COHU

Business Context and Reporting Period

Company: COHU, INC.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2003
Business Overview: Cohu is a global supplier of semiconductor test handling equipment (via subsidiary Delta Design), closed-circuit television cameras, metal detection instruments, and microwave communications equipment. The semiconductor equipment segment accounted for 80% of net sales in 2003.

Key Financial Metrics

Liquidity: The company held $7.1 million in cash and cash equivalents and $100.5 million in short-term investments as of December 31, 2003. It maintains a $5 million bank line of credit with approximately $2.5 million allocated to standby letters of credit.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 3% to $138.6 million, driven by a 7% increase in semiconductor equipment sales. Conversely, sales in television cameras, metal detection, and microwave communications declined.
• Profitability: The company narrowed its net loss significantly from $0.9 million in 2002 to $47,000 in 2003. This improvement was largely due to a $7.9 million pretax gain from the sale of land held for future development.
• Margin Compression: Gross margin decreased to 33.8% from 36.9% in 2002. This was attributed to product mix changes, intangible asset amortization, and $4.6 million in inventory charges (excess/obsolete and lower of cost or market).
• Investment Write-down: A $2.5 million charge was recorded for the impairment of an investment in KryoTech, Inc.
• Facility Consolidation: The company consolidated operations in Columbus, Ohio, and Littleton, Massachusetts, into its Poway, California facility, incurring approximately $1.5 million in exit costs during 2003.

Outlook, Risks, and Contingencies

• Customer Concentration: The semiconductor segment relies heavily on two customers. Intel and Texas Instruments accounted for 41% and 16% of total net sales, respectively, in 2003. Loss of these customers poses a significant risk.
• Inventory Risk: The semiconductor industry is cyclical. The company recorded significant inventory charges in 2003 ($4.6 million) and warns that future reductions in customer forecasts could lead to additional write-offs.
• Large Contract Execution: Cohu secured an $8.5 million contract with the United Arab Emirates Armed Services. Revenue recognition is deferred until customer acceptance, which is expected in 2004. Failure to meet acceptance criteria could result in material write-offs.
• Tax Position: Due to cumulative losses, the company established a valuation allowance of $11.7 million against deferred tax assets, reducing the realizable value of these assets.
• Legal Proceedings: A lawsuit against subsidiary BMS regarding defective components was settled in December 2003 with obligations fully covered by insurance. An IRS examination of tax returns for 2000-2002 is ongoing.

Investor Verification Checklist

• Customer Dependency: Verify the stability of relationships with Intel and Texas Instruments, which represent 57% of total sales.
• Inventory Valuation: Assess the adequacy of inventory reserves given the history of write-downs and the cyclical nature of the semiconductor market.
• UAE Contract Status: Monitor the progress of the $8.5 million UAE contract and the likelihood of timely customer acceptance in 2004.
• Non-Core Segments: Evaluate the long-term viability of the television camera, metal detection, and microwave segments, which have been unprofitable and declining.
• Cash Flow Sustainability: Review the shift from positive operating cash flow in 2002 to negative operating cash flow in 2003 to ensure liquidity remains sufficient without debt.