Fair Value of Financial Instruments

The Company has determined that the only assets and liabilities in the Company’s financial statements that are required to be measured at fair value on a recurring basis are the Company’s cash equivalents, investment portfolio, pension plan assets / liabilities and contingent consideration. The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).


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


•	Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.


•	Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company’s cash equivalents and investment portfolio assets consist of debt securities, money market funds, and commercial paper and are reflected on our consolidated condensed balance sheets under the headings cash and cash equivalents, marketable securities, and long-term marketable securities. The Company determines the fair value of its investment portfolio assets by obtaining non-binding market prices from its third-party pricing providers on the last day of the quarter, whose sources may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value.

In connection with one of the Company’s second quarter fiscal year 2016 acquisitions, the Company reported contingent consideration based upon achievement of certain milestones. This liability is classified as Level 3 and valued using a discounted cash flow model. The assumptions used in preparing the discounted cash flow include discount rate estimates and cash flow amounts. See additional details below.

Prior to paying off the Company’s long-term revolving facility in the current fiscal quarter, interest was applied at a base rate plus applicable margin or LIBOR plus applicable margin and the fair value of the revolving facility approximated carrying value.

As of June 24, 2017 and March 25, 2017, the Company classified all investment portfolio and pension plan assets and liabilities as Level 1 or Level 2 assets and liabilities. The only Level 3 liability is the contingent consideration described above and below. The Company has no Level 3 assets. There were no transfers between Level 1, Level 2, or Level 3 measurements for the three months ending June 24, 2017.

The following summarizes the fair value of our financial instruments at June 24, 2017, exclusive of pension plan assets and liabilities (in thousands):



	Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3		Total
Assets:
Cash equivalents
Money market funds	$	138,128	$	—	$	—	$	138,128
U.S. treasury securities	1,250		—		—		1,250
	$	139,378	$	—	$	—	$	139,378
Available-for-sale securities
Corporate debt securities	$	—	$	133,462	$	—	$	133,462
Non-US government securities	—		11,809		—		11,809
Certificates of deposit	—		500		—		500
Agency discount notes	—		460		—		460
	$	—	$	146,231	$	—	$	146,231
Liabilities:
Other accrued liabilities
Contingent consideration	$	—	$	—	$	646	$	646

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The following summarizes the fair value of our financial instruments at March 25, 2017, exclusive of pension plan assets and liabilities (in thousands):



	Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3		Total
Assets:
Cash equivalents
Money market funds	$	313,982	$	—	$	—	$	313,982

Available-for-sale securities
Corporate debt securities	$	—	$	33,330	$	—	$	33,330
Commercial paper			66,483		—		66,483
	$	—	$	99,813	$	—	$	99,813
Liabilities:
Other accrued liabilities
Contingent consideration	$	—	$	—	$	4,695	$	4,695

Contingent consideration

The following summarizes the fair value of the liability for contingent consideration at June 24, 2017:



	Maximum Value if Milestones Achieved (in thousands)		Estimated Discount Rate (%)		Fair Value (in thousands)
Tranche B - 30 month earn out period	$	5,000	7.7	%	$	646

The valuation of contingent consideration was initially based on a weighted-average discounted cash flow model. The fair value is reviewed and estimated on a quarterly basis based on the probability of achieving defined milestones and current interest rates. Significant changes in any of the unobservable inputs used in the fair value measurement of contingent consideration could result in a significantly lower or higher fair value. An increase or decrease in the probability of achieving certain milestones within the earn out period would be accompanied by a directionally similar change in the fair value of the recorded liability. A change in discount rate would be accompanied by a directionally opposite change in fair value. Changes in the fair value of the recorded liability are reported in research and development expense in the consolidated condensed statements of income. In the current fiscal year, changes in the probability of achieving certain milestones associated with Tranche B of the earn out were determined following a review of product shipment forecasts within the earn out period. The revised estimates reduced the fair value of the liability as of June 24, 2017 as shown in the table below.

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	Three Months Ended
	June 24,
	2017
	(in thousands)
Beginning balance	$	4,695
Adjustment to estimates (research and development expense)	(4,049		)
Fair value charge recognized in earnings (research and development expense)	—
Ending balance	$	646