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Fair Value of Financial Instruments | 9 Months Ended
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Oct. 03, 2015
Fair Value of Financial Instruments |
Fair Value of Financial Instruments | 5. Fair Value of Financial Instruments The fair values of the Company’s financial instruments are recorded using a hierarchal disclosure framework based upon the level of subjectivity of the inputs used in measuring assets and liabilities. The three levels are described below: Level 1 - Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. Level 2 - Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 - Inputs are unobservable for the asset or liability and are developed based on the best information available in the circumstances, which might include the Company’s own data. The following summarizes the valuation of the Company’s financial instruments (in thousands). The tables do not include either cash on hand or assets and liabilities that are measured at historical cost or any basis other than fair value.
|  | Fair Value Measurements at October 3, 2015 Using |  |  |
Description |  | 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 |  | $ | 63,316 |  | $ | — |  | $ | — |  | $ | 63,316 |
Certificates of deposit |  | — |  | 3,903 |  | — |  | 3,903 |
Total cash equivalents |  | $ | 63,316 |  | $ | 3,903 |  | $ | — |  | $ | 67,219 |
Short-term Investments: |  |  |  |  |  |  |  |  |
Municipal bonds |  | $ | — |  | $ | 98,741 |  | $ | — |  | $ | 98,741 |
Variable-rate demand notes |  | — |  | 9,495 |  | — |  | 9,495 |
International government bonds |  | — |  | 2,235 |  | — |  | 2,235 |
Corporate bonds |  | — |  | 2,199 |  | — |  | 2,199 |
Total short-term investments |  | $ | — |  | $ | 112,670 |  | $ | — |  | $ | 112,670 |
Long-term Investments: |  |  |  |  |  |  |  |  |
Auction rate securities |  | $ | — |  | $ | — |  | $ | 7,240 |  | $ | 7,240 |
Total long-term investments |  | $ | — |  | $ | — |  | $ | 7,240 |  | $ | 7,240 |
Total |  | $ | 63,316 |  | $ | 116,573 |  | $ | 7,240 |  | $ | 187,129 |
Liabilities: |  |  |  |  |  |  |  |  |
Accrued expenses: |  |  |  |  |  |  |  |  |
Contingent consideration |  | $ | — |  | $ | — |  | $ | 4,070 |  | $ | 4,070 |
Other non-current liabilities: |  |  |  |  |  |  |  |  |
Contingent consideration |  | $ | — |  | $ | — |  | $ | 9,192 |  | $ | 9,192 |
Derivative instruments |  | — |  | 329 |  | — |  | 329 |
|  | $ | — |  | $ | 329 |  | $ | 9,192 |  | $ | 9,521 |
Total |  | $ | — |  | $ | 329 |  | $ | 13,262 |  | $ | 13,591 |
|  | Fair Value Measurements at January 3, 2015 Using |  |  |
Description |  | 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 |  | $ | 71,415 |  | $ | — |  | $ | — |  | $ | 71,415 |
Certificates of deposit |  | — |  | 7,739 |  | — |  | 7,739 |
Commercial paper |  | — |  | 5,348 |  | — |  | 5,348 |
Municipal bonds |  | — |  | 1,757 |  | — |  | 1,757 |
U.S. government agency |  | — |  | 1,202 |  | — |  | 1,202 |
Corporate bonds |  | — |  | 1,101 |  | — |  | 1,101 |
U.S. government bonds |  | 1,000 |  | — |  | — |  | 1,000 |
Total cash equivalents |  | $ | 72,415 |  | $ | 17,147 |  | $ | — |  | $ | 89,562 |
Short-term Investments: |  |  |  |  |  |  |  |  |
Municipal bonds |  | $ | — |  | $ | 129,152 |  | $ | — |  | $ | 129,152 |
Corporate bonds |  | — |  | 33,033 |  | — |  | 33,033 |
Variable-rate demand notes |  | — |  | 12,915 |  | — |  | 12,915 |
Commercial paper |  | — |  | 8,995 |  | — |  | 8,995 |
Asset-backed securities |  | — |  | 5,377 |  | — |  | 5,377 |
International government bonds |  | — |  | 2,516 |  | — |  | 2,516 |
U.S. government bond |  | 650 |  | — |  | — |  | 650 |
U.S. government agency |  | — |  | 601 |  | — |  | 601 |
Certificates of deposit |  | — |  | 250 |  | — |  | 250 |
Total short-term investments |  | $ | 650 |  | $ | 192,839 |  | $ | — |  | $ | 193,489 |
Long-term Investments: |  |  |  |  |  |  |  |  |
Auction rate securities |  | $ | — |  | $ | — |  | $ | 7,419 |  | $ | 7,419 |
Total long-term investments |  | $ | — |  | $ | — |  | $ | 7,419 |  | $ | 7,419 |
Other assets, net: |  |  |  |  |  |  |  |  |
Derivative instruments |  | $ | — |  | $ | 331 |  | $ | — |  | $ | 331 |
Total |  | $ | — |  | $ | 331 |  | $ | — |  | $ | 331 |
Total |  | $ | 73,065 |  | $ | 210,317 |  | $ | 7,419 |  | $ | 290,801 |
Liabilities: |  |  |  |  |  |  |  |  |
Accrued expenses: |  |  |  |  |  |  |  |  |
Contingent consideration |  | $ | — |  | $ | — |  | $ | 4,288 |  | $ | 4,288 |
Other non-current liabilities: |  |  |  |  |  |  |  |  |
Contingent consideration |  | $ | — |  | $ | — |  | $ | 14,150 |  | $ | 14,150 |
Total |  | $ | — |  | $ | — |  | $ | 18,438 |  | $ | 18,438 |
The Company’s cash equivalents and short-term investments that are classified as Level 1 are valued using quoted prices and other relevant information generated by market transactions involving identical assets. Cash equivalents and short-term investments classified as Level 2 are valued using non-binding market consensus prices that are corroborated with observable market data; quoted market prices for similar instruments in active markets; or pricing models, such as a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data. Investments classified as Level 3 are valued using a discounted cash flow model. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, amount of cash flows, expected holding periods of the securities and a discount to reflect the Company’s inability to liquidate the securities. The Company’s derivative instruments are valued using discounted cash flow models. The assumptions used in preparing the valuation models include quoted interest swap rates, foreign exchange rates, forward and spot prices for currencies, and market observable data of similar instruments. The Company’s contingent consideration is valued using a Monte Carlo simulation model or a probability weighted discounted cash flow model. The assumptions used in preparing the Monte Carlo simulation model include estimates for revenue growth rates, revenue volatility, contractual terms and discount rates. The assumptions used in preparing the discounted cash flow model include estimates for outcomes if milestone goals are achieved, the probability of achieving each outcome and discount rates. The following summarizes quantitative information about Level 3 fair value measurements. Auction rate securities
Fair Value at October 3, 2015 (000s) |  | Valuation Technique |  | Unobservable Input |  | Weighted Average |
$ | 7,240 |  | Discounted cash flow |  | Estimated yield |  | 1.04% |
|  |  |  | Expected holding period |  | 10 years |
|  |  |  | Estimated discount rate |  | 3.46% |
The Company has followed an established internal control procedure used in valuing auction rate securities. The procedure involves the analysis of valuation techniques and evaluation of unobservable inputs commonly used by market participants to price similar instruments, and which have been demonstrated to provide reasonable estimates of prices obtained in actual market transactions. Outputs from the valuation process are assessed against various market sources when they are available, including marketplace quotes, recent trades of similar illiquid securities, benchmark indices and independent pricing services. The technique and unobservable input parameters may be recalibrated periodically to achieve an appropriate estimation of the fair value of the securities. Significant changes in any of the unobservable inputs used in the fair value measurement of auction rate securities in isolation could result in a significantly lower or higher fair value measurement. An increase in expected yield would result in a higher fair value measurement, whereas an increase in expected holding period or estimated discount rate would result in a lower fair value measurement. Generally, a change in the assumptions used for expected holding period is accompanied by a directionally similar change in the assumptions used for estimated yield and discount rate. Contingent consideration
Fair Value at October 3, 2015 (000s) |  | Valuation Technique |  | Unobservable Input |  | Range |
$ | 13,262 |  | Monte Carlo simulation |  | Expected revenue growth rate |  | 38.6% – 47.0% |
|  |  |  | Expected revenue volatility |  | 20.0% |
|  |  |  | Expected term |  | 0.3 years – 3.3 years |
|  |  |  | Estimated discount rate |  | 0.34% – 1.44% |
The Company has followed an established internal control procedure used in valuing contingent consideration. The valuation of contingent consideration for the Energy Micro acquisition is based on a Monte Carlo simulation model. The fair value of this valuation is estimated on a quarterly basis through a collaborative effort by the Company’s sales, marketing and finance departments. Significant changes in any of the unobservable inputs used in the fair value measurement of contingent consideration in isolation could result in a significantly lower or higher fair value. A change in projected revenue growth rates would be accompanied by a directionally similar change in fair value. The following summarizes the activity in Level 3 financial instruments for the three and nine months ended October 3, 2015 (in thousands): Assets
Auction Rate Securities |  | Three Months Ended |  | Nine Months Ended |
Beginning balance |  | $ | 7,179 |  | $ | 7,419 |
Gain (loss) included in other comprehensive income (loss) |  | 61 |  | (179 | )
Balance at October 3, 2015 |  | $ | 7,240 |  | $ | 7,240 |
Liabilities
Contingent Consideration (1) |  | Three Months Ended |  | Nine Months Ended |
Beginning balance |  | $ | 15,092 |  | $ | 18,438 |
Settlements |  | — |  | (4,464 | )
Gain recognized in earnings (2) |  | (1,830 | ) | (712 | )
Balance at October 3, 2015 |  | $ | 13,262 |  | $ | 13,262 |
Net gain for the period included in earnings attributable to contingent consideration held at the end of the period: |  | $ | 1,830 |  | $ | 712 |
(1) In connection with the acquisition of Energy Micro, the Company recorded contingent consideration based upon the expected achievement of certain milestone goals. Changes to the fair value of contingent consideration due to changes in assumptions used in preparing the valuation model are recorded in selling, general and administrative expenses in the Consolidated Statement of Income. (2) Changes to the estimated fair value of contingent consideration were primarily due to revisions to the Company’s expectations of earn-out achievement. Fair values of other financial instruments The Company’s debt under the Credit Facilities bears interest at the Eurodollar rate plus an applicable margin. The Credit Facilities are recorded at cost, but are measured at fair value for disclosure purposes. Fair value is estimated based on Level 2 inputs, using a discounted cash flow analysis of future principal payments and projected interest based on current market rates. As of October 3, 2015 and January 3, 2015, the fair value of the Company’s debt under the Credit Facilities was approximately $80.0 million and $87.4 million, respectively. The Company’s other financial instruments, including cash, accounts receivable and accounts payable, are recorded at amounts that approximate their fair values due to their short maturities.

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- 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. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=36462937&loc=d3e19207-110258 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13537-108611 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13504-108611 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13433-108611 + Details
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