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Financial Derivatives
 6 Months Ended
Feb. 29, 2012
Financial Derivatives [Abstract]  
Financial Derivatives

(8) Financial Derivatives

The Company uses certain financial derivatives to mitigate its exposure to volatility in interest rates and foreign currency exchange rates. The Company uses these derivative instruments to hedge exposures in the ordinary course of business and does not invest in derivative instruments for speculative purposes. Each derivative is designated as a cash flow hedge, a hedge of a net investment, or remains undesignated. The Company records the fair value of these derivative instruments on the balance sheet. For the instruments that are designated as a cash flow hedge and meet certain documentary and analytical requirements to qualify for hedge accounting treatment, changes in the fair value for the effective portion are reported in other comprehensive income ("OCI"), net of related income tax effects, and are reclassified to the income statement when the effects of the item being hedged are recognized in the income statement. Changes in fair value of derivative instruments that qualify as hedges of a net investment in foreign operations are recorded as a component of accumulated currency translation adjustment in accumulated other comprehensive income ("AOCI"), net of related income tax effects. Changes in the fair value of undesignated hedges are recognized currently in the income statement as other income (expense). All changes in derivative fair values due to ineffectiveness are recognized in earnings.

The Company manages market and credit risks associated with its derivative instruments by establishing and monitoring limits as to the types and degree of risk that may be undertaken, and by entering into transactions with high-quality counterparties. As of February 29, 2012, the Company's derivative counterparty had investment grade credit ratings.

Financial derivatives consist of the following:

  Fair Values of Derivative Instruments
Asset (Liability) Derivatives
 
    February 29,   February 28,     August 31,  
$ in thousands Balance Sheet Location   2012     2011     2011  
Derivatives designated as hedging                    
instruments:                    
Foreign currency option contract Other current assets $ 4   $ -   $ -  
Foreign currency forward contracts Other current liabilities   (641 )   (388 )   (218 )
Interest rate swap Other current liabilities   (180 )   (354 )   (267 )
Interest rate swap Other noncurrent liabilities   (43 )   (271 )   (149 )
Total derivatives designated as hedging                    
instruments   $ (860 ) $ (1,013 ) $ (634 )
 
Derivatives not designated as hedging                    
instruments:                    
Foreign currency forward contracts Other current liabilities $ (34 ) $ -   $ -  
Total derivatives not designated as                    
hedging instruments   $ (34 ) $ -   $ -  

 

 

In addition, accumulated other comprehensive income included realized and unrealized gains, net of related income tax effects, of $1.3 million, $0.5 million and $0.5 million at February 29, 2012, February 28, 2011 and August 31, 2011, respectively, related to derivative contracts designated as hedging instruments.

Cash Flow Hedging Relationships

In order to reduce interest rate risk on the BSI Term Note, the Company entered into an interest rate swap agreement with Wells Fargo Bank, N.A. that is designed to convert the variable interest rate on the entire amount of the borrowing to a fixed rate of 6.05 percent per annum. Under the terms of the interest rate swap, the Company receives variable interest rate payments and makes fixed interest rate payments on an amount equal to the outstanding balance of the BSI Term Note. Changes in the fair value of the interest rate swap designated as a hedging instrument that effectively offset the variability of cash flows associated with variable-rate, long-term debt obligations are reported in AOCI, net of related income tax effects.

In order to reduce exposures related to changes in foreign currency exchange rates, the Company, at times, may enter into forward exchange or option contracts for transactions denominated in a currency other than the functional currency for certain of its operations. This activity primarily relates to economically hedging against foreign currency risk in purchasing inventory, sales of finished goods, and future settlement of foreign denominated assets and liabilities. Changes in the fair value of the forward exchange contracts or option contracts designated as hedging instruments that effectively offset the hedged risks are reported in AOCI, net of related income tax effects. The Company had no material forward exchange contracts and option contracts with cash flow hedging relationships at February 29, 2012, February 28, 2011 and August 31, 2011. In addition, the amount of gain or loss recognized in OCI, the amount of gain or loss reclassified from AOCI into income and the amount of gain or loss recognized in income related to the outstanding cash flow hedging relationships were immaterial.

Net Investment Hedging Relationships

In order to reduce translation exposure resulting from translating the financial statements of its international subsidiaries into U.S. dollars, the Company, at times, utilizes Euro foreign currency forward contracts to hedge a portion of its Euro net investment exposure in its foreign operations. These foreign currency forward contracts qualify as a hedge of net investments in foreign operations. Changes in fair value of the net investment hedge contracts are reported in OCI as part of the currency translation adjustment, net of tax.

$ in thousands   Amount of Gain/(Loss) Recognized in OCI on Derivatives  
    Three months ended     Six months ended  
    February 29,   February 28,   February 29,   February 28,  
    2012   2011     2012   2011  
Foreign currency forward contracts(1)                    
  $ 104 $ (219 ) $ 695 $ (649 )

 

(1) Net of tax expense of $63 and $423 for the three and six months ended February 29, 2012. Net of tax benefit of $134 and $397 for the three and six months ended February 28, 2011.

For the three and six months ended February 29, 2012, the Company settled Euro foreign currency forward contracts resulting in after-tax net gains of $0.7 million and $1.0 million, respectively, which were included in OCI as part of a currency translation adjustment. There were no after-tax gains or losses from Euro foreign currency forward contracts for the three months ended February 28, 2011. For the six months ended February 28, 2011, the Company settled Euro foreign currency forward contracts resulting in after-tax net losses of $0.4 million which were included in OCI as part of a currency translation adjustment.

There were no amounts recorded in the condensed consolidated statement of operations related to ineffectiveness of Euro foreign currency forward contracts for the three and six months ended February 29, 2012 and February 28, 2011, respectively. Accumulated currency translation adjustments in AOCI at February 29, 2012, February 28, 2011 and August 31, 2011 reflected realized after-tax gains of $1.8 million, $1.1 million and $0.9 million, respectively.

At February 29, 2012, February 28, 2011 and August 31, 2011, the Company had outstanding Euro foreign currency forward contracts to sell 17.0 million Euro, 5.0 million Euro and 10.0 million Euro, respectively, at fixed prices to settle during the next fiscal quarter. The Company's foreign currency forward contracts qualify as hedges of a net investment in foreign operations.