Annual report pursuant to Section 13 and 15(d)

Fair Value of Financial Instruments

v3.23.1
Fair Value of Financial Instruments
 12 Months Ended
Feb. 28, 2023
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 or 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 Pre-issuance hedge 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 investment
Equity securities, Warrants – The 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. If the Canopy Transaction is completed we intend to surrender the November 2018 Canopy Warrants for cancellation. The inputs used to estimate the fair value of the November 2018 Canopy Warrants are as follows(1)(2):
February 28, 2023 February 28, 2022
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$ 3.17  C$ 3.17  C$ 9.04  C$ 9.04 
Remaining contractual term (7)
0.7 years 3.7 years 1.7 years 4.7 years
Expected volatility (8)
100.0  % 100.0  % 75.0  % 75.0  %
Risk-free interest rate (9)
4.6  % 3.7  % 1.4  % 1.7  %
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. The Tranche C Warrants 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 shares 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 – We have elected the fair value option to account for 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 settled prior to maturity by either party upon the occurrence of certain events. 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. In April 2023, we extended the maturity of the remaining Canopy Debt Securities by exchanging them for the 2023 Canopy Promissory Note. If the Canopy Amendment is authorized by Canopy’s shareholders, we maintain our intention to negotiate an exchange of the principal amount of the 2023 Canopy Promissory Note for Exchangeable Shares, although neither we nor Canopy has any binding obligation to do so. For additional information, refer to Note 10.

The inputs used to estimate the fair value of the Canopy Debt Securities are as follows:
February 28,
2023		 February 28,
2022
Conversion price (1)
C$ 48.17  C$ 48.17 
Valuation date stock price (2)
C$ 3.17  C$ 9.04 
Remaining term (3)
0.4 years 1.4 years
Expected volatility (4)
100.0  % 75.0  %
Risk-free interest rate (5)
4.6  % 1.4  %
Expected dividend yield (6)
0.0  % 0.0  %
(1)Based on the rate which the Canopy Debt Securities may be settled. In June 2022, the Canopy Debt Securities were amended to remove Canopy’s right to settle the Canopy Debt Securities on conversion into Canopy common shares. As a result, the Canopy Debt Securities may only be settled in cash. Prior to the June 2022 amendment, the Canopy Debt Securities could be settled, at Canopy’s option, in cash, Canopy common shares, or a combination thereof.
(2)Based on the closing market price for Canopy common shares 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, adjusted for certain risks associated with debt securities, as appropriate.
(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.

Short-term borrowings
Our short-term borrowings consist of our commercial paper program and the revolving credit facility under our senior credit facility. The revolving 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). For these short-term borrowings the carrying value approximates the fair value.

Long-term debt
The term loans under our term credit agreements are variable interest rate bearing notes with a fixed margin, adjustable based upon our debt rating. The carrying values approximate the fair value of the term loans. 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, and accounts payable, approximate fair value as of February 28, 2023, and February 28, 2022, due to the relatively short maturity of these instruments. As of February 28, 2023, the carrying amount of long-term debt, including the current portion, was $11,296.0 million, compared with an estimated fair value of $10,236.0 million. As of February 28, 2022, the carrying amount of long-term debt, including the current portion, was $10,093.5 million, compared with an estimated fair value of $10,345.3 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)
February 28, 2023
Assets:
Foreign currency contracts $ —  $ 249.5  $ —  $ 249.5 
Commodity derivative contracts $ —  $ 25.8  $ —  $ 25.8 
November 2018 Canopy Warrants (1)
$ —  $ 0.2  $ —  $ 0.2 
Canopy Debt Securities (1)
$ —  $ 69.6  $ —  $ 69.6 
Liabilities:
Foreign currency contracts $ —  $ 17.2  $ —  $ 17.2 
Commodity derivative contracts $ —  $ 27.8  $ —  $ 27.8 
February 28, 2022
Assets:
Foreign currency contracts $ —  $ 56.4  $ —  $ 56.4 
Commodity derivative contracts $ —  $ 91.0  $ —  $ 91.0 
November 2018 Canopy Warrants (1)
$ —  $ 36.3  $ —  $ 36.3 
Canopy Debt Securities (1)
$ —  $ 146.6  $ —  $ 146.6 
Liabilities:
Foreign currency contracts $ —  $ 17.8  $ —  $ 17.8 
Commodity derivative contracts $ —  $ 0.9  $ —  $ 0.9 
Pre-issuance hedge contracts $ —  $ 0.4  $ —  $ 0.4 
(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:
February 28,
2023		 February 28,
2022
(in millions)
November 2018 Canopy Warrants $ (36.1) $ (1,603.4)
Canopy Debt Securities (i)
(9.8) (41.3)
$ (45.9) $ (1,644.7)
(i)
In July 2022, we received 29.2 million common shares of Canopy through the exchange of C$100.0 million principal amount of our Canopy Debt Securities. We continued to hold Canopy Debt Securities of C$100.0 million principal amount as of February 28, 2023. For additional information, refer to Note 10.
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 Year Ended February 28, 2023
Equity method investments $ 398.4  $ —  $ —  $ 1,060.3 
Long-lived assets —  —  6.3  53.5 
Trademarks —  —  —  13.0 
$ 398.4  $ —  $ 6.3  $ 1,126.8 
For the Year Ended February 28, 2022
Long-lived assets $ —  $ —  $ 20.0  $ 665.9 
For the Year Ended February 28, 2021
Long-lived assets held for sale $ —  $ —  $ —  $ 24.0 
Trademarks —  —  4.0  6.0 
$ —  $ —  $ 4.0  $ 30.0 

Equity method investments
As of August 31, 2022, we evaluated the Canopy Equity Method Investment and determined there was an other-than-temporary impairment based on several contributing factors, including: (i) the period of time for which the fair value had been less than the carrying value and the uncertainty surrounding Canopy’s stock price recovering in the near-term, (ii) Canopy recording a significant impairment of goodwill related to its cannabis operations during its three months ended June 30, 2022, and (iii) the uncertainty of U.S. federal cannabis permissibility. As a result, the Canopy Equity Method Investment with a carrying value of $1,695.1 million was written down to its estimated fair value of $634.8 million, resulting in an impairment of $1,060.3 million. This loss from impairment was included in income (loss) from unconsolidated investments within our consolidated results for the year ended February 28, 2023. The estimated fair value was determined based on the closing price of the underlying equity security as of August 31, 2022. As of February 28, 2023, the estimated fair value was $398.4 million, as such, we evaluated the Canopy Equity Method Investment for an additional other-than-temporary impairment. If Canopy’s stock price does not recover above our carrying value in the near-term there may be a future impairment of the Canopy Equity Method Investment. For additional information, refer to Note 10.

Long-lived assets
For the year ended February 28, 2023, in connection with certain continued negative trends within our Beer segment’s craft beer business, management updated its long-term financial forecasts for this business and determined it was no longer part of the beer asset group. This change in financial forecasts indicated it was more likely than not the fair value of our long-lived assets associated with the craft beer business might be below its carrying value. Accordingly, we performed a quantitative assessment for impairment. As a result, certain long-lived assets with a carrying value of $59.8 million were written down to their estimated fair value of $6.3 million, resulting in a total loss of $53.5 million. This loss was included in selling, general, and administrative expenses within our consolidated results of operations for the year ended February 28, 2023. These assets consisted primarily of property, plant, and equipment, including the Daleville Facility. Our estimated fair value was primarily based on the cash flows expected to be generated by the 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, for the first quarter of Fiscal 2022, 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. This impairment was included in impairment of brewery construction in progress within our consolidated results of operations for the year ended February 28, 2022. Our estimate of fair value was determined based on the expected salvage value of the assets. The Mexicali Brewery is a component of the Beer segment. In April 2022, we announced that, with the assistance of the Mexican government and state and local officials in Mexico, we acquired land in Veracruz for the construction of the Veracruz Brewery where there is ample water and we will have a skilled workforce to meet our long-term needs. The design and construction process for the Veracruz Brewery is underway. In the medium-term, under normal operating conditions, we have ample capacity at our current Mexican breweries to meet consumer needs based on current growth forecasts and current and planned production capabilities. Expansion, optimization, and/or construction activities continue at our breweries in Mexico to align with our anticipated future growth expectations.

Long-lived assets held for sale
For the year ended February 28, 2021, primarily in connection with the Wine and Spirits Divestitures and the Concentrate Business Divestiture, long-lived assets held for sale with a carrying value of $736.4 million were written down to their estimated fair value of $712.4 million, less costs to sell, resulting in a total loss of $24.0 million. This loss was included in selling, general, and administrative expenses 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 as of November 30, 2020, primarily based on the expected proceeds from the Wine and Spirits Divestitures and the Concentrate Business Divestiture, excluding the then-potential contingent consideration.

Trademarks
For the year ended February 28, 2023, in connection with certain continued negative trends within our Beer segment’s Funky Buddha and Four Corners craft beer portfolios, management updated its long-term financial forecasts for these portfolios. As a result, the Funky Buddha and Four Corners craft beer trademark assets with a net carrying value of $13.0 million were written-off, resulting in an impairment of $13.0 million. This impairment was included in selling, general, and administrative expenses within our consolidated results of operations for the year ended February 28, 2023.

For the year ended February 28, 2021, certain negative trends within our Beer segment’s Four Corners craft beer portfolio, including slower growth rates and increased competition, resulted in updated long-term financial forecasts. The updated forecasts indicated it was more likely than not the fair value of our indefinite-lived intangible asset associated with the Four Corners trademark might be below its carrying value. Accordingly, we performed a quantitative assessment for impairment. As a result of this assessment, the Four Corners trademark asset with a carrying value of $10.0 million was written down to its estimated fair value of $4.0 million, resulting in an impairment of $6.0 million. This impairment was included in selling, general, and administrative expenses within our consolidated results of operations for the year ended February 28, 2021.

When performing a quantitative assessment for impairment of a trademark asset, we measure the amount of impairment by calculating the amount by which the carrying value of the trademark asset exceeds its estimated fair value. The estimated fair value is 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 the trademark asset. The cash flow projections we use to estimate the fair value of our trademark assets involve several assumptions, including (i) projected revenue growth rates, (ii) estimated royalty rates, (iii) after-tax royalty savings expected from ownership of the trademarks, and (iv) discount rates used to derive the estimated fair value of the trademark assets.