Fair Value of Financial Instruments

9 Months Ended

Oct. 01, 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 October 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:
Money market funds	$	66,328	$	—	$	—	$	66,328
Total cash equivalents	$	66,328	$	—	$	—	$	66,328
Short-term Investments:
Corporate bonds	$	—	$	80,060	$	—	$	80,060
Municipal bonds	—		56,402		—		56,402
Variable-rate demand notes	—		13,200		—		13,200
U.S. government agency	—		10,048		—		10,048
U.S. Treasury bills	8,600		—		—		8,600
International government bonds	—		2,792		—		2,792
Certificates of deposit	—		1,569		—		1,569
Asset-backed securities	—		1,244		—		1,244
Commercial paper	—		1,000		—		1,000
Total short-term investments	$	8,600	$	166,315	$	—	$	174,915
Long-term Investments:
Auction rate securities	$	—	$	—	$	17,840	$	17,840
Total long-term investments	$	—	$	—	$	17,840	$	17,840
Total	$	74,928	$	166,315	$	17,840	$	259,083
Liabilities:
Derivative instruments	$	—	$	2,526	$	—	$	2,526
Contingent consideration	—		—		1,523		1,523
Total	$	—	$	2,526	$	1,523	$	4,049

	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) (1)		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	$	95,264	$	2,659	$	—	$	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	$	6,999	$	220,296	$	—	$	227,295
Long-term Investments:
Auction rate securities	$	—	$	—	$	17,500	$	17,500
Total long-term investments	$	—	$	—	$	17,500	$	17,500
Total	$	102,263	$	222,955	$	17,500	$	342,718
Liabilities:
Derivative instruments	$	—	$	3,811	$	—	$	3,811
Contingent consideration	—		—		1,780		1,780
Total	$	—	$	3,811	$	1,780	$	5,591

(1)The Company previously classified all of its cash equivalents and short-term investments as using Level 1 inputs. The Company has determined that the pricing methods for certain of these investments use significant other observable inputs. Accordingly, such investments held in prior periods have been reclassified to Level 2 to conform to the current year presentation. The reclassification had no impact on the fair value of investments in any of the periods presented.

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. 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 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 nine months ended October 1, 2011 (in thousands):

Assets

Auction Rate Securities	Three Months Ended			Nine Months Ended
Beginning balance	$	17,196		$	17,500
Settlements	(150		)	(450		)
Unrealized gains	794			790
Balance at October 1, 2011	$	17,840		$	17,840

Liabilities

Contingent Consideration (1)	Three Months Ended			Nine Months Ended
Beginning balance	$	2,034		$	1,780
Issuances	—			1,025
Recognized net gain (2)	(511		)	(1,282		)
Balance at October 1, 2011	$	1,523		$	1,523
Net gain for period included in earnings attributable to contingent consideration still held at October 1, 2011:	$	511		$	1,282

(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)The Company reduced the estimated fair value of contingent consideration based on the expectation that certain milestone goals 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.