American Eagle Outfitters 2008 Annual Report Download - page 29

•Level 2 — 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. We
have concluded that the ARPS with underlyings of publicly traded preferred stock that we have classified as
short term represent a Level 2 valuation and have been valued using the publicly available trading prices of
the underlying preferred shares as the basis for valuation.
•Level 3 — Unobservable inputs (i.e. projections, estimates, interpretations, etc.) that are supported by little
or no market activity and that are significant to the fair value of the assets or liabilities. We have concluded
that the ARS that we have classified as long-term due to failed auctions or that have long-term auction resets,
as well as ARPS with underlyings of non-publicly traded preferred stock, represent a Level 3 valuation and
should be valued using a discounted cash flow analysis. The assumptions used in preparing the discounted
cash flow model include estimates for interest rates, timing and amount of cash flows and expected recovery
periods of the ARS.
As of January 31, 2009, we held certain assets that are required to be measured at fair value on a recurring
basis. These include cash equivalents and short and long-term investments, consisting primarily of AAA and AA
rated ARS and ARPS.
In accordance with SFAS No. 157, the following table represents the fair value hierarchy for our financial
assets (cash equivalents and investments) measured at fair value on a recurring basis as of January 31, 2009:
Carrying Amount
as of January 31,
2009
Quoted Market
Prices in Active
Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value Measurements at January 31, 2009
(In thousands)
Cash and Cash Equivalents
Cash ....................... $ 61,355 $ 61,355 $ — $ —
Money-market ................ 411,987 411,987 — —
Total cash and cash equivalents ..... $473,342 $473,342 $ — $ —
Short-term Investments
Preferred stock ............... $ 6,219 $ 6,219 $ — $ —
Auction rate preferred securities. . . 4,292 — 4,292 —
Total Short-term Investments ....... $ 10,511 $ 6,219 $4,292 $ —
Long-term Investments
Student-loan backed ARS ....... $169,254 $ — $ — $169,254
State and local government ARS . . 69,970 — — 69,970
Auction rate preferred securities. . . 11,783 — — 11,783
Total Long-term Investments ....... $251,007 $ — $ — $251,007
Total......................... $734,860 $479,561 $4,292 $251,007
Percent to total ................. 100.0% 65.3% 0.6% 34.1%
We used a discounted cash flow (“DCF”) model to value our Level 3 investments. The assumptions in our
model included different recovery periods depending on the type of security and varying discount factors for yield
and illiquidity. These assumptions are subjective. They are based on our current judgment and our view of current
market conditions. The use of different assumptions would result in a different valuation and related charge. For
example, an increase in the recovery period by one year would reduce the fair value of our investment in auction rate
securities by approximately $6.1 million. An increase to the yield and illiquidity premium of 100 basis points would
reduce the estimated fair value of our investment in auction rate securities by approximately $11.7 million.
27