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 June 30, 2018 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	$	82,111	$	—	$	—	$	82,111
Corporate debt securities	—		23,906		—		23,906
Government debt securities	—		8,359		—		8,359
Total cash equivalents	$	82,111	$	32,265	$	—	$	114,376

Short-term investments:
Government debt securities	$	71,459	$	124,322	$	—	$	195,781
Corporate debt securities	—		151,635		—		151,635
Total short-term investments	$	71,459	$	275,957	$	—	$	347,416

Other assets, net:
Auction rate securities	$	—	$	—	$	5,642	$	5,642
Total	$	—	$	—	$	5,642	$	5,642

Total	$	153,570	$	308,222	$	5,642	$	467,434

	Fair Value Measurements at December 30, 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	$	106,047	$	—	$	—	$	106,047
Corporate debt securities	—		11,231		—		11,231
Government debt securities	53,615		1,453		—		55,068
Total cash equivalents	$	159,662	$	12,684	$	—	$	172,346

Short-term investments:
Government debt securities	$	94,575	$	228,247	$	—	$	322,822
Corporate debt securities	—		171,835		—		171,835
Total short-term investments	$	94,575	$	400,082	$	—	$	494,657

Other assets, net:
Auction rate securities	$	—	$	—	$	5,681	$	5,681
Total	$	—	$	—	$	5,681	$	5,681

Total	$	254,237	$	412,766	$	5,681	$	672,684

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 foreign exchange rates, forward and spot prices for currencies, and market observable data of similar instruments.

Available-for-sale investments

The Company’s investments are reported at fair value, with unrealized gains and losses, net of tax, recorded as a component of accumulated other comprehensive loss in the Consolidated Balance Sheet. The following summarizes the contractual underlying maturities of the Company’s available-for-sale investments at June 30, 2018 (in thousands):

	Cost		Fair Value
Due in one year or less	$	313,832	$	313,333
Due after one year through ten years	131,655		130,420
Due after ten years	24,042		23,681
	$	469,529	$	467,434

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 June 30, 2018	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Government debt securities	$	153,566	$	(893	)	$	3,269	$	(6	)	$	156,835	$	(899	)
Corporate debt securities	126,879		(790		)	11,152		(70		)	138,031		(860		)
Auction rate securities	—		—			5,642		(358		)	5,642		(358		)
	$	280,445	$	(1,683	)	$	20,063	$	(434	)	$	300,508	$	(2,117	)

	Less Than 12 Months					12 Months or Greater					Total
As of December 30, 2017	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Government debt securities	$	244,880	$	(931	)	$	3,027	$	(15	)	$	247,907	$	(946	)
Corporate debt securities	151,149		(447		)	11,578		(73		)	162,727		(520		)
Auction rate securities	—		—			5,681		(319		)	5,681		(319		)
	$	396,029	$	(1,378	)	$	20,286	$	(407	)	$	416,315	$	(1,785	)

The gross unrealized losses as of June 30, 2018 and December 30, 2017 were due primarily to changes in market interest rates and the illiquidity of the Company’s auction-rate securities. 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. The Company is unable to predict if these funds will become available before their maturity date.

The Company considers the declines in market value of its marketable securities investment portfolio to be temporary in nature. When evaluating an investment for other-than-temporary impairment, the Company reviews factors such as the severity and duration of the impairment, changes in underlying credit ratings, forecasted recovery, the Company’s intent to sell or the likelihood that it would be required to sell the investment before its anticipated recovery in market value and the probability that the scheduled cash payments will continue to be made. As of June 30, 2018, the Company has determined that no other-than-temporary impairment losses existed.

At June 30, 2018 and December 30, 2017, 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 June 30, 2018 (000s)		Valuation Technique	Unobservable Input	Weighted Average
$	5,642	Discounted cash flow	Estimated yield	2.56%

			Expected holding period	10 years

			Estimated discount rate	3.82%

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.

The following summarizes the activity in Level 3 financial instruments for the three and six months ended June 30, 2018 (in thousands):

Assets

Auction Rate Securities	Three Months Ended		Six Months Ended
Beginning balance	$	5,609	$	5,681
Gain (loss) included in other comprehensive loss	33		(39		)
Balance at June 30, 2018	$	5,642	$	5,642

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. As of June 30, 2018 and December 30, 2017, the fair value of the convertible senior notes was $488.7 million and $466.2 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.