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Income Taxes
12 Months Ended
Dec. 31, 2016
Income Tax Disclosure [Abstract]  
INCOME TAXES
INCOME TAXES
Cadence’s income before provision for income taxes included income from the United States and from foreign subsidiaries for fiscal 2016, 2015 and 2014, is as follows:
 
2016
 
2015
 
2014
 
(In thousands)
United States
$
84,694

 
$
47,867

 
$
12,680

Foreign subsidiaries
152,459

 
219,729

 
168,322

Total income before provision for income taxes
$
237,153

 
$
267,596

 
$
181,002


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 for income taxes was comprised of the following items for fiscal 2016, 2015 and 2014:
 
2016
 
2015
 
2014
 
(In thousands)
Current:
 
 
 
 
 
Federal
$
4,839

 
$
(10,265
)
 
$
(13,754
)
State and local
50

 
(713
)
 
(1,159
)
Foreign
34,047

 
24,622

 
19,100

Total current
38,936

 
13,644

 
4,187

 
 
 
 
 
 
Deferred:
 
 
 
 
 
Federal
(5,291
)
 
(13,165
)
 
2,075

State and local
6,006

 
1,751

 
1,633

Foreign
(5,584
)
 
(1,734
)
 
8,770

Total deferred
(4,869
)

(13,148
)
 
12,478

 
 
 
 
 
 
Tax expense allocated to shareholders’ equity

 
14,683

 
5,439

 
 
 
 
 
 
Total provision for income taxes
$
34,067

 
$
15,179

 
$
22,104


The provision for income taxes differs from the amount estimated by applying the United States statutory federal income tax rate of 35% to income before provision for income taxes for fiscal 2016, 2015 and 2014 as follows:
 
2016
 
2015
 
2014
 
(In thousands)
Provision computed at federal statutory income tax rate
$
83,003

 
$
93,659

 
$
63,350

State and local income tax, net of federal tax effect
5,534

 
3,621

 
1,168

Foreign income tax rate differential
(36,098
)
 
(56,873
)
 
(39,012
)
Stock-based compensation
(13,132
)
 
2,687

 
5,726

Change in deferred tax asset valuation allowance
1,243

 
(11,066
)
 
10,065

Tax credits
(39,765
)
 
(19,243
)
 
(17,331
)
Repatriation of foreign earnings
25,145

 
50

 
(2,910
)
Non-deductible research and development expense

 
336

 
2,195

Tax effects of intra-entity transfer of assets
(7,661
)
 
(7,928
)
 
(5,397
)
Domestic production activity deduction
(2,826
)
 

 
(1,281
)
Withholding taxes
9,870

 
5,119

 
4,064

Tax settlements, foreign
5,620

 

 

Interest and penalties not included in tax settlements
451

 
331

 
(382
)
Increase in unrecognized tax benefits not included in tax settlements
614

 
3,530

 
157

Other
2,069

 
956

 
1,692

Provision for income taxes
$
34,067

 
$
15,179

 
$
22,104

Effective tax rate
14
%
 
6
%
 
12
%


Cadence adopted the new accounting standard related to stock-based compensation in fiscal 2016, which requires the excess tax benefits or deficiencies to be reflected in the consolidated income statements as a component of the provision for income taxes, whereas these income tax effects were previously recognized in stockholders’ equity in the consolidated balance sheets. Total excess tax benefits recognized in the provision for income taxes in fiscal 2016 were $17.2 million. Cadence adopted the accounting standard on a prospective basis and prior fiscal periods were not restated. For further discussion regarding accounting standards adopted during fiscal 2016, see Note 2 in the notes to consolidated financial statements under the heading “Recently Adopted Accounting Standards.”
The components of deferred tax assets and liabilities consisted of the following as of December 31, 2016 and January 2, 2016:
 
As of
 
December 31,
2016
 
January 2,
2016
 
(In thousands)
Deferred tax assets:
 
 
 
Tax credit carryforwards
$
180,999

 
$
189,672

Reserves and accruals
62,438

 
54,774

Intangible assets
23,335

 
29,256

Capitalized research and development expense for income tax purposes
19,093

 
26,332

Operating loss carryforwards
23,175

 
25,208

Deferred income
14,842

 
16,407

Capital loss carryforwards
20,580

 
20,552

Stock-based compensation costs
20,087

 
17,612

Depreciation and amortization
12,202

 
22,442

Investments
6,442

 
7,113

Prepaid expenses
26,526

 

Total deferred tax assets
409,719

 
409,368

Valuation allowance
(92,920
)
 
(91,677
)
Net deferred tax assets
316,799

 
317,691

 
 
 
 
Deferred tax liabilities:
 
 
 
Intangible assets
(35,651
)
 
(45,697
)
Undistributed foreign earnings
(24,529
)
 
(25,156
)
Other
(119
)
 
(1,390
)
Total deferred tax liabilities
(60,299
)
 
(72,243
)
Total net deferred tax assets
$
256,500

 
$
245,448


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 2016, Cadence determined that there was sufficient positive evidence to conclude that $316.8 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 historical 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 31, 2016 that provides Cadence with an objective source of future revenues to be recognized in fiscal 2017 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 2016 and 2015, Cadence maintained valuation allowances of $92.9 million and $91.7 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 reinvested outside of the United States. Cadence intends to indefinitely reinvest $503.8 million of undistributed earnings of certain foreign subsidiaries as of December 31, 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 December 31, 2016, Cadence’s operating loss carryforwards were as follows:
 
Amount
 
Expiration Periods
 
(In thousands)
 
 
Federal
$
2,045

 
from 2021 through 2029
California
172,903

 
from 2019 through 2035
Other states (tax effected, net of federal benefit)
2,009

 
from 2019 through 2035
Foreign (tax effected)
10,515

 
from 2025 through indefinite

As of December 31, 2016, Cadence had tax credit carryforwards of:
 
Amount
 
Expiration Periods
 
(In thousands)
 
 
Federal*
$
123,672

 
from 2019 through 2036
California
36,348

 
indefinite
Other states
6,738

 
from 2017 through 2035
Foreign
14,241

 
from 2017 through 2036
_____________
*Certain of Cadence’s foreign tax credits have yet to be realized 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 December 31, 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
 
2013
United States - California
 
2012
Hungary
 
2011
South Korea
 
2011

Unrecognized Tax Benefits
The changes in Cadence’s gross amount of unrecognized tax benefits during fiscal 2016, 2015 and 2014 are as follows:
 
2016
 
2015
 
2014
 
(In thousands)
Unrecognized tax benefits at the beginning of the fiscal year
$
87,820

 
$
97,224

 
$
78,279

Gross amount of the increases (decreases) in unrecognized tax benefits of tax positions taken during a prior year*
(155
)
 
(7,331
)
 
8,301

Gross amount of the increases in unrecognized tax benefits as a result of tax positions taken during the current year
11,342

 
7,513

 
12,381

Amount of decreases in unrecognized tax benefits relating to settlements with taxing authorities, including the utilization of tax attributes

 
(9,571
)
 

Reductions to unrecognized tax benefits resulting from the lapse of the applicable statute of limitations
(149
)
 
(119
)
 
(86
)
Effect of foreign currency translation
(318
)
 
104

 
(1,651
)
Unrecognized tax benefits at the end of the fiscal year
$
98,540

 
$
87,820

 
$
97,224

 
 
 
 
 
 
Total amounts of unrecognized tax benefits that, if upon resolution of the uncertain tax positions would reduce Cadence’s effective tax rate
$
56,248

 
$
48,335

 
$
57,127

_________
* 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 2016, 2015 and 2014 were as follows:
 
2016
 
2015
 
2014
 
(In thousands)
Interest
$
1,166

 
$
110

 
$
255

Penalties
3

 
(127
)
 
(748
)
The total amounts of gross accrued interest and penalties recognized in the consolidated balance sheets as of December 31, 2016 and January 2, 2016 were as follows:
 
As of
 
December 31,
2016
 
January 2,
2016
 
(In thousands)
Interest
$
1,332

 
$
1,128

Penalties
265

 
270