6. Fair Value of Financial Instruments

The following summarizes the valuation of the Company's financial instruments (in thousands). The tables do not include either cash on hand or assets and liabilities that are measured at historical cost or any basis other than fair value.

	Fair Value Measurements at December 28, 2013 Using

Description	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
Cash Equivalents:
Money market funds	$	39,538	$	—	$	—	$	39,538
Certificates of deposit		—		7,768		—		7,768
Commercial paper		—		2,499		—		2,499
Municipal bonds		—		451		—		451

Total cash equivalents	$	39,538	$	10,718	$	—	$	50,256
Short-term Investments:
Municipal bonds	$	—	$	119,460	$	—	$	119,460
Variable-rate demand notes		—		38,025		—		38,025
Corporate bonds		—		17,844		—		17,844
Commercial paper		—		3,748		—		3,748
Asset-backed securities		—		516		—		516

Total short-term investments	$	—	$	179,593	$	—	$	179,593
Long-term Investments:
Auction rate securities	$	—	$	—	$	10,632	$	10,632

Total long-term investments	$	—	$	—	$	10,632	$	10,632
Other assets, net:
Derivative instruments	$	—	$	513	$	—	$	513

Total	$	—	$	513	$	—	$	513

Total	$	39,538	$	190,824	$	10,632	$	240,994


Other non-current liabilities:
Contingent consideration	$	—	$	—	$	12,919	$	12,919

Total	$	—	$	—	$	12,919	$	12,919

	Fair Value Measurements at December 29, 2012 Using

Description	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
Cash Equivalents:
U.S. Treasury bills	$	25,050	$	—	$	—	$	25,050
Money market funds		22,686		—		—		22,686
Municipal bonds		—		1,000		—		1,000

Total cash equivalents	$	47,736	$	1,000	$	—	$	48,736
Short-term Investments:
Corporate bonds	$	—	$	59,351	$	—	$	59,351
Municipal bonds		—		45,689		—		45,689
Variable-rate demand notes		—		41,785		—		41,785
Asset-backed securities		—		15,069		—		15,069
U.S. government bonds		12,663		—		—		12,663
International government bonds		—		2,008		—		2,008

Total short-term investments	$	12,663	$	163,902	$	—	$	176,565
Long-term Investments:
Auction rate securities	$	—	$	—	$	11,369	$	11,369

Total long-term investments	$	—	$	—	$	11,369	$	11,369

Total	$	60,399	$	164,902	$	11,369	$	236,670


Liabilities:
Derivative instruments	$	—	$	658	$	—	$	658
Contingent consideration		—		—		2,750		2,750

Total	$	—	$	658	$	2,750	$	3,408

The Company's cash equivalents and short-term investments that are classified as Level 1 are valued using quoted prices and other relevant information generated by market transactions involving identical assets. Cash equivalents and short-term investments classified as Level 2 are valued using non-binding market consensus prices that are corroborated with observable market data; quoted market prices for similar instruments in active markets; or pricing models, such as a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data. Investments classified as Level 3 are valued using a discounted cash flow model. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, amount of cash flows, expected holding periods of the securities and a discount to reflect the Company's inability to liquidate the securities. The Company's derivative instruments are valued using a discounted cash flow model. The assumptions used in preparing the discounted cash flow model include quoted interest swap rates and market observable data of similar instruments.

The Company's contingent consideration is valued using a Monte Carlo simulation model or a probability weighted discounted cash flow model. The assumptions used in preparing the Monte Carlo simulation model include estimates for revenue growth rates, revenue volatility, contractual terms and discount rates. The assumptions used in preparing the discounted cash flow model include estimates for outcomes if milestone goals are achieved, the probability of achieving each outcome and discount rates.

The following summarizes quantitative information about Level 3 fair value measurements.

Auction rate securities

Fair Value at December 28, 2013 (000s)	Valuation Technique	Unobservable Input	Weighted Average

$10,632	Discounted cash flow	Estimated yield	1.11%
		Expected holding period	10 years
		Estimated discount rate	4.05%

The Company has followed an established internal control procedure used in valuing auction rate securities. The procedure involves the analysis of valuation techniques and evaluation of unobservable inputs commonly used by market participants to price similar instruments, and which have been demonstrated to provide reasonable estimates of prices obtained in actual market transactions. Outputs from the valuation process are assessed against various market sources when they are available, including marketplace quotes, recent trades of similar illiquid securities, benchmark indices and independent pricing services. The technique and unobservable input parameters may be recalibrated periodically to achieve an appropriate estimation of the fair value of the securities.

Significant changes in any of the unobservable inputs used in the fair value measurement of auction rate securities in isolation could result in a significantly lower or higher fair value measurement. An increase in expected yield would result in a higher fair value measurement, whereas an increase in expected holding period or estimated discount rate would result in a lower fair value measurement. Generally, a change in the assumptions used for expected holding period is accompanied by a directionally similar change in the assumptions used for estimated yield and discount rate.

Contingent consideration

Fair Value at December 28, 2013 (000s)	Valuation Technique	Unobservable Input	Range

$12,919	Monte Carlo simulation	Expected revenue growth rate	26.2% - 51.9%
		Expected revenue volatility	20.0%
		Expected term	1.0 - 5.0 years
		Estimated discount rate	0.1% - 1.6%

The Company has followed an established internal control procedure used in valuing contingent consideration. The valuation of contingent consideration for the Energy Micro acquisition is based on a Monte Carlo simulation model. The fair value of this valuation is estimated on a quarterly basis through a collaborative effort by the Company's sales, marketing and finance departments.

Significant changes in any of the unobservable inputs used in the fair value measurement of contingent consideration in isolation could result in a significantly lower or higher fair value. A change in projected revenue growth rates would be accompanied by a directionally similar change in fair value. A change in discount rate would be accompanied by a directionally opposite change in fair value.

The following summarizes the activity in Level 3 financial instruments for the years ended December 28, 2013 and December 29, 2012 (in thousands):

Assets

	Year Ended

Auction Rate Securities	December 28, 2013			December 29, 2012
Beginning balance	$	11,369		$	17,477
Settlements		(100	)		(6,700	)
Gain (loss) included in other comprehensive income		(637	)		592

Ending balance	$	10,632		$	11,369

Liabilities

	Year Ended

Contingent Consideration (1)	December 28, 2013			December 29, 2012
Beginning balance	$	2,750		$	876
Issues		13,964			4,004
Gain recognized in earnings (2)		(3,795	)		(2,130	)

Ending balance	$	12,919		$	2,750


Net gain for the period included in earnings attributable to contingent consideration held at the end of the period:	$	1,045		$	1,254

(1): In connection with the acquisition of Energy Micro, Ember and ChipSensors, the Company recorded contingent consideration based upon the expected achievement of certain milestone goals. Changes to the fair value of contingent consideration due to changes in assumptions used in preparing the valuation model are recorded in selling, general and administrative expenses in the Consolidated Statements of Income.
(2): The Company reduced the estimated fair value of contingent consideration because certain milestone goals were either not achieved or were expected to be achieved at a lower outcome.

Fair values of other financial instruments

The Company's Term Loan Facility bears interest at LIBOR plus an applicable margin. The fair value of the Company's Term Loan Facility approximates its carrying values as of December 28, 2013 and December 29, 2012, based on the estimated margin observed for loans to companies under similar terms and credit profiles. The Company's other financial instruments, including cash, accounts receivable and accounts payable, are recorded at amounts that approximate their fair values due to their short maturities.