Fair Value Measurements

9 Months Ended

Sep. 30, 2016

We consider the carrying amounts of cash and cash equivalents and other current assets and current liabilities (not including derivatives and the current portion of long-term debt) to approximate their fair values because of the relatively short period of time between the origination of these instruments and their expected realization or payment. For our financial instruments measured at fair value on a recurring basis, we prioritize the inputs used in measuring fair value according to a three-tier fair value hierarchy as follows:

Level 1 — Observable Inputs. Level 1 financial instruments are actively traded and therefore the fair value for these securities is based on quoted market prices on one or more securities exchanges.

Level 2 — Directly or Indirectly Observable Inputs. Level 2 financial instruments are traded frequently though not necessarily daily. Fair value for these investments is determined using a market approach based on quoted prices for similar securities in active markets or quoted prices for identical securities in inactive markets.

Level 3 — Unobservable Inputs. Level 3 financial instruments are valued using unobservable inputs that represent management's best estimate of what market participants would use in pricing the financial instrument at the measurement date. Our Level 3 financial instruments include derivative financial instruments.

Derivative financial instruments include the 1.125% Call Option derivative asset and the 1.125% Conversion Option derivative liability. These derivatives are not actively traded and are valued based on an option pricing model that uses observable and unobservable market data for inputs. Significant market data inputs used to determine fair value as of September 30, 2016 included the price of our common stock, the time to maturity of the derivative instruments, the risk-free interest rate, and the implied volatility of our common stock. As described further in Note 11, “Derivatives,” the 1.125% Call Option asset and the 1.125% Conversion Option liability were designed such that changes in their fair values offset, with minimal impact to the consolidated statements of income. Therefore, the sensitivity of changes in the unobservable inputs to the option pricing model for such instruments is mitigated.

The changes in fair value of Level 3 financial instruments were insignificant to our results of operations for the nine months ended September 30, 2016.

Our financial instruments measured at fair value on a recurring basis at September 30, 2016, were as follows:



	Total		Level 1		Level 2		Level 3
	(In millions)
Corporate debt securities	$	1,127	$	—	$	1,127	$	—
Government-sponsored enterprise securities (GSEs)	259		259		—		—
Municipal securities	148		—		148		—
Asset-backed securities	76		—		76		—
U.S. treasury notes	65		65		—		—
Certificates of deposit	60		—		60		—
Subtotal - current investments	1,735		324		1,411		—
1.125% Call Option derivative asset	314		—		—		314
Total assets measured at fair value on a recurring basis	$	2,049	$	324	$	1,411	$	314

1.125% Conversion Option derivative liability	$	314	$	—	$	—	$	314
Total liabilities measured at fair value on a recurring basis	$	314	$	—	$	—	$	314

Our financial instruments measured at fair value on a recurring basis at December 31, 2015, were as follows:



	Total		Level 1		Level 2		Level 3
	(In millions)
Corporate debt securities	$	1,184	$	—	$	1,184	$	—
GSEs	211		211		—		—
Municipal securities	185		—		185		—
Asset-backed securities	63		—		63		—
U.S. treasury notes	78		78		—		—
Certificates of deposit	80		—		80		—
Subtotal - current investments	1,801		289		1,512		—
1.125% Call Option derivative asset	374		—		—		374
Total assets measured at fair value on a recurring basis	$	2,175	$	289	$	1,512	$	374

1.125% Conversion Option derivative liability	$	374	$	—	$	—	$	374
Total liabilities measured at fair value on a recurring basis	$	374	$	—	$	—	$	374

Fair Value Measurements – Disclosure Only

The carrying amounts and estimated fair values of our senior notes, which are classified as Level 2 financial instruments, are indicated in the following table.



	September 30, 2016				December 31, 2015
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(In millions)
5.375% Notes	$	690	$	725	$	689	$	700
1.125% Convertible Notes	466		827		448		865
1.625% Convertible Notes	281		358		273		365
	$	1,437	$	1,910	$	1,410	$	1,930

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details