| INCOME TAXES | 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, January 3, (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, January 3, (In thousands) Interest $ 1,128 $ 1,155 Penalties 270 446 |
