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, foreign currency exchange rate 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 and treasury locks to further manage our exposure to interest rate variations related to our borrowings and to lower our overall borrowing costs.

Foreign Currency Exchange Risk Management – We conduct business in several major international currencies and are therefore subject to risks associated with changing foreign currency exchange rates. We enter into various contracts that change in value as foreign currency exchange rates change to manage this exposure. Such contracts limit exposure to both favorable and unfavorable currency exchange rate fluctuations. The translation of foreign currencies into U.S. dollars also subjects us to exposure related to fluctuating currency 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. 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. 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" 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 lines in which they were recorded in the consolidated balance sheet at August 31, 2018:

	Asset Derivatives			Liability Derivatives
	Balance			Balance
	Sheet	Fair		Sheet	Fair
(in thousands)	Location	Value		Location	Value
Derivatives designated as hedging instruments:
Commodity contracts	Receivables	$	3,133	Accounts payable	$	179
	Other assets		-	Other liabilities		36
Totals		$	3,133		$	215

Derivatives not designated as hedging instruments:
Commodity contracts	Receivables	$	1,789	Accounts payable	$	916
	Other assets		217	Other liabilities		438
			2,006			1,354
Foreign exchange contracts	Receivables		5	Accounts payable		-
Totals		$	2,011		$	1,354
Total derivative instruments		$	5,144		$	1,569

The amounts in the table above reflect the fair value of the Company’s derivative instruments on a net basis. Had these amounts been recognized on a gross basis, the impact would have been a $1,392,000 increase in receivables with a corresponding increase in accounts payable.

The following table summarizes the fair value of our derivative instruments and the respective lines in which they were recorded in the consolidated balance sheet at May 31, 2018:

	Asset Derivatives			Liability Derivatives
	Balance			Balance
	Sheet	Fair		Sheet	Fair
(in thousands)	Location	Value		Location	Value
Derivatives designated as hedging instruments:
Commodity contracts	Receivables	$	6,385	Accounts payable	$	-
	Other assets		68	Other liabilities		-
Totals		$	6,453		$	-

Derivatives not designated as hedging instruments:
Commodity contracts	Receivables	$	4,749	Accounts payable	$	613
	Other assets		221	Other liabilities		158
			4,970			771
Foreign exchange contracts	Receivables		-	Accounts payable		75
Totals		$	4,970		$	846
Total derivative instruments		$	11,423		$	846

The amounts in the table above reflect the fair value of the Company’s derivative instruments on a net basis. Had these amounts been recognized on a gross basis, the impact would have been a $351,000 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 AOCI and reclassified into earnings in the same line 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 August 31, 2018:

	Notional
(in thousands)	Amount		Maturity Date
Commodity contracts	$	12,181	September 2018 - September 2019

The following table summarizes the gain (loss) recognized in OCI and the gain (loss) reclassified from AOCI into earnings for derivative instruments designated as cash flow hedges for the periods presented:

Location of

Gain

Gain (Loss)

(Ineffective

Gain (Loss)

Reclassified

Portion)

Recognized

from

and Excluded

in OCI

AOCI

from

(Effective

Effectiveness

(in thousands)

Portion)

Testing

For the three months

ended August 31, 2018:

Commodity contracts

(31

)

Cost of goods sold

2,543

Cost of goods sold

Interest rate contracts

Interest expense

(47

)

Interest expense

Totals

(31

)

2,496

For the three months

ended August 31, 2017:

Commodity contracts

3,734

Cost of goods sold

4,168

Cost of goods sold

Interest rate contracts

3,064

Interest expense

(363

)

Interest expense

Totals

6,798

3,805

The estimated net amount of the losses recognized in AOCI at August 31, 2018 expected to be reclassified into net earnings within the succeeding twelve months is $3,847,000 (net of tax of $1,205,000). This amount was computed using the fair value of the cash flow hedges at August 31, 2018, and will change before actual reclassification from OCI to net earnings during the fiscal years ending May 31, 2019 and May 31, 2020.

Economic (Non-designated) Hedges

We enter into foreign exchange contracts to manage our foreign currency exchange rate 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 August 31, 2018:

	Notional
(in thousands)	Amount		Maturity Date(s)
Commodity contracts	$	27,961	September 2018 - February 2020
Foreign exchange contracts		6,647	September 2018 - May 2019

The following table summarizes the gain (loss) recognized in earnings for economic (non-designated) derivative financial instruments for the periods presented:

		Gain (Loss) Recognized
		In Earnings for the
	Location of Gain (Loss)	Three Months Ended August 31,
(in thousands)	Recognized in Earnings	2018			2017
Commodity contracts	Cost of goods sold	$	(2,197	)	$	2,334
Foreign exchange contracts	Miscellaneous income, net		(1,506	)		(208	)
Total		$	(3,703	)	$	2,126

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