6.	Employee Benefit Plans

Defined Contribution Retirement Plans

– Cohu and Xcerra each maintain defined contribution

401

(k) retirement savings plans covering all their respective salaried and hourly U.S. employees. Participation is voluntary and participants’ contributions are based on their eligible compensation. Participants in the Cohu plan receive matching contributions of

50%

up to

of salary contributed and participants in the Xcerra plan receive matching contributions of

50%

up to

of salary contributed, both subject to various statutory limits. In

2018

we made matching contributions to the plan of

$1.1

million which includes matching contributions to the Xcerra

401

(k) plan from

October 1

through

December 29, 2018.

In both

2017

and

2016

we made contributions to the plan of

$0.6

million.

Defined Benefit Retirement Plans

– As a result of the acquisition of Ismeca effective

December 31, 2012,

we took over the Ismeca Europe Semiconductor BVG Pension Plan in Switzerland (“the Swiss Plan”) and the following discussion only relates to the Swiss Plan.

Net periodic benefit cost of the Swiss Plan was as follows:

(in thousands)	2018			2017			2016
Service cost	$	925		$	907		$	868
Interest cost		207			198			245
Expected return on assets		(124	)		(119	)		(147	)
Net periodic costs	$	1,008		$	986		$	966

The following table sets forth the projected benefit obligation, the fair value of plan assets, the funded status and the liability we have recorded in our consolidated balance sheet related to the Swiss Plan:

(in thousands)	2018			2017
Change in projected benefit obligation:
Benefit obligation at beginning of year	$	(30,512	)	$	(27,499	)
Service cost		(925	)		(907	)
Interest cost		(207	)		(198	)
Actuarial gain (loss)		708			(628	)
Participant contributions		(816	)		(789	)
Benefits paid		1,079			743
Plan change		199			-
Foreign currency exchange adjustment		564			(1,234	)
Benefit obligation at end of year		(29,910	)		(30,512	)
Change in plan assets:
Fair value of plan assets at beginning of year		17,746			16,077
Return on assets, net of actuarial loss		114			112
Employer contributions		816			789
Participant contributions		816			789
Benefits paid		(1,079	)		(743	)
Foreign currency exchange adjustment		(325	)		722
Fair value of plan assets at end of year		18,088			17,746
Net liability at end of year	$	(11,822	)	$	(12,766	)

December 29, 2018

and

December 30, 2017,

the Swiss Plan’s net liability is included in noncurrent accrued retirement benefits. Amounts recognized in accumulated other comprehensive income net of tax related to the Swiss Plan consisted of an unrecognized net actuarial loss totaling

$2.7

million at

December 29, 2018,

and

$3.1

million at

December 30, 2017.

Weighted-average actuarial assumptions used to determine the projected benefit obligation under the Swiss Plan are as follows:

	2018			2017
Discount rate		0.9	%		0.7	%
Compensation increase		1.8	%		1.8	%

Weighted-average assumptions used to determine net periodic benefit cost of the Swiss Plan are as follows:

	2018			2017			2016
Discount rate		0.7	%		0.7	%		1.0	%
Rate of return on Assets		0.7	%		0.7	%		1.0	%
Compensation increase		1.8	%		1.5	%		1.8	%

During

2019

employer and employee contributions to the Swiss Plan are expected to total

$0.8

million. Estimated benefit payments are expected to be as follows:

2019

$0.7

million;

2020

$0.9

million;

2021

$1.0

million;

2022

$0.8

million;

2023

$1.3

million; and

$5.9

million thereafter through

2028.

As is customary with Swiss pension plans, the assets of the plan are invested in a collective fund with multiple employers. We have

investment authority over the assets of the plan that are held and invested by a Swiss insurance company. Investment holdings are made with respect to Swiss laws and target allocations for plan assets are

67%

debt securities and cash,

16%

real estate investments,

alternative investments and

equity securities. The valuation of the collective fund assets as a whole is a Level

measurement; however the individual investments of the fund are generally Level

(equity securities), Level

(fixed income) and Level

(real estate and alternative) investments. We determine the fair value of the plan assets based on information provided by the collective fund, through review of the collective fund’s annual financial statements. See Note

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

three

-tier fair value hierarchy.

We maintain other defined benefit plans for employees located outside the U.S. for which the majority of the obligations and net periodic benefit cost were determined to be immaterial for all periods presented.

Retiree Medical Benefits

– We provide post-retirement health benefits to certain executives and directors under a noncontributory plan. The net periodic benefit cost was

$0.1

million in

2018,

2017,

and

2016.

We fund benefits as costs are incurred and as a result there are

plan assets.

The weighted average discount rate used in determining the accumulated post-retirement benefit obligation was

4.1%

2018,

3.4%

2017

and

3.9%

2016.

The annual rates of increase of the cost of health benefits was assumed to be

8.8%

2019.

This rate was then assumed to decrease

0.6%

per year to

4.4%

2027

and remain level thereafter. A

one

percent increase (decrease) in health care cost trend rates would increase (decrease) the

2018

net periodic benefit cost by approximately

$14,000

(

$12,000

) and the accumulated post-retirement benefit obligation as of

December 29, 2018,

by approximately

$349,000

(

$298,000

Contributions to the post-retirement health benefit plan are expected to total

$0.1

million in

2019.

Estimated benefit payments are expected to be as follows:

2019

$0.1

million;

2020

$0.1

million;

2021

$0.1

million;

2022

$0.2

million;

2023

$0.2

million and

$0.9

million thereafter through

2027.

The following table sets forth the post-retirement benefit obligation, funded status and the liability we have recorded in our consolidated balance sheets:

(in thousands)	2018			2017
Accumulated benefit obligation at beginning of year	$	3,148		$	2,490
Interest cost		105			95
Actuarial (gain) loss		(216	)		677
Benefits paid		(157	)		(114	)
Accumulated benefit obligation at end of year		2,880			3,148
Plan assets at end of year		-			-
Funded status	$	(2,880	)	$	(3,148	)

Deferred Compensation

– The Cohu, Inc. Deferred Compensation Plan allows certain of our officers to defer a portion of their current compensation. We have purchased life insurance policies on the participants with Cohu as the named beneficiary. Participant contributions, distributions and investment earnings and losses are accumulated in a separate account for each participant. At

December 29, 2018,

the payroll liability to participants, included in accrued compensation and benefits in the consolidated balance sheet, was approximately

$2.0

million and the cash surrender value of the related life insurance policies included in other current assets was approximately

$1.6

million. At

December 30, 2017,

the liability totaled

$2.3

million and the corresponding assets were

$2.2

million.

Employee Stock Purchase Plan

– The Cohu, Inc.

1997

Employee Stock Purchase Plan (“the Plan”) provides for the issuance of a maximum of

2,650,000

shares of our common stock. Under the Plan, eligible employees

may

purchase shares of common stock through payroll deductions. The price paid for the common stock is equal to

85%

of the fair market value of our common stock on specified dates. During the last

three

years we issued shares under the Plan as follows:

2018

84,678;

2017

99,144

and

2016

110,579.

December 29, 2018,

there were

598,610

shares reserved for issuance under the Plan.

Stock Options

– At

December 29, 2018,

a total of

1,198,058

shares were available for future equity grants under the Cohu, Inc.

2005

Equity Incentive Plan (“the

2005

Plan”). Under the

2005

Plan stock options

may

be granted to employees, consultants and outside directors to purchase a fixed number of shares of our common stock at prices

not

less than

100%

of the fair market value at the date of grant. Options generally vest and become exercisable after

one

year or in

four

annual increments beginning

one

year after the grant date and expire

ten

years from the grant date. We have historically issued new shares of Cohu common stock upon share option exercise.

During

2018,

2017

and

2016

stock options were granted and the activity under our share-based compensation plans was as follows:

	2018					2017					2016
				Wt. Avg.					Wt. Avg.					Wt. Avg.
(in thousands, except per share data)	Shares			Ex. Price		Shares			Ex. Price		Shares			Ex. Price
Outstanding, beginning of year		472		$	10.20		1,641		$	10.79		1,965		$	11.25
Exercised		(67	)	$	10.10		(1,164	)	$	10.98		(101	)	$	7.89
Cancelled		-		$	-		(5	)	$	20.73		(223	)	$	16.19
Outstanding, end of year		405		$	10.22		472		$	10.20		1,641		$	10.79

Options exercisable at year end		405		$	10.22		469		$	10.20		1,537		$	10.85

The aggregate intrinsic value of options exercised was

$0.9

million in

2018,

$10.1

million in

2017,

and

$0.5

million in

2016.

December 29, 2018,

the aggregate intrinsic value of options outstanding, vested and expected to vest and exercisable was

$2.3

million.

Information about stock options outstanding at

December 29, 2018

is as follows

(options in thousands)

					Options Outstanding						Options Exercisable
							Approximate
							Wt. Avg.
Range of					Number		Remaining		Wt. Avg.		Number		Wt. Avg.
Exercise Prices					Outstanding		Life (Years)		Ex. Price		Exercisable		Ex. Price
$	7.32	-	$	9.44		225		4.0	$	9.35		225	$	9.35
$	9.45	-	$	10.54		10		3.0	$	10.54		10	$	10.54
$	10.55	-	$	15.89		170		3.2	$	11.34		170	$	11.34
						405		3.6	$	10.22		405	$	10.22

Restricted Stock Units

– Under our equity incentive plans, restricted stock units

may

be granted to employees, consultants and outside directors. Restricted stock units vest over a

one

-year,

two

-year or a

four

-year period from the date of grant. Prior to vesting, restricted stock units do

not

have dividend equivalent rights, do

not

have voting rights and the shares underlying the restricted stock units are

not

considered issued and outstanding. New shares of our common stock will be issued on the date the restricted stock units vest net of the statutory tax withholding requirements to be paid by us on behalf of our employees. As a result, the actual number of shares issued will be fewer than the actual number of RSUs outstanding at

December 29, 2018.

Restricted stock unit activity under our share-based compensation plans was as follows:

	2018					2017					2016
				Wt. Avg.					Wt. Avg.					Wt. Avg.
(in thousands, except per share data)	Units			Fair Value		Units			Fair Value		Units			Fair Value
Outstanding, beginning of year		981		$	12.50		1,083		$	10.50		1,078		$	9.93
Granted		822		$	23.70		353		$	15.95		471		$	11.25
Released		(500	)	$	13.10		(409	)	$	10.26		(409	)	$	9.90
Cancelled		(38	)	$	14.67		(46	)	$	11.85		(57	)	$	10.25
Outstanding, end of year		1,265		$	19.48		981		$	12.50		1,083		$	10.50

RSUs granted in

2018

in the table above include the issuance of

529,995

assumed RSUs to Xcerra employees, based on a conversion formula.

Equity-Based Performance Stock Units

–

We grant performance stock units (“PSUs”) to certain senior executives as a part of our long-term equity compensation program. The performance criteria for the PSUs is based on a combination of the Company’s annualized Total Shareholder Return (“TSR”) for the performance period and the relative performance of the Company’s TSR compared with the annualized TSR of certain peer companies for the performance period.

The number of shares of common stock that will ultimately be issued to settle PSUs granted over the last

four

years is as follows:

Year Granted	Range of Awards			Performance Criteria Period (years)
2018	25%	-	200%	3
2017	25%	-	200%	3
2016	25%	-	200%	3
2015	25%	-	200%	2

PSUs granted in

2018,

2017

and

2016

vest

100%

on the

third

anniversary of their grant and PSUs granted in

2015

vested

50%

on the

second

and

third

anniversary of their grant, respectively.

We estimated the fair value of the PSUs using a Monte Carlo simulation model on the date of grant. Compensation expense is recognized over the derived service period. New shares of our common stock will be issued on the date the PSUs vest net of the minimum statutory tax withholding requirements to be paid by us on behalf of our employees. As a result, the actual number of shares issued will be fewer than the actual number of PSUs outstanding at

December 29, 2018.

PSU activity under our share-based compensation plans was as follows:

	2018					2017					2016
				Wt. Avg.					Wt. Avg.					Wt. Avg.
(in thousands, except per share data)	Units			Fair Value		Units			Fair Value		Units			Fair Value
Outstanding, beginning of year		334		$	14.31		403		$	11.04		376		$	10.80
Granted		89		$	24.32		185		$	17.60		222		$	11.38
Released		(41	)	$	9.92		(186	)	$	11.35		(172	)	$	11.27
Cancelled		(42	)	$	10.69		(68	)	$	11.94		(23	)	$	8.75
Outstanding, end of year		340		$	17.89		334		$	14.31		403		$	11.04

Share-based Compensation

– We estimate the fair value of each share-based award on the grant date using the Black-Scholes and the Monte Carlo simulation valuation models. Option valuation models require the input of highly subjective assumptions and changes in the assumptions used can materially affect the grant date fair value of an award. These assumptions for the Black-Scholes model include the risk-free rate of interest, expected dividend yield, expected volatility, and the expected life of the award. The risk-free rate of interest is based on the U.S. Treasury rates appropriate for the expected term of the award as of the grant date. Expected dividends are based primarily on historical factors related to our common stock. Expected volatility is based on historic weekly stock price observations of our common stock during the period immediately preceding the share-based award grant that is equal in length to the award’s expected term. We believe that historical volatility is the best estimate of future volatility. Expected life of the award is based on historical option exercise data. The Monte Carlo simulation model incorporates assumptions for the risk-free interest rate, Cohu and the selected peer group price volatility, the correlation between Cohu and the selected index, and dividend yields. Share-based compensation expense related to restricted stock unit awards is calculated based on the market price of our common stock on the date of grant, reduced by the present value of dividends expected to be paid on our common stock prior to vesting of the restricted stock unit.

The following weighted average assumptions were used to value share-based awards granted:

Employee Stock Purchase Plan	2018	2017	2016
Dividend yield	1.1 %	1.4 %	2.0 %
Expected volatility	39.0 %	33.3 %	31.2 %
Risk-free interest rate	1.7 %	0.7 %	0.3 %
Expected term (years)	0.5	0.5	0.5
Weighted-average grant date fair value per share	$ 5.90	$ 4.63	$ 2.82

Restricted Stock Units		2018			2017			2016
Dividend yield		1.0 %			1.4 %			2.0 %

Reported share-based compensation is classified in the Consolidated Financial Statements as follows:

(in thousands)	2018			2017			2016
Cost of sales	$	546		$	423		$	398
Research and development		1,717			1,054			1,292
Selling, general and administrative		7,790			5,530			5,453
Share-based compensation of continuing operations		10,053			7,007			7,143
Income tax benefit		(993	)		(530	)		(269	)
Total share-based compensation, net of tax	$	9,060		$	6,477		$	6,874

Share based compensation presented above for the year ended

December 29, 2018,

excludes

$8.2

million of compensation recorded related to the acceleration of RSU awards held by certain executive officers and the Board of Directors of Xcerra because of the change in control. This non-cash expense has been included in restructuring in our consolidated statements of operations.

We adopted ASU

2016

in the

fourth

quarter of

2016,

which among other items, provides an accounting policy election to account for forfeitures as they occur, rather than based on an estimate of expected forfeitures. We elected to account for forfeitures as they occur and therefore, share-based compensation expense for the years ended

December 29, 2018,

December 30, 2017,

and

December 31, 2016,

have been calculated based on actual forfeitures in our consolidated statement of operations, rather than our previous approach where the expense was net of estimated forfeitures determined at the grant date. The net cumulative effect of this change was recognized as a

$0.2

million increase to paid-in capital and a decrease to retained earnings as of

December 26, 2015.

December 29, 2018,

we had approximately

$21.2

million of pre-tax unrecognized compensation cost related to unvested restricted stock units and performance stock units which is expected to be recognized over a weighted-average period of approximately

2.4

years.