INCOME TAXES

Cadence’s income before provision for income taxes included income from the United States and from foreign subsidiaries for fiscal 2018, 2017 and 2016, was as follows:



	2018		2017		2016
	(In thousands)
United States	$	58,963	$	81,619	$	84,694
Foreign subsidiaries	317,427		233,427		152,459
Total income before provision for income taxes	$	376,390	$	315,046	$	237,153

Cadence’s provision for income taxes was comprised of the following items for fiscal 2018, 2017 and 2016:



	2018			2017			2016
	(In thousands)
Current:
Federal	$	902		$	(2,193	)	$	4,839
State and local	(1,270		)	(2,097		)	50
Foreign	42,657			35,301			34,047
Total current	42,289			31,011			38,936

Deferred:
Federal	(10,324		)	76,494			(5,291		)
State and local	886			5,571			6,006
Foreign	(2,238		)	(2,131		)	(5,584		)
Total deferred	(11,676		)	79,934			(4,869		)

Total provision for income taxes	$	30,613		$	110,945		$	34,067

The provision for income taxes differs from the amount estimated by applying the United States statutory federal income tax rates of 21% to income before provision for income taxes for fiscal 2018 and of 35% to income before provision for income taxes for fiscal 2017 and 2016 as follows:



	2018			2017			2016
	(In thousands)
Provision computed at federal statutory income tax rate	$	79,042		$	110,266		$	83,003
State and local income tax, net of federal tax effect	15,540			5,867			5,534
Foreign income tax rate differential	(37,031		)	(65,296		)	(36,098		)
Deemed repatriation transition tax	(1,409		)	67,188			—
Remeasurement of U.S. deferred tax assets and liabilities	—			25,200			—
U.S. tax on foreign entities	28,846			—			—
Stock-based compensation	(13,539		)	(24,455		)	(13,132		)
Change in deferred tax asset valuation allowance	13,234			4,689			1,243
Tax credits	(72,815		)	(26,789		)	(39,765		)
Repatriation of foreign earnings	—			—			25,145
Non-deductible research and development expense	4,700			—			—
Tax effects of intra-entity transfer of assets	79			(8,450		)	(7,661		)
Domestic production activity deduction	—			(2,474		)	(2,826		)
Withholding taxes	11,535			11,225			9,870
Tax settlements, foreign	—			3,086			5,620
Increase in unrecognized tax benefits not included in tax settlements	(1,545		)	4,054			614
Other	3,976			6,834			2,520
Provision for income taxes	$	30,613		$	110,945		$	34,067
Effective tax rate	8		%	35		%	14		%

The Tax Act was enacted in December 2017 and included several provisions that affected Cadence significantly, such as a one-time, mandatory transition tax on its previously untaxed foreign earnings and a reduction in the federal corporation income tax rate from 35% to 21% as of January 1, 2018, among others.

Cadence is required to recognize the effect of tax law changes in the period of enactment, which in the case of the Tax Act was December 2017, even though the effective date for most provisions of the Tax Act was January 1, 2018. The Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”), which allowed registrants to record reasonable estimates or to apply tax laws in effect prior to the enactment of the Tax Act for a period of up to one year from the date of enactment when it did not have the necessary information available, prepared or analyzed in reasonable detail to complete its accounting for the changes in taxation.

Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, Cadence recorded a provisional $67.2 million expense related to the one-time transition tax during fiscal 2017. In accordance with SAB 118, this amount was updated to $65.8 million of expense during fiscal 2018. For purposes of SAB 118, the accounting for the tax effects of the Tax Act is complete.

Cadence adopted the new accounting standard related to stock-based compensation in fiscal 2016, which required 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 2018, fiscal 2017 and fiscal 2016, were $21.3 million, $32.0 million and $17.2 million, respectively.

The components of deferred tax assets and liabilities consisted of the following as of December 29, 2018 and December 30, 2017:



	As of
	December 29, 2018			December 30, 2017
	(In thousands)
Deferred tax assets:
Tax credit carryforwards	$	197,524		$	164,687
Reserves and accruals	43,522			42,357
Intangible assets	12,096			13,112
Capitalized research and development expense for income tax purposes	6,975			10,621
Operating loss carryforwards	15,347			20,650
Deferred income	6,580			12,178
Capital loss carryforwards	20,342			20,266
Stock-based compensation costs	15,329			15,782
Depreciation and amortization	8,759			7,665
Investments	2,900			3,201
Total deferred tax assets	329,374			310,519
Valuation allowance	(108,724		)	(95,491		)
Net deferred tax assets	220,650			215,028

Deferred tax liabilities:
Intangible assets	(36,194		)	(36,683		)
Undistributed foreign earnings	(27,627		)	(23,563		)
Other	(2,497		)	(2,730		)
Total deferred tax liabilities	(66,318		)	(62,976		)
Total net deferred tax assets	$	154,332		$	152,052

During fiscal 2018 and 2017, Cadence maintained valuation allowances of $108.7 million and $95.5 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.

As of December 29, 2018, Cadence’s operating loss carryforwards were as follows:



	Amount		Expiration Periods
	(In thousands)
Federal	$	1,374	from 2021 through 2029
California	175,541		from 2019 through 2037
Other states (tax effected, net of federal benefit)	2,333		from 2019 through 2037
Foreign (tax effected)	293		from 2025 through indefinite

As of December 29, 2018, Cadence had tax credit carryforwards of:



	Amount		Expiration Periods
	(In thousands)
Federal*	$	108,934	from 2023 through 2038
California	61,473		indefinite
Other states	10,445		from 2019 through 2038
Foreign	16,672		from 2019 through 2038

_____________

*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. As of December 29, 2018 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		2015
United States - California		2014

Unrecognized Tax Benefits

The changes in Cadence’s gross amount of unrecognized tax benefits during fiscal 2018, 2017 and 2016 are as follows:



	2018			2017			2016
	(In thousands)
Unrecognized tax benefits at the beginning of the fiscal year	$	110,179		$	98,540		$	87,820
Gross amount of the increases (decreases) in unrecognized tax benefits of tax positions taken during a prior year*	(4,183		)	688			(155		)
Gross amount of the increases in unrecognized tax benefits as a result of tax positions taken during the current year	2,370			13,141			11,342
Reductions to unrecognized tax benefits resulting from the lapse of the applicable statute of limitations	(5,179		)	(3,028		)	(149		)
Effect of foreign currency translation	(1,330		)	838			(318		)
Unrecognized tax benefits at the end of the fiscal year	$	101,857		$	110,179		$	98,540

Total amounts of unrecognized tax benefits that, if upon resolution of the uncertain tax positions would reduce Cadence’s effective tax rate	$	58,022		$	63,108		$	56,248

_____________

* 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 for income taxes for fiscal 2018, 2017 and 2016 were as follows:



	2018		2017		2016
	(In thousands)
Interest	$	585	$	1,865	$	1,166
Penalties	342		218		3

The total amounts of gross accrued interest and penalties recognized in the consolidated balance sheets as of December 29, 2018 and December 30, 2017 were as follows:



	As of
	December 29, 2018		December 30, 2017
	(In thousands)
Interest	$	2,699	$	2,511
Penalties	10		151