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FINANCIAL INSTRUMENTS AND RISK MANAGEMENT | 12 Months Ended
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Feb. 28, 2013
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 2013, 2012 and 2011, 17.0, 18.2 and 14.1 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 ($2.36), ($0.67) and $1.82 million in SG&A and ($0.04), $0.04 and ($0.02) million in income tax expense during fiscal years 2013, 2012 and 2011, respectively. A significant portion of the products we sell are purchased from third-party manufacturers in China. During fiscal year 2013, the Chinese Renminbi remained relatively flat against the U.S. Dollar. During fiscal years 2012 and 2011, the Chinese Renminbi appreciated against the U.S. Dollar approximately 4 percent each period. 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 28, 2013 is both floating and fixed. Fixed rates are in place on $100.00 million of Senior Notes at 3.90 percent and floating rates are in place on $82.00 million of borrowings under our Credit Agreement 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 Credit Agreement. 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 28, 2013, 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 0.31 percent as of February 28, 2013 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 occur at the same time as 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 years 2013 and 2012: FAIR VALUES OF DERIVATIVE INSTRUMENTS (in thousands)
February 28, 2013
|  |  |  |  |  |  |  | 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 Euro |  | Cash flow |  | 10/2013 |  | € | 7,050 |  | $ | 239 |  | $ | - |  | $ | - |
Foreign currency contracts - sell Pounds |  | Cash flow |  | 11/2013 |  | £ | 3,000 |  | 257 |  | - |  | - |
Interest rate swap |  | Cash flow |  | 6/2014 |  | $ | 75,000 |  | - |  | 3,044 |  | 1,780 |
Total fair value |  |  |  |  |  |  |  | $ | 496 |  | $ | 3,044 |  | $ | 1,780 |
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 fiscal years 2013 and 2012 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) |
|  | 2013 |  |  | 2012 |  | Location |  | 2013 |  |  | 2012 |  | Location |  | 2013 |  |  | 2012 |
Currency contracts and swaps - cash flow hedges |  | $ | (132 | ) |  | $ | 563 |  | SG&A |  | $ | (629 | ) |  | $ | (244 | ) | SG&A |  | $ | (44 | ) |  | $ | (63 | )
Interest rate swaps - cash flow hedges |  | (103 | ) |  | (3,353 | ) | Interest expense |  | (3,833 | ) |  | (4,424 | ) |  |  | - |  |  | - |
Total |  | $ | (235 | ) |  | $ | (2,790 | ) |  |  | $ | (4,462 | ) |  | $ | (4,668 | ) |  |  | $ | (44 | ) |  | $ | (63 | )
(1) The amounts shown represent the ineffective portion of the change in fair value of cash flow hedges. We expect net gains of $0.50 million associated with foreign currency contracts, and a loss of $3.04 million associated with our interest rate swap, currently reported in accumulated other comprehensive loss to be reclassified into income (expense) over the next twelve months. The amount ultimately realized, however, will differ as exchange rates change and the underlying contracts settle. See Notes (1), (11) and (17) 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 and Cash Equivalents – Our cash and cash equivalents 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 money market investment accounts. The following table summarizes our cash and cash equivalents at the end of fiscal years 2013 and 2012: CASH AND CASH EQUIVALENTS (in thousands)
|  |  | February 28, 2013 |  |  | February 29, 2012 |
|  |  | Carrying |  | Range of |  |  | Carrying |  | Range of |
|  |  | Amount |  | Interest Rates |  |  | Amount |  | Interest Rates |
Cash and cash equivalents: |  |  |  |  |  |  |  |  |  |  |
Cash, interest and non-interest-bearing accounts - unrestricted |  |  | $ | 9,568 |  | 0.00 to 1.30% |  |  | $ | 18,375 |  | 0.00 to 1.70% |
Cash, interest and non-interest-bearing accounts - restricted |  |  | 2,183 |  | 0.00 to 0.75% |  |  | 2,670 |  | 0.00 to 1.25% |
Money market funds |  |  | 1,091 |  | 0.35 to 0.37% |  |  | 801 |  | 0.53 to 4.32% |
Total cash and cash equivalents |  |  | $ | 12,842 |  |  |  |  | $ | 21,846 |  |  |
Our cash balances at the end of fiscal years 2013 and 2012 include restricted cash of $2.18 and $2.67 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. In February 2013, the Venezuelan government devalued its currency from 4.30 per dollar to 6.30 per dollar. As a result of this devaluation, we recorded a $1.41 million unfavorable exchange rate impact in SG&A for the fourth quarter of fiscal year 2013. At the end of fiscal years 2013 and 2012, our cash equivalents were in money market accounts, therefore, we believe there was no material interest rate risk associated with these holdings.

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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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