Quarterly report pursuant to Section 13 or 15(d)

Fair Value of Financial Instruments

v3.21.2
Fair Value of Financial Instruments
3 Months Ended
May 31, 2021
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).

Canopy investment
Equity securities, WarrantsThe November 2018 Canopy Warrants consist of three tranches of warrants, including 88.5 million Tranche A Warrants expiring November 1, 2023, which are currently exercisable, 38.4 million Tranche B Warrants expiring November 1, 2026, and 12.8 million Tranche C Warrants expiring November 1, 2026. The inputs used to estimate the fair value of the November 2018 Canopy Warrants are as follows(1) (2):
May 31, 2021 February 28, 2021
Tranche A
Warrants (3)
Tranche B
Warrants (4)
Tranche A
Warrants (3)
Tranche B
Warrants (4)
Exercise price (5)
C$ 50.40  C$ 76.68  C$ 50.40  C$ 76.68 
Valuation date stock price (6)
C$ 30.25  C$ 30.25  C$ 41.90  C$ 41.90 
Remaining contractual term (7)
2.4 years 5.4 years 2.7 years 5.7 years
Expected volatility (8)
70.0  % 70.0  % 70.0  % 70.0  %
Risk-free interest rate (9)
0.4  % 1.0  % 0.5  % 1.1  %
Expected dividend yield (10)
0.0  % 0.0  % 0.0  % 0.0  %
(1)The exercise price for the Tranche C Warrants is based on the VWAP Exercise Price and are not included in the table as there is no fair value assigned.
(2)In connection with the Acreage Transaction, we obtained other rights which include a share repurchase credit. If Canopy has not purchased the lesser of 27,378,866 Canopy common shares, or C$1,583.0 million worth of Canopy common shares for cancellation between April 18, 2019, and two-years after the full exercise of the Tranche A Warrants, we will be credited an amount that will reduce the aggregate exercise price otherwise payable upon each exercise of the Tranche B Warrants and Tranche C Warrants. The credit will be an amount equal to the difference between C$1,583.0 million and the actual price paid by Canopy in purchasing its common shares for cancellation. The likelihood of receiving the share repurchase credit if we were to fully exercise the Tranche A Warrants is remote, therefore, no fair value has been 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 expiration date of the warrants.
(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 the Canopy Debt Securities for C$200.0 million, or $150.5 million. 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 market spreads using bond data as of the valuation date.

The inputs used to estimate the fair value of the Canopy Debt Securities are as follows:
May 31,
2021
February 28,
2021
Conversion price (1)
C$ 48.17  C$ 48.17 
Valuation date stock price (2)
C$ 30.25  C$ 41.90 
Remaining term (3)
2.1 years 2.4 years
Expected volatility (4)
70.0  % 57.6  %
Risk-free interest rate (5)
0.3  % 0.4  %
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 consideration of historical and/or implied volatility levels of the underlying equity security, and for February 28, 2021, the volatility was 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 Canopy Debt Securities.
(6)Based on historical dividend levels.

Long-term debt
The term loan under our March 2020 Term Credit Agreement is a variable interest rate bearing note with a fixed margin, adjustable based upon our debt rating. The carrying value approximates the fair value of the term loan. The fair value of the remaining fixed interest rate long-term debt 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 May 31, 2021, and February 28, 2021, due to the relatively short maturity of these instruments. As of May 31, 2021, the carrying amount of long-term debt, including the current portion, was $10,444.2 million, compared with an estimated fair value of $11,476.0 million. As of February 28, 2021, the carrying amount of long-term debt, including the current portion, was $10,442.3 million, compared with an estimated fair value of $11,580.9 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)
May 31, 2021
Assets:
Foreign currency contracts $ —  $ 94.6  $ —  $ 94.6 
Commodity derivative contracts $ —  $ 39.6  $ —  $ 39.6 
Equity securities (1)
$ —  $ 903.5  $ —  $ 903.5 
Canopy Debt Securities (1)
$ —  $ 170.1  $ —  $ 170.1 
Liabilities:
Foreign currency contracts $ —  $ 7.8  $ —  $ 7.8 
Commodity derivative contracts $ —  $ 1.6  $ —  $ 1.6 
February 28, 2021
Assets:
Foreign currency contracts $ —  $ 76.6  $ —  $ 76.6 
Commodity derivative contracts $ —  $ 21.2  $ —  $ 21.2 
Equity securities (1)
$ —  $ 1,639.7  $ —  $ 1,639.7 
Canopy Debt Securities (1)
$ —  $ 176.3  $ —  $ 176.3 
Liabilities:
Foreign currency contracts $ —  $ 9.7  $ —  $ 9.7 
Commodity derivative contracts $ —  $ 5.3  $ —  $ 5.3 
(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 Three Months
Ended May 31,
2021 2020
(in millions)
November 2017 Canopy Warrants (i)
$ —  $ (61.8)
November 2018 Canopy Warrants (736.2) (123.0)
Canopy Debt Securities (8.9) (12.5)
$ (745.1) $ (197.3)
(i)
In May 2020, we exercised warrants obtained in November 2017 which gave us the option to purchase 18.9 million common shares of Canopy at an exercise price of C$12.98 per warrant share for C$245.0 million, or $173.9 million.
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 Three Months Ended May 31, 2021
Long-lived assets $ —  $ —  $ 20.0  $ 665.9 
For the Three Months Ended May 31, 2020
Long-lived assets held for sale $ —  $ —  $ 784.0  $ 25.0 

Long-lived assets
In April 2021, our Board of Directors authorized management to sell or abandon the Mexicali Brewery. Subsequently, management determined that we will be unable to use or repurpose certain assets at the Mexicali Brewery. Accordingly, long-lived assets with a carrying value of $685.9 million were written down to their estimated fair value of $20.0 million, resulting in an impairment of $665.9 million for the three months ended May 31, 2021. This impairment was included in impairment of brewery construction in progress within our consolidated results of operations for the three months ended May 31, 2021. Our estimate of fair value was determined based on the expected salvage value of the assets as of May 31, 2021. The Mexicali Brewery is a component of the Beer segment. We are continuing to work with government officials in Mexico to (i) determine next steps for our suspended Mexicali Brewery construction project and (ii) pursue various forms of recovery for capitalized costs and additional expenses incurred in establishing the brewery, however, there can be no assurance of any recoveries. In the medium-term, under normal operating conditions, we have ample capacity at the Nava and Obregon breweries to meet consumer needs based on current growth forecasts and current and planned production capabilities. To align with our anticipated future growth expectations we are also working with the Mexican government to explore options to add further capacity at other locations in Mexico where there is ample water and a skilled workforce to meet our long-term needs.

Long-lived assets held for sale
For the three months ended May 31, 2020, in connection with the Wine and Spirits Divestitures and the Concentrate Business Divestiture, long-lived assets held for sale with a carrying value of $809.0 million were written down to their estimated fair value of $784.0 million, less costs to sell, resulting in a loss of $25.0 million. 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 estimated fair value was determined based on the expected proceeds primarily from the Wine and Spirits Divestitures and the Concentrate Business Divestiture as of May 31, 2020, excluding the contingent consideration, which we will recognize when it is determined to be realizable.