NOTE N – Derivative Instruments and Hedging Activities

We utilize derivative 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, foreign currency exchange rate 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.

Foreign Currency Rate Risk Management – We conduct business in several major international currencies and are therefore subject to risks associated with changing foreign currency exchange rates. We enter into various contracts that change in value as foreign currency 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 foreign currency 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. 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. 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 O – Fair Value” 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 financial statement caption in which they were recorded in our consolidated balance sheet at February 28, 2017:


	Asset Derivatives				Liability Derivatives
(in thousands)	Balance Sheet Location		Fair Value		Balance Sheet Location		Fair Value
Derivatives designated as hedging instruments:
Commodity contracts		Receivables	$	14,053		Accounts payable	$	-
		Other assets		176		Other liabilities		-

				14,229				-

Interest rate contracts		Receivables		-		Accounts payable		83
		Other assets		-		Other liabilities		228

				-				311

Totals			$	14,229			$	311

Derivatives not designated as hedging instruments:
Commodity contracts		Receivables	$	2,964		Accounts payable	$	233
		Other assets		-		Other liabilities		36

				2,964				269

Foreign currency contracts		Receivables		511		Accounts payable		-

Totals			$	3,475			$	269

Total derivative instruments			$	17,704			$	580

The amounts in the table above reflect the fair value of the Company’s derivative instruments on a net basis. Had these amounts been recognized on a gross basis, the aggregate impact would have been a $91,000 increase in receivables with a corresponding increase in accounts payable.

The following table summarizes the fair value of our derivative instruments and the financial statement caption in which they were recorded in the consolidated balance sheet at May 31, 2016:


	Asset Derivatives				Liability Derivatives
(in thousands)	Balance Sheet Location		Fair Value		Balance Sheet Location		Fair Value
Derivatives designated as hedging instruments:
Commodity contracts		Receivables	$	13,224		Accounts payable	$	696
		Other assets		3,589		Other liabilities		80

				16,813				776

Interest rate contracts		Receivables		-		Accounts payable		155
		Other assets		-		Other liabilities		306

				-				461

Totals			$	16,813			$	1,237

Derivatives not designated as hedging instruments:
Commodity contracts		Receivables	$	4,660		Accounts payable	$	761
		Other assets		317		Other liabilities		-

				4,977				761

Foreign currency contracts		Receivables		-		Accounts payable		15

				-				15

Totals			$	4,977			$	776

Total derivative instruments			$	21,790			$	2,013

The amounts in the table above reflect the fair value of the Company’s derivative instruments on a net basis. Had these amounts been recognized on a gross basis, the aggregate impact would have been a $300,000 decrease in receivables with a corresponding decrease in accounts payable.

Cash Flow Hedges

We enter into derivative instruments to hedge our exposure to changes in cash flows attributable to interest rates 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 OCI and reclassified into earnings in the same financial statement caption 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 February 28, 2017:


(in thousands)	Notional Amount		Maturity Date
Commodity contracts	$	40,570	March 2017 - December 2018
Interest rate contracts		16,183	September 2019

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 the three months ended February 28, 2017 and February 29, 2016:

Location of

Gain (Loss)

Gain

Reclassified

(Ineffective

Gain (Loss)

from

Portion)

Recognized

Accumulated

and Excluded

in OCI

OCI

from

(Effective

Effectiveness

(in thousands)

Portion)

Testing

For the three months ended February 28, 2017:

Commodity contracts

2,037

Cost of goods sold

3,397

Cost of goods sold

Interest rate contracts

Interest expense

(36

)

Interest expense

Totals

2,062

3,361

For the three months ended February 29, 2016:

Commodity contracts

707

Cost of goods sold

(7,775

)

Cost of goods sold

Interest rate contracts

(107

)

Interest expense

(130

)

Interest expense

Totals

600

(7,905

)

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 the nine months ended February 28, 2017 and February 29, 2016:


				Location of				Location of
				Gain (Loss)	Gain (Loss)			Gain	Gain
				Reclassified	Reclassified			(Ineffective	(Ineffective
	Gain (Loss)			from	from			Portion)	Portion)
	Recognized			Accumulated	Accumulated			and Excluded	and Excluded
	in OCI			OCI	OCI			from	from
	(Effective			(Effective	(Effective			Effectiveness	Effectiveness
(in thousands)	Portion)			Portion)	Portion)			Testing	Testing
For the nine months ended February 28, 2017:
Commodity contracts	$	9,963		Cost of goods sold	$	8,882		Interest expense	$	-
Interest rate contracts		149		Interest expense		(606	)	Cost of goods sold		-

Totals	$	10,112			$	8,276			$	-

For the nine months ended February 29, 2016:
Commodity contracts	$	(17,629	)	Cost of goods sold	$	(23,422	)	Interest expense	$	-
Interest rate contracts		(274	)	Interest expense		(415	)	Cost of goods sold		-
Foreign currency contracts		-		Miscellaneous income, net		(4	)	Miscellaneous income, net		-

Totals	$	(17,903	)		$	(23,841	)		$	-

The estimated net amount of the losses recognized in accumulated OCI at February 28, 2017 expected to be reclassified into net earnings within the succeeding twelve months is $10,088,000 (net of tax of $5,725,000). This amount was computed using the fair value of the cash flow hedges at February 28, 2017, and will change before actual reclassification from OCI to net earnings during the fiscal years ending May 31, 2017 and 2018.

Economic (Non-designated) Hedges

We enter into foreign currency contracts to manage our foreign currency exchange rate 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 February 28, 2017:


(in thousands)	Notional Amount		Maturity Date(s)
Commodity contracts	$	22,971	March 2017 - December 2018
Foreign currency contracts		15,450	March 2017 - August 2017

The following table summarizes the gain recognized in earnings for economic (non-designated) derivative financial instruments during the three months ended February 28, 2017 and February 29, 2016:


			Gain (Loss) Recognized
			in Earnings for the
			Three Months Ended
(in thousands)	Location of Gain (Loss) Recognized in Earnings		February 28, 2017			February 29, 2016
Commodity contracts		Cost of goods sold	$	258		$	173
Foreign currency contracts		Miscellaneous income, net		(172	)		47

Total			$	86		$	220

The following table summarizes the gain (loss) recognized in earnings for economic (non-designated) derivative financial instruments during the nine months ended February 28, 2017 and February 29, 2016:


			Gain (Loss) Recognized
			in Earnings for the
			Nine Months Ended
(in thousands)	Location of Gain (Loss) Recognized in Earnings		February 28, 2017			February 29, 2016
Commodity contracts		Cost of goods sold	$	5,169		$	(7,972	)
Foreign currency contracts		Miscellaneous income, net		(837	)		117

Total			$	4,332		$	(7,855	)

The gain (loss) on the foreign currency derivatives significantly offsets the gain (loss) on the hedged item.