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Derivative Financial Instruments and Hedging Activities | 9 Months Ended
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Feb. 28, 2023
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Financial Instruments and Hedging Activities | Note Q – Derivative Financial Instruments and Hedging Activities We utilize derivative financial instruments to primarily manage exposure to certain risks related to our ongoing operations. The primary risks managed through the use of derivative financial instruments include interest rate risk, foreign currency exchange rate risk and commodity price risk. While certain of our derivative financial instruments are designated as hedging instruments, we also enter into derivative financial instruments that are designed to hedge a risk, but are not designated as hedging instruments and, therefore, do not qualify for hedge accounting. These derivative financial instruments are adjusted to current fair value through earnings at the end of each period. Interest Rate Risk Management – We are exposed to the impact of interest rate changes. Our objective is to manage the impact of interest rate changes on cash flows and the market value of our borrowings. We utilize a mix of debt maturities along with both fixed-rate and variable-rate debt to manage changes in interest rates. In addition, we enter into interest rate swaps and treasury locks to further manage our exposure to interest rate variations related to our borrowings and to lower our overall borrowing costs. Foreign Currency Exchange Rate Risk Management – We conduct business in several major international currencies and are, therefore, subject to risks associated with changing foreign currency exchange rates. We enter into various contracts that change in value as foreign currency exchange rates change to manage this exposure. Such contracts limit exposure to both favorable and unfavorable currency exchange rate fluctuations. The translation of foreign currencies into U.S. dollars also subjects us to exposure related to fluctuating currency exchange rates; however, derivative financial instruments are not used to manage this risk. Commodity Price Risk Management – We are exposed to changes in the price of certain commodities, including steel, natural gas, copper, zinc and other raw materials, and our utility requirements. Our objective is to reduce earnings and cash flow volatility associated with forecasted purchases and sales of these commodities to allow management to focus its attention on business operations. Accordingly, we enter into derivative financial instruments to manage the associated price risk. We are exposed to counterparty credit risk on all of our derivative financial instruments. Accordingly, we have established and maintain strict counterparty credit guidelines. We have credit support agreements in place with certain counterparties to limit our credit exposure. These agreements require either party to post cash collateral if its cumulative market position exceeds a predefined liability threshold. Amounts posted to the margin accounts accrue interest at market rates and are required to be refunded in the period in which the cumulative market position falls below the required threshold. We do not have significant exposure to any one counterparty, and management believes the overall risk of loss is remote and, in any event, would not be material. Refer to “Note R – Fair Value” for additional information regarding the accounting treatment for our derivative financial instruments, as well as how fair value is determined. The following table summarizes the fair value of our derivative financial instruments and the respective lines in which they were recorded in the consolidated balance sheet at February 28, 2023:
|  | Asset Derivatives |  |  | Liability Derivatives |
|  | Balance |  |  |  |  | Balance |  |  |
|  | Sheet |  | Fair |  |  | Sheet |  | Fair |
(in thousands) |  | Location |  | Value |  |  | Location |  | Value |
Derivatives designated as hedging instruments: |  |  |  |  |  |  |  |  |  |
Commodity contracts |  | Receivables |  | $ | 30,670 |  |  | Accounts payable |  | $ | 1,701 |
|  | Other assets |  |  | 1,137 |  |  | Other liabilities |  |  | 8 |
|  |  |  |  | 31,807 |  |  |  |  |  | 1,709 |
Foreign currency exchange contracts |  | Other assets |  |  | 273 |  |  | Accounts payable |  |  | - |
Total |  |  |  | $ | 32,080 |  |  |  |  | $ | 1,709 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |
Commodity contracts |  | Receivables |  | $ | 1,410 |  |  | Accounts payable |  | $ | 19,185 |
|  | Other assets |  |  | - |  |  | Other liabilities |  |  | 1,719 |
|  |  |  |  | 1,410 |  |  |  |  |  | 20,904 |
Foreign currency exchange contracts |  | Receivables |  |  | - |  |  | Accounts payable |  |  | 15 |
Total |  |  |  | $ | 1,410 |  |  |  |  | $ | 20,919 |
Total derivative financial instruments |  |  |  | $ | 33,490 |  |  |  |  | $ | 22,628 |
The amounts in the table above reflect the fair value of our derivative financial instruments on a net basis where allowable under master netting arrangements. Had these amounts been recognized on a gross basis, the impact would have been an $8,326,000 increase in Receivables with a corresponding increase in Accounts payable. The following table summarizes the fair value of our derivative financial instruments and the respective lines in which they were recorded in the consolidated balance sheet at May 31, 2022:
|  | Asset Derivatives |  |  | Liability Derivatives |
|  | Balance |  |  |  |  | Balance |  |  |
|  | Sheet |  | Fair |  |  | Sheet |  | Fair |
(in thousands) |  | Location |  | Value |  |  | Location |  | Value |
Derivatives designated as hedging instruments: |  |  |  |  |  |  |  |  |  |
Commodity contracts |  | Receivables |  | $ | 1,040 |  |  | Accounts payable |  | $ | 4,517 |
|  | Other assets |  |  | - |  |  | Other liabilities |  |  | 48 |
|  |  |  |  | 1,040 |  |  |  |  |  | 4,565 |
Foreign currency exchange contracts |  | Receivables |  |  | - |  |  | Accounts payable |  |  | - |
|  | Other assets |  |  | - |  |  | Other liabilities |  |  | 17 |
|  |  |  |  | - |  |  |  |  |  | 17 |
Total |  |  |  | $ | 1,040 |  |  |  |  | $ | 4,582 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |
Commodity contracts |  | Receivables |  | $ | 11,555 |  |  | Accounts payable |  | $ | 4,142 |
|  | Other assets |  |  | 48 |  |  | Other liabilities |  |  | 24 |
|  |  |  |  | 11,603 |  |  |  |  |  | 4,166 |
Foreign currency exchange contracts |  | Receivables |  |  | - |  |  | Accounts payable |  |  | 255 |
Total |  |  |  | $ | 11,603 |  |  |  |  | $ | 4,421 |
Total derivative financial instruments |  |  |  | $ | 12,643 |  |  |  |  | $ | 9,003 |
The amounts in the table above reflect the fair value of our derivative financial instruments on a net basis where allowable under master netting arrangements. Had these amounts been recognized on a gross basis, the impact would have been a $6,300,000 increase in Receivables with a corresponding increase in Accounts payable. Cash Flow Hedges We enter into derivative financial instruments to hedge our exposure to changes in cash flows attributable to commodity price fluctuations associated with certain forecasted transactions. These derivative financial instruments are designated and qualify as cash flow hedges. The earnings effects of these derivative financial instruments are presented in the same statement of earnings line items as the earnings effects of the hedged items. For derivative financial instruments designated as cash flow hedges, we assess hedge effectiveness both at the onset of the hedge and at regular intervals throughout the life of the derivative financial instruments. The following table summarizes our cash flow hedges outstanding at February 28, 2023:
|  | Notional |  |  |
(in thousands) |  | Amount |  |  | Maturity Date
Commodity contracts |  | $ | 136,907 |  |  | March 2023 - September 2024
Foreign currency exchange contracts |  | $ | 604 |  |  | March 2023 - July 2023
The following table summarizes the gain (loss) recognized in OCI and the gain (loss) reclassified from Accumulated Other Comprehensive Income (Loss) (“AOCI”) into net earnings for derivative financial instruments designated as cash flow hedges for the periods presented:
(in thousands) |  | Gain (Loss) Recognized in OCI |  |  | Location of Gain (Loss) Reclassified from AOCI into Net Earnings |  | Gain (Loss) Reclassified from AOCI into Net Earnings |
For the three months ended February 28, 2023: |
Commodity contracts |  | $ | 32,976 |  |  | Cost of goods sold |  | $ | (10,980 | )
Interest rate contracts |  |  | - |  |  | Interest expense |  |  | (7 | )
Foreign currency exchange contracts |  |  | 67 |  |  | Net sales/Cost of goods sold |  |  | 67 |
Total |  | $ | 33,043 |  |  |  |  | $ | (10,920 | )
For the three months ended February 28, 2022: |
Commodity contracts |  | $ | (2,460 | ) |  | Cost of goods sold |  | $ | 24,025 |
Interest rate contracts |  |  | - |  |  | Interest expense |  |  | (7 | )
Foreign currency exchange contracts |  |  | (71 | ) |  | Miscellaneous income, net |  |  | (21 | )
Total |  | $ | (2,531 | ) |  |  |  | $ | 23,997 |
For the nine months ended February 28, 2023: |
Commodity contracts |  | $ | (3,123 | ) |  | Cost of goods sold |  | $ | (24,173 | )
Interest rate contracts |  |  | - |  |  | Interest expense |  |  | (20 | )
Foreign currency exchange contracts |  |  | 124 |  |  | Net sales/Cost of goods sold |  |  | (7 | )
Total |  | $ | (2,999 | ) |  |  |  | $ | (24,200 | )
For the nine months ended February 28, 2022: |
Commodity contracts |  | $ | 11,758 |  |  | Cost of goods sold |  | $ | 107,190 |
Interest rate contracts |  |  | - |  |  | Interest expense |  |  | (20 | )
Foreign currency exchange contracts |  |  | (11 | ) |  | Miscellaneous income, net |  |  | (18 | )
Total |  | $ | 11,747 |  |  |  |  | $ | 107,152 |
The estimated net amount of the gains recognized in AOCI at February 28, 2023 expected to be reclassified into net earnings within the succeeding twelve months is $13,848,000 (net of tax of $3,313,000). This amount was computed using the fair value of the cash flow hedges at February 28, 2023, and will change before actual reclassification from OCI to net earnings during the fiscal years ending May 31, 2023 and May 31, 2024. Economic (Non-designated) Hedges We enter into foreign currency exchange contracts to manage our foreign currency exchange rate exposure related to inter-company and financing transactions that do not meet the requirements for hedge accounting treatment. We also enter into certain commodity contracts that do not qualify for hedge accounting treatment. Accordingly, these derivative financial instruments are adjusted to current market value at the end of each period through gain (loss) recognized in earnings. The following table summarizes our economic (non-designated) derivative financial instruments outstanding at February 28, 2023:
|  | Notional |  |  |
(in thousands) |  | Amount |  |  | Maturity Date(s)
Commodity contracts |  | $ | 2,439 |  |  | February 2023 - December 2024
Foreign currency exchange contracts |  | $ | 2,138 |  |  | March 2023 - July 2023
The following table summarizes the gain (loss) recognized in earnings for economic (non-designated) derivative financial instruments for the periods presented:
|  |  |  | Gain (Loss) Recognized |
|  |  |  | In Earnings for the |
|  | Location of Gain (Loss) |  | Three Months Ended February 28, |
(in thousands) |  | Recognized in Earnings |  | 2023 |  |  | 2022 |
Commodity contracts |  | Cost of goods sold |  | $ | (6,523 | ) |  | $ | (4,694 | )
Foreign currency exchange contracts |  | Miscellaneous income, net |  |  | 79 |  |  |  | (23 | )
Total |  |  |  | $ | (6,444 | ) |  | $ | (4,717 | )
|  |  |  | Gain (Loss) Recognized |
|  |  |  | in Earnings for the |
|  | Location of Gain (Loss) |  | Nine Months Ended February 28, |
(in thousands) |  | Recognized in Earnings |  | 2023 |  |  | 2022 |
Commodity contracts |  | Cost of goods sold |  | $ | (6,428 | ) |  | $ | 14,698 |
Foreign currency exchange contracts |  | Miscellaneous income, net |  |  | 32 |  |  |  | 226 |
Total |  |  |  | $ | (6,396 | ) |  | $ | 14,924 |

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI https://asc.fasb.org/topic&trid=2229140 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 40 -Section 50 -Paragraph 5 -Subparagraph (f) -URI https://asc.fasb.org/extlink&oid=126731327&loc=d3e90205-114008 + Details
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