Quarterly report pursuant to Section 13 or 15(d)

Fair Value of Financial Instruments

v2.4.0.6
Fair Value of Financial Instruments
9 Months Ended
Nov. 30, 2011
Fair Value of Financial Instruments [Abstract]  
FAIR VALUE OF FINANCIAL INSTRUMENTS
6. 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, 2011     February 28, 2011  
     Carrying
Amount
    Fair
Value
    Carrying
Amount
    Fair
Value
 

(in millions)

                               

Assets:

                               

Cash and cash investments

  $ 55.8     $ 55.8     $ 9.2     $ 9.2  

Accounts receivable

  $ 567.7     $ 567.7     $ 416.2     $ 416.2  

Available-for-sale debt securities

  $ 25.1     $ 25.1     $ 40.8     $ 40.8  

Foreign currency contracts

  $ 13.7     $ 13.7     $ 17.0     $ 17.0  

Interest rate swap contracts

  $ -             $ -             $ 1.7     $ 1.7  

Notes receivable

  $ 4.9     $ 4.9     $ 6.0     $ 6.0  
         

Liabilities:

                               

Notes payable to banks

  $ 352.3     $ 348.1     $ 83.7     $ 83.8  

Accounts payable

  $ 270.6     $ 270.6     $ 129.2     $ 129.2  

Long-term debt, including current portion

  $ 2,752.3     $ 2,934.8     $ 3,152.6     $ 3,298.2  

Foreign currency contracts

  $ 6.5     $ 6.5     $ 5.3     $ 5.3  

Interest rate swap contracts

  $ 42.8     $ 42.8     $ 6.1     $ 6.1  

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.

Available-for-sale (“AFS”) debt securities: The fair value is estimated by discounting cash flows using market-based inputs (see “Fair value measurements” below).

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).

Interest rate swap contracts: The fair value is estimated based on quoted market prices from respective counterparties (see “Fair value measurements” below).

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.

Notes payable to banks: The revolving credit facility under the 2006 Credit Agreement (as defined in Note 10) 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 2006 Credit Agreement). 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.

Long-term debt: The tranche B term loan facility under the 2006 Credit Agreement is a variable interest rate bearing note which includes a fixed margin. The fair value of the tranche B term loan facility 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.

 

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)

                               

November 30, 2011

                               

Assets:

                               

AFS debt securities

  $ -             $ -             $ 25.1     $ 25.1  

Foreign currency contracts

  $ -             $ 13.7     $ -             $ 13.7  

Liabilities:

                               

Foreign currency contracts

  $ -             $ 6.5     $ -             $ 6.5  

Interest rate swap contracts

  $ -             $ 42.8     $ -             $ 42.8  
         

February 28, 2011

                               

Assets:

                               

AFS debt securities

  $ -             $ -             $ 40.8     $ 40.8  

Foreign currency contracts

  $ -             $ 17.0     $ -             $ 17.0  

Interest rate swap contracts

  $ -             $ 1.7     $ -             $ 1.7  

Liabilities:

                               

Foreign currency contracts

  $ -             $ 5.3     $ -             $ 5.3  

Interest rate swap contracts

  $ -             $ 6.1     $ -             $ 6.1  

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. 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 financial instruments measured at fair value on a recurring basis using significant unobservable inputs (Level 3).

         
    AFS
Debt
Securities
 

(in millions)

       

Balance at February 28, 2011

  $ 40.8  

Total net gains:

       

Included in earnings (interest expense, net)

    4.5  

Included in other comprehensive income (net unrealized gains on AFS debt securities)

    1.5  
   

 

 

 

Total net gains

    6.0  

Settlements

    (21.7

Transfers in and/or out of Level 3

    -          
   

 

 

 

Balance at November 30, 2011

  $ 25.1  
   

 

 

 

In the third quarter of fiscal 2012, the Company received cash proceeds of $21.7 million, consisting of proceeds for principal of $20.2 million and proceeds for interest of $1.5 million, in connection with the early redemption of certain of the AFS debt securities. In addition, the Company reclassified net gains of $3.2 million, net of income tax effect, from AOCI to selling, general and administrative expenses on the Company’s Consolidated Statements of Operations for the nine months and three months ended November 30, 2011.

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 periods presented.

      $000,000.00       $000,000.00       $000,000.00       $000,000.00  
    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, 2010

                               

Long-lived assets held for sale

  $ -             $ -             $ 4.1     $ 5.8  

Trademarks

    -               -               -               6.9  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ -             $ -             $ 4.1     $ 12.7  
   

 

 

   

 

 

   

 

 

   

 

 

 
         

For the Three Months Ended November 30, 2010

                               

Trademarks

  $ -             $ -             $ -             $ 6.9  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ -             $ -             $ -             $ 6.9  
   

 

 

   

 

 

   

 

 

   

 

 

 

Long-lived assets held for sale:

For the nine months ended November 30, 2010, in connection with the Company’s plan announced in August 2008 to sell certain assets and implement operational changes designed to improve the efficiencies and returns associated with its then existing Australian business, primarily by consolidating certain winemaking and packaging operations and reducing the Company’s overall grape supply due to reduced capacity needs resulting from a streamlining of the Company’s product portfolio (the “Australian Initiative”), long-lived assets held for sale with a carrying value of $10.1 million were written down to their estimated fair value of $4.1 million, less cost to sell (which was estimated to be minimal), resulting in a loss of $5.8 million, which is included in restructuring charges on the Company’s Consolidated Statements of Operations. These assets consisted primarily of 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 the Company’s estimate of fair value less cost to sell. The fair value was determined based on a market value approach adjusted for the different characteristics between assets measured and the assets upon which the observable inputs were based.

 

Trademarks:

In connection with the Company’s third quarter of fiscal 2011 decision to discontinue certain wine brands within its CWNA segment’s wine portfolio, certain indefinite-lived trademarks, with a carrying value of $6.9 million, were written down to their estimated fair value resulting in an impairment of $6.9 million for the nine months and three months ended November 30, 2010. This impairment is included in impairment of intangible assets on the Company’s Consolidated Statements of Operations. 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 models 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.