| 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 2022 Annual Report and have not changed significantly for the six months and three months ended August 31, 2022.
We have an investment 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 7). This investment is
included in securities measured at fair value and is accounted for at fair value, with the net gain (loss) from the changes in fair value of this investment recognized in income (loss) from unconsolidated investments (see Note 4).
The aggregate notional value of outstanding derivative instruments is as follows:
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August 31,
2022 |
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February 28,
2022 |
| (in millions) |
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| Derivative instruments designated as hedging instruments |
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| Foreign currency contracts |
$ |
2,013.3 |
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$ |
1,863.2 |
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| Pre-issuance hedge contracts |
$ |
— |
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$ |
100.0 |
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| Derivative instruments not designated as hedging instruments |
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| Foreign currency contracts |
$ |
720.5 |
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$ |
497.6 |
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| Commodity derivative contracts |
$ |
328.9 |
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$ |
291.1 |
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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, 2022, the estimated fair value of derivative instruments in a net liability position due to counterparties was $17.9 million. If we were required to settle the net liability position under these derivative instruments on August 31, 2022, 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 4):
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| Assets |
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Liabilities |
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August 31,
2022 |
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February 28,
2022 |
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August 31,
2022 |
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February 28,
2022 |
| (in millions) |
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| Derivative instruments designated as hedging instruments |
| Foreign currency contracts: |
| Prepaid expenses and other |
$ |
55.5 |
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$ |
28.6 |
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Other accrued expenses and liabilities |
$ |
15.6 |
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$ |
5.9 |
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| Other assets |
$ |
66.6 |
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$ |
25.1 |
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Deferred income taxes and other liabilities |
$ |
10.4 |
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$ |
8.6 |
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| Pre-issuance hedge contracts: |
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| Other assets |
$ |
— |
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$ |
— |
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Deferred income taxes and other liabilities |
$ |
— |
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$ |
0.4 |
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| Assets |
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Liabilities |
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August 31,
2022 |
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February 28,
2022 |
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August 31,
2022 |
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February 28,
2022 |
| (in millions) |
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| Derivative instruments not designated as hedging instruments |
| Foreign currency contracts: |
| Prepaid expenses and other |
$ |
3.3 |
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$ |
2.7 |
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Other accrued expenses and liabilities |
$ |
3.8 |
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$ |
3.3 |
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| Commodity derivative contracts: |
| Prepaid expenses and other |
$ |
67.6 |
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$ |
61.3 |
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Other accrued expenses and liabilities |
$ |
13.4 |
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$ |
0.7 |
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| Other assets |
$ |
18.8 |
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$ |
29.7 |
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Deferred income taxes and other liabilities |
$ |
6.5 |
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$ |
0.2 |
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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 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, 2022 |
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| Foreign currency contracts |
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$ |
71.3 |
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Sales |
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$ |
(1.2) |
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Cost of product sold |
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21.9 |
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| Pre-issuance hedge contracts |
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15.7 |
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Interest expense |
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(0.6) |
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$ |
87.0 |
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$ |
20.1 |
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| For the Six Months Ended August 31, 2021 |
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| Foreign currency contracts |
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$ |
11.7 |
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Sales |
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$ |
(0.4) |
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Cost of product sold |
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21.6 |
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| Pre-issuance hedge contracts |
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— |
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Interest expense |
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(1.5) |
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$ |
11.7 |
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$ |
19.7 |
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| For the Three Months Ended August 31, 2022 |
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| Foreign currency contracts |
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$ |
(8.2) |
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Sales |
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$ |
(0.6) |
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Cost of product sold |
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10.8 |
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| Pre-issuance hedge contracts |
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— |
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Interest expense |
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(0.1) |
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$ |
(8.2) |
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$ |
10.1 |
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| For the Three Months Ended August 31, 2021 |
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| Foreign currency contracts |
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$ |
(7.6) |
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Sales |
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$ |
(0.2) |
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Cost of product sold |
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12.6 |
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| Pre-issuance hedge contracts |
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— |
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Interest expense |
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(0.9) |
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$ |
(7.6) |
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$ |
11.5 |
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We expect $35.3 million of net gains, net of income tax effect, to be reclassified from AOCI to our results of operations within the next 12 months.
The effect of our undesignated derivative instruments on our results of operations is as follows:
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Derivative Instruments Not
Designated as Hedging Instruments |
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Location of Net Gain (Loss)
Recognized in Income (Loss) |
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Net
Gain (Loss)
Recognized
in Income (Loss) |
| (in millions) |
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| For the Six Months Ended August 31, 2022 |
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| Commodity derivative contracts |
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Cost of product sold |
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$ |
33.1 |
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| Foreign currency contracts |
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Selling, general, and administrative expenses |
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(2.6) |
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$ |
30.5 |
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| For the Six Months Ended August 31, 2021 |
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| Commodity derivative contracts |
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Cost of product sold |
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$ |
48.1 |
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| Foreign currency contracts |
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Selling, general, and administrative expenses |
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(8.4) |
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$ |
39.7 |
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| For the Three Months Ended August 31, 2022 |
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| Commodity derivative contracts |
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Cost of product sold |
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$ |
(15.4) |
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| Foreign currency contracts |
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Selling, general, and administrative expenses |
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(8.8) |
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$ |
(24.2) |
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| For the Three Months Ended August 31, 2021 |
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| Commodity derivative contracts |
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Cost of product sold |
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$ |
24.0 |
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| Foreign currency contracts |
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Selling, general, and administrative expenses |
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(6.2) |
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$ |
17.8 |
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