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FINANCIAL INSTRUMENTS AND RISK MANAGEMENT | 12 Months Ended
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Feb. 29, 2016
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 2016, 2015 and 2014, approximately 14, 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 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 exchange gains (losses) from foreign currency fluctuations, including the impact of currency hedges and the cross-currency debt swap, of ($3.14), ($5.72) and ($0.95) million in SG&A and $(0.10), $0.40 and ($0.17) million in income tax expense during fiscal years 2016, 2015 and 2014, respectively. As further discussed in Note (2), we also recorded charges of $18.73 million in fiscal year 2016 due to a change in the rate used to re-measure our Venezuelan financial statements as of February 29, 2016 from the official exchange rate of 6.3 Bolivars per U.S. Dollar to the SIMADI rate of approximately 205 Bolivars per U.S. Dollar. We hedge against certain foreign currency exchange rate-risk by using a series of forward contracts designated as cash flow hedges and mark-to-market derivatives 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. The Chinese Renminbi has fluctuated against the U.S. Dollar in recent years, devaluing by approximately 6 percent against the U.S. Dollar during fiscal year 2016. If China’s currency continues to fluctuate against the U.S. Dollar in the short-to-intermediate term, we cannot accurately predict the impact of those fluctuations on our results of operations. There can be no assurance that foreign exchange rates will be stable in the future or that fluctuations in Chinese foreign currency markets will not have a material adverse effect on our business, results of operations and financial condition. Interest Rate Risk – Interest on our outstanding debt as of February 29, 2016 is both floating and fixed. Fixed rates are in place on $40 million of Senior Notes at 3.90% and floating rates are in place on the balance of all other debt outstanding, which totaled $583.91 million as of February 29, 2016. If short-term interest rates increase, we will incur higher interest rates on any future outstanding balances of floating rate debt. The following table summarizes the fair values of our various derivative instruments at the end of fiscal years 2016 and 2015: FAIR VALUES OF DERIVATIVE INSTRUMENTS (in thousands)
|  | February 29, 2016
|  |  |  |  |  |  |  |  | Prepaid |  |  |  | Accrued |  |  |
|  |  |  |  |  |  |  |  | Expenses |  |  |  | Expenses |  |
|  |  |  | Final |  |  |  |  | and Other |  |  |  | and Other |  | Other
|  |  |  | Settlement |  | Notional |  | Current |  | Other |  | Current |  | Liabilities,
Derivatives designated as hedging instruments |  | Hedge Type |  | Date |  | Amount |  | Assets |  | Assets |  | Liabilities |  | Non-current
Foreign currency contracts - sell Euro |  | Cash flow |  | 2/2017 |  | € | 27,000 |  | $ | 1,066 |  | $ | - |  | $ | - |  | $ | -
Foreign currency contracts - sell Canadian Dollars |  | Cash flow |  | 6/2017 |  | $ | 28,000 |  |  | - |  |  | - |  |  | 495 |  |  | 7
Foreign currency contracts - sell Pounds |  | Cash flow |  | 2/2017 |  | £ | 3,450 |  |  | 94 |  |  | - |  |  | - |  |  | -
Foreign currency contracts - sell Australian Dollars |  | Cash flow |  | 8/2016 |  | $ | 1,650 |  |  | 6 |  |  | - |  |  | - |  |  | -
Subtotal |  |  |  |  |  |  |  |  |  | 1,166 |  |  | - |  |  | 495 |  |  | 7
Derivatives not designated under hedge accounting |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency contracts - cross-currency debt swap |  | (1) |  | 1/2018 |  | $ | 5,000 |  |  | - |  |  | 206 |  |  | - |  |  | -
Total fair value |  |  |  |  |  |  |  |  | $ | 1,166 |  | $ | 206 |  | $ | 495 |  | $ | 7
| (1) |  | During fiscal year 2016 we entered into a cross-currency debt swap, which in effect adjusts the currency denomination of $5 million of our 3.90% Senior Notes due January 2018 to the Euro, creating an economic hedge against currency movements. On this contract, we have not elected hedge accounting.
|  | February 28, 2015
|  |  |  |  |  |  |  |  | Prepaid |  |  |  | Accrued |  |  |
|  |  |  |  |  |  |  |  | Expenses |  |  |  | Expenses |  |
|  |  |  | Final |  |  |  |  | and Other |  |  |  | and Other |  | Other
|  |  |  | Settlement |  | Notional |  | Current |  | Other |  | Current |  | Liabilities,
Derivatives designated as hedging instruments |  | Hedge Type |  | Date |  | Amount |  | Assets |  | Assets |  | Liabilities |  | Non-current
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 fiscal years 2016 and 2015 is as follows: PRE-TAX EFFECT OF DERIVATIVE INSTRUMENTS (in thousands)
|  | Fiscal Years Ended the Last Day of February,
|  | Gain / (Loss) |  | Gain / (Loss) Reclassified |  |
|  | Recognized in OCI |  | from Accumulated Other |  | Gain / (Loss) Recognized
|  | (effective portion) |  | Comprehensive Income (Loss) into Income |  | As Income
|  | 2016 |  | 2015 |  | Location |  | 2016 |  | 2015 |  | Location |  | 2016 |  | 2015
Currency contracts - cash flow hedges |  | $ | 1,978 |  | $ | 434 |  | SG&A |  | $ | 1,203 |  | $ | 176 |  |  |  | $ | - |  | $ | -
Interest rate swaps - cash flow hedges |  |  | - |  |  | 28 |  | Interest expense |  |  | - |  |  | (1,199) |  |  |  |  | - |  |  | -
Cross-currency debt swaps - principal |  |  | - |  |  | - |  |  |  |  | - |  |  | - |  | SG&A |  |  | 206 |  |  | -
Cross-currency debt swaps - interest |  |  | - |  |  | - |  |  |  |  | - |  |  | - |  | Interest Expense |  |  | 11 |  |  | -
Total |  | $ | 1,978 |  | $ | 462 |  |  |  | $ | 1,203 |  | $ | (1,023) |  |  |  | $ | 217 |  | $ | -
We expect net gains of $0.67 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), (11) and (17) to these consolidated financial statements for more information on our hedging activities. Counterparty Credit Risk – Financial instruments, including foreign currency contracts, cross-currency debt swaps 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 – As the levels of our cash and cash equivalents change, they can become more subject to foreign exchange rate risk, interest rate risk, credit risk, and liquidity risk. Cash consists of interest-bearing, non-interest-bearing and short-term investment accounts. We consider money market accounts, which at February 29, 2016 primarily held short-term U.S. treasury obligations, to be cash equivalents. The following table summarizes our cash and cash equivalents at the end of fiscal years 2016 and 2015: CASH AND CASH EQUIVALENTS (in thousands)
|  | February 29, 2016 |  | February 28, 2015
|  | Carrying |  | Range of |  | Carrying |  | Range of
|  | Amount |  | Interest Rates |  | Amount |  | Interest Rates
Cash, interest and non-interest-bearing accounts - unrestricted |  | $ | 13,826 |  | 0.00 to 0.50% |  | $ | 9,877 |  | 0.00 to 0.65%
Cash, interest and non-interest-bearing accounts - restricted |  |  | 10 |  | 0.00% |  |  | 726 |  | 0.00 to 0.50%
Money market funds |  |  | 211,964 |  | 0.11 to 0.19% |  |  | 1,692 |  | 0.18 to 0.31%
Total cash and cash equivalents |  | $ | 225,800 |  |  |  | $ | 12,295 |  |
Our money market balance at the end of fiscal year 2016 includes $210 million drawn shortly before the end of the fiscal year, in order to facilitate the closing of the Hydro Flask acquisition in March 2016. Our cash balances at the end of fiscal years 2016 and 2015 include restricted cash of $0.01 and $0.73 million, respectively, denominated in Venezuelan Bolivars, shown above under the heading “Cash, interest and non-interest-bearing accounts - restricted.” The balances arise from our operations within the Venezuelan market. 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. As discussed previously, at the end of fiscal year 2016 we re-measured our restricted cash using the SIMADI exchange rate of 205 Bolivars per U.S. Dollar.

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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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