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 nine months ended November 30, 2018 and 2017, approximately 13% of our net sales revenue was in foreign currencies, respectively. These sales were primarily denominated in Euros, Canadian Dollars, British Pounds, and Mexican Pesos.

In our condensed 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. During the three and nine months ended November 30, 2018, we recorded net foreign exchange gains (losses) from remeasurement, including the impact of foreign currency hedges and cross-currency debt swaps of $0.3 million and $(0.8) million, respectively, in SG&A, and $0.0 million and $0.5 million, respectively, in income tax expense. For the three and nine months ended November 30, 2017, we recorded net foreign exchange gains (losses) from remeasurement, including the impact of foreign currency hedges and cross-currency debt swaps, of $(2.2) million and $(1.5) million, respectively, in SG&A and $(0.1) million and $(0.7) million, respectively, 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 manage 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 November 30, 2018 is based on floating interest rates. If short-term interest rates increase, we will incur higher interest expense on any future outstanding balances of floating rate debt. Floating interest rates are hedged with an interest rate swap to effectively fix interest rates on $100.0 million of the outstanding principal balance under the Credit Agreement, which totaled $320.4 million (excluding prepaid finance fees) as of November 30, 2018.

The following table summarizes the fair values of our derivative instruments as of the end of the periods shown:



(in thousands)	November 30, 2018
Derivatives designated as hedging instruments	Hedge Type	Final Settlement Date	Notional Amount		Prepaid Expenses and Other Current Assets		Other Assets		Accrued Expenses and Other Current Liabilities		Other Liabilities, Non-current
Foreign currency contracts - sell Euro	Cash flow	11/2019	€	20,500	$	1,759	$	—	$	—	$	—
Foreign currency contracts - sell Canadian Dollars	Cash flow	01/2020	$	16,000	477		26		—		—
Foreign currency contracts - sell Pounds	Cash flow	02/2020	£	18,500	1,490		81		—		—
Foreign currency contracts - sell Mexican Pesos	Cash flow	09/2019	$	40,000	39		—		—		—
Interest rate swap	Cash flow	12/2021	$	100,000	901		1,652		—		—
Subtotal					4,666		1,759		—		—

Derivatives not designated under hedge accounting
Foreign currency contracts - cross-currency debt swap - Euro	(1)	04/2020	$	5,280	—		185		—		—
Foreign currency contracts - cross-currency debt swaps - Pound	(1)	04/2020	$	6,395	—		—		—		64
Subtotal					—		185		—		64
Total fair value					$	4,666	$	1,944	$	—	$	64



(in thousands)	February 28, 2018
Derivatives designated as hedging instruments	Hedge Type	Final Settlement Date	Notional Amount		Prepaid Expenses and Other Current Assets		Other Assets		Accrued Expenses and Other Current Liabilities		Other Liabilities, Non-current
Foreign currency contracts - sell Euro	Cash flow	07/2019	€	38,000	$	—	$	102	$	1,320	$	—
Foreign currency contracts - sell Canadian Dollars	Cash flow	06/2019	$	27,750	378		101		—		—
Foreign currency contracts - sell Pounds	Cash flow	04/2019	£	19,500	—		56		513		—
Foreign currency contracts - sell Mexican Pesos	Cash flow	05/2018	$	20,000	5		—		—		—
Interest rate swap	Cash flow	12/2021	$	100,000	539		1,942		—		—
Subtotal					922		2,201		1,833		—
Derivatives not designated under hedge accounting
Foreign currency contracts - cross-currency debt swap - Euro	(1)	04/2020	$	5,280	—		—		—		208
Foreign currency contracts - cross-currency debt swaps - Pound	(1)	04/2020	$	6,395	—		—		—		565
Subtotal					—		—		—		773
Total fair value					$	922	$	2,201	$	1,833	$	773


(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, as applicable, 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:



	Three Months Ended November 30,
	Gain (Loss) Recognized in OCI (effective portion)					Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income						Gain (Loss) Recognized As Income
(in thousands)	2018			2017		Location	2018			2017		Location	2018		2017
Currency contracts - cash flow hedges	$	(563	)	$	2,928	SG&A	$	(1,178	)	$	1,328		$	—	$	—
Interest rate swaps - cash flow hedges	(4		)	753		Interest expense	—			—		Interest expense	136		(48		)
Cross-currency debt swaps - principal	—			—			—			—		SG&A	228		(419		)
Cross-currency debt swaps - interest	—			—			—			—		Interest Expense	73		74
Total	$	(567	)	$	3,681		$	(1,178	)	$	1,328		$	437	$	(393	)



	Nine Months Ended November 30,
	Gain (Loss) Recognized in OCI (effective portion)					Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income						Gain (Loss) Recognized As Income
(in thousands)	2018		2017			Location	2018			2017		Location	2018		2017
Currency contracts - cash flow hedges	$	3,962	$	(1,275	)	SG&A	$	(1,101	)	$	2,208		$	—	$	—
Interest rate swaps - cash flow hedges	72		753			Interest expense	—			—		Interest expense	347		(48		)
Cross-currency debt swaps - principal	—		—				—			—		SG&A	894		(1,183		)
Cross-currency debt swaps - interest	—		—				—			—		Interest Expense	147		74
Total	$	4,034	$	(522	)		$	(1,101	)	$	2,208		$	1,388	$	(1,157	)

We expect pre-tax net gains of $4.7 million associated with foreign currency contracts and interest rate swaps 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 vary 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.