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FINANCIAL INSTRUMENTS
6 Months Ended
Dec. 29, 2019
Fair Value Disclosures [Abstract]  
FINANCIAL INSTRUMENTS FINANCIAL INSTRUMENTS
The Company maintains an investment portfolio of various holdings, types, and maturities. The Company’s mutual funds, which are related to the Company’s obligations under the deferred compensation plan, are classified as trading securities. Investments classified as trading securities are recorded at fair value based upon quoted market prices. Differences between the cost and fair value of trading securities are recognized as other income (expense) in the Condensed Consolidated Statements of Operations. All of the Company’s other investments are classified as available-for-sale and consequently are recorded in the Condensed Consolidated Balance Sheets at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss), net of tax.
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 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 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 12 - Long-Term Debt and Other Borrowings for additional information regarding the fair value of the Company’s senior notes and convertible senior notes.
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 December 29, 2019, and June 30, 2019:
 
December 29, 2019
 
 
 
 
 
 
 
 
 
(Reported Within)
 
Cost
 
Unrealized
Gain
 
Unrealized
(Loss)
 
Fair Value
 
Cash and
Cash
Equivalents
 
Investments
 
Restricted
Cash &
Investments
 
Other
Assets
 
(in thousands)
Cash
$
580,318

 
$

 
$

 
$
580,318

 
$
576,439

 
$

 
$
3,879

 
$

Time deposit
1,606,528

 

 

 
1,606,528

 
1,356,500

 

 
250,028

 

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
977,274

 

 

 
977,274

 
977,274

 

 

 

U.S. Treasury and agencies
476,406

 
116

 
(54
)
 
476,468

 

 
476,468

 

 

Mutual funds
75,244

 
5,792

 
(452
)
 
80,584

 

 

 

 
80,584

Level 1 Total
1,528,924

 
5,908

 
(506
)
 
1,534,326

 
977,274

 
476,468

 

 
80,584

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises
9,819

 

 
(3
)
 
9,816

 
2,799

 
7,017

 

 

Foreign government bonds
30,507

 
2

 
(6
)
 
30,503

 

 
30,503

 

 

Corporate notes and bonds
1,225,526

 
742

 
(444
)
 
1,225,824

 
122,875

 
1,102,949

 

 

Mortgage backed securities — residential
4,172

 
8

 

 
4,180

 

 
4,180

 

 

Mortgage backed securities — commercial
26,751

 
34

 
(35
)
 
26,750

 

 
26,750

 

 

Level 2 Total
1,296,775

 
786

 
(488
)
 
1,297,073

 
125,674

 
1,171,399

 

 

Total
$
5,012,545

 
$
6,694

 
$
(994
)
 
$
5,018,245

 
$
3,035,887

 
$
1,647,867

 
$
253,907

 
$
80,584

 
 
June 30, 2019
 
 
 
 
 
 
 
 
 
(Reported Within)
 
Cost
 
Unrealized
Gain
 
Unrealized
(Loss)
 
Fair Value
 
Cash and
Cash
Equivalents
 
Investments
 
Restricted
Cash &
Investments
 
Other
Assets
 
(in thousands)
Cash
$
467,460

 
$

 
$

 
$
467,460

 
$
462,310

 
$

 
$
5,150

 
$

Time deposit
1,563,686

 

 

 
1,563,686

 
1,313,659

 

 
250,027

 

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
1,644,659

 

 

 
1,644,659

 
1,644,659

 

 

 

U.S. Treasury and agencies
465,655

 
283

 
(24
)
 
465,914

 
86,981

 
378,933

 

 

Mutual funds
76,961

 
1,063

 
(283
)
 
77,741

 

 

 

 
77,741

Level 1 Total
2,187,275

 
1,346

 
(307
)
 
2,188,314

 
1,731,640

 
378,933

 

 
77,741

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises
16,005

 
5

 
(41
)
 
15,969

 

 
15,969

 

 

Foreign government bonds
24,408

 
35

 

 
24,443

 

 
24,443

 

 

Corporate notes and bonds
1,466,167

 
2,310

 
(99
)
 
1,468,378

 
150,610

 
1,317,768

 

 

Mortgage backed securities — residential
6,148

 

 
(4
)
 
6,144

 

 
6,144

 

 

Mortgage backed securities — commercial
29,587

 
140

 

 
29,727

 

 
29,727

 

 

Level 2 Total
1,542,315

 
2,490

 
(144
)
 
1,544,661

 
150,610

 
1,394,051

 

 

Total
$
5,760,736

 
$
3,836

 
$
(451
)
 
$
5,764,121

 
$
3,658,219

 
$
1,772,984

 
$
255,177

 
$
77,741


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.
The Company did not recognize any losses on investments due to other-than-temporary impairments during the three and six months ended December 29, 2019 or December 23, 2018. Additionally, gross realized gains/(losses) from sales of investments were insignificant in the three and six months ended December 29, 2019 and December 23, 2018.
The following is an analysis of the Company’s cash, cash equivalents, investments, and restricted cash and investments in unrealized loss positions:
 
December 29, 2019
 
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
$
325,502

 
$
(54
)
 
$

 
$

 
$
325,502

 
$
(54
)
Mutual funds
2,925

 
(195
)
 
7,955

 
(257
)
 
10,880

 
(452
)
Government-sponsored enterprises

 

 
6,995

 
(3
)
 
6,995

 
(3
)
Foreign government bonds
29,420

 
(6
)
 

 

 
29,420

 
(6
)
Corporate notes and bonds
703,002

 
(441
)
 
6,780

 
(3
)
 
709,782

 
(444
)
Mortgage backed securities — commercial
16,805

 
(35
)
 

 

 
16,805

 
(35
)
 
$
1,077,654

 
$
(731
)
 
$
21,730

 
$
(263
)
 
$
1,099,384

 
$
(994
)


The amortized cost and fair value of cash equivalents, investments, and restricted investments with contractual maturities are as follows as of December 29, 2019:
 
Cost
 
Estimated
Fair
Value
 
(in thousands)
Due in one year or less
$
3,889,431

 
$
3,889,377

Due after one year through five years
444,558

 
444,950

Due in more than five years
22,994

 
23,016

 
$
4,356,983

 
$
4,357,343


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 12 months from the date of purchase nonetheless are classified as short-term on the accompanying Condensed Consolidated Balance Sheets.
Derivative Instruments and Hedging
The Company carries derivative financial instruments (“derivatives”) on its Condensed 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. During the three and six months ended December 29, 2019, the Company entered into a series of these interest rate swap agreements with a total notional value of $200 million. As of December 29, 2019, the Company had a net gain of $1.9 million accumulated in other comprehensive income, net of tax, related to these interest rate swap agreements. Additionally, in January 2020, the Company entered into an additional series of interest rate swap agreements with a total notional value of $200 million.
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 three and six months ended December 29, 2019 and December 23, 2018 associated with forecasted transactions that failed to occur.
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 December 29, 2019, the Company had a net gain of $2.0 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 December 29, 2019, the Company had a net loss of $2.1 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 5.2 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 Condensed 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. During the quarter ended September 29, 2019, the Company terminated and consequently discontinued the hedging relationship of selected interest rate contracts; refer to Note 12 - Long-Term Debt and Other Borrowings for additional information regarding the accumulated fair value adjustment and the related amortization.
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 December 29, 2019, 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
$

 
$
100,830

 
$
61,301

 
$

Euro
61,007

 

 
42,371

 

Korean won
15,401

 

 

 
4,294

British pound sterling

 

 
48,439

 

Taiwan dollar

 

 
33,328

 

Chinese renminbi

 

 
31,683

 

Swiss franc

 

 
22,493

 

Singapore dollar

 

 
21,409

 

Indian rupee

 

 
7,855

 

 
$
76,408

 
$
100,830

 
$
268,879

 
$
4,294



The fair value of derivative instruments in the Company’s Condensed Consolidated Balance Sheet as of December 29, 2019, and June 30, 2019 were as follows:
 
December 29, 2019
 
June 30, 2019
 
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
 
$
2,437

 
Accrued expenses and other current liabilities
 
$
16

 
Prepaid expense
and other assets
 
$
119

 
Accrued expenses and other current liabilities
 
$
2,756

Interest rate contracts, short-term
 
 

 
Accrued expenses and other current liabilities
 
2,746

 
 
 

 
Accrued expenses and other current liabilities
 
5,149

Interest rate contracts, long-term
Other assets
 
3,605

 

 

 
Other assets
 
1,537

 

 

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Foreign exchange contracts
Prepaid expense
and other assets
 
21

 
Accrued expenses and other current liabilities
 
200

 
Prepaid expense
and other assets
 
1,249

 
Accrued expenses and other current liabilities
 
748

Total Derivatives
 
 
$
6,063

 
 
 
$
2,962

 
 
 
$
2,905

 
 
 
$
8,653


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 December 29, 2019, 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 $2.3 million, resulting in a net derivative asset of $3.8 million and net derivative liability of $0.7 million. As of June 30, 2019, the potential effect of rights of offset associated with the above foreign exchange and interest rate contracts would be an offset to both assets and liabilities by $2.4 million, resulting in a net derivative asset of $0.5 million and a net derivative liability of $6.2 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 Condensed Consolidated Statements of Operations, including accumulated other comprehensive income (“AOCI”) was as follows:
 
 
Three Months Ended
 
Six Months Ended
 
December 29, 2019
 
December 29, 2019
 
Location of 
Gain or (Loss)
Recognized in or Reclassified into Income
Gain
Recognized
in AOCI
 
Loss
Reclassified
from AOCI
into Income
 
Gain (Loss)
Recognized
in AOCI
 
Loss
Reclassified
from AOCI
into Income
Derivatives in Cash Flow Hedging Relationships
(in thousands)
Foreign Exchange Contracts
Revenue
$
2,264

 
$
(172
)
 
$
3,198

 
$
(506
)
Foreign Exchange Contracts
Cost of goods sold
196

 
(1,090
)
 
(1,067
)
 
(1,900
)
Foreign Exchange Contracts
Selling, general, and administrative
130

 
(417
)
 
(465
)
 
(893
)
Interest Rate Contracts
Other expense, net
2,394

 
(35
)
 
2,394

 
(70
)
 
 
$
4,984

 
$
(1,714
)
 
$
4,060

 
$
(3,369
)
 
 
Three Months Ended
 
Six Months Ended
 
December 23, 2018
 
December 23, 2018
 
Location of 
Gain or (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
$
8,229

 
$
7,813

 
$
16,670

 
$
8,487

Foreign Exchange Contracts
Cost of goods sold
(1,965
)
 
(851
)
 
(2,089
)
 
(2,408
)
Foreign Exchange Contracts
Selling, general, and administrative
(674
)
 
(651
)
 
(878
)
 
(1,178
)
Interest Rate Contracts
Other expense, net

 
(33
)
 

 
(66
)
 
 
$
5,590

 
$
6,278

 
$
13,703

 
$
4,835

The effect of derivative instruments not designated as cash flow hedges on the Company’s Condensed Consolidated Statements of Operations was as follows:
 
 
Three Months Ended
 
Six Months Ended
 
 
December 29,
2019
 
December 23,
2018
 
December 29,
2019
 
December 23,
2018
Derivatives Not Designated as Hedging Instruments:
Location 
of Gain (Loss) Recognized 
in Income
Gain
Recognized
in Income
 
Gain
Recognized
in Income
 
Loss
Recognized
in Income
 
Gain
Recognized
in Income
 
 
(in thousands)
Foreign Exchange Contracts
Other income
$
3,571

 
$
301

 
$
(1,930
)
 
$
10,889



The following table presents the effect of the fair value cash flow hedge accounting on the Statement of Financial Performance as well as presents the location and amount of gain/(loss) recognized in Income on fair value and cash flow hedging relationships:
 
Three Months Ended
 
Six Months Ended
 
December 29, 2019
 
December 29, 2019
 
Revenue
 
Cost of Goods Sold
 
Selling, General and Admini-strative
 
Other Income (Expense)
 
Revenue
 
Cost of Goods Sold
 
Selling, General and Admini-strative
 
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:
 
$
2,583,501

 
$1,403,857
 
$
174,272

 
$
(13,924
)
 
$
4,749,247

 
$
2,587,893

 
$
331,700

 
$
(26,652
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
$

 
$

 
$

 
$
2,342

 
$

 
$

 
$

 
$
(5,092
)
Derivatives designated as hedging instruments
$

 
$

 
$

 
$
(2,342
)
 
$

 
$

 
$

 
$
5,092

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gain or (loss) on cash flow hedging relationships in Subtopic 815-20:
 
 
 
 
 
 
 
 
Foreign exchange contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of loss reclassified from accumulated other comprehensive income into income
$
(172
)
 
$
(1,090
)
 
$
(417
)
 
$

 
$
(506
)
 
$
(1,900
)
 
$
(893
)
 
$

Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of loss reclassified from accumulated other comprehensive income into income
$

 
$

 
$

 
$
(35
)
 
$

 
$

 
$

 
$
(70
)

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.