Financial Instruments and Fair Value Measurements

6 Months Ended

May 31, 2019

Fair Value Measurement and Measurement Inputs, Recurring and Nonrecurring [Text Block]

Financial Instruments and Fair Value Measurements

Financial Risk Management Objectives and Policies

The Company is exposed primarily to credit, interest rate, and foreign currency rate risks, which arise in the normal course of business.

Credit Risk

Credit risk is the potential financial loss resulting from the failure of a customer or counterparty to settle its financial and contractual obligations with the Company as and when they fall due. The primary credit risk for the Company is its accounts receivable, which are generally unsecured. The Company has established credit limits for customers and monitors their balances to mitigate its risk of loss. Concentrations of credit risk with respect to accounts receivable are generally limited due to the wide variety of customers and markets using the Company's products. There was no single customer that represented more than 10% of the Company’s consolidated net sales during the three and six month periods ending May 31, 2019 and 2018. There was no single customer who represented more than 10% of the Company’s net trade receivables at May 31, 2019 or November 30, 2018.

Interest Rate Risk

The Company’s exposure to the risk of changes in market interest rates relates primarily to the Company’s Term Loan B, Senior Secured Revolving Credit Facility, and various foreign subsidiary borrowings, all of which bear interest at variable rates, approximating market interest rates.

Foreign Currency Rate Risk

The Company incurs foreign currency rate risk on sales and purchases denominated in other than the functional currency. The currencies giving rise to this risk are primarily the Euro, Great Britain Pound Sterling, Renminbi, and Thai Baht.

Foreign currency exchange contracts are used by the Company to manage risks from the change in market exchange rates on cash payments by the Company's foreign subsidiaries and U.S. Dollar cash holdings in foreign locations. These forward contracts are used on a continuing basis for periods of approximately 30 days, consistent with the underlying hedged transactions. Hedging intends to offset the impact of foreign exchange rate movements on the Company’s operating results. The

counterparties to these instruments are investment-grade financial institutions and the Company does not anticipate any non-performance. The Company maintains control over the size of positions entered into with any one counterparty and regularly monitors the credit rating of these institutions. Such instruments are not purchased or sold for trading purposes. These contracts are not designated as hedging instruments and changes in fair value of these instruments are recognized in earnings immediately. Foreign currency transaction gains and losses, including the impact of foreign currency contracts, that were recorded in the Consolidated Statements of Operations, as a component of other income (loss), were gains of $0.1 million for each of the six-month periods ending May 31, 2019 and 2018.

Derivative Instruments

The Company recognizes the fair value of qualifying derivative instruments as either an asset or a liability within its Consolidated Balance Sheets. For derivative instruments not designated as hedges, the change in fair value of the derivative is recognized in earnings each reporting period. The Company defines fair value as the price that would be received to transfer an asset or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses a hierarchy of valuation inputs to measure fair value.

The hierarchy prioritizes the inputs into three broad levels:

Level 1 inputs—Quoted market prices in active markets for identical assets or liabilities.

Level 2 inputs—Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3 inputs—Unobservable inputs that are not corroborated by market data.

Fair Value Measurements

The Company uses the market approach and the income approach to value assets and liabilities as appropriate. The following financial assets and liabilities are measured and presented at fair value on a recurring basis as of May 31, 2019 and November 30, 2018:



	Notional Amount		Fair Value		Level 1		Level 2		Level 3
	(Dollars in millions)
Fair value measurements - May 31, 2019:
Financial assets
Foreign currency exchange contracts	$	22.9	$	.1	$	—	$	.1	$	—
Total assets	$	22.9	$	.1	$	—	$	.1	$	—

Financial liabilities
Contingent consideration ⁽¹⁾	$	—	$	—	$	—	$	—	$	—
Total liabilities	$	—	$	—	$	—	$	—	$	—

Fair value measurements - November 30, 2018:
Financial assets
Foreign currency exchange contracts	$	16.5	$	.1	$	—	$	.1	$	—
Total assets	$	16.5	$	.1	$	—	$	.1	$	—

Financial liabilities
Contingent consideration⁽¹⁾	$	—	$	.6	$	—	$	—	$	.6
Total liabilities	$	—	$	.6	$	—	$	—	$	.6

⁽¹⁾ Contingent consideration obligations arise from business or product line acquisitions. The fair values are based on a probability weighted discounted cash flow analysis reflecting an estimated achievement of specified performance measures of the acquired product lines. Contingent consideration is classified in the consolidated balance sheets as other current liabilities or other non-current liabilities based on contractual payment dates.

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis during the first six months of 2019 are summarized as follows:



	Contingent Consideration
	(Dollars in millions)
Balance at November 30, 2018	$	.6
Adjustments	(.6		)
Balance at May 31, 2019	$	—

There were no transfers into or out of Level 3 during the first six months of 2019 or 2018. During the second quarter of fiscal 2019, the Company removed the contingent consideration liability based on its expected value. Changes in expected value are recognized in other income within the consolidated statements of operations.

The fair value of the Company’s Term Loan B at May 31, 2019 approximated $300.0 million, which is slightly less than its book value of $300.4 million as a result of prevailing market rates on the Company’s debt. The fair value of the Term Loan B is based on market price information and is measured using the last available trade of the instrument on a secondary market in each respective period and therefore is considered a Level 2 measurement. The fair value is not indicative of the amount that the Company would have to pay to redeem these instruments since they are infrequently traded and are not callable at this value. The carrying value of the Senior Secured Revolving Credit Facility approximates fair value. The fair value of the Company's capital lease obligation approximates its carrying amount based on estimated borrowing rates to discount the future cash flows to their present value.