Quarterly report pursuant to Section 13 or 15(d)

Fair Value of Financial Instruments

v3.20.2
Fair Value of Financial Instruments
6 Months Ended
Aug. 31, 2020
Fair Value Disclosures [Abstract]  
FAIR VALUE OF FINANCIAL INSTRUMENTS FAIR VALUE OF FINANCIAL INSTRUMENTS
Authoritative guidance establishes a framework for measuring fair value, including 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 includes 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 volatility, 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.

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

Foreign currency and commodity derivative contracts
The fair value is estimated using market-based inputs, obtained from independent pricing services, entered into valuation models. These valuation models require various inputs, including contractual terms, market foreign exchange prices, market commodity prices, interest-rate yield curves, and currency volatilities, as applicable (Level 2 fair value measurement).

Interest rate swap and treasury lock contracts
The fair value is estimated based on quoted market prices from respective counterparties. Quotes are corroborated by using discounted cash flow calculations based upon forward interest-rate yield curves, which are obtained from independent pricing services (Level 2 fair value measurement).

Canopy investments
Equity securities, Warrants The November 2017 Canopy Warrants were exercised on May 1, 2020. For additional information on the November 2017 Canopy Warrants and the related exercise, refer to Note 8.
The inputs used to estimate the fair value of the Canopy warrants (all as defined in Note 8) are as follows:
August 31, 2020 (1) (2)
February 29, 2020 (2)

Tranche A
Warrants (3)

Tranche B
Warrants (4)

Tranche A
Warrants (3)

Tranche B
Warrants (4)
November
2017 Canopy
Warrants (3)
Exercise price (5)
C$ 50.40  C$ 76.68  C$ 50.40  C$ 76.68  C$ 12.98 
Valuation date stock price (6)
C$ 21.51  C$ 21.51  C$ 25.17  C$ 25.17  C$ 25.17 
Remaining contractual term (7)
3.2 years 6.2 years 3.7 years 6.7 years 0.2 years
Expected volatility (8)
75.0  % 75.0  % 70.0  % 70.0  % 105.3  %
Risk-free interest rate (9)
0.3  % 0.4  % 1.1  % 1.1  % 1.5  %
Expected dividend yield (10)
0.0  % 0.0  % 0.0  % 0.0  % 0.0  %
(1)The November 2017 Canopy Warrants were exercised on May 1, 2020 and as such are not included in the table as of August 31, 2020.
(2)The exercise price for the Tranche C Warrants is based on the volume-weighted average of the closing market price of Canopy’s common shares on the Toronto Stock Exchange (“TSX”) for the five trading days immediately preceding the exercise date (“VWAP Exercise Price”) and are not included in the table as there is no fair value assigned.
(3)The fair value is estimated using the Black-Scholes option-pricing model (Level 2 fair value measurement).
(4)The fair value is estimated using Monte Carlo simulations (Level 2 fair value measurement).
(5)Based on the exercise price from the applicable underlying agreements.
(6)Based on the closing market price for Canopy common stock on the TSX as of the applicable date.
(7)Based on the following expiration dates for the November 2017 Canopy Warrants and November 2018 Canopy Warrants (all as defined in Note 8):
November 2017 Canopy Warrants May 1, 2020
Tranche A Warrants November 1, 2023
Tranche B Warrants November 1, 2026
(8)Based on consideration of historical and/or implied volatility levels of the underlying equity security and limited consideration of historical peer group volatility levels.
(9)Based on the implied yield currently available on Canadian Treasury zero coupon issues with a remaining term equal to the expiration date of the applicable warrants.
(10)Based on historical dividend levels.

Debt securities, ConvertibleWe have elected the fair value option to account for convertible debt securities issued by Canopy for C$200.0 million, or $150.5 million (the “Canopy Debt Securities”). Interest income on the Canopy Debt Securities is calculated using the effective interest method and is recognized separately from the changes in fair value in interest expense. The Canopy Debt Securities have a contractual maturity of five years from the date of issuance but may be converted prior to maturity by either party upon the occurrence of certain events. At settlement, the Canopy Debt Securities can be settled at the option of the issuer, in cash, equity shares of the issuer, or a combination thereof. The fair value is estimated using a binomial lattice option-pricing model (Level 2 fair value measurement), which includes an estimate of the credit spread based on the implied spread as of the issuance date of the notes and changes in market spreads through the valuation date of the notes.
The inputs used to estimate the fair value of the Canopy Debt Securities are as follows:
August 31,
2020
February 29,
2020
Conversion price (1)
C$ 48.17  C$ 48.17 
Valuation date stock price (2)
C$ 21.51  C$ 25.17 
Remaining term (3)
2.9 years 3.4 years
Expected volatility (4)
61.9  % 58.2  %
Risk-free interest rate (5)
0.3  % 1.1  %
Expected dividend yield (6)
0.0  % 0.0  %
(1)Based on the rate which the Canopy Debt Securities may be converted into equity shares, or the equivalent amount of cash, at the option of the issuer.
(2)Based on the closing market price for Canopy common stock on the TSX as of the applicable date.
(3)Based on the contractual maturity date of the notes.
(4)Based on historical volatility levels of the underlying equity security, reduced for certain risks associated with debt securities.
(5)Based on the implied yield currently available on Canadian Treasury zero coupon issues with a term equal to the remaining contractual term of the debt securities.
(6)Based on historical dividend levels.

Short-term borrowings
The revolving credit facility under our senior credit facility is a variable interest rate bearing note with a fixed margin, adjustable based upon our debt rating (as defined in our senior credit facility). Its fair value is estimated by discounting cash flows using LIBOR plus a margin reflecting current market conditions obtained from participating member financial institutions (Level 2 fair value measurement). The remaining instruments, including our commercial paper, are variable interest rate bearing notes for which the carrying value approximates the fair value.

Long-term debt
The term loan under our March 2020 Term Credit Agreement (as defined in Note 9) is a variable interest rate bearing note with a fixed margin, adjustable based upon our debt rating. The senior floating rate notes are variable interest rate bearing notes which include fixed margins. The carrying value approximates the fair value of the term loan. The fair value of the remaining long-term debt, which is primarily fixed interest rate, is estimated by discounting cash flows using interest rates currently available for debt with similar terms and maturities (Level 2 fair value measurement).

The carrying amounts of certain of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and short-term borrowings, approximate fair value as of August 31, 2020, and February 29, 2020, due to the relatively short maturity of these instruments. As of August 31, 2020, the carrying amount of long-term debt, including the current portion, was $11,600.6 million, compared with an estimated fair value of $12,975.1 million. As of February 29, 2020, the carrying amount of long-term debt, including the current portion, was $11,945.7 million, compared with an estimated fair value of $12,935.9 million.
Recurring basis measurements
The following table presents our financial assets and liabilities measured at estimated fair value on a recurring basis:
Fair Value Measurements Using
Quoted
Prices in
Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
(in millions)
August 31, 2020
Assets:
Foreign currency contracts $   $ 16.9  $   $ 16.9 
Commodity derivative contracts $   $ 5.5  $   $ 5.5 
Equity securities (1)
$   $ 635.9  $   $ 635.9 
Canopy Debt Securities (1)
$   $ 128.1  $   $ 128.1 
Liabilities:
Foreign currency contracts $   $ 64.5  $   $ 64.5 
Commodity derivative contracts $   $ 31.0  $   $ 31.0 
February 29, 2020
Assets:
Foreign currency contracts $   $ 96.3  $   $ 96.3 
Commodity derivative contracts $   $ 0.6  $   $ 0.6 
Equity securities (1)
$   $ 991.5  $   $ 991.5 
Canopy Debt Securities (1)
$   $ 125.6  $   $ 125.6 
Liabilities:
Foreign currency contracts $   $ 34.4  $   $ 34.4 
Commodity derivative contracts $   $ 40.9  $   $ 40.9 
Interest rate swap contracts $   $ 0.8  $   $ 0.8 
Treasury lock contracts $   $ 7.6  $   $ 7.6 
(1)
Unrealized net gain (loss) from the changes in fair value of our securities measured at fair value recognized in income (loss) from unconsolidated investments, are as follows:
For the Six Months
Ended August 31,
For the Three Months
Ended August 31,
2020 2019 2020 2019
(in millions)
November 2017 Canopy Warrants (i)
$ (61.8) $ (450.8) $   $ (316.7)
November 2018 Canopy Warrants (ii)
(180.6) (1,134.4) (57.6) (473.6)
Canopy Debt Securities (2.5) (81.4) 10.0  (48.8)
$ (244.9) $ (1,666.6) $ (47.6) $ (839.1)
(i)
The November 2017 Canopy Warrants were exercised in May 2020. For additional information on the November 2017 Canopy Warrants and the related exercise, refer to Note 8.
(ii)
The terms of the November 2018 Canopy Warrants were modified in June 2019. For additional information on the November 2018 Canopy Warrants and the related modification, refer to Note 8. The amounts for the six months and three months ended August 31, 2019, are net of a $1,176.0 million unrealized gain resulting from the June 2019 Warrant Modification.
Nonrecurring basis measurements
The following table presents our assets and liabilities measured at estimated fair value on a nonrecurring basis for which an impairment assessment was performed for the periods presented:
Fair Value Measurements Using
Quoted
Prices in
Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total Losses
(in millions)
For the Six Months Ended August 31, 2020
Long-lived assets held for sale $   $   $ 795.2  $ 3.0 
For the Six Months Ended August 31, 2019
Long-lived assets held for sale $   $   $ 1,444.4  $ 27.0 
Trademarks     17.0  11.0 
Total $   $   $ 1,461.4  $ 38.0 

Long-lived assets held for sale
For the first quarter of fiscal 2021, in connection with the Wine and Spirits Transactions and the Concentrate Business Transaction, long-lived assets held for sale were written down to their estimated fair value, less costs to sell, resulting in a loss of $25.0 million. Subsequently, for the second quarter of fiscal 2021, a reduction to the loss on long-lived assets held for sale of $22.0 million was recognized. The long-lived assets held for sale with a carrying value of $798.2 million were written down to their estimated fair value of $795.2 million, less costs to sell, resulting in a total loss of $3.0 million for the six months ended August 31, 2020. This loss was included in impairment of assets held for sale within our consolidated results of operations. These assets consisted primarily of goodwill, intangible assets, and certain winery and vineyard assets which had satisfied the conditions necessary to be classified as held for sale. Our current estimate of fair value was determined based on the expected proceeds from the Wine and Spirits Transactions and the Concentrate Business Transaction as of August 31, 2020, excluding the contingent consideration, which we will recognize when it is determined to be realizable.

For the six months and three months ended August 31, 2019, in connection with the Original Wine and Spirits Transaction, long-lived assets held for sale with a carrying value of $1,471.4 million were written down to their estimated fair value of $1,444.4 million, less cost to sell, resulting in a loss of $27.0 million. These losses are included in impairment of assets held for sale within our consolidated results of operations. These assets consisted primarily of goodwill, intangible assets, and certain winery and vineyard assets which had satisfied the conditions necessary to be classified as held for sale. As such, these assets were written down to a value based on our estimate of fair value less cost to sell. Our estimate of fair value was determined based on the expected proceeds from the Original Wine and Spirits Transaction as of August 31, 2019.

Trademarks
For the six months and three months ended August 31, 2019, certain continuing negative trends within our Beer segment’s Ballast Point craft beer portfolio, including increased rate of revenue decline and increased competition, indicated that it was more likely than not that the fair value of our indefinite lived intangible asset associated with the Ballast Point craft beer trademark might be below its carrying value. Accordingly, we performed a quantitative assessment for impairment. As a result of this assessment, the Ballast Point craft beer trademark asset with a carrying value of $28.0 million was written down to its estimated fair value of $17.0 million, resulting in an impairment of $11.0 million. This impairment is included in selling, general, and administrative expenses within our consolidated results of operations.