Quarterly report pursuant to Section 13 or 15(d)

Fair Value of Financial Instruments

v2.4.0.8
Fair Value of Financial Instruments
 9 Months Ended
Nov. 30, 2013
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:
 
November 30, 2013
 
February 28, 2013
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
(in millions)
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Cash and cash investments
$
65.2

 
$
65.2

 
$
331.5

 
$
331.5

Accounts receivable, net
$
668.8

 
$
668.8

 
$
471.9

 
$
471.9

Available-for-sale debt securities
$
36.4

 
$
36.4

 
$
34.2

 
$
34.2

Foreign currency contracts
$
12.3

 
$
12.3

 
$
9.7

 
$
9.7

Interest rate swap contracts
$
6.4

 
$
6.4

 
$
6.6

 
$
6.6

Diesel fuel swap contracts
$
0.9

 
$
0.9

 
$
0.6

 
$
0.6

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Notes payable to banks
$
170.5

 
$
170.5

 
$
—

 
$
—

Accounts payable
$
462.4

 
$
462.4

 
$
209.0

 
$
209.0

Long-term debt, including current portion
$
6,964.1

 
$
6,995.6

 
$
3,305.4

 
$
3,603.6

Foreign currency contracts
$
10.9

 
$
10.9

 
$
5.3

 
$
5.3

Interest rate swap contracts
$
41.1

 
$
41.1

 
$
47.1

 
$
47.1

Diesel fuel swap contracts
$
—

 
$
—

 
$
0.1

 
$
0.1



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).
Diesel fuel 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 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 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).

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.
 
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)
 
 
 
 
 
 
 
November 30, 2013
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
AFS debt securities
$
—

 
$
—

 
$
36.4

 
$
36.4

Foreign currency contracts
$
—

 
$
12.3

 
$
—

 
$
12.3

Interest rate swap contracts
$
—

 
$
6.4

 
$
—

 
$
6.4

Diesel fuel swap contracts
$
—

 
$
0.9

 
$
—

 
$
0.9

Liabilities:
 
 
 
 
 
 
 
Foreign currency contracts
$
—

 
$
10.9

 
$
—

 
$
10.9

Interest rate swap contracts
$
—

 
$
41.1

 
$
—

 
$
41.1

 
 
 
 
 
 
 
 
February 28, 2013
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
AFS debt securities
$
—

 
$
—

 
$
34.2

 
$
34.2

Foreign currency contracts
$
—

 
$
9.7

 
$
—

 
$
9.7

Interest rate swap contracts
$
—

 
$
6.6

 
$
—

 
$
6.6

Diesel fuel swap contracts
$
—

 
$
0.6

 
$
—

 
$
0.6

Liabilities:
 
 
 
 
 
 
 
Foreign currency contracts
$
—

 
$
5.3

 
$
—

 
$
5.3

Interest rate swap contracts
$
—

 
$
47.1

 
$
—

 
$
47.1

Diesel fuel swap contracts
$
—

 
$
0.1

 
$
—

 
$
0.1



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. Diesel fuel swap fair values are based on quotes from respective counterparties. Quotes are corroborated by the Company using market data. AFS debt securities are valued using market-based inputs into discounted cash flow models.

The following table presents the Company’s assets and liabilities measured at fair value on a nonrecurring basis for which an impairment assessment was performed for the period 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 Nine Months Ended November 30, 2013
 
 
 
 
 
 
 
Goodwill
$
—

 
$
—

 
$
159.6

 
$
278.7

Trademarks
—

 
—

 
68.3

 
22.2

Total
$
—

 
$
—

 
$
227.9

 
$
300.9



Goodwill:
For the three months ended August 31, 2013, the Company identified certain negative trends within its Wine and Spirits’ Canadian reporting unit which, when combined with recent changes in strategy within the Canadian business, indicated that the fair value of the reporting unit might be below its carrying value. These negative trends included a reduction in market growth rates for certain segments of the domestic Canadian wine industry as well as the identification that certain improvement initiatives had not materialized in segments of the Canadian business such as refreshments and wine kits. In addition, imported brands have been experiencing market growth within the Canadian market, and certain of the Company’s non-Canadian branded wine products imported into Canada provide higher margin to the Company on a consolidated basis. Accordingly, the Company has modified its strategy to capitalize on this trend and shift focus from certain segments of the domestic business to imported brands. The Canadian reporting unit realizes only a portion of the overall profit attributable to imported brands whereas it realizes all of the profit attributable to the domestic business. Therefore, the Company performed the two-step process to evaluate goodwill for impairment for the Wine and Spirits’ Canadian reporting unit. In the first step, the fair value of the Canadian reporting unit was compared to the carrying value of the reporting unit, including goodwill. The estimate of fair value of the reporting unit was determined on the basis of discounted future cash flows. As the estimated fair value of the reporting unit was less than the carrying value of the reporting unit, a second step was performed to determine the amount of the goodwill impairment the Company should record. In the second step, an implied fair value of the reporting unit’s goodwill was determined by comparing the fair value of the reporting unit with the fair value of the reporting unit’s assets and liabilities other than goodwill (including any unrecognized intangible assets). In determining the estimated fair value of the reporting unit, the Company considered estimates of future operating results and cash flows of the reporting unit discounted using market based discount rates. The estimates of future operating results and cash flows were principally derived from the Company’s updated long-term financial forecast, which was developed as part of the Company’s new strategy for the Canadian business. The decline in the implied fair value of the goodwill and the resulting impairment loss was primarily driven by the updated long-term financial forecasts, which showed lower estimated future operating results primarily due to the change in the Company’s strategy for the Canadian business. The implied fair value of the Canadian reporting unit’s goodwill of $159.6 million compared to the carrying value of the Canadian reporting unit’s goodwill of $433.9 million resulted in the recognition of an impairment of $278.7 million. This impairment is included in impairment of goodwill and intangible assets on the Company’s Consolidated Statements of Comprehensive Income.

Trademarks:
For the three months ended August 31, 2013, prior to the goodwill impairment analysis, the Company performed a review of indefinite lived intangible assets for impairment. The Company determined that certain trademarks associated with the Wine and Spirits’ Canadian reporting unit were impaired largely due to lower revenue and profits associated with the related products included in the updated long-term financial forecasts developed as part of the Company’s new strategy for the Canadian business. The Company measured the amount of impairment by calculating the amount by which the carrying value of these assets exceeded their estimated fair values. The fair value was determined based on an income approach using the relief from royalty method, which assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of trademark assets. The cash flow projections the Company uses to estimate the fair values of its trademarks involve several assumptions, including (i)  projected revenue growth rates; (ii)  estimated royalty rates; (iii)  calculated after-tax royalty savings expected from ownership of the subject trademarks; and (iv)  discount rates used to derive the present value factors used in determining the fair value of the trademarks. As a result of this review, trademarks for the Wine and Spirits’ Canadian reporting unit with a carrying value of $90.2 million were written down to their fair value of $68.3 million, resulting in an impairment of $22.2 million. This impairment is included in impairment of goodwill and intangible assets on the Company’s Consolidated Statements of Comprehensive Income.