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

2019

we made matching contributions to the plan of

$2.0

million. In

2018

we made 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.

2017

we made contributions to the plan of

$0.6

million.

Defined Benefit Retirement Plans

– As a result of our acquisition of Ismeca in

2013,

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

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

(in thousands)	2019			2018			2017
Service cost	$	920		$	925		$	907
Interest cost		267			207			198
Expected return on assets		(168	)		(124	)		(119	)
Net periodic costs	$	1,019		$	1,008		$	986

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)	2019			2018
Change in projected benefit obligation:
Benefit obligation at beginning of year	$	(29,910	)	$	(30,512	)
Service cost		(920	)		(925	)
Interest cost		(267	)		(207	)
Actuarial gain (loss)		(1,456	)		708
Participant contributions		(1,434	)		(816	)
Benefits paid		2,313			1,079
Plan change		-			199
Foreign currency exchange adjustment		(567	)		564
Benefit obligation at end of year		(32,241	)		(29,910	)
Change in plan assets:
Fair value of plan assets at beginning of year		18,088			17,746
Return on assets, net of actuarial loss		281			114
Employer contributions		882			816
Participant contributions		1,434			816
Benefits paid		(2,313	)		(1,079	)
Foreign currency exchange adjustment		333			(325	)
Fair value of plan assets at end of year		18,705			18,088
Net liability at end of year	$	(13,536	)	$	(11,822	)

December 28, 2019

and

December 29, 2018,

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

$4.1

million at

December 28, 2019,

and

$2.7

million at

December 29, 2018.

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

	2019			2018
Discount rate		0.2	%		0.9	%
Compensation increase		1.1	%		1.8	%

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

	2019			2018			2017
Discount rate		0.9	%		0.7	%		0.7	%
Rate of return on assets		0.9	%		0.7	%		0.7	%
Compensation increase		1.8	%		1.8	%		1.5	%

During

2020

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

$0.9

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

2020

$1.4

million;

2021

$1.3

million;

2022

$1.1

million;

2023

$1.7

million;

2024

$1.3

million; and

$7.0

million thereafter through

2029.

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

62%

debt securities and cash,

17%

real estate investments,

10%

alternative investments and

11%

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

2019,

2018,

and

2017.

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

3.0%

2019,

4.1%

2018

and

3.4%

2017.

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

7.4%

2020.

This rate was then assumed to decrease

0.4%

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

2019

net periodic benefit cost by approximately

$14,000

(

$12,000

) and the accumulated post-retirement benefit obligation as of

December 28, 2019,

by approximately

$318,000

(

$270,000

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

$0.1

million in

2020.

Estimated benefit payments are expected to be as follows:

2020

$0.1

million;

2021

$0.1

million;

2022

$0.1

million;

2023

$0.1

million;

2024

$0.1

million and

$0.7

million thereafter through

2029.

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)	2019			2018
Accumulated benefit obligation at beginning of year	$	2,880		$	3,148
Interest cost		115			105
Actuarial gain		(258	)		(216	)
Benefits paid		(166	)		(157	)
Accumulated benefit obligation at end of year		2,571			2,880
Plan assets at end of year		-			-
Funded status	$	(2,571	)	$	(2,880	)

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 28, 2019,

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

$1.7

million. At

December 29, 2018,

the liability totaled

$2.0

million and the corresponding assets were

$1.6

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. On

May 8, 2019,

our stockholders approved an amendment to the ESPP which increased the number of ESPP shares that

may

be issued by

500,000.

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:

2019

187,273;

2018

84,678

and

2017

99,144.

December 28, 2019,

there were

911,337

shares reserved for issuance under the Plan.

Stock Options

– At

December 28, 2019,

a total of

2,503,918

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

2005

Equity Incentive Plan (“the

2005

Plan”). On

May 8, 2019,

our stockholders approved amendments to the

2005

Plan which increased the shares of stock available for issuance by

2,000,000

and eliminated a sublimit on the aggregate number of shares that

may

be issued pursuant to restricted stock, restricted stock units, performance shares or performance unit awards. 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

2019,

2018

and

2017

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

	2019					2018					2017
				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		405		$	10.22		472		$	10.20		1,641		$	10.79
Exercised		(42	)	$	9.82		(67	)	$	10.10		(1,164	)	$	10.98
Cancelled		-		$	-		-		$	-		(5	)	$	20.73
Outstanding, end of year		363		$	10.27		405		$	10.22		472		$	10.20

Options exercisable at year end		363		$	10.27		405		$	10.22		469		$	10.20

The aggregate intrinsic value of options exercised was

$0.2

million in

2019,

$0.9

million in

2018,

and

$10.1

million in

2017.

December 28, 2019,

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

$4.4

million.

Information about stock options outstanding at

December 28, 2019

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
$	9.44	-	$	10.54		200		3.2	$	9.50		200	$	9.50
$	10.55	-	$	10.58		126		2.2	$	10.58		126	$	10.58
$	10.59	-	$	15.89		37		2.3	$	13.32		37	$	13.23
						363		2.8	$	10.27		363	$	10.27

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 28, 2019.

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

	2019					2018					2017
				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		1,265		$	19.48		981		$	12.50		1,083		$	10.50
Granted		694		$	14.32		822		$	23.70		353		$	15.95
Released		(563	)	$	19.08		(500	)	$	13.10		(409	)	$	10.26
Cancelled		(68	)	$	17.60		(38	)	$	14.67		(46	)	$	11.85
Outstanding, end of year		1,328		$	17.05		1,265		$	19.48		981		$	12.50

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 (in years)
2019		25%	-	200%		3
2018		25%	-	200%		3
2017		25%	-	200%		3
2016		25%	-	200%		3

PSUs granted in

2019,

2018,

2017

and

2016

vest

100%

on the

third

anniversary of their grant.

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 28, 2019.

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

	2019					2018					2017
				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		340		$	17.89		334		$	14.31		403		$	11.04
Granted		167		$	14.11		89		$	24.32		185		$	17.60
Released		(36	)	$	11.35		(41	)	$	9.92		(186	)	$	11.35
Cancelled		(107	)	$	11.35		(42	)	$	10.69		(68	)	$	11.94
Outstanding, end of year		364		$	18.72		340		$	17.89		334		$	14.31

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	2019			2018			2017
Dividend yield		1.3	%		1.1	%		1.4	%
Expected volatility		46.4	%		39.0	%		33.3	%
Risk-free interest rate		2.2	%		1.7	%		0.7	%
Expected term (years)		0.5			0.5			0.5
Weighted-average grant date fair value per share	$	5.35		$	5.90		$	4.63

Restricted Stock Units		2019				2018				2017
Dividend yield			1.6	%			1.0	%			1.4	%

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

(in thousands)	2019			2018			2017
Cost of sales	$	736		$	546		$	423
Research and development		2,994			1,717			1,054
Selling, general and administrative		10,418			7,790			5,530
Share-based compensation of continuing operations		14,148			10,053			7,007
Income tax benefit		(587	)		(993	)		(530	)
Total share-based compensation, net of tax	$	13,561		$	9,060		$	6,477

We account for forfeitures of plan based awards as they occur. Share based compensation 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 charges in our consolidated statements of operations for the year ended

December 28, 2019.

December 28, 2019,

we had approximately

$18.7

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

2.2

years.