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FINANCIAL INSTRUMENTS AND RISK MANAGEMENT | 12 Months Ended
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Feb. 29, 2012
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT |
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT |
NOTE 12 – FINANCIAL INSTRUMENTS AND RISK MANAGEMENT Foreign Currency Risk - Our functional currency is the U.S. Dollar. By operating internationally, we are subject to foreign currency risk from transactions denominated in currencies other than the U.S. Dollar (“foreign currencies”). Such transactions include sales, certain inventory purchases and operating expenses. As a result of such transactions, portions of our cash, trade accounts receivable and trade accounts payable are denominated in foreign currencies. For the fiscal years 2012, 2011 and 2010, 18.2, 14.1 and 14.8 percent, respectively, of our net sales revenue was in foreign currencies. These sales were primarily denominated in British Pounds, Euros, Mexican Pesos, Canadian Dollars, Japanese Yen, Australian Dollars, Chilean Pesos, Peruvian Soles, and Venezuelan Bolivares Fuertes. We make most of our inventory purchases from the Far East and use the U.S. Dollar for such purchases. In our consolidated statements of income, exchange gains and losses resulting from the remeasurement of foreign taxes receivable, taxes payable, deferred tax assets, and deferred tax liabilities, are recognized in their respective income tax lines, and all other foreign exchange gains and losses are recognized in SG&A. We recorded net foreign exchange gains (losses), including the impact of currency hedges, of ($0.67), $1.82 and $1.73 million in SG&A and $0.04, ($0.02) and $0.05 million in income tax expense during fiscal years 2012, 2011 and 2010, respectively. A significant portion of the products we sell are purchased from third-party manufacturers in China. During fiscal 2012 and 2011, the Chinese Renminbi appreciated against the U.S. Dollar approximately 4 percent each period. During fiscal 2010, the Chinese Renminbi remained relatively stable against the U.S. Dollar. To the extent the Chinese Renminbi appreciates with respect to the U.S. Dollar in the future, the Company may experience cost increases on such purchases, and this can adversely impact profitability. China’s currency intervention strategy with respect to the U.S. Dollar continues to evolve. Future interventions by China may result in further currency appreciation and increase our product costs over time. We have historically hedged against certain foreign currency exchange rate-risk by using a series of forward contracts designated as cash flow hedges to protect against the foreign currency exchange risk inherent in our forecasted transactions denominated in currencies other than the U.S. Dollar. We do not enter into any forward exchange contracts or similar instruments for trading or other speculative purposes. Interest Rate Risk – Interest on our outstanding debt as of February 29, 2012 is both floating and fixed. Fixed rates are in place on $103.00 million of Senior Notes at rates ranging from 3.90 to 7.24 percent and floating rates are in place on $171.10 million in advances against our 2010 RCA and $75.00 million of Senior Notes due 2015. If short-term interest rates increase, we will incur higher interest rates on any outstanding balances under the 2010 RCA. The floating rate Senior Notes due 2015 reset as described in Note (9), and have been effectively converted to fixed rate debt using an interest rate swap, as described below. We manage our floating rate term debt using an interest rate swap (the “swap”). As of February 29, 2012, we had a swap that converted an aggregate notional principal of $75.00 million from floating interest rate payments under our Senior Notes due 2015 to fixed interest rate payments at 6.01 percent. In the swap transaction, we maintain contracts to pay fixed rates of interest on an aggregate notional principal amount of $75.00 million at a rate of 5.11 percent on our Senior Notes due 2015, while simultaneously receiving floating rate interest payments set at 0.58 percent as of February 29, 2012 on the same notional amounts. The fixed rate side of the swap will not change over the life of the swap. The floating rate payments are reset quarterly based on three-month LIBOR. The resets are concurrent with the interest payments made on the underlying debt. Changes in the spread between the fixed rate payment side of the swap and the floating rate receipt side of the swap offset 100 percent of the change in any period of the underlying debt’s floating rate payments. The swap is used to reduce the Company’s risk of increased interest costs; however, when interest rates drop significantly below the swap rates, we lose the benefit that our floating rate debt would provide, if not managed with a swap. The swap is considered 100 percent effective. The following table summarizes the fair values of our various derivative instruments at the end of fiscal 2012 and 2011:
FAIR VALUES OF DERIVATIVE INSTRUMENTS IN THE CONSOLIDATED BALANCE SHEETS
(in thousands)
February 29, 2012
|  |  |  |  |  |  |  | Accrued |  |  |
|  |  |  |  |  |  |  | Expenses |  |  |
|  |  |  | Final |  |  |  | and Other |  | Derivative |
|  |  |  | Settlement |  | Notional |  | Current |  | Liabilities, |
Designated as hedging instruments |  | Hedge Type |  | Date |  | Amount |  | Liabilities |  | Noncurrent |
Foreign currency contracts - sell Canadian |  | Cash flow |  | 12/2012 |  | $ | 7,000 |  | $ | 163 |  | - |
Interest rate swap |  | Cash flow |  | 6/2014 |  | $ | 75,000 |  | 3,531 |  | 5,022 |
Total fair value |  |  |  |  |  |  |  | $ | 3,694 |  | $ | 5,022 |
February 28, 2011
|  |  |  |  |  |  |  | Accrued |  |  |
|  |  |  |  |  |  |  | Expenses |  |  |
|  |  |  | Final |  |  |  | and Other |  | Derivative |
|  |  |  | Settlement |  | Notional |  | Current |  | Liabilities, |
Designated as hedging instruments |  | Hedge Type |  | Date |  | Amount |  | Liabilities |  | Noncurrent |
Foreign currency contracts - sell Pounds |  | Cash flow |  | 2/2012 |  | £ | 7,000 |  | $ | 197 |  | $ | - |
Foreign currency contracts - sell Canadian |  | Cash flow |  | 12/2012 |  | $ | 13,000 |  | 208 |  | 191 |
Foreign currency contracts - sell Euros |  | Cash flow |  | 2/2012 |  | € | 5,000 |  | 374 |  | - |
Subtotal |  |  |  |  |  |  |  | 779 |  | 191 |
Interest rate swaps |  | Cash flow |  | 6/2014 |  | $ | 125,000 |  | 3,785 |  | 5,840 |
Total fair value |  |  |  |  |  |  |  | $ | 4,564 |  | $ | 6,031 |
The pre-tax effect of derivative instruments for the fiscal years 2012 and 2011 is as follows:
PRE TAX EFFECT OF DERIVATIVE INSTRUMENTS
(in thousands)
|  | Fiscal Years Ended |
|  | Gain \ (Loss) |  | Gain \ (Loss) Reclassified |  |  |  |  |  |  |  |
|  | Recognized in OCI |  | from Accumulated Other |  |  | Gain \ (Loss) Recognized |
|  | (effective portion) |  | Comprehensive Loss into Income |  |  | as Income (1) |
|  | 2012 |  | 2011 |  | Location |  | 2012 |  | 2011 |  |  | Location |  | 2012 |  | 2011 |
Currency contracts - ordinary and cash flow hedges |  | $ | 563 |  | $ | (1,556 | ) | SG&A |  | $ | (244 | ) | $ | 209 |  |  | SG&A |  | $ | (63 | ) | $ | (16 | )
Interest rate swaps - cash flow hedges |  | (3,353 | ) | (3,600 | ) | Interest expense |  | (4,424 | ) | (5,997 | ) |  |  |  | - |  | - |
Total |  | $ | (2,790 | ) | $ | (5,156 | ) |  |  | $ | (4,668 | ) | $ | (5,788 | ) |  |  |  | $ | (63 | ) | $ | (16 | )
(1) The amounts shown represent the ineffective portion of the change in fair value of a cash flow hedge. We expect losses of $0.16 million associated with foreign currency contracts that are currently reported in accumulated other comprehensive loss to be reclassified into income over the next year. The amount ultimately realized, however, will differ as exchange rates change and the underlying contracts settle. See Notes (1) and (11) to these consolidated financial statements for more information on our hedging activities. Counterparty Credit Risk - Financial instruments, including foreign currency contracts and interest rate swaps, expose us to counterparty credit risk for nonperformance. We manage our exposure to counterparty credit risk by dealing with counterparties who are substantial international financial institutions with significant experience using such derivative instruments. Although our theoretical credit risk is the replacement cost at the then-estimated fair value of these instruments, we believe that the risk of incurring credit risk losses is remote. Risks Inherent in Cash, Cash Equivalents and Investment Holdings – Our cash, cash equivalents and investments are subject to interest rate risk, credit risk and liquidity risk. Cash consists of interest-bearing, non-interest-bearing and short-term investment accounts. Cash equivalents consist of commercial paper and money market investment accounts. Investments at February 28, 2011 consisted of AAA rated ARS that we normally seek to dispose of within 35 or fewer days and mutual funds. The following table summarizes our cash, cash equivalents and investments at the end of fiscal 2012 and 2011:
CASH, CASH EQUIVALENTS AND INVESTMENTS (in thousands)
|  |  | February 29, 2012 |  |  | February 28, 2011 |
|  |  | Carrying |  | Range of |  |  | Carrying |  | Range of |
|  |  | Amount |  | Interest Rates |  |  | Amount |  | Interest Rates |
Cash and cash equivalents: |  |  |  |  |  |  |  |  |  |  |
Cash, interest and non-interest-bearing accounts - unrestricted |  |  | $ | 18,375 |  | 0.00 to 1.70% |  |  | $ | 16,587 |  | 0.00 to 1.60% |
Cash, interest and non-interest-bearing accounts - restricted |  |  | 2,670 |  | 0.00 to 1.25% |  |  | 2,611 |  | 0.00 to 1.25% |
Commercial paper |  |  | - |  | - |  |  | 1,560 |  | 0.13% |
Money market funds |  |  | 801 |  | 0.53 to 4.32% |  |  | 6,435 |  | 0.03 to 3.27% |
Total cash and cash equivalents |  |  | $ | 21,846 |  |  |  |  | $ | 27,193 |  |  |
Investments: |  |  |  |  |  |  |  |  |  |  |
Auction rate securities |  |  | $ | - |  |  |  |  | $ | 20,711 |  | 1.76 to 8.47% |
Mutual funds, principally equity based |  |  | - |  |  |  |  | 1,233 |  |  |
Total investments |  |  | $ | - |  |  |  |  | $ | 21,944 |  |  |
Our cash balances at the end of fiscal 2012 and 2011 include restricted cash of $2.67 and $2.61 million, respectively, denominated in Venezuelan Bolivares Fuertes, shown above under the heading “Cash, interest and non interest-bearing accounts – restricted.” The balances arise from our operations within the Venezuelan market. Until we are able to repatriate cash from Venezuela, we intend to use these cash balances in-country to continue to fund operations. We do not otherwise rely on these restricted funds as a source of liquidity. Most of our cash equivalents and investments are or were in commercial paper, money market accounts and ARS with frequent rate resets; therefore, we believe there is no material interest rate risk. At February 28, 2011, we held investments in ARS collateralized by student loans (with underlying maturities from 18 to 35 years). Substantially all of the collateral was guaranteed by the U.S. government under the Federal Family Education Loan Program. Liquidity for these securities was normally dependent on an auction process that reset the applicable interest rate at predetermined intervals, ranging from 7 to 35 days. Beginning in February 2008, the auctions for the ARS held by us and others were unsuccessful, requiring us to hold them beyond their typical auction reset dates. Auctions fail when there is insufficient demand, but these failures did not represent a default by the issuer of the security. Upon an auction’s failure, the interest rates were reset based on a formula contained in the security. The securities continued to accrue interest and to be auctioned until the issuer called or we otherwise sold the securities. At February 28, 2011, we had cumulative pre-tax unrealized losses on our ARS of $1.34 million, reflected in accumulated other comprehensive loss in our accompanying consolidated balance sheet, net of related tax effects of $0.46 million. The recording of this unrealized loss was not a result of the quality of the underlying collateral but rather a markdown reflecting a lack of liquidity and other market conditions at that time. On September 15, 2011, the Company entered into an agreement to sell its then remaining portfolio of $18.80 million par value ARS for approximately 96 percent of par, or $18.05 million. The transaction settled in the fiscal quarter ended November 30, 2011. As a result of the agreement, a temporary impairment loss was reversed through other comprehensive income and an other-than-temporary, nonoperating pre-tax realized loss of $0.75 million, net of related tax effects of $0.26 million, was recognized in our consolidated statement of income for fiscal 2012. For the fiscal years ended February 2012 and 2011, in addition to the transaction just described, we liquidated $3.25 and $0.35 million, respectively, of these securities at par.

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- Definition The entire disclosure for financial instruments. This disclosure includes, but is not limited to, fair value measurements of short and long term marketable securities, international currencies forward contracts, and auction rate securities. Financial instruments may include hedging and non-hedging currency exchange instruments, derivatives, securitizations and securities available for sale at fair value. Also included are investment results, realized and unrealized gains and losses as well as impairments and risk management disclosures. + References No definition available. + Details
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