Investments and Fair Value Measurements

The Company’s total cash, cash equivalents and marketable securities was as follows:



	January 3, 2016		December 28, 2014
	(In thousands)
Cash and cash equivalents	$	1,478,948	$	809,003
Short-term marketable securities	2,527,245		1,455,509
Long-term marketable securities	117,142		2,758,475
Total cash, cash equivalents and marketable securities	$	4,123,335	$	5,022,987

Fair Value of Financial Instruments. For certain of the Company’s financial instruments, including cash held in banks, accounts receivable and accounts payable, the carrying amounts approximate fair value due to their short maturities, and are therefore excluded from the fair value tables below.

The Company categorizes the fair value of its financial assets and liabilities according to the hierarchy established by the FASB, which prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are:



Level 1	Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to directly access.
Level 2	Valuations based on quoted prices for similar assets or liabilities; valuations for interest-bearing securities based on non-daily quoted prices in active markets; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
Level 3	Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

In circumstances in which a quoted price in an active market for the identical liability is not available, the Company is required to use the quoted price of the identical liability when traded as an asset, quoted prices for similar liabilities, or quoted prices for similar liabilities when traded as assets. If these quoted prices are not available, the Company is required to use another valuation technique, such as an income approach or a market approach.

The Company’s financial assets are measured at fair value on a recurring basis. Instruments that are classified within Level 1 of the fair value hierarchy generally include money market funds and U.S. Treasury securities. Level 1 securities represent quoted prices in active markets, and therefore do not require significant management judgment.

Instruments that are classified within Level 2 of the fair value hierarchy primarily include U.S. government-sponsored agency securities, international government securities, corporate notes and bonds, asset-backed securities, mortgage-backed securities and municipal notes and bonds. The Company’s Level 2 securities are primarily valued using quoted market prices for similar instruments and non-binding market prices that are corroborated by observable market data. The Company uses inputs such as actual trade data, benchmark yields, broker/dealer quotes and other similar data, which are obtained from independent pricing vendors, quoted market prices or other sources to determine the ultimate fair value of the Company’s assets and liabilities. The inputs and fair value are reviewed for reasonableness and may be further validated by comparison to publicly available information or compared to multiple independent valuation sources. In addition, the Company reviews third‑party valuation models, independently calculates the fair value of selective financial instruments and assesses the controls at its third-party valuation service providers in determining the overall reasonableness of the fair value of its Level 2 financial instruments.

Financial assets and liabilities measured and recorded at fair value on a recurring basis consisted of the following types of instruments:



	January 3, 2016								December 28, 2014
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(In thousands)
Money market funds	$	1,180,614	$	—	$	—	$	1,180,614	$	533,133	$	—	$	—	$	533,133
Fixed income securities	122,899		2,609,123		—		2,732,022		25,162		4,213,599		—		4,238,761
Derivative assets	—		3,376		—		3,376		—		4,800		—		4,800
Total financial assets	$	1,303,513	$	2,612,499	$	—	$	3,916,012	$	558,295	$	4,218,399	$	—	$	4,776,694

Derivative liabilities	$	—	$	1,747	$	—	$	1,747	$	—	$	8,224	$	—	$	8,224
Total financial liabilities	$	—	$	1,747	$	—	$	1,747	$	—	$	8,224	$	—	$	8,224

Financial assets and liabilities measured and recorded at fair value on a recurring basis were presented on the Consolidated Balance Sheets as follows:



	January 3, 2016								December 28, 2014
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(In thousands)
Cash equivalents⁽¹⁾	$	1,180,614	$	87,635	$	—	$	1,268,249	$	533,133	$	24,777	$	—	$	557,910
Short-term marketable securities	122,899		2,404,346		—		2,527,245		3,327		1,452,182		—		1,455,509
Long-term marketable securities	—		117,142		—		117,142		21,835		2,736,640		—		2,758,475
Other current assets	—		3,376		—		3,376		—		4,800		—		4,800
Total financial assets	$	1,303,513	$	2,612,499	$	—	$	3,916,012	$	558,295	$	4,218,399	$	—	$	4,776,694

Other current accrued liabilities	$	—	$	1,747	$	—	$	1,747	$	—	$	8,224	$	—	$	8,224
Total financial liabilities	$	—	$	1,747	$	—	$	1,747	$	—	$	8,224	$	—	$	8,224


⁽¹⁾	Cash equivalents exclude cash holdings of $210.7 million and $251.1 million included in Cash and cash equivalents on the Consolidated Balance Sheets as of January 3, 2016 and December 28, 2014, respectively.

During years 2015 and 2014, the Company had no transfers of financial assets and liabilities between Level 1 and Level 2.

As of January 3, 2016 and December 28, 2014, the Company had no financial assets or liabilities categorized as Level 3 and had not elected the fair value option for any financial assets and liabilities for which such an election would have been permitted.

Available-for-Sale Investments. Available-for-sale investments were as follows:



	January 3, 2016									December 28, 2014
	Amortized Cost⁽¹⁾		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value		Amortized Cost⁽¹⁾		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
	(In thousands)
U.S. Treasury securities	$	122,891	$	11	$	(3	)	$	122,899	$	25,194	$	—	$	(32	)	$	25,162
U.S. government-sponsored agency securities	37,447		14		(74		)	37,387		7,511		—		(18		)	7,493
International government securities	47,463		—		(16		)	47,447		82,033		—		(314		)	81,719
Corporate notes and bonds	471,421		52		(559		)	470,914		774,869		325		(2,052		)	773,142
Asset-backed securities	133,518		3		(75		)	133,446		171,221		42		(353		)	170,910
Mortgage-backed securities	12,661		—		(4		)	12,657		48,378		6		(173		)	48,211
Municipal notes and bonds	1,905,299		1,991		(18		)	1,907,272		3,124,189		9,733		(1,798		)	3,132,124
Total available-for-sale investments	$	2,730,700	$	2,071	$	(749	)	$	2,732,022	$	4,233,395	$	10,106	$	(4,740	)	$	4,238,761


⁽¹⁾	Amortized cost includes adjustments made to the cost basis of an investment for accretion, amortization and other-than temporary impairment.

The Company recorded other-than-temporary impairment losses of $1.5 million as of January 3, 2016 related to securities it now expects to sell prior to their maturity dates as a result of the pending acquisition of SanDisk by Western Digital. See Note 1, “Organization and Summary of Significant Accounting Policies-Pending Acquisition by Western Digital Corporation.” The fair value and gross unrealized losses on the available-for-sale securities, net of the impact of other-than-temporary impairment losses, that have been in a continuous unrealized loss position, aggregated by type of investment instrument, and the length of time that individual securities have been in a continuous unrealized loss position as of January 3, 2016, are summarized in the following table. Available-for-sale securities that were in an unrealized gain position have been excluded from the table.



	Less than 12 months					Greater than 12 months
	Fair Value		Gross Unrealized Loss			Fair Value		Gross Unrealized Loss
	(In thousands)
U.S. Treasury securities	$	75,635	$	(3	)	$	—	$	—
U.S. government-sponsored agency securities	11,914		(74		)	—		—
International government securities	47,447		(16		)	—		—
Corporate notes and bonds	399,680		(546		)	10,938		(13		)
Asset-backed securities	114,932		(68		)	4,726		(7		)
Mortgage-backed securities	10,726		(1		)	1,930		(3		)
Municipal notes and bonds	534,651		(17		)	10,579		(1		)
Total	$	1,194,985	$	(725	)	$	28,173	$	(24	)

The gross unrealized loss, net of the impact of other-than-temporary impairment losses, related to these securities was due primarily to changes in interest rates. The gross unrealized loss, net of the impact of other-than-temporary impairment losses, on all available-for-sale fixed income securities at January 3, 2016 was considered temporary in nature. Factors considered in determining whether a loss is temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the investee, and the Company’s intent and ability to hold an investment for a period of time sufficient to allow for any anticipated recovery in market value. For debt security investments, the Company considered additional factors including the Company’s intent to sell the investments or whether it is “more likely than not” the Company will be required to sell the investments before the recovery of its amortized cost.

The following table shows the realized gains and (losses) on sales of available-for-sale securities:



	Years ended
	January 3, 2016			December 28, 2014			December 29, 2013
	(In thousands)
Realized gains	$	6,807		$	8,918		$	4,724
Realized losses	(3,157		)	(1,375		)	(2,349		)
Net realized gains	$	3,650		$	7,543		$	2,375

Fixed income securities by contractual maturity as of January 3, 2016 are shown below. Actual maturities may differ from contractual maturities because issuers of the securities may have the right to prepay obligations or the Company has the option to demand payment.



	Amortized Cost		Fair Value
	(In thousands)
Due in one year or less	$	1,321,975	$	1,323,097
After one year through five years	902,289		902,452
After five years through ten years	113,542		113,516
After ten years	392,894		392,957
Total	$	2,730,700	$	2,732,022

Financial Instruments. For those financial instruments where the carrying amounts differ from fair value, the following table represents the related carrying values and fair values, which are based on quoted market prices. As of January 3, 2016, the 1.5% Convertible Senior Notes due 2017 and the 0.5% Convertible Senior Notes due 2020 were both categorized as Level 1, based on the frequency of trading of each respective convertible note directly prior to the end of the fourth quarter of 2015. As of December 28, 2014, the 1.5% Convertible Senior Notes due 2017 was categorized as Level 1 and the 0.5% Convertible Senior Notes due 2020 was classified as Level 2, both based on the frequency of trading of each respective convertible note directly prior to the end of 2014. See Note 7, “Financing Arrangements,” regarding details of each convertible note presented.



	January 3, 2016				December 28, 2014
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(In thousands)
1.5% Convertible Senior Notes due 2017	$	913,178	$	1,573,285	$	864,718	$	1,948,721
0.5% Convertible Senior Notes due 2020	1,237,776		1,563,750		1,188,491		1,789,500
Total	$	2,150,954	$	3,137,035	$	2,053,209	$	3,738,221

Cost Method Investments. As of January 3, 2016 and December 28, 2014, the Company had aggregate net investments under the cost method of accounting of $38.6 million and $29.3 million, respectively, and these investments consisted of privately-held equity securities without a readily determinable fair value. These privately-held equity investments are reported under Other non-current assets in the Consolidated Balance Sheets.