Financial Instruments and Risk Management

6 Months Ended

Aug. 31, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Financial Instruments and Risk Management

Note 12 - 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 12% of our net sales revenue was denominated in foreign currencies during both the three and six month periods ended August 31, 2022, respectively, compared to 9% and 10%, respectively, for the same periods last year. These sales were primarily denominated in British Pounds, Euros, Mexican Pesos, Canadian Dollars and Norwegian Kroner. 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 and six month periods ended August 31, 2022, we recorded foreign currency exchange rate net losses of $2.7 million and $2.5 million,

respectively, in SG&A, compared to $0.9 million and $0.5 million, respectively, for the same periods last year.

We mitigate certain foreign currency exchange rate risk by using forward contracts and 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. Certain of our forward contracts are designated as cash flow hedges (“foreign currency contracts”) 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. Foreign currency derivatives for which we have not elected hedge accounting consist of our forward contracts and cross-currency debt swaps, and any changes in the fair value of these derivatives are recorded in our condensed consolidated statements of income. These undesignated derivatives are used to hedge monetary net asset and liability positions. We evaluate our derivatives designated as cash flow hedges each quarter to assess hedge effectiveness.

Interest Rate Risk

Interest on our outstanding debt as of August 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 $1,158.0 million as of August 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.

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


(in thousands)	August 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	€	20,900	$	2,489	$	—	$	—	$	—
Forward contracts - sell Canadian Dollars	Cash flow	11/2023	$	39,050	1,204		149		—		—
Forward contracts - sell Pounds	Cash flow	6/2023	£	18,410	3,444		—		—		—


Forward contracts - sell Australian Dollars	Cash flow	12/2022	A$	800	18		—		—		—
Forward contracts - sell Norwegian Kroner	Cash flow	6/2023	kr	36,180	135		—		—		—
Interest rate swaps	Cash flow	1/2024	$	125,000	1,275		534		—		—
Subtotal					8,565		683		—		—

Derivatives not designated under hedge accounting


Forward contracts - buy Euro	(1)	9/2022	€	4,532	—		—		74		—
Forward contracts - buy Pounds	(1)	9/2022	£	2,291	—		—		119		—
Subtotal					—		—		193		—
Total fair value					$	8,565	$	683	$	193	$	—


(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	(2)	4/2022	€	6,000	—		—		244		—
Cross-currency debt swaps - Pounds	(2)	4/2022	£	4,500	—		—		468		—
Subtotal					—		—		712		—
Total fair value					$	2,918	$	—	$	2,271	$	1,335

(1)These forward contracts, for which we have not elected hedge accounting, hedge monetary net asset and liability positions for the notional amounts reported, creating an economic hedge against currency movements.

(2)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 August 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	$	6,226	$	5,456	Sales revenue, net	$	2,715	$	(861)
Interest rate swaps - cash flow hedges	1,423		66		Interest expense	(281)		(1,350)


Total	$	7,649	$	5,522		$	2,434	$	(2,211)


	Six Months Ended August 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	$	8,545	$	2,265	Sales revenue, net	$	3,911	$	(2,087)
Interest rate swaps - cash flow hedges	3,629		(224)		Interest expense	(961)		(2,634)


Total	$	12,174	$	2,041		$	2,950	$	(4,721)

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 August 31,				Six Months Ended August 31,
(in thousands)	Location	2022		2021		2022		2021
Forward contracts	SG&A	$	(250)	$	—	$	(250)	$	—
Cross-currency debt swaps - principal	SG&A	—		469		875		340
Cross-currency debt swaps - interest	Interest expense	—		—		—		(2)
Total		$	(250)	$	469	$	625	$	338

We expect a net gain of $8.6 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 11 and 13 to these condensed consolidated financial statements for more information.

Counterparty Credit Risk

Financial instruments, including foreign currency contracts, forward 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.