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, and (ii) foreign currency forward contracts that match the expected settlements for purchases and sales denominated in foreign currencies.

At May 31, 2018, the notional values of the Company's foreign currency contract commitments and its commodity contract commitments were $140.4 million and $64.8 million, respectively. At May 31, 2017, the notional values of the Company's foreign currency contract commitments and its commodity contract commitments were $262.8 million and $36.9 million, respectively.

The following table provides information regarding the Company's commodity contract commitments as of May 31, 2018:



Commodity	Long/Short	Total
Aluminum	Long	6,125	MT
Aluminum	Short	3,075	MT
Copper	Long	363	MT
Copper	Short	6,021	MT

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MT = Metric Ton

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 unaudited condensed consolidated statements of earnings, and there were no components excluded from the assessment of hedge effectiveness for the three and nine months ended May 31, 2018 and May 31, 2017. 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 unaudited condensed consolidated statements of earnings (amounts in thousands):



		Three Months Ended May 31,					Nine Months Ended May 31,
Derivatives Not Designated as Hedging Instruments	Location	2018		2017			2018			2017
Commodity	Cost of goods sold	$	1,498	$	1,654		$	2,071		$	(3,121	)
Foreign exchange	Net sales	—		(2		)	—			(2		)
Foreign exchange	Cost of goods sold	—		(5		)	(50		)	(38		)
Foreign exchange	SG&A expenses	518		(1,076		)	1,169			2,295
Gain (loss) before income taxes		$	2,016	$	571		$	3,190		$	(866	)

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 and capital expenditures.



	Location of Gain (Loss) Recognized in Income on Derivatives	Amount of Gain (Loss) Recognized in Income on Derivatives for the Three Months Ended May 31,						Location of gain (loss) recognized in income on related hedged items	Amount of Gain (Loss) Recognized in Income on Related Hedge Items for the Three Months Ended May 31,
	Location of Gain (Loss) Recognized in Income on Derivatives	2018			2017				2018			2017
Foreign exchange	Net sales	$	163		$	(102	)	Net sales	$	(163	)	$	102
Foreign exchange	Cost of goods sold	(429		)	1,042			Cost of goods sold	429			(1,042		)
Gain (loss) before income taxes		$	(266	)	$	940			$	266		$	(940	)



	Location of Gain (Loss) Recognized in Income on Derivatives	Amount of Gain (Loss) Recognized in Income on Derivatives for the Nine Months Ended May 31,						Location of gain (loss) recognized in income on related hedged items	Amount of Gain (Loss) Recognized in Income on Related Hedge Items for the Nine Months Ended May 31,
	Location of Gain (Loss) Recognized in Income on Derivatives	2018			2017				2018			2017
Foreign exchange	Net sales	$	(66	)	$	(58	)	Net sales	$	66		$	58
Foreign exchange	Cost of goods sold	1,596			435			Cost of goods sold	(1,596		)	(435		)
Gain (loss) before income taxes		$	1,530		$	377			$	(1,530	)	$	(377	)



Effective Portion of Derivatives Designated as Cash Flow Hedging Instruments Recognized in AOCI	Three Months Ended May 31,					Nine Months Ended May 31,
	2018		2017			2018		2017
Commodity	$	—	$	(9	)	$	—	$	208
Foreign exchange	13		263			38		488
Gain, net of income taxes	$	13	$	254		$	38	$	696

Refer to Note 3, Accumulated Other Comprehensive Income (Loss), for the effective portion of derivatives designated as cash flow hedging instruments reclassified from AOCI.

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 unaudited condensed consolidated balance sheets. The asset and liability balances in the tables below reflect the gross amounts of derivative instruments at May 31, 2018 and August 31, 2017. The fair value of the Company's derivative instruments on the unaudited condensed consolidated balance sheets was as follows (amounts are in thousands):



Derivative Assets	May 31, 2018		August 31, 2017
Commodity — not designated for hedge accounting	$	901	$	767
Foreign exchange — designated for hedge accounting	—		81
Foreign exchange — not designated for hedge accounting	1,573		1,286
Derivative assets (other current assets)*	$	2,474	$	2,134



Derivative Liabilities	May 31, 2018		August 31, 2017
Commodity — not designated for hedge accounting	$	80	$	3,251
Foreign exchange — designated for hedge accounting	—		1,549
Foreign exchange — not designated for hedge accounting	1,550		3,710
Derivative liabilities (accrued expenses and other payables)*	$	1,630	$	8,510

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

As of May 31, 2018, 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 were not entered into for trading purposes.