Acquisitions and Acquisition-Related Contingent Consideration

12 Months Ended

Dec. 29, 2012

Business Combinations [Abstract]

ACQUISITIONS AND ACQUISITION-RELATED CONTINGENT CONSIDERATION

ACQUISITIONS AND ACQUISITION-RELATED CONTINGENT CONSIDERATION

For each of the acquisitions described below, the results of operations and the estimated fair value of the assets acquired and liabilities assumed have been included in the consolidated financial statements from the date of the acquisition.

Sigrity, Inc.

On July 2, 2012, Cadence acquired Sigrity, Inc., or Sigrity, a provider of signal and power integrity analysis tools for system, printed circuit board and integrated circuit package designs. Cadence is incorporating the Sigrity technology into its Allegro product offering. The goodwill associated with this acquisition resulted primarily from Cadence's expectation of synergies from the integration of Sigrity's product offerings with Cadence's product offerings, and is not deductible for income tax purposes. Comparative pro forma financial information for this acquisition has not been presented because the results of operations were not material to Cadence's consolidated financial statements.

Total cash consideration for Sigrity was $78.5 million (net of cash acquired of $7.5 million), of which $64.3 million was paid at closing, and $14.2 million was deferred and is conditioned upon certain Sigrity shareholders remaining employees of Cadence over designated retention periods. Cadence recorded compensation expense of $3.5 million during fiscal 2012 related to this deferred purchase consideration and will expense the remaining $10.7 million over the remaining retention periods.

The following table summarizes the assets acquired and liabilities assumed as part of the Sigrity acquisition:

	(In thousands)
Cash and cash equivalents	$	7,490
Trade receivables	4,254
Property, plant and equipment	238
Other assets	1,004
Acquired intangibles:
Existing technology (four- to ten-year useful lives)	22,200
Agreements and relationships (three- to ten-year useful lives)	17,100
Tradenames and trademarks (nine-year useful lives)	1,300
Goodwill	39,680
Total assets acquired	$	93,266
Deferred revenue	(3,800		)
Other liabilities	(2,547		)
Long-term deferred tax liabilities	(15,079		)
Net assets acquired	$	71,840

Sigrity's assets and liabilities were recorded at their fair values on the date of acquisition. The fair values of Sigrity's intangible assets and deferred revenue were determined using significant inputs that are not observable in the market. For an additional description of these fair value calculations, see Note 8.

The deferred tax liabilities primarily related to the intangible assets acquired with Sigrity which will provide Cadence a future source of taxable income. As a result, Cadence released $14.8 million of its deferred tax asset valuation allowance, which was recognized as a benefit for income taxes during fiscal 2012.

2011 Acquisitions

During fiscal 2011, Cadence acquired companies for an aggregate purchase price of $49.3 million and recorded a total of $32.3 million of goodwill and $21.6 million of other intangible assets. The intangibles are being amortized over a weighted-average life of approximately seven years. The $32.3 million of goodwill is not expected to be deductible for income tax purposes.

Denali Software, Inc.

In June 2010, Cadence acquired Denali Software, Inc., or Denali, a privately-held provider of electronic design automation software and intellectual property used in system-on-chip design and verification. Cadence acquired Denali to expand its portfolio to provide system component modeling and design IP. The goodwill associated with Cadence's acquisition of Denali resulted primarily from Cadence's expectation of synergies from the integration of Denali's product offerings with Cadence's EDA product offerings. Total cash consideration for Denali was $262.8 million (net of cash acquired of $46.7 million), of which $250.2 million was paid at closing and $12.6 million was deferred and was conditioned on certain Denali shareholders remaining employees of Cadence over designated retention periods, and as a result, Cadence recorded compensation expense of $0.7 million, $1.5 million and $10.2 million during fiscal 2012, 2011 and 2010, respectively. Cadence expects to expense the remaining $0.2 million over the stated retention periods through 2014. The $152.2 million of goodwill recorded in connection with this acquisition is not expected to be deductible for income tax purposes.

The following table summarizes the allocation of the purchase price for Denali and the estimated amortization period for the acquired intangibles:

	(In thousands)
Cash and cash equivalents	$	46,670
Accounts receivable	11,060
Current assets	1,668
Other assets	630
Acquired intangibles:
Existing technology (six- to nine-year useful lives)	65,700
Agreements and relationships (three- to twelve-year useful lives)	98,800
Tradenames, trademarks and patents (ten-year useful lives)	4,300
Goodwill	152,172
Total assets acquired	$	381,000
Deferred revenue	(11,259		)
Other current liabilities	(5,783		)
Long-term deferred tax liabilities	(67,153		)
Net assets acquired	$	296,805

Denali's assets and liabilities were recorded at their fair values on the date of acquisition. The fair values of Denali's intangible assets and deferred revenue were determined using significant inputs that are not observable in the market. For an additional description of these fair value calculations, see Note 8.

The financial information in the table below summarizes the combined results of operations of Cadence and Denali, on a pro forma basis, as though the companies had been combined as of the beginning of fiscal 2010. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place on January 3, 2010 or of results that may occur in the future.

	2010
	(In thousands)
Total revenue	$	947,849
Net income	$	109,828

Because Cadence recorded deferred taxes of $66.7 million, primarily related to the intangible assets acquired with Denali, Cadence released a corresponding amount of its deferred tax asset valuation allowance. The $66.7 million release of the valuation allowance was recognized as a benefit for income taxes during fiscal 2010. The pro forma net income presented above does not include this non-recurring benefit for income taxes. The pro forma tax effects were calculated considering Cadence's valuation allowance position on its United States losses and tax credits.

Other 2010 Acquisition

During fiscal 2010, Cadence acquired another company and recorded $3.9 million of goodwill and $2.2 million of intangible assets. The $3.9 million of goodwill recorded in connection with this acquisition is not expected to be deductible for income tax purposes. Of the $2.2 million of intangible assets, $0.5 million was initially allocated to in-process research and development as an indefinite-lived intangible asset. The project was completed during fiscal 2011 and is being amortized over its expected life of 5 years. The remaining $1.7 million of intangible assets has a weighted-average life of 5 years.

Acquisition-related Contingent Consideration

For business combinations completed after January 3, 2009, contingent consideration is recorded at fair value on the acquisition date and adjusted to fair value at the end of each reporting period.

One of the fiscal 2011 acquisitions includes contingent consideration payments based on certain future financial measures associated with the acquired technology. This contingent consideration arrangement requires payments of up to $5.0 million if these measures are met during the three-year period subsequent to October 1, 2011.

One of the fiscal 2010 acquisitions includes contingent consideration payments based on future financial measures of the acquired technology. The contingent consideration arrangement requires payments of up to $4.0 million if certain financial measures are met during the three-year period subsequent to the consummation of the acquisition.

The following table presents the maximum payment and fair value of the contingent consideration for the fiscal 2011 and the fiscal 2010 acquisitions:

			Fair value as of
	Maximum payment		Acquisition Date		December 29, 2012
	(in thousands)
Fiscal 2011 acquisition contingent consideration	$	5,000	$	3,521	$	4,118
Fiscal 2010 acquisition contingent consideration	4,000		858		100

Cadence may be obligated to make cash payments in connection with its business combinations and asset acquisitions, including the contingent consideration noted in the table above, subject to the satisfaction of future financial measures. If performance is such that these payments are fully achieved, Cadence may be obligated to pay up to an aggregate of $18.8 million over the next 40 months. Of the $18.8 million, up to $12.4 million would be recorded as operating expenses in the consolidated income statements.