Income Taxes

12 Months Ended

Dec. 28, 2019

Cadence’s income before provision (benefit) for income taxes included income from the United States and from foreign subsidiaries for fiscal 2019, 2018 and 2017, was as follows:



	2019		2018		2017
	(In thousands)
United States	$	139,306	$	58,963	$	81,619
Foreign subsidiaries	339,662		317,427		233,427
Total income before provision (benefit) for income taxes	$	478,968	$	376,390	$	315,046

Cadence’s provision (benefit) for income taxes was comprised of the following items for fiscal 2019, 2018 and 2017:



	2019			2018			2017
	(In thousands)
Current:
Federal	$	15,282		$	902		$	(2,193	)
State and local	2,716			(1,270		)	(2,097		)
Foreign	48,729			42,657			35,301
Total current	66,727			42,289			31,011

Deferred:
Federal	(9,001		)	(10,324		)	76,494
State and local	6,593			886			5,571
Foreign	(574,330		)	(2,238		)	(2,131		)
Total deferred	(576,738		)	(11,676		)	79,934

Total provision (benefit) for income taxes	$	(510,011	)	$	30,613		$	110,945

During the fourth quarter of fiscal 2019, Cadence completed intercompany transfers of certain intangible property rights to its Irish subsidiary, which resulted in the establishment of a deferred tax asset and the recognition of an income tax benefit of $575.6 million. Cadence expects to be able to realize the Irish deferred tax asset in future years and did not provide for a valuation allowance. Cadence considered all available positive and negative evidence, including its past operating results, forecasted earnings, future taxable income, and any prudent and feasible tax planning strategies in making this determination.

The U.S. Tax Cuts and Jobs Act (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.

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 (benefit) for income taxes for fiscal 2019 and fiscal 2018 and of 35% to income before provision for income taxes for fiscal 2017 as follows:



	2019			2018			2017
	(In thousands)
Provision computed at federal statutory income tax rate	$	100,583		$	79,042		$	110,266
State and local income tax, net of federal tax effect	23,221			15,540			5,867
Intercompany transfers of intangible property rights	(575,618		)	—			—
Foreign income tax rate differential	(37,786		)	(37,031		)	(65,296		)
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	57,225			28,846			—
Stock-based compensation	(29,785		)	(13,539		)	(24,455		)
Change in deferred tax asset valuation allowance	16,796			13,234			4,689
Tax credits	(87,793		)	(72,815		)	(26,789		)
Non-deductible research and development expense	4,363			4,700			—
Tax effects of intra-entity transfer of assets	895			79			(8,450		)
Domestic production activity deduction	—			—			(2,474		)
Withholding taxes	15,865			11,535			11,225
Tax settlements, foreign	458			—			3,086
Increase (decrease) in unrecognized tax benefits	(1,303		)	(1,545		)	4,054
Other	2,868			3,976			6,834
Provision (benefit) for income taxes	$	(510,011	)	$	30,613		$	110,945
Effective tax rate	(106		)%	8		%	35		%

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 the Securities and Exchange Commission Staff Accounting Bulletin No. 118, this amount was updated to $65.8 million of expense during fiscal 2018.

The components of deferred tax assets and liabilities consisted of the following as of December 28, 2019 and December 29, 2018:



	As of
	December 28, 2019			December 29, 2018
	(In thousands)
Deferred tax assets:
Tax credit carryforwards	$	206,008		$	197,524
Reserves and accruals	47,562			43,522
Intangible assets	583,323			12,096
Capitalized research and development expense for income tax purposes	18,477			6,975
Operating loss carryforwards	6,201			15,347
Deferred income	16,704			6,580
Capital loss carryforwards	17,320			20,342
Stock-based compensation costs	15,097			15,329
Depreciation and amortization	8,721			8,759
Investments	2,459			2,900
Lease liability	25,016			—
Total deferred tax assets	946,888			329,374
Valuation allowance	(125,520		)	(108,724		)
Net deferred tax assets	821,368			220,650

Deferred tax liabilities:
Intangible assets	(24,907		)	(36,194		)
Undistributed foreign earnings	(31,916		)	(27,627		)
ROU assets	(25,016		)	—
Other	(8,350		)	(2,497		)
Total deferred tax liabilities	(90,189		)	(66,318		)
Total net deferred tax assets	$	731,179		$	154,332

During fiscal 2019 and 2018, Cadence maintained valuation allowances of $125.5 million and $108.7 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.

As of December 28, 2019, Cadence’s operating loss carryforwards were as follows:



	Amount		Expiration Periods
	(In thousands)
Federal	$	1,059	from 2021 through 2029
California	28,820		from 2027 through 2036
Other states (tax effected, net of federal benefit)	1,853		from 2020 through 2038
Foreign (tax effected)	2,113		from 2025 through indefinite

As of December 28, 2019, Cadence had tax credit carryforwards of:



	Amount		Expiration Periods
	(In thousands)
Federal*	$	100,128	from 2025 through 2039
California	72,897		indefinite
Other states	11,286		from 2020 through indefinite
Foreign	21,697		from 2035 through indefinite

_____________

*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 28, 2019, 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		2015
Ireland		2015

Unrecognized Tax Benefits

The changes in Cadence’s gross amount of unrecognized tax benefits during fiscal 2019, 2018 and 2017 are as follows:



	2019			2018			2017
	(In thousands)
Unrecognized tax benefits at the beginning of the fiscal year	$	101,857		$	110,179		$	98,540
Gross amount of the increases (decreases) in unrecognized tax benefits of tax positions taken during a prior year*	(3,143		)	(4,183		)	688
Gross amount of the increases in unrecognized tax benefits as a result of tax positions taken during the current year	8,951			2,370			13,141
Amount of decreases in unrecognized tax benefits relating to settlements with taxing authorities, including the utilization of tax attributes	(380		)	—			—
Reductions to unrecognized tax benefits resulting from the lapse of the applicable statute of limitations	(1,692		)	(5,179		)	(3,028		)
Effect of foreign currency translation	448			(1,330		)	838
Unrecognized tax benefits at the end of the fiscal year	$	106,041		$	101,857		$	110,179

Total amounts of unrecognized tax benefits that, if upon resolution of the uncertain tax positions would reduce Cadence’s effective tax rate	$	61,527		$	58,022		$	63,108

_____________

* Includes unrecognized tax benefits of tax positions recorded in connection with acquisitions

It is reasonably possible that the amount of unrecognized tax positions could decrease by approximately $10 million during the next 12 months. The potential decrease could be primarily driven by settlements with tax authorities. The actual amount could vary significantly depending on the ultimate timing and nature of any settlements.

The total amounts of interest, net of tax, and penalties recognized in the consolidated income statements as provision (benefit) for income taxes for fiscal 2019, 2018 and 2017 were as follows:



	2019		2018		2017
	(In thousands)
Interest	$	490	$	585	$	1,865
Penalties	19		342		218

The total amounts of gross accrued interest and penalties recognized in the consolidated balance sheets as of December 28, 2019 and December 29, 2018 were as follows:



	As of
	December 28, 2019		December 29, 2018
	(In thousands)
Interest	$	3,500	$	2,699
Penalties	12		10