Fair Value Measurements

9 Months Ended

Jul. 31, 2017

Fair Value Disclosures [Abstract]

Fair Value, Measurement Inputs, Disclosure [Text Block]

Fair Value Measurements

For assets and liabilities measured at fair value on a recurring and nonrecurring basis, a three-level hierarchy of measurements based upon observable and unobservable inputs is used to arrive at fair value. Observable inputs are developed based on market data obtained from independent sources, while unobservable inputs reflect our assumptions about valuation based on the best information available in the circumstances. Depending on the inputs, we classify each fair value measurement as follows:

• Level 1—based upon quoted prices for identical instruments in active markets,

• Level 2—based upon quoted prices for similar instruments, prices for identical or similar instruments in markets that are not active, or model-derived valuations, all of whose significant inputs are observable, and

• Level 3—based upon one or more significant unobservable inputs.

The following section describes key inputs and assumptions in our valuation methodologies:

Cash Equivalents and Restricted Cash Equivalents—We classify highly liquid investments, with an original maturity of 90 days or less, including U.S. Treasury bills, federal agency securities, and commercial paper, as cash equivalents. The carrying amounts of cash and cash equivalents and restricted cash approximate fair value because of the short-term maturity and highly liquid nature of these instruments.

Marketable Securities—Our marketable securities portfolios are classified as available-for-sale and primarily include investments in U.S. government securities and commercial paper with an original maturity greater than 90 days. We use quoted prices from active markets to determine fair value.

Derivative Assets and Liabilities—We measure the fair value of derivatives assuming that the unit of account is an individual derivative transaction and that each derivative could be sold or transferred on a stand-alone basis. We classify within Level 2 our derivatives that are traded over-the-counter and valued using internal models based on observable market inputs. In certain cases, market data is not available and we estimate inputs such as in situations where trading in a particular commodity is not active. Measurements based upon these unobservable inputs are classified within Level 3.

Guarantees—We provide certain guarantees of payments and residual values, to which losses are generally capped, to specific counterparties. The fair value of these guarantees includes a contingent component and a non-contingent component that are based upon internally developed models using unobservable inputs. We classify these liabilities within Level 3. For more information regarding guarantees, see Note 10, Commitments and Contingencies.

Impaired Finance Receivables and Impaired Assets Under Operating Leases— Fair values of the underlying collateral are determined by current and forecasted sales prices, aging of and demand for used trucks, and the mix of sales through various market channels. For more information regarding impaired finance receivables, see Note 4, Allowance for Doubtful Accounts, and for more information regarding impaired assets under operating leases, see Note 2, Restructuring and Impairments.

Impaired Property, Plant and Equipment— We measure the fair value by discounting future cash flows expected to be received from the operation of, or disposition of, the asset or asset group that has been determined to be impaired. For more information regarding the impairment of property, plant and equipment, see Note 2, Restructuring and Impairments.

The following table presents the financial instruments measured at fair value on a recurring basis:

	As of July 31, 2017								As of October 31, 2016
(in millions)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets
Marketable securities:
U.S. Treasury bills	$	3	$	—	$	—	$	3	$	6	$	—	$	—	$	6
Other	59		—		—		59		40		—		—		40
Derivative financial instruments:
Commodity forward contracts(A)	—		2		—		2		—		2		—		2
Foreign currency contracts(A)	—		1		—		1		—		—		—		—
Interest rate caps(B)	—		1		—		1		—		1		—		1
Total assets	$	62	$	4	$	—	$	66	$	46	$	3	$	—	$	49
Liabilities
Derivative financial instruments:
Foreign currency contracts(C)	$	—	$	9	$	—	$	9	$	—	$	—	$	—	$	—
Guarantees	—		—		19		19		—		—		23		23
Total liabilities	$	—	$	9	$	19	$	28	$	—	$	—	$	23	$	23

_________________________

(A) The asset value of commodity forward contracts and foreign currency contracts is included in Other current assets in the accompanying Consolidated Balance Sheets.

(B) The asset value of interest rate caps is included in Other noncurrent assets in the accompanying Consolidated Balance Sheets.

(C) The liability value of foreign currency contracts is included in Other current liabilities in the accompanying Consolidated Balance Sheets.

The following table presents the changes for those financial instruments classified within Level 3 of the valuation hierarchy:

	Three Months Ended July 31,						Nine Months Ended July 31,
(in millions)	2017			2016			2017			2016
Guarantees, at beginning of period	$	(19	)	$	(19	)	$	(23	)	$	(10	)
Transfers out of Level 3	—			—			—			—
Net terminations (issuances)	—			(5		)	1			(16		)
Settlements	—			1			3			3
Guarantees, at end of period	$	(19	)	$	(23	)	$	(19	)	$	(23	)

In addition to the methods and assumptions we use for the financial instruments recorded at fair value as discussed above, we use the following methods and assumptions to estimate the fair value for our other financial instruments that are not marked to market on a recurring basis. The carrying amounts of Cash and cash equivalents, Restricted cash, and Accounts payable approximate fair values because of the short-term maturity and highly liquid nature of these instruments. Finance receivables generally consist of retail and wholesale accounts and retail and wholesale notes. The carrying amounts of Trade and other receivables and retail and wholesale accounts approximate fair values as a result of the short-term nature of the receivables. The carrying amounts of wholesale notes approximate fair values as a result of the short-term nature of the wholesale notes and their variable interest rate terms. Due to the nature of the aforementioned financial instruments, they have been excluded from the fair value amounts presented in the table below.

The fair values of our retail notes are estimated by discounting expected cash flows at estimated current market rates. The fair values of our retail notes are classified as Level 3 financial instruments.

The fair values of our debt instruments classified as Level 1 were determined using quoted market prices. The 6.5% Tax Exempt Bonds, due 2040, are traded, but the trading market is illiquid, and as a result, the Loan Agreement underlying the Tax Exempt Bonds is classified as Level 2. The fair values of our Level 3 debt instruments are generally determined using internally developed valuation techniques such as discounted cash flow modeling. Inputs such as discount rates and credit spreads reflect our estimates of assumptions that market participants would use in pricing the instrument and may be unobservable.

Fair value measurements

Fair Value Measurements

For assets and liabilities measured at fair value on a recurring and nonrecurring basis, a three-level hierarchy of measurements based upon observable and unobservable inputs is used to arrive at fair value. Observable inputs are developed based on market data obtained from independent sources, while unobservable inputs reflect our assumptions about valuation based on the best information available in the circumstances. Depending on the inputs, we classify each fair value measurement as follows:

• Level 1—based upon quoted prices for identical instruments in active markets,

• Level 2—based upon quoted prices for similar instruments, prices for identical or similar instruments in markets that are not active, or model-derived valuations, all of whose significant inputs are observable, and

• Level 3—based upon one or more significant unobservable inputs.

The following section describes key inputs and assumptions in our valuation methodologies:

Cash Equivalents and Restricted Cash Equivalents—We classify highly liquid investments, with an original maturity of 90 days or less, including U.S. Treasury bills, federal agency securities, and commercial paper, as cash equivalents. The carrying amounts of cash and cash equivalents and restricted cash approximate fair value because of the short-term maturity and highly liquid nature of these instruments.

Marketable Securities—Our marketable securities portfolios are classified as available-for-sale and primarily include investments in U.S. government securities and commercial paper with an original maturity greater than 90 days. We use quoted prices from active markets to determine fair value.

Derivative Assets and Liabilities—We measure the fair value of derivatives assuming that the unit of account is an individual derivative transaction and that each derivative could be sold or transferred on a stand-alone basis. We classify within Level 2 our derivatives that are traded over-the-counter and valued using internal models based on observable market inputs. In certain cases, market data is not available and we estimate inputs such as in situations where trading in a particular commodity is not active. Measurements based upon these unobservable inputs are classified within Level 3.

Guarantees—We provide certain guarantees of payments and residual values, to which losses are generally capped, to specific counterparties. The fair value of these guarantees includes a contingent component and a non-contingent component that are based upon internally developed models using unobservable inputs. We classify these liabilities within Level 3. For more information regarding guarantees, see Note 10, Commitments and Contingencies.

Impaired Finance Receivables and Impaired Assets Under Operating Leases— Fair values of the underlying collateral are determined by current and forecasted sales prices, aging of and demand for used trucks, and the mix of sales through various market channels. For more information regarding impaired finance receivables, see Note 4, Allowance for Doubtful Accounts, and for more information regarding impaired assets under operating leases, see Note 2, Restructuring and Impairments.

Impaired Property, Plant and Equipment— We measure the fair value by discounting future cash flows expected to be received from the operation of, or disposition of, the asset or asset group that has been determined to be impaired. For more information regarding the impairment of property, plant and equipment, see Note 2, Restructuring and Impairments.

The following table presents the financial instruments measured at fair value on a recurring basis:

	As of July 31, 2017								As of October 31, 2016
(in millions)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets
Marketable securities:
U.S. Treasury bills	$	3	$	—	$	—	$	3	$	6	$	—	$	—	$	6
Other	59		—		—		59		40		—		—		40
Derivative financial instruments:
Commodity forward contracts(A)	—		2		—		2		—		2		—		2
Foreign currency contracts(A)	—		1		—		1		—		—		—		—
Interest rate caps(B)	—		1		—		1		—		1		—		1
Total assets	$	62	$	4	$	—	$	66	$	46	$	3	$	—	$	49
Liabilities
Derivative financial instruments:
Foreign currency contracts(C)	$	—	$	9	$	—	$	9	$	—	$	—	$	—	$	—
Guarantees	—		—		19		19		—		—		23		23
Total liabilities	$	—	$	9	$	19	$	28	$	—	$	—	$	23	$	23

_________________________

(A) The asset value of commodity forward contracts and foreign currency contracts is included in Other current assets in the accompanying Consolidated Balance Sheets.

(B) The asset value of interest rate caps is included in Other noncurrent assets in the accompanying Consolidated Balance Sheets.

(C) The liability value of foreign currency contracts is included in Other current liabilities in the accompanying Consolidated Balance Sheets.

The following table presents the changes for those financial instruments classified within Level 3 of the valuation hierarchy:

	Three Months Ended July 31,						Nine Months Ended July 31,
(in millions)	2017			2016			2017			2016
Guarantees, at beginning of period	$	(19	)	$	(19	)	$	(23	)	$	(10	)
Transfers out of Level 3	—			—			—			—
Net terminations (issuances)	—			(5		)	1			(16		)
Settlements	—			1			3			3
Guarantees, at end of period	$	(19	)	$	(23	)	$	(19	)	$	(23	)

In addition to the methods and assumptions we use for the financial instruments recorded at fair value as discussed above, we use the following methods and assumptions to estimate the fair value for our other financial instruments that are not marked to market on a recurring basis. The carrying amounts of Cash and cash equivalents, Restricted cash, and Accounts payable approximate fair values because of the short-term maturity and highly liquid nature of these instruments. Finance receivables generally consist of retail and wholesale accounts and retail and wholesale notes. The carrying amounts of Trade and other receivables and retail and wholesale accounts approximate fair values as a result of the short-term nature of the receivables. The carrying amounts of wholesale notes approximate fair values as a result of the short-term nature of the wholesale notes and their variable interest rate terms. Due to the nature of the aforementioned financial instruments, they have been excluded from the fair value amounts presented in the table below.

The fair values of our retail notes are estimated by discounting expected cash flows at estimated current market rates. The fair values of our retail notes are classified as Level 3 financial instruments.

The fair values of our debt instruments classified as Level 1 were determined using quoted market prices. The 6.5% Tax Exempt Bonds, due 2040, are traded, but the trading market is illiquid, and as a result, the Loan Agreement underlying the Tax Exempt Bonds is classified as Level 2. The fair values of our Level 3 debt instruments are generally determined using internally developed valuation techniques such as discounted cash flow modeling. Inputs such as discount rates and credit spreads reflect our estimates of assumptions that market participants would use in pricing the instrument and may be unobservable.

The following tables present the carrying values and estimated fair values of financial instruments:

	As of July 31, 2017
	Estimated Fair Value								Carrying Value
(in millions)	Level 1		Level 2		Level 3		Total
Assets
Retail notes	$	—	$	—	$	152	$	152	$	158
Notes receivable	—		—		—		—		—
Liabilities
Debt:
Manufacturing operations
Senior Secured Term Loan Credit Facility, as Amended, due 2020	—		—		1,031		1,031		1,001
8.25% Senior Notes, due 2022	1,447		—		—		1,447		1,422
4.50% Senior Subordinated Convertible Notes, due 2018(A)	—		—		201		201		193
4.75% Senior Subordinated Convertible Notes, due 2019(A)	—		—		413		413		391
Financing arrangements	—		—		16		16		32
Loan Agreement related to 6.50% Tax Exempt Bonds, due 2040	—		234		—		234		220
Financed lease obligations	—		—		127		127		127
Other	—		—		34		34		34
Financial Services operations
Asset-backed debt issued by consolidated SPEs, at various rates, due serially through 2022	—		—		828		828		822
Bank credit facilities, at fixed and variable rates, due dates from 2017 through 2023	—		—		751		751		774
Commercial paper, at variable rates, program matures in 2022	100		—		—		100		100
Borrowings secured by operating and finance leases, at various rates, due serially through 2022	—		—		101		101		100

	As of October 31, 2016
	Estimated Fair Value								Carrying Value
(in millions)	Level 1		Level 2		Level 3		Total
Assets
Retail notes	$	—	$	—	$	153	$	153	$	151
Notes receivable	—		—		1		1		1
Liabilities
Debt:
Manufacturing operations
Senior Secured Term Loan Credit Facility, as Amended, due 2020	—		—		1,037		1,037		1,009
8.25% Senior Notes, due 2022	1,180		—		—		1,180		1,173
4.50% Senior Subordinated Convertible Notes, due 2018(A)	—		—		189		189		189
4.75% Senior Subordinated Convertible Notes, due 2019(A)	—		—		382		382		383
Financing arrangements	—		—		17		17		37
Loan Agreement related to 6.50% Tax Exempt Bonds, due 2040	—		233		—		233		220
Financed lease obligations	—		—		52		52		52
Other	—		—		26		26		28
Financial Services operations
Asset-backed debt issued by consolidated SPEs, at various rates, due serially through 2022	—		—		754		754		753
Bank credit facilities, at fixed and variable rates, due dates from 2017 through 2023	—		—		851		851		861
Commercial paper, at variable rates, program matures in 2022	96		—		—		96		96
Borrowings secured by operating and finance leases, at various rates, due serially through 2022	—		—		98		98		98

_________________________

(A) The carrying value represents the consolidated financial statement amount of the debt which excludes the allocation of the conversion feature to equity, while the fair value is based on internally developed valuation techniques such as discounted cash flow modeling for Level 3 convertible notes which include the equity feature.