Fair Value

9 Months Ended

Oct. 01, 2022

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 nine months ended October 1, 2022.

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 October 1, 2022 and January 1, 2022:


	Fair Value Measurements as of October 1, 2022
	Total		Level 1		Level 2		Level 3
	(In thousands)
Assets
Cash equivalents:
Money market funds	$	587,205	$	587,205	$	—	$	—
Marketable equity securities	3,963		3,963		—		—
Securities held in Non-Qualified Deferred Compensation (“NQDC”) trust	50,509		50,509		—		—

Total Assets	$	641,677	$	641,677	$	—	$	—

	Total		Level 1		Level 2		Level 3
	(In thousands)
Liabilities
Foreign currency exchange contracts	$	16,748	$	—	$	16,748	$	—
Total Liabilities	$	16,748	$	—	$	16,748	$	—


	Fair Value Measurements as of January 1, 2022
	Total		Level 1		Level 2		Level 3
	(In thousands)
Assets
Cash equivalents:
Money market funds	$	658,474	$	658,474	$	—	$	—
Marketable equity securities	5,956		5,956		—		—
Securities held in NQDC trust	56,165		56,165		—		—

Total Assets	$	720,595	$	720,595	$	—	$	—


	Total		Level 1		Level 2		Level 3
	(In thousands)
Liabilities
Foreign currency exchange contracts	$	306	$	—	$	306	$	—
Total Liabilities	$	306	$	—	$	306	$	—

Level 1 Measurements

Cadence’s cash equivalents held in money market funds, 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 valuation techniques used to determine the fair value of Cadence’s foreign currency forward exchange contracts, the 2024 Notes and the 2025 Term Loan are classified within Level 2 of the fair value hierarchy. For additional information relating to Cadence’s debt arrangements, see Note 4 in the notes to condensed consolidated financial statements.

Level 3 Measurements

During the second quarter of fiscal 2022, Cadence acquired intangible assets of $15.0 million. The fair value of the intangible assets acquired was determined using the multi-period excess earnings method, a variation of the income approach that utilizes unobservable inputs classified as Level 3 measurements. This method estimates the revenues and cash flows derived from the acquired assets, net of investment in supporting assets. The resulting cash flow, which is attributable solely to the assets acquired, is then discounted at a rate of return commensurate with the associated risk of the asset to calculate the present value. Cadence assumed discount rates between 23% and 25%.

During the third quarter of fiscal 2022, Cadence acquired combined intangible assets of $155.5 million through its acquisitions of OpenEye and Future Facilities. For existing technology acquired during the third quarter of fiscal 2022, the fair value was determined by applying the relief-from-royalty method. This method is based on the application of a royalty rate to forecasted revenue to quantify the benefit of owning the intangible asset rather than paying a royalty for use of the asset. To estimate royalty savings over time, Cadence projected revenue from the acquired existing technology over the estimated remaining life of the technology, including the effect of assumed technological obsolescence, before applying an assumed royalty rate. For both OpenEye and Future Facilities, Cadence assumed technological obsolescence at a rate of 10% annually, before applying an assumed royalty rate of 25%.

The fair value for agreements and relationships acquired during the third quarter of fiscal 2022 was determined by using the multi-period excess earnings method. This method reflects the present value of the projected cash flows that are expected to be generated from existing customers, less charges representing the contribution of other assets to those cash flows. Projected income from existing customer relationships was determined using customer retention rates between 95% and 100% for OpenEye and 95% for Future Facilities. The present value of operating cash flows from existing customers was determined using discount rates ranging from 10% to 11%.

Cadence believes that its estimates and assumptions related to the fair value of its acquired intangible assets and assumed liabilities are reasonable, but significant judgment is involved.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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