INCOME TAXES

Cadence’s income before provision (benefit) for income taxes included income from the United States and from foreign subsidiaries for fiscal 2015, 2014 and 2013, is as follows:



	2015		2014		2013
	(In thousands)
United States	$	47,867	$	12,680	$	20,092
Foreign subsidiaries	219,729		168,322		138,904
Total income before provision (benefit) for income taxes	$	267,596	$	181,002	$	158,996

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 2015, 2014 and 2013:



	2015			2014			2013
	(In thousands)
Current:
Federal	$	(10,265	)	$	(13,754	)	$	(40,494	)
State and local	(713		)	(1,159		)	2,574
Foreign	24,622			19,100			28,040
Total current	13,644			4,187			(9,880		)

Deferred:
Federal	(13,165		)	2,075			4,888
State and local	1,751			1,633			3,037
Foreign	(1,734		)	8,770			(10,291		)
Total deferred	(13,148		)	12,478			(2,366		)

Tax expense allocated to shareholders’ equity	14,683			5,439			6,999

Total provision (benefit) for income taxes	$	15,179		$	22,104		$	(5,247	)

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 2015, 2014 and 2013 as follows:



	2015			2014			2013
	(In thousands)
Provision computed at federal statutory income tax rate	$	93,659		$	63,350		$	55,648
State and local income tax, net of federal tax effect	3,621			1,168			4,085
Foreign income tax rate differential	(56,873		)	(39,012		)	(39,144		)
Non-deductible share-based compensation costs	2,687			5,726			2,053
Change in deferred tax asset valuation allowance	(11,066		)	10,065			18,354
Tax credits	(19,243		)	(17,331		)	(18,372		)
Repatriation of foreign earnings	50			(2,910		)	(2,116		)
Non-deductible research and development expense	336			2,195			3,043
Tax effects of intra-entity transfer of assets	(7,928		)	(5,397		)	270
Domestic production activity deduction	—			(1,281		)	(1,088		)
Withholding taxes	5,119			4,064			3,333
Interest and penalties not included in tax settlements	331			(382		)	1,701
Increase (decrease) in unrecognized tax benefits not included in tax settlements	3,530			157			(33,730		)
Other	956			1,692			716
Provision (benefit) for income taxes	$	15,179		$	22,104		$	(5,247	)
Effective tax rate	6		%	12		%	(3		)%

In December 2015, the Protecting Americans from Tax Hikes Act of 2015 was signed into law, retroactively extending the United States federal research and development credit from January 1, 2015. As a result, Cadence recognized the retroactive benefit of approximately $10.1 million in the fourth quarter of 2015, the period in which the legislation was enacted.

The components of deferred tax assets and liabilities consisted of the following as of January 2, 2016 and January 3, 2015:



	As of
	January 2, 2016			January 3, 2015
	(In thousands)
Deferred tax assets:
Tax credit carryforwards	$	189,672		$	180,127
Reserves and accruals	54,774			65,935
Intangible assets	29,256			38,938
Capitalized research and development expense for income tax purposes	26,332			33,552
Operating loss carryforwards	25,208			25,285
Deferred income	16,407			19,534
Capital loss carryforwards	20,552			21,494
Stock-based compensation costs	17,612			20,009
Depreciation and amortization	22,442			10,904
Investments	7,113			6,825
Other	—			1,332
Total deferred tax assets	409,368			423,935
Valuation allowance	(91,677		)	(102,742		)
Net deferred tax assets	317,691			321,193

Deferred tax liabilities:
Intangible assets	(45,697		)	(57,040		)
Undistributed foreign earnings	(25,156		)	(28,026		)
Other	(1,390		)	(1,607		)
Total deferred tax liabilities	(72,243		)	(86,673		)
Total net deferred tax assets	$	245,448		$	234,520

The table of deferred tax assets and liabilities above does not include certain deferred tax assets as of January 2, 2016 that arose directly from tax deductions related to stock compensation greater than compensation recognized for financial reporting. Stockholders’ equity will be increased $8.1 million if and when such deferred tax assets are ultimately realized. Cadence uses tax law ordering when determining when excess tax benefits have been realized.

Cadence early adopted ASU 2015-17, “Balance Sheet Classification of Deferred Taxes,” effective January 2, 2016 on a prospective basis. Adoption of this ASU resulted in a reclassification of Cadence’s net current deferred tax asset to the net non-current deferred tax asset in the consolidated balance sheet as of January 2, 2016. No prior periods were retrospectively adjusted. For information regarding new accounting standards applicable to Cadence, see Note 2 in the notes to consolidated financial statements under the heading “New Accounting Standards.”

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 2015, Cadence determined that there was sufficient positive evidence to judge that $317.7 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 2, 2016 that provides Cadence with an objective source of future revenues to be recognized in fiscal 2016 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 2015 and 2014, Cadence maintained valuation allowances of $91.7 million and $102.7 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 states that are accumulating at a rate greater than Cadence’s capacity to utilize the credits and tax credits in certain states where it is likely the credits will expire unused;


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


•	Foreign tax credits that can only be fully utilized if Cadence has sufficient income of a specific character 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 $594.2 million of undistributed earnings of its foreign subsidiaries as of January 2, 2016, 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 complexities and uncertainties of the hypothetical calculation.

As of January 2, 2016, Cadence’s operating loss carryforwards were as follows:



	Amount		Expiration Periods
	(In thousands)
Federal*	$	25,976	from 2021 through 2035
California*	240,885		from 2016 through 2035
Other states (tax effected, net of federal benefit)*	3,177		from 2016 through 2035
Foreign (tax effected)	7,193		from 2032 through indefinite

_____________

* Includes net operating losses that arose directly from tax deductions for stock compensation greater than compensation recognized for financial reporting.

As of January 2, 2016, Cadence had tax credit carryforwards of:



	Amount		Expiration Periods
	(In thousands)
Federal*	$	139,820	from 2016 through 2035
California	30,455		indefinite
Other states	6,150		from 2016 through 2030
Foreign	13,246		from 2017 through 2035

_____________

*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 September 2015, a Cadence foreign subsidiary entered into a settlement agreement with a foreign tax authority with respect to its tax returns from 2010 through 2012. As a result of the settlement, Cadence recognized a tax benefit of $1.2 million from the recognition of previously unrecognized tax benefits. The settlement also provided Cadence with additional visibility into when it could expect to utilize certain tax credits, which in turn allowed Cadence to release $12.6 million of valuation allowance on anticipated credits.

As of January 2, 2016 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		2012
United States - California		2011
Hungary		2007

Unrecognized Tax Benefits

The changes in Cadence’s gross amount of unrecognized tax benefits during fiscal 2015, 2014 and 2013 are as follows:



	2015			2014			2013
	(In thousands)
Unrecognized tax benefits at the beginning of the fiscal year	$	97,224		$	78,279		$	92,378
Gross amount of the increases (decreases) in unrecognized tax benefits of tax positions taken during a prior year*	(7,331		)	8,301			6,196
Gross amount of the increases in unrecognized tax benefits as a result of tax positions taken during the current year	7,513			12,381			5,119
Amount of decreases in unrecognized tax benefits relating to settlements with taxing authorities, including the utilization of tax attributes	(9,571		)	—			(15,171		)
Reductions to unrecognized tax benefits resulting from the lapse of the applicable statute of limitations	(119		)	(86		)	(11,850		)
Effect of foreign currency translation	104			(1,651		)	1,607
Unrecognized tax benefits at the end of the fiscal year	$	87,820		$	97,224		$	78,279

Total amounts of unrecognized tax benefits that, if upon resolution of the uncertain tax positions would reduce Cadence’s effective tax rate	$	48,335		$	57,127		$	49,458

_________

* 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 2015, 2014 and 2013 were as follows:



	2015			2014			2013
	(In thousands)
Interest	$	110		$	255		$	(12,470	)
Penalties	(127		)	(748		)	(7,698		)

The total amounts of gross accrued interest and penalties recognized in the consolidated balance sheets as of January 2, 2016 and January 3, 2015 were as follows:



	As of
	January 2, 2016		January 3, 2015
	(In thousands)
Interest	$	1,128	$	1,155
Penalties	270		446