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 April 4, 2015 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	$	58,808	$	—	$	—	$	58,808
Certificates of deposit	—		5,148		—		5,148
Municipal bonds	—		452		—		452
Total cash equivalents	$	58,808	$	5,600	$	—	$	64,408

Short-term Investments:
Municipal bonds	$	—	$	122,917	$	—	$	122,917
Corporate bonds	—		10,117		—		10,117
Variable-rate demand notes	—		8,615		—		8,615
Commercial paper	—		4,898		—		4,898
International government bonds	—		2,248		—		2,248
Total short-term investments	$	—	$	148,795	$	—	$	148,795

Long-term Investments:
Auction rate securities	$	—	$	—	$	7,401	$	7,401
Total long-term investments	$	—	$	—	$	7,401	$	7,401

Total	$	58,808	$	154,395	$	7,401	$	220,604

Liabilities:
Accrued expenses:
Contingent consideration	$	—	$	—	$	3,225	$	3,225

Other non-current liabilities:
Contingent consideration	$	—	$	—	$	11,579	$	11,579
Derivative instruments	—		165		—		165
	$	—	$	165	$	11,579	$	11,744

Total	$	—	$	165	$	14,804	$	14,969

	Fair Value Measurements at January 3, 2015 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	$	71,415	$	—	$	—	$	71,415
Certificates of deposit	—		7,739		—		7,739
Commercial paper	—		5,348		—		5,348
Municipal bonds	—		1,757		—		1,757
U.S. government agency	—		1,202		—		1,202
Corporate bonds	—		1,101		—		1,101
U.S. government bonds	1,000		—		—		1,000
Total cash equivalents	$	72,415	$	17,147	$	—	$	89,562

Short-term Investments:
Municipal bonds	$	—	$	129,152	$	—	$	129,152
Corporate bonds	—		33,033		—		33,033
Variable-rate demand notes	—		12,915		—		12,915
Commercial paper	—		8,995		—		8,995
Asset-backed securities	—		5,377		—		5,377
International government bonds	—		2,516		—		2,516
U.S. government bond	650		—		—		650
U.S. government agency	—		601		—		601
Certificates of deposit	—		250		—		250
Total short-term investments	$	650	$	192,839	$	—	$	193,489

Long-term Investments:
Auction rate securities	$	—	$	—	$	7,419	$	7,419
Total long-term investments	$	—	$	—	$	7,419	$	7,419

Other assets, net:
Derivative instruments	$	—	$	331	$	—	$	331
Total	$	—	$	331	$	—	$	331

Total	$	73,065	$	210,317	$	7,419	$	290,801

Liabilities:
Accrued expenses:
Contingent consideration	$	—	$	—	$	4,288	$	4,288

Other non-current liabilities:
Contingent consideration	$	—	$	—	$	14,150	$	14,150

Total	$	—	$	—	$	18,438	$	18,438

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 discounted cash flow models. The assumptions used in preparing the valuation models include quoted interest swap rates, foreign exchange rates, forward and spot prices for currencies, 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 April 4, 2015 (000s)		Valuation Technique	Unobservable Input	Weighted Average
$	7,401	Discounted cash flow	Estimated yield	0.97	%

			Expected holding period	10 years

			Estimated discount rate	2.96	%

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 April 4, 2015 (000s)		Valuation Technique	Unobservable Input	Range
$	14,804	Monte Carlo simulation	Expected revenue growth rate	35.6% — 69.1%

			Expected revenue volatility	20.0%

			Expected term	0.8 years — 3.8 years

			Estimated discount rate	0.23% — 1.58%

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.

The following summarizes the activity in Level 3 financial instruments for the three months ended April 4, 2015 (in thousands):

Assets

Auction Rate Securities	Three Months Ended
Beginning balance	$	7,419
Loss included in other comprehensive income (loss)	(18		)
Balance at April 4, 2015	$	7,401

Liabilities

Contingent Consideration (1)	Three Months Ended
Beginning balance	$	18,438
Settlements	(4,464		)
Loss recognized in earnings (2)	830
Balance at April 4, 2015	$	14,804

Net loss for the period included in earnings attributable to contingent consideration held at the end of the period:	$	(830	)

(1)

In connection with the acquisition of Energy Micro, 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 Statement of Income.

(2)

Changes to the estimated fair value of contingent consideration were primarily due to revisions to the Company’s expectations of earn-out achievement.

Fair values of other financial instruments

The Company’s Term Loan Facility bears interest at LIBOR plus an applicable margin. The Term Loan Facility is recorded at cost, but is measured at fair value for disclosure purposes. Fair value is estimated based on Level 2 inputs, using a discounted cash flow analysis of future principal payments and projected interest based on current market rates. As of April 4, 2015 and January 3, 2015, the fair value of the Company’s debt under the Term Loan Facility was approximately $84.9 million and $87.4 million, respectively.

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.