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Financial Instruments and Risk Management | 3 Months Ended
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May 31, 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. During the three month periods ended May 31, 2012 and 2011, approximately 17 and 20 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 condensed 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 from remeasurement are recognized in SG&A. For the three month periods ended May 31, 2012 and 2011, we recorded net foreign exchange gains (losses), including the impact of currency hedges, of ($0.94) and ($0.15) million, respectively, in SG&A and $0.19 and ($0.04) million, respectively, in income tax expense. 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 May 31, 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 $158.00 million in advances against our 2010 RCA and $75.00 million of Senior Notes due June 2014. 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 June 2014 reset as described in Note 10, and have been effectively converted to fixed rate debt using an interest rate swap (the “swap”), as described below. We manage our floating rate debt using an interest rate swap. As of May 31, 2012, the swap converted an aggregate notional principal amount of $75.00 million from floating interest rate payments under our Senior Notes due June 2014 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 June 2014, while simultaneously receiving floating rate interest payments set at 0.47 percent as of May 31, 2012 on the same notional amounts. The fixed rate side of the swap will not change over its life. 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 our risk of increased interest costs; however, when interest rates drop significantly below the swap rate, 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 fair values of our various derivative instruments are as follows: FAIR VALUES OF DERIVATIVE INSTRUMENTS (in thousands)
May 31, 2012
|  |  |  |  |  |  |  | Prepaid |  | Accrued |  |  |
|  |  |  |  |  |  |  | Expenses |  | Expenses |  |  |
|  |  |  | Final |  |  |  | and Other |  | and Other |  | Other |
|  |  |  | Settlement |  | Notional |  | Current |  | Current |  | Liabilities, |
Designated as hedging instruments |  | Hedge Type |  | Date |  | Amount |  | Assets |  | Liabilities |  | Noncurrent |
Foreign currency contracts - sell Canadian |  | Cash flow |  | 12/2012 |  | $ | 7,000 |  | $ | 120 |  | $ | - |  | $ | - |
Foreign currency contracts - sell Pounds |  | Cash flow |  | 2/2013 |  | £ | 5,750 |  | 262 |  | - |  | - |
Subtotal |  |  |  |  |  |  |  | 382 |  | - |  | - |
Interest rate swap |  | Cash flow |  | 6/2014 |  | $ | 75,000 |  | - |  | 3,464 |  | 4,207 |
Total fair value |  |  |  |  |  |  |  |  | $ | 382 |  | $ | 3,464 |  | $ | 4,207 |
February 29, 2012
|  |  |  |  |  |  |  | Prepaid |  | Accrued |  |  |
|  |  |  |  |  |  |  | Expenses |  | Expenses |  |  |
|  |  |  | Final |  |  |  | and Other |  | and Other |  | Other |
|  |  |  | Settlement |  | Notional |  | Current |  | Current |  | Liabilities, |
Designated as hedging instruments |  | Hedge Type |  | Date |  | Amount |  | Assets |  | 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 |
The pre-tax effect of derivative instruments for the periods covered in the accompanying consolidated condensed financial statements are as follows:
PRE-TAX EFFECT OF DERIVATIVE INSTRUMENTS |
(in thousands) |
|  | Three Months Ended May 31, |
|  | 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 |  | $ | 910 |  | $ | (487 | ) | SG&A |  | $ | 26 |  | $ | (144 | ) | SG&A |  | $ | 35 |  | $ | (63 | )
Interest rate swaps - cash flow hedges |  | (44 | ) | (2,442 | ) | Interest expense |  | (926 | ) | (1,526 | ) |  |  | - |  | - |
Total |  | $ | 866 |  | $ | (2,929 | ) |  |  | $ | (900 | ) | $ | (1,670 | ) |  |  | $ | 35 |  | $ | (63 | )
(1) The amounts shown represent the ineffective portion of the change in fair value of a cash flow hedge. We expect gains of $0.38 million associated with foreign currency contracts and losses of $3.46 million associated with our interest rate swap, currently reported in accumulated other comprehensive loss, to be reclassified into income over the next twelve months. The amount ultimately realized, however, will differ as exchange rates and interest rates change and the underlying contracts settle. 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 only 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.

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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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