Cerence Inc.CRNC
Cerence Inc. Income Taxes Disclosure
Income Taxes
Provision for income taxes
The components of loss before income taxes are as follows (dollars in thousands):
| Year Ended September 30, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Domestic | $ | (26,686) | $ | (524,632) | $ | (24,524) | |||||||||||
| Foreign | 17,865 | (59,978) | (11,865) | ||||||||||||||
| Loss before income taxes | $ | (8,821) | $ | (584,610) | $ | (36,389) | |||||||||||
The components of provision for income taxes are as follows (dollars in thousands):
| Year Ended September 30, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Current: | |||||||||||||||||
| Federal | $ | 575 | $ | (561) | $ | 611 | |||||||||||
| State | 38 | 32 | 38 | ||||||||||||||
| Foreign | 9,039 | 8,655 | 11,619 | ||||||||||||||
| Total current | 9,652 | 8,126 | 12,268 | ||||||||||||||
| Deferred: | |||||||||||||||||
| Federal | (393) | (4,596) | 7,941 | ||||||||||||||
| State | 1,107 | 219 | (1,164) | ||||||||||||||
| Foreign | (473) | (281) | 820 | ||||||||||||||
| Total deferred | 241 | (4,658) | 7,597 | ||||||||||||||
| Provision for income taxes | $ | 9,893 | $ | 3,468 | $ | 19,865 | |||||||||||
| Effective income tax rate | (112.1) | % | (0.6) | % | (54.6) | % | |||||||||||
The provision for income taxes differed from the amount computed by applying the federal statutory rate to our loss before income taxes as follows (dollars in thousands):
| Year Ended September 30, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Federal tax provision at statutory rate | $ | (1,848) | $ | (122,768) | $ | (7,633) | |||||||||||
| State tax, net of federal benefit | 904 | 199 | (890) | ||||||||||||||
| Foreign tax rate and other foreign related tax items | 4,370 | 3,230 | 3,203 | ||||||||||||||
| Uncertain tax positions | 1,289 | 1,681 | 4,202 | ||||||||||||||
| Stock-based compensation | 3,708 | 1,953 | 4,734 | ||||||||||||||
| Global intangible low-taxed income | 809 | (1,601) | 7,464 | ||||||||||||||
| Goodwill impairment | — | 114,863 | — | ||||||||||||||
| Change in valuation allowance | (23,320) | (1,763) | 27,101 | ||||||||||||||
| Executive compensation | 1,351 | 183 | 991 | ||||||||||||||
| Non-deductible expenditures | 968 | 835 | 211 | ||||||||||||||
| R&D credits | (2,254) | (1,531) | (588) | ||||||||||||||
| Intangible property transfers | — | — | (18,930) | ||||||||||||||
| Capital losses | — | 8,187 | — | ||||||||||||||
| Enacted changes in tax laws or rates | 23,916 | — | — | ||||||||||||||
| Provision for income taxes | $ | 9,893 | $ | 3,468 | $ | 19,865 | |||||||||||
The effective income tax rate is based upon the income for the year, the composition of the income in different countries, and adjustments, if any, for the potential tax consequences, benefits or resolutions of audits or other tax contingencies. Our effective tax rate may be adversely affected by earnings being lower than anticipated in countries where we have lower statutory tax rates and higher than anticipated in countries where we have higher statutory tax rates.
Our effective tax rate for the fiscal year 2025 differed from the U.S. federal statutory rate of 21.0%, primarily due to the tax impacts of stock-based compensation, research credits, and our composition of jurisdictional earnings.
During the fiscal year ended September 30, 2025, we recorded a non-cash out-of-period adjustment of $3.8 million to increase deferred tax assets and decrease goodwill to correct an error related to a prior period. Management evaluated this error under SAB No. 99 and SAB No. 108 and determined it was not material to prior annual or interim periods. Therefore, the correction was recorded in the current period's financial statements rather than by restating prior periods.
Our effective tax rate for the fiscal year 2024 differed from the U.S. federal statutory rate of 21.0%, primarily due to impairment of book goodwill, the tax impacts of stock-based compensation, U.S. inclusions of foreign taxable income, valuation allowance on foreign loss carryforwards, and our composition of jurisdictional earnings.
The effective tax rate for the fiscal year 2023 differed from the U.S. federal statutory rate of 21.0%, primarily due to the tax impacts of stock-based compensation, U.S. inclusions of foreign taxable income, valuation allowance on foreign loss carryforwards, and our composition of jurisdictional earnings. The intangible property transfers deferred tax benefit was offset by a change in valuation allowance deferred tax expense.
As of September 30, 2025, we have not provided taxes on undistributed earnings of our foreign subsidiaries, which may be subject to foreign withholding taxes upon repatriation, as we consider these earnings indefinitely reinvested. Our indefinite reinvestment determination is based on the future operational and capital requirements of our domestic and foreign operations. We expect our international cash and cash equivalents and marketable securities will continue to be used for our foreign operations and therefore do not anticipate repatriating these funds. As of September 30, 2025, it is not practical to calculate the unrecognized deferred tax liability on these earnings due to the complexities of the utilization of foreign tax credits and other tax assets.
Deferred tax assets (liabilities) consist of the following as of September 30, 2025 and 2024 (dollars in thousands):
| September 30, | |||||||||||
| 2025 | 2024 | ||||||||||
| Deferred tax assets: | |||||||||||
| Net operating loss carryforwards | $ | 39,503 | $ | 40,155 | |||||||
| Federal credit carryforwards | 7,072 | 7,380 | |||||||||
| Accrued expenses and other reserves | 5,962 | 3,119 | |||||||||
| Deferred revenue | 39,186 | 37,508 | |||||||||
| Acquired intangibles | 88,686 | 110,844 | |||||||||
| Interest limitations carryforward | 6,651 | 9,456 | |||||||||
| Operating lease liabilities | 4,219 | 3,714 | |||||||||
| Depreciation | 29,374 | 25,394 | |||||||||
| Deferred compensation | 660 | 1,028 | |||||||||
| Pension obligation | 479 | 462 | |||||||||
| Other | 3,812 | 3,873 | |||||||||
| Total deferred tax assets | 225,604 | 242,933 | |||||||||
| Valuation allowance for deferred tax assets | (150,996) | (167,314) | |||||||||
| Deferred tax assets | $ | 74,608 | $ | 75,619 | |||||||
| Deferred tax liabilities: | |||||||||||
| Depreciation | $ | (6,617) | $ | (5,006) | |||||||
| Acquired intangibles | (2,716) | (6,889) | |||||||||
| Operating lease right of use assets | (4,009) | (3,557) | |||||||||
| Deferred costs | (5,430) | (7,691) | |||||||||
| Other | (1,731) | (1,656) | |||||||||
| Total deferred tax liabilities | (20,503) | (24,799) | |||||||||
| Net deferred tax assets | $ | 54,105 | $ | 50,820 | |||||||
Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expenses. We regularly assess the need for a valuation allowance against our deferred tax assets. In evaluating whether it is more likely than not that some or all of our deferred tax assets will not be realized, we consider all available positive and negative evidence. We maintain a valuation allowance against these deferred tax assets until we believe it is more likely than not that they will be realized. If sufficient positive evidence arises in the future indicating that all or a portion of the deferred tax assets meet the more likely than not standard, the valuation allowance would be reversed accordingly in the period that such determination is made. As of September 30, 2025, we have $151.0 million in valuation allowance against our net foreign deferred tax assets. As of September 30, 2024, we have $167.3 million in valuation allowance against our net foreign deferred tax assets. The change in valuation allowance of $(16.3) million included income tax provision of $(23.3) million, cumulative translation adjustments of $7.1 million, and other comprehensive income of $(0.1) million.
The remaining deferred tax assets after valuation allowances are primarily domestic. For each of the periods shown, we have domestic financial taxable income resulting from permanent differences between domestic loss before income taxes and taxable income. Based on the level of historical financial taxable income and projections for future financial taxable income over the periods for which these deferred tax assets are deductible, we believe that it is more likely than not that we will realize the benefits of the domestic deductible differences.
As of September 30, 2025, we have immaterial U.S. federal net operating loss (“NOL”) carryforwards, we have state NOL carryforwards of $8.3 million, and foreign NOL carryforwards of $453.8 million, before uncertain tax positions of $284.2 million. As of September 30, 2024, we have immaterial U.S. federal net operating loss (“NOL”) carryforwards, state NOL carryforwards of $9.8 million, and foreign NOL carryforwards of $433.6 million, before uncertain tax positions of $270.2 million. These carryforwards will expire at various dates beginning in 2026 and extending up to an unlimited period. As of September 30, 2025 and 2024, unlimited federal NOLs are immaterial and immaterial, respectively, and unlimited Netherlands NOLs are $387.6 million and $360.7 million, respectively.
As of September 30, 2025, we have U.S. federal research and development carryforwards and foreign tax credit carryforwards of $4.1 million, before uncertain tax positions of $3.9 million, state research and development credits of $0.5 million, and foreign research and development credits of $9.1 million. As of September 30, 2024, we have U.S. federal research and development carryforwards and foreign tax credit carryforwards of $7.0 million, before uncertain tax positions of $5.2 million, state research and development credits of $0.3 million, and foreign research and development credits of $7.2 million. These carryforwards will expire at various dates beginning in 2026 and extending up to 2042.
Uncertain Tax Positions
ASC 740 prescribes the accounting for uncertainty in income taxes recognized in the financial statements. We regularly assess the outcome of potential examinations in each of the taxing jurisdictions when determining the adequacy of the amount of unrecognized tax benefit recorded. We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit which is more likely than not to be realized upon ultimate settlement. We recognize interest and penalties related to unrecognized tax positions in our provision for (benefit from) income taxes line of our Consolidated Statements of Operations.
The aggregate changes in the balance of our gross unrecognized tax benefits were as follows (dollars in thousands):
| September 30, | |||||||||||
| 2025 | 2024 | ||||||||||
| Balance at the beginning of the year | $ | 87,400 | $ | 85,172 | |||||||
| Beginning balance adjustment | 3,169 | 4,018 | |||||||||
| Increases related to tax positions taken from prior periods | — | 216 | |||||||||
| Decreases related to tax positions taken from prior periods | (1,283) | (2,272) | |||||||||
| Increases related to tax positions taken during current period | 406 | 484 | |||||||||
| Decreases for tax settlements and lapse in statutes | (442) | (218) | |||||||||
| Balance at the end of the year | $ | 89,250 | $ | 87,400 | |||||||
As of September 30, 2025 and 2024, beginning balance adjustments include cumulative translation adjustments of $3.2 million and $4.0 million, respectively.
As of September 30, 2025, $89.3 million of the unrecognized tax benefits, if recognized, would impact our effective tax rate. We do not expect a significant change in the amount of unrecognized tax benefits within the next 12 months. We recognized interest related to uncertain tax positions in our provision for (benefit from) income taxes of $1.3 million, $1.3 million and $0.6 million during fiscal years 2025, 2024 and 2023 respectively. We recorded interest of $6.3 million and $5.6 million as of September 30, 2025 and 2024, respectively.
On July 4, 2025, the One Big Beautiful Bill Act (the "Act") was signed into law. Certain provisions of the Act were applicable to us beginning in 2025 while other provisions will become effective beginning in fiscal 2026 and 2027. The impact of the Act is not material to our year ended September 30, 2025 consolidated financial statements. We continue to evaluate the future impact of these tax law changes.
We are subject to U.S. federal income tax, various state and local taxes and international income taxes in numerous jurisdictions. The 2016 through 2024 tax years remain open for all purposes of examination by the IRS and other taxing authorities in material jurisdictions.
About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.