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
Type of Instruments	Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Balance
(In millions)
Assets at September 26, 2014:
Available-for-sale corporate debt securities	$	-	$	-		$	75.6		$	75.6
Derivative assets		-		1.5			-			1.5
Total assets measured at fair value	$	-	$	1.5		$	75.6		$	77.1

Liabilities at September 26, 2014:
Contingent consideration	$	-	$	-		$	(7.5	)	$	(7.5	)
Total liabilities measured at fair value	$	-	$	-		$	(7.5	)	$	(7.5	)

Assets at September 27, 2013:
Money market funds	$	50.0	$	-		$	-		$	50.0
Available-for-sale corporate debt securities		-		-			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 privately-held 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 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 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 or completion of certain milestone targets during the earn-out period, volatility, and estimated discount rates corresponding to the periods of expected payments. If the estimated sales units, revenues or probability of completing certain milestones 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 or the estimated discount rates were to increase or decrease, the fair value of contingent consideration would decrease or increase, respectively. The Company estimated that the threshold for the earn-out payments for Calypso Medical Technologies, Inc., acquired in fiscal year 2012 would not be met and reversed the entire amount of contingent consideration liability of $4.9 million during fiscal year 2013. The Company decreased the contingent consideration liability of InfiMed, Inc., acquired in fiscal year 2012, by $0.5 million and $0.3 million during fiscal year 2014 and fiscal year 2013, respectively, based on revised estimates of sales units during the remaining earn-out period.

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 loans 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 of these securities above their par values as ORIX Capital Markets, LLC (“ORIX”), the loan agent, has the option to purchase these loans 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 that was classified as a Level 3 asset and its fair value was 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 option was written off upon its expiry during the third quarter of fiscal year 2014. See further discussion below.

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):

(In millions)	Available-For-Sale Corporate Debt Securities			Contingent Consideration			Option to Purchase a Privately-Held Company
Balance at September 27, 2013	$	62.7		$	(2.5	)	$	1.4
Additions ⁽¹⁾		51.0			(6.2	)
Sale of portion of corporate debt security ⁽²⁾		(38.1	)		-
Settlements ⁽³⁾		-			0.5
Change in fair value recognized in earnings		-			0.7			(1.4	)
Balance at September 26, 2014	$	75.6		$	(7.5	)	$	-

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 fiscal years 2014, 2013 and 2012. Transfers between fair value measurement levels are recognized at the end of the reporting period.

Assets Measured at Fair Value on a Nonrecurring Basis

During the fiscal year ended September 26, 2014, the Company recognized a $7.7 million charge relating to the impairment of a portion of its 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 fiscal year ended September 26, 2014, the Company’s assets that were measured at fair value on a nonrecurring basis are summarized below:

(in millions)

Carrying

Value as of

End of Period

Total Losses for

Fiscal Year 2014

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 within 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 included in cash equivalents, accounts receivable, net of allowance for doubtful accounts, notes receivable, accounts payable, and short-term debt approximate their carrying amounts due to their short maturities.

At September 26, 2014 and September 27, 2013, the fair value of current maturities of the 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 $387.5 million and $450.0 million at September 26, 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.