Income Taxes

12 Months Ended

Dec. 31, 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 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, 2023		December 31, 2022
	(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, 2023		December 31, 2022
	(In thousands)
Interest	$	4,813	$	5,133
Penalties	—		—