6.	Employee Benefit Plans

Defined Contribution Retirement Plans – We have a voluntary defined contribution retirement 401(k) plan whereby we match employee contributions. In 2012 and 2013 we provided a matching contribution at 1.5% and made contributions to the plan of approximately $0.4 million in both periods. In 2014 we increased our matching contribution to 3% and made contributions to the plan of approximately $0.8 million.

Defined Benefit Retirement Plans – We maintain defined benefit plans for employees located outside the U.S. for which the majority of the obligations and net periodic benefit cost were determined to be immaterial at both December 27, 2014 and December 28, 2013. As a result of the acquisition of Ismeca effective December 31, 2012, we took over the Ismeca Europe Semiconductor BVG Pension Plan in Switzerland (“the Swiss Plan”) and the following discussion relates to the Swiss Plan for the years ended December 27, 2014 and December 28, 2013.

Net periodic benefit cost of the Swiss Plan was as follows:


(in thousands)	2014			2013
Service cost	$	749		$	841
Interest cost		491			398
Expected return on assets		(343	)		(267	)

Net periodic costs	$	897		$	972

The following table sets forth the projected benefit obligation, the fair value of plan assets, the funded status and the liability we have recorded in our consolidated balance sheet related to the Swiss Plan:


(in thousands)	2014			2013
Change in projected benefit obligation:
Benefit obligation at beginning of year	$	(23,850	)	$	(23,541	)
Service cost		(749	)		(841	)
Interest cost		(491	)		(398	)
Actuarial gain (loss)		(3,649	)		1,538
Participant contributions		(728	)		(751	)
Benefits paid		998			704
Foreign currency exchange adjustment		2,442			(561	)

Benefit obligation at end of year		(26,027	)		(23,850	)
Change in plan assets:
Fair value of plan assets at beginning of year		16,083			15,236
Return on assets, net of actuarial loss		652			(338	)
Employer contributions		728			751
Participant contributions		728			751
Benefits paid		(998	)		(704	)
Foreign currency exchange adjustment		(1,590	)		387

Fair value of plan assets at end of year		15,603			16,083

Net liability at December 27, 2014	$	(10,424	)	$	(7,767	)

At December 27, 2014 and December 28, 2013, the Swiss Plan was underfunded and the related net liability is included in noncurrent accrued retirement benefits. Amounts recognized in accumulated other comprehensive income at December 27, 2014 related to the Swiss Plan consisted of an unrecognized net actuarial loss totaling $2.4 million compared to a net gain totaling $1.0 million at December 28, 2013.

Weighted-average actuarial assumptions used to determine the benefit obligation under the Swiss Plan are as follows:


	2014			2013
Discount rate		1.3	%		2.3	%
Compensation increase		1.8	%		2.0	%

Weighted-average assumptions used to determine net periodic benefit cost of the Swiss Plan are as follows:


	2014			2013
Discount rate		2.3	%		1.8	%
Rate of return on Assets		2.3	%		1.8	%
Compensation increase		2.0	%		2.0	%

During 2015 employer and employee respective contributions to the Swiss Plan are expected to total $0.7 million. Estimated benefit payments are expected to be as follows: 2015 - $0.7 million; 2016 - $0.7 million; 2017 - $0.7 million; 2018 - $0.7 million; 2019 - $0.8 million; and $5.5 million thereafter through 2024.

As is customary with Swiss pension plans, the assets of the plan are invested in a collective fund with multiple employers. We have no investment authority over the assets of the plan that are held and invested by a Swiss insurance company. Investment holdings are made with respect to Swiss laws and target allocations for plan assets are 76% debt securities, 11% real estate investments, 9% alternative investments, 3% cash and 1% equity securities. All assets of the plan fall within Level 2 of the fair value hierarchy. See Note 5 for a description of the levels of inputs used to determine fair value measurement.

Retiree Medical Benefits – We provide post-retirement health benefits to certain executives and directors under a noncontributory plan. The net periodic benefit income was $0.1 million in 2014 compared to a net periodic benefit cost of $0.1 million and $0.3 million in 2013 and 2012, 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 3.8% in 2014, 4.6% in 2013 and 3.7% in 2012. Annual rates of increase of the cost of health benefits were assumed to be 8.0% in 2015. 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 2014 net periodic benefit cost by approximately $14,000 ($11,000) and the accumulated post-retirement benefit obligation as of December 27, 2014, by approximately $363,000 ($297,000).

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)	2014			2013
Accumulated benefit obligation at beginning of year	$	2,021		$	2,366
Service cost		13			15
Interest cost		91			86
Actuarial (gain) loss		370			(386	)
Benefits paid		(67	)		(60	)

Accumulated benefit obligation at end of year		2,428			2,021
Plan assets at end of year		—			—

Funded status	$	(2,428	)	$	(2,021	)

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 27, 2014 and December 28, 2013, the payroll liability to participants, included in accrued compensation and benefits in the consolidated balance sheet, was approximately $2.6 million and $2.4 million and the cash surrender value of the related life insurance policies included in other current assets was approximately $2.3 million and $2.1 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 2014, 2013, and 2012, 138,831, 163,120 and 151,812 shares, respectively, were issued under the Plan. At December 27, 2014, there were 183,591 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 27, 2014, 992,666 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:


	2014					2013					2012
(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		3,086		$	11.93		3,113		$	12.62		3,112		$	13.01
Granted		10		$	12.58		470		$	9.83		437		$	10.50
Exercised		(237	)	$	8.43		(117	)	$	7.55		(73	)	$	8.26
Cancelled		(424	)	$	15.37		(380	)	$	16.37		(363	)	$	14.29

Outstanding, end of year		2,435		$	11.67		3,086		$	11.93		3,113		$	12.62

Options exercisable at year end		1,901		$	12.08		2,195		$	12.46		2,209		$	13.52

The aggregate intrinsic value of options exercised during 2014, 2013 and 2012 was approximately $0.7 million, $0.4 million, and $0.2 million, respectively. At December 27, 2014, the aggregate intrinsic value of options outstanding, vested and expected to vest were each approximately $4.4 million and the aggregate intrinsic value of options exercisable was approximately $3.4 million.

Information about stock options outstanding at December 27, 2014 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 - $10.98		1,402		6.2	$	8.86		898	$	8.22
$10.99 - $16.49		814		4.2	$	14.95		784	$	14.98
$16.50 - $24.74		214		0.7	$	17.31		214	$	17.31
$24.75 - $37.13		5		0.6	$	25.70		5	$	25.70

		2,435		5.0	$	11.67		1,901	$	12.08

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:


	2014					2013					2012
(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		887		$	9.46		615		$	10.54		299		$	12.98
Granted		497		$	10.07		531		$	8.80		462		$	9.57
Released		(315	)	$	10.16		(223	)	$	10.86		(108	)	$	13.27
Cancelled		(43	)	$	9.41		(36	)	$	9.86		(38	)	$	13.92

Outstanding, end of year		1,026		$	9.54		887		$	9.46		615		$	10.54

Equity-Based Performance Stock Units – In March 2012, we began granting equity-based performance units covering shares of our common stock to certain employees. The number of shares of stock ultimately issued will depend upon the extent to which certain financial performance goals set by our Board of Directors are met during the one-year award measurement period. Based upon the level of achievement of performance goals the number of shares we ultimately issue can range from 0% up to 150% of the number of shares under each grant which vest over 3 years from the date of initial grant. On March 25, 2014, we awarded equity-based performance stock units to senior executives with vesting that is contingent on the level of achievement of certain performance goals, market return and continued service (“market-based PSUs”). The market-based PSUs issued in 2014 are subject to a one-year performance period after which the number of market-based PSUs earned will be determined and will then be subject to certain adjustments resulting from performance of Cohu’s Relative Total Shareholder Return (“TSR”) to a selected peer group over a two year measurement period following the date of grant with the total adjustment ranging from 75% to 125% of the target amount based on the percentage by which our TSR exceeds or falls below the selected peer group. Market-based PSUs earned will vest at the rate of 50% on the second and third anniversary of their grant. We estimated the fair value of market-based PSUs using a Monte Carlo simulation model on the date of grant. Compensation expense is recognized ratably over the measurement period. We record a provision for equity-based performance units outstanding based on our current assessment of achievement of the performance goals. New shares of our common stock will be issued on the date the equity-based performance units vest.

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


	2014					2013					2012
(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		238		$	9.32		122		$	9.89		—		$	—
Granted		208		$	11.34		158		$	9.03		129		$	9.89
Released		(38	)	$	9.52		(26	)	$	9.89		—		$	—
Cancelled		(74	)	$	9.59		(16	)	$	9.89		(7	)	$	9.89

Outstanding, end of year		334		$	10.49		238		$	9.32		122		$	9.89

Share-based Compensation – We estimate the fair value of each share-based award on the grant date using the Black-Scholes and the Monte Carlo simulation valuation models. Option valuation models 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 for the Black-Scholes model 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. The Monte Carlo simulation model incorporates assumptions for the risk-free interest rate, Cohu and the selected peer group price volatility, the correlation between Cohu and the selected index, and dividend yields.

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. 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.

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


Employee Stock Purchase Plan	2014			2013			2012
Dividend yield		2.4	%		2.6	%		2.4	%
Expected volatility		35.3	%		38.4	%		43.6	%
Risk-free interest rate		0.1	%		0.1	%		0.1	%
Expected term of options		0.5 years			0.5 years			0.5 years
Weighted-average grant date fair value per share	$	2.52		$	2.32		$	2.78


Employee Stock Options	2014			2013			2012
Dividend yield		2.0	%		2.6	%		2.1	%
Expected volatility		42.5	%		44.9	%		46.3	%
Risk-free interest rate		1.9	%		1.1	%		1.2	%
Expected term of options		5.9 years			6.4 years			6.3 years
Weighted-average grant date fair value per share	$	4.39		$	3.37		$	3.87
Restricted Stock Units		2014			2013			2012

Dividend yield		2.2	%		2.5	%		2.3	%
Performance Stock Units		2014			2013			2012

Dividend yield		2.2	%		2.5	%		2.3	%

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


(in thousands)	2014			2013		2012
Cost of sales	$	491		$	390	$	417
Research and development		1,901			1,677		1,347
Selling, general and administrative		4,193			3,279		2,735

Total share-based compensation		6,585			5,346		4,499
Income tax benefit		(204	)		—		—

Total share-based compensation, net of tax	$	6,381		$	5,346	$	4,499

At December 27, 2014, excluding a reduction for forfeitures, we had approximately $1.5 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 1.0 years.

At December 27, 2014, excluding a reduction for forfeitures, we had approximately $9.6 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 1.6 years.