| DERIVATIVE INSTRUMENTS Overview
Our risk management and derivative accounting policies are presented in Notes 1 and 6 of our consolidated financial statements included in our 2020 Annual Report and have not changed significantly for the six months and three months ended August 31, 2020.
We have investments in certain equity securities and other rights which provide us with the option to purchase an additional ownership interest in the equity securities of Canopy (see Note 8). These investments are included in securities measured at fair value and are accounted for at fair value, with the net gain (loss) from the changes in fair value of these investments recognized in income (loss) from unconsolidated investments (see Note 5).
The aggregate notional value of outstanding derivative instruments is as follows:
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August 31,
2020 |
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February 29,
2020 |
| (in millions) |
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| Derivative instruments designated as hedging instruments |
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| Foreign currency contracts |
$ |
1,527.2
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$ |
1,831.0
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| Interest rate swap contracts |
$ |
—
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$ |
375.0
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| Treasury lock contracts |
$ |
—
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$ |
300.0
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| Derivative instruments not designated as hedging instruments |
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| Foreign currency contracts |
$ |
366.8
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$ |
1,180.2
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| Commodity derivative contracts |
$ |
246.5
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$ |
282.8
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Credit risk
We are exposed to credit-related losses if the counterparties to our derivative contracts default. This credit risk is limited to the fair value of the derivative contracts. To manage this risk, we contract only with major financial institutions that have earned investment-grade credit ratings and with whom we have standard International Swaps and Derivatives Association agreements which allow for net settlement of the derivative contracts. We have also established counterparty credit guidelines that are regularly monitored. Because of these safeguards, we believe the risk of loss from counterparty default to be immaterial.
In addition, our derivative instruments are not subject to credit rating contingencies or collateral requirements. As of August 31, 2020, the estimated fair value of derivative instruments in a net liability position due to counterparties was $73.5 million. If we were required to settle the net liability position under these derivative instruments on August 31, 2020, we would have had sufficient available liquidity on hand to satisfy this obligation.
Results of period derivative activity
The estimated fair value and location of our derivative instruments on our balance sheets are as follows (see Note 5):
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| Assets |
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Liabilities |
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August 31,
2020 |
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February 29,
2020 |
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August 31,
2020 |
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February 29,
2020 |
| (in millions) |
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| Derivative instruments designated as hedging instruments |
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| Foreign currency contracts: |
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| Prepaid expenses and other |
$ |
5.7
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$ |
47.8
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Other accrued expenses and liabilities |
$ |
30.5
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$ |
13.0
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| Other assets |
$ |
8.5
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$ |
39.5
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Deferred income taxes and other liabilities |
$ |
32.7
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$ |
7.1
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| Interest rate swap contracts: |
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| Prepaid expenses and other |
$ |
—
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$ |
—
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Other accrued expenses and liabilities |
$ |
—
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$ |
0.8
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| Treasury lock contracts: |
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| Prepaid expenses and other |
$ |
—
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$ |
—
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Other accrued expenses and liabilities |
$ |
—
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$ |
7.6
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| Derivative instruments not designated as hedging instruments |
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| Foreign currency contracts: |
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| Prepaid expenses and other |
$ |
2.7
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$ |
9.0
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Other accrued expenses and liabilities |
$ |
1.3
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$ |
14.3
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| Commodity derivative contracts: |
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| Prepaid expenses and other |
$ |
3.7
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$ |
0.5
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Other accrued expenses and liabilities |
$ |
20.0
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$ |
25.4
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| Other assets |
$ |
1.8
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$ |
0.1
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Deferred income taxes and other liabilities |
$ |
11.0
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$ |
15.5
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The principal effect of our derivative instruments designated in cash flow hedging relationships on our results of operations, as well as Other Comprehensive Income (Loss) (“OCI”), net of income tax effect, is as follows:
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Derivative Instruments in
Designated Cash Flow
Hedging Relationships |
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Net
Gain (Loss)
Recognized
in OCI |
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Location of Net Gain (Loss)
Reclassified from
AOCI to Income (Loss) |
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Net
Gain (Loss)
Reclassified
from AOCI
to Income (Loss) |
| (in millions) |
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| For the Six Months Ended August 31, 2020 |
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| Foreign currency contracts |
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$ |
(156.0) |
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Sales |
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$ |
0.9
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Cost of product sold |
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(27.2) |
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| Interest rate swap contracts |
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(0.6) |
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Interest expense |
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(1.1) |
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| Treasury lock contracts |
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(16.1) |
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Interest expense |
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(0.7) |
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$ |
(172.7) |
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$ |
(28.1) |
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Derivative Instruments in
Designated Cash Flow
Hedging Relationships |
|
Net
Gain (Loss)
Recognized
in OCI |
|
Location of Net Gain (Loss)
Reclassified from
AOCI to Income (Loss) |
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Net
Gain (Loss)
Reclassified
from AOCI
to Income (Loss) |
| (in millions) |
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| For the Six Months Ended August 31, 2019 |
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| Foreign currency contracts |
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$ |
(35.6) |
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Sales |
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$ |
—
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Cost of product sold |
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7.8
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| Interest rate swap contracts |
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(0.6) |
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Interest expense |
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—
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$ |
(36.2) |
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$ |
7.8
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| For the Three Months Ended August 31, 2020 |
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| Foreign currency contracts |
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$ |
37.4
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Sales |
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$ |
0.5
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Cost of product sold |
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(18.7) |
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| Interest rate swap contracts |
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(0.3) |
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Interest expense |
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(0.7) |
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| Treasury lock contracts |
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—
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Interest expense |
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(0.7) |
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$ |
37.1
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$ |
(19.6) |
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| For the Three Months Ended August 31, 2019 |
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| Foreign currency contracts |
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$ |
(33.2) |
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Sales |
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$ |
—
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Cost of product sold |
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4.2
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| Interest rate swap contracts |
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(0.6) |
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Interest expense |
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—
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$ |
(33.8) |
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$ |
4.2
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We expect $25.8 million of net losses, net of income tax effect, to be reclassified from accumulated other comprehensive income (loss) (“AOCI”) to our results of operations within the next 12 months.
The effect of our undesignated derivative instruments on our results of operations is as follows:
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Derivative Instruments Not
Designated as Hedging Instruments |
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Location of Net Gain (Loss)
Recognized in Income (Loss) |
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Net
Gain (Loss)
Recognized
in Income (Loss) |
| (in millions) |
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| For the Six Months Ended August 31, 2020 |
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| Commodity derivative contracts |
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Cost of product sold |
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$ |
(9.4) |
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| Foreign currency contracts |
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Selling, general, and administrative expenses |
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(20.0) |
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$ |
(29.4) |
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| For the Six Months Ended August 31, 2019 |
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| Commodity derivative contracts |
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Cost of product sold |
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$ |
(26.8) |
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| Foreign currency contracts |
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Selling, general, and administrative expenses |
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(8.9) |
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$ |
(35.7) |
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| For the Three Months Ended August 31, 2020 |
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| Commodity derivative contracts |
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Cost of product sold |
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$ |
17.4
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| Foreign currency contracts |
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Selling, general and administrative expenses |
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5.9
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$ |
23.3
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Derivative Instruments Not
Designated as Hedging Instruments |
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Location of Net Gain (Loss)
Recognized in Income (Loss) |
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Net
Gain (Loss)
Recognized
in Income (Loss) |
| (in millions) |
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| For the Three Months Ended August 31, 2019 |
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| Commodity derivative contracts |
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Cost of product sold |
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$ |
(10.9) |
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| Foreign currency contracts |
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Selling, general and administrative expenses |
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(5.1) |
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$ |
(16.0) |
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