Leases

3 Months Ended

Mar. 30, 2019

LEASES

Lessee Considerations

Under Topic 842, operating lease expense is generally recognized evenly over the term of the lease. Cadence has operating leases primarily consisting of facilities with remaining lease terms of one year to twelve years. Cadence has options to terminate many of its leases early. The lease term represents the period up to the early termination date unless it is reasonably certain that Cadence will not exercise the early termination option. For certain leases, Cadence has options to extend the lease term for additional periods ranging from one year to ten years. These renewal options are not considered in the remaining lease term unless it is reasonably certain that Cadence will exercise such options. Certain leases include rental payments that are adjusted periodically based on changes in consumer price and other indices.

Leases with an initial term of twelve months or less are not recorded on the balance sheet. For lease agreements entered into or reassessed after the adoption of Topic 842, Cadence combines the lease and non-lease components in determining the lease liabilities and ROU assets.

Activity related to Cadence’s leases was as follows:



	Three Months Ended
	March 30, 2019
	(In thousands)
Operating lease expense	$	7,681
Cash paid for amounts included in the measurement of operating lease liabilities	6,296
ROU assets obtained in exchange for operating lease obligations	17,505

Cadence’s lease agreements generally do not provide an implicit borrowing rate, therefore an internal incremental borrowing rate is determined based on information available at lease commencement date for purposes of determining the present value of lease payments. Cadence used the incremental borrowing rate on December 29, 2018 for all leases that commenced prior to that date.

ROU lease assets and lease liabilities for Cadence’s operating leases were recorded in the condensed consolidated balance sheet as follows:



	As of
	March 30, 2019
	(In thousands)
Other assets	$	94,223

Accounts payable and accrued liabilities	$	23,783
Other long-term liabilities	81,337
Total lease liabilities	$	105,120

Weighted average remaining lease term (in years)	5.0
Weighted average discount rate	4.6		%

Future lease payments included in the measurement of lease liabilities on the condensed consolidated balance sheet as of March 30, 2019, for the following five fiscal years and thereafter were as follows:



	Operating
	Leases
	(In thousands)
2019 – remaining period	$	20,543
2020	26,618
2021	24,240
2022	17,627
2023	12,529
Thereafter	17,152
Total future minimum lease payments	118,709
Less imputed interest	(13,589		)
Total	$	105,120

As of March 30, 2019, Cadence had additional operating lease obligations for a lease with a future effective date of $1.0 million. This operating lease will commence during the third quarter of fiscal 2019 with a lease term of five years.

As of December 29, 2018, future minimum lease payments, as defined under the previous lease accounting guidance of ASC Topic 840, under non-cancelable operating leases for the following five fiscal years and thereafter were as follows:



	Operating
	Leases
	(In thousands)
2019	$	26,252
2020	23,130
2021	19,778
2022	14,243
2023	11,510
Thereafter	17,100
Total lease payments	$	112,013

Lessor Considerations

Although most of Cadence’s revenue from its hardware business comes from sales of hardware, Cadence also leases its hardware products to some customers. Cadence determines the existence of a lease when the customer controls the use of the identified hardware for a period of time defined in the lease agreement.

Cadence’s leases range in duration up to four years with payments generally collected in equal quarterly installments. Cadence’s leases do not include termination rights or variable pricing and typically do not include purchase rights at the end of the lease. Short-term leases are usually less than two years and are classified as operating leases with revenue recognized and depreciation expensed on a straight-line basis over the term of the lease. Long-term leases are typically for three to four years and are classified as sales-type leases with revenue and cost of sales recognized upon delivery.

Cadence’s operating leases and sales-type leases contain both lease and non-lease components. Because the pattern of revenue recognition is the same for both the lease and non-lease components in Cadence’s operating leases, Cadence has elected the practical expedient to not separate lease and related non-lease components and accounts for both components under Topic 842. Cadence allocates value to the lease and non-lease components in its sales-type leases using standalone selling prices similar to those used under Topic 606, the current accounting standard governing revenue recognition. When Cadence leases its hardware in the same arrangement as software or IP, Cadence allocates value to each performance obligation using standalone selling prices.