Fair Value Measurements

9 Months Ended

Sep. 30, 2019

We consider the carrying amounts of 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 the three-tier fair value hierarchy. For a description of the methods and assumptions that we use to a) estimate the fair value; and b) determine the classification according to the fair value hierarchy for each financial instrument, see Note 4, “Fair Value Measurements,” in our 2018 Annual Report on Form 10-K.

Derivative financial instruments include the 1.125% Call Option derivative asset and the 1.125% Conversion Option derivative liability (see Note 8 “Derivatives,” for definitions and further information). 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, 2019, 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. The 1.125% Call Option derivative asset and the 1.125% Conversion Option derivative liability were designed such that changes in their fair values would 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 derivative instruments is mitigated.

The net changes in fair value of Level 3 financial instruments were insignificant to our results of operations for the nine months ended September 30, 2019.

Our financial instruments measured at fair value on a recurring basis at September 30, 2019, were as follows:



	Total		Observable Inputs (Level 1)		Directly or Indirectly Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
	(In millions)
Corporate debt securities	$	1,129	$	—	$	1,129	$	—
Mortgage-backed securities	303		—		303		—
Asset-backed securities	110		—		110		—
Government-sponsored enterprise securities (“GSEs”)	97		—		97		—
Municipal securities	68		—		68		—
U.S. Treasury notes	40		—		40		—
Foreign securities	7		—		7		—
Certificates of deposit	3		—		3		—
Subtotal - current investments	1,757		—		1,757		—
1.125% Call Option derivative asset	21		—		—		21
Total assets	$	1,778	$	—	$	1,757	$	21

1.125% Conversion Option derivative liability	$	21	$	—	$	—	$	21
Total liabilities	$	21	$	—	$	—	$	21

Our financial instruments measured at fair value on a recurring basis at December 31, 2018, were as follows:



	Total		Observable Inputs (Level 1)		Directly or Indirectly Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
	(In millions)
Corporate debt securities	$	1,123	$	—	$	1,123	$	—
Asset-backed securities	82		—		82		—
GSEs	163		—		163		—
Municipal securities	114		—		114		—
U.S. Treasury notes	181		—		181		—
Foreign securities	4		—		4		—
Certificates of deposit	14		—		14		—
Subtotal	1,681		—		1,681		—
1.125% Call Option derivative asset	476		—		—		476
Total assets	$	2,157	$	—	$	1,681	$	476

1.125% Conversion Option derivative liability	$	476	$	—	$	—	$	476
Total liabilities	$	476	$	—	$	—	$	476

Fair Value Measurements – Disclosure Only

The carrying amounts and estimated fair values of our notes payable are classified as Level 2 financial instruments. Fair value for these securities is determined using a market approach based on quoted market prices for similar securities in active markets or quoted prices for identical securities in inactive markets. The carrying amount and estimated fair value of the Term Loan Facility is classified as a Level 3 financial instrument, because certain inputs used to determine its fair value are not observable. As of September 30, 2019, the carrying amount of the Term Loan Facility approximated fair value because its interest rate is a variable rate that approximates rates currently available to us.



	September 30, 2019				December 31, 2018
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(In millions)
5.375% Notes	$	695	$	744	$	694	$	674
4.875% Notes	327		334		326		301
Term Loan Facility	220		220		—		—
1.125% Convertible Notes ^(1),(2)	12		34		240		732
Totals	$	1,254	$	1,332	$	1,260	$	1,707

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(1)	The fair value of the 1.125% Conversion Option (the embedded cash conversion option), which is reflected in the fair value amounts presented above, amounted to $21 million and $476 million as of September 30, 2019, and December 31, 2018, respectively. See further discussion at Note 7, “Debt,” and Note 8, “Derivatives.”

(2)

For more information on debt repayments in 2019, refer to Note 7, “Debt.”

- 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.

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