Note 9: Financial Instruments

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 cash and cash equivalents, short-term investments, restricted cash and investments, long-term investments, accounts receivable, accounts payable, long-term debt and capital leases, and foreign currency related derivatives. The estimated fair value of cash and cash equivalents, accounts receivable and accounts payable approximates their carrying value due to the short period of time to their maturities. The estimated fair values of capital 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 14 to the Consolidated Financial Statements for additional information regarding the fair value of the Company’s Convertible Notes and Senior Notes.

Investments

The following table sets forth the Company’s cash, cash equivalents, short-term investments, restricted cash and investments, and other assets measured at fair value on a recurring basis as of June 28, 2015 and June 29, 2014:


	June 28, 2015
										(Reported Within)
	Cost		Unrealized Gain		Unrealized (Loss)			Fair Value		Cash and Cash Equivalents		Short-Term Investments		Restricted Cash & Investments		Other Assets
	(in thousands)
Cash	$	276,663	$	—	$	—		$	276,663	$	271,452	$	—	$	5,211	$	—
Level 1:
Time Deposit		177,567		—		—			177,567		44,738		—		132,829		—
Money Market Funds		1,177,875		—		—			1,177,875		1,177,875		—		—		—
US Treasury and Agencies		349,009		72		(861	)		348,220		—		315,291		32,929		—
Mutual Funds		30,584		2,926		(47	)		33,463		—		—		—		33,463

Level 1 Total	$	1,735,035	$	2,998	$	(908	)	$	1,737,125	$	1,222,613	$	315,291	$	165,758	$	33,463

Level 2:
Municipal Notes and Bonds		659,550		429		(335	)		659,644		7,474		652,170		—		—
US Treasuries and Agencies		4,007		—		(4	)		4,003		—		4,003		—		—
Government-Sponsored Enterprises		53,612		2		(249	)		53,365		—		53,365		—		—
Foreign Government Bonds		50,336		31		(161	)		50,206		—		50,206		—		—
Corporate Notes and Bonds		1,329,587		685		(3,797	)		1,326,475		—		1,326,475		—		—
Mortgage Backed Securities - Residential		32,231		72		(292	)		32,011		—		32,011		—		—
Mortgage Backed Securities - Commercial		141,988		44		(606	)		141,426		—		141,426		—		—

Level 2 Total	$	2,271,311	$	1,263	$	(5,444	)	$	2,267,130	$	7,474	$	2,259,656	$	—	$	—

Total	$	4,283,009	$	4,261	$	(6,352	)	$	4,280,918	$	1,501,539	$	2,574,947	$	170,969	$	33,463


	June 29, 2014
										(Reported Within)
	Cost		Unrealized Gain		Unrealized (Loss)			Fair Value		Cash and Cash Equivalents		Short-Term Investments		Restricted Cash & Investments		Other Assets
	(in thousands)
Cash	$	285,031	$	—	$	—		$	285,031	$	279,126	$	—	$	5,905	$	—
Level 1:
Time Deposit		132,549		—		—			132,549		—		—		132,549		—
Money Market Funds		1,168,261		—		—			1,168,261		1,168,261		—		—		—
US Treasury and Agencies		212,436		178		(27	)		212,587		—		204,549		8,038		—
Mutual Funds		18,784		2,974		—			21,758		—		—		—		21,758

Level 1 Total	$	1,532,030	$	3,152	$	(27	)	$	1,535,155	$	1,168,261	$	204,549	$	140,587	$	21,758

Level 2:
Municipal Notes and Bonds		334,329		1,108		(4	)		335,433		5,290		330,143		—		—
Government-Sponsored Enterprises		27,666		41		(15	)		27,692		—		27,692		—		—
Foreign Government Bonds		35,438		57		(28	)		35,467		—		35,467		—		—
Corporate Notes and Bonds		874,540		2,034		(335	)		876,239		—		876,239		—		—
Mortgage Backed Securities - Residential		27,067		59		(182	)		26,944		—		26,944		—		—
Mortgage Backed Securities - Commercial		112,642		100		(809	)		111,933		—		111,933		—		—

Level 2 Total	$	1,411,682	$	3,399	$	(1,373	)	$	1,413,708	$	5,290	$	1,408,418	$	—	$	—

Total	$	3,228,743	$	6,551	$	(1,400	)	$	3,233,894	$	1,452,677	$	1,612,967	$	146,492	$	21,758

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. Net realized gains (losses) on investments included other-than-temporary impairment charges of $3.7 million in fiscal year 2013. There were no other-than-temporary impairment charges in fiscal year 2015 or 2014. Additionally, gross realized gains/(losses) from sales of investments were $2.8 million and $(2.1) million in fiscal year 2015, $1.5 million and $(2.0) million in fiscal year 2014, and $1.6 million and $(1.5) million in fiscal year 2013, respectively.

The following is an analysis of the Company’s cash, cash equivalents, short-term investments, and restricted cash and investments in unrealized loss positions:


	June 28, 2015
	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)
Municipal Notes and Bonds	$	272,388	$	(335	)	$	—	$	—		$	272,388	$	(335	)
US Treasury & Agencies		296,237		(865	)		—		—			296,237		(865	)
Retail Funds		3,532		(47	)		—		—			3,532		(47	)
Government-Sponsored Enterprises		49,184		(249	)		—		—			49,184		(249	)
Foreign Government Bonds		34,882		(161	)		—		—			34,882		(161	)
Corporate Notes and Bonds		889,064		(3,750	)		16,586		(47	)		905,650		(3,797	)
Mortgage Backed Securities - Residential		20,913		(196	)		2,190		(96	)		23,103		(292	)
Mortgage Backed Securities - Commercial		100,388		(431	)		19,729		(175	)		120,117		(606	)

	$	1,666,588	$	(6,034	)	$	38,505	$	(318	)	$	1,705,093	$	(6,352	)

The amortized cost and fair value of cash equivalents, short-term investments, and restricted cash and investments with contractual maturities are as follows:


	Cost		Estimated Fair Value
	(in thousands)
Due in one year or less	$	1,651,592	$	1,651,673
Due after one year through five years		1,944,674		1,940,529
Due in more than five years		379,496		378,590

	$	3,975,762	$	3,970,792

Management has the ability, if necessary, to liquidate any of its cash equivalents and short-term investments in order to meet the Company’s liquidity needs in the next 12 months. Accordingly, those investments with contractual maturities greater than one year from the date of purchase nonetheless are classified as short-term on the accompanying Consolidated Balance Sheets.

Derivative Instruments and Hedging

The Company carries derivative financial instruments (“derivatives”) on its Consolidated Balance Sheets at their fair values. The Company enters into foreign currency forward contracts with financial institutions with the primary objective of reducing volatility of earnings and cash flows related to foreign currency exchange rate fluctuations. The counterparties to these foreign currency forward contracts 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-US 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 foreign currency forward contracts that generally expire within twelve months and no later than 24 months. These foreign currency forward 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, during the twelve months ended June 28, 2015, the Company entered into and settled a series of forward-starting interest rate swap agreements, with a total notional value of $375 million, to hedge against the variability of cash flows due to changes in the benchmark interest rate of fixed rate debt. These instruments were designated as cash flow hedges at inception and were settled in conjunction with the issuance of debt during the three months ended March 29, 2015. The effective portion of the contracts’ loss is included in accumulated other comprehensive (loss) and will amortize into income as the hedged item impacts earnings.

At inception and at each quarter end, hedges are tested prospectively and retrospectively for effectiveness using regression analysis. Changes in the fair value of the forward contracts due to changes in time value are excluded from the assessment of effectiveness and are recognized in revenue or expense in the current period. The change in time value related to these contracts was not material for all reported periods. To qualify for hedge accounting, the hedge relationship must meet criteria relating both to 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 twelve months ended June 28, 2015 or June 29, 2014 associated with ineffectiveness or 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, with the exception of excluded time value and hedge ineffectiveness recognized, 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 June 28, 2015, the Company had losses of $2.9 million accumulated in other comprehensive income, net of tax, including, $0.2 million gains related to foreign exchange which it expects to reclassify from other comprehensive income into earnings over the next 12 months and $3.1 million losses related to interest rate contracts which it expects to reclassify from other comprehensive income into earnings over the next 9.7 years.

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 third party accounts receivables, accounts payables and intercompany receivables and payables. These foreign currency 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 June 28, 2015, the Company had the following outstanding foreign currency forward contracts that were entered into under its cash flow and balance sheet hedge program:


	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	$	—	$	18,946	$	—	$	49,924
Swiss franc		—		—		—		3,346
Euro		34,377		—		4,049		—
Korean won		7,269		—		8,945		—
Taiwan dollar		—		—		33,239		11,162

	$	41,646	$	18,946	$	46,233	$	64,432

The fair value of derivatives instruments in the Company’s consolidated balance sheet as of June 28, 2015 and June 29, 2014 were as follows:

June 28, 2015

June 29, 2014

Fair Value of Derivative Instruments (Level 2)

Asset Derivatives

Liability
Derivatives

Asset Derivatives

Liability
Derivatives

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 forward contracts

Prepaid expense
and other assets

3,388

Accrued
liabilities

957

Prepaid expense
and other assets

483

Accrued
liabilities

805

Derivatives not designated as hedging instruments:

Foreign exchange forward contracts

Prepaid expense
and other assets

Accrued
liabilities

960

Prepaid expense
and other assets

1,109

Accrued
liabilities

118

Total derivatives

3,396

1,917

1,592

923

Under the master agreements with the respective counterparties to the Company’s foreign exchange 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 in the Company’s balance sheet. As of June 28, 2015, the potential effect of rights of set-off associated with the above foreign exchange contracts would be an offset to both assets and liabilities by $1.9 million, resulting in a net derivative asset of $1.5 million. As of June 29, 2014, the potential effect of rights of set-off associated with the above foreign exchange contracts would be an offset to both assets and liabilities by $0.5 million, resulting in a net derivative asset of $1.1 million. The Company is not required to pledge, nor is the Company entitled to receive, cash collateral related to these derivative transactions.

The effect of derivative instruments designated as cash flow hedges, before tax, on the Company’s Consolidated Statements of Operations was as follows:


		Year Ended June 28, 2015									Year Ended June 29, 2014
	Location of Gain (Loss) Recognized in or Reclassified into Income	Effective Portion						Ineffective Portion and Amount Excluded from Effectiveness			Effective Portion				Ineffective Portion and Amount Excluded from Effectiveness
Derivatives Designated as Hedging Instruments		Gain (Loss) Reconginzed in AOCI			Gain (Loss) Reclassified from AOCI into Income			Gain (Loss) Recognized in Income			Gain Recognized in AOCI		Gain Reclassified from AOCI into Income		Gain (Loss) Recognized in Income
		(in thousands)									(in thousands)
Foreign Exchange Contracts	Revenue	$	13,678		$	11,375		$	258		$	7,939	$	9,027	$	277
Foreign Exchange Contracts	Cost of goods sold		(6,318	)		(4,349	)		(75	)		812		2,393		(52	)
Foreign Exchange Contracts	Selling, general, and administrative		(2,579	)		(2,618	)		(39	)		318		1,087		(23	)
Interest Rate Contracts	Other expense, net		(5,071	)		(112	)		(231	)		—		—		—

		$	(290	)	$	4,296		$	(87	)	$	9,069	$	12,507	$	202

The effect of derivative instruments not designated as cash flow hedges on the Company’s Consolidated Statement of Operations was as follows:


		Year Ended
		June 28, 2015		June 29, 2014
Derivatives Not Designated as Hedging Instruments:	Location of Gain Recognized in Income	Gain Recognized in Income		Gain Recognized in Income
		(in thousands)
Foreign Exchange Contracts	Other income	$	1,784	$	8,205

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, short term investments, restricted cash and investments, trade accounts receivable, and derivative financial instruments used in hedging activities. Cash is placed on deposit in 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 over-all portfolio of available-for-sale securities must maintain an average minimum rating of “AA-” or “Aa3” as rated by Standard and Poor’s or Moody’s Investor Services, respectively. 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 the foreign currency forward contracts that are used to mitigate the effect of exchange rate fluctuations and on contracts related to structured share repurchase agreements. 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, ae performed on all new customers and the Company monitors its customers’ financial statements and payment performance. In general, the Company does not require collateral on sales.

As of June 28, 2015, four customers accounted for approximately 17%, 13%, 12%, and 11% of accounts receivable. As of June 29, 2014, four customers accounted for approximately 15%, 13%, 12%, and 12% of accounts receivable. No other customers accounted for more than 10% of accounts receivable.