2.	Business Acquisitions

Pursuant to the Agreement and Plan of Merger (the “Merger Agreement”) dated as of

May 7, 2018,

among Cohu, Inc., a Delaware corporation (“Cohu”), Xcerra Corporation, a Massachusetts corporation (“Xcerra”), and Xavier Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary of Cohu (“Merger Sub”), Merger Sub merged with and into Xcerra (the “Merger”), with Xcerra surviving such merger as a wholly owned subsidiary of Cohu. The Merger was effective on

October 1, 2018 (

“the Effective Time”). At the Effective Time, each share of Xcerra Common Stock issued and outstanding immediately prior to the Effective Time (other than dissenting shares and shares held by Cohu, Merger Sub, Xcerra or any direct or indirect wholly owned subsidiary of Cohu or Xcerra), were converted into the right to receive, in the aggregate for all shares of Xcerra Common Stock, consideration, which totaled approximately

$794.4

million as of the Effective Time.

Xcerra is comprised of

four

businesses in the semiconductor and electronics manufacturing test markets: atg-Luther & Maelzer, Everett Charles Technologies, LTX-Credence and Multitest. The combination of these businesses creates a company with a broad spectrum of semiconductor and PCB test expertise that drives innovative new products and services, and the ability to deliver to customers fully integrated semiconductor test cell solutions. Xcerra addresses the broad, divergent requirements of the mobility, industrial, automotive and consumer end markets, offering a comprehensive portfolio of solutions and technologies, and a global network of strategically deployed applications and support resources. The acquisition of Xcerra was a strategic transaction to expand our total available market, extend our market leadership and broaden our product offerings.

Cohu financed the Merger, including all related fees and expenses, with the following:

●

$160.5

million cash from our combined balance sheets;

●

The incurrence of

$350.0

million from the Credit Facility, as described below;

●

The issuance of

11,776,149

shares of Cohu common stock; and

●

The issuance of

529,995

assumed RSUs to Xcerra employees, of which

$0.8

million of the fair value of the assumed RSUs was attributed to pre-merger services.

October 1, 2018,

Cohu entered into a Credit Agreement with Cohu, as borrower, certain of its subsidiaries as guarantor subsidiaries, the financial institutions party thereto from time to time as lenders, and Deutsche Bank AG New York Branch, as administrative agent and collateral agent, providing for a

$350.0

million Credit Facility (the “Credit Facility”), and borrowed the full amount. Loans under the Credit Facility amortize in equal quarterly installments equal to

0.25%

of the original principal amount thereof, with the balance payable at maturity. Subject to certain exceptions and thresholds, the Credit Facility will also require mandatory prepayments in connection with (i) excess cash flow, (ii) non-ordinary course asset sales and other dispositions and (iii) the issuance of certain debt obligations, among other things. Cohu has the right to prepay loans under the Credit Agreement in whole or in part at any time, without premium or penalty other than a

1.00%

prepayment fee in connection with certain “repricing” transactions on or before the

sixth

month anniversary of the closing date of the Credit Agreement. Amounts repaid in respect of loans under the Credit Facility

may

not

be reborrowed. All outstanding principal and interest in respect of the Credit Facility must be repaid on or before

October 1, 2025.

The loans under the Term Loan Facility bear interest, at Cohu’s option, at a floating annual rate equal to LIBOR plus a margin of

3.00%.

The lender

may

accelerate the payment terms of the Credit Agreement upon the occurrence of certain events of default set forth therein, which include: the failure of Cohu to make timely payments of amounts due under the Credit Agreement, the failure of the Cohu to adhere to the representations and covenants set forth in the Credit Agreement or to provide required notices, upon the event that related collateral agreements become ineffective, upon the event that certain legal judgments are entered against Cohu, the insolvency of Cohu, or upon the change of control of Cohu.

Immediately prior to the Effective Time, each Xcerra RSU that was vested was cancelled and the holder received cash and share consideration for the outstanding shares. Each unvested RSU held by employees of Xcerra were assumed by Cohu and converted into an RSU representing the number of whole shares of Cohu common stock based on a conversion formula resulting in the number of assumed RSUs described above.

The acquisition method of accounting is based on ASC

805,

Business Combinations (“ASC

805”

)

, and uses the fair value concepts defined in ASC

820,

Fair Value Measurement (“ASC

820”

)

. The purchase price allocation described herein is preliminary and is based on the information that was available to make estimates of the fair value and

may

change as further information becomes available and additional analyses are completed. While we believe such information provides a reasonable basis for estimating the fair values, we

may

obtain more information and evidence during the measurement period that result in changes to the estimated fair value amounts. The measurement period ends on the earlier of

one

year after the acquisition date or the date we receive the information about the facts and circumstances that existed at the acquisition date. Subsequent adjustments, if necessary, will be recognized during the period in which the amounts are determined. These refinements include: (

) changes in the estimated fair value of certain intangible assets acquired; and (

) changes in deferred tax assets and liabilities related to the fair value estimates.

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 Xcerra were recorded at their respective fair values including an amount for goodwill which represents the purchase price paid in excess of the fair value of net tangible and intangible assets acquired, and is attributable primarily to expected synergies, economies of scale and the assembled workforce of Xcerra. Goodwill has been allocated to our THG, STG, ISG and PTG operating segments.

ASC

805

requires, among other things, that most assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. In addition, ASC

805

requires that the consideration transferred be measured at the date the merger is completed at the then-current market price. The market price of the shares of Cohu Common Stock at the Effective Time was

$25.10

which was based upon the closing price of shares of Cohu Common Stock on the NASDAQ Global Select Market on Friday,

September 28, 2018,

the last day of trading prior to the Effective Time.

ASC

820

defines the term “fair value” and sets forth the valuation requirements for any asset or liability measured at fair value, expands related disclosure requirements and specifies a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair value measurements. Fair value is defined in ASC

820

as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” This is an exit price concept for the valuation of the asset or liability. In addition, market participants are assumed to be buyers and sellers in the principal (or the most advantageous) market for the asset or liability. Fair value measurements for an asset assume the highest and best use by these market participants. As a result of these standards, Cohu

may

be required to record the fair value of assets which are

not

intended to be used or sold and/or to value assets at fair values that do

not

reflect Cohu’s intended use of those assets. Many of these fair value measurements can be highly subjective, and it is possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts.

Under ASC

805,

acquisition-related transaction costs (e.g., advisory, legal, investment banking and other professional fees) are

not

included as a component of consideration transferred but are accounted for as expenses in the periods in which such costs are incurred. Total Merger-related transaction costs, that exclude other costs related to employee termination and restructuring, incurred by Cohu were

$9.8

million in the year ended

December 29, 2018.

Severance and other separation payments made to certain executive officers of Xcerra related to change-in-control with double trigger provisions in their existing employment agreements totaled

$6.9

million in the year ended

December 29, 2018.

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

October 1, 2018 (

in thousands

Current assets, including cash received	$	375,990
Property, plant and equipment		40,729
Other assets		2,109
Intangible assets		321,160
Goodwill		179,263
Total assets acquired		919,251
Liabilities assumed		(124,821	)
Net assets acquired	$	794,430

We recorded a

$19.6

million step-up of inventory to its fair value as of the acquisition date based on the preliminary valuation.

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

(in thousands)

			Weighted
			Average
	Estimated		Useful Life
	Fair Value		(years)
Developed technology	$	194,600	7.8
Customer relationships		65,890	10.6
In-process technology		36,360	indefinite
Product backlog		6,410	0.8
Trade names		16,800	11.0
Favorable leases		1,100	5.5
Total intangible assets	$	321,160

Acquired intangible assets reported above are being amortized using the straight-line method over their estimated useful lives which approximates the pattern of how the economic benefit is expected to be used. This includes amounts allocated to customer relationships because of anticipated high customer retention rates that are common in the semiconductor capital equipment industry.

The value assigned to 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 Xcerra’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 Xcerra and 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.

In-process research and development (“IPR&D”) represents the estimated fair value assigned to research and development projects acquired in a business combination that have

not

been completed at the date of acquisition and which have

alternative future use. IPR&D is initially accounted for as an indefinite-lived intangible asset. Once a project reaches technological feasibility amounts capitalized related to the project are reclassified to developed technology and the intangible asset begins to be amortized over its estimated useful life. For the IPR&D, additional research and development will be required to assess technological feasibility.

The value assigned to backlog acquired was estimated based upon the contractual nature of the backlog as of

October 1, 2018,

using the income approach to discount back to present value the cash flows attributable to the backlog.

The value assigned to trademarks and 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.

In our preliminary estimate of the fair value of Xcerra’s net assets, Cohu identified leases that appear to be at both favorable and unfavorable rates compared to current market rates. As a result, Cohu has recorded both favorable and unfavorable lease assets, which are being amortized to rent expense over the terms of the related lease. As of

December 29, 2018,

we have completed the analysis of all material lease agreements but are still in the process of gathering market rate data for other lease agreements and, as a result the preliminary net favorable lease asset presented above

may

change.

Unaudited Pro Forma Financial Information

The unaudited financial information in the table below summarizes the combined results of operations of Cohu and Xcerra on a pro forma basis, as though the companies had been combined as of

January 1, 2017.

The pro forma financial information is presented for informational purposes only and is

not

indicative of the results of operations that would have been achieved if the acquisition had taken place on

January 1, 2017.

The pro forma financial information for all periods presented also includes adjustments to, amortization charges for acquired intangible assets, adjustments to interest income, and related tax effects.

The pro forma financial information for the

twelve

months ended

December

29,

2018

combines our results and include the results of Xcerra subsequent to

October

2018,

the date of acquisition. The net sales and net loss attributable to Xcerra consolidated into our financial statements since the date of acquisition was

$94.4

million and (

$40.0

) million, respectively. The pro forma financial information for the

twelve

months ended

December

30,

2017,

combines our historical results for that period with the historical results of Xcerra for the

twelve

months ended

January 31, 2018.

The pro forma financial information for the

twelve

months ended

December

29,

2018,

combines our historical results for that period with the historical results of Xcerra for the

nine

months prior to acquisition.

The following table summarizes the unaudited pro forma financial information

(in thousands)

	Twelve Months Ended
	December 29,					December 30,
	2018					2017
	Reported			Pro Forma		Reported		Pro Forma

Net sales	$	451,768		$	771,314	$	352,704	$	808,255
Net income (loss) attributable to Cohu	$	(32,424	)	$	9,473	$	32,843	$	(29,545	)

Material nonrecurring adjustments to the pro forma financial information presented above include:

●

Elimination of

$12.0

million of deal-related costs incurred by Cohu and Xcerra during

2018

that would have been incurred in

2016

had the acquisition occurred on

January 1, 2017.

●

2018

restructuring charges totaling

$37.8

million related to the integration of Xcerra were assumed to have occurred in

2017.

●

Adjustments to

2017

and

2018

to present Xcerra’s fixtures services business as discontinued operations.

Kita Manufacturing

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 year ended

December 30, 2017

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

$0.4

million.

The Acquisition has been accounted for in conformity with 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, which 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 29, 2018,

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 operations. 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

2018

revenue and EBITDA targets were achieved and a payment of

$1.5

million will be made in early

2019.

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 29, 2018 (

in thousands

	Fair Value of					Mark-to-Market
	Consideration			Settlement of		Adjustments		Impact of		Fair Value of
	Beginning of			Contingent		Charged to		Currency		Consideration at
	Period			Consideration		Expense		Exchange		End of Period

2017	$	823	(1)	$	–	$	1,423	$	7	$	2,253

2018	$	2,253		$	(1,500)	$	657	$	77	$	1,487

(1)

Value recorded on inception of the liability as of the acquisition 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 and was allocated to our ISG 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		(years)
Developed technology	$	700	8.0
Customer relationships		600	4.0
Covenant not-to-compete		300	10.0
Product backlog		100	1.0
Trade names		400	5.0
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 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.