Fair Value

6 Months Ended

Jun. 29, 2013

Fair Value Disclosures [Abstract]

FAIR VALUE

FAIR VALUE

Inputs to valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Cadence’s market assumptions. These two types of inputs have created the following fair value hierarchy:

• Level 1 – Quoted prices for identical instruments in active markets;

• Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and

• Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

This hierarchy requires Cadence to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value. Cadence recognizes transfers between levels of the hierarchy based on the fair values of the respective financial instruments at the end of the reporting period in which the transfer occurred. There were no transfers between levels of the fair value hierarchy during the three and six months ended June 29, 2013.

On a quarterly basis, Cadence measures at fair value certain financial assets and liabilities. The fair value of financial assets and liabilities was determined using the following levels of inputs as of June 29, 2013 and December 29, 2012:

	Fair Value Measurements as of June 29, 2013:
	Total		Level 1		Level 2		Level 3
	(In thousands)
Assets
Cash equivalents:
Money market funds	$	403,153	$	403,153	$	—	$	—
Corporate debt securities	501		—		501		—
Short-term investments:
Corporate debt securities	34,205		—		34,205		—
Bank certificates of deposit	26,215		—		26,215		—
United States Treasury securities	25,856		25,856		—		—
United States government agency securities	11,223		11,223		—		—
Commercial paper	1,797		—		1,797		—
Marketable equity securities	1,955		1,955		—		—
Trading securities held in Non-Qualified Deferred Compensation, or NQDC, trust	21,472		21,472		—		—
2015 Notes Hedges	335,131		—		335,131		—
Total Assets	$	861,508	$	463,659	$	397,849	$	—
	Total		Level 1		Level 2		Level 3
	(In thousands)
Liabilities
Acquisition-related contingent consideration	$	3,832	$	—	$	—	$	3,832
2015 Notes Embedded Conversion Derivative	335,131		—		335,131		—
Foreign currency exchange contracts	$	1,498	$	—	$	1,498	$	—
Total Liabilities	$	340,461	$	—	$	336,629	$	3,832

	Fair Value Measurements as of December 29, 2012:
	Total		Level 1		Level 2		Level 3
	(In thousands)
Assets
Cash equivalents:
Money market funds	$	566,334	$	566,334	$	—	$	—
Short-term investments:
Corporate debt securities	31,359		—		31,359		—
Bank certificates of deposit	27,826		—		27,826		—
United States Treasury securities	23,239		23,239		—		—
United States government agency securities	10,258		10,258		—		—
Commercial paper	5,783		—		5,783		—
Marketable equity securities	2,239		2,239		—		—
Trading securities held in NQDC trust	24,329		24,329		—		—
2015 Notes Hedges	303,154		—		303,154		—
Foreign currency exchange contracts	1,737		—		1,737		—
Total Assets	$	996,258	$	626,399	$	369,859	$	—
	Total		Level 1		Level 2		Level 3
	(In thousands)
Liabilities
Acquisition-related contingent consideration	$	4,218	$	—	$	—	$	4,218
2015 Notes Embedded Conversion Derivative	303,154		—		303,154		—
Total Liabilities	$	307,372	$	—	$	303,154	$	4,218

Level 1 Measurements

Cadence’s cash equivalents held in money market funds, available-for-sale United States Treasury securities, United States government agency securities, marketable equity securities and the trading securities held in Cadence’s NQDC trust are measured at fair value using level 1 inputs.

Level 2 Measurements

The 2015 Notes Hedges and the 2015 Notes Embedded Conversion Derivative are measured at fair value using level 1 and level 2 inputs. These instruments are not actively traded and are valued using an option pricing model that uses observable market data for all inputs, such as implied volatility of Cadence’s common stock, risk-free interest rate and other factors.

Cadence’s available-for-sale corporate debt securities, bank certificates of deposit and commercial paper are measured at fair value using level 2 inputs. Cadence obtains the fair values of its level 2 available-for-sale securities from a professional pricing service and validates the fair values by assessing the pricing methods and inputs and by comparing the fair values to another independent source.

The fair values of Cadence’s 2013 Notes and 2015 Notes, which differ from their carrying values, are influenced by interest rates and Cadence’s stock price and stock price volatility and are determined by prices for the 2013 Notes and 2015 Notes observed in market trading, which are level 2 inputs.

Cadence’s foreign currency exchange contracts are measured at fair value using observable foreign currency exchange rates.

Level 3 Measurements

The liabilities included in level 3 represent the fair value of contingent consideration associated with certain of Cadence’s 2011 and 2010 acquisitions. Cadence makes estimates regarding the fair value of contingent consideration liabilities on the acquisition date and at the end of each reporting period until the contingency is resolved. The fair value of these arrangements is determined by calculating the net present value of the expected payments using significant inputs that are not observable in the market, including revenue projections and discount rates consistent with the level of risk of achievement. The fair value of these contingent consideration arrangements is affected most significantly by the changes in the revenue projections, but is also impacted by the discount rate used to adjust the outcomes to their present values. If the revenue projections increase or decrease, the fair value of the contingent consideration will increase or decrease accordingly, in amounts that will vary based on the timing of the projected revenues, the timing of the expected payments and the discount rate used to calculate the present value of the expected payments. Cadence used discount rates ranging from 11% to 16% to value its contingent consideration liabilities as of June 29, 2013 and December 29, 2012. Cadence believes that its estimates and assumptions are reasonable, but significant judgment is involved.

Changes in the fair value of contingent consideration liabilities subsequent to the acquisition are recorded in general and administrative expense in the condensed consolidated income statements.

The following table summarizes the level 3 activity for the six months ended June 29, 2013:

	(In thousands)
Balance as of December 29, 2012	$	4,218
Payments	(740		)
Adjustments	354
Balance as of June 29, 2013	$	3,832

Cadence acquired intangible assets, including in-process technology, of $173.8 million in connection with its acquisitions during the six months ended June 29, 2013. The fair value of the intangible assets acquired was determined using the income approach and using level 3 inputs. Key assumptions include the level and timing of expected future cash flows, conditions and demands specific to IP solutions, discount rates consistent with the level of risk and the economy in general. The fair value of these intangible assets is affected most significantly by the projected income associated with the intangible assets and the anticipated timing of the projected income, but is also impacted by the discount rate used to adjust the outcomes to their present values. If the income projections increase or decrease, the fair value of the intangible assets would increase or decrease accordingly in amounts that will vary based on the anticipated timing of the projected income and the discount rate used to calculate the present value of the expected income. Cadence used discount rates ranging from 10% to 15% to value the intangible assets acquired during the six months ended June 29, 2013.

As part of its acquisitions, Cadence also assumed obligations related to deferred revenue of $8.2 million, which was estimated using the cost build-up approach. The cost build-up approach determines fair value using estimates of the costs required to provide the contracted deliverables plus an assumed profit between10% and 25%. The total costs including the assumed profit were adjusted to present value using a discount rate of approximately 3%. The resulting fair value approximates the amount that Cadence would be required to pay a third party to assume the obligation. The fair value of the deferred revenue obligation is affected most significantly by the estimated costs required to support the obligation, but is also affected by the assumed profit and the discount rate.

Cadence believes that its estimates and assumptions related to the fair value of its acquired intangible assets and deferred revenue obligations are reasonable, but significant judgment is involved.