COHU

Business Context and Reporting Period

Company: COHU, INC.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2002
Industry: Semiconductor Test Handling Equipment, Television Cameras, Metal Detection, Microwave Communications.

Cohu operates primarily through two reportable segments: Semiconductor Equipment (Delta Design, Inc.) and Television Cameras (Electronics Division). The Semiconductor Equipment segment accounted for 77% of net sales in 2002. The company faced a continued downturn in the semiconductor industry, leading to workforce reductions and strategic cost-cutting measures.

Key Financial Metrics (Year Ended Dec 31, 2002)

Debt & Liquidity: The company maintained a $5.0 million unsecured bank line of credit with no borrowings outstanding as of December 31, 2002. Cash and cash equivalents totaled $32.7 million, with short-term investments of $74.5 million.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 6% to $134.7 million in 2002 compared to 2001, driven by a 10% increase in semiconductor equipment sales. This contrasts sharply with the 56% decline seen in 2001.
• Profitability Improvement: The net loss narrowed significantly from $6.5 million in 2001 to $0.9 million in 2002. Gross margin improved to 36.9% from 26.0% in 2001, primarily due to reduced provisions for excess and obsolete inventory ($2.5 million in 2002 vs. $15.9 million in 2001).
• Inventory Management: Total inventory decreased from $30.4 million in 2001 to $24.3 million in 2002, reflecting better alignment with customer forecasts.
• Customer Concentration: Intel and Texas Instruments accounted for 53% of total net sales in 2002 (34% and 19%, respectively), up from 44% in 2001.

Guidance, Outlook, and Risks

Management Commentary: Management anticipates continued volatility in the semiconductor industry. While the company reduced its workforce by approximately 10% in 2002 and an additional 5% in January 2003, further reductions are possible if market conditions persist. The company is consolidating operations (relocating Columbus, Ohio operations to Poway, California) to reduce costs, expecting a $1 million charge in 2003.

Investments & Acquisitions:

• Invested $2.5 million in KryoTech, Inc. preferred stock in December 2002, with a commitment to invest an additional $2.5 million contingent on joint development success.
• Entered a $1.7 million license agreement with LiveTools Technology SA for intellectual property.

Risks & Contingencies:

• Customer Concentration: Heavy reliance on a limited number of customers (Intel, Texas Instruments) creates significant risk if orders are reduced or outsourced.
• Inventory Obsolescence: Rapid technological changes in the semiconductor industry pose a risk of excess inventory write-offs.
• Legal Proceedings: A lawsuit filed against subsidiary BMS regarding defective components is set for trial in July 2003; management believes claims are without merit.
• Deferred Tax Assets: A valuation allowance of $4.7 million was established in Q4 2002 due to uncertainties regarding the realization of deferred tax assets.

Investor Verification Checklist

• Customer Concentration: Verify the stability of orders from Intel and Texas Instruments, which represent over half of total revenue.
• Inventory Reserves: Monitor future quarters for potential increases in excess and obsolete inventory charges if customer forecasts decline again.
• Deferred Tax Assets: Assess the likelihood of generating sufficient taxable income to utilize the net deferred tax assets of $6.1 million.
• Backlog Visibility: Note that order backlog ($30.6 million) is subject to cancellation and may not accurately predict future revenue.
• Investment Risk: Track the performance of the KryoTech, Inc. investment and the success of the joint development program.