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Fair Value
12 Months Ended
Jan. 03, 2015
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 fiscal 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 January 3, 2015 and December 28, 2013:
 
Fair Value Measurements as of January 3, 2015:
  
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Assets
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
728,496

 
$
728,496

 
$

 
$

Short-term investments:

 
 
 
 
 
 
Corporate debt securities
34,894

 

 
34,894

 

Bank certificates of deposit
21,910

 

 
21,910

 

United States Treasury securities
19,374

 
19,374

 

 

United States government agency securities
9,208

 
9,208

 

 

Commercial paper
3,186

 

 
3,186

 

Marketable equity securities
1,873

 
1,873

 

 

Trading securities held NQDC trust
27,034

 
27,034

 

 

2015 Notes Hedges
523,930

 

 
523,930

 

Total Assets
$
1,369,905

 
$
785,985

 
$
583,920

 
$

 
 
 
 
 
 
 
 
  
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Liabilities
 
2015 Notes Embedded Conversion Derivative
$
523,930

 
$

 
$
523,930

 
$

Foreign currency exchange contracts
3,163

 

 
3,163

 

Total Liabilities
$
527,093

 
$

 
$
527,093

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 a combination of 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 as of December 28, 2013 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 amounts and 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 a discount rate of 11% to value its contingent consideration liabilities as of December 28, 2013. As of January 3, 2015, Cadence determined there was no remaining liability related to its contingent consideration arrangements.
Changes in the fair value of contingent consideration liabilities subsequent to the acquisition are recorded in general and administrative expense in the consolidated income statements.
The following table summarizes the level 3 activity for fiscal 2014 and 2013:
 
(In thousands)
Balance as of December 29, 2012
$
4,218

Payments
(835
)
Adjustments
708

Balance as of December 28, 2013
$
4,091

Payments
(2,329
)
Adjustments
(1,762
)
Balance as of January 3, 2015
$


Cadence acquired intangible assets of $109.9 million and $173.8 million in fiscal 2014 and 2013 , respectively. The fair value of the intangible assets acquired was determined using the income approach and level 3 inputs. Key assumptions include the level and timing of expected future cash flows, market conditions, the level of customer demand for IP solutions and electronic design automation software, discount rates and the economy in general. The fair value of these intangible assets was affected most significantly by the projected income associated with the intangible assets and the anticipated timing of the projected income, but was also impacted by the discount rate used to adjust the outcomes to their present values. Cadence used discount rates ranging from 10% to 19% to value the intangible assets acquired during fiscal 2014 and discount rates ranging from 10% to 15% to value the intangible assets acquired during fiscal 2013.
As part of the fiscal 2014 acquisitions, Cadence also assumed obligations related to deferred revenue of $17.0 million, which were estimated using the cost build-up approach. The cost build-up approach determines fair value using estimates of the costs required to fulfill the contracted obligations plus an assumed profit. Cadence assumed a profit of 25% when valuing these liabilities, which were then adjusted to present value using a discount rate of approximately 3.25%. Cadence also used the cost build-up approach to estimate the fair value of deferred revenue assumed with its fiscal 2013 acquisitions using an assumed profit between 10% and 25% and a discount rate of approximately 3%. The resulting fair value using this approach approximates the amount that Cadence would be required to pay a third party to assume the obligation. The fair value of the deferred revenue obligations assumed was affected most significantly by the estimated costs required to support the obligation, but was 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, deferred revenue obligations and contingent consideration are reasonable, but significant judgment is involved.