Fair Value of Financial Instruments

12 Months Ended

Mar. 25, 2017

Fair Value of Financial Instruments [Abstract]

Fair Value of Financial Instruments

4.      Fair Value of Financial Instruments

The Company has determined that the only assets and liabilities in the Company’s financial statements that are required to be measured at fair value on a recurring basis are the Company’s cash equivalents, investment portfolio, pension plan assets/liabilities and contingent consideration.  The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

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

• Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not 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.

• 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.

The Company’s cash equivalents and investment portfolio assets consist of corporate debt securities, money market funds, U.S. Treasury securities, and commercial paper and are reflected on our Consolidated Balance Sheet under the headings cash and cash equivalents, marketable securities, and long-term marketable securities.  The Company determines the fair value of its investment portfolio assets by obtaining non-binding market prices from its third-party portfolio managers on the last day of the quarter, whose sources may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value. 

In connection with one of the Company’s second quarter fiscal year 2016 acquisitions, the Company reports contingent consideration based upon achievement of certain milestones.  This liability is classified as Level 3 and is valued using a discounted cash flow model.  The assumptions used in preparing the discounted cash flow include discount rate estimates and cash flow amounts.  

The Company’s long-term revolving facility, described in Note 7, bears interest at a base rate plus applicable margin or LIBOR plus applicable margin.  As of March 25, 2017, the fair value of the Company’s long-term revolving facility approximates carrying value based on estimated margin.

As of March 25, 2017 and March 26, 2016, the Company classified all investment portfolio assets and pension plan assets (discussed in Note 9) as Level 1 or Level 2 assets and liabilities.  The only Level 3 liability is the contingent consideration described above and below.  The Company has no Level 3 assets.  There were no transfers between Level 1, Level 2, or Level 3 measurements for the years ending March 25, 2017 and March 26, 2016.

The following summarizes the fair value of our financial instruments, exclusive of pension plan assets detailed in Note 9, at March 25, 2017 (in thousands):

	Quoted Prices
	in Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable
	Assets		Inputs		Inputs
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents
Money market funds	$	313,982	$	-	$	-	$	313,982
Available-for-sale securities
Corporate debt securities	$	-	$	33,330	$	-	$	33,330
Commercial paper		-		66,483		-		66,483
	$	-	$	99,813	$	-	$	99,813
Liabilities:
Other accrued liabilities
Contingent consideration - short-term	$	-	$	-	$	4,695	$	4,695

The following summarizes the fair value of our financial instruments at March 26, 2016 (in thousands):

	Quoted Prices
	in Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable
	Assets		Inputs		Inputs
	Level 1		Level 2		Level 3		Total
Cash equivalents
Money market funds	$	79,256	$	-	$	-	$	79,256
Available-for-sale securities
Corporate debt securities	$	-	$	81,213	$	-	$	81,213
Liabilities:
Other accrued liabilities
Contingent consideration - short-term	$	-	$	-	$	4,709	$	4,709
Other long-term liabilities
Contingent consideration - long-term	$	-	$	-	$	4,359	$	4,359

Contingent consideration

The following summarizes the fair value of the contingent consideration at March 25, 2017:

		Maximum Value if Milestones Achieved (in thousands)	Estimated Discount Rate (%)		Fair Value (in thousands)
Tranche A - 18 month earn out period	$	5,000	7.0	$	-
Tranche B - 30 month earn out period		5,000	7.7		4,695
	$	10,000		$	4,695

	Fiscal year ended
	March 25,
	2017
	(in thousands)
Beginning balance	$	9,068
Adjustment to estimates (research and development expense)		(3,579)
Payout of Tranche A contingent consideration		(1,213)
Fair value charge recognized in earnings (research and development expense)		419
Ending balance	$	4,695

The valuation of contingent consideration is based on a weighted-average discounted cash flows model.  The fair value is reviewed and estimated on a quarterly basis based on the probability of achieving defined milestones and current interest rates.  Significant changes in any of the unobservable inputs used in the fair value measurement of contingent consideration could result in a significantly lower or higher fair value.  A change in projected outcomes if milestones are achieved would be accompanied by a directionally similar change in fair value.  A change in discount rate would be accompanied by a directionally opposite change in fair value.  Changes to the fair value due to changes in assumptions would be reported in research and development expense in the Consolidated Statements of Income.  In the second quarter of fiscal year 2017, changes in milestone estimates of Tranche A occurred following a review of product shipment forecasts within the earn out period.  The revised estimates reduced the fair value of the liability prior to the pay out in the fourth quarter of fiscal year 2017.