FAIR VALUE MEASUREMENTS

3 Months Ended

Feb. 02, 2020

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

(17)  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:

	February 2, 2020				November 3, 2019				January 27, 2019
	Carrying Value		Fair Value *		Carrying Value		Fair Value *		Carrying Value		Fair Value *
Financing receivables – net:
Equipment operations	$	130	$	123	$	65	$	61	$	102	$	99
Financial services		27,164		27,177		29,130		29,106		25,048		24,900
Total	$	27,294	$	27,300	$	29,195	$	29,167	$	25,150	$	24,999
Financing receivables securitized – net:
Equipment operations	$	42	$	40	$	44	$	43	$	67	$	65
Financial services		4,436		4,464		4,339		4,362		4,496		4,454
Total	$	4,478	$	4,504	$	4,383	$	4,405	$	4,563	$	4,519
Short-term securitization borrowings:
Equipment operations	$	42	$	42	$	44	$	45	$	67	$	67
Financial services		4,374		4,403		4,277		4,302		4,397		4,391
Total	$	4,416	$	4,445	$	4,321	$	4,347	$	4,464	$	4,458
Long-term borrowings due within one year: **
Equipment operations	$	567	$	567	$	642	$	645	$	928	$	937
Financial services		6,638		6,650		6,786		6,788		5,198		5,186
Total	$	7,205	$	7,217	$	7,428	$	7,433	$	6,126	$	6,123
Long-term borrowings: **
Equipment operations	$	5,544	$	6,403	$	5,415	$	6,138	$	4,712	$	4,989
Financial services		24,908		25,299		24,814		25,122		23,143		23,217
Total	$	30,452	$	31,702	$	30,229	$	31,260	$	27,855	$	28,206

* 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.

** Carrying values exclude finance lease liabilities that are presented as borrowings beginning in 2020 (see Notes 3 and 15).

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*:

	February 2		November 3		January 27
	2020		2019		2019
Level 1:
Marketable securities
International equity securities ***	$	3
Equity fund ***		62	$	59	$	51
U.S. government debt securities		52		50		44
Total Level 1 marketable securities		117		109		95
Level 2:
Marketable securities
U.S. government debt securities		87		81		76
Municipal debt securities		62		60		51
Corporate debt securities		173		165		141
International debt securities		4		5		9
Mortgage-backed securities**		165		160		145
Total Level 2 marketable securities		491		471		422
Other assets
Derivatives:
Interest rate contracts		443		363		76
Foreign exchange contracts		37		20		59
Cross-currency interest rate contracts		1		1		3
Total Level 2 other assets		481		384		138
Accounts payable and accrued expenses
Derivatives:
Interest rate contracts		57		65		232
Foreign exchange contracts		40		71		64
Cross-currency interest rate contracts		4		3		2
Total Level 2 accounts payable and accrued expenses		101		139		298
Level 3:
Marketable securities
International debt securities		1		1		6

* 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 first quarter of 2020 and 2019 net unrealized gains on equity securities recorded in “Other income” were $6 million and none, respectively.

The contractual maturities of debt securities at February 2, 2020 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	$	28	$	24
Due after one through five years		96		99
Due after five through 10 years		96		103
Due after 10 years		143		153
Mortgage-backed securities		159		165
Debt securities	$	522	$	544

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

	Three Months Ended
	February 2		January 27
	2020		2019
Beginning of period balance	$	1	$	8
Principal payments				(3)
Other				1
End of period balance	$	1	$	6

Fair value, nonrecurring Level 3 measurements from impairments in millions of dollars follow:

	Fair Value *				Losses
					Three Months Ended
	February 2	November 3		January 27	February 2	January 27
	2020	2019		2019	2020	2019
Equipment on operating leases – net		$	855
Other assets		$	142

*  See financing receivables with specific allowances 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.

Equipment on Operating Leases – Net – The impairments are based on an income approach (discounted cash flow), using the contractual payments, plus an estimate of equipment sale price at lease maturity. Inputs include realized sales values.

Other Assets – The impairments are measured at the fair value of the matured operating lease inventory. The valuations were based on a market approach. The inputs include sales of comparable assets.