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Note 9 - Income Taxes | 12 Months Ended
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Dec. 31, 2022
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) |  | 2022 |  |  | 2021 |  |  | 2020 |
Current: |  |  |  |  |  |  |  |  |  |  |  |
U.S. Federal |  | $ | 1,609 |  |  | $ | 1,103 |  |  | $ | - |
U.S. State |  |  | 456 |  |  |  | 101 |  |  |  | 21 |
Foreign |  |  | 31,307 |  |  |  | 22,862 |  |  |  | 5,950 |
Total current |  |  | 33,372 |  |  |  | 24,066 |  |  |  | 5,971 |
Deferred: |  |  |  |  |  |  |  |  |  |  |  |
U.S. Federal |  |  | (9 | ) |  |  | 5 |  |  |  | 8 |
Foreign |  |  | (3,495 | ) |  |  | 948 |  |  |  | (5,313 | )
Total deferred |  |  | (3,504 | ) |  |  | 953 |  |  |  | (5,305 | )
|  | $ | 29,868 |  |  | $ | 25,019 |  |  | $ | 666 |
Income (loss) before income taxes from continuing operations consisted of the following:
(in thousands) |  | 2022 |  |  | 2021 |  |  | 2020 |
U.S. |  | $ | 9,180 |  |  | $ | 30,588 |  |  | $ | (25,005 | )
Foreign |  |  | 117,535 |  |  |  | 161,756 |  |  |  | 11,828 |
Total |  | $ | 126,715 |  |  | $ | 192,344 |  |  | $ | (13,177 | )
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) |  | 2022 |  |  | 2021 |
Deferred tax assets: |  |  |  |  |  |  |  |
Inventory, receivable and warranty reserves |  | $ | 13,599 |  |  | $ | 12,166 |
Net operating loss carryforwards |  |  | 39,545 |  |  |  | 44,806 |
Tax credit carryforwards |  |  | 29,646 |  |  |  | 31,264 |
Capitalized R&D |  |  | 19,819 |  |  |  | 8,728 |
Accrued employee benefits |  |  | 4,416 |  |  |  | 5,695 |
Stock-based compensation |  |  | 2,990 |  |  |  | 2,222 |
Lease liabilities |  |  | 3,965 |  |  |  | 4,500 |
Other |  |  | 472 |  |  |  | 2,674 |
Gross deferred tax assets |  |  | 114,452 |  |  |  | 112,055 |
Less valuation allowance |  |  | (89,234 | ) |  |  | (76,250 | )
Total deferred tax assets |  |  | 25,218 |  |  |  | 35,805 |
Deferred tax liabilities: |  |  |  |  |  |  |  |
Intangible assets and other acquisition basis differences |  |  | 38,921 |  |  |  | 48,657 |
Operating lease right-of-use assets |  |  | 3,573 |  |  |  | 4,066 |
Unremitted earnings of foreign subsidiaries |  |  | 153 |  |  |  | 4,207 |
Total deferred tax liabilities |  |  | 42,647 |  |  |  | 56,930 |
Net deferred tax liabilities |  | $ | (17,429 | ) |  | $ | (21,125 | )
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) |  | 2022 |  |  | 2021 |
Other assets (long-term) |  | $ | 3,930 |  |  | $ | 4,762 |
Long-term deferred income tax liabilities |  |  | (21,359 | ) |  |  | (25,887 | )
Net deferred tax liabilities |  | $ | (17,429 | ) |  | $ | (21,125 | )
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 taxable income in prior carryback years, future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, and prudent and feasible tax planning strategies that we would be willing to undertake to prevent a deferred tax asset from otherwise expiring. The assessment regarding whether a valuation allowance is required or whether a change in judgement regarding the valuation allowance has occurred also considers all available positive and negative evidence, including but not limited to:
| • | Nature, frequency, and severity of cumulative losses in recent years
| • | Duration of statutory carryforward and carryback periods
| • | Statutory limitations against utilization of tax attribute carryforwards against taxable income
| • | Historical experience with tax attributes expiring unused
| • | Near- and medium-term financial outlook
The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. Accordingly, it is generally difficult to conclude a valuation allowance is not required when there is significant objective and verifiable negative evidence, such as cumulative losses in recent years. We use the actual results for the last two years and current year results as the primary measure of cumulative losses in recent years. The evaluation of deferred tax assets requires judgment in assessing the likely future tax consequences of events recognized in the financial statements or tax returns and future profitability. The recognition of deferred tax assets represents our best estimate of those future events. Changes in the current estimates, due to unanticipated events or otherwise, could have a material effect on our results of operations and financial condition. In certain tax jurisdictions, our analysis indicates that it has cumulative losses in recent years. This is considered significant negative evidence, which is objective and veritable and, therefore, difficult to overcome. However, the cumulative loss position is not solely determinative and, accordingly, we consider all other available positive and negative evidence in this analysis. Based on the evidence available including a lack of sustainable earnings and history of expiring unused NOLs, and tax credits, we continue to maintain the judgement that a previously recorded valuation allowance against substantially all net deferred tax assets in the United States is still required. If a change in judgement regarding this valuation allowance were to occur in the future, we will record a potentially material deferred tax benefit, which could result in a favorable impact on the effective tax rate in that period. Our valuation allowance on our DTAs at December 31, 2022, and December 25, 2021, was approximately $89.2 million and $76.3 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. 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) |  | 2022 |  |  | 2021 |  |  | 2020 |
Tax provision at U.S. 21% statutory rate |  | $ | 26,610 |  |  | $ | 40,392 |  |  | $ | (2,757 | )
State income taxes, net of federal tax benefit |  |  | (1,535 | ) |  |  | 2,246 |  |  |  | (1,160 | )
Settlements, adjustments and releases from statute expirations |  |  | 348 |  |  |  | (787 | ) |  |  | (118 | )
Federal R&D credits |  |  | (1,679 | ) |  |  | (943 | ) |  |  | (46 | )
Stock-based compensation |  |  | (572 | ) |  |  | (4,802 | ) |  |  | 727 |
Excess executive compensation |  |  | 946 |  |  |  | 1,608 |  |  |  | 491 |
Change in valuation allowance |  |  | 13,307 |  |  |  | (9,882 | ) |  |  | (1,691 | )
Exemption of PTG gain |  |  | - |  |  |  | (12,378 | ) |  |  | - |
Dividend, net of foreign tax credits |  |  | 13 |  |  |  | 693 |  |  |  | 1,224 |
GILTI, net of foreign tax credits |  |  | 3,458 |  |  |  | 9,343 |  |  |  | 4,191 |
Foreign rate differential |  |  | (6,131 | ) |  |  | (1,023 | ) |  |  | (1,512 | )
Other, net |  |  | (4,897 | ) |  |  | 552 |  |  |  | 1,317 |
|  | $ | 29,868 |  |  | $ | 25,019 |  |  | $ | 666 |
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 31, 2022, we had federal, state and foreign net operating loss carryforwards of approximately $140.0 million, $113.9 million and $9.0 million, respectively, that expire in various tax years beginning in 2023 through 2041 or have no expiration date. We also have federal and state tax credit carryforwards at December 31, 2022 of approximately $3.7 million and $32.9 million, respectively, certain of which expire in various tax years beginning in 2023 through 2041 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 laws. We analyzed and determined that there were no ownership changes during the three-year period ending December 31, 2022. 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 both 2022 and 2021, and $3.6 million, or $0.09 per share, in fiscal 2020. A reconciliation of our gross unrecognized tax benefits, excluding accrued interest and penalties, is as follows:
(in thousands) |  | 2022 |  |  | 2021 |  |  | 2020 |
Balance at beginning of year |  | $ | 33,391 |  |  | $ | 33,696 |  |  | $ | 34,740 |
Additions for tax positions of current year |  |  | 910 |  |  |  | 686 |  |  |  | 817 |
Reductions for tax positions of prior years |  |  | (428 | ) |  |  | (83 | ) |  |  | (425 | )
Reductions due to lapse of the statute of limitations |  |  | (354 | ) |  |  | (1,012 | ) |  |  | (304 | )
Reductions due to settlements |  |  | - |  |  |  | - |  |  |  | (1,134 | )
Foreign exchange rate impact |  |  | (151 | ) |  |  | 104 |  |  |  | 2 |
Balance at end of year |  | $ | 33,368 |  |  | $ | 33,391 |  |  | $ | 33,696 |
If the unrecognized tax benefits at December 31, 2022 are ultimately recognized, excluding the impact of U.S. tax benefits netted against deferred taxes that are subject to a valuation allowance, approximately $5.8 million ($5.3 million at December 25, 2021 and $5.9 million at December 26, 2020) 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 $0.6 million and $0.8 million accrued for the payment of interest and penalties at December 31, 2022, and December 25, 2021, respectively. Interest expense, net of accrued interest reversed, was $(0.1) million in 2022, $(0.2) million in 2021 and $(0.3) million in 2020. Our U.S. federal and state income tax returns for years after 2018 and 2017, 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, Singapore, Philippines and Malaysia. We believe our financial statement accruals for income taxes are appropriate.

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