NOTE 13 – 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 2015, 2014 and 2013, approximately 14, 15 and 15 percent, respectively, 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 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 ($5.72), ($0.95) and ($2.36) million in SG&A and $0.40, ($0.17) and ($0.04) million in income tax expense during fiscal years 2015, 2014 and 2013, respectively.

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.

Chinese Renminbi Currency Exchange Uncertainties - A significant portion of the products we sell are purchased from third-party manufacturers in China. During fiscal years 2015 and 2013, the Chinese Renminbi remained relatively flat against the U.S. Dollar. During fiscal year 2014, the Chinese Renminbi appreciated against the U.S. Dollar approximately 3 percent. While China’s currency intervention strategy with respect to the U.S. Dollar is continuously evolving, we believe that China’s currency may continue to fluctuate against the U.S. Dollar in the short-to-intermediate term, which could result in increased product costs over time.

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 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 February 28, 2015, the SICAD 1 rate was 12 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.

In February 2015, the Venezuelan Government unveiled its latest foreign exchange mechanism known as SIMADI, which replaced the SICAD 2 rate as the lowest rate in Venezuela’s three-tier foreign exchange system. Under the latest program, SICAD 1 (now referred to as “SICAD”) is still being used in limited circumstances, which we believe preclude us from accessing such rates if we chose to do so. SIMADI is a somewhat less restrictive auction system whose value is determined by market forces. SIMADI is currently under a trial period and accounts for a small percentage of Venezuelan’s foreign exchange. At February 28, 2015, the SIMADI rate was approximately 177 Bolivars to the U.S. Dollar.

Despite the recent changes made by the Venezuelan government, there remains a significant degree of uncertainty as to which exchange markets might be available to the Company. To date, we have not gained access to U.S. Dollars in Venezuela through either SICAD or SIMADI mechanisms. As of February 28, 2015, these auctions had not eliminated or changed 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 or SIMADI. 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 years 2015, 2014 and 2013 sales in Venezuela represented approximately 0.7, 0.6 and 0.6 percent, respectively, of the Company’s consolidated net sales revenue. At February 28, 2015 and 2014, we had a U.S. Dollar based net investment in our Venezuelan business of $10.38 and $7.35 million, respectively, consisting almost entirely of working capital.

Developments within the Venezuelan economy, including any future governmental interventions, are beyond our ability to control or predict, and we cannot assess 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.

Interest Rate Risk – Interest on our outstanding debt as of February 28, 2015 is both floating and fixed. Fixed rates are in place on $60 million of Senior Notes at 3.90 percent and floating rates are in place on the balance of all other debt outstanding, which totaled $373.21 million as of February 28, 2015. If short-term interest rates increase, we will incur higher interest rates on any future outstanding balances under our Credit Agreement and MFBC Loan.

At February 28, 2014, floating rate $75 million Senior Notes due June 2014 had been effectively converted to fixed rate debt using an interest rate swap (the “swap”). The swap converted the total aggregate notional principal from floating interest rate payments to fixed interest rate payments at 6.01 percent. 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 following table summarizes the fair values of our various derivative instruments at the end of fiscal years 2015 and 2014:

FAIR VALUES OF DERIVATIVE INSTRUMENTS

(in thousands)

February 28, 2015

Prepaid

Accrued

Expenses

Final

and Other

Settlement

Notional

Current

Designated as hedging instruments

Hedge Type

Date

Amount

Assets

Liabilities

Foreign currency contracts - sell Euro

Cash flow

1/2016

€

10,000

129

Foreign currency contracts - sell Pounds

Cash flow

2/2016

6,900

240

Total fair value

129

240

February 28, 2014

Prepaid

Accrued

Expenses

Final

and Other

Settlement

Notional

Current

Designated as hedging instruments

Hedge Type

Date

Amount

Assets

Liabilities

Foreign currency contracts - sell Euro

Cash flow

6/2014

€

2,850

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 fiscal years 2015 and 2014 is as follows:

PRE-TAX EFFECT OF DERIVATIVE INSTRUMENTS


	Fiscal Years Ended the Last Day of February
	Gain / (Loss)				Gain / (Loss) Reclassified
	Recognized in OCI				from Accumulated Other
	(effective portion)				Comprehensive Income (Loss) into Income
	2015		2014		Location	2015		2014
Currency contracts - cash flow hedges	$	434	$	(962)	SG&A	$	176	$	(98)
Interest rate swaps - cash flow hedges		28		(111)	Interest expense		(1,199)		(3,707)
Total	$	462	$	(1,073)		$	(1,023)	$	(3,805)

We expect net losses of $0.11 million associated with foreign currency contracts currently reported in accumulated other comprehensive income (loss), to be reclassified into income over the next twelve months. The amount ultimately realized, however, will differ as exchange rates change and the underlying contracts settle. See Notes (1), (12) and (18) 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.