XML 28 R12.htm IDEA: XBRL DOCUMENT

Fair Value Measurements and Derivatives

6 Months Ended

Aug. 31, 2022

(5) Fair Value Measurements and Derivatives

The Company applies the authoritative guidance on “Fair Value Measurements," which among other things, requires enhanced disclosures about assets and liabilities that are measured and reported at fair value. This guidance establishes a hierarchal disclosure framework that prioritizes and ranks the level of market price observability used in measuring investments at fair value. Market price observability is impacted by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices, or for which fair value can be measured from actively quoted prices, generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

Investments measured and reported at fair value are classified and disclosed in one of the following categories:

Level 1 - Quoted market prices in active markets for identical assets or liabilities.

Level 2 - Inputs other than Level 1 inputs that are either directly or indirectly observable.

Level 3 - Unobservable inputs developed using the Company's estimates and assumptions, which reflect those that market participants would use.

The following table presents financial assets and liabilities measured at fair value on a recurring basis at August 31, 2022:


			Fair Value Measurements at Reporting Date Using
	Total		Level 1		Level 2		Level 3
Assets:
Cash and money market funds	$	4,326	$	4,326	$	-	$	-
Mutual funds		1,225		1,225		-		-
Derivatives designated for hedging		84		-		84		-

Liabilities:
Contingent consideration	$	5,018	$	-	$	-	$	5,018

The following table presents financial assets and liabilities measured at fair value on a recurring basis at February 28, 2022:


			Fair Value Measurements at Reporting Date Using
	Total		Level 1		Level 2		Level 3
Assets
Cash and money market funds	$	27,788	$	27,788	$	-	$	-
Mutual funds		1,231		1,231		-		-

Liabilities:
Derivatives designated for hedging	$	188		-		188		-
Contingent consideration		6,435		-		-		6,435

At August 31, 2022, the carrying value of the Company's accounts receivable, short-term debt, accounts payable, accrued expenses, bank obligations, and long-term debt approximates fair value because of either (i) the short-term nature of the financial instrument; (ii) the interest rate on the financial instrument being reset every quarter to reflect current market rates; or (iii) the stated or implicit interest rate approximates the current market rates or are not materially different from market rates.

Contingent consideration is related to the Company’s Onkyo acquisition (see Note 2). The estimated fair value of the contingent consideration is classified within Level 3 and was determined using an income approach. Under this method, potential future purchases applicable to the contingent consideration were determined using internal estimates for growth. The potential future purchases applicable to the contingent consideration were multiplied by the appropriate percentage of payments due to OHEC, and the resulting contingent consideration amounts were adjusted for risk at the appropriate discount rate. The value of the contingent consideration was further discounted to reflect the credit risk of the Company. Changes in either the revenue growth rate assumptions or the discount rate could result in a material change to the amount of contingent consideration accrued and such changes will be recorded in the Company's Unaudited Consolidated Statements of Operations and Comprehensive (Loss) Income.

The following table provides a rollforward of the Company's contingent consideration balance for the six months ended August 31, 2022:



Balance at February 28, 2022	$	6,435
Payments made to OHEC		(397	)
Fair value adjustment		52
Foreign currency translation		(1,072	)
Balance at August 31, 2022	$	5,018

Derivative Instruments

The Company’s derivative instruments include an interest rate swap agreement and have also included forward foreign currency contracts in prior periods. The Company’s interest rate swap agreement hedges interest rate exposure related to the outstanding balance of its Florida Mortgage, with monthly payments due through March 2026. The swap agreement locks the interest rate on the debt at 3.48% (inclusive of credit spread) through the maturity date of the loan. Interest rate swap agreements qualifying for hedge accounting are designated as cash flow hedges and valued based on a comparison of the change in fair value of the actual swap contracts designated as the hedging instruments and the change in fair value of a hypothetical swap contract (Level 2). We calculate the fair value of our interest rate swap agreement quarterly based on the quoted market price for the same or similar financial instruments. Interest rate swaps are classified in the balance sheet as either assets or liabilities based on the fair value of the instruments at the end of the period.

When entered into, forward foreign currency contracts are utilized to hedge a portion of the Company’s foreign currency inventory purchases. Forward foreign currency derivatives qualifying for hedge accounting are designated as cash flow hedges and valued using observable forward rates for the same or similar instruments (Level 2). As of August 31, 2022, there are no open forward foreign currency contracts.

Financial Statement Classification

The following table discloses the fair value as of August 31, 2022 and February 28, 2022 of the Company’s derivative instruments:


	Derivative Assets and Liabilities
		Fair Value
	Account	August 31, 2022		February 28, 2022
Designated derivative instruments
Interest rate swap agreements	Other assets		84		—
	Other long-term liabilities		—		(188	)
Total derivatives		$	84	$	(188	)

Cash Flow Hedges

The Company's policy is to enter into derivative instrument contracts with terms that coincide with the underlying exposure being hedged. As such, the Company’s derivative instruments are expected to be highly effective. For derivative instruments that are designated and qualify as cash flow hedges, the entire change in fair value of the hedging instrument included in the assessment of the hedge ineffectiveness is recorded to Other comprehensive (loss) income. When the amounts recorded in Other comprehensive (loss) income are reclassified to earnings, they are presented in the same income statement line item as the effect of the hedged item.

During Fiscal 2022 and through the second quarter of Fiscal 2023, the Company did not enter into any new forward foreign currency contracts. All forward foreign currency contracts entered into during Fiscal 2021 settled as of February 28, 2022 and had been designated as cash flow hedges. The current outstanding notional value of the Company's interest rate swap at August 31, 2022 is $6,365. For cash flow hedges, the gain or loss is reported as a component of Other comprehensive (loss) income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The net income recognized in Other comprehensive (loss) income for foreign currency contracts settled in the fourth quarter of Fiscal 2022 were recognized in Cost of sales during the three and six months ended August 31, 2022. No amounts were excluded from the assessment of hedge effectiveness during the respective periods. The gain or loss on the Company’s interest rate swap is recorded in Other comprehensive (loss) income and subsequently reclassified into Interest and bank charges in the period in which the hedged transaction affects earnings. As of August 31, 2022, no interest rate swaps originally designated for hedge accounting were de-designated or terminated.

Activity related to cash flow hedges recorded during the three and six months ended August 31, 2022 and 2021 was as follows:


	Three months ended				Six months ended
	August 31, 2022				August 31, 2022
	Pretax Gain Recognized in Other Comprehensive Income		Pretax Loss Reclassified from Accumulated Other Comprehensive Income		Pretax Gain Recognized in Other Comprehensive Income		Pretax Gain Reclassified from Accumulated Other Comprehensive Income
Cash flow hedges
Foreign currency contracts	$	—	$	—	$	—	$	63
Interest rate swaps		99		—		272		—


	Three months ended					Six months ended
	August 31, 2021					August 31, 2021
	Pretax (Loss) Gain Recognized in Other Comprehensive Income		Pretax Loss Reclassified from Accumulated Other Comprehensive Income			Pretax (Loss) Gain Recognized in Other Comprehensive Income		Pretax Loss Reclassified from Accumulated Other Comprehensive Income
Cash flow hedges
Foreign currency contracts	$	172	$	(29	)	$	144	$	(205	)
Interest rate swaps		19		—			37		—

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details