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.