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Fair Value of Financial Instruments
6 Months Ended
Jul. 04, 2020
Fair Value of Financial Instruments  
Fair Value of Financial Instruments

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 4, 2020 Using

    

Quoted Prices in

    

Significant Other

    

Significant

    

Active Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

Description

(Level 1)

(Level 2)

(Level 3)

Total

Assets:

Cash equivalents:

Money market funds

$

179,239

$

$

$

179,239

Corporate debt securities

2,397

2,397

Government debt securities

22,344

22,344

Total cash equivalents

$

179,239

$

24,741

$

$

203,980

Short-term investments:

Government debt securities

$

77,409

$

45,443

$

$

122,852

Corporate debt securities

322,833

322,833

Total short-term investments

$

77,409

$

368,276

$

$

445,685

Other assets, net:

Auction rate securities

$

$

$

5,400

$

5,400

Total

$

$

$

5,400

$

5,400

Total

$

256,648

$

393,017

$

5,400

$

655,065

Fair Value Measurements

at December 28, 2019 Using

    

Quoted Prices in

    

Significant Other

    

Significant

    

Active Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

Description

(Level 1)

(Level 2)

(Level 3)

Total

Assets:

Cash equivalents:

Money market funds

$

92,379

$

$

$

92,379

Corporate debt securities

1,325

1,325

Total cash equivalents

$

92,379

$

1,325

$

$

93,704

Short-term investments:

Government debt securities

$

85,189

$

86,682

$

$

171,871

Corporate debt securities

 

326,954

326,954

Total short-term investments

$

85,189

$

413,636

$

$

498,825

Other assets, net:

Auction rate securities

$

$

$

5,647

$

5,647

Total

$

$

$

5,647

$

5,647

Total

$

177,568

$

414,961

$

5,647

$

598,176

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.

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 income in the Consolidated Balance Sheet. The following summarizes the contractual underlying maturities of the Company’s available-for-sale investments at July 4, 2020 (in thousands):

    

    

Fair

Cost

Value

Due in one year or less

$

438,505

$

439,825

Due after one year through ten years

207,194

209,840

Due after ten years

6,000

5,400

$

651,699

$

655,065

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

    

    

Gross

    

    

Gross

    

    

Gross

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

As of July 4, 2020

Value

Losses

Value

Losses

Value

Losses

Government debt securities

$

8,186

$

(1)

$

$

$

8,186

$

(1)

Corporate debt securities

57,574

(65)

57,574

(65)

Auction rate securities

5,400

(600)

5,400

(600)

$

65,760

$

(66)

$

5,400

$

(600)

$

71,160

$

(666)

Less Than 12 Months

12 Months or Greater

Total

    

    

Gross

    

    

Gross

    

    

Gross

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

As of December 28, 2019

Value

Losses

Value

Losses

Value

Losses

Government debt securities

$

11,947

$

(19)

$

7,183

$

(7)

$

19,130

$

(26)

Corporate debt securities

68,116

(81)

20

68,136

(81)

Auction rate securities

5,647

(353)

5,647

(353)

$

80,063

$

(100)

$

12,850

$

(360)

$

92,913

$

(460)

The gross unrealized losses as of July 4, 2020 and December 28, 2019 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 records an allowance for credit loss when a decline in investment market value is due to credit-related factors. When evaluating an investment for impairment, the Company reviews factors such as the severity 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 July 4, 2020, there were no material declines in the market value of available-for-sale investments due to credit-related factors.

At July 4, 2020 and December 28, 2019, 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 4, 2020

(000s)

    

Valuation Technique

    

Unobservable Input

    

Weighted Average

$

5,400

 

Discounted cash flow

 

Estimated yield

2.22%

 

Expected holding period

10 years

 

Estimated discount rate

2.15%

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 July 4, 2020 (in thousands):

Assets

    

Three Months

    

Six Months

Auction Rate Securities

Ended

    

Ended

Beginning balance

$

5,400

$

5,647

Loss included in other comprehensive income

 

 

(247)

Balance at July 4, 2020

$

5,400

$

5,400

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 July 4, 2020 and December 28, 2019, the fair value of the 1.375% convertible senior notes was $196.5 million and $524.0 million, respectively. The fair value of the 0.625% convertible senior notes as of July 4, 2020 was $569.1 million.

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.