Derivatives and Risk Management

3 Months Ended

Nov. 30, 2011

Derivatives and Risk Management [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 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.

At November 30, 2011, the Company’s notional value of its foreign currency contract commitments was $298 million and interest rate swap contract commitments was $800 million.

The following table provides commodity contract commitments as of November 30, 2011:

Commodity	Long/Short	Total
Aluminum	Long		5,175 MT
Aluminum	Short		3,225 MT
Copper	Long		848 MT
Copper	Short		5,636 MT
Zinc	Long		36 MT
Natural Gas	Long		160,000 MMBtu

• 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 statements of earnings, and there were no components excluded from the assessment of hedge effectiveness for the three months ended November 30, 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 earnings (in thousands):

Derivatives Not Designated as Hedging Instruments	Location	Three Months Ended November 30,
		2011			2010
Commodity	Cost of goods sold	$	3,577		$	(10,286	)
Foreign exchange	Net sales		(108	)		(18	)
Foreign exchange	Cost of goods sold		(233	)		580
Foreign exchange	SG&A expenses		(7,159	)		(3,324	)
Loss before taxes		$	(3,923	)	$	(13,048	)

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 November 30, 2011, fair value hedge accounting for interest rate swap contracts increased the carrying value of debt instruments by $45.6 million.

Derivatives Designated as Fair Value Hedging Instruments	Location	Three Months  Ended November 30,
		2011		2010
Foreign exchange	SG&A expenses	$	2,570	$	(7,887	)
Interest rate	Interest expense		1,205		21,555
Gain before taxes		$	3,775	$	13,668

Hedged (Underlying) Items Designated as Fair Value Hedging Instruments	Location	Three Months Ended November 30,
		2011			2010
Foreign exchange	Net sales	$	—		$	38
Foreign exchange	SG&A expenses		(2,579	)		7,848
Interest rate	Interest expense		(1,205	)		(21,555	)
Loss before taxes		$	(3,784	)	$	(13,669	)

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 $4.2 million and $3.3 million for the three months ended November 30, 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)	Three Months  Ended November 30,
	2011			2010
Commodity	$	(25	)	$	37
Foreign exchange		(1,161	)		17
Gain (loss), net of taxes	$	(1,186	)	$	54

Effective Portion of Derivatives Designated as Cash Flow Hedging Instruments Reclassified from Accumulated Other Comprehensive Income		Three Months  Ended November 30,
(Loss)	Location	2011			2010
Commodity	Cost of goods sold	$	(13	)	$	(83	)
Foreign exchange	Net sales		(1,157	)		—
Foreign exchange	SG&A expenses		(64	)		33
Interest rate	Interest expense		101			114
Gain (loss), net of taxes		$	(1,133	)	$	64

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

Derivative Assets	November 30, 2011		August 31, 2011
Commodity — designated	$	62	$	17
Commodity — not designated		1,918		2,329
Foreign exchange — designated		1,176		893
Foreign exchange — not designated		680		970
Current interest rate — designated		17,403		19,134
Long-term interest rate — designated		28,226		29,515
Derivative assets (other current assets and other assets)*	$	49,465	$	52,858

Derivative Liabilities	November 30, 2011		August 31, 2011
Commodity — not designated	$	3,268	$	2,625
Foreign exchange — designated		1,901		805
Foreign exchange — not designated		2,567		2,258
Derivative liabilities (accrued expenses, other payables and long-term liabilities)*	$	7,736	$	5,688

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

As of November 30, 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 not entered into for trading purposes.