Quarterly report pursuant to Section 13 or 15(d)

Fair Value of Financial Instruments

v2.4.0.6
Fair Value of Financial Instruments
 3 Months Ended
May 31, 2012
Fair Value Disclosures [Abstract]  
FAIR VALUE OF FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS:

The Company calculates the fair value of financial instruments using quoted market prices whenever available. When quoted market prices are not available, the Company uses standard pricing models for various types of financial instruments (such as forwards, options, swaps, etc.) which take into account the present value of estimated future cash flows.

The carrying amount and estimated fair value of the Company’s financial instruments are summarized as follows:

 
May 31, 2012
 
February 29, 2012
  
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
(in millions)
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Cash and cash investments
$
69.1

 
$
69.1

 
$
85.8

 
$
85.8

Accounts receivable
$
457.8

 
$
457.8

 
$
436.0

 
$
436.0

Available-for-sale debt securities
$
27.4

 
$
27.4

 
$
28.5

 
$
28.5

Foreign currency contracts
$
9.9

 
$
9.9

 
$
13.2

 
$
13.2

Interest rate swap contracts
$
2.3

 
$
2.3

 
$
—

 
$
—

Notes receivable
$
—

 
$
—

 
$
1.6

 
$
1.6

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Notes payable to banks
$
97.9

 
$
98.7

 
$
377.9

 
$
377.6

Accounts payable
$
117.2

 
$
117.2

 
$
130.5

 
$
130.5

Long-term debt, including current portion
$
3,323.1

 
$
3,580.1

 
$
2,751.6

 
$
3,007.9

Foreign currency contracts
$
10.9

 
$
10.9

 
$
6.4

 
$
6.4

Interest rate swap contracts
$
49.5

 
$
49.5

 
$
45.7

 
$
45.7



The following methods and assumptions are used to estimate the fair value of each class of financial instruments:

Cash and cash investments, accounts receivable and accounts payable: The carrying amounts approximate fair value due to the short maturity of these instruments (Level 1 fair value measurement).
Available-for-sale (“AFS”) debt securities: The fair value is estimated by discounting cash flows using market-based inputs (see “Fair value measurements” below) (Level 3 fair value measurement).
Foreign currency contracts: The fair value is estimated using market-based inputs, obtained from independent pricing services, into valuation models (see “Fair value measurements” below) (Level 2 fair value measurement).
Interest rate swap contracts: The fair value is estimated based on quoted market prices from respective counterparties (see “Fair value measurements” below) (Level 2 fair value measurement).
Notes receivable: These instruments are fixed interest rate bearing notes. The fair value is estimated by discounting cash flows using market-based inputs, including counterparty credit risk (Level 3 fair value measurement).
Notes payable to banks: The revolving credit facility under the Company's senior credit facility is a variable interest rate bearing note which includes a fixed margin which is adjustable based upon the Company's debt ratio (as defined in the Company's senior credit facility). The fair value of the revolving credit facility is estimated by discounting cash flows using LIBOR plus a margin reflecting current market conditions obtained from participating member financial institutions. The remaining instruments are variable interest rate bearing notes for which the carrying value approximates the fair value (Level 2 fair value measurement).
Long-term debt: The term loans under the Company's senior credit facility are variable interest rate bearing notes which include a fixed margin which is adjustable based upon the Company's debt ratio. The fair value of the term loans is estimated by discounting cash flows using LIBOR plus a margin reflecting current market conditions obtained from participating member financial institutions. The fair value of the remaining long-term debt, which is all fixed rate, is estimated by discounting cash flows using interest rates currently available for debt with similar terms and maturities (Level 2 fair value measurement).

Fair value measurements –
The FASB guidance on fair value measurements and disclosures defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and requires disclosures about fair value measurements. This guidance emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and states that a fair value measurement should be determined based on assumptions that market participants would use in pricing an asset or liability. The fair value measurement guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy is broken down into three levels: Level 1 inputs are quoted prices in active markets for identical assets or liabilities; Level 2 inputs include data points that are observable such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) such as interest rates and yield curves that are observable for the asset and liability, either directly or indirectly; and Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis.

 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
(in millions)
 
 
 
 
 
 
 
May 31, 2012
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
AFS debt securities
$
—

 
$
—

 
$
27.4

 
$
27.4

Foreign currency contracts
$
—

 
$
9.9

 
$
—

 
$
9.9

Interest rate swap contracts
$
—

 
$
2.3

 
$
—

 
$
2.3

Liabilities:
 
 
 
 
 
 
 
Foreign currency contracts
$
—

 
$
10.9

 
$
—

 
$
10.9

Interest rate swap contracts
$
—

 
$
49.5

 
$
—

 
$
49.5

 
 
 
 
 
 
 
 
February 29, 2012
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
AFS debt securities
$
—

 
$
—

 
$
28.5

 
$
28.5

Foreign currency contracts
$
—

 
$
13.2

 
$
—

 
$
13.2

Liabilities:
 
 
 
 
 
 
 
Foreign currency contracts
$
—

 
$
6.4

 
$
—

 
$
6.4

Interest rate swap contracts
$
—

 
$
45.7

 
$
—

 
$
45.7



The Company’s foreign currency contracts consist of foreign currency forward and option contracts which are valued using market-based inputs, obtained from independent pricing services, into valuation models. These valuation models require various inputs, including contractual terms, market foreign exchange prices, interest-rate yield curves and currency volatilities. Interest rate swap fair values are based on quotes from respective counterparties. Quotes are corroborated by the Company using discounted cash flow calculations based upon forward interest-rate yield curves, which are obtained from independent pricing services. AFS debt securities are valued using market-based inputs into discounted cash flow models.

The following table represents a reconciliation of the changes in fair value of the Company's financial instruments measured at fair value on a recurring basis using significant unobservable inputs (Level 3).

 
May 31,
2012
 
May 31,
2011
(in millions)
 
 
 
AFS Debt Securities
 
 
 
Balance as of March 1
$
28.5

 
$
40.8

Total net gains (losses):
 
 
 
Included in earnings (interest expense, net)
1.2

 
1.5

Included in other comprehensive income (net unrealized losses on AFS debt securities)
(2.3
)
 
—

Included in other comprehensive income (foreign currency translation adjustments)
—

 
1.6

Total net (losses) gains
(1.1
)
 
3.1

Settlements
—

 
—

Transfers in and/or out of Level 3
—

 
—

Balance as of the end of the period
$
27.4

 
$
43.9



The fair value of the Level 3 AFS debt securities is based upon market-based inputs into discounted cash flow models that use unobservable inputs. The significant unobservable inputs used in the fair value measurement of AFS debt securities are the Australian risk-free interest rate and the global high yield “B” rated option adjusted spread. Significant changes in the unobservable inputs could result in a significant change in the value of the AFS debt securities. As of May 31, 2012, the Australian risk-free interest rate was 3.75% and the global high yield “B” rated option adjusted spread was 7.63%. During the twelve month period ended May 31, 2012, the Australian risk-free interest rate ranged from 3.75% to 4.75%, and the global high yield “B” rated option adjusted spread ranged from 5.23% to 7.63%. If these unobservable inputs used in the fair value measurement at May 31, 2012, had been 100 basis points lower, the fair value of the Level 3 AFS debt securities would have been approximately $0.9 million higher. If these unobservable inputs used in the fair value measurement at May 31, 2012, had been 100 basis points higher, the fair value of the Level 3 AFS debt securities would have been approximately $0.8 million lower. These calculated amounts are based solely on changes in the unobservable inputs and do not take into account any other changes to the fair value measurement calculation.