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COHU > SEC Filings for COHU > Form 10-Q on 5-Nov-2012All Recent SEC Filings

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Form 10-Q for COHU INC


5-Nov-2012

Quarterly Report

Management's Discussion and Analysis of Financial Condition and Results of Operations

September 29, 2012

This Form 10-Q contains certain forward-looking statements including expectations of market conditions, challenges and plans, within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and is subject to the Safe Harbor provisions created by that statute. Such forward-looking statements are based on management's current expectations and beliefs, including estimates and projections about our industries and include, but are not limited to, statements concerning financial position, business strategy, and plans or objectives for future operations. Forward-looking statements are not guarantees of future performance, and are subject to certain risks, uncertainties, and assumptions that are difficult to predict and may cause actual results to differ materially from management's current expectations. Such risks and uncertainties include those set forth in this Quarterly Report on Form 10-Q and our 2011 Annual Report on Form 10-K under the heading "Item 1A. Risk Factors". The forward-looking statements in this report speak only as of the time they are made, and do not necessarily reflect management's outlook at any other point in time. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or for any other reason, however, readers should carefully review the risk factors set forth in other reports or documents we file from time to time with the SEC after the date of this Quarterly Report.

OVERVIEW

Cohu operates in three business segments. Our primary business is the development, manufacture, sale and servicing of test handling, burn-in, thermal sub-systems and MEMS test solutions for the global semiconductor industry through our wholly-owned subsidiaries, Delta Design, Inc. and Rasco GmbH. This business is significantly dependent on capital expenditures by semiconductor manufacturers and test subcontractors, which in turn is dependent on the current and anticipated market demand for semiconductors that is subject to cyclical trends. We expect that the semiconductor equipment industry will continue to be cyclical and volatile in part because consumer electronics, the principal end market for integrated circuits, is a highly dynamic industry and demand is difficult to accurately predict. Our other businesses produce mobile microwave communications equipment (Broadcast Microwave Services, Inc.) and video cameras and accessories (Cohu Electronics Division).

Orders for semiconductor test and assembly equipment as reported by Semiconductor Equipment and Materials International (SEMI) increased sequentially each month during the first five months of 2012 but have decreased since May. Orders reported by our semiconductor equipment segment decreased 35% sequentially in the third quarter. The decline in orders is attributed to slowing semiconductor sales as a result of a weak global macro-economic environment including uncertainty caused by social and economic turmoil within the Eurozone, continued high rate of unemployment and political uncertainty in the U.S. and a reduction in China's growth rate. Despite the currently weak macro-economic environment and near-term uncertainty, we continue to be optimistic about the long-term prospects for the semiconductor equipment industry due to expanding applications and growing integrated circuit content in consumer, industrial and automotive applications.

Our non-semiconductor equipment businesses comprised approximately 19% of our consolidated revenues for the three-year period ended December 31, 2011 and were approximately 18% for the first nine months of 2012. Our microwave communications equipment business develops, manufactures and sells mobile microwave communications equipment, antenna systems and associated equipment. These products are used in the transmission of video, audio, and telemetry. Applications for these microwave data-links include unmanned aerial vehicles ("UAVs"), public safety, security, surveillance, and electronic news gathering. Customers for these products are government agencies, public safety organizations, UAV program contractors, television broadcasters, and other commercial entities. Opportunities for our microwave communications equipment business continue to expand in the surveillance, UAV and law enforcement markets.

Our video camera segment develops, manufactures and sells a wide variety of video cameras and related products, specializing in video solutions for security, surveillance and traffic monitoring. Customers for these products are distributed among security, surveillance, traffic control/management, scientific imaging and machine vision.

Application of Critical Accounting Estimates and Policies

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience, forecasts and on various other assumptions that are believed to be reasonable under the circumstances, however actual results may differ from those estimates under different assumptions or conditions. The methods, estimates and judgments we use in applying our accounting policies have a significant impact on the results we report in our financial statements. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Our most critical accounting estimates that we believe are the most important to an investor's understanding of our financial results and condition and require complex management judgment include:

revenue recognition, including the deferral of revenue on sales to customers, which impacts our results of operations;


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Cohu, Inc.

Management's Discussion and Analysis of Financial Condition and Results of Operations

September 29, 2012

estimation of valuation allowances and accrued liabilities, specifically product warranty, inventory reserves and allowance for bad debts, which impact gross margin or operating expenses;

the recognition and measurement of current and deferred income tax assets and liabilities, unrecognized tax benefits and the valuation allowance on deferred tax assets, which impact our tax provision;

the assessment of recoverability of long-lived assets including goodwill and other intangible assets, which primarily impacts gross margin or operating expenses if we are required to record impairments of assets or accelerate their depreciation; and

the valuation and recognition of share-based compensation, which impacts gross margin, research and development expense, and selling, general and administrative expense.

Below, we discuss these policies further, as well as the estimates and judgments involved. We also have other policies that we consider key accounting policies; however, these policies typically do not require us to make estimates or judgments that are difficult or subjective.

Revenue Recognition: We generally recognize revenue upon shipment and title passage for established products (i.e., those that have previously satisfied customer acceptance requirements) that provide for full payment tied to shipment. Revenue for products that have not previously satisfied customer acceptance requirements or from sales where customer payment dates are not determinable is recognized upon customer acceptance. For arrangements containing multiple elements initiated prior to December 26, 2010 the revenue relating to the undelivered elements is deferred at their estimated relative fair values until delivery of the deferred elements. For arrangements initiated or materially modified subsequent to December 26, 2010 containing multiple elements, the revenue relating to the undelivered elements is deferred using the relative selling price method utilizing estimated sales prices until delivery of the deferred elements. We limit the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services, future performance obligations or subject to customer-specified return or adjustment.

Warranty: We provide for the estimated costs of product warranties in the period sales are recognized. Our warranty obligation estimates are affected by historical product shipment levels, product performance, and material and labor costs incurred in correcting product performance problems. Should product performance, material usage or labor repair costs differ from our estimates, revisions to the estimated warranty liability would be required.

Inventory: The valuation of inventory requires us to estimate obsolete or excess inventory as well as inventory that is not of saleable quality. The determination of obsolete or excess inventory requires us to estimate the future demand for our products. The demand forecast is a direct input in the development of our short-term manufacturing plans. We record valuation reserves on our inventory for estimated excess and obsolete inventory and lower of cost or market concerns equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future product demand, market conditions and product selling prices. If future product demand, market conditions or product selling prices are less than those projected by management or if continued modifications to products are required to meet specifications or other customer requirements, increases to inventory reserves may be required which would have a negative impact on our gross margin.

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.

Income Taxes: We estimate our liability for income taxes based on the various jurisdictions where we conduct business. This requires us to estimate our
(i) current taxes; (ii) temporary differences that result from differing treatment of certain items for tax and accounting purposes and
(iii) unrecognized tax benefits. Temporary differences result in deferred tax assets and liabilities that are reflected in the consolidated balance sheet. The deferred tax assets are reduced by a valuation allowance if, based upon all available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Establishing, reducing or increasing a valuation allowance in an accounting period generally results in an increase or decrease in tax expense in the statement of operations. We must make significant judgments to determine the provision for income taxes, deferred tax assets and liabilities, unrecognized tax benefits and any valuation allowance to be recorded against deferred tax assets. Our gross deferred tax asset balance as of September 29, 2012 was approximately $28.8 million, with a valuation allowance of approximately $23.2 million. Our deferred tax assets consist primarily of reserves and accruals that are not yet deductible for tax, tax credits, and net operating loss carryforwards.


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Cohu, Inc.

Management's Discussion and Analysis of Financial Condition and Results of Operations

September 29, 2012

Goodwill, Purchased Intangible Assets and Other Long-lived Assets: We evaluate goodwill for impairment annually and when an event occurs or circumstances change that indicate that the carrying value may not be recoverable. We test goodwill for impairment by first comparing the book value of net assets to the fair value of the reporting units. If the fair value is determined to be less than the book value, a second step is performed to compute the amount of impairment as the difference between the estimated fair value of goodwill and the carrying value. We estimated the fair values of our reporting units primarily using the income approach valuation methodology that includes the discounted cash flow method, taking into consideration the market approach and certain market multiples as a validation of the values derived using the discounted cash flow methodology. Forecasts of future cash flows are based on our best estimate of future net sales and operating expenses, based primarily on customer forecasts, industry trade organization data and general economic conditions.

We conduct our annual impairment test as of October 1 of each year and determined there was no impairment as of October 1, 2011. Other events and changes in circumstances may also require goodwill to be tested for impairment between annual measurement dates. While a decline in stock price and market capitalization is not specifically cited as a goodwill impairment indicator, a company's stock price and market capitalization should be considered in determining whether it is more likely than not that the fair value of a reporting unit is less that its carrying value. Additionally, a significant decline in a company's stock price may suggest that an adverse change in the business climate may have caused the fair value of one or more reporting units to fall below their carrying value. The financial and credit market volatility directly impacts our fair value measurement through our stock price that we use to determine our market capitalization. During times of volatility, significant judgment must be applied to determine whether credit or stock price changes are a short-term swing or a longer-term trend. As of September 29, 2012 we do not believe there have been any events or circumstances that would require us to perform an interim goodwill impairment review, however, a sustained decline in Cohu's market capitalization below its book value could lead us to determine, in a future period, that an interim goodwill impairment review is required and may result in an impairment charge which would have a negative impact on our results from operations.

Long-lived assets, other than goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or any other significant adverse change that would indicate that the carrying amount of an asset or group of assets may not be recoverable. For long-lived assets, impairment losses are only recorded if the asset's carrying amount is not recoverable through its undiscounted, probability-weighted future cash flows. We measure the impairment loss based on the difference between the carrying amount and estimated fair value.

Contingencies: We are subject to certain contingencies that arise in the ordinary course of our businesses which require us to assess the likelihood that future events will confirm the existence of a loss or an impairment of an asset. If a loss or asset impairment is probable and the amount of the loss or impairment is reasonably estimable, we accrue a charge to operations in the period such conditions become known.

Share-based Compensation: Share-based compensation expense related to stock options is recorded based on the fair value of the award on its grant date which we estimate using the Black-Scholes valuation model. Share-based compensation expense related to restricted stock unit awards is calculated based on the market price of our common stock on the grant date, reduced by the present value of dividends expected to be paid on our common stock prior to vesting of the restricted stock unit.

Recent Accounting Pronouncements

For a description of accounting changes and recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see Note 1, "Recent Accounting Pronouncements" in Part I, Item 1 of this Form 10-Q.


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Cohu, Inc.

Management's Discussion and Analysis of Financial Condition and Results of Operations

September 29, 2012

RESULTS OF OPERATIONS

The following table summarizes certain operating data as a percentage of net
sales:



                                              Three Months Ended                                 Nine Months Ended
                                    September 29,             September 24,           September 29,             September 24,
                                         2012                     2011                     2012                     2011

Net sales                                     100.0 %                  100.0 %                  100.0 %                  100.0 %
Cost of sales                                 (68.6 )                  (67.5 )                  (69.9 )                  (67.5 )

Gross margin                                   31.4                     32.5                     30.1                     32.5
Research and development                      (15.8 )                  (12.3 )                  (15.4 )                  (11.2 )
Selling, general and
administrative                                (20.1 )                  (16.5 )                  (19.7 )                  (14.6 )

Income (loss) from operations                  (4.5 )%                   3.7 %                   (5.0 )%                   6.7 %

Third Quarter of Fiscal 2012 Compared to Third Quarter of Fiscal 2011

Net Sales

Our consolidated net sales decreased 19.6% to $57.7 million in the third quarter of fiscal 2012, compared to $71.8 million in the same period of 2011. Sales of semiconductor equipment in the third quarter of fiscal 2012 were $47.0 million, and decreased $12.4 million or 20.9% from 2011 and represented 81.4% of consolidated net sales in 2012 versus 82.7% in 2011. Sales of our semiconductor equipment segment decreased in the third quarter of 2012 compared to the corresponding prior year period as global macro-economic weakness and political uncertainty reduced demand for semiconductors. This, in turn, resulted in higher inventory of integrated circuits leading many customers to operate at equipment utilization levels which do not require purchases of new systems.

Sales of mobile microwave communications equipment in the third quarter of fiscal 2012 were $7.1 million, representing 12.2% of consolidated net sales and decreased $0.6 million or 8.1% when compared to the same period of fiscal 2011.

Sales of video cameras in the third quarter of fiscal 2012 were $3.7 million representing 6.4% of consolidated net sales and decreased $1.0 million or 21.9% when compared to the same period of fiscal 2011. The decrease in business volume within our video camera segment resulted primarily from delays in obtaining customer orders for equipment to be used in traffic related public infrastructure projects.

Gross Margin

Gross margin consists of net sales less cost of sales. Cost of sales consists primarily of the cost of materials, assembly and test labor, and overhead from operations. Our gross margin can fluctuate due to a number of factors, including, but not limited to, the mix of products sold, product support costs, inventory reserve adjustments, and utilization of manufacturing capacity. Our gross margin, as a percentage of net sales, decreased to 31.4% in the third quarter of fiscal 2012 from 32.5% in the same period of 2011. Our gross margin decreased compared to the prior year as a result of inefficiencies associated with lower levels of production caused by decreased business volume primarily within our semiconductor equipment segment and charges to cost of sales related to excess, obsolete and lower of cost or market inventory adjustments. We compute the majority of our excess and obsolete inventory reserve requirements using a one-year inventory usage forecast. During the third quarter of fiscal 2012 and 2011, we recorded net charges to cost of sales of approximately $2.9 million and $0.7 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 known exposures at September 29, 2012, reductions in customer forecasts or continued modifications to products, as a result of our failure to meet specifications or other customer requirements, may result in additional charges to operations that could negatively impact our gross margin in future periods.

Research and Development Expense ("R&D Expense")

R&D expense consists primarily of salaries and related costs of employees engaged in ongoing research, product design and development activities, costs of engineering materials and supplies, and professional consulting expenses. R&D expense as a percentage of net sales increased to 15.8% or $9.1 million in the third quarter of fiscal 2012 from 12.3% or $8.8 million in the same period of 2011.


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Cohu, Inc.

Management's Discussion and Analysis of Financial Condition and Results of Operations

September 29, 2012

Selling, General and Administrative Expense ("SG&A Expense")

SG&A expense consists primarily of salaries and benefit costs of employees, commission expense for independent sales representatives, product promotion and costs of professional services. SG&A expense as a percentage of net sales increased to 20.1% or $11.6 million in the third quarter of fiscal 2012, from 16.5% or $11.9 million in the same period of 2011.

Interest and other, net

Interest and other, net was approximately $0.7 million and $0.1 million in the third quarter of fiscal 2012 and 2011, respectively. Interest and other income for the third quarter of fiscal 2012 includes a gain on the sale of a facility totaling $0.7 million related to our metal detection equipment segment which was divested in 2006.

Income Taxes

Ordinarily, interim tax provisions are calculated using the estimated effective tax rate ("ETR") expected to be applicable for the full fiscal year. However, when a reliable estimate of the annual ETR cannot be made, the actual ETR for the year-to-date period may be the best estimate of the annual ETR. For the three months ended September 29, 2012 we used the actual year-to-date ETR in computing our tax provision as a reliable estimate of the annual ETR cannot be made as relatively small changes in our projected income or loss produce a significant variance in our ETR. The ETR for the three months ended September 29, 2012 and September 24, 2011, was 6.4% and 21.7%, respectively. The tax provision and benefit in 2012 and 2011 differ from the U.S. federal statutory rate primarily due to the inability to benefit our domestic losses, foreign income taxed at lower rates, changes in our deferred tax asset valuation allowance, state taxes and changes and interest related to unrecognized tax benefits.

There was no material change to our unrecognized tax benefits and interest accrued related to unrecognized tax benefits during the three months ended September 29, 2012.

As a result of the factors set forth above, our net loss in the third quarter of fiscal 2012 was $1.7 million compared to net income of $3.4 million in the same period of 2011.

First Nine Months of Fiscal 2012 Compared to First Nine Months of Fiscal 2011

Net Sales

Our consolidated net sales decreased 29.7% to $170.4 million in the first nine months of fiscal 2012, compared to $242.4 million in the same period of 2011. Sales of semiconductor equipment in the first nine months of fiscal 2012 were $139.3 million, and decreased $69.2 million or 33.2% from 2011 and represented 81.7% of consolidated net sales in 2012 versus 86.0% in 2011. Sales of our semiconductor equipment segment decreased in the first nine months of 2012 due to global macro-economic weakness and political uncertainty resulting in reduced demand for semiconductors. This, in turn, resulted in higher inventory of integrated circuits leading many customers to operate at equipment utilization levels which do not require purchases of new systems.

Sales of mobile microwave communications equipment in the first nine months of fiscal 2012 were $19.7 million, representing 11.5% of consolidated net sales, and decreased $1.0 million or 4.6% when compared to the same period of fiscal 2011. The decrease in business volume within our microwave equipment segment resulted from customer orders delays caused by governmental budget constraints.

Sales of video cameras in the first nine months of fiscal 2012 were $11.5 million, representing 6.8% of consolidated net sales, a decrease of $1.8 million or 13.5% when compared to the same period of fiscal 2011. The decrease in business volume within our video camera segment resulted primarily from delays in obtaining customer orders for equipment to be used in traffic related public infrastructure projects.

Gross Margin

Our gross margin, as a percentage of net sales, decreased to 30.1% in the first nine months of fiscal 2012 from 32.5% in the same period of 2011. Our gross margin decreased compared to the prior year as a result of inefficiencies associated with lower levels of production caused by decreased business volume and charges to cost of sales for excess and obsolete inventory.


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Cohu, Inc.

Management's Discussion and Analysis of Financial Condition and Results of Operations

September 29, 2012

During the first nine months of fiscal 2012 and 2011 we recorded net charges to cost of sales of approximately $5.6 million and $3.3 million for excess and obsolete inventory, respectively.

R&D Expense

R&D expense as a percentage of net sales was 15.4% in the first nine months of fiscal 2012, compared to 11.2% in the same period of 2011. In absolute dollars, R&D expense decreased to $26.2 million in 2012 from $27.2 million in 2011 as a result of decreased labor and material costs related to product development within our semiconductor equipment segment.

SG&A Expense

As a result of the decrease in business volume in the first nine months of fiscal 2012, SG&A expense as a percentage of net sales increased to 19.7% in 2012, from 14.6% in 2011. In absolute dollars, SG&A expense decreased to $33.5 million in the first nine months of fiscal 2012 from $35.4 million in the same period of 2011 due primarily to decreased variable selling expenses.

Interest and other, net

Interest and other, net was approximately $0.9 million and $0.3 million in the first nine months of fiscal 2012 and 2011, respectively. Interest and other income for the first nine months of fiscal 2012 includes a gain on the sale of a facility totaling $0.7 million related to our metal detection equipment segment which was divested in 2006.

Income Taxes

For the nine months ended September 29, 2012 we used the actual year-to-date ETR in computing our tax provision as a reliable estimate of the annual ETR cannot . . .

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