| 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 2023 and 2022 effective tax rates, deferred tax assets, and cash tax payments. Cadence’s income before provision for income taxes included income from the United States and from foreign subsidiaries for fiscal 2023, 2022 and 2021, was as follows: 2023 2022 2021 (In thousands) United States $ 533,442 $ 402,083 $ 376,037 Foreign subsidiaries 748,484 643,280 392,398 Total income before provision for income taxes $ 1,281,926 $ 1,045,363 $ 768,435 Cadence’s provision for income taxes was comprised of the following items for fiscal 2023, 2022 and 2021: 2023 2022 2021 (In thousands) Current: Federal $ 156,495 $ 212,380 $ 19,957 State and local 15,933 7,280 25,246 Foreign 104,866 84,357 70,455 Total current 277,294 304,017 115,658 Deferred: Federal (87,851) (79,170) (16,415) State and local 25,440 (50,640) (30,406) Foreign 25,899 22,204 3,643 Total deferred (36,512) (107,606) (43,178) Total provision for income taxes $ 240,782 $ 196,411 $ 72,480 During fiscal 2023, Cadence recognized a tax benefit of approximately $24.8 million due to the recognition of previously unrecognized tax benefits from the expiration of the applicable statute of limitations and a tax benefit of approximately $14.0 million primarily related to a change in R&D expenses that were capitalized in fiscal 2022. During 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. 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 2023, 2022, and 2021 as follows: 2023 2022 2021 (In thousands) Provision computed at federal statutory income tax rate $ 269,205 $ 219,526 $ 161,880 State and local income tax, net of federal tax effect 40,304 29,622 24,640 Intercompany transfers of intangible property rights 23,826 — — Foreign income tax rate differential (54,210) (49,949) (26,887) Foreign-derived intangible income deduction (14,253) (2,335) (22,050) U.S. tax on foreign entities 113,011 132,563 51,112 Stock-based compensation (26,805) (17,023) (55,091) Change in deferred tax asset valuation allowance 9,077 (38,073) (8,262) Tax credits (130,383) (105,366) (90,054) Non-deductible research and development expense — — 4,443 Withholding taxes 15,300 17,459 23,495 Tax settlements, foreign 4,034 — — Increase (decrease) in unrecognized tax benefits (19,660) 2,354 1,511 Other 11,336 7,633 7,743 Provision for income taxes $ 240,782 $ 196,411 $ 72,480 Effective tax rate 19 % 19 % 9 % The components of deferred tax assets and liabilities consisted of the following as of December 31, 2023, and December 31, 2022: As of December 31, December 31, (In thousands) Deferred tax assets: Tax credit carryforwards $ 129,513 $ 142,374 Reserves and accruals 78,993 75,543 Intangible assets 506,398 538,424 Capitalized research and development expense for income tax purposes 242,465 149,625 Operating loss carryforwards 9,598 11,081 Deferred income 77,066 64,897 Capital loss carryforwards 16,483 16,777 Stock-based compensation costs 27,409 22,830 Depreciation and amortization 10,671 9,176 Investments 15,949 9,016 Lease liability 33,639 37,758 Prepaid expenses 3,253 14,699 Total deferred tax assets 1,151,437 1,092,200 Valuation allowance (79,162) (70,085) Net deferred tax assets 1,072,275 1,022,115 Deferred tax liabilities: Intangible assets (83,308) (82,971) Undistributed foreign earnings (64,371) (51,394) ROU assets (33,639) (37,758) Investments (6,318) — Other (13,455) (11,060) Total deferred tax liabilities (201,091) (183,183) Total net deferred tax assets $ 871,184 $ 838,932 During fiscal 2023, 2022 and 2021 Cadence maintained valuation allowances of $79.2 million, $70.1 million, and $108.2 million, respectively, on certain federal, state and foreign deferred tax assets because the realization of these deferred tax assets requires 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 increased by $9.1 million during fiscal 2023, and decreased by $38.1 million and $8.3 million during fiscal 2022 and fiscal 2021, respectively. The valuation allowance activity was primarily related to state research and development tax credits and certain foreign tax credits. As of December 31, 2023, Cadence’s operating loss carryforwards were as follows: Amount Expiration Periods (In thousands) Federal $ 167 from 2027 through 2033 California 28,437 from 2025 through 2041 Other states (tax effected, net of federal benefit) 762 from 2024 through indefinite Foreign (tax effected) 6,719 indefinite As of December 31, 2023, Cadence had tax credit carryforwards of: Amount Expiration Periods (In thousands) Federal* $ 42,905 from 2031 California 33,542 indefinite Other states 11,065 from 2031 through indefinite Foreign 42,002 from 2042 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, 2023, 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 2019 Ireland 2019 Israel 2017 Korea 2019 Unrecognized Tax Benefits The changes in Cadence’s gross amount of unrecognized tax benefits during fiscal 2023, 2022 and 2021 are as follows: 2023 2022 2021 (In thousands) Unrecognized tax benefits at the beginning of the fiscal year $ 126,073 $ 130,530 $ 113,021 Gross amount of the increase (decrease) in unrecognized tax benefits of tax positions taken during a prior year* (1,401) 2,152 15,414 Gross amount of the increases in unrecognized tax benefits as a result of tax positions taken during the current year 2,565 2,660 5,100 Amount of decreases in unrecognized tax benefits relating to settlements with taxing authorities, including the utilization of tax attributes (8,000) — (270) Reductions to unrecognized tax benefits resulting from the lapse of the applicable statute of limitations (24,768) (7,430) (2,778) Effect of foreign currency translation (158) (1,839) 43 Unrecognized tax benefits at the end of the fiscal year $ 94,311 $ 126,073 $ 130,530 Total amounts of unrecognized tax benefits that, if upon resolution of the uncertain tax positions would reduce Cadence’s effective tax rate $ 93,398 $ 121,415 $ 79,654 _____________ * 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 $4.9 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 2023, 2022 and 2021 were as follows: 2023 2022 2021 (In thousands) Interest $ 2,282 $ 434 $ 1,171 Penalties 267 7 (11) The total amounts of gross accrued interest and penalties recognized in the consolidated balance sheets as of December 31, 2023, and December 31, 2022, were as follows: As of December 31, December 31, (In thousands) Interest $ 4,813 $ 5,133 Penalties — — |
