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Financial Instruments and Risk Management | 6 Months Ended
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Aug. 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 and six month periods ended August 31, 2020, approximately 10% and 13%, respectively, of our net sales revenue was in foreign currencies, compared to 14% and 13%, respectively, for the same periods last year. 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. During the three and six month periods ended August 31, 2020, we recorded net exchange gains from foreign currency fluctuations, including the impact of currency hedges and the cross-currency debt swaps, of $1.8 million and $0.1 million, respectively, in SG&A compared to net foreign exchange gains of $0.8 million and $1.6 million, respectively, for the same periods last year. 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 Other Comprehensive Income (“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 August 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 $286.0 million (excluding prepaid finance fees) as of August 31, 2020. The following table summarizes the fair values of our derivative instruments as of the end of the periods shown:
(in thousands) | August 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 | € | 4,000 |  | $ | — |  | $ | — |  | $ | 63 |  | $ | — |
Foreign currency contracts - sell Euro | Cash flow | 02/2022 | € | 47,975 |  | — |  | — |  | 1,802 |  | 845 |
Foreign currency contracts - sell Canadian Dollar | Cash flow | 02/2022 | $ | 28,750 |  | — |  | — |  | 708 |  | 165 |
Zero-cost collar - Pound | Cash flow | 02/2021 | £ | 4,000 |  | — |  | — |  | 266 |  | — |
Foreign currency contracts - sell Pound | Cash flow | 02/2022 | £ | 26,635 |  | — |  | — |  | 621 |  | 526 |
Foreign currency contracts - sell Mexican Peso | Cash flow | 11/2020 | $ | 15,000 |  | — |  | — |  | — |  | — |
Foreign currency contracts - Sell Australian Dollar | Cash flow | 11/2020 | $ | 2,000 |  | — |  | — |  | 110 |  | — |
Interest rate swaps | Cash flow | 01/2024 | $ | 225,000 |  | — |  | — |  | 5,114 |  | 8,052 |
Subtotal |  |  |  | — |  | — |  | 8,684 |  | 9,588 |
Derivatives not designated under hedge accounting |  |  |  |  |  |  |
Foreign currency contracts - cross-currency debt swaps - Euro | (1) | 04/2022 | € | 6,000 |  | — |  | — |  | — |  | 726 |
Foreign currency contracts - cross-currency debt swaps - Pound | (1) | 04/2022 | £ | 4,500 |  | — |  | — |  | — |  | 512 |
Subtotal |  |  |  | — |  | — |  | — |  | 1,238 |
Total fair value |  |  |  | $ | — |  | $ | — |  | $ | 8,684 |  | $ | 10,826 |
(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 August 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 | $ | (7,277) |  |  | $ | (482) |  |  | SG&A |  | $ | 92 |  |  | $ | (992) |  |  |  |  | $ | — |  |  | $ | — |
Interest rate swaps - cash flow hedges | 957 |  |  | (4,126) |  |  | Interest expense |  | — |  |  | — |  |  | Interest expense |  | (1,207) |  |  | 77 |
Cross-currency debt swaps - principal | — |  |  | — |  |  |  |  | — |  |  | — |  |  | SG&A |  | (949) |  |  | 344 |
Cross-currency debt swaps - interest | — |  |  | — |  |  |  |  | — |  |  | — |  |  | Interest Expense |  | — |  |  | — |
Total | $ | (6,320) |  |  | $ | (4,608) |  |  |  |  | $ | 92 |  |  | $ | (992) |  |  |  |  | $ | (2,156) |  |  | $ | 421 |
| Six Months Ended August 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 | $ | (7,203) |  |  | $ | (668) |  |  | SG&A |  | $ | (673) |  |  | $ | (2,210) |  |  |  |  | $ | — |  |  | $ | — |
Interest rate swaps - cash flow hedges | (2,449) |  |  | (9,326) |  |  | Interest expense |  | — |  |  | — |  |  | Interest expense |  | (1,933) |  |  | 231 |
Cross-currency debt swaps - principal | — |  |  | — |  |  |  |  | — |  |  | — |  |  | SG&A |  | (1,098) |  |  | 808 |
Cross-currency debt swaps - interest | — |  |  | — |  |  |  |  | — |  |  | — |  |  | Interest expense |  | 74 |  |  | 74 |
Total | $ | (9,652) |  |  | $ | (9,994) |  |  |  |  | $ | (673) |  |  | $ | (2,210) |  |  |  |  | $ | (2,957) |  |  | $ | 1,113 |
We expect pre-tax losses of $8.7 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 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.

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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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