DERIVATIVES AND RISK MANAGEMENT

6 Months Ended

Feb. 28, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives and risk management

NOTE 8. DERIVATIVES AND RISK MANAGEMENT

The Company's global operations and product lines expose it to risks from fluctuations in metal 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 (i) metal commodity futures and forward contracts to mitigate the risk of unanticipated changes in gross margin due to the volatility of the commodities' prices, (ii) foreign currency forward contracts that match the expected settlements for purchases and sales denominated in foreign currencies and (iii) 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.

At February 28, 2015, the notional values of the Company's foreign currency contract commitments and its commodity contract commitments were $402.3 million and $50.0 million, respectively. At February 28, 2014, the notional values of the Company's foreign currency contract commitments and its commodity contract commitments were $439.9 million and $48.3 million, respectively.

The following table provides information regarding the Company's commodity contract commitments as of February 28, 2015:

Commodity	Long/Short	Total
Aluminum	Long	4,246	MT
Aluminum	Short	225	MT
Copper	Long	1,457	MT
Copper	Short	5,381	MT
Zinc	Long	29	MT
Natural Gas	Long	360,000	MMBTUs

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. These hedges resulted in substantially no ineffectiveness in the Company's consolidated statements of earnings, and there were no components excluded from the assessment of hedge effectiveness for the three and six months ended February 28, 2015 and 2014. Certain 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 items recognized in the consolidated statements of earnings:

		Three Months Ended February 28,					Six Months Ended February 28,
Derivatives Not Designated as Hedging Instruments (in thousands)	Location	2015		2014			2015		2014
Commodity	Cost of goods sold	$	1,866	$	129		$	5,301	$	639
Foreign exchange	Net sales	569		(226		)	3,005		(385		)
Foreign exchange	Cost of goods sold	2,480		(250		)	4,351		(371		)
Foreign exchange	SG&A expenses	7,874		(2,122		)	20,074		(6,815		)
Gain (loss) before income taxes		$	12,789	$	(2,469	)	$	32,731	$	(6,932	)

The Company's fair value hedges are designated for accounting purposes with the gains or losses on the hedged items offsetting the gains or losses on the related derivative transactions. Hedged items relate to firm commitments on commercial sales and purchases.

Derivatives Designated as Fair Value Hedging Instruments (in thousands)		Three Months Ended February 28,						Six Months Ended February 28,
	Location	2015			2014			2015		2014
Foreign exchange	Net sales	$	534		$	140		$	359	$	27
Foreign exchange	Cost of goods sold	(229		)	(953		)	925		(1,080		)
Gain (loss) before income taxes		$	305		$	(813	)	$	1,284	$	(1,053	)

Hedged Items Designated as Fair Value Hedging Instruments (in thousands)		Three Months Ended February 28,						Six Months Ended February 28,
	Location	2015			2014			2015			2014
Foreign exchange	Net sales	$	(537	)	$	(130	)	$	(358	)	$	(37	)
Foreign exchange	Cost of goods sold	229			955			(925		)	1,080
Gain (loss) before income taxes		$	(308	)	$	825		$	(1,283	)	$	1,043

Effective Portion of Derivatives Designated as Cash Flow Hedging Instruments Recognized in Accumulated Other Comprehensive Income (Loss) (in thousands)	Three Months Ended February 28,						Six Months Ended February 28,
	2015			2014			2015			2014
Commodity	$	(348	)	$	(24	)	$	(416	)	$	(113	)
Foreign exchange	(1,552		)	(402		)	(2,009		)	(1,930		)
Loss, net of income taxes	$	(1,900	)	$	(426	)	$	(2,425	)	$	(2,043	)

Effective Portion of Derivatives Designated as Cash Flow Hedging Instruments Reclassified from Accumulated Other Comprehensive Income (Loss) (in thousands)		Three Months Ended February 28,						Six Months Ended February 28,
	Location	2015			2014			2015			2014
Commodity	Cost of goods sold	$	(91	)	$	(64	)	$	(104	)	$	(153	)
Foreign exchange	Net sales	76			(2		)	76			(233		)
Foreign exchange	Cost of goods sold	(813		)	(416		)	(943		)	(1,174		)
Foreign exchange	SG&A expenses	15			13			32			25
Interest rate	Interest expense	86			87			173			173
Loss, net of income taxes		(727		)	$	(382	)	$	(766	)	$	(1,362	)

The Company enters into derivative agreements that include provisions to allow the set-off of certain amounts. Derivative instruments are presented on a gross basis on the Company's consolidated balance sheets. The asset and liability balances in the tables below reflect the gross amounts of derivative instruments at February 28, 2015 and August 31, 2014. The fair value of the Company's derivative instruments on the consolidated balance sheets was as follows:

Derivative Assets (in thousands)	February 28, 2015		August 31, 2014
Commodity — designated for hedge accounting	$	10	$	42
Commodity — not designated for hedge accounting	698		869
Foreign exchange — designated for hedge accounting	1,445		136
Foreign exchange — not designated for hedge accounting	2,502		1,853
Derivative assets (other current assets)*	$	4,655	$	2,900

Derivative Liabilities (in thousands)	February 28, 2015		August 31, 2014
Commodity — designated for hedge accounting	$	421	$	6
Commodity — not designated for hedge accounting	1,295		162
Foreign exchange — designated for hedge accounting	1,936		325
Foreign exchange — not designated for hedge accounting	2,040		1,010
Derivative liabilities (accrued expenses and other payables)*	$	5,692	$	1,503

 _________________ 

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

As of February 28, 2015, most 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 were not entered into for trading purposes.