NOTE P – Fair Value

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is an exit price concept that assumes an orderly transaction between willing market participants and is required to be based on assumptions that market participants would use in pricing an asset or a liability. Current accounting guidance establishes a three-tier fair value hierarchy as a basis for considering such assumptions and for classifying the inputs used in the valuation methodologies. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair values are as follows:

 

Level 1		–		Observable prices in active markets for identical assets and liabilities.
Level 2		–		Observable inputs other than quoted prices in active markets for identical assets and liabilities.
Level 3		–		Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities.

 

At February 28, 2014, our financial assets and liabilities measured at fair value on a recurring basis were as follows:

 

(in thousands)		Quoted Prices in Active Markets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Totals
Assets
Derivative contracts (1)		$	-			$	1,839			$	-			$	1,839
Total assets		$	-			$	1,839			$	-			$	1,839
Liabilities
Derivative contracts (1)		$	-			$	4,654			$	-			$	4,654
Contingent consideration obligation (2)			-				-				310				310
Total liabilities		$	-			$	4,654			$	310			$	4,964

At May 31, 2013, our financial assets and liabilities measured at fair value on a recurring basis were as follows:

 

(in thousands)		Quoted Prices in Active Markets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Totals
Assets
Derivative contracts (1)		$	-			$	761			$	-			$	761
Total assets		$	-			$	761			$	-			$	761
Liabilities
Derivative contracts (1)		$	-			$	9,774			$	-			$	9,774
Total liabilities		$	-			$	9,774			$	-			$	9,774

 

(1)

The fair value of our derivative contracts is based on the present value of the expected future cash flows considering the risks involved, including non-performance risk, and using discount rates appropriate for the respective maturities. Market observable, Level 2 inputs are used to determine the present value of the expected future cash flows. Refer to “NOTE O – Derivative Instruments and Hedging Activities” for additional information regarding our use of derivative instruments.

 

(2)

The fair value of the contingent consideration obligation is determined using a Monte Carlo simulation model based on management’s projections of future EBITDA levels. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement. At each reporting date, we will revalue the contingent consideration obligation to estimated fair value and record changes in fair value as income or expense in our consolidated statement of earnings.

 

The fair value included in the carrying amounts of cash and cash equivalents, receivables, income taxes receivable, other assets, deferred income taxes, accounts payable, short-term borrowings, accrued compensation, contributions to employee benefit plans and related taxes, other accrued items, income taxes payable and other liabilities approximate carrying value due to their short-term nature. The fair value of long-term debt, including current maturities, based upon models utilizing market observable (Level 2) inputs and credit risk, was $415,517,000 and $421,056,000 at February 28, 2014 and May 31, 2013, respectively. The carrying amount of long-term debt, including current maturities, was $406,484,000 and $407,328,000 at February 28, 2014 and May 31, 2013, respectively.