Fair Value Measurements

12 Months Ended

Dec. 31, 2012

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value Measurements.

U.S. GAAP requires enhanced disclosures about investments and non-recurring non-financial assets and non-financial liabilities that are measured and reported at fair value and has established a hierarchal disclosure framework that prioritizes and ranks the level of market price observability used in measuring investments or non-financial assets and liabilities at fair value. Market price observability is impacted by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

Investments and non-financial assets and/or liabilities measured and reported at fair value are classified and disclosed in one of the following categories:

Level 1 - Quoted prices are available in active markets for identical investments as of the reporting date. The types of investments included in Level 1 include listed equities and listed derivatives. We do not adjust the quoted price for these investments, even in situations where we hold a large position.

Level 2 - Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies. Investments that are generally included in this category include corporate bonds and loans, less liquid and restricted equity securities and certain over-the-counter derivatives. The inputs and assumptions of our Level 2 investments are derived from market observable sources including: reported trades, broker/dealer quotes and other pertinent data.

Level 3 - Pricing inputs are unobservable for the investment and non-financial asset and/or liability and include situations where there is little, if any, market activity for the investment or non-financial asset and/or liability. The inputs into the determination of fair value require significant management judgment or estimation. Fair value is determined using comparable market transactions and other valuation methodologies, adjusted as appropriate for liquidity, credit, market and/or other risk factors.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment's level within the fair value hierarchy is 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 in its entirety requires judgment and considers factors specific to the investment. Significant transfers, if any, between the levels within the fair value hierarchy are recognized at the beginning of the reporting period when changes in circumstances require such transfers.

Investment

The following table summarizes the valuation of the Investment Funds' investments and derivative contracts by the above fair value hierarchy levels as of December 31, 2012 and 2011: 

	December 31, 2012								December 31, 2011
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets	(in millions)
Investments:
Equity securities:
Basic materials	$	144	$	9	$	—	$	153	$	128	$	—	$	—	$	128
Communications	560		16		—		576		2,593		—		—		2,593
Consumer, non-cyclical	1,340		—		—		1,340		1,778		26		—		1,804
Consumer, cyclical	261		—		—		261		376		378		—		754
Energy	1,052		55		—		1,107		1,644		29		—		1,673
Financial	244		—		—		244		263		—		—		263
Funds	—		308		—		308		—		—		—		—
Industrial	—		—		—		—		—		32		—		32
Technology	325		—		—		325		254		—		—		254
Utilities	208		—		—		208		83		21		—		104
	4,134		388		—		4,522		7,119		486		—		7,605
Corporate debt:
Communications	—		—		—		—		—		84		—		84
Consumer, cyclical	—		—		288		288		—		150		289		439
Financial	—		50		—		50		—		109		—		109
Sovereign debt	—		5		—		5		—		10		—		10
Utilities	—		31		—		31		—		34		—		34
	—		86		288		374		—		387		289		676
Mortgage-backed securities:
Financial	—		188		—		188		—		167		—		167
	4,134		662		288		5,084		7,119		1,040		289		8,448
Derivative contracts, at fair value(1)	—		—		—		—		—		3		—		3
	$	4,134	$	662	$	288	$	5,084	$	7,119	$	1,043	$	289	$	8,451
Liabilities
Securities sold, not yet purchased, at fair value:
Equity securities:
Consumer, cyclical	$	473	$	—	$	—	$	473	$	—	$	—	$	—	$	—
Energy	—		—		—		—		—		—		—		—
Funds	—		60		—		60		4,466		10		—		4,476
	473		60		—		533		4,466		10		—		4,476
Derivative contracts, at fair value(2)	—		84		—		84		—		42		—		42
	$	473	$	144	$	—	$	617	$	4,466	$	52	$	—	$	4,518

⁽¹⁾  Included in other assets in our consolidated balance sheets.

⁽²⁾  Included in accrued expenses and other liabilities in our consolidated balance sheets.

The changes in investments measured at fair value for which our Investment segment has used Level 3 input to determine fair value are as follows:

	Year Ended December 31,
	2012			2011
	(in millions)
Balance at January 1	$	289		$	329
Gross realized and unrealized gains	4			8
Gross proceeds	(5		)	(48		)
Balance at December 31	$	288		$	289

Unrealized gains of $4 million are included in earnings related to Level 3 investments still held at December 31, 2012. Total realized and unrealized gains and losses recorded for Level 3 investments, if any, are reported in net gain from investment activities in our consolidated statements of operations.

The Investment Funds owned one Level 3 corporate debt investment at December 31, 2012.  Fair value was determined through yield analysis of comparable loans to which we applied a risk premium that we determined to be appropriate, which resulted in a lower valuation for our Level 3 investment.  Adjusting the risk premium by 1% in either direction would result in a 3% change in the fair value of the loan.

Other Segments and Holding Company

The following table summarizes the valuation of our Automotive and Energy segments and our Holding Company investments and derivative contracts by the above fair value hierarchy levels as of December 31, 2012 and 2011: 

	December 31, 2012								December 31, 2011
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets	(in millions)
Marketable equity and debt securities	$	1	$	—	$	—	$	1	$	20	$	—	$	—	$	20
Trading securities	—		—		60		60		—		—		—		—
Investments in precious metals	—		—		—		—		150		—		—		150
Derivative contracts, at fair value(1)	—		1		21		22		—		3		—		3
	$	1	$	1	$	81	$	83	$	170	$	3	$	—	$	173
Liabilities
Derivative contracts, at fair value(2)	$	—	$	89	$	—	$	89	$	—	$	57	$	—	$	57

⁽¹⁾  Amounts are classified within other assets in our consolidated balance sheets.

⁽²⁾  Amounts are classified within accrued expenses and other liabilities in our consolidated balance sheets.

The changes in trading securities measured at fair value for which our Holding Company have used Level 3 input to determine fair value are as follows:

	Year Ended December 31,
	2012		2011
	(in millions)
Balance at January 1	$	—	$	—
Transfer in	81		—
Gross realized and unrealized gains	—		—
Balance at December 31	$	81	$	—

A certain security and a related derivative held by the Holding Company was transferred from Level 2 to Level 3 during the fourth quarter of 2012 because there was lack of observable market data due to a decrease in market activity for this security. This security was valued based on trading EBITDA multiples and enterprise value to resource ratios of market comparables.

Assets measured at fair value on a nonrecurring basis during the years ended December 31, 2012 are set forth in the table below:

	December 31, 2012
	Level 3		Recognized
Category	Asset		Loss
	(in millions)
Property, plant and equipment	$	109	$	59
Intangible assets	232		52
Goodwill	—		14
Other assets	—		4

We determined the fair value of property, plant and equipment by applying probability weighted, expected present value techniques to the estimated future cash flows using assumptions a market participant would utilize and through the use of valuation specialists. The fair values of intangible assets, primarily related to certain trademarks and brand names, are based upon the prospective stream of hypothetical after-tax royalty cost savings discounted at rates that reflect the rates of return appropriate for these intangible assets. Refer to Note 9, "Goodwill and Intangible Assets, Net," for further discussion relating to our Metals segment's goodwill impairment analysis.

The following table presents our Automotive segment's defined benefit plan assets measured at fair value on a recurring basis as of December 31, 2012 and 2011:

	December 31, 2012								December 31, 2011
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(in millions)
U.S. Plans:
Cash	$	34	$	—	$	—	$	34	$	—	$	—	$	—	$	—
Amounts due from broker	—		—		—		—		669		—		—		669
Investments with registered investment companies:
Equity securities	257		—		—		257		1		—		—		1
Fixed income securities	143		—		—		143		—		—		—		—
Real estate and other	4		—		—		4		—		—		—		—
Equity securities	217		—		—		217		—		—		—		—
Fixed income collective trust	—		45		—		45		—		—		—		—
Debt securities:
Corporate and other	—		37		—		37		—		—		—		—
Government	—		27		—		27		—		—		—		—
Hedge funds	—		—		14		14		—		—		—		—
	$	655	$	109	$	14	$	778	$	670	$	—	$	—	$	670
Non-U.S. Plans:
Insurance contracts	$	—	$	—	$	42	$	42	$	—	$	—	$	35	$	35
Cash	—		—		—		—		1		—		—		1
Investments with registered investment companies:
Fixed income securities	10		—		—		10		9		—		—		9
Equity securities	1		—		—		1		1		—		—		1
Corporate bonds	—		2		—		2		—		2		—		2
	$	11	$	2	$	42	$	55	$	11	$	2	$	35	$	48

The changes in U.S. and Non-U.S. plan assets measured at fair value for which our Automotive segment has used Level 3 input to determine fair value are as follows:

	Year Ended December 31,
	2012		2011
	(in millions)
U.S. Plans:
Hedge funds:
Balance at January 1	$	—	$	—
Realized/unrealized gains (losses), net	2		—
Purchases and settlements, net	12		—
Balance at December 31	$	14	$	—

	Year Ended December 31,
	2012			2011
	(in millions)
Non-U.S. Plans:
Insurance contracts:
Balance at January 1	$	35		$	33
Realized/unrealized gains (losses), net	1			2
Purchases and settlements, net	7			4
Sales, net	(2		)	(3		)
Foreign currency exchange rate movements	1			(1		)
Balance at December 31	$	42		$	35

U.S. Plans

As of December 31, 2012, plan assets were comprised of 61% equity investments, 33% fixed income investments, and 6% in other investments which include hedge funds. Approximately 95% of the U.S. plan assets were invested in actively managed investment funds. Federal-Mogul's investment strategy includes a target asset allocation of 50% equity investments, 25% fixed income investments and 25% in other investment types including hedge funds.

Federal-Mogul changed investment managers for its U.S. pension plan assets near the end of 2011. The transition was implemented on December 31, 2011 and almost all of the plan assets were sold and the proceeds reinvested as funds became available on January 3, 2012. Accordingly, the plans assets were comprised almost entirely of amounts due from broker at December 31, 2011 and then immediately reinvested beginning January 3, 2012.

Investments with registered investment companies, common and preferred stocks, and government debt securities are valued at the closing price reported on the active market on which the funds are traded. Corporate debt securities are valued by third-party pricing sources. Hedge funds and collective trusts are valued at net asset value per share.

Non-U.S. Plans

The insurance contracts guarantee a minimum rate of return. Federal-Mogul has no input into the investment strategy of the assets underlying the contracts, but they are typically heavily invested in active bond markets and are highly regulated by local law.

The following table presents our Food Packaging and Railcar segment's defined benefit plan assets measured at fair value on a recurring basis as of December 31, 2012 and 2011:

	December 31, 2012								December 31, 2011
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(in millions)
U.S. and Non-U.S. Plans:
Asset category:
Cash equivalents	$	7	$	—	$	—	$	7	$	4	$	—	$	—	$	4
Equity securities	23		29		—		52		18		33		—		51
Fixed income securities	14		15		—		29		18		14		—		32
Other	—		1		30		31		—		—		27		27
	$	44	$	45	$	30	$	119	$	40	$	47	$	27	$	114

The changes in U.S. and Non-U.S. plan assets measured at fair value for which our Food Packaging and Railcar segment's have used Level 3 input to determine fair value are as follows:

	Year Ended December 31,
	2012		2011
	(in millions)
U.S. and Non-U.S. Plans:
Balance at January 1	$	27	$	28
Realized/unrealized gains (losses), net	3		(1		)
Purchases and settlements, net	—		—
Balance at December 31	$	30	$	27