| FINANCIAL INSTRUMENTS | 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 expense, net 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 Condensed Consolidated Balance Sheets at fair value with unrealized gains or losses associated with market valuation changes, unrelated to credit losses, reported as a separate component of accumulated other comprehensive income (loss), net of tax; and credit losses, if any, recognized as other expense, net in the Condensed Consolidated Statements of Operations. 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 leases, and foreign currency related 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. Refer to Note 12 - Long-Term Debt and Other Borrowings for additional information regarding the fair value of the Company’s senior notes and convertible senior notes. Investments 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, 2020, and June 28, 2020: September 27, 2020 (Reported Within) Cost Unrealized Unrealized Fair Value Cash and Investments Restricted Other (in thousands) Cash $ 756,609 $ — $ — $ 756,609 $ 753,178 $ — $ 3,431 $ — Time deposits 1,614,040 — — 1,614,040 1,364,013 — 250,027 — Level 1: Money market funds 1,753,879 — — 1,753,879 1,753,879 — — — U.S. Treasury and agencies 770,184 264 (1) 770,447 93,453 676,994 — — Mutual funds 67,183 8,886 (583) 75,486 — — — 75,486 Level 1 Total 2,591,246 9,150 (584) 2,599,812 1,847,332 676,994 — 75,486 Level 2: Government-sponsored enterprises 3,498 14 — 3,512 — 3,512 — — Foreign government bonds 60,139 34 (12) 60,161 3,340 56,821 — — Corporate notes and bonds 1,919,478 4,472 (392) 1,923,558 161,204 1,762,354 — — Mortgage backed securities — residential 7,754 67 (15) 7,806 — 7,806 — — Mortgage backed securities — commercial 21,257 97 — 21,354 — 21,354 — — Level 2 Total 2,012,126 4,684 (419) 2,016,391 164,544 1,851,847 — — Total $ 6,974,021 $ 13,834 $ (1,003) $ 6,986,852 $ 4,129,067 $ 2,528,841 $ 253,458 $ 75,486 June 28, 2020 (Reported Within) Cost Unrealized Unrealized Fair Value Cash and Investments Restricted Other (in thousands) Cash $ 977,862 $ — $ — $ 977,862 $ 973,978 $ — $ 3,884 $ — Time deposits 2,244,655 — — 2,244,655 1,994,628 — 250,027 — Level 1: Money market funds 1,709,350 — — 1,709,350 1,709,350 — — — U.S. Treasury and agencies 552,088 373 (9) 552,452 76,992 475,460 — — Mutual funds 68,784 4,571 (928) 72,427 — — — 72,427 Level 1 Total 2,330,222 4,944 (937) 2,334,229 1,786,342 475,460 — 72,427 Level 2: Government-sponsored enterprises 31,442 12 — 31,454 25,999 5,455 — — Foreign government bonds 10,693 28 (5) 10,716 2,540 8,176 — — Corporate notes and bonds 1,405,615 5,344 (302) 1,410,657 131,685 1,278,972 — — Mortgage backed securities — residential 3,142 71 — 3,213 — 3,213 — — Mortgage backed securities — commercial 23,660 144 — 23,804 — 23,804 — — Level 2 Total 1,474,552 5,599 (307) 1,479,844 160,224 1,319,620 — — Total $ 7,027,291 $ 10,543 $ (1,244) $ 7,036,590 $ 4,915,172 $ 1,795,080 $ 253,911 $ 72,427 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. Following the adoption of ASC 326-30 (see additional information in Note 2 - Recent Accounting Pronouncements) the Company evaluates its investments with fair value less than amortized cost by first considering whether the Company has the intent to sell the security or whether it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. In either such situation, the difference between fair value and amortized cost is recognized as a loss in the income statement. Where such sales are not likely to occur, the Company considers whether a portion of the loss is the result of a credit loss. To the extent such losses are the result of credit losses, those amounts are recognized in the income statement. All other differences between fair value and amortized cost are recognized in other comprehensive income. No such losses were recognized through the income statement during the three months ended September 27, 2020. The Company did not recognize any losses on investments due to other-than-temporary impairments during the three months ended September 29, 2019. Gross realized gains/(losses) from sales of investments were insignificant in the three months ended September 27, 2020 and September 29, 2019. The following is an analysis of the Company’s cash, cash equivalents, investments, and restricted cash and investments in unrealized loss positions: September 27, 2020 Unrealized Losses Unrealized Losses Total Fair Value Gross Fair Value Gross Fair Value Gross (in thousands) U.S. Treasury and agencies $ 74,231 $ (1) $ — $ — $ 74,231 $ (1) Mutual funds — — 7,953 (583) 7,953 (583) Foreign government bonds 46,218 (12) — — 46,218 (12) Corporate notes and bonds 478,124 (392) — — 478,124 (392) Mortgage backed securities — residential 4,912 (15) — — 4,912 (15) $ 603,485 $ (420) $ 7,953 $ (583) $ 611,438 $ (1,003) The amortized cost and fair value of cash equivalents, investments, and restricted investments with contractual maturities are as follows as of September 27, 2020: Cost Estimated (in thousands) Due in one year or less $ 5,325,959 $ 5,327,267 Due after one year through five years 783,076 786,135 Due in more than five years 41,194 41,355 $ 6,150,229 $ 6,154,757 The Company 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 12 months 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 Condensed Consolidated Balance Sheets at their fair values. The Company enters into foreign currency forward contracts and foreign currency options with financial institutions with the primary objective of reducing volatility of earnings and cash flows related to foreign currency exchange rate fluctuations. In addition, the Company enters into interest rate swap arrangements to manage interest rate risk. The counterparties to these derivatives 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. 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 and foreign currency options that generally expire within 12 months and no later than 24 months. These hedge 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 affect earnings. In addition, the Company has entered into interest rate swap agreements to hedge against the variability of cash flows due to changes in certain benchmark interest rates on fixed rate debt. These instruments are designated as cash flow hedges at inception and are settled in conjunction with the issuance of debt. The effective portion of the contracts’ gains or losses is included in accumulated other comprehensive income (loss) and is amortized 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 foreign exchange contracts due to changes in time value are included in the assessment of effectiveness. To qualify for hedge accounting, the hedge relationship must meet criteria relating to both 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. 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, 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, 2020, the Company had an immaterial net gain accumulated in other comprehensive income, net of tax, related to foreign exchange cash flow hedges which it expects to reclassify from other comprehensive income into earnings over the next 12 months. Additionally, as of September 27, 2020, the Company had an immaterial net loss related to interest rate contracts 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 cash, third-party accounts receivable, accounts payable, 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 expense, net and offsets the change in fair value of the foreign currency denominated assets and liabilities, which are also recorded in other expense, net. As of September 27, 2020, the Company had the following outstanding foreign currency contracts that were entered into under its cash flow and balance sheet hedge programs: Notional Value Derivatives Designated as Derivatives Not Designated (in thousands) Buy Contracts Sell Contracts Buy Contracts Sell Contracts Japanese yen $ — $ 370,658 $ — $ 9,495 Euro 101,899 — 32,707 — Korean won 84,339 — — 51,523 Malaysian ringgit 43,120 — 14,484 — Indian rupee 39,170 — 3,616 — Taiwan dollar — — 51,855 — Chinese renminbi — — 40,996 — Swiss franc — — 22,124 — Singapore dollar — — 14,598 — British pound sterling — — 9,564 — $ 268,528 $ 370,658 $ 189,944 $ 61,018 The fair value of derivative instruments in the Company’s Condensed Consolidated Balance Sheet as of September 27, 2020, and June 28, 2020 were as follows: September 27, 2020 June 28, 2020 Fair Value of Derivative Instruments (Level 2) Fair Value of Derivative Instruments (Level 2) Derivative Assets Derivative Liabilities Derivative Assets Derivative Liabilities Balance Sheet Fair Value Balance Sheet Fair Value Balance Sheet Fair Value Balance Sheet Fair Value (in thousands) Derivatives designated as hedging instruments: Foreign exchange contracts Prepaid expense $ 3,700 Accrued expenses and other current liabilities $ 3,509 Prepaid expense $ 1,862 Accrued expenses and other current liabilities $ 1,405 Derivatives not designated as hedging instruments: Foreign exchange contracts Prepaid expense 169 Accrued expenses and other current liabilities 85 Prepaid expense 155 Accrued expenses and other current liabilities 70 Total Derivatives $ 3,869 $ 3,594 $ 2,017 $ 1,475 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, 2020, the potential effect of rights of offset associated with the above foreign exchange and interest rate contracts would be an offset to assets and liabilities of $1.7 million, resulting in a net derivative asset of $2.2 million and net derivative liability of $1.9 million. As of June 28, 2020, the potential effect of rights of offset associated with the above foreign exchange and interest rate contracts would be an offset to both assets and liabilities of $0.9 million, resulting in a net derivative asset of $1.1 million and a net derivative liability of $0.6 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, 2020 Location of (Loss) Gain (Loss) Gain Derivatives in Cash Flow Hedging Relationships (in thousands) Foreign Exchange Contracts Revenue $ (3,281) $ (835) Foreign Exchange Contracts Cost of goods sold 1,093 560 Foreign Exchange Contracts Selling, general, and administrative 1,640 305 Foreign Exchange Contracts Research and Development 394 — Interest Rate Contracts Other expense, net — (952) $ (154) $ (922) Three Months Ended September 29, 2019 Location of Gain (Loss) Loss Derivatives in Cash Flow Hedging Relationships (in thousands) Foreign Exchange Contracts Revenue $ 934 $ (334) Foreign Exchange Contracts Cost of goods sold (1,263) (810) Foreign Exchange Contracts Selling, general, and administrative (595) (476) Interest Rate Contracts Other expense, net — (35) $ (924) $ (1,655) 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, September 29, Derivatives Not Designated as Hedging Instruments: Location Gain Loss (in thousands) Foreign Exchange Contracts Other expense, net $ 2,747 $ (5,501) The following table presents the effect of the fair value cash flow hedge accounting on the Statement of Financial Performance as well as presents the location and amount of gain/(loss) recognized in Income on cash flow hedging relationships: Three Months Ended September 27, 2020 Revenue Cost of Goods Sold Selling, General and Admini-strative Other Expense, Net (in thousands) Total amounts of income and expense line items presented in the statement of financial performance in which the effects of cash flow hedges are recorded: $ 3,177,080 $ 1,670,901 $ 189,748 $ (38,792) (Loss) or gain on cash flow hedging relationships in Subtopic 815-20: Foreign exchange contracts: Amount of (loss) gain reclassified from accumulated other comprehensive income into income $ (835) $ 560 $ 305 $ — Interest rate contracts: Amount of loss reclassified from accumulated other comprehensive income into income $ — $ — $ — $ (952) 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, Fitch Ratings, or Moody’s Investor Services. 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 and interest rate hedge contracts that are used to mitigate the effect of exchange rate and interest 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. |
