Fair Value of Financial Instruments

6 Months Ended

Jun. 29, 2013

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 June 29, 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	$	119,064	$	—	$	—	$	119,064
Commercial paper	—		1,000		—		1,000
Certificates of deposit	—		5,550		—		5,550
Total cash equivalents	$	119,064	$	6,550	$	—	$	125,614
Short-term Investments:
Municipal bonds	$	—	$	79,355	$	—	$	79,355
Variable-rate demand notes	—		56,007		—		56,007
Corporate bonds	—		13,077		—		13,077
Certificates of deposit	—		1,858		—		1,858
International government bonds	—		1,126		—		1,126
Total short-term investments	$	—	$	151,423	$	—	$	151,423
Long-term Investments:
Auction rate securities	$	—	$	—	$	10,197	$	10,197
Total long-term investments	$	—	$	—	$	10,197	$	10,197
Other assets, net:
Derivative instruments	$	—	$	808	$	—	$	808
Total	$	—	$	808	$	—	$	808
Total	$	119,064	$	158,781	$	10,197	$	288,042

	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 probability weighted discounted cash flow model. 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 June 29, 2013 (000s)		Valuation Technique	Unobservable Input	Weighted Average
$	10,197	Discounted cash flow	Estimated yield	1.09	%
			Expected holding period	10 years
			Estimated discount rate	3.71	%

The Company has followed an established internal control procedure used in valuing auction rate securities. The procedure involves several layers of the Company’s finance management in 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.

The following summarizes the activity in Level 3 financial instruments for the three and six months ended June 29, 2013 (in thousands):

Assets

Auction Rate Securities	Three Months Ended			Six Months Ended
Beginning balance	$	11,189		$	11,369
Settlements	(25		)	(100		)
Losses included in other comprehensive income	(967		)	(1,072		)
Balance at June 29, 2013	$	10,197		$	10,197

Liabilities

Contingent Consideration (1)	Three Months Ended		Six Months Ended
Beginning balance	$	—	$	2,750
Gain recognized in earnings (2)	—		(2,750		)
Balance at June 29, 2013	$	—	$	—

(1) In connection with the acquisition of Ember, the Company recorded contingent consideration based upon the expected achievement of a milestone goal. 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.

(2) The Company reduced the estimated fair value of contingent consideration because the milestone goal was not achieved.

Fair values of other financial instruments

The fair value of the Company’s Term Loan Facility approximates its carrying values due to the variable interest rate feature of this instrument. 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.