FAIR VALUE MEASUREMENTS

9 Months Ended

Jul. 28, 2019

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

(16)  Fair Value Measurements

Fair value is defined 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. To determine fair value, the Company uses various methods including market and income approaches. The Company utilizes valuation models and techniques that maximize the use of observable inputs. The models are industry-standard models that consider various assumptions including time values and yield curves as well as other economic measures. These valuation techniques are consistently applied.

Level 1 measurements consist of quoted prices in active markets for identical assets or liabilities. Level 2 measurements include significant other observable inputs such as quoted prices for similar assets or liabilities in active markets; identical assets or liabilities in inactive markets; observable inputs such as interest rates and yield curves; and other market-corroborated inputs. Level 3 measurements include significant unobservable inputs.

The fair values of financial instruments that do not approximate the carrying values in millions of dollars follow:

	July 28, 2019				October 28, 2018				July 29, 2018
	Carrying Value		Fair Value *		Carrying Value		Fair Value *		Carrying Value		Fair Value *
Financing receivables – net:
Equipment operations	$	100	$	93	$	93	$	91	$	78	$	75
Financial services		26,949		26,921		26,961		26,722		25,135		24,911
Total	$	27,049	$	27,014	$	27,054	$	26,813	$	25,213	$	24,986
Financing receivables securitized – net:
Equipment operations	$	54	$	52	$	76	$	73	$	90	$	89
Financial services		5,146		5,154		3,946		3,895		4,572		4,517
Total	$	5,200	$	5,206	$	4,022	$	3,968	$	4,662	$	4,606
Short-term securitization borrowings:
Equipment operations	$	53	$	54	$	75	$	75	$	90	$	89
Financial services		4,995		5,017		3,882		3,870		4,438		4,426
Total	$	5,048	$	5,071	$	3,957	$	3,945	$	4,528	$	4,515
Long-term borrowings due within one year:
Equipment operations	$	1,009	$	1,013	$	970	$	979	$	238	$	239
Financial services		6,922		6,914		5,427		5,411		5,955		5,947
Total	$	7,931	$	7,927	$	6,397	$	6,390	$	6,193	$	6,186
Long-term borrowings:
Equipment operations	$	5,364	$	6,017	$	4,714	$	4,948	$	5,526	$	5,838
Financial services		23,878		24,143		22,523		22,590		21,312		21,388
Total	$	29,242	$	30,160	$	27,237	$	27,538	$	26,838	$	27,226

*  Fair value measurements above were Level 3 for all financing receivables, Level 3 for equipment operations short-term securitization borrowings, and Level 2 for all other borrowings.

Fair values of the financing receivables that were issued long-term were based on the discounted values of their related cash flows at interest rates currently being offered by the Company for similar financing receivables. The fair values of the remaining financing receivables approximated the carrying amounts.

Fair values of long-term borrowings and short-term securitization borrowings were based on current market quotes for identical or similar borrowings and credit risk, or on the discounted values of their related cash flows at current market interest rates. Certain long-term borrowings have been swapped to current variable interest rates. The carrying values of these long-term borrowings included adjustments related to fair value hedges.

Assets and liabilities measured at fair value on a recurring basis in millions of dollars follow*:

	July 28		October 28		July 29
	2019		2018		2018
Level 1:
Marketable securities
Equity fund ***	$	59	$	46	$	46
Fixed income fund ***						9
U.S. government debt securities		49		44		39
Total Level 1 marketable securities		108		90		94
Level 2:
Marketable securities
U.S. government debt securities		73		67		60
Municipal debt securities		57		46		47
Corporate debt securities		156		140		138
International debt securities		9		2		3
Mortgage-backed securities **		158		137		136
Total Level 2 marketable securities		453		392		384
Other assets
Derivatives:
Interest rate contracts		265		80		68
Foreign exchange contracts		53		83		50
Cross-currency interest rate contracts		2		5		6
Total Level 2 other assets		320		168		124
Accounts payable and accrued expenses
Derivatives:
Interest rate contracts		99		350		330
Foreign exchange contracts		45		49		52
Cross-currency interest rate contracts		2				2
Total Level 2 accounts payable and accrued expenses		146		399		384
Level 3:
Marketable securities
International debt securities		4		8		10

* Excluded from this table were the Company’s cash equivalents, which were carried at cost that approximates fair value. The cash equivalents consist primarily of money market funds and time deposits.

**  Primarily issued by U.S. government sponsored enterprises.

***During the third quarter and first nine months of 2019, $1 million and $7 million, respectively, of net unrealized gains on equity securities were recorded in “Other income”.

The contractual maturities of debt securities at July 28, 2019 in millions of dollars are shown below. Actual maturities may differ from those scheduled as a result of prepayments by the issuers. Because of the potential for prepayment on mortgage-backed securities, they are not categorized by contractual maturity.

	Amortized		Fair
	Cost		Value
Due in one year or less	$	30	$	30
Due after one through five years		101		102
Due after five through 10 years		92		96
Due after 10 years		115		120
Mortgage-backed securities		155		158
Debt securities	$	493	$	506

Fair value, recurring Level 3 measurements from available-for-sale marketable securities in millions of dollars follow:

	Three Months Ended				Nine Months Ended
	July 28		July 29		July 28		July 29
	2019		2018		2019		2018
Beginning of period balance	$	4	$	14	$	8	$	17
Principal payments				(4)		(5)		(7)
Other						1
End of period balance	$	4	$	10	$	4	$	10

There were no fair value, nonrecurring measurements from impairments in the reported periods. Financing receivables with specific allowances are shown in Note 11. Losses were not significant.

The following is a description of the valuation methodologies the Company uses to measure certain financial instruments on the balance sheet at fair value:

Marketable Securities – The portfolio of investments, except for the Level 3 measurement international debt securities, is primarily valued on a market approach (matrix pricing model) in which all significant inputs are observable or can be derived from or corroborated by observable market data such as interest rates, yield curves, volatilities, credit risk, and prepayment speeds. Funds are primarily valued using the fund’s net asset value, based on the fair value of the underlying securities. The Level 3 measurement international debt securities are primarily valued using an income approach based on discounted cash flows using yield curves derived from limited, observable market data.

Derivatives – The Company’s derivative financial instruments consist of interest rate swaps and caps, foreign currency futures, forwards and swaps, and cross-currency interest rate swaps. The portfolio is valued based on an income approach (discounted cash flow) using market observable inputs, including swap curves and both forward and spot exchange rates for currencies.

Financing Receivables – Specific reserve impairments are based on the fair value of the collateral, which is measured using a market approach (appraisal values or realizable values). Inputs include a selection of realizable values.