Business Acquisitions

January 4, 2017,

we completed

the acquisition of all the outstanding stock 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, during the years ended

December 30, 2017,

and

December 31, 2016,

we incurred acquisition related costs, which were expensed to selling, general and administrative, totaling

$0.4

million and

$1.8

million, respectively.

The Acquisition has been accounted for in conformity with FASB ASC

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 that 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 and at

December 30, 2017,

was estimated using the Monte Carlo simulation model. Adjustments to the fair value of contingent consideration are reflected in selling, general, and administrative expense in our consolidated statements of income. We have classified the contingent consideration payable 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.

The

2017

revenue and EBITDA targets were achieved and a payment of

$1.5

million will be made in early

2018.

The fair value of the contingent consideration is recorded in our consolidated balance sheets in both other current accrued liabilities and long term other accrued liabilities.

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

December 30, 2017 (

in thousands

Fair Value of

Mark-to-Market

Consideration

Settlement of

Adjustments

Impact of

Fair Value of

Recognized at

Contingent

Charged to

Currency

Consideration at

Acquisition Date

Consideration

Expense

Exchange

December 30, 2017

823

1,423

2,253

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 and was allocated to our ITS operating segment.

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		2,397
Intangible assets subject to amortization		2,100
Goodwill		2,654
Total assets acquired		30,393
Liabilities assumed		(14,570	)
Net assets acquired	$	15,823

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

(in thousands)

	Estimated		Useful Life
	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
Total intangible assets	$	2,100

Acquired intangible assets reported above are being amortized using the straight-line method over their estimated useful lives.

The 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.

Pro forma Information

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

twelve

months ended

December 30,

2017,

were

$19.2

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

twelve

months ended

December 31,

2016,

were

$16.6

million.