FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy contains three levels as follows:
Level 1 — Unadjusted quoted prices available in active markets for the identical assets or liabilities at the measurement date.
Level 2 — Other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:
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• | Quoted prices for similar assets or liabilities in active markets; |
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• | Quoted prices for identical or similar assets in non-active markets; |
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• | Inputs other than quoted prices that are observable for the asset or liability; and |
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• | Inputs derived principally from or corroborated by other observable market data. |
Level 3 — Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The fair value hierarchy requires the use of observable market data when available. In instances where the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input significant to the fair value measurement in its entirety. Our assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.
The following tables set forth by level within the fair value hierarchy our financial assets and liabilities accounted for at fair value on a recurring basis according to the valuation techniques we used to determine their fair values:
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| | | | | | | | | | | | | | | | | | | |
| | | | | | | in millions | |
September 28, 2013 | Level 1 |
| | Level 2 |
| | Level 3 |
| | Netting (a) |
| | Total |
|
Assets: | | | | | | | | | |
Commodity Derivatives | $ | — |
| | $ | 29 |
| | $ | — |
| | $ | (21 | ) | | $ | 8 |
|
Foreign Exchange Forward Contracts | — |
| | 3 |
| | — |
| | (1 | ) | | 2 |
|
Available for Sale Securities: | | | | | | | | | |
Current | — |
| | 1 |
| | — |
| | — |
| | 1 |
|
Non-current | 4 |
| | 24 |
| | 65 |
| | — |
| | 93 |
|
Deferred Compensation Assets | 23 |
| | 191 |
| | — |
| | — |
| | 214 |
|
Total Assets | $ | 27 |
| | $ | 248 |
| | $ | 65 |
| | $ | (22 | ) | | $ | 318 |
|
| | | | | | | | | |
Liabilities: | | | | | | | | | |
Commodity Derivatives | $ | — |
| | $ | 101 |
| | $ | — |
| | $ | (101 | ) | | $ | — |
|
Foreign Exchange Forward Contracts | — |
| | 1 |
| | — |
| | — |
| | 1 |
|
Total Liabilities | $ | — |
| | $ | 102 |
| | $ | — |
| | $ | (101 | ) | | $ | 1 |
|
| | | | | | | | | |
September 29, 2012 | Level 1 |
| | Level 2 |
| | Level 3 |
| | Netting (a) |
| | Total |
|
Assets: | | | | | | | | | |
Commodity Derivatives | $ | — |
| | $ | 53 |
| | $ | — |
| | $ | (40 | ) | | $ | 13 |
|
Foreign Exchange Forward Contracts | — |
| | 1 |
| | — |
| | (1 | ) | | — |
|
Available for Sale Securities: | | | | | | | | | |
Current | — |
| | 3 |
| | — |
| | — |
| | 3 |
|
Non-current | 6 |
| | 25 |
| | 86 |
| | — |
| | 117 |
|
Deferred Compensation Assets | 31 |
| | 149 |
| | — |
| | — |
| | 180 |
|
Total Assets | $ | 37 |
| | $ | 231 |
| | $ | 86 |
| | $ | (41 | ) | | $ | 313 |
|
| | | | | | | | | |
Liabilities: | | | | | | | | | |
Commodity Derivatives | $ | — |
| | $ | 102 |
| | $ | — |
| | $ | (100 | ) | | $ | 2 |
|
Foreign Exchange Forward Contracts | — |
| | 3 |
| | — |
| | — |
| | 3 |
|
Total Liabilities | $ | — |
| | $ | 105 |
| | $ | — |
| | $ | (100 | ) | | $ | 5 |
|
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(a) | Our derivative assets and liabilities are presented in our Consolidated Balance Sheets on a net basis. We net derivative assets and liabilities, including cash collateral, when a legally enforceable master netting arrangement exists between the counterparty to a derivative contract and us. At September 28, 2013, and September 29, 2012, we had posted with various counterparties $79 million and $59 million, respectively, of cash collateral and held no cash collateral. |
The following table provides a reconciliation between the beginning and ending balance of debt securities measured at fair value on a recurring basis in the table above that used significant unobservable inputs (Level 3): |
| | | | | | | |
| | | in millions |
|
| September 28, 2013 |
| | September 29, 2012 |
|
Balance at beginning of year | $ | 86 |
| | $ | 83 |
|
Total realized and unrealized gains (losses): | | | |
Included in earnings | 1 |
| | 1 |
|
Included in other comprehensive income (loss) | — |
| | — |
|
Purchases | 19 |
| | 28 |
|
Issuances | — |
| | — |
|
Settlements | (41 | ) | | (26 | ) |
Balance at end of year | $ | 65 |
| | $ | 86 |
|
Total gains (losses) for the periods included in earnings attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at end of year | $ | — |
| | $ | — |
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The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Derivative Assets and Liabilities: Our commodities and foreign exchange forward contracts primarily include exchange-traded and over-the-counter contracts which are further described in Note 12: Derivative Financial Instruments. We record our commodity derivatives at fair value using quoted market prices adjusted for credit and non-performance risk and internal models that use as their basis readily observable market inputs including current and forward commodity market prices. Our foreign exchange forward contracts are recorded at fair value based on quoted prices and spot and forward currency prices adjusted for credit and non-performance risk. We classify these instruments in Level 2 when quoted market prices can be corroborated utilizing observable current and forward commodity market prices on active exchanges or observable market transactions of spot currency rates and forward currency prices.
Available for Sale Securities: Our investments in marketable debt securities are classified as available-for-sale and are reported at fair value based on pricing models and quoted market prices adjusted for credit and non-performance risk. Short-term investments with maturities of less than 12 months are included in Other current assets in the Consolidated Balance Sheets and primarily include certificates of deposit and commercial paper. All other marketable debt securities are included in Other Assets in the Consolidated Balance Sheets and have maturities ranging up to 35 years. We classify our investments in U.S. government, U.S. agency, certificates of deposit and commercial paper debt securities as Level 2 as fair value is generally estimated using discounted cash flow models that are primarily industry-standard models that consider various assumptions, including time value and yield curve as well as other readily available relevant economic measures. We classify certain corporate, asset-backed and other debt securities as Level 3 as there is limited activity or less observable inputs into valuation models, including current interest rates and estimated prepayment, default and recovery rates on the underlying portfolio or structured investment vehicle. We also classified privately held redeemable preferred stock securities as Level 3 as there was limited activity or less observable inputs into valuation models, including interest rates and credit worthiness of the underlying private issuer. As of September 28, 2013, the privately held redeemable preferred stock had been fully redeemed. Significant changes to assumptions or unobservable inputs in the valuation of our Level 3 instruments would not have a significant impact to our consolidated financial statements.
Additionally, we have 0.8 million shares of Syntroleum Corporation common stock and 0.4 million warrants, which expire in June 2015, to purchase an equivalent amount of Syntroleum Corporation common stock at an average price of $28.70. We record the shares and warrants in Other Assets in the Consolidated Balance Sheets at fair value based on quoted market prices. We classify the shares as Level 1 as the fair value is based on unadjusted quoted prices available in active markets. We classify the warrants as Level 2 as fair value can be corroborated based on observable market data.
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| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | in millions | |
| September 28, 2013 | | September 29, 2012 |
| Amortized Cost Basis |
| | Fair Value |
| | Unrealized Gain/(Loss) |
| | Amortized Cost Basis |
| | Fair Value |
| | Unrealized Gain/(Loss) |
|
Available for Sale Securities: | | | | | | | | | | | |
Debt Securities: | | | | | | | | | | | |
U.S. Treasury and Agency | $ | 25 |
| | $ | 25 |
| | $ | — |
| | $ | 26 |
| | $ | 27 |
| | $ | 1 |
|
Corporate and Asset-Backed (a) | 64 |
| | 65 |
| | 1 |
| | 64 |
| | 66 |
| | 2 |
|
Redeemable Preferred Stock | — |
| | — |
| | — |
| | 20 |
| | 20 |
| | — |
|
Equity Securities: | | | | | | | | | | | |
Common Stock and Warrants | 9 |
| | 4 |
| | (5 | ) | | 9 |
| | 7 |
| | (2 | ) |
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(a) | At September 28, 2013, and September 29, 2012, the amortized cost basis for Corporate and Asset-Backed debt securities had been reduced by accumulated other than temporary impairments of $1 million and $2 million, respectively. |
Unrealized holding gains (losses), net of tax, are excluded from earnings and reported in OCI until the security is settled or sold. On a quarterly basis, we evaluate whether losses related to our available-for-sale securities are temporary in nature. Losses on equity securities are recognized in earnings if the decline in value is judged to be other than temporary. If losses related to our debt securities are determined to be other than temporary, the loss would be recognized in earnings if we intend, or more likely than not will be required, to sell the security prior to recovery. For debt securities in which we have the intent and ability to hold until maturity, losses determined to be other than temporary would remain in OCI, other than expected credit losses which are recognized in earnings. We consider many factors in determining whether a loss is temporary, including the length of time and extent to which the fair value has been below cost, the financial condition and near-term prospects of the issuer and our ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery. During fiscal 2013, 2012 and 2011, we recognized no other than temporary impairments in earnings. No other than temporary losses were deferred in OCI as of September 28, 2013, and September 29, 2012.
Deferred Compensation Assets: We maintain non-qualified deferred compensation plans for certain executives and other highly compensated employees. Investments are maintained within a trust and include money market funds, mutual funds and life insurance policies. The cash surrender value of the life insurance policies is invested primarily in mutual funds. The investments are recorded at fair value based on quoted market prices and are included in Other Assets in the Consolidated Balance Sheets. We classify the investments which have observable market prices in active markets in Level 1 as these are generally publicly-traded mutual funds. The remaining deferred compensation assets are classified in Level 2, as fair value can be corroborated based on observable market data. Realized and unrealized gains (losses) on deferred compensation are included in earnings.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
In addition to assets and liabilities that are recorded at fair value on a recurring basis, we record assets and liabilities at fair value on a nonrecurring basis. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges. During fiscal 2013, we recorded a $56 million impairment charge related to our Weifang operation in China. The impairment charge resulted from the completion of an assessment of our long-term business strategy in China, in which we determined Weifang was no longer core to the execution of our future business plan. Our valuation of these assets incorporated unobservable Level 3 inputs. We did not have any other significant measurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition.
Other Financial Instruments
Fair value of our debt is principally estimated using Level 2 inputs based on quoted prices for those or similar instruments. Fair value and carrying value for our debt are as follows: |
| | | | | | | | | | | | | | | |
| | | | | in millions | |
| September 28, 2013 | | September 29, 2012 |
| Fair Value |
| | Carrying Value |
| | Fair Value |
| | Carrying Value |
|
Total Debt | $ | 2,541 |
| | $ | 2,408 |
| | $ | 2,596 |
| | $ | 2,432 |
|
Concentrations of Credit Risk
Our financial instruments exposed to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. Our cash equivalents are in high quality securities placed with major banks and financial institutions. Concentrations of credit risk with respect to receivables are limited due to the large number of customers and their dispersion across geographic areas. We perform periodic credit evaluations of our customers’ financial condition and generally do not require collateral. At September 28, 2013, and September 29, 2012, 17.5% and 17.1%, respectively, of our net accounts receivable balance was due from Wal-Mart Stores, Inc. No other single customer or customer group represented greater than 10% of net accounts receivable.
