Financial Instruments and Risk Management

9 Months Ended

Nov. 30, 2021

Financial Instruments, Owned, at Fair Value [Abstract]

Financial Instruments and Risk Management

Note 11 - Financial Instruments and Risk Management

Foreign Currency Risk

The U.S. Dollar is the functional currency for the Company and all of its subsidiaries and is also the reporting currency for the Company. 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. For both the three and nine month periods ended November 30, 2021, approximately 10% of our net sales revenue was denominated in foreign currencies, compared to 11% and 12%, respectively, for the same periods last year. These sales were primarily denominated in British Pounds, Euros, Mexican Pesos and Canadian Dollars. We make most of our inventory purchases from vendors in the Asia Pacific market and primarily use the U.S. Dollar for such purchases.

In our condensed consolidated statements of income, foreign currency exchange rate 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 currency exchange rate gains and losses are recognized in SG&A. During the three and nine month periods ended November 30, 2021, we recorded foreign currency exchange rate net losses of $0.3 million and $0.8 million, respectively, in SG&A compared to foreign currency exchange rate net gains of $0.4 million and $0.5 million, respectively, for the same periods last year.

We mitigate certain foreign currency exchange rate risk by using a series of foreign currency contracts, which can include forward contracts and zero-cost collars, designated as cash flow hedges, and mark-to-market cross-currency debt swaps to protect against the foreign currency exchange rate risk inherent in our forecasted transactions denominated in foreign currencies. We do not enter into any derivatives or similar instruments for trading or other speculative purposes. Our foreign currency contracts are designated as cash flow hedges and are recorded on the balance sheet at fair value with changes in fair value recorded in Other Comprehensive Income (Loss) (“OCI”) until the hedge transaction is settled, at which point amounts are reclassified from Accumulated Other Comprehensive Income (Loss) (“AOCI”) to our condensed consolidated statements of income. Derivatives for which we have not elected hedge accounting consist of our cross-currency debt swaps, and any changes in the fair value of the derivatives are recorded in our condensed consolidated statements of income. We evaluate our derivatives designated as cash flow hedges each quarter to assess hedge effectiveness. Any ineffectiveness, which is not material for any period presented, is immediately recognized in our condensed consolidated statements of income.

Interest Rate Risk

Interest on our outstanding debt as of November 30, 2021 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 $434.0 million as of November 30, 2021. Our interest rate swaps are designated as cash flow hedges and are recorded on the balance sheet at fair value with changes in fair value recorded in OCI until the hedge transaction is settled, at which point amounts are reclassified from AOCI to our condensed consolidated statements of income. We evaluate our derivatives designated as cash flow hedges each quarter to assess hedge effectiveness. Any ineffectiveness, which is not material for any period presented, is immediately recognized in our condensed consolidated statements of income.

The following tables summarize the fair values of our derivative instruments as of the end of the periods presented:


(in thousands)	November 30, 2021
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

Forward contracts - sell Euro	Cash flow	2/2023	€	30,500	$	1,494	$	157	$	—	$	—
Forward contracts - sell Canadian Dollars	Cash flow	2/2023	$	34,700	344		148		—		—
Forward contracts - sell Pounds	Cash flow	2/2023	£	28,250	953		352		—		—



Interest rate swaps	Cash flow	1/2024	$	225,000	—		—		2,411		2,775
Subtotal					2,791		657		2,411		2,775

Derivatives not designated under hedge accounting
Cross-currency debt swaps - Euro	(1)	4/2022	€	6,000	—		—		272		—
Cross-currency debt swaps - Pounds	(1)	4/2022	£	4,500	—		—		386		—
Subtotal					—		—		658		—
Total fair value					$	2,791	$	657	$	3,069	$	2,775


(in thousands)	February 28, 2021
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

Forward contracts - sell Euro	Cash flow	2/2022	€	39,000	$	—	$	—	$	1,851	$	—
Forward contracts - sell Canadian Dollars	Cash flow	2/2023	$	34,000	—		33		1,061		—

Forward contracts - sell Pounds	Cash flow	2/2023	£	34,500	—		—		2,026		21

Forward contracts - sell Australian Dollars	Cash flow	11/2021	A$	4,000	—		—		18		—
Interest rate swaps	Cash flow	1/2024	$	225,000	—		—		4,407		5,534
Subtotal					—		33		9,363		5,555

Derivatives not designated under hedge accounting
Cross-currency debt swaps - Euro	(1)	4/2022	€	6,000	—		—		—		817
Cross-currency debt swaps - Pounds	(1)	4/2022	£	4,500	—		—		—		756
Subtotal					—		—		—		1,573
Total fair value					$	—	$	33	$	9,363	$	7,128

(1)These cross-currency debt swaps, for which we have not elected hedge accounting, 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 pre-tax effects of derivative instruments designated as cash flow hedges were as follows for the periods presented:


	Three Months Ended November 30,
	Gain (Loss) Recognized in AOCI		Gain (Loss) Reclassified from AOCI into Income
(in thousands)	2021			Location	2021
Foreign currency contracts - cash flow hedges	$	3,686		Sales revenue, net	$	(354)
Interest rate swaps - cash flow hedges	1,045			Interest expense	(1,300)


Total	$	4,731			$	(1,654)


	Three Months Ended November 30,
	Gain (Loss) Recognized in AOCI		Gain (Loss) Reclassified from AOCI into Income
(in thousands)	2020		Location	2020
Foreign currency contracts - cash flow hedges	$	452	SG&A	$	(549)
Interest rate swaps - cash flow hedges	250		Interest expense	(1,289)


Total	$	702		$	(1,838)


	Nine Months Ended November 30,
	Gain (Loss) Recognized in AOCI		Gain (Loss) Reclassified from AOCI into Income
(in thousands)	2021			Location	2021
Foreign currency contracts - cash flow hedges	$	5,951		Sales revenue, net	$	(2,441)
Interest rate swaps - cash flow hedges	821			Interest expense	(3,934)


Total	$	6,772			$	(6,375)


	Nine Months Ended November 30,
	Gain (Loss) Recognized in AOCI		Gain (Loss) Reclassified from AOCI into Income
(in thousands)	2020		Location	2020
Foreign currency contracts - cash flow hedges	$	(5,405)	SG&A	$	124
Interest rate swaps - cash flow hedges	(4,132)		Interest expense	(3,222)


Total	$	(9,537)		$	(3,098)

The pre-tax effects of derivative instruments not designated under hedge accounting were as follows for the periods presented:


	Gain (Loss) Recognized in Income
		Three Months Ended November 30,				Nine Months Ended November 30,
(in thousands)	Location	2021		2020		2021		2020
Cross-currency debt swaps - principal	SG&A	$	575	$	23	$	915	$	(1,075)
Cross-currency debt swaps - interest	Interest expense	(1)		(2)		(3)		72
Total		$	574	$	21	$	912	$	(1,003)

We expect a net gain of $0.4 million associated with foreign currency contracts and interest rate swaps currently reported in AOCI to be reclassified into income over the next twelve months. The amount ultimately realized, however, will differ as exchange rates and interest rates change and the underlying contracts settle. See Notes 10 and 12 to these condensed consolidated financial statements for more information.

Counterparty Credit Risk

Financial instruments, including foreign currency contracts, cross-currency debt swaps and interest rate 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. We believe that the risk of incurring credit losses is remote.