Financial Instruments

3 Months Ended

Feb. 29, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Financing Arrangements and Financial Instruments

FINANCING ARRANGEMENTS AND FINANCIAL INSTRUMENTS

During each of the three months ended February 29, 2020 and February 28, 2019, we repaid $18.8 million (representing the required quarterly principal payment) of the five-year term loan due August 17, 2022.

We use derivative financial instruments to enhance our ability to manage risk, including foreign currency, net investment and interest rate exposures, which exist as part of our ongoing business operations. We do not enter into contracts for trading purposes, nor are we a party to any leveraged derivative instrument, and all derivatives are designated as hedges. We are not a party to master netting arrangements, and we do not offset the fair value of derivative contracts with the same counterparty in our financial statement disclosures. The use of derivative financial instruments is monitored through regular communication with senior management and the use of written guidelines.

Foreign currency exchange risk. We are potentially exposed to foreign currency fluctuations affecting net investments in subsidiaries, transactions (both third-party and intercompany) and earnings denominated in foreign currencies. Management assesses foreign currency risk based on transactional cash flows and translational volatility and may enter into forward contract and currency swaps to reduce fluctuations in the long or short currency positions. Forward contracts are generally less than 18 months duration. Currency swap agreements are established in conjunction with the terms of the underlying debt issues.

At February 29, 2020, we had foreign currency exchange contracts to purchase or sell $517.1 million of foreign currencies as compared to $489.2 million at November 30, 2019. All of these contracts were designated as hedges of anticipated purchases denominated in a foreign currency or hedges of foreign currency denominated assets or liabilities. Hedge ineffectiveness was not material. All foreign currency exchange contracts outstanding at February 29, 2020 have durations of less than 12 months, including $194.6 million of notional contracts that have durations of less than seven days and are used to hedge short-term cash flow funding.

Contracts which are designated as hedges of anticipated purchases denominated in a foreign currency (generally purchases of raw materials in U.S. dollars by operating units outside the U.S.) are considered cash flow hedges. The gains and losses on these contracts are deferred in accumulated other comprehensive income until the hedged item is recognized in cost of goods sold, at which time the net amount deferred in accumulated other comprehensive income is also recognized in cost of goods sold. Gains and losses from contracts that are designated as hedges of assets, liabilities or firm commitments are recognized through income, offsetting the change in fair value of the hedged item.

We also enter into fair value foreign currency exchange contracts to manage exposure to currency fluctuations in certain intercompany loans between subsidiaries. At February 29, 2020, the notional value of these contracts was $400.8 million. During the three months ended February 29, 2020 and February 28, 2019, we recognized (losses) gains of $(2.2) million and $1.7 million, respectively, on the change in fair value of these contracts and gains (losses) of $2.0 million and $(1.8) million, respectively, on the change in the currency component of the underlying loans. Both the gains and the losses were recognized in our consolidated income statement as other income, net.

We also utilize cross currency interest rate swap contracts that are considered net investment hedges. As of February 29, 2020, we had cross currency interest rate swap contracts of (i) $250 million notional value to receive $250 million at three-month U.S.

LIBOR plus 0.685% and pay £194.1 million at three-month GBP LIBOR plus 0.740% and (ii) £194.1 million notional value to receive £194.1 million at three-month GBP LIBOR plus 0.740% and pay €221.8 million at three-month Euro EURIBOR plus 0.808%. These cross currency interest rate swap contracts expire in August 2027.

Interest rate risk. We finance a portion of our operations with both fixed and variable rate debt instruments, principally commercial paper, notes and bank loans. We utilize interest rate swap agreements to minimize worldwide financing costs and to achieve a desired mix of variable and fixed rate debt.

As of February 29, 2020, we have outstanding interest rate swap contracts for a notional amount of $350 million. Those interest rate swap contracts include a $100 million notional value of interest rate swap contracts, where we receive interest at 3.25% and pay a variable rate of interest based on three-month LIBOR plus 1.22%, which expire in November 2025, and are designated as fair value hedges of the changes in fair value of $100 million of the $250 million 3.25% medium-term notes due 2025. We also have $250 million notional interest rate swap contracts where we receive interest at 3.40% and pay a variable rate of interest based on three-month LIBOR plus 0.685%, which expire in August 2027, and are designated as fair value hedges of the changes in fair value of $250 million of the $750 million 3.40% term notes due 2027. Any realized gain or loss on these swap contracts was offset by a corresponding increase or decrease of the value of the hedged debt. Hedge ineffectiveness was not material.

All derivatives are recognized at fair value in the balance sheet and recorded in either other current assets, other long-term assets, other accrued liabilities or other long-term liabilities, depending upon their nature and maturity.

The following table discloses the notional amount and fair values of derivative instruments on our balance sheet (in millions):

As of February 29, 2020	Asset Derivatives					Liability Derivatives
	Balance sheet location	Notional amount		Fair value		Balance sheet location	Notional amount		Fair value
Interest rate contracts	Other current assets / Other long-term assets	$	350.0	$	34.2	Other accrued liabilities	$	—	$	—
Foreign exchange contracts	Other current assets	244.1		5.6		Other accrued liabilities	273.0		7.6
Cross currency contracts	Other current assets / Other long-term assets	247.3		2.6		Other long-term liabilities	243.9		1.0
Total				$	42.4				$	8.6
As of February 28, 2019	Asset Derivatives					Liability Derivatives
	Balance sheet location	Notional amount		Fair value		Balance sheet location	Notional amount		Fair value
Interest rate contracts	Other current assets / Other long-term assets	$	250.0	$	0.1	Other accrued liabilities	$	100.0	$	4.0
Foreign exchange contracts	Other current assets	343.0		3.2		Other accrued liabilities	204.8		4.8
Cross currency contracts	Other current assets / Other long-term assets	—		—		Other long-term liabilities	509.8		9.2
Total				$	3.3				$	18.0
As of November 30, 2019	Asset Derivatives					Liability Derivatives
	Balance sheet location	Notional amount		Fair value		Balance sheet location	Notional amount		Fair value
Interest rate contracts	Other current assets / Other long-term assets	$	350.0	$	20.9	Other accrued liabilities	$	—	$	—
Foreign exchange contracts	Other current assets	293.1		3.3		Other accrued liabilities	196.1		3.6
Cross currency contracts	Other current assets / Other long-term assets	495.5		3.2		Other long-term liabilities	—		—
Total				$	27.4				$	3.6

The following tables disclose the impact of derivative instruments on our other comprehensive income ("OCI"), accumulated other comprehensive income ("AOCI") and our consolidated income statement for the three-month periods ended February 29, 2020 and February 28, 2019 (in millions):

Fair Value Hedges
Derivative	Income statement location	Income (expense)
		Three months ended February 29, 2020		Three months ended February 28, 2019
Interest rate contracts	Interest expense	$	0.5	$	0.2

Three months ended	Income statement location	Gain (loss) recognized in income					Income statement location	Gain (loss) recognized in income
Derivative		February 29, 2020		February 28, 2019		Hedged item		February 29, 2020		February 28, 2019
Foreign exchange contracts	Other income, net	$	(2.2)	$	1.7	Intercompany loans	Other income, net	$	2.0	$	(1.8)

Cash Flow Hedges
Three months ended
Derivative	Gain or (loss) recognized in OCI				Income statement location	Gain or (loss) reclassified from AOCI
	February 29, 2020		February 28, 2019			February 29, 2020		February 28, 2019
Interest rate contracts	$	—	$	—	Interest expense	$	0.1	$	0.1
Foreign exchange contracts	0.6		(1.2)		Cost of goods sold	0.4		0.3
Total	$	0.6	$	(1.2)		$	0.5	$	0.4

For all cash flow and settled interest rate fair value hedge derivatives, the net amount of accumulated other comprehensive income (loss) expected to be reclassified in the next 12 months is $0.3 million as an increase to earnings.

Net Investment Hedges
Three months ended
Derivative	Gain or (loss) recognized in OCI				Income statement location	Gain or (loss) excluded from the assessment of hedge effectiveness
	February 29, 2020		February 28, 2019			February 29, 2020		February 28, 2019
Cross currency contracts	$	0.2	$	(9.5)	Interest expense	$	1.3	$	0.3

For all net investment hedges, no amounts have been reclassified out of accumulated other comprehensive income (loss). The amounts noted in the tables above for OCI do not include any adjustments for the impact of deferred income taxes.