Financial Instruments and Risk Management

3 Months Ended

May 31, 2022

Derivative Instruments and Hedging Activities Disclosure [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. Approximately 13% and 12% of our net sales revenue was denominated in foreign currencies during the three month periods ended May 31, 2022 and 2021, respectively. These sales were primarily denominated in British Pounds, Euros, Mexican Pesos and Canadian Dollars. We make most of our inventory purchases from manufacturers in Asia 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 month periods ended May 31, 2022 and 2021, we recorded foreign currency exchange rate net gains of $0.2 million and $0.4 million, respectively, in SG&A.

We mitigate certain foreign currency exchange rate risk by using forward contracts (“foreign currency contracts”) and mark-to-market cross-currency debt swaps to protect against the foreign currency exchange rate risk inherent in our 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 May 31, 2022 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 $125.0 million of the outstanding principal balance under the Credit Agreement, which totaled

$1,093.5 million as of May 31, 2022. 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)	May 31, 2022
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	6/2023	€	33,200	$	1,680	$	—	$	167	$	4
Forward contracts - sell Canadian Dollars	Cash flow	8/2023	$	45,150	332		15		—		—
Forward contracts - sell Pounds	Cash flow	6/2023	£	25,375	2,330		—		89		1


Forward contracts - sell Australian Dollars	Cash flow	12/2022	A$	2,350	—		—		25		—
Forward contracts - sell Norwegian Kroner	Cash flow	5/2023	kr	53,450	—		—		143		—
Interest rate swaps	Cash flow	1/2024	$	125,000	63		42		—		—






Total fair value					$	4,405	$	57	$	424	$	5


(in thousands)	February 28, 2022
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	€	17,000	$	1,224	$	—	$	—	$	—
Forward contracts - sell Canadian Dollars	Cash flow	2/2023	$	40,000	475		—		—		—

Forward contracts - sell Pounds	Cash flow	2/2023	£	24,000	1,219		—		—		—

Forward contracts - sell Australian Dollars	Cash flow	12/2022	A$	5,700	—		—		113		—
Interest rate swaps	Cash flow	1/2024	$	125,000	—		—		1,446		1,335
Subtotal					2,918		—		1,559		1,335

Derivatives not designated under hedge accounting
Cross-currency debt swaps - Euro	(1)	4/2022	€	6,000	—		—		244		—
Cross-currency debt swaps - Pounds	(1)	4/2022	£	4,500	—		—		468		—
Subtotal					—		—		712		—
Total fair value					$	2,918	$	—	$	2,271	$	1,335

(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 May 31,
	Gain (Loss) Recognized in AOCI				Gain (Loss) Reclassified from AOCI into Income
(in thousands)	2022		2021		Location	2022		2021
Foreign currency contracts - cash flow hedges	$	2,319	$	(3,191)	Sales revenue, net	$	1,196	$	(1,226)
Interest rate swaps - cash flow hedges	2,206		(290)		Interest expense	(680)		(1,284)


Total	$	4,525	$	(3,481)		$	516	$	(2,510)

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 May 31,
(in thousands)	Location	2022		2021
Cross-currency debt swaps - principal	SG&A	$	875	$	(129)
Cross-currency debt swaps - interest	Interest expense	—		(2)
Total		$	875	$	(131)

We expect a net gain of $4.0 million associated with foreign currency contracts and interest rate swaps currently recorded 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.