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Fair Value Measurements and Derivatives

3 Months Ended

May 31, 2024

(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 these assets and liabilities at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various assets and liabilities. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the assets and liabilities.

Assets and liabilities 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 May 31, 2024:


			Fair Value Measurements at Reporting Date Using
	Total		Level 1		Level 2		Level 3
Assets:
Cash and money market funds	$	4,160	$	4,160	$	-	$	-
Mutual funds		761		761		-		-
Derivatives designated for hedging		244		-		244		-

The following table presents financial assets and liabilities measured at fair value on a recurring basis at February 29, 2024:


			Fair Value Measurements at Reporting Date Using
	Total		Level 1		Level 2		Level 3
Assets:
Cash and money market funds	$	10,986	$	10,986	$	-	$	-
Mutual funds		828	$	828	$	-	$	-
Derivatives designated for hedging		263		-		263		-

The carrying value of our other financial instruments did not differ materially from their estimated fair values at May 31, 2024 and February 29, 2024.

Derivative Instruments

The Company’s derivative instruments include an interest rate swap agreement and foreign currency contracts.

The Company’s interest rate swap agreement hedges interest rate exposure related to the outstanding balance of its Florida Industrial Revenue Bonds ("the Florida Mortgage"), with monthly payments due through March 2026. The swap agreement locks the interest rate on the debt at 3.43% (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. The current outstanding notional value of the Company's interest rate swap at May 31, 2024 is $5,490.

Foreign currency contracts are utilized by our German subsidiary to hedge a portion of their U.S. Dollar company’s inventory purchases when management views them to be advantageous. The valuation of our foreign currency options is performed based on foreign exchange rates and yield curves built from observable market parameters and, where applicable, on Black Scholes or local volatility models calibrated to available volatility quotes (Level 2). During Fiscal 2024, the Company entered into forward foreign currency contracts which have notional U.S. Dollar equivalent amounts aggregating $10,350 at May 31, 2024, and that have been designated as cash flow hedges. The remaining maturities of these option contracts are less than one year. During the three months ended May 31, 2023, the Company had no open forward foreign currency contracts.

Financial Statement Classification

The following table discloses the fair value as of May 31, 2024 and February 29, 2024 of the Company’s derivative instruments:


	Derivative Assets and Liabilities
		Fair Value
	Account	May 31, 2024		February 29, 2024
Derivative instruments
Foreign currency contracts designated as cash flow hedges	Prepaid expenses and other current assets	$	102	$	121
Interest rate swap agreements designated as cash flow hedges	Other assets		142		142
Total derivatives		$	244	$	263

Cash Flow Hedges

The change in the fair value of hedging derivative instruments that are expected to be highly effective and have been designated and qualify as cash flow hedges are recorded to Other comprehensive loss. During the same period or periods during which the hedged transaction affects earnings, the amounts recorded in Other comprehensive loss are reclassified to earnings and presented in the same income statement line item as the effect of the hedged item. The change in fair value of the derivative instruments that do not qualify for hedge accounting and have not been designated as cash flow hedges are included in other (expense) income on the accompanying Unaudited Consolidated Statements of Operations and Comprehensive Loss immediately.

The gain or loss on the Company’s interest rate swap is recorded in Other comprehensive loss and subsequently reclassified into Interest and bank charges in the period in which the hedged transaction affects earnings. As of May 31, 2024, no interest rate swaps originally designated for hedge accounting were de-designated or terminated.

The net income (loss) recognized in Other comprehensive income (loss) for foreign currency contracts is expected to be recognized in Cost of sales during the next twelve months. No amounts were excluded from the assessment of hedge effectiveness during the respective periods.

Activity related to cash flow hedges recorded during the three months ended May 31, 2024 and 2023 was as follows:


	Three months ended
	May 31, 2024
	Pretax Gain Recognized in Other Comprehensive Income		Pretax Loss Reclassified from Accumulated Other Comprehensive Income
Cash flow hedges
Foreign currency contracts	$	8	$	(21	)
Interest rate swaps		-		-


	Three months ended
	May 31, 2023
	Pretax Loss Recognized in Other Comprehensive Income			Pretax Gain (Loss) Reclassified from Accumulated Other Comprehensive Income
Cash flow hedges
Foreign currency contracts	$	-		$	-
Interest rate swaps		(60	)		-

- 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.

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