STOCK COMPENSATION PLANS AND STOCK-BASED COMPENSATION

Equity Incentive Plans

Cadence’s Omnibus Plan provides for the issuance of both incentive and non-qualified options, restricted stock awards, restricted stock units, stock bonuses and the rights to acquire restricted stock to both executive and non-executive employees. During fiscal 2017, Cadence’s shareholders approved an amendment to the Omnibus Plan to increase the number of shares of common stock authorized for issuance by 6.5 million. As of December 30, 2017, the total number of shares available for future issuance under the Omnibus Plan was 11.2 million. Options granted under the Omnibus Plan have an exercise price not less than the fair market value of the stock on the date of grant. Options and restricted stock generally vest over a three- to four-year period. Options granted under the Omnibus Plan expire seven years from the date of grant. Vesting of restricted stock awards granted under the Omnibus Plan may require the attainment of specified performance criteria.

Cadence’s 1995 Directors Stock Incentive Plan (the “Directors Plan”) provides for the issuance of non-qualified options, restricted stock awards and restricted stock units to its non-employee directors. Options granted under the Directors Plan have an exercise price not less than the fair market value of the stock on the date of grant. As of December 30, 2017, the total number of shares available for future issuance under the Directors Plan was 0.6 million. Options granted under the Directors Plan expire after ten years, and options, restricted stock awards and restricted stock units vest one year from the date of grant.

Cadence has assumed certain options granted to employees of acquired companies (“Acquired Options”). The Acquired Options were assumed by Cadence outside of its stock option plans, and each option is administered under the terms of the respective original plans of the acquired companies. All of the Acquired Options have been adjusted for the price conversion under the terms of the acquisition agreement between Cadence and the relevant acquired company. If the Acquired Options are canceled, forfeited or expire, they do not become available for future grant. No additional options will be granted under any of the acquired companies’ plans.

Stock-based Compensation

Stock-based compensation expense and the related income tax benefit recognized in connection with stock options, restricted stock and the ESPP during fiscal 2017, 2016 and 2015 were as follows:



	2017		2016		2015
	(In thousands)
Stock options	$	5,417	$	5,649	$	7,903
Restricted stock	117,797		96,989		78,615
ESPP	6,809		6,579		5,823
Total stock-based compensation expense	$	130,023	$	109,217	$	92,341

Income tax benefit	$	36,664	$	30,980	$	24,294

Stock-based compensation expense is reflected in Cadence’s consolidated income statements during fiscal 2017, 2016 and 2015 as follows:



	2017		2016		2015
	(In thousands)
Cost of product and maintenance	$	2,218	$	1,995	$	2,436
Cost of services	3,232		2,911		3,561
Marketing and sales	26,838		22,700		21,654
Research and development	77,222		64,061		49,755
General and administrative	20,513		17,550		14,935
Total stock-based compensation expense	$	130,023	$	109,217	$	92,341

Stock Options

The exercise price of each stock option granted under Cadence’s employee equity incentive plans is equal to or greater than the closing price of Cadence’s common stock on the date of grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The weighted-average grant date fair value of options granted and the weighted-average assumptions used in the model for fiscal 2017, 2016 and 2015 were as follows:



	2017			2016			2015
Dividend yield	None			None			None
Expected volatility	21.2		%	31.5		%	26.8		%
Risk-free interest rate	2.01		%	1.21		%	1.61		%
Expected term (in years)	4.8			4.8			5.0
Weighted-average fair value of options granted	$	6.86		$	5.84		$	4.60

A summary of the changes in stock options outstanding under Cadence’s equity incentive plans during fiscal 2017 is presented below:



			Weighted- Average		Weighted- Average Remaining Contractual Terms	Aggregate Intrinsic
	Shares		Exercise Price		(Years)	Value
	(In thousands)					(In thousands)
Options outstanding as of December 31, 2016	7,117		$	13.61
Granted	820		30.72
Exercised	(1,957	)	11.37
Canceled and forfeited	(197	)	20.52
Options outstanding as of December 30, 2017	5,783		$	16.56	3.8	$	110,114
Options vested as of December 30, 2017	4,104		$	13.72	3.2	$	89,790

Cadence had total unrecognized compensation expense related to stock option grants of $9.5 million as of December 30, 2017, which will be recognized over the remaining vesting period. The remaining weighted-average vesting period of unvested awards is 2.3 years.

The total intrinsic value of and cash received from options exercised during fiscal 2017, 2016 and 2015 was:



	2017		2016		2015
	(In thousands)
Intrinsic value of options exercised	$	45,643	$	44,835	$	67,363
Cash received from options exercised	22,255		30,984		52,261

Restricted Stock

Generally, restricted stock, which includes restricted stock awards and restricted stock units, vests over three to four years and is subject to the employee’s continuing service to Cadence. Stock-based compensation expense is recognized ratably over the vesting term. The vesting of certain restricted stock grants is subject to attainment of specified performance criteria. Each fiscal quarter, Cadence estimates the probability of the achievement of these performance goals and recognizes any related stock-based compensation expense using the graded-vesting method. The amount of stock-based compensation expense recognized in any one period can vary based on the attainment or expected attainment of the various performance goals. If such performance goals are not ultimately met, no compensation expense is recognized and any previously recognized compensation expense is reversed.

Certain long-term, performance-based stock awards granted to executives, vest over three to five years and are subject to certain market conditions and the executives’ continuing service to Cadence. Stock-based compensation expense is recognized straight-line over the vesting term. If the market conditions are not ultimately met, compensation expense previously recognized is not reversed. As of December 30, 2017, Cadence had granted a total of 1.53 million shares of long-term, performance-based stock awards to executives.

Stock-based compensation expense related to performance-based restricted stock grants for fiscal 2017, 2016 and 2015 was as follows:



	2017		2016		2015
	(In thousands)
Stock-based compensation expense related to performance-based grants	$	8,224	$	9,195	$	5,544

A summary of the changes in restricted stock outstanding under Cadence’s equity incentive plans during fiscal 2017, is presented below:



			Weighted- Average Grant Date		Weighted- Average Remaining Vesting Terms	Aggregate Intrinsic
	Shares		Fair Value		(Years)	Value
	(In thousands)					(In thousands)
Unvested shares as of December 31, 2016	12,082		$	20.40
Granted	5,909		34.48
Vested	(5,121	)	20.75
Forfeited	(902	)	21.49
Unvested shares as of December 30, 2017	11,968		$	27.11	1.1	$	500,231

Cadence had total unrecognized compensation expense related to restricted stock grants of $264.4 million as of December 30, 2017, which will be recognized over the remaining vesting period. The remaining weighted-average vesting period of unvested awards is 2.1 years.

The total fair value realized by employees upon vesting of restricted stock during fiscal 2017, 2016 and 2015 was:



	2017		2016		2015
	(In thousands)
Fair value of restricted stock realized upon vesting	$	174,548	$	113,114	$	99,564

Employee Stock Purchase Plan

Cadence provides an ESPP, as amended from time to time. A majority of Cadence employees are eligible to participate in the ESPP. Under the terms of the ESPP, eligible employees may purchase Cadence’s common stock at a price equal to 85% of the lower of the fair market value at the beginning or the end of the applicable offering period, in an amount not to exceed 7% of their annual base earnings plus bonuses and commissions, and subject to a limit in any calendar year of $9,411.76 worth of common stock. Each offering period has a six-month duration beginning on either February 1 or August 1. The purchase dates fall on the last days of the six-month offering periods. As of December 30, 2017, the total number of shares available for future issuance under the ESPP was 3.9 million.

Compensation expense is calculated using the fair value of the employees’ purchase rights under the Black-Scholes option pricing model. The weighted-average grant date fair value of purchase rights granted under the ESPP and the weighted-average assumptions used in the model for fiscal 2017, 2016 and 2015 were as follows:



	2017			2016			2015
Dividend yield	None			None			None
Expected volatility	20.4		%	24.4		%	22.9		%
Risk-free interest rate	0.92		%	0.43		%	0.13		%
Expected term (in years)	0.5			0.5			0.5
Weighted-average fair value of options granted	$	6.64		$	4.85		$	4.23

Shares of common stock issued under the ESPP for fiscal 2017, 2016 and 2015 were as follows:



	2017		2016		2015
	(In thousands, except per share amounts)
Cadence shares purchased under the ESPP	1,270		1,471		1,519
Cash received for the purchase of shares under the ESPP	$	26,709	$	24,450	$	22,449
Weighted-average purchase price per share	$	21.04	$	16.62	$	14.78

Reserved for Future Issuance

As of December 30, 2017, Cadence had reserved the following shares of authorized but unissued common stock for future issuance:



	Shares
	(In thousands)
Employee equity incentive plans*	18,663
Employee stock purchase plans	3,920
Directors stock plans*	1,298
Total	23,881

_____________

* Includes shares reserved for: (i) issuance upon exercise of future option grants, (ii) issuance upon vesting of future restricted stock grants, (iii) outstanding but unexercised options to purchase common stock, or (iv) unvested restricted stock units.