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Financial Instruments and Risk Management | 3 Months Ended
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May 31, 2016
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 quarters ended May 31, 2016 and 2015, approximately 14 percent of our net sales revenue in each period 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, 2016, we recorded net foreign exchange gains from remeasurement, including the impact of foreign currency hedges and cross-currency debt swaps, of $0.24 million in SG&A, and $0.01 million in income tax expense. For the fiscal quarter ended May 31, 2015, we recorded net foreign exchange gains (losses) from remeasurement, including the impact of foreign currency hedges, of $(0.88) million in SG&A and $0.14 million in income tax expense. 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. D ollar during fiscal year 2016. If China’s currency fluctuates 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, financial condition and results of operations. Venezuelan Bolivar Currency Exchange Uncertainties - In February 2016, the Venezuelan government announced further changes to its foreign currency exchange system. These changes included an immediate devaluation of its official rate, now known as DIPRO, from 6.30 Bolivars per U.S. Dollar to 10.00 Bolivars per U.S. Dollar. The changes also included the dissolution of its previous alternative exchange rate systems, and the institution of a new alternative exchange system known as DICOM governing all other transactions not covered by DIPRO. DICOM replaced SIMADI, which was the lowest rate in the previous exchange system. SIMADI closed at February 29, 2016 at approximately 205 Bolivars per U.S. Dollar. DICOM opened in early March 2016 at approximately 207 Bolivars per U.S. Dollar. As a result of the further devaluation of the official rate, continued economic instability from declines in oil prices and the declaration of an economic emergency, among other factors, we determined that SIMADI was the most appropriate rate to use to re-measure our financial state ments as of February 29, 2016. The determination was further substantiated by the announcement of DICOM as an intended market-based rate, which opened at approximately the same rate as SIMADI shortly aft er the end of our fiscal year. As a result of the adoption of SIMADI, we recorded Venezuelan re-measurement related charges totaling $18.73 million in the fourt h quarter of fiscal year 2016. The Company adopted DICOM in the firs t quarter of fiscal year 2017. Absent further changes in the exchange system, or unless future developments call for further changes, we intend to use DICOM to re-measure our financial statements going forward. At the current DICOM exchange rate, we expect that U.S. Dollar reported operating results from Venezuela will no longer be meaningful to the Company or the Beauty segment. Net sales revenue from Venezuela for the quarter ended May 31, 2016 was $0.23 million compared to $4.11 million for t he quarter ended May 31, 2015. Operating income (loss) from Venezuela for the quarter ended May 31, 2016 was ($0.10) million compared to $1.58 million for the quarter ended May 31, 2015. Developments within the Venezuelan economy, including any future governmental interventions, are beyond our ability to control or predict, and we cannot assess the impacts, if any, such events may have on our Venezuelan business. Interest Rate Risk – Interest on our outstanding debt as of May 31, 2016 is both floating and fixed. Fixed rates are i n 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 $547.94 million as of May 31, 2016. 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, 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 |  | 2/2018 |  | € | 32,250 |  | $ | 547 |  | $ | 175 |  | $ | - |  | $ | -
Foreign currency contracts - sell Canadian Dollars |  | Cash flow |  | 10/2017 |  | $ | 29,250 |  |  | - |  |  | 11 |  |  | 925 |  |  | -
Foreign currency contracts - sell Pounds |  | Cash flow |  | 8/2017 |  | £ | 10,950 |  |  | - |  |  | 13 |  |  | 6 |  |  | -
Foreign currency contracts - sell Australian Dollars |  | Cash flow |  | 2/2017 |  | $ | 3,000 |  |  | - |  |  | - |  |  | 12 |  |  | -
Subtotal |  |  |  |  |  |  |  |  |  | 547 |  |  | 199 |  |  | 943 |  |  | -
Derivatives not designated under hedge accounting |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency contracts - cross-currency debt swaps |  | (1) |  | 1/2018 |  | $ | 10,000 |  |  | - |  |  | 259 |  |  | - |  |  | -
Total fair value |  |  |  |  |  |  |  |  | $ | 547 |  | $ | 458 |  | $ | 943 |  | $ | -
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) |  | We have entered into foreign currency contracts referred to as “cross-currency debt swaps”, which in effect adjusts the currency denomination of our 3.90% Senior Notes due January 2018 to the Euro for the notional amounts reported, creating an economic hedge against currency movements. On these contracts, we have not elected hedge accounting.
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 |  | 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 |  | $ | (1,019) |  | $ | 267 |  | SG&A |  | $ | (158) |  | $ | 119 |  |  |  | $ | - |  | $ | -
Cross-currency debt swaps - principal |  |  | - |  |  | - |  |  |  |  | - |  |  | - |  | SG&A |  |  | 52 |  |  | -
Total |  | $ | (1,019) |  | $ | 267 |  |  |  | $ | (158) |  | $ | 119 |  |  |  | $ | 52 |  | $ | -
We expect pre-tax net losses of $0.40 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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