Note 9 - Income Taxes

12 Months Ended

Dec. 26, 2020

Notes to Financial Statements

Income Tax Disclosure [Text Block]

9.     Income Taxes

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

(in thousands)	2020			2019			2018
Current:
U.S. Federal	$	-		$	-		$	-
U.S. State		21			130			51
Foreign		5,950			2,173			8,787
Total current		5,971			2,303			8,838
Deferred:
U.S. Federal		8			98			56
U.S. State		-			1			-
Foreign		(5,313	)		(5,484	)		(8,263	)
Total deferred		(5,305	)		(5,385	)		(8,207	)
	$	666		$	(3,082	)	$	631

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

(in thousands)	2020			2019			2018
U.S.	$	(25,005	)	$	(72,669	)	$	(42,682	)
Foreign		11,828			592			10,770
Total	$	(13,177	)	$	(72,077	)	$	(31,912	)

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% to 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 The Tax Act also repealed the alternative minimum tax (AMT) effective January 1, 2018, and made changes to net operating loss provisions, expensing of certain assets and capitalization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, we 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, we 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 no 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 8% 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.

In 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 2018-29 that addresses certain aspects of the calculation of the transition tax (“Notice 2018-29”). Application of Notice 2018-29 resulted in an increase to our transition tax liability of approximately $5.1 million that was fully offset by net operating losses resulting in no net increase to income tax expense.

Deferred tax effects

The Tax Act reduces the U.S. statutory tax rate from 35% to 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 in 2017, 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 20 years to indefinite.

Beginning in 2018, the Tax Act provides a 100% deduction for dividends received from 10-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 740-30-25-18 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)	2020			2019
Deferred tax assets:
Inventory, receivable and warranty reserves	$	11,720		$	11,235
Net operating loss carryforwards		56,777			69,092
Tax credit carryforwards		37,393			36,489
Accrued employee benefits		5,306			4,274
Stock-based compensation		2,210			2,372
Lease liabilities		5,146			5,804
Other		4,221			9,390
Gross deferred tax assets		122,773			138,656
Less valuation allowance		(86,124	)		(93,494	)
Total deferred tax assets		36,649			45,162
Deferred tax liabilities:
Intangible assets and other acquisition basis differences		52,012			63,866
Operating lease right-of-use assets		4,706			5,258
Unremitted earnings of foreign subsidiaries		3,119			2,462
Total deferred tax liabilities		59,837			71,586
Net deferred tax liabilities	$	(23,188	)	$	(26,424	)

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 loss history at the end of various fiscal periods including 2020.

As a result of our cumulative, three-year U.S. GAAP pretax loss from continuing operations at the end of 2020 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 2021 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 26, 2020, and December 28, 2019, was approximately $86.1 million and $93.5 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 CARES Act was signed into law on March 27,2020. The CARES Act includes several significant business tax provisions that, among other things, would eliminate the taxable income limit for certain net operating losses (“NOL”) and allow businesses to carry back NOLs arising in 2018, 2019 and 2020 to the five prior years, suspend the excess business loss rules, accelerate refunds of previously generated corporate alternative minimum tax credits, generally loosen the business interest limitation under IRC section 163(j) from 30 percent to 50 percent among other technical corrections included in the Tax Cuts and Jobs Act tax provisions. Due to our overall loss position in the US, the CARES Act did not have a significant impact on Company’s financial position or statement of operations.

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)	2020			2019			2018
Tax provision at U.S. 21% statutory rate	$	(2,757	)	$	(15,136	)	$	(6,702	)
Impact of Tax Act, before reduction in valuation allowance		-			-			5,095
State income taxes, net of federal tax benefit		(1,160	)		(1,097	)		(663	)
Settlements, adjustments and releases from statute expirations		(118	)		(1,204	)		(783	)
Federal tax credits		(46	)		(1,458	)		(864	)
Stock-based compensation		727			587			(838	)
Executive compensation limited by Section 162(m)		491			190			3,456
Change in valuation allowance		(1,691	)		11,270			(2,015	)
Non-deductible transaction related costs		-			-			1,106
Deemed dividend		1,224			1,453			470
GILTI		4,191			2,480			3,531
Foreign rate differential		(1,512	)		(1,266	)		(904	)
Other, net		1,317			1,099			(258	)
	$	666		$	(3,082	)	$	631

At December 26, 2020, including carryforwards from the Xcerra acquisition as described below, we had federal, state and foreign net operating loss carryforwards of approximately $200.9 million, $130.1 million and $22.5 million, respectively, that expire in various tax years beginning in 2021 through 2040 or have no expiration date. We also have federal and state tax credit carryforwards at December 26, 2020 of approximately $11.5 million and $32.8 million, respectively, certain of which expire in various tax years beginning in 2021 through 2040 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. We believe the state tax credit is not likely to be realized in the foreseeable future.

We have 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 26, 2020. As a result of the analysis, we 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. We reduced our 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 no net effect on the income tax provision or effective tax rate. We 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 $3.6 million or $0.09 per share in 2020, $2.1 million, or $0.05 per share, in 2019 and $2.4 million, or $0.08 per share, in fiscal 2018.

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

(in thousands)	2020			2019			2018
Balance at beginning of year	$	34,740		$	34,873		$	10,321
Additions for tax positions of current year		817			1,231			524
Additions (reductions) for tax positions of prior years		(425	)		(484	)		191
Reductions due to lapse of the statute of limitations		(304	)		(957	)		(645	)
Additions related to Xcerra acquisition		-			-			24,524
Reductions due to settlements		(1,134	)		(30	)		-
Foreign exchange rate impact		2			107			(42	)
Balance at end of year	$	33,696		$	34,740		$	34,873

If the unrecognized tax benefits at December 26, 2020 are ultimately recognized, excluding the impact of U.S. tax benefits netted against deferred taxes that are subject to a valuation allowance, approximately $5.7 million ($7.0 million at December 28, 2019 and $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 26, 2020, could decrease in 2021 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 $1.0 million and $1.3 million accrued for the payment of interest and penalties at December 26, 2020, and December 28, 2019, respectively. Interest expense, net of accrued interest reversed, was $(0.3) million in 2020, $(0.3) million in 2019 and $0.6 million in 2018.

Our U.S. federal and state income tax returns for years after 2016 and 2015, 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. While the examination of several of our German subsidiaries income tax returns for 2012 through 2017 were concluded in 2020, our other German subsidiaries income tax returns for 2015 to 2017 are currently under routine examination by tax authorities in Germany. Similarly, our Philippines subsidiary income tax return for 2017 is currently under routine examination by the Bureau of Internal Revenue, and the audit for the 2018 income tax year was concluded in 2020. Subsequent to December 26, 2020, we were notified by the taxing authority in Malaysia of its intent to perform an audit for 2014 to 2019 for one of our Malaysian subsidiaries.