Fair Value of Financial Instruments

9 Months Ended

Oct. 02, 2021

Fair Value of Financial Instruments

Fair Value of Financial Instruments

4. 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 October 2, 2021 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	$	1,126,821	$	—	$	—	$	1,126,821
Corporate debt securities		—		25,455		—		25,455
Total cash equivalents	$	1,126,821	$	25,455	$	—	$	1,152,276
Short-term investments:
Government debt securities	$	378,439	$	101,871	$	—	$	480,310
Corporate debt securities		—		883,785		—		883,785
Total short-term investments	$	378,439	$	985,656	$	—	$	1,364,095
Other assets, net:
Auction rate securities	$	—	$	—	$	5,100	$	5,100
Total	$	—	$	—	$	5,100	$	5,100
Total	$	1,505,260	$	1,011,111	$	5,100	$	2,521,471

	Fair Value Measurements
	at January 2, 2021 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	$	75,606	$	—	$	—	$	75,606
Corporate debt securities		—		14,995		—		14,995
Government debt securities		2,355		2,564		—		4,919
Total cash equivalents	$	77,961	$	17,559	$	—	$	95,520
Short-term investments:
Government debt securities	$	38,461	$	104,112	$	—	$	142,573
Corporate debt securities		—		379,390		—		379,390
Total short-term investments	$	38,461	$	483,502	$	—	$	521,963
Other assets, net:
Auction rate securities	$	—	$	—	$	5,340	$	5,340
Total	$	—	$	—	$	5,340	$	5,340
Total	$	116,422	$	501,061	$	5,340	$	622,823

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.

Contractual maturities of 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 (loss) in the Consolidated Balance Sheet. The following summarizes the contractual underlying maturities of the Company’s available-for-sale investments at October 2, 2021 (in thousands):

			Fair
	Cost		Value
Due in one year or less	$	1,024,156	$	1,024,471
Due after one year through ten years		365,147		365,079
Due after ten years		6,000		5,100
	$	1,395,303	$	1,394,650

Available-for-sale investments

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 October 2, 2021	Value		Losses		Value		Losses		Value		Losses
Government debt securities	$	373,994	$	(59)	$	—	$	—	$	373,994	$	(59)
Corporate debt securities		249,579		(252)		—		—		249,579		(252)
Auction rate securities		—		—		5,100		(900)		5,100		(900)
	$	623,573	$	(311)	$	5,100	$	(900)	$	628,673	$	(1,211)

	Less Than 12 Months				12 Months or Greater				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
As of January 2, 2021	Value		Losses		Value		Losses		Value		Losses
Government debt securities	$	10,146	$	(5)	$	—	$	—	$	10,146	$	(5)
Corporate debt securities		51,909		(74)		—		—		51,909		(74)
Auction rate securities		—		—		5,340		(660)		5,340		(660)
	$	62,055	$	(79)	$	5,340	$	(660)	$	67,395	$	(739)

The gross unrealized losses as of October 2, 2021 and January 2, 2021 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 October 2, 2021, there were no material declines in the market value of available-for-sale investments due to credit-related factors.

At October 2, 2021 and January 2, 2021, 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
October 2, 2021
(000s)		Valuation Technique	Unobservable Input	Weighted Average
$	5,100	Discounted cash flow	Estimated yield	1.07%
			Expected holding period	10 years
			Estimated discount rate	2.35%

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 nine months ended October 2, 2021 (in thousands):

Assets

	Three Months		Nine Months
Auction Rate Securities	Ended		Ended
Beginning balance	$	5,100	$	5,340
Loss included in other comprehensive income (loss)		—		(240)
Balance at October 2, 2021	$	5,100	$	5,100

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 October 2, 2021 and January 2, 2021, the fair value of the 0.625% convertible senior notes due in 2025 was $690.2 million and $671.4 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.