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Financial Instruments and Risk Management | 3 Months Ended
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May 31, 2014
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 each of the fiscal quarters ended May 31, 2014 and 2013, approximately 15 percent of our net sales revenue was in foreign currencies. These sales were primarily denominated in British Pounds, Euros, Mexican Pesos, Canadian Dollars, Australian Dollars, Peruvian Soles, and Venezuelan Bolivars. 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 fiscal quarters ended May 31, 2014 and 2013, we recorded net foreign exchange gains (losses), including the impact of currency hedges, of ($0.03) and ($0.12) million, respectively, in SG&A and $0.04 and $0.05 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. Venezuelan Bolivar Currency Exchange Uncertainties- In February 2013, the Venezuelan government devalued its currency from 4.30 to 6.30 Bolivars per U.S. Dollar for all goods and services. In connection with this devaluation, we recorded a charge of $1.41 million in the fourth quarter of fiscal year 2013. In March 2013, the Venezuelan government announced an additional complementary auction-based exchange rate mechanism known as SICAD 1. SICAD 1 was made available to certain companies that operate in designated industry sectors. At May 31, 2014, the SICAD 1 rate was 10 Bolivars to the U.S. Dollar. In early 2014, the Venezuelan government created a National Center of Foreign Commerce (“CENCOEX”) to control the multiple currency exchange rate mechanisms that may be available for a company to exchange funds. CENCOEX was granted the authority to determine the sectors that will be allowed to buy U.S. dollars in SICAD auctions, and subsequently introduced a more accessible market-based, SICAD 2 daily auction exchange market. At May 31, 2014, the SICAD 2 rate was approximately 50 Bolivars to the U.S. Dollar. Despite the recent announcements made by the Venezuelan government, there remains a significant degree of uncertainty as to which exchange markets might be available for particular types of transactions. To date, we have not gained access to U.S. Dollars in Venezuela through either SICAD 1 or SICAD 2 auctions, nor do we intend to. These auctions do not eliminate or change the official rate of 6.30 Bolivars per U.S. Dollar. Our business in Venezuela continues to be entirely self-funded with earnings from operations. We have no current need or intention to repatriate Venezuelan earnings and remain committed to the business for the long-term. Within Venezuela, we market primarily liquid-, solid- and powder-based personal care and grooming products which are sourced almost entirely within the country. We do not have, nor do we foresee having, any need to access SICAD 1 or SICAD 2. Accordingly, we continue to utilize the official rate of 6.30 Bolivars per U.S. Dollar to re-measure our Venezuelan financial statements. For the fiscal quarters ended May 31, 2014 and 2013, sales in Venezuela represented approximately 0.6 and 0.5 percent, respectively, of the Company’s consolidated net sales revenue. At May 31, 2014, we had a U.S. Dollar based net investment in our Venezuelan business of $7.84 million, consisting almost entirely of working capital. Developments within the Venezuelan economy, including any future governmental interventions, are beyond our ability to control or predict, nor can we assess what impacts, if any, such events may have on our Venezuelan business. We will continue to closely monitor the applicability and viability of the various exchange mechanisms. A future devaluation, if any, would result in additional charges against income, and these charges could be material. Interest Rate Risk - Interest on our outstanding debt as of May 31, 2014 is both floating and fixed. Fixed rates are in place on $80 million of Senior Notes at 3.90 percent, while floating rates are in place on the balance of all other debt outstanding, which totaled $345.71 million as of May 31, 2014. If short-term interest rates increase, we will incur higher interest rates on any outstanding balances under our Credit Agreement and MBFC Loan. The floating rate $75 million Senior Notes due June 2014 reset as described in Note 9 and have been effectively converted to fixed rate debt using an interest rate swap (the “swap”). As of May 31, 2014, the swap converted the total aggregate notional principal from floating interest rate payments 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 at a rate of 5.11 percent, while simultaneously receiving floating rate interest payments set at 0.23 percent as of May 31, 2014 on the same notional amounts. The fixed rate side of the swap did not change over its life. The floating rate payments reset quarterly based on three month LIBOR. The resets were 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 was 100 percent effective. As of June 30, 2014, the swap ended concurrent with the repayment at maturity of $75 million of principal on the related Senior Notes. The fair values of our various derivative instruments are as follows: FAIR VALUES OF DERIVATIVE INSTRUMENTS (in thousands)
May 31, 2014
|  |  |  |  |  |  |  | Prepaid |  | Accrued |
|  |  |  |  |  |  |  | Expenses |  | Expenses |
|  |  |  | Final |  |  |  | and Other |  | and Other |
|  |  |  | Settlement |  | Notional |  | Current |  | Current |
Designated as hedging instruments |  | Hedge Type |  | Date |  | Amount |  | Assets |  | Liabilities |
Foreign currency contracts - sell Euro |  | Cash flow |  | 10/2014 |  | € | 3,350 |  | $ | 45 |  | $ | - |
Foreign currency contracts - sell Pounds |  | Cash flow |  | 2/2015 |  | £ | 4,500 |  | - |  | 170 |
Interest rate swap |  | Cash flow |  | 6/2014 |  | $ | 75,000 |  | - |  | 301 |
Total fair value |  |  |  |  |  |  |  | $ | 45 |  | $ | 471 |
February 28, 2014
|  |  |  |  |  |  |  | Prepaid |  | Accrued |
|  |  |  |  |  |  |  | Expenses |  | Expenses |
|  |  |  | Final |  |  |  | and Other |  | and Other |
|  |  |  | Settlement |  | Notional |  | Current |  | Current |
Designated as hedging instruments |  | Hedge Type |  | Date |  | Amount |  | Assets |  | Liabilities |
Foreign currency contracts - sell Euro |  | Cash flow |  | 6/2014 |  | € | 2,850 |  | $ | - |  | $ | 89 |
Foreign currency contracts - sell Pounds |  | Cash flow |  | 11/2014 |  | £ | 4,250 |  | - |  | 280 |
Interest rate swap |  | Cash flow |  | 6/2014 |  | $ | 75,000 |  | - |  | 1,227 |
Total fair value |  |  |  |  |  |  |  | $ | - |  | $ | 1,596 |
The pre-tax effect of derivative instruments for the periods covered in this quarterly report 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 |
|  | (effective portion) |  |  | Comprehensive Loss into Income |
|  | 2014 |  |  | 2013 |  |  | Location |  |  | 2014 |  |  | 2013 |
Currency contracts - cash flow hedges |  | $ | 78 |  |  | $ | 36 |  |  | SG&A |  |  | $ | (166 | ) |  | $ | 216 |
Interest rate swaps - cash flow hedges |  | 12 |  |  | (3 | ) |  | Interest expense |  |  | (914 | ) |  | (914 | )
Total |  | $ | 90 |  |  | $ | 33 |  |  |  |  |  | $ | (1,080 | ) |  | $ | (698 | )
We expect net losses of $0.13 million associated with foreign currency contracts and $0.30 million associated with our interest rate swap, currently reported in accumulated other comprehensive loss, to be reclassified into income over the next nine 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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