Income Taxes

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

(in thousands)	2017			2016			2015
Current:
U.S. Federal	$	12		$	11		$	5
U.S. State		18			8			28
Foreign		6,005			3,793			1,956
Total current		6,035			3,812			1,989
Deferred:
U.S. Federal		(3,451	)		91			89
U.S. State		(481	)		47			49
Foreign		141			(1,203	)		84
Total deferred		(3,791	)		(1,065	)		222
	$	2,244		$	2,747		$	2,211

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

(in thousands)	2017		2016			2015
U.S.	$	1,430	$	(13,420	)	$	(5,214	)
Foreign		33,935		19,427			13,217
Total	$	35,365	$	6,007		$	8,003

The Tax Act was enacted on

December 22, 2017,

and introduces significant changes to U.S. income tax law. Effective in

2018,

the Tax Act reduces the U.S. statutory tax rate from

35%

21%

and creates new taxes on certain foreign-sourced earnings and related-party payments, which are referred to as the global intangible low-taxed income tax and the base erosion and anti-abuse tax, respectively. In addition, in

2017

we were subject to a

one

-time transition tax on accumulated foreign subsidiary earnings

not

previously subject to U.S. income tax. The Tax Act also repealed the alternative minimum tax (AMT) effective

January 1, 2018,

and made changes to net operating loss provisions, expensing of certain assets and capitalization of research and development expense with such changes effective for

2018

and later years.

Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, we have made reasonable estimates of the effects and recorded provisional amounts in our financial statements as of

December 30, 2017.

As we collect and prepare necessary data, and interpret the Tax Act and any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, we

may

make adjustments to the provisional amounts. Those adjustments

may

materially impact our provision for income taxes and effective tax rate in the period in which the adjustments are made. The accounting for the tax effects of the Tax Act will be completed in

2018

in accordance with SAB

118.

Provisional amounts for the following income tax effects of the Tax Act have been recorded as of

December 30, 2017,

and are subject to change during

2018.

One-time transition tax

The Tax Act requires us to pay U.S. income taxes on accumulated foreign subsidiary earnings

not

previously subject to U.S. income tax at a rate of

15.5%

to the extent of foreign cash and certain other net current assets and

on the remaining earnings. Foreign tax credits and net operating losses

may

be used to reduce this tax which is referred to as a transition or deemed repatriation tax. We recorded a provisional amount for our

one

-time transition tax liability of

$16.6

million and used foreign tax credits and net operating losses to fully offset this liability. We have recorded provisional amounts based on estimates of the effects of the Tax Act as the analysis requires significant data from our foreign subsidiaries that is

not

regularly collected or analyzed.

Deferred tax effects

The Tax Act reduces the U.S. statutory tax rate from

35%

21%

for years after

2017.

Accordingly, we have remeasured our deferred taxes as of

December 30, 2017

to reflect the reduced rate that will apply in future periods when these deferred taxes are settled or realized. We recognized a deferred tax benefit of

$4.0

million, net of a reduction in the related valuation allowance, to reflect the reduced U.S. tax rate and other effects of the Tax Act including the change in the life of NOL carryforwards from

years to indefinite. Although the tax rate reduction is known, we have

not

collected the necessary data to complete our analysis of the effect of the Tax Act on the underlying deferred taxes and as such, the amounts recorded as of

December 30, 2017

are provisional.

Beginning in

2018,

the Tax Act provides a

100%

deduction for dividends received from

-percent owned foreign corporations by U.S. corporate shareholders, subject to a

one

-year holding period. Although dividend income is now exempt from U.S. federal tax i

n the hands of U.S. corporate shareholders, companies must still apply the guidance of ASC

740

to account for the tax consequences of outside basis differences and other tax impacts of their investments in non-U.S. subsidiaries. Deferred tax liabilities are recognized for taxes payable on the unremitted earnings from foreign operations of our subsidiaries, except where it is our intention to indefinitely reinvest a portion or all of these undistributed earnings.

As we complete our analysis of the Tax Act and incorporate additional guidance that

may

be issued by the U.S. Treasury Department, the IRS or other standard-setting bodies, we

may

identify additional effects

not

reflected as of

December 30, 2017.

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)	2017			2016
Deferred tax assets:
Inventory, receivable and warranty reserves	$	3,417		$	5,868
Net operating loss carryforwards		7,467			11,681
Tax credit carryforwards		14,724			13,715
Accrued employee benefits		4,796			5,002
Deferred profit and gain on facility sale		3,617			5,412
Stock-based compensation		1,897			4,189
Acquisition basis differences		1,606			1,334
Other		208			103
Gross deferred tax assets		37,732			47,304
Less valuation allowance		(31,491	)		(44,731	)
Total deferred tax assets		6,241			2,573
Deferred tax liabilities:
Depreciation and fixed asset related		120			53
Acquisition basis differences		5,518			7,423
Unremitted earnings of foreign subsidiaries		2,002			-
Other		437			662
Total deferred tax liabilities		8,077			8,138
Net deferred tax liabilities	$	(1,836	)	$	(5,565	)

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, (

) future reversals of existing taxable temporary differences (i.e. offset of gross deferred tax assets against gross deferred tax liabilities); (

) taxable income in prior carryback years, if carryback is permitted under the tax law; (

) tax planning strategies and (

) 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

2017.

As a result of our cumulative,

three

-year U.S. GAAP pretax loss from continuing operations at the end of

2017

we were unable to conclude at

December 30, 2017,

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

2018

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 30, 2017,

and

December 31, 2016,

was approximately

$31.5

million and

$44.7

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 deferred tax liabilities recorded as part of the

2008

acquisition of Rasco, a German corporation, the fiscal

2013

acquisition of Ismeca, a Swiss Corporation, and the fiscal

2017

acquisition of Kita Japan, a Japanese company 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 for income taxes for continuing operations is as follows:

(in thousands)	2017			2016			2015
Tax provision at U.S. 35% statutory rate	$	12,378		$	2,102		$	2,801
Impact of Tax Act, before reduction in valuation allowance		12,397			-			-
State income taxes, net of federal tax benefit		56			168			(152	)
Settlements, adjustments and releases from statute expirations		(1,731	)		(312	)		(104	)
Federal tax credits		(371	)		(183	)		(221	)
Stock-based compensation		(2,801	)		168			156
Change in valuation allowance		(13,484	)		2,430			2,181
Non-deductible transaction related costs		577			463			-
Foreign income taxed at different rates		(4,866	)		(2,378	)		(2,601	)
Other, net		89			289			151
	$	2,244		$	2,747		$	2,211

Our effective tax rate for each of the years presented was impacted by earnings realized in foreign jurisdictions with statutory tax rates lower than the U.S. federal statutory tax rate. Included in

2017

foreign income taxed at different rates is

$2.0

million of foreign withholding tax that we accrued in the event we repatriate funds from certain of our foreign subsidiaries. Beginning in

2018,

earnings realized in foreign jurisdictions will be subject to U.S. tax in accordance with the Tax Act. State income taxes, net of federal benefit, have been reduced by research tax credits totaling approximately

$0.2

million,

$0.2

million and

$0.4

million in

2017,

2016

and

2015,

respectively.

December 30, 2017,

we had federal and state net operating loss carryforwards of approximately

$31.2

million and

$19.0

million, respectively, that expire in various tax years beginning in

2018

through

2036

or have

expiration date. We also have federal and state tax credit carryforwards at

December 30, 2017

of approximately

$7.6

million and

$14.1

million, respectively, certain of which expire in various tax years beginning in

2018

through

2037

or have

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. We believe the state tax credit is

not

likely to be realized.

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

2027.

The impact of these holidays was an increase in net income of approximately

$2.8

million or

$0.10

per share in

2017,

$1.0

million, or

$0.04

per share, in

2016

and

$0.8

million, or

$0.03

per share, in fiscal

2015.

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

(in thousands)	2017			2016			2015
Balance at beginning of year	$	10,075		$	10,444		$	10,841
Gross additions for tax positions of current year		200			125			215
Gross additions for tax positions of prior years		958			58			248
Reductions due to lapse of the statute of limitations		(1,148	)		(446	)		(243	)
Foreign exchange rate impact		236			(106	)		(617	)
Balance at end of year	$	10,321		$	10,075		$	10,444

The gross additions for tax positions of prior years is primarily related to the Kita acquisition.

If the unrecognized tax benefits at

December 30, 2017

are ultimately recognized, approximately

$4.3

million (

$5.2

million at

December 31, 2016)

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 30, 2017,

could decrease in

2018

by approximately

$0.6

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

$1.1

million and

$1.2

million accrued for the payment of interest and penalties at

December

30,

2017,

and

December 31, 2016,

respectively. Interest expense, net of accrued interest reversed, was $(

0.3

) million in

2017,

not

significant in

2016

and

$0.1

million in

2015.

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

2013

and

2012,

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

ten

years after the year for which the tax return is due or the tax is assessed.