NOTE 7 — 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 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 Company’s primary financial instruments include its cash, cash equivalents, investments, restricted cash and investments, long-term investments, accounts receivable, accounts payable, long-term debt and capital leases, and derivative instruments. 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 11 for additional information regarding the fair value of the Company’s convertible notes.

The following table sets forth the Company’s cash, cash equivalents, investments, restricted cash and investments, and other assets measured at fair value on a recurring basis as of September 27, 2015 and June 28, 2015:


	September 27, 2015
										(Reported Within)
	Cost		Unrealized Gain		Unrealized (Loss)			Fair Value		Cash and Cash Equivalents		Investments		Restricted Cash & Investments		Other Assets
	(in thousands)
Cash	$	557,698	$	—	$	—		$	557,698	$	552,559	$	—	$	5,139	$	—
Level 1:
Time Deposit		174,933		—		—			174,933		42,105		—		132,828		—
Money Market Funds		1,148,450		—		—			1,148,450		1,148,450		—		—		—
U.S. Treasury and Agencies		335,120		404		(28	)		335,496		—		290,008		45,488		—
Mutual Funds		30,760		2,099		(525	)		32,334		—		—		—		32,334

Level 1 Total	$	1,689,263	$	2,503	$	(553	)	$	1,691,213	$	1,190,555	$	290,008	$	178,316	$	32,334

Level 2:
Municipal Notes and Bonds		666,992		1,122		(71	)		668,043		—		668,043		—		—
U.S. Treasury and Agencies		8,057		—		(82	)		7,975		—		7,975		—		—
Government-Sponsored Enterprises		44,381		44		(20	)		44,405		—		44,405		—		—
Foreign Government Bonds		45,562		67		(65	)		45,564		—		45,564		—		—
Corporate Notes and Bonds		1,381,861		1,397		(3,320	)		1,379,938		1,211		1,378,727		—		—
Mortgage Backed Securities - Residential		31,715		106		(255	)		31,566		—		31,566		—		—
Mortgage Backed Securities - Commercial		121,673		65		(552	)		121,186		—		121,186		—		—

Level 2 Total	$	2,300,241	$	2,801	$	(4,365	)	$	2,298,677	$	1,211	$	2,297,466	$	—	$	—

Total	$	4,547,202	$	5,304	$	(4,918	)	$	4,547,588	$	1,744,325	$	2,587,474	$	183,455	$	32,334


	June 28, 2015
										(Reported Within)
	Cost		Unrealized Gain		Unrealized (Loss)			Fair Value		Cash and Cash Equivalents		Investments		Restricted Cash & Investments		Other Assets
	(in thousands)
Cash	$	276,663	$	—	$	—		$	276,663	$	271,452	$	—	$	5,211	$	—
Level 1:
Time Deposit		177,567		—		—			177,567		44,738		—		132,829		—
Money Market Funds		1,177,875		—		—			1,177,875		1,177,875		—		—		—
U.S. Treasury and Agencies		349,009		72		(861	)		348,220		—		315,291		32,929		—
Mutual Funds		30,584		2,926		(47	)		33,463		—		—		—		33,463

Level 1 Total	$	1,735,035	$	2,998	$	(908	)	$	1,737,125	$	1,222,613	$	315,291	$	165,758	$	33,463

Level 2:
Municipal Notes and Bonds		659,550		429		(335	)		659,644		7,474		652,170		—		—
U.S. Treasury and Agencies		4,007		—		(4	)		4,003				4,003
Government-Sponsored Enterprises		53,612		2		(249	)		53,365				53,365		—		—
Foreign Government Bonds		50,336		31		(161	)		50,206				50,206		—		—
Corporate Notes and Bonds		1,329,587		685		(3,797	)		1,326,475				1,326,475		—		—
Mortgage Backed Securities - Residential		32,231		72		(292	)		32,011				32,011		—		—

Mortgage Backed Securities - Commercial	$	141,988	$	44	$	(606	)	$	141,426			$	141,426	$	—	$	—

Level 2 Total	$	2,271,311	$	1,263	$	(5,444	)	$	2,267,130	$	7,474	$	2,259,656	$	—	$	—

Total	$	4,283,009	$	4,261	$	(6,352	)	$	4,280,918	$	1,501,539	$	2,574,947	$	170,969	$	33,463

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 27, 2015 or September 28, 2014. Additionally, gross realized gains and gross realized (losses) from sales of investments were approximately $0.2 million and $(0.7) million, respectively, in the three months ended September 27, 2015 and $0.5 million and $(0.6) million, respectively, in the three months ended September 28, 2014.

The following is an analysis of the Company’s cash, cash equivalents, investments, and restricted cash and investments in unrealized loss positions:


	September 27, 2015
	Unrealized Losses Less Than 12 Months					Unrealized Losses 12 Months or Greater					Total
	Fair Value		Gross Unrealized Loss			Fair Value		Gross Unrealized Loss			Fair Value		Gross Unrealized Loss
	(in thousands)
Municipal Notes and Bonds	$	36,289	$	(71	)	$	—	$	—		$	36,289	$	(71	)
U.S. Treasury & Agencies		87,628		(110	)		—		—			87,628		(110	)
Mutual Funds		18,043		(525	)		—		—			18,043		(525	)
Government-Sponsored Enterprises		6,805		(20	)		—		—			6,805		(20	)
Foreign Government Bonds		21,102		(65	)		—		—			21,102		(65	)
Corporate Notes and Bonds		759,706		(3,240	)		25,380		(80	)		785,086		(3,320	)
Mortgage Backed Securities - Residential		18,279		(165	)		1,943		(90	)		20,222		(255	)
Mortgage Backed Securities - Commercial		80,320		(398	)		20,162		(154	)		100,482		(552	)

	$	1,028,172	$	(4,594	)	$	47,485	$	(324	)	$	1,075,657	$	(4,918	)

The amortized cost and fair value of cash equivalents, investments and restricted investments with contractual maturities are as follows as of September 27, 2015:


	Cost		Estimated Fair Value
	(in thousands)
Due in one year or less	$	1,816,857	$	1,817,160
Due after one year through five years		1,941,115		1,940,258
Due in more than five years		200,772		200,138

	$	3,958,744	$	3,957,556

Management has the ability, if necessary, to liquidate its 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 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 derivative contracts with financial institutions with the primary objective of reducing volatility of earnings and cash flows related to foreign currency exchange rate and interest rate fluctuations. The counterparties to these derivative contracts are large global financial institutions that the Company believes are creditworthy, and therefore, it does 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-U.S. dollar transactions or cash flows, primarily from Japanese yen-denominated revenues, and euro and Korean won-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.

In addition, during fiscal year ended June 28, 2015, the Company entered into and settled a series of forward-starting interest rate swap agreements, with a total notional value of $375 million, to hedge against the variability of cash flows due to changes in the benchmark interest rate of fixed rate debt. These instruments were designated as cash flow hedges at inception and were settled in conjunction with the issuance of debt during the three months ended March 29, 2015. The effective portion of the contracts’ loss is included in accumulated other comprehensive (loss) and will amortize into income as the hedged item impacts earnings.

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 material gains or losses during the three months ended September 27, 2015 or September 28, 2014 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. As of September 27, 2015, the Company had losses of $3.1 million accumulated in other comprehensive income, net of tax, related to interest rate contracts which it expects to reclassify from other comprehensive income into earnings over the next 9.5 years.

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 27, 2015, the Company had the following outstanding foreign currency forward contracts that were entered into under its cash flow and balance sheet hedge program:


	Notional Value
	Derivatives Designated as Hedging Instruments:				Derivatives Not Designated as Hedging Instruments:
	(in thousands)
Foreign Currency Forward Contracts
	Buy Contracts		Sell Contracts		Buy Contracts		Sell Contracts
Japanese yen	$	—	$	76,362	$	—	$	60,791
Swiss franc		—		—		2,866		—
Euro		21,929		—		—		14,535
Korean won		4,048		—		16,837		—
Taiwan dollar		—		—		26,577		—

	$	25,977	$	76,362	$	46,280	$	75,326

The fair value of derivative instruments in the Company’s Consolidated Balance Sheets as of September 27, 2015 and June 28, 2015 were as follows:

September 27, 2015

June 28, 2015

Fair Value of Derivative Instruments (Level 2)

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

1,801

Accrued
liabilities

573

Prepaid expense
and other assets

3,388

Accrued
liabilities

957

Derivatives not designated as hedging instruments:

Foreign exchange forward contracts

Prepaid expense
and other assets

619

Accrued
liabilities

3,080

Prepaid expense
and other assets

Accrued
liabilities

960

Total derivatives

2,420

3,653

3,396

1,917

Under the master netting agreements with the respective counterparties to the Company’s derivative contracts, subject to applicable requirements, the Company is allowed to net settle transactions of the same currency with a single net amount payable by one party to the other. However, the Company has elected to present the derivative assets and derivative liabilities on a gross basis on its balance sheet. As of September 27, 2015, the potential effect of rights of off-set associated with the above foreign exchange contracts would be an offset to assets and liabilities by $1.8 million, resulting in a net derivative asset of $0.7 million and net derivative liability of $1.9 million. As of June 28, 2015, 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 $1.9 million, resulting in a net derivative asset of $1.5 million. The Company is not required to pledge, nor is the Company entitled to receive, cash collateral for these derivative transactions.

The effect of derivative instruments designated as cash flow hedges on the Company’s Condensed Consolidated Statements of Operations, including accumulated other comprehensive income (“AOCI”) was as follows:


		Three Months Ended September 27, 2015									Three Months Ended September 28, 2014
		Effective Portion						Ineffective Portion and Amount Excluded from Effectiveness			Effective Portion						Ineffective Portion and Amount Excluded from Effectiveness
	Location of Gain (Loss) Recognized in or Reclassified into Income	(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
Derivatives Designated as Hedging Instruments		(in thousands)									(in thousands)
Foreign Exchange Contracts	Revenue	$	(69	)	$	(1,378	)	$	32		$	3,024		$	469		$	42
Foreign Exchange Contracts	Cost of goods sold		(415	)		1,505			(22	)		(2,023	)		(276	)		(6	)
Foreign Exchange Contracts	Selling, general, and administrative		(173	)		258			(7	)		(866	)		(105	)		(1	)
Interest Rate Contracts	Other expense, net		—			(94	)		—			—			—			—

		$	(657	)	$	291		$	3		$	135		$	88		$	35

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 27, 2015		September 28, 2014
Derivatives Not Designated as Hedging Instruments:	Location of Gain Recognized in Income	Gain Recognized in Income		Gain Recognized in Income
		(in thousands)
Foreign Exchange Contracts	Other income	$	6,007	$	968

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, investments, restricted cash and investments, trade accounts receivable, and derivative financial instruments used in hedging activities. Cash is placed on deposit at 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, Moody’s Investor Services, or Fitch Ratings. 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 foreign currency forward hedge contracts that are used to mitigate the effect of exchange rate fluctuations, and on contracts related to structured share repurchase arrangements. 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 condition and payment performance. In general, the Company does not require collateral on sales.