary was relocating its
Littleton, Massachusetts operation to its headquarters facility in Poway, California. The
consolidation was substantially completed in March 2004. For the three- and six-month period
ended June 24, 2006 we recorded charges to operations, totaling $9,000 for severance and
one-time termination benefits. These charges are included in cost of sales. There were no
charges to operations recorded during the first half of fiscal 2005. Cumulative charges to
operations for severance and other exit costs for the period April 10, 2003 to June 24, 2006,
were approximately $1.1 million.
13
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
June 24, 2006
On May 5, 2006, we completed the sale of the land and building previously used by our
operations in Littleton, Massachusetts to FPK Realty, LLC, (FPK). The property was sold for
$6.5 million in cash, less related costs, resulting in a net pretax gain of approximately $3.0
million. In conjunction with the sale, Cohu entered into a one-year leaseback agreement with
FPK for a portion of the facility. Total lease payments to be made under the lease are
approximately $0.2 million. The sale-leaseback transaction was accounted for pursuant to FASB
Statement No. 98, Accounting for Leases.
The following table reconciles amounts accrued and paid under the consolidation plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 24, 2006 |
|
Severance and |
|
|
Other exit |
|
|
|
|
(in thousands) |
|
other payroll |
|
|
costs |
|
|
Total |
|
|
Liability at March 25, 2006 |
|
$ |
242 |
|
|
$ |
|
|
|
$ |
242 |
|
Costs accrued |
|
|
9 |
|
|
|
|
|
|
|
9 |
|
Amounts paid or charged |
|
|
(17 |
) |
|
|
|
|
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
Liability at June 24, 2006 |
|
$ |
234 |
|
|
|
|
|
|
$ |
234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 24, 2006 |
|
Severance and |
|
|
Other exit |
|
|
|
|
(in thousands) |
|
other payroll |
|
|
costs |
|
|
Total |
|
|
Liability at January 1, 2006 |
|
$ |
273 |
|
|
$ |
|
|
|
$ |
273 |
|
Costs accrued |
|
|
9 |
|
|
|
|
|
|
|
9 |
|
Amounts paid or charged |
|
|
(48 |
) |
|
|
|
|
|
|
(48 |
) |
|
|
|
|
|
|
|
|
|
|
Liability at June 24, 2006 |
|
$ |
234 |
|
|
|
|
|
|
$ |
234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 25, 2005 |
|
Severance and |
|
|
Other exit |
|
|
|
|
(in thousands) |
|
other payroll |
|
|
costs |
|
|
Total |
|
|
Liability at March 26, 2005 |
|
$ |
285 |
|
|
$ |
|
|
|
$ |
285 |
|
Costs accrued |
|
|
|
|
|
|
|
|
|
|
|
|
Amounts paid or charged |
|
|
(25 |
) |
|
|
|
|
|
|
(25 |
) |
|
|
|
|
|
|
|
|
|
|
Liability at June 25, 2005 |
|
$ |
260 |
|
|
|
|
|
|
$ |
260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 25, 2005 |
|
Severance and |
|
|
Other exit |
|
|
|
|
(in thousands) |
|
other payroll |
|
|
costs |
|
|
Total |
|
|
Liability at January 1, 2005 |
|
$ |
285 |
|
|
$ |
|
|
|
$ |
285 |
|
Costs accrued |
|
|
|
|
|
|
|
|
|
|
|
|
Amounts paid or charged |
|
|
(25 |
) |
|
|
|
|
|
|
(25 |
) |
|
|
|
|
|
|
|
|
|
|
Liability at June 25, 2005 |
|
$ |
260 |
|
|
|
|
|
|
$ |
260 |
|
|
|
|
|
|
|
|
|
|
|
We have three reportable segments as defined by FASB Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information. As discussed in Note 2, in May, 2006, we
sold substantially all the assets of FRL, which comprised our metal detection equipment
segment and have presented financial information for this segment as discontinued operations.
Our reportable segments are business units that offer different products and are managed
separately because each business requires different technology and marketing strategies.
14
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
June 24, 2006
Financial information concerning our reportable segments of our continuing operations is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
(in thousands) |
|
June 24, 2006 |
|
|
June 25, 2005 |
|
|
June 24, 2006 |
|
|
June 25, 2005 |
|
|
Net sales by segment * : |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor equipment |
|
$ |
54,798 |
|
|
$ |
41,603 |
|
|
$ |
104,107 |
|
|
$ |
78,853 |
|
Television cameras |
|
|
4,647 |
|
|
|
4,703 |
|
|
|
8,245 |
|
|
|
8,489 |
|
Microwave communications |
|
|
2,497 |
|
|
|
3,373 |
|
|
|
6,360 |
|
|
|
4,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated net
sales and net sales for
reportable segments |
|
$ |
61,942 |
|
|
$ |
49,679 |
|
|
$ |
118,712 |
|
|
$ |
92,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor equipment |
|
|
4,534 |
|
|
|
5,514 |
|
|
|
10,037 |
|
|
|
11,399 |
|
Television cameras |
|
|
102 |
|
|
|
(92 |
) |
|
|
(687 |
) |
|
|
(520 |
) |
Microwave communications |
|
|
(579 |
) |
|
|
(20 |
) |
|
|
(347 |
) |
|
|
(806 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit for reportable
segments |
|
|
4,057 |
|
|
|
5,402 |
|
|
|
9,003 |
|
|
|
10,073 |
|
Other unallocated amounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of facilities |
|
|
2,963 |
|
|
|
|
|
|
|
2,963 |
|
|
|
|
|
Corporate expenses |
|
|
(732 |
) |
|
|
(778 |
) |
|
|
(1,592 |
) |
|
|
(1,534 |
) |
Interest income |
|
|
1,657 |
|
|
|
890 |
|
|
|
3,043 |
|
|
|
1,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations before income
taxes |
|
$ |
7,945 |
|
|
$ |
5,514 |
|
|
$ |
13,417 |
|
|
$ |
10,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Intersegment sales were not significant in any period presented. |
|
|
|
|
|
|
|
|
|
(in thousands) |
|
June 24, 2006 |
|
|
December 31, 2005 |
|
|
Total assets by segment: |
|
|
|
|
|
|
|
|
Semiconductor equipment |
|
$ |
135,121 |
|
|
$ |
115,689 |
|
Television cameras |
|
|
9,892 |
|
|
|
9,883 |
|
Microwave communications |
|
|
14,333 |
|
|
|
13,919 |
|
|
|
|
|
|
|
|
Total assets for reportable segments |
|
|
159,346 |
|
|
|
139,491 |
|
Corporate, principally cash and
investments and deferred taxes |
|
|
165,525 |
|
|
|
163,089 |
|
Discontinued operations |
|
|
487 |
|
|
|
4,397 |
|
|
|
|
|
|
|
|
Total consolidated assets |
|
$ |
325,358 |
|
|
$ |
306,977 |
|
|
|
|
|
|
|
|
9. |
|
Contingencies |
|
|
|
We are occasionally involved in various legal proceedings, lawsuits, examinations by various
tax authorities and claims that have arisen in the ordinary course of our businesses.
Although the outcome of such legal proceedings, claims and examinations cannot be predicted
with certainty, we do not believe any such matters exist at this time that will have a
material adverse effect on our financial position or results of operations. |
|
10. |
|
Guarantees |
|
|
|
Our products are generally sold with a 12-month to 36-month warranty period following sale or
installation. Parts and labor are covered under the terms of the warranty agreement. The
warranty provision is based on historical and projected experience by product and
configuration. |
15
Cohu, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
June 24, 2006
|
|
Changes in accrued warranty, of our continuing operations, during the second fiscal quarter
and the first half of fiscal 2006 and 2005 were as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
(in thousands) |
|
June 24, 2006 |
|
|
June 25, 2005 |
|
|
June 24, 2006 |
|
|
June 25, 2005 |
|
|
Balance at beginning of
period |
|
$ |
6,839 |
|
|
$ |
4,031 |
|
|
$ |
4,560 |
|
|
$ |
4,157 |
|
Warranty expense accruals |
|
|
1,890 |
|
|
|
1,006 |
|
|
|
6,616 |
|
|
|
2,004 |
|
Warranty payments |
|
|
(2,419 |
) |
|
|
(1,640 |
) |
|
|
(4,895 |
) |
|
|
(2,764 |
) |
Warranty liability assumed |
|
|
|
|
|
|
461 |
|
|
|
29 |
|
|
|
461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
6,310 |
|
|
$ |
3,858 |
|
|
$ |
6,310 |
|
|
$ |
3,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty expense in the first half of fiscal 2006 was impacted by higher than expected costs
associated with supporting certain customer test handler applications and a change in estimate
of future handler support costs.
In the ordinary course of business, from time-to-time, we provide standby letters of credit to
certain parties. As of June 24, 2006, the maximum potential amount of future payments that
Cohu could be required to make under these standby letters of credit is approximately $1.0
million. We have not recorded any liability in connection with these guarantee arrangements
beyond that required to appropriately account for the underlying transaction being guaranteed.
We do not believe, based on historical experience and information currently available, that
it is probable that any amounts will be required to be paid under these arrangements.
16
Cohu, Inc.
Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
June 24, 2006
This Form 10-Q contains certain forward-looking statements including expectations of market
conditions, challenges and plans, within the meaning of Section 21E of the Securities Exchange Act
of 1934, as amended, and is subject to the Safe Harbor provisions created by that statute. Such
forward-looking statements are based on managements current expectations and beliefs, including
estimates and projections about our industries and include, but are not limited to, statements
concerning financial position, business strategy, and plans or objectives for future operations.
Forward-looking statements are not guarantees of future performance, and are subject to certain
risks, uncertainties, and assumptions that are difficult to predict and may cause actual results to
differ materially from managements current expectations. Such risks and uncertainties include
those set forth in this Quarterly Report on Form 10-Q and our 2005 Annual Report on Form 10-K under
the heading Item 1A. Risk Factors. The forward-looking statements in this report speak only as
of the time they are made, and do not necessarily reflect managements outlook at any other point
in time. We undertake no obligation to publicly update any forward-looking statements, whether as
a result of new information, future events, or for any other reason, however, readers should
carefully review the risk factors set forth in other reports or documents we file from time to time
with the SEC after the date of this Quarterly Report.
OVERVIEW
Our primary business activity involves the development, manufacture, marketing, sale and servicing
of test handling and burn-in equipment for the global semiconductor industry. This business is
significantly dependent on capital expenditures by semiconductor manufacturers and test
subcontractors, which in turn are dependent on the current and anticipated market demand for
semiconductors that are subject to significant cyclical trends in demand. Changes in the
semiconductor, electronics, computer and telecommunications industries, as well as rapidly shifting
global economic conditions, have had and will continue to have a significant impact on our
businesses.
In the first six months of 2004, our semiconductor equipment business, as well as the semiconductor
equipment industry generally, saw significantly improved order bookings and backlog, an indication
that a three-year industry downturn had possibly ended. However, in the second half of 2004, our
orders declined and business conditions in the semiconductor equipment industry appeared to be
weakening. In 2005 this trend reversed, and during the year ended December 31, 2005, our
semiconductor equipment business saw a significant increase in order bookings that accounted for
our consolidated order growth, from $46.1 million in the fourth quarter of 2004 to $71.4 million in
the fourth quarter of 2005, and our sales in each of the four quarters of 2005 increased from the
fourth quarter of 2004.
Our orders during the first half of fiscal 2006 have remained relatively consistent with the fourth
quarter of fiscal 2005. During the first half of fiscal 2006 there has been a decrease in demand
for our advanced thermal products which has been offset by an increase in orders for our high-speed
test handlers and burn-in products. As a result of this shift in product mix and increased
customer support costs our gross margin in the first half of fiscal 2006 declined. We will
continue to focus on reducing product costs and overall spending, while we develop new product
offerings for the test handler and burn-in markets.
Our deferred revenue totaled $42.6 million at June 24, 2006. This is an increase of $6.4 million
and $11.9 million from March 25, 2006 and December 31, 2005, respectively. The increase in
deferred revenue is primarily the result of additional deferrals associated with our sales of
semiconductor equipment products, including those acquired from KryoTech and Unigen, which as of
June 24, 2006 are awaiting customer acceptance. During the first half of fiscal 2006 we have
deferred approximately $5.4 million in sales of products acquired from KryoTech and approximately
$9.3 million in sales of products acquired from Unigen.
Our operating results in the last three years have been impacted by charges to cost of sales
related to excess, obsolete and lower of cost or market inventory issues. These charges totaled
approximately $16.6 million during the three-year period ended December 31, 2005 (approximately
$1.1 million for the first half of fiscal 2006) and were primarily the result of decreases in
customer forecasts, competitive conditions in the test handler industry and, to a lesser extent,
changes in our sales product mix as a result of new product introductions. Exposure related to
inventories is common in the semiconductor equipment industry due to the narrow customer base, the
custom nature of the products and inventory and the shortened product life cycles caused by rapid
changes in semiconductor manufacturing technology. Increased competition, particularly in the last
several years, has also negatively impacted our gross margins on certain products and we believe it
is likely these conditions will exist for the foreseeable future.
Our other operating costs consist of research and development (R&D) and selling, general and
administrative expenses (SG&A). Both R&D and SG&A expense increased in 2006, due to increased
business volume and investment in development programs.
17
Cohu, Inc.
Managements Discussion and Analysis of Financial Condition and Results of Operations
June 24, 2006
Our non-semiconductor equipment businesses have comprised approximately 14% of our revenues during
the last three years. During 2005, we saw improved results in our microwave communications
business while the results of our television camera business deteriorated.
Our financial condition is strong with significant cash and short-term investments and no long-term
debt. During the three-year period ended June 24, 2006, total cash and investments have increased
from $111.1 million at June 30, 2003 to $138.8 million at June 24, 2006.
Our management team uses several performance metrics to manage our various businesses. These
metrics, which tend to focus on near-term forecasts due to the limited order backlog in our
businesses, include (i) order bookings and backlog for the most recently completed quarter and the
forecast for the next quarter; (ii) inventory levels and related excess exposures typically based
on the next twelve months forecast; (iii) gross margin and other operating expense trends; and
(iv) industry data and trends noted in various publicly available sources. Due to the short-term
nature of our order backlog that historically has represented about three months of business and
the inherent volatility of the semiconductor equipment business, our past performance is frequently
not indicative of future operating results or cash flows.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.
On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories,
intangible assets, income taxes, warranty obligations and contingencies and litigation. We base
our estimates on historical experience, forecasts and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities. Actual results may differ from
these estimates under different assumptions or conditions. We believe the following critical
accounting policies, that are more fully described in our Consolidated Financial Statements
included in Item 15 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2005,
affect the significant judgments and estimates used in the preparation of our consolidated
financial statements.
Share-Based Compensation: On January 1, 2006, we adopted the provisions of Statement No.123R and
SAB 107 requiring the measurement and recognition of all share-based compensation under the fair
value method. During fiscal 2006, we began recognizing share-based compensation, under Statement
No. 123R, for all awards granted in fiscal 2006 and for the unvested portion of previous award
grants based on each awards grant date fair value. We implemented Statement No. 123R using the
modified prospective transition method. Under this transition method our financial statements and
related information presented, pertaining to periods prior to our adoption of Statement No. 123R,
have not been adjusted to reflect fair value of share-based compensation expense.
We estimate the fair value of each share-based award on the grant date using the Black-Scholes
valuation model. To facilitate our adoption of Statement No. 123R, we applied the provisions of
SAB 107 in developing our methodologies to estimate our Black-Scholes model inputs. Option
valuation models, including Black-Scholes, require the input of highly subjective assumptions, and
changes in the assumptions used can materially affect the grant date fair value of an award. These
assumptions include the risk-free rate of interest, expected dividend yield, expected volatility,
and the expected life of the award. The risk-free rate of interest is based on the U.S. Treasury
rates appropriate for the expected term of the award. Expected dividends are based primarily on
historical factors related to our common stock. Expected volatility is based on historic, weekly
stock price observations of our common stock during the period immediately preceding the
share-based award grant that is equal in length to the awards expected term. We believe that
historical volatility is the best estimate of future volatility. Due to a limited amount of
historical option exercise data related to options with a five-year contractual term we adopted SAB
107s simplified method for estimating the expected term of share-based awards granted in the first
half of fiscal 2006. Statement No. 123R also requires that estimated forfeitures be included as a
part of the grant date estimate. We used historical data to estimate expected employee behaviors
related to option exercises and forfeitures. Prior to our adoption of Statement No. 123R, we
reduced pro-forma share-based compensation expense, presented in the notes to our financial
statements, for actual forfeitures as they occurred.
18
Cohu, Inc.
Managements Discussion and Analysis of Financial Condition and Results of Operations
June 24, 2006
Revenue Recognition: We generally recognize revenue upon shipment and title passage for established
products (i.e., those that have previously satisfied customer acceptance requirements) that provide
for full payment tied to shipment. Revenue for products that have not previously satisfied
customer acceptance requirements or from sales where customer payment dates are not determinable is
recognized upon customer acceptance. For arrangements containing multiple elements, the revenue
relating to the undelivered elements is deferred at estimated fair value until delivery of the
deferred elements.
Accounts Receivable: We maintain an allowance for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. If the financial condition of our
customers deteriorates, resulting in an impairment of their ability to make payments, additional
allowances may be required.
Warranty: We provide for the estimated costs of product warranties in the period sales are
recognized. Our warranty obligation estimates are affected by historical product shipment levels,
product performance and material and labor costs incurred in correcting product performance
problems. Should product performance, material usage or labor repair costs differ from our
estimates, revisions to the estimated warranty liability would be required.
Inventory: We record valuation reserves on our inventory for estimated excess and obsolete
inventory and lower of cost or market concerns equal to the difference between the cost of
inventory and the estimated market value based upon assumptions about future product demand, market
conditions and product selling prices. If future product demand, market conditions or product
selling prices are less or more favorable than those projected by management or if continued
modifications to products are required to meet specifications or other customer requirements,
increases to inventory reserves may be required.
Income Taxes: We estimate our liability for income taxes based on the various jurisdictions where
we conduct business. This requires us to estimate our actual current tax exposure and to assess
temporary differences that result from differing treatment of certain items for tax and accounting
purposes. These differences result in deferred tax assets and liabilities that are reflected in
the consolidated balance sheet. The net deferred tax assets are reduced by a valuation allowance
if, based upon all available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized. Establishing, reducing or increasing a valuation allowance in an
accounting period results in an increase or decrease in tax expense in the statement of operations.
We must make significant judgments to determine the provision for income taxes, deferred tax
assets and liabilities and any valuation allowance to be recorded against net deferred tax assets.
Our gross deferred tax asset balance as of June 24, 2006 was $26.2 million, with a valuation
allowance of $1.8 million for state tax credit and loss carryforwards. The deferred tax assets
consist primarily of deductible temporary differences, tax credit and net operating loss
carryforwards.
Intangible Assets: At June 24, 2006, intangible assets other than goodwill were evaluated for
impairment using undiscounted cash flows expected to result from the use of the assets as required
by FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
(Statement No. 144), and we concluded there was no impairment loss. We are required to assess
goodwill impairment using the methodology prescribed by FASB Statement No. 142, Goodwill and Other
Intangible Assets, (Statement No. 142). Statement No. 142 requires that goodwill be tested for
impairment on an annual basis and more frequently in certain circumstances. The required annual
goodwill impairment test is performed as of October 1st of each year. We did not
recognize any goodwill impairment as a result of performing this annual test in fiscal 2005.
Contingencies: We are subject to certain contingencies that arise in the ordinary course of our
businesses. In accordance with FASB Statement No. 5, Accounting for Contingencies, (Statement No.
5) we assess the likelihood that future events will confirm the existence of a loss or an
impairment of an asset. If a loss or asset impairment is probable, as defined in Statement No. 5
and the amount of the loss or impairment is reasonably estimable, we accrue a charge to operations
in the period such conditions become known.
Recent Accounting Pronouncements: There have been no material changes to the recent accounting
pronouncements as previously reported in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2005.
19
Cohu, Inc.
Managements Discussion and Analysis of Financial Condition and Results of Operations
June 24, 2006
RESULTS OF OPERATIONS
The following table summarizes certain operating data from continuing operations as a percentage of
net sales for the three- and six-month periods ended June 24, 2006 and June 25, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 24, 2006 |
|
|
June 25, 2005 |
|
|
June 24, 2006 |
|
|
June 25, 2005 |
|
|
|
|
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales |
|
|
(64.9 |
) |
|
|
(60.9 |
) |
|
|
(64.6 |
) |
|
|
(60.3 |
) |
|
|
|
Gross margin |
|
|
35.1 |
|
|
|
39.1 |
|
|
|
35.4 |
|
|
|
39.7 |
|
Research and development expense |
|
|
(15.6 |
) |
|
|
(14.0 |
) |
|
|
(14.6 |
) |
|
|
(14.6 |
) |
Selling, general and administrative expense |
|
|
(14.1 |
) |
|
|
(15.8 |
) |
|
|
(14.6 |
) |
|
|
(15.8 |
) |
Gain on sale of facilities |
|
|
4.8 |
|
|
|
|
|
|
|
2.5 |
|
|
|
|
|
|
|
|
Income from operations |
|
|
10.2 |
% |
|
|
9.3 |
% |
|
|
8.7 |
% |
|
|
9.3 |
% |
|
|
|
Second Fiscal Quarter 2006 Compared to Second Fiscal Quarter 2005
In May, 2006, we completed the sale of our metal detection equipment segment FRL. Effective with
the June 24, 2006 financial statements, the operating results of FRL are presented as discontinued
operations and all prior period financial statements have been reclassified accordingly.
The discussion below covers the comparative results from continuing operations.
Net Sales
Our net sales increased 24.7% to $61.9 million in 2006, compared to net sales of $49.7 million in
2005. Sales of semiconductor test handling equipment in the second fiscal quarter of 2006 increased
31.7% from the comparable 2005 period and accounted for 88.5% of consolidated net sales in 2006
versus 83.7% in 2005. The primary reason for the increase in sales of our semiconductor equipment
business was increased customer demand for our high-speed test handlers.
Sales of television cameras and other equipment accounted for 7.5% of net sales in 2006 and
decreased 1.2% when compared to the same period in 2005. Sales of microwave equipment accounted
for 4.0% of net sales in fiscal 2006 and decreased 26.0% when compared to fiscal 2005. The decline
in sales of our microwave communications business was primarily attributable to production delays
and the timing of revenue recognition pursuant to accounting rules.
At June 24, 2006, we had deferred revenue totaling approximately $42.6 million and deferred profit
of $17.4 million. At December 31, 2005, we had deferred revenue totaling approximately $30.7
million and deferred profit of $13.8 million. The increase in deferred revenue is primarily the
result of additional revenue deferrals associated with our sales of new semiconductor equipment
products, including those acquired from KryoTech and Unigen, that are awaiting customer acceptance
as of June 24, 2006.
Gross margin
Despite the growth in sales, our gross margin, as a percentage of net sales, decreased to 35.1% in
2006 from 39.1% in 2005. The decrease was the result of lower margins in our semiconductor
equipment business. During the second fiscal quarter of 2006, our high-speed test handlers
accounted for a greater percentage of our revenue than in fiscal 2005. Our high-speed test
handlers have significantly lower gross margins than our advanced thermal test handlers. If this
shift in product mix continues, our gross margin percentage in the second half of fiscal 2006 will
be negatively impacted. Additionally, during the second fiscal quarter of 2006, we recorded
approximately $0.1 million in share-based compensation expense as a result of our adoption of
Statement No. 123R.
We compute the majority of our excess and obsolete inventory reserve requirements using a one-year
inventory usage forecast. During the second quarter of fiscal 2006 and 2005, we recorded net
charges to cost of sales of approximately $0.6 million and $1.2 million, respectively, for excess
and obsolete inventory. While we believe our reserves for excess and obsolete inventory and lower
of cost or market concerns are adequate to cover our known exposures at June 24, 2006, reductions
in customer forecasts or continued modifications to products, as a result of our failure to meet
specifications or other customer requirements, will result in additional charges to operations that
could negatively impact our gross margin in future periods. Conversely, if our actual inventory
usage is greater than our forecasted usage, our gross margin in future periods may be favorably
impacted.
20
Cohu, Inc.
Managements Discussion and Analysis of Financial Condition and Results of Operations
June 24, 2006
Research and Development Expense
R&D expense as a percentage of net sales was 15.6% in 2006, compared to 14.0% in 2005, increasing
from $7.0 million in fiscal 2005 to $9.7 million in fiscal 2006. Higher R&D expense in 2006 was
primarily a result of increased expense as a result of the Unigen acquisition and material costs
for product development within our semiconductor equipment business. Additionally, during the
second fiscal quarter of 2006, we recorded approximately $0.2 million in share-based compensation
expense as a result of our adoption of Statement No. 123R.
Selling, General and Administrative Expense
SG&A expense as a percentage of net sales decreased to 14.1% in 2006, from 15.8% in fiscal 2005,
increasing in absolute dollars from $7.9 million in 2005 to $8.7 million in 2006. The increase in
SG&A expense was primarily related to increased business volume within our semiconductor equipment
business and increases in headcount in our television camera and microwave equipment businesses.
During fiscal 2006 we expanded our sales force at our television camera and microwave equipment
businesses in an effort to expand the market share of our new and existing product offerings.
Additionally, during the second fiscal quarter of 2006, we recorded approximately $0.4 million in
share-based compensation expense as a result of our adoption of Statement No. 123R.
Interest Income
Interest income was approximately $1.7 million and $0.9 million in fiscal 2006 and 2005,
respectively. The increase in interest income resulted from an increase in our average cash and
cash equivalents and investment balances and higher interest rates in fiscal 2006.
Income Taxes
The provision (benefit) for income taxes expressed as a percentage of pretax income was 34.7% in
2006 and (1.7)% in 2005. The income tax provision (benefit) included in the statements of income
for the three months ended June 24, 2006 and June 25, 2005, is based on the estimated annual
effective tax rate for the entire year. These estimated effective tax rates are subject to
adjustment in subsequent quarterly periods as our estimates of pretax income for the year are
increased or decreased. The effective tax rate of 34.7% for the three months ended June 24, 2006 is
less than the U.S. federal statutory rate primarily due to state research and development tax
credits and export sales benefits offset by the effect of Statement No. 123R that does not allow
deferred tax benefits to be recognized on compensation expense related to incentive stock options.
Our income tax credit in 2005 was, in part, the result of research tax credits and export sales
benefits. In addition, in March 2005, the Internal Revenue Service completed a routine examination
of our consolidated tax returns for the period 2000 through 2002. The examination resulted in no
assessment related to our tax returns as filed. Consequently, approximately $3.0 million of
accrued taxes related to the examined years were reversed with a corresponding credit to income tax
expense in the quarter ended March, 2005.
In accordance with Statement No. 109, net deferred tax assets are reduced by a valuation allowance
if, based on all the available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized. A valuation allowance of approximately $1.8 million was
provided on deferred tax assets at June 24, 2006 and December 31, 2005. The amount of deferred tax
assets considered realizable was determined based on (i) taxable income in prior carryback years;
(ii) future reversals of existing taxable temporary differences (i.e. offset gross deferred tax
assets against gross deferred tax liabilities); (iii) tax planning strategies and (iv) future
taxable income, exclusive of reversing temporary differences and carryforwards.
Our business improved significantly in the fiscal quarter ended June 25, 2005 with orders
increasing from $44.4 million in the first quarter of 2005 to $71.0 million in the second quarter.
This unanticipated increase in orders caused us to reassess our forecast of 2005 income. In
accordance with Statement No. 109, we reduced the valuation allowance required at June 25, 2005 by
approximately $1.7 million as a result of the increase in forecasted 2005 income with a
corresponding credit to income tax expense.
We have derived significant tax benefits from export sales. As a result of the American Jobs
Creation Act of 2004, the export sales benefit derived from the ETI was repealed subject to a
phase-out that limits the full tax benefit to 60% in 2006. The ETI benefit was replaced with a
deduction for domestic manufacturing activities subject to a phase-in beginning in 2005. The future
tax benefits we derive from the domestic manufacturing deduction will likely be less than those
from ETI.
21
Cohu, Inc.
Managements Discussion and Analysis of Financial Condition and Results of Operations
June 24, 2006
The federal research credit expired on December 31, 2005. Legislation to retroactively reinstate
the credit is pending in the U.S. Congress, however it had not been enacted and signed into law as
of June 24, 2006. Accordingly, no benefit from the federal research credit has been included in
estimating the 2006 effective tax rate. If Congress retroactively reinstates the research credit
the effect of the credit will be reflected in the computation of the annual effective tax rate
beginning as of the first period that includes the enactment date of the legislation.
Other Items
In April 2003, our Broadcast Microwave Services subsidiary was awarded an $8.5 million contract
from the UAE Armed Services to provide microwave communications equipment for a command center and
infrastructure system for border security. The contract utilizes our most advanced microwave
communications technology that has not previously been installed in an application of this size and
complexity, and requires that 40% of the total contract price be paid after the system has been
fully accepted by the customer. As a result of these factors and the inability to make reasonably
dependable estimates of progress toward completion and acceptance, we will recognize all revenue
and related costs under this contract in the period the system is accepted by the customer. In the
fourth quarter of 2005, BMS received notification that the customer had approved an amendment to
the original contract increasing the total value of the contract to $8.9 million. Under the terms
of the amendment BMS will provide certain additional equipment and services. Through June 24,
2006, we had shipped inventory with a sales value of $8.9 million and deferred costs of
approximately $6.7 million resulting in deferred profit of approximately $2.2 million under the
contract. In addition, at June 24, 2006 we had unbilled accounts receivable of approximately $3.6
million. We have also provided the customer with a standby letter of credit which was reduced from
$2.6 million at December 31, 2005 to $1.0 million during the first quarter of fiscal 2006. At June
24, 2006, approximately $1.0 million of this letter of credit may be drawn upon, by the customer,
if BMS does not fulfill the terms of the contract. While customer acceptance and final contract
payment has taken longer than anticipated, we believe that such acceptance and payment will be
received. However, in the event BMS is unable to obtain customer acceptance of the system, the
receivables may need to be written off and the customer might seek a refund of the $5.3 million in
payments made under the contract, which could materially impact our results of operations.
In May, 2006, we sold the land and building previously used by our operations in Littleton,
Massachusetts. The property was sold for $6.5 million in cash, less related costs, resulting in a
net pretax gain of approximately $3.0 million which was recognized in the second fiscal quarter of
2006.
In May, 2006, we sold substantially all the assets of our metal detection equipment segment, FRL.
The disposition resulted in a loss of approximately $0.8 million ($0.5 million net of the related
tax benefit) that was recorded in the second fiscal quarter of 2006.
As a result of the factors set forth above, our income from continuing operations was $5.2 million
in 2006, compared to $5.6 million in 2005. Our net income was $4.7 million in 2006, compared to
$5.6 million in 2005.
First Half of Fiscal 2006 Compared to First Half of Fiscal 2005
Net Sales
Our net sales increased 28.8% to $118.7 million in 2006, compared to net sales of $92.1 million in
2005. Sales of semiconductor test handling equipment in the first half of fiscal 2006 increased
32.0% from the comparable 2005 period and accounted for 87.7% of consolidated net sales in 2006
versus 85.6% in 2005. The primary reason for the increase in sales of our semiconductor equipment
business was increased customer demand for our high-speed test handlers.
Sales of television cameras and other equipment accounted for 6.9% of net sales in 2006 and
decreased 2.9% when compared to the same period of 2005, while sales of microwave equipment
accounted for 5.4% of net sales in 2006. During the first half of fiscal 2006, sales of microwave
equipment increased 32.5% when compared to 2005. The decrease in sales experienced by our
television camera business was primarily attributable to a decline in demand for our traffic
management products. The increase in sales of our microwave communications business was primarily
attributable to increased demand for our products from law enforcement agencies and the timing of
revenue recognition pursuant to accounting rules.
22
Cohu, Inc.
Managements Discussion and Analysis of Financial Condition and Results of Operations
June 24, 2006
Gross margin
Gross margin as a percentage of net sales decreased to 35.4% in 2006 from 39.7% in 2005. This
decrease was the result of lower margins in our semiconductor equipment business which were
impacted by product mix and higher than expected costs associated with supporting certain customer
test handler applications. During the first half of fiscal 2006, high-speed test handlers accounted
for a greater percentage of our revenue than in 2005. Our high-speed test handlers have
significantly lower gross margins than our advanced thermal test handlers. If this shift in
product mix continues, our gross margin percentage in the second half of fiscal 2006 will be
negatively impacted. Additionally, during the first half of fiscal 2006, we recorded
approximately $0.2 million in share-based compensation expense as a result of our adoption of
Statement No. 123R.
We compute the majority of our excess and obsolete inventory reserve requirements using a one-year
inventory usage forecast. During the first half of fiscal 2006 and 2005, we recorded net charges to
cost of sales of approximately $1.1 million and $1.2 million, respectively, for excess and obsolete
inventory. While we believe our reserves for excess and obsolete inventory and lower of cost or
market concerns are adequate to cover our known exposures at June 24, 2006, reductions in customer
forecasts or continued modifications to products, as a result of our failure to meet specifications
or other customer requirements, will result in additional charges to operations that could
negatively impact our gross margin in future periods. Conversely, if our actual inventory usage is
greater than our forecasted usage, our gross margin in future periods may be favorably impacted.
Research and Development Expense
R&D expense as a percentage of net sales was 14.6% in 2006 and 2005, increasing from $13.5 million
in 2005 to $17.3 million in 2006. The increase in R&D was primarily the result of increased
engineering labor and material costs due to increases in headcount and product development costs in
our semiconductor equipment and microwave communication businesses. Additionally, during the first
half of fiscal 2006, we recorded approximately $0.4 million in share-based compensation expense as
a result of our adoption of Statement No. 123R.
Selling, General and Administrative Expense
SG&A expense as a percentage of net sales decreased to 14.6% in 2006, from 15.8% in 2005,
increasing in absolute dollars from $14.6 million in 2005 to $17.3 million in 2006. The increase in
SG&A expense was primarily related to increased business volume. Additionally, during the first
half of fiscal 2006, we recorded approximately $0.9 million in share-based compensation expense as
a result of our adoption of Statement No. 123R.
Interest Income
Interest income was approximately $3.0 million and $1.6 million in 2006 and 2005, respectively. The
increase in interest income resulted from an increase in our average cash and cash equivalents and
investment balances and higher interest rates in fiscal 2006.
Income Taxes
The provision (benefit) for income taxes expressed as a percentage of pretax income was 34.6% in
2006 and (19.8)% in 2005. The income tax provision (benefit) included in the statements of income
for the six months ended June 24, 2006 and June 25, 2005, is based on the estimated annual
effective tax rate for the entire year. These estimated effective tax rates are subject to
adjustment in subsequent quarterly periods as our estimates of pretax income for the year are
increased or decreased. The effective tax rate of 34.6% for the six months ended June 24, 2006 is
less than the U.S. federal statutory rate primarily due to state research and development tax
credits and export sales benefits offset by the effects of Statement No. 123R that does not allow
deferred tax benefits to be recognized on compensation expense related to incentive stock options.
Our income tax credit in 2005 was, in part, the result of research tax credits and export sales
benefits. In addition, in March 2005, the Internal Revenue Service completed a routine examination
of our consolidated tax returns for the period 2000 through 2002. The examination resulted in no
assessment related to our tax returns as filed. Consequently, approximately $3.0 million of
accrued taxes related to the examined years were reversed with a corresponding credit to income tax
expense in the quarter ended March, 2005.
In accordance with Statement No. 109, net deferred tax assets are reduced by a valuation allowance
if, based on all the available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized. A valuation
23
Cohu, Inc.
Managements Discussion and Analysis of Financial Condition and Results of Operations
June 24, 2006
allowance of approximately $1.8 million was provided on deferred tax assets at June 24, 2006 and
December 31, 2005. The amount of deferred tax assets considered realizable was determined based on
(i) taxable income in prior carryback years; (ii) future reversals of existing taxable temporary
differences (i.e. offset gross deferred tax assets against gross deferred tax liabilities); (iii)
tax planning strategies and (iv) future taxable income, exclusive of reversing temporary
differences and carryforwards.
Our business improved significantly in the quarter ended June 25, 2005, with orders increasing from
$44.4 million in the first quarter of 2005 to $71.0 million in the second quarter. This
unanticipated increase in orders caused us to reassess our forecast of 2005 income. In accordance
with Statement No. 109 we reduced the valuation allowance required at June 25, 2005 by
approximately $1.7 million as a result of the increase in forecasted 2005 income with a
corresponding credit to income tax expense.
We have derived significant tax benefits from export sales. As a result of the American Jobs
Creation Act of 2004, the export sales benefit derived from the ETI was repealed subject to a
phase-out that limits the full tax benefit to 60% in 2006. The ETI benefit was replaced with a
deduction for domestic manufacturing activities subject to a phase-in beginning in 2005. The future
tax benefits we derive from the domestic manufacturing deduction will likely be less than those
from ETI.
The federal research credit expired on December 31, 2005. Legislation to retroactively reinstate
the credit is pending in the U.S. Congress, however it had not been enacted and signed into law as
of June 24, 2006. Accordingly, no benefit from the federal research credit has been included in
estimating the 2006 effective tax rate. If Congress retroactively reinstates the research credit
the effect of the credit will be reflected in the computation of the annual effective tax rate
beginning as of the first period that includes the enactment date of the legislation.
As a result of the factors set forth above, our income from continuing operations was $8.8 million
in 2006, compared to $12.1 million in 2005. Our net income was $8.1 million in 2006, compared to
$12.1 million in 2005.
LIQUIDITY AND CAPITAL RESOURCES
Our business is dependent on capital expenditures by semiconductor manufacturers and test
subcontractors that are, in turn, dependent on the current and anticipated market demand for
semiconductors. Demand for semiconductors is cyclical. In response to this cyclicality, we have in
the past implemented cost reduction programs aimed at aligning our ongoing operating costs with our
currently expected revenues over the near term. These cost management initiatives have included
consolidating facilities, reductions to headcount and reduced spending. The cyclical nature of our
industry makes estimates of future revenues, results of operations and net cash flows difficult.
Our primary historical source of liquidity and capital resources has been cash flow generated by
our operations. While we maintain a credit facility, we have not used this as a source of cash and
do not intend to do so. We use cash to fund growth in our operating assets, including accounts
receivable and inventory, and to fund new products and product enhancements primarily through
research and development.
Liquidity
Working Capital: The following summarizes our cash, cash equivalents, investments and working
capital from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 24, |
|
|
December 31, |
|
|
|
|
|
Percentage |
|
(in thousands) |
|
2006 |
|
|
2005 |
|
|
Increase |
|
|
Change |
|
|
Cash, cash equivalents and investments |
|
$ |
138,843 |
|
|
$ |
138,745 |
|
|
$ |
98 |
|
|
|
0.0 |
% |
Working capital |
|
|
213,538 |
|
|
|
203,325 |
|
|
|
10,213 |
|
|
|
5.0 |
% |
24
Cohu, Inc.
Managements Discussion and Analysis of Financial Condition and Results of Operations
June 24, 2006
Cash Flows
Operating Activities: Our net cash flows provided from operating activities in the first half of
fiscal 2006 totaled $0.3 million. The major components of cash flows provided by operating
activities were net income of $8.1 million, loss from discontinued operations of $0.6 million,
offset by depreciation and amortization of $3.3 million, non cash share-based compensation expense
of $1.5 million, an increase in deferred tax assets of $2.1 million, tax benefits from stock
options exercised of $0.8 million, and other net changes in current assets. The net change in
current assets and liabilities included increases in accounts receivable and inventories of $5.6
million and $6.8 million, respectively. The increase in accounts receivable was primarily
attributable to the timing of cash collections and increased business volume and the increase in
inventory was, in part, attributable to inventory acquired in the Unigen transaction and to meet
customer demand for our products.
Investing Activities: Our net cash used for investing activities in 2006 totaled $14.5 million and
was primarily the result of $42.6 million cash used for purchases of short-term investments;
partially offset by $29.8 million in net proceeds from sales and maturities of short-term
investments. Our other expenditures, in the first half of fiscal 2006
were $11.1 million and
include the purchase of Unigen assets for $7.7 million and purchases of property, plant and
equipment of $3.4 million. The acquisition of the Unigen assets was a strategic transaction to
strengthen the portfolio of thermal products, patents and know-how within our semiconductor
equipment business. The purchases of property, plant and equipment were primarily made to support
activities in our semiconductor equipment business and consisted primarily of equipment used in
engineering, manufacturing and related functions. Investing activities also included cash receipts
in the amount of $6.2 million for the sale of our facility in Littleton, Massachusetts and $3.2
million for the sale of our metal detection equipment segment, FRL
Financing Activities: Our net cash provided from financing activities included $3.3 million
received from the issuance of stock upon the exercise of stock options, and the tax benefits from
stock options exercised of $0.8 million, offset by $2.7 million for the payment of dividends.
Capital Resources
In June 2006, we renewed our $5.0 million unsecured bank line of credit bearing interest at the
banks prime rate. The line of credit will now expire in July 2007. Our bank line of credit
requires that we maintain specified minimum levels of net worth, limits the amount of our capital
expenditures and requires us to meet certain other financial covenants. We were in compliance with
all covenants at June 24, 2006. No borrowings were outstanding at June 24, 2006; however, $1.0
million of the credit facility was allocated to standby letters of credit at June 24, 2006, leaving
the balance of $4.0 million available for future borrowings.
We expect that we will continue to make capital expenditures to support our business and we
anticipate that present working capital and available borrowings under our line of credit will be
sufficient to meet our operating requirements for at least the next twelve months.
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations: Our significant contractual obligations consist of operating leases and
have not changed materially from those disclosed in our Annual Report on Form 10-K for the year
ended December 31, 2005.
Purchase Obligations: From time to time, we enter into commitments with our vendors to purchase
inventory at fixed prices or in guaranteed quantities. We are not able to determine the aggregate
amount of such purchase orders that represent contractual obligations, as purchase orders may
represent authorizations to purchase rather than binding agreements. Our purchase orders are based
on our current manufacturing needs and are fulfilled by our vendors within relatively short time
horizons. We do not have significant agreements for the purchase of raw materials or other goods
specifying minimum quantities or set prices that exceed our expected requirements for the next
six months.
Off-Balance Sheet Arrangements: During the ordinary course of business, we provide standby letters
of credit instruments to certain parties as required. As of June 24, 2006, the maximum potential
amount of future payments that we could be required to make under these standby letters of credit
was approximately $1.0 million. No liability has been recorded in connection with these
arrangements beyond those required to appropriately account for the underlying transaction being
guaranteed. We do not believe, based on historical experience and information currently available,
that it is probable that any amounts will be required to be paid under these arrangements.
25
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Interest rate risk.
At June 24, 2006 our investment portfolio includes fixed-income securities with a fair value of
approximately $113.0 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 ten percent change in interest rates (e.g. 3.00% to 3.30%) 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 our
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.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures. Under the supervision and
with the participation of our management, including our principal executive officer and principal
financial officer, we evaluated the effectiveness of our disclosure controls and procedures, as
such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act
of 1934, as amended. Based on this evaluation, our principal executive officer and principal
financial officer concluded that our disclosure controls and procedures were effective as of the
end of the period covered by this quarterly report.
It should be noted that any system of controls, however well designed and operated, can provide
only reasonable, and not absolute, assurance that the objectives of the system are met. In
addition, the design of any control system is based in part upon certain assumptions about the
likelihood of future events. Because of these and other inherent limitations of control systems,
there can be no assurance that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote. Our disclosure controls and procedures are
designed to provide reasonable assurance of achieving their objectives and our principal executive
officer and principal financial officer concluded that our disclosure controls and procedures were
effective at the reasonable assurance level.
(b) Changes in Internal Controls. In the second fiscal quarter of 2006, we
transferred the accounting function for the remaining assets of our discontinued metal detection
equipment segment to our corporate office. The transfer involved a change in accounting systems
that included internal controls, and has required that we make certain changes to our internal
control over financial reporting. During this process, we reviewed the new accounting system as it
was being implemented, and we made appropriate changes to those controls impacted by this
conversion. We believe that the controls, as modified, are appropriate and functioning
effectively.
26
|
|
|
Part II |
|
OTHER INFORMATION |
|
|
|
Item 1. |
|
Legal Proceedings |
The information set forth above under Note 9 contained in the Notes to Unaudited
Condensed Consolidated Financial Statements is incorporated herein by reference.
The most significant risk factors applicable to Cohu are described in Part I, Item
1A (Risk Factors) of Cohus Annual Report on Form 10-K for the fiscal year ended December
31, 2005 (our 2005 Form 10-K). There have been no material changes to the risk factors
previously disclosed in our 2005 Form 10-K, except that we have updated the risk factors
set forth below to reflect events occurring since the filing of our 2005 Form 10-K.
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, including the products
obtained in our acquisitions of KryoTech and Unigen, may adversely impact sales and/or
margins of existing products. In addition, the introduction of new products by us or by
our competitors, the concentration of our revenues in a limited number of large
customers, the migration to new semiconductor 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 each of the years in the three-year period ended December 31, 2005.
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 acceptance
and performance requirements, integration of the equipment 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 industrys constantly evolving needs and achieve commercial acceptance at
prices that produce satisfactory profit margins. The design and development of new
semiconductor equipment is heavily influenced by changes in integrated circuit assembly,
test and final manufacturing processes and integrated circuit package design changes. We
believe that the rate of change in such processes and integrated circuit packages is
accelerating. As a result of these changes and other factors, assessing the market
potential and commercial viability of new test equipment is extremely difficult and
subject to a great deal of risk. In addition, not all integrated circuit 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
industrys future test 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 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 equipment. In
addition, as is common with semiconductor equipment, our after sale support and warranty
costs have been significantly higher with new test products 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
27
customer requirements or achieve market acceptance. Furthermore, we might not realize
acceptable profit margins on such products.
If we cannot continue to develop, manufacture and market products and services that meet
customer requirements for innovation and quality, our revenue and gross margin may
suffer.
The process of developing new high technology products and services and enhancing
existing products and services is complex, costly and uncertain, and any failure by us to
anticipate customers changing needs and emerging technological trends accurately could
significantly harm our market share and results of operations. In addition, in the course
of conducting our business, we must adequately address quality issues associated with our
products and services, including defects in our engineering, design and manufacturing
processes, as well as defects in third party components included in our products. In
order to address quality issues, we work extensively with our customers and suppliers and
engage in product testing to determine the cause of quality problems and to determine
appropriate solutions. Finding solutions to quality issues can be expensive and may
result in additional warranty, replacement and other costs, adversely affecting our
profits. In addition, quality issues can impair our relationships with new or existing
customers and adversely affect our reputation, which could lead to a material adverse
effect on our operating results.
Our backlog is limited and may not accurately reflect future business activity.
Our order backlog has historically represented approximately three months of business.
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 accounting requirements, our backlog at any point in time may not
be representative of 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 could have a material adverse effect on our
business, financial condition and results of operations. In addition, our backlog at
June 24, 2006, may not be a reliable indicator of revenues in future periods due to
delayed delivery dates or customer requested changes to delivery schedules, order
cancellations and delays in recognizing revenue due to accounting requirements.
New accounting rules may impact our future operating results.
A change in accounting standards or a change in existing taxation rules can have a
significant effect on our reported results. New accounting pronouncements and taxation
rules and varying interpretations of accounting pronouncements have occurred and may
occur in the future. These new accounting pronouncements and taxation rules may
adversely affect our reported financial results or the way we conduct our business.
|
|
|
Item 2. |
|
Unregistered Sales of Equity Securities and Use of Proceeds |
Recent Sales of Unregistered Securities
None
Issuer Purchases of Equity Securities
None
|
|
|
Item 3. |
|
Defaults Upon Senior Securities |
None
|
|
|
Item 4. |
|
Submission of Matters to a Vote of Security Holders |
The Cohu Annual Meeting of Stockholders was held on May 9, 2006. The voting results for
the proposals voted on at the meeting are incorporated herein by reference from Item 8.01
of the Cohu, Inc. Current Report on Form 8-K filed with the Securities and Exchange
Commission on May 10, 2006
|
|
|
Item 5. |
|
Other Information |
None.
28
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 ChaseMellon Shareholder
Services, L.L.C., incorporated herein by reference from the Cohu, Inc. Report on Form 8-K
filed December 12, 1996, Exhibit 4.1 |
|
10.1 |
|
Amendment No. 2 dated June 16, 2006 to Loan Agreement dated June 28, 2004 between Cohu, Inc.
and Bank of America, N.A., incorporated herein by reference from the Cohu, Inc. Current Report
on Form 8-K filed with the Securities and Exchange Commission on June 19, 2006, Exhibit 99.1 |
|
10.2 |
|
Amended Cohu, Inc. 2005 Equity Incentive Plan, incorporated herein by reference
from the Cohu, Inc. Current Report on Form 8-K filed with the Securities and Exchange
Commission on May 10, 2006, Exhibit 10.1* |
|
10.3 |
|
Amended Cohu, Inc. 1997 Employee Stock Purchase Plan, incorporated herein by reference from
the Cohu, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on
May 10, 2006, Exhibit 10.2* |
|
10.4 |
|
Form of Restricted Stock Unit Agreement of Cohu, Inc. incorporated herein by reference from
the Cohu, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on
April 20, 2006, Exhibit 10.1* |
|
31.1 |
|
Certification pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 |
|
31.2 |
|
Certification pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 |
|
32.1 |
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
32.2 |
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
* |
|
Management contract or compensatory plan or arrangement |
29
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, 2006
|
|
/s/ James A. Donahue |
|
|
|
|
|
|
|
|
|
James A. Donahue |
|
|
|
|
President & Chief Executive Officer |
|
|
|
|
|
|
|
Date: July 24, 2006
|
|
/s/ John H. Allen |
|
|
|
|
|
|
|
|
|
John H. Allen |
|
|
|
|
Vice President, Finance & Chief Financial Officer |
|
|
30
EXHIBIT INDEX
|
|
|
Exhibit No. |
|
Description |
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 ChaseMellon Shareholder
Services, L.L.C., incorporated herein by reference from the Cohu, Inc. Report on Form 8-K
filed December 12, 1996, Exhibit 4.1 |
|
|
|
10.1
|
|
Amendment No. 2 dated June 16, 2006 to Loan Agreement dated June 28, 2004 between Cohu,
Inc. and Bank of America, N.A., incorporated herein by reference from the Cohu, Inc. Current
Report on Form 8-K filed with the Securities and Exchange Commission on June 19, 2006,
Exhibit 99.1 |
|
|
|
10.2
|
|
Amended Cohu, Inc. 2005 Equity Incentive Plan, incorporated herein by reference from the
Cohu, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on
May 10, 2006, Exhibit 10.1* |
|
|
|
10.3
|
|
Amended Cohu, Inc. 1997 Employee Stock Purchase Plan, incorporated herein by reference from
the Cohu, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission
on May 10, 2006, Exhibit 10.2* |
|
|
|
10.4
|
|
Form of Restricted Stock Unit Agreement of Cohu, Inc. incorporated herein by reference from
the Cohu, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission
on April 20, 2006, Exhibit 10.1* |
|
|
|
31.1
|
|
Certification pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2
|
|
Certification pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
* |
|
Management contract or compensatory plan or arrangement |
exv31w1
Exhibit 31.1
COHU, INC.
SARBANES-OXLEY ACT SECTION 302(a)
CERTIFICATION
I, James A. Donahue, certify that:
|
1. |
|
I have reviewed this Form 10-Q of Cohu, Inc.; |
|
2. |
|
Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the
period covered by this report; |
|
3. |
|
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
|
4. |
|
The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is
being prepared;
(b) Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants internal control
over financial reporting; and
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5. |
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The registrants other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of the registrants board of directors (or persons
performing the equivalent functions): |
(a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrants ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting.
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Date: July 24, 2006 |
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/s/ James A. Donahue
James A. Donahue
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President and Chief Executive Officer |
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exv31w2
Exhibit 31.2
COHU, INC.
SARBANES-OXLEY ACT SECTION 302(a)
CERTIFICATION
I, John H. Allen, certify that:
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1. |
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I have reviewed this Form 10-Q of Cohu, Inc.; |
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2. |
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Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the
period covered by this report; |
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3. |
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Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
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4. |
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The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is
being prepared;
(b) Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants internal control
over financial reporting; and
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5. |
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The registrants other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of the registrants board of directors (or persons
performing the equivalent functions): |
(a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrants ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting.
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Date: July 24, 2006 |
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/s/ John H. Allen
John H. Allen
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Vice President Finance & Chief Financial Officer |
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exv32w1
Exhibit 32.1
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
In connection with the accompanying Quarterly Report of Cohu, Inc. (the Company) on Form
10-Q for the fiscal quarter ended June 24, 2006 (the Report), I, James A. Donahue, President and
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, based on my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
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Date: July 24, 2006 |
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/s/ James A. Donahue
James A. Donahue,
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President and Chief Executive Officer |
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exv32w2
Exhibit 32.2
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
In connection with the accompanying Quarterly Report of Cohu, Inc. (the Company) on Form
10-Q for the fiscal quarter ended June 24, 2006 (the Report), I, John H. Allen, Vice President
Finance & Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, based on my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
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Date: July 24, 2006 |
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/s/ John H. Allen
John H. Allen,
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Vice President Finance & Chief Financial Officer |
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