Fair Value

12 Months Ended

Dec. 31, 2011

Fair Value [Abstract]

FAIR VALUE

NOTE 9. 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 2011.

The fair value of Cadence’s cash and cash equivalents, receivables, accounts payable and accrued liabilities approximate their carrying value due to the short-term nature of these instruments. The fair values of Cadence’s installment contract receivables approximate their carrying values based upon current market rates of interest. The fair values of Cadence’s 2013 Notes and 2015 Notes are influenced by interest rates, Cadence’s stock price and stock price volatility and are determined by market trading.

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 December 31, 2011 and January 1, 2011:

	Fair Value Measurements as of December 31, 2011:
Assets	Total			Level 1			Level 2			Level 3
	(In thousands)
Cash equivalents – Money market funds		$	484,102		$	484,102		$	----		$	----
Available-for-sale securities			3,037			3,037			----			----
Trading securities held in Non-Qualified Deferred Compensation Plan (NQDC)			24,058			24,058			----			----
2015 Notes Hedges			215,113			----			215,113			----
Foreign currency exchange contracts			200			----			200			----
Total Assets		$	726,510		$	511,197		$	215,313		$	----
Liabilities	Total			Level 1			Level 2			Level 3
	(In thousands)
Acquisition-related contingent consideration		$	3,911		$	----		$	----		$	3,911
2015 Notes Embedded Conversion Derivative			215,113			----			215,113			----
Total Liabilities		$	219,024		$	----		$	215,113		$	3,911
	Fair Value Measurements as of January 1, 2011:
Assets	Total			Level 1			Level 2			Level 3
	(In thousands)
Cash equivalents – Money market funds		$	463,681		$	463,681		$	----		$	----
Available-for-sale securities			12,715			12,715			----			----
Trading securities held in NQDC plan			28,738			28,738			----			----
2015 Notes Hedges			130,211			----			130,211			----
Foreign currency exchange contracts			1,559			----			1,559			----
Total Assets		$	636,904		$	505,134		$	131,770		$	----
Liabilities	Total			Level 1			Level 2			Level 3
	(In thousands)
Acquisition-related contingent consideration		$	966		$	----		$	----		$	966
2015 Notes Embedded Conversion Derivative			130,211			----			130,211			----
Total Liabilities		$	131,177		$	----		$	130,211		$	966

Level 1 Measurements

Cadence’s cash equivalents held in money market funds, available-for-sale 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 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 foreign currency forward exchange contracts are measured at fair value using observable foreign currency exchange rates.

Level 3 Measurements

The liabilities included in Level 3 represent the fair value of contingent consideration associated with certain of Cadence’s 2011 and 2010 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 using significant inputs that are not observable in the market, including probability-adjusted revenue projections and discount rates consistent with the level of risk of achievement. The expected outcomes are adjusted to their net present value. Cadence believes that its estimates and assumptions are reasonable, but significant judgment is involved.

Changes in the fair value of contingent consideration liabilities subsequent to the acquisition are recorded in general and administrative expense in the Consolidated Statements of Operations. For an additional description of the related business combinations, see Note 4.

The following table summarizes this Level 3 activity for the fiscal years ended January 1, 2011 and December 31, 2011:

	(In thousands)
Balance as of January 2, 2010	$	----
Additions from acquisitions		858
Accretion		108
Balance as of January 1, 2011	$	966
Additions from acquisitions		3,521
Adjustments		(765	)
Accretion		189
Balance as of December 31, 2011	$	3,911

Cadence acquired intangible assets of $21.6 million in connection with business combinations during fiscal 2011, and acquired intangible assets of $171.0 million in connection with business combinations during fiscal 2010. The fair value of the intangible assets acquired in each of these business combinations was determined using the income approach and using Level 3 inputs. Key assumptions included the level and timing of expected future cash flows, conditions and demands specific to electronic design automation software development, discount rates consistent with the level of risk and the economy in general. For an additional description of these business combinations, see Note 4.

The fair values of lease losses included in restructuring and other charges (credits) of $1.5 million during fiscal 2011 and $0.9 million during fiscal 2010 were estimated using Level 3 inputs, including estimated sublease income after facilities are vacated, lease buyout costs, certain contractual costs to maintain vacated facilities and discount rates. For an additional description of Cadence’s lease loss estimates, see Note 7.

Cadence determined during fiscal 2009 that certain of its non-marketable securities were other-than-temporarily impaired based on the current prices of similar non-marketable securities offered by the issuers. Cadence wrote down the investments by $5.2 million during fiscal 2009. These amounts are included in other income (expense), net in the Consolidated Statement of Operations. The fair value of these non-marketable securities was estimated using Level 3 inputs.