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FAIR VALUE MEASUREMENTS
9 Months Ended
Feb. 29, 2012
FAIR VALUE MEASUREMENTS

NOTE 5 — FAIR VALUE MEASUREMENTS

Financial instruments recorded on our Consolidated Balance Sheet include cash and cash equivalents, trade accounts receivable, marketable securities, notes and accounts payable, and debt.

 

An allowance for anticipated uncollectible trade receivable amounts is established using a combination of specifically identified accounts to be reserved, and a reserve covering trends in collectibility. These estimates are based on an analysis of trends in collectibility, past experience, and individual account balances identified as doubtful based on specific facts and conditions. Receivable losses are charged against the allowance when we confirm uncollectibility.

All derivative instruments are recognized on our Consolidated Balance Sheet and measured at fair value. Changes in the fair values of derivative instruments that do not qualify as hedges and/or any ineffective portion of hedges are recognized as a gain or (loss) in our Consolidated Statement of Income in the current period. Changes in the fair value of derivative instruments used effectively as cash flow hedges are recognized in other comprehensive income (loss), along with the change in the value of the hedged item. We do not hold or issue derivative instruments for speculative purposes.

The valuation techniques utilized for establishing the fair values of assets and liabilities are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect management’s market assumptions. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value, as follows:

Level 1 Inputs — Quoted prices for identical instruments in active markets.

Level 2 Inputs — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 Inputs — Instruments with primarily unobservable value drivers.

The following table presents our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy.

 

(In thousands)

  Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
    Significant
Other
Observable
Inputs (Level 2)
    Significant
Unobservable
Inputs (Level 3)
    Fair Value at
February 29, 2012
 

U.S. Treasury and other government

  $ —        $ 19,403     $ —        $ 19,403  

Foreign bonds

      39         39  

Mortgage-backed securities

      349         349  

Corporate bonds

      2,693         2,693  

Stocks — foreign

    1,281           1,281  

Stocks — domestic

    27,588           27,588  

Mutual funds — foreign

      17,876         17,876  

Mutual funds — domestic

      40,271         40,271  

Foreign currency forward contract

      (752       (752

Cross-currency swap

      (13,626       (13,626

Kemrock Industries and Exports Limited global depository receipts

    7,086           7,086  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 35,955     $ 66,253     $ —        $ 102,208  
 

 

 

   

 

 

   

 

 

   

 

 

 

(In thousands)

  Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
    Significant
Other
Observable
Inputs (Level 2)
    Significant
Unobservable
Inputs (Level 3)
    Fair Value at
May 31, 2011
 

U.S. Treasury and other government

  $ —        $ 26,480     $ —        $ 26,480  

Mortgage-backed securities

      532         532  

Corporate bonds

      3,029         3,029  

Stocks — foreign

    37,549           37,549  

Stocks — domestic

    31,849           31,849  

Mutual funds — foreign

      18,413         18,413  

Mutual funds — domestic

      31,791         31,791  

Foreign currency forward contract

      6,157         6,157  

Cross-currency swap

      (20,519       (20,519
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 69,398     $ 65,883     $ —        $ 135,281  
 

 

 

   

 

 

   

 

 

   

 

 

 

Our marketable securities are composed of mainly available-for-sale securities, and are valued using a market approach based on quoted market prices for identical instruments. The availability of inputs observable in the market varies from instrument to instrument and depends on a variety of factors including the type of instrument, whether the instrument is actively traded, and other characteristics particular to the transaction. For most of our financial instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants, and the valuation does not require significant management discretion. For other financial instruments, pricing inputs are less observable in the market and may require management judgment.

Our cross-currency swap is a liability that has a fair value of $13.6 million at February 29, 2012, that was originally designed to fix our interest and principal payments in euros for the life of our unsecured 6.70% senior notes due November 1, 2015, which resulted in an effective euro fixed-rate borrowing of 5.31%. The basis for determining the rates for this swap included three legs at the inception of the agreement: the U.S. dollar (USD) fixed rate to a USD floating rate; the euro floating to euro fixed rate; and the dollar to euro basis fixed rate at inception. Therefore, we essentially exchanged fixed payments denominated in USD for fixed payments denominated in euros, paying fixed euros at 5.31% and receiving fixed USD at 6.70%. The ultimate payments are based on the notional principal amounts of 150 million USD and approximately 125 million euros. There will be an exchange of the notional amounts at maturity. The rates included in this swap are based upon observable market data, but are not quoted market prices, and therefore, the cross-currency swap is considered a Level 2 liability on the fair value hierarchy. Additionally, this cross-currency swap has been designated as a hedging instrument, and is classified as other long-term liabilities in our Consolidated Balance Sheets.

Our foreign currency forward contract, which had a fair value of $6.2 million at May 31, 2011, matured on November 23, 2011. There was an exchange of the notional amounts at maturity, which resulted in a gain of $0.5 million, which was partially offset by the change in exchange rates associated with the related intercompany foreign currency denominated loans. On November 23, 2011, a new foreign currency forward contract was established with terms similar to the previous contract, with a new maturity date of March 30, 2012. The new foreign currency forward contract had a fair value of approximately $0.8 million at February 29, 2012, and is classified as other accrued liabilities in our Consolidated Balance Sheets. This new foreign currency forward contract, which has not been designated as a hedge, was designed to reduce our exposure to the changes in the cash flows of intercompany foreign-currency-denominated loans related to changes in foreign currency exchange rates by fixing the functional currency cash flows. Upon inception of the contract, we purchased 90.3 million USD and sold approximately 59.9 million euros and approximately 6.1 million pounds sterling. Changes in the USD/euro exchange rate and in the USD/pound sterling exchange rate will either increase or decrease our USD functional currency earnings, and will be reflected in selling, general and administrative expenses on our Consolidated Statements of Income. The foreign exchange rates included in this new forward contract are based upon observable market data, but are not quoted market prices, and therefore, the forward currency forward contract is considered a Level 2 liability on the fair value hierarchy.

The carrying value of our current financial instruments, which include cash and cash equivalents, marketable securities, trade accounts receivable, accounts payable and short-term debt approximates fair value because of the short-term maturity of these financial instruments. At February 29, 2012 and May 31, 2011, the fair value of our long-term debt was estimated using active market quotes, based on our current incremental borrowing rates for similar types of borrowing arrangements, which are considered to be Level 2 inputs. Based on the analysis performed, the fair value and the carrying value of our financial instruments and long-term debt as of February 29, 2012 and May 31, 2011 are as follows:

 

     At February 29, 2012  
(In thousands)    Carrying
Value
     Fair Value  

Cash and cash equivalents

   $ 272,178      $ 272,178  

Marketable equity securities

     94,102        94,102  

Marketable debt securities

     22,484        22,484  

Long-term debt, including current portion

     1,102,698        1,202,483  
     At May 31, 2011  
(In thousands)    Carrying
Value
     Fair Value  

Cash and cash equivalents

   $ 435,011      $ 435,011  

Marketable equity securities

     119,602        119,602  

Marketable debt securities

     30,041        30,041  

Long-term debt, including current portion

     1,108,853        1,203,016