Entity information:
INCOME TAXES
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 is January 1, 2018. The Securities and Exchange Commission issued Staff Accounting Bulletin No. 118, which allows 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 does not have the necessary information available, prepared or analyzed in reasonable detail to complete its accounting for the changes in taxation. This provisional period ends when a company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond December 22, 2018.
Cadence was unable to complete the accounting for the effects of the Tax Act in fiscal 2017 because of the complexity and ambiguity of certain tax and accounting effects of the Tax Act. Cadence made reasonable estimates and recorded provisional amounts for the following effects of the Tax Act:
•
Transition tax on the deemed repatriation of past earnings of foreign subsidiaries;
•
Remeasurement of U.S. deferred taxes for the U.S. tax rate reduction;
•
Deferred taxes on past earnings of foreign subsidiaries that may be repatriated in the future; and
•
Unrecognized tax benefits related to the transition tax.
Cadence was unable to make reasonable estimates for the following tax law changes and applied the tax laws in effect prior to the enactment of the Tax Act:
•
Deferred taxes related to global intangible low-taxed income; and
•
Assessment of the valuation allowance applying the comprehensive changes in tax laws under the Tax Act.
Cadence expects to refine and complete the accounting for the Tax Act during fiscal 2018 as it obtains, prepares and analyzes additional information. Cadence also expects that additional guidance and interpretation of the tax law changes and accounting for the tax effects of the Tax Act will be available during fiscal 2018.
Cadence’s income before provision for income taxes included income from the United States and from foreign subsidiaries for fiscal 2017, 2016 and 2015, was as follows:
 
2017
 
2016
 
2015
 
(In thousands)
United States
$
81,619

 
$
84,694

 
$
47,867

Foreign subsidiaries
233,427

 
152,459

 
219,729

Total income before provision for income taxes
$
315,046

 
$
237,153

 
$
267,596


During fiscal 2017, 2016 and 2015, Cadence’s foreign subsidiaries were 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 2017, 2016 and 2015:
 
2017
 
2016
 
2015
 
(In thousands)
Current:
 
 
 
 
 
Federal
$
(2,193
)
 
$
4,839

 
$
(10,265
)
State and local
(2,097
)
 
50

 
(713
)
Foreign
35,301

 
34,047

 
24,622

Total current
31,011

 
38,936

 
13,644

 
 
 
 
 
 
Deferred:
 
 
 
 
 
Federal
76,494

 
(5,291
)
 
(13,165
)
State and local
5,571

 
6,006

 
1,751

Foreign
(2,131
)
 
(5,584
)
 
(1,734
)
Total deferred
79,934


(4,869
)
 
(13,148
)
 
 
 
 
 
 
Tax expense allocated to shareholders’ equity
—

 
—

 
14,683

 
 
 
 
 
 
Total provision for income taxes
$
110,945

 
$
34,067

 
$
15,179


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 2017, 2016 and 2015 as follows:
 
2017
 
2016
 
2015
 
(In thousands)
Provision computed at federal statutory income tax rate
$
110,266

 
$
83,003

 
$
93,659

State and local income tax, net of federal tax effect
5,867

 
5,534

 
3,621

Foreign income tax rate differential
(65,296
)
 
(36,098
)
 
(56,873
)
Impact of 2017 Tax Act*
96,798

 
—

 
—

Stock-based compensation
(24,455
)
 
(13,132
)
 
2,687

Change in deferred tax asset valuation allowance
4,689

 
1,243

 
(11,066
)
Tax credits
(26,789
)
 
(39,765
)
 
(19,243
)
Repatriation of foreign earnings
—

 
25,145

 
50

Tax effects of intra-entity transfer of assets
(8,450
)
 
(7,661
)
 
(7,928
)
Domestic production activity deduction
(2,474
)
 
(2,826
)
 
—

Withholding taxes
11,225

 
9,870

 
5,119

Tax settlements, foreign
3,086

 
5,620

 
—

Increase in unrecognized tax benefits not included in tax settlements
4,054

 
614

 
3,530

Other
2,424

 
2,520

 
1,623

Provision for income taxes
$
110,945

 
$
34,067

 
$
15,179

Effective tax rate
35
%
 
14
%
 
6
%

____________
* The provisional amount related to the remeasurement of U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future was $25.2 million. The provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was $67.2 million.

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. Cadence adopted the accounting standard on a prospective basis and prior fiscal periods were not restated. Total excess tax benefits recognized in the provision for income taxes in fiscal 2017 and fiscal 2016 were $32.0 million and $17.2 million, respectively.
The components of deferred tax assets and liabilities consisted of the following as of December 30, 2017 and December 31, 2016:
 
As of
 
December 30,
2017
 
December 31,
2016
 
(In thousands)
Deferred tax assets:
 
 
 
Tax credit carryforwards
$
164,687

 
$
180,999

Reserves and accruals
42,357

 
62,438

Intangible assets
13,112

 
23,335

Capitalized research and development expense for income tax purposes
10,621

 
19,093

Operating loss carryforwards
20,650

 
23,175

Deferred income
12,178

 
14,842

Capital loss carryforwards
20,266

 
20,580

Stock-based compensation costs
15,782

 
20,087

Depreciation and amortization
7,665

 
12,202

Investments
3,201

 
6,442

Prepaid expenses
—

 
26,526

Total deferred tax assets
310,519

 
409,719

Valuation allowance
(95,491
)
 
(92,920
)
Net deferred tax assets
215,028

 
316,799

 
 
 
 
Deferred tax liabilities:
 
 
 
Intangible assets
(36,683
)
 
(35,651
)
Undistributed foreign earnings
(23,563
)
 
(24,529
)
Other
(2,730
)
 
(119
)
Total deferred tax liabilities
(62,976
)
 
(60,299
)
Total net deferred tax assets
$
152,052

 
$
256,500


Cadence remeasured its fiscal 2017 federal deferred tax assets and liabilities at the applicable tax rate of 21% in accordance with the Tax Act.
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. Because the Tax Act includes significant changes to tax laws that potentially impact Cadence’s valuation allowance analysis and Cadence could not make a reasonable estimate of the effect of such changes, Cadence reviewed its valuation allowance by applying the tax law in effect prior to the enactment of the Tax Act. During fiscal 2017, Cadence determined that there was sufficient positive evidence to conclude that $215.0 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 generates revenue recognized over time;
•
Cadence’s existing revenue backlog as of December 30, 2017 that provides Cadence with an objective source of future revenues to be recognized in fiscal 2018 and subsequent periods; and
•
Cadence’s expectation of having sufficient sources of income in the future to prevent the expiration of deferred tax assets.
Cadence will provide adjustments to the fiscal 2017 valuation allowance during fiscal 2018 upon obtaining, preparing and analyzing the information necessary to update and finalize its accounting for the tax effects of the Tax Act.
During fiscal 2017 and 2016, Cadence maintained valuation allowances of $95.5 million and $92.9 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 30, 2017, Cadence’s operating loss carryforwards were as follows:
 
Amount
 
Expiration Periods
 
(In thousands)
 
 
Federal
$
13,638

 
from 2021 through 2036
California
198,173

 
from 2019 through 2036
Other states (tax effected, net of federal benefit)
3,081

 
from 2019 through 2037
Foreign (tax effected)
866

 
from 2025 through indefinite

As of December 30, 2017, Cadence had tax credit carryforwards of:
 
Amount
 
Expiration Periods
 
(In thousands)
 
 
Federal*
$
87,746

 
from 2023 through 2037
California
52,628

 
indefinite
Other states
9,153

 
from 2018 through 2037
Foreign
15,160

 
from 2018 through 2037
_____________
*Certain of Cadence’s foreign tax credits have yet to be realized and as a result do not yet have an expiration period.
Under the Tax Act, all foreign earnings are subject to U.S. taxation. Accordingly, Cadence does not expect to indefinitely reinvest the earnings from its foreign subsidiaries, although Cadence continues to evaluate the accounting for all of the tax effects of the Tax Act during fiscal 2018.
Examinations by Tax Authorities
Taxing authorities regularly examine Cadence’s income tax returns. As of December 30, 2017 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
 
2014
United States - California
 
2013
Hungary
 
2012

Unrecognized Tax Benefits
The changes in Cadence’s gross amount of unrecognized tax benefits during fiscal 2017, 2016 and 2015 are as follows:
 
2017
 
2016
 
2015
 
(In thousands)
Unrecognized tax benefits at the beginning of the fiscal year
$
98,540

 
$
87,820

 
$
97,224

Gross amount of the increases (decreases) in unrecognized tax benefits of tax positions taken during a prior year*
688

 
(155
)
 
(7,331
)
Gross amount of the increases in unrecognized tax benefits as a result of tax positions taken during the current year
13,141

 
11,342

 
7,513

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
(3,028
)
 
(149
)
 
(119
)
Effect of foreign currency translation
838

 
(318
)
 
104

Unrecognized tax benefits at the end of the fiscal year
$
110,179

 
$
98,540

 
$
87,820

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

 
$
56,248

 
$
48,335

_________
* 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 2017, 2016 and 2015 were as follows:
 
2017
 
2016
 
2015
 
(In thousands)
Interest
$
1,865

 
$
1,166

 
$
110

Penalties
218

 
3

 
(127
)
The total amounts of gross accrued interest and penalties recognized in the consolidated balance sheets as of December 30, 2017 and December 31, 2016 were as follows:
 
As of
 
December 30,
2017
 
December 31,
2016
 
(In thousands)
Interest
$
2,511

 
$
1,332

Penalties
151

 
265