Income Taxes

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

(in thousands)	2019			2018			2017
Current:
U.S. Federal	$	-		$	-		$	12
U.S. State		130			51			18
Foreign		2,173			8,787			6,005
Total current		2,303			8,838			6,035
Deferred:
U.S. Federal		98			56			(3,451	)
U.S. State		1			-			(481	)
Foreign		(5,484	)		(8,263	)		141
Total deferred		(5,385	)		(8,207	)		(3,791	)
	$	(3,082	)	$	631		$	2,244

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

(in thousands)	2019			2018			2017
U.S.	$	(72,669	)	$	(42,682	)	$	1,430
Foreign		592			10,770			33,935
Total	$	(72,077	)	$	(31,912	)	$	35,365

The Tax Act was enacted on

December 22, 2017,

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

2018,

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

35%

21%

and created new taxes on certain foreign-sourced earnings and related-party payments, which are referred to as the global intangible low-taxed income (“GILTI”) 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 The Tax Act also repealed the alternative minimum tax (AMT) effective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, the Company made reasonable estimates of the effects and recorded provisional amounts in our financial statements as of

December 30, 2017

by applying the guidance in SAB

118

because we had

not

completed our accounting for these effects. During

2018,

the Company completed the accounting for these effects. Except as described below under “One-time transition tax”, due to the valuation allowance against our deferred tax assets, there was

net change made in

2018

to our

2017

enactment-date provisional income tax.

Under GAAP, we are allowed to make an accounting policy election to either (i) treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred or (ii) factor such amounts into a company’s measurement of its deferred taxes. We have elected to account for GILTI as a period cost.

One-time transition tax

The Tax Act required 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.

2017

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. In

2018

the IRS and U.S. Treasury issued Notice

2018

that addresses certain aspects of the calculation of the transition tax (“Notice

2018

29”

). Application of Notice

2018

resulted in an increase to our transition tax liability of approximately

$5.1

million that was fully offset by net operating losses resulting in

net increase to income tax expense.

Deferred tax effects

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

35%

21%

for years after

2017.

Accordingly, we 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.

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 in the hands of U.S. corporate shareholders, we 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.

Except for working capital requirements in certain foreign jurisdictions, we provide for all taxes, including withholding and other residual taxes, related to unremitted earnings of our foreign subsidiaries.

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)	2019			2018
Deferred tax assets:
Inventory, receivable and warranty reserves	$	11,896		$	12,560
Net operating loss carryforwards		69,096			65,587
Tax credit carryforwards		36,489			34,251
Accrued employee benefits		4,685			5,134
Stock-based compensation		2,372			2,108
Lease liabilities		7,890			-
Other		7,885			7,827
Gross deferred tax assets		140,313			127,467
Less valuation allowance		(93,498	)		(84,718	)
Total deferred tax assets		46,815			42,749
Deferred tax liabilities:
Depreciation and fixed asset related		948			3,156
Intangible assets and other acquisition basis differences		62,325			70,415
Operating lease right-of-use assets		7,504			-
Unremitted earnings of foreign subsidiaries		2,462			5,257
Total deferred tax liabilities		73,239			78,828
Net deferred tax liabilities	$	(26,424	)	$	(36,079	)

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 loss history at the end of various fiscal periods including

2019.

As a result of our cumulative,

three

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

2019

we were unable to conclude 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

2020

and should circumstances change it is possible an additional valuation allowance will be recorded or the remaining valuation allowance, or a portion thereof, will be reversed in a future period.

Our valuation allowance on our DTAs at

December 28, 2019,

and

December 29, 2018,

was approximately

$93.5

million and

$84.7

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 by our non-U.S. subsidiaries 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)	2019			2018			2017
Tax provision at U.S. 21% statutory rate (35% in 2017)	$	(15,136	)	$	(6,702	)	$	12,378
Impact of Tax Act, before reduction in valuation allowance		-			5,095			12,397
State income taxes, net of federal tax benefit		(1,097	)		(663	)		56
Settlements, adjustments and releases from statute expirations		(1,204	)		(783	)		(1,731	)
Federal tax credits		(1,458	)		(864	)		(371	)
Stock-based compensation		587			(838	)		(2,801	)
Executive compensation limited by Section 162(m)		190			3,456			246
Change in valuation allowance		11,270			(2,015	)		(13,484	)
Non-deductible transaction related costs		-			1,106			331
GILTI		2,480			3,531			-
Foreign rate differential		187			(435	)		(4,866	)
Other, net		1,099			(257	)		89
	$	(3,082	)	$	631		$	2,244

December 28, 2019,

including carryforwards from the Xcerra acquisition as described below, we had federal, state and foreign net operating loss carryforwards of approximately

$246.9

million,

$160.5

million and

$25.1

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

2020

through

2039

or have

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

December 28, 2019

of approximately

$11.5

million and

$31.6

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

2020

through

2039

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 in the foreseeable future.

The Company has completed a Section

382

and

383

analysis of the Internal Revenue Code and applicable state law, regarding the limitation of its net operating loss and business tax credit carryforwards as of

December 28, 2019.

As a result of the analysis, the Company concluded that the acquisition of Xcerra on

October 1, 2018,

triggered a limitation in the utilization of Xcerra’s net operating loss and research credit carryforwards. The Company has reduced its deferred tax assets related to the Xcerra U.S. net operating loss and credit carryforwards that are anticipated to expire unused as a result of ownership changes. These tax attributes have been excluded from deferred tax assets with a corresponding reduction of the valuation allowance with

net effect on the income tax provision or effective tax rate. The Company will continue to assess the realizability of these carryforwards in subsequent periods. Future changes in the ownership of Cohu could further limit the utilization of these carryforwards.

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

$2.1

million or

$0.05

per share in

2019,

$2.4

million, or

$0.08

per share, in

2018

and

$2.8

million, or

$0.10

per share, in fiscal

2017.

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

(in thousands)	2019			2018			2017
Balance at beginning of year	$	34,701		$	10,321		$	10,075
Additions for tax positions of current year		1,231			524			200
Additions (reductions) for tax positions of prior years		(484	)		191			58
Reductions due to lapse of the statute of limitations		(957	)		(645	)		(1,148	)
Additions related to Xcerra and Kita acquisitions		-			24,352			900
Reductions due to settlements		(30	)		-			-
Foreign exchange rate impact		104			(42	)		236
Balance at end of year	$	34,565		$	34,701		$	10,321

If the unrecognized tax benefits at

December 28, 2019

are ultimately recognized, excluding the impact of U.S. tax benefits netted against deferred taxes that are subject to a valuation allowance, approximately

$7.0

million (

$8.2

million at

December 29, 2018)

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 28, 2019,

could decrease in

2020

by approximately

$0.4

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

$1.3

million and

$1.5

million accrued for the payment of interest and penalties at

December

28,

2019,

and

December 29, 2018,

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

0.3

) million in

2019,

$0.6

million in

2018

and $(

0.3

) million in

2017.

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

2015

and

2014

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. Our German subsidiaries income tax returns for

2012

2016

are currently under routine examination by tax authorities in Germany. Our Philippines subsidiary income tax return for

2017

is currently under routine examination by the Bureau of Internal Revenue. The examination of our Japan subsidiary income tax returns for

2017

and

2018

was concluded in

2019.