6. Employee Benefit Plans

Defined Contribution Retirement Plans

– We maintain a defined contribution 401(k) retirement savings plan covering all salaried and hourly U.S. employees. Participation is voluntary and participants’ contributions are based on their eligible compensation. We match contributions of participants, up to various statutory limits. In 2013 we provided a matching contribution at 1.5% and made contributions to the plan of approximately $0.3 million. In 2014 we increased our matching contribution to 3% and made contributions to the plan of approximately $0.7 million in both 2015 and 2014.

COHU, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 for all period presented. 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 only relates to the Swiss Plan.

Net periodic benefit cost of the Swiss Plan was as follows

(in thousands)	2015			2014			2013
Service cost	$	856		$	749		$	841
Interest cost		311			491			398
Expected return on assets		(193	)		(343	)		(267	)
Settlements		235			-			-
Net periodic costs	$	1,209		$	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)	2015			2014
Change in projected benefit obligation:

Benefit obligation at beginning of year	$	(26,027	)	$	(23,850	)
Service cost		(856	)		(749	)
Interest cost		(311	)		(491	)
Actuarial gain (loss)		(660	)		(3,649	)
Participant contributions		(672	)		(728	)
Benefits paid		296			998
Plan change		558			-
Settlements		2,199			-
Foreign currency exchange adjustment		(10	)		2,442
Benefit obligation at end of year		(25,483	)		(26,027	)

Change in plan assets:

Fair value of plan assets at beginning of year		15,603			16,083
Return on assets, net of actuarial loss		277			652
Employer contributions		672			728
Participant contributions		672			728
Benefits paid		(296	)		(998	)
Settlements		(2,199	)		-
Foreign currency exchange adjustment		(13	)		(1,590	)
Fair value of plan assets at end of year		14,716			15,603

Net liability at end of year	$	(10,767	)	$	(10,424	)

At December 26, 2015 and December 27, 2014, the Swiss Plan’s net liability is included in noncurrent accrued retirement benefits. Amounts recognized in accumulated other comprehensive income net of tax related to the Swiss Plan consisted of an unrecognized net actuarial loss totaling $1.8 million at December 26, 2015 and $2.0 million at December 27, 2014.

COHU, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

	2015			2014
Discount rate		1.0	%		1.3	%
Compensation increase		1.8	%		1.8	%

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

	2015			2014			2013
Discount rate		1.3	%		2.3	%		1.8	%
Rate of return on Assets		1.3	%		2.3	%		1.8	%
Compensation increase		1.8	%		2.0	%		2.0	%

During 2016 employer and employee contributions to the Swiss Plan are expected to total $0.7 million. Estimated benefit payments are expected to be as follows: 2016 - $0.6 million; 2017 - $0.6 million; 2018 - $0.7 million; 2019 - $0.8 million; 2020 - $0.9 million; and $5.2 million thereafter through 2025.

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 75% debt securities, 12% real estate investments, 8% alternative investments, 2% cash and 3% equity securities. The valuation of the collective fund assets as a whole is a Level 3 measurement; however the individual investments of the fund are generally Level 1 (equity securities), Level 2 (fixed income) and Level 3 (real estate and alternative) investments. We determine the fair value of the plan assets based on information provided by the collective fund, through review of the collective fund’s annual financial statements. See Note 5, “Financial Instruments Measured at Fair Value” for additional information on the three-tier fair value hierarchy.

Retiree Medical Benefits

– We provide post-retirement health benefits to certain executives and directors under a noncontributory plan. The net periodic benefit cost was $0.1 million in both 2015 and 2013 compared to a net periodic benefit income of $0.1 million in 2014. 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 4.2% in 2015, 3.8% in 2014 and 4.6% in 2013. Annual rates of increase of the cost of health benefits were assumed to be 7.5% in 2016. These rates were then assumed to decrease 0.3% per year to 4.5% in 2025 and remain level thereafter. A one percent increase (decrease) in health care cost trend rates would increase (decrease) the 2015 net periodic benefit cost by approximately $14,000 ($11,000) and the accumulated post-retirement benefit obligation as of December 26, 2015, by approximately $411,000 ($338,000).

Contributions to the post-retirement health benefit plan are expected to total $0.1 million in 2016. Estimated benefit payments are expected to be as follows: 2016 - $0.1 million; 2017 - $0.1 million; 2018 - $0.1 million; 2019 - $0.1 million; 2020 - $0.1 million; and $0.7 million thereafter through 2025.

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)	2015			2014
Accumulated benefit obligation at beginning of year	$	2,428		$	2,021
Service cost		-			13
Interest cost		90			91
Actuarial loss		187			370
Benefits paid		(56	)		(67	)
Accumulated benefit obligation at end of year		2,649			2,428
Plan assets at end of year		-			-
Funded status	$	(2,649	)	$	(2,428	)

COHU, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 both December 26, 2015 and December 27, 2014, the payroll liability to participants, included in accrued compensation and benefits in the consolidated balance sheet, was approximately $2.6 million and the cash surrender value of the related life insurance policies included in other current assets was approximately $2.3 million.

Employee Stock Purchase Plan

– On May 12, 2015 our stockholders approved an amendment to the Cohu, Inc. 1997 Employee Stock Purchase Plan (“the Plan”) which increased the number of shares that may be issued under the Plan by 750,000 shares. As a result of this amendment the Plan

provides for the issuance of a maximum of 2,650,000 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. During the last three years we issued shares under the Plan as follows: 2015 - 122,528; 2014 - 138,831 and 2013 - 163,120. At December 26, 2015, there were 811,063 shares reserved for issuance under the Plan.

Stock Options

– On May 12, 2015, our stockholders approved an amendment to the Cohu, Inc. 2005 Equity Incentive Plan (“the 2005 Plan”) which increased the number of shares that may be issued under the 2005 Plan by 1,500,000 shares. At December 26, 2015, a total of 2,255,701 shares were available for future equity grants under the 2005 Plan. Under the 2005 Plan 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. 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:

	2015					2014					2013
				Wt. Avg.					Wt. Avg.					Wt. Avg.
(in thousands, except per share data)	Shares			Ex. Price		Shares			Ex. Price		Shares			Ex. Price
Outstanding, beginning of year		2,435		$	11.67		3,086		$	11.93		3,113		$	12.62
Granted		10		$	10.98		10		$	12.58		470		$	9.83
Exercised		(175	)	$	8.65		(237	)	$	8.43		(117	)	$	7.55
Cancelled		(305	)	$	16.07		(424	)	$	15.37		(380	)	$	16.37
Outstanding, end of year		1,965		$	11.25		2,435		$	11.67		3,086		$	11.93

Options exercisable at year end		1,673		$	11.47		1,901		$	12.08		2,195		$	12.46

The aggregate intrinsic value of options exercised was $0.7 million in both 2015 and 2014, and $0.4 million in 2013. At December 26, 2015, the aggregate intrinsic value of options outstanding, vested and expected to vest and exercisable was $1.2 million.

Information about stock options outstanding at December 26, 2015 is as follows

(options in thousands)

			Options Outstanding						Options Exercisable
					Approximate
					Wt. Avg.
Range of			Number		Remaining		Wt. Avg.		Number		Wt. Avg.
Exercise Prices			Outstanding		Life (Years)		Ex. Price		Exercisable		Ex. Price
$7.32	-	$10.58		1,182		5.2	$	8.82		922	$	8.54
$10.59	-	$15.50		498		4.2	$	14.06		466	$	14.26
$15.51	-	$20.73		285		1.7	$	16.44		285	$	16.44
				1,965		4.4	$	11.25		1,673	$	11.47

COHU, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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. New shares of our common stock will be issued on the date the restricted stock units vest net of the minimum statutory tax withholding requirements to be paid by us on behalf of our employees. As a result, the actual number of shares issued will be fewer than the actual number of RSUs outstanding.

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

	2015					2014					2013
				Wt. Avg.					Wt. Avg.					Wt. Avg.
(in thousands, except per share data)	Units			Fair Value		Units			Fair Value		Units			Fair Value
Outstanding, beginning of year		1,026		$	9.54		887		$	9.46		615		$	10.54
Granted		482		$	10.54		497		$	10.07		531		$	8.80
Released		(339	)	$	9.63		(315	)	$	10.16		(223	)	$	10.86
Cancelled		(91	)	$	9.82		(43	)	$	9.41		(36	)	$	9.86
Outstanding, end of year		1,078		$	9.93		1,026		$	9.54		887		$	9.46

Equity-Based Performance Stock Units

–

In 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. In 2014, we began awarding 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”) and in 2015, the market-based PSUs granted are only 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 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 of each vesting tranche 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 net of the minimum statutory tax withholding requirements to be paid by us on behalf of our employees. As a result, the actual number of shares issued will be fewer than the actual number outstanding.

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

	2015					2014					2013
				Wt. Avg.					Wt. Avg.					Wt. Avg.
(in thousands, except per share data)	Units			Fair Value		Units			Fair Value		Units			Fair Value
Outstanding, beginning of year		334		$	10.49		238		$	9.32		122		$	9.89
Granted		156		$	10.69		208		$	11.34		158		$	9.03
Released		(38	)	$	9.52		(38	)	$	9.52		(26	)	$	9.89
Cancelled		(76	)	$	9.86		(74	)	$	9.59		(16	)	$	9.89
Outstanding, end of year		376		$	10.80		334		$	10.49		238		$	9.32

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.

COHU, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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	2015			2014			2013
Dividend yield		2.2	%		2.4	%		2.6	%
Expected volatility		35.3	%		35.3	%		38.4	%
Risk-free interest rate		0.1	%		0.1	%		0.1	%
Expected term (years)		0.5			0.5			0.5
Weighted-average grant date fair value per share	$	2.71		$	2.52		$	2.32

Employee Stock Options	2015			2014			2013
Dividend yield		2.1	%		2.0	%		2.6	%
Expected volatility		39.1	%		42.5	%		44.9	%
Risk-free interest rate		1.6	%		1.9	%		1.1	%
Expected term (years)		5.9			5.9			6.4
Weighted-average grant date fair value per share	$	3.46		$	4.39		$	3.37

Restricted Stock Units		2015				2014				2013
Dividend yield			2.1	%			2.2	%			2.5	%

Performance Stock Units		2015				2014				2013
Dividend yield			2.1	%			2.2	%			2.5	%

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

(in thousands)	2015			2014			2013
Cost of sales	$	566		$	491		$	390
Research and development		1,092			1,858			1,623
Selling, general and administrative		5,097			4,039			3,098
Share-based compensation of continuing operations		6,755			6,388			5,111
Discontinued operations		138			388			357
Income tax benefit		(249	)		(204	)		-
Total share-based compensation, net of tax	$	6,644		$	6,572		$	5,468

At December 26, 2015, excluding a reduction for forfeitures, we had approximately $0.6 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 1.2 years.

At December 26, 2015, excluding a reduction for forfeitures, we had approximately $10.0 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.