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DERIVATIVE INSTRUMENTS AND FAIR VALUE MEASUREMENTS | 3 Months Ended
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Mar. 29, 2014
DERIVATIVE INSTRUMENTS AND FAIR VALUE MEASUREMENTS | NOTE 10. DERIVATIVE INSTRUMENTS AND FAIR VALUE MEASUREMENTS Derivative Instruments and Hedging Activities As a global supplier of office products and services the Company is exposed to risks associated with changes in foreign currency exchange rates, fuel and other commodity prices and interest rates. Depending on the exposure, settlement timeframe and other factors, the Company may enter into derivative transactions to mitigate those risks. The Company may designate and account for such qualifying arrangements as hedges. Historically, the Company has not entered into transactions to hedge its net investment in foreign operations but may do so in future periods. Financial instruments authorized under the Company’s established risk management policy include spot trades, swaps, options, caps, collars, forwards and futures. Use of derivative financial instruments for speculative purposes is expressly prohibited. The fair value and activity of derivative financial instruments were not material as of March 29, 2014 and December 28, 2013 and for the periods ended March 29, 2014 and March 30, 2013. Financial Instruments The Company measures 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. In developing its fair value estimates, the Company uses the following hierarchy:
Level 1: |  | Quoted prices in active markets for identical assets or liabilities.
Level 2: |  | Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: |  | Significant unobservable inputs that are not corroborated by market data. Generally, these fair value measures are model-based valuation techniques such as discounted cash flows or option pricing models using the Company’s own estimates and assumptions or those expected to be used by market participants.
The fair values of cash and cash equivalents, receivables, accounts payable and accrued expenses and other current liabilities approximate their carrying values because of their short-term nature. The fair values of foreign currency contracts and fuel contracts are the amounts receivable or payable to terminate the agreements at the reporting date, taking into account current exchange rates and commodity prices. The values are based on market-based inputs or unobservable inputs that are corroborated by market data (Level 2 measure). At the end of the first quarter of 2014, the amounts receivable or payable under foreign currency and fuel contracts were not significant. The following table presents information about financial instruments at the balance sheet dates indicated.
|  | March 29, 2014 |  |  | December 28, 2013 |
(In millions) |  | Carrying Value |  |  | Fair Value |  |  | Carrying Value |  |  | Fair Value |
Financial assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Timber notes receivables |  | $ | 940 |  |  | $ | 937 |  |  | $ | 945 |  |  | $ | 933 |
Boise investment |  | $ | 20 |  |  | $ | 20 |  |  | $ | 46 |  |  | $ | 47 |
Financial liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Recourse debt |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
9.75% senior secured notes |  | $ | 250 |  |  | $ | 291 |  |  | $ | 250 |  |  | $ | 290 |
7.35% debentures, due 2016 |  |  | 18 |  |  |  | 19 |  |  |  | 18 |  |  |  | 19 |
Revenue bonds, due in varying amounts periodically through 2029 |  |  | 186 |  |  |  | 186 |  |  |  | 186 |  |  |  | 186 |
American & Foreign Power Company, Inc. 5% debentures, due 2030 |  |  | 13 |  |  |  | 13 |  |  |  | 13 |  |  |  | 13 |
Non-recourse debt |  | $ | 854 |  |  | $ | 852 |  |  | $ | 859 |  |  | $ | 851 |
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
| • |  | Timber notes receivable: Fair value is determined as the present value of expected future cash flows discounted at the current interest rate for loans of similar terms with comparable credit risk (Level 2 measure).
| • |  | Boise investment: Fair value at December 28, 2013 was calculated as the sum of the market value of the Company’s indirect investment in Boise Cascade, the primary investment of Boise Cascade Holdings, plus the Company’s portion of any cash held by Boise Cascade Holdings as of the balance sheet date (together, Level 2 measure). The Company’s indirect investment in Boise Cascade was calculated using the number of shares the Company indirectly held in Boise Cascade multiplied by its closing stock price as of the last trading day prior to the balance sheet date.
The fair value at March 29, 2014 is based on the number of shares of Boise Cascade held by the Company multiplied by its closing stock price as of the last trading day prior to the balance sheet date (Level 1 measure). Refer to Note 4 for further details.
| • |  | Recourse debt: Recourse debt for which there were no transactions on the measurement date was valued based on quoted market prices near the measurement date when available or by discounting the future cash flows of each instrument using rates based on the most recently observable trade or using rates currently offered to the Company for similar debt instruments of comparable maturities (Level 2 measure).
| • |  | Non-recourse debt: Fair value is estimated by discounting the future cash flows of the instrument at rates currently available to the Company for similar instruments of comparable maturities (Level 2 measure).
Fair Value Estimates Used in Impairment Analyses Because of declining sales in recent periods, the Company has conducted a detailed quarterly store impairment analysis. The analysis uses input from retail store operations and the Company’s accounting and finance personnel that organizationally report to the Chief Financial Officer. These projections are based on management’s estimates of store-level sales, gross margins, direct expenses, exercise of future lease renewal options, where applicable, and resulting cash flows and, by their nature, include judgments about how current initiatives will impact future performance. If the anticipated cash flows of a store cannot support the carrying value of its assets, the assets are impaired and written down to estimated fair value using Level 3 inputs. The Company recognized store asset impairment charges of $9 million and $5 million, in the first quarters of 2014 and 2013, respectively. The first quarter of 2014 impairment charge included $1 million from a decision in March 2014 to close the 19 stores in Canada acquired as part of the Merger. The remaining first quarter of 2014 impairment charge is based on a discounted cash flow analysis of the retail locations that assumes a sales decline next year similar to recent experience, with negative but improving trends for later years. Gross margin and operating costs have been assumed to be consistent with recent actual results and planned activities. For the first quarter 2014 impairment analysis, 51 locations were reduced to estimated fair value of $4 million based on their projected cash flows, discounted at 13% and 361 locations were reduced to estimated salvage value of $8 million. A 100 basis point decrease in next year sales used in these estimates would have increased impairment by approximately $2 million. Independent of the sensitivity on sales assumptions, a 50 basis point decrease in next year gross margin would have increased the impairment by approximately $2 million. The interrelationship of having both of those inputs change as indicated would have resulted in impairment of approximately equal to the sum of the two individual inputs. As part of the integration of the Office Depot and OfficeMax stores, the Company is developing a new retail strategy. This new strategy is likely to include store closure decisions that could result in modifications to our projected cash flows and significant asset impairment charges may follow. However, at the end of the first quarter of 2014, the impairment analysis reflects the Company’s best estimate of future performance, based on the current business model. In the first quarter of 2014, the Company also recognized asset impairment charges of $28 million related to the abandonment of a software implementation project in Europe, and $13 million for the write off of capitalized software following certain information technology platform decisions related to the Merger. These charges are included in the Asset impairments line in the Condensed Consolidated Statement of Operations.

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- Definition The entire disclosure for derivatives and fair value of assets and liabilities. + References No definition available. + Details
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