NOTE O – Derivative Instruments and Hedging Activities

We utilize derivative 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 contracts 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 have credit support agreements in place with certain counterparties to limit our credit exposure. These agreements require either party to post cash collateral if its cumulative market position exceeds a predefined liability threshold. At February 29, 2016, we had posted total cash collateral of $3,810,000 to our margin accounts. Amounts posted to the margin accounts accrue interest at market rates and are required to be refunded in the period in which the cumulative market position falls below the required threshold. 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 Measurements” 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 February 29, 2016:


	Asset Derivatives			Liability Derivatives
(in thousands)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments:
Commodity contracts	Receivables	$	-	Accounts payable	$	12,334
	Other assets		-	Other liabilities		338

			-			12,672
Interest rate contracts	Receivables		-	Accounts payable		141
	Other assets		-	Other liabilities		327

			-			468

Totals		$	-		$	13,140

Derivatives not designated as hedging instruments:
Commodity contracts	Receivables	$	-	Accounts payable	$	2,247
	Other assets		-	Other liabilities		133

			-			2,380

Foreign exchange contracts	Receivables		-	Accounts payable		2

			-			2

Totals		$	-		$	2,382

Total Derivative Instruments		$	-		$	15,522

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 $995,000 increase in receivables with a corresponding increase in accounts payable.

The following table summarizes the fair value of our derivative instruments and the financial statement caption in which they were recorded in the consolidated balance sheet at May 31, 2015:


	Asset Derivatives			Liability Derivatives
	Balance			Balance
	Sheet	Fair		Sheet	Fair
(in thousands)	Location	Value		Location	Value
Derivatives designated as hedging instruments:
Commodity contracts	Receivables	$	-	Accounts payable	$	17,241
	Other assets		-	Other liabilities		592

			-			17,833
Interest rate contracts	Receivables		-	Accounts payable		81
Other assets	Other assets		-	Other liabilities		113

			-			194

Foreign exchange contracts	Receivables		75	Accounts payable		-

Totals		$	75		$	18,027

Derivatives not designated as hedging instruments:
Commodity contracts	Receivables	$	96	Accounts payable	$	4,104

Totals		$	96		$	4,104

Total Derivative Instruments		$	171		$	22,131

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 $500,000 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 rates, foreign exchange rates, 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 (loss) (“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 February 29, 2016:


(in thousands)	Notional Amount		Maturity Date
Commodity contracts	$	103,490	March 2016 - December 2017
Interest rate contracts		16,635	September 2019

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 February 29, 2016 and February 28, 2015:


				Location of				Location of
				Gain (Loss)	Gain (Loss)			Gain (Loss)	Gain (Loss)
				Reclassified	Reclassified			(Ineffective	(Ineffective
	Gain (Loss)			from	from			Portion)	Portion)
	Recognized			Accumulated	Accumulated			and Excluded	and Excluded
	in OCI			OCI	OCI			from	from
	(Effective			(Effective	(Effective			Effectiveness	Effectiveness
(in thousands)	Portion)			Portion)	Portion)			Testing	Testing
For the three months ended February 29, 2016:
Interest rate contracts	$	(107	)	Interest expense	$	(130	)	Interest expense	$	-
Commodity contracts		707		Cost of goods sold		(7,775	)	Cost of goods sold		-

Totals	$	600			$	(7,905	)		$	-

For the three months ended February 28, 2015:
Interest rate contracts	$	-		Interest expense	$	(160	)	Interest expense	$	-
Commodity contracts		(15,178	)	Cost of goods sold		539		Cost of goods sold		-
Foreign currency contracts		314		Miscellaneous income		-		Miscellaneous income		-

Totals	$	(14,864	)		$	379			$	-

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 nine months ended February 29, 2016 and February 28, 2015:


				Location of				Location of
				Gain (Loss)	Gain (Loss)			Gain (Loss)	Gain (Loss)
				Reclassified	Reclassified			(Ineffective	(Ineffective
	Gain (Loss)			from	from			Portion)	Portion)
	Recognized			Accumulated	Accumulated			and Excluded	and Excluded
	in OCI			OCI	OCI			from	from
	(Effective			(Effective	(Effective			Effectiveness	Effectiveness
(in thousands)	Portion)			Portion)	Portion)			Testing	Testing
For the nine months ended February 29, 2016:
Interest rate contracts	$	(274	)	Interest expense	$	(415	)	Interest expense	$	-
Commodity contracts		(17,629	)	Cost of goods sold		(23,422	)	Cost of goods sold		-
Foreign currency contracts		-		Miscellaneous income		(4	)	Miscellaneous income		-

Totals	$	(17,903	)		$	(23,841	)		$	-

For the nine months ended February 28, 2015:
Interest rate contracts	$	-		Interest expense	$	(2,445	)	Interest expense	$	-
Commodity contracts		(19,953	)	Cost of goods sold		(613	)	Cost of goods sold		-
Foreign currency contracts		211		Miscellaneous income		-		Miscellaneous income		-

Totals	$	(19,742	)		$	(3,058	)		$	-

The estimated net amount of the losses recognized in accumulated OCI at February 29, 2016 expected to be reclassified into net earnings within the succeeding twelve months is $9,382,000 (net of tax of $5,349,000). This amount was computed using the fair value of the cash flow hedges at February 29, 2016, and will change before actual reclassification from OCI to net earnings during the fiscal years ending May 31, 2016 and 2017.

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 February 29, 2016:


(in thousands)	Notional Amount		Maturity Date(s)
Commodity contracts	$	36,996	March 2016 - October 2017
Foreign currency contracts		6,806	March 2016 - February 2017

The following table summarizes the gain (loss) recognized in earnings for economic (non-designated) derivative financial instruments during the three months ended February 29, 2016 and February 28, 2015:


		Gain (Loss) Recognized in Earnings for the Three Months Ended
(in thousands)	Location of Gain (Loss) Recognized in Earnings	February 29, 2016		February 28, 2015
Commodity contracts	Cost of goods sold	$	173	$	(4,105	)
Foreign currency contracts	Miscellaneous income (expense)		47		—

Total		$	220	$	(4,105	)

The following table summarizes the gain (loss) recognized in earnings for economic (non-designated) derivative financial instruments during the nine months ended February 29, 2016 and February 28, 2015:


		Gain (Loss) Recognized in Earnings for the Nine Months Ended
(in thousands)	Location of Gain (Loss) Recognized in Earnings	February 29, 2016			February 28, 2015
Commodity contracts	Cost of goods sold	$	(7,972	)	$	(6,522	)
Foreign currency contracts	Miscellaneous income (expense)		117			43

Total		$	(7,855	)	$	(6,479	)

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