1.	Summary of Significant Accounting Policies

Basis of Presentation

Our fiscal years are based on a

- or

-week period ending on the last Saturday in

December.

The condensed consolidated balance sheet at

December

31,

2016

has been derived from our audited financial statements at that date. The interim condensed consolidated financial statements as of

March

25,

2017

(also referred to as “the

first

quarter of fiscal

2017”

and “the

first

three

months of fiscal

2017”)

and

March

26,

2016

(also referred to as “the

first

quarter of fiscal

2016”

and “the

first

three

months of fiscal

2016”)

are unaudited. However, in management’s opinion, these financial statements reflect all adjustments (consisting only of normal, recurring items) necessary to provide a fair presentation of our financial position, results of operations and cash flows for the periods presented. The

first

quarter of fiscal

2017

was comprised of

weeks and

2016

was comprised of

weeks.

Our interim results are not necessarily indicative of the results that should be expected for the full year. For a better understanding of Cohu, Inc. and our financial statements, we recommend reading these interim condensed consolidated financial statements in conjunction with our audited financial statements for the year ended

December

31,

2016,

which are included in our

2016

Annual Report on Form

-K, filed with the U. S. Securities and Exchange Commission (“SEC”). In the following notes to our interim condensed consolidated financial statements, Cohu, Inc. is referred to as “Cohu”, “we”, “our” and “us”.

Certain prior year amounts have been restated as a result of our early adoption of 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

was for fiscal years beginning after

December

15,

2016,

earlier adoption was permitted and we elected to adopt ASU

2016

during the

fourth

quarter of fiscal

2016.

As part of our adoption of ASU

2016

we elected to eliminate the use of an estimated forfeiture rate and recognize actual forfeitures as they occur. This amendment was adopted on a modified retrospective basis and, as a result, our share-based compensation for the

first

quarter of fiscal

2016

was revised and is approximately

$0.2

million lower, under the new method, than what was previously reported.

Discontinued Operations

June

10,

2015,

we sold our microwave communications equipment segment, Broadcast Microwave Services, Inc. (“BMS”). See Note

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

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 both

March

25,

2017

and

December

31,

2016,

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

March

25,

2017,

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

may

result in changes to our estimates regarding collectability.

Segment Information

We applied the provisions of Accounting Standards Codification (“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 and the financial information disclosed herein materially represents all of the financial information related to our semiconductor equipment segment.

Goodwill, Other Intangible Assets and

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 have determined there was no 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

March

25,

2017

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.

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

three

months ended

March

25,

2017

and

March

26,

2016

we recognized foreign exchange losses of

$1.3

million and

$0.5

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

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) 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.

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

(in thousands)

	Three Months Ended
	March 25,			March 26,
	2017			2016
Cost of sales	$	83		$	93
Research and development		316			294
Selling, general and administrative		1,318			1,350
Total share-based compensation		1,717			1,737
Income tax benefit		(75	)		(40	)
Total share-based compensation, net	$	1,642		$	1,697

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 (loss) per share includes the dilutive effect of common shares potentially issuable upon the exercise of stock options, vesting of outstanding restricted stock and performance 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 (loss) 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

three

months ended

March

25,

2017,

approximately

258,000

shares of common stock were excluded from the computation.

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

(in thousands)

	Three Months Ended
	March 25,		March 26,
	2017		2016
Weighted average common shares		26,978		26,317
Effect of dilutive stock options		1,274		-
		28,252		26,317

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, kit and contactor 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. At

March

25,

2017,

we had deferred revenue totaling approximately

$5.7

million and deferred profit of

$4.8

million. At

December

31,

2016,

we had deferred revenue totaling approximately

$9.3

million and deferred profit of

$6.9

million. The periodic decrease is a result of the recognition of previously deferred revenue.

A small number of customers historically have been responsible for a significant portion of our net sales. Significant customer concentration information is as follows:

	Three Months Ended
	March 25,		March 26,
	2017		2016

Customers individually accounting for more than 10% of net sales		one		two

Percentage of net sales		20%		32%

Comprehensive Loss

Our accumulated other comprehensive loss balance totaled approximately

$23.9

million and

$27.9

million at

March

25,

2017

and

December

31,

2016,

respectively, and was attributed to all non-owner changes in stockholders’ equity and consists of, on an after-tax basis where applicable, foreign currency adjustments resulting from the translation of certain of our subsidiary accounts where the functional currency is not the U.S. Dollar

and adjustments related to postretirement benefits. Reclassification adjustments from accumulated other comprehensive income

during the

first

three

months of fiscal

2017

and

2016

were not significant.

Retiree Medical Benefits

We provide post-retirement health benefits to certain executives and directors under a noncontributory plan. The net periodic benefit cost incurred during the

first

three

months of fiscal

2017

and

2016

was not significant.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements –

July

2015,

the Financial Accounting Standards Board (“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.

The adoption of this authoritative guidance did not impact our Consolidated Financial Statements.

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.

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. Based on our preliminary review of our customer agreements, we currently expect that our revenue will continue to be recognized at a point in time, generally upon shipment of products to customers, consistent with our current revenue recognition model. In certain instances, when customer payment terms provide that a minority portion (e.g. up to

20%)

of the equipment purchase price be paid only upon customer acceptance, recognition of revenue

may

occur sooner under the new model.