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Fair Value Measurements and Derivative Instruments

12 Months Ended

Dec. 31, 2019

Fair Value Measurements and Derivative Instruments

We measure certain financial assets and liabilities at fair value on a recurring basis. Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. An entity is required to classify certain assets and liabilities measured at fair value based on the following fair value hierarchy that prioritizes the inputs used to measure fair value:


Level 1 –	Unadjusted quoted prices in active markets for identical assets and liabilities.


Level 2 –	Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.


Level 3 –	Unobservable inputs that are supported by little or no market activity, may be derived from internally developed methodologies based on management's best estimate of fair value and that are significant to the fair value of the asset or liability.

Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect its placement within the fair value hierarchy. The following tables show, by level within the fair value hierarchy, our financial assets and liabilities that are accounted for at fair value on a recurring basis at December 31, 2019 and 2018.



	December 31, 2019
	Level 1		Level 2			Level 3		Total
Assets:
Investment securities
Money market funds / commercial paper	$	161,441	$	240,364		$	—	$	401,805
Equity securities	—		21,979			—		21,979
Commingled fixed income securities	1,656		18,404			—		20,060
Government and related securities	64,572		17,478			—		82,050
Corporate debt securities	—		72,149			—		72,149
Mortgage-backed / asset-backed securities	—		66,339			—		66,339
Derivatives
Foreign exchange contracts	—		3,256			—		3,256
Total assets	$	227,669	$	439,969		$	—	$	667,638
Liabilities:
Derivatives
Foreign exchange contracts	$	—	$	(1,402	)	$	—	$	(1,402	)
Total liabilities	$	—	$	(1,402	)	$	—	$	(1,402	)



	December 31, 2018
	Level 1		Level 2			Level 3		Total
Assets:
Investment securities
Money market funds / commercial paper	$	220,756	$	391,891		$	—	$	612,647
Equity securities	—		19,133			—		19,133
Commingled fixed income securities	1,570		20,141			—		21,711
Government and related securities	98,790		9,787			—		108,577
Corporate debt securities	—		56,938			—		56,938
Mortgage-backed / asset-backed securities	—		98,334			—		98,334
Derivatives
Foreign exchange contracts	—		2,031			—		2,031
Total assets	$	321,116	$	598,255		$	—	$	919,371
Liabilities:
Derivatives
Foreign exchange contracts	$	—	$	(735	)	$	—	$	(735	)
Total liabilities	$	—	$	(735	)	$	—	$	(735	)

Investment Securities

The valuation of investment securities is based on the market approach using inputs that are observable, or can be corroborated by observable data, in an active marketplace. The following information relates to our classification into the fair value hierarchy:

•

Money Market Funds / Commercial Paper: Money market funds typically invest in government securities, certificates of deposit, commercial paper and other highly liquid, low risk securities. Money market funds are principally used for overnight deposits and are classified as Level 1 when unadjusted quoted prices in active markets are available and as Level 2 when they are not actively traded on an exchange. Direct investments in commercial paper are not listed on an exchange in an active market and are classified as Level 2.


•	Equity Securities: Equity securities are comprised of mutual funds investing in U.S. and foreign stocks. These mutual funds are classified as Level 2.

•

Commingled Fixed Income Securities: Commingled fixed income securities are comprised of mutual funds that invest in a variety of fixed income securities, including securities of the U.S. government and its agencies, corporate debt, mortgage-backed securities and asset-backed securities. Fair value is based on the value of the underlying investments owned by each fund, minus its liabilities, divided by the number of shares outstanding, as reported by the fund manager. These mutual funds are classified as Level 1 when unadjusted quoted prices in active markets are available and as Level 2 when they are not actively traded on an exchange.

•

Government and Related Securities: Debt securities are classified as Level 1 where active, high volume trades for identical securities exist. Valuation adjustments are not applied to these securities. Debt securities are classified as Level 2 where fair value is determined using quoted market prices for similar securities or benchmarking model derived prices to quoted market prices and trade data for identical or comparable securities.


•	Corporate Debt Securities: Corporate debt securities are valued using recently executed comparable transactions, market price quotations or bond spreads for the same maturity as the security. These securities are classified as Level 2.


•	Mortgage-Backed Securities / Asset-Backed Securities: These securities are valued based on external pricing indices or on external price/spread data. These securities are classified as Level 2.

Available-For-Sale Securities

Available-for-sale securities consisted of the following:



	December 31, 2019
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value
Government and related securities	$	80,732	$	1,358	$	(114	)	$	81,976
Corporate debt securities	70,426		2,009		(286		)	72,149
Commingled fixed income securities	1,675		—		(19		)	1,656
Mortgage-backed / asset-backed securities	65,679		960		(300		)	66,339
Total	$	218,512	$	4,327	$	(719	)	$	222,120



	December 31, 2018
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value
Government and related securities	$	109,776	$	47	$	(1,336	)	$	108,487
Corporate debt securities	58,714		4		(1,780		)	56,938
Commingled fixed income securities	1,637		—		(67		)	1,570
Mortgage-backed / asset-backed securities	100,186		167		(2,019		)	98,334
Total	$	270,313	$	218	$	(5,202	)	$	265,329

Investment securities in a loss position were as follows:



	December 31, 2019				December 31, 2018
	Fair Value		Gross unrealized losses		Fair Value		Gross unrealized losses
Greater than 12 continuous months	$	9,227	$	136	$	177,331	$	4,355
Less than 12 continuous months	52,521		583		48,318		847
Total	$	61,748	$	719	$	225,649	$	5,202

We have not recognized an other-than-temporary impairment on any of the investment securities in an unrealized loss position because we have the ability and intent to hold these securities until recovery of the unrealized losses and expect to receive the stated principal and interest at maturity.

At December 31, 2019, scheduled maturities of available-for-sale securities were as follows:



	Amortized cost		Estimated fair value
Within 1 year	$	35,393	$	35,495
After 1 year through 5 years	49,647		50,426
After 5 years through 10 years	59,265		60,345
After 10 years	74,207		75,854
Total	$	218,512	$	222,120

The actual maturities may not coincide with scheduled maturities as certain securities contain early redemption features and/or allow for the prepayment of obligations with or without penalty.

Held-to-Maturity Securities

Held-to-maturity securities at December 31, 2019, include $383 million of time deposits scheduled to mature within six months. Due to the short-term nature of these investments, they are recorded at cost as it approximates fair value.

Derivative Instruments

Foreign Exchange Contracts

We enter into foreign exchange contracts to mitigate the currency risk associated with anticipated inventory purchases between affiliates and from third parties. These contracts are designated as cash flow hedges. The effective portion of the gain or loss on cash flow hedges is included in AOCI in the period that the change in fair value occurs and is reclassified to earnings in the period that the hedged item is recorded in earnings. At December 31, 2019 and 2018, outstanding contracts associated with these anticipated transactions had a notional amount of $7 million and $8 million, respectively. The valuation of foreign exchange derivatives is based on a market approach using observable market inputs, such as foreign currency spot and forward rates and yield curves.

Interest Rate Swaps

We had an interest rate swap with a notional amount of $300 million to mitigate the interest rate risk associated with $300 million of variable-rate term loans. This swap matured in September 2018. While outstanding, the swap was designated as a cash flow hedge and the effective portion of the gain or loss on the cash flow hedge was included in AOCI in the period that the change in fair value occurred and reclassified to earnings in the period that the hedged item was recorded in earnings.

The fair value of our derivative instruments at December 31, 2019 and 2018 was as follows:



		December 31,
Designation of Derivatives	Balance Sheet Location	2019			2018
Derivatives designated as hedging instruments
Foreign exchange contracts	Other current assets and prepayments	$	207		$	61
	Accounts payable and accrued liabilities	(56		)	(104		)

Derivatives not designated as hedging instruments
Foreign exchange contracts	Other current assets and prepayments	3,049			1,970
	Accounts payable and accrued liabilities	(1,346		)	(631		)

	Total derivative assets	3,256			2,031
	Total derivative liabilities	(1,402		)	(735		)
	Total net derivative asset	$	1,854		$	1,296

The amounts included in AOCI at December 31, 2019 will be recognized in earnings within the next 12 months. No amount of ineffectiveness was recorded in earnings for these designated cash flow hedges.

The following represents the results of cash flow hedging relationships for the years ended December 31, 2019 and 2018:



	Years Ended December 31,
	Derivative Gain (Loss) Recognized in AOCI (Effective Portion)					Location of Gain (Loss) (Effective Portion)	Gain (Loss) Reclassified from AOCI to Earnings (Effective Portion)
Derivative Instrument	2019		2018			Location of Gain (Loss) (Effective Portion)	2019		2018
Foreign exchange contracts	$	371	$	106		Revenue	$	72	$	11
						Cost of sales	104		51
Interest rate swap	$	—	$	(1,776	)	Interest Expense	—		—
							$	176	$	62

We also enter into foreign exchange contracts to minimize the impact of exchange rate fluctuations on short-term intercompany loans and related interest that are denominated in a foreign currency. The revaluation of the intercompany loans and interest and the mark-to-market adjustment on the derivatives are both recorded in earnings. All outstanding contracts at December 31, 2019 mature over the next three months.

The following represents the mark-to-market adjustment on our non-designated derivative instruments for the years ended December 31, 2019 and 2018:



		Years Ended December 31,
		Derivative Gain (Loss) Recognized in Earnings
Derivatives Instrument	Location of Derivative Gain (Loss)	2019		2018
Foreign exchange contracts	Selling, general and administrative expense	$	5,154	$	(33,453	)

Credit-Risk-Related Contingent Features

Certain derivative instruments contain credit-risk-related contingent features that could require us to post collateral based on our long-term senior unsecured debt ratings and the net fair value of our derivatives. At December 31, 2019, we were not required to post any collateral.

Fair Value of Financial Instruments

Our financial instruments include cash and cash equivalents, investment securities, accounts receivable, loan receivables, derivative instruments, accounts payable and debt. The carrying value for cash and cash equivalents, accounts receivable, loans receivable, and accounts payable approximate fair value. The fair value of our debt is estimated based on recently executed transactions and market price quotations. The inputs used to determine the fair value of our debt were classified as Level 2 in the fair value hierarchy. The carrying value and estimated fair value of our debt at December 31, 2019 and 2018 was as follows:



	December 31,
	2019		2018
Carrying value	$	2,739,722	$	3,265,608
Fair value	$	2,572,794	$	3,003,678