Derivatives and Risk Management

12 Months Ended

Aug. 31, 2011

Derivatives and Risk Management [Abstract]

DERIVATIVES AND RISK MANAGEMENT

NOTE 10. 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 minimize the effect of the volatility of ocean freight rates. The Company enters into interest rate swap contracts to maintain a portion 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.

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 year ended August 31, 2011 and 2010. 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	2011			2010			2009
Commodity	Cost of goods sold	$	(10,857	)	$	(5,745	)	$	14,666
Foreign exchange	Net sales		38			(898	)		532
Foreign exchange	Cost of goods sold		1,412			(1,153	)		26
Foreign exchange	SG&A expenses		(8,025	)		32			(9,816	)
Other	Cost of goods sold		—			—			(941	)
Other	SG&A expenses		—			—			97
Gain (loss) before taxes		$	(17,432	)	$	(7,764	)	$	4,564

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, capital expenditures and fixed rate debt obligations. 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		August 31,
Hedging Instruments	Location	2011			2010			2009
Foreign exchange	SG&A expenses	$	(15,053	)	$	(4,194	)	$	43,185
Interest rate	Interest expense		33,485			32,438			—
Gain before taxes		$	18,432		$	28,244		$	43,185

Hedged (Underlying) Items Designated as Fair Value		August 31,
Hedging Instruments	Location	2011			2010			2009
Foreign exchange	Net sales	$	91		$	39		$	32
Foreign exchange	SG&A expenses		14,955			4,147			(43,212	)
Interest rate	Interest expense		(33,485	)		(32,438	)		—
Loss before taxes		$	(18,439	)	$	(28,252	)	$	(43,180	)

The Company recognizes 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 reductions to interest expense related to interest rate swaps of $15.7 million and $5.7 million for the years ended August 31, 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	August 31,
Recognized in Accumulated Other Comprehensive Income (Loss)	2011		2010		2009
Commodity	$	26	$	27	$	(360	)
Foreign exchange		797		264		11,446
Gain, net of taxes	$	823	$	291	$	11,086

Effective Portion of Derivatives Designated as Cash Flow
Hedging Instruments Reclassified from		August 31,
Accumulated Other Comprehensive Income (Loss)	Location	2011		2010			2009
Commodity	Cost of goods sold	$	195	$	(7	)	$	(284	)
Foreign exchange	SG&A expenses		365		(81	)		(122	)
Interest rate	Interest expense		458		458			458
Gain, net of taxes		$	1,018	$	370		$	52

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	2011		2010
Commodity — designated	$	17	$	80
Commodity — not designated		2,329		911
Foreign exchange — designated		893		435
Foreign exchange — not designated		970		1,188
Current interest rate — designated		19,134		12,173
Long-term interest rate — designated		29,515		20,265
Derivative assets (other current assets and other assets)*	$	52,858	$	35,052

Derivative Liabilities	2011		2010
Commodity — designated	$	—	$	95
Commodity — not designated		2,625		2,817
Foreign exchange — designated		805		1,749
Foreign exchange — not designated		2,258		1,097
Derivative liabilities (accrued expenses, other payables and long-term liabilities)*	$	5,688	$	5,758

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

As of August 31, 2011, 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 none are entered into for trading purposes.