DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

9 Months Ended

May 31, 2022

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES [Abstract]

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

NOTE 8 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company is exposed to interest rate risk relating to its ongoing business operations. To manage interest rate exposure, the Company enters into hedge transactions (interest rate swaps) using derivative financial instruments. The objective of entering into interest rate swaps is to eliminate the variability of cash flows in the LIBOR interest payments associated with variable-rate loans over the life of the loans. As changes in interest rates impact the future cash flow of interest payments, the hedges provide a synthetic offset to interest rate movements.

In addition, the Company is exposed to foreign currency and interest rate cash flow exposure related to non-functional currency long-term debt of two of its wholly owned subsidiaries. To manage this foreign currency and interest rate cash flow exposure, the Company’s subsidiaries entered into cross-currency interest rate swaps that convert their U.S. dollar denominated floating interest payments to functional currency fixed interest payments during the life of the hedging instrument.  As changes in foreign exchange and interest rates impact the future cash flow of interest payments, the hedges are intended to offset changes in cash flows attributable to interest rate and foreign exchange movements.

These derivative instruments (cash flow hedging instruments) are designated and qualify as cash flow hedges, with the entire gain or loss on the derivative reported as a component of other comprehensive loss. Amounts are deferred in other comprehensive loss and reclassified into earnings in the same income statement line item that is used to present the earnings effect of the hedged item when the hedged item affects earnings.

The Company is exposed to foreign-currency exchange-rate fluctuations in the normal course of business, including foreign-currency exchange-rate fluctuations on U.S. dollar denominated liabilities within its international subsidiaries whose functional currency is other than the U.S. dollar. The Company manages these fluctuations, in part, through the use of non-deliverable forward foreign-exchange contracts (NDFs) that are intended to offset changes in cash flow attributable to currency exchange movements. These contracts are intended primarily to economically address exposure to U.S. dollar merchandise inventory expenditures made by the Company’s international subsidiaries whose functional currency is other than the U.S. dollar. Currently, these contracts do not qualify for derivative hedge accounting. The Company seeks to mitigate foreign-currency exchange-rate risk with the use of these contracts and does not intend to engage in speculative transactions. These contracts do not contain any credit-risk-related contingent features.

Cash Flow Hedges

As of May 31, 2022, all of the Company’s interest rate swap and cross-currency interest rate swap derivative financial instruments are designated and qualify as cash flow hedges. The Company formally documents the hedging relationships for its derivative instruments that qualify for hedge accounting.

The following table summarizes agreements for which the Company has recorded cash flow hedge accounting for the nine months ended May 31, 2022:

Entity	Date ‎Entered ‎into	Derivative ‎Financial ‎Counter- ‎party	Derivative ‎Financial ‎Instruments	Initial ‎US$ ‎Notional ‎Amount		Bank ‎US$ ‎loan  ‎Held ‎with	Floating Leg ‎(swap ‎counter-party)	Fixed Rate ‎for PSMT ‎Subsidiary		Settlement ‎Dates	Effective ‎Period of swap
Colombia subsidiary	3-May-22	Citibank, N.A. ("Citi")	Cross currency interest rate swap	$	10,000,000	PriceSmart, Inc.	3.00%	9.04	%	3rd day of each May, August, November and February, beginning on August 3, 2022	May 3, 2022 - ‎May 3, 2027
Colombia subsidiary	17-Nov-21	Citibank, N.A. ("Citi")	Cross currency interest rate swap	$	10,000,000	PriceSmart, Inc.	3.00%	8.40	%	17th day of each February, May, August, and November, beginning on February 17, 2022	November 17, 2021 - ‎November 18, 2024
Colombia subsidiary	3-Dec-19	Citibank, N.A. ("Citi")	Cross currency interest rate swap	$	7,875,000	Citibank, N.A.	Variable rate 3-month Libor plus 2.45%	7.87	%	3rd day of each December, March, June, and September, beginning on March 3, 2020	December 3, 2019 - ‎December 3, 2024
Colombia subsidiary	27-Nov-19	Citibank, N.A. ("Citi")	Cross currency interest rate swap	$	25,000,000	Citibank, N.A.	Variable rate 3-month Libor plus 2.45%	7.93	%	27th day of each November, February, May and August beginning February 27, 2020	November 27, 2019 - ‎November 27, 2024
Colombia subsidiary	24-Sep-19	Citibank, N.A. ("Citi")	Cross currency interest rate swap	$	12,500,000	PriceSmart, Inc.	Variable rate 3-month Libor plus 2.50%	7.09	%	24th day of each December, March, June and September beginning December 24, 2019	September 24, 2019 - ‎September 26, 2022
Panama subsidiary	25-Jun-18	Bank of Nova Scotia ("Scotiabank")	Interest rate swap	$	14,625,000	Bank of Nova Scotia	Variable rate 3-month Libor plus 3.0%	5.99	%	23rd day of each month beginning on July 23, 2018	June 25, 2018 - ‎March 23, 2023
Honduras subsidiary	26-Feb-18	Citibank, N.A. ("Citi")	Cross currency interest rate swap	$	13,500,000	Citibank, N.A.	Variable rate 3-month Libor plus 3.00%	9.75	%	29th day of May, August, November and February beginning May 29, 2018	February 26, 2018 - ‎February 24, 2024
PriceSmart, Inc.	7-Nov-16	MUFG Union Bank, N.A. ("Union Bank")	Interest rate swap	$	35,700,000	Union Bank	Variable rate 1-month Libor plus 1.7%	3.65	%	1st day of each month beginning on April 1, 2017	March 1, 2017 - ‎March 1, 2027

For the three and nine months ended May 31, 2022 and May 31, 2021, the Company included the gain or loss on the hedged items (that is, variable-rate borrowings) in the same line item—interest expense—as the offsetting gain or loss on the related interest rate swaps as follows (in thousands):

Income Statement Classification	Interest ‎expense on ‎borrowings(1)		Cost of ‎swaps (2)		Total
Interest expense for the three months ended May 31, 2022	$	618	$	871	$	1,489
Interest expense for the three months ended May 31, 2021	$	656	$	907	$	1,563
Interest expense for the nine months ended May 31, 2022	$	1,720	$	2,628	$	4,348
Interest expense for the nine months ended May 31, 2021	$	2,015	$	2,785	$	4,800

⁽¹⁾This amount is representative of the interest expense recognized on the underlying hedged transactions.

⁽²⁾This amount is representative of the interest expense recognized on the interest rate swaps and cross-currency swaps designated as cash flow hedging instruments.

The total notional balance of the Company’s pay-fixed/receive-variable interest rate swaps and cross-currency interest rate swaps was as follows (in thousands):

	Notional Amount as of
	May 31,		August 31,
Floating Rate Payer (Swap Counterparty)	2022		2021
Union Bank	$	31,663	$	32,619
Citibank N.A.		67,522		51,032
Scotiabank		9,000		10,125
Total	$	108,185	$	93,776

Derivatives listed on the table below were designated as cash flow hedging instruments. The table summarizes the effect of the fair value of interest rate swap and cross-currency interest rate swap derivative instruments that qualify for derivative hedge accounting and its associated tax effect on accumulated other comprehensive (income)/loss (in thousands):

		May 31, 2022						August 31, 2021
Derivatives designated as cash flow hedging instruments	Balance Sheet ‎Classification	Fair ‎Value		Net Tax ‎Effect		Net ‎OCI		Fair ‎Value		Net Tax ‎Effect		Net ‎OCI
Cross-currency interest rate swaps	Other non-current assets	$	4,512	$	(1,579)	$	2,933	$	2,464	$	(741)	$	1,723
Cross-currency interest rate swaps	Other current assets		1,550		(543)		1,007		—		—		—
Interest rate swaps	Other non-current assets		898		(198)		700		—		—		—
Interest rate swaps	Other long-term liabilities		(49)		14		(35)		(2,305)		535		(1,770)
Cross-currency interest rate swaps	Other long-term liabilities		(999)		340		(659)		(705)		212		(493)
Net fair value of derivatives designated as hedging instruments		$	5,912	$	(1,966)	$	3,946	$	(546)	$	6	$	(540)

Fair Value Instruments

From time to time the Company enters into non-deliverable forward foreign-exchange contracts. These contracts are treated for accounting purposes as fair value contracts and do not qualify for derivative hedge accounting. The use of non-deliverable forward foreign-exchange contracts is intended to offset changes in cash flow attributable to currency exchange movements. These contracts are intended primarily to economically hedge exposure to U.S. dollar merchandise inventory expenditures made by the Company’s international subsidiaries whose functional currency is other than the U.S. dollar.

Subsidiary	Dates ‎entered into	Financial ‎Derivative ‎(Counterparty)	Derivative ‎Financial ‎Instrument	Notional ‎Amount ‎(in thousands)		Settlement Date	Effective Period ‎of Forward
Colombia	4-Feb-22	Scotiabank Colpatria, S.A.	Forward foreign ‎‎exchange contracts (USD)	$	5,000	3-Aug-22	February 4, 2022 - August 3, 2022
Colombia	28-Mar-22	Scotiabank Colpatria, S.A.	Forward foreign ‎‎exchange contracts (USD)	$	2,000	28-Jun-22	28 March, 2022 - 28 June, 2022
Colombia	28-Mar-22	Scotiabank Colpatria, S.A.	Forward foreign ‎‎exchange contracts (USD)	$	2,000	26-Jul-22	28 March, 2022 - 26 July, 2022
Colombia	28-Mar-22	Scotiabank Colpatria, S.A.	Forward foreign ‎‎exchange contracts (USD)	$	1,000	25-Aug-22	28 March, 2022 - 25 August, 2022

Forward derivative gains and (losses) on non-deliverable forward foreign-exchange contracts are included in Other income (expense), net in the consolidated statements of income in the period of change, but the amounts were immaterial for the three and nine month periods ended May 31, 2022 and May 31, 2021.