FINANCIAL INSTRUMENTS, FAIR VALUE AND RISK MANAGEMENT

The Company has determined the estimated fair values of its financial instruments based on appropriate valuation methodologies; however, considerable judgment is required to develop these estimates. The fair values of the Company's financial instruments are not materially different from their carrying values.

Fair value measurements

The Company classifies and discloses its fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels: (a) quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1); (b) inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices) (Level 2); and (c) inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3).

The fair value is principally applied to financial assets and liabilities such as derivative instruments consisting of foreign exchange forward contracts, available-for-sale securities relating to Republic of Austria bonds, held-for-trading securities relating to the Company's U.S. deferred compensation plan, and a liability relating to an earnout payment on future Biologics operating results. The following table provides a summary of the financial assets and liabilities that are measured at fair value as of January 31, 2017 and October 31, 2016:



	Fair value measurement at January 31, 2017				Fair value measurement at October 31, 2016
Assets measured at fair value	Level 1	Level 2	Level 3	Total	Level 1	Level 2	Level 3	Total
	$	$	$	$	$	$	$	$
Foreign exchange forward contracts	—	1.0	—	1.0	—	—	—	—
Available-for-sale securities	1.4	—	—	1.4	1.4	—	—	1.4
Held-for-trading securities	—	1.4	—	1.4	—	1.4	—	1.4
Total assets	1.4	2.4	—	3.8	1.4	1.4	—	2.8



	Fair value measurement at January 31, 2017				Fair value measurement at October 31, 2016
Liabilities measured at fair value	Level 1	Level 2	Level 3	Total	Level 1	Level 2	Level 3	Total
	$	$	$	$	$	$	$	$
Foreign exchange forward contracts	—	—	—	—	—	2.7	—	2.7
Earnout liability	—	—	37.4	37.4	—	—	33.8	33.8
Total liabilities	—	—	37.4	37.4	—	2.7	33.8	36.5

Level 1 - Based on quoted market prices in active markets.

Level 2 - Inputs, other than quoted prices in active markets, that are observable, either directly or indirectly.

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

The following table presents the fair value of the Company's derivative financial instruments and their classifications on the consolidated balance sheets as of January 31, 2017 and October 31, 2016:



	Assets as of January 31, 2017		Assets as of October 31, 2016
	Balance sheet location	Fair value	Balance sheet location	Fair value
		$		$
Foreign exchange forward contracts	Prepaid expenses and other	1.0	Prepaid expenses and other	—
Available-for-sale securities	Investments	1.4	Investments	1.4
Held-for-trade securities	Investments	1.4	Investments	1.4
Total		3.8		2.8



	Liabilities as of January 31, 2017		Liabilities as of October 31, 2016
	Balance sheet location	Fair value	Balance sheet location	Fair value
		$		$
Foreign exchange forward contracts	Accounts payable and accrued liabilities	—	Accounts payable and accrued liabilities	2.7
Earnout liability	Other long-term liabilities	37.4	Other long-term liabilities	33.8
Total		37.4		36.5

The Company has the option to net settle its derivatives with the counter party under the terms of its contracts and as such any unrealized positions are recorded net. As of January 31, 2017, the Company had gross unrealized gains of $1.5 million and gross unrealized losses of $0.5 million under its derivative contracts. As of October 31, 2016, the Company had gross unrealized losses of $2.7 million and gross unrealized gains of less than $0.1 million under its derivative contracts.

Long-term obligations

As of January 31, 2017, the fair values and carrying values of the Company’s long-term debt, including the current portion of long-term debt, are categorized in the table below:



	Fair Value
	Level 1	Level 2	Level 3	Total	Carrying Value
	$	$	$	$	$
Long-term debt, including current portion	—	2,154.2	—	2,154.2	2,106.2

As of October 31, 2016, the fair values and carrying values of the Company’s long-term debt, including the current portion of long-term debt, are categorized in the table below:



	Fair Value
	Level 1	Level 2	Level 3	Total	Carrying Value
	$	$	$	$	$
Long-term debt, including current portion	—	2,156.8	—	2,156.8	2,119.0

The fair value of the Company's long-term debt, including the current portion of long-term debt, is based on the quoted market prices for the same issues or on the current rates offered for debt of similar remaining maturities.

Foreign exchange forward contracts and other arrangements

The Company utilizes financial instruments to manage the risk associated with fluctuations in foreign exchange and interest rates. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions.

As of January 31, 2017, the Company's Canadian operations had entered into foreign exchange forward contracts to sell a net aggregate amount of $72.7 million (USD). These contracts hedge the Canadian operations expected exposure to U.S. dollar denominated receivables and mature at the latest on December 22, 2017, at an average exchange rate of $1.3180 Canadian dollars per U.S. dollar. The mark-to-market value of these financial instruments as of January 31, 2017 was a net unrealized gain of $1.0 million, which has been recorded in accumulated other comprehensive income in shareholders' deficit, net of associated income tax.

The Company acquired a portion of its Biologics business from DSM ("the DPP acquisition") in March 2014. In connection with the DPP acquisition, DSM was entitled to receive certain additional future contingent payments based on the performance of the acquired biologics business (the "earnout"). Under the terms of the original contribution agreement, the earnout only related to the DSM biologics business acquired in March 2014 and the earnout liability was payable by the Partnership, the parent of the Company before the Company's IPO on July 21, 2016. The value of the earnout liability as of January 29, 2016 was $36.0 million.

On January 29, 2016, the Company, the Partnership, JLL, and DSM entered into an agreement (the "Earnout Agreement") whereby the Partnership’s earnout liability was legally assigned to the Company. The assignment of the liability from the Partnership to the Company was deemed a capital transaction with the Partnership of $36.0 million.

Concurrently, the calculation of the earnout consideration was revised to include the future earnings of the Company’s entire biologics business ("Biologics Adjusted EBITDA"), which includes biologics business acquired in connection with a September 2014 acquisition of Gallus Pharmaceuticals. As a result of executing this Earnout Agreement, the Company will pay additional consideration to DSM based on the achievement of certain Biologics Adjusted EBITDA targets, as defined in the Earnout Agreement, of the Company’s biologics business at the conclusion of the 2020 fiscal year. If the Company sells or disposes of the biologics business prior to the end of the 2020 fiscal year, Biologics Adjusted EBITDA will be calculated by applying a 10% compounded annual growth rate through the remaining period ending October 31, 2020 to the Biologics Adjusted EBITDA for the twelve-month period ended on the last day of the month immediately preceding the date of such sale or disposition. The Company's maximum and minimum payments to DSM under the terms of the Earnout Agreement is $60.0 million and $25.0 million, respectively. Using the revised earnout definition, the value of the earnout liability as of January 31, 2016 was $31.1 million and resulted in the Company recognizing income of $4.9 million in the first quarter of fiscal 2016.

The Company estimated the value of the earnout by valuing the three payout tranches. The first tranche of the $25.0 million minimum earnout payment, which is not contingent to Biologics Adjusted EBITDA performance, was estimated by discounting the $25.0 million using cost of debt of the Company. The values of the remaining two tranches, (i) an additional $25.0 million earnout payment which will be realized gradually as Biologics Adjusted EBITDA reaches $98.0 million, and (ii) an additional $10.0 million earnout payment which will be achieved gradually as Biologics Adjusted EBITDA approaches $110.0 million, were estimated using an option pricing framework, where the Company used a modified Black-Scholes model.

The Company adjusted the earnout value to its estimated fair value as of January 31, 2017 to $37.4 million. The Company recorded $3.6 million of expense and $4.9 million of income in the three months ended January 31, 2017 and 2016, respectively, relating to marking the liability to its estimated fair value. The January 31, 2017 earnout valuation applies an asset volatility of 30% and an asset beta of 0.9. A 1% change in asset volatility would have an impact on the value of +/- $0.2 million while a 0.1 change in beta would have an impact on the value of +/- $0.4 million. Assumptions are Level 3 in nature.

The earnout liability activity is summarized as follows for the three months ended January 31, 2017:



	Total
	$
Balance at October 31, 2016	33.8
Change in fair value	3.6
Balance at January 31, 2017	37.4

The change in fair value relating to the earnout is recorded in other operating income on the consolidated statements of operations.

Risks arising from financial instruments and risk management

The Company's activities expose it to a variety of financial risks: market risk (including foreign exchange and interest rate), credit risk and liquidity risk. The Company's overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company's financial performance. The Company uses derivative financial instruments to hedge certain risk exposures. The Company does not purchase any derivative financial instruments for speculative purposes.

Financial risk management is the responsibility of the Company's corporate treasury. The corporate treasury works with the Company's operational personnel to identify, evaluate and, where appropriate, hedge financial risks. The Company's corporate treasury also monitors material risks and discusses them with the Audit Committee of the Board of Directors.

Foreign exchange risk

As of January 31, 2017, the Company operated in Canada, the United States, Italy, France, the United Kingdom, The Netherlands, Australia, Germany, Austria, and Japan. Foreign exchange risk arises because the value of the local currency receivable or payable for transactions denominated in foreign currencies may vary due to changes in exchange rates ("transaction exposures") and because the non-U.S. dollar denominated financial statements of the Company may vary on consolidation into the reporting currency of U.S. dollars ("translation exposures").

The Company's most significant transaction exposure is from its Canadian operations. Approximately 90% of the cash receipts and 15% of the cash outflows relating to Canadian operations are transacted in U.S. dollars. As a result, the Company may experience transaction exposures because of volatility in the exchange rate between the Canadian and U.S. dollar. Based on the Company's current U.S. denominated net inflows, as of January 31, 2017, fluctuations of +/- 10% would, everything else being equal, have an effect on quarterly (loss) income before income taxes of approximately +/- $3.0 million, prior to hedging activities.

The objective of the Company's foreign exchange risk management activities is to minimize transaction exposures and the resulting volatility of the Company's earnings. The Company manages this risk by entering into foreign exchange contracts. As of January 31, 2017, the Company has entered into foreign exchange contracts to cover approximately 71% of its Canadian-U.S. dollar cash flow exposures for the next twelve months.

The amount of the Company's Euro denominated debt designated as a hedge against its net investment in its subsidiaries in Austria, The Netherlands, Germany, France and Italy, is €464.3 million as of January 31, 2017. This hedge was originally designated in March 2014 as a part of the Company's acquisition of manufacturing sites from DSM and is re-designated on a quarterly basis. As of January 31, 2017, the balance of the net investment hedge was $79.3 million and is included in accumulated other comprehensive income (loss) in members' deficit. Any unrealized exchange losses are included in the consolidated statement of operations due to ineffectiveness.

The following table summarizes the net investment hedge foreign exchange activity for the three months ended January 31, 2017 and 2016 since net investment hedge inception:



	Three months ended January 31,
	2017	2016
	$	$
Foreign exchange gain for the period from net investment hedge	8.6	8.0
Release of ineffective portion of net investment hedge to consolidated statement of operations	—	(1.1	)
Net gain to other comprehensive income (loss) for the period related to net investment hedge	8.6	6.9

Translation gains and losses related to certain foreign currency denominated intercompany loans are included as part of the net investment in certain foreign subsidiaries, and are included in accumulated other comprehensive income (loss) in shareholders' deficit.

The following table summarizes the foreign currency activity on the intercompany loans that are included as part of the net investment in certain foreign subsidiaries for the three months ended January 31, 2017 and 2016 since net investment hedge inception:



	Three months ended January 31,
	2017	2016
	$	$
Foreign exchange loss for the period from long-term intercompany loan revaluation	—	(0.8	)

Credit risk

Credit risk arises from cash and cash equivalents held with banks and financial institutions, derivative financial instruments (foreign exchange contracts with positive fair values), and credit exposure to customers, including outstanding accounts receivable. The maximum exposure to credit risk is equal to the carrying value of the financial assets.

The objective of managing counterparty credit risk is to prevent losses in financial assets. The Company regularly assesses the credit quality of the counterparties, taking into account their financial position, past experience and other factors. Management also regularly monitors the utilization of credit limits. In cases where the credit quality of a customer does not meet the Company's requirements, a cash deposit is received before any services are provided. As of January 31, 2017 and October 31, 2016, the Company held deposits of $4.9 million and $4.3 million, respectively.

Liquidity risk

Liquidity risk arises when financial obligations exceed financial assets available at a particular point in time. The Company's objective in managing liquidity risk is to maintain sufficient readily available reserves in order to meet its liquidity requirements at all times. The Company mitigates liquidity risk by maintaining cash and cash equivalents on-hand and through the availability of funding from credit facilities. As of January 31, 2017, the Company was holding cash and cash equivalents of $89.0 million and had undrawn lines of credit available to it of $188.9 million.