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v2.4.0.6
Fair Value Measurements
6 Months Ended
Aug. 25, 2012
Fair Value Measurements  
Fair Value Measurements

2) Fair Value Measurements

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., “the exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various valuation approaches, including quoted market prices and discounted cash flows. The hierarchy for inputs used in measuring fair value maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect a company’s judgment concerning the assumptions that market participants would use in pricing the asset or liability developed based on the best information available under the circumstances. The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:

 

· Level 1 — Valuations based on quoted prices in active markets for identical instruments that the Company is able to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

 

· Level 2 — Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

 

· Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

 

As of August 25, 2012, the Company’s financial assets utilizing Level 1 inputs include long term investment securities traded on active securities exchanges. The Company did not have any financial assets utilizing Level 2 inputs. Financial assets utilizing Level 3 inputs included short term and long term investments in auction rate securities consisting of preferred shares of closed end municipal bond funds (See “Investment Securities,” Note 4).

 

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the Company’s degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an asset or liability must be classified in its entirety based on the lowest level of input that is significant to the measurement of fair value.

 

Valuation techniques used by the Company must be consistent with at least one of the three possible approaches: the market approach, income approach and/or cost approach. The Company’s Level 1 valuations are based on the market approach and consist primarily of quoted prices for identical items on active securities exchanges. The Company’s Level 3 valuations of auction rate securities, which had temporary valuation adjustments of approximately $3.0 million and $3.7 million as of August 25, 2012 and February 25, 2012, respectively, are based on the income approach, specifically, discounted cash flow analyses which utilize significant inputs based on the Company’s estimates and assumptions. As of August 25, 2012, the inputs used in the Company’s discounted cash flow analysis included current coupon rates ranging from 0.21% to 0.24%, an estimated redemption period of 5 years and a discount rate of 1.07%. The discount rate was based on market rates for risk-free tax-exempt securities, as adjusted for a risk premium to reflect the lack of liquidity of these investments. Assuming a higher discount rate, a longer estimated redemption period and lower coupon rates would result in a lower fair market value. Conversely, assuming a lower discount rate, a shorter estimated redemption period and higher coupon rates would result in a higher fair market value.

 

The following table presents the valuation of the Company’s financial assets as of August 25, 2012 measured at fair value on a recurring basis by input level:

 

 

 

Quoted Prices
in Active
Markets for
Identical
Assets

 

Significant
Unobservable
Inputs

 

 

 

(in millions)

 

(Level 1)

 

(Level 3)

 

Total

 

Short term - available-for-sale securities:

 

 

 

 

 

 

 

Auction rate securities

 

$

 

$

14.3

 

$

14.3

 

Long term - available-for-sale securities:

 

 

 

 

 

 

 

Auction rate securities

 

 

58.0

 

58.0

 

Long term - trading securities:

 

 

 

 

 

 

 

Nonqualified deferred compensation plan assets

 

24.4

 

 

24.4

 

Total

 

$

24.4

 

$

72.3

 

$

96.7

 

 

The following table presents the changes in the Company’s financial assets that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

 

(in millions)

 

Auction Rate
Securities

 

Balance on February 25, 2012, net of temporary valuation adjustment

 

$

80.2

 

Change in temporary valuation adjustment included in accumulated other comprehensive loss

 

0.6

 

Redemptions at par

 

(8.5

)

Balance on August 25, 2012, net of temporary valuation adjustment

 

$

72.3

 

 

Subsequent to the end of the second quarter of fiscal 2012, the Company tendered approximately $14.3 million of short term available-for-sale securities at a price equal to 95% of par value.  As a result, the Company incurred a realized loss of approximately $0.7 million which will be reflected in its fiscal third quarter results.  On September 18, 2012, the Company redeemed these securities for $13.6 million.

 

Fair Value of Financial Instruments

 

The Company’s financial instruments include cash and cash equivalents, investment securities, accounts payable and certain other liabilities. The Company’s investment securities consist primarily of U.S. Treasury securities, which are stated at amortized cost, and auction rate securities, which are stated at their approximate fair value. The book value of all financial instruments is representative of their fair values.