3. FAIR VALUE

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. There is a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; 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 that are significant to the fair value of the assets or liabilities.

Assets/Liabilities Measured at Fair Value on a Recurring Basis

In the tables below, the Company has segregated all assets and liabilities that are measured at fair value on a recurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date.

	Fair Value Measurement Using
	Quoted Prices in		Significant
	Active Markets		Other			Significant
	for Identical		Observable			Unobservable
	Instruments		Inputs			Inputs			Total
Type of Instruments	(Level 1)		(Level 2)			(Level 3)			Balance
(In millions)
Assets at June 27, 2014:
Available-for-sale corporate debt securities	$	-	$	-		$	69.4		$	69.4
Derivative assets		-		0.1			-			0.1
Total assets measured at fair value	$	-	$	0.1		$	69.4		$	69.5

Liabilities at June 27, 2014:
Contingent consideration	$	-	$	-		$	(4.2	)	$	(4.2	)
Total liabilities measured at fair value	$	-	$	-		$	(4.2	)	$	(4.2	)

Assets at September 27, 2013:
Money market funds	$	50.0	$	-		$	-		$	50.0
Available-for-sale corporate debt security		-		-			62.7			62.7
Option to purchase a privately-held company		-		-			1.4			1.4
Total assets measured at fair value	$	50.0	$	-		$	64.1		$	114.1

Liabilities at September 27, 2013:
Derivative liabilities	$	-	$	(1.1	)	$	-		$	(1.1	)
Contingent consideration		-		-			(2.5	)		(2.5	)
Total liabilities measured at fair value	$	-	$	(1.1	)	$	(2.5	)	$	(3.6	)

Money market funds are included under cash and cash equivalents, available-for-sale corporate debt securities are included under short-term investment and other assets, derivative assets are included under prepaid expenses and other current assets, option to purchase a company is included under other assets, derivative liabilities are included under accrued liabilities and contingent consideration is included under accrued liabilities and other-long term liabilities on the condensed consolidated balance sheets.

The Company obtains valuations of Level 1 money market funds from quotes for transactions in active exchange markets involving identical assets.

The Company’s valuation of its Level 2 instruments includes valuations obtained from quoted prices for identical assets in markets that are not active. In addition, the Company has elected to use the income approach to value its derivative instruments using standard valuation techniques and Level 2 inputs, such as currency spot rates, forward points and credit default swap spreads. The Company’s derivative instruments are short-term in nature, typically one month to thirteen months in duration.

The Company measures the fair value of its Level 3 contingent consideration liabilities based on the income approach by using a Monte Carlo simulation model with key assumptions that include estimated sales units or revenues of the acquired business during the earn-out period, volatility, and estimated discount rates corresponding to the periods of expected payments. If the estimated sales units or revenues were to increase or decrease during the respective earn-out period, the fair value of the contingent consideration would increase or decrease, respectively. If the volatility were to increase or decrease, the fair value of contingent consideration would decrease or increase, respectively. If the estimated discount rates used were to increase or decrease, the fair value of the contingent consideration would decrease or increase, respectively.

The fair value of the Company’s Level 3 available-for-sale corporate debt securities is based on the income approach by using the discounted cash flow model with key assumptions that include discount rates corresponding to the terms and risks associated with the loan to CPTC. If the estimated discount rates used were to increase or decrease, the fair value of the debt securities would decrease or increase, respectively. However, the Company does not increase the fair value above its par value as ORIX Capital Markets, LLC (“ORIX”), the loan agent, has the option to purchase this loan from the Company under the original terms and conditions at par value.

As of September 27, 2013, the Company had an option to purchase the remaining equity interest of Augmenix, Inc. (“Augmenix”), a privately-held company. The option to purchase the remaining equity interest of Augmenix is classified as a Level 3 asset and its fair value is based on the income approach using key assumptions that include projected operating results of the company and an estimated discount rate corresponding to the period of expected payment.

The following table presents the reconciliation for all assets and liabilities measured and recorded at fair value on a recurring basis using significant unobservable inputs (Level 3):

							Option to
	Available-For-Sale Corporate Debt			Contingent			Purchase a Privately - Held
(In millions)	Securities			Consideration			Company
Balance at September 27, 2013	$	62.7		$	(2.5	)	$	1.4
Additions ⁽¹⁾		44.8			(2.9	)		-
Sale of a portion of available-for-sale corporate debt securities⁽²⁾		(38.1	)		-			-
Settlements ⁽³⁾		-			0.6			-
Change in fair value recognized in earnings		-			0.6			(1.4	)
Balance at June 27, 2014	$	69.4		$	(4.2	)	$	-

1.	Amounts reported under Available-For-Sale Corporate Debt Securities include accrued interest.

2.	Refer to Note 16 “CPTC Loans”

3.	Amounts reported under “Contingent Consideration” represent cash payments to settle contingent consideration liabilities.

There were no transfers of assets or liabilities between fair value measurement levels during either the three and nine months ended June 27, 2014, or the three and nine months ended June 28, 2013. Transfers between fair value measurement levels are recognized at the end of the reporting period.

Assets Measured at Fair Value on a Nonrecurring Basis

For the three and nine months ended June 27, 2014, the Company recognized a $7.7 million charge relating to the impairment of a portion of our privately-held investment in Augmenix. The impairment charge of $7.7 million included a $1.4 million write-off of the option to purchase the remaining equity interest of Augmenix, upon its expiry. This option was previously measured at fair value on a recurring basis.

For the three and nine months ended June 27, 2014, the Company’s assets that were measured at fair value on a nonrecurring basis are summarized below:

	Net Carrying Value		Total Losses for the
(In millions)	as of June 27, 2014		three and nine months ended
Equity investment in Augmenix	$	7.3	$	6.3

The fair value measurement of the impaired privately held investment was classified as Level 3 because significant unobservable inputs were used in the valuation due to the absence of quoted market prices and inherent lack of liquidity. Significant unobservable inputs, which included financial condition and recent financing activities of the investees, reflected the assumptions market participants would use in pricing these assets. The impairment charge, representing the difference between the net book value and the fair value of the investment as a result of the evaluation, was recorded to Selling, general and administrative expenses.

Fair Value of Other Financial Instruments

The fair values of certain of the Company’s financial instruments, including bank deposits and certificate of deposits included in cash and cash equivalents, accounts receivable, net of allowance for doubtful accounts, note receivables, accounts payable, and short-term debt approximate their carrying amounts due to their short maturities.

As of both June 27, 2014 and September 27, 2013, the fair value of current maturities of long-term debt approximated its carrying value of $50.0 million and $56.3 million, respectively, due to its short-term maturity. The fair value of the long-term debt payable in installments through fiscal year 2018 approximated its carrying value of $400.0 million and $450.0 million, at June 27, 2014 and September 27, 2013, respectively, because it is carried at a market observable interest rate that resets periodically and is categorized as level 2 in the fair value hierarchy.