Derivative Instruments and Hedging Activities

12 Months Ended

Jun. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Risk Management Objective of Using Derivatives

The Company is exposed to fluctuations in the currency exchange rates applicable to its investments in foreign operations. While the Company does not actively hedge against changes in foreign currency, the Company has mitigated the exposure arising from its investments in its European operations by denominating a portion of its Senior Notes in euros. At June 30, 2020, the Company had euro-denominated debt outstanding of $909.9 million (U.S. dollar equivalent), which qualifies as a hedge of a net investment in foreign operations. For non-derivatives designated and qualifying as net investment hedges, the effective portion of the translation gains or losses are reported in accumulated other comprehensive income/(loss) as part of the cumulative translation adjustment. The unhedged portions of the translation gains or losses are reported in the consolidated statements of operations. The following table includes net investment hedge activity during the fiscal years ended June 30, 2020 and 2019, respectively:

(Dollars in millions)	June 30, 2020		June 30, 2019
Unrealized foreign exchange gain/(loss) within Other Comprehensive Income	$	2.7	$	12.2
Unrealized foreign exchange gain/(loss) within the Consolidated Statements of Operations	$	6.1	$	7.6

The net accumulated gain of this net investment within accumulated other comprehensive income/(loss) was $62.5 million as of June 30, 2020. Amounts are reclassified out of accumulated other comprehensive income/(loss) into earnings when the entity in which the gains and losses reside is either sold or substantially liquidated.

2020 Derivative Liability

As discussed in Note 13, Redeemable Preferred Stock—Series A Preferred, in May 2019, the Company issued shares of Series A Preferred Stock in exchange for net proceeds of $646.3 million after taking into account the $3.7 million issuance cost.

The dividend rate used to determine the amount of the quarterly dividend payable on shares of the Series A Preferred Stock is subject to adjustment so as to provide holders of shares of Series A Preferred Stock with certain protections against a decline in the trading price of shares of Common Stock. The Company determined that this feature should be accounted for as a derivative liability, since the feature fluctuates inversely to changes in the trading price and is also linked to the performance of

the S&P 500 stock index. Accordingly, the Company bifurcated the adjustable dividend feature from the remainder of the Series A Preferred Stock and accounted for this feature as a derivative liability at fair value. Changes in the fair value of the derivative liability are recognized in the consolidated statements of operations for each reporting period. The fair value was based on an option pricing methodology, specifically both a Monte Carlo simulation and a binomial lattice model. The methodology incorporates the terms and conditions of the preferred stock arrangement, historical stock price volatility, the risk-free interest rate, a credit spread based on the yield indexes of high-yield bonds, and the trading price of shares of the Common Stock. The calculation of the estimated fair value of the derivative liability is highly sensitive to changes in the unobservable inputs, such as the expected volatility and the Company’s specific credit spread.

The Company recorded a gain of $3.2 million on the change in the estimated fair value of the derivative liability from issuance through June 30, 2020, which is reflected as a non-operating expense in the consolidated statements of operations. The fair value of the derivative liability as of June 30, 2020 was $23.6 million.

The fair value is classified as Level 3 in the fair value hierarchy due to the significant management judgment required for the assumptions underlying the calculation of value. The following table sets forth a summary of changes in the estimated fair value of the derivative liability:

(Dollars in millions)	Fair Value Measurements of Series A Preferred Stock Derivative Liability Using Significant Unobservable Inputs (Level 3)
Balance at July 1, 2019	$	26.8
Change in estimated fair value of Series A Preferred Stock derivative liability	(3.2)
Balance at June 30, 2020	$	23.6

Interest-Rate Swap

Pursuant to its interest rate and risk management strategy, in April 2020, Operating Company entered into an interest-rate swap agreement with Bank of America N.A. as a hedge against the economic effect of a portion of the variable interest obligation associated with its U.S dollar-denominated term loans under its senior secured credit facilities, so that the interest payable on that portion of the debt becomes fixed at a certain rate, thereby reducing the impact of future interest rate changes on future interest expense. As a result of entering into the interest-rate swap agreement, the floating portion of the applicable rate on $500.0 million of the term loans is now effectively fixed at 1.26%, for a total fixed rate of 3.51%.

The interest-rate swap agreement qualifies for and is designated as a cash-flow hedge. All hedging relationships are formally documented, and the hedges are designed to offset changes to future cash flows on hedged transactions. We evaluate hedge effectiveness at the inception of the hedge and on an ongoing basis.

The fair value of the interest-rate swap agreement is determined at the end of each reporting period based on valuation models that use interest rate yield curves and discount rates as inputs. The discount rates are based on U.S. Deposit or U.S. Treasury rates. The significant inputs used in the valuation models are readily available in public markets or can be derived from observable market transactions and, therefore, have been classified as Level 2 in the fair value hierarchy. The estimated fair value of the interest rate swap as of June 30, 2020 was reported as a derivative liability of $3.7 million within other liabilities in the consolidated balance sheet. The cash flows associated with the interest-rate swap are reported in net cash provided by operating activities in the consolidated statement of cash flows. The unrealized gain from the mark-to-market of the interest-rate swap valuation during the fiscal year ended June 30, 2020 was immaterial.