Income Taxes

12 Months Ended

Dec. 31, 2011

Income Taxes [Abstract]

Income Taxes

6. Income Taxes

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

(in thousands)	2011			2010			2009
Current:
U.S. Federal	$	(90	)	$	1,239		$	(4,025	)
U.S. State		(250	)		(71	)		47
Foreign		4,075			6,397			991
Total current		3,735			7,565			(2,987	)
Deferred:
U.S. Federal		(977	)		(1,519	)		17,285
U.S. State		(4	)		(207	)		2,590
Foreign		(695	)		(245	)		(2,515	)
Total deferred		(1,676	)		(1,971	)		17,360
	$	2,059		$	5,594		$	14,373

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

(in thousands)	2011		2010		2009
U.S.	$	8,154	$	7,059	$	(8,430	)
Foreign		9,624		23,179		(5,365	)
Total	$	17,778	$	30,238	$	(13,795	)

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)	2011			2010
Deferred tax assets:
Inventory, receivable and warranty reserves	$	12,604		$	10,446
Net operating loss carryforwards		1,069			1,077
Tax credit carryforwards		7,213			6,135
Accrued employee benefits		2,233			2,672
Deferred profit		688			3,842
Stock-based compensation		2,715			1,887
Acquisition basis differences		2,369			2,593
Excess of book over tax depreciation		—			135
Capitalized research expenses, accrued interest and other		207			316
Gross deferred tax assets		29,098			29,103
Less valuation allowance		(22,352	)		(23,295	)
Total deferred tax assets		6,746			5,808
Deferred tax liabilities:
Excess of tax over book depreciation		211			—
Gain on facilities sale		2,788			2,788
Acquisition basis differences		9,591			10,584
Prepaid and other		252			299
Total deferred tax liabilities		12,842			13,671
Net deferred tax liabilities	$	(6,096	)	$	(7,863	)

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.

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 the 2009 and 2010 fiscal year periods.

After a review of the four sources of taxable income described above and in view of our three-year cumulative U.S. loss, we recorded an increase in our valuation allowance on U.S. DTAs, with a corresponding charge to our income tax provision, of approximately $19.6 million in the second quarter of fiscal 2009.

Notwithstanding our 36-month domestic, cumulative GAAP pretax income of approximately $7 million at the end of 2011, with (i) the weak semiconductor equipment industry business conditions we have experienced in the second half of 2011, (ii) global economic uncertainty and (iii) our significant gross deferred tax assets we were unable to conclude at December 31, 2011 that it was “more likely than not” that our DTAs would be realized and, consistent with 2010 and 2011, will only reverse the valuation allowance and reinstate DTAs to the extent we accrue taxes on future income. We will evaluate the realizability of our DTAs at the end of each quarterly reporting period in 2012 and should circumstances change it is possible the remaining valuation allowance, or a portion thereof, will be reversed during 2012.

Our valuation allowance on DTAs at December 31, 2011 and December 25, 2010 was approximately $22.4 million and $23.3 million, respectively. The remaining gross DTAs for which a valuation allowance was not recorded are realizable through future reversals of existing taxable temporary differences or loss carryback. As the realization of DTAs is determined by tax jurisdiction, the significant deferred tax liability recorded as part of the 2008 acquisition of Rasco, a German corporation, was 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 is as follows:

(in thousands)	2011			2010			2009
Tax at U.S. 35% statutory rate	$	6,223		$	10,583		$	(4,828	)
State income taxes, net of federal tax benefit		(941	)		95			(1,051	)
Settlements, adjustments and releases from statute expirations		(791	)		(712	)		(166	)
Change in effective tax rate for deferred balances		—			638			—
Federal tax credits		(707	)		(688	)		(375	)
Stock-based compensation on which no tax benefit provided		202			55			157
Change in valuation allowance		(483	)		(2,027	)		20,562
Foreign income taxed at different rates		(726	)		(1,740	)		(130	)
Other, net		(718	)		(610	)		204
	$	2,059		$	5,594		$	14,373

State income taxes, net of federal benefit, have been reduced by research tax credits totaling approximately $0.6 million in all periods presented.

At December 31, 2011, we had state and foreign net operating loss carryforwards of approximately $19.6 million and $0.1 million, respectively, that expire in various tax years through 2031. We also have federal and state tax credit carryforwards at December 31, 2011 of approximately $2.0 million and $10.0 million, respectively, certain of which expire in various tax years beginning in 2014 through 2031 or have no expiration date.

U.S. income taxes have not been provided on approximately $20.0 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 or incentives with respect to our operations in Singapore and the Philippines. These holidays or incentives require compliance with certain conditions and expire at various dates through 2020. The impact of these holidays or incentives on net income was not significant for fiscal years ended December 2011, 2010 and 2009.

A reconciliation of our gross unrecognized tax benefits is as follows:

(in thousands)	2011			2010			2009
Balance at beginning of year	$	5,069		$	4,886		$	4,562
Gross additions for tax positions of current year		1,455			578			964
Gross additions (reductions) for tax positions of prior years		126			(23	)		22
Reductions as a result of settlements with tax authorities		—			—			(135	)
Reductions as a result of a lapse of the statute of limitations		(1,269	)		(372	)		(527	)
Balance at end of year	$	5,381		$	5,069		$	4,886

If the unrecognized tax benefits at December 31, 2011 are ultimately recognized, approximately $3.1 million would result in a reduction in our income tax expense and effective tax rate. We are unable to estimate the range of any reasonably possible increase or decrease in our gross unrecognized tax benefits over the next 12 months. However, we do not expect any such outcome will result in a material change to our financial condition or results of operations.

We recognize interest and penalties related to unrecognized tax benefits in income tax expense. Cohu had approximately $0.4 million and $0.6 million accrued for the payment of interest and penalties at December 31, 2011 and December 25, 2010, respectively. Interest expense recognized in 2011, 2010 and 2009 was approximately $0.2 million, $0.1 million and $0.1 million, respectively.

In 2009 and 2010 we concluded routine examinations by the Internal Revenue Service of our 2005 to 2008 U.S. income tax returns without any material adjustments. In 2010 the Internal Revenue Service commenced a routine examination of our 2009 U.S. income tax return as a result of our net operating loss carryback. This examination was concluded in 2010 without any material adjustments.

Our U.S. federal and state income tax returns for years after 2007 and 2006, respectively, remain open to examination, subject to the statute of limitations. 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 six years after the year for which the tax is due.