COHU INC (Form: 10-K, Received: 02/23/2016 14:48:30)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☑

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑

The aggregate market value of voting stock held by nonaffiliates of the registrant was approximately $193,000,000 based on the closing stock price as reported by the NASDAQ Stock Market LLC as of June 26, 2015. Shares of common stock held by each officer and director and by each person or group who owns 5% or more of the outstanding common stock have been excluded in that such persons or groups may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of February 11, 2016 the Registrant had 26,249,438 shares of its $1.00 par value common stock outstanding.

Portions of the Proxy Statement for Cohu, Inc.’s 2016 Annual Meeting of Stockholders to be held on May 11, 2016, and to be filed pursuant to Regulation 14A within 120 days after registrant’s fiscal year ended December 26, 2015, are incorporated by reference into Part III of this Report.

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains certain forward-looking statements including expectations of market conditions, challenges and plans, within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and is subject to the Safe Harbor provisions created by that statute. These forward-looking statements are based on management’s current expectations and beliefs, including estimates and projections about our business. Statements concerning financial position, business strategy, and plans or objectives for future operations are forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties, and assumptions that are difficult to predict and may cause actual results to differ materially from management’s current expectations. Such risks and uncertainties include those set forth in this Annual Report on Form 10-K under the heading “Item 1A. Risk Factors”. The forward-looking statements in this report speak only as of the time they are made and do not necessarily reflect management’s outlook at any other point in time. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or for any other reason. However, readers should carefully review the risk factors set forth in other reports or documents we file from time to time with the Securities and Exchange Commission (“SEC”) after the date of this Annual Report.

1. Summary of Significant Accounting Policies

Basis of Presentation – Cohu, Inc. (“Cohu”, “we”, “our” and “us”), through our wholly owned subsidiaries, is a provider of semiconductor test equipment. Our consolidated financial statements include the accounts of Cohu and our wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.

Our fiscal years are based on a 52- or 53-week period ending on the last Saturday in December. Our fiscal years ended on December 26, 2015, December 27, 2014 and December 28, 2013 each consisted of 52 weeks.

Certain prior-period amounts in our consolidated financial statements have been reclassified to conform to the current period presentation.

Discontinued Operations – On June 10, 2015, we sold our mobile microwave communications equipment business, Broadcast Microwave Services, Inc. (“BMS”) and on June 6, 2014, we completed the sale of our video camera business, Cohu Electronics. The operating results of BMS and Cohu Electronics are being presented as discontinued operations and all prior period amounts have been reclassified accordingly. See Note 2, “Discontinued Operations ” for additional information. Unless otherwise indicated, all amounts herein relate to continuing operations.

Income (Loss ) Per Share – Basic income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the reporting period. Diluted income per share includes the dilutive effect of common shares potentially issuable upon the exercise of stock options, vesting of outstanding restricted stock units and issuance of stock under our employee stock purchase plan using the treasury stock method. In loss periods, potentially dilutive securities are excluded from the per share computations due to their anti-dilutive effect. For purposes of computing diluted income per share, stock options with exercise prices that exceed the average fair market value of our common stock for the period are excluded. For the years ended December 26, 2015 and December 27, 2014 approximately 875,000 and 1,771,000 shares of our common stock were excluded from the computation, respectively.

The following table reconciles the denominators used in computing basic and diluted income (loss) per share :

(in thousands)	2015		2014		2013
Weighted average common shares outstanding		26,057		25,393		24,859
Effect of dilutive stock options and restricted stock units		731		613		-
		26,788		26,006		24,859

Cohu has utilized the “control number” concept in the computation of diluted earnings per share to determine whether potential common stock instruments are dilutive. The control number used is income from continuing operations. The control number concept requires that the same number of potentially dilutive securities applied in computing diluted earnings per share from continuing operations be applied to all other categories of income or loss, regardless of their anti-dilutive effect on such categories.

Cash, Cash Equivalents and Short-term Investments – Highly liquid investments with insignificant interest rate risk and original maturities of three months or less are classified as cash and cash equivalents. Investments with maturities greater than three months are classified as short-term investments. All of our short-term investments are classified as available-for-sale and are reported at fair value, with any unrealized gains and losses, net of tax, recorded in the statement of comprehensive income (loss). We manage our cash equivalents and short-term investments as a single portfolio of highly marketable securities. We have the ability and intent, if necessary, to liquidate any of our investments in order to meet the liquidity needs of our current operations during the next 12 months. Accordingly, investments with contractual maturities greater than one year from December 26, 2015 have been classified as current assets in the accompanying consolidated balance sheets.

COHU, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair Value of Financial Instruments – The carrying amounts of our financial instruments, including cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued expenses, approximate fair value due to the short maturities of these financial instruments.

Concentration of Credit Risk – Financial instruments that potentially subject us to significant credit risk consist principally of cash equivalents, short-term investments and trade accounts receivable. We invest in a variety of financial instruments and, by policy, limit the amount of credit exposure with any one issuer.

Trade accounts receivable are presented net of allowance for doubtful accounts of $0.1 million at December 26, 2015 and $0.2 million at December 27, 2014. Our customers include semiconductor manufacturers and semiconductor test subcontractors and other customers located throughout many areas of the world. While we believe that our allowance for doubtful accounts is adequate and represents our best estimate of potential loss exposure at December 26, 2015, we will continue to monitor customer liquidity and other economic conditions, which may result in changes to our estimates regarding collectability.

Inventories – Inventories are stated at the lower of cost, determined on a current average or first-in, first-out basis, or market. Cost includes labor, material and overhead costs. Determining market value of inventories involves numerous estimates and judgments including projecting average selling prices and sales volumes for future periods and costs to complete and dispose of inventory. As a result of these analyses, we record a charge to cost of sales in advance of the period when the inventory is sold when estimated market values are below our costs. Charges to cost of sales for excess and obsolete inventories aggregated $2.4 million, $2.6 million, and $7.1 million in 2015, 2014 and 2013, respectively.

Property, Plant and Equipment – Depreciation and amortization of property, plant and equipment is calculated principally on the straight-line method based on estimated useful lives of thirty to forty years for buildings, five to fifteen years for building improvements and three to ten years for machinery, equipment and software. Land is not depreciated.

Property, plant and equipment consisted of the following (in thousands) :

	December 26,			December 27,
	2015			2014
Property, plant and equipment, at cost:
Land and land improvements	$	4,607		$	11,762
Buildings and building improvements		8,971			31,065
Machinery and equipment		31,888			32,356
		45,466			75,183
Less accumulated depreciation and amortization		(26,466	)		(43,329	)
Property plant and equipment, net	$	19,000		$	31,854

Depreciation expense was approximately $4.2 million in 2015, $4.8 million in 2014 and $4.7 million 2013.

Segment Information – We applied the provisions of ASC Topic 280, Segment Reporting , (“ASC 280”), which sets forth a management approach to segment reporting and establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products, major customers and the geographies in which the entity holds material assets and reports revenue. An operating segment is defined as a component that engages in business activities whose operating results are reviewed by the chief operating decision maker and for which discrete financial information is available. Based on the provisions of ASC 280, we have determined that our identified operating segments qualify for aggregation under ASC 280 due to similarities in their customers, their economic characteristics, and the nature of products and services provided. As a result, we report in one segment, semiconductor equipment.

COHU, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Goodwill, Purchased Intangible Assets and Other Long-lived Assets – We evaluate goodwill for impairment annually on October 1 ^st of each year and when an event occurs or circumstances change that indicate that the carrying value may not be recoverable. As a part of our annual assessment process for 2015 we performed a qualitative assessment to determine whether current events or changes in circumstances lead us to a determination that it is more likely than not (defined as a likelihood of more than 50 percent) that the fair value of our reporting unit is less than its carrying amount. Under this approach, absent a qualitative determination that the fair value of our reporting unit is more likely than not to be less than its carrying value, we do not need to proceed to the traditional estimated fair value test for that asset which would involve comparing the book value of net assets to the fair value of our identified reporting unit.

As of October 1, 2015, the results of our qualitative assessment indicated there was no impairment.

Long-lived assets, other than goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or any other significant adverse change that would indicate that the carrying amount of an asset or group of assets may not be recoverable. For long-lived assets, impairment losses are only recorded if the asset’s carrying amount is not recoverable through its undiscounted, probability-weighted future cash flows. We measure the impairment loss based on the difference between the assets carrying amount and estimated fair value.

Product Warranty – Product warranty costs are accrued in the period sales are recognized. Our products are generally sold with standard warranty periods, which differ by product, ranging from 12- to 36-months. Parts and labor are typically covered under the terms of the warranty agreement. Our warranty expense accruals are based on historical and estimated costs by product and configuration. From time-to-time we offer customers extended warranties beyond the standard warranty period. In those situations the revenue relating to the extended warranty is deferred at its estimated fair value and recognized on a straight-line basis over the contract period. Costs associated with our extended warranty contracts are expensed as incurred.

Income Taxes – We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting dates. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. Where applicable, associated interest and penalties have also been recognized and recorded, net of federal and state tax benefits, in income tax expense.

Contingencies and Litigation – We assess the probability of adverse judgments in connection with current and threatened litigation. We would accrue the cost of an adverse judgment if, in our estimation, the adverse outcome is probable and we can reasonably estimate the ultimate cost.

Revenue Recognition – Our net sales are derived from the sale of products and services and are adjusted for estimated returns and allowances, which historically have been insignificant. We recognize revenue when there is persuasive evidence of an arrangement, title and risk of loss have passed, delivery has occurred or the services have been rendered, the sales price is fixed or determinable and collection of the related receivable is reasonably assured. Title and risk of loss generally pass to our customers upon shipment. In circumstances where either title or risk of loss pass upon destination or acceptance, we defer revenue recognition until such events occur.

Revenue for established products that have previously satisfied a customer’s acceptance requirements and provide for full payment tied to shipment is generally recognized upon shipment and passage of title. In certain instances, customer payment terms may provide that a minority portion (e.g. up to 20%) of the equipment purchase price be paid only upon customer acceptance. In those situations, the majority portion (e.g. 80%) of revenue where the contingent payment is tied to shipment and the entire product cost of sale are recognized upon shipment and passage of title and the minority portion of the purchase price related to customer acceptance is deferred and recognized upon receipt of customer acceptance. In cases where a prior history of customer acceptance cannot be demonstrated or from sales where customer payment dates are not determinable and in the case of new products, revenue is deferred until customer acceptance has been received. Our post-shipment obligations typically include installation and standard warranties. The estimated fair value of installation related revenue is recognized in the period the installation is performed. Service revenue is recognized ratably over the period of the related contract or upon completion of the services if they are short-term in nature. Spares and kit revenue is generally recognized upon shipment.

COHU, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Certain of our equipment sales are accounted for as multiple-element arrangements. A multiple-element arrangement is a transaction which may involve the delivery or performance of multiple products, services, or rights to use assets, and performance may occur at different points in time or over different periods of time. For arrangements containing multiple elements, the revenue relating to the undelivered elements is deferred using the relative selling price method utilizing estimated sales prices until delivery of the deferred elements. We limit the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services, future performance obligations or subject to customer-specified return or adjustment.

On shipments where sales are not recognized, gross profit is generally recorded as deferred profit in our consolidated balance sheet representing the difference between the receivable recorded and the inventory shipped. In certain instances where customer payments are received prior to product shipment, the customer’s payments are recorded as customer advances. At December 26, 2015, we had total deferred revenue of approximately $5.0 million and deferred profit of $3.7 million. At December 27, 2014, we had total deferred revenue of approximately $10.7 million and deferred profit of $6.9 million.

Advertising Costs – Advertising costs are expensed as incurred and were not material for all periods presented.

Share-based Compensation – We measure and recognize all share-based compensation under the fair value method. Our estimate of share-based compensation expense requires a number of complex and subjective assumptions including our stock price volatility, employee exercise patterns (expected life of the options), future forfeitures and related tax effects. The assumptions used in calculating the fair value of share-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. Although we believe the assumptions and estimates we have made are reasonable and appropriate, changes in assumptions could materially impact our reported financial results.

Foreign Currency Translation – Assets and liabilities of our wholly owned foreign subsidiaries that use the U.S. Dollar as their functional currency are re-measured using exchange rates in effect at the end of the period, except for nonmonetary assets, such as inventories and property, plant and equipment, which are re-measured using historical exchange rates. Revenues and costs are re-measured using average exchange rates for the period, except for costs related to those balance sheet items that are re-measured using historical exchange rates. Gains and losses on foreign currency transactions are recognized as incurred. Certain of our foreign subsidiaries have designated the local currency as their functional currency and, as a result, their assets and liabilities are translated at the rate of exchange at the balance sheet date, while revenue and expenses are translated using the average exchange rate for the period. During the years ended December 26, 2015 and December 27, 2014 we recognized approximately $1.4 million and $2.0 million of foreign exchange gains in our consolidated statement of operations, respectively. Cumulative translation adjustments resulting from the translation of the financial statements are included as a separate component of stockholders’ equity.

Comprehensive Loss – Our accumulated other comprehensive loss totaled approximately $21.8 million at December 26, 2015 and $10.7 million at December 27, 2014 and was attributed to, net of income taxes where applicable; foreign currency adjustments resulting from the translation of certain accounts into U.S. Dollars, unrealized losses and gains on investments and adjustments to accumulated postretirement benefit obligations. The U.S. Dollar strengthened relative to many foreign currencies as of December 26, 2015 compared to December 27, 2014. Consequently, our accumulated comprehensive loss increased by $11.0 million as a result of the foreign currency translation. Similarly, in the previous year, strengthening of the U.S. Dollar as of December 27, 2014 compared to December 28, 2013 led to an increase in our accumulated comprehensive loss of $14.1 million. Additional information related to accumulated other comprehensive income, on an after-tax basis is included in Note 11.

COHU, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements – In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2015-04, “Compensation - Retirement Benefits (Subtopic 715): Practical Expedient for the Measurement Date of an Employer's Defined Benefit Obligation and Plan Assets.” This update provides a practical expedient that permits a company to measure defined benefit plan assets and obligations using the month-end date that is closest to the company's fiscal year-end and apply that practical expedient consistently from year to year. The practical expedient should be applied consistently to all plans if the company has more than one plan. During the fourth quarter of fiscal 2015, we elected to early adopt this guidance and the adoption had no impact on our results of operations.

In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”, which provides guidance on the presentation of deferred income taxes that requires deferred tax assets and liabilities, along with related valuation allowances, to be classified as noncurrent on the balance sheet. As a result, each tax jurisdiction will now only have one net noncurrent deferred tax asset or liability. The new guidance does not change the existing requirement that prohibits offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. During the fourth quarter of fiscal 2015, we elected to early-adopt this guidance retrospectively. Adoption had no impact on our results of operations. The following table summarizes the adjustments made to conform prior year classifications with the new guidance ( in thousands ):

	December 27, 2014
	As Filed			Reclass			As Adjusted
Current deferred income tax assets	$	4,406		$	(4,406	)	$	-
Noncurrent deferred income tax assets		-			353			353
Current deferred income tax liabilities (included in other accrued liabilities)		(261	)		261			-
Noncurrent deferred income tax liabilities		(11,061	)		3,792			(7,269	)
Net deferred income tax assets (liabilities)	$	(6,916	)	$	-		$	(6,916	)

Recently Issued Accounting Pronouncements – In May 2014, the FASB issued new guidance on revenue from contracts with customers. The amended guidance outlines a single comprehensive revenue model for entities to use in accounting for revenue arising from contracts with customers. The guidance supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” Entities have the option of using either a full retrospective or modified approach to adopt the guidance. This guidance is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2016. In April 2015, the FASB agreed to propose a one-year deferral of the revenue recognition standard's effective date for all entities, which would change the effectiveness to annual reporting periods beginning after December 15, 2017, with the option to adopt as early as December 15, 2016. We are currently evaluating the impact of the new guidance on our financial statements and have not yet determined which transition method we will utilize upon adoption or the potential impact of this new guidance on our consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements - Going Concern, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. This standard sets forth management’s responsibility to evaluate, each reporting period, whether there is substantial doubt about an entity’s ability to continue as a going concern, and if so, to provide related footnote disclosures. The standard is effective for annual reporting periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016. The Company does not believe that the adoption of this guidance will have any material impact on its financial position or results of operations.

In July 2015, the FASB issued ASU 2015-11 “Simplifying the Measurement of Inventory” (ASU 2015-11). ASU 2015-11 simplifies the guidance on the subsequent measurement of inventory, excluding inventory measured using last-in, first out or the retail inventory method. Under the new standard, in scope inventory should be measured at the lower of cost and net realizable value. The new standard is effective for interim and annual periods beginning after December 15, 2016, with early adoption permitted. We are evaluating the impact of the new standard on our consolidated financial statements and our timing for adoption.

COHU, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In September 2015, the FASB issued ASU 2015-16 “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments” (ASU 2015-16). ASU 2015-16 requires an entity to: recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined; record, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date; and present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The new standard is effective for interim and annual periods beginning after December 15, 2015, with early adoption permitted for financial statements that have not been issued. We do not expect the new standard to have a significant impact on our consolidated financial statements upon adoption.

5.	Financial Instruments Measured at Fair Value

Our cash, cash equivalents, and short-term investments consisted primarily of cash and other investment grade securities. We do not hold investment securities for trading purposes. All short-term investments are classified as available-for-sale and recorded at fair value. Investment securities are exposed to market risk due to changes in interest rates and credit risk and we monitor credit risk and attempt to mitigate exposure by making high-quality investments and through investment diversification.

Gains and losses on investments are calculated using the specific-identification method and are recognized during the period in which the investment is sold or when an investment experiences an other-than-temporary decline in value. Factors that could indicate an impairment exists include, but are not limited to: earnings performance, changes in credit rating or adverse changes in the regulatory or economic environment of the asset. Gross realized gains and losses on sales of short-term investments are included in interest income. Realized gains and losses for the periods presented were not significant.

Investments that we have classified as short-term, by security type, are as follows (in thousands) :

	At December 26, 2015
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Foreign government security	$	650	$	-	$	-	$	650
Bank certificates of deposit		1,002		-		-		1,002
	$	1,652	$	-	$	-	$	1,652

COHU, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	At December 27, 2014
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Municipal securities	$	155	$	-	$	-	$	155
Bank certificates of deposit		1,000		-		-		1,000
	$	1,155	$	-	$	-	$	1,155

Effective maturities of short-term investments at December 26, 2015, were as follows:

	Amortized		Estimated
(in thousands)	Cost		Fair Value
Due in one year or less	$	1,450	$	1,450
Due after one year through three years		202		202
	$	1,652	$	1,652

Accounting standards pertaining to fair value measurements establish a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. When available, we use quoted market prices to determine the fair value of our investments, and they are included in Level 1. When quoted market prices are unobservable, we use quotes from independent pricing vendors based on recent trading activity and other relevant information.

The following table summarizes, by major security type, our financial instruments that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy (in thousands) :

	Fair value measurements at December 26, 2015 using:
							Total estimated
	Level 1		Level 2		Level 3		fair value
Cash	$	73,746	$	-	$	-	$	73,746
Foreign government security		-		650		-		650
Money market funds		-		41,624		-		41,624
Bank certificates of deposit		-		1,002		-		1,002
	$	73,746	$	43,276	$	-	$	117,022

	Fair value measurements at December 27, 2014 using:
							Total estimated
	Level 1		Level 2		Level 3		fair value
Cash	$	66,467	$	-	$	-	$	66,467
Municipal securities		-		155		-		155
Money market funds		-		4,418		-		4,418
Bank certificates of deposit		-		1,000		-		1,000
	$	66,467	$	5,573	$	-	$	72,040

6. Employee Benefit Plans

Defined Contribution Retirement Plans – We maintain a defined contribution 401(k) retirement savings plan covering all salaried and hourly U.S. employees. Participation is voluntary and participants’ contributions are based on their eligible compensation. We match contributions of participants, up to various statutory limits. In 2013 we provided a matching contribution at 1.5% and made contributions to the plan of approximately $0.3 million. In 2014 we increased our matching contribution to 3% and made contributions to the plan of approximately $0.7 million in both 2015 and 2014.

COHU, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Defined Benefit Retirement Plans – We maintain 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 period presented. 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)	2015			2014			2013
Service cost	$	856		$	749		$	841
Interest cost		311			491			398
Expected return on assets		(193	)		(343	)		(267	)
Settlements		235			-			-
Net periodic costs	$	1,209		$	897		$	972

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)	2015			2014
Change in projected benefit obligation:

Benefit obligation at beginning of year	$	(26,027	)	$	(23,850	)
Service cost		(856	)		(749	)
Interest cost		(311	)		(491	)
Actuarial gain (loss)		(660	)		(3,649	)
Participant contributions		(672	)		(728	)
Benefits paid		296			998
Plan change		558			-
Settlements		2,199			-
Foreign currency exchange adjustment		(10	)		2,442
Benefit obligation at end of year		(25,483	)		(26,027	)

Change in plan assets:

Fair value of plan assets at beginning of year		15,603			16,083
Return on assets, net of actuarial loss		277			652
Employer contributions		672			728
Participant contributions		672			728
Benefits paid		(296	)		(998	)
Settlements		(2,199	)		-
Foreign currency exchange adjustment		(13	)		(1,590	)
Fair value of plan assets at end of year		14,716			15,603

Net liability at end of year	$	(10,767	)	$	(10,424	)

At December 26, 2015 and December 27, 2014, 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 $1.8 million at December 26, 2015 and $2.0 million at December 27, 2014.

COHU, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

	2015			2014
Discount rate		1.0	%		1.3	%
Compensation increase		1.8	%		1.8	%

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

	2015			2014			2013
Discount rate		1.3	%		2.3	%		1.8	%
Rate of return on Assets		1.3	%		2.3	%		1.8	%
Compensation increase		1.8	%		2.0	%		2.0	%

During 2016 employer and employee contributions to the Swiss Plan are expected to total $0.7 million. Estimated benefit payments are expected to be as follows: 2016 - $0.6 million; 2017 - $0.6 million; 2018 - $0.7 million; 2019 - $0.8 million; 2020 - $0.9 million; and $5.2 million thereafter through 2025.

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 75% debt securities, 12% real estate investments, 8% alternative investments, 2% cash and 3% 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 5, “Financial Instruments Measured at Fair Value” for additional information on the three-tier fair value hierarchy.

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 both 2015 and 2013 compared to a net periodic benefit income of $0.1 million in 2014. 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 4.2% in 2015, 3.8% in 2014 and 4.6% in 2013. Annual rates of increase of the cost of health benefits were assumed to be 7.5% in 2016. These rates were then assumed to decrease 0.3% per year to 4.5% in 2025 and remain level thereafter. A one percent increase (decrease) in health care cost trend rates would increase (decrease) the 2015 net periodic benefit cost by approximately $14,000 ($11,000) and the accumulated post-retirement benefit obligation as of December 26, 2015, by approximately $411,000 ($338,000).

Contributions to the post-retirement health benefit plan are expected to total $0.1 million in 2016. Estimated benefit payments are expected to be as follows: 2016 - $0.1 million; 2017 - $0.1 million; 2018 - $0.1 million; 2019 - $0.1 million; 2020 - $0.1 million; and $0.7 million thereafter through 2025.

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)	2015			2014
Accumulated benefit obligation at beginning of year	$	2,428		$	2,021
Service cost		-			13
Interest cost		90			91
Actuarial loss		187			370
Benefits paid		(56	)		(67	)
Accumulated benefit obligation at end of year		2,649			2,428
Plan assets at end of year		-			-
Funded status	$	(2,649	)	$	(2,428	)

COHU, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 both December 26, 2015 and December 27, 2014, the payroll liability to participants, included in accrued compensation and benefits in the consolidated balance sheet, was approximately $2.6 million and the cash surrender value of the related life insurance policies included in other current assets was approximately $2.3 million.

Employee Stock Purchase Plan – On May 12, 2015 our stockholders approved an amendment to the Cohu, Inc. 1997 Employee Stock Purchase Plan (“the Plan”) which increased the number of shares that may be issued under the Plan by 750,000 shares. As a result of this amendment 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: 2015 - 122,528; 2014 - 138,831 and 2013 - 163,120. At December 26, 2015, there were 811,063 shares reserved for issuance under the Plan.

Stock Options – On May 12, 2015, our stockholders approved an amendment to the Cohu, Inc. 2005 Equity Incentive Plan (“the 2005 Plan”) which increased the number of shares that may be issued under the 2005 Plan by 1,500,000 shares. At December 26, 2015, a total of 2,255,701 shares were available for future equity grants under 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.

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

	2015					2014					2013
				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		2,435		$	11.67		3,086		$	11.93		3,113		$	12.62
Granted		10		$	10.98		10		$	12.58		470		$	9.83
Exercised		(175	)	$	8.65		(237	)	$	8.43		(117	)	$	7.55
Cancelled		(305	)	$	16.07		(424	)	$	15.37		(380	)	$	16.37
Outstanding, end of year		1,965		$	11.25		2,435		$	11.67		3,086		$	11.93

Options exercisable at year end		1,673		$	11.47		1,901		$	12.08		2,195		$	12.46

The aggregate intrinsic value of options exercised was $0.7 million in both 2015 and 2014, and $0.4 million in 2013. At December 26, 2015, the aggregate intrinsic value of options outstanding, vested and expected to vest and exercisable was $1.2 million.

Information about stock options outstanding at December 26, 2015 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	-	$10.58		1,182		5.2	$	8.82		922	$	8.54
$10.59	-	$15.50		498		4.2	$	14.06		466	$	14.26
$15.51	-	$20.73		285		1.7	$	16.44		285	$	16.44
				1,965		4.4	$	11.25		1,673	$	11.47

COHU, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 either a one-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 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 RSUs outstanding.

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

	2015					2014					2013
				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		1,026		$	9.54		887		$	9.46		615		$	10.54
Granted		482		$	10.54		497		$	10.07		531		$	8.80
Released		(339	)	$	9.63		(315	)	$	10.16		(223	)	$	10.86
Cancelled		(91	)	$	9.82		(43	)	$	9.41		(36	)	$	9.86
Outstanding, end of year		1,078		$	9.93		1,026		$	9.54		887		$	9.46

Equity-Based Performance Stock Units – In 2012, we began granting equity-based performance units covering shares of our common stock to certain employees. The number of shares of stock ultimately issued will depend upon the extent to which certain financial performance goals set by our Board of Directors are met during the one-year award measurement period. Based upon the level of achievement of performance goals the number of shares we ultimately issue can range from 0% up to 150% of the number of shares under each grant which vest over 3 years from the date of initial grant. In 2014, we began awarding equity-based performance stock units to senior executives with vesting that is contingent on the level of achievement of certain performance goals, market return and continued service (“market-based PSUs”) and in 2015, the market-based PSUs granted are only subject to certain adjustments resulting from performance of Cohu’s Relative Total Shareholder Return (“TSR”) to a selected peer group over a two-year measurement period following the date of grant based on the percentage by which our TSR exceeds or falls below the selected peer group. Market-based PSUs earned will vest at the rate of 50% on the second and third anniversary of their grant. We estimated the fair value of market-based PSUs using a Monte Carlo simulation model on the date of grant. Compensation expense is recognized ratably over the measurement period of each vesting tranche based on our current assessment of achievement of the performance goals. New shares of our common stock will be issued on the date the equity-based performance units 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 outstanding.

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

	2015					2014					2013
				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		$	10.49		238		$	9.32		122		$	9.89
Granted		156		$	10.69		208		$	11.34		158		$	9.03
Released		(38	)	$	9.52		(38	)	$	9.52		(26	)	$	9.89
Cancelled		(76	)	$	9.86		(74	)	$	9.59		(16	)	$	9.89
Outstanding, end of year		376		$	10.80		334		$	10.49		238		$	9.32

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.

COHU, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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. Estimated forfeitures are required to be included as a part of the grant date expense estimate. We used historical data to estimate expected employee behaviors related to option exercises and forfeitures.

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

Employee Stock Purchase Plan	2015			2014			2013
Dividend yield		2.2	%		2.4	%		2.6	%
Expected volatility		35.3	%		35.3	%		38.4	%
Risk-free interest rate		0.1	%		0.1	%		0.1	%
Expected term (years)		0.5			0.5			0.5
Weighted-average grant date fair value per share	$	2.71		$	2.52		$	2.32

Employee Stock Options	2015			2014			2013
Dividend yield		2.1	%		2.0	%		2.6	%
Expected volatility		39.1	%		42.5	%		44.9	%
Risk-free interest rate		1.6	%		1.9	%		1.1	%
Expected term (years)		5.9			5.9			6.4
Weighted-average grant date fair value per share	$	3.46		$	4.39		$	3.37

Restricted Stock Units		2015				2014				2013
Dividend yield			2.1	%			2.2	%			2.5	%

Performance Stock Units		2015				2014				2013
Dividend yield			2.1	%			2.2	%			2.5	%

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

(in thousands)	2015			2014			2013
Cost of sales	$	566		$	491		$	390
Research and development		1,092			1,858			1,623
Selling, general and administrative		5,097			4,039			3,098
Share-based compensation of continuing operations		6,755			6,388			5,111
Discontinued operations		138			388			357
Income tax benefit		(249	)		(204	)		-
Total share-based compensation, net of tax	$	6,644		$	6,572		$	5,468

At December 26, 2015, excluding a reduction for forfeitures, we had approximately $0.6 million of pre-tax unrecognized compensation cost related to unvested stock options which is expected to be recognized over a weighted-average period of approximately 1.2 years.

At December 26, 2015, excluding a reduction for forfeitures, we had approximately $10.0 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 2.3 years.

7. Income Taxes

Significant components of the provision (benefit) for income taxes for continuing operations are as follows :

(in thousands)	2015		2014			2013
Current:
U.S. Federal	$	5	$	(307	)	$	(1,539	)
U.S. State		28		40			42
Foreign		1,956		4,088			780
Total current		1,989		3,821			(717	)
Deferred:
U.S. Federal		89		112			763
U.S. State		49		(17	)		24
Foreign		84		737			(2,443	)
Total deferred		222		832			(1,656	)
	$	2,211	$	4,653		$	(2,373	)

Income (loss) before income taxes from continuing operations consisted of the following :

(in thousands)	2015			2014		2013
U.S.	$	(5,214	)	$	1,076	$	(23,193	)
Foreign		13,217			18,357		(7,728	)
Total	$	8,003		$	19,433	$	(30,921	)

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and tax purposes. Significant components of our deferred tax assets and liabilities were as follows:

(in thousands)	2015			2014
Deferred tax assets:
Inventory, receivable and warranty reserves	$	8,207		$	9,585
Net operating loss carryforwards		7,605			8,266
Tax credit carryforwards		12,291			11,905
Accrued employee benefits		4,993			5,232
Deferred profit and gain on facility sale		6,084			1,091
Stock-based compensation		4,443			4,352
Acquisition basis differences		1,544			2,133
Other		265			608
Gross deferred tax assets		45,432			43,172
Less valuation allowance		(42,289	)		(37,023	)
Total deferred tax assets		3,143			6,149
Deferred tax liabilities:
Depreciation and fixed asset related		227			1,822
Acquisition basis differences		8,904			10,600
Other		563			643
Total deferred tax liabilities		9,694			13,065
Net deferred tax liabilities	$	(6,551	)	$	(6,916	)

Companies are required to assess whether a valuation allowance should be recorded against their deferred tax assets (“DTAs”) based on the consideration of all available evidence, using a “more likely than not” realization standard. The four sources of taxable income that must be considered in determining whether DTAs will be realized are, (1) future reversals of existing taxable temporary differences (i.e. offset of gross deferred tax assets against gross deferred tax liabilities); (2) taxable income in prior carryback years, if carryback is permitted under the tax law; (3) tax planning strategies and (4) future taxable income exclusive of reversing temporary differences and carryforwards.

COHU, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In assessing whether a valuation allowance is required, significant weight is to be given to evidence that can be objectively verified. We have evaluated our DTAs each reporting period, including an assessment of our cumulative income or loss over the prior three-year period and future periods, to determine if a valuation allowance was required. A significant negative factor in our assessment was Cohu's three-year cumulative U.S. loss history at the end of various fiscal periods including 2015.

As a result of our cumulative, three-year U.S. GAAP pretax loss from continuing operations of approximately $27.3 million at the end of 2015, and our U.S. loss in 2015, we were unable to conclude at December 26, 2015 that it was “more likely than not” that our U.S. DTAs would be realized. We will evaluate the realizability of our DTAs at the end of each quarterly reporting period in 2016 and should circumstances change it is possible the remaining valuation allowance, or a portion thereof, will be reversed in a future period.

Our valuation allowance on our DTAs at December 26, 2015 and December 27, 2014 was approximately $42.3 million and $37.0 million, respectively. The remaining gross DTAs for which a valuation allowance was not recorded are realizable through future reversals of existing taxable temporary differences.

As the realization of DTAs is determined by tax jurisdiction, the deferred tax liabilities recorded as part of the 2008 acquisition of Rasco, a German corporation, and the fiscal 2013 acquisition of Ismeca, a Swiss Corporation, were not a source of taxable income in assessing the realization of our DTAs in the U.S.

The reconciliation of income tax computed at the U.S. federal statutory tax rate to the provision (benefit) for income taxes for continuing operations is as follows:

(in thousands)	2015			2014			2013
Tax provision (credit) at U.S. 35% statutory rate	$	2,801		$	6,802		$	(10,822	)
State income taxes, net of federal tax benefit		(152	)		119			(1,089	)
Settlements, adjustments and releases from statute expirations		(104	)		(65	)		(849	)
Federal tax credits		(221	)		(244	)		(1,340	)
Stock-based compensation on which no tax benefit provided		156			160			168
Change in valuation allowance		2,181			437			9,574
Foreign income taxed at different rates		(2,601	)		(2,151	)		1,513
Other, net		151			(405	)		472
	$	2,211		$	4,653		$	(2,373	)

State income taxes, net of federal benefit, have been reduced by research tax credits totaling approximately $0.4 million, $0.5 million and $0.7 million in 2015, 2014 and 2013, respectively.

At December 26, 2015, we had federal, state and foreign net operating loss carryforwards of approximately $19.3 million, $21.3 million and $1.6 million, respectively, that expire in various tax years beginning in 2018 through 2035 or have no expiration date. We also have federal and state tax credit carryforwards at December 26, 2015 of approximately $6.7 million and $13.6 million, respectively, certain of which expire in various tax years beginning in 2016 through 2035 or have no expiration date. The federal and state loss and credit carryforwards are subject to annual limitations under Sections 382 and 383 of the Internal Revenue Code and applicable state tax law.

The American Taxpayer Relief Act of 2012, which reinstated the United States federal research and development tax credit retroactively from January 1, 2012 through December 31, 2013, was not enacted into law until the first quarter of 2013. Therefore, the tax benefit from the credits for 2012 and 2013 is reflected in the Company's 2013 income tax provision.

U.S. income taxes have not been provided on approximately $41 million of accumulated undistributed earnings of certain foreign subsidiaries, as we currently intend to indefinitely reinvest these earnings in operations outside the U.S. It is not practicable to estimate the amount of tax that might be payable if some or all of such earnings were to be remitted. We have certain tax holidays with respect to our operations in Malaysia and the Philippines. These holidays require compliance with certain conditions and expire at various dates through 2023. The impact of these holidays was an increase in net income of approximately $0.8 million, or $0.03 per share, in 2015 and not significant in fiscal 2014 and 2013.

COHU, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A reconciliation of our gross unrecognized tax benefits, excluding accrued interest and penalties, is as follows:

(in thousands)	2015			2014			2013
Balance at beginning of year	$	10,841		$	10,483		$	6,080
Gross additions for tax positions of current year		215			761			933
Gross additions for tax positions of prior years		248			365			3,700
Reductions due to lapse of the statute of limitations		(243	)		(587	)		-
Foreign exchange rate impact		(617	)		(181	)		(230	)
Balance at end of year	$	10,444		$	10,841		$	10,483

The 2013 gross additions for tax positions of prior years are primarily composed of additions from the Ismeca acquisition.

If the unrecognized tax benefits at December 26, 2015 are ultimately recognized, approximately $5.6 million ($6.2 million at December 27, 2014) would result in a reduction in our income tax expense and effective tax rate. It is reasonably possible that our gross unrecognized tax benefits as of December 26, 2015 could decrease in 2016 by approximately $0.5 million as a result of the expiration of certain statutes of limitations.

We recognize interest and penalties related to unrecognized tax benefits in income tax expense. Cohu had approximately $1.4 million accrued for the payment of interest and penalties at December 26, 2015 and December 27, 2014. Interest and penalty expense, net of accrued interest reversed, was approximately $0.1 in 2015, not significant in 2014 and approximately $(0.1) million in 2013.

Our U.S. federal and state income tax returns for years after 2011 and 2010, respectively, remain open to examination, subject to the statute of limitations. Net operating loss and credit carryforwards arising prior to these years are also open to examination if and when utilized. The statute of limitations for the assessment and collection of income taxes related to our foreign tax returns varies by country. In the foreign countries where we have significant operations these time periods generally range from four to ten years after the year for which the tax return is due or the tax is assessed.

Delaware	95-1934119
(State or other jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

12367 Crosthwaite Circle, Poway, California	92064-6817
(Address of principal executive offices)	(Zip Code)

Title of Each Class	Name of Exchange on Which Registered
Common Stock, $1.00 par value	The NASDAQ Stock Market LLC

Large accelerated filer ☐	Accelerated filer ☑	Non-accelerated filer ☐	Smaller reporting company ☐
		(Do not check if a smaller reporting company)

		Page
PART I

Item 1.	Business	1
Item 1A.	Risk Factors	7
Item 1B.	Unresolved Staff Comments	13
Item 2.	Properties	14
Item 3.	Legal Proceedings	14
Item 4.	Mine Safety Disclosures	14

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	15
Item 6.	Selected Financial Data	17
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 8.	Financial Statements and Supplementary Data	25
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	25
Item 9A.	Controls and Procedures	26
Item 9B.	Other Information	28

PART III

Item 10.	Directors, Executive Officers and Corporate Governance	28
Item 11.	Executive Compensation	28
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	28
Item 13.	Certain Relationships and Related Transactions, and Director Independence	28
Item 14.	Principal Accounting Fees and Services	28

PART IV

Item 15.	Exhibits, Financial Statement Schedules	29
Signatures		58

	2015		2014		2013
Semiconductor test handler systems		47%		47%		40%
Thermal sub-systems		7%		9%		8%
Spares, tooling (kits) and service		46%		44%		52%

Name	Age	Position
Luis A. Müller	46	President and Chief Executive Officer
Jeffrey D. Jones	54	Vice President, Finance and Chief Financial Officer
John H. Allen	64	Vice President, Administration
Hock W. Chiang	58	Vice President Global Sales & Service

Location	Approximate Sq. Footage	Ownership
Poway, California ⁽¹⁾	340,000	Leased
Kolbermoor, Germany	40,000	Owned
Malacca, Malaysia	84,000	Leased
Calamba City, Laguna, Philippines	51,000	Leased
La Chaux-de-Fonds, Switzerland	34,000	Leased
Suzhou, China	6,000	Leased

	Fiscal 2015				Fiscal 2014
	High		Low		High		Low
First Quarter	$	12.10	$	10.28	$	11.36	$	9.26
Second Quarter	$	13.84	$	10.17	$	11.35	$	9.73
Third Quarter	$	13.49	$	9.14	$	13.08	$	10.12
Fourth Quarter	$	13.43	$	9.38	$	12.46	$	9.67

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) (1)		Weighted average exercise price of outstanding options, warrants and rights (b) (2)		Number of securities available for future issuance under equity compensation plans (excluding securities reflected in column (a))(c) (3)
Equity compensation plans approved by security holders		3,419	$	11.25		3,067

Equity compensation plans not approved by security holders		-		-		-
		3,419	$	11.25		3,067

	2010		2011		2012		2013		2014		2015
Cohu, Inc.	$	100	$	73	$	68	$	68	$	82	$	91
NASDAQ Index	$	100	$	101	$	117	$	166	$	189	$	200
Custom Peer Group	$	100	$	80	$	93	$	105	$	123	$	114

Years Ended,	Dec. 26		Dec. 27		Dec. 28			Dec. 29			Dec. 31
(in thousands, except per share data)	2015 ⁽¹⁾		2014		2013			2012			2011 ⁽²⁾
Consolidated Statement of Operations Data:
Net sales	$	269,654	$	316,629	$	214,511		$	179,449		$	260,648
Income (loss) from continuing operations	$	5,792	$	14,780	$	(28,548	)	$	(11,255	)	$	13,629
Net income (loss)	$	250	$	8,708	$	(33,418	)	$	(12,243	)	$	15,719
Income (loss) from continuing operations - basic	$	0.22	$	0.58	$	(1.15	)	$	(0.46	)	$	0.56
Income (loss) from continuing operations - diluted	$	0.22	$	0.57	$	(1.15	)	$	(0.46	)	$	0.56
Net income (loss) - basic	$	0.01	$	0.34	$	(1.34	)	$	(0.50	)	$	0.65
Net income (loss) - diluted	$	0.01	$	0.33	$	(1.34	)	$	(0.50	)	$	0.64
Cash dividends per share, paid quarterly	$	0.24	$	0.24	$	0.24		$	0.24		$	0.24
Consolidated Balance Sheet Data:
Total Consolidated Assets ⁽³⁾	$	345,346	$	344,765	$	345,423		$	334,873		$	361,608
Working Capital ⁽³⁾	$	171,272	$	142,194	$	125,837		$	184,703		$	191,945

(in thousands)		2016				2017				2018				2019				2020				Thereafter				Total
Non-cancelable operating leases		$	3,639			$	2,628			$	2,389			$	2,404			$	2,453			$	11,901			$	25,414

	Form 10-K

Description	Page Number

Consolidated Balance Sheets at December 26, 2015 and December 27, 2014	30

Consolidated Statements of Operations for each of the three years in the period ended December 26, 2015	31

Consolidated Statements of Comprehensive Loss for each of the three years in the period ended December 26, 2015	32

Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended December 26, 2015	33

Consolidated Statements of Cash Flows for each of the three years in the period ended December 26, 2015	34

Notes to Consolidated Financial Statements	35

Report of Independent Registered Public Accounting Firm	55

(2) Financial Statement Schedule

Schedule II – Valuation and Qualifying Accounts	59

All other financial statement schedules have been omitted because the required information is not applicable or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto.

(3) Exhibits

The exhibits listed under Item 15(b) hereof are filed with, or incorporated by reference into, this Annual Report on Form 10-K.

	December 26, 2015			December 27, 2014
ASSETS

Current assets:
Cash and cash equivalents	$	115,370		$	70,885
Short-term investments		1,652			1,155
Accounts receivable, net		59,832			70,490
Inventories:
Raw materials and purchased parts		24,423			26,239
Work in process		20,124			19,044
Finished goods		6,801			3,917
		51,348			49,200
Other current assets		6,261			8,363
Current assets of discontinued operations (Note 2)		-			10,318
Total current assets		234,463			210,411
Property plant and equipment, net		19,000			31,854
Goodwill		60,264			63,132
Intangible assets, net		25,297			33,087
Other assets		6,322			6,281
	$	345,346		$	344,765

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable	$	27,290		$	25,119
Accrued compensation and benefits		15,628			18,687
Accrued warranty		3,785			4,846
Deferred profit		3,730			6,941
Income taxes payable		4,195			3,133
Other accrued liabilities		8,563			6,708
Current liabilities of discontinued operations (Note 2)		-			2,783
Total current liabilities		63,191			68,217
Accrued retirement benefits		15,397			13,180
Noncurrent deferred gain on sale of facility (Note 3)		13,142			-
Deferred income taxes		6,954			7,269
Noncurrent income tax liabilities		6,761			7,321
Other accrued liabilities		1,764			1,004
Noncurrent liabilities of discontinued operations (Note 2)		-			706
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par value; 1,000 shares authorized, none issued		-			-
Common stock, $1 par value; 60,000 shares authorized, 26,240 shares issued and outstanding in 2015 and 25,692 shares in 2014		26,240			25,692
Paid-in capital		105,516			97,938
Retained earnings		128,153			134,152
Accumulated other comprehensive loss		(21,772	)		(10,714	)
Total stockholders' equity		238,137			247,068
	$	345,346		$	344,765

	Years ended
	December 26,			December 27,			December 28,
	2015			2014			2013
Net sales	$	269,654		$	316,629		$	214,511
Cost and expenses:
Cost of sales		180,616			210,657			157,111
Research and development		33,107			36,018			40,450
Selling, general and administrative		51,170			50,551			47,925
Gain on sale of facility (Note 3)		(3,198	)		-			-
		261,695			297,226			245,486
Income (loss) from operations		7,959			19,403			(30,975	)
Interest income		44			30			54
Income (loss) from continuing operations before taxes		8,003			19,433			(30,921	)
Income tax provision (benefit)		2,211			4,653			(2,373	)
Income (loss) from continuing operations		5,792			14,780			(28,548	)
Loss from discontinued operations, net of tax (Note 2)		(5,542	)		(6,072	)		(4,870	)
Net income (loss)	$	250		$	8,708		$	(33,418	)

Income (loss) per share:
Basic:
Income (loss) from continuing operations	$	0.22		$	0.58		$	(1.15	)
Loss from discontinued operations		(0.21	)		(0.24	)		(0.19	)
Net income (loss)	$	0.01		$	0.34		$	(1.34	)

Diluted:
Income (loss) from continuing operations	$	0.22		$	0.57		$	(1.15	)
Loss from discontinued operations		(0.21	)		(0.24	)		(0.19	)
Net income (loss)	$	0.01		$	0.33		$	(1.34	)

Weighted average shares used in computing income (loss) per share:
Basic		26,057			25,393			24,859
Diluted		26,788			26,006			24,859

	2015			2014			2013
Intel		18.0	%		15.7	%		18.5	%
NXP Semiconductors N.V. ⁽¹⁾		11.4	%		11.4	%		13.5	%

COHU, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)

	Common stock $1 par value			Paid-in capital			Retained earnings			Accumulated other comprehensive income (loss)			Total
Balance at December 29, 2012	$	24,632		$	83,547		$	170,937		$	1,783		$	280,899
Net loss		-			-			(33,418	)		-			(33,418	)
Changes in cumulative translation adjustment		-			-			-			3,270			3,270
Adjustments related to postretirement benefits, net of tax		-			-			-			1,604			1,604
Changes in unrealized gains and losses on investments, net of tax		-			-			-			(6	)		(6	)
Cash dividends - $0.24 per share		-			-			(5,973	)		-			(5,973	)
Exercise of stock options		117			769			-			-			886
Shares issued under employee stock purchase plan		163			1,088			-			-			1,251
Shares issued for restricted stock units vested		249			(249	)		-			-			-
Repurchase and retirement of stock		(81	)		(740	)		-			-			(821	)
Share-based compensation expense		-			5,468			-			-			5,468
Balance at December 28, 2013		25,080			89,883			131,546			6,651			253,160
Net income		-			-			8,708			-			8,708
Changes in cumulative translation adjustment		-			-			-			(14,107	)		(14,107	)
Adjustments related to postretirement benefits, net of tax		-			-			-			(3,258	)		(3,258	)
Cash dividends - $0.24 per share		-			-			(6,102	)		-			(6,102	)
Exercise of stock options		237			1,764			-			-			2,001
Shares issued under employee stock purchase plan		139			1,001			-			-			1,140
Shares issued for restricted stock units vested		353			(353	)		-			-			-
Repurchase and retirement of stock		(117	)		(1,133	)		-			-			(1,250	)
Share-based compensation expense		-			6,776			-			-			6,776
Balance at December 27, 2014		25,692			97,938			134,152			(10,714	)		247,068
Net income		-			-			250			-			250
Changes in cumulative translation adjustment		-			-			-			(11,000	)		(11,000	)
Adjustments related to postretirement benefits, net of tax		-			-			-			(58	)		(58	)
Cash dividends - $0.24 per share		-			-			(6,249	)		-			(6,249	)
Exercise of stock options		175			1,335			-			-			1,510
Shares issued under employee stock purchase plan		123			977			-			-			1,100
Shares issued for restricted stock units vested		377			(377	)		-			-			-
Repurchase and retirement of stock		(127	)		(1,250	)		-			-			(1,377	)
Share-based compensation expense		-			6,893			-			-			6,893
Balance at December 26, 2015	$	26,240		$	105,516		$	128,153		$	(21,772	)	$	238,137

	December 26, 2015		December 27, 2014
Assets:
Accounts receivable, net	$	-	$	3,156
Inventories		-		6,345
Other current assets		-		817
Total current assets	$	-	$	10,318
Liabilities:
Deferred Profit	$	-	$	504
Other accrued current liabilities		-		2,279
Total current liabilities		-		2,783
Noncurrent liabilities				706
Total liabilities	$	-	$	3,489

	Total Goodwill
Balance, December 28, 2013	$	67,983
Impact of currency exchange		(4,851	)
Balance, December 27, 2014		63,132
Impact of currency exchange		(2,868	)
Balance, December 26, 2015	$	60,264

	December 26, 2015						December 27, 2014
					Remaining
	Gross Carrying		Accumulated		Useful Life		Gross Carrying		Accumulated
	Amount		Amortization		(years)		Amount		Amortization
Rasco technology	$	26,904	$	23,776		0.9	$	29,845	$	22,616
Ismeca technology		27,043		10,329		5.0		27,014		6,879
Trade names		5,547		92		14.7		5,723		-
	$	59,494	$	34,197			$	62,582	$	29,495

(in thousands)	Before Tax amount			Tax (Expense) Benefit			Net of Tax Amount
Year ended December 28, 2013
Foreign currency translation adjustments	$	3,270		$	-		$	3,270
Adjustments related to postretirement benefits		1,889			(285	)		1,604
Change in unrealized gain/loss on investments		(14	)		8			(6	)
Other comprehensive income (loss)	$	5,145		$	(277	)	$	4,868
Year ended December 27, 2014
Foreign currency translation adjustments	$	(14,107	)	$	-		$	(14,107	)
Adjustments related to postretirement benefits		(3,809	)		551			(3,258	)
Other comprehensive income (loss)	$	(17,916	)	$	551		$	(17,365	)
Year ended December 26, 2015
Foreign currency translation adjustments	$	(11,000	)	$	-		$	(11,000	)
Adjustments related to postretirement benefits		(24	)		(34	)		(58	)
Other comprehensive income (loss)	$	(11,024	)	$	(34	)	$	(11,058	)

Quarter		First (a)			Second (a)			Third (a)		Fourth (a)		Year
(in thousands, except per share data)

Net sales:	2015	$	63,447		$	75,211		$	67,512	$	63,484	$	269,654
	2014	$	60,170		$	74,299		$	91,573	$	90,587	$	316,629

Gross profit:	2015	$	20,145		$	25,702		$	22,794	$	20,397	$	89,038
	2014	$	20,030		$	24,263		$	32,952	$	28,727	$	105,972

Income (loss) from continuing operations	2015	$	(1,720	)	$	3,887		$	1,335	$	2,290	$	5,792
	2014	$	(2,707	)	$	2,200		$	10,012	$	5,275	$	14,780

Net income (loss)	2015	$	(2,740	)	$	(72	)	$	1,113	$	1,949	$	250
	2014	$	(3,348	)	$	4,163		$	7,519	$	374	$	8,708

Income (loss) per share (b):
Basic:
Income (loss) from continuing operations	2015	$	(0.07	)	$	0.15		$	0.05	$	0.09	$	0.22
	2014	$	(0.11	)	$	0.09		$	0.39	$	0.21	$	0.58

Net income (loss)	2015	$	(0.11	)	$	0.00		$	0.04	$	0.07	$	0.01
	2014	$	(0.13	)	$	0.16		$	0.30	$	0.01	$	0.34

Diluted:
Income (loss) from continuing operations	2015	$	(0.07	)	$	0.15		$	0.05	$	0.08	$	0.22
	2014	$	(0.11	)	$	0.09		$	0.38	$	0.20	$	0.57

Net income (loss)	2015	$	(0.11	)	$	0.00		$	0.04	$	0.07	$	0.01
	2014	$	(0.13	)	$	0.16		$	0.29	$	0.01	$	0.33

Index to Exhibits

15. (b)	The following exhibits are filed as part of, or incorporated into, the 2015 Cohu, Inc. Annual Report on Form 10-K:

Exhibit No.		Description

	3.1	Amended and Restated Certificate of Incorporation of Cohu, Inc. incorporated herein by reference to Exhibit 3.1(a) from the Cohu, Inc. Form 10-Q for the quarterly period ended June 30, 1999

	3.1(a)	Certificate of Amendment of Amended and Restated Certificate of Incorporation of Cohu, Inc. incorporated herein by reference from the Cohu, Inc. Form S-8 filed June 30, 2000, Exhibit 4.1(a)

	3.2	Amended and Restated Bylaws of Cohu, Inc. incorporated herein by reference to Exhibit 3.2 from the Cohu, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on December 12, 1996

	10.1	Amended Cohu, Inc. 2005 Equity Incentive Plan incorporated herein by reference to Exhibit 10.1 from the Cohu, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on May 13, 2015*

	10.2	Amended Cohu, Inc. 1997 Employee Stock Purchase Plan, incorporated herein by reference to Exhibit 10.2 from the Cohu, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on May 13, 2015*

	10.3	Cohu, Inc. Deferred Compensation Plan (as amended and restated) incorporated herein by reference to Exhibit 10.1 from the Cohu, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on December 29, 2008*

	10.4	Form of employee restricted stock unit agreement for use with restricted stock units granted pursuant to the Cohu, Inc. 2005 Equity Incentive Plan incorporated herein by reference to Exhibit 10.1 from the Cohu, Inc. Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 4, 2015*

	10.5	Form of non-employee director restricted stock unit agreement for use with restricted stock units granted pursuant to the Cohu, Inc. 2005 Equity Incentive Plan incorporated herein by reference to Exhibit 10.2 from the Cohu, Inc. Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 4, 2015*

	10.6	Form of non-employee director restricted stock unit deferral election form for use with restricted stock units granted pursuant to the Cohu, Inc. 2005 Equity Incentive Plan incorporated herein by reference to Exhibit 10.3 from the Cohu, Inc. Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 4, 2015*

	10.7	Non-employee director fee deferral election form incorporated herein by reference to Exhibit 10.4 from the Cohu, Inc. Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 4, 2015*

	10.8	Form of deferred stock agreement for shares granted pursuant to the Cohu, Inc. 2005 Equity Incentive Plan incorporated herein by reference to Exhibit 10.5 from the Cohu, Inc. Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 4, 2015*

	10.9	Form of stock option agreement for use with stock options granted pursuant to the Cohu, Inc. 2005 Equity Incentive Plan incorporated herein by reference to Exhibit 10.6 from the Cohu, Inc. Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 4, 2015*

10.10		Intel Corporation Purchase Agreement Capital Equipment, Goods and Services, dated April 30, 2012, by and between Delta Design, Inc. and Intel Corporation incorporated herein by reference to Exhibit 99.1 from the Cohu, Inc. Current Report on Form 8-K/A filed August 1, 2012

10.11		Form of Indemnity Agreement, incorporated by reference to Exhibit 10.1 from the Cohu, Inc. Current Report on Form 8-K filed July 28, 2008*

10.12		Cohu, Inc. Retiree Health Benefits Agreement (as amended) incorporated herein by reference to Exhibit 10.2 from the Cohu, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on December 29, 2008*

10.13		Cohu, Inc. Change in Control Agreement incorporated herein by reference to Exhibit 10.3 from the Cohu, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on December 29, 2008*

10.14		Lease agreement dated December 4, 2015 by and between CT Crosthwaite I, LLC and Cohu, Inc.

21		Subsidiaries of Cohu, Inc.

23		Consent of Independent Registered Public Accounting Firm

31.1		Certification pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 for Luis A. Müller
31.2		Certification pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 for Jeffrey D. Jones
32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Luis A. Müller
32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Jeffrey D. Jones

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

	* Management contract or compensatory plan or arrangement

			COHU, INC.

Date:	February 23, 2016	By:	/s/ Luis A. Müller
			Luis A. Müller
			President and Chief Executive Officer

Signature	Title	Date

/s/ James A. Donahue	Chairman of the Board,	February 23, 2016
James A. Donahue	Director

/s/ Luis A. Müller	President and Chief Executive Officer,	February 23, 2016
Luis A. Müller	Director (Principal Executive Officer)

/s/ Jeffrey D. Jones	Vice President, Finance and Chief Financial Officer	February 23, 2016
Jeffrey D. Jones	(Principal Financial and Accounting Officer)

/s/ William E. Bendush	Director	February 23, 2016
William E. Bendush

/s/ Steven J. Bilodeau	Director	February 23, 2016
Steven J. Bilodeau

/s/ Andrew M. Caggia	Director	February 23, 2016
Andrew M. Caggia

/s/ Robert L. Ciardella	Director	February 23, 2016
Robert L. Ciardella

/s/ Karl H. Funke	Director	February 23, 2016
Karl H. Funke

			Additions			Additions
			(Reductions)			(Reductions)
	Balance at		Not			Charged					Balance
	Beginning		Charged			(Credited)			Deductions/		at End
Description	of Year		to Expense			to Expense			Write-offs		of Year

Allowance for doubtful accounts:

Year ended December 28, 2013	$	12	$	353	⁽²⁾	$	172		$	207	$	330

Year ended December 27, 2014	$	330	$	(1	) ⁽¹⁾	$	(126	)	$	24	$	179

Year ended December 26, 2015	$	179	$	1	⁽¹⁾	$	19		$	128	$	71


Reserve for excess and obsolete inventories:

Year ended December 28, 2013	$	25,261	$	7,398	⁽³⁾	$	7,068		$	4,506	$	35,221

Year ended December 27, 2014	$	35,221	$	(762	) ⁽¹⁾	$	2,624		$	9,232	$	27,851

Year ended December 26, 2015	$	27,851	$	(648	) ⁽¹⁾	$	2,409		$	2,959	$	26,653

(1)	Changes in reserve balances resulting from foreign currency impact.
(2)	Includes $0.4 million resulting from Ismeca Acquisition on December 31, 2012 and foreign currency impact.
(3)	Includes $6.8 million resulting from Ismeca Acquisition on December 31, 2012, foreign currency impact and reclass from other reserves.

ARTICLE 1	BASIC LEASE PROVISIONS		1

ARTICLE 2	TERM/PREMISES		2

ARTICLE 3	RENTAL		2
	(a)	Basic Rental	2
	(b)	Direct Costs	3
	(c)	Definitions	3
	(d)	Determination of Payment	6
	(e)	Use of Common Area	7
	(f)	Maintenance of Common Area	7

ARTICLE 4	SECURITY DEPOSIT		8

ARTICLE 5	HOLDING OVER		8

ARTICLE 6	OTHER TAXES		9

ARTICLE 7	PERMITTED USE/COMPLIANCE WITH LAWS		9
	(a)	Permitted Use	9
	(b)	Compliance with Laws	9
	(c)	Certain Prohibited Uses	9
	(d)	Care of Premises by Tenant	10
	(e)	Tenant Financial Statements	10
	(f)	Confidentiality; Marketing Materials	10

ARTICLE 8	CONDITION OF PREMISES		11
	(a)	Existing Condition	11
	(b)	Landlord's Work	11
	(c)	Tenant Improvements	12

ARTICLE 9	REPAIRS AND ALTERATIONS		12
	(a)	Landlord's Obligations	12
	(b)	Tenant's Right to Make Repairs	13
	(c)	Tenant's Obligations	14
	(d)	Alterations	15
	(e)	Insurance	15
	(f)	Costs and Fees; Removal	16
	(g)	Quality of Construction Work by Tenant	16
	(h)	Renovation by Landlord	16

ARTICLE 10	LIENS		16

ARTICLE 11	PROJECT SERVICES		17
	(a)	Utilities and Services	17
	(b)	Abatement Event	18

ARTICLE 12	ENTRY RIGHTS OF LANDLORD		18

ARTICLE 13	INDEMNITY; EXEMPTION OF LANDLORD FROM LIABILITY		19
	(a)	Indemnity	19
	(b)	Exemption of Landlord from Liability	19

ARTICLE 14	INSURANCE		20
	(a)	Tenant's Insurance	20
	(b)	Form of Policies	20
	(c)	Landlord's Insurance	21
	(d)	Waiver of Subrogation	21

ARTICLE 15	ASSIGNMENT AND SUBLETTING		21

ARTICLE 16	DAMAGE OR DESTRUCTION		24

ARTICLE 17	SUBORDINATION		25

ARTICLE 18	EMINENT DOMAIN		26

ARTICLE 19	DEFAULT		26
	(a)	Tenant's Default	26
	(b)	Landlord's Default	27

ARTICLE 20	REMEDIES		27

ARTICLE 21	TRANSFER OF LANDLORD'S INTEREST		29

ARTICLE 22	BROKER		30

ARTICLE 23	PARKING		30

ARTICLE 24	WAIVER		31

ARTICLE 25	ESTOPPEL CERTIFICATE		31

ARTICLE 26	LIABILITY OF LANDLORD		32

ARTICLE 27	INABILITY TO PERFORM		32

ARTICLE 28	HAZARDOUS WASTE		32

ARTICLE 29	SURRENDER OF PREMISES; REMOVAL OF PROPERTY		33

ARTICLE 30	MISCELLANEOUS		34
	(a)	SEVERABILITY; ENTIRE AGREEMENT	34
	(b)	Attorneys' Fees; Waiver of Jury Trial	34
	(c)	Time of Essence	35
	(d)	Headings	35
	(e)	Rules and Regulations	35
	(f)	Quiet Possession	35
	(g)	Rent	35
	(h)	Successors and Assigns	35
	(i)	Notices	35
	(j)	Survival of Obligations	36
	(k)	Governing Law	36
	(l)	Office of Foreign Assets Control	36
	(m)	California Certified Access Specialist Inspection	36
	(n)	Exterior Equipment	36
	(o)	Landlord Lien Waiver/Equipment Financing	37
	(p)	Communication Equipment	37
	(q)	Exhibits	38
	(r)	Counterparts	38
	(s)	REIT Compliance	38
	(t)	No Recording	38

ARTICLE 31	OPTION TO EXTEND		39
	(a)	Option Right	39
	(b)	Option Rent	39
	(c)	Exercise of Options	39
	(d)	Determination of Market Rent	39

ARTICLE 32	RIGHT OF FIRST OFFER		40
	(a)	Procedure for Offer	41
	(b)	Procedure for Acceptance	41
	(c)	Lease of First Offer Space	42
	(d)	Limitation	42

ARTICLE 33	SIGNAGE		42

Abatement Event	18
Abatement Notice	18
Additional Rent	3
Affiliate	23
Affiliated Assignee	23
Agreed Amortization Procedure	13
Alteration Notice	15
Alterations	15
Backup Generators	37
Basic Rental	2
BMS System	18
Broker	2
Claims	20
Code	23
Commencement Date	1
Common Area	4
Communication Equipment	38
Company	39
Control	23
Controllable Operating Costs	6
Damage Repair Estimate	24
Deemed Response Notice	22
Demising Work	11
Direct Costs	3
Economic Terms	41
Eligibility Period	19
Emergency Cure Period	14
Emergency Notice	14
Environmental Laws	33
Equipment Lienor	37
Estimate	6
Estimate Statement	6
Event of Default	27
Exercise Notice	41
Expiration Date	1
Exterior Equipment	37
First Offer Notice	41
First Offer Space	41
Force Majeure	32
Hazardous Material	33
HVAC System	12
Initial Aggregate Cost	13
Interest Rate	29
Landlord	1
Landlord Parties	19
Laws	10
Lease	1

Lienor Requirements	38
Market Rent	39
Minor Alterations	16
Necessary Action	14
Objection Notice	40
Operating Costs	4
Option Rent	39
Option Rent Notice	40
Option Terms	39
Options	39
Original Tenant	39
Outside Agreement Date	40
Parking	2
Parking Programs	31
Permitted Use	2
Premises	1
Project	1
Project Systems	12
Real Property	3
REIT	39
Required Action	13
Rules and Regulations	36
Second Chance Notice	42
Second Demand	14
Security Deposit	2
Shared Space	1
Short Term Lease	17
Signage	43
Signage Specifications	43
Square Footage of Premises	1
Statement	6
Tax Costs	3
Tenant	1
Tenant Improvements	12
Tenant's Acceptance	40
Tenant's Property	37
Tenant's Proportionate Share	2
Term	1
Transfer	22
Transfer Premium	23
Transferee	23

A.	Term :	Approximately ten (10) years.

	Commencement Date :	December ___, 2015

	Expiration Date :	December 31, 2025

B.	Square Footage of Premises :	Approximately 146,635 rentable square feet. The square footage of the Premises includes Tenant's prorata share of the shared electrical room and any other shared utility room in the Project (collectively, the " Shared Space ").

C.	Basic Rental :