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Financial Instruments and Risk Management | 3 Months Ended
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May 31, 2017
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 three months ended May 31, 2017, approximately 12% of our net sales revenue was in foreign currencies. During the three months ended May 31, 2016, approximately 14% of our net sales revenue was in foreign currencies. These sales were primarily denominated in British Pounds, Euros, Mexican Pesos and Canadian Dollars. 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 three months ended May 31, 2017, we recorded net foreign exchange gains (losses) from remeasurement, including the impact of foreign currency hedges and cross-currency debt swaps, of $0.6 million in SG&A, and ($0.1) million in income tax expense. For the three months ended May 31, 2016, we recorded net foreign exchange gains (losses) from remeasurement, including the impact of foreign currency hedges and cross-currency debt swaps, of $0.2 million in SG&A. 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. Interest Rate Risk - Interest on our outstanding debt as of May 31, 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 $438.6 million as of May 31, 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 derivative instruments as of the end of the periods shown: FAIR VALUES OF DERIVATIVE INSTRUMENTS
|  | May 31, 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 |  | 5/2018 |  | € | 29,750 |  | $ | - |  | $ | - |  | $ | 995 |  | $ | -
Foreign currency contracts - sell Canadian Dollars |  | Cash flow |  | 6/2018 |  | $ | 20,750 |  |  | 425 |  |  | 15 |  |  | - |  |  | -
Foreign currency contracts - sell Pounds |  | Cash flow |  | 2/2018 |  | £ | 15,250 |  |  | - |  |  | - |  |  | 292 |  |  | -
Foreign currency contracts - sell Mexican Pesos |  | Cash flow |  | 2/2018 |  | $ | 50,000 |  |  | - |  |  | - |  |  | 285 |  |  | -
Subtotal |  |  |  |  |  |  |  |  |  | 425 |  |  | 15 |  |  | 1,572 |  |  | -
Derivatives not designated under hedge accounting |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency contracts - cross-currency debt swaps - Euro |  | (1) |  | 4/2020 |  | $ | 5,280 |  |  | - |  |  | 276 |  |  | - |  |  | -
Foreign currency contracts - cross-currency debt swaps - Pound |  | (1) |  | 4/2020 |  | $ | 6,395 |  |  | - |  |  | - |  |  | - |  |  | 120
Subtotal |  |  |  |  |  |  |  |  |  | - |  |  | 276 |  |  | - |  |  | 120
Total fair value |  |  |  |  |  |  |  |  | $ | 425 |  | $ | 291 |  | $ | 1,572 |  | $ | 120
|  | February 28, 2017
|  |  |  |  |  |  |  |  | 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 |  | € | 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 swap - Euro |  | (1) |  | 1/2018 |  | $ | 10,000 |  |  | 705 |  |  | - |  |  | - |  |  | -
Total fair value |  |  |  |  |  |  |  |  | $ | 2,135 |  | $ | 32 |  | $ | 47 |  | $ | -
| (1) |  | These are foreign currency contracts for which we have not elected hedge accounting. We refer to them as “cross-currency debt swaps”. They in effect adjust the currency denomination of a portion of our outstanding debt to the Euro and British Pound for the notional amounts reported, creating an economic hedge against currency movements.
The following table summarizes the pre-tax effect of derivative instruments for the periods shown: PRE-TAX EFFECT OF DERIVATIVE INSTRUMENTS
|  | Three Months Ended May 31,
|  | 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 |  | $ | (2,245) |  | $ | (1,019) |  | SG&A |  | $ | 302 |  | $ | (158) |  |  |  | $ | - |  | $ | -
Cross-currency debt swaps - principal |  |  | - |  |  | - |  |  |  |  | - |  |  | - |  | SG&A |  |  | (549) |  |  | 52
Total |  | $ | (2,245) |  | $ | (1,019) |  |  |  | $ | 302 |  | $ | (158) |  |  |  | $ | (549) |  | $ | 52
We expect pre-tax net losses of $1.1 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 and cross currency debt swaps, 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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