NOTE O – Derivative Instruments and Hedging Activities

We utilize derivative financial instruments to manage exposure to certain risks related to our ongoing operations. The primary risks managed through the use of derivative instruments include interest rate risk, currency exchange risk and commodity price risk. While certain of our derivative instruments are designated as hedging instruments, we also enter into derivative instruments that are designed to hedge a risk, but are not designated as hedging instruments and therefore do not qualify for hedge accounting. These derivative instruments are adjusted to current fair value through earnings at the end of each period.

Interest Rate Risk Management – We are exposed to the impact of interest rate changes. Our objective is to manage the impact of interest rate changes on cash flows and the market value of our borrowings. We utilize a mix of debt maturities along with both fixed-rate and variable-rate debt to manage changes in interest rates. In addition, we enter into interest rate swaps to further manage our exposure to interest rate variations related to our borrowings and to lower our overall borrowing costs.

Currency Exchange Risk Management – We conduct business in several major international currencies and are therefore subject to risks associated with changing foreign exchange rates. We enter into various contracts that change in value as foreign exchange rates change to manage this exposure. Such contracts limit exposure to both favorable and unfavorable currency fluctuations. The translation of foreign currencies into United States dollars also subjects us to exposure related to fluctuating exchange rates; however, derivative instruments are not used to manage this risk.

Commodity Price Risk Management – We are exposed to changes in the price of certain commodities, including steel, natural gas, zinc and other raw materials, and our utility requirements. Our objective is to reduce earnings and cash flow volatility associated with forecasted purchases and sales of these commodities to allow management to focus its attention on business operations. Accordingly, we enter into derivative instruments to manage the associated price risk.

We are exposed to counterparty credit risk on all of our derivative instruments. Accordingly, we have established and maintain strict counterparty credit guidelines and enter into derivative instruments only with major financial institutions. We do not have significant exposure to any one counterparty and management believes the risk of loss is remote and, in any event, would not be material.

Refer to “Note P – Fair Value” for additional information regarding the accounting treatment for our derivative instruments, as well as how fair value is determined.

The following table summarizes the fair value of our derivative instruments and the respective financial statement caption in which they were recorded in our consolidated balance sheet at November 30, 2014:


	Asset Derivatives				Liability Derivatives
(in thousands)	Balance Sheet Location		Fair Value		Balance Sheet Location		Fair Value
Derivatives designated as hedging instruments:
Interest rate contracts		Receivables	$	-		Accounts payable	$	2,102
		Other assets		-		Other liabilities		183

				-				2,285

Foreign exchange contracts		Receivables		106		Accounts payable		-
Commodity contracts		Receivables		-		Accounts payable		3,444

Totals			$	106			$	5,729

Derivatives not designated as hedging instruments:
Commodity contracts		Receivables	$	231		Accounts payable	$	595

Totals			$	231			$	595

Total Derivative Instruments			$	337			$	6,324

The amounts in the table above reflect the fair value of the Company’s derivative contracts on a net basis. Had these amounts been recognized on a gross basis, the impact would have been a $324,000 increase in receivables with a corresponding increase in accounts payable.

The following table summarizes the fair value of our derivative instruments and the respective line in which they were recorded in the consolidated balance sheet at May 31, 2014:


	Asset Derivatives			Liability Derivatives
(in thousands)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments:
Interest rate contracts	Receivables	$	-	Accounts payable	$	4,180
Commodity contracts	Receivables		456	Accounts payable		-

Totals		$	456		$	4,180

Derivatives not designated as hedging instruments:
Commodity contracts	Receivables	$	796	Accounts payable	$	295
Foreign exchange contracts	Receivables		32	Accounts payable		-

Totals		$	828		$	295

Total Derivative Instruments		$	1,284		$	4,475

The amounts in the table above reflect the fair value of the Company’s derivative contracts on a net basis. Had these amounts been recognized on a gross basis, the impact would have been a $730,000 increase in receivables with a corresponding increase in accounts payable.

Cash Flow Hedges

We enter into derivative instruments to hedge our exposure to changes in cash flows attributable to interest rate and commodity price fluctuations associated with certain forecasted transactions. These derivative instruments are designated and qualify as cash flow hedges. Accordingly, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (“OCI”) and reclassified into earnings in the same financial statement caption associated with the forecasted transaction and in the same period during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument is recognized in earnings immediately.

The following table summarizes our cash flow hedges outstanding at November 30, 2014:


(in thousands)	Notional Amount		Maturity Date
Commodity contracts	$	57,368	December 2014 - July 2016
Interest rate contracts		120,000	December 2014 - September 2019
Foreign currency contracts		11,168	December 2014 - June 2015

The following table summarizes the gain (loss) recognized in OCI and the gain (loss) reclassified from accumulated OCI into earnings for derivative instruments designated as cash flow hedges during the three months ended November 30, 2014 and 2013:


(in thousands)	Gain (Loss) Recognized in OCI (Effective Portion)			Location of Gain (Loss) Reclassified from Accumulated OCI (Effective Portion)	Gain (Loss) Reclassified from Accumulated OCI (Effective Portion)			Location of Gain (Loss) (Ineffective Portion) and Excluded from Effectiveness Testing		Gain (Loss) (Ineffective Portion) and Excluded from Effectiveness Testing
For the three months ended November 30, 2014:
Interest rate contracts	$	-		Interest expense	$	(1,137	)		Interest expense	$	-
Commodity contracts		(4,362	)	Cost of goods sold		(356	)		Cost of goods sold		-
Foreign currency contracts		(103	)	Miscellaneous income		-			Miscellaneous income		-

Totals	$	(4,465	)		$	(1,493	)			$	-

For the three months ended November 30, 2013:
Interest rate contracts	$	(181	)	Interest expense	$	(1,057	)		Interest expense	$	-
Commodity contracts		(1,047	)	Cost of goods sold		(812	)		Cost of goods sold		-

Totals	$	(1,228	)		$	(1,869	)			$	-


(in thousands)	Gain (Loss) Recognized in OCI (Effective Portion)			Location of Gain (Loss) Reclassified from Accumulated OCI (Effective Portion)	Gain (Loss) Reclassified from Accumulated OCI (Effective Portion)			Location of Gain (Loss) (Ineffective Portion) and Excluded from Effectiveness Testing	Gain (Loss) (Ineffective Portion) and Excluded from Effectiveness Testing
For the six months ended November 30, 2014:
Interest rate contracts	$	-		Interest expense	$	(2,285	)	Interest expense	$	-
Commodity contracts		(4,775	)	Cost of goods sold		(1,152	)	Cost of goods sold		-
Foreign currency contracts		(103	)	Miscellaneous income		-		Miscellaneous income		-

Totals	$	(4,878	)		$	(3,437	)		$	-

For the six months ended November 30, 2013:
Interest rate contracts	$	(384	)	Interest expense	$	(2,120	)	Interest expense	$	-
Commodity contracts		2,617		Cost of goods sold		(1,128	)	Cost of goods sold		-

Totals	$	2,233			$	(3,248	)		$	-

The estimated net amount of the losses recognized in accumulated OCI at November 30, 2014 expected to be reclassified into net earnings within the succeeding twelve months is $2,118,000 (net of tax of $1,251,000). This amount was computed using the fair value of the cash flow hedges at November 30, 2014, and will change before actual reclassification from OCI to net earnings during the fiscal years ending May 31, 2015 and 2016.

Economic (Non-designated) Hedges

We enter into foreign currency contracts to manage our foreign exchange exposure related to inter-company and financing transactions that do not meet the requirements for hedge accounting treatment. We also enter into certain commodity contracts that do not qualify for hedge accounting treatment. Accordingly, these derivative instruments are adjusted to current market value at the end of each period through earnings.

The following table summarizes our economic (non-designated) derivative instruments outstanding at November 30, 2014:


(in thousands)	Notional Amount		Maturity Date(s)
Commodity contracts	$	57,607	December 2014 - June 2016

The following table summarizes the loss recognized in earnings for economic (non-designated) derivative financial instruments during the three months ended November 30, 2014 and 2013:


	Location of Loss	Loss Recognized in Earnings for the Three Months Ended November 30,
(in thousands)	Recognized in Earnings	2014			2013
Commodity contracts	Cost of goods sold	$	(2,360	)	$	(394	)
Foreign currency contracts	Miscellaneous income (expense)		(218	)		-

Total		$	(2,578	)	$	(394	)

The following table summarizes the gain (loss) recognized in earnings for economic (non-designated) derivative financial instruments during the six months ended November 30, 2014 and 2013:


	Location of Gain (Loss)	Gain (Loss) Recognized in Earnings for the Six Months Ended November 30,
(in thousands)	Recognized in Earnings	2014			2013
Commodity contracts	Cost of goods sold	$	(2,417	)	$	282
Foreign currency contracts	Miscellaneous income (expense)		43			(5	)

Total		$	(2,374	)	$	277

The gain (loss) on the foreign currency derivatives significantly offsets the gain (loss) on the hedged item.