Fair Value of Financial Instruments

The company's financial instruments consist of cash equivalents, marketable securities, accounts and notes receivable, deferred compensation plan, accounts payable, debt, redeemable noncontrolling interests and foreign currency exchange contracts. The company's financial instruments, other than long-term debt, are recorded at fair value. The fair value of fixed rate debt was based on third-party quotes (Level 2). The carrying value and fair value of the company's long-term debt, including current maturities, is as follows for the periods indicated:



(In millions)	June 3, 2017		May 28, 2016
Carrying value	$	199.9	$	221.9
Fair value	$	213.0	$	241.7

The following describes the methods the company uses to estimate the fair value of financial assets and liabilities, of which there have been no significant changes in the current period:

Available-for-sale securities — The company's available-for-sale marketable securities primarily include exchange equity and fixed income mutual funds and government obligations. These investments are recorded at fair value using quoted prices for similar securities.

Foreign currency exchange contracts — The company's foreign currency exchange contracts are valued using an approach based on foreign currency exchange rates obtained from active markets. The estimated fair value of forward currency exchange contracts is based on month-end spot rates as adjusted by current market-based activity.

Interest rate swap agreement — The company's interest rate swap agreement value is determined using a market approach based on rates obtained from active markets. The interest rate swap agreement is designated as a cash flow hedging instrument.

Deferred compensation plan assets — The company's deferred compensation plan assets primarily include domestic equity large cap and lifestyle mutual funds and are valued using quoted prices for similar securities.

Other — The company's redeemable noncontrolling interests are deemed to be a nonrecurring level 3 fair value measurement. Refer to Note 15 for further information regarding redeemable noncontrolling interests. The purchase price allocation performed to determine fair value of the underlying assets and liabilities associated with the equity investment in Naughtone utilized nonrecurring level 3 fair value measurements. Refer to Note 4 for further information regarding the investment in Naughtone. Nonrecurring level 3 fair value measurements were used to determine the fair value of the Nemschoff trade name, which was impaired during fiscal 2017. Refer to Note 16 for further information regarding the Nemschoff trade name impairment. Nonrecurring level 3 fair value measurements were used to determine the fair value of the building and the related financing liability associated with a construction-type lease related to a new DWR studio in Palo Alto, California. Refer to Note 5 for further information related to this lease.

The following tables set forth financial assets and liabilities measured at fair value in the Consolidated Balance Sheets and the respective pricing levels to which the fair value measurements are classified within the fair value hierarchy as of June 3, 2017 and May 28, 2016:



(In millions)	Fair Value Measurements
	June 3, 2017				May 28, 2016
Financial Assets	Quoted Prices With Other Observable Inputs (Level 2)		Management Estimates (Level 3)		Quoted Prices With Other Observable Inputs (Level 2)		Management Estimates (Level 3)
Available-for-sale securities:
Mutual funds - fixed income	$	7.7	$	—	$	6.4	$	—
Mutual funds - equity	0.9		—		0.7		—
Government obligations	—		—		0.4		—
Foreign currency forward contracts	0.5		—		0.5		—
Interest rate swap agreement	3.3		—		—		—
Deferred compensation plan	12.8		—		7.9		—
Total	$	25.2	$	—	$	15.9	$	—

Financial Liabilities
Foreign currency forward contracts	$	0.6	$	—	$	0.8	$	—
Contingent consideration	—		0.5		—		2.7
Total	$	0.6	$	0.5	$	0.8	$	2.7

The table below presents a reconciliation for liabilities measured at fair value using significant unobservable inputs (Level 3) (in millions):



(In millions)
Contingent Consideration	June 3, 2017			May 28, 2016
Beginning balance	$	2.7		$	2.6
Net realized gains	(0.2		)	—
Foreign currency translation adjustments	—			(0.1		)
Settlements	(2.0		)	(2.5		)
Purchases or additions	—			2.7
Ending balance	$	0.5		$	2.7

The contingent consideration liabilities represent future payment obligations that relate to business and product line acquisitions. These payments are based on the future performance of the acquired businesses. The contingent consideration liabilities are valued using estimates based on discount rates that reflect the risk involved and the projected sales and earnings of the acquired businesses. The estimates are updated and the liabilities are adjusted to fair value on a quarterly basis.

The following is a summary of the carrying and market values of the company's marketable securities as of the dates indicated:



	June 3, 2017								May 28, 2016
(In millions)	Cost		Unrealized Gain		Unrealized Loss		Market Value		Cost		Unrealized Gain		Unrealized Loss		Market Value
Mutual funds - fixed income	$	7.6	$	0.1	$	—	$	7.7	$	6.4	$	—	$	—	$	6.4
Mutual funds - equity	0.9		—		—		0.9		0.7		—		—		0.7
Government obligations	—		—		—		—		0.4		—		—		0.4
Total	$	8.5	$	0.1	$	—	$	8.6	$	7.5	$	—	$	—	$	7.5

Adjustments to the fair value of available-for-sale securities are recorded as increases or decreases, net of income taxes, within Accumulated other comprehensive loss in stockholders’ equity. These adjustments are also included within the caption Unrealized holding gain within the Condensed Consolidated Statements of Comprehensive Income. Unrealized gains recognized in the company's Condensed Consolidated Statement of Comprehensive Income related to available-for-sale securities were $0.1 million and zero for the fiscal years ended June 3, 2017 and May 28, 2016, respectively. The cost of securities sold is based on the specific identification method; realized gains and losses resulting from such sales are included in the Condensed Consolidated Statements of Comprehensive Income within "Other, net".

The company reviews its investment portfolio for any unrealized losses that would be deemed other-than-temporary and require the recognition of an impairment loss in earnings. If the cost of an investment exceeds its fair value, the company evaluates, among other factors, general market conditions, the duration and extent to which the fair value is less than its cost, the company's intent to hold the investment and whether it is more likely than not that the company will be required to sell the investment before recovery of the cost basis. The company also considers the type of security, related industry and sector performance and published investment ratings. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established. If conditions within individual markets, industry segments or macro-economic environments deteriorate, the company could incur future impairments.

The company views its available-for-sale portfolio as available for use in its current operations. Accordingly, the investments are recorded within Current Assets within the Condensed Consolidated Balance Sheets.

Derivative Instruments and Hedging Activities

Foreign Currency Forward Contracts

The company transacts business in various foreign currencies and has established a program that primarily utilizes foreign currency forward contracts to offset the risks associated with the effects of certain foreign currency exposures. Under this program, the company's strategy is to have increases or decreases in our foreign currency exposures offset by gains or losses on the foreign currency forward contracts to mitigate the risks and volatility associated with foreign currency transaction gains or losses. These foreign currency exposures typically arise from net liability or asset exposures in non-functional currencies on the balance sheets of our foreign subsidiaries. These foreign currency forward contracts generally settle within 30 days and are not used for trading purposes. These forward contracts are not designated as hedging instruments. Accordingly, we record the fair value of these contracts as of the end of the reporting period in the Consolidated Balance Sheets with changes in fair value recorded within the Consolidated Statements of Comprehensive Income. The balance sheet classification for the fair values of these forward contracts is to Other current assets for unrealized gains and to Other accrued liabilities for unrealized losses. The Consolidated Statements of Comprehensive Income classification for the fair values of these forward contracts is to Other expenses (income): Other, net, for both realized and unrealized gains and losses.

The notional amounts of the forward contracts held to purchase and sell U.S. dollars in exchange for other major international currencies were $36.1 million and $64.3 million as of June 3, 2017 and May 28, 2016, respectively. The notional amounts of the foreign currency forward contracts held to purchase and sell British pound sterling in exchange for other major international currencies were £19.4 million and £31.2 million as of June 3, 2017 and May 28, 2016, respectively. The company also has other forward contracts related to other currency pairs at varying notional amounts.

Interest Rate Swaps

During the fiscal year ended June 3, 2017, the company entered into an interest rate swap agreement with an aggregate notional amount of $150.0 million, a forward start date of January 3, 2018 and a termination date of January 3, 2028. The company expects to borrow on its variable rate LIBOR-based revolving credit facility in order to pay off the existing $150.0 million of Series B Senior Notes. The interest rate swap is expected to be utilized to effectively convert the $150.0 million of outstanding indebtedness from a LIBOR-based floating interest rate, plus applicable margin, to a 1.949 percent fixed interest rate plus applicable margin under the agreement as of the forward start date.

The company enters into interest rate swap agreements to manage its exposure to interest rate changes and its overall cost of borrowing. The company's interest rate swap agreement was entered into to exchange variable rate interest payments for fixed rate payments over the life of the agreement without the exchange of the underlying notional amounts. The notional amount of the interest rate swap agreement is used to measure interest to be paid or received and does not represent the amount of exposure to credit loss. The differential paid or received on the interest rate swap agreement is recognized as an adjustment to interest expense.

The interest rate swap was a designated cash flow hedge at inception and remains an effective accounting hedge as of June 3, 2017. Since a designated derivative meets hedge accounting criteria, the fair value of the hedge is recorded in the Consolidated Statement of Stockholders’ Equity as a component of Accumulated other comprehensive loss, net of tax. The ineffective portion of the change in fair value of the derivative is immediately recognized in earnings. The interest rate swap agreement is assessed for hedge effectiveness on a quarterly basis.

Effects of Derivatives on the Financial Statements

The effects of derivatives on the consolidated financial statements were as follows for the fiscal years ended 2017 and 2016 (amounts presented exclude any income tax effects):



(In millions)	Balance Sheet Location	June 3, 2017		May 28, 2016
Designated derivatives:
Interest rate swap	Long-term assets: Other assets	$	3.3	$	—
Non-designated derivatives:
Foreign currency forward contracts	Current assets: Other	$	0.5	$	0.5
Foreign currency forward contracts	Current liabilities: Other accrued liabilities	$	0.6	$	0.8



(In millions)		Fiscal Year
	Statement of Comprehensive Income Location	June 3, 2017			May 28, 2016			May 30, 2015
Gain recognized on foreign currency forward contracts	Other expenses (income): Other, net	$	(1.2	)	$	(0.7	)	$	(2.1	)

The gain recorded, net of income taxes, in Other comprehensive loss for the effective portion of designated derivatives was as follows for the periods presented below:



(In millions)	Fiscal Year
	June 3, 2017		May 28, 2016		May 30, 2015
Interest rate swap	$	2.1	$	—	$	—

For fiscal 2017, 2016 and 2015, there were zero gains or losses recognized against earnings for hedge ineffectiveness and zero gains or losses reclassified from Accumulated other comprehensive loss into earnings. The company expects zero to be reclassified from Accumulated other comprehensive loss to earnings, in the next fiscal year, related to the interest rate swap.