Fair Value of Financial Instruments

6 Months Ended

Jul. 02, 2011

Fair Value of Financial Instruments

Fair Value of Financial Instruments

5. Fair Value of Financial Instruments

The fair values of the Company’s financial instruments are recorded using a hierarchal disclosure framework based upon the level of subjectivity of the inputs used in measuring assets and liabilities. The three levels are described below:

Level 1 - Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2 - Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 - Inputs are unobservable for the asset or liability and are developed based on the best information available in the circumstances, which might include the Company’s own data.

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 July 2, 2011 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	$	98,736	$	—	$	—	$	98,736
U.S. government agency	998		—		—		998
Commercial paper	500		—		—		500
Total cash equivalents	$	100,234	$	—	$	—	$	100,234
Short-term Investments:
Corporate bonds	$	81,232	$	—	$	—	$	81,232
Municipal bonds	47,454		—		—		47,454
Variable-rate demand notes	36,725		—		—		36,725
U.S. Treasury bills	11,898		—		—		11,898
U.S. government agency	10,070		—		—		10,070
International government bonds	7,819		—		—		7,819
Commercial paper	1,998		—		—		1,998
Certificates of deposit	1,570		—		—		1,570
Total short-term investments	$	198,766	$	—	$	—	$	198,766
Long-term Investments:
Auction rate securities	$	—	$	—	$	17,196	$	17,196
Total long-term investments	$	—	$	—	$	17,196	$	17,196
Total	$	299,000	$	—	$	17,196	$	316,196
Liabilities:
Derivative instruments	$	—	$	2,941	$	—	$	2,941
Contingent consideration	—		—		2,034		2,034
Total	$	—	$	2,941	$	2,034	$	4,975

	Fair Value Measurements at January 1, 2011 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	$	50,097	$	—	$	—	$	50,097
Money market funds	45,167		—		—		45,167
Commercial paper	2,659		—		—		2,659
Total cash equivalents	$	97,923	$	—	$	—	$	97,923
Short-term Investments:
Corporate bonds	$	88,518	$	—	$	—	$	88,518
Variable-rate demand notes	39,425		—		—		39,425
Municipal bonds	38,414		—		—		38,414
U.S. government agency	34,680		—		—		34,680
International government bonds	10,830		—		—		10,830
U.S. Treasury bills	6,999		—		—		6,999
Certificates of deposit	5,742		—		—		5,742
Commercial paper	2,687		—		—		2,687
Total short-term investments	$	227,295	$	—	$	—	$	227,295
Long-term Investments:
Auction rate securities	$	—	$	—	$	17,500	$	17,500
Total long-term investments	$	—	$	—	$	17,500	$	17,500
Total	$	325,218	$	—	$	17,500	$	342,718
Liabilities:
Derivative instruments	$	—	$	3,811	$	—	$	3,811
Contingent consideration	—		—		1,780		1,780
Total	$	—	$	3,811	$	1,780	$	5,591

The Company’s cash equivalents and short-term investments are valued using quoted prices and other relevant information generated by market transactions involving identical assets. The Company’s auction-rate securities 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 probability weighted discounted cash flow model. The assumptions used in preparing the discounted cash flow model include estimates for possible outcomes if certain milestone goals are achieved, the probability of achieving each outcome and discount rates.

The following summarizes the activity in Level 3 financial instruments for the three and six months ended July 2, 2011 (in thousands):

Assets

Auction Rate Securities	Three Months Ended			Six Months Ended
Beginning balance	$	16,965		$	17,500
Settlements	(125		)	(300		)
Unrealized gains (losses)	356			(4		)
Balance at July 2, 2011	$	17,196		$	17,196

Liabilities

Contingent Consideration (1)	Three Months Ended			Six Months Ended
Beginning balance	$	2,974		$	1,780
Issuances	—			1,025
Recognized net gain (2)	(940		)	(771		)
Balance at July 2, 2011	$	2,034		$	2,034
Net gain for period included in earnings attributable to contingent consideration still held at July 2, 2011:	$	940		$	771

(1) In connection with the acquisitions of Spectra Linear and ChipSensors, the Company recorded contingent consideration based upon the achievement of certain milestone goals. Changes to the fair value of contingent consideration due to changes in assumptions used in preparing the discounted cash flow model are recorded in selling, general and administrative expenses in the Consolidated Statement of Income. Changes resulting from foreign currency remeasurement adjustments to the contingent consideration liability are recorded in other income (expense), net.

(2) In the three months ended July 2, 2011, the Company reduced the estimated fair value of contingent consideration by $1.0 million based on the expectation that a milestone goal will no longer be achieved.

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.