Quarterly report pursuant to Section 13 or 15(d)

Financial Instruments

v2.4.0.6
Financial Instruments
 3 Months Ended
Mar. 31, 2012
Financial Instruments [Abstract]  
Financial Instruments

NOTE 7. Financial Instruments

Available-for-sale securities held by the Company as of March 31, 2012 and December 31, 2011 were as follows:

 

     Quarter Ended  
     March 31,
2012		      December 31,
2011		  
     (In millions)  

Fair Value

      

Classified as cash equivalents:

      

Money market funds

    $ 917       $ 738   

Commercial paper

      125         1   
  

 

 

     

 

 

  

Total classified as cash equivalents

    $ 1,042       $ 739   
  

 

 

     

 

 

  

Classified as current marketable securities:

      

Commercial paper

    $ 249       $ 698   

Time deposits

      70         160   

Auction rate securities

      32         38   
  

 

 

     

 

 

  

Total classified as current marketable securities

    $ 351       $ 896   
  

 

 

     

 

 

  

Classified as long-term marketable securities:

      

Money market funds

    $ 1       $ 9   

Corporate bonds

      168         140   
  

 

 

     

 

 

  

Total classified as long-term marketable securities

    $ 169       $ 149   
  

 

 

     

 

 

  

Classified as other assets:

      

Money market funds

    $ 10       $ 10   
  

 

 

     

 

 

  

Total classified as other assets

    $ 10       $ 10   
  

 

 

     

 

 

  

 

The amortized cost of available-for-sale securities approximates the fair value for all periods presented.

As of each of March 31, 2012 and December 31, 2011, the Company had approximately $10 million, of available-for-sale investments in money market funds used as collateral for leased buildings, which was included in other assets on the Company's condensed consolidated balance sheets. The Company is restricted from accessing these deposits.

The Company realized no gain or loss on sales of available-for-sale securities of approximately $6 million during first quarter of 2012. The carrying value of the Company's remaining auction rate securities (ARS) holdings as of March 31, 2012 was $32 million (par value $37 million). The Company has the intent and believes it has the ability to sell these ARS within the next 12 months. The Company realized net gains of $1 million on sales of available-for-sale securities of approximately $8 million during first quarter of 2011.

The Company intends to hold its long-term marketable securities for greater than one year and does not intend to use in current operations.

All contractual maturities of the Company's available-for-sale marketable debt securities as of March 31, 2012 were within one year, except those for ARS and certain long-term marketable securities. The Company's ARS have stated maturities ranging from January 2030 to December 2050. The Company's long-term marketable securities include corporate bonds and money market funds. The corporate bonds have maximum stated maturities of 2 years, and the Company intends to invest the money market funds into corporate bonds with maturities of greater than a year. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without call or prepayment penalties.

 

Fair Value Measurements

Financial instruments measured and recorded at fair value on a recurring basis are summarized below:

 

            Fair value measurement at reporting dates using  
     Total      Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) 		     Significant
Other
Observable
Inputs
(Level 2)		      Significant
Unobservable
Inputs
(Level 3) 		 
     (In millions)  

March 31, 2012

            

Assets

            

Classified as cash equivalents:

            

Money market funds

    $ 917       $ 917       $ —         $ —     

Commercial paper

      125         —           125         —     
  

 

 

     

 

 

     

 

 

     

 

 

  

Total classified as cash equivalents

    $ 1,042       $ 917       $ 125       $ —     
  

 

 

     

 

 

     

 

 

     

 

 

  

Classified as current marketable securities:

            

Commercial paper

    $ 249       $ —         $ 249       $ —     

Time deposits

      70         —           70         —     

Auction rate securities

      32         —           —           32   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total classified as current marketable securities

    $ 351       $ —         $ 319       $ 32   
  

 

 

     

 

 

     

 

 

     

 

 

  

Classified as long-term marketable securities:

            

Money market funds

    $ 1       $ 1       $ —         $ —     

Corporate bonds

      168         —           168         —     
  

 

 

     

 

 

     

 

 

     

 

 

  

Total classified as long-term marketable securities

    $ 169       $ 1       $ 168       $ —     
  

 

 

     

 

 

     

 

 

     

 

 

  

Classified as other assets:

            

Money market funds

    $ 10       $ 10       $ —         $ —     
  

 

 

     

 

 

     

 

 

     

 

 

  

Total classified as other assets

    $ 10       $ 10       $ —         $ —     
  

 

 

     

 

 

     

 

 

     

 

 

  

Classified as prepaid expenses and other current assets:

            

Foreign currency derivative contracts

    $ 1       $ —         $ 1       $ —     
  

 

 

     

 

 

     

 

 

     

 

 

  

Total classified as prepaid expenses and other current assets

    $ 1       $ —         $ 1       $ —     
  

 

 

     

 

 

     

 

 

     

 

 

  

Total assets measured at fair value

    $ 1,573       $ 928       $ 613       $ 32   
  

 

 

     

 

 

     

 

 

     

 

 

  

December 31, 2011

            

Assets

            

Classified as cash equivalents:

            

Money market funds

    $ 738       $ 738       $ —         $ —     

Commercial paper

      1         —           1         —     
  

 

 

     

 

 

     

 

 

     

 

 

  

Total classified as cash equivalents

    $ 739       $ 738       $ 1       $ —     
  

 

 

     

 

 

     

 

 

     

 

 

  

Classified as current marketable securities:

            

Commercial paper

    $ 698       $ —         $ 698       $ —     

Time deposits

      160         —           160         —     

Auction rate securities

      38         —           —           38   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total classified as current marketable securities

    $ 896       $ —         $ 858       $ 38   
  

 

 

     

 

 

     

 

 

     

 

 

  

Classified as long-term marketable securities:

            

Money market funds

    $ 9       $ 9       $ 0       $ —     

Corporate bonds

      140         —           140         —     
  

 

 

     

 

 

     

 

 

     

 

 

  

Total classified as long-term marketable securities

    $ 149      $ 9       $ 140      $ —     
  

 

 

    

 

 

     

 

 

    

 

 

  

Classified as other assets:

          

Money market funds

    $ 10      $ 10       $ —        $ —     
  

 

 

    

 

 

     

 

 

    

 

 

  

Total classified as other assets

    $ 10      $ 10       $ —        $ —     
  

 

 

    

 

 

     

 

 

    

 

 

  

Total assets measured at fair value

    $ 1,794      $ 757       $ 999      $ 38   
  

 

 

    

 

 

     

 

 

    

 

 

  

Liabilities

          

Classified as accrued liabilities - Foreign currency derivative contracts

    $ (2 )    $ —         $ (2 )    $ —     
  

 

 

    

 

 

     

 

 

    

 

 

  

Total liabilities measured at fair value

    $ (2 )    $ —         $ (2 )    $ —     
  

 

 

    

 

 

     

 

 

    

 

 

  

 

With the exception of its long-term debt, the Company carries its financial instruments at fair value. Investments in money market mutual funds, commercial paper, time deposits, marketable equity securities, corporate bonds and foreign currency derivative contracts are classified within Level 1 or Level 2. This is because such financial instruments are valued primarily using quoted market prices or alternative pricing sources and models utilizing market observable inputs, as provided to the Company by its brokers. The Company's Level 1 assets are valued using quoted prices for identical instruments in active markets. The Company's Level 2 short-term investments are valued using broker reports that utilize quoted market prices for identical or comparable instruments. Brokers gather observable inputs for all of the Company's fixed income securities from a variety of industry data providers and other third-party sources. The Company's Level 2 long-term investments are valued using broker reports that utilize a third party professional pricing service who gathers information from multiple market sources and integrates relevant credit information, observed market movements and sector news into their pricing evaluation. The Company validates, on a sample basis, the derived prices provided by the brokers by comparing their assessment of the fair values of the Level 2 long term investments against the fair values of the portfolio balances of another third-party professional's pricing services, other than that utilized by the brokers, who use a similar technique as the brokers to derive pricing as described above. The Company's foreign currency derivative contracts are classified within Level 2 because the valuation inputs are based on quoted prices and market observable data of similar instruments in active markets, such as currency spot and forward rates.

The Company did not have any transfers between Level 1 and Level 2 of the fair value hierarchy.

The ARS investments are classified within Level 3 because they are valued using a discounted cash flow model. Some of the inputs to this model are unobservable in the market and are significant.

The continuing uncertainties in the credit markets have affected all of the Company's ARS investments and auctions for these securities have failed to settle on their respective settlement dates since February 2008. As a result, reliable Level 1 or Level 2 pricing is not available for these ARS. In light of these developments, the Company performs its own discounted cash flow analysis to value these ARS. As of March 31, 2012 and December 31, 2011, the Company's significant inputs and assumptions used in the discounted cash flow model to determine the fair value of its ARS include interest rate, liquidity and credit discounts and the estimated life of the ARS investments. The outcomes of these analyses indicated that the fair value of the ARS remained relatively unchanged as of March 31, 2012 when compared to the fair value as of December 31, 2011. As of March 31, 2012, these Level 3 ARS accounted for approximately 2 percent of the Company's total cash, cash equivalents and current marketable securities.

The roll-forward of the financial instruments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows:

 

     Quarter Ended  
     March 31, 2012     April 2, 2011  
     Auction
Rate Securities		     Auction
Rate Securities		  
     (In millions)  

Beginning balance

    $ 38      $ 57   

Redemption at par

      (6 )      —     
  

 

 

    

 

 

  

Ending balance

    $ 32      $ 57   
  

 

 

    

 

 

  

The Company's significant inputs and assumptions used in the discounted cash flow model to determine the fair value of its ARS are listed below:

 

     Quarter Ended  
     March 31,
2012 		    December 31,
2011 		 

Discount rate for periodic interest payments

      1.05 %      1.13 % 

Discount rate for principal repayments

      1.79 %      1.93 % 

Liquidity discount

      0.90 %      0.90 % 

Credit discount

      2.00 %      2.00 % 

Estimated period (years)

      17         17   

Significant increases (decreases) in the significant inputs and assumptions above in isolation would result in a significantly lower (higher) fair value measurement. There is no interrelationship between changes in the inputs.

Financial Instruments Not Recorded at Fair Value on a Recurring Basis. Financial instruments that are not recorded at fair value are measured at fair value on a quarterly basis for disclosure purposes. The carrying amounts and estimated fair values of financial instruments not recorded at fair value are as follows:

 

     March 31, 2012      December 31, 2011  
     Carrying
amount		      Estimated
Fair Value		      Carrying
amount		      Estimated
Fair Value		  
     (In millions)  

Short-term debt (excluding capital leases)

    $ 485       $ 492       $ 485      $ 490  

Long-term debt (excluding capital leases)

    $ 1,508       $ 1,719       $ 1,505       $ 1,619   

The fair value of the Company's short-term and long-term debt, Level 2 financial instruments, was estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The fair value of the Company's accounts receivable, accounts payable and other short-term obligations approximate their carrying value based on existing payment terms.