| 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, January 2, (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, January 2, (In thousands) Interest $ 1,332 $ 1,128 Penalties 265 270 |
