INCOME TAXES

Cadence’s income before provision (benefit) for income taxes included income from the United States and from foreign subsidiaries for fiscal 2014, 2013 and 2012, is as follows:



	2014		2013		2012
	(In thousands)
United States	$	12,680	$	20,092	$	61,865
Foreign subsidiaries	168,322		138,904		126,406
Total income before provision (benefit) for income taxes	$	181,002	$	158,996	$	188,271

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 2014, 2013 and 2012:



	2014			2013			2012
	(In thousands)
Current:
Federal	$	(13,754	)	$	(40,494	)	$	(588	)
State and local	(1,159		)	2,574			(36,650		)
Foreign	19,100			28,040			19,409
Total current	4,187			(9,880		)	(17,829		)

Deferred:
Federal	2,075			4,888			(203,731		)
State and local	1,633			3,037			(28,894		)
Foreign	8,770			(10,291		)	(7,799		)
Total deferred	12,478			(2,366		)	(240,424		)

Tax expense allocated to shareholders’ equity	5,439			6,999			6,576

Total provision (benefit) for income taxes	$	22,104		$	(5,247	)	$	(251,677	)

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 2014, 2013 and 2012 as follows:



	2014			2013			2012
	(In thousands)
Provision computed at federal statutory income tax rate	$	63,350		$	55,648		$	65,895
State and local income tax, net of federal tax effect	1,168			4,085			3,626
Foreign income tax rate differential	(39,012		)	(39,144		)	(39,308		)
Non-deductible share-based compensation costs	5,726			2,053			7,785
Change in deferred tax asset valuation allowance	10,065			18,354			(301,542		)
Tax credits	(17,331		)	(18,372		)	(3,744		)
Repatriation of foreign earnings	(2,910		)	(2,116		)	(2,645		)
Non-deductible research and development expense	2,195			3,043			1,968
Tax effects of intra-entity transfer of assets	(5,397		)	270			148
Domestic production activity deduction	(1,281		)	(1,088		)	—
Withholding taxes	4,064			3,333			3,593
Tax settlements, domestic	—			—			(37,481		)
Interest and penalties not included in tax settlements	(382		)	1,701			2,552
Increase (decrease) in unrecognized tax benefits not included in tax settlements	157			(33,730		)	47,329
Other	1,692			716			147
Provision (benefit) for income taxes	$	22,104		$	(5,247	)	$	(251,677	)
Effective tax rate	12		%	(3		)%	(134		)%

In December 2014, the Tax Increase Prevention Act of 2014 was signed into law, retroactively extending the United States federal research and development credit from January 1, 2014 through December 31, 2014. As a result, Cadence recognized the retroactive benefit of approximately $8.1 million in the fourth quarter of 2014, the period in which the legislation was enacted.

The components of deferred tax assets and liabilities consisted of the following as of January 3, 2015 and December 28, 2013:



	As of
	January 3, 2015			December 28, 2013
	(In thousands)
Deferred tax assets:
Tax credit carryforwards	$	180,127		$	159,839
Reserves and accruals	65,935			49,450
Intangible assets	38,938			45,948
Capitalized research and development expense for income tax purposes	33,552			33,742
Operating loss carryforwards	25,285			27,205
Deferred income	19,534			25,420
Capital loss carryforwards	21,494			22,050
Share-based compensation costs	20,009			20,652
Depreciation and amortization	10,904			11,167
Investments	6,825			7,643
Other	1,332			4,911
Total deferred tax assets	423,935			408,027
Valuation allowance	(102,742		)	(92,677		)
Net deferred tax assets	321,193			315,350

Deferred tax liabilities:
Intangible assets	(57,040		)	(66,775		)
Undistributed foreign earnings	(28,026		)	(17,301		)
Other	(1,607		)	(2,230		)
Total deferred tax liabilities	(86,673		)	(86,306		)
Total net deferred tax assets	$	234,520		$	229,044

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. During fiscal 2014, Cadence determined that there was sufficient positive evidence to judge that $321.2 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 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 January 3, 2015 that provides Cadence with an objective source of future revenues to be recognized in fiscal 2015 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 2014 and 2013, Cadence maintained valuation allowances of $102.7 million and $92.7 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 $444.1 million of undistributed earnings of its foreign subsidiaries as of January 3, 2015, to meet the working capital and long-term capital needs of its foreign subsidiaries.

Cadence has not calculated the unrecognized deferred tax liability for these indefinitely reinvested foreign earnings because it was impracticable due to the resources required and the significant complexity of the judgments and calculations required.

As of January 3, 2015, Cadence’s operating loss carryforwards were as follows:



	Amount		Expiration Periods
	(In thousands)
Federal	$	6,151	from 2021 through 2033
California	241,015		from 2015 through 2033
Other states (tax effected, net of federal benefit)	2,558		from 2015 through 2031
Foreign (tax effected)	7,182		from 2031 through indefinite

As of January 3, 2015, Cadence had tax credit carryforwards of:



	Amount		Expiration Periods
	(In thousands)
Federal*	$	132,426	from 2017 through 2034
California	28,396		indefinite
Other states	5,956		from 2015 through 2029
Foreign	13,349		from 2017 through 2032

_____________

*Certain of Cadence’s foreign tax credits are anticipated and as a 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. Cadence determined that certain tax positions were effectively settled and recognized a benefit for income taxes of $36.7 million in its consolidated income statement during fiscal 2012.

As of January 3, 2015 Cadence’s earliest tax years that remain open to examination and the assessment of additional tax include:



Jurisdiction		Earliest Tax Year Open to Examination

United States - Federal		2011
United States - California		2010
Israel		2010
Hungary		2007

Unrecognized Tax Benefits

The changes in Cadence’s gross amount of unrecognized tax benefits during fiscal 2014, 2013 and 2012 are as follows:



	2014			2013			2012
	(In thousands)
Unrecognized tax benefits at the beginning of the fiscal year	$	78,279		$	92,378		$	98,812
Gross amount of the increases (decreases) in unrecognized tax benefits of tax positions taken during a prior year*	8,301			6,196			2,194
Gross amount of the increases in unrecognized tax benefits as a result of tax positions taken during the current year	12,381			5,119			3,082
Amount of decreases in unrecognized tax benefits relating to settlements with taxing authorities, including the utilization of tax attributes	—			(15,171		)	(11,768		)
Reductions to unrecognized tax benefits resulting from the lapse of the applicable statute of limitations	(86		)	(11,850		)	(189		)
Effect of foreign currency translation	(1,651		)	1,607			247
Unrecognized tax benefits at the end of the fiscal year	$	97,224		$	78,279		$	92,378

Total amounts of unrecognized tax benefits that, if upon resolution of the uncertain tax positions would reduce Cadence’s effective tax rate	$	57,127		$	49,458		$	57,725

_________

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

The total amounts of interest, net of tax, and penalties recognized in the consolidated income statements as provision (benefit) for income taxes for fiscal 2014, 2013 and 2012 were as follows:



	2014			2013			2012
	(In thousands)
Interest	$	255		$	(12,470	)	$	(11,184	)
Penalties	(748		)	(7,698		)	(1,862		)

The total amounts of gross accrued interest and penalties recognized in the consolidated balance sheets as of January 3, 2015 and December 28, 2013 were as follows:



	As of
	January 3, 2015		December 28, 2013
	(In thousands)
Interest	$	1,155	$	37
Penalties	446		1,227