DEBT

Cadence’s outstanding debt as of January 3, 2015 and December 28, 2013 was as follows:



	January 3, 2015							December 28, 2013
	(In thousands)
	Principal		Unamortized Discount			Carrying Value		Principal		Unamortized Discount			Carrying Value
2015 Notes	$	349,999	$	(7,500	)	$	342,499	$	350,000	$	(25,174	)	$	324,826
2024 Notes	350,000		(1,324		)	348,676		—		—			—
Revolving credit facility	—		—			—		—		—			—
Total outstanding debt	$	699,999	$	(8,824	)	$	691,175	$	350,000	$	(25,174	)	$	324,826

2015 Notes

In June 2010, Cadence issued $350.0 million principal amount of 2.625% Cash Convertible Senior Notes Due 2015. At maturity, the holders of the 2015 Notes will be entitled to receive the principal amount of the 2015 Notes plus accrued interest. The holders of the 2015 notes may elect to convert their 2015 notes to cash at any time through the second trading day immediately preceding the maturity date, as specified in the table below under “Early conversion conditions” and “Conversion immediately preceding maturity.” If a holder of the 2015 Notes elects to convert its notes prior to maturity, that note holder will be entitled to receive cash equal to the principal amount of the notes converted plus any additional conversion value as described in the table below under the heading “Conversion feature.” As of January 3, 2015, a total of $47.9 million principal value of the 2015 Notes had been tendered for early conversion, of which one thousand dollars principal value had been settled. As discussed in Note 20, subsequent to January 3, 2015, additional notes were tendered for early conversion.

Cadence entered into hedge transactions, or the 2015 Notes Hedges, in connection with the issuance of the 2015 Notes. The purpose of the 2015 Notes Hedges was to limit Cadence’s exposure to the additional cash payments above the principal amount of the 2015 Notes that may be due to the holders. As a result of the 2015 Notes Hedges, Cadence’s maximum expected cash exposure upon conversion of the 2015 Notes is the remaining principal balance of the notes and accrued interest. In June 2010, Cadence also sold warrants in separate transactions, or the 2015 Warrants. As a result of the 2015 Warrants, Cadence experiences dilution to its diluted earnings per share when its average closing stock price exceeds $10.78 for any fiscal quarter. To the extent that Cadence’s stock price exceeds $10.78 at expiration of the 2015 Warrants, Cadence will issue shares to net settle the 2015 Warrants.

A summary of key terms of the 2015 Notes is as follows:



		2015 Notes
		(In thousands, except percentages and per share amounts)

Outstanding principal maturity value – at January 3, 2015		$349,999

Contractual interest rate		2.625%

Contractual maturity date		June 1, 2015

Initial conversion rate		132.5205 shares of common stock per $1,000 principal amount of notes, which is equivalent to a conversion price of approximately $7.55 per share of Cadence common stock.

Conversion feature (in addition to principal amount payable in cash)		Cash to the extent Cadence’s stock price exceeds approximately $7.55 per share, calculated based on the applicable conversion rate multiplied by the volume weighted average price of Cadence common stock over a specified period.

Early conversion conditions (or the Early Conversion Conditions)		• Closing stock price greater than $9.81 for at least 20 of the last 30 trading days in a fiscal quarter (convertible only for subsequent quarter); • Specified corporate transactions; or • Note trading price falls below a calculated minimum.

Conversion immediately preceding maturity		From March 1, 2015 until the second trading day immediately preceding the maturity date, holders may elect convert their 2015 Notes into cash as described above under “Conversion feature.”

Redemption at Cadence’s option prior to maturity		None.

Fundamental change put right		Upon certain fundamental corporate changes prior to maturity, the 2015 Note holders could require Cadence to repurchase their notes for cash equal to the principal amount of the notes plus accrued interest.

Make-whole premium		Upon certain fundamental changes prior to maturity, if Cadence’s stock price were between $6.16 and $40.00 per share at that time, the holders of the notes would be entitled to an increase to the conversion rate. This is referred to as a “make-whole premium.”

Financial covenants		None.

Impact of Early Conversion Conditions on Financial Statements

If the note holders elect to convert their 2015 Notes prior to maturity, any unamortized discount and transaction fees will be expensed at the time of settlement. If the entire outstanding principal amount had been converted and settled on January 3, 2015, Cadence would have recorded an expense of $8.5 million associated with the conversion, comprised of $7.5 million of unamortized debt discount and $1.0 million of unamortized transaction fees.

As of January 3, 2015, the if-converted value of the 2015 Notes to the note holders of approximately $873.4 million exceeded the principal amount of $350.0 million. The fair value of the 2015 Notes was $873.9 million as of January 3, 2015 and $654.1 million as of December 28, 2013.

2015 Notes Embedded Conversion Derivative

The conversion feature of the 2015 Notes, or the 2015 Notes Embedded Conversion Derivative, requires bifurcation from the 2015 Notes and is accounted for as a derivative liability. The fair value of the 2015 Notes Embedded Conversion Derivative at the time of issuance of the 2015 Notes was $76.6 million and was recorded as original debt discount for purposes of accounting for the debt component of the 2015 Notes. This discount is amortized as interest expense using the effective interest method over the term of the 2015 Notes. The 2015 Notes Embedded Conversion Derivative is carried on the consolidated balance sheet at its estimated fair value. The fair value was $523.9 million as of January 3, 2015 and $306.8 million as of December 28, 2013.

2015 Notes Hedges

The 2015 Notes Hedges expire on June 1, 2015, and must be settled in cash. The aggregate cost of the 2015 Notes Hedges was $76.6 million. The 2015 Notes Hedges are accounted for as a derivative asset and are carried on the consolidated balance sheet at their estimated fair value. The fair value of the 2015 Notes Hedges was $523.9 million as of January 3, 2015 and $306.8 million as of December 28, 2013. The 2015 Notes Embedded Conversion Derivative liability and the 2015 Notes Hedges asset are adjusted to fair value each reporting period and unrealized gains and losses are reflected in the consolidated income statements. The 2015 Notes Embedded Conversion Derivative and the 2015 Notes Hedges are designed to have similar fair values. Accordingly, the changes in the fair values of these instruments offset during fiscal 2014, 2013 and 2012 and did not have a significant net impact on the consolidated income statements for the respective periods.

The classification of the 2015 Notes Embedded Conversion Derivative liability and the 2015 Notes Hedges asset as current on the consolidated balance sheet corresponds with the classification of the 2015 Notes.

2015 Warrants

In June 2010, Cadence sold the 2015 Warrants in separate transactions for the purchase of up to approximately 46.4 million shares of Cadence’s common stock at a strike price of $10.78 per share, for total proceeds of $37.5 million, which was recorded as an increase in stockholders’ equity. The 2015 Warrants expire on various dates from September 2015 through December 2015 and must be settled in net shares of Cadence’s common stock. Upon expiration of the 2015 Warrants, Cadence will issue shares of common stock to the purchasers of the 2015 Warrants that represent the value by which the price of the common stock exceeds the strike price stipulated within the particular warrant agreement.

2015 Notes Interest Expense

The effective interest rate and components of interest expense of the 2015 Notes for fiscal 2014, 2013 and 2012 were as follows:



	2014			2013			2012
	(In thousands, except percentages)
Effective interest rate	8.1		%	8.1		%	8.1		%

Contractual interest expense	$	9,332		$	9,157		$	9,157
Amortization of debt discount	17,674			16,007			14,758
Total interest expense	$	27,006		$	25,164		$	23,915

2024 Notes

On October 9, 2014, Cadence issued $350.0 million aggregate principal amount of 4.375% Senior Notes due October 15, 2024, or the 2024 Notes. Cadence received net proceeds of $342.4 million from issuance of the 2024 Notes, net of a discount of $1.4 million and issuance costs of $6.2 million. Both the discount and issuance costs will be amortized to interest expense over the term of the 2024 Notes using the effective interest method. Interest will be payable in cash semi-annually commencing on April 15, 2015. The 2024 Notes are unsecured and rank equal in right of payment to all of our existing and future senior indebtedness. The proceeds of the 2024 Notes are available for general corporate purposes, which may include the retirement of debt, working capital, capital expenditures, acquisitions and strategic transactions.

Cadence may redeem the 2024 Notes, in whole or in part, at a redemption price equal to the greater of (a) 100% of the principal amount of the notes to be redeemed and (b) the sum of the present values of the remaining scheduled payments of principal and interest, plus any accrued and unpaid interest, as more particularly described in the indentures governing the 2024 Notes.

The 2024 Notes indenture includes customary representations, warranties and restrictive covenants, including, but not limited to, restrictions on our ability to grant liens on assets, enter into sale and lease-back transactions, or merge, consolidate or sell assets, and also includes customary events of default.

Revolving Credit Facility

In December 2012, Cadence entered into a five-year senior secured revolving credit facility with a group of lenders led by Bank of America, N.A., as administrative agent. The credit facility was amended on September 19, 2014, on terms substantially similar to the prior credit agreement, except that, as amended, the credit facility (i) is unsecured, (ii) expires on September 19, 2019, (iii) has no subsidiary guarantors and (iv) includes certain amendments to the negative financial covenants.

The credit facility provides for borrowings up to $250.0 million, with the right to request increased capacity up to an additional $150.0 million upon the receipt of lender commitments, for total maximum borrowings of $400.0 million. Any outstanding loans drawn under the credit facility are due at maturity on September 19, 2019. Outstanding amounts may be paid at any time prior to maturity.

Interest accrues on borrowings under the credit facility at either LIBOR plus a margin between 1.25% and 2.0% per annum or at the base rate plus a margin between 0.25% and 1.0% per annum. The interest rate applied to borrowings is determined by Cadence’s consolidated leverage ratio, as specified by the credit facility agreement. Interest is payable quarterly. A commitment fee ranging from 0.20% to 0.35% is assessed on the daily average undrawn portion of revolving commitments.

The credit facility contains customary negative covenants that, among other things, restrict Cadence’s ability to incur additional indebtedness, grant liens, make certain investments (including acquisitions), dispose of certain assets and make certain payments, including share repurchases and dividends. In addition, the credit facility contains financial covenants that require Cadence to maintain a leverage ratio not to exceed 2.75 to 1, and a minimum interest coverage ratio of 3 to 1.

As of January 3, 2015 and December 28, 2013, Cadence had no outstanding balance under the revolving credit facility and was in compliance with all financial covenants.