Convertible Notes

6 Months Ended

Jul. 02, 2011

Convertible Notes [Abstract]

CONVERTIBLE NOTES

NOTE 2. CONVERTIBLE NOTES

2.625% Cash Convertible Senior Notes Due 2015

In June 2010, Cadence issued $350.0 million principal amount of its 2.625% Cash Convertible Senior Notes Due 2015, or the 2015 Notes. The 2015 Notes have a stated interest rate of 2.625%, mature on June 1, 2015 and may be settled only in cash. The indenture for the 2015 Notes does not contain any financial covenants. Contractual interest on the 2015 Notes began accruing in June 2010 and is payable semi-annually each December 1st and June 1st. The initial purchasers’ transaction fees and expenses totaling $10.6 million were capitalized as deferred financing costs and are amortized over the term of the 2015 Notes using the effective interest method. An aggregate of $187.2 million of the net proceeds from the 2015 Notes was used to purchase $100.0 million principal amount of Cadence’s 1.375% Convertible Senior Notes Due December 15, 2011, or the 2011 Notes, and $100.0 million principal amount of its 1.500% Convertible Senior Notes Due December 15, 2013, or the 2013 Notes, and collectively with the 2011 Notes, the Convertible Senior Notes. Cadence also used $40.0 million of the net proceeds from the 2015 Notes to repurchase approximately 6.5 million shares of Cadence common stock.

Prior to March 1, 2015, holders may convert their 2015 Notes into cash upon the occurrence of any one of the following conditions:

• During any fiscal quarter, and only during such fiscal quarter, if the closing sale price of Cadence’s common stock exceeds $9.81 for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding quarter;

• Specified corporate transactions; or

• The trading price of the 2015 Notes falls below 98% of the product of (i) the closing sale price of Cadence’s common stock and (ii) the conversion rate on that date.

During the three months ended July 2, 2011, the closing sale price of Cadence’s common stock exceeded $9.81 for more than 20 of the last 30 consecutive trading days of that period. As a result, as of July 2, 2011, the 2015 Notes became convertible into cash at the election of holders of the 2015 Notes. Holders of the 2015 Notes can submit their 2015 Notes for conversion from July 2, 2011 through October 1, 2011. Because Cadence would be required to settle the 2015 Notes in cash if holders elect to convert the 2015 Notes, Cadence classified the $287.1 million net liability of the 2015 Notes as a current liability on its Condensed Consolidated Balance Sheet as of July 2, 2011. Any gain or loss on extinguishment of the 2015 Notes would be recognized upon the cash conversion of the 2015 Notes. The 2015 Notes currently trade, and have traded during the three months ended July 2, 2011, at a substantial premium to the conversion price.

In order for the 2015 Notes to be convertible into cash in a particular fiscal quarter, a conversion condition must be met during the preceding fiscal quarter. Cadence will reassess whether this conversion condition has been met at the end of Cadence’s next fiscal quarter, which ends on October 1, 2011. If the closing sale price of Cadence’s common stock does not exceed $9.81 for 20 or more of the last 30 trading days during the three months ending October 1, 2011, the conversion condition would not be met and Cadence would classify its 2015 Notes as a long-term liability on its Condensed Consolidated Balance Sheet as of that date.

From March 1, 2015 and until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2015 Notes into cash at any time, regardless of the occurrence of any of the foregoing conversion conditions. Cadence may not redeem the 2015 Notes prior to maturity.

The initial cash conversion rate for the 2015 Notes is 132.5205 shares of Cadence common stock per $1,000 principal amount of 2015 Notes, equivalent to a cash conversion price of approximately $7.55 per share of Cadence common stock, with the amount due on conversion payable in cash. Upon cash conversion, a holder will receive the sum of the daily settlement amounts, calculated on a proportionate basis for each day, during a specified observation period following the cash conversion date.

If a fundamental change were to occur prior to maturity and Cadence’s stock price were greater than $6.16 per share at that time, the cash conversion rate would increase by an additional amount of up to 29.8171 shares of Cadence’s common stock per $1,000 principal amount of 2015 Notes, which amount would be paid entirely in cash to each holder that elects to convert its 2015 Notes at that time. A fundamental change is any transaction or event (whether by means of an exchange offer, liquidation, tender offer, consolidation, merger, combination, reclassification, recapitalization or otherwise) in which more than 50% of Cadence’s common stock is exchanged for, converted into, acquired for or constitutes solely the right to receive, consideration. No fundamental change would occur if at least 90% of the consideration received consists of shares of common stock, or depositary receipts representing such shares, that are:

• Listed on, or immediately after the transaction or event will be listed on, a United States national securities exchange; or

• Approved, or immediately after the transaction or event will be approved, for quotation on a United States system of automated dissemination of quotations of securities prices similar to the NASDAQ National Market prior to its designation as a national securities exchange.

The cash conversion feature of the 2015 Notes, or the 2015 Notes Embedded Conversion Derivative, requires bifurcation from the 2015 Notes. The 2015 Notes Embedded Conversion Derivative is accounted for as a derivative liability. Because the 2015 Notes were convertible into cash as of July 2, 2011, the 2015 Notes Embedded Conversion Derivative is classified as a current liability in Cadence’s Condensed Consolidated Balance Sheet as of July 2, 2011, but is classified as a long-term liability in Cadence’s Condensed Consolidated Balance Sheet as of January 1, 2011. The fair value of the 2015 Notes Embedded Conversion Derivative at the time of issuance of the 2015 Notes was $76.6 million and was recorded as the original debt discount for purposes of accounting for the debt component of the 2015 Notes. This discount is recognized as interest expense using the effective interest method over the term of the 2015 Notes. As of July 2, 2011, the estimated fair value of the 2015 Notes Embedded Conversion Derivative was $222.1 million.

Concurrently with the issuance of the 2015 Notes, Cadence entered into hedge transactions, or the 2015 Notes Hedges, with various parties whereby Cadence has the option to receive the cash amount that may be due to 2015 Notes holders at maturity or upon conversion in excess of the $350.0 million principal amount of the notes, subject to certain conversion rate adjustments in the 2015 Notes Indenture. These options expire on June 1, 2015 and must be settled in cash. The aggregate cost of the 2015 Notes Hedges was $76.6 million. The 2015 Notes Hedges are accounted for as derivative assets. Because the 2015 Notes were convertible into cash as of July 2, 2011, the 2015 Notes Hedges are classified as current assets in Cadence’s Condensed Consolidated Balance Sheet as of July 2, 2011, but are classified as long-term assets in Cadence’s Condensed Consolidated Balance Sheet as of January 1, 2011. As of July 2, 2011, the estimated fair value of the 2015 Notes Hedges was $222.1 million.

If the conversion condition is not met as of the end of any fiscal quarter, Cadence would classify its 2015 Notes Embedded Conversion Derivative as a long-term liability and its 2015 Notes Hedges as long-term assets in its Condensed Consolidated Balance Sheet as of that date.

The 2015 Notes Embedded Conversion Derivative and the 2015 Notes Hedges are adjusted to fair value each reporting period and unrealized gains and losses are reflected in Cadence’s Condensed Consolidated Income Statements. Because the fair values of the 2015 Notes Embedded Conversion Derivative and the 2015 Notes Hedges are similar, there was no impact to Cadence’s Condensed Consolidated Income Statements relating to these adjustments to fair value during the three and six months ended July 2, 2011.

In separate transactions, Cadence also sold warrants, or the 2015 Warrants, to various parties for the purchase of up to approximately 46.4 million shares of Cadence’s common stock at a price of $10.78 per share in a private placement pursuant to Section 4(2) of the Securities Act of 1933, as amended, or the Securities Act. The 2015 Warrants expire on various dates from September 2015 through December 2015 and must be settled in net shares. Cadence received $37.5 million in cash proceeds from the sale of the 2015 Warrants, which has been recorded as an increase in Stockholders’ equity. Changes in the fair value of the 2015 Warrants will not be recognized in Cadence’s Condensed Consolidated Financial Statements as long as the instruments remain classified as equity. The 2015 Warrants are included in diluted earnings per share to the extent the impact is dilutive. As of July 2, 2011, the 2015 Warrants were not dilutive.

The principal amount, unamortized debt discount and net carrying amount of the liability component of the 2015 Notes as of July 2, 2011 and January 1, 2011 were as follows:

	As of
	July 2,			January 1,
	2011			2011
	(In thousands)
Principal amount of 2015 Notes	$	350,000		$	350,000
Unamortized debt discount of 2015 Notes		(62,890	)		(69,604	)
Net liability of 2015 Notes	$	287,110		$	280,396

The effective interest rate, contractual interest expense and amortization of debt discount for the 2015 Notes for the three and six months ended July 2, 2011 and July 3, 2010 were as follows:

	Three Months Ended				Six Months Ended
	July 2,		July 3,		July 2,		July 3,
	2011		2010		2011		2010
	(In thousands, except percentages)
Effective interest rate		8.1%		8.1%		8.1%		8.1%
Contractual interest expense	$	2,289	$	427	$	4,578	$	427
Amortization of debt discount	$	3,376	$	592	$	6,713	$	592

As of July 2, 2011, the if-converted value of the 2015 Notes exceeded the principal amount of the 2015 Notes. The total fair value of the 2015 Notes was $537.0 million.

1.375% Convertible Senior Notes Due December 15, 2011 and 1.500% Convertible Senior Notes Due December 15, 2013

In December 2006, Cadence issued $250.0 million principal amount of its 2011 Notes and $250.0 million principal amount of its 2013 Notes. The indentures for the Convertible Senior Notes do not contain any financial covenants. Contractual interest payable on the Convertible Senior Notes began accruing in December 2006 and is payable semi-annually each December 15th and June 15th. In June 2010, Cadence repurchased $100.0 million principal amount of its 2011 Notes and $100.0 million principal amount of its 2013 Notes, and in November 2010, Cadence repurchased in the open market $5.5 million principal amount of its 2013 Notes. These repurchases resulted in a remaining principal balance of $150.0 million for the 2011 Notes and $144.5 million for the 2013 Notes. Because Cadence’s 2011 Notes mature on December 15, 2011, its Condensed Consolidated Balance Sheets include a current liability of $146.7 million as of July 2, 2011 and $143.3 million as of January 1, 2011, representing the $150.0 million principal amount of the 2011 Notes, net of the applicable debt discount on the respective dates. Amortization of the debt discount will continue through December 15, 2011, when the carrying value of the 2011 Notes will equal the $150.0 million principal amount due at maturity.

Holders may convert their Convertible Senior Notes prior to maturity upon the occurrence of any one of the following conditions:

• The closing price of Cadence’s common stock exceeds $27.50 during certain periods of time specified in the Convertible Senior Notes;

• Specified corporate transactions occur; or

• The trading price of the Convertible Senior Notes falls below 98% of the product of (i) the closing sale price of Cadence’s common stock and (ii) the conversion rate on that date.

From November 2, 2011, in the case of the 2011 Notes, and November 1, 2013, in the case of the 2013 Notes, and until the close of business on the scheduled trading day immediately preceding the maturity date, holders may convert their Convertible Senior Notes at any time, regardless of the occurrence of any of the foregoing conditions. Cadence may not redeem the Convertible Senior Notes prior to maturity.

The initial conversion rate for the Convertible Senior Notes is 47.2813 shares of Cadence common stock per $1,000 principal amount of Convertible Senior Notes, equivalent to a conversion price of approximately $21.15 per share of Cadence common stock. Upon conversion, a holder will receive the sum of the daily settlement amounts, calculated on a proportionate basis for each day, during a specified observation period following the conversion date. The daily settlement amount during each date of the observation period consists of:

• Cash up to the principal amount of the note; and

• Cadence’s common stock to the extent that the conversion value exceeds the amount of cash paid upon conversion of the Convertible Senior Notes.

If a fundamental change were to occur prior to maturity and Cadence’s stock price were greater than $18.00 per share at that time, the conversion rate would increase by an additional amount of up to $8.27 per share, which amount would be paid entirely in cash to each holder that elects to convert its Convertible Senior Notes at that time. A fundamental change is any transaction or event (whether by means of an exchange offer, liquidation, tender offer, consolidation, merger, combination, reclassification, recapitalization or otherwise) in which more than 50% of Cadence’s common stock is exchanged for, converted into, acquired for or constitutes solely the right to receive, consideration. No fundamental change would occur if at least 90% of the consideration received consists of shares of common stock, or depositary receipts representing such shares, that are:

• Listed on, or immediately after the transaction or event will be listed on, a United States national securities exchange; or

• Approved, or immediately after the transaction or event will be approved, for quotation on a United States system of automated dissemination of quotations of securities prices similar to the NASDAQ National Market prior to its designation as a national securities exchange.

As of July 2, 2011, none of the conditions allowing the holders of the Convertible Senior Notes to convert had been met.

During the three months ended July 3, 2010, Cadence purchased in the open market $100.0 million principal amount of the 2011 Notes and $100.0 million principal amount of the 2013 Notes. During the three months ended January 1, 2011, Cadence purchased in the open market $5.5 million principal amount of the 2013 Notes. At settlement, the fair value of the liability component immediately prior to its extinguishment is measured first, and the difference between the fair value of the aggregate consideration remitted to its holders and the fair value of the liability component immediately prior to its extinguishment is attributed to the reacquisition of the equity component.

The components of the fiscal 2010 repurchases and related loss on early extinguishment of debt were as follows:

	2011 Notes			2013 Notes			Total
	(In thousands)
Principal amount repurchased	$	100,000		$	105,539		$	205,539
Amount allocated to:
Extinguishment of liability component	$	95,865		$	90,881		$	186,746
Extinguishment of equity component		2,285			3,333			5,618
Total cash paid for repurchase	$	98,150		$	94,214		$	192,364
Principal amount repurchased	$	100,000		$	105,539		$	205,539
Unamortized debt discount		(6,958	)		(15,780	)		(22,738	)
Extinguishment of liability component		(95,865	)		(90,881	)		(186,746	)
Related debt issuance costs		(676	)		(1,084	)		(1,760	)
Loss on early extinguishment of debt	$	(3,499	)	$	(2,206	)	$	(5,705	)

Concurrently with the issuance of the Convertible Senior Notes, Cadence entered into hedge transactions, or the Convertible Senior Notes Hedges, with various parties whereby Cadence has the option to receive the amount of shares that may be owed to Convertible Senior Notes holders at maturity or upon conversion of the notes, subject to certain conversion rate adjustments in the Convertible Senior Notes Indenture. The aggregate cost of the Convertible Senior Notes Hedges was $119.8 million and has been recorded as a reduction to Stockholders’ equity. In connection with the purchase of a portion of the Convertible Senior Notes in June 2010 and November 2010, Cadence also sold a portion of the Convertible Senior Notes Hedges representing options to purchase approximately 9.7 million shares of Cadence’s common stock and received proceeds of $0.4 million. The estimated fair value of the remaining Convertible Senior Notes Hedges was $2.4 million as of July 2, 2011. These options expire on December 15, 2011, in the case of the 2011 Notes, and December 15, 2013, in the case of the 2013 Notes, and must be settled in net shares. Subsequent changes in the fair value of the Convertible Senior Notes Hedges will not be recognized in Cadence’s Condensed Consolidated Financial Statements as long as the instruments remain classified as equity.

In separate transactions, Cadence also sold warrants, or the Convertible Senior Notes Warrants, to various parties for the purchase of up to 23.6 million shares of Cadence’s common stock at a price of $31.50 per share in a private placement pursuant to Section 4(2) of the Securities Act. Cadence received $39.4 million in cash proceeds from the sale of the Convertible Senior Notes Warrants, which has been recorded as an increase in Stockholders’ equity. In connection with the purchase of a portion of the Convertible Senior Notes in June 2010 and November 2010, Cadence also purchased a portion of the Convertible Senior Notes Warrants, reducing the number of shares of Cadence common stock available for purchase by 9.7 million shares at a cost of $0.1 million. The Convertible Senior Notes Warrants expire on various dates from February 2012 through April 2012 in the case of the 2011 Notes, and February 2014 through April 2014 in the case of the 2013 Notes, and must be settled in net shares. Changes in the fair value of the Convertible Senior Notes Warrants will not be recognized in Cadence’s Condensed Consolidated Financial Statements as long as the instruments remain classified as equity. The remaining warrants are included in diluted earnings per share to the extent the impact is dilutive. As of July 2, 2011, the Convertible Senior Notes Warrants were not dilutive.

The carrying amount of the equity component of the Convertible Senior Notes and the principal amount, unamortized debt discount and net carrying amount of the liability component of the Convertible Senior Notes as of July 2, 2011 and January 1, 2011 were as follows:

	As of
	July 2,			January 1,
	2011			2011
	(In thousands)
Equity component of Convertible Senior Notes	$	111,375		$	111,375
Principal amount of Convertible Senior Notes	$	294,461		$	294,461
Unamortized debt discount of Convertible Senior Notes		(18,964	)		(25,373	)
Liability component of Convertible Senior Notes	$	275,497		$	269,088

The effective interest rate, contractual interest expense and amortization of debt discount for the Convertible Senior Notes for the three and six months ended July 2, 2011 and July 3, 2010, were as follows:

	Three Months Ended				Six Months Ended
	July 2,			July 3,	July 2,			July 3,
	2011			2010	2011			2010
	(In thousands, except percentages)
Effective interest rate		6.3%		6.3%		6.3%		6.3%
Contractual interest expense	$	1,053	$	1,649	$	2,106	$	3,440
Amortization of debt discount	$	3,212	$	4,706	$	6,409	$	9,801

As of July 2, 2011, the if-converted value of the Convertible Senior Notes does not exceed the principal amount of the Convertible Senior Notes and the total fair value of the Convertible Senior Notes, including the equity component, was $289.4 million.

Zero Coupon Zero Yield Senior Convertible Notes Due 2023

In August 2003, Cadence issued $420.0 million principal amount of its Zero Coupon Zero Yield Senior Convertible Notes Due 2023, or the 2023 Notes. As of July 2, 2011, the remaining balance and the total fair value of the 2023 Notes was $0.2 million.