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 30, 2017,

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

June 30, 2018, (

also referred to as “the

second

quarter, of fiscal

2018”

and “the

first

six

months of fiscal

2018”

) and

June 24, 2017, (

also referred to as “the

second

quarter of fiscal

2017”

and “the

first

six

months of fiscal

2017”

) 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

three

- and

six

-month periods ended

June 30, 2018,

were comprised of

and

weeks, respectively. The

three

- and

six

-month periods ended

June 24, 2017,

were comprised of

and

weeks, respectively.

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 30, 2017,

which are included in our

2017

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”.

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

$0.2

million at both

June 30, 2018

and

December 30, 2017.

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

June 30, 2018,

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 net realizable value. 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 net realizable values are below our costs.

Inventories by category were as follows (

in thousands

	June 30,		December 30,
	2018		2017
Raw materials and purchased parts	$	28,810	$	27,918
Work in process		23,691		25,130
Finished goods		10,635		9,037
Total inventories	$	63,136	$	62,085

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)

	June 30,			December 30,
	2018			2017
Land and land improvements	$	7,971		$	8,017
Buildings and building improvements		14,173			13,779
Machinery and equipment		45,990			45,333
		68,134			67,129
Less accumulated depreciation and amortization		(34,597	)		(32,957	)
Property, plant and equipment, net	$	33,537		$	34,172

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, which are Digital Test Handlers (DTH), Analog Test Handlers (ATH) and Integrated Test Solutions (ITS), 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, 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

impairment as of

October

2017

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

June 30, 2018,

we do

not

believe that circumstances have occurred that indicate impairment of our goodwill is more-likely-than-

not.

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 Remeasurement and 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. During the

three

and

six

months ended

June 30, 2018,

we recognized foreign exchange gains of

$3.0

million and

$1.5

million, respectively, in our condensed consolidated statements of income. During the

three

and

six

months ended

June 24, 2017,

we recognized foreign exchange losses of

$1.2

million and

$2.5

million in our condensed consolidated statements of income, respectively. 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. 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						Six Months Ended
	June 30,			June 24,			June 30,			June 24,
	2018			2017			2018			2017
Cost of sales	$	162		$	121		$	283		$	204
Research and development		395			262			744			578
Selling, general and administrative		1,391			1,376			2,590			2,694
Total share-based compensation		1,948			1,759			3,617			3,476
Income tax benefit		(126	)		(249	)		(440	)		(322	)
Total share-based compensation, net	$	1,822		$	1,510		$	3,177		$	3,154

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

and

six

months ended

June 30, 2018,

options to issue approximately

3,000

and

19,000

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

three

and

six

months ended

June 24, 2017,

options to issue approximately

46,000

and

152,000

shares of 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)

	Three Months Ended				Six Months Ended
	June 30,		June 24,		June 30,		June 24,
	2018		2017		2018		2017
Weighted average common shares		28,893		27,708		28,747		27,343
Effect of dilutive securities		758		1,017		844		1,145
		29,651		28,725		29,591		28,488

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

Adoption of New Revenue Accounting Standard

We adopted ASC Topic

606,

Revenue from Contracts with Customers

(“ASC

606”

), on

December 31, 2017,

the

first

day of our

2018

fiscal year. We elected to implement the new standard using the modified retrospective method of adoption which only applies to those contracts which were

not

completed as of

December 31, 2017.

Revenues for the quarter ended

June 30, 2018

and the year ended

June 30, 2018,

have been accounted for using ASC

606

and the prior year quarter ended

June 24, 2017

and year ended

June 24, 2017,

have

not

been adjusted. Upon adoption of ASC

606,

we recorded a cumulative-effect adjustment to retained earnings of

$1.1

million on

December 31, 2017,

which represents the impact of ASC

606

on our deferred revenue.

Material changes recorded in connection with the cumulative-effect adjustment were as follows (

in thousands

	Balance at		Adjustments			Balance at
	December 30,		due to adoption			December 31,
Financial Statement Line Item	2017		of ASC 606			2017

Deferred profit	$	6,608	$	(1,258	)	$	5,350
Income taxes payable	$	2,159	$	201		$	2,360
Retained earnings	$	150,726	$	1,057		$	151,783

The adoption of ASC

606

had

impact to cash used in net operating, investing or financing activities in our condensed consolidated statements of cash flows. The following table presents the amounts by which financial statement line items included in our condensed consolidated statements of income for the

three

and

six

months ended

June 30, 2018

and our condensed consolidated balance sheet at

June 30, 2018

were materially affected due to the adoption of ASC

606

(in thousands

	For the Three Months Ended June 30, 2018
			Balances
			without adoption		Effect of
Condensed Consolidated Statements of Income	As Reported		of ASC 606		Change

Net sales	$	99,817	$	99,556	$	261
Income tax provision	$	2,468	$	2,213	$	255
Net income	$	11,648	$	11,642	$	6
Income per share:
Basic:	$	0.40	$	0.40	$	(0.00	)
Diluted:	$	0.39	$	0.39	$	(0.00	)

	For the Six Months Ended June 30, 2018
			Balances
			without adoption		Effect of
Condensed Consolidated Statements of Income	As Reported		of ASC 606		Change

Net sales	$	194,967	$	192,218	$	2,749
Income tax provision	$	4,595	$	4,096	$	499
Net income	$	19,770	$	17,520	$	2,250
Income per share:
Basic:	$	0.69	$	0.61	$	0.08
Diluted:	$	0.67	$	0.59	$	0.08

			Balances
			without adoption		Effect of
Condensed Consolidated Balance Sheets*	As Reported		of ASC 606		Change

Deferred profit	$	1,709	$	5,884	$	(4,175	)
Retained earnings	$	168,040	$	164,733	$	3,307

* Balance sheet line items include the cumulative-effect adjustment recorded on

December 31, 2017.

Under ASC

606

our revenue will continue to be recognized at a point in time when the performance obligation has been satisfied and transfer of control has occurred, typically, this occurs upon shipment of products to our customers. In certain instances, when customer payment terms provide that a minority portion of the equipment purchase price be paid only upon customer acceptance, recognition of revenue

may

occur sooner under ASC

606.

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 the obligations under the terms of a contract with our customers are satisfied; generally, this occurs with the transfer of control of our systems, non-system products or services. In circumstances where control is

not

transferred until destination or acceptance, we defer revenue recognition until such events occur.

Revenue for established products that have previously satisfied a customer’s acceptance requirements is generally recognized upon shipment. 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 and cost of sales are 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 over time as we transfer control to our customer for the related contract or upon completion of the services if they are short-term in nature. Spares, contactor and kit revenue is generally recognized upon shipment.

Certain of our equipment sales have multiple performance obligations. These arrangements involve the delivery or performance of multiple performance obligations, and transfer of control of performance obligations

may

occur at different points in time or over different periods of time. For arrangements containing multiple performance obligations, the revenue relating to the undelivered performance obligation is deferred using the relative standalone selling price method utilizing estimated sales prices until satisfaction of the deferred performance obligation.

Unsatisfied performance obligations primarily represent contracts for products with future delivery dates and with an original expected duration of

one

year or less. As allowed under ASC

606,

we have opted to

not

disclose unsatisfied performance obligations as these contracts have original expected durations of less than

one

year.

We generally sell our equipment with a product warranty. The product warranty provides assurance to customers that delivered products are as specified in the contract (an “assurance-type warranty”). Therefore, we account for such product warranties under ASC

460,

Guarantees

(ASC

460

), and

not

as a separate performance obligation.

The transaction price reflects our expectations about the consideration we will be entitled to receive from the customer and

may

include fixed or variable amounts. Fixed consideration primarily includes sales to customers that are known as of the end of the reporting period. Variable consideration includes sales in which the amount of consideration that we will receive is unknown as of the end of a reporting period. Such consideration primarily includes sales made to certain customers with cumulative tier volume discounts offered. Variable consideration arrangements are rare; however, when they occur, we estimate variable consideration as the expected value to which we expect to be entitled. Included in the transaction price estimate are amounts in which it is probable that a significant reversal of cumulative revenue recognized will

not

occur when the uncertainty associated with the variable consideration is subsequently resolved. Variable consideration that does

not

meet revenue recognition criteria is deferred.

Our contracts are typically less than

one

year in duration and we have elected to use the practical expedient available in ASC

606

to expense cost to obtain contracts as they are incurred because they would be amortized over less than

one

year.

Accounts receivable represents our unconditional right to receive consideration from our customer. Payments terms do

not

exceed

one

year from the invoice date and therefore do

not

include a significant financing component. To date, there have been

material impairment losses on accounts receivable. There were

material contract assets or contract liabilities recorded on the condensed consolidated balance sheet in any of the periods presented.

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

June 30, 2018,

we had deferred revenue totaling approximately

$3.4

million, current deferred profit of

$1.7

million and deferred profit expected to be recognized after

one

year included in noncurrent other accrued liabilities of

$1.2

million. At

December 30, 2017,

we had deferred revenue totaling approximately

$10.4

million, current deferred profit of

$6.6

million and deferred profit expected to be recognized after

one

year included in noncurrent other accrued liabilities of

$0.8

million. Our balances at

June 30, 2018,

include a

$1.1

million beginning retained earnings adjustment as result of our adoption of ASC

606

on the

first

day of fiscal

2018.

The periodic change is primarily a result of increases and decreases in deferrals of revenue associated with product shipments made to our customers in accordance with our revenue recognition policy.

Net sales by type are as follows

(in thousands):

	Three Months Ended		Six Months Ended
	June 30, 2018		June 30, 2018
Systems	$	55,663	$	110,568
Non-systems		44,154		84,399
Net sales	$	99,817	$	194,967

Revenue by geographic area based upon product shipment destination

(

in thousands

	Three months ended		Six months ended
	June 30, 2018		June 30, 2018
China	$	19,140	$	39,383
United States		15,662		30,140
Malaysia		13,048		24,857
Philippines		9,916		20,462
Rest of the World		42,051		80,125
Net sales	$	99,817	$	194,967

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						Six Months Ended
	June 30,			June 24,			June 30,			June 24,
	2018			2017			2018			2017

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

Percentage of net sales		11.3	%		20.7	%		10.6	%		20.4	%

Accumulated Other Comprehensive Loss

Our accumulated other comprehensive loss balance totaled approximately

$20.7

million and

$17.8

million at

June 30, 2018

and

December 30, 2017,

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 loss during the

first

six

months of fiscal

2018

and

2017

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

six

months of fiscal

2018

and

2017

was

not

significant.

Discontinued Operations

2015,

we sold all of the outstanding stock of our mobile microwave communication equipment segment, Broadcast Microwave Services (BMS), for

$4.9

million in cash and up to

$2.5

million of contingent cash consideration. Our decision to sell this non-core business resulted from management’s determination that they were

longer a strategic fit within our organization.

As part of the divestiture of BMS we recorded a contingent consideration receivable that was 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. The contingent consideration represented the estimated fair value of future payments we are due based on BMS achieving annual revenue targets in

2016

and

2017

as specified in the sale agreement. We determined the fair value of the contingent consideration using a Monte Carlo simulation model with changes to the fair value of the contingent consideration being recognized in discontinued operations. During

2017,

BMS failed to meet the necessary revenue targets and the contingent consideration receivable was written-off. Unless otherwise indicated, all amounts herein relate to continuing operations.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

March 2017,

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

No.

2017

, Compensation – Retirement Benefits (Topic

715

) – Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,

which provides additional guidance on the presentation of net periodic pension and postretirement benefit costs in the income statement and on the components eligible for capitalization. The amendments in this guidance require that an employer report the service cost component of the net periodic benefit costs in the same income statement line item as other compensation costs arising from services rendered by employees during the period. The non-service-cost components of net periodic benefit costs are to be presented in the income statement separately from the service cost components and outside a subtotal of income from operations. The guidance also allows for the capitalization of the service cost components, when applicable (i.e., as a cost of internally manufactured inventory or a self-constructed asset). The guidance is effective for annual periods beginning after

December 15, 2017,

including interim periods within those annual periods. The amendments in this guidance are to be applied retrospectively. The adoption of ASU

2017

did

not

have a material impact on our condensed 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 combination. This guidance is effective for annual periods beginning after

December 15, 2017.

The adoption of ASU

2017

did

not

have a material impact on our condensed 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.

The adoption of ASU

2016

did

not

have a material impact on our condensed consolidated financial statements.

October 2016,

the FASB issued ASU

2016

16,

Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory.

ASU

2016

changes the timing of income tax recognition for an intercompany sale of assets excluding inventory. ASU

2016

requires the seller’s tax effects and the buyer’s deferred taxes to be recognized immediately upon the sale instead of deferring accounting for the income tax implications until the assets are sold to a

third

party or recovered through use. ASU

2016

is effective for fiscal years beginning after

December 15, 2017

including interim periods within the year of adoption. The adoption of ASU

2016

did

not

have a material impact on our condensed consolidated financial statements.

August 2016,

the FASB issued ASU

No.

2016

, 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. The adoption of ASU

2016

did

not

have a material impact on our condensed consolidated financial statements.

Recently Issued Accounting Pronouncements

February 2018,

the FASB issued ASU

2018

02,

Income Statement-Reporting Comprehensive Income

to give companies the option to reclassify the income tax effects on items within accumulated other comprehensive income resulting from U.S. tax reform to retained earnings. ASU

2018

is effective for fiscal years beginning after

December 15, 2018,

including interim periods within those years. Early adoption is permitted. We are currently assessing and have

not

yet determined the impact ASU

2018

may

have on our condensed consolidated financial statements.

January 2017,

the FASB issued ASU

No.

2017

04,

Simplifying the Test for Goodwill Impairment

. It eliminates Step

from the goodwill impairment test and requires an entity to 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 condensed 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 commenced our assessment of Topic

842

during the

second

quarter of

2018

and developed a comprehensive project plan that includes evaluating Cohu’s lease portfolio, analyzing the standard's impact on various types of lease contracts and identifying reporting requirements of the new standard. We are in the process of identifying and implementing appropriate changes to our business processes, systems and controls to support lease accounting and disclosure under Topic

842.

We are still completing our analysis on the impact this guidance will have on our condensed consolidated financial statements and related disclosures, but recognizing the lease liabilities and related right-of-use assets will have a material impact on our balance sheet.