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Fair Value and Derivative Instruments

9 Months Ended

Sep. 26, 2020

Whenever possible, the fair values of our financial assets and liabilities are determined using quoted market prices of identical securities or quoted market prices of similar securities from active markets. The three levels of inputs that may be used to measure fair value are as follows:

•Level 1 valuations are obtained from real-time quotes for transactions in active exchange markets involving identical securities;

•Level 2 valuations utilize significant observable inputs, such as quoted prices for similar assets or liabilities, quoted prices near the reporting date in markets that are less 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; and

•Level 3 valuations utilize unobservable inputs to the valuation methodology and include our own data about assumptions market participants would use in pricing the asset or liability based on the best information available under the circumstances.

We did not have any transfers of assets or liabilities measured at fair value on a recurring basis to or from Level 1, Level 2 or Level 3 during the three and nine months ended September 26, 2020 or the year ended December 28, 2019.

The carrying values of Cash, Accounts receivable, net, Restricted cash, Prepaid expenses and other current assets, Accounts payable, Accrued liabilities, and Current portion of term loans, net of unamortized issuance costs, approximate fair value due to their short maturities.

No changes were made to our valuation techniques during the first nine months of fiscal 2020.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis were as follows (in thousands):


September 26, 2020	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
Money market funds	$	71,663	$	—	$	—	$	71,663



Marketable securities:
U.S. treasuries	34,198		—		—		34,198
Certificates of deposit	—		2,428		—		2,428
U.S. agency securities	—		2,083		—		2,083
Corporate bonds	—		17,391		—		17,391

	34,198		21,902		—		56,100
Foreign exchange derivative contracts	—		470		—		470

Total assets	$	105,861	$	22,372	$	—	$	128,233
Liabilities:

Interest rate swap derivative contracts	$	—	$	(271)	$	—	$	(271)
Contingent consideration	—		—		(2,966)		(2,966)
Total liabilities	$	—	$	(271)	$	(2,966)	$	(3,237)


December 28, 2019	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
Money market funds	$	17,056	$	—	$	—	$	17,056


Marketable securities:
U.S. treasuries	10,468		—		—		10,468
Certificates of deposit	—		3,590		—		3,590
U.S. agency securities	—		24,430		—		24,430
Corporate bonds	—		33,928		—		33,928
Commercial paper	—		3,911		—		3,911
	10,468		65,859		—		76,327
Foreign exchange derivative contracts	—		41		—		41
Interest rate swap derivative contracts	—		26		—		26
Total assets	$	27,524	$	65,926	$	—	$	93,450
Liabilities:
Foreign exchange derivative contracts	$	—	$	(240)	$	—	$	(240)
Contingent consideration	—		—		(5,364)		(5,364)
Total liabilities	$	—	$	(240)	$	(5,364)	$	(5,604)

Cash Equivalents

The fair value of our cash equivalents is determined based on quoted market prices for similar or identical securities.

Marketable Securities

We classify our marketable securities as available-for-sale and value them utilizing a market approach. Our investments are priced by pricing vendors who provide observable inputs for their pricing without applying significant judgment. Broker pricing is used mainly when a quoted price is not available, the investment is not priced by our pricing vendors or when a broker price is more reflective of fair value. Our broker-priced investments are categorized as Level 2 investments because fair value is based on similar assets without applying significant judgments. In addition, all investments have a sufficient trading volume to demonstrate that the fair value is appropriate.

Unrealized gains and losses were immaterial and were recorded as a component of Accumulated other comprehensive income in our Condensed Consolidated Balance Sheets. We did not have any other-than-temporary unrealized gains or losses at either period end included in these financial statements.

Contingent Consideration

Contingent consideration, arising from the acquisition of FRT, is a cash amount equal to 1.5x EBIT as defined in the purchase agreement, up to a maximum of €10.3 million, payable subject to the performance of the acquired business in calendar 2020. We estimated the fair value of contingent consideration using a probability weighted approach. Key assumptions in determining the fair value of contingent consideration include estimating EBIT levels that are likely to be achieved during the performance period and discounting at an appropriate discount rate. Contingent consideration as of September 26, 2020 was estimated to be $3.0 million, a net decrease of $2.4 million from $5.4 million as of December 28, 2019. The net decrease was as a result of a $1.2 million increase in the estimated contingent consideration upon acquisition and as part of purchase accounting that was adjusted in the first fiscal quarter of 2020, offset by a net $3.6 million decrease in the estimated contingent consideration from subsequent remeasurement of the liability and foreign currency translation.

Interest Rate Swaps

The fair value of our interest rate swap contracts is determined at the end of each reporting period based on valuation models that use interest rate yield curves as inputs. For accounting purposes, our interest rate swap contracts qualify for, and are designated as, cash flow hedges. The cash flows associated with the interest rate swaps are reported in Net cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows and the fair value of the interest rate swap contracts are recorded within Accrued liabilities and Other liabilities in our Condensed Consolidated Balance Sheets.

The impact of the interest rate swaps on our Condensed Consolidated Statements of Income was as follows (in thousands):


	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)		Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)		Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)	Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
Three Months Ended September 26, 2020	$	(53)	Interest expense	$	(38)	Interest expense	$	—
Three Months Ended September 28, 2019	$	12	Interest expense	$	113	Interest expense	$	—

Nine Months Ended September 26, 2020	$	(323)	Interest expense	$	(26)	Interest expense	$	—
Nine Months Ended September 28, 2019	$	(78)	Interest expense	$	496	Interest expense	$	—

Foreign Exchange Derivative Contracts

We operate and sell our products in various global markets. As a result, we are exposed to changes in foreign currency exchange rates. We utilize foreign currency forward contracts to hedge against future movements in foreign exchange rates that affect certain existing foreign currency denominated assets and liabilities and forecasted foreign currency revenue and expense transactions. Under this program, our strategy is to have increases or decreases in our foreign currency exposures mitigated by gains or losses on the foreign currency forward contracts in order to mitigate the risks and volatility associated with foreign currency transaction gains or losses.

We do not use derivative financial instruments for speculative or trading purposes. For accounting purposes, certain of our foreign currency forward contracts are not designated as hedging instruments and, accordingly, we record the fair value of these contracts as of the end of our reporting period in our Condensed Consolidated Balance Sheets with changes in fair value recorded within Other income, net in our Condensed Consolidated Statement of Income for both realized and unrealized gains and losses. Certain of our foreign currency forward contracts are designated as cash flow hedges, and, accordingly, we record the fair value of these contracts as of the end of our reporting period in our Condensed Consolidated Balance Sheets with changes in fair value recorded as a component of Accumulated other comprehensive income (loss) and reclassified into earnings in the same period in which the hedged transaction affects earnings, and in the same line item on the Condensed Consolidated Statements of Income as the impact of the hedge transaction. At September 26, 2020, we expect to reclassify $0.5 million of the amount accumulated in other comprehensive income (loss) to earnings during the next 12 months, due to the recognition in earnings of the hedged forecasted transactions.

The fair value of our foreign exchange derivative contracts was determined based on current foreign currency exchange rates and forward points. All of our foreign exchange derivative contracts outstanding at September 26, 2020 will mature by the third quarter of fiscal 2021.

The following table provides information about our foreign currency forward contracts outstanding as of September 26, 2020 (in thousands):


Currency	Contract Position	Contract Amount (Local Currency)	Contract Amount (U.S. Dollars)
Euro Dollar	Buy	(10,341)	(11,591)
Euro Dollar	Sell	9,835	11,447
Japanese Yen	Sell	2,119,658	20,070
Korean Won	Buy	(3,259,002)	(2,785)


Total USD notional amount of outstanding foreign exchange contracts			$	17,141

Our foreign currency contracts are classified within Level 2 of the fair value hierarchy as they are valued using pricing models that utilize observable market inputs.

The impact of foreign exchange derivative contracts not designated as cash flow hedges on our Condensed Consolidated Statements of Income was as follows (in thousands):


		Amount of Gain (Loss) Recognized on Derivatives
		Three Months Ended				Nine Months Ended
Derivatives Not Designated as Hedging Instruments	Location of Gain (Loss) Recognized on Derivatives	September 26, 2020		September 28, 2019		September 26, 2020		September 28, 2019
Foreign exchange forward contracts	Other income, net	$	529	$	(76)	$	878	$	198

The impact of foreign exchange derivative contracts designated as cash flow hedges on our Condensed Consolidated Statements of Income was as follows (in thousands):


	Amount of Gain (Loss) Recognized in Accumulated OCI on Derivative		Location of Gain (Loss) Reclassified from Accumulated OCI into Income	Amount of Gain (Loss) Reclassified from Accumulated OCI into Income
Three Months Ended September 26, 2020	$	(553)	Cost of revenues	$	150
			Research and development	23
			Selling, general and administrative	63
				$	236

Three Months Ended September 28, 2019	$	(642)	Cost of revenues	$	(126)
			Research and development	(23)
			Selling, general and administrative	(58)
				$	(207)

Nine Months Ended September 26, 2020	$	427	Cost of revenues	$	109
			Research and development	11
			Selling, general and administrative	16
				$	136

Nine Months Ended September 28, 2019	$	(1,096)	Cost of revenues	$	(297)
			Research and development	(42)
			Selling, general and administrative	(109)
				$	(448)

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

We measure and report our non-financial assets such as Property, plant and equipment, Goodwill and Intangible assets at fair value on a non-recurring basis if we determine these assets to be impaired or in the period when we make a business acquisition. Other than as discussed in Note 4, Acquisition, there were no assets or liabilities measured at fair value on a nonrecurring basis during the three and nine months ended September 26, 2020 or September 28, 2019.

- 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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