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Financial Instruments and Risk Management | 3 Months Ended
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May. 31, 2015
Financial Instruments and Risk Management |
Financial Instruments and Risk Management | 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. During the fiscal quarter s ended May 31, 2015 and 2014, approximately 14 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, and Venezuelan Bolivars. We make most of our inventory purchases from the Far East and primarily 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 of the balance sheet are recognized in SG&A. For the fiscal quarter ended May 31, 2015, we recorded net foreign exchange losses, including the impact of currency hedges, of $0.88 million in SG&A and gains of $0.14 million in income tax expense. For the fiscal quarter ended May 31, 2014, we recorded net foreign exchange losses, including the impact of currency hedges, of $0.03 million in SG&A and gains of $0.04 million 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. Chinese Renminbi Currency Exchange Uncertainties - A significant portion of the products we sell are purchased from third-party manufacturers in China. During fiscal year 2015 and through the end of our first quarter in fiscal year 2016, the Chinese Renminbi remained relatively flat against the U.S. Dollar. However, China’s currency intervention strategy with respect to the U.S. Dollar is continuously evolving. If China’s currency begins to fluctuate against the U.S. Dollar in the short-to-intermediate term, our product costs could increase 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 ra te mechanism known as SICAD 1. SICAD 1 was made available to certain companies that operate in designated i ndustry sectors. At May 31, 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. D ollars 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 Venezuela’s foreign exchange. At May 31, 2015, the SIMADI rate was approximately 199 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, nor do we intend to do so. As of May 31, 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 quarters ended May 31, 2015 and 2014, sales in Venezuela represented approximately 1.2 and 0.6 percent, respectively, of the Company’s consolidated net sales revenue. At May 31, 2015, we had a U.S. Dollar based net investment in our Venezuelan business of $11.60 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, 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 May 31, 2015 is both floating and fixed. Fixed rates are in place on $60 million of 3.90% Senior Notes due January 2018, while floating rates are in place on the balance of all other debt outstanding, which totaled $378.81 million as of May 31, 2015. If short-term interest rates increase, we will incur higher interest rates on any outstanding balances under our Credit Agreement and the MBFC Loan. The fair values of our derivative instruments are as follows: FAIR VALUES OF DERIVATIVE INSTRUMENTS (in thousands)
|  | May 31, 2015
|  |  |  |  |  |  |  |  | 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 Canadian Dollars |  | Cash flow |  | 2/2016 |  | $ | 13,250 |  | $ | 143 |  | $ | -
Foreign currency contracts - sell Euro |  | Cash flow |  | 2/2016 |  | € | 11,000 |  |  | 15 |  |  | -
Foreign currency contracts - sell Pounds |  | Cash flow |  | 2/2016 |  | £ | 5,700 |  |  | - |  |  | 121
Total fair value |  |  |  |  |  |  |  |  | $ | 158 |  | $ | 121
|  | February 28, 2015
|  |  |  |  |  |  |  |  | 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 |  | 1/2016 |  | € | 10,000 |  | $ | 129 |  | $ | -
Foreign currency contracts - sell Pounds |  | Cash flow |  | 2/2016 |  | £ | 6,900 |  |  | - |  |  | 240
Total fair value |  |  |  |  |  |  |  |  | $ | 129 |  | $ | 240
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 Income (Loss) into Income |
|  | 2015 |  | 2014 |  | Location |  | 2015 |  | 2014 |
Currency contracts - cash flow hedges |  | $ | 267 |  | $ | 78 |  | SG&A |  | $ | 119 |  | $ | (166) |
Interest rate swaps - cash flow hedges |  |  | - |  |  | 12 |  | Interest expense |  |  | - |  |  | (914) |
Total |  | $ | 267 |  | $ | 90 |  |  |  | $ | 119 |  | $ | (1,080) |
We expect net gains of $0.04 million associated with foreign currency contracts currently reported in accumulated other comprehensive income, 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. Counterparty Credit Risk - Financial instruments, including foreign currency contracts, 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 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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