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 March 30, 2019 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	$	84,151	$	—	$	—	$	84,151
Corporate debt securities	—		14,665		—		14,665
Government debt securities	21,878		19,463		—		41,341
Total cash equivalents	$	106,029	$	34,128	$	—	$	140,157

Short-term investments:
Government debt securities	$	55,571	$	70,349	$	—	$	125,920
Corporate debt securities	—		256,790		—		256,790
Total short-term investments	$	55,571	$	327,139	$	—	$	382,710

Other assets, net:
Auction rate securities	$	—	$	—	$	5,761	$	5,761
Total	$	—	$	—	$	5,761	$	5,761

Total	$	161,600	$	361,267	$	5,761	$	528,628

	Fair Value Measurements at December 29, 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	$	74,990	$	—	$	—	$	74,990
Corporate debt securities	—		18,820		—		18,820
Government debt securities	9,338		—		—		9,338
Total cash equivalents	$	84,328	$	18,820	$	—	$	103,148

Short-term investments:
Government debt securities	$	48,141	$	99,211	$	—	$	147,352
Corporate debt securities	—		269,427		—		269,427
Total short-term investments	$	48,141	$	368,638	$	—	$	416,779

Other assets, net:
Auction rate securities	$	—	$	—	$	5,759	$	5,759
Total	$	—	$	—	$	5,759	$	5,759

Total	$	132,469	$	387,458	$	5,759	$	525,686

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 March 30, 2019 (in thousands):

	Cost		Fair Value
Due in one year or less	$	363,143	$	362,990
Due after one year through ten years	159,416		159,877
Due after ten years	6,000		5,761
	$	528,559	$	528,628

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 March 30, 2019	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Government debt securities	$	11,437	$	(3	)	$	72,515	$	(325	)	$	83,952	$	(328	)
Corporate debt securities	31,053		(33		)	43,724		(179		)	74,777		(212		)
Auction rate securities	—		—			5,761		(239		)	5,761		(239		)
	$	42,490	$	(36	)	$	122,000	$	(743	)	$	164,490	$	(779	)

	Less Than 12 Months					12 Months or Greater					Total
As of December 29, 2018	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Government debt securities	$	13,278	$	(10	)	$	88,696	$	(583	)	$	101,974	$	(593	)
Corporate debt securities	112,699		(273		)	76,310		(448		)	189,009		(721		)
Auction rate securities	—		—			5,759		(241		)	5,759		(241		)
	$	125,977	$	(283	)	$	170,765	$	(1,272	)	$	296,742	$	(1,555	)

The gross unrealized losses as of March 30, 2019 and December 29, 2018 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 March 30, 2019, the Company has determined that no other-than-temporary impairment losses existed.

At March 30, 2019 and December 29, 2018, 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 March 30, 2019 (000s)		Valuation Technique	Unobservable Input	Weighted Average
$	5,761	Discounted cash flow	Estimated yield	3.42%

			Expected holding period	10 years

			Estimated discount rate	3.43%

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 months ended March 30, 2019 (in thousands):

Assets

Auction Rate Securities	Three Months Ended
Beginning balance	$	5,759
Gain included in other comprehensive income (loss)	2
Balance at March 30, 2019	$	5,761

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 March 30, 2019 and December 29, 2018, the fair value of the convertible senior notes was $433.8 million and $419.0 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.