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- and six-months ended August 31, 2017, approximately 12% and 13%, respectively, of our net sales revenue was in foreign currencies. During the three- and six-months ended August 31, 2016, approximately 11% and 12%, respectively, 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- and six-months ended August 31, 2017, we recorded net foreign exchange gains (losses) from remeasurement, including the impact of foreign currency hedges and cross-currency debt swaps, of $0.1 and $0.7 million, respectively, in SG&A, and $(0.5) and $(0.6) million, respectively, in income tax expense. For the three- and six-months ended August 31, 2016, we recorded net foreign exchange gains (losses) from remeasurement, including the impact of foreign currency hedges and cross-currency debt swaps, of ($0.7) and ($0.5) million, respectively, in SG&A, and $0.1 million in income tax expense for both periods.

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 August 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 $428.7 million as of August 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


	August 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	12/2018	€	36,500	$	-	$	-	$	2,283	$	2
Foreign currency contracts - sell Canadian Dollars	Cash flow	12/2018	$	27,000		-		-		719		23
Foreign currency contracts - sell Pounds	Cash flow	8/2018	£	15,500		-		-		174		-
Foreign currency contracts - sell Mexican Pesos	Cash flow	5/2018	$	70,000		-		-		467		-
Subtotal						-		-		3,643		25

Derivatives not designated under hedge accounting
Foreign currency contracts - cross-currency debt swaps - Euro	(1)	4/2020	$	5,280		-		19		-		-
Foreign currency contracts - cross-currency debt swaps - Pound	(1)	4/2020	$	6,395		-		-		-		78
Subtotal						-		19		-		78
Total fair value					$	-	$	19	$	3,643	$	103


	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 August 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	$	(1,958)	$	1,289	SG&A	$	578	$	141		$	-	$	-
Cross-currency debt swaps - principal		-		-			-		-	SG&A		(215)		(17)
Cross-currency debt swaps - interest		-		-			-		-	Interest Expense		-		35
Total	$	(1,958)	$	1,289		$	578	$	141		$	(215)	$	18


	Six Months Ended August 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	$	(4,203)	$	270	SG&A	$	880	$	(17)		$	-	$	-
Cross-currency debt swaps - principal		-		-			-		-	SG&A		(764)		35
Cross-currency debt swaps - interest		-		-			-		-	Interest Expense		-		35
Total	$	(4,203)	$	270		$	880	$	(17)		$	(764)	$	70

We expect pre-tax net losses of $3.6 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.