Derivatives And Risk Management

12 Months Ended

Aug. 31, 2012

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives and risk management

NOTE 11. 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 that 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 had 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, are 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 10, Credit Arrangements for additional information. 

The Company designates only those contracts which closely match the terms of the underlying transaction as hedges for accounting purposes. These hedges resulted in substantially no ineffectiveness in the statements of operations, and there were no components excluded from the assessment of hedge effectiveness for the years ended August 31, 2012 and 2011. 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) for the years ended August 31:

Derivatives Not Designated as Hedging Instruments	Location	2012			2011			2010
Commodity	Cost of goods sold	$	4,496		$	(10,857	)	$	(5,745	)
Foreign exchange	Net sales	(199		)	38			(898		)
Foreign exchange	Cost of goods sold	(537		)	1,412			(1,153		)
Foreign exchange	SG&A expenses	(872		)	(8,025		)	32
Gain (loss) before taxes		$	2,888		$	(17,432	)	$	(7,764	)

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. As of August 31, 2011, fair value hedge accounting for interest rate swap contracts increased the carrying value of debt instruments by $48.6 million.

Derivatives Designated as Fair Value Hedging Instruments		August 31,
	Location	2012		2011			2010
Foreign exchange	SG&A expenses	$	383	$	(15,053	)	(4,194	)
Interest rate	Interest expense	10,561		33,485			32,438
Gain before taxes		$	10,944	$	18,432		28,244

Hedged (Underlying) Items Designated as Fair Value Hedging Instruments		August 31,
	Location	2012			2011			2010
Foreign exchange	Net sales	$	—		$	91		39
Foreign exchange	SG&A expenses	(383		)	14,955			4,147
Interest rate	Interest expense	(10,561		)	(33,485		)	(32,438	)
Loss before taxes		$	(10,944	)	$	(18,439	)	(28,252	)

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 a reduction to interest expense related to interest rate swaps of $6.5 million, $15.7 million and $5.7 million for the years ended August 31, 2012, 2011 and 2010, 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)	August 31,
	2012			2011		2010
Commodity	$	—		$	26	27
Foreign exchange	(1,545		)	797		264
Gain (loss), net of taxes	$	(1,545	)	$	823	291

Effective Portion of Derivatives Designated as Cash Flow Hedging Instruments Reclassified from Accumulated Other Comprehensive Income (Loss)		August 31,
	Location	2012			2011		2010
Commodity	Cost of  goods sold	$	27		$	195	(7	)
Foreign exchange	Net sales	(826		)	—		—
Foreign exchange	SG&A expenses	(300		)	365		(81	)
Interest rate	Interest expense	521			458		458
Gain (loss), net of taxes		$	(578	)	$	1,018	370

The Company’s derivative instruments were recorded at their respective fair values as follows on the consolidated balance sheets (in thousands) for the year ended August 31:

Derivative Assets	2012		2011
Commodity — designated	$	—	$	17
Commodity — not designated	407		2,329
Foreign exchange — designated	670		893
Foreign exchange — not designated	798		970
Current interest rate — designated	—		19,134
Long-term interest rate — designated	—		29,515
Derivative assets (other current assets and other assets)*	$	1,875	$	52,858

Derivative Liabilities	2012		2011
Commodity — designated	$	2	$	—
Commodity — not designated	993		2,625
Foreign exchange — designated	1,272		805
Foreign exchange — not designated	1,248		2,258
Other — not designated	32		—
Derivative liabilities (accrued expenses, other payables and long-term liabilities)*	$	3,547	$	5,688

 _________________ 

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

As of August 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.