Stock Compensation Plans and Stock Based Compensation

12 Months Ended

Dec. 31, 2011

Stock Compensation Plans and Stock Based Compensation [Abstract]

STOCK COMPENSATION PLANS AND STOCK-BASED COMPENSATION

NOTE 12. STOCK COMPENSATION PLANS AND STOCK-BASED COMPENSATION

Equity Incentive Plans

During 2011, Cadence’s stockholders approved an amendment and restatement of the 2000 Equity Incentive Plan, or 2000 Plan, formerly known as the 2000 Nonstatutory Equity Incentive Plan. As a result, the Company’s 1997 Nonstatutory Stock Incentive Plan and the 1993 Nonstatutory Stock Incentive Plan, or the Prior Plans, have been terminated for future grants. The 2000 Plan is used to grant awards to employees, with the exception of certain executive officers. The total number of shares available for issuance under the 2000 Plan, as amended, is 57,500,000 plus any shares that were not subject to a grant or that are forfeited under the Prior Plans. The 2000 Plan provides for the issuance of non-qualified stock options, restricted stock, stock bonuses and rights to acquire restricted stock. Options granted under the 2000 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 2000 Plan expire seven years from the date of grant.

Cadence’s 1987 Stock Incentive Plan, or the 1987 Plan, provides for the issuance of either incentive or non-qualified options and restricted stock awards. The 1987 Plan is used to grant awards to certain executive officers. The number of shares available for issuance under the 1987 Plan, as amended, is 79,370,100 shares, of which only 5,000,000 shares may be issued pursuant to restricted stock awards. Options granted under the 1987 Plan have an exercise price not less than fair market value of the stock on the date of grant and become exercisable over periods of up to five years. Options granted under the 1987 Plan expire seven years from the date of grant. Vesting of restricted stock awards granted under the 1987 Plan may require attainment of specified performance criteria.

Under the 1995 Directors’ Stock Option Plan, or the Directors’ Plan, Cadence may grant non-qualified options to its non-employee directors at an exercise price equal to the average closing price for the 20 trading days prior to the grant date. The maximum number of shares available for issuance under the Directors’ Plan is 3,050,000. Options granted under the Directors’ Plan expire after ten years and vest one year from the date of grant.

Cadence has assumed certain options granted to employees of acquired companies, or 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. The Acquired Options generally become exercisable over a four or five year period and generally expire between five and ten years from the date of 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 Employee Stock Purchase Plan, or ESPP, during fiscal 2011, fiscal 2010 and fiscal 2009 were as follows:

	2011		2010		2009
	(In thousands)
Stock options	$	8,685	$	7,924	$	10,606
Restricted stock		30,815		31,725		35,680
ESPP		4,088		3,811		8,420
Total stock-based compensation expense	$	43,588	$	43,460	$	54,706
Income tax benefit	$	1,406	$	1,370	$	1,536

Stock-based compensation expense is reflected throughout Cadence’s costs and expenses during fiscal 2011, fiscal 2010 and fiscal 2009 as follows:

	2011		2010		2009
	(In thousands)
Cost of product	$	111	$	117	$	151
Cost of services		2,105		2,225		3,321
Cost of maintenance		1,357		1,435		2,126
Marketing and sales		10,356		9,765		12,285
Research and development		18,561		18,324		26,364
General and administrative		11,098		11,594		10,459
Total stock-based compensation expense	$	43,588	$	43,460	$	54,706

The fair value of stock options and purchase rights issued under our ESPP are calculated using the Black-Scholes option pricing model. The computation of the expected volatility assumption used for new awards is based on implied volatility when the remaining maturities of the underlying traded options are at least one year. When the remaining maturities of the underlying traded options are less than one year, expected volatility is based on a weighting of historical and implied volatilities. When determining the expected term, Cadence reviews historical employee exercise behavior from awards having similar vesting periods. The risk-free interest rate for the period within the expected term of the option is based on the yield of United States Treasury notes for the comparable term in effect at the time of grant. The expected dividend yield used in the calculation is zero because Cadence has not historically paid and does not expect to pay dividends.

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 2011, fiscal 2010 and fiscal 2009 were as follows:

	2011		2010		2009
Dividend yield		None		None		None
Expected volatility		44.9%		45.9%		65.8%
Risk-free interest rate		2.18%		2.45%		1.91%
Expected term (in years)		4.7		4.6		4.5
Weighted-average fair value of options granted	$	3.93	$	2.51	$	2.33

A summary of the changes in stock options outstanding under Cadence’s equity incentive plans during fiscal 2011 is presented below:

	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Terms (Years)		Aggregate Intrinsic Value
	(In thousands)							(In thousands)
Options outstanding as of January 1, 2011		25,877		$	12.16		3.7	$	31,128
Acquired options		290		$	1.39
Granted		3,053		$	9.65
Exercised		(1,332	)	$	4.86
Canceled and forfeited		(4,892	)	$	17.37
Options outstanding as of December 31, 2011		22,996		$	11.01		3.5	$	44,692
Options vested as of December 31, 2011		18,215		$	12.00		2.9	$	29,580
Options vested as of, and expected to vest after, December 31, 2011		22,884		$	11.02		3.5	$	44,472

Cadence had total unrecognized compensation expense, net of estimated forfeitures, related to stock option grants of $13.8 million as of December 31, 2011, which will be recognized over the remaining weighted-average vesting period of 2.3 years.

The total intrinsic value of and cash received from options exercised during fiscal 2011, fiscal 2010 and fiscal 2009 was:

	2011		2010		2009
	(In thousands)
Intrinsic value of options exercised	$	7,255	$	1,435	$	800
Cash received from options exercised	$	6,478	$	868	$	493

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. 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.

Stock-based compensation expense related to performance-based restricted stock grants for fiscal 2011, fiscal 2010 and fiscal 2009 was as follows:

	2011		2010		2009
	(In thousands)
Stock-based compensation expense related to performance-based grants	$	2,174	$	2,541	$	914

A summary of the changes in restricted stock outstanding under Cadence’s equity incentive plans during fiscal 2011 is presented below:

	Shares			Weighted- Average Grant Date Fair Value		Weighted- Average Remaining Vesting Terms (Years)		Aggregate Intrinsic Value
	(In thousands)							(In thousands)
Unvested shares as of January 1, 2011		8,297		$	6.64		1.7	$	68,532
Granted		4,416		$	9.83
Vested		(4,335	)	$	6.64
Forfeited		(551	)	$	7.33
Unvested shares as of December 31, 2011		7,827		$	8.39		1.7	$	81,405
Unvested shares expected to vest after December 31, 2011		7,391		$	8.37		1.7	$	76,859

Cadence had total unrecognized compensation expense, net of estimated forfeitures, related to restricted stock grants of $48.8 million as of December 31, 2011, which will be recognized over the remaining weighted-average vesting period of 1.9 years.

The total fair value realized by employees upon vesting of restricted stock during fiscal 2011, fiscal 2010 and fiscal 2009 was:

	2011		2010		2009
	(In thousands)
Fair value of restricted stock realized upon vesting	$	43,756	$	28,866	$	19,838

Employee Stock Purchase Plan

Cadence administers an ESPP, as amended and restated from time to time. Under the terms of the ESPP, Cadence is authorized to issue up to 66,500,000 shares of common stock.

Under the ESPP, a majority of Cadence’s employees are eligible to 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 5% of their annual base earnings plus bonuses and commissions, and subject to a limit in any calendar year of $7,058.82 worth of common stock. The offering periods are six months and begin on each February 1 and August 1. The purchase dates fall on the last days of the six-month offering periods. For offering periods ending prior to February 1, 2009, participating employees were eligible to contribute up to 12% of their base earnings, bonuses and commissions, subject to a limit in any calendar year of $25,000 worth of common stock.

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 2011, fiscal 2010 and fiscal 2009 were as follows:

	2011		2010		2009
Dividend yield		None		None		None
Expected volatility		38.4%		39.1%		51.3%
Risk-free interest rate		0.17%		0.19%		0.21%
Expected term (in years)		0.5		0.5		0.3
Weighted-average fair value of options granted	$	2.48	$	1.72	$	1.96

Shares of common stock issued under the ESPP for fiscal 2011, fiscal 2010 and fiscal 2009 were as follows:

	2011		2010		2009
	(In thousands, except per share amounts)
Cadence shares purchased under the ESPP		2,029		2,568		8,661
Cash received for the purchase of shares under the ESPP	$	13,236	$	12,765	$	27,517
Weighted-average purchase price per share	$	6.52	$	4.97	$	3.18

Reserved for Future Issuance

As of December 31, 2011, Cadence had reserved the following shares of authorized but unissued common stock for future issuance:

	Shares
	(In thousands)
Employee equity incentive plans*		46,776
2015 Warrants (Note 3)		46,382
2011 and 2013 Notes Warrants (Note 3)		13,922
Employee stock purchase plans		5,299
Directors stock option plans*		2,307
2023 Notes conversion (Note 3)		11
Total		114,697

* 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.