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Income Taxes
12 Months Ended
Dec. 27, 2014
Income Tax Disclosure [Abstract]  
Income Taxes
7. Income Taxes

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

 

(in thousands)

   2014      2013      2012  

Current:

        

U.S. Federal

   $ (307    $ (1,538    $ (1,898

U.S. State

     40        42        (388

Foreign

     4,047        825        831  
  

 

 

    

 

 

    

 

 

 

Total current

     3,780        (671      (1,455

Deferred:

        

U.S. Federal

     (1,207      286        1,890  

U.S. State

     (17      26        186  

Foreign

     737        (2,444      (1,495
  

 

 

    

 

 

    

 

 

 

Total deferred

     (487      (2,132      581  
  

 

 

    

 

 

    

 

 

 
   $ 3,293      $ (2,803    $ (874
  

 

 

    

 

 

    

 

 

 

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

 

(in thousands)

   2014      2013      2012  

U.S.

   $ (3,898    $ (29,219    $ (10,066

Foreign

     13,026        (7,844      (2,930
  

 

 

    

 

 

    

 

 

 

Total

   $ 9,128      $ (37,063    $ (12,996
  

 

 

    

 

 

    

 

 

 

 

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)

   2014      2013  

Deferred tax assets:

     

Inventory, receivable and warranty reserves

   $ 9,585      $ 13,290  

Net operating loss carryforwards

     8,266        9,070   

Tax credit carryforwards

     11,905        11,258  

Accrued employee benefits

     5,232        3,709   

Deferred profit

     1,091        839  

Stock-based compensation

     4,352        3,972  

Acquisition basis differences

     2,133        2,105  

Depreciation and fixed asset related

     1,001        831  

Other

     608        121  
  

 

 

    

 

 

 

Gross deferred tax assets

     44,173        45,195  

Less valuation allowance

     (37,023      (36,064
  

 

 

    

 

 

 

Total deferred tax assets

     7,150        9,131  

Deferred tax liabilities:

     

Depreciation and fixed asset related

     2,823        2,909  

Acquisition basis differences

     10,600        13,193  

Other

     643        461  
  

 

 

    

 

 

 

Total deferred tax liabilities

     14,066        16,563  
  

 

 

    

 

 

 

Net deferred tax liabilities

   $ (6,916    $ (7,432
  

 

 

    

 

 

 

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 2014.

As a result of our cumulative, three-year U.S. GAAP pretax loss from continuing operations of approximately $43.2 million at the end of 2014, and our U.S. loss in 2014, we were unable to conclude at December 27, 2014 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 2015 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 27, 2014 and December 28, 2013 was approximately $37.0 million and $36.1 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 for continuing operations is as follows:

 

(in thousands)

   2014     2013     2012  

Tax provision (credit) at U.S. 35% statutory rate

   $ 3,194     $ (12,972   $ (4,548

State income taxes, net of federal tax benefit

     119       (1,112     (645

Settlements, adjustments and releases from statute expirations

     (103     (846     366  

Change in effective tax rate for deferred balances

                  346  

Federal tax credits

     (244     (1,340      

Stock-based compensation on which no tax benefit provided

     160       168       177  

Change in valuation allowance

     1,072       11,283       2,572  

Foreign income taxed at different rates

     (2,055     1,526       (227

Non-deductible goodwill impairment charge and transaction costs

     1,069             700  

Other, net

     81        490       385  
  

 

 

   

 

 

   

 

 

 
   $ 3,293     $ (2,803   $ (874
  

 

 

   

 

 

   

 

 

 

State income taxes, net of federal benefit, have been reduced by research tax credits totaling approximately $0.5 million, $0.7 million and $0.6 million in 2014, 2013 and 2012, respectively.

At December 27, 2014, we had federal, state and foreign net operating loss carryforwards of approximately $15.8 million, $21.8 million and $11.8 million, respectively, that expire in various tax years beginning in 2015 through 2034 or have no expiration date. We also have federal and state tax credit carryforwards at December 27, 2014 of approximately $6.3 million and $13.2 million, respectively, some of which expire in various tax years beginning in 2015 through 2034 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 has 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 $32.0 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 on net income was not significant in fiscal years 2014, 2013 and 2012.

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

 

(in thousands)

   2014     2013     2012  

Balance at beginning of year

   $ 10,483     $ 6,080     $ 5,381  

Gross additions for tax positions of current year

     761       933       776  

Gross additions for tax positions of prior years

     365       3,700       195  

Reductions due to lapse of the statute of limitations

     (587           (272

Foreign exchange rate impact

     (181     (230      
  

 

 

   

 

 

   

 

 

 

Balance at end of year

   $ 10,841     $ 10,483     $ 6,080  
  

 

 

   

 

 

   

 

 

 

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 27, 2014 are ultimately recognized, approximately $6.2 million ($6.2 million at December 28, 2013) 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 $1.4 million accrued for the payment of interest and penalties at December 27, 2014 and $1.5 million at December 28, 2013. Interest expense, net of accrued interest reversed, was not significant in 2014 and in 2013 and 2012 was approximately $(0.1) million and $0.1 million, respectively.

Our U.S. federal and state income tax returns for years after 2010 and 2009, 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.