| COHU INC 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 update publicly 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 Securities and Exchange Commission (“SEC”) after the date of this Annual Report |
| (“Cohu”, “we”, “our” and “us”) was incorporated under the laws of California in 1947, as Kalbfell Lab, Inc |
| and commenced active operations in the same year |
| In 1957, Cohu was reincorporated under the laws of the State of Delaware as Cohu Electronics, Inc |
| We have four reportable segments as defined by Financial Accounting Standards Board (“FASB”) Statement Nodtta 131, Disclosures about Segments of an Enterprise and Related Information, (“Statement Nodtta 131”) |
| Our four segments are: semiconductor equipment; television cameras; metal detection and microwave communications |
| The semiconductor equipment segment, operated under our wholly owned subsidiary Delta Design, Inc |
| (“Delta”), designs, manufactures and sells semiconductor test handling equipment to semiconductor manufacturers and semiconductor test subcontractors throughout the world |
| The television camera segment (“Electronics Division”) designs, manufactures and sells closed circuit television cameras and systems to original equipment manufacturers, contractors and government agencies |
| Our other reportable segments include Fisher Research Laboratory, Inc |
| (“FRL”), a metal detection instrumentation business, and Broadcast Microwave Services, Inc |
| (“BMS”), a microwave communications equipment company |
| Sales by reportable segment, expressed as a percentage of total consolidated net sales, for the last three years were as follows: 2005 2004 2003 Semiconductor equipment 84 % 82 % 80 % Television cameras 8 11 12 Metal detection 3 4 4 Microwave communications 5 3 4 100 % 100 % 100 % Additional financial information on industry segments for each of the last three years is included on pages 16 (Selected Financial Data) and 46 (Note 10 to the Consolidated Financial Statements) |
| Semiconductor Equipment We are a worldwide supplier of semiconductor test handling equipment |
| Delta, designs, manufactures, sells and services a broad line of test handlers capable of handling a wide range of integrated circuit packages |
| Test handlers are electromechanical systems used to automate the final test process in the “back end” of the semiconductor manufacturing process |
| Testing determines the quality and performance of the integrated circuit 2 _________________________________________________________________ [35]Table of Contents prior to shipment to customers |
| Testers are designed to verify the performance of what is inside of the integrated circuit, such as microprocessors, logic, DRAM or mixed signal devices |
| Handlers are engineered to thermally condition and present for testing, the packages that protect the micro-circuitry within the integrated circuit |
| The majority of test handlers use either pick-and-place or gravity-feed technologies to process integrated circuits |
| Delta’s product line includes pick-and-place handlers |
| The integrated circuit package type normally determines the appropriate handling approach |
| Because gravity-feed handling is simple, reliable and fast, it is the preferred technique for handling packages with leads on only two sides, including the dual-in-line and small outline packages |
| In gravity-feed handlers, integrated circuits are typically unloaded from plastic tubes or metal magazines at the top of the machine and flow through the system, from top to bottom, propelled along precision track work by the force of gravity |
| After testing, the integrated circuits are sorted and reloaded into tubes or magazines for additional process steps or for shipment |
| Integrated circuits with leads on all four sides, such as the quad flat pack, balls or pads on the bottom of the package, such as ball grid array packages and certain low profile integrated circuits with leads on two sides, such as the thin small outline package, are predominately handled in pick-and-place systems |
| In pick-and-place systems, integrated circuits are picked from waffle-like trays, placed in precision transport boats or carriers and cycled through the system |
| After testing, integrated circuits are sorted and reloaded into designated trays, based on test results |
| To ensure the quality of the integrated circuits produced, semiconductor manufacturers typically test integrated circuits at hot and/or cold temperatures, which can accelerate failures within the integrated circuit |
| Delta’s test handlers are designed to provide a precisely controlled test environment over the range of -60 degrees Celsius to +160 degrees Celsius |
| In recent years, as the performance and speed of integrated circuits has increased, test handler manufacturers have faced the additional and substantial challenge of dissipating the significant amount of heat that is generated within these high performance integrated circuits during the test process |
| This heat is capable of damaging or destroying the integrated circuit and can result in speed downgrading, when devices self heat and fail to successfully test at their maximum possible speed |
| Device yields are extremely important and may directly affect the selling price of the integrated circuit and the profitability of the semiconductor manufacturer |
| In addition to temperature capability, other key factors in the design of test handlers are cost, handling speed, flexibility, parallel test capability, system size and reliability |
| Handlers are complex, electromechanical systems, that are used in high volume production environments and many are in service twenty-four hours per day, seven days a week |
| Customers continuously strive to increase the utilization of their production test equipment and expect high reliability from test handlers |
| The availability of trained technical support personnel is an important competitive factor in the marketplace |
| Delta deploys service engineers worldwide, often within customer production facilities, who work with customer personnel on continuous equipment improvement programs |
| Our Products We currently sell the following products into the semiconductor test handling equipment market: Delta’s Castle Lx is a hot and cold pick-and-place handler and it is capable of thermally conditioning devices from -60 degrees Celsius to +160 degrees Celsius |
| The Castle Lx can position from one to nine devices for testing |
| Its large thermal soak area provides a steady flow of thermally conditioned devices to the test site allowing the handler to process parts at high speed when running at temperature |
| The Castle Lx contains an innovative vertical tray storage system which saves space on the test floor by minimizing the handler’s footprint |
| Delta’s Summit series of pick-and-place handlers are designed to meet the requirements of manufacturers of advanced microprocessors and other high speed, high power devices |
| The Summit handlers are designed around Delta’s proprietary thermal management technology |
| The Summit PTC, or Passive Thermal Control, and ATC, or Active Thermal Control, models are designed to dissipate the heat generated during test and maintain the desired set point temperature of the device being tested |
| 3 _________________________________________________________________ [36]Table of Contents The Delta EDGE™ is a pick-and-place handler that combines an economical design with a small footprint and fast index time |
| The EDGE™ handler is currently designed to meet the needs of integrated circuit manufacturers and subcontractors who test only at ambient and hot temperatures |
| Delta’s Orion system is a test-on-strip handler |
| In pick-and-place handlers, integrated circuits are processed in single packages, after they are excised from leadframes or laminate substrates |
| Test-on-strip may provide advantages in some applications, such as when testing very small integrated circuits and when testing multiple integrated circuits simultaneously (parallel testing) |
| Television Cameras The Electronics Division has developed, manufactured and sold closed circuit television or CCTV cameras and systems for over 50 years |
| The customer base for these products is broadly distributed between machine vision, traffic control and management, scientific imaging and security/surveillance markets |
| The current product line consists of a broad array of indoor and outdoor CCTV cameras and camera control equipment |
| To support its camera products, the Electronics Division offers accessories including monitors, lenses and camera test equipment |
| Metal Detection FRL designs, manufactures and sells metal detectors and related underground detection instruments for consumer, industrial and security applications |
| Consumer metal detectors include models for prospectors, relic hunters, sport divers and treasure hunters |
| Industrial products include pipe and cable locators, water leak detectors, property marker locators and instruments for locating reinforcing bars in concrete |
| Security products include FRL’s portable walk-through metal detector which was introduced in late 2004 |
| Microwave Communications BMS designs, manufactures and sells microwave communications equipment, antenna systems and associated equipment |
| These products are used in the transmission of telemetry, data, video and audio signals |
| Customers include military applications, government test ranges, law enforcement agencies, unmanned air vehicle programs, television broadcasters and other commercial venues |
| Customers Semiconductor Equipment Our customers include semiconductor manufacturers and subcontractors (test houses) that perform test services for integrated circuit manufacturers |
| Repeat sales to existing customers represent a significant portion of our sales in this segment |
| In 2005, Intel, Advanced Micro Devices and Texas Instruments accounted for 43prca, 12prca, and 8prca, respectively, of our consolidated net sales |
| In 2004, Intel, Advanced Micro Devices and Texas Instruments accounted for 44prca, 1prca, and 9prca, respectively, of our consolidated net sales |
| In 2003, Intel, Advanced Micro Devices and Texas Instruments accounted for 41prca, 1prca, and 16prca, respectively, of our consolidated net sales |
| The loss of, or a significant reduction in, orders by these or other significant customers, including reductions due to market, economic or competitive conditions or the outsourcing of final integrated circuit test to subcontractors that are not our customers would adversely affect our financial condition and results of operations and as a result, we believe that our customer concentration is a significant business risk |
| Television Cameras, Metal Detection and Microwave Communications Our customer base in the television camera industry segment is diverse and includes government agencies, original equipment manufacturers, contractors and value-added resellers throughout the world |
| No single customer of this segment accounted for 10prca or more of our consolidated net sales in 2005, 2004 or 2003 |
| 4 _________________________________________________________________ [37]Table of Contents Our customer base for FRL and BMS is also diverse and includes government agencies, original equipment manufacturers, contractors, distributors and consumers throughout the world |
| No single customer of either FRL or BMS accounted for 10prca or more of our consolidated net sales in 2005, 2004 or 2003 |
| Marketing We market our products worldwide through a combination of a direct sales force and independent sales representatives |
| In geographic areas where we believe there is sufficient sales potential, we maintain sales offices staffed with our own sales personnel |
| We maintain US sales offices for the semiconductor equipment business in Santa Clara, California and Austin, Texas and at Delta’s Poway, California and Littleton, Massachusetts facilities |
| In 1993, a foreign subsidiary was formed in Singapore to handle the sales and service of our test handling products to customers located in Southeast Asia |
| In 1995, a branch of the Singapore sales and service subsidiary was opened in Taipei, Taiwan |
| Sales in Europe are made primarily through independent sales representatives |
| A portion of the sales at our FRL and Cohu Electronics businesses are made under agreements to independent sales representatives or distributors that purchase products for resale to end-users |
| These agreements include standard payment terms and no right of return, price protection or stock rotation rights |
| Revenue is generally recognized at the time of shipment, provided all the requirements of Staff Accounting Bulletin Nodtta 104, Revenue Recognition, (“SAB Nodtta 104”), and all accounting principles generally accepted in the United States of America are satisfied |
| Competition Semiconductor Equipment The semiconductor equipment industry is intensely competitive and is characterized by rapid technological change and demanding worldwide service requirements |
| Significant competitive factors include product performance, price, reliability, customer support and installed base of products |
| While we are a leading worldwide supplier of semiconductor test handling equipment, we face substantial competition in the US and throughout the world and there are a large number of competitors for a relatively small worldwide market |
| The Japanese and Korean markets for test handling equipment are large and represent a significant percentage of the worldwide market |
| During the last five years our sales to Japanese and Korean customers, who have historically purchased test handling equipment from Asian suppliers, have represented less than five percent of our total sales |
| Some of our current and potential competitors have substantially greater financial, engineering, manufacturing and customer support capabilities and offer more extensive product offerings than Cohu |
| To remain competitive we believe we will require significant financial resources to offer a broad range of products, maintain customer support and service centers worldwide and to invest in research and development of new products |
| Failure to introduce new products in a timely manner or the introduction by competitors of products with perceived or actual advantages could result in a loss of competitive position and reduced sales of existing products |
| No assurance can be given that we will continue to compete successfully in the US or throughout the world |
| Television Cameras, Metal Detection and Microwave Communications Our products in the television camera, metal detection and microwave communications segments are sold in highly competitive markets throughout the world, where competition is on the basis of price, product performance and integration with customer requirements, service, product quality and reliability |
| Many of our competitors are divisions or segments of large, diversified companies with substantially greater financial, engineering, marketing, manufacturing and customer support capabilities than Cohu |
| No assurance can be given that we will continue to compete successfully in these market segments |
| Backlog The dollar amount of our order backlog as of December 31, 2005, was dlra83dtta2 million as compared to dlra62dtta6 million at December 31, 2004 |
| Of these amounts, dlra52dtta6 million (dlra40dtta8 million in 2004) was in semiconductor test handling equipment, dlra5dtta3 million (dlra4dtta9 million in 2004) was in television cameras and dlra25dtta3 million (dlra16dtta9 million in 2004) from FRL and BMS Backlog is generally expected to be shipped within the next twelve months |
| Our backlog at any point in time may not be representative of actual sales in any future period due to the 5 _________________________________________________________________ [38]Table of Contents 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 |
| Certain orders are subject to cancellation or rescheduling by the customer with limited penalty |
| There is no significant seasonal aspect to our business |
| Manufacturing and Raw Materials Our manufacturing operations are currently located in Poway, California (BMS and Delta Design), San Diego, California (Electronics Division), Littleton, Massachusetts (Delta Design), Los Banos, California (FRL), Tijuana, BC Mexico (Delta Design) and near Manila, in the Philippines (Delta Design) |
| Many of the components and subassemblies we utilize are standard products, although certain items are made to our specifications |
| Certain components, particularly in our semiconductor equipment business, are obtained or are available from a limited number of suppliers |
| We seek to reduce our dependence on sole and limited source suppliers, however in some cases the complete or partial loss of certain of these sources could have a material adverse effect on our operations while we attempt to locate and qualify replacement suppliers |
| Patents and Trademarks Our proprietary technology is protected by various intellectual property laws including patents, licenses, trademarks, copyrights and trade secrets |
| In addition, we believe that, due to the rapid pace of technological change in the semiconductor equipment industry and our other business segments, the successful manufacture and sale of our products also depend upon our experience, technological know-how, manufacturing and marketing skills and speed of response to sales opportunities |
| In the absence of patent protection, we would be vulnerable to competitors who attempt to copy or imitate our products or processes |
| We believe our intellectual property has value and we have in the past and will in the future take actions we deem appropriate to protect such property from misappropriation |
| However, there can be no assurance such actions will provide meaningful protection from competition |
| Protecting our intellectual property rights or defending against claims brought by other holders of such rights, either directly against us or against customers we have agreed to indemnify, would likely be expensive and time consuming and could have a material adverse effect on our operations |
| Research and Development Certain of the markets in which we compete, particularly the semiconductor equipment industry, are characterized by rapid technological change |
| Research and development activities are carried on in our various subsidiaries and division and are directed toward development of new products and equipment, as well as enhancements to existing products and equipment |
| Our total research and development expense was dlra29dtta8 million in 2005, dlra27dtta9 million in 2004 and dlra24dtta7 million in 2003 |
| We work closely with our customers to make improvements to our existing products and in the development of new products |
| We expect to continue to invest heavily in research and development and must manage product transitions successfully as introductions of new products could adversely impact sales of existing products |
| Environmental Laws Our business is subject to numerous federal, state, local and international environmental laws |
| On occasion, we have been notified by local authorities of instances of noncompliance with local and/or state environmental laws |
| We believe we are in compliance with applicable federal, state, local and international regulations |
| Thus far, compliance with federal, state and local laws which have been enacted or adopted regulating the discharge of materials into the environment or otherwise relating to the protection of the environment has not had a material effect and is not expected to have a material effect upon the capital expenditures, results of operations or our competitive position |
| However, future changes in regulations may require expenditures which could adversely impact earnings in future years |
| 6 _________________________________________________________________ [39]Table of Contents Executive Officers of the Registrant The following sets forth the names, ages, positions and offices held by all executive officers of Cohu as of February 17, 2006 |
| Executive Officers serve at the discretion of the Board of Directors, until their successors are appointed |
| Donahue has been employed by Delta Design since 1978 and has been President of Delta Design since May, 1983 |
| Donahue was named to the position of President and Chief Operating Officer of Cohu and was appointed to Cohu’s Board of Directors |
| Donahue was promoted to Chief Executive Officer |
| Allen has been employed by Cohu since June, 1995 |
| He was Director of Finance until September, 1995, became Vice President, Finance in September, 1995 and was appointed Chief Financial Officer in October, 1995 |
| Allen held various positions with Ernst & Young LLP from 1976 until June, 1995 and had been a partner with that firm since 1987 |
| Lightner has been employed by Delta Design since 2000 |
| He was Director of Manufacturing from 2000 until April 2001 at which time he was promoted to Vice President of Manufacturing |
| McFarlane has been employed by Delta Design since 1989 |
| He was Director of Engineering from 1992 to 1998 and was promoted to Vice President of Engineering in 1998 |
| McFarlane was promoted to Senior Vice President |
| Scholefield has been employed by Delta Design since 1991 and has held various positions including Customer Support Manager |
| He was promoted to Vice President of Sales in 2000, Senior Vice President of Sales in 2001 and Senior Vice President of Sales and Service in 2003 |
| Our employee headcount has fluctuated in the last five years primarily due to the volatile business conditions in the semiconductor equipment industry |
| None of our employees are covered by collective bargaining agreements |
| We believe that a great part of our future success will depend on our continued ability to attract and retain qualified employees |
| Competition for the services of certain personnel, particularly those with technical skills, is intense |
| There can be no assurance that we will be able to attract, hire, assimilate and retain a sufficient number of qualified employees |
| Available Information Our web site address is www |
| We make available free of charge, on or through our web site, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission |
| Our Code of Business Conduct and Ethics is also posted on our web site at www |
| Information contained on our web site is not deemed part of this report |
| 7 _________________________________________________________________ [40]Table of Contents Item 1A Risk Factors Before deciding to purchase, hold or sell our common stock, you should carefully consider the risks described below in addition to the other cautionary statements and risks described elsewhere, and the other information contained, in this Annual Report on Form 10-K The risks and uncertainties described below are not the only ones we face |
| Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business |
| If any of these known or unknown risks or uncertainties actually occurs with material adverse effects on Cohu, our business, financial condition and results of operations could be seriously harmed |
| Risks Relating to the Industries in Which We Compete and Our Business The semiconductor industry we serve is highly volatile and unpredictable |
| Visibility into our markets is limited |
| Our operating results are substantially dependent on our semiconductor equipment business |
| This capital equipment business is in turn highly dependent on the overall strength of the semiconductor industry |
| Historically, the semiconductor industry has been highly cyclical with recurring periods of oversupply and excess capacity, which often have had a significant effect on the semiconductor industry’s demand for capital equipment, including equipment of the type we manufacture and market |
| We anticipate that the markets for newer generations of semiconductors and semiconductor equipment may also be subject to similar cycles and severe downturns, such as those experienced in 2001, 2002, 2003 and during the third and fourth quarters of 2004 |
| Any significant reductions in capital equipment investment by semiconductor manufacturers and semiconductor test subcontractors will materially and adversely affect our business, financial position and results of operations |
| In addition, the volatile and unpredictable nature of semiconductor equipment demand has in the past and may in the future expose us to significant excess and obsolete and lower of cost or market inventory write-offs and reserve requirements |
| In the years ended December 31, 2005, 2004, and 2003, we recorded pretax inventory-related charges of approximately dlra6dtta2 million, dlra5dtta8 million, dlra4dtta6 million, respectively, primarily as a result of changes in customer forecasts |
| A limited number of customers account for a substantial percentage of our net sales |
| A relatively small number of customers historically have been responsible for a significant portion of our net sales |
| In the year ended December 31, 2005, three customers of the semiconductor equipment segment accounted for 63prca (54prca in 2004, and 58prca in 2003) of our net sales |
| During the past five years, the percentage of our sales derived from each of these and other significant customers has varied greatly |
| Such variations are due to changes in the customers’ business and their purchase of products from our competitors |
| It is common in the semiconductor test handler industry for customers to purchase equipment from more than one equipment supplier, increasing the risk that our competitive position with a specific customer may deteriorate |
| No assurance can be given that we will continue to maintain our competitive position with these or other significant customers |
| Furthermore, we expect the percentage of our revenues derived from significant customers will vary greatly in future periods |
| The loss of, or a significant reduction in, orders by these or other significant customers as a result of competitive products, market conditions, outsourcing final semiconductor test to test subcontractors that are not our customers or other factors, would adversely impact our business, financial condition and results of operations |
| Furthermore, the concentration of our revenues in a limited number of large customers may cause significant fluctuations in our future annual and quarterly operating results |
| The semiconductor equipment industry in general and the test handler market in particular, is highly competitive |
| The semiconductor test handler industry is intensely competitive and we face substantial competition from numerous companies throughout the world |
| The test handler industry, while relatively small in terms of worldwide market size compared to other segments of the semiconductor equipment industry, has an inordinately large number of participants resulting in intense competitive pricing pressures |
| Future competition may include companies that do not currently supply test handlers |
| The Japanese and Korean markets for test handling equipment are large and represent a significant percentage of the worldwide market |
| During the last five years we have had only limited sales to Japanese and Korean customers who have historically purchased test handling equipment from Asian suppliers |
| Some of our competitors have substantially greater financial, engineering, 8 _________________________________________________________________ [41]Table of Contents manufacturing and customer support capabilities and offer more extensive product offerings than Cohu |
| In addition, there are emerging semiconductor equipment companies that provide or may provide innovative technology incorporated in products that may compete favorably against our products |
| We expect our competitors to continue to improve the design and performance of their current products and introduce new products with improved performance capabilities |
| Our failure to introduce new products in a timely manner, the introduction by our competitors of products with perceived or actual advantages, or disputes over rights to use certain intellectual property or technology could result in a loss of our competitive position and reduced sales of, or margins on our existing products |
| We believe that competitive conditions in the semiconductor test handler market have intensified over the last several years |
| This intense competition has adversely impacted our product average selling prices and gross margins on certain products |
| If we are unable to reduce the cost of our existing products and successfully introduce new lower cost products we expect these competitive conditions to negatively impact our gross margin and operating results in the foreseeable future |
| 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 our Delta EDGE™ handler, 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 test handler 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 industry’s constantly evolving needs and achieve commercial acceptance at prices that produce satisfactory profit margins |
| The design and development of new test handling 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 integrated circuit test handling 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 industry’s future test handler 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 handler 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 handlers |
| In addition, as is common with semiconductor equipment, our after sale support and warranty costs have been significantly higher with new test handlers 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 customer requirements or achieve market acceptance |
| Furthermore, we might not realize acceptable profit margins on such products |
| 9 _________________________________________________________________ [42]Table of Contents We are exposed to risks associated with acquisitions and investments |
| We have made, and may in the future make, acquisitions of, or significant investments in, businesses with complementary products, services and/or technologies |
| Acquisitions and investments involve numerous risks, including, but not limited to: • difficulties and increased costs in connection with integration of the personnel, operations, technologies and products of acquired businesses; • diversion of management’s attention from other operational matters; • the potential loss of key employees of acquired businesses; • lack of synergy, or the inability to realize expected synergies, resulting from the acquisition; • failure to commercialize purchased technology; and • the impairment of acquired intangible assets and goodwill that could result in significant charges to operating results in future periods |
| Additionally, such acquisitions or investments may result in immediate charges to operating results |
| Mergers, acquisitions and investments are inherently risky and the inability to effectively manage these risks could materially and adversely affect our business, financial condition and results of operations |
| We have taken remedial measures to address previous slowdowns in the semiconductor equipment industry that may affect our ability to be competitive |
| In particular, we reduced our workforce, delayed salary increases, reduced senior executives’ pay, implemented furloughs, reduced expense budgets and announced facility consolidations including Delta Design’s Columbus, Ohio and Littleton, Massachusetts operations into our Poway, California facility |
| Each of these measures could have long-term effects on our business by reducing our pool of technical talent, decreasing or slowing improvements in our products and making it more difficult for us to respond to our customer’s needs |
| Our backlog is limited and may not accurately reflect future business activity |
| Our order backlog has historically represented approximately three months of revenue and as a result our visibility of future business activity is limited |
| 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 December 31, 2005, 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 |
| The cyclical nature of the semiconductor equipment industry places enormous demands on our employees, operations and infrastructure |
| The semiconductor equipment industry is characterized by dramatic and sometimes volatile changes in demand for its products |
| Changes in product demand result from a number of factors including the semiconductor industry’s continually changing and unpredictable capacity requirements and changes in integrated circuit design and packaging |
| Sudden changes in demand for semiconductor equipment have a significant impact on our operations |
| Typically, we reduce and increase our workforce, particularly in manufacturing, based on customer demand for our products |
| These changes in workforce levels place enormous demands on our employees, operations and infrastructure since newly hired personnel rarely possess the expertise and level of experience of current employees |
| Additionally, these transitions divert management time and attention from other activities and adversely impact employee morale |
| We have in the past and may in the future experience difficulties, particularly in manufacturing, in training and recruiting the large number of additions to our workforce |
| The volatility in 10 _________________________________________________________________ [43]Table of Contents headcount and business levels, combined with the cyclical nature of the semiconductor industry, may require that we invest substantial amounts in new operational and financial systems, procedures and controls |
| We may not be able to successfully adjust our systems, facilities and production capacity to meet our customers’ changing requirements |
| The inability to meet such requirements will have an adverse impact on our business, financial position and results of operations |
| We do not participate in the gravity-feed and DRAM test handler markets |
| Pick-and-place handlers used in DRAM applications account for a significant portion of the worldwide test handler market and our market share in the DRAM segment is negligible |
| In addition, gravity-feed test handlers are used in numerous non DRAM applications and continue to represent a significant portion of the worldwide test handler market |
| Because we do not participate in the DRAM and/or gravity-feed market segments, our total available sales market is limited |
| We are a global corporation with offices and subsidiaries around the world to support our sales and services to the global semiconductor industry and, as such, we face risks in doing business abroad that we do not face domestically |
| Certain aspects inherent in transacting business internationally could negatively impact our operating results, including: • costs and difficulties in staffing and managing international operations; • unexpected changes in regulatory requirements; • difficulties in enforcing contractual and intellectual property rights; • longer payment cycles; • local political and economic conditions; • potentially adverse tax consequences, including restrictions on repatriating earnings and the threat of “double taxation”; and • fluctuations in currency exchange rates, which can affect demand and increase our costs |
| Additionally, managing geographically dispersed operations presents difficult challenges associated with organizational alignment and infrastructure, communications and information technology, inventory control, customer relationship management, terrorist threats and related security matters and cultural diversities |
| If we are unsuccessful in managing such operations effectively, our business and results of operations will be adversely affected |
| Failure of critical suppliers to deliver sufficient quantities of parts in a timely and cost-effective manner could adversely impact our operations |
| We use numerous vendors to supply parts, components and subassemblies for the manufacture of our products |
| It is not always possible to maintain multiple qualified suppliers for all of our parts, components and subassemblies |
| In addition, suppliers may cease manufacturing certain components that are difficult to replace without significant reengineering of our products |
| On occasion, we have experienced problems in obtaining adequate and reliable quantities of various parts and components from certain key suppliers |
| Our results of operations may be materially and adversely impacted if we do not receive sufficient parts to meet our requirements in a timely and cost effective manner |
| We cannot provide assurance that we will continue to declare dividends at all or in any particular amounts |
| We intend to continue to pay quarterly dividends subject to capital availability and periodic determinations that cash dividends are in the best interest of the stockholders |
| Our dividend policy may be affected by, among other items, our views on potential future capital requirements, including those related to research and development, creation and expansion of sales distribution channels, investments and acquisitions, legal risks and stock repurchases |
| 11 _________________________________________________________________ [44]Table of Contents Third parties may violate our proprietary rights or accuse us of infringing upon their proprietary rights |
| We rely on patent, copyright, trademark and trade secret laws to establish and maintain proprietary rights in our technology and products |
| Any of our proprietary rights may expire due to patent life, or be challenged, invalidated or circumvented, and certain of these patent rights are licensed from third parties and we may not be able to negotiate extensions of any such licenses that have or may expire and these rights may cease to provide significant competitive advantages |
| In addition, from time to time, we receive notices from third parties regarding patent or copyright claims |
| Any such claims, with or without merit, could be time-consuming to defend, result in costly litigation, divert management’s attention and resources and cause us to incur significant expenses |
| In the event of a successful claim of infringement against us and our failure or inability to license the infringed technology or to substitute similar non-infringing technology, our business, financial condition and results of operations could be adversely affected |
| A majority of our revenues are generated from exports to foreign countries, primarily in Asia, that are subject to economic and political instability and we compete against a number of Asian test handling equipment suppliers |
| During the year ended December 31, 2005, 75dtta4prca of our total net sales were exported to foreign countries, including 85dtta4prca of the sales in the semiconductor equipment segment |
| The majority of our export sales are made to destinations in Asia |
| Political or economic instability, particularly in Asia, may adversely impact the demand for capital equipment, including equipment of the type we manufacture and market |
| In addition, we face intense competition from a number of Asian suppliers that have certain advantages over US suppliers, including us |
| These advantages include, among other things, proximity to customers, favorable tariffs and affiliation with significantly larger organizations |
| In addition, changes in the amount or price of semiconductors produced in Asia could impact the profitability or capital equipment spending programs of our foreign and domestic customers |
| The loss of key personnel could adversely impact our business |
| Certain key personnel are critical to our business |
| Our future operating results depend substantially upon the continued service of our key personnel, many of whom are not bound by employment or non-competition agreements |
| Our future operating results also depend in significant part upon our ability to attract and retain qualified management, manufacturing, technical, engineering, marketing, sales and support personnel |
| Competition for qualified personnel, particularly those with technical skills, is intense, and we cannot ensure success in attracting or retaining qualified personnel |
| In addition, the cost of living in San Diego, California, where the majority of our personnel are located, is very high and we have had difficulty in recruiting prospective employees from other locations |
| There may be only a limited number of persons with the requisite skills and relevant industry experience to serve in these positions and it may become increasingly difficult for us to hire personnel over time |
| Our business, financial condition and results of operations could be materially adversely affected by the loss of any of our key employees, by the failure of any key employee to perform in his or her current position, or by our inability to attract and retain skilled employees |
| Our non-semiconductor equipment businesses have experienced little or no growth and have generated significant losses |
| We develop, manufacture and sell products used in closed circuit television, metal detection and microwave communications applications |
| These products are sold in highly competitive markets and many competitors are segments of large, diversified companies with substantially greater financial, engineering, marketing, manufacturing and customer support capabilities than Cohu |
| In addition, there are smaller companies that provide or may provide innovative technology in products that may compete favorably against our own products |
| We have seen a significant decline in the operating results of these businesses over the last several years with increasing losses and the future prospects for certain of these businesses remain uncertain |
| We may not be able to continue to compete successfully in these businesses |
| New accounting rules will 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 |
| 12 _________________________________________________________________ [45]Table of Contents For example, under Statement Nodtta 123R, in 2006, we will be required to account for equity under our stock plans as a compensation expense and our net income and net income per share will be significantly reduced |
| Currently, we calculate compensation expense and disclose the impact on net income and net income per share, as well as the impact of all stock-based compensation expense in a footnote to the consolidated financial statements |
| Statement Nodtta 123R requires that we expense share-based payment awards given to employees, including shares issued under employee stock purchase plans and stock options, as compensation cost |
| As a result, our adoption of the new standard in the first quarter of fiscal 2006 could negatively affect our stock price and our stock price volatility |
| Our financial and operating results may vary and may fall below analysts’ estimates, which may cause the price of our common stock to decline |
| Our operating results may fluctuate from quarter to quarter due to a variety of factors including, but not limited to: • timing of orders from customers and shipments to customers; • inability to recognize revenue due to accounting requirements; • impact of foreign currency exchange rates on the price of our products in international locations; • inventory writedowns; and • inability to deliver solutions as expected by our customers |
| Due to these factors or other unanticipated events, quarter-to-quarter comparisons of our operating results may not be reliable indicators of our future performance |
| In addition, from time to time our quarterly financial results may fall below the expectations of the securities and industry analysts who publish reports on our company or of investors generally |
| This could cause the market price of our stock to decline, perhaps significantly |
| We have experienced significant volatility in our stock price |
| A variety of factors may cause the price of our stock to be volatile |
| In recent years, the stock market in general, and the market for shares of high-technology companies in particular, including ours, have experienced extreme price fluctuations, which have often been unrelated to the operating performance of affected companies |
| The price of our stock may be more volatile than other companies due to, among other factors, the unpredictable and cyclical nature of the semiconductor industry, our significant customer concentration, intense competition in the test handler industry, our limited backlog making earnings predictability difficult and our relatively low daily stock trading volume |
| The market price of our common stock is likely to continue to fluctuate significantly in the future, including fluctuations related and unrelated to our performance |
| Recently enacted and future changes in securities laws and regulations have increased our costs |
| Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and Nasdaq National Market rules, are creating challenges for all publicly-held companies |
| We are committed to maintaining high standards of corporate governance and public disclosure |
| As a result, our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities |
| In particular, our efforts to maintain compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal controls over financial reporting and our external auditors’ audit of that assessment has required the commitment of significant financial and managerial resources |
| We expect these efforts to require the continued commitment of significant resources |
| Further, our board members, chief executive officer and chief financial officer could face an increased risk of personal liability in connection with the performance of their duties |
| As a result, we may have difficulty attracting and retaining qualified board members and executive officers, which could harm our business |
| 13 _________________________________________________________________ [46]Table of Contents The occurrence of natural disasters in Asia and geopolitical instability caused by terrorist attacks and threats may adversely impact our operations and sales |
| Our Asian sales and service headquarters is located in Singapore and the majority of our sales are made to destinations in Asia |
| In addition, we have an operation in the Philippines that fabricates certain component parts used in our semiconductor test handlers |
| These regions are known for being vulnerable to natural disasters and other risks, such as earthquakes, tsunamis, fires, floods and Avian (bird) flu, which at times have disrupted the local economies |
| A significant earthquake or tsunami could materially affect operating results |
| We are not insured for most losses and business interruptions of this kind, and do not presently have redundant, multiple site capacity in the event of a natural disaster |
| Furthermore, BMS is currently involved in a significant contract with the United Arab Emirates |
| Continued terrorist attacks or threats in this region may cause geopolitical instability that may have an adverse effect on our ability to successfully satisfy customer acceptance requirements and recognize revenue under the agreement, which could materially impact our results of operations and financial condition |