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DERIVATIVE INSTRUMENTS AND FAIR VALUE MEASUREMENTS | 9 Months Ended
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Sep. 27, 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 by the Company’s policies. The fair value and activity associated with derivative financial instruments were not significant as of September 27, 2014 and December 28, 2013 and for the periods ended September 27, 2014 and September 28, 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). As of September 27, 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.
|  | September 27, 2014 |  |  | December 28, 2013 |
(In millions) |  | Carrying Value |  |  | Fair Value |  |  | Carrying Value |  |  | Fair Value |
Financial assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Timber notes receivables |  | $ | 931 |  |  | $ | 935 |  |  | $ | 945 |  |  | $ | 933 |
Financial liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Recourse debt |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
9.75% senior secured notes, due 2019 |  |  | 250 |  |  |  | 282 |  |  |  | 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 |  | $ | 844 |  |  | $ | 850 |  |  | $ | 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).
| • |  | 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 North American Retail Division As a result 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, projected store closures, exercise of future lease renewal options, and favorable lease values, where applicable. The resulting cash flows, 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 their estimated fair value using a discounted cash flow approach (a Level 3 measure). The Company recognized store asset impairment charges of $6 million and $25 million, in the third quarter and year-to-date 2014, respectively, and $5 million and $14 million, in the third quarter and year-to-date 2013, respectively. The third quarter 2014 charge includes approximately $1 million impairment of favorable lease intangible asset values following identification of closing locations where future intangible asset recovery was considered unlikely. As part of the integration of the Office Depot and OfficeMax stores, the Company is implementing a real estate strategy that anticipates closing at least 400 stores through 2016. Because the specific identity of retail locations to be closed over this timeframe is subject to change as the real estate strategy is implemented, the Company applied a probability method to estimate store closures. The financial analysis used in developing this real estate strategy considered projected sales transfer to stores remaining open, the impact of fixed costs on the remaining stores, projected store closing costs, expected impacts on other sales channels and an overall market strategy. Based on the identification of locations likely to close under the real estate strategy, the third quarter 2014 store impairment analysis considered the projected operating cash flows consistent with these anticipated closing dates. The actual stores to close may be more, fewer or different from the current projections as market and competitive conditions change. However, at the end of the third quarter of 2014, the impairment analysis reflects the Company’s best estimate of future performance, based on the current business model. The third quarter and year-to-date 2014 impairment charges were based on a discounted cash flow analysis of the retail locations that assumed a sales decline next year similar to recent experience, with negative but improving rates for later years. Gross margin and operating costs have been assumed to be consistent with recent actual results and planned activities. For the third quarter 2014 impairment analysis, seven locations were reduced to estimated aggregate fair value of $1 million based on their projected cash flows, discounted at 13% and 120 locations were reduced to estimated aggregate salvage value of $2 million. A 100 basis point decrease in next year sales used in these estimates and a 50 basis point decrease in next year gross margin, individually and combined, would have increased the impairment by less than $1 million. Other assets Other asset impairment charges for year-to-date 2014 include $12 million resulting from a decision to convert certain websites to a common platform, $28 million related to the abandonment of a software implementation project in Europe, and $13 million write off of capitalized software following certain information technology platform decisions related to the Merger. Goodwill Following the 2013 sale of the Company’s interest in Office Depot de Mexico and return of cash proceeds to the U.S. parent company, the reporting unit carrying value exceeded the estimated fair value and goodwill was fully impaired. The impairment charge of $44 million is included in Asset impairments in the Condensed Consolidated Statement of Operations for the third quarter and year-to-date 2013. Refer to Note 4 for further discussion of the Office Depot de Mexico sale.

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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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