Spansion Inc. - 10-Q filing on 2013-05-03

Note 9. Fair Value Measurement

3 Months Ended

Mar. 31, 2013

9. 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.

Cash equivalents, auction rate securities and marketable securities are classified within Level 1 or Level 2. This is because the Company values them 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:

	March 31, 2013									December 30, 2012
	Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3		Total
	(in thousands)

Money market funds	$	4,359	$	-	$	-	$	4,359	(1)	$	1,181	$	-	$	-	$	1,181	(2)
Commercial paper		-		14,984		-		14,984	(1)		-		14,980		-		14,980	(2)
Foreign currency forward contracts		-		7,486		-		7,486			-		3,032		-		3,032
Auction rate securities		-		-		-		-			-		1,530		-		1,530
Total financial assets	$	4,359	$	22,470	$	-	$	26,829		$	1,181	$	19,542	$	-		20,723
Interest rate swaps	$	-	$	251	$	-	$	251		$	-	$	514	$	-	$	514
Foreign currency forward contracts			$	44			$	44		$	-	$	296	$	-	$	296
Total financial liabilities	$	-	$	295	$	-	$	295		$	-	$	810	$	-	$	810

(1) Total cash and cash equivalents, short-term investments of $309.1 million as of March 31, 2013 includes cash of $253.3 million held in operating accounts, $4.3 million in money market funds, $15.0 million in commercial paper and $36.5 million in FDIC insured certificates of deposit.

(2) Total cash and cash equivalents, short-term investments of $313.9 million as of December 30, 2012 includes cash of $297.7 million held in operating accounts, $1.2 million in money market funds and $15.0 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 March 31, 2013 and December 30, 2012 and is Level 1. The carrying amounts and estimated fair values of the Company’s debt instruments are as follows:

	March 31, 2013				December 30, 2012
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
			(in thousands)

Debt traded in the market:
Term Loan	$	214,978	$	217,128	$	216,295	$	217,917
Senior Unsecured Notes		200,000		209,500		200,000		201,000
Total Debt Obligations	$	414,978	$	426,628	$	416,295	$	418,917

The fair value of the Company’s cash equivalents, accounts receivable, accounts payable and other current liabilities approximates their carrying value.