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Financial Derivatives
 3 Months Ended
May 31, 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 May 31, 2012, the Company’s derivative counterparty had investment grade credit ratings.

 

Financial derivatives consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Values of Derivative Instruments

 

 

Asset (Liability)

 

 

 

 

May 31,

 

May 31,

 

August 31,

$ in thousands

 

Balance Sheet Location

 

2012

 

2011

 

2011

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

    Foreign currency forward contracts

 

Other current assets

 

$

 1,798 

 

$

 -

 

$

 -

    Foreign currency forward contracts

 

Other current liabilities

 

 

 -

 

 

 (143)

 

 

 (218)

    Interest rate swap

 

Other current liabilities

 

 

 (133)

 

 

 (310)

 

 

 (267)

    Interest rate swap

 

Other noncurrent liabilities

 

 

 (15)

 

 

 (207)

 

 

 (149)

Total derivatives designated as hedging  instruments

 

$

 1,650 

 

$

 (660)

 

$

 (634)

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

    Foreign currency forward contracts

 

Other current assets

 

$

 116 

 

$

 -

 

$

 -

Total derivatives not designated as hedging instruments

 

$

 116 

 

$

 -

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

In addition, accumulated other comprehensive income included realized and unrealized gains, net of related income tax effects, of $2.7 million, $0.4 million and $0.5 million at May 31, 2012 and 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 $2.3 million, $1.1 million, and $0.7 million of U.S. dollar equivalent cash flow forward exchange contracts and option contracts outstanding as of May 31, 2012 and 2011, and August 31, 2011, respectively.  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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of Gain/(Loss) Recognized in OCI on Derivatives

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

 

 

 

May 31,

 

May 31,

 

$ in thousands

 

 

 

2012

 

2011

 

2012

 

2011

 

Foreign currency  forward contracts(1)

 

 

 

$

1,313

 

$

(173)

 

$

2,008

 

$

(823)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Net of tax benefit of $802 and $1,225 for the three and nine months ended May 31, 2012, respectively. Net of tax benefit of $106 and $503 for the three and nine months ended May 31, 2011, respectively.

 

 

For the three and nine months ended May 31, 2012, the Company settled Euro foreign currency forward contracts resulting in after-tax net loss (gain) of $0.2 million and ($0.8) million, respectively, which were included in OCI as part of a currency translation adjustment.  For the three and nine months ended May 31, 2011, the Company settled Euro foreign currency forward contracts resulting in after-tax net loss of $0.3 million and $0.7 million, respectively, 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 nine months ended May 31, 2012 and 2011. Accumulated currency translation adjustments in AOCI at May 31, 2012 and 2011 and August 31, 2011 reflected realized and unrealized after-tax gains of $2.7 million, $0.8 million and $0.9 million, respectively.

 

At May 31, 2012 and 2011 and August 31, 2011, the Company had outstanding Euro foreign currency forward contracts to sell 22.5 million Euro, 10.0 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.