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Fair Value Measurements

6 Months Ended

Jan. 31, 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.

As of January 31, 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.

As of January 31, 2021, the estimated fair values of fixed interest rate long-term debt were $297.5 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. Long-term debt is classified as Level 2 in the fair value hierarchy.

The carrying values of variable interest rate long-term debt, including current maturities, were $227.4 million and $350.0 million as of January 31, 2021 and July 31, 2020, respectively, and approximate fair values.

The fair values of the Company’s financial assets and liabilities for 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 therefore are classified as Level 2 in the fair value hierarchy. These inputs include foreign currency exchange rates and interest rates. The financial assets and liabilities are primarily valued using standard calculations and models that use as their basis readily observable market parameters. Industry standard data providers are the primary source for forward and spot rate information for both interest rates and currency rates.

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.

Forward Foreign Currency Exchange Contracts

The Company uses forward currency exchange contracts to manage exposure to fluctuations in foreign currency. The Company enters into certain purchase commitments with foreign suppliers based on the value of its purchasing subsidiaries’ local currency relative to the currency’s requirement of the supplier on the date of the commitment. The Company also sells into foreign countries based on the value of the purchaser’s local currency. The Company mitigates risk using forward currency contracts that generally mature in 12 months or less, which is consistent with the related purchases and sales. Contracts that qualify for hedge accounting are designated as cash flow hedges.

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.

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 quarter of fiscal 2021, the Company entered into an interest rate swap agreement designated as a cash flow hedge with an aggregate notional amount of $40.0 million hedging future fixed-rate debt issuances, which effectively fixed a portion of interest payments based on the ten year treasury rates. This instrument has a mandatory termination date of on or before July 31, 2021.

The Company determines the fair values of its derivatives based on valuation models which project future cash flows and discount the future amounts to a present value using market-based observable inputs including foreign currency rates, interest rate curves, futures and basis spreads, as applicable.

The fair value of the Company’s derivative contracts, which are recorded on a gross basis on the Company’s Condensed Consolidated Balance Sheets as of January 31, 2021 and July 31, 2020, are as follows (in millions):


					Fair Values Significant Other Observable Inputs
	Notional Amounts				Assets (1)				Liabilities (2) (3)
	January 31,		July 31,		January 31,		July 31,		January 31,		July 31,
	2021		2020		2021		2020		2021		2020
Forward foreign currency exchange contracts	$	20.6	$	26.2	$	1.5	$	2.1	$	(2.3)	$	(1.4)
Net investment hedge	50.0		55.8		1.1		1.2		(3.3)		—
Interest rate swap	40.0		—		1.1		—		—		—
Total	$	110.6	$	82.0	$	3.7	$	3.3	$	(5.6)	$	(1.4)

(1)As of January 31, 2021, the Company recorded $3.7 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.

Changes in the fair value of the Company’s forward foreign currency exchange contracts, net gain or loss on the net investment hedge and the interest rate swap, and interest earned on the net investment hedge are reported in accumulated other comprehensive loss on the Company’s Condensed Consolidated Balance Sheets.

Amounts reported in accumulated other comprehensive loss reported on the Company’s Condensed Consolidated Balance Sheets are reclassified into net earnings as the related transaction occurs. Changes in the fair value of forward foreign currency exchange contracts are recognized as a component of cost of sales; net gain or loss on the net investment hedge and the interest rate swap, and interest earned on the net investment hedge are reported in other (income) expense, net on the Company’s Condensed Consolidated Statements of Earnings.

Amounts related to forward foreign currency exchange contracts are expected to be reclassified into earnings during the next 12 months, based upon the timing of inventory purchases and sales. Amounts related to the net investment hedge and the interest rate swap are expected to be reclassified into earnings through their termination in July 2029 and July 2021, respectively. See Note 13 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 January 31, 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.

Equity Method Investments

The Company holds equity method investments, which are classified in other long-term assets on the accompanying Condensed Consolidated Balance Sheets. The aggregate carrying amount of these investments was $23.3 million and $21.7 million as of January 31, 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.

- 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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