Income Taxes

12 Months Ended

Jan. 01, 2022

Income Tax Disclosure [Abstract]

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 2021, 2020 and 2019, was as follows:

	2021		2020		2019
	(In thousands)
United States	$	376,037	$	256,032	$	139,306
Foreign subsidiaries	392,398		376,716		339,662
Total income before provision (benefit) for income taxes	$	768,435	$	632,748	$	478,968

Cadence’s provision (benefit) for income taxes was comprised of the following items for fiscal 2021, 2020 and 2019:

	2021		2020		2019
	(In thousands)
Current:
Federal	$	19,957	$	15,083	$	15,282
State and local	25,246		6,401		2,716
Foreign	70,455		46,737		48,729
Total current	115,658		68,221		66,727
Deferred:
Federal	(16,415)		(11,155)		(9,001)
State and local	(30,406)		(24,186)		6,593
Foreign	3,643		9,224		(574,330)
Total deferred	(43,178)		(26,117)		(576,738)
Total provision (benefit) for income taxes	$	72,480	$	42,104	$	(510,011)

During the fourth quarter of fiscal 2021, Cadence recognized a tax benefit of approximately $10.5 million due to a release of the valuation allowance on our Massachusetts research and development tax credit deferred tax assets. Cadence expects to utilize these tax credits prior to expiration based on strong current earnings and future taxable income projections.

During the third quarter of fiscal 2020, 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 2021, 2020, and 2019 as follows:

	2021			2020			2019
	(In thousands)
Provision computed at federal statutory income tax rate	$	161,880		$	132,877		$	100,583
State and local income tax, net of federal tax effect	24,640			20,936			23,221
Intercompany transfers of intangible property rights	—			—			(575,618)
Foreign income tax rate differential	(26,887)			(32,589)			(37,786)
Foreign-derived intangible income deduction	(22,050)			(3,762)			(1,201)
U.S. tax on foreign entities	51,112			43,615			57,225
Stock-based compensation	(55,091)			(51,226)			(29,785)
Change in deferred tax asset valuation allowance	(8,262)			(9,101)			16,796
Tax credits	(90,054)			(89,684)			(87,793)
Non-deductible research and development expense	4,443			5,163			4,363
Withholding taxes	23,495			17,189			15,865
Other	9,254			8,686			4,119
Provision (benefit) for income taxes	$	72,480		$	42,104		$	(510,011)
Effective tax rate	9		%	7		%	(106)		%

The components of deferred tax assets and liabilities consisted of the following as of January 1, 2022 and January 2, 2021:

	As of
	January 1, 2022		January 2, 2021
	(In thousands)
Deferred tax assets:
Tax credit carryforwards	$	147,248	$	197,436
Reserves and accruals	72,287		60,272
Intangible assets	568,199		578,267
Capitalized research and development expense for income tax purposes	34,467		39,427
Operating loss carryforwards	6,630		5,935
Deferred income	42,753		21,170
Capital loss carryforwards	16,957		16,944
Stock-based compensation costs	17,690		14,656
Depreciation and amortization	5,005		4,402
Investments	6,833		2,521
Lease liability	27,362		31,278
Prepaid expenses	53,893		—
Total deferred tax assets	999,324		972,308
Valuation allowance	(108,158)		(116,419)
Net deferred tax assets	891,166		855,889
Deferred tax liabilities:
Intangible assets	(55,178)		(44,549)
Undistributed foreign earnings	(45,460)		(41,957)
ROU assets	(27,362)		(31,278)
Other	(8,528)		(10,749)
Total deferred tax liabilities	(136,528)		(128,533)
Total net deferred tax assets	$	754,638	$	727,356

During fiscal 2021, 2020 and 2019 Cadence maintained valuation allowances of $108.2 million, $116.4 million, and $125.5 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 $8.3 million during fiscal 2021, decreased by $9.1 million during fiscal 2020 and increased by $16.8 million during fiscal 2019. The valuation allowance activity was primarily related to state research and development tax credits and certain foreign tax credits.

As of January 1, 2022, Cadence’s operating loss carryforwards were as follows:

	Amount		Expiration Periods
	(In thousands)
Federal	$	428	from 2027 through 2033
California	27,044		from 2025 through 2038
Other states (tax effected, net of federal benefit)	1,174		from 2022 through 2037
Foreign (tax effected)	3,478		from 2030 through indefinite

As of January 1, 2022, Cadence had tax credit carryforwards of:

	Amount		Expiration Periods
	(In thousands)
Federal*	$	46,743	from 2029 through 2041
California	77,651		indefinite
Other states	14,361		from 2025 through indefinite
Foreign	27,814		from 2037 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 1, 2022, 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	2017
United States – California	2015
Ireland	2017
Israel	2016
Korea	2016

Unrecognized Tax Benefits

The changes in Cadence’s gross amount of unrecognized tax benefits during fiscal 2021, 2020 and 2019 are as follows:

	2021		2020		2019
	(In thousands)
Unrecognized tax benefits at the beginning of the fiscal year	$	113,021	$	106,041	$	101,857
Gross amount of the increases (decreases) in unrecognized tax benefits of tax positions taken during a prior year*	15,414		5,037		(3,143)
Gross amount of the increases in unrecognized tax benefits as a result of tax positions taken during the current year	5,100		3,344		8,951
Amount of decreases in unrecognized tax benefits relating to settlements with taxing authorities, including the utilization of tax attributes	(270)		(1,316)		(380)
Reductions to unrecognized tax benefits resulting from the lapse of the applicable statute of limitations	(2,778)		(676)		(1,692)
Effect of foreign currency translation	43		591		448
Unrecognized tax benefits at the end of the fiscal year	$	130,530	$	113,021	$	106,041
Total amounts of unrecognized tax benefits that, if upon resolution of the uncertain tax positions would reduce Cadence’s effective tax rate	$	79,654	$	66,010	$	61,527

_____________

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

Cadence is currently under examination or contesting proposed adjustments by various domestic and international taxing authorities. It is reasonably possible that the amount of unrecognized tax positions could decrease by approximately $20.6 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 2021, 2020 and 2019 were as follows:

	2021		2020		2019
	(In thousands)
Interest	$	1,171	$	473	$	490
Penalties	(11)		(3)		19

The total amounts of gross accrued interest and penalties recognized in the consolidated balance sheets as of January 1, 2022 and January 2, 2021 were as follows:

	As of
	January 1, 2022		January 2, 2021
	(In thousands)
Interest	$	4,921	$	3,555
Penalties	—		12