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Investments, Forward Contracts and Fair Value Measurements

6 Months Ended

Dec. 28, 2019

Investments, Forward Contracts and Fair Value Measurements

Note 8. Investments, Forward Contracts and Fair Value Measurements

Available-For-Sale Investments

The following table presents the Company’s available-for-sale securities as of December 28, 2019 (in millions):



	Amortized Cost/ Carrying Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-sale debt securities:
Asset-backed securities	$	0.9	$	—	$	(0.4	)	$	0.5
Total available-for-sale debt securities	$	0.9	$	—	$	(0.4	)	$	0.5

The Company generally classifies debt securities as available-for-sale and as cash equivalents, short-term investments or other non-current assets based on the stated maturities; however, certain securities with stated maturities of longer than twelve months which are highly liquid and available to support current operations are also classified as short-term investments. As of December 28, 2019, the total estimated fair value of $0.5 million was classified as other non-current assets.

In addition to the amounts presented above, the Company’s short-term investments classified as trading securities related to the deferred compensation plan as of December 28, 2019, were $1.6 million, of which $0.5 million was invested in debt securities, $0.3 million was invested in money market instruments and funds and $0.8 million was invested in equity securities. Trading securities are reported at fair value, with the unrealized gains or losses resulting from changes in fair value recognized in the Company’s Consolidated Statements of Operations as a component of interest and other income, net.

During the three and six months ended December 28, 2019 and December 29, 2018, the Company recorded no other-than-temporary impairment charges in each respective period.

The following table presents contractual maturities of the Company’s debt securities classified as available-for-sale as of December 28, 2019, (in millions):



	Amortized Cost/ Carrying Cost		Estimated Fair Value
Amounts maturing in more than 5 years	$	0.9	$	0.5
Total debt available-for-sale securities	$	0.9	$	0.5

The following table presents the Company’s available-for-sale securities as of June 29, 2019, (in millions):



	Amortized Cost/ Carrying Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-sale securities:
Asset-backed securities	$	0.9	$	—	$	(0.3	)	$	0.6
Total available-for-sale securities	$	0.9	$	—	$	(0.3	)	$	0.6

As of June 29, 2019, of the estimated fair value of $0.6 million was classified as other non-current assets.

In addition to the amounts presented above, as of June 29, 2019, the Company’s short-term investments classified as trading securities, related to the deferred compensation plan, were $1.5 million, of which $0.4 million was invested in debt securities, $0.3 million was invested in money market instruments and funds and $0.8 million was invested in equity securities. Trading securities are reported at fair value, with the unrealized gains or losses resulting from changes in fair value recognized in the Company’s Consolidated Statements of Operations as a component of interest and other income, net.

Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. There is an established hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring the most observable inputs be used when available. Observable inputs are, inputs which market participants would use in valuing an asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs, which reflect the assumptions market participants would use in valuing an asset or liability.

The Company’s cash and investment instruments are classified within Level 1 or Level 2 of the fair value hierarchy based on quoted prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.


•	Level 1: includes financial instruments for which quoted market prices for identical instruments are available in active markets. Level 1 assets of the Company include money market funds, U.S. Treasury securities and marketable equity securities as they are traded with sufficient volume and frequency of transactions.

•

Level 2: includes financial instruments for which the valuations are based on 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 data for substantially the full term of the assets or liabilities. Level 2 instruments of the Company generally include certain U.S. and foreign government and agency securities, commercial paper, corporate and municipal bonds and notes, asset-backed securities, certificates of deposit, and foreign currency forward contracts. To estimate their fair value, the Company utilizes pricing models based on market data. The significant inputs for the valuation model usually include benchmark yields, reported trades, broker and dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data, and industry and economic events.


•	Level 3: includes financial instruments for which fair value is derived from valuation-based inputs, that are unobservable and significant to the overall fair value measurement. As of December 28, 2019 and June 29, 2019, the Company did not hold any Level 3 investment securities. The fair value of the Company’s contingent liability was determined using Level 3 inputs, as discussed below.

Fair Value Measurements

The following table presents assets and liabilities measured at fair value as of December 28, 2019 and June 29, 2019, (in millions):



	December 28, 2019								June 29, 2019
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Assets:
Debt available-for-sale securities
Asset-backed securities	$	0.5	$	—	$	0.5	$	—	$	0.6	$	—	$	0.6	$	—
Total debt available-for-sale securities	0.5		—		0.5		—		0.6		—		0.6		—
Money market funds	349.3		349.3		—		—		322.9		322.9		—		—
Trading securities	1.6		1.6		—		—		1.5		1.5		—		—
Foreign currency forward contract ⁽¹⁾	5.9		—		5.9		—		1.2		—		1.2		—
Total assets ⁽²⁾	$	357.3	$	350.9	$	6.4	$	—	$	326.2	$	324.4	$	1.8	$	—

Liability:
Foreign currency forward contract ⁽³⁾	$	1.1	$	—	$	1.1	$	—	$	4.0	$	—	$	4.0	$	—
Contingent consideration ⁽⁴⁾	34.1		—		—		34.1		38.4		—		—		38.4
Total liabilities	$	35.2	$	—	$	1.1	$	34.1	$	42.4	$	—	$	4.0	$	38.4


⁽¹⁾	$5.9 million and $1.2 million in prepayments and other current assets on the Company’s Consolidated Balance Sheets as of December 28, 2019 and June 29, 2019, respectively.

⁽²⁾

$341.9 million in cash and cash equivalents, $1.6 million in short-term investments, $3.4 million in restricted cash, $5.9 million in prepayments and other current assets, and $4.5 million in other non-current assets on the Company’s Consolidated Balance Sheets as of December 28, 2019. $315.5 million in cash and cash equivalents, $1.5 million in short-term investments, $3.5 million in restricted cash, $1.2 million in other current assets, and $4.5 million in other non-current assets on the Company’s Consolidated Balance Sheets as of June 29, 2019.


⁽³⁾	$1.1 million and $4.0 million in other current liabilities on the Company’s Consolidated Balance Sheets as of December 28, 2019 and June 29, 2019, respectively.


⁽⁴⁾	$0.8 million and $0.7 million in other current liabilities on the Company’s Consolidated Balance Sheets as of December 28, 2019 and June 29, 2019, respectively. $33.3 million and $37.7 million in other non-current liabilities on the Company’s Consolidated Balance Sheets as of December 28, 2019 and June 29, 2019, respectively.

The Company’s Level 3 liabilities as of December 28, 2019, consist of contingent purchase consideration. The Company has aggregate contingent liabilities related to its acquisitions. The earn-out liabilities represent future payments by the Company of up to $63.0 million over three years, that are contingent on the achievement of certain revenue and gross profit targets. As of December 28, 2019, the aggregate fair value of our contingent consideration was $34.1 million. The fair value of earn-out liabilities were determined using a Monte Carlo Simulation that includes significant unobservable inputs such as the risk-free rate, risk-adjusted discount rate, the volatility of the underlying financial metrics and projected financial forecast of the acquired business over the earn-out period. The fair value of contingent consideration liabilities is remeasured at each reporting period at the estimated fair value based on the input on the date of remeasurement, with the change in fair value recognized in Selling, General and Administrative expense of the Consolidated Statements of Operations.

The following table provides a reconciliation of changes in fair value of the Company’s Level 3 liabilities for the three and six months ended December 28, 2019 (in millions):



	Three Months Ended					Six Months Ended
	December 28, 2019			December 29, 2018		December 28, 2019			December 29, 2018
Beginning period balance	$	40.1		$	—	$	38.4		$	—
Additions: To Level 3 contingent consideration liabilities	—			36.2		—			36.2
Fair value adjustment of contingent consideration liabilities	(6.0		)	—		(4.3		)	—
Ending period balance	$	34.1		$	36.2	$	34.1		$	36.2

No payments were made in connection with the Company’s contingent earn-out liabilities during the three and six months ended December 28, 2019 and December 29, 2018.

Non-Designated Foreign Currency Forward Contracts

The Company has foreign subsidiaries that operate and sell the Company’s products in various markets around the world. As a result, the Company is exposed to foreign exchange risks. The Company utilizes foreign exchange forward contracts to manage foreign currency risk associated with foreign currency denominated monetary assets and liabilities, primarily certain short-term intercompany receivables and payables, and to reduce the volatility of earnings and cash flows related to foreign-currency transactions. The Company does not use these foreign currency forward contracts for trading purposes.

As of December 28, 2019, the Company had forward contracts that were effectively closed but not settled with the counterparties by quarter end. Therefore, the fair value of these contracts of $5.9 million and $1.1 million is reflected as prepayments and other current assets and other current liabilities, respectively. As of June 29, 2019, the fair value of these contracts of $1.2 million and $4.0 million is reflected as prepayments and other current assets and other current liabilities, respectively.

The forward contracts outstanding and not effectively closed, with a term of less than 120 days, were transacted near quarter end; therefore, the fair value of the contracts is not significant. As of December 28, 2019 and June 29, 2019, the notional amounts of the forward contracts the Company held to purchase foreign currencies were $124.7 million and $117.8 million, respectively, and the notional amounts of forward contracts the Company held to sell foreign currencies were $36.6 million and $31.3 million, respectively.

The change in the fair value of foreign currency forward contracts is recorded as gain or loss in the Company’s Consolidated Statements of Operations as a component of interest and other income, net. The cash flows related to the settlement of foreign currency forward contracts are classified as operating activities. The foreign exchange forward contracts incurred a gain of $4.8 million and $2.2 million for the three and six months ended December 28, 2019, respectively. The foreign exchange forward contracts incurred a loss of $4.5 million and $5.8 million for the three and six months ended December 29, 2018, respectively.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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