FINANCIAL INSTRUMENTS

Short-term investments

Fair values were as follows:



	September 29, 2012								June 30, 2012
	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss		Estimated Fair Value		Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss		Estimated Fair Value
	(in thousands)
Available-for-sale investments
Government agency securities	$	75,021	$	262	$	—	$	75,283	$	75,007	$	319	$	—	$	75,326
Total available-for-sale investments	$	75,021	$	262	$	—	$	75,283	$	75,007	$	319	$	—	$	75,326

In the three months ended September 29, 2012 and the year ended June 30, 2012, Maxim Integrated did not recognize any impairment charges on short-term investments.

The government agency securities have maturity dates between February 26, 2013 and December 18, 2013.

Derivative instruments and hedging activities

Foreign Currency Risk

The Company generates revenues in various global markets based on orders obtained in non-U.S. currencies, primarily the Japanese Yen, the Euro and the British Pound. Maxim Integrated incurs expenditures denominated in non-U.S. currencies, principally the Philippine Peso and Thai Baht associated with the Company's manufacturing activities in the Philippines and Thailand, respectively, and expenditures for sales offices and research and development activities undertaken outside of the U.S. Maxim Integrated is exposed to fluctuations in foreign currency exchange rates primarily on orders and accounts receivable from sales in these foreign currencies and cash flows for expenditures in these foreign currencies. Maxim Integrated has established risk management strategies designed to reduce the impact of volatility of future cash flows caused by changes in the exchange rate for these currencies. These strategies reduce, but do not entirely eliminate, the impact of currency exchange rates movements. Maxim Integrated does not use derivative financial instruments for speculative or trading purposes. The Company routinely hedges its exposures to certain foreign currencies with various financial institutions in an effort to minimize the impact of certain currency exchange rate fluctuations. If a financial counterparty to any of the Company's hedging arrangements experiences financial difficulties or is otherwise unable to honor the terms of the foreign currency hedge, the Company may experience financial losses.

For derivative instruments that are designated and qualify as cash flow hedges under Accounting Standards Codification ("ASC") No. 815-Derivatives and Hedging, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive loss and reclassified into earnings into the same financial statement line as the item being hedged, and in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in interest and other income (expense), net.

For derivative instruments that are not designated as hedging instruments under ASC No. 815, gains and losses are recognized in interest and other income (expense), net. All derivatives are foreign currency forward contracts to hedge certain foreign currency denominated assets or liabilities. The gains and losses on these derivatives largely offset the changes in the fair value of the assets or liabilities being hedged.

Fair Value of Derivative Instruments in the Condensed Consolidated Balance Sheets

Maxim Integrated estimates the fair value of derivatives primarily based on pricing models using current market rates and records all derivatives on the balance sheet at fair value. The gross notional and the recorded fair value of derivative financial instruments in the Condensed Consolidated Balance Sheets were as follows:



	As of September 29, 2012						As of June 30, 2012
	Gross Notional(1)		Other Current Assets		Accrued Expenses		Gross Notional (1)		Other Current Assets		Accrued Expenses
	(in thousands)
Derivatives designated as hedging instruments
Cash flow hedges:
Foreign exchange contracts	$	59,107	$	751	$	140	$	37,955	$	150	$	459

Derivatives not designated as hedging instruments
Foreign exchange contracts	56,069		256		133		35,105		492		48
Total derivatives	$	115,176	$	1,007	$	273	$	73,060	$	642	$	507

(1) Represents the face amounts of contracts that were outstanding as of September 29, 2012 and June 30, 2012, as applicable.

Derivatives designated as hedging instruments

The following table provides the balances and changes in the accumulated other comprehensive loss (income) related to derivative instruments during the three months ended September 29, 2012 and the year ended June 30, 2012.



	September 29, 2012			June 30, 2012
	(in thousands)
Beginning balance	$	309		$	(234	)
Gain (loss) reclassified to income	6			653
Loss (gain) recorded in other comprehensive loss	(926		)	(110		)
Ending balance	$	(611	)	$	309

Maxim Integrated expects to reclassify an estimated net accumulated other comprehensive gain of $0.4 million, net of taxes, to earnings in the next twelve months along with the earnings effects of the related forecasted transactions in association with cash flow hedges.

The before-tax effect of cash flow derivative instruments for the three months ended September 29, 2012 and September 24, 2011 was as follows:



	Loss (Gain) Reclassified from Accumulated OCI into Income (Effective portion)
		Three Months Ended
	Location	September 29, 2012			September 24, 2011
		(in thousands)
Cash Flow hedges:
Foreign exchange contracts	Net revenues	$	25		$	(243	)
Foreign exchange contracts	Cost of goods sold	252			195
Foreign exchange contracts	Operating expenses	(283		)	—
Total cash flow hedges		$	(6	)	$	(48	)

The before-tax effect of derivative instruments not designated as hedging instruments on the Condensed Consolidated Statements of Income for the three months ended September 29, 2012 and September 24, 2011 was as follows:



	Gain (Loss) Recognized in Income on Derivative Instrument
		Three Months Ended
	Location	September 29, 2012			September 24, 2011
		(in thousands)
Foreign exchange contracts	Interest and other expense, net	$	(1,696	)	$	529
Total		$	(1,696	)	$	529

Volume of Derivative Activity

Total net U.S. Dollar notional amounts for foreign currency forward contracts, presented by net currency purchase (sell), are as follows:



In United States Dollars	September 29, 2012			June 30, 2012
	(in thousands)
Euro	$	(19,550	)	$	(10,686	)
Japanese Yen	(4,917		)	(2,254		)
British Pound	(2,497		)	(575		)
Philippine Peso	22,472			15,443
Thai Baht	5,091			4,264
Total	$	599		$	6,192

Long-term debt

The following table summarizes the Company's long-term debt:



	September 29, 2012			June 30, 2012
	(in thousands)
3.45% fixed rate notes due June 2013	$	300,000		$	300,000
SensorDynamics Debt (Denominated in Euro)
Term fixed rate notes (2.0%-2.5%) due March 2013 to September 2015	6,285			6,285
Amortizing fixed rate notes (1.5%-2.75%) due up to June 2014	903			1,127
Amortizing floating rate notes (EURIBOR plus 1.5%) due up to June 2014	1,676			1,676
Total	308,864			309,088
Less: Current portion	(303,272		)	(303,496		)
Total long-term debt	$	5,592		$	5,592

On June 17, 2010, the Company completed a public offering of $300 million aggregate principal amount of the Company's 3.45% senior unsecured notes due on June 14, 2013 ("$300 million notes"), with an effective interest rate of 3.49%. Interest is payable semi-annually in arrears on June 14 and December 14 of each year. The $300 million notes are governed by base and supplemental indentures dated June 10, 2010 and June 17, 2010, respectively, between the Company and Wells Fargo Bank, National Association, as trustee.

In conjunction with the SensorDynamics acquisition as discussed in Note 13: "Acquisitions" of these Notes to Condensed Consolidated Financial Statements, Maxim Integrated acquired certain fixed and floating rate notes as detailed in the table above.

The Company accounts for all the notes above based on their amortized cost. The discount and expenses are being amortized to Interest and other income (expense), net over the life of the notes. Interest expense associated with the notes was $2.9 million and $2.8 million during the three months ended September 29, 2012 and September 24, 2011, respectively. The interest expense is recorded in Interest and other income (expense), net in the Condensed Consolidated Statements of Income.

The estimated fair value of Maxim Integrated's debt was approximately $315 million at September 29, 2012. The estimated fair value of the debt is based primarily on quoted market prices.

As of September 29, 2012, the Company had the capacity to issue an unspecified amount of additional debt securities, common stock, preferred stock, warrants, rights and units under its 2010 Shelf Registration Statement.

Credit Facility

On October 13, 2011, the Company entered into a $250 million senior unsecured revolving credit facility with certain institutional lenders that expires on October 13, 2016. The Company agreed to pay the lenders a facility fee at a rate per annum that varies based on the Company's debt rating. Any advances under the credit agreement will accrue interest at a base rate plus a margin based on the Company's debt rating. The credit agreement requires the Company to comply with certain covenants, including a requirement that the Company maintain a ratio of debt to EBITDA (earnings before interest, taxes, depreciation, and amortization) of not more than 3 to 1 and a minimum interest coverage ratio (EBITDA divided by interest expense) greater than 3.5 to 1. As of September 29, 2012, the Company had not borrowed any amounts under this credit facility.

Other Financial Instruments

For the balance of Maxim Integrated's financial instruments, cash equivalents, accounts receivable, accounts payable and other accrued liabilities, the carrying amounts approximate fair value due to their short maturities.