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Income Taxes
 12 Months Ended
Jan. 01, 2022
Income Tax Disclosure [Abstract]  
INCOME TAXES INCOME TAXES
The United States enacted the Tax Cuts and Jobs Act in December 2017, which required companies to capitalize all of their research and development (“R&D”) costs, including software development costs, incurred in tax years beginning after December 31, 2021. Beginning in fiscal 2022, Cadence began capitalizing and amortizing R&D costs over five years for domestic research and fifteen years for international research rather than expensing these costs as incurred. The mandatory capitalization requirement increased Cadence’s fiscal 2022 effective tax rate, deferred tax assets, and cash tax liabilities.
Cadence’s income before provision for income taxes included income from the United States and from foreign subsidiaries for fiscal 2022, 2021 and 2020, was as follows:
202220212020
(In thousands)
United States$402,083 $376,037 $256,032 
Foreign subsidiaries643,280 392,398 376,716 
Total income before provision for income taxes$1,045,363 $768,435 $632,748 
Cadence’s provision for income taxes was comprised of the following items for fiscal 2022, 2021 and 2020:
202220212020
(In thousands)
Current:
Federal$212,380 $19,957 $15,083 
State and local7,280 25,246 6,401 
Foreign84,357 70,455 46,737 
Total current304,017 115,658 68,221 
Deferred:
Federal(79,170)(16,415)(11,155)
State and local(50,640)(30,406)(24,186)
Foreign22,204 3,643 9,224 
Total deferred(107,606)(43,178)(26,117)
Total provision for income taxes$196,411 $72,480 $42,104 
During the fourth quarter of fiscal 2022, Cadence recognized a tax benefit of approximately $68.7 million due to a release of the valuation allowance on its California research and development tax credit deferred tax assets. In evaluating its ability to realize its deferred tax assets, Cadence considered all available positive and negative evidence, including its past operating results, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies. Cadence expects to utilize these tax credits based on current earnings and future taxable income projections.
During fiscal 2021, Cadence recognized a tax benefit of approximately $10.5 million due to a release of the valuation allowance on its Massachusetts research and development tax credit deferred tax assets. Cadence expects to utilize these tax credits prior to expiration based on current earnings and future taxable income projections.
During fiscal 2020, Cadence recognized a tax benefit of approximately $22.2 million due to a partial release of the valuation allowance on its California research and development tax credit deferred tax assets as a result of certain tax elections made in Cadence’s 2019 California tax return.
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 for income taxes for fiscal 2022, 2021, and 2020 as follows:
202220212020
(In thousands)
Provision computed at federal statutory income tax rate$219,526 $161,880 $132,877 
State and local income tax, net of federal tax effect29,622 24,640 20,936 
Foreign income tax rate differential(49,949)(26,887)(32,589)
Foreign-derived intangible income deduction(2,335)(22,050)(3,762)
U.S. tax on foreign entities132,563 51,112 43,615 
Stock-based compensation(17,023)(55,091)(51,226)
Change in deferred tax asset valuation allowance(38,073)(8,262)(9,101)
Tax credits(105,366)(90,054)(89,684)
Non-deductible research and development expense— 4,443 5,163 
Withholding taxes17,459 23,495 17,189 
Other9,987 9,254 8,686 
Provision for income taxes$196,411 $72,480 $42,104 
Effective tax rate19 %9 %7 %
The components of deferred tax assets and liabilities consisted of the following as of December 31, 2022 and January 1, 2022:
As of
December 31,
2022		January 1,
2022
(In thousands)
Deferred tax assets:
Tax credit carryforwards$142,374 $147,248 
Reserves and accruals75,543 72,287 
Intangible assets538,424 568,199 
Capitalized research and development expense for income tax purposes149,625 34,467 
Operating loss carryforwards11,081 6,630 
Deferred income64,897 42,753 
Capital loss carryforwards16,777 16,957 
Stock-based compensation costs22,830 17,690 
Depreciation and amortization9,176 5,005 
Investments9,016 6,833 
Lease liability37,758 27,362 
Prepaid expenses14,699 53,893 
Total deferred tax assets1,092,200 999,324 
Valuation allowance(70,085)(108,158)
Net deferred tax assets1,022,115 891,166 
Deferred tax liabilities:
Intangible assets(82,971)(55,178)
Undistributed foreign earnings(51,394)(45,460)
ROU assets(37,758)(27,362)
Other(11,060)(8,528)
Total deferred tax liabilities(183,183)(136,528)
Total net deferred tax assets$838,932 $754,638 
During fiscal 2022, 2021 and 2020 Cadence maintained valuation allowances of $70.1 million, $108.2 million, and $116.4 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 $38.1 million during fiscal 2022, decreased by $8.3 million during fiscal 2021 and decreased by $9.1 million during fiscal 2020. The valuation allowance activity was primarily related to state research and development tax credits and certain foreign tax credits.
As of December 31, 2022, Cadence’s operating loss carryforwards were as follows:
AmountExpiration Periods
(In thousands)
Federal$297 from 2027 through 2033
California30,603 from 2025 through 2041
Other states (tax effected, net of federal benefit)1,462 from 2023 through indefinite
Foreign (tax effected)6,394 indefinite
As of December 31, 2022, Cadence had tax credit carryforwards of:
AmountExpiration Periods
(In thousands)
Federal*$39,055 from 2031 through 2032
California51,190 indefinite
Other states 11,465 from 2028 through indefinite
Foreign 41,634 from 2040 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 31, 2022, Cadence’s earliest tax years that remain open to examination and the assessment of additional tax include:
JurisdictionEarliest Tax Year Open to Examination
United States – Federal2017
United States – California2018
Ireland2018
Israel2017
Korea2019
Unrecognized Tax Benefits
The changes in Cadence’s gross amount of unrecognized tax benefits during fiscal 2022, 2021 and 2020 are as follows:
202220212020
(In thousands)
Unrecognized tax benefits at the beginning of the fiscal year$130,530 $113,021 $106,041 
Gross amount of the increases in unrecognized tax benefits of tax positions taken during a prior year*2,152 15,414 5,037 
Gross amount of the increases in unrecognized tax benefits as a result of tax positions taken during the current year2,660 5,100 3,344 
Amount of decreases in unrecognized tax benefits relating to settlements with taxing authorities, including the utilization of tax attributes— (270)(1,316)
Reductions to unrecognized tax benefits resulting from the lapse of the applicable statute of limitations(7,430)(2,778)(676)
Effect of foreign currency translation(1,839)43 591 
Unrecognized tax benefits at the end of the fiscal year$126,073 $130,530 $113,021 
Total amounts of unrecognized tax benefits that, if upon resolution of the uncertain tax positions would reduce Cadence’s effective tax rate$121,415 $79,654 $66,010 
_____________
* 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 $35.3 million during the next 12 months. The potential decrease could be a combination of settlements with tax authorities and expiration of statute of limitations. The actual amount could vary significantly depending on the ultimate timing and nature of any settlements or examinations in advance of statute of limitation expirations.
The total amounts of interest, net of tax, and penalties recognized in the consolidated income statements as provision for income taxes for fiscal 2022, 2021 and 2020 were as follows:
202220212020
(In thousands)
Interest$434 $1,171 $473 
Penalties7 (11)(3)
The total amounts of gross accrued interest and penalties recognized in the consolidated balance sheets as of December 31, 2022 and January 1, 2022 were as follows:
As of
December 31,
2022		January 1,
2022
(In thousands)
Interest$5,133 $4,921 
Penalties— —