Spansion Inc. - 10-Q filing on 2012-10-31

Note 8. Fair Value Measurement

9 Months Ended

Sep. 30, 2012

8. Fair Value Measurement

The Company measures its cash equivalents, marketable securities, foreign currency forward contracts and interest rate derivative contracts at fair value. Fair value is an exit price, representing the amount that would be received on sale of an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:

Level 1— Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2—Include other inputs that are directly or indirectly observable in the marketplace.

Level 3—Unobservable inputs that are supported by little or no market activities.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The cash equivalents and marketable securities are classified within Level 1 or Level 2. This is because the Company values its cash equivalents and marketable securities using quoted market prices or alternative pricing sources and models utilizing observable market inputs. The foreign currency forward contracts and interest rate derivative contracts are classified as Level 2 because the valuation inputs are based on quoted prices and observable market data of similar instruments. The Company principally executes its foreign currency contracts in the retail market in an over-the-counter environment with a relatively high level of price transparency. The market participants and the Company’s counterparties are large money center banks and regional banks. The valuation inputs for the Company’s foreign currency contracts are based on quoted prices and quoted pricing intervals from public data sources (specifically, spot exchange rates, LIBOR rates and credit default rates) and do not involve management judgment. In determining the fair value of the Company’s interest rate swap, the Company uses the present value of expected cash flows based on observable market interest rate yield curves and interest rate volatility commensurate with the term of each instrument.

The fair value measurements of the Company’s financial assets and liabilities consisted of the following types of instruments categorized in the table below based upon the fair value hierarchy:

	September 30, 2012									December 25, 2011
	Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3		Total
	(in thousands)

Money market funds	$	9,180	$	-	$	-	$	9,180	(1)	$	1,172	$	-	$	-	$	1,172	(2)
Commercial paper		-		14,980		-		14,980	(1)		-		24,963		-		24,963	(2)
Foreign currency forward contracts		-		80		-		80			-		20		-		20
Total financial assets	$	9,180	$	15,060	$	-		24,240		$	1,172	$	24,983	$	-		26,155
Interest rate swaps	$	-	$	778	$	-	$	778		$	-	$	1,443	$	-	$	1,443
Foreign currency forward contracts		-	$	1,298		-	$	1,298		$	-	$	-	$	-	$	-
Total financial liabilities	$	-	$	2,076	$	-	$	2,076		$	-	$	1,443	$	-	$	1,443

(1) Total cash and cash equivalents, short-term investments of $328.1 million as of September 30, 2012 includes cash of $303.9 million held in operating accounts, $9.2 million in money market funds and $15.0 million in commercial paper.
(2) Total cash and cash equivalents, short-term investments of $262.7 million as of December 25, 2011 includes cash of $236.5 million held in operating accounts, $1.2 million in money market funds and $25.0 million in commercial paper.

Fair Value of Other Financial Instruments not carried at Fair Value

Substantially all of the Company’s long-term debt is traded in the market and the fair value in the table below is based on the quoted market price as of September 30, 2012 and December 25, 2011 and is Level 1. The carrying amounts and estimated fair values of the Company’s debt instruments are as follows:

	September 30, 2012				December 25, 2011
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
			(in thousands)

Debt traded in the market:
Term Loan	$	217,300	$	218,658	$	249,181	$	246,066
Senior Unsecured Notes		200,000		196,000		200,000		179,000
Debt not traded in the market		-		-		2,317		2,317
Total Debt Obligations	$	417,300	$	414,658	$	451,498	$	427,383

The fair value of the Company’s long-term debt that is not traded in the market was estimated by considering the interest rates and the terms of the debt and it is Level 3. The fair value of the Company’s cash equivalents, accounts receivable, accounts payable and other current liabilities approximates their carrying value.