Note 9 - Income Taxes

12 Months Ended

Dec. 25, 2021

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)	2021		2020			2019
Current:
U.S. Federal	$	1,103	$	-		$	-
U.S. State		101		21			130
Foreign		22,862		5,950			2,173
Total current		24,066		5,971			2,303
Deferred:
U.S. Federal		5		8			98
U.S. State		-		-			1
Foreign		948		(5,313	)		(5,484	)
Total deferred		953		(5,305	)		(5,385	)
	$	25,019	$	666		$	(3,082	)

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

(in thousands)	2021		2020			2019
U.S.	$	30,588	$	(25,005	)	$	(72,669	)
Foreign		161,756		11,828			592
Total	$	192,344	$	(13,177	)	$	(72,077	)

Deferred tax effects

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)	2021			2020
Deferred tax assets:
Inventory, receivable and warranty reserves	$	12,166		$	11,720
Net operating loss carryforwards		44,806			56,777
Tax credit carryforwards		31,264			37,393
Accrued employee benefits		5,695			5,306
Stock-based compensation		2,222			2,210
Lease liabilities		4,500			5,146
Other		2,674			4,309
Gross deferred tax assets		103,327			122,861
Less valuation allowance		(76,250	)		(86,124	)
Total deferred tax assets		27,077			36,737
Deferred tax liabilities:
Intangible assets and other acquisition basis differences		39,929			52,012
Operating lease right-of-use assets		4,066			4,706
Unremitted earnings of foreign subsidiaries		4,207			3,119
Total deferred tax liabilities		48,202			59,837
Net deferred tax liabilities	$	(21,125	)	$	(23,100	)

The components of total net deferred tax assets (liabilities), net of valuation allowances, as shown in our consolidated balance sheets are as follows:

(in thousands)	2021			2020
Other assets (long-term)	$	4,762		$	5,716
Long-term deferred income tax liabilities		(25,887	)		(28,816	)
Net deferred tax liabilities	$	(21,125	)	$	(23,100	)

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 incurred at our U.S. operations at the end of various fiscal periods including 2021.

As a result of our cumulative, three-year U.S. GAAP pretax loss and excluding the one-time gain on the sale of PTG from our U.S. continuing operations at the end of 2021, 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 2022 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 25, 2021, and December 26, 2020, was approximately $76.3 million and $86.1 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 and to a lesser extent future taxable income in certain jurisdictions exclusive of reversing temporary differences and carryforwards.

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 U.S. during the last five years, 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)	2021			2020			2019
Tax provision at U.S. 21% statutory rate	$	40,392		$	(2,757	)	$	(15,136	)
State income taxes, net of federal tax benefit		2,246			(1,160	)		(1,097	)
Settlements, adjustments and releases from statute expirations		(787	)		(118	)		(1,204	)
Federal R&D credits		(943	)		(46	)		(1,458	)
Stock-based compensation		(4,802	)		727			587
Excess executive compensation		1,608			491			190
Change in valuation allowance		(9,882	)		(1,691	)		11,270
Exemption of PTG gain		(12,378	)		-			-
Dividend, net of foreign tax credits		693			1,224			1,453
GILTI, net of foreign tax credits		9,343			4,191			2,480
Foreign rate differential		(1,023	)		(1,512	)		(1,266	)
Other, net		552			1,317			1,099
	$	25,019		$	666		$	(3,082	)

An accounting policy may be selected to either (i) treat taxes due on future U.S. inclusions in taxable income related to global intangible low-taxed income (“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.

At December 25, 2021, we had federal, state and foreign net operating loss carryforwards of approximately $160.5 million, $135.3 million and $9.6 million, respectively, that expire in various tax years beginning in 2022 through 2040 or have no expiration date. We also have federal and state tax credit carryforwards at December 25, 2021 of approximately $6.8 million and $30.9 million, respectively, certain of which expire in various tax years beginning in 2022 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 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 through October 1, 2018. 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’ve also analyzed and determined that there were no subsequent ownership changes during the three-year period ending December 25, 2021. 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 $4.5 million or $0.09 per share in 2021, $3.6 million, or $0.09 per share, in 2020 and $2.1 million, or $0.05 per share, in fiscal 2019.

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

(in thousands)	2021			2020			2019
Balance at beginning of year	$	33,696		$	34,740		$	34,873
Additions for tax positions of current year		686			817			1,231
Reductions for tax positions of prior years		(83	)		(425	)		(484	)
Reductions due to lapse of the statute of limitations		(1,012	)		(304	)		(957	)
Reductions due to settlements		-			(1,134	)		(30	)
Foreign exchange rate impact		104			2			107
Balance at end of year	$	33,391		$	33,696		$	34,740

If the unrecognized tax benefits at December 25, 2021 are ultimately recognized, excluding the impact of U.S. tax benefits netted against deferred taxes that are subject to a valuation allowance, approximately $5.3 million ($5.9 million at December 26, 2020 and $7.0 million at December 28, 2019) would result in a reduction in our income tax expense and effective tax rate.

We recognize interest and penalties related to unrecognized tax benefits in income tax expense. Cohu had approximately $0.8 million and $1.0 million accrued for the payment of interest and penalties at December 25, 2021, and December 26, 2020, respectively. Interest expense, net of accrued interest reversed, was $(0.2) million in 2021 and $(0.3) million in both 2020 and 2019.

Our U.S. federal and state income tax returns for years after 2017 and 2016, 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.

We conduct business globally and as a result, Cohu or one or more of its subsidiaries files income tax returns in the US and various state and foreign jurisdictions. In the normal course of business, we are subject to examinations by taxing authorities throughout the world and are currently under examination in Germany and Malaysia. We believe our financial statement accruals for income taxes are appropriate.