Derivative Instruments

12 Months Ended

Aug. 31, 2012

Derivative Instruments

Note 15 - Derivative Instruments

Foreign operations give rise to market risks from changes in foreign currency exchange rates. Foreign currency forward exchange contracts with established financial institutions are utilized to hedge a portion of that risk in Euro. Interest rate swap agreements are utilized to reduce the impact of changes in interest rates on certain debt. The Company’s foreign currency forward exchange contracts and interest rate swap agreements are designated as cash flow hedges, and therefore the effective portion of unrealized gains and losses are recorded in accumulated other comprehensive loss.

At August 31, 2012 exchange rates, forward exchange contracts for the purchase of Polish Zloty and the sale of Euro aggregated to $87.5 million. Adjusting the foreign currency exchange contracts to the fair value of the cash flow hedges at August 31, 2012 resulted in an unrealized pre-tax gain of $2.1 million that was recorded in accumulated other comprehensive loss. The fair value of the contracts is included in Accounts payable and accrued liabilities when there is a loss, or Accounts receivable, net when there is a gain, on the Consolidated Balance Sheets. As the contracts mature at various dates through December 2013, any such gain or loss remaining will be recognized in manufacturing revenue along with the related transactions when they occur. In the event that the underlying sales transaction does not occur or does not occur in the period designated at the inception of the hedge, the amount classified in accumulated other comprehensive loss would be reclassified to the current year’s results of operations in Interest and foreign exchange.

At August 31, 2012, an interest rate swap agreement had a notional amount of $42.9 million and matures March 2014. The fair value of this cash flow hedge at August 31, 2012 resulted in an unrealized pre-tax loss of $2.9 million. The loss is included in Accumulated other comprehensive loss and the fair value of the contract is included in Accounts payable and accrued liabilities on the Consolidated Balance Sheet. As interest expense on the underlying debt is recognized, amounts corresponding to the interest rate swap are reclassified from accumulated other comprehensive loss and charged or credited to interest expense. At August 31, 2012 interest rates, approximately $1.6 million would be reclassified to interest expense in the next 12 months.

Fair Values of Derivative Instruments

	Asset Derivatives					Liability Derivatives
		August 31,					August 31,
		2012		2011			2012		2011
(In thousands)	Balance sheet location	Fair Value		Fair Value		Balance sheet location	Fair Value		Fair Value
Derivatives designated as hedging instruments
Foreign forward exchange contracts	Accounts receivable	$	2,703	$	–	Accounts payable and accrued liabilities	$	182	$	2,848
Interest rate swap contracts	Other assets		–		–	Accounts payable and accrued liabilities		2,861		4,386
		$	2,703	$	–		$	3,043	$	7,234
Derivatives not designated as hedging instruments
Foreign forward exchange contracts	Accounts receivable	$	141	$	–	Accounts payable and accrued liabilities	$	102	$	525

The Effect of Derivative Instruments on the Statement of Income

Derivatives in cash flow hedging relationships	Location of gain (loss) recognized in income on derivative	Gain (loss) recognized in income on derivative Twelve months  ended August 31,
		2012		2011
Foreign forward exchange contract	Interest and foreign exchange	$	371	$	(626	)

Derivatives in cash flow hedging relationships	Gain (loss) recognized in OCI on derivatives (effective portion) Twelve months ended August 31,						Location of gain (loss) reclassified from accumulated OCI into income	Gain (loss) reclassified from accumulated OCI into income (effective portion) Twelve months ended August 31,						Location of loss in income on derivative (ineffective portion and amount excluded from effectiveness testing)	Gain (loss) recognized on derivative (ineffective portion and amount excluded from effectiveness testing) Twelve months ended August 31,
	2012			2011				2012			2011				2012		2011
Foreign forward exchange contracts	$	136		$	(3,302	)	Revenue	$	(4,615	)	$	71		Interest and foreign exchange	$	1,403	$	860
Interest rate swap contracts		(153	)		(2,563	)	Interest and foreign exchange		(1,678	)		(1,808	)	Interest and foreign exchange		–		–
	$	(17	)	$	(5,865	)		$	(6,293	)	$	(1,737	)		$	1,403	$	860