Income Taxes

12 Months Ended

Dec. 31, 2011

Income Taxes [Abstract]

INCOME TAXES

NOTE 6. INCOME TAXES

Cadence’s income (loss) before provision (benefit) for income taxes included income (loss) from the United States and from foreign subsidiaries for fiscal 2011, fiscal 2010 and fiscal 2009, as follows:

	2011		2010			2009
	(In thousands)
United States	$	39,175	$	(141,726	)	$	(184,268	)
Foreign Subsidiaries		56,251		78,958			30,763
Total income (loss) before provision (benefit) for income taxes	$	95,426	$	(62,768	)	$	(153,505	)

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 2011, fiscal 2010 and fiscal 2009:

	2011			2010			2009
	(In thousands)
Current:
Federal	$	(662	)	$	(143,045	)	$	(3,079	)
State and Local		1,363			(3,475	)		1,027
Foreign		13,752			24,468			2,155
Total current		14,453			(122,052	)		103
Deferred:
Federal		(4,937	)		(59,880	)		----
State and Local		(524	)		(8,523	)		----
Foreign		(2,350	)		4,212			(3,438	)
Total deferred		(7,811	)		(64,191	)		(3,438	)
Tax expense (benefit) allocated to shareholders’ equity		16,555			(3,063	)		(299	)
Total provision (benefit) for income taxes	$	23,197		$	(189,306	)	$	(3,634	)

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 (loss) before provision (benefit) for income taxes for fiscal 2011, fiscal 2010 and fiscal 2009 as follows, and includes some amounts in fiscal 2010 and fiscal 2009 that have been reclassified to conform to the fiscal 2011 presentation:

	2011			2010			2009
	(In thousands)
Provision computed at federal statutory income tax rate	$	33,400		$	(21,968	)	$	(53,727	)
State and local income tax, net of federal tax effect		6,493			(3,970	)		(9,334	)
Foreign income tax rate differential		(6,676	)		(7,053	)		(10,241	)
Non-deductible share-based compensation costs		1,651			11,129			7,579
Change in deferred tax asset valuation allowance		(3,617	)		(26,550	)		52,021
Tax credits		(12,588	)		(12,495	)		(11,356	)
Repatriation of foreign earnings		708			(407	)		3,412
Non-deductible research and development expense		----			3,199			----
Financing arrangements		----			(1,821	)		----
Non-deductible impairment losses		----			----			627
Withholding taxes		3,851			2,778			2,028
Tax settlements, domestic		328			(147,109	)		----
Tax settlements, foreign		(2,451	)		----			(649	)
Interest and penalties not included in tax settlements		1,840			7,595			11,629
Increase (decrease) in unrecognized tax benefits not included in tax settlements		933			8,496			5,730
Other		(675	)		(1,130	)		(1,353	)
Provision (benefit) for income taxes	$	23,197		$	(189,306	)	$	(3,634	)
Effective tax rate		24%			302%			2%

The components of deferred tax assets and liabilities consisted of the following as of December 31, 2011 and January 1, 2011:

	2011			2010
	(In thousands)
Deferred Tax Assets:
Intangible assets	$	70,314		$	85,695
Reserves and accruals		77,325			96,782
Tax credit carryforwards		133,829			137,571
Capitalized research and development expense for income tax purposes		40,510			48,167
Investments		7,339			13,124
Share-based compensation costs		20,661			20,980
Operating loss carryforwards		56,330			45,768
Deferred income		17,840			14,944
Capital loss carryforwards		23,737			6,391
Other		10,781			12,713
Total deferred tax assets		458,666			482,135
Valuation allowance		(375,864	)		(374,740	)
Net deferred tax assets		82,802			107,395
Deferred Tax Liabilities:
Undistributed foreign earnings		(5,584	)		(15,561	)
Intangible assets		(66,878	)		(66,901	)
Tax deferred income		----			(9,651	)
Other		(6,700	)		(8,920	)
Total deferred tax liabilities		(79,162	)		(101,033	)
Total net deferred tax assets	$	3,640		$	6,362

The operating loss carryforwards included in the components of deferred tax assets and liabilities 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 31, 2011 and January 1, 2011, Cadence had unrealized share-based compensation deductions as follows:

	2011		2010
	(Tax Effected - In thousands)
Federal	$	2,343	$	1,884
California		457		312

Upon realization of these deductions on Cadence’s income tax returns, the tax effect of these deductions will result in an increase to stockholder’s 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 than 50% likely that some portion of the deferred tax assets will not be realized. Cadence gives significant weight to evidence that can be objectively verified. Under this standard Cadence’s cumulative loss in the United States incurred over the three year period ended December 31, 2011 was considered significant negative evidence with a high level of objectivity that outweighed Cadence’s ability to rely on projections of future income in determining whether a valuation allowance was needed. On the basis of this evaluation, Cadence concluded that a valuation allowance of $375.9 million was required as of December 31, 2011 to reserve a significant portion of the deferred tax assets. The amount of the deferred tax asset considered realizable could be adjusted in the future if cumulative loss in the United States is no longer present and additional weight can be given to subjective evidence such as projections for growth.

After consideration of the valuation allowance, Cadence had total net deferred tax assets of $3.6 million as of December 31, 2011. The net increase during fiscal 2011 in the total valuation allowance was $1.2 million. The net deferred tax assets include United States net operating loss and tax credit carryforwards. The net deferred tax assets are presented gross of unrecognized tax benefits, which are not directly associated with the net operating loss and tax credit carryforwards. These unrecognized tax benefits are presented separately as a liability and provide a source of taxable income for purposes of assessing the potential realization of the deferred tax assets.

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. As of December 31, 2011, Cadence had a deferred tax liability of $5.6 million related to $5.4 million of earnings from certain foreign subsidiaries that are not considered indefinitely reinvested outside the United States and for which Cadence has previously made a provision for income tax.

Cadence intends to indefinitely reinvest $173.8 million of undistributed earnings of its foreign subsidiaries as of December 31, 2011, 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 $83.5 million as of December 31, 2011.

As of December 31, 2011, Cadence’s operating loss carryforwards were as follows:

	Amount		Expiration Periods
	(In thousands)
Federal	$	93,873	from 2021 through 2031
California		308,409	from 2016 through 2031
Other States (tax effected, net of federal benefit)		4,098	from 2012 through 2031
Foreign (tax effected)		1,595	do not expire until utilized

For fiscal 2008 through fiscal 2011, no California state net operating loss deduction is allowed.

As of December 31, 2011, Cadence had tax credit carryforwards of:

	Amount		Expiration Periods
	(In thousands)
Federal	$	86,770	from 2012 through 2031
California		34,590	do not expire until utilized
Other States		8,986	from 2012 through 2025
Foreign		6,175	do not expire until utilized

Examinations by Tax Authorities

The IRS and other tax authorities regularly examine Cadence’s income tax returns. Cadence’s federal income tax returns beginning with the 2006 tax year remain subject to examination by the IRS. Cadence’s California state income tax returns beginning with the 2001 tax year remain subject to examination by the California Franchise Tax Board, or FTB, and the FTB is currently examining Cadence’s California state income tax returns for the tax years 2001 through 2006. Cadence’s Israel income tax returns beginning with the 2006 tax year are subject to examination by the Israeli Tax Authority.

In October 2010, the Appeals Office of the IRS, or the Appeals Office provided Cadence with copies of the settlement agreements that resolved the previously disputed tax positions. As a result of this effective settlement, Cadence recognized a benefit for income taxes of $147.9 million in the Consolidated Statements of Operations during fiscal 2010.

In 2009, the IRS completed its field examination of Cadence’s federal income tax returns for the tax years 2003 through 2005 and issued a Revenue Agent’s Report, or RAR, in which the IRS proposed to assess an aggregate deficiency for the three-year period of $60.7 million. The IRS contested Cadence’s transfer pricing arrangements with its foreign subsidiaries and deductions for foreign trade income. In June 2011, the Appeals Office provided Cadence with copies of the settlement agreements that were executed by the Appeals Office, resolving the previously disputed tax positions. As a result of this effective settlement, Cadence recognized a benefit for income taxes of $5.7 million in the Consolidated Statement of Operations during fiscal 2011.

In November 2011, the IRS completed its field examination of Cadence’s federal income tax returns for the tax years 2006 through 2009 and issued examination reports, in which the IRS proposed to assess an aggregate deficiency for the four-year period of $4.1 million. Cadence determined that the certain tax positions were effectively settled and Cadence recognized a provision for income taxes of $3.9 million in the Consolidated Statement of Operations during fiscal 2011.

Unrecognized Tax Benefits

The changes in Cadence’s gross amount of unrecognized tax benefits during fiscal 2011 and fiscal 2010 are as follows:

	2011			2010			2009
	(In thousands)
Unrecognized tax benefits at the beginning of the fiscal year	$	131,545		$	324,837		$	322,742
Gross amount of the increases (decreases) in unrecognized tax benefits of tax positions taken during a prior year		(3,791	)		(130,313	)		(1,638	)
Gross amount of the increases in unrecognized tax benefits as a result of tax positions taken during the current year		1,588			12,052			4,838
Amount of decreases in unrecognized tax benefits relating to settlements with taxing authorities, including the utilization of tax attributes		(30,115	)		(74,890	)		(1,061	)
Reductions to unrecognized tax benefits resulting from the lapse of the applicable statute of limitations		(421	)		(109	)		(226	)
Effect of foreign currency translation		6			(32	)		182
Unrecognized tax benefits at the end of the fiscal year	$	98,812		$	131,545		$	324,837
Total amounts of unrecognized tax benefits that, if upon resolution of the uncertain tax positions would reduce Cadence’s effective tax rate	$	75,057		$	83,676		$	257,589

The total amounts of interest and penalties recognized in the Consolidated Statements of Operations as provision (benefit) for income taxes for fiscal 2011, fiscal 2010 and fiscal 2009 were as follows:

	2011			2010			2009
	(In thousands)
Interest	$	2,173		$	(46,268	)	$	17,540
Penalties		(1,495	)		4,471			1,043

The total amounts of gross accrued interest and penalties recognized in the Consolidated Balance Sheets as of December 31, 2011 and January 1, 2011 were as follows:

	2011		2010
	(In thousands)
Interest	$	35,368	$	33,749
Penalties		11,574		15,260

Cadence believes that it is reasonably possible that the total amount of unrecognized tax benefits related to FTB examination of its California income tax returns for the tax years 2001 through 2006 could decrease during fiscal 2012 if Cadence is able to effectively settle the examination. Cadence cannot currently provide an estimate of the range of possible outcomes.