3. Fair Value Measurements and Other-Than-Temporary Impairments

Fair Value Measurements

Pursuant to the accounting guidance for fair value measurements and its subsequent updates, fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

Valuation techniques used by the Company are based upon observable and unobservable inputs. Observable or market inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions about market participant assumptions based on best information available. Observable inputs are the preferred source of values. These two types of inputs create the following fair value hierarchy:


Level 1	–	Quoted prices in active markets for identical assets or liabilities.

Level 2	–	Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3	–	Prices or valuations that require management inputs that are both significant to the fair value measurement and unobservable.

The Company measures its cash equivalents, derivative instruments and debt securities at fair value and classifies its securities in accordance with the fair value hierarchy. The Company’s money market funds and U.S. treasuries are classified within Level 1 of the fair value hierarchy and are valued based on quoted prices in active markets for identical securities.

The Company classifies its certificates of deposit, commercial paper, corporate bonds, U.S. agency notes and foreign currency exchange forward contracts within Level 2 of the fair value hierarchy as follows:

Certificates of Deposit

The Company reviews market pricing and other observable market inputs for the same or similar securities obtained from a number of industry standard data providers. In the event that a transaction is observed for the same or similar security in the marketplace, the price on that transaction reflects the market price and fair value on that day. In the absence of any observable market transactions for a particular security, the fair market value at period end would be equal to the par value. These inputs represent quoted prices for similar assets or these inputs have been derived from observable market data, and result in the classification of these securities as Level 2 of the fair value hierarchy.

Commercial Paper

The Company reviews market pricing and other observable market inputs for the same or similar securities obtained from a number of industry standard data providers. In the event that a transaction is observed for the same or similar security in the marketplace, the price on that transaction reflects the market price and fair value on that day and then follows a revised accretion schedule to determine the fair market value at period end. In the absence of any observable market transactions for a particular security, the fair market value at period end is derived by accreting from the last observable market price. These inputs represent quoted prices for similar assets or these inputs have been derived from observable market data accreted mathematically to par, and result in the classification of these securities as Level 2 of the fair value hierarchy.

Corporate Bonds

The Company reviews trading activity and pricing for each of the corporate bond securities in its portfolio as of the measurement date and determines if pricing data of sufficient frequency and volume in an active market exists in order to support Level 1 classification of these securities. Since sufficient quoted pricing for identical securities is not available, the Company obtains market pricing and other observable market inputs for similar securities from a number of industry standard data providers. In instances where multiple prices exist for similar securities, these prices are used as inputs into a distribution-curve to determine the fair market value at period end. As a result, the Company classifies its corporate bonds as Level 2 of the fair value hierarchy.

U.S. Agency Notes

The Company reviews trading activity and pricing for its U.S. agency notes as of the measurement date. When sufficient quoted pricing for identical securities is not available, the Company uses market pricing and other observable market inputs for similar securities obtained from a number of industry standard data providers. These inputs represent quoted prices for similar assets in active markets or these inputs have been derived from observable market data, and result in the classification of these securities as Level 2 of the fair value hierarchy.

Foreign Currency Exchange Forward Contracts

As discussed in Note 5, “Derivative Instruments,” to the Notes to Condensed Consolidated Financial Statements, the Company mainly holds non-speculative foreign exchange forward contracts to hedge certain foreign currency exchange exposures. The Company estimates the fair values of derivatives based on quoted market prices or pricing models using current market rates. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit risk, foreign exchange rates, and forward and spot prices for currencies. As a result, the Company classifies its derivative instruments as Level 2 of the fair value hierarchy.

The Company classifies its auction rate securities (“ARS”) within Level 3 of the fair value hierarchy.

The Company’s ARS are classified within Level 3 because they are valued, in part, by using inputs that are unobservable in the market and are significant to the valuation. Uncertainties in the credit markets have affected all of the Company’s ARS and auctions for these securities have failed to settle on their respective settlement dates. In light of these developments, to determine the fair value for the Company’s ARS, the Company used a combination of the market approach and income approach. The market approach uses pricing based on transactions in an inactive secondary market for similar or comparable securities. In addition, the Company performed its own discounted cash flow analysis. Management determined that it was most appropriate to value the ARS using the market approach and income approach equally given the facts and circumstances as of September 29, 2012, and therefore incorporated both valuations in the Company’s fair value measurement.

The significant unobservable inputs and assumptions used in the discounted cash flow model to determine the fair value of the Company’s ARS, as of September 29, 2012, are as follows:

•

Contractual cash flow

The model assumed that the principal amount or par value for these securities will be repaid at the end of the estimated workout period. In addition, future interest payments were estimated as described in each individual prospectus and based on the then-current U.S. Treasury Bill rate adjusted for a failed auction premium of 150 basis points (“bps”) for A3 rated securities.

•

ARS discount rate

The model incorporated a discount rate equal to an estimate of the LIBOR rates commensurate with the estimated workout period of the securities. As of the measurement date, these rates were then adjusted by a discount factor of 207 bps, representing an estimate of the market student loan spread and a discount factor to reflect the lack of liquidity and credit risk associated with these securities. As of September 29, 2012, the Company held $3.1 million (par value) of A3 rated securities. The Company’s ARS are mostly collateralized by student loans guaranteed by the U.S. government under the Federal Family Education Loan Program. The discount rate does, however, include a discount factor to reflect the issuer’s credit risk and its potential inability to perform its obligations under the terms of the ARS agreements. The Company’s valuation analysis indicates that the estimated credit risk element included in the discount rate was 200 bps for A3 rated securities.

•

Estimated maturity

The Company estimated the workout period of its ARS as the weighted-average life of the underlying trust loan portfolio where this information was available from servicing and other trust reports. In a small number of instances where this information was not available, the Company used the weighted-average life of the loan portfolio of a similar trust. The estimated time to maturity of the securities as of the measurement date was 6.7 years for A3 rated securities.

The following tables represent the Company’s fair value hierarchy for its assets and liabilities measured at fair value on a recurring basis (in thousands):


	As of September 29, 2012								As of December 31, 2011
	Fair Value Measured Using								Fair Value Measured Using
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets
Money market funds	$	24,295	$	0	$	0	$	24,295	$	53,208	$	0	$	0	$	53,208
Certificates of deposit		0		4,523		0		4,523		0		16,778		0		16,778
Commercial paper		0		15,211		0		15,211		0		5,888		0		5,888
Corporate bonds		0		70,686		0		70,686		0		87,694		0		87,694
U.S. agency notes		0		0		0		0		0		9,999		0		9,999
U.S. treasuries		20,532		0		0		20,532		27,577		0		0		27,577
ARS		0		0		2,879		2,879		0		0		7,675		7,675

Total assets	$	44,827	$	90,420	$	2,879	$	138,126	$	80,785	$	120,359	$	7,675	$	208,819

Liabilities
Foreign currency exchange forward contracts	$	0	$	57	$	0	$	57	$	0	$	82	$	0	$	82

Total liabilities	$	0	$	57	$	0	$	57	$	0	$	82	$	0	$	82

During the three and nine months ended September 29, 2012, there were no transfers of assets or liabilities between Level 1 and Level 2 financial assets and there were no transfers into or out of Level 3 financial assets.

The following tables present a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable (Level 3) inputs (in thousands):


	Three Months Ended
	June 30, 2012		Total Net Gains Included in Other Comprehensive Loss			Calls			September 29, 2012
ARS - available-for-sale		2,796		83	⁽¹⁾		0	⁽²⁾		2,879

	Nine Months Ended
	December 31, 2011		Total Net Gains Included in Other Comprehensive Loss			Calls			September 29, 2012
ARS - available-for-sale		7,675		143	⁽¹⁾		(4,939	)⁽²⁾		2,879

	Three Months Ended
	June 25, 2011		Total Net Gains Included in Other Comprehensive Loss			Calls			September 24, 2011
ARS - available-for-sale	$	7,903	$	185	⁽¹⁾	$	(305	)⁽³⁾	$	7,783

	Nine Months Ended
	December 25, 2010		Total Net Gains Included in Other Comprehensive Loss			Calls			September 24, 2011
ARS - available-for-sale	$	7,790	$	512	⁽¹⁾	$	(519	)⁽³⁾	$	7,783

⁽¹⁾	Amount represents the change in the non-credit loss related other-than-temporary impairments (“OTTI”) recorded in Accumulated other comprehensive loss in the accompanying condensed consolidated balance sheets.

⁽²⁾	Amount represents the fair market value of the securities called. Realized gains on these calls for the three and nine months ended September 29, 2012 were $0 and $0.5 million, respectively.

⁽³⁾	Amount represents the fair market value of the securities called. Realized gains on these calls for three and nine months ended September 24, 2011 were $0.3 million and $0.5 million, respectively.

Investments at fair value were as follows (in thousands):


	September 29, 2012
	Adjusted Amortized Cost			Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Money market funds	$	24,295		$	0	$	0		$	24,295
Certificates of deposit		4,524			0		(1	)		4,523
Commercial paper		15,213			0		(2	)		15,211
Corporate bonds		70,640			54		(8	)		70,686
U.S. treasuries		20,529			4		(1	)		20,532
ARS		2,715	⁽¹⁾		164		0			2,879	⁽³⁾

Total available-for-sale investments	$	137,916		$	222	$	(12	)	$	138,126


	December 31, 2011
	Adjusted Amortized Cost			Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Money market funds	$	53,208		$	0	$	0		$	53,208
Certificates of deposit		16,797			0		(19	)		16,778
Commercial paper		5,898			0		(10	)		5,888
Corporate bonds		87,808			7		(121	)		87,694
U.S. agency notes		9,998			2		(1	)		9,999
U.S. treasuries		27,577			5		(5	)		27,577
ARS		7,368	⁽²⁾		307		0			7,675	⁽³⁾

Total available-for-sale investments	$	208,654		$	321	$	(156	)	$	208,819

⁽¹⁾	Amount represents the par value less $0.4 million of credit-related OTTI recognized through earnings in prior years.

⁽²⁾	Amount represents the par value less $0.9 million of credit-related OTTI recognized through earnings in prior years.

⁽³⁾	Amount reflects investments in a continuous loss position for twelve months or longer.

As of September 29, 2012, the Company’s available-for-sale investments in certificates of deposit, commercial paper, corporate bonds, and U.S. treasuries have a contractual maturity term of no more than 15 months, and ARS have contractual maturity terms of up to 33.2 years. Proceeds from sales, maturities and calls of available-for-sale investments were $102.1 million and $221.8 million in the nine months ended September 29, 2012 and September 24, 2011, respectively. The specific identification method is used to account for gains and losses on available-for-sale investments.

Other-Than-Temporary Impairments

During the second quarter of 2009, the Company determined that it did not intend to sell its ARS and did not believe that it was more likely than not that it would be required to sell the securities before recovery of their par value. However, given that the present value of the expected cash flows for these securities was below their par value, as of June 27, 2009, an initial OTTI of $2.7 million, equal to the difference between the fair value and the amortized cost basis, had occurred. This OTTI write-down was separated into an amount representing credit loss, which was recognized as Other gain (loss), net in the Company’s consolidated statements of operations, and an amount related to all other factors, which was recorded in Accumulated other comprehensive loss in the Company’s consolidated balance sheets. In determining if a credit loss had occurred, the Company isolated the credit loss related portion of the discount rate used to derive the fair market value of the securities and applied this to the expected cash flows in order to determine the portion of the OTTI that was credit loss related. This credit loss related portion of the discount rate is based on the financial condition of the issuer, rating agency credit ratings for the security and credit related yield spreads on similar securities offered by the same issuer.

During the three and nine months ended September 29, 2012, $0 and $5.2 million of AAA rated ARS were called at par value, respectively. The realized gain for these ARS for the three and nine months ended September 29, 2012 were $0, and $0.5 million, respectively.

As of September 29, 2012, the Company held $3.1 million (par value) of A3 rated available-for-sale ARS. These remaining ARS had an insignificant net increase in fair value for the three months ended September 29, 2012. This change was recognized in Accumulated other comprehensive loss in the Company’s condensed consolidated balance sheets. The Company did not recognize any additional OTTI credit loss on any of its securities during the three and nine months ended September 29, 2012.

A roll-forward of amortized cost, cumulative OTTI recognized in earnings and Accumulated other comprehensive income (loss) is as follows (in thousands):


	Amortized Cost			Cumulative OTTI in Earnings			Unrealized Gain			OTTI Loss in Accumulated Other Comprehensive Loss			Accumulated Other Comprehensive Income (Loss)
Balance at December 31, 2011	$	7,368		$	(884	)	$	1,619		$	(1,312	)	$	307
Unrealized gain		0			0			143			0			143
Call on investments		(4,653	)		498			(1,131	)		845			(286	)

Balance at September 29, 2012	$	2,715		$	(386	)	$	631		$	(467	)	$	164

The Company believes that the credit risk associated with its available-for-sale ARS could change significantly in the future based on market conditions and continued uncertainties in the financial markets. The ARS student loan credit spread may be subject to significant volatility and it is difficult to predict future fluctuations. A 10% deterioration in the ARS student loan credit spread would result in an insignificant amount in the credit loss related portion of the OTTI for the third quarter of 2012.