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Fair Value Measurements

9 Months Ended

Apr. 30, 2021

Fair value measurements of financial instruments are reported in one of three levels based on the lowest level of significant input used. For Level 1, inputs to the fair value measurement are quoted prices in active markets for identical assets or liabilities. For Level 2, inputs to the fair value measurement include quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. For Level 3, inputs to the fair value measurement are unobservable inputs or are based on valuation techniques.

Short-term Financial Instruments

As of April 30, 2021, the carrying values of cash and cash equivalents, accounts receivable, short-term borrowings and accounts payable approximate fair value because of the short-term nature of these instruments, and are classified as Level 1 in the fair value hierarchy.

Long-term Debt

As of April 30, 2021, the estimated fair values of fixed interest rate long-term debt were $293.3 million compared to the carrying values of $275.0 million. As of July 31, 2020, the estimated fair values of fixed interest rate long-term debt were $297.3 million compared to the carrying values of $275.0 million. The fair values are estimated by discounting the projected cash flows using the rates at which similar amounts of debt could currently be borrowed. The carrying values of variable interest rate long-term debt were $186.3 million and $350.0 million as of April 30, 2021 and July 31, 2020, respectively, and approximate fair values. Long-term debt is classified as Level 2 in the fair value hierarchy.

Equity Method Investments

The Company holds equity method investments, which are included in other long-term assets on the accompanying Condensed Consolidated Balance Sheets. The aggregate carrying amount of these investments was $24.2 million and $21.7 million as of April 30, 2021 and July 31, 2020, respectively. These equity method investments are measured at fair value on a non-recurring basis. The fair value of the Company’s equity method investments has not been estimated as there have been no identified events or changes in circumstance that would have had an adverse impact on the value of these investments. In the event that these investments are required to be measured, they would fall within Level 3 of the fair value hierarchy due to the use of significant unobservable inputs to determine fair value, as the investments are in privately-held entities.

Derivative Fair Value Measurements

The Company enters into derivative instrument agreements, including forward foreign currency exchange contracts, net investment hedges and interest rate swaps, to manage risk in connection with changes in foreign currency and interest rates. The Company only enters into derivative instrument agreements with counterparties who have highly rated credit. The Company does not enter into derivative instrument agreements for trading or speculative purposes.

The fair values of the Company’s forward foreign currency exchange contracts, net investment hedges and interest rate swaps reflect the amounts that would be received to sell the assets or paid to transfer the liabilities in an orderly transaction between market participants at the measurement date (exit price). The fair values are based on inputs other than quoted prices that are observable for the asset or liability and are determined by standard calculations and models that use readily observable market parameters. These inputs include foreign currency exchange rates and interest rates. Industry standard data providers are the primary source for forward and spot rate information for both interest rates and foreign currency exchange rates. The fair values of the Company’s forward foreign currency exchange contracts, net investment hedges and interest rate swaps are classified as Level 2 in the fair value hierarchy.

Forward Foreign Currency Exchange Contracts

The Company buys materials from foreign suppliers. Those transactions can be denominated in those suppliers’ local currency. The Company also sells to customers in foreign countries. Those transactions can be denominated in those customers’ local currency. Both of these transaction types can create volatility in the Company’s financial statements. The Company uses forward currency exchange contracts to manage those exposures and fluctuations. These contracts generally mature in twelve months or less, which is consistent with the forecasts of the related purchases and sales. Certain contracts are designated as cash flow hedges, whereas the remaining contracts, related to certain intercompany transactions, are undesignated.

Net Investment Hedges

The Company uses fixed-to-fixed cross-currency swap agreements to hedge its exposure to adverse foreign currency exchange rate movements for its operations in Europe. The Company has elected the spot method of designating these contracts as cash flow hedges.

Interest Rate Swaps

The Company uses swap agreements to hedge exposure related to interest expense and to manage its exposure to interest rate movements. During the first and third quarters of fiscal 2021, the Company entered into interest rate swap agreements designated as cash flow hedges with aggregate notional amounts of $40.0 million and $25.0 million, respectively, hedging future fixed-rate debt issuances, which effectively fixed a portion of interest payments based on the ten year treasury rates. Both instruments terminated on May 5, 2021 generating a realized gain of $2.6 million, and were subsequently recognized in accumulated other comprehensive loss on the Condensed Consolidated Balance Sheet and will be amortized to interest expense over the life of the related debt which is set to be issued in August 2021.

Fair Value of Derivative Contracts

The fair value of the Company’s derivative contracts, which are recorded on the Company’s Condensed Consolidated Balance Sheets, are as follows (in millions):


					Fair Values Significant Other Observable Inputs
	Total Notional Amounts				Assets (1)				Liabilities (2) (3)
	April 30,		July 31,		April 30,		July 31,		April 30,		July 31,
	2021		2020		2021		2020		2021		2020
Designated as hedging instruments
Forward foreign currency exchange contracts(4)	$	39.5	$	68.1	$	0.4	$	0.1	$	0.9	$	0.6
Net investment hedge	55.8		55.8		1.1		1.2		3.3		—
Interest rate swaps	65.0		—		3.0		—		—		—
Total designated	160.3		123.9		4.5		1.3		4.2		0.6

Not designated as hedging instruments
Forward foreign currency exchange contracts(5)	151.4		169.1		0.9		2.0		0.9		0.8
Total not designated	151.4		169.1		0.9		2.0		0.9		0.8
Total	$	311.7	$	293.0	$	5.4	$	3.3	$	5.1	$	1.4

(1)As of April 30, 2021, the Company recorded $5.3 million in other current assets on the Company’s Condensed Consolidated Balance Sheets. As of July 31, 2020, the Company recorded $3.2 million and $0.1 million in other current assets and other long-term assets, respectively, on the Company’s Condensed Consolidated Balance Sheets.

(2)The forward foreign currency exchange contracts are recorded in other current liabilities on the Company’s Condensed Consolidated Balance Sheets.

(3)The net investment hedge is recorded in other long-term liabilities on the Company’s Condensed Consolidated Balance Sheets.

(4)The total notional amount of $39.5 million as of April 30, 2021 includes purchases of $26.9 million and sales of $12.6 million, or a net of $14.4 million. The total notional amount of $68.1 million as of July 31, 2020 includes purchases of $45.2 million and sales of $22.9 million, or a net of $22.3 million.

(5)The total notional amount of $151.4 million as of April 30, 2021 includes purchases of $76.6 million and sales of $74.8 million, or a net of $1.8 million. The total notional amount of $169.1 million as of July 31, 2020 includes purchases of $82.9 million and sales of $86.2 million, or a net of $(3.2) million.

Changes in the fair value of the Company’s designated hedges are reported in accumulated other comprehensive loss until the related transaction occurs on the Company’s Condensed Consolidated Balance Sheets. Designated hedges are recognized as a component of sales, cost of sales, and operating expenses and other income, net in the Company’s Condensed Consolidated Statements of Earnings upon occurrence of the related hedged transaction. Interest earned is reported in other income, net.

Hedges which are not designated are recognized in other income, net in the Company’s Condensed Consolidated Statements of Earnings upon occurrence of the related hedged transaction. Changes in the fair value of these hedges are recognized in other income, net.

Cash flows are recorded in operating activities in the Condensed Consolidated Statements of Cash Flows.

Amounts related to forward foreign currency exchange contracts are expected to be reclassified into earnings during the next twelve months, based upon the timing of inventory purchases and sales. Amounts related to the net investment hedge are expected to be reclassified into earnings through their termination in July 2029. See Note 14 for additional information on accumulated other comprehensive loss.

Credit Risk Related Contingent Features

Contract provisions may require the posting of collateral or settlement of the contracts for various reasons, including if the Company’s credit ratings are downgraded below its investment grade credit rating by any of the major credit agencies or for cross default contractual provisions if there is a failure under other financing arrangements related to payment terms or covenants. As of April 30, 2021 and July 31, 2020, no collateral was posted.

Counterparty Credit Risk

There is risk that counterparties to derivative contracts will fail to meet their contractual obligations. In order to mitigate counterparty credit risk, the Company only enters into contracts with carefully selected financial institutions based upon their credit ratings and certain other financial factors.

- 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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