Financial Instruments and Fair Value

3 Months Ended

Jul. 27, 2012

Financial Instruments and Fair Value

8.  Financial Instruments and Fair Value

The accounting guidance for fair value measurements provides a framework for measuring fair value on either a recurring or nonrecurring basis whereby the inputs used in valuation techniques are assigned a hierarchical level. The following are the three levels of inputs to measure fair value:

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

Level 2: Inputs that reflect quoted prices for identical assets or liabilities in less active markets; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3: Unobservable inputs that reflect our own assumptions incorporated in valuation techniques used to measure fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

We consider an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an on-going basis, and consider an inactive market to be one in which there are infrequent or few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. Where appropriate, our own or the counterparty’s non-performance risk is considered in measuring the fair values of liabilities and assets, respectively.

Investments

The following is a summary of our investments (in millions):

	July 27, 2012									April 27, 2012
			Gross Unrealized									Gross Unrealized
	Cost or Amortized Cost		Gains		Losses			Estimated Fair Value		Cost or Amortized Cost		Gains		Losses			Estimated Fair Value
Corporate bonds	$	2,968.3	$	12.4	$	(0.6	)	$	2,980.1	$	2,665.2	$	9.5	$	(1.4	)	$	2,673.3
U.S. Treasury and government debt securities		620.0		1.2		0.0			621.2		836.7		1.2		(0.1	)		837.8
Commercial paper		207.4		0.0		0.0			207.4		164.6		0.0		0.0			164.6
Certificates of deposit		306.7		0.3		0.0			307.0		347.7		0.5		0.0			348.2
Money market funds		481.9		0.0		0.0			481.9		724.8		0.0		0.0			724.8
Auction rate securities		49.1		0.8		(3.6	)		46.3		54.1		0.9		(4.0	)		51.0
Equity funds		26.4		0.0		0.0			26.4		25.5		0.0		0.0			25.5
Total debt and equity securities	$	4,659.8	$	14.7	$	(4.2	)	$	4,670.3	$	4,818.6	$	12.1	$	(5.5	)	$	4,825.2

The following table presents the contractual maturities of our debt investments as of July 27, 2012 (in millions):

	Amortized Cost		Fair Value
Due in one year or less	$	1,655.4	$	1,658.8
Due in one through five years		2,243.0		2,252.9
Due after ten years*		49.1		46.3
	$	3,947.5	$	3,958.0

* Consists of auction rate securities which have contractual maturities of greater than 10 years.

Fair Value of Financial Instruments

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of July 27, 2012 (in millions):

			Fair Value Measurements at Reporting Date Using
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Corporate bonds	$	2,980.1	$	0.0	$	2,980.1	$	0.0
U.S. Treasury and government debt securities		621.2		224.9		396.3		0.0
Commercial paper		207.4		0.0		207.4		0.0
Certificates of deposit		307.0		0.0		307.0		0.0
Money market funds		481.9		481.9		0.0		0.0
Auction rate securities		46.3		0.0		0.0		46.3
Equity funds		26.4		26.4		0.0		0.0
Foreign currency contracts		8.9		0.0		8.9		0.0
Total	$	4,679.2	$	733.2	$	3,899.7	$	46.3
Liabilities
Foreign currency contracts	$	0.4	$	0.0	$	0.4	$	0.0

Reported as (in millions):

			Fair Value Measurements at Reporting Date Using
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Cash equivalents	$	685.9	$	481.9	$	204.0	$	0.0
Short-term investments		3,911.7		224.9		3,686.8		0.0
Other current assets		15.1		6.2		8.9		0.0
Other non-current assets		66.5		20.2		0.0		46.3
Total	$	4,679.2	$	733.2	$	3,899.7	$	46.3
Liabilities
Other current liabilities	$	0.4	$	0.0	$	0.4	$	0.0

Level 2 investments are held by a custodian who prices some of the investments themselves using standard inputs in various asset price models or obtains investment prices from a third party pricing provider that incorporates standard inputs in various asset price models. We review Level 2 inputs and fair value for reasonableness and the values may be further validated by comparison to multiple independent pricing sources. In addition, we review third-party pricing provider models, key inputs and assumptions and understand the pricing processes at our third-party providers in determining the overall reasonableness of the fair value of our Level 2 financial instruments. As of July 27, 2012 and April 27, 2012, we have not made any adjustments to the prices obtained from our third party pricing providers.

The unrealized losses on our available-for-sale investments in corporate bonds were caused by market value declines as a result of the economic environment, as well as fluctuations in market interest rates. Because the decline in market value is attributable to changes in market conditions and not credit quality, and because we have concluded currently that we neither intend to sell nor is it more likely than not that we will be required to sell these investments prior to a recovery of par value, we do not consider these investments to be other-than temporarily impaired as of July 27, 2012.

Quantitative information about our Level 3 fair value measurements is as follows (fair value in millions):

	Fair Value at July 27, 2012		Valuation Techniques	Unobservable Inputs	Range (Weighted average)
ARSs	$	46.3	Discounted cash flow	Time-to-economic maturity	6.7 yrs – 11.8 yrs (8.7 yrs)
				Liquidity risk premium, market credit spread and other factors	1.7% - 2.4% (2.0%)
				Coupon rate	0.0% - 2.8% (1.4%)
			Market comparable securities	Discount rate	6.0% - 17.0% (12.7%)

All of our ARSs are classified as other non-current assets and are backed by pools of student loans guaranteed by the U.S. Department of Education. We estimate the fair value of each individual ARS using an income (discounted cash flow) and market approach that incorporate both observable and unobservable inputs. Key inputs into the discounted cash flow analysis include the time-to-economic maturity, liquidity risk premium, market credit spread and other factors and a coupon rate. The key input into the market approach is a discount rate. A significant increase (decrease) in the time-to-economic maturity, liquidity risk premium, market credit spread and other factors, coupon rate or discount rate could result in a significantly lower (higher) fair value estimate. We review the fair value of our Level 3 financial instruments for overall reasonableness by reviewing service provider pricing methodologies, key inputs and assumptions and by understanding the processes used by our third-party service providers. Based on our ability to access our cash and short-term investments, our expected operating cash flows, and our other sources of cash, we do not intend to sell these investments prior to recovery of value. We will continue to monitor our ARS investments in light of the debt market environment and evaluate these investments for impairment and classification.

The table below provides a reconciliation of the beginning and ending balance of our Level 3 auction rate securities measured at fair value on a recurring basis using significant unobservable inputs (in millions):

	Three Months Ended
	July 27, 2012			July 29, 2011
Balance at beginning of period	$	51.0		$	65.1
Total unrealized gains, net included in other comprehensive income		0.3			0.9
Settlements		(5.0	)		(9.7	)
Balance at end of period	$	46.3		$	56.3