1.	Summary of Significant Accounting Policies

Basis of Presentation

– Cohu, Inc. (“Cohu”, “we”, “our” and “us”), through our wholly owned subsidiaries, is a provider of semiconductor test equipment. Our Consolidated Financial Statements include the accounts of Cohu and our wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.

Our fiscal years are based on a

- or

-week period ending on the last Saturday in

December.

Our current fiscal year which ended on

December

31,

2016

consisted of

weeks. Our fiscal years ending on

December

26,

2015

and

December

27,

2014

each consisted of

weeks.

Discontinued Operations

– On

June

10,

2015,

we sold our mobile microwave communications equipment business, Broadcast Microwave Services, Inc. (“BMS”) and on

June

2014,

we completed the sale of our video camera business, Cohu Electronics. The operating results of BMS and Cohu Electronics are being presented as discontinued operations and all prior period amounts have been reclassified accordingly. See Note

“Discontinued Operations

” for additional information. Unless otherwise indicated, all amounts herein relate to continuing operations.

Income (Loss

) Per Share

– Basic income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the reporting period. Diluted income per share includes the dilutive effect of common shares potentially issuable upon the exercise of stock options, vesting of outstanding restricted stock units and issuance of stock under our employee stock purchase plan using the treasury stock method. In loss periods, potentially dilutive securities are excluded from the per share computations due to their anti-dilutive effect. For purposes of computing diluted income per share, stock options with exercise prices that exceed the average fair market value of our common stock for the period are excluded.

For the years ended

December

31,

2016,

December

26,

2015

and

December

27,

2014

approximately

697,000,

875,000

and

1,771,000

shares of our common stock were excluded from the computation, respectively.

The following table reconciles the denominators used in computing basic and diluted income (loss) per share

(in thousands)	2016		2015		2014
Weighted average common shares outstanding		26,659		26,057		25,393
Effect of dilutive stock options and restricted stock units		821		731		613
		27,480		26,788		26,006

Cohu has utilized the “control number” concept in the computation of diluted earnings per share to determine whether potential common stock instruments are dilutive. The control number used is income from continuing operations. The control number concept requires that the same number of potentially dilutive securities applied in computing diluted earnings per share from continuing operations be applied to all other categories of income or loss, regardless of their anti-dilutive effect on such categories.

Cash, Cash Equivalents and Short-term Investments

– Highly liquid investments with insignificant interest rate risk and original maturities of

three

months or less are classified as cash and cash equivalents. Investments with maturities greater than

three

months are classified as short-term investments. All of our short-term investments are classified as available-for-sale and are reported at fair value, with any unrealized gains and losses, net of tax, recorded in the statement of comprehensive loss. We manage our cash equivalents and short-term investments as a single portfolio of highly marketable securities. We have the ability and intent, if necessary, to liquidate any of our investments in order to meet the liquidity needs of our current operations during the next

months. Accordingly, investments with contractual maturities greater than

one

year have been classified as current assets in the accompanying consolidated balance sheets.

Fair Value of Financial Instruments

– The carrying amounts of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, approximate fair value due to the short maturities of these financial instruments.

Concentration of Credit Risk

– Financial instruments that potentially subject us to significant credit risk consist principally of cash equivalents, short-term investments and trade accounts receivable. We invest in a variety of financial instruments and, by policy, limit the amount of credit exposure with any

one

issuer.

Trade accounts receivable are presented net of allowance for doubtful accounts of

$0.1

million at

December

31,

2016

and

$0.1

million at

December

26,

2015.

Our customers primarily include semiconductor manufacturers and semiconductor test subcontractors located throughout many areas of the world. While we believe that our allowance for doubtful accounts is adequate and represents our best estimate of potential loss exposure at

December

31,

2016,

we will continue to monitor customer liquidity and other economic conditions, which

may

result in changes to our estimates regarding collectability.

Inventories

– Inventories are stated at the lower of cost, determined on a

first

-in,

first

-out basis, or market. Cost includes labor, material and overhead costs. Determining market value of inventories involves numerous estimates and judgments including projecting average selling prices and sales volumes for future periods and costs to complete and dispose of inventory. As a result of these analyses, we record a charge to cost of sales in advance of the period when the inventory is sold when estimated market values are below our costs. Charges to cost of sales for excess and obsolete inventories aggregated

$1.1

million,

$2.4

million, and

$2.6

million in

2016,

2015

and

2014,

respectively.

Property, Plant and Equipment

– Depreciation and amortization of property, plant and equipment is calculated principally on the straight-line method based on estimated useful lives of

thirty

forty

years for buildings,

five

fifteen

years for building improvements and

three

ten

years for machinery, equipment and software. Land is not depreciated.

Property, plant and equipment, at cost, consisted of the following

(in thousands)

	December 31,			December 26,
	2016			2015
Land and land improvements	$	4,079		$	4,607
Buildings and building improvements		7,967			8,971
Machinery and equipment		35,157			31,888
		47,203			45,466
Less accumulated depreciation and amortization		(28,969	)		(26,466	)
Property, plant and equipment, net	$	18,234		$	19,000

Depreciation expense was

$3.5

million in

2016,

$4.2

million in

2015

and

$4.8

million

2014.

Segment Information

– We applied the provisions of ASC Topic

280,

Segment Reporting

, (“ASC

280”),

which sets forth a management approach to segment reporting and establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products, major customers and the geographies in which the entity holds material assets and reports revenue. An operating segment is defined as a component that engages in business activities whose operating results are reviewed by the chief operating decision maker and for which discrete financial information is available. Based on the provisions of ASC

280,

we have determined that our identified operating segments qualify for aggregation under ASC

280

due to similarities in their customers, their economic characteristics, and the nature of products and services provided. As a result, we report in

one

segment, semiconductor equipment.

Goodwill, Purchased Intangible Assets and Other Long-lived Assets

–

We evaluate goodwill for impairment annually and when an event occurs or circumstances change that indicate that the carrying value

may

not be recoverable. We test goodwill for impairment by

first

comparing the book value of net assets to the fair value of the reporting units. If the fair value is determined to be less than the book value, a

second

step is performed to compute the amount of impairment as the difference between the estimated fair value of goodwill and the carrying value. We estimated the fair values of our reporting units primarily using the income approach valuation methodology that includes the discounted cash flow method, taking into consideration the market approach and certain market multiples as a validation of the values derived using the discounted cash flow methodology. Forecasts of future cash flows are based on our best estimate of future net sales and operating expenses, based primarily on customer forecasts, industry trade organization data and general economic conditions.

We conduct our annual impairment test as of

October

1st

of each year, and determined there was

impairment as of

October

2016

as we determined that the estimated fair values of our reporting units exceeded their carrying values on that date. Other events and changes in circumstances

may

also require goodwill to be tested for impairment between annual measurement dates. As of

December

31,

2016

we do not believe there have been any events or circumstances that would require us to perform an interim goodwill impairment review. In the event we determine that an interim goodwill impairment review is required, in a future period, the review

may

result in an impairment charge, which would have a negative impact on our results of operations.

Long-lived assets, other than goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or any other significant adverse change that would indicate that the carrying amount of an asset or group of assets

may

not be recoverable. For long-lived assets, impairment losses are only recorded if the asset’s carrying amount is not recoverable through its undiscounted, probability-weighted future cash flows. We measure the impairment loss based on the difference between the carrying amount and estimated fair value.

Product Warranty

– Product warranty costs are accrued in the period sales are recognized. Our products are generally sold with standard warranty periods, which differ by product, ranging from

- to

-months. Parts and labor are typically covered under the terms of the warranty agreement. Our warranty expense accruals are based on historical and estimated costs by product and configuration. From time-to-time we offer customers extended warranties beyond the standard warranty period. In those situations the revenue relating to the extended warranty is deferred at its estimated fair value and recognized on a straight-line basis over the contract period. Costs associated with our extended warranty contracts are expensed as incurred.

Income Taxes

– We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting dates. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than

percent likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. Where applicable, associated interest and penalties have also been recognized and recorded, net of federal and state tax benefits, in income tax expense.

Contingencies and Litigation

– We assess the probability of adverse judgments in connection with current and threatened litigation. We would accrue the cost of an adverse judgment if, in our estimation, the adverse outcome is probable and we can reasonably estimate the ultimate cost.

Revenue Recognition

– Our net sales are derived from the sale of products and services and are adjusted for estimated returns and allowances, which historically have been insignificant. We recognize revenue when there is persuasive evidence of an arrangement, title and risk of loss have passed, delivery has occurred or the services have been rendered, the sales price is fixed or determinable and collection of the related receivable is reasonably assured. Title and risk of loss generally pass to our customers upon shipment. In circumstances where either title or risk of loss pass upon destination or acceptance, we defer revenue recognition until such events occur.

Revenue for established products that have previously satisfied a customer’s acceptance requirements and provide for full payment tied to shipment is generally recognized upon shipment and passage of title. In certain instances, customer payment terms

may

provide that a minority portion (e.g. up to

20%)

of the equipment purchase price be paid only upon customer acceptance. In those situations, the majority portion (e.g.

80%)

of revenue where the contingent payment is tied to shipment and the entire product cost of sale are recognized upon shipment and passage of title and the minority portion of the purchase price related to customer acceptance is deferred and recognized upon receipt of customer acceptance. In cases where a prior history of customer acceptance cannot be demonstrated or from sales where customer payment dates are not determinable and in the case of new products, revenue is deferred until customer acceptance has been received. Our post-shipment obligations typically include installation and standard warranties. The estimated fair value of installation related revenue is recognized in the period the installation is performed. Service revenue is recognized ratably over the period of the related contract or upon completion of the services if they are short-term in nature. Spares and kit revenue is generally recognized upon shipment.

Certain of our equipment sales are accounted for as multiple-element arrangements. A multiple-element arrangement is a transaction which

may

involve the delivery or performance of multiple products, services, or rights to use assets, and performance

may

occur at different points in time or over different periods of time. For arrangements containing multiple elements, the revenue relating to the undelivered elements is deferred using the relative selling price method utilizing estimated sales prices until delivery of the deferred elements. We limit the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services, future performance obligations or subject to customer-specified return or adjustment.

On shipments where sales are not recognized, gross profit is generally recorded as deferred profit in our consolidated balance sheet representing the difference between the receivable recorded and the inventory shipped. In certain instances where customer payments are received prior to product shipment, the customer’s payments are recorded as customer advances. At

December

31,

2016,

we had total deferred revenue of approximately

$9.3

million and deferred profit of

$6.9

million. At

December

26,

2015,

we had total deferred revenue of approximately

$5.0

million and deferred profit of

$3.7

million.

Advertising Costs

– Advertising costs are expensed as incurred and were not material for all periods presented.

Share-based Compensation

– We measure and recognize all share-based compensation under the fair value method. Our estimate of share-based compensation expense requires a number of complex and subjective assumptions including our stock price volatility, employee exercise patterns (expected life of the options), future forfeitures and related tax effects. The assumptions used in calculating the fair value of share-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. Although we believe the assumptions and estimates we have made are reasonable and appropriate, changes in assumptions could materially impact our reported financial results.

Foreign Currency Translation

– Assets and liabilities of our wholly owned foreign subsidiaries that use the U.S. Dollar as their functional currency are re-measured using exchange rates in effect at the end of the period, except for nonmonetary assets, such as inventories and property, plant and equipment, which are re-measured using historical exchange rates. Revenues and costs are re-measured using average exchange rates for the period, except for costs related to those balance sheet items that are re-measured using historical exchange rates. Gains and losses on foreign currency transactions are recognized as incurred. Certain of our foreign subsidiaries have designated the local currency as their functional currency and, as a result, their assets and liabilities are translated at the rate of exchange at the balance sheet date, while revenue and expenses are translated using the average exchange rate for the period. During the years ended

December

31,

2016,

December

26,

2015

and

December

27,

2014

we recognized approximately

$2.6

million

$1.4

million and

$2.0

million, respectively, of foreign exchange gains that are included in our consolidated statement of income. Cumulative translation adjustments resulting from the translation of the financial statements are included as a separate component of stockholders’ equity.

Comprehensive Loss

– Our accumulated other comprehensive loss totaled approximately

$27.9

million at

December

31,

2016

and

$21.8

million at

December

26,

2015

and was attributed to, net of income taxes where applicable: foreign currency adjustments resulting from the translation of certain accounts into U.S. Dollars, unrealized losses and gains on investments and adjustments to accumulated postretirement benefit obligations. The U.S. Dollar strengthened relative to certain foreign currencies in countries where we have operations as of

December

31,

2016

compared to

December

26,

2015.

Consequently, our comprehensive loss increased by

$5.8

million as a result of the foreign currency translation. In the previous year, strengthening of the U.S. Dollar led to an increase in our comprehensive loss of

$11.0

million. Additional information related to accumulated other comprehensive loss, on an after-tax basis is included in Note

11.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements –

March

2016,

the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)

No.

2016

09,

Compensation - Stock Compensation (Topic

718):

Improvements to Employee Share-Based Payment Accounting

(ASU

2016

09).

While the effective date of ASU

2016

is for fiscal years beginning after

December

15,

2016,

earlier adoption is permitted and we adopted the amendments in ASU

2016

during the

fourth

quarter of fiscal

2016.

This standard simplifies or clarifies several aspects of the accounting for equity-based payment awards, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Certain of these changes are required to be applied retrospectively, while other changes are required to be applied prospectively.

The impact of the adoption of ASU

2016

resulted in the following:

●

We elected to eliminate the use of an estimated forfeiture rate and recognize actual forfeitures as they occur. We adopted this amendment on a modified retrospective basis and, as a result, we recorded a

$0.2

million cumulative effect adjustment to retained earnings at

December

27,

2015,

the

first

day of our fiscal

2016.

●

We excluded the excess tax benefits from the assumed proceeds available to repurchase shares in the computation of our diluted earnings per share for the year ended

December

31,

2016.

The effect of this change on our diluted earnings per share was not significant.

Recently Issued Accounting Pronouncements

– In

January

2017,

the FASB issued ASU No.

2017

04,

Simplifying the Test for Goodwill Impairment

. It eliminates Step

from the goodwill impairment test and an entity should recognize an impairment charge for the amount by which the carrying amount of goodwill exceeds the reporting unit's fair value, not to exceed the carrying amount of goodwill. This guidance is effective for annual and any interim impairment tests in fiscal years beginning after

December

15,

2019.

We do not expect this guidance to have any impact on our Consolidated Financial Statements.

January

2017,

the FASB issued ASU No.

2017

01,

Clarifying the Definition of a Business.

It revises the definition of a business and provides a framework to evaluate when an input and a substantive process are present in an acquisition to be considered a business. This guidance is effective for annual periods beginning after

December

15,

2017.

We do not expect this guidance to have any impact on our Consolidated Financial Statements.

November

2016,

the FASB issued ASU No.

2016

18,

Restricted Cash.

It requires that amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance is effective for interim and annual reporting periods beginning after

December

15,

2017.

We do not expect this guidance to have a material impact on our Consolidated Financial Statements.

August

2016,

the FASB issued ASU No.

2016

15,

Classification of Certain Cash Receipts and Cash Payments.

It provides guidance on

eight

specific cash flow issues with the objective of reducing the existing diversity in practice in how they are classified in the statement of cash flows. This guidance is effective for interim and annual reporting periods beginning after

December

15,

2017.

Early adoption is permitted, provided that all of the amendments are adopted in the same period. We do not expect this guidance to have a material impact on our Consolidated Financial Statements.

February

2016,

the FASB issued ASU No.

2016

02,

Leases (Topic

842).

Under this guidance, lessees will be required to recognize a right-of-use asset and a lease liability for all operating leases defined under previous GAAP. This guidance is effective for interim and annual reporting periods beginning after

December

15,

2018.

The new guidance must be adopted using a modified retrospective transition, and provides for certain practical expedients. We are currently evaluating the impact of this new standard on our financial reporting, but recognizing the lease liabilities and related right-of-use assets will impact our balance sheet.

July

2015,

the FASB issued ASU No.

2015

11,

Simplifying the Measurement of Inventory

. Under this guidance, inventory should be measured at the lower of cost and net realizable value. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. This guidance is effective for interim and annual reporting periods beginning after

December

15,

2016.

We do not expect this guidance to have a material impact on our Consolidated Financial Statements.

May

2014,

the FASB issued Accounting Standards Update No.

2014

09,

Revenue from Contracts with Customers (Topic

606)

(ASU

2014

09),

which amends the existing accounting standards for revenue recognition. In

August

2015,

the FASB issued ASU No.

2015

14,

Revenue from Contracts with Customers (Topic

606):

Deferral of the Effective Date

, which delays the effective date of ASU

2014

one

year. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. In

March

2016,

the FASB issued Accounting Standards Update No.

2016

08,

Revenue from Contracts with Customers (Topic

606):

Principal versus Agent Considerations (Reporting Revenue Gross versus Net)

(ASU

2016

08)

which clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers. The new revenue recognition standard will be effective for us in the

first

quarter of

2018,

with the option to adopt it in the

first

quarter of

2017.

We will adopt the new standard effective

December

31,

2017,

which is the

first

day of our

2018

fiscal year. The new standard also permits

two

methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). We currently anticipate adopting the standard using the modified retrospective method. We are still in the process of completing our analysis on the impact this guidance will have on our Consolidated Financial Statements and related disclosures.