NOTE O – 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, 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 and treasury locks to further manage our exposure to interest rate variations related to our borrowings and to lower our overall borrowing costs.

Foreign Currency Exchange 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 exchange rate fluctuations. The translation of foreign currencies into United States dollars also subjects us to exposure related to fluctuating 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 P – 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 line in which they were recorded in the consolidated balance sheet at November 30, 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	$	3,721		Accounts payable	$	-
		Other assets		649		Other liabilities		-

				4,370				-

Interest rate contracts		Receivables		-		Accounts payable		240
		Other assets		-		Other liabilities		25

				-				265

Totals			$	4,370			$	265

Derivatives not designated as hedging instruments:
Commodity contracts		Receivables	$	1,692		Accounts payable	$	320
		Other assets		18		Other liabilities		-

				1,710				320

Foreign exchange contracts		Receivables		-		Accounts payable		46

Totals			$	1,710			$	366

Total derivative instruments			$	6,080			$	631

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 $292,000 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, 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	$	7,148		Accounts payable	$	111
		Other assets		6		Other liabilities		159

				7,154				270

Interest rate contracts		Receivables		-		Accounts payable		141
		Other assets		-		Other liabilities		160

				-				301

Totals			$	7,154			$	571

Derivatives not designated as hedging instruments:
Commodity contracts		Receivables	$	1,110		Accounts payable	$	570
		Other assets		-		Other liabilities		1

				1,110				571

Foreign exchange contracts		Receivables		62		Accounts payable		-
Totals			$	1,172			$	571

Total derivative instruments			$	8,326			$	1,142

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 $100,000 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 accumulated 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 November 30, 2017:


(in thousands)	Notional Amount		Maturity Date
Commodity contracts	$	22,011	December 2017 - June 2019
Interest rate contracts		18,212	September 2019

The following table summarizes the gain (loss) recognized in OCI and the gain (loss) reclassified from AOCI into earnings for derivative instruments designated as cash flow hedges during the three months ended November 30, 2017 and 2016:

Location of

Gain (Loss)

Gain

Reclassified

(Ineffective

Gain

from

Portion)

Recognized

Accumulated

and Excluded

in OCI

OCI

from

(Effective

Effectiveness

(in thousands)

Portion)

Testing

For the three months ended November 30, 2017:

Commodity contracts

2,080

Cost of goods sold

5,637

Cost of goods sold

Interest rate contracts

Interest expense

(28

)

Interest expense

Totals

2,114

5,609

For the three months ended November 30, 2016:

Commodity contracts

7,157

Cost of goods sold

5,737

Cost of goods sold

Interest rate contracts

160

Interest expense

(467

)

Interest expense

Totals

7,317

5,270

The following table summarizes the gain recognized in OCI and the gain reclassified from accumulated OCI into earnings for derivative instruments designated as cash flow hedges during the six months ended November 30, 2017 and 2016:

Location of

Gain (Loss)

Gain

Reclassified

(Ineffective

Gain

from

Portion)

Recognized

Accumulated

and Excluded

in OCI

OCI

from

(Effective

Effectiveness

(in thousands)

Portion)

Testing

For the six months ended November 30, 2017:

Commodity contracts

5,814

Cost of goods sold

9,805

Cost of goods sold

Interest rate contracts

3,098

Interest expense

(391

)

Interest expense

Totals

8,912

9,414

For the six months ended November 30, 2016:

Commodity contracts

7,926

Cost of goods sold

5,485

Cost of goods sold

Interest rate contracts

124

Interest expense

(570

)

Interest expense

Totals

8,050

4,915

The estimated net amount of the losses recognized in AOCI at November 30, 2017 expected to be reclassified into net earnings within the succeeding twelve months is $3,201,000 (net of tax of $1,970,000). This amount was computed using the fair value of the cash flow hedges at November 30, 2017, and will change before actual reclassification from other comprehensive income to net earnings during the fiscal years ending May 31, 2018 and May 31, 2019.

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 November 30, 2017:


(in thousands)	Notional Amount		Maturity Date(s)
Commodity contracts	$	25,427	December 2017 - May 2019
Foreign exchange contracts		5,469	December 2017 - June 2018

The following table summarizes the gain (loss) recognized in earnings for economic (non-designated) derivative financial instruments during the three months ended November 30, 2017 and 2016:


			Gain (Loss) Recognized
			In Earnings for the
			Three Months Ended
	Location of Gain (Loss)		November 30,
(in thousands)	Recognized in Earnings		2017			2016
Commodity contracts		Cost of goods sold	$	(86	)	$	2,003
Foreign exchange contracts		Miscellaneous income, net		19			(599	)

Total			$	(67	)	$	1,404


The following table summarizes the gain recognized in earnings for economic (non-designated) derivative financial instruments during the six months ended November 30, 2017 and 2016:
			Gain (Loss) Recognized
			in Earnings for the
			Six Months Ended
	Location of Gain (Loss)		November 30,
(in thousands)	Recognized in Earnings		2017			2016
Commodity contracts		Cost of goods sold	$	2,248		$	4,911
Foreign exchange contracts		Miscellaneous income, net		(189	)		(665	)

Total			$	2,059		$	4,246

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