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Note 6 - Employee Benefit Plans

12 Months Ended

Dec. 26, 2020

Share-based Payment Arrangement [Text Block]

6. Employee Benefit Plans

Defined Contribution Retirement Plans – Cohu and Xcerra each maintained defined contribution 401(k) retirement savings plans covering all their respective salaried and hourly U.S. employees. At the beginning of 2020 the legacy Xcerra plan were merged into Cohu’s. Participation is voluntary and participants’ contributions are based on their eligible compensation. Participants in the Cohu plan receive matching contributions of 50% up to 8% of salary contributed, subject to various statutory limits. In 2020 and 2019 we made matching contributions to the plan of $2.3 million and $2.0 million, respectively. 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.

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)	2020			2019			2018
Service cost	$	1,310		$	920		$	925
Interest cost		67			267			207
Expected return on assets		(200	)		(168	)		(124	)
Settlements		292			-			-
Net periodic costs	$	1,469		$	1,019		$	1,008

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 sheets related to the Swiss Plan:

(in thousands)	2020			2019
Change in projected benefit obligation:
Benefit obligation at beginning of year	$	(32,241	)	$	(29,910	)
Service cost		(1,310	)		(920	)
Interest cost		(67	)		(267	)
Actuarial gain (loss)		1,916			(1,456	)
Participant contributions		(1,136	)		(1,434	)
Benefits paid		419			2,313
Plan change		944			-
Settlements		3,446			-
Foreign currency exchange adjustment		(3,010	)		(567	)
Benefit obligation at end of year		(31,039	)		(32,241	)
Change in plan assets:
Fair value of plan assets at beginning of year		18,705			18,088
Return on assets, net of actuarial loss		129			281
Employer contributions		886			882
Participant contributions		1,136			1,434
Benefits paid		(419	)		(2,313	)
Settlements		(3,446	)		-
Foreign currency exchange adjustment		1,765			333
Fair value of plan assets at end of year		18,756			18,705
Net liability at end of year	$	(12,283	)	$	(13,536	)

At December 26, 2020 and December 28, 2019, the Swiss Plan’s net liability is included in noncurrent accrued retirement benefits. Amounts recognized in accumulated other comprehensive loss net of tax related to the Swiss Plan consisted of an unrecognized net actuarial loss totaling $1.3 million at December 26, 2020, and $4.1 million at December 28, 2019.

Actuarial gain of $1.9 million for the year ended December 26, 2020, was primarily due to plan experience. The actuarial loss of $1.5 million for the year ended December 28, 2019, was due to assumption changes, partially offset by plan experience.

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

	2020		2019
Discount rate		0.2%		0.2%
Compensation increase		1.1%		1.1%

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

	2020		2019		2018
Discount rate		0.2%		0.9%		0.7%
Rate of return on assets		1.0%		0.9%		0.7%
Compensation increase		1.1%		1.8%		1.8%

During 2021 employer and employee contributions to the Swiss Plan are expected to total $0.9 million. Estimated benefit payments are expected to be as follows: 2021 - $1.3 million; 2022 - $1.1 million; 2023 - $1.8 million; 2024 - $1.3 million; 2025 - $1.1 million; and $6.5 million thereafter through 2030.

As is customary with Swiss pension plans, the assets of the plan are invested in a collective fund with multiple employers. We have no 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 58% debt securities and cash, 20% real estate investments, 10% alternative investments and 12% equity securities. The valuation of the collective fund assets as a whole is a Level 3 measurement; however, the individual investments of the fund are generally Level 1 (equity securities), Level 2 (fixed income) and Level 3 (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 7, “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 2020, 2019, and 2018. We fund benefits as costs are incurred and as a result there are no plan assets.

The weighted average discount rate used in determining the accumulated post-retirement benefit obligation was 2.1% in 2020, 3.0% in 2019 and 4.1% in 2018. The annual rates of increase of the cost of health benefits was assumed to be 6.8% in 2021. This rate was then assumed to decrease 0.27% per year to 4.4% in 2030 and remain level thereafter.

Contributions to the post-retirement health benefit plan are expected to total $0.1 million in 2021. Estimated benefit payments are expected to be as follows: 2021 - $0.1 million; 2022 - $0.1 million; 2023 - $0.1 million; 2024 - $0.1 million; 2025 - $0.1 million and $0.6 million thereafter through 2030.

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)	2020			2019
Accumulated benefit obligation at beginning of year	$	(2,571	)	$	(2,880	)
Interest cost		(75	)		(115	)
Actuarial gain		134			258
Benefits paid		114			166
Accumulated benefit obligation at end of year		(2,398	)		(2,571	)
Plan assets at end of year		-			-
Funded status	$	(2,398	)	$	(2,571	)

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 26, 2020, the payroll liability to participants, included in accrued compensation and benefits in the consolidated balance sheet, was approximately $1.8 million and the cash surrender value of the related life insurance policies included in other current assets was approximately $1.8 million. At December 28, 2019, the liability totaled $2.0 million and the corresponding assets were $1.7 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: 2020 - 242,633; 2019 - 187,273 and 2018 - 84,678. At December 26, 2020, there were 668,704 shares reserved for issuance under the Plan.

Stock Options – At December 26, 2020, a total of 1,671,053 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 2020, 2019 and 2018 no stock options were granted and the activity under our share-based compensation plans was as follows:

	2020					2019					2018
				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		363		$	10.27		405		$	10.22		472		$	10.20
Exercised		(101	)	$	10.95		(42	)	$	9.82		(67	)	$	10.10
Outstanding, end of year		262		$	10.01		363		$	10.27		405		$	10.22

Options exercisable at year end		262		$	10.01		363		$	10.27		405		$	10.22

The aggregate intrinsic value of options exercised was $1.3 million in 2020, $0.2 million in 2019, and $0.9 million in 2018. At December 26, 2020, the aggregate intrinsic value of options outstanding, vested and expected to vest and exercisable was $7.5 million.

Information about stock options outstanding at December 26, 2020 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		159		2.2	$	9.50		159	$	9.50
$ 10.55	-	$ 10.58		92		1.2	$	10.58		92	$	10.58
$ 10.59	-	$ 12.58		11		3.5	$	12.44		11	$	12.44
				262		1.9	$	10.01		262	$	10.01

Restricted Stock Units – Under our equity incentive plans, restricted stock units (“RSUs”) 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 26, 2020.

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

	2020					2019					2018
				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		1,328		$	17.05		1,265		$	19.48		981		$	12.50
Granted		779		$	14.02		694		$	14.32		822		$	23.70
Released		(621	)	$	17.48		(563	)	$	19.08		(500	)	$	13.10
Cancelled		(72	)	$	17.59		(68	)	$	17.60		(38	)	$	14.67
Outstanding, end of year		1,414		$	15.16		1,328		$	17.05		1,265		$	19.48

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 number of shares of common stock that will ultimately be issued to settle PSUs granted ranges from 25% to 200% of the number granted and is determined based on certain performance criteria over a three-year measurement period. The performance criteria for the PSUs are based on a combination of our annualized Total Shareholder Return (“TSR”) for the performance period and the relative performance of our TSR compared with the annualized TSR of certain peer companies for the performance period. PSUs granted vest 100% on the third anniversary of their grant, assuming achievement of the applicable performance criteria.

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 requisite 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.

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

	2020					2019					2018
				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		364		$	18.72		340		$	17.89		334		$	14.31
Granted		200		$	13.18		167		$	14.11		89		$	24.32
Released		(39	)	$	21.40		(36	)	$	11.35		(41	)	$	9.92
Cancelled		(100	)	$	20.25		(107	)	$	11.35		(42	)	$	10.69
Outstanding, end of year		425		$	15.51		364		$	18.72		340		$	17.89

Share-based Compensation – We estimate the fair value of stock options and RSUs on the grant date using the Black-Scholes valuation model. The estimated fair value of PSUs is determined on the grant date using the Monte Carlo simulation valuation model. 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. As a result of the COVID-19 pandemic, Cohu’s Board of Directors authorized suspending our quarterly cash dividend indefinitely, as of May 5, 2020. All awards granted in 2020 exclude the assumption of dividend payments and the estimated fair value awards granted in prior years, when dividends were being paid, are unchanged.

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

Employee Stock Purchase Plan	2020			2019			2018
Dividend yield		0.5	%		1.3	%		1.1	%
Expected volatility		67.1	%		46.4	%		39.0	%
Risk-free interest rate		1.1	%		2.2	%		1.7	%
Expected term (years)		0.5			0.5			0.5
Weighted-average grant date fair value per share	$	6.01		$	5.35		$	5.90

Restricted Stock Units		2020				2019				2018
Dividend yield			0.0	%			1.6	%			1.0	%

Reported share-based compensation is classified in the consolidated financial statements as follows:

(in thousands)	2020			2019			2018
Cost of sales	$	893		$	736		$	546
Research and development		3,245			2,994			1,717
Selling, general and administrative		10,096			10,418			7,790
Share-based compensation of continuing operations		14,234			14,148			10,053
Income tax benefit		(963	)		(587	)		(993	)
Total share-based compensation, net of tax	$	13,271		$	13,561		$	9,060

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.

At December 26, 2020, we had approximately $17.6 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.