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DERIVATIVES AND RISK MANAGEMENT
 3 Months Ended
Nov. 30, 2016
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivatives and risk management
NOTE 9. DERIVATIVES AND RISK MANAGEMENT

The Company's global operations and product lines expose it to risks from fluctuations in metal commodity prices, foreign currency exchange rates, natural gas prices and interest rates. One objective of the Company's risk management program is to mitigate these risks using derivative instruments. The Company enters into (i) metal commodity futures and forward contracts to mitigate the risk of unanticipated changes in gross margin due to the volatility of the commodities' prices, (ii) foreign currency forward contracts that match the expected settlements for purchases and sales denominated in foreign currencies and (iii) natural gas forward contracts to mitigate the risk of unanticipated changes in operating cost due to the volatility of natural gas prices. When sales commitments to customers include a fixed price freight component, the Company occasionally enters into freight forward contracts to reduce the effects of the volatility of ocean freight rates.

At November 30, 2016, the notional values of the Company's foreign currency contract commitments and its commodity contract commitments were $265.8 million and $31.2 million, respectively. At November 30, 2015, the notional values of the Company's foreign currency contract commitments and its commodity contract commitments were $306.3 million and $33.5 million, respectively.

The following table provides information regarding the Company's commodity contract commitments as of November 30, 2016:
Commodity
 
Long/Short
 
Total
Aluminum
 
Long
 
1,822

 MT
Copper
 
Long
 
237

 MT
Copper
 
Short
 
5,160

 MT
Zinc
 
Long
 
22

 MT
 _________________
MT = Metric Ton

The Company designates only those contracts which closely match the terms of the underlying transaction as hedges for accounting purposes. These hedges resulted in substantially no ineffectiveness in the Company's condensed consolidated statements of earnings, and there were no components excluded from the assessment of hedge effectiveness for the three months ended November 30, 2016 and 2015. Certain foreign currency and commodity contracts were not designated as hedges for accounting purposes, although management believes they are essential economic hedges.

The following tables summarize activities related to the Company's derivative instruments and hedged items recognized in the condensed consolidated statements of earnings: 
 
 
 
 
Three Months Ended November 30,
Derivatives Not Designated as Hedging Instruments (in thousands)
 
Location
 
2016
 
2015
Commodity
 
Cost of goods sold
 
$
(4,629
)
 
$
2,172

Foreign exchange
 
Cost of goods sold
 
(8
)
 
50

Foreign exchange
 
SG&A expenses
 
4,049

 
5,219

Gain (loss) before income taxes
 
 
 
$
(588
)
 
$
7,441


The Company's fair value hedges are designated for accounting purposes with the gains or losses on the hedged items offsetting the gains or losses on the related derivative transactions. Hedged items relate to firm commitments on commercial sales and purchases and capital expenditures.
Derivatives Designated as Fair Value Hedging Instruments (in thousands)
 
 
 
Three Months Ended November 30,
 
Location
 
2016
 
2015
Foreign exchange
 
Net sales
 
$
(22
)
 
$
144

Foreign exchange
 
Cost of goods sold
 
1,086

 
(994
)
Gain (loss) before income taxes
 
 
 
$
1,064

 
$
(850
)

Hedged Items Designated as Fair Value Hedging Instruments (in thousands)
 
 
 
Three Months Ended November 30,
 
Location
 
2016
 
2015
Foreign exchange
 
Net sales
 
$
22

 
$
(145
)
Foreign exchange
 
Cost of goods sold
 
(1,086
)
 
994

Gain (loss) before income taxes
 
 
 
$
(1,064
)
 
$
849



Effective Portion of Derivatives Designated as Cash Flow Hedging Instruments Recognized in Accumulated Other Comprehensive Income (Loss) (in thousands)
 
Three Months Ended November 30,
 
2016
 
2015
Commodity
 
$
99

 
$
(477
)
Foreign exchange
 
33

 
468

Gain (loss), net of income taxes
 
$
132

 
$
(9
)


Effective Portion of Derivatives Designated as Cash Flow Hedging Instruments Reclassified from Accumulated Other Comprehensive Income (Loss) (in thousands)
 
 
 
Three Months Ended November 30,
 
Location
 
2016
 
2015
Commodity
 
Cost of goods sold
 
$
(92
)
 
$
(51
)
Foreign exchange
 
Net sales
 
(85
)
 
57

Foreign exchange
 
Cost of goods sold
 
128

 
(8
)
Foreign exchange
 
SG&A expenses
 
152

 
35

Interest rate
 
Interest expense
 
134

 
134

Gain before income taxes
 
 
 
237

 
167

Income taxes
 
Income taxes
 
(47
)
 
(49
)
Gain, net of income taxes
 
 
 
$
190

 
$
118



The Company enters into derivative agreements that include provisions to allow the set-off of certain amounts. Derivative instruments are presented on a gross basis on the Company's condensed consolidated balance sheets. The asset and liability balances in the tables below reflect the gross amounts of derivative instruments at November 30, 2016 and August 31, 2016. The fair value of the Company's derivative instruments on the condensed consolidated balance sheets was as follows: 
Derivative Assets (in thousands)
 
November 30, 2016
 
August 31, 2016
Commodity — designated for hedge accounting
 
$
89

 
$
4

Commodity — not designated for hedge accounting
 
108

 
584

Foreign exchange — designated for hedge accounting
 
1,595

 
1,398

Foreign exchange — not designated for hedge accounting
 
3,055

 
750

Derivative assets (other current assets)*
 
$
4,847

 
$
2,736


 
Derivative Liabilities (in thousands)
 
November 30, 2016
 
August 31, 2016
Commodity — designated for hedge accounting
 
$
—

 
$
5

Commodity — not designated for hedge accounting
 
3,211

 
117

Foreign exchange — designated for hedge accounting
 
360

 
902

Foreign exchange — not designated for hedge accounting
 
1,498

 
1,161

Derivative liabilities (accrued expenses and other payables)*
 
$
5,069

 
$
2,185

 _________________ 
* Derivative assets and liabilities do not include the hedged items designated as fair value hedges.

As of November 30, 2016, substantially all of the Company's derivative instruments designated to hedge exposure to the variability in future cash flows of the forecasted transactions will mature within twelve months. All of the instruments are highly liquid and were not entered into for trading purposes.