2.	Business Acquisitions, Goodwill and Purchased Intangible Assets

Xcerra

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

May 7, 2018,

among Cohu, 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) was 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.

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

converted RSUs to Xcerra employees, of which

$0.8

million of the fair value of the converted 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(ies) thereto as

may

from time to time be 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 of

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. 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(s)

may

accelerate the payment terms of the Credit Agreement upon the occurrence of certain events of default as set forth therein, which include: the failure of Cohu to make timely payments of amounts due under the Credit Agreement, the failure of Cohu to adhere to the representations and covenants set forth in the Credit Agreement, the failure to provide notice of any event that causes a material adverse effect or to provide other 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. Any event that could require us to repay debt prior to its due date could have a material adverse impact on our financial condition and results of operations.

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,

and uses the fair value concepts defined in ASC

820,

Fair Value Measurement

(“ASC

820

”

). The purchase price allocation described herein contains adjustments made during the post-acquisition measurement period, which were made as a result of obtaining new facts and circumstances related to certain assets acquired and liabilities assumed as of the date of acquisition. The net impact of the measurement period adjustments were offset against goodwill.

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

$0.4

million and

$5.2

million in the

first

nine

months ended

September 28, 2019

and

September 29, 2018,

respectively.

The table below summarizes the assets acquired and liabilities assumed as of the acquisition date,

October 1, 2018,

with purchase price allocation adjustments made subsequent to the preliminary purchase price allocation (

in thousands

	Fair Value at			Measurement			Adjusted
	Acquisition Date			Period Adjustments*			Fair Value
Current assets, including cash received	$	375,990					$	375,990
Property, plant and equipment		40,729						40,729
Other assets		2,109			(1,058	)		1,051
Intangible assets		321,160						321,160
Goodwill		179,263			1,134			180,397
Total assets acquired		919,251						919,327
Liabilities assumed		(124,821	)		(76	)		(124,897	)
Net assets acquired	$	794,430					$	794,430

Measurement period adjustments made as a result of obtaining new facts and circumstances related to certain assets acquired and liabilities assumed as of the date of acquisition. The net impact of the measurement period adjustments were offset against goodwill.

We recorded a

$19.6

million step-up of inventory to its fair value as of the acquisition date.

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

(in thousands)

	Estimated Fair Value		Weighted Average Useful Life (years)
Developed technology	$	194,600		7.8
Customer relationships		65,890		10.6
In-process research and development		36,360		indefinite
Product backlog		6,410		0.8
Trademarks and 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 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.

Goodwill and Intangible Assets

Changes in the carrying value of goodwill during the year ended

December 29, 2018,

and the

nine

-month period ended

September 28, 2019,

by segment, were as follows (

in thousands

	Semiconductor Test
	& Inspection (1)			PCB Test			Total
Balance, December 30, 2017	$	65,613		$	-		$	65,613
Additions, net		157,661			21,602			179,263
Impact of currency exchange		(2,466	)		(283	)		(2,749	)
Balance, December 29, 2018		220,808			21,319			242,127
Adjustments (2)		2,117			(983	)		1,134
Impact of currency exchange		(6,603	)		(755	)		(7,358	)
Balance, September 28, 2019	$	216,322		$	19,581		$	235,903

	( 1 )	After the acquisition of Xcerra on October 1, 2018 we report in two segments, Semiconductor Test & Inspection and PCB Test. Prior year amounts would have been reported in our Semiconductor Test & Inspection segment and have been presented accordingly.
	( 2 )	Amounts represent adjustments made during the post-acquisition measurement period to the preliminary goodwill from the Xcerra acquisition.

Purchased intangible assets, subject to amortization are as follows (

in thousands

	September 28, 2019						December 29, 2018
					Remaining
					Weighted
					Average
	Gross				Amort.		Gross
	Carrying		Accum.		Period		Carrying		Accum.
	Amount		Amort.		(in years)		Amount		Amort.
Developed technology	$	223,454	$	42,021		6.8	$	214,266	$	21,197
Customer relationships		71,720		12,815		9.5		73,104		7,378
Trade names		22,384		3,339		9.8		22,701		1,807
Backlog		6,279		6,279		0		6,372		4,696
Favorable leases*		-		-		4.6		1,100		62
Covenant not-to-compete		326		90		7.3		314		63
Total intangible assets	$	324,163	$	64,544			$	317,857	$	35,203

* Favorable leases were reclassified from intangible assets, net to operating lease right of use assets on

December 30, 2018

as a result of our adoption of ASU

2016

Leases (Topic

842

)

The table above excludes

$22.9

million and

$36.3

million of IPR&D, at

September 28, 2019

and

December 29, 2018,

respectively, which has an indefinite life and is subject to impairment or future amortization as developed technology when the projects are completed. During the

nine

months ended

September 28, 2019,

we completed certain projects previously included in IPR&D and transferred

$13.2

million to developed technology. Changes in the carrying values of purchased intangible assets presented above are a result of the impact of fluctuation in currency exchange rates.

Amortization expense related to intangible assets was approximately

$10.0

million in the

third

quarter of fiscal

2019

and

$30.0

million in the

first

nine

months of fiscal

2019.

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.

The increase in amortization expense in the current year is the result of amortization of assets acquired in the Xcerra transaction.