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 fiscal 2017, 2016 and 2015, approximately 12%, 14% and 14%, 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 $0.5, ($3.1) and ($5.7) million in SG&A during fiscal 2017, 2016 and 2015, respectively.

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. The effective portion of the changes in fair value of these instruments is reported in OCI and reclassified into SG&A in the same period they are settled. The ineffective portion, which is not material for any year presented, is immediately recognized in SG&A.

Interest Rate Risk – Interest on our outstanding debt as of February 28, 2017 is both floating and fixed. Fixed rates are in place on $20 million of Senior Notes at 3.9% and floating rates are in place on the balance of all other debt outstanding, which totaled $470.7 million as of February 28, 2017. 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 2017 and 2016:

FAIR VALUES OF DERIVATIVE INSTRUMENTS


	February 28, 2017
					Prepaid				Accrued
					Expenses				Expenses
		Final			and Other				and Other		Other
(in thousands)		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	€	27,500	$	727	$	-	$	-	$	-
Foreign currency contracts - sell Canadian Dollars	Cash flow	6/2018	$	26,000		155		32		-		-
Foreign currency contracts - sell Pounds	Cash flow	2/2018	£	13,500		548		-		-		-
Foreign currency contracts - sell Mexican Pesos	Cash flow	2/2018	$	59,600		-		-		47		-
Subtotal						1,430		32		47		-

Derivatives not designated under hedge accounting
Foreign currency contracts - cross-currency debt swaps	(1)	1/2018	$	10,000		705		-		-		-
Total fair value					$	2,135	$	32	$	47	$	-

(1)

We have entered into foreign currency contracts referred to as “cross-currency deb swaps”, which in effect adjusts the currency denomination of our 3.9% 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.


	February 29, 2016
					Prepaid				Accrued
					Expenses				Expenses
		Final			and Other				and Other		Other
(in thousands)		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

The pre-tax effect of derivative instruments for fiscal 2017 and 2016 is as follows:

PRE-TAX EFFECT OF DERIVATIVE INSTRUMENTS


	Fiscal Years Ended the Last Day of February,
	Gain / (Loss)				Gain / (Loss) Reclassified from
	Recognized in OCI				Accumulated Other Comprehensive					Gain / (Loss) Recognized
	(effective portion)				Income (Loss) into Income					As Income
(in thousands)	2017		2016		Location	2017		2016		Location	2017		2016
Currency contracts - cash flow hedges	$	2,205	$	1,978	SG&A	$	1,454	$	1,203		$	-	$	-
Interest rate swaps - cash flow hedges		-		-	Interest expense		-		-			-		-
Cross-currency debt swaps - principal		-		-			-		-	SG&A		499		206
Cross-currency debt swaps - interest		-		-			-		-	Interest Expense		90		11
Total	$	2,205	$	1,978		$	1,454	$	1,203		$	589	$	217

We expect net gains of $1.4 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. 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, 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 2017 and 2016:

CASH AND CASH EQUIVALENTS


	February 28, 2017			February 29, 2016
	Carrying		Range of	Carrying		Range of
(in thousands)	Amount		Interest Rates	Amount		Interest Rates
Cash, interest and non-interest-bearing accounts	$	20,376	0.00 to 0.35%	$	13,836	0.00 to 0.50%
Money market funds		2,711	0.18 to 0.19%		211,964	0.11 to 0.19%
Total cash and cash equivalents	$	23,087		$	225,800

Our money market balance at the end of fiscal 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.