6.	Income Taxes

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


(in thousands)	2012			2011			2010
Current:
U.S. Federal	$	(1,898	)	$	(90	)	$	1,239
U.S. State		(388	)		(250	)		(71	)
Foreign		831			4,075			6,397

Total current		(1,455	)		3,735			7,565
Deferred:
U.S. Federal		1,890			(977	)		(1,519	)
U.S. State		186			(4	)		(207	)
Foreign		(1,495	)		(695	)		(245	)

Total deferred		581			(1,676	)		(1,971	)

	$	(874	)	$	2,059		$	5,594

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


(in thousands)	2012			2011		2010
U.S.	$	(10,189	)	$	8,154	$	7,059
Foreign		(2,928	)		9,624		23,179

Total	$	(13,117	)	$	17,778	$	30,238

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)	2012			2011
Deferred tax assets:
Inventory, receivable and warranty reserves	$	11,434		$	12,604
Net operating loss carryforwards		2,299			1,069
Tax credit carryforwards		7,764			7,213
Accrued employee benefits		2,167			2,233
Deferred profit		502			688
Stock-based compensation		3,409			2,715
Acquisition basis differences		2,226			2,369
Depreciation and fixed asset related		318			—
Other		243			207

Gross deferred tax assets		30,362			29,098
Less valuation allowance		(24,948	)		(22,352	)

Total deferred tax assets		5,414			6,746
Deferred tax liabilities:
Depreciation and fixed asset related		—			211
Gain on facilities sale		2,792			2,788
Acquisition basis differences		9,340			9,591
Other		283			252

Total deferred tax liabilities		12,415			12,842

Net deferred tax liabilities	$	(7,001	)	$	(6,096	)

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 $5.0 million at the end of 2012, with (i) our operating loss in 2012, (ii) weak business conditions in our primary business segment and (iii) our significant gross deferred tax assets we were unable to conclude at December 29, 2012 that it was “more likely than not” that our DTAs would be realized and 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 2013 and should circumstances change it is possible the remaining valuation allowance, or a portion thereof, will be reversed during 2013.

Our valuation allowance on DTAs at December 29, 2012 and December 31, 2011 was approximately $24.9 million and $22.4 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)	2012			2011			2010
Tax provision (credit) at U.S. 35% statutory rate	$	(4,591	)	$	6,223		$	10,583
State income taxes, net of federal tax benefit		(645	)		(941	)		95
Settlements, adjustments and releases from statute expirations		367			(791	)		(712	)
Change in effective tax rate for deferred balances		346			—			638
Federal tax credits		—			(707	)		(688	)
Stock-based compensation on which no tax benefit provided		177			202			55
Change in valuation allowance		2,614			(483	)		(2,027	)
Foreign income taxed at different rates		(227	)		(726	)		(1,740	)
Non-deductible transaction costs		700			—			—
Other, net		385			(718	)		(610	)

	$	(874	)	$	2,059		$	5,594

State income taxes, net of federal benefit, have been reduced by research tax credits totaling approximately $0.6 million in 2012, 2011 and 2010.

At December 29, 2012, we had state and foreign net operating loss carryforwards of approximately $21.7 million and $3.7 million, respectively, that expire in various tax years through 2032 or have no expiration date. We also have federal and state tax credit carryforwards at December 29, 2012 of approximately $3.0 million and $11.2 million, respectively, certain of which expire in various tax years beginning in 2014 through 2032 or have no expiration date. The federal credit carryforward and state net operating 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, 2012, was not enacted into law until the first quarter of 2013. Therefore, the expected tax benefit, if any, resulting from such reinstatement for fiscal 2012 will not be reflected in the Company’s income tax provision until 2013.

U.S. income taxes have not been provided on approximately $16 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 2012, 2011 and 2010.

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


(in thousands)	2012			2011			2010
Balance at beginning of year	$	5,381		$	5,069		$	4,886
Gross additions for tax positions of current year		776			1,455			578
Gross additions (reductions) for tax positions of prior years		195			126			(23	)
Reductions as a result of a lapse of the statute of limitations		(272	)		(1,269	)		(372	)

Balance at end of year	$	6,080		$	5,381		$	5,069

If the unrecognized tax benefits at December 29, 2012 are ultimately recognized, approximately $2.5 million ($3.1 million at December 31, 2011) 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 accrued for the payment of interest and penalties at December 29, 2012 and December 31, 2011. Interest expense recognized in 2012, 2011 and 2010 was approximately $0.1 million, $0.2 million and $0.1 million, respectively.

Our U.S. federal and state income tax returns for years after 2008 and 2007, 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 six years after the year for which the tax is due.