2.	Business Acquisitions, Goodwill and Other Purchased Intangible Assets

Kita

January 4, 2017,

we completed the acquisition of all the outstanding share capital of Kita Manufacturing Co., LTD. and Kita USA, Inc. (together “Kita”) (the “Acquisition”). Kita, headquartered in Osaka, Japan, and with operations in Attleboro, Massachusetts and Kyoto, Japan, designs, manufactures and sells spring probe contacts used in final test contactors, probe cards, PCB test boards and connectors sold to customers worldwide. The acquisition of Kita was a strategic transaction to expand our total available market, extend our market leadership and broaden our product offerings. In connection with the Acquisition we incurred acquisition related costs, which were expensed to selling, general and administrative, that totaled

$1.0

million and

$0.9

million during the

first

nine

months of

September 30, 2017

and

September 24, 2016,

respectively.

The Acquisition has been accounted for in conformity with FASB Accounting Standards Codification

805,

Business Combinations

(“ASC

805”

). The purchase price for Kita was funded primarily by cash reserves and consisted of the following

(

in thousands

Cash paid to Kita shareholders	$	15,000
Fair value of contingent consideration		823
Total purchase price	$	15,823

The contingent consideration represents the estimated fair value of future payments totaling up to

$3.0

million we would be required to make as a result of Kita achieving annual revenue and EBITDA targets in

2017

and

2018

as specified in the purchase agreement for the Acquisition. The fair value of the contingent consideration recognized on the acquisition date was estimated by using the

Monte Carlo simulation model

. The contingent consideration payable has been classified as level

in the fair value hierarchy. See Note

“Financial Instruments Measured at Fair Value” for additional information on the

three

-tier fair value hierarchy.

Contingent consideration is recorded in our condensed consolidated balance sheets in other accrued liabilities. Adjustments to the fair value of contingent consideration are reflected in selling, general, and administrative expense in our condensed consolidated statements of income and are included in the acquisition related costs above.

The following table presents the fair value of contingent consideration from the date of acquisition through

September 30, 2017 (

in thousands

Fair Value of

Mark to Market

Fair Value of

Consideration

Settlement of

Adjustment

Impact of

Consideration at

Recognized at

Contingent

Charged to

Currency

September 30,

Acquisition Date

Consideration

Expense

Exchange

2017

Kita

823

668

1,500

We have

not

finalized the purchase price allocation. Accordingly, the preliminary purchase price allocation shown below could materially change as the fair values of the tangible and intangible assets acquired and liabilities assumed and the related income tax effects are finalized during the remainder of the measurement period (which will

not

exceed

months from the Acquisition closing date). The Acquisition was nontaxable to Cohu and certain of the assets acquired, including goodwill and intangibles, will

not

be deductible for tax purposes. The acquired assets and liabilities of Kita were recorded at their respective fair values

including an amount for goodwill representing the difference between the Acquisition consideration and the fair value of the identifiable net assets.

The table below summarizes the assets acquired and liabilities assumed as of

January 4, 2017

(

in thousands

Current assets, including cash received	$	10,491
Property, plant and equipment		12,751
Other assets		2,291
Intangible assets subject to amortization		2,100
Goodwill		3,142
Total assets acquired		30,775
Liabilities assumed		(14,952	)
Net assets acquired	$	15,823

The preliminary allocation of the intangible assets subject to amortization is as follows

(in thousands)

			Average
	Estimated		Useful Life
Description	Fair Value		(in years)
Developed technology	$	700		8
Customer relationships		600		4
Covenant not-to-compete		300		10
Product backlog		100		1
Trade names		400		5
	$	2,100

The preliminary value assigned to the developed technology was determined by using the multi-period excess earnings method under the income approach. Developed technology, which comprises products that have reached technological feasibility, includes the products in Kita

’s product line. The revenue estimates used to value the developed technology were based on estimates of relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by Kita and its competitors. The estimated cash flows were based on revenues for the developed technology net of operating expenses and net of contributory asset charges. The discount rate utilized to discount the net cash flows of the developed technology to present value was based on the risk associated with the respective cash flows taking into consideration the perceived risk of the technology relative to the other acquired assets, the weighted average cost of capital, the internal rate of return, and the weighted average return on assets.

The value assigned to customer relationships was determined by using the with and without method under the income approach, which analyzes the difference in discounted cash flows generated with the customer relationships in place compared to the discounted cash flows generated without the customer relationships in place.

The value assigned to the covenant

not

-to-compete was estimated based upon the with and without method of the income approach. Specifically, the present value of the differential of the projected cash flows with and without the covenant in place was measured utilizing the appropriate expected rate of return.

The value assigned to backlog acquired was estimated based upon the contractual nature of the backlog as of the acquisition date, using the income approach to discount back to present value the cash flows attributable to the backlog.

The value assigned to trade names was estimated using the relief-from-royalty method of the income approach. This approach is based on the assumption that in lieu of ownership, a company would be willing to pay a royalty in order to exploit the related benefits of this intangible asset.

Kita

’s results of operations were included in, but

not

material to, Cohu’s consolidated statements of income and comprehensive income commencing

January 4, 2017

and Kita’s net sales for the

three

- and

nine

-month periods ended

September 30, 2017

were

$5.3

million and

$14.4

million, respectively. Prior to the acquisition by Cohu, Kita’s net sales for the

three

- and

nine

-month periods ended

September 24, 2016

were

$4.3

million and

$12.9

million, respectively.

Goodwill and Intangible Assets

Changes in the carrying value of goodwill during the year ended

December 31, 2016

and the

nine

-month period ended

September 30, 2017

were as follows

(

in thousands

	Goodwill
Balance, December 26, 2015	$	60,264
Impact of currency exchange		(1,415	)
Balance, December 31, 2016		58,849
Additions, net		3,142
Impact of currency exchange		3,492
Balance, September 30, 2017	$	65,483

Purchased intangible assets, subject to amortization are as follows

(

in thousands

)

	September 30, 2017						December 31, 2016
					Remaining
					Weighted
	Gross				Average		Gross
	Carrying		Accum.		Amort.		Carrying		Accum.
	Amount		Amort.		Period (in years)		Amount		Amort.
Developed technology	$	20,785	$	11,977		3.6	$	19,195	$	9,597
Customer relationships		7,935		4,582		3.3		6,996		3,644
Trade names		6,139		849		12.4		5,353		468
Covenant not-to-compete		312		23		9.3		-		-
Backlog		104		78		0.3		-		-
Total intangible assets	$	35,275	$	17,509			$	31,544	$	13,709

Amortization expense related to intangible assets was approximately

$1.1

million in the

third

quarter of fiscal

2017

and

$3.2

million in the

first

nine

months of fiscal

2017.

Amortization expense related to intangible assets was approximately

$1.8

million in the

third

quarter of fiscal

2016

and

$5.4

million in the

first

nine

months of fiscal

2016.

The year-over-year decrease in amortization is a result of certain intangible assets that became fully amortized in the prior year. Changes in the carrying values of these intangible assets are a result of the impact of fluctuations in currency exchange rates.