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 months ended March 29, 2014.

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 March 29, 2014 and December 28, 2013:



	Fair Value Measurements as of March 29, 2014:
	Total		Level 1		Level 2		Level 3
	(In thousands)
Assets
Cash equivalents:
Money market funds	$	348,884	$	348,884	$	—	$	—
Short-term investments:
Corporate debt securities	36,906		—		36,906		—
Bank certificates of deposit	26,362		—		26,362		—
United States Treasury securities	18,944		18,944		—		—
United States government agency securities	10,366		10,366		—		—
Commercial paper	2,495		—		2,495		—
Marketable equity securities	1,933		1,933		—		—
Trading securities held in Non-Qualified Deferred Compensation, or NQDC, trust	23,786		23,786		—		—
2015 Notes Hedges	369,731		—		369,731		—
Total Assets	$	839,407	$	403,913	$	435,494	$	—

	Total		Level 1		Level 2		Level 3
	(In thousands)
Liabilities
Acquisition-related contingent consideration	$	1,805	$	—	$	—	$	1,805
2015 Notes Embedded Conversion Derivative	369,731		—		369,731		—
Foreign currency exchange contracts	$	367	$	—	$	367	$	—
Total Liabilities	$	371,903	$	—	$	370,098	$	1,805



	Fair Value Measurements as of December 28, 2013:
	Total		Level 1		Level 2		Level 3
	(In thousands)
Assets
Cash equivalents:
Money market funds	$	345,872	$	345,872	$	—	$	—
Bank certificates of deposit	2,300		—		2,300		—
Short-term investments:
Corporate debt securities	37,441		—		37,441		—
Bank certificates of deposit	20,308		—		20,308		—
United States Treasury securities	24,246		24,246		—		—
United States government agency securities	10,223		10,223		—		—
Commercial paper	2,493		—		2,493		—
Marketable equity securities	2,077		2,077		—		—
Trading securities held in NQDC trust	23,960		23,960		—		—
2015 Notes Hedges	306,817		—		306,817		—
Foreign currency exchange contracts	262		—		262		—
Total Assets	$	775,999	$	406,378	$	369,621	$	—

	Total		Level 1		Level 2		Level 3
	(In thousands)
Liabilities
Acquisition-related contingent consideration	$	4,091	$	—	$	—	$	4,091
2015 Notes Embedded Conversion Derivative	306,817		—		306,817		—
Total Liabilities	$	310,908	$	—	$	306,817	$	4,091

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 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 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 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 March 29, 2014 and December 28, 2013. 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 three months ended March 29, 2014:



	(In thousands)
Balance as of December 28, 2013	$	4,091
Payments	(2,329		)
Adjustments	43
Balance as of March 29, 2014	$	1,805