Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments

v2.4.0.8
Derivative Instruments
 3 Months Ended
May 31, 2014
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE INSTRUMENTS
DERIVATIVE INSTRUMENTS:

As a multinational company, the Company is exposed to market risk from changes in foreign currency exchange rates, commodity prices 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, commodity and interest rate market movements during that same period.

The Company enters into derivative instruments, primarily foreign currency forward and option contracts, commodity pricing swaps and interest rate swaps, to manage foreign currency, commodity pricing and interest rate risks, respectively. The Company recognizes all derivatives as either assets or liabilities on its Consolidated Balance Sheets and measures those instruments at fair value (see Note 6). The fair values of the Company’s derivative instruments change with fluctuations in currency rates, commodity prices and/or interest 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 foreign currency, commodity pricing and interest rate 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 and qualitative measures.

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.

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 primarily 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 the repatriation of those loans or investments; and commodity prices, primarily consisting of diesel fuel, corn, aluminum and natural gas prices. Foreign currency contracts, generally less than 12 months in duration, and commodity swap contracts, generally less than 36 months in duration, are used to hedge some of these risks. The Company’s derivative policy permits the use of undesignated derivatives as approved by senior management.

For these undesignated instruments, the mark to fair value is reported currently through earnings on the Company’s Consolidated Statements of Comprehensive Income. For purposes of measuring segment operating performance, the unrealized gains or losses from the mark to fair value of the Company’s undesignated commodity swap contracts are reported outside of segment operating results until such time that the underlying exposure is realized in the segment operating results. At that time, the realized gains or losses from the mark to fair value of the undesignated commodity swap contracts are reported in the appropriate operating segment, allowing the Company’s operating segments to realize the economic effects of the commodity swap contracts without the resulting unrealized mark to fair value volatility. The net unrealized gain reported outside of segment operating results for the three months ended May 31, 2014, was not material. There were no amounts reported outside of segment operating results for the three months ended May 31, 2013.

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 commodity swap contracts to manage its exposure to changes in commodity prices and interest rate swap contracts 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 on at least a quarterly basis, 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 on the Company’s Consolidated Statements of Comprehensive Income. In conjunction with its effectiveness testing, the Company also evaluates ineffectiveness associated with the hedge relationship. Resulting ineffectiveness, if any, is recognized immediately on the Company’s Consolidated Statements of Comprehensive Income.

The Company records the fair value of its foreign currency contracts, commodity swap contracts and interest rate swap contracts qualifying for cash flow hedge accounting treatment on its Consolidated Balance Sheets 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 14)). These deferred gains or losses are recognized on the Company’s Consolidated Statements of Comprehensive Income 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 such derivative instrument is immediately recognized on the Company’s Consolidated Statements of Comprehensive Income. The Company expects $2.4 million of net gains, net of income tax effect, to be reclassified from AOCI to earnings within the next 12 months.

The absolute notional value of outstanding derivative instruments are as follows:
 
May 31,
2014
 
February 28,
2014
(in millions)
 
 
 
Derivative instruments designated as hedging instruments
 
 
 
Foreign currency contracts
$
708.0

 
$
636.6

Interest rate swap contracts
$
500.0

 
$
500.0

 
 
 
 
Derivative instruments not designated as hedging instruments
 
 
 
Foreign currency contracts
$
951.7

 
$
643.8

Commodity swap contracts
$
168.0

 
$
88.0

Interest rate swap contracts
$
1,000.0

 
$
1,000.0



Fair values of derivative instruments:
The estimated fair value and location of the Company’s derivative instruments on its Consolidated Balance Sheets are as follows (see Note 6):
Balance Sheet Location
 
May 31,
2014
 
February 28,
2014
(in millions)
 
 
 
 
Derivative instruments designated as hedging instruments
 
 
 
 
Foreign currency contracts:
 
 
 
 
Prepaid expenses and other
 
$
15.0

 
$
11.2

Other accrued expenses and liabilities
 
$
0.3

 
$
3.2

Other assets, net
 
$
8.4

 
$
4.4

Other liabilities
 
$
0.4

 
$
0.7

 
 
 
 
 
Interest rate swap contracts:
 
 
 
 
Other accrued expenses and liabilities
 
$
3.8

 
$
3.4

Other liabilities
 
$
0.5

 
$
0.7

 
 
 
 
 
Derivative instruments not designated as hedging instruments
 
 
 
 
Foreign currency contracts:
 
 
 
 
Prepaid expenses and other
 
$
2.0

 
$
3.3

Other accrued expenses and liabilities
 
$
5.6

 
$
0.9

 
 
 
 
 
Interest rate swap contracts:
 
 
 
 
Prepaid expenses and other
 
$
4.4

 
$
3.5

Other accrued expenses and liabilities
 
$
16.6

 
$
13.3

Other assets, net
 
$
0.6

 
$
0.9

Other liabilities
 
$
12.8

 
$
15.5

 
 
 
 
 
Commodity swap contracts:
 
 
 
 
Prepaid expenses and other
 
$
1.0

 
$
1.3

Other accrued expenses and liabilities
 
$
0.7

 
$
0.1

Other assets, net
 
$
0.8

 
$
0.2

Other liabilities
 
$
0.4

 
$
0.4



The effect of the Company’s derivative instruments designated in cash flow hedging relationships on its Consolidated Statements of Comprehensive Income, as well as its Other Comprehensive Income (“OCI”), net of income tax effect, is as follows:
Derivative Instruments in
Designated Cash Flow
Hedging Relationships
 
Net
Gain (Loss)
Recognized
in OCI
(Effective
portion)
 
Location of Net Gain (Loss)
Reclassified from AOCI to
Income (Effective portion)
 
Net
Gain (Loss)
Reclassified
from AOCI to
Income
(Effective
portion)
(in millions)
 
 
 
 
 
 
For the Three Months Ended May 31, 2014
 
 
 
 
 
 
Foreign currency contracts
 
$
9.9

 
Sales
 
$
1.2

Foreign currency contracts
 
0.4

 
Cost of product sold
 
0.3

Interest rate swap contracts
 
(0.5
)
 
Interest expense, net
 
(2.0
)
Total
 
$
9.8

 
Total
 
$
(0.5
)
 
 
 
 
 
 
 
For the Three Months Ended May 31, 2013
 
 
 
 
 
 
Foreign currency contracts
 
$
(0.5
)
 
Sales
 
$
0.9

Foreign currency contracts
 
(1.2
)
 
Cost of product sold
 
0.2

Interest rate swap contracts
 
1.2

 
Interest expense, net
 
(2.1
)
Total
 
$
(0.5
)
 
Total
 
$
(1.0
)
Derivative Instruments in
Designated Cash Flow
Hedging Relationships
 
 
 
Location of Net (Loss) Gain
Recognized in Income
(Ineffective portion)
 
Net
(Loss) Gain
Recognized
in Income
(Ineffective
portion)
(in millions)
 
 
 
 
 
 
For the Three Months Ended May 31, 2014
 
 
 
 
 
 
Foreign currency contracts
 
 
 
Selling, general and administrative expenses
 
$
(0.1
)
 
 
 
 
 
 
 
For the Three Months Ended May 31, 2013
 
 
 
 
 
 
Foreign currency contracts
 
 
 
Selling, general and administrative expenses
 
$
0.1

Commodity swap contracts
 
 
 
Selling, general and administrative expenses
 
0.1

 
 
 
 
 
 
$
0.2


The effect of the Company’s undesignated derivative instruments on its Consolidated Statements of Comprehensive Income is as follows:
Derivative Instruments Not
Designated as Hedging Instruments
 
 
 
Location of Net Gain (Loss)
Recognized in Income
 
Net
Gain (Loss)
Recognized
in Income
(in millions)
 
 
 
 
 
 
For the Three Months Ended May 31, 2014
 
 
 
 
 
 
Commodity swap contracts
 
 
 
Cost of product sold
 
$
0.2

Foreign currency contracts
 
 
 
Selling, general and administrative expenses
 
(5.7
)
 
 
 
 
 
 
$
(5.5
)
 
 
 
 
 
 
 
For the Three Months Ended May 31, 2013
 
 
 
 
 
 
Foreign currency contracts
 
 
 
Selling, general and administrative expenses
 
$
(2.0
)
Commodity swap contracts
 
 
 
Selling, general and administrative expenses
 
(1.0
)
 
 
 
 
 
 
$
(3.0
)


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 May 31, 2014, the estimated fair value of derivative instruments in a net liability position due to counterparties was $28.0 million. If the Company were required to settle the net liability position under these derivative instruments on May 31, 2014, 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 May 31, 2014, 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 May 31, 2014, the estimated fair value of derivative instruments in a net receivable position due from counterparties was $19.1 million.