Financial Instruments and Risk Management

3 Months Ended

May 31, 2020

Financial Instruments, Owned, at Fair Value [Abstract]

Financial Instruments and Risk Management

Note 15 - 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 month periods ended May 31, 2020 and 2019, approximately 15% and 12% of our net sales revenue was in foreign currency, respectively. These sales were primarily denominated in Euros, British Pounds, Canadian Dollars and Mexican Pesos. We make most of our inventory purchases from the Far East and primarily use the U.S. Dollar for such purchases. 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. We recorded net exchange gains (losses) from foreign currency fluctuations, including the impact of currency hedges and cross-currency debt swaps, of $(1.7) million and $0.8 million in SG&A during the three months ended May 31, 2020 and 2019, respectively.

We hedge against certain foreign currency exchange rate-risk by using a series of forward contracts and zero-cost collars 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 May 31, 2020 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 interest rate swaps to effectively fix interest rates on $225.0 million of the outstanding principal balance under the Credit Agreement, which totaled $311.0 million (excluding prepaid finance fees) as of May 31, 2020.

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


(in thousands)	May 31, 2020
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
Zero-cost collar - Euro	Cash flow	02/2021	€	6,500	$	58	$	—	$	—	$	—
Foreign currency contracts - sell Euro	Cash flow	02/2022	€	34,125	708		102		—		—
Foreign currency contracts - sell Canadian Dollar	Cash flow	09/2021	$	21,250	310		—		—		47
Zero-cost collar - Pound	Cash flow	02/2021	£	5,500	69		—		—		—
Foreign currency contracts - sell Pound	Cash flow	02/2022	£	15,935	945		181		—		—
Foreign currency contracts - sell Mexican Peso	Cash flow	08/2020	$	10,000	—		—		45		—
Foreign currency contracts - sell Australian Dollar	Cash flow	08/2020	$	1,000	—		—		18		—
Interest rate swaps	Cash flow	01/2024	$	225,000	—		—		5,045		9,078
Subtotal					2,090		283		5,108		9,125

Derivatives not designated under hedge accounting
Foreign currency contracts - cross-currency debt swaps - Euro	(1)	04/2022	€	6,000	—		—		—		237
Foreign currency contracts - cross-currency debt swaps - Pound	(1)	04/2022	£	4,500	—		—		—		53
Subtotal					—		—		—		290
Total fair value					$	2,090	$	283	$	5,108	$	9,415


(in thousands)	February 29, 2020
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
Zero-cost collar - Euro	Cash flow	02/2021	€	8,000	$	74	$	—	$	—	$	—
Foreign currency contracts - sell Euro	Cash flow	05/2021	€	25,875	837		—		—		15
Foreign currency contracts - sell Canadian Dollar	Cash flow	02/2021	$	14,000	202		—		—		—
Zero-cost collar - Pound	Cash flow	02/2021	£	6,500	—		—		144		—
Foreign currency contracts - sell Pound	Cash flow	05/2021	£	13,000	435		23		—		—
Foreign currency contracts - sell Mexican Peso	Cash flow	05/2020	$	10,000	12		—		—		—
Interest rate swaps	Cash flow	01/2024	$	225,000	—		—		3,489		7,228
Subtotal					1,560		23		3,633		7,243

Derivatives not designated under hedge accounting
Foreign currency contracts - cross-currency debt swaps - Euro	(1)	04/2020	€	4,400	473		—		—		—
Foreign currency contracts - cross-currency debt swaps - Pound	(1)	04/2020	£	5,000	27		—		—		—
Subtotal					500		—		—		—
Total fair value					$	2,060	$	23	$	3,633	$	7,243

(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 May 31,
	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)	2020		2019		Location	2020		2019		Location	2020		2019
Currency contracts - cash flow hedges	$	74	$	(186)	SG&A	$	(765)	$	(1,218)		$	—	$	—
Interest rate swaps - cash flow hedges	(3,407)		(5,200)		Interest expense	—		—		Interest expense	(726)		154
Cross-currency debt swaps - principal	—		—			—		—		SG&A	(149)		464
Cross-currency debt swaps - interest	—		—			—		—		Interest Expense	74		74
Total	$	(3,333)	$	(5,386)		$	(765)	$	(1,218)		$	(801)	$	692

We expect pre-tax losses of $3.0 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 non-performance. 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.