Derivative Instruments and Hedging Activities

12 Months Ended

May. 31, 2015

Derivative Instruments and Hedging Activities

Note P – Derivative Instruments and Hedging Activities

We utilize derivative financial instruments to manage exposure to certain risks related to our ongoing operations. The primary risks managed through the use of derivative instruments include interest rate risk, currency exchange risk and commodity price risk. While certain of our derivative instruments are designated as hedging instruments, we also enter into derivative instruments that are designed to hedge a risk, but are not designated as hedging instruments and therefore do not qualify for hedge accounting. These derivative instruments are adjusted to current fair value through earnings at the end of each period.

Interest Rate Risk Management – We are exposed to the impact of interest rate changes. Our objective is to manage the impact of interest rate changes on cash flows and the market value of our borrowings. We utilize a mix of debt maturities along with both fixed-rate and variable-rate debt to manage changes in interest rates. In addition, we enter into interest rate swaps to further manage our exposure to interest rate variations related to our borrowings and to lower our overall borrowing costs.

Currency Exchange Risk Management – We conduct business in several major international currencies and are therefore subject to risks associated with changing foreign exchange rates. We enter into various contracts that change in value as foreign exchange rates change to manage this exposure. Such contracts limit exposure to both favorable and unfavorable currency fluctuations. The translation of foreign currencies into United States dollars also subjects us to exposure related to fluctuating exchange rates; however, derivative instruments are not used to manage this risk.

Commodity Price Risk Management – We are exposed to changes in the price of certain commodities, including steel, natural gas, zinc and other raw materials, and our utility requirements. Our objective is to reduce earnings and cash flow volatility associated with forecasted purchases and sales of these commodities to allow management to focus its attention on business operations. Accordingly, we enter into derivative contracts to manage the associated price risk.

We are exposed to counterparty credit risk on all of our derivative instruments. Accordingly, we have established and maintain strict counterparty credit guidelines and enter into derivative instruments only with major financial institutions. We have credit support agreements in place with certain counterparties to limit our credit exposure. These agreements require either party to post cash collateral if its cumulative market position exceeds a predefined liability threshold. At May 31, 2015, we had posted total cash collateral of $2,248,000 to our margin accounts. Amounts posted to the margin accounts accrue interest at market rates and are required to be refunded in the period in which the cumulative market position falls below the required threshold. We do not have significant exposure to any one counterparty and management believes the risk of loss is remote and, in any event, would not be material.

Refer to “Note Q – Fair Value Measurements” for additional information regarding the accounting treatment for our derivative instruments, as well as how fair value is determined.

The following table summarizes the fair value of our derivative instruments and the respective line in which they were recorded in the consolidated balance sheet at May 31, 2015:

	Asset Derivatives				Liability Derivatives
(in thousands)	Balance Sheet Location		Fair Value		Balance  Sheet Location		Fair Value
Derivatives designated as hedging instruments:
Commodity contracts		Receivables	$	-		Accounts payable	$	17,241
		Other assets		-		Other liabilities		592
				-				17,833
Interest rate contracts		Receivables		-		Accounts payable		81
		Other assets		-		Other liabilities		113
				-				194
Foreign exchange contracts		Receivables		75		Accounts payable
Totals			$	75			$	18,027
Derivatives not designated as hedging instruments:
Commodity contracts		Receivables	$	96		Accounts payable	$	4,104
		Other assets		-		Other liabilities		-
Totals			$	96			$	4,104
Total Derivative Instruments			$	171			$	22,131

The amounts in the table above reflect the fair value of the Company’s derivative contracts on a net basis. Had these amounts been recognized on a gross basis, the impact would have been a $500,000 increase in receivables with a corresponding increase in accounts payable.

The following table summarizes the fair value of our derivative instruments and the respective line in which they were recorded in the consolidated balance sheet at May 31, 2014:

	Asset Derivatives				Liability Derivatives
(in thousands)	Balance Sheet Location		Fair Value		Balance Sheet Location		Fair Value
Derivatives designated as hedging instruments:
Interest rate contracts		Receivables	$	-		Accounts payable	$	4,180
		Other assets		-		Other liabilities		-
				-				4,180
Commodity contracts		Receivables		456		Accounts payable		-
				456				-
Totals			$	456			$	4,180
Derivatives not designated as hedging instruments:
Commodity contracts		Receivables	$	796		Accounts payable	$	295
				796				295
Foreign exchange contracts		Receivables		32		Accounts payable		-
				32				-
Totals			$	828			$	295
Total Derivative Instruments			$	1,284			$	4,475

The amounts in the table above reflect the fair value of the Company’s derivative contracts on a net basis. Had these amounts been recognized on a gross basis, the impact would have been a $730,000 increase in receivables with a corresponding increase in accounts payable.

Cash Flow Hedges

We enter into derivative instruments to hedge our exposure to changes in cash flows attributable to interest rate and commodity price fluctuations associated with certain forecasted transactions. These derivative instruments are designated and qualify as cash flow hedges. Accordingly, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (“OCI”) and reclassified into earnings in the same line associated with the forecasted transaction and in the same period during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument is recognized in earnings immediately.

The following table summarizes our cash flow hedges outstanding at May 31, 2015:

(in thousands)	Notional Amount		Maturity Date
Commodity contracts	$	102,129		June 2015 – December 2016
Interest rate contracts		16,809		September 2019
Foreign currency contracts		570		June 2015

The following table summarizes the gain (loss) recognized in OCI and the gain (loss) reclassified from accumulated OCI into earnings for derivative instruments designated as cash flow hedges during fiscal 2015 and fiscal 2014:

(in thousands)	Income (Loss) Recognized in OCI (Effective Portion)			Location of Income (Loss) Reclassified from Accumulated OCI (Effective Portion)	Income (Loss) Reclassified from Accumulated OCI (Effective Portion)			Location of Income (Loss) (Ineffective Portion) Excluded from Effectiveness Testing	Income (Loss) (Ineffective Portion) Excluded from Effectiveness Testing
For the fiscal year ended
May 31, 2015:
Interest rate contracts	$	(167	)	Interest expense	$	(2,538	)	Interest expense	$	-
Commodity contracts		(29,336	)	Cost of goods sold		(8,364	)	Cost of goods sold		-
Foreign currency contracts		851				855
Totals	$	(28,652	)		$	(10,047	)		$	-
For the fiscal year ended
May 31, 2014:
Interest rate contracts	$	(3,351	)	Interest expense	$	(4,586	)	Interest expense	$	-
Commodity contracts		(2,602	)	Cost of goods sold		(4,915	)	Cost of goods sold		-
Totals	$	(5,953	)		$	(9,501	)		$	-

The estimated net amount of the losses in AOCI at May 31, 2015 expected to be reclassified into net earnings within the succeeding twelve months is $12,619,000 (net of tax of $7,518,000). This amount was computed using the fair value of the cash flow hedges at May 31, 2015, and will change before actual reclassification from other comprehensive income to net earnings during fiscal 2016.

Economic (Non-designated) Hedges

We enter into foreign currency contracts to manage our foreign exchange exposure related to inter-company and financing transactions that do not meet the requirements for hedge accounting treatment. We also enter into certain commodity contracts that do not qualify for hedge accounting treatment. Accordingly, these derivative instruments are adjusted to current market value at the end of each period through earnings.

The following table summarizes our economic (non-designated) derivative instruments outstanding at May 31, 2015:

(in thousands)	Notional Amount		Maturity Date(s)
Commodity contracts	$	33,564		June 2015 - November 2016

The following table summarizes the gain (loss) recognized in earnings for economic (non-designated) derivative financial instruments during fiscal 2015 and fiscal 2014:

		Income (Loss) Recognized in Earnings
	Location of Income (Loss) Recognized in Earnings	Fiscal Year Ended May 31,
(in thousands)		2015			2014
Commodity contracts	Cost of goods sold	$	(15,432	)	$	(1,304	)
Foreign exchange contracts	Miscellaneous income (expense)		-			27
Total		$	(15,432	)	$	(1,277	)