Note 13 – Financial Instruments and Risk Management

Foreign Currency Risk - Our functional currency is the U.S. Dollar. 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. During the three-months ended May 31, 2018 and 2017, approximately 14% and 13% of our net sales revenue was in foreign currencies, respectively. These sales were primarily denominated in British Pounds, Euros, Mexican Pesos and Canadian Dollars.

In our condensed consolidated statements of income, exchange 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 exchange gains and losses are recognized in SG&A. For the three-months ended May 31, 2018 and 2017, we recorded net foreign exchange gains (losses), including the impact of foreign currency hedges and cross-currency debt swaps of ($1.6) million and $0.6 million in SG&A, respectively. We recorded gains of $0.3 million and $0.1 million in income tax expense for the three months ended May 31, 2018 and 2017, respectively. We hedge against certain foreign currency exchange rate risk by using a series of forward contracts designated as cash flow hedges and mark-to-market derivatives to manage the foreign currency exchange risk inherent in our forecasted transactions denominated in currencies other than the U.S. Dollar. We do not enter into any forward exchange contracts or similar instruments for trading or other speculative purposes.

Interest Rate Risk - Interest on our outstanding debt as of May 31, 2018 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 an interest rate swap to effectively fix interest rates on $100.0 million of the outstanding principal balance under the Credit Agreement, which totaled $281.3 million as of May 31, 2018 (excluding prepaid financing fees).

The following table summarizes the fair values of our derivative instruments as of the end of the periods shown:


	May 31, 2018
					Prepaid				Accrued
					Expenses				Expenses
		Final			and Other				and Other		Other
(in thousands)	Hedge	Settlement	Notional		Current		Other		Current		Liabilities,
Derivatives designated as hedging instruments	Type	Date	Amount		Assets		Assets		Liabilities		Non-current
Foreign currency contracts - sell Euro	Cash flow	07/2019	€	29,500	$	1,181	$	128	$	-	$	-
Foreign currency contracts - sell Canadian Dollars	Cash flow	06/2019	$	21,250		579		18		-		-
Foreign currency contracts - sell Pounds	Cash flow	07/2019	£	17,500		591		102		-		-
Foreign currency contracts - sell Mexican Pesos	Cash flow	09/2018	$	20,000		99		-		-		-
Interest rate swap	Cash flow	12/2021	$	100,000		415		2,005		-		-
Subtotal						2,865		2,253		-		-

Derivatives not designated under hedge accounting
Foreign currency contracts - cross-currency debt swaps - Euro	(1)	4/2020	$	5,280		-		11		-		-
Foreign currency contracts - cross-currency debt swaps - Pound	(1)	4/2020	$	6,395		-		-		-		361
Subtotal						-		11		-		361
Total fair value					$	2,865	$	2,264	$	-	$	361


	February 28, 2018
					Prepaid				Accrued
					Expenses				Expenses
		Final			and Other				and Other		Other
	Hedge	Settlement	Notional		Current		Other		Current		Liabilities,
Derivatives designated as hedging instruments	Type	Date	Amount		Assets		Assets		Liabilities		Non-current
Foreign currency contracts - sell Euro	Cash flow	07/2019	€	38,000	$	-	$	102	$	1,320	$	-
Foreign currency contracts - sell Canadian Dollars	Cash flow	06/2019	$	27,750		378		101		-		-
Foreign currency contracts - sell Pounds	Cash flow	04/2019	£	19,500		-		56		513		-
Foreign currency contracts - sell Mexican Pesos	Cash flow	05/2018	$	20,000		5		-		-		-
Interest rate swap	Cash flow	12/2021	$	100,000		539		1,942		-		-
Subtotal						922		2,201		1,833		-

Derivatives not designated under hedge accounting
Foreign currency contracts - cross-currency debt swap - Euro	(1)	4/2020	$	5,280		-		-		-		208
Foreign currency contracts - cross-currency debt swaps - Pound	(1)	4/2020	$	6,395		-		-		-		565
Subtotal						-		-		-		773
Total fair value					$	922	$	2,201	$	1,833	$	773

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These are foreign currency contracts for which we have not elected hedge accounting. We refer to them as “cross-currency debt swaps”. They, in effect, 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 following table summarizes the pre-tax effect of derivative instruments for the periods shown:


	Three Months Ended May 31,
	Gain (Loss)				Gain (Loss) Reclassified from
	Recognized in OCI				Accumulated Other Comprehensive					Gain (Loss) Recognized
	(effective portion)				Income (Loss) into Income					As Income
(in thousands)	2018		2017		Location	2018		2017		Location	2018		2017
Currency contracts - cash flow hedges	$	4,576	$	(2,245)	SG&A	$	687	$	302		$	-	$	-
Interest rate swaps - cash flow hedges		(61)		-	Interest expense		-		-	Interest expense		75		-
Cross-currency debt swaps - principal		-		-			-		-	SG&A		423		(549)
Cross-currency debt swaps - interest		-		-			-		-	Interest Expense		74		-
Total	$	4,515	$	(2,245)		$	687	$	302		$	572	$	(549)

We expect pre-tax net gains of $2.9 million associated with foreign currency contracts currently reported in accumulated other comprehensive income, to be reclassified into income over the next twelve months. The amount ultimately realized, however, will differ as exchange rates vary and the underlying contracts settle.

Counterparty Credit Risk - Financial instruments, including foreign currency contracts and cross currency debt swaps, expose us to counterparty credit risk for nonperformance. 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. Although our theoretical credit risk is the replacement cost at the then-estimated fair value of these instruments, we believe that the risk of incurring credit losses is remote.