Fair Value Measurements and Derivative Instruments

We measure certain financial assets and liabilities at fair value on a recurring basis. Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. An entity is required to classify certain assets and liabilities measured at fair value based on the following fair value hierarchy that prioritizes the inputs used to measure fair value:


Level 1 –	Unadjusted quoted prices in active markets for identical assets and liabilities.


Level 2 –	Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or other inputs that are observable or can be corroborated by observable market data.


Level 3 –	Unobservable inputs that are supported by little or no market activity and may be derived from internally developed methodologies based on management's best estimates.

Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect their placement within the fair value hierarchy. The following tables show, by level within the fair value hierarchy, our financial assets and liabilities that are accounted for at fair value on a recurring basis at December 31, 2017 and 2016.



	December 31, 2017
	Level 1		Level 2			Level 3		Total
Assets:
Investment securities
Money market funds / commercial paper	$	143,349	$	542,568		$	—	$	685,917
Equity securities	—		40,717			—		40,717
Commingled fixed income securities	1,569		4,516			—		6,085
Government and related securities	116,041		18,587			—		134,628
Corporate debt securities	—		75,109			—		75,109
Mortgage-backed / asset-backed securities	—		158,202			—		158,202
Derivatives
Interest rate swap	—		1,776			—		1,776
Foreign exchange contracts	—		122			—		122
Total assets	$	260,959	$	841,597		$	—	$	1,102,556
Liabilities:
Derivatives
Foreign exchange contracts	$	—	$	(335	)	$	—	$	(335	)
Total liabilities	$	—	$	(335	)	$	—	$	(335	)



	December 31, 2016
	Level 1		Level 2			Level 3		Total
Assets:
Investment securities
Money market funds / commercial paper	$	114,471	$	217,175		$	—	$	331,646
Equity securities	—		24,571			—		24,571
Commingled fixed income securities	1,536		22,132			—		23,668
Government and related securities	116,822		19,358			—		136,180
Corporate debt securities	—		69,891			—		69,891
Mortgage-backed / asset-backed securities	—		158,996			—		158,996
Derivatives
Interest rate swap	—		1,588			—		1,588
Foreign exchange contracts	—		637			—		637
Total assets	$	232,829	$	514,348		$	—	$	747,177
Liabilities:
Derivatives
Foreign exchange contracts	$	—	$	(3,717	)	$	—	$	(3,717	)
Total liabilities	$	—	$	(3,717	)	$	—	$	(3,717	)

Investment Securities

The valuation of investment securities is based on the market approach using inputs that are observable, or can be corroborated by observable data, in an active marketplace. The following information relates to our classification into the fair value hierarchy:

•

Money Market Funds / Commercial Paper: Money market funds typically invest in government securities, certificates of deposit, commercial paper and other highly liquid, low risk securities. Money market funds are principally used for overnight deposits and are classified as Level 1 when unadjusted quoted prices in active markets are available and as Level 2 when they are not actively traded on an exchange. Direct investments in commercial paper are not listed on an exchange in an active market and are classified as Level 2.


•	Equity Securities: comprised of mutual funds investing in U.S. and foreign stocks. These mutual funds are classified as Level 2.

•

Commingled Fixed Income Securities: comprised of mutual funds that invest in a variety of fixed income securities including securities of the U.S. government and its agencies, corporate debt, mortgage-backed securities and asset-backed securities. Fair value is based on the value of the underlying investments owned by each fund, minus its liabilities, divided by the number of shares outstanding, as reported by the fund manager. These mutual funds are classified as Level 2.

•

Government and related securities: Debt securities are classified as Level 1 where active, high volume trades for identical securities exist. Valuation adjustments are not applied to these securities. Debt securities valued using quoted market prices for similar securities or benchmarking model derived prices to quoted market prices and trade data for identical or comparable securities are classified as Level 2.


•	Corporate Debt Securities: Corporate debt securities are valued using recently executed transactions, market price quotations where observable, or bond spreads. The spread data used are for the same maturity as the security. These securities are classified as Level 2.


•	Mortgage-Backed Securities / Asset-Backed Securities: These securities are valued based on external pricing indices. When external index pricing is not observable, these securities are valued based on external price/spread data. These securities are classified as Level 2.

Available-For-Sale Securities

At December 31, 2017 and 2016, available-for-sale securities consisted of the following:



	December 31, 2017
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value
Government and related securities	$	131,872	$	1,984	$	(1,090	)	$	132,766
Corporate debt securities	73,612		1,724		(227		)	75,109
Commingled fixed income securities	1,796		—		(40		)	1,756
Mortgage-backed / asset-backed securities	158,496		1,348		(1,642		)	158,202
Total	$	365,776	$	5,056	$	(2,999	)	$	367,833



	December 31, 2016
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value
Government and related securities	$	136,316	$	1,571	$	(1,707	)	$	136,180
Corporate debt securities	69,376		1,180		(665		)	69,891
Commingled fixed income securities	1,568		—		(32		)	1,536
Mortgage-backed / asset-backed securities	159,312		1,566		(1,882		)	158,996
Total	$	366,572	$	4,317	$	(4,286	)	$	366,603

Investment securities in a loss position for 12 or more continuous months at December 31, 2017 had aggregate unrealized holding losses of $2 million and an estimated fair value of $116 million. Investment securities in a loss position for less than 12 continuous months at December 31, 2017 had aggregate unrealized holding losses of $1 million and an estimated fair value of $91 million. We have not experienced any write-offs in our investment portfolio.

Investment securities in a loss position for 12 or more continuous months at December 31, 2016 had aggregate unrealized holding losses of less than $1 million and an estimated fair value of $12 million. Investment securities in a loss position for less than 12 continuous months at December 31, 2016 had aggregate unrealized holding losses of $4 million and an estimated fair value of $171 million.

We have not recognized an other-than-temporary impairment on any of the investment securities in an unrealized loss position because we do not intend to sell these securities, it is more likely than not that we will not be required to sell these securities before recovery of the unrealized losses and we expect to receive the contractual principal and interest on these investment securities.

At December 31, 2017, scheduled maturities of available-for-sale securities were as follows:



	Amortized cost		Estimated fair value
Within 1 year	$	38,624	$	38,414
After 1 year through 5 years	111,756		111,704
After 5 years through 10 years	68,599		69,154
After 10 years	146,797		148,561
Total	$	365,776	$	367,833

The actual maturities may not coincide with scheduled maturities as certain securities contain early redemption features and/or allow for the prepayment of obligations with or without penalty.

Derivative Instruments

In the normal course of business, we are exposed to the impact of changes in foreign currency exchange rates and interest rates. We limit these risks by following established risk management policies and procedures, including the use of derivatives. We use derivative instruments to limit the effects of exchange rate fluctuations on financial results and manage the related cost of debt. We do not use derivatives for trading or speculative purposes. We record derivative instruments at fair value and the accounting for changes in the fair value depends on the intended use of the derivative, the resulting designation and the effectiveness of the instrument in offsetting the risk exposure it is designed to hedge.

Foreign Exchange Contracts

We enter into foreign exchange contracts to mitigate the currency risk associated with anticipated inventory purchases between affiliates and from third parties. These contracts are designated as cash flow hedges. The effective portion of the gain or loss on cash flow hedges is included in accumulated other comprehensive income (AOCI) in the period that the change in fair value occurs and is reclassified to earnings in the period that the hedged item is recorded in earnings. At December 31, 2017 and 2016, outstanding contracts associated with these anticipated transactions had a notional amount of $10 million and $13 million, respectively. The valuation of foreign exchange derivatives is based on a market approach using observable market inputs, such as foreign currency spot and forward rates and yield curves.

Interest Rate Swaps

We have an interest rate swap with a notional amount of $300 million to mitigate the interest rate risk associated with our $300 million variable-rate term loan. The swap is designated as a cash flow hedge. The effective portion of the gain or loss on the cash flow hedge is included in AOCI in the period that the change in fair value occurs and is reclassified to earnings in the period that the hedged item is recorded in earnings. Under the terms of the swap agreement, we pay fixed-rate interest of 0.8826% and receive variable-rate interest based on one-month LIBOR. The variable interest rate resets monthly. The valuation of our interest rate swap is based on an income approach using inputs that are observable or that can be derived from, or corroborated by, observable market data.

The fair value of our derivative instruments at December 31, 2017 and 2016 was as follows:



		December 31,
Designation of Derivatives	Balance Sheet Location	2017			2016
Derivatives designated as hedging instruments
Foreign exchange contracts	Other current assets and prepayments	$	57		$	487
	Accounts payable and accrued liabilities	(144		)	(136		)

Interest rate swap	Other non-current assets	1,776			1,588

Derivatives not designated as hedging instruments
Foreign exchange contracts	Other current assets and prepayments	65			150
	Accounts payable and accrued liabilities	(191		)	(3,581		)

	Total derivative assets	1,898			2,225
	Total derivative liabilities	(335		)	(3,717		)
	Total net derivative liability	$	1,563		$	(1,492	)

The amounts included in AOCI at December 31, 2017 will be recognized in earnings within the next 12 months. No amount of ineffectiveness was recorded in earnings for these designated cash flow hedges.

The following represents the results of cash flow hedging relationships for the years ended December 31, 2017 and 2016:



	Years Ended December 31,
	Derivative Gain (Loss) Recognized in AOCI (Effective Portion)					Location of Gain (Loss) (Effective Portion)	Gain (Loss) Reclassified from AOCI to Earnings (Effective Portion)
Derivative Instrument	2017			2016		Location of Gain (Loss) (Effective Portion)	2017			2016
Foreign exchange contracts	$	(650	)	$	496	Revenue	$	(179	)	$	(68	)
						Cost of sales	(32		)	222
Interest rate swap	$	1,776		$	1,588	Interest Expense	—			—
							$	(211	)	$	154

We also enter into foreign exchange contracts to minimize the impact of exchange rate fluctuations on short-term intercompany loans and related interest that are denominated in a foreign currency. The revaluation of the intercompany loans and interest and the mark-to-market adjustment on the derivatives are both recorded in earnings. All outstanding contracts at December 31, 2017 mature over the next three months.

The following represents the results of our non-designated derivative instruments for the years ended December 31, 2017 and 2016:



		Years Ended December 31,
		Derivative Gain (Loss) Recognized in Earnings
Derivatives Instrument	Location of Derivative Gain (Loss)	2017			2016
Foreign exchange contracts	Selling, general and administrative expense	$	(2,203	)	$	(2,382	)

Credit-Risk-Related Contingent Features

Certain derivative instruments contain credit-risk-related contingent features that would require us to post collateral based on a combination of our long-term senior unsecured debt ratings and the net fair value of our derivatives. At December 31, 2017, we were not required to post any collateral.

Fair Value of Financial Instruments

Our financial instruments include cash and cash equivalents, investment securities, accounts receivable, loan receivables, derivative instruments, accounts payable and debt. The carrying value for cash and cash equivalents, accounts receivable, loans receivable, and accounts payable approximate fair value because of the short maturity of these instruments.

The fair value of our debt is estimated based on recently executed transactions and market price quotations. The inputs used to determine the fair value of our debt were classified as Level 2 in the fair value hierarchy. The carrying value and estimated fair value of our debt at December 31, 2017 and 2016 was as follows:



	December 31,
	2017		2016
Carrying value	$	3,830,335	$	3,364,890
Fair value	$	3,718,986	$	3,412,581