3. Fair Value of Financial Instruments

The fair values of the Company’s financial instruments are recorded using a hierarchical 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 1, 2017 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	$	78,006	$	—	$	—	$	78,006
Corporate debt securities	—		31,827		—		31,827
Government debt securities	—		1,496		—		1,496
Total cash equivalents	$	78,006	$	33,323	$	—	$	111,329

Short-term investments:
Government debt securities	$	60,769	$	215,086	$	—	$	275,855
Corporate debt securities	—		175,259		—		175,259
Total short-term investments	$	60,769	$	390,345	$	—	$	451,114

Long-term investments:
Auction rate securities	$	—	$	—	$	5,379	$	5,379
Total long-term investments	$	—	$	—	$	5,379	$	5,379

Total	$	138,775	$	423,668	$	5,379	$	567,822

Liabilities:
Other non-current liabilities:
Contingent consideration	$	—	$	—	$	3,993	$	3,993
Total	$	—	$	—	$	3,993	$	3,993

	Fair Value Measurements at December 31, 2016 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	$	69,432	$	—	$	—	$	69,432
Corporate debt securities	—		7,153		—		7,153
Government debt securities	—		3,904		—		3,904
Total cash equivalents	$	69,432	$	11,057	$	—	$	80,489

Short-term investments:
Government debt securities	$	12,416	$	97,103	$	—	$	109,519
Corporate debt securities	—		44,442		—		44,442
Total short-term investments	$	12,416	$	141,545	$	—	$	153,961

Long-term investments:
Auction rate securities	$	—	$	—	$	5,196	$	5,196
Total long-term investments	$	—	$	—	$	5,196	$	5,196

Other assets, net:
Derivative instruments	$	—	$	1,808	$	—	$	1,808
Total	$	—	$	1,808	$	—	$	1,808

Total	$	81,848	$	154,410	$	5,196	$	241,454

Valuation methodology

The Company’s cash equivalents and short-term investments that are 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 probability weighted discounted cash flow model. The assumptions used in preparing the discounted cash flow model include estimates for the outcome if the milestone goal is achieved, the probability of achieving each outcome and discount rates.

Available-for-sale investments

The Company’s investments typically have original maturities greater than ninety days as of the date of purchase. Investments are reported at fair value, with unrealized gains and losses, net of tax, recorded as a component of accumulated other comprehensive income (loss) in the Consolidated Balance Sheet. The following summarizes the contractual underlying maturities of the Company’s available-for-sale investments at July 1, 2017 (in thousands):

	Cost		Fair Value
Due in one year or less	$	293,156	$	293,132
Due after one year through ten years	179,050		179,051
Due after ten years	96,260		95,639
	$	568,466	$	567,822

The available-for-sale investments that were in a continuous unrealized loss position, aggregated by length of time that individual securities have been in a continuous loss position, were as follows (in thousands):

	Less Than 12 Months					12 Months or Greater					Total
As of July 1, 2017	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Government debt securities	$	110,741	$	(97	)	$	—	$	—		$	110,741	$	(97	)
Corporate debt securities	84,486		(124		)	—		—			84,486		(124		)
Auction rate securities	—		—			5,379		(621		)	5,379		(621		)
	$	195,227	$	(221	)	$	5,379	$	(621	)	$	200,606	$	(842	)

	Less Than 12 Months					12 Months or Greater					Total
As of December 31, 2016	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Government debt securities	$	79,743	$	(156	)	$	—	$	—		$	79,743	$	(156	)
Corporate debt securities	21,737		(132		)	—		—			21,737		(132		)
Auction rate securities	—		—			5,196		(804		)	5,196		(804		)
	$	101,480	$	(288	)	$	5,196	$	(804	)	$	106,676	$	(1,092	)

The gross unrealized losses as of July 1, 2017 and December 31, 2016 were due primarily to the illiquidity of the Company’s auction-rate securities and, to a lesser extent, to changes in market interest rates. The Company’s auction-rate securities have been illiquid since 2008 when auctions for the securities failed because sell orders exceeded buy orders. These securities have a contractual maturity date of 2046 at July 1, 2017. The Company is unable to predict if these funds will become available before their maturity date.

The Company does not expect to need access to the capital represented by any of its auction-rate securities prior to their maturities. The Company does not intend to sell, and believes it is not more likely than not that it will be required to sell, its auction-rate securities before their anticipated recovery in market value or final settlement at the underlying par value. The Company believes that the credit ratings and credit support of the security issuers indicate that they have the ability to settle the securities at par value. As such, the Company has determined that no other-than-temporary impairment losses existed as of July 1, 2017.

At July 1, 2017 and December 31, 2016, there were no material unrealized gains associated with the Company’s available-for-sale investments.

Level 3 fair value measurements

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

Auction rate securities

Fair Value at July 1, 2017 (000s)		Valuation Technique	Unobservable Input	Weighted Average
$	5,379	Discounted cash flow	Estimated yield	0.88%

			Expected holding period	10 years

			Estimated discount rate	3.29%

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 July 1, 2017 (000s)		Valuation Technique	Unobservable Input	Weighted Average
$	3,993	Discounted cash flow	Expected term	6 months

			Estimated discount rate	12.0%

The Company has followed an established internal control procedure used in valuing contingent consideration. The valuation of contingent consideration for the Zentri acquisition is based on a discounted cash flow 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 would be accompanied by a directionally similar change in fair value.

The following summarizes the activity in Level 3 financial instruments for the three and six months ended July 1, 2017 (in thousands):

Assets

Auction Rate Securities	Three Months Ended		Six Months Ended
Beginning balance	$	5,257	$	5,196
Gain included in other comprehensive income (loss)	122		183
Balance at July 1, 2017	$	5,379	$	5,379

Liabilities

Contingent Consideration (1)	Three Months Ended			Six Months Ended
Beginning balance	$	3,829		$	—
Issues	—			3,829
Loss recognized in earnings	164			164
Balance at July 1, 2017	$	3,993		$	3,993

Net loss for the period included in earnings attributable to contingent consideration held at the end of the period:	$	(164	)	$	(164	)

(1) In connection with the acquisition of Zentri, 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 valuation model are recorded in selling, general and administrative expenses in the Consolidated Statement of Income.

Fair values of other financial instruments

The Company’s debt is recorded at cost, but is measured at fair value for disclosure purposes. The fair value of the Company’s convertible senior notes is determined using observable market prices. The notes are traded in less active markets and are therefore classified as a Level 2 fair value measurement. The fair value of the convertible senior notes at July 1, 2017 was $414.8 million. The Company’s prior debt under the Credit Facility bore interest at the Eurodollar rate plus an applicable margin. Fair value was 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 July 1, 2017 and December 31, 2016, the fair value of the Company’s debt under the Credit Facility was approximately $0.0 and $72.5 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.