5.	Income Taxes

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


(in thousands)	2013			2012			2011
Current:
U.S. Federal	$	(1,538	)	$	(1,898	)	$	(90	)
U.S. State		42			(388	)		(250	)
Foreign		825			831			4,075

Total current		(671	)		(1,455	)		3,735
Deferred:
U.S. Federal		761			1,890			(977	)
U.S. State		26			186			(4	)
Foreign		(2,444	)		(1,495	)		(695	)

Total deferred		(1,657	)		581			(1,676	)

	$	(2,328	)	$	(874	)	$	2,059

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


(in thousands)	2013			2012			2011
U.S.	$	(27,902	)	$	(10,189	)	$	8,154
Foreign		(7,844	)		(2,928	)		9,624

Total	$	(35,746	)	$	(13,117	)	$	17,778

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)	2013			2012
Deferred tax assets:
Inventory, receivable and warranty reserves	$	13,290		$	11,434
Net operating loss carryforwards		9,070			2,299
Tax credit carryforwards		11,258			7,764
Accrued employee benefits		3,709			2,167
Deferred profit		839			502
Stock-based compensation		3,972			3,409
Acquisition basis differences		2,105			2,226
Depreciation and fixed asset related		831			318
Other		121			243

Gross deferred tax assets		45,195			30,362
Less valuation allowance		(36,064	)		(24,948	)

Total deferred tax assets		9,131			5,414
Deferred tax liabilities:
Depreciation and fixed asset related		2,909			2,792
Acquisition basis differences		13,193			9,340
Other		461			283

Total deferred tax liabilities		16,563			12,415

Net deferred tax liabilities	$	(7,432	)	$	(7,001	)

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 various fiscal periods including 2013.

As a result of our cumulative, three-year GAAP domestic pretax loss of approximately $29.9 million at the end of 2013, and our loss in 2013, we were unable to conclude at December 28, 2013 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 2014 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 28, 2013 and December 29, 2012 was approximately $36.1 million and $24.9 million, respectively. The remaining gross DTAs for which a valuation allowance was not recorded are realizable primarily through future reversals of existing taxable temporary differences. As the realization of DTAs is determined by tax jurisdiction, the significant 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 is as follows:


(in thousands)	2013			2012			2011
Tax provision (benefit) at U.S. 35% statutory rate	$	(12,511	)	$	(4,591	)	$	6,223
State income taxes, net of federal tax benefit		(1,098	)		(645	)		(941	)
Settlements, adjustments and releases from statute expirations		(846	)		367			(791	)
Change in effective tax rate for deferred balances		—			346			—
Federal tax credits		(1,340	)		—			(707	)
Stock-based compensation on which no tax benefit provided		168			177			202
Change in valuation allowance		11,283			2,614			(483	)
Foreign income taxed at different rates		1,526			(227	)		(726	)
Non-deductible transaction costs		—			700			—
Other, net		490			385			(718	)

	$	(2,328	)	$	(874	)	$	2,059

State income taxes, net of federal benefit, have been reduced by research tax credits totaling approximately $0.7 million, $0.6 million and $0.6 million in 2013, 2012 and 2011.

At December 28, 2013, we had federal, state and foreign net operating loss carryforwards of approximately $16.3 million, $29.1 million and $19.1 million, respectively, that expire in various tax years through 2033 or have no expiration date. We also have federal and state tax credit carryforwards at December 28, 2013 of approximately $6.3 million and $12.5 million, respectively, some of which expire in various tax years beginning in 2014 through 2033 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. Approximately $5.1 million of U.S. federal net operating loss carryforwards acquired in the Ismeca acquisition are expected to expire unutilized as a result of the annual limitations imposed by Section 382. As a result we have reduced our deferred tax assets and valuation allowance related to these net operating loss carryforwards.

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 are reflected in our 2013 income tax provision.

U.S. income taxes have not been provided on approximately $17.0 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 Malaysia, Singapore and the Philippines. These holidays or incentives require compliance with certain conditions and expire at various dates through 2023. The impact of these holidays or incentives on net income was not significant for fiscal years ended December 2013, 2012 and 2011.

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


(in thousands)	2013		2012			2011
Balance at beginning of year	$	6,080	$	5,381		$	5,069
Gross additions for tax positions of current year		933		776			1,455
Gross additions for tax positions of prior years		3,470		195			126
Reductions due to lapse of the statute of limitations		—		(272	)		(1,269	)

Balance at end of year	$	10,483	$	6,080		$	5,381

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 28, 2013 are ultimately recognized, approximately $6.2 million ($2.5 million at December 29, 2012) 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 $1.5 million accrued for the payment of interest and penalties at December 28, 2013 and $0.4 million at December 29, 2012. The increase in accrued interest and penalties is due to the Ismeca acquisition. Interest expense, net of accrued interest reversed, in 2013, 2012 and 2011 was approximately $(0.1) million, $0.1 million and $0.2 million, respectively.

Our U.S. federal and state income tax returns for years after 2009 and 2008, 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.