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Income Taxes

12 Months Ended

Jan. 02, 2021

Cadence’s income before provision (benefit) for income taxes included income from the United States and from foreign subsidiaries for fiscal 2020, 2019 and 2018, was as follows:


	2020		2019		2018
	(In thousands)
United States	$	256,032	$	139,306	$	58,963
Foreign subsidiaries	376,716		339,662		317,427
Total income before provision (benefit) for income taxes	$	632,748	$	478,968	$	376,390

Cadence’s provision (benefit) for income taxes was comprised of the following items for fiscal 2020, 2019 and 2018:


	2020		2019		2018
	(In thousands)
Current:
Federal	$	15,083	$	15,282	$	902
State and local	6,401		2,716		(1,270)
Foreign	46,737		48,729		42,657
Total current	68,221		66,727		42,289

Deferred:
Federal	(11,155)		(9,001)		(10,324)
State and local	(24,186)		6,593		886
Foreign	9,224		(574,330)		(2,238)
Total deferred	(26,117)		(576,738)		(11,676)

Total provision (benefit) for income taxes	$	42,104	$	(510,011)	$	30,613

During the third quarter of fiscal 2020, the State of California enacted legislation that, for a three-year period beginning in fiscal 2020, will limit Cadence’s utilization of California research and development tax credits to $5 million annually and will suspend the use of California net operating loss deductions. Cadence accounted for the effects of the California tax law change in the period of enactment. Cadence recognized a tax benefit of approximately $22.2 million due to a partial release of the valuation allowance on our California research and development tax credit deferred tax assets as a result of certain tax elections made in Cadence’s 2019 California tax return.

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 expected 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 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 2020, 2019, and 2018 as follows:


	2020			2019			2018
	(In thousands)
Provision computed at federal statutory income tax rate	$	132,877		$	100,583		$	79,042
State and local income tax, net of federal tax effect	20,936			23,221			15,540
Intercompany transfers of intangible property rights	—			(575,618)			—
Foreign income tax rate differential	(32,589)			(37,786)			(37,031)
Deemed repatriation transition tax	—			—			(1,409)

U.S. tax on foreign entities	43,615			57,225			28,846
Stock-based compensation	(51,226)			(29,785)			(13,539)
Change in deferred tax asset valuation allowance	(9,101)			16,796			13,234
Tax credits	(89,684)			(87,793)			(72,815)
Non-deductible research and development expense	5,163			4,363			4,700
Tax effects of intra-entity transfer of assets	392			895			79

Withholding taxes	17,189			15,865			11,535
Tax settlements, foreign	1,193			458			—
Increase (decrease) in unrecognized tax benefits	159			(1,303)			(1,545)
Other	3,180			2,868			3,976
Provision (benefit) for income taxes	$	42,104		$	(510,011)		$	30,613
Effective tax rate	7		%	(106)		%	8		%

The components of deferred tax assets and liabilities consisted of the following as of January 2, 2021 and December 28, 2019:


	As of
	January 2, 2021		December 28, 2019
	(In thousands)
Deferred tax assets:
Tax credit carryforwards	$	197,436	$	206,008
Reserves and accruals	60,272		47,562
Intangible assets	578,267		583,323
Capitalized research and development expense for income tax purposes	39,427		18,477
Operating loss carryforwards	5,935		6,201
Deferred income	21,170		16,704
Capital loss carryforwards	16,944		17,320
Stock-based compensation costs	14,656		15,097
Depreciation and amortization	4,402		8,721
Investments	2,521		2,459
Lease liability	31,278		25,016
Total deferred tax assets	972,308		946,888
Valuation allowance	(116,419)		(125,520)
Net deferred tax assets	855,889		821,368

Deferred tax liabilities:
Intangible assets	(44,549)		(24,907)
Undistributed foreign earnings	(41,957)		(31,916)
ROU assets	(31,278)		(25,016)
Other	(10,749)		(8,350)
Total deferred tax liabilities	(128,533)		(90,189)
Total net deferred tax assets	$	727,356	$	731,179

During fiscal 2020, 2019 and 2018 Cadence maintained valuation allowances of $116.4 million, $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.

The valuation allowance decreased by $9.1 million during fiscal 2020 and increased by $16.8 million and $13.2 million, during fiscal 2019 and fiscal 2018, respectively. The valuation allowance activity was primarily related to California research and development tax credits and certain foreign tax credits.

As of January 2, 2021, Cadence’s operating loss carryforwards were as follows:


	Amount		Expiration Periods
	(In thousands)
Federal	$	743	from 2021 through 2029
California	27,093		from 2030 through 2039
Other states (tax effected, net of federal benefit)	1,564		from 2021 through 2037
Foreign (tax effected)	2,322		from 2025 through indefinite

As of January 2, 2021, Cadence had tax credit carryforwards of:


	Amount		Expiration Periods
	(In thousands)
Federal*	$	96,417	from 2038 through 2040
California	63,130		indefinite
Other states	12,023		from 2021 through indefinite
Foreign	25,866		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 January 2, 2021, 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						2016
Ireland						2016

Unrecognized Tax Benefits

The changes in Cadence’s gross amount of unrecognized tax benefits during fiscal 2020, 2019 and 2018 are as follows:


	2020		2019		2018
	(In thousands)
Unrecognized tax benefits at the beginning of the fiscal year	$	106,041	$	101,857	$	110,179
Gross amount of the increases (decreases) in unrecognized tax benefits of tax positions taken during a prior year*	5,037		(3,143)		(4,183)
Gross amount of the increases in unrecognized tax benefits as a result of tax positions taken during the current year	3,344		8,951		2,370
Amount of decreases in unrecognized tax benefits relating to settlements with taxing authorities, including the utilization of tax attributes	(1,316)		(380)		—
Reductions to unrecognized tax benefits resulting from the lapse of the applicable statute of limitations	(676)		(1,692)		(5,179)
Effect of foreign currency translation	591		448		(1,330)
Unrecognized tax benefits at the end of the fiscal year	$	113,021	$	106,041	$	101,857

Total amounts of unrecognized tax benefits that, if upon resolution of the uncertain tax positions would reduce Cadence’s effective tax rate	$	66,010	$	61,527	$	58,022

_____________

* 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 $10.5 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 2020, 2019 and 2018 were as follows:


	2020		2019		2018
	(In thousands)
Interest	$	473	$	490	$	585
Penalties	(3)		19		342

The total amounts of gross accrued interest and penalties recognized in the consolidated balance sheets as of January 2, 2021 and December 28, 2019 were as follows:


	As of
	January 2, 2021		December 28, 2019
	(In thousands)
Interest	$	3,555	$	3,500
Penalties	12		12

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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