American Eagle Outfitters 2008 Annual Report Download - page 56

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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 its 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. The Company has
concluded that the ARS that it has 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, the Company 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.
In accordance with SFAS No. 157, the following table represents the Company’s fair value hierarchy for its
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%
The Company used a discounted cash flow (“DCF”) model to value its Level 3 investments. The assumptions
in the Company’s 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 the Company’s current
judgment and its view of current market conditions. The use of different assumptions would result in a different
valuation and related charge.
54
AMERICAN EAGLE OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)