INCOME TAXES

Cadence's income before provision (benefit) for income taxes included income from the United States and from foreign subsidiaries for fiscal 2013, 2012 and 2011, is as follows:



	2013		2012		2011
	(In thousands)
United States	$	20,092	$	61,865	$	39,175
Foreign subsidiaries	138,904		126,406		56,251
Total income before provision (benefit) for income taxes	$	158,996	$	188,271	$	95,426

Cadence's foreign subsidiaries are generally subject to lower statutory tax rates than the United States statutory federal income tax rate of 35%.

Cadence's provision (benefit) for income taxes was comprised of the following items for fiscal 2013, 2012 and 2011:



	2013			2012			2011
	(In thousands)
Current:
Federal	$	(40,494	)	$	(588	)	$	(662	)
State and local	2,574			(36,650		)	1,363
Foreign	28,040			19,409			13,752
Total current	(9,880		)	(17,829		)	14,453

Deferred:
Federal	4,888			(203,731		)	(4,937		)
State and local	3,037			(28,894		)	(524		)
Foreign	(10,291		)	(7,799		)	(2,350		)
Total deferred	(2,366		)	(240,424		)	(7,811		)

Tax expense allocated to shareholders' equity	6,999			6,576			16,555

Total provision (benefit) for income taxes	$	(5,247	)	$	(251,677	)	$	23,197

The provision (benefit) for income taxes differs from the amount estimated by applying the United States statutory federal income tax rate of 35% to income before provision (benefit) for income taxes for fiscal 2013, 2012 and 2011 as follows:



	2013			2012			2011
	(In thousands)
Provision computed at federal statutory income tax rate	$	55,648		$	65,895		$	33,400
State and local income tax, net of federal tax effect	4,085			3,626			6,493
Foreign income tax rate differential	(36,392		)	(39,308		)	(6,676		)
Non-deductible share-based compensation costs	2,053			7,785			1,651
Change in deferred tax asset valuation allowance	18,354			(301,542		)	(3,617		)
Tax credits	(18,372		)	(3,744		)	(12,588		)
Repatriation of foreign earnings	(2,116		)	(2,645		)	708
Non-deductible research and development expense	3,043			1,968			—
Domestic production activity deduction	(1,088		)	—			—
Withholding taxes	3,333			3,593			3,851
Tax settlements, domestic	—			(37,481		)	328
Tax settlements, foreign	680			(804		)	(2,451		)
Interest and penalties not included in tax settlements	1,701			2,552			1,840
Increase (decrease) in unrecognized tax benefits not included in tax settlements	(33,730		)	47,329			933
Other	(2,446		)	1,099			(675		)
Provision (benefit) for income taxes	$	(5,247	)	$	(251,677	)	$	23,197
Effective tax rate	(3		)%	(134		)%	24		%

The components of deferred tax assets and liabilities consisted of the following as of December 28, 2013 and December 29, 2012:



	As of
	December 28, 2013			December 29, 2012
	(In thousands)
Deferred tax assets:
Tax credit carryforwards	$	159,839		$	129,724
Reserves and accruals	49,450			50,960
Intangible assets	45,948			56,512
Capitalized research and development expense for income tax purposes	33,742			34,046
Operating loss carryforwards	27,205			24,429
Deferred income	25,420			27,237
Capital loss carryforwards	22,050			23,026
Share-based compensation costs	20,652			20,012
Depreciation and amortization	11,167			8,979
Investments	7,643			7,550
Other	4,911			4,185
Total deferred tax assets	408,027			386,660
Valuation allowance	(92,677		)	(74,323		)
Net deferred tax assets	315,350			312,337

Deferred tax liabilities:
Intangible assets	(66,775		)	(70,086		)
Undistributed foreign earnings	(17,301		)	(13,113		)
Other	(2,230		)	(965		)
Total deferred tax liabilities	(86,306		)	(84,164		)
Total net deferred tax assets	$	229,044		$	228,173

The operating loss carryforwards included in the components of deferred tax assets and liabilities do not include excess tax benefits associated with share-based compensation. The excess tax benefit from share-based compensation is not recognized until a tax deduction is realized on Cadence's income tax returns. As of December 28, 2013 and December 29, 2012, Cadence had unrealized share-based compensation deductions as follows:



	As of
	December 28, 2013		December 29, 2012
	(Tax Effected - In thousands)
Federal	$	—	$	2,170
California	457		457

Upon realization of these deductions on Cadence's income tax returns, the tax effect of these deductions will result in an increase to stockholders' equity rather than as a reduction of income tax expense.

Cadence regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance if it is more likely than not that some portion of the deferred tax assets will not be realized. This analysis involves weighing both the positive and negative evidence concerning the realizability of the Company's deferred tax assets in each tax jurisdiction. During fiscal 2013, Cadence determined that there was sufficient positive evidence to judge that $315.4 million of deferred tax assets were more likely than not to be realized. The evidence that the Company relied on to make this determination included the following:


•	The magnitude and duration of Cadence's current profitability in the United States;


•	Cadence's multi-year history of approximately 90% of the aggregate value of its bookings being of a type that revenue is recurring in nature;


•	Cadence's existing revenue backlog as of December 28, 2013 that provides Cadence with an objective source of future revenues to be recognized in fiscal 2014 and subsequent periods; and


•	Cadence's expectation of having sufficient sources of income in the future to prevent the expiration of deferred tax assets.

During fiscal 2012, Cadence weighed similar evidence available for that period to release a valuation allowance of $219.6 million that was previously reserved against a substantial portion of the United States federal and state deferred tax assets.

During fiscal 2013 and 2012, Cadence maintained valuation allowances of $92.7 million and $74.3 million, respectively, on certain federal, state and foreign deferred tax assets because the realization of these deferred tax assets require future income of a specific character or amount that Cadence considered uncertain. The valuation allowance primarily relates to the following:


•	Tax credits in certain state and foreign jurisdictions that are accumulating at a rate greater than Cadence's capacity to utilize the credits;


•	Federal and foreign deferred tax assets related to investments and capital losses that can only be utilized against gains that are capital in nature; and


•	Domestic foreign tax credits that have not been recognized for income tax purposes and can only be fully utilized if Cadence has sufficient levels of foreign source income in the future.

Cadence provides for United States income taxes on the earnings of foreign subsidiaries unless the earnings are considered indefinitely invested outside of the United States. Cadence intends to indefinitely reinvest $297.1 million of undistributed earnings of its foreign subsidiaries as of December 28, 2013, to meet the working capital and long-term capital needs of its foreign subsidiaries. The unrecognized deferred tax liability for these indefinitely reinvested foreign earnings was $51.2 million as of December 28, 2013.

As of December 28, 2013, Cadence's operating loss carryforwards were as follows:



	Amount		Expiration Periods
	(in thousands)
Federal	$	5,394	from 2021 through 2029
California	256,393		from 2014 through 2031
Other states (tax effected, net of federal benefit)	3,265		from 2014 through 2031
Foreign (tax effected)	7,777		from 2021 through indefinite

As of December 28, 2013, Cadence had tax credit carryforwards of:



	Amount		Expiration Periods
	(in thousands)
Federal*	$	114,646	from 2015 through 2030
California	24,946		do not expire until utilized
Other states	5,572		from 2014 through 2027
Foreign	14,675		from 2017 through 2031

_____________

*Certain of Cadence's foreign tax credits are anticipated and as result do not yet have an expiration period.

Examinations by Tax Authorities

Taxing authorities regularly examine Cadence's income tax returns.

In December 2012, the California Franchise Tax Board, or FTB, completed its field examination of Cadence's California state income tax returns for the tax years 2001 through 2003 and issued a Notice of Proposed Assessment, or NPA, that resulted in tax refunds due to Cadence. Cadence determined that certain tax positions were effectively settled and Cadence recognized a benefit for income taxes of $36.7 million in its consolidated income statement during fiscal 2012.

In June 2013, the FTB completed its field examination of Cadence's California state income tax returns for the tax years 2004 through 2006, which did not significantly impact Cadence's consolidated income statement during fiscal 2013.

As of December 28, 2013, Cadence's earliest tax years that remain open to examination include:



Jurisdiction		Earliest Tax Year Open to Examination

United States - Federal		2010
United States - California		2009
Israel		2009
Hungary		2007

Unrecognized Tax Benefits

The changes in Cadence's gross amount of unrecognized tax benefits during fiscal 2013, 2012 and 2011 are as follows:



	2013			2012			2011
	(In thousands)
Unrecognized tax benefits at the beginning of the fiscal year	$	92,378		$	98,812		$	131,545
Gross amount of the increases (decreases) in unrecognized tax benefits of tax positions taken during a prior year*	6,196			2,194			(3,791		)
Gross amount of the increases in unrecognized tax benefits as a result of tax positions taken during the current year	5,119			3,082			1,588
Amount of decreases in unrecognized tax benefits relating to settlements with taxing authorities, including the utilization of tax attributes	(15,171		)	(11,768		)	(30,115		)
Reductions to unrecognized tax benefits resulting from the lapse of the applicable statute of limitations	(11,850		)	(189		)	(421		)
Effect of foreign currency translation	1,607			247			6
Unrecognized tax benefits at the end of the fiscal year	$	78,279		$	92,378		$	98,812

Total amounts of unrecognized tax benefits that, if upon resolution of the uncertain tax positions would reduce Cadence's effective tax rate	$	49,458		57,725			$	75,057

_________

* Includes unrecognized tax benefits of tax positions recorded in connection with acquisitions

The total amounts of interest and penalties recognized in the consolidated income statements as provision (benefit) for income taxes for fiscal 2013, 2012 and 2011 were as follows:



	2013			2012			2011
	(In thousands)
Interest	$	(12,470	)	$	(11,184	)	$	2,173
Penalties	(7,698		)	(1,862		)	(1,495		)

The total amounts of gross accrued interest and penalties recognized in the consolidated balance sheets as of December 28, 2013 and December 29, 2012 were as follows:



	As of
	December 28, 2013		December 29, 2012
	(In thousands)
Interest	$	37	$	24,427
Penalties	1,227		8,953