Derivatives And Risk Management

9 Months Ended

May 31, 2012

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives and risk management

NOTE 9 — DERIVATIVES AND RISK MANAGEMENT

The Company’s worldwide operations and product lines expose it to risks from fluctuations in metals commodity prices, foreign currency exchange rates, natural gas prices and interest rates. One objective of the Company’s risk management program is to mitigate these risks using derivative instruments. The Company enters into metal commodity futures and forward contracts to mitigate the risk of unanticipated declines in gross margin due to the volatility of the commodities’ prices, enters into foreign currency forward contracts which match the expected settlements for purchases and sales denominated in foreign currencies and enters into natural gas forward contracts to mitigate the risk of unanticipated changes in operating cost due to the volatility of natural gas prices. When sales commitments to customers include a fixed price freight component, the Company occasionally enters into freight forward contracts to reduce the effects of the volatility of ocean freight rates. The Company entered into interest rate swap contracts to maintain the majority of the Company’s debt obligations at variable interest rates. These interest rate swap contracts, under which the Company has agreed to pay variable rates of interest and receive fixed rates of interest, were designated as fair value hedges of fixed-rate debt. During the third quarter of 2012, the Company terminated its existing interest rate swap transactions having a notional value of $800 million. See Note 8, Credit Arrangements for additional details.

At May 31, 2012, the Company’s notional values of its foreign currency contract commitments were $323 million.

The following table provides commodity contract commitments as of May 31, 2012:

Commodity	Long/Short	Total
Aluminum	Long	6,325	MT
Aluminum	Short	3,400	MT
Copper	Long	1,122	MT
Copper	Short	5,103	MT
Zinc	Long	15	MT
Natural Gas	Long	50,000	MMBtu

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• MT = Metric Ton

• MMBtu = One million British thermal units

The Company designates only those contracts which closely match the terms of the underlying transaction as hedges for accounting purposes. For the three and nine months ended May 31, 2012 and 2011, these hedges resulted in substantially no ineffectiveness in the statements of operations, and there were no components excluded from the assessment of hedge effectiveness. Certain of the foreign currency and commodity contracts were not designated as hedges for accounting purposes, although management believes they are essential economic hedges.

The following tables summarize activities related to the Company’s derivative instruments and hedged (underlying) items recognized within the statements of operations (in thousands):

Derivatives Not Designated as Hedging Instruments		Three Months Ended May 31,						Nine Months Ended May 31,
	Location	2012			2011			2012			2011
Commodity	Cost of goods sold	$	5,737		$	4,296		$	5,978		$	(11,744	)
Foreign exchange	Net sales	(18		)	39			(199		)	35
Foreign exchange	Cost of goods sold	—			305			(537		)	1,174
Foreign exchange	SG&A expenses	1,173			(3,984		)	479			(4,823		)
Gain (loss) before taxes		$	6,892		$	656		$	5,721		$	(15,358	)

The Company’s fair value hedges are designated for accounting purposes with gains and losses on the hedged (underlying) items offsetting the gain or loss on the related derivative transaction. Hedged (underlying) items relate to firm commitments on commercial sales and purchases and capital expenditures.

Derivatives Designated as Fair Value Hedging Instruments		Three Months Ended May 31,						Nine Months Ended May 31,
	Location	2012			2011			2012		2011
Foreign exchange	SG&A expenses	$	5,805		$	(5,382	)	$	4,255	$	(14,157	)
Interest rate	Interest expense	(6,613		)	11,091			10,561		17,331
Gain (loss) before taxes		$	(808	)	$	5,709		$	14,816	$	3,174

Hedged (Underlying) Items Designated as Fair Value Hedging Instruments		Three Months Ended May 31,						Nine Months Ended May 31,
	Location	2012			2011			2012			2011
Foreign exchange	Net sales	$	—		$	77		$	—		$	126
Foreign exchange	SG&A expenses	(5,805		)	5,299			(4,255		)	14,031
Interest rate	Interest expense	6,613			(11,090		)	(10,561		)	(17,331		)
Gain (loss) before taxes		$	808		$	(5,714	)	$	(14,816	)	$	(3,174	)

The Company recognized the impact of actual and estimated net periodic settlements of current interest on active interest rate swaps as adjustments to interest expense. The Company recorded an increase to interest expense of $2.1 million for the three months ended May 31, 2012, related to the termination of the interest rate swaps. The Company recorded a reduction to interest expense related to interest rate swaps of $3.9 million for the three months ended May 31, 2011. The Company recorded reductions to interest expense related to interest rate swaps of $6.5 million and $10.7 million for the nine months ended May 31, 2012 and 2011, respectively. These amounts represent the net of the Company’s periodic variable-rate interest obligations and the swap counterparty’s fixed-rate interest obligations. The Company’s variable-rate obligations are based on a spread from the six-month LIBOR.

Effective Portion of Derivatives Designated as Cash Flow Hedging Instruments Recognized in Accumulated Other Comprehensive Income (Loss)	Three Months Ended May 31,						Nine Months Ended May 31,
	2012			2011			2012			2011
Commodity	$	(22	)	$	(266	)	$	(3	)	$	126
Foreign exchange	(1,001		)	125			(2,629		)	296
Gain (loss), net of taxes	$	(1,023	)	$	(141	)	$	(2,632	)	$	422

Effective Portion of Derivatives Designated as Cash Flow Hedging Instruments Reclassified from Accumulated Other Comprehensive Income (Loss)		Three Months Ended May 31,					Nine Months Ended May 31,
	Location	2012			2011		2012			2011
Commodity	Cost of  goods sold	$	3		$	133	$	18		$	103
Foreign exchange	Net sales	40			—		(1,153		)	—
Foreign exchange	SG&A expenses	(116		)	16		(277		)	82
Interest rate	Interest expense	102			115		305			344
Gain (loss), net of taxes		$	29		$	264	$	(1,107	)	$	529

The Company’s derivative instruments were recorded at their respective fair values as follows on the consolidated balance sheets (in thousands):

Derivative Assets	May 31, 2012		August 31, 2011
Commodity — designated	$	15	$	17
Commodity — not designated	4,835		2,329
Foreign exchange — designated	2,391		893
Foreign exchange — not designated	1,415		970
Current interest rate — designated	—		19,134
Long-term interest rate — designated	—		29,515
Derivative assets (other current assets and other assets)*	$	8,656	$	52,858

Derivative Liabilities	May 31, 2012		August 31, 2011
Commodity — designated	$	6	$	—
Commodity — not designated	2,977		2,625
Foreign exchange — designated	1,456		805
Foreign exchange — not designated	1,844		2,258
Derivative liabilities (accrued expenses, other payables and long-term liabilities)*	$	6,283	$	5,688

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* Derivative assets and liabilities do not include the hedged (underlying) items designated as fair value hedges.

As of May 31, 2012, all of the Company’s derivative instruments designated to hedge exposure to the variability in future cash flows of the forecasted transactions will mature within twelve months.

All of the instruments are highly liquid, and not entered into for trading purposes.