Financial Instruments

Fair Value

The Company defines fair value 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.

A fair value hierarchy has been established that prioritizes the inputs to valuation techniques used to measure fair value. The level of an asset or liability in the hierarchy is based on the lowest level of input that is significant to the fair value measurement. Assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

Level 1: Valuations based on quoted prices in active markets for identical assets or liabilities with sufficient volume and frequency of transactions.

Level 2: Valuations based on observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or model-derived valuations techniques for which all significant inputs 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: Valuations based on unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities and based on non-binding, broker-provided price quotes and may not have been corroborated by observable market data.

The Company’s primary financial instruments include its cash, cash equivalents, investments, restricted cash and investments, long-term investments, accounts receivable, accounts payable, long-term debt and capital leases, and foreign currency related derivative instruments. The estimated fair value of cash, accounts receivable, and accounts payable approximates their carrying value due to the short period of time to their maturities. The estimated fair values of capital lease obligations approximate their carrying value as the substantial majority of these obligations have interest rates that adjust to market rates on a periodic basis. Refer to Note 13 - Long Term Debt and Other Borrowings for additional information regarding the fair value of the Company’s Senior Notes and 2041 Notes.

Investments

The following table sets forth the Company’s cash, cash equivalents, investments, restricted cash and investments, and other assets measured at fair value on a recurring basis as of June 24, 2018, and June 25, 2017:



	June 24, 2018
										(Reported Within)
	Cost		Unrealized Gain		Unrealized (Loss)			Fair Value		Cash and Cash Equivalents		Investments		Restricted Cash & Investments		Other Assets
	(in thousands)
Cash	$	708,364	$	—	$	—		$	708,364	$	702,090	$	—	$	6,274	$	—
Time deposit	999,666		—		—			999,666		749,639		—		250,027		—
Level 1:
Money market funds	2,341,807		—		—			2,341,807		2,341,807		—		—		—
U.S. Treasury and agencies	356,679		—		(170		)	356,509		333,721		22,788		—		—
Mutual funds	68,568		516		(142		)	68,942		—		—		—		68,942
Level 1 total	2,767,054		516		(312		)	2,767,258		2,675,528		22,788		—		68,942
Level 2:
Municipal notes and bonds	152,378		37		(279		)	152,136		—		152,136		—		—
Government-sponsored enterprises	110,963		—		(201		)	110,762		99,934		10,828		—		—
Foreign government bonds	19,986		—		(1		)	19,985		19,985		—		—		—
Corporate notes and bonds	516,955		95		(1,184		)	515,866		265,081		250,785		—		—
Mortgage backed securities - residential	804		—		(3		)	801		—		801		—		—
Level 2 total	801,086		132		(1,668		)	799,550		385,000		414,550		—		—
Total	$	5,276,170	$	648	$	(1,980	)	$	5,274,838	$	4,512,257	$	437,338	$	256,301	$	68,942



	June 25, 2017
										(Reported Within)
	Cost		Unrealized Gain		Unrealized (Loss)			Fair Value		Cash and Cash Equivalents		Investments		Restricted Cash & Investments		Other Assets
	(in thousands)
Cash	$	551,308	$	—	$	—		$	551,308	$	545,130	$	—	$	6,178	$	—
Time deposit	640,666		—		—			640,666		390,639		—		250,027		—
Level 1:
Money market funds	1,423,417		—		—			1,423,417		1,423,417		—		—		—
U.S. Treasury and agencies	783,848		684		(2,111		)	782,421		8,297		774,124		—		—
Mutual funds	53,247		3,007		—			56,254		—		—		—		56,254
Level 1 total	2,260,512		3,691		(2,111		)	2,262,092		1,431,714		774,124		—		56,254
Level 2:
Municipal notes and bonds	194,575		308		(7		)	194,876		—		194,876		—		—
U.S. Treasury and agencies	12,795		—		(167		)	12,628		—		12,628		—		—
Government-sponsored enterprises	24,502		—		(6		)	24,496		—		24,496		—		—
Foreign government bonds	62,917		219		(114		)	63,022		—		63,022		—		—
Corporate notes and bonds	2,433,622		4,654		(1,840		)	2,436,436		10,051		2,426,385		—		—
Mortgage backed securities - residential	102,760		87		(489		)	102,358		—		102,358		—		—
Mortgage backed securities - commercial	65,828		9		(98		)	65,739		—		65,739		—		—
Level 2 total	2,896,999		5,277		(2,721		)	2,899,555		10,051		2,889,504		—		—
Total	$	6,349,485	$	8,968	$	(4,832	)	$	6,353,621	$	2,377,534	$	3,663,628	$	256,205	$	56,254

The Company accounts for its investment portfolio at fair value. Realized gains (losses) for investment sales are specifically identified. Management assesses the fair value of investments in debt securities that are not actively traded through consideration of interest rates and their impact on the present value of the cash flows to be received from the investments. The Company also considers whether changes in the credit ratings of the issuer could impact the assessment of fair value. Additionally, the Company also considers factors such as the Company’s intent to sell the security and whether it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis.

During the fiscal year 2018, the Company recorded a $42.5 million other-than-temporary impairment charge on a portion of its available for sale investments as a result of a decision to sell selected investments held in foreign jurisdictions in conjunction with our cash repatriation strategy following the U.S. tax reform legislation. The Company did not recognize any losses on investments due to other-than-temporary impairments in fiscal year 2017 or 2016.

The Company does not intend to sell its domestic investment portfolio and it is not more likely than not that it will be required to sell these investments before recovery of their amortized cost bases. Accordingly, the Company does not consider its domestically held investments to be other-than-temporarily impaired.

Gross realized gains/(losses) from sales of investments were $2.4 million and $(8.5) million in fiscal year 2018, $3.6 million and $(2.4) million in fiscal year 2017, and $2.0 million and $(3.0) million in fiscal year 2016.

The following is an analysis of the Company’s cash, cash equivalents, investments, and restricted cash and investments in unrealized loss positions:



	June 24, 2018
	Unrealized Losses Less than 12 Months					Unrealized Losses 12 Months or Greater					Total
	Fair Value		Gross Unrealized Loss			Fair Value		Gross Unrealized Loss			Fair Value		Gross Unrealized Loss
	(in thousands)
U.S. Treasury and agencies	$	332,903	$	(100	)	$	11,026	$	(70	)	$	343,929	$	(170	)
Municipal notes and bonds	141,139		(279		)	—		—			141,139		(279		)
Mutual funds	25,312		(142		)	—		—			25,312		(142		)
Government-sponsored enterprises	110,722		(201		)	—		—			110,722		(201		)
Foreign government bonds	19,985		(1		)	—		—			19,985		(1		)
Corporate notes and bonds	161,813		(1,092		)	14,928		(92		)	176,741		(1,184		)
Mortgage backed securities - residential	801		(3		)	—		—			801		(3		)
	$	792,675	$	(1,818	)	$	25,954	$	(162	)	$	818,629	$	(1,980	)

The amortized cost and fair value of cash equivalents, investments, and restricted investments with contractual maturities as of June 24, 2018, are as follows:



	Cost		Estimated Fair Value
	(in thousands)
Due in one year or less	$	4,312,694	$	4,312,352
Due after one year through five years	181,681		180,352
Due in more than five years	4,863		4,828
	$	4,499,238	$	4,497,532

The Company has the ability, if necessary, to liquidate its investments in order to meet the Company’s liquidity needs in the next 12 months. Accordingly, those investments with contractual maturities greater than one year from the date of purchase nonetheless are classified as short-term on the accompanying Consolidated Balance Sheets.

Derivative Instruments and Hedging

The Company carries derivative financial instruments (“derivatives”) on its Consolidated Balance Sheets at their fair values. The Company enters into foreign currency forward contracts and foreign currency options with financial institutions with the primary objective of reducing volatility of earnings and cash flows related to foreign currency exchange rate fluctuations. In addition, the Company enters into interest rate swap arrangements to manage interest rate risk. The counterparties to these derivatives are large, global financial institutions that the Company believes are creditworthy, and therefore, it does not consider the risk of counterparty nonperformance to be material.

Cash Flow Hedges

The Company’s financial position is routinely subjected to market risk associated with foreign currency exchange rate fluctuations on non-U.S. dollar transactions or cash flows, primarily from Japanese yen-denominated revenues and euro-denominated and Korean won-denominated expenses. The Company’s policy is to mitigate the foreign exchange risk arising from the fluctuations in the value of these non-U.S. dollar denominated transactions or cash flows through a foreign currency cash flow hedging program, using forward contracts and foreign currency options that generally expire within 12 months and no later than 24 months. These hedge contracts are designated as cash flow hedges and are carried on the Company’s balance sheet at fair value with the effective portion of the contracts’ gains or losses included in accumulated other comprehensive income (loss) and subsequently recognized in revenue/expense in the same period the hedged items are recognized.

In addition, the Company has entered into interest rate swap agreements to hedge against the variability of cash flows due to changes in certain benchmark interest rates on fixed rate debt. These instruments are designated as cash flow hedges at inception and are settled in conjunction with the issuance of debt. The effective portion of the contracts’ gains or losses is included in accumulated other comprehensive income (loss) and is amortized into income as the hedged item impacts earnings.

At inception and at each quarter-end, hedges are tested prospectively and retrospectively for effectiveness using regression analysis. Changes in the fair value of foreign exchange contracts due to changes in time value are included in the assessment of effectiveness. To qualify for hedge accounting, the hedge relationship must meet criteria relating to both the derivative instrument and the hedged item. These criteria include identification of the hedging instrument, the hedged item, the nature of the risk being hedged, and how the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value or cash flows will be measured. There were no material gains or losses during the fiscal years ended June 24, 2018, June 25, 2017, or June 26, 2016 associated with forecasted transactions that failed to occur. There were no material gains or losses during the fiscal years ended June 25, 2017, or June 26, 2016 associated with ineffectiveness.

To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be tested to demonstrate an expectation of providing highly effective offsetting changes to future cash flows on hedged transactions. When derivative instruments are designated and qualify as effective cash flow hedges, the Company recognizes effective changes in the fair value of the hedging instrument within accumulated other comprehensive income (loss) until the hedged exposure is realized. Consequently, the Company’s results of operations are not subject to fluctuation as a result of changes in the fair value of the derivative instruments. If hedges are not highly effective or if the Company does not believe that the underlying hedged forecasted transactions will occur, the Company may not be able to account for its derivative instruments as cash flow hedges. If this were to occur, future changes in the fair values of the Company’s derivative instruments would be recognized in earnings. Additionally, related amounts previously recorded in other comprehensive income would be reclassified to income immediately. As of June 24, 2018, the Company had a net loss of $2.2 million accumulated in other comprehensive income, net of tax, related to foreign exchange cash flow hedges which it expects to reclassify from other comprehensive income into earnings over the next 12 months. Additionally, as of June 24, 2018, the Company had a net loss of $1.8 million accumulated in other comprehensive income, net of tax, related to interest rate contracts which it expects to reclassify from other comprehensive income into earnings over the next 6.7 years.

Fair Value Hedges

The Company has interest rate contracts whereby the Company receives fixed rates and pays variable rates based on certain benchmark interest rates, resulting in a net increase or decrease to interest expense, a component of other expense, net in our Consolidated Statement of Operations. These interest rate contracts are designated as fair value hedges and hedge against changes in the fair value of our debt portfolio. The Company concluded that these interest rate contracts meet the criteria necessary to qualify for the short-cut method of hedge accounting, and as such, an assumption is made that the change in the fair value of the hedged debt, due to changes in the benchmark rate, exactly offsets the change in the fair value of the interest rate swap. Therefore, the derivative is considered to be effective at achieving offsetting changes in the fair value of the hedged liability, and no ineffectiveness is recognized.

Balance Sheet Hedges

The Company also enters into foreign currency forward contracts to hedge fluctuations associated with foreign currency denominated monetary assets and liabilities, primarily cash, third-party accounts receivable, accounts payable, and intercompany receivables and payables. These forward contracts are not designated for hedge accounting treatment. Therefore, the change in fair value of these derivatives is recorded as a component of other income (expense) and offsets the change in fair value of the foreign currency denominated assets and liabilities, which are also recorded in other income (expense).

As of June 24, 2018, the Company had the following outstanding foreign currency contracts that were entered into under its cash flow and balance sheet hedge programs:



	Notional Value
	Derivatives Designated as Hedging Instruments:				Derivatives Not Designated as Hedging Instruments:

	(in thousands)
Foreign currency forward contracts
	Buy Contracts		Sell Contracts		Buy Contracts		Sell Contracts
Japanese yen	$	—	$	568,970	$	—	$	267,367
Euro	102,557		—		45,298		—
Korean won	28,887		—		—		99,408
Taiwan dollar	—		—		31,859		—
Singapore dollar	—		—		21,376		—
British pound sterling	—		—		15,865		—
Swiss franc	—		—		14,899		—
Indian rupee	—		—		3,220		—
Chinese renminbi	—		—		2,467		—
	$	131,444	$	568,970	$	134,984	$	366,775
Foreign currency option contracts
	Buy Put		Sell Call		Buy Put		Sell Put
Japanese yen ⁽¹⁾	$	9,050	$	9,709	$	—	$	—

(1) The local currency notional amounts of these foreign currency option contracts are equal to each other.

The fair value of derivative instruments in the Company’s Consolidated Balance Sheet as of June 24, 2018, and June 25, 2017, were as follows:



	June 24, 2018						June 25, 2017
	Fair Value of Derivative Instruments (Level 2)						Fair Value of Derivative Instruments (Level 2)
	Derivative Assets			Derivative Liabilities			Derivative Assets			Derivative Liabilities
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
	(in thousands)
Derivatives designated as hedging instruments:
Foreign exchange contracts	Prepaid expense and other assets	$	7,581	Accrued expenses and other current liabilities	$	8,866	Prepaid expense and other assets	$	8,061	Accrued expenses and other current liabilities	$	2,916
Interest rate contracts, short-term		—		Accrued expenses and other current liabilities	7,468			—		Accrued expenses and other current liabilities	2,833
Interest rate contracts, long-term		—		Other long-term liabilities	23,720			—		Other long-term liabilities	7,269
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Prepaid expense and other assets	111		Accrued expenses and other current liabilities	32		Prepaid expense and other assets	213		Accrued expenses and other current liabilities	342
Total derivatives		$	7,692		$	40,086		$	8,274		$	13,360

Under the master netting agreements with the respective counterparties to the Company’s derivative contracts, subject to applicable requirements, the Company is allowed to net settle transactions of the same currency with a single net amount payable by one party to the other. However, the Company has elected to present the derivative assets and derivative liabilities on a gross basis on its balance sheet. As of June 24, 2018, the potential effect of rights of offset associated with the above foreign exchange and interest rate contracts would be an offset to assets and liabilities by $5.6 million, resulting in a net derivative asset of $2.1 million and net derivative liability of $34.4 million. As of June 25, 2017, the potential effect of rights of offset associated with the above foreign exchange contracts would be an offset to both assets and liabilities by $5.9 million, resulting in a net derivative asset of $2.3 million and a net derivative liability of $7.4 million. The Company is not required to pledge, nor is the Company entitled to receive, cash collateral for these derivative transactions.

The effect of derivative instruments designated as cash flow hedges on the Company’s Consolidated Statements of Operations, including accumulated other comprehensive income (“AOCI”), was as follows:



		Year Ended June 24, 2018
	Location of Gain (Loss) Recognized in or Reclassified into Income	Gain (Loss) Recognized in AOCI			Gain (Loss) Reclassified from AOCI into Income
		Gain (Loss) Recognized in AOCI			Gain (Loss) Reclassified from AOCI into Income
Derivatives in Cash Flow Hedging Relationships		(in thousands)
Foreign exchange contracts	Revenue	$	(8,305	)	$	(11,284	)
Foreign exchange contracts	Cost of goods sold	57			5,218
Foreign exchange contracts	SG&A	558			2,654
Foreign exchange contracts	Other expense, net	—			—
		$	(7,690	)	$	(3,412	)
Derivatives in Fair Value Hedging Relationships
Interest rate contracts	Other expense, net	$	—		$	(126	)



		Year Ended June 25, 2017
	Location of Gain (Loss) Recognized in or Reclassified into Income	Effective Portion					Ineffective Portion and Amount Excluded from Effectiveness
Derivatives Designated as Hedging Instruments		Gain (Loss) Recognized in AOCI		Gain (Loss) Reclassified from AOCI into Income			Gain (Loss) Recognized in Income
		(in thousands)
Foreign exchange contracts	Revenue	$	2,927	$	(12,000	)	$	6,982
Foreign exchange contracts	Cost of goods sold	2,859		666			(686		)
Foreign exchange contracts	SG&A	1,128		71			(267		)
Foreign exchange contracts	Other expense, net	—		—			(82		)
Interest rate contracts	Other expense, net	—		1,727			—
		$	6,914	$	(9,536	)	$	5,947

The effect of derivative instruments not designated as cash flow hedges on the Company’s Consolidated Statement of Operations was as follows:



		Year Ended
		June 24, 2018		June 25, 2017
Derivatives Not Designated as Hedging Instruments:	Location of Gain Recognized in Income	Gain Recognized in Income		Gain Recognized in Income
		(in thousands)
Foreign exchange contracts	Other income	$	7,756	$	523

The following table presents the effect of the fair value cash flow hedge accounting on the Statement of Financial Performance:



	Location and Amount of Gain (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships
	Year ended
	June 24, 2018
	Revenue			Cost of Goods Sold		Selling, General and Administrative		Other Income (Expense)
	(in thousands)
Total amounts of income and expense line items presented in the statement of financial performance in which the effects of fair value or cash flow hedges are recorded:
	$	11,076,998		$	5,911,966	$	762,219	$	(61,510	)

The effects of fair value and cash flow hedging:
Gain or (loss) on fair value hedging relationships in Subtopic 815-20:
Interest contracts:
Hedged items	—			—		—		21,086
Derivatives designated as hedging instruments	—			—		—		(21,086		)

Gain or (loss) on cash flow hedging relationships in Subtopic 815-20:
Foreign exchange contracts:
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income	(11,284		)	5,218		2,654		—

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, investments, restricted cash and investments, trade accounts receivable, and derivative financial instruments used in hedging activities. Cash is placed on deposit at large, global financial institutions. Such deposits may be in excess of insured limits. Management believes that the financial institutions that hold the Company’s cash are creditworthy and, accordingly, minimal credit risk exists with respect to these balances.

The Company’s overall portfolio of available-for-sale securities must maintain an average minimum rating of “AA-” or “Aa3” as rated by Standard and Poor’s, Fitch Ratings, or Moody’s Investor Services. To ensure diversification and minimize concentration, the Company’s policy limits the amount of credit exposure with any one financial institution or commercial issuer.

The Company is exposed to credit losses in the event of nonperformance by counterparties on foreign currency and interest rate hedge contracts that are used to mitigate the effect of exchange rate and interest rate fluctuations and on contracts related to structured share repurchase arrangements. These counterparties are large, global financial institutions and, to date, no such counterparty has failed to meet its financial obligations to the Company.

Credit risk evaluations, including trade references, bank references, and Dun & Bradstreet ratings, are performed on all new customers, and the Company monitors its customers’ financial condition and payment performance. In general, the Company does not require collateral on sales.

As of June 24, 2018, four customers accounted for approximately 24%, 17%, 10%, and 10%, of accounts receivable, respectively. As of June 25, 2017, four customers accounted for approximately 22%, 19%, 13%, and 12% of accounts receivable, respectively. No other customers accounted for more than 10% of accounts receivable, respectively. The Company’s balance and transactional activity for its allowance for doubtful accounts is not material as of and for the twelve months ended June 24, 2018, June 25, 2017, and June 26, 2016.