FAIR VALUE MEASUREMENTS
ASC 820, “Fair Value Measurement,” 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. ASC 820 also establishes a three-level fair value hierarchy that prioritizes information used in developing assumptions when pricing an asset or liability as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs where there is little or no market data, which requires the reporting entity to develop its own assumptions.
ASC 820 requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
Recurring Fair Value Measurements
The following tables present the Company’s fair value hierarchy for those assets and liabilities measured at fair value as of September 30, 2013 and 2012 (in millions):
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements Using: |
| Total as of September 30, 2013 | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Other current assets | | | | | | | |
Foreign currency exchange derivatives | $ | 33 |
| | $ | — |
| | $ | 33 |
| | $ | — |
|
Commodity derivatives | 8 |
| | — |
| | 8 |
| | — |
|
Interest rate swaps | 2 |
| | — |
| | 2 |
| | — |
|
Cross-currency interest rate swaps | 7 |
| | — |
| | 7 |
| | — |
|
Other noncurrent assets | | | | | | | |
Interest rate swaps | 3 |
| | — |
| | 3 |
| | — |
|
Investments in marketable common stock | 30 |
| | 30 |
| | — |
| | — |
|
Equity swap | 183 |
| | 183 |
| | — |
| | — |
|
Total assets | $ | 266 |
| | $ | 213 |
| | $ | 53 |
| | $ | — |
|
Other current liabilities | | | | | | | |
Foreign currency exchange derivatives | $ | 32 |
| | $ | — |
| | $ | 32 |
| | $ | — |
|
Commodity derivatives | 3 |
| | — |
| | 3 |
| | — |
|
Current portion of long-term debt | | | | | | | |
Fixed rate debt swapped to floating | 452 |
| | — |
| | 452 |
| | — |
|
Long-term debt | | | | | | | |
Fixed rate debt swapped to floating | 927 |
| | — |
| | 927 |
| | — |
|
Total liabilities | $ | 1,414 |
| | $ | — |
| | $ | 1,414 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements Using: |
| Total as of September 30, 2012 | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Other current assets | | | | | | | |
Foreign currency exchange derivatives | $ | 22 |
| | $ | — |
| | $ | 22 |
| | $ | — |
|
Commodity derivatives | 11 |
| | — |
| | 11 |
| | — |
|
Interest rate swaps | 2 |
| | — |
| | 2 |
| | — |
|
Cross-currency interest rate swaps | 1 |
| | — |
| | 1 |
| | — |
|
Other noncurrent assets | | | | | | | |
Interest rate swaps | 6 |
| | — |
| | 6 |
| | — |
|
Investments in marketable common stock | 32 |
| | 32 |
| | — |
| | — |
|
Equity swap | 123 |
| | 123 |
| | — |
| | — |
|
Total assets | $ | 197 |
| | $ | 155 |
| | $ | 42 |
| | $ | — |
|
Other current liabilities | | | | | | | |
Foreign currency exchange derivatives | $ | 26 |
| | $ | — |
| | $ | 26 |
| | $ | — |
|
Current portion of long-term debt | | | | | | | |
Fixed rate debt swapped to floating | 401 |
| | — |
| | 401 |
| | — |
|
Long-term debt | | | | | | | |
Fixed rate debt swapped to floating | 456 |
| | — |
| | 456 |
| | — |
|
Total liabilities | $ | 883 |
| | $ | — |
| | $ | 883 |
| | $ | — |
|
Valuation Methods
Foreign currency exchange derivatives - The Company selectively hedges anticipated transactions that are subject to foreign exchange rate risk primarily using foreign currency exchange hedge contracts. The foreign currency exchange derivatives are valued under a market approach using publicized spot and forward prices. As cash flow hedges under ASC 815, the effective portion of the hedge gains or losses due to changes in fair value are initially recorded as a component of accumulated other comprehensive income and are subsequently reclassified into earnings when the hedged transactions occur and affect earnings. Any ineffective portion of the hedge is reflected in the consolidated statement of income. These contracts were highly effective in hedging the variability in future cash flows attributable to changes in currency exchange rates at September 30, 2013 and 2012. The fair value of foreign currency exchange derivatives not designated as hedging instruments under ASC 815 are recorded in the consolidated statements of income.
Commodity derivatives - The Company selectively hedges anticipated transactions that are subject to commodity price risk, primarily using commodity hedge contracts, to minimize overall price risk associated with the Company’s purchases of lead, copper, tin and aluminum. The commodity derivatives are valued under a market approach using publicized prices, where available, or dealer quotes. As cash flow hedges, the effective portion of the hedge gains or losses due to changes in fair value are initially recorded as a component of accumulated other comprehensive income and are subsequently reclassified into earnings when the hedged transactions, typically sales or cost related to sales, occur and affect earnings. Any ineffective portion of the hedge is reflected in the consolidated statements of income. These contracts were highly effective in hedging the variability in future cash flows attributable to changes in commodity prices at September 30, 2013 and 2012.
Interest rate swaps and related debt - The Company selectively uses interest rate swaps to reduce market risk associated with changes in interest rates for its fixed-rate notes. As fair value hedges, the interest rate swaps and related debt balances are valued under a market approach using publicized swap curves. Changes in the fair value of the swap and hedged portion of the debt are recorded in the consolidated statements of income. In the second quarter of fiscal 2011, the Company entered into a fixed to floating interest rate swap totaling $100 million to hedge the coupons of its 5.80% notes which matured on November 15, 2012, two fixed to floating interest rate swaps totaling $300 million to hedge the coupon of its 4.875% notes which matured on September 15, 2013 and five fixed to floating interest rate swaps totaling $450 million to hedge the coupon of its 1.75% notes maturing March 1, 2014. In the fourth quarter of fiscal 2013, the Company entered into a fixed to floating interest rate swap totaling approximately $125 million to hedge the coupon of its 7.70% notes maturing March 1, 2015. Additionally, in the fourth quarter of fiscal 2013, the Company entered into four fixed to floating interest rate swaps totaling $800 million to hedge the coupon of its 5.50% notes maturing January 15, 2016. There were ten interest rate swaps outstanding as of September 30, 2013 and eight interest rate swaps outstanding as of September 30, 2012.
Cross-currency interest rate swaps - The Company selectively uses cross-currency interest rate swaps to hedge the foreign currency rate risk associated with certain of its investments in Japan. The cross-currency interest rate swaps are valued using observable market data. Changes in the market value of the swaps are reflected in the foreign currency translation adjustments component of accumulated other comprehensive income where they offset gains and losses recorded on the Company’s net investment in Japan. At September 30, 2013, the Company had five cross-currency interest rate swaps outstanding totaling 25 billion yen. At September 30, 2012, the Company had three cross-currency interest rate swaps outstanding totaling 20 billion yen.
Investments in marketable common stock - The Company invests in certain marketable common stock, which is valued under a market approach using publicized share prices. As of September 30, 2013 and 2012, the Company recorded unrealized gains of $7 million and $5 million, respectively, in accumulated other comprehensive income. The Company recorded no unrealized losses in accumulated other comprehensive income as of September 30, 2013 and 2012. In the second quarter of fiscal 2012, the Company recorded an impairment charge related to an investment in marketable common stock due to the investee’s bankruptcy announcement in March 2012. As a result, the Company recorded a $14 million impairment charge within selling, general, and administrative expenses in the Power Solutions segment. The impairment reduced the investment to zero and was measured under a market approach using the publicized share price. The inputs utilized in the analysis are classified as Level 1 inputs within the fair value hierarchy as defined in ASC 820.
Equity swaps - The Company selectively uses equity swaps to reduce market risk associated with certain of its stock-based compensation plans, such as its deferred compensation plans. The equity swaps are valued under a market approach as the fair value of the swaps is equal to the Company’s stock price at the reporting period date. Changes in fair value on the equity swaps are reflected in the consolidated statements of income within selling, general and administrative expenses.
The fair values of cash and cash equivalents, accounts receivable, short-term debt and accounts payable approximate their carrying values. The fair value of long-term debt, which was $5.7 billion and $6.3 billion at September 30, 2013 and 2012, respectively, was determined primarily using market quotes classified as Level 1 inputs within the ASC 820 fair value hierarchy.
