Fair Value of Financial Investments and Liabilities

12 Months Ended

Dec. 31, 2011

Fair Value of Financial Investments and Liabilities [Abstract]

Fair Value of Financial Investments and Liabilities

E.   FAIR VALUE OF FINANCIAL INVESTMENTS AND LIABILITIES

Accounting Policy.    The Company follows accounting guidance that defines fair value, establishes a framework for measuring fair value and prescribes disclosures about fair value measurements for its financial investments and liabilities. The guidance defines fair value 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.” Further, it defines a fair value hierarchy, as follows: Level 1 inputs as quoted prices in active markets for identical assets or liabilities; Level 2 inputs as observable inputs other than Level 1 prices, such as quoted market prices for similar assets or liabilities or other inputs that are observable or can be corroborated by market data; and Level 3 inputs as unobservable inputs that are supported by little or no market activity and that are financial instruments whose value is determined using pricing models or instruments for which the determination of fair value requires significant management judgment or estimation.

Financial investments that are available to be traded on readily accessible stock exchanges (domestic or foreign) are considered to have active markets and have been valued using Level 1 inputs. Financial investments that are not available to be traded on a public market or have limited secondary markets, or contain provisions that limit the ability to sell the investment are considered to have inactive markets and have been valued using Level 2 or 3 inputs. The Company incorporated credit risk into the valuations of financial investments by estimating the likelihood of non-performance by the counterparty to the applicable transactions. The estimate included the length of time relative to the contract, financial condition of the counterparty and current market conditions. The criteria for determining if a market was active or inactive were based on the individual facts and circumstances.

Financial Investments.    The Company has maintained investments in available-for-sale securities and a number of private equity funds and other private investments, principally as part of its tax planning strategies, as any gains enhance the utilization of any current and future tax capital losses.

Financial investments included in other assets were as follows, in millions:

	At December 31
	2011		2010
Auction rate securities	$	22	$	22
TriMas Corporation common stock		—		40
Total recurring investments		22		62
Private equity funds		86		106
Other investments		4		6
Total non-recurring investments		90		112
Total	$	112	$	174

The Company’s investments in available-for-sale securities at December 31, 2011 and 2010 were as follows, in millions:

			Pre-tax
	Cost Basis		Unrealized Gains		Unrealized Losses		Recorded Basis
December 31, 2011	$	19	$	3	$	—	$	22
December 31, 2010	$	22	$	40	$	—	$	62

The Company’s investments in private equity funds and other private investments are carried at cost. At December 31, 2011, the Company has investments in 17 venture capital funds, with an aggregate carrying value of $17 million. The venture capital funds invest in start-up or smaller, early-stage established businesses, principally in the information technology, bio-technology and health care sectors. At December 31, 2011, the Company also has investments in 22 buyout funds, with an aggregate carrying value of $69 million. The buyout funds invest in later-stage, established businesses and no buyout fund has a concentration in a particular sector.

Recurring Fair Value Measurements.    For financial investments measured at fair value on a recurring basis at each reporting period, the unrealized gains or losses (that are deemed to be temporary) are recognized, net of tax effect, through shareholders’ equity, as a component of other comprehensive income. Realized gains and losses and charges for other-than-temporary impairments are included in determining net income, with related purchase costs based upon specific identification.

For marketable securities, the Company reviews, on a recurring basis, industry analyst reports, key ratios and statistics, market analyses and other factors for each investment to determine if an unrealized loss is other-than-temporary.

In the past, the Company invested excess cash in auction rate securities. Auction rate securities are investment securities that have interest rates which are reset every 7, 28 or 35 days. The fair values of the auction rate securities held by the Company have been estimated, on a recurring basis, using a discounted cash flow model (Level 3 input). The significant inputs in the discounted cash flow model used to value the auction rate securities include: expected maturity of auction rate securities, discount rate used to determine the present value of expected cash flows and assumptions for credit defaults, since the auction rate securities are backed by credit default swap agreements.

During 2010, the Company and Asahi Tec agreed to amend the preferred stock to include a more favorable conversion feature into common stock and to include a mandatory conversion date of February 28, 2011. As a result of the amendment, the Company recognized a $28 million impairment loss based on the current fair value of the preferred stock on an if-converted basis at June 30, 2010. Also, as a result of the amendment, the Company reversed an unrealized gain of $23 million that was previously included in accumulated other comprehensive income. During the last six months of 2010, the Company converted all its holdings of Asahi Tec preferred stock into common stock which was sold, in its entirety, in open market transactions. The Company realized cash proceeds of $11 million and realized losses aggregating $8 million in 2010. As a result of the disposition of the Asahi Tec common stock, the Company received a tax refund of $16 million in 2011 relating to the utilization of a loss carryback to offset taxes paid on prior capital gains.

During 2011 and 2010, the Company sold 1,974,000 shares and 481,000 shares, respectively, of its investment in TriMas common stock for cash of $43 million and $10 million, respectively; at December 31, 2011, the Company does not own any shares of TriMas common stock.

Non-Recurring Fair Value Measurements.    It is not practicable for the Company to estimate a fair value for private equity funds and other private investments because there are no quoted market prices, and sufficient information is not readily available for the Company to utilize a valuation model to determine the fair value for each fund. These investments are evaluated, on a non-recurring basis, for potential other-than-temporary impairment when impairment indicators are present, or when an event or change in circumstances has occurred, that may have a significant adverse effect on the fair value of the investment.

Impairment indicators the Company considers include the following: whether there has been a significant deterioration in earnings performance, asset quality or business prospects; a significant adverse change in the regulatory, economic or technological environment; a significant adverse change in the general market condition or geographic area in which the investment operates; industry and sector performance; current equity and credit market conditions; and any bona fide offers to purchase the investment for less than the carrying value. The Company also considers specific adverse conditions related to the financial health of and business outlook for the fund, including industry and sector performance. The significant assumptions utilized in analyzing a fund for potential other-than-temporary impairment include current economic conditions, market analysis for specific funds and performance indicators in the residential and commercial construction, bio-technology, health care and information technology sectors in which the applicable funds’ investments operate. Since there is no active trading market for these investments, they are for the most part illiquid. These investments, by their nature, can also have a relatively higher degree of business risk, including financial leverage, than other financial investments. Future changes in market conditions, the future performance of the underlying investments or new information provided by private equity fund managers could affect the recorded values of such investments and the amounts realized upon liquidation. Due to the significant unobservable inputs, the fair value measurements used to evaluate impairment are a Level 3 input.

Recurring Fair Value Measurements.    Financial investments and (liabilities) measured at fair value on a recurring basis at each reporting period and the amounts for each level within the fair value hierarchy were as follows, in millions:

			Fair Value Measurements Using
	Dec. 31, 2011		Quoted Market Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Auction rate securities	$	22	$	—	$	—	$	22
Total	$	22	$	—	$	—	$	22

			Fair Value Measurements Using
	Dec. 31, 2010		Quoted Market Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
TriMas Corporation	$	40	$	40	$	—	$	—
Auction rate securities		22		—		—		22
Total	$	62	$	40	$	—	$	22

The following table summarizes the changes in Level 3 financial investments measured at fair value on a recurring basis for the years ended December 31, 2011 and 2010, in millions:

	Auction Rate Securities
Fair value January 1, 2011	$	22
Total losses included in earnings
Unrealized losses		—
Purchases, issuances, settlements		—
Transfers from Level 3 to Level 2		—
Fair value at December 31, 2011	$	22

	Asahi Tec Preferred Stock			Auction Rate Securities		Total
Fair value January 1, 2010	$	71		$	22	$	93
Total losses included in earnings		(28	)		—		(28	)
Unrealized losses		(23	)		—		(23	)
Purchases, issuances, settlements		—			—		—
Transfers from Level 3 to Level 2		(20	)		—		(20	)
Fair value at December 31, 2010	$	—		$	22	$	22

Non-Recurring Fair Value Measurements.    During 2011, there were not any financial investments measured on a non-recurring basis. Financial investments measured at fair value on a non-recurring basis during 2010 and the amounts for each level within the fair value hierarchy were as follows, in millions:

			Fair Value Measurements Using
	Dec. 31, 2010		Quoted Market Prices (Level 1)		Significant Other Observable Unobservable Inputs (Level 2)		Significant Total Inputs (Level 3)		Gains (Losses)
Private equity funds	$	2	$	—	$	—	$	2	$	(4	)
Other private investments		—		—		—		—		(2	)
	$	2	$	—	$	—	$	2	$	(6	)

None of the Company’s investments in private equity funds, for which fair value was determined, had unrealized losses in 2011 or 2010.

The remaining private equity investments in 2010 with an aggregate carrying value of $104 million, were not reviewed for impairment, as there were no indicators of impairment or identified events or changes in circumstances that would have a significant adverse effect on the fair value of the investment.

Realized Gains (Losses) and Impairment Charges.    The Company did not have any transfers between Level 1 and Level 2 financial assets in 2011 or 2010. During 2010, based on information from the fund manager, the Company determined that the decline in the estimated value of three private equity funds (with an aggregate carrying value of $6 million prior to impairment) was other-than-temporary and, accordingly, recognized non-cash, pre-tax impairment charges of $4 million. During 2010, the Company also determined that the decline in the estimated value of one private investment was other-than-temporary and, accordingly, recognized a non-cash, pre-tax impairment charge of $2 million.

During 2009, the Company determined that the decline in the estimated value of five private equity funds, with an aggregate carrying value of $41 million prior to impairment, was other-than-temporary. Accordingly, for the year ended December 31, 2009, the Company recognized non-cash, pre-tax impairment charges of $10 million.

Income from financial investments, net, included in other, net, within other income (expense), net, and impairment charges for financial investments were as follows, in millions:

	2011		2010			2009
Realized gains from marketable securities	$	41	$	10		$	—
Realized losses from marketable securities		—		(8	)		—
Dividend income from marketable securities		—		—			—
Income from other investments, net		32		7			3
Dividend income from other investments		—		—			—
Income from financial investments, net	$	73	$	9		$	3
Impairment charges:
Asahi Tec	$	—	$	(28	)	$	—
Private equity funds		—		(4	)		(10	)
Other private investments		—		(2	)		—
TriMas Corporation		—		—			—
Marketable securities		—		—			—
Total impairment charges	$	—	$	(34	)	$	(10	)

The impairment charges related to the Company’s financial investments recognized during 2010 and 2009 were based upon then-current estimates for the fair value of certain financial investments; such estimates could change in the near-term based upon future events and circumstances.

The fair value of the Company’s short-term and long-term fixed-rate debt instruments is based principally upon quoted market prices for the same or similar issues or the current rates available to the Company for debt with similar terms and remaining maturities. The aggregate estimated market value of short-term and long-term debt at December 31, 2011 was approximately $4.0 billion, compared with the aggregate carrying value of $4.0 billion. The aggregate estimated market value of short-term and long-term debt at December 31, 2010 was approximately $4.2 billion, compared with the aggregate carrying value of $4.1 billion.