Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments

 v2.3.0.11
Derivative Instruments
 6 Months Ended
Aug. 31, 2011
Derivative Instruments [Abstract]  
DERIVATIVE INSTRUMENTS
5.       DERIVATIVE INSTRUMENTS:
          As a multinational company, the Company is exposed to market risk from changes in foreign currency exchange rates and interest rates that could affect the Company’s results of operations and financial condition. The amount of volatility realized will vary based upon the effectiveness and level of derivative instruments outstanding during a particular period of time, as well as the currency and interest rate market movements during that same period.
          The Company enters into derivative instruments, primarily interest rate swaps and foreign currency forward and option contracts, to manage interest rate and foreign currency risks. In accordance with the FASB guidance for derivatives and hedging, the Company recognizes all derivatives as either assets or liabilities on the balance sheet and measures those instruments at fair value (see Note 6). The fair values of the Company’s derivative instruments change with fluctuations in interest rates and/or currency rates and are expected to offset changes in the values of the underlying exposures. The Company’s derivative instruments are held solely to hedge economic exposures. The Company follows strict policies to manage interest rate and foreign currency risks, including prohibitions on derivative market-making or other speculative activities.
          To qualify for hedge accounting treatment under the FASB guidance for derivatives and hedging, the details of the hedging relationship must be formally documented at inception of the arrangement, including the risk management objective, hedging strategy, hedged item, specific risk that is being hedged, the derivative instrument, how effectiveness is being assessed and how ineffectiveness will be measured. The derivative must be highly effective in offsetting either changes in the fair value or cash flows, as appropriate, of the risk being hedged. Effectiveness is evaluated on a retrospective and prospective basis based on quantitative measures.
          Certain of the Company’s derivative instruments do not qualify for hedge accounting treatment under the FASB guidance for derivatives and hedging; for others, the Company chooses not to maintain the required documentation to apply hedge accounting treatment. These undesignated instruments are used to economically hedge the Company’s exposure to fluctuations in the value of foreign currency denominated receivables and payables; foreign currency investments, primarily consisting of loans to subsidiaries; and cash flows related primarily to repatriation of those loans or investments. Foreign currency contracts, generally less than 12 months in duration, are used to hedge some of these risks. The Company’s derivative policy permits the use of undesignated derivatives when the derivative instrument is settled within the fiscal quarter or offsets a recognized balance sheet exposure. In these circumstances, the mark to fair value is reported currently through earnings in selling, general and administrative expenses on the Company’s Consolidated Statements of Operations. As of August 31, 2011, and February 28, 2011, the Company had undesignated foreign currency contracts outstanding with a notional value of $331.8 million and $160.0 million, respectively. The Company had no undesignated interest rate swap agreements outstanding as of August 31, 2011, and February 28, 2011.
          Furthermore, when the Company determines that a derivative instrument which qualified for hedge accounting treatment has ceased to be highly effective as a hedge, the Company discontinues hedge accounting prospectively. The Company also discontinues hedge accounting prospectively when (i) a derivative expires or is sold, terminated, or exercised; (ii) it is no longer probable that the forecasted transaction will occur; or (iii) management determines that designating the derivative as a hedging instrument is no longer appropriate.
          Cash flow hedges:
          The Company is exposed to foreign denominated cash flow fluctuations in connection with third party and intercompany sales and purchases and, historically, third party financing arrangements. The Company primarily uses foreign currency forward and option contracts to hedge certain of these risks. In addition, the Company utilizes interest rate swaps to manage its exposure to changes in interest rates. Derivatives managing the Company’s cash flow exposures generally mature within three years or less, with a maximum maturity of five years. Throughout the term of the designated cash flow hedge relationship, but at least quarterly, a retrospective evaluation and prospective assessment of hedge effectiveness is performed. All components of the Company’s derivative instruments’ gains or losses are included in the assessment of hedge effectiveness. In the event the relationship is no longer effective, the Company recognizes the change in the fair value of the hedging derivative instrument from the date the hedging derivative instrument became no longer effective immediately in the Company’s Consolidated Statements of Operations. In conjunction with its effectiveness testing, the Company also evaluates ineffectiveness associated with the hedge relationship. Resulting ineffectiveness, if any, is recognized immediately in the Company’s Consolidated Statements of Operations in selling, general and administrative expenses.
          The Company records the fair value of its foreign currency and interest rate swap contracts qualifying for cash flow hedge accounting treatment in its consolidated balance sheet with the effective portion of the related gain or loss on those contracts deferred in stockholders’ equity (as a component of AOCI (as defined in Note 15)). These deferred gains or losses are recognized in the Company’s Consolidated Statements of Operations in the same period in which the underlying hedged items are recognized and on the same line item as the underlying hedged items. However, to the extent that any derivative instrument is not considered to be highly effective in offsetting the change in the value of the hedged item, the hedging relationship is terminated and the amount related to the ineffective portion of this derivative instrument is immediately recognized in the Company’s Consolidated Statements of Operations in selling, general and administrative expenses.
          As of August 31, 2011, and February 28, 2011, the Company had cash flow designated foreign currency contracts outstanding with a notional value of $357.3 million and $166.4 million, respectively. In addition, as of August 31, 2011, and February 28, 2011, the Company had cash flow designated interest rate swap agreements outstanding with a notional value of $500.0 million (see Note 10). The Company expects $4.3 million of net gains, net of income tax effect, to be reclassified from AOCI to earnings within the next 12 months.
          Fair value hedges:
          Fair value hedges are hedges that offset the risk of changes in the fair values of recorded assets and liabilities, and firm commitments. The Company records changes in fair value of derivative instruments which are designated and deemed effective as fair value hedges, in earnings offset by the corresponding changes in the fair value of the hedged items. The Company did not designate any derivative instruments as fair value hedges for the six months and three months ended August 31, 2011, and August 31, 2010.
          Net investment hedges:
          Net investment hedges are hedges that use derivative instruments or non-derivative instruments to hedge the foreign currency exposure of a net investment in a foreign operation. Historically, the Company has managed currency exposures resulting from certain of its net investments in foreign subsidiaries principally with debt denominated in the related foreign currency. Accordingly, gains and losses on these instruments were recorded as foreign currency translation adjustments in AOCI. The Company did not designate any derivative or non-derivative instruments as net investment hedges for the six months and three months ended August 31, 2011, and August 31, 2010.
          Fair values of derivative instruments:
          The fair value and location of the Company’s derivative instruments on its Consolidated Balance Sheets are as follows:
                 
    August 31,     February 28,  
Balance Sheet Location   2011     2011  
(in millions)                
Derivative instruments designated as hedging instruments
               
Foreign currency contracts
               
Prepaid expenses and other
  $ 16.3     $ 11.0  
Other accrued expenses and liabilities
  $ 1.5     $ 3.4  
Other assets, net
  $ 6.5     $ 2.8  
Other liabilities
  $ 1.3     $ 0.9  
 
               
Interest rate swap contracts
               
Other accrued expenses and liabilities
  $ 12.6     $ 6.1  
Other assets, net
  $ -     $ 1.7  
Other liabilities
  $ 28.9     $ -  
 
               
Derivative instruments not designated as hedging instruments
               
Foreign currency contracts
               
Prepaid expenses and other
  $ 4.9     $ 3.2  
Other accrued expenses and liabilities
  $ 1.2     $ 1.0  
Other assets, net
  $ 0.1     $ -  
Other liabilities
  $ 0.1     $ -  
          The effect of the Company’s derivative instruments designated in cash flow hedging relationships on its Consolidated Statements of Operations, as well as its Other Comprehensive Income (“OCI”), net of income tax effect, is as follows:
                         
                    Net  
    Net             Gain (Loss)  
    Gain (Loss)             Reclassified  
    Recognized             from AOCI to  
Derivative Instruments in   in OCI     Location of Net Gain (Loss)     Income  
Designated Cash Flow   (Effective     Reclassified from AOCI to     (Effective  
Hedging Relationships   portion)     Income (Effective portion)     portion)  
(in millions)                        
For the Six Months Ended August 31, 2011
                       
Foreign currency contracts
  $ 7.0     Sales   $ 2.7  
Foreign currency contracts
    6.2     Cost of product sold     0.6  
Interest rate swap contracts
    (22.6 )   Interest expense, net     -  
 
                   
Total
  $ (9.4 )       Total   $ 3.3  
 
                   
 
                       
For the Six Months Ended August 31, 2010
                       
Foreign currency contracts
  $ 0.1     Sales   $ 7.9  
Foreign currency contracts
    (2.1 )   Cost of product sold     1.3  
Interest rate swap contracts
    (12.0 )   Interest expense, net     -  
 
                   
Total
  $ (14.0 )       Total   $ 9.2  
 
                   
 
                       
For the Three Months Ended August 31, 2011
                       
Foreign currency contracts
  $ 3.3     Sales   $ 1.7  
Foreign currency contracts
    2.3     Cost of product sold     0.6  
Interest rate swap contracts
    (13.0 )   Interest expense, net     -  
 
                   
Total
  $ (7.4 )       Total   $ 2.3  
 
                   
 
                       
For the Three Months Ended August 31, 2010
                       
Foreign currency contracts
  $ 1.2     Sales   $ 4.3  
Foreign currency contracts
    1.2     Cost of product sold     (0.9 )
Interest rate swap contracts
    (12.0 )   Interest expense, net     -  
 
                   
Total
  $ (9.6 )       Total   $ 3.4  
 
                   
 
                       
             
        Net Gain  
        Recognized  
Derivative Instruments in   Location of Net Gain   in Income  
Designated Cash Flow   Recognized in Income   (Ineffective  
Hedging Relationships   (Ineffective portion)   portion)  
(in millions)            
For the Six Months Ended August 31, 2011
           
 
  Selling, general and        
Foreign currency contracts
       administrative expenses   $ 0.8  
 
         
 
For the Six Months Ended August 31, 2010
           
 
  Selling, general and
        
Foreign currency contracts
       administrative expenses   $ 0.7  
 
         
 
           
For the Three Months Ended August 31, 2011
           
 
  Selling, general and
        
Foreign currency contracts
       administrative expenses   $ 0.2  
 
         
 
       
For the Three Months Ended August 31, 2010
           
 
  Selling, general and
        
Foreign currency contracts
       administrative expenses   $ 0.4  
 
         
          The effect of the Company’s undesignated derivative instruments on its Consolidated Statements of Operations is as follows:
                 
            Net  
            Gain (Loss)  
Derivative Instruments not   Location of Net Gain (Loss)     Recognized  
Designated as Hedging Instruments   Recognized in Income     in Income  
(in millions)                
For the Six Months Ended August 31, 2011
               
Foreign currency contracts
 
Selling, general and administrative expenses
  $ 4.8  
 
             
 
               
For the Six Months Ended August 31, 2010
               
Foreign currency contracts
 
Selling, general and administrative expenses
  $ (1.0 )
 
             
 
               
For the Three Months Ended August 31, 2011
               
Foreign currency contracts
 
Selling, general and administrative expenses
  $ 1.7  
 
             
 
               
For the Three Months Ended August 31, 2010
               
Foreign currency contracts
 
Selling, general and administrative expenses
  $ 3.3  
 
             
          Credit risk:
          The Company enters into master agreements with its bank derivative trading counterparties that allow netting of certain derivative positions in order to manage credit risk. The Company’s derivative instruments are not subject to credit rating contingencies or collateral requirements. As of August 31, 2011, the fair value of derivative instruments in a net liability position due to counterparties was $41.9 million. If the Company were required to settle the net liability position under these derivative instruments on August 31, 2011, the Company would have had sufficient availability under its revolving credit facility to satisfy this obligation.
          Counterparty credit risk:
          Counterparty credit risk relates to losses the Company could incur if a counterparty defaults on a derivative contract. The Company manages exposure to counterparty credit risk by requiring specified minimum credit standards and diversification of counterparties. The Company enters into master agreements with its bank derivative trading counterparties that allow netting of certain derivative positions in order to manage counterparty credit risk. As of August 31, 2011, all of the Company’s counterparty exposures are with financial institutions which have investment grade ratings. The Company has procedures to monitor counterparty credit risk for both current and future potential credit exposures. As of August 31, 2011, the fair value of derivative instruments in a net receivable position due from counterparties was $24.1 million.