Note 2 - Business Acquisitions, Goodwill and Purchased Intangible Assets

9 Months Ended

Sep. 29, 2018

Notes to Financial Statements

Business Combination Disclosure [Text Block]

2. Business Acquisitions, Goodwill and Purchased Intangible Assets

Kita

On

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 pins 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 during the

nine

months ended

September 30, 2017.

No

acquisition related costs were incurred during the

nine

months ended

September 29, 2018.

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

805,

Business Combinations

. 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 and at

September 29, 2018

was estimated by using the Monte Carlo simulation model. Adjustments to the fair value of contingent consideration are reflected in selling, general, and administrative expense in our condensed consolidated statements of income. The contingent consideration payable has been classified as level

3

in the fair value hierarchy. See Note

3

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

three

-tier fair value hierarchy. The fair value of the contingent consideration is recorded in our condensed consolidated balance sheets in current other accrued liabilities.

The following table presents the changes in fair value of contingent consideration during the year ended

December 30, 2017,

and the

nine

-month period ended

September 29, 2018 (

in thousands

):

	Fair Value of Contingent Consideration
Balance, December 31, 2016	$	-
Fair value of consideration at acquisition date		823
Mark-to-market adjustments charged to expense		1,423
Impact of currency exchange		7
Balance, December 30, 2017		2,253
Mark-to-market adjustments charged to expense		657
Settlement of contingent consideration		(1,500	)
Impact of currency exchange		60
Balance, September 29, 2018	$	1,470

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 which represented the difference between the Acquisition consideration and the fair value of the identifiable net assets and was allocated to our ITS operating segment.

Goodwill and Intangible Assets

Changes in the carrying value of goodwill during the year ended

December 30, 2017,

and the

nine

-month period ended

September 29, 2018

were as follows (

in thousands

):

	Goodwill
Balance, December 31, 2016	$	58,849
Additions, net		2,654
Impact of currency exchange		4,110
Balance, December 30, 2017		65,613
Impact of currency exchange		(1,034	)
Balance, September 29, 2018	$	64,579

Purchased intangible assets, subject to amortization are as follows (

in thousands

):

	September 29, 2018						December 30, 2017
					Remaining Weighted
					Average
	Gross				Amort		Gross
	Carrying		Accum.		Period		Carrying		Accum.
	Amount		Amort.		(in years)		Amount		Amort.
Developed technology	$	20,632	$	14,468		2.7	$	20,780	$	12,623
Customer relationships		7,877		5,572		2.3		7,934		4,838
Trade names		6,088		1,301		11.5		6,185		972
Covenant not-to-compete		310		54		8.3		313		31
Total intangible assets	$	34,907	$	21,395			$	35,212	$	18,464

Amortization expense related to intangible assets was approximately

$1.0

 million in the

third

quarter of fiscal

2018

and

$3.1

 million in the

first

nine

months of fiscal

2018.

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.

Changes in the carrying values of these intangible assets are a result of the impact of fluctuations in currency exchange rates.