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Financial Instruments and Risk Management | 9 Months Ended
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Nov. 30, 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 and year-to-date periods ended November 30, 2015, approximately 16 and 15 percent, respectively, of our net sales revenue was in foreign currencies. During both the fiscal quarter and year-to-date periods ended November 30, 2014, 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, 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 and year-to-date ended November 30, 2015, we recorded net foreign exchange gains (losses) from remeasurement, including the impact of foreign currency hedges and cross-currency debt swaps, of ($0.44) and ($2.54) million, respectively, in SG&A, and $0.27 and $0.33 million, respectively, in income tax expense. For the fiscal quarter and year-to-date ended November 30, 2014, we recorded net foreign exchange gains (losses) from remeasurement, including the impact of foreign currency hedges, of ($2.21) and ($3.34) million, respectively, in SG&A and $0.18 and $0.28 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 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. 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. During the second quarter of fiscal year 2016, the Chinese Renminbi devalued by approximately 4.4 percent against the U.S. Dollar. During the third quarter of fiscal year 2016, the Chinese Renminbi remained relatively flat against the U.S. Dollar. 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. Accordingly, 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, financial condition and results of operations. 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. Since that time, Venezuela has undergone numerous changes and additions to its currency exchange regimes, but has not eliminated or changed the official rate of 6.30 Bolivars per U.S. Dollar. In March 2013, the Venezuelan government announced an additional complementary auction-based exchange rate mechanism now known as SICAD, which was made available to certain companies that operate in designated industries. SICAD is being used in limited circumstances, which we believe preclude us from accessing such rates. At November 30, 2015, the SICAD rate was 13.50 Boliv ars to the U.S. Dollar. In February 2015, the Venezuelan government unveiled its latest foreign exchange mechanism known as SIMADI, which is the lowest rate in its current three-tier foreign exchange system. SIMADI is a somewhat less restrictive auction system whose value is determined by market forces. We believe a number of circumstances preclude us from accessing SIMADI. At November 30, 2015, the SIMADI rate was approximately 200 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. 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 November 30, 2015 and 2014, sales in Venezuela represented approximately 1.6 and 0.9 percent, respectively, of the Company’s consolidated net sales revenue. For the fiscal year-to-date periods ended November 30, 2015 and 2014, sales in Venezuela represented approximately 1.5 and 0.8 percent, respectively, of the Company’s consolidated net sales revenue. For the fiscal quarters ended November 30, 2015 and 2014, operating income in Venezuela was approximately $3.12 and $1.19 million, respectively. For the fiscal year-to-date periods ended November 30, 2015 and 2014, operating income in Venezuela was approximately $6.44 and $2.50 million, respectively. At November 30, 2015, we had a U.S. Dollar based net investment in our Venezuelan business of $16.49 million, consisting almost entirely of working capital. A devaluation in the Venezuela official exchange rate could have a material adverse impact on the reported U.S. Dollar value of this investment and the future profitability of our business there. Developments within the Venezuelan economy, including any future governmental interventions, are beyond our ability to control or predict. W e cannot assess impacts, if any, such events may have on our Venezuelan business. We continue to closely monitor the applicability and viability of the various exchange mechanisms. Interest Rate Risk – Interest on our outstanding debt as of November 30, 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 $414.71 million as of November 30, 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)
|  | November 30, 2015
|  |  |  |  |  |  |  |  | Prepaid |  |  |  | Accrued
|  |  |  |  |  |  |  |  | Expenses |  |  |  | Expenses
|  |  |  | Final |  |  |  |  | and Other |  |  |  | and Other
|  |  |  | Settlement |  | Notional |  | Current |  | Other |  | Current
Derivatives designated as hedging instruments |  | Hedge Type |  | Date |  | Amount |  | Assets |  | Assets |  | Liabilities
Foreign currency contracts - sell Canadian Dollars |  | Cash flow |  | 8/2016 |  | $ | 8,250 |  | $ | 387 |  | $ | - |  | $ | -
Foreign currency contracts - sell Euro |  | Cash flow |  | 2/2017 |  | € | 23,250 |  |  | 1,511 |  |  | 147 |  |  | -
Foreign currency contracts - sell Pounds |  | Cash flow |  | 2/2016 |  | £ | 3,000 |  |  | - |  |  | - |  |  | 7
Subtotal |  |  |  |  |  |  |  |  |  | 1,898 |  |  | 147 |  |  | 7
Derivatives not designated under hedge accounting |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency contracts - cross-currency debt swap |  | (1) |  | 1/2018 |  | $ | 5,000 |  |  | - |  |  | 324 |  |  | -
Total fair value |  |  |  |  |  |  |  |  | $ | 1,898 |  | $ | 471 |  | $ | 7
(1) During the fiscal quarter ended November 30, 2015 we entered into a foreign currency contract referred to above as 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.
| (1) |  |
|  | February 28, 2015
|  |  |  |  |  |  |  |  | Prepaid |  |  |  | Accrued
|  |  |  |  |  |  |  |  | Expenses |  |  |  | Expenses
|  |  |  | Final |  |  |  |  | and Other |  |  |  | and Other
|  |  |  | Settlement |  | Notional |  | Current |  | Other |  | Current
Derivatives designated as hedging instruments |  | Hedge Type |  | Date |  | Amount |  | Assets |  | 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 November 30,
|  | Gain / (Loss) |  | Gain / (Loss) Reclassified |  |
|  | Recognized in OCI |  | from Accumulated Other |  | Gain / (Loss) Recognized
|  | (effective portion) |  | Comprehensive Income (Loss) into Income |  | As Income
|  | 2015 |  | 2014 |  | Location |  | 2015 |  | 2014 |  | Location |  | 2015 |  | 2014
Currency contracts - cash flow hedges |  | $ | 1,841 |  | $ | 301 |  | SG&A |  | $ | 263 |  | $ | 201 |  |  |  | $ | - |  | $ | -
Interest rate swaps - cash flow hedges |  |  | - |  |  | - |  |  |  |  | - |  |  | - |  |  |  |  | - |  |  | -
Currency contracts - cross-currency debt swaps |  |  | - |  |  | - |  |  |  |  | - |  |  | - |  | SG&A |  |  | 324 |  |  | -
Total |  | $ | 1,841 |  | $ | 301 |  |  |  | $ | 263 |  | $ | 201 |  |  |  | $ | 324 |  | $ | -
|  | Nine Months Ended November 30,
|  | Gain / (Loss) |  | Gain / (Loss) Reclassified |  |
|  | Recognized in OCI |  | from Accumulated Other |  | Gain / (Loss) Recognized
|  | (effective portion) |  | Comprehensive Income (Loss) into Income |  | As Income
|  | 2015 |  | 2014 |  | Location |  | 2015 |  | 2014 |  | Location |  | 2015 |  | 2014
Currency contracts - cash flow hedges |  | $ | 2,653 |  | $ | 515 |  | SG&A |  | $ | 503 |  | $ | (15) |  |  |  | $ | - |  | $ | -
Interest rate swaps - cash flow hedges |  |  | - |  |  | 28 |  | Interest expense |  |  | - |  |  | (1,199) |  |  |  |  | - |  |  | -
Currency contracts - cross-currency debt swaps |  |  | - |  |  | - |  |  |  |  | - |  |  | - |  | SG&A |  |  | 324 |  |  | -
Total |  | $ | 2,653 |  | $ | 543 |  |  |  | $ | 503 |  | $ | (1,214) |  |  |  | $ | 324 |  | $ | -
We expect net gains of $1.89 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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