Financial Instruments and Fair Value Measurements

12 Months Ended

Nov. 30, 2018

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 and notes 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 who represented more than 10% of the Company's consolidated net sales for the years ended November 30, 2019 and 2018. There was one Performance Materials' customer that represented approximately 10% of the Company’s consolidated net sales during the years ended November 30, 2017. There was no single customer who represented more than 10% of the Company’s net trade receivables at November 30, 2019 or 2018.

Interest Rate Risk

The Company’s exposure to the risk of changes in market interest rates relates primarily to the Company’s $350.0 million Term Loan B, Senior Secured Revolving Credit Facility, and various foreign subsidiary borrowings, which bear interest at variable rates, approximating market interest rates. The Term Loan B has a LIBOR floor of 1.00%. As of November 30, 2019, the LIBOR rate applicable to the Term Loan B was 1.74%.

Foreign Currency Rate Risk

The Company incurs foreign currency 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 thirty days, consistent with the underlying hedged transactions. Hedging limits 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. Net losses on foreign currency contracts that were recorded in the Consolidated Statement of Operations, as a component of other income, were $0.2 million for the year ended November 30, 2019. Net gains on foreign currency contracts for the year ended November 30, 2018 were $1.0 million.

Derivative Instruments

The Company recognizes the fair value of qualifying derivative instruments as either an asset or a liability within its statement of financial position. 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.

The fair value of derivative financial instruments recognized in the Consolidated Statements of Financial Position are as follows:



	Notional Amount		Other Current Assets		Other Current Liabilities		Type of Hedge	Term
	(Dollars in millions)
Derivatives - November 30, 2019
Foreign currency exchange contracts	$	16.6	$	—	$	—	Cash Flow	30 days
Total	$	16.6	$	—	$	—

Derivatives - November 30, 2018
Foreign currency exchange contracts	$	16.5	$	0.1	$	—	Cash Flow	30 days
Total	$	16.5	$	0.1	$	—

Fair Value Measurements

The Company uses the market approach and the income approach to value assets and liabilities as appropriate. The model uses Level 2 market observable inputs including currency spot prices. The following financial assets and liabilities are measured and presented at fair value on a recurring basis as of November 30, 2019 and November 30, 2018:



	Fair Value		Level 1		Level 2		Level 3
	(Dollars in millions)
Fair Value Measurements - November 30, 2019
Financial Assets
Foreign currency exchange contracts	$	—	$	—	$	—	$	—
Total Assets	$	—	$	—	$	—	$	—

Financial Liabilities
Contingent consideration	$	—	$	—	$	—	$	—
Total Liabilities	$	—	$	—	$	—	$	—

Fair Value Measurements - November 30, 2018
Financial Assets
Foreign currency exchange contracts	$	0.1	$	—	$	0.1	$	—
Total Assets	$	0.1	$	—	$	0.1	$	—

Financial Liabilities
Contingent Consideration	$	0.6	$	—	$	—	$	0.6
Total Liabilities	$	0.6	$	—	$	—	$	0.6

The following table summarizes changes in fair value of contingent consideration classified as Level 3:



	(Dollars in millions)
Balance November 30, 2017	$	1.0
Adjustments	0.1
Payments	(0.5		)
Balance November 30, 2018	0.6
Adjustments	(0.6		)
Balance November 30, 2019	$	—

During fiscal year 2019 and 2018, the Company did not record any material other-than-temporary impairments on financial assets required to be measured at fair value on a nonrecurring basis.

The Company measures the fair value of its foreign exchange forward contracts using month-end currency spot prices.

In connection with the Creole acquisition, the Company recorded a contingent consideration liability with a fair value of $1.0 million as of November 30, 2017. As of November 30, 2019, this contingent consideration liability has expired. Changes in expected value are recognized in other income within the consolidated statements of operations. Under the contingent consideration agreement, the amounts to be paid are based upon actual financial results of the acquired product sales over a two-year period. The fair value of the contingent consideration is a Level 3 valuation and fair valued using a probability weighted discounted cash flow analysis. There were no transfers into or out of Level 3 during 2019 or 2018.

The fair value of the Company’s Term Loan B at November 30, 2019 approximated $298.2 million, which is less than the book value of $298.6 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 cash flows to their present value.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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