Financial Instruments

3 Months Ended

Sep. 29, 2013

Financial Instruments

NOTE 4 — FINANCIAL INSTRUMENTS

The Company maintains an investment portfolio of various holdings, types, and maturities. The Company’s mutual funds, which are related to the Company’s obligations under the deferred compensation plan, are classified as trading securities. Investments classified as trading securities are recorded at fair value based upon quoted market prices. Differences between the cost and fair value of trading securities are recognized as other income (expense) in the Condensed Consolidated Statements of Operations. All of the Company’s other short-term investments are classified as available-for-sale and consequently are recorded in the Consolidated Balance Sheets at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss), net of tax.

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 following table sets forth the Company’s financial assets and liabilities measured at fair value on a recurring basis:

			Fair Value Measurement at September 29, 2013
			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
			Identical Assets		Observable Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
	(In thousands)
Assets
Short-Term Investments
Money Market Funds	$	926,971	$	926,971	$	—	$	—
Municipal Notes and Bonds		247,864		—		247,864		—
US Treasury and Agencies		154,401		154,401		—		—
Government-Sponsored Enterprises		54,713		—		54,713		—
Foreign Government Bonds		23,699		—		23,699		—
Corporate Notes and Bonds		845,095		164,885		680,210		—
Mortgage Backed Securities - Residential		25,218		—		25,218		—
Mortgage Backed Securities - Commercial		103,092		—		103,092		—
Equities		5,834		5,834		—		—
Total Short-Term Investments	$	2,386,887	$	1,252,091	$	1,134,796	$	—
Mutual Funds		19,235		19,235		—		—
Derivative Assets		4,184		—		4,184		—
Total Assets	$	2,410,306	$	1,271,326	$	1,138,980	$	—
Liabilities
Derivative Liabilities	$	542	$	—	$	367	$	175

The amounts in the table above are reported in the Consolidated Balance Sheet as of September 29, 2013 as follows:

	Total		Level 1		Level 2		Level 3
	(In thousands)
Reported Within:
Cash Equivalents	$	926,971	$	926,971	$	—	$	—
Short-Term Investments		1,295,031		160,235		1,134,796		—
Restricted Cash and Investments		164,885		164,885		—		—
Prepaid Expenses and Other Current Assets		4,184		—		4,184		—
Other Assets		19,235		19,235		—		—
Total Assets	$	2,410,306	$	1,271,326	$	1,138,980	$	—
Accrued Expenses and Other Current Liabilities	$	367	$	—	$	367	$	—
Other Non-current Liabilities		175		—		—		175
Total Liabilities	$	542	$	—	$	367	$	175

The following table sets forth the Company’s financial assets and liabilities measured at fair value on a recurring basis:

			Fair Value Measurement at June 30, 2013
			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
			Identical Assets		Observable Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
	(In thousands)
Assets
Short-Term Investments
Money Market Funds	$	725,311	$	725,311	$	—	$	—
Municipal Notes and Bonds		268,746		—		268,746		—
US Treasury and Agencies		155,293		155,293		—		—
Government-Sponsored Enterprises		54,805		—		54,805		—
Foreign Government Bond		24,972		—		24,972		—
Corporate Notes and Bonds		860,492		164,885		695,607		—
Mortgage Backed Securities - Residential		27,365		—		27,365		—
Mortgage Backed Securities - Commercial		107,958		—		107,958		—
Total Short-Term Investments	$	2,224,942	$	1,045,489	$	1,179,453	$	—
Equities		7,096		7,096		—		—
Mutual Funds		18,216		18,216		—		—
Derivative Assets		4,929		—		4,929		—
Total Assets	$	2,255,183	$	1,070,801	$	1,184,382	$	—
Liabilities
Derivative Liabilities	$	1,815	$	—	$	1,620	$	195

The amounts in the table above are reported in the Consolidated Balance Sheet as of June 30, 2013 as follows:

	Total		Level 1		Level 2		Level 3
	(In thousands)
Reported Within:
Cash Equivalents	$	725,311	$	725,311	$	—	$	—
Short-Term Investments		1,334,746		155,293		1,179,453		—
Restricted Cash and Investments		164,885		164,885		—		—
Prepaid Expenses and Other Current Assets		4,929		—		4,929		—
Other Assets		25,312		25,312		—		—
Total Assets	$	2,255,183	$	1,070,801	$	1,184,382	$	—
Accrued Expenses and Other Current Liabilities	$	1,620	$	—	$	1,620	$	—
Other Non-current Liabilities		195		—		—		195
Total Liabilities	$	1,815	$	—	$	1,620	$	195

The Company’s primary financial instruments include its cash, 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, 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 13 for additional information regarding the fair value of the Company’s convertible notes.

Investments

The following tables summarize the Company’s investments (in thousands):

	September 29, 2013									June 30, 2013
	Cost		Unrealized Gain		Unrealized (Loss)			Fair Value		Cost		Unrealized Gain		Unrealized (Loss)			Fair Value
Cash	$	230,713	$	—	$	—		$	230,713	$	438,813	$	—	$	—		$	438,813
Fixed Income Money Market Funds		926,971		—		—			926,971		725,311		—		—			725,311
Municipal Notes and Bonds		247,111		894		(141	)		247,864		268,390		805		(449	)		268,746
US Treasury and Agencies		154,440		77		(116	)		154,401		155,648		18		(373	)		155,293
Government-Sponsored Enterprises		54,674		79		(40	)		54,713		54,835		65		(95	)		54,805
Foreign Government Bonds		23,628		79		(8	)		23,699		24,950		47		(25	)		24,972
Corporate Notes and Bonds		844,524		1,568		(997	)		845,095		861,109		1,328		(1,945	)		860,492
Mortgage Backed Securities - Residential		25,522		18		(322	)		25,218		27,618		29		(282	)		27,365
Mortgage Backed Securities - Commercial		103,407		344		(659	)		103,092		108,204		426		(672	)		107,958
Publicly Traded Equity Security		5,584		250		—			5,834		—		—		—			—
Private Equity Security		5,000		—		—			5,000		—		—		—			—
Total Cash and Short-Term Investments	$	2,621,574	$	3,309	$	(2,283	)	$	2,622,600	$	2,664,878	$	2,718	$	(3,841	)	$	2,663,755
Publicly Traded Equity Security	$	—	$	—	$	—		$	—	$	5,610	$	1,486	$	—		$	7,096
Private Equity Security		—		—		—			—		5,000		—		—			5,000
Mutual Funds		17,804		1,523		(92	)		19,235		16,611		1,619		(14	)		18,216
Total Financial Instruments	$	2,639,378	$	4,832	$	(2,375	)	$	2,641,835	$	2,692,099	$	5,823	$	(3,855	)	$	2,694,067
Reported Within
Cash and Cash Equivalents	$	1,156,184	$	—	$	—		$	1,156,184	$	1,162,473	$	—	$	—		$	1,162,473
Short-Term Investments		1,299,005		3,309		(2,283	)		1,300,031		1,335,868		2,718		(3,841	)		1,334,745
Restricted Cash and Investments		166,385		—		—			166,385		166,536		—		—			166,536
Other assets		17,804		1,523		(92	)		19,235		27,222		3,105		(14	)		30,313
Total	$	2,639,378	$	4,832	$	(2,375	)	$	2,641,835	$	2,692,099	$	5,823	$	(3,855	)	$	2,694,067

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. The Company did not recognize any losses on investments due to other-than-temporary impairments during the three months ended September 29, 2013 or September 23, 2012. Additionally, gross realized gains and gross realized (losses) from sales of investments were approximately $0.2 million and $(0.6) million, respectively, in the three months ended September 29, 2013 and $0.3 million and $(0.4) million, respectively, in the three months ended September 23, 2012.

The following is an analysis of the Company’s fixed income securities in unrealized loss positions (in thousands):

	September 29, 2013
	Unrealized Losses					Unrealized Losses
	Less Than 12 Months					12 Months or Greater					Total
	Fair Value		Gross Unrealized Loss			Fair Value		Gross Unrealized Loss			Fair Value		Gross Unrealized Loss
Short-Term Investments
Municipal Notes and Bonds	$	38,907	$	(141	)	$	—	$	—		$	38,907	$	(141	)
US Treasury and Agencies		58,400		(116	)		—		—			58,400		(116	)
Government-Sponsored Enterprises		14,988		(40	)		—		—			14,988		(40	)
Foreign Government Bonds		8,162		(8	)		—		—			8,162		(8	)
Corporate Notes and Bonds		302,417		(977	)		715		(20	)		303,132		(997	)
Mortgage Backed Securities - Residential		25,013		(322	)		—					25,013		(322	)
Mortgage Backed Securities - Commercial		62,157		(498	)		6,555		(161	)		68,712		(659	)
Total Short-Term Investments	$	510,044	$	(2,102	)	$	7,270	$	(181	)	$	517,314	$	(2,283	)

The amortized cost and fair value of cash equivalents, short-term investments, and restricted cash and investments with contractual maturities are as follows as of September 29, 2013:

	Cost		Estimated Fair Value
	(in thousands)
Due in one year or less	$	1,372,583	$	1,373,071
Due after one year through five years		851,648		852,550
Due in more than five years		156,046		155,432
No Single Maturity Date		10,584		10,834
	$	2,390,861	$	2,391,887

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 Condensed 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 forward contracts are large global financial institutions that the Company believes are creditworthy, and therefore, we do 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 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 forward contracts that generally expire within 12 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.

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 gains or losses during the three months ended September 29, 2013 or September 23, 2012 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. At September 29, 2013, the Company had gains of $3.5 million accumulated in other comprehensive income, which it expects to reclassify from other comprehensive income into earnings over the next 12 months.

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 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 September 29, 2013, 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:
Foreign Currency Forward Contracts	(in thousands)
	Buy Contracts		Sell Contracts		Buy Contracts		Sell Contracts
Japanese Yen	$	—	$	110,274	$	—	$	93,945
Swiss Francs		—		—		18,692		1,621
Euro		58,281		—		5,081		18,452
Korean Won		—		—		14,771		—
Taiwan Dollar		—		—		121,742		—
	$	58,281	$	110,274	$	160,286	$	114,018

The fair value of derivative instruments in the Company’s Consolidated Balance Sheets as of September 29, 2013 and June 30, 2013 were as follows:

	September 29, 2013						June 30, 2013
	Fair Value of Derivative Instruments						Fair Value of Derivative Instruments
	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	$	4,169	Accrued liabilities	$	130	Prepaid expense and other assets	$	4,858	Accrued liabilities	$	1,577
Derivatives not designated as hedging instruments:
Foreign exchange forward contracts	Prepaid expense and other assets		15	Accrued liabilities		237	Prepaid expense and other assets		71	Accrued liabilities		43
Total derivatives		$	4,184		$	367		$	4,929		$	1,620

Under the master netting agreements with the respective counterparties to our foreign exchange contracts, subject to applicable requirements, we are allowed to net settle transactions of the same currency with a single net amount payable by one party to the other. However, we have elected to present the derivative assets and derivative liabilities on a gross basis in our balance sheet. As of September 29, 2013, 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 $0.4 million, resulting in a net derivative asset of $3.8 million. As of June 30, 2013, 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 $1.6 million, resulting in a net derivative asset of $3.3 million. We are not required to pledge, nor are we entitled to receive, cash collateral related to these derivative transactions.

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

		Three Months Ended September 29, 2013							Three Months Ended September 23, 2012
		Effective Portion				Ineffective Portion and Amount Excluded from Effectiveness Testing			Effective Portion						Ineffective Portion and Amount Excluded from Effectiveness Testing
	Location of Gain (Loss) Recognized in or Reclassified into Income	Gain (Loss) Recognized in AOCI		Gain (Loss) Reclassified from AOCI into Income		Gain (Loss) Recognized in Income			Gain (Loss) Recognized in AOCI			Gain (Loss) Reclassified from AOCI into Income			Gain (Loss) Recognized in Income
		(in thousands)							(in thousands)
Derivatives Designated as Hedging Instruments
Foreign Exchange Contracts	Revenue	$	4,878	$	3,383	$	93		$	(2,726	)	$	857		$	—
Foreign Exchange Contracts	Cost of goods sold		149		651		(32	)		1,251			(2,024	)		—
Foreign Exchange Contracts	Selling, general, and administrative		48		317		(15	)		756			(759	)		—
Foreign Exchange Contracts	Other income (expense)		—		—		—			—			—			(22	)
		$	5,075	$	4,351	$	46		$	(719	)	$	(1,926	)	$	(22	)

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

		Three Months Ended
		September 29, 2013		September 23, 2012
Derivatives Not Designated as Hedging Instruments:	Location of Gain (Loss) Recognized in Income	Gain Recognized in Income		Loss Recognized in Income
		(in thousands)
Foreign Exchange Contracts	Other income (expense)	$	6,027	$	(5,382	)

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 overall 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, are 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.