| 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 2024, 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 2024, 2023 and 2022, was as follows: 2024 2023 2022 (In thousands) United States $ 600,088 $ 533,442 $ 402,083 Foreign subsidiaries 795,731 748,484 643,280 Total income before provision for income taxes $ 1,395,819 $ 1,281,926 $ 1,045,363 Cadence’s provision for income taxes was comprised of the following items for fiscal 2024, 2023 and 2022: 2024 2023 2022 (In thousands) Current: Federal $ 281,674 $ 156,495 $ 212,380 State and local 50,430 15,933 7,280 Foreign 136,968 104,866 84,357 Total current 469,072 277,294 304,017 Deferred: Federal (130,490) (87,851) (79,170) State and local (5,127) 25,440 (50,640) Foreign 6,880 25,899 22,204 Total deferred (128,737) (36,512) (107,606) Total provision for income taxes $ 340,335 $ 240,782 $ 196,411 During fiscal 2024, the State of California enacted legislation that, for a three-year period beginning in fiscal 2024, will limit Cadence's utilization of California research and development tax credits to $5 million annually and provides the ability to receive a refund of credits that would have otherwise been used to reduce the California tax liability. The legislation increased the cash paid for income taxes and long-term receivables for fiscal 2024 by approximately $33 million and $21 million, respectively. 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. 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 2024, 2023, and 2022 as follows: 2024 2023 2022 (In thousands) Provision computed at federal statutory income tax rate $ 293,122 $ 269,205 $ 219,526 State and local income tax, net of federal tax effect 50,130 40,304 29,622 Intercompany transfers of intangible property rights 7,833 23,826 — Foreign income tax rate differential (62,798) (54,210) (49,949) Foreign-derived intangible income deduction (13,344) (14,253) (2,335) U.S. tax on foreign entities 144,222 113,011 132,563 Stock-based compensation (6,181) (26,805) (17,023) Change in deferred tax asset valuation allowance 11,441 9,077 (38,073) Tax credits (135,344) (130,383) (105,366) Non-deductible acquisitions-related costs 11,770 6,709 4,273 Withholding taxes 20,175 15,300 17,459 Tax settlements, foreign — 4,034 — Increase (decrease) in unrecognized tax benefits 9,061 (19,660) 2,354 Other 10,248 4,627 3,360 Provision for income taxes $ 340,335 $ 240,782 $ 196,411 Effective tax rate 24 % 19 % 19 % The components of deferred tax assets and liabilities consisted of the following as of December 31, 2024, and December 31, 2023: As of December 31, December 31, (In thousands) Deferred tax assets: Tax credit carryforwards $ 110,031 $ 129,513 Reserves and accruals 103,731 78,993 Intangible assets 487,947 506,398 Capitalized research and development expense for income tax purposes 368,085 242,465 Operating loss carryforwards 9,781 9,598 Deferred income 79,195 77,066 Capital loss carryforwards 16,861 16,483 Stock-based compensation costs 34,045 27,409 Depreciation and amortization 17,228 10,671 Investments 20,757 15,949 Lease liability 33,341 33,639 Prepaid expenses — 3,253 Total deferred tax assets 1,281,002 1,151,437 Valuation allowance (90,603) (79,162) Net deferred tax assets 1,190,399 1,072,275 Deferred tax liabilities: Intangible assets (107,251) (83,308) Undistributed foreign earnings (76,045) (64,371) ROU assets (33,341) (33,639) Investments (14,171) (6,318) Other (7,869) (13,455) Total deferred tax liabilities (238,677) (201,091) Total net deferred tax assets $ 951,722 $ 871,184 During fiscal 2024, 2023 and 2022 Cadence maintained valuation allowances of $90.6 million, $79.2 million, and $70.1 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 $11.4 million and $9.1 million during fiscal 2024 and fiscal 2023, respectively, and decreased by $38.1 million during fiscal 2022. The valuation allowance activity was primarily related to state research and development tax credits and certain foreign tax credits. As of December 31, 2024, Cadence’s operating loss carryforwards were as follows: Amount Expiration Periods (In thousands) Federal $ 61 2033 California 26,872 from 2025 through 2043 Other states (tax effected, net of federal benefit) 410 from 2025 through indefinite Foreign (tax effected) 8,077 indefinite As of December 31, 2024, Cadence had tax credit carryforwards of: Amount Expiration Periods (In thousands) Federal* $ 51,535 from 2031 California 58 indefinite Other states 11,331 from 2033 through indefinite Foreign 47,107 from 2044 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, 2024, 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 2020 United States – California 2020 Ireland 2020 Israel 2017 Korea 2019 Unrecognized Tax Benefits The changes in Cadence’s gross amount of unrecognized tax benefits during fiscal 2024, 2023 and 2022 are as follows: 2024 2023 2022 (In thousands) Unrecognized tax benefits at the beginning of the fiscal year $ 94,311 $ 126,073 $ 130,530 Gross amount of the increase (decrease) in unrecognized tax benefits of tax positions taken during a prior year* 10,109 (1,401) 2,152 Gross amount of the increases in unrecognized tax benefits as a result of tax positions taken during the current year 6,669 2,565 2,660 Amount of decreases in unrecognized tax benefits relating to settlements with taxing authorities, including the utilization of tax attributes — (8,000) — Reductions to unrecognized tax benefits resulting from the lapse of the applicable statute of limitations (3,173) (24,768) (7,430) Effect of foreign currency translation (528) (158) (1,839) Unrecognized tax benefits at the end of the fiscal year $ 107,388 $ 94,311 $ 126,073 Total amounts of unrecognized tax benefits that, if upon resolution of the uncertain tax positions would reduce Cadence’s effective tax rate $ 106,420 $ 93,398 $ 121,415 _____________ * 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 $9.4 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 2024, 2023 and 2022 were as follows: 2024 2023 2022 (In thousands) Interest $ 3,893 $ 2,282 $ 434 Penalties 143 267 7 The total amounts of gross accrued interest and penalties recognized in the consolidated balance sheets as of December 31, 2024, and December 31, 2023, were as follows: As of December 31, December 31, (In thousands) Interest $ 9,010 $ 4,813 Penalties 1,261 — |
