Fair Value Measurements

6 Months Ended

May 01, 2011

Fair Value Measurements [Abstract]

Fair Value Measurements

Note 4   Fair Value Measurements

Applied’s financial assets are measured and recorded at fair value, except for equity investments held in privately-held companies. These equity investments are generally accounted for under the cost method of accounting and are periodically assessed for other-than-temporary impairment when events or circumstances indicate that an other-than-temporary decline in value may have occurred. Applied’s nonfinancial assets, such as goodwill, intangible assets, and property, plant and equipment, are recorded at cost and are assessed for impairment when events or circumstances indicate that an other-than-temporary decline in value may have occurred.

Fair Value Hierarchy

Applied uses the following fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

•  Level 1 — Quoted prices in active markets for identical assets or liabilities;

•  Level 2 — Observable inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

•  Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Applied’s investments are comprised primarily of debt securities that are classified as available-for-sale and recorded at their fair values. In determining the fair value of investments, Applied uses pricing information from pricing services that value securities based on quoted market prices and models that utilize observable market inputs. In the event a fair value estimate is unavailable from a pricing service, Applied generally obtains non-binding price quotes from brokers. Applied then reviews the information provided by the pricing services or brokers to determine the fair value of its short-term and long-term investments. In addition, to validate pricing information obtained from pricing services, Applied periodically performs supplemental analysis on a sample of securities. Applied reviews any significant unanticipated differences identified through this analysis to determine the appropriate fair value.

Investments with remaining effective maturities of 12 months or less from the balance sheet date are classified as short-term investments. Investments with remaining effective maturities of more than 12 months from the balance sheet date are classified as long-term investments. As of May 1, 2011, substantially all of Applied’s available-for-sale, short-term and long-term investments were recognized at fair value that was determined based upon observable inputs.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Financial assets and liabilities (excluding cash balances) measured at fair value on a recurring basis are summarized below as of May 1, 2011 and October 31, 2010:

	May 1, 2011								October 31, 2010
	Level 1		Level 2		Level 3		Total		Level 1		Level 2			Level 3		Total
	(In millions)								(In millions)
Assets:
Money market funds	$	1,746	$	—	$	—	$	1,746	$	1,139	$	—		$	—	$	1,139
U.S. Treasury and agency securities		84		612		—		696		153		520			—		673
U.S. commercial paper, corporate bonds and medium-term notes		—		629		—		629		—		509			—		509
Obligations of states and political subdivisions		—		534		—		534		—		523			—		523
Other debt securities		—		402		—		402		—		263			—		263
Publicly traded equity securities		33		—		—		33		25		—			—		25
Foreign exchange derivative assets		—		10		—		10		—		6			—		6
Total	$	1,863	$	2,187	$	—	$	4,050	$	1,317	$	1,821		$	—	$	3,138
Liabilities:
Foreign exchange derivative liabilities	$	—	$	—	$	—	$	—	$	—	$	(1	)	$	—	$	(1	)
Total	$	—	$	—	$	—	$	—	$	—	$	(1	)	$	—	$	(1	)

There were no significant transfers in and out of Level 1 and Level 2 fair value measurements and there were no Level 3 investments during either the three or six months ended May 1, 2011 and May 2, 2010. Applied did not have any financial assets measured at fair value on a recurring basis within Level 3 fair value measurements during the three and six months ended May 1, 2011 and May 2, 2010.

Assets and Liabilities Measured at Fair Value on a Non-recurring Basis

Equity investments in privately-held companies are generally accounted for under the cost method of accounting and are periodically assessed for other-than-temporary impairment when an event or circumstance indicates that an other-than-temporary decline in value may have occurred. If Applied determines that an other-than-temporary impairment has occurred, the investment will be written down to its estimated fair value based on available information, such as pricing in recent rounds of financing, current cash positions, earnings and cash flow forecasts, recent operational performance and any other readily available market data. Equity investments in privately-held companies totaled $59 million at May 1, 2011, of which $46 million of investments were accounted for under the cost method of accounting and $13 million of Level 3 investments had been measured at fair value on a non-recurring basis due to an other-than-temporary decline in value. At May 2, 2010, equity investments in privately-held companies totaled $68 million, of which $52 million of investments were accounted for under the cost method of accounting and $16 million of Level 3 investments had been measured at fair value on a non-recurring basis due to an other-than-temporary decline in value. There were no impairments in our equity investments in privately-held companies for the three and six months ended May 1, 2011.

The following tables present the balances of equity securities at May 1, 2011 and May 2, 2010 that had been measured at fair value on a non-recurring basis, using the process described above, and the impairment charges recorded during the three months then ended:

							Total		Total
							Impairment for		Impairment for
							the Three		the Six Months
							Months Ended		Ended
	Level 1		Level 2		Level 3		May 1, 2011		May 1, 2011
	(In millions)
Equity investments in privately-held companies measured at fair value on a non-recurring basis during fiscal 2011	$	—	$	—	$	13	$	—	$	—

							Total		Total
							Impairment for		Impairment for
							the Three		the Six Months
							Months Ended		Ended
	Level 1		Level 2		Level 3		May 2, 2010		May 2, 2010
	(In millions)
Equity investments in privately-held companies measured at fair value on a non-recurring basis during fiscal 2010	$	—	$	—	$	16	$	4	$	5

At October 31, 2010, equity investments in privately-held companies totaled $59 million, of which $40 million of investments were accounted for under the cost method of accounting and $19 million of Level 3 investments had been measured at fair value on a non-recurring basis due to an other-than-temporary decline in value.

Other

The carrying amounts of Applied’s financial instruments, including cash and cash equivalents, accounts receivable, notes payable, and accounts payable and accrued expenses, approximate fair value due to the short maturities of these financial instruments. The carrying amount of Applied’s long-term debt at May 1, 2011 was $205 million and the estimated fair value was $242 million. At October 31, 2010, the carrying amount of long-term debt was $205 million and the estimated fair value was $238 million. The estimated fair value of long-term debt is determined by Level 2 inputs and is based primarily on quoted market prices for the same or similar issues.