5.	Employee Benefit Plans

Retirement Plans – We have a voluntary defined contribution retirement 401(k) plan whereby we match employee contributions. In 2012 and 2011, we provided a matching contribution at 1.5% of eligible employee compensation and made contributions to the plan of approximately $0.5 million in both periods. There were no employer matching contributions made to the plan in 2010. Certain of our foreign employees participate in defined benefit pension plans. The related expense and benefit obligation of these plans were not significant for any period presented.

Retiree Medical Benefits – We provide post-retirement health benefits to certain executives and directors under a noncontributory plan. The net periodic benefit cost was $0.3 million, $0.4 million and $0.3 million in 2012, 2011 and 2010, respectively. We fund benefits as costs are incurred and as a result there are no plan assets.

The weighted average discount rate used in determining the accumulated post-retirement benefit obligation was 3.7% in 2012, 4.2% in 2011 and 5.4% in 2010. Annual rates of increase of the cost of health benefits were assumed to be 9.0% in 2013. These rates were then assumed to decrease 0.5% per year to 5.0% in 2021 and remain level thereafter. A one percent increase (decrease) in health care cost trend rates would increase (decrease) the 2012 net periodic benefit cost by approximately $13,000 ($13,000) and the accumulated post-retirement benefit obligation as of December 29, 2012, by approximately $322,000 ($269,000).

The following table sets forth the post-retirement benefit obligation, funded status and the liability we have recorded in our consolidated balance sheets:


(in thousands)	2012			2011
Accumulated benefit obligation at beginning of year	$	2,909		$	3,909
Service cost		16			20
Interest cost		120			208
Actuarial gain		(617	)		(1,137	)
Benefits paid		(62	)		(91	)

Accumulated benefit obligation at end of year		2,366			2,909
Plan assets at end of year		—			—

Funded status	$	(2,366	)	$	(2,909	)

Deferred Compensation – The Cohu, Inc. Deferred Compensation Plan allows certain of our officers to defer a portion of their current compensation. We have purchased life insurance policies on the participants with Cohu as the named beneficiary. Participant contributions, distributions and investment earnings and losses are accumulated in a separate account for each participant. At December 29, 2012 and December 31, 2011, the payroll liability to participants, included in accrued compensation and benefits in the consolidated balance sheet, was approximately $2.1 million and $2.0 million and the cash surrender value of the related life insurance policies included in other current assets was approximately $1.7 million and $1.6 million, respectively.

Employee Stock Purchase Plan – The Cohu, Inc. 1997 Employee Stock Purchase Plan (“the Plan”) provides for the issuance of a maximum of 1,900,000 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. In 2012, 2011, and 2010, 151,812, 120,240 and 112,745 shares, respectively, were issued under the Plan. At December 29, 2012, there were 485,542 shares reserved for issuance under the Plan.

Stock Options – Under our equity incentive plans, stock options may be granted to employees, consultants 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 after one year or in four annual increments beginning one year after the grant date and expire ten years from the grant date. At December 29, 2012, 1,931,575 shares were available for future equity grants under the Cohu, Inc. 2005 Equity Incentive Plan. We have historically issued new shares of Cohu common stock upon share option exercise.

Stock option activity under our share-based compensation plans was as follows:


	2012					2011					2010
(in thousands, except per share data)	Shares			Wt. Avg. Ex. Price		Shares			Wt. Avg. Ex. Price		Shares			Wt. Avg. Ex. Price
(in thousands, except per share data)	Shares			Wt. Avg. Ex. Price		Shares			Wt. Avg. Ex. Price		Shares			Wt. Avg. Ex. Price
Outstanding, beginning of year		3,112		$	13.01		3,210		$	12.89		3,221		$	12.87
Granted		437		$	10.50		157		$	13.33		380		$	13.77
Exercised		(73	)	$	8.26		(123	)	$	9.03		(263	)	$	10.92
Canceled		(363	)	$	14.29		(132	)	$	14.24		(128	)	$	19.06

Outstanding, end of year		3,113		$	12.62		3,112		$	13.01		3,210		$	12.89

Options exercisable at year end		2,209		$	13.52		2,112		$	14.44		1,857		$	15.26

The aggregate intrinsic value of options exercised during 2012, 2011 and 2010 was approximately $0.2 million, $0.6 million, and $0.8 million, respectively. At December 29, 2012, the aggregate intrinsic value of options outstanding, vested and expected to vest were each approximately $2.8 million and the aggregate intrinsic value of options exercisable was approximately $1.9 million.

Information about stock options outstanding at December 29, 2012 is as follows (options in thousands):


	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number Outstanding		Approximate Wt. Avg. Remaining Life (Years)		Wt. Avg. Ex. Price		Number Exercisable		Wt. Avg. Ex. Price



$ 7.32 - $10.83		1,317		7.2	$	8.33		641	$	7.39
$10.84 - $16.26		1,001		5.0	$	14.49		773	$	14.64
$16.27 - $24.41		790		2.3	$	17.33		790	$	17.33
$24.42 - $36.63		5		2.5	$	25.70		5	$	25.70

		3,113		5.2	$	12.62		2,209	$	13.52

Restricted Stock Units – Under our equity incentive plans, restricted stock units may be granted to employees, consultants and outside directors. Restricted stock units vest over either a one-year or a four-year period from the date of grant. Prior to vesting, restricted stock units do not have dividend equivalent rights, do not have voting rights and the shares underlying the restricted stock units are not considered issued and outstanding. Shares of our common stock will be issued on the date the restricted stock units vest.

Restricted stock unit activity under our share-based compensation plans was as follows:


	2012					2011					2010
(in thousands, except per share data)	Units			Wt. Avg. Fair Value		Units			Wt. Avg. Fair Value		Units			Wt. Avg. Fair Value
(in thousands, except per share data)	Units			Wt. Avg. Fair Value		Units			Wt. Avg. Fair Value		Units			Wt. Avg. Fair Value
Outstanding, beginning of year		299		$	12.98		373		$	13.35		155		$	14.60
Granted		462		$	9.57		75		$	13.00		323		$	12.90
Vested		(108	)	$	13.27		(139	)	$	13.91		(101	)	$	14.68
Canceled		(38	)	$	13.92		(10	)	$	13.41		(4	)	$	15.40

Outstanding, end of year		615		$	10.54		299		$	12.98		373		$	13.35

Equity-Based Performance Stock Units – In March 2012, we granted equity-based performance units covering 128,916 shares of our common stock to certain employees. The number of shares of stock ultimately issued to participants will depend upon the extent to which the financial performance goals set by our Board of Directors are met. The award measurement period is based on a one-year period which ends on December 29, 2012. Based upon the level of achievement of performance goals the number of shares we will issue can range from 0% up to 150% of the number of shares under each grant which will vest over 3 years from the date of initial grant. We record a provision for equity-based performance units outstanding based on our current assessment of achievement of the performance goals. Shares of our common stock will be issued on the date the equity-based performance units vest.

Share-based Compensation – We estimate the fair value of each share-based award on the grant date using the Black-Scholes valuation model. 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 as of the grant date. 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 award’s expected term. We believe that historical volatility is the best estimate of future volatility. Expected life of the award is based on historical option exercise data. Estimated forfeitures are required to 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.

Share-based compensation expense related to restricted stock unit awards is calculated based on the market price of our common stock on the date of grant, reduced by the present value of dividends expected to be paid on our common stock prior to vesting of the restricted stock unit.

The following weighted average assumptions were used to value share-based awards granted:


Employee Stock Purchase Plan	2012	2011	2010
Dividend yield	2.4%	1.9%	1.8%
Expected volatility	43.6%	42.4%	48.2%
Risk-free interest rate	0.1%	0.1%	0.2%
Expected term of options	0.5 years	0.5 years	0.5 years
Weighted-average grant date fair value per share	$2.78	$3.77	$3.90


Employee Stock Options	2012	2011	2010
Dividend yield	2.1%	2.0%	1.6%
Expected volatility	46.3%	45.8%	46.6%
Risk-free interest rate	1.2%	1.9%	1.6%
Expected term of options	6.25 years	6.0 years	5.9 years
Weighted-average grant date fair value per share	$3.87	$5.06	$5.39

Restricted Stock Units	2012	2011	2010
Dividend yield	2.3%	1.8%	1.7%

Performance Stock Units	2012
Dividend yield	2.3%

Reported share-based compensation is classified in the consolidated financial statements as follows:


(in thousands)	2012		2011		2010
Cost of sales	$	417	$	420	$	297
Research and development		1,364		1,356		1,121
Selling, general and administrative		2,840		2,511		2,125

Total share-based compensation		4,621		4,287		3,543
Income tax benefit		—		—		—

Total share-based compensation, net of tax	$	4,621	$	4,287	$	3,543

At December 29, 2012, excluding a reduction for forfeitures, we had approximately $2.8 million of pre-tax unrecognized compensation cost related to unvested stock options which is expected to be recognized over a weighted-average period of approximately 1.5 years.

At December 29, 2012, excluding a reduction for forfeitures, we had approximately $5.9 million of pre-tax unrecognized compensation cost related to unvested restricted stock units and performance stock units which is expected to be recognized over a weighted-average period of approximately 2.3 years.