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FINANCIAL INSTRUMENTS | 12 Months Ended
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Oct. 31, 2015
FINANCIAL INSTRUMENTS |
FINANCIAL INSTRUMENTS |
14 |  | FINANCIAL INSTRUMENTS
Concentrations of Credit Risk Financial instruments, which potentially subject the company to concentrations of credit risk, consist principally of accounts receivable that are concentrated in the Professional and Residential business segments. The credit risk associated with these segments is limited because of the large number of customers in the company's customer base and their geographic dispersion, except for the Residential segment that has significant sales to The Home Depot. Derivative Instruments and Hedging Activities The company is exposed to foreign currency exchange rate risk arising from transactions in the normal course of business, such as sales to third party customers, sales and loans to wholly owned foreign subsidiaries, foreign plant operations, and purchases from suppliers. The company actively manages the exposure of its foreign currency exchange rate market risk by entering into various hedging instruments, authorized under company policies that place controls on these activities, with counterparties that are highly rated financial institutions. The company's hedging activities primarily involve the use of forward currency contracts, as well as cross currency swaps that are intended to offset intercompany loan exposures. The company uses derivative instruments only in an attempt to limit underlying exposure from foreign currency exchange rate fluctuations and to minimize earnings and cash flow volatility associated with foreign currency exchange rate changes. Decisions on whether to use such contracts are primarily based on the amount of exposure to the currency involved and an assessment of the near-term market value for each currency. The company's policy does not allow the use of derivatives for trading or speculative purposes. The company also made an accounting policy election to use the portfolio exception with respect to measuring counterparty credit risk for derivative instruments, and to measure the fair value of a portfolio of financial assets and financial liabilities on the basis of the net open risk position with each counterparty. The company's primary currency exchange rate exposures are with the Euro, the Australian dollar, the Canadian dollar, the British pound, the Mexican peso, the Japanese yen, the Chinese Renminbi, and the Romanian New Leu against the U.S. dollar, as well as the Romanian New Leu against the Euro. Cash Flow Hedges. The company recognizes all derivative instruments as either assets or liabilities at fair value on the consolidated balance sheet and formally documents relationships between cash flow hedging instruments and hedged transactions, as well as its risk-management objective and strategy for undertaking hedge transactions. This process includes linking all derivatives to the forecasted transactions, such as sales to third parties, foreign plant operations, and purchases from suppliers. Changes in fair values of outstanding cash flow hedge derivatives, except the ineffective portion, are recorded in other comprehensive income ("OCI"), until net earnings is affected by the variability of cash flows of the hedged transaction. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in net earnings. The consolidated statement of earnings classification of effective hedge results is the same as that of the underlying exposure. Results of hedges of sales are recorded in net sales, and foreign plant operations and purchases of suppliers are recorded in cost of sales when the underlying hedged transaction affects net earnings. The maximum amount of time the company hedges its exposure to the variability in future cash flows for forecasted trade sales and purchases is two years. Results of hedges of intercompany loans are recorded in other income, net as an offset to the remeasurement of the foreign loan balance. The company formally assesses, at a hedge's inception and on an ongoing basis, whether the derivatives that are designated as hedges have been highly effective in offsetting changes in the cash flows of the hedged transactions and whether those derivatives may be expected to remain highly effective in future periods. When it is determined that a derivative is not, or has ceased to be, highly effective as a hedge, the company discontinues hedge accounting prospectively. When the company discontinues hedge accounting because it is no longer probable, but it is still reasonably possible that the forecasted transaction will occur by the end of the originally expected period or within an additional two-month period of time thereafter, the gain or loss on the derivative remains in AOCL and is reclassified to net earnings when the forecasted transaction affects net earnings. However, if it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter, the gains and losses that were in AOCL are recognized immediately in net earnings. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the company carries the derivative at its fair value on the consolidated balance sheet, recognizing future changes in the fair value in other income, net. For the fiscal years ended October 31, 2015 and 2014, there were immaterial gains and losses on contracts reclassified into earnings as a result of the discontinuance of cash flow hedges. As of October 31, 2015, the notional amount of outstanding forward contracts designated as cash flow hedges was $103,740. Additionally, the company has one cross currency interest rate swap instrument outstanding as of October 31, 2015 for a fixed pay notional of 36,593 Romanian New Leu and receive floating notional of 8,500 Euro. Derivatives Not Designated as Hedging Instruments. The company also enters into foreign currency contracts that include forward currency contracts and cross currency swaps to mitigate the remeasurement of specific assets and liabilities on the consolidated balance sheet. These contracts are not designated as hedging instruments. Accordingly, changes in the fair value of hedges of recorded balance sheet positions, such as cash, receivables, payables, intercompany notes, and other various contractual claims to pay or receive foreign currencies other than the functional currency, are recognized immediately in other income, net, on the consolidated statements of earnings together with the transaction gain or loss from the hedged balance sheet position. The following table presents the fair value of the company's derivatives and consolidated balance sheet location.
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|  | Asset Derivatives |  | Liability Derivatives |
|  | October 31, 2015 |  | October 31, 2014 |  | October 31, 2015 |  | October 31, 2014 |
|  | Balance Sheet Location |  |  | Fair Value |  | Balance Sheet Location |  |  | Fair Value |  | Balance Sheet Location |  |  | Fair Value |  | Balance Sheet Location |  |  | Fair Value |
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Derivatives Designated as Hedging Instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Forward currency contracts |  | Prepaid expenses |  | $ | 2,102 |  | Prepaid expenses |  | $ | 4,626 |  | Accrued liabilities |  | $ | 1,363 |  | Accrued liabilities |  | $ | 9 |
Cross currency contracts |  | Prepaid expenses |  |  | – |  | Prepaid expenses |  |  | 831 |  | Accrued liabilities |  |  | 134 |  | Accrued liabilities |  |  | – |
Derivatives Not Designated as Hedging Instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Forward currency contracts |  | Prepaid expenses |  | $ | 1,071 |  | Prepaid expenses |  | $ | 1,404 |  | Accrued liabilities |  | $ | 348 |  | Accrued liabilities |  | $ | – |
Cross currency contracts |  | Prepaid expenses |  |  | 2,136 |  | Prepaid expenses |  |  | – |  | Accrued liabilities |  |  | – |  | Accrued liabilities |  |  | 536 |
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Total Derivatives |  |  |  | $ | 5,309 |  |  |  | $ | 6,861 |  |  |  | $ | 1,845 |  |  |  | $ | 545 |
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The following table presents the impact of derivative instruments on the consolidated statements of earnings and the consolidated statements of comprehensive income for the company's derivatives designated as cash flow hedging instruments for the fiscal years ended October 31, 2015 and 2014, respectively.
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|  | Gain (Loss) Recognized in OCI on Derivatives, net of tax (Effective Portion) |  | Location of Gain (Loss) Reclassified from AOCL into Income (Effective Portion) |  | Gain (Loss) Reclassified from AOCL into Income (Effective Portion) |  | Location of Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion and excluded from Effectiveness Testing) |  | Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion and Excluded from Effectiveness Testing) |
Fiscal years ended |  |  | October 31, 2015 |  |  | October 31, 2014 |  |  |  |  | October 31, 2015 |  |  | October 31, 2014 |  |  |  |  | October 31, 2015 |  |  | October 31, 2014 |
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Forward currency contracts |  | $ | (745 | ) | $ | 4,150 |  | Net sales |  | $ | 13,067 |  | $ | (1,128 | ) | Other income, net |  | $ | 747 |  | $ | 120 |
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Forward currency contracts |  |  | (1,687 | ) |  | (712 | ) | Cost of sales |  |  | (2,806 | ) |  | 103 |  |  |  |  |  |  |  |  |
Cross currency contracts |  |  | 200 |  |  | (238 | ) | Other income, net |  |  | (355 | ) |  | (537 | ) |  |  |  |  |  |  |  |
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Total |  | $ | (2,232 | ) | $ | 3,200 |  | Total |  | $ | 9,906 |  | $ | (1,562 | ) |  |  |  |  |  |  |  |
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As of October 31, 2015, the company anticipates to reclassify approximately $652 of gains from AOCL to earnings during the next twelve months. The following table presents the impact of derivative instruments on the consolidated statements of earnings for the company's derivatives not designated as hedging instruments.
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|  |  |  | Gain (Loss) Recognized in Net Earnings Fiscal Year Ended |
|  | Location of Gain (Loss) Recognized in Net Earnings |  |  | October 31, 2015 |  |  | October 31, 2014 |
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Forward currency contracts |  | Other income, net |  | $ | 7,703 |  | $ | 3,555 |
Cross currency contracts |  | Other income, net |  |  | 1,400 |  |  | 951 |
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Total |  |  |  | $ | 9,103 |  | $ | 4,506 |
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The company entered into an International Swap Dealers Association ("ISDA") Master Agreement with each counterparty that permits the net settlement of amounts owed under their respective contracts. The ISDA Master Agreement is an industry standardized contract that governs all derivative contracts entered into between the company and the respective counterparty. Under these master netting agreements, net settlement generally permits the company or the counterparty to determine the net amount payable or receivable for contracts due on the same date or in the same currency for similar types of derivative transactions. The company records the fair value of its derivative contracts at the net amount in its consolidated balance sheets. The following tables show the effects of the master netting arrangements on the fair value of the company's derivative contracts that are recorded in the consolidated balance sheets:
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|  | Assets |  | Liabilities |
October 31, 2015 |  |  | Gross Amounts of Recognized Assets |  |  | Gross Liabilities Offset in the Balance Sheet |  |  | Net Amount of Assets Presented in the Balance Sheet |  |  | Gross Amounts of Recognized Liabilities |  |  | Gross Assets offset in the Balance Sheet |  |  | Net Amount of Liabilities Presented in the Balance Sheet |
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Forward currency contracts |  | $ | 3,380 |  | $ | (207 | ) | $ | 3,173 |  | $ | (1,711 | ) |  | – |  | $ | (1,711 | )
Cross currency contracts |  |  | 2,136 |  |  | – |  |  | 2,136 |  |  | (134 | ) |  | – |  |  | (134 | )
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Total |  | $ | 5,516 |  | $ | (207 | ) | $ | 5,309 |  | $ | (1,845 | ) |  | – |  | $ | (1,845 | )
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|  | Assets |  | Liabilities |
October 31, 2014 |  |  | Gross Amounts of Recognized Assets |  |  | Gross Liabilities Offset in the Balance Sheet |  |  | Net Amount of Assets Presented in the Balance Sheet |  |  | Gross Amounts of Recognized Liabilities |  |  | Gross Assets offset in the Balance Sheet |  |  | Net Amount of Liabilities Presented in the Balance Sheet |
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Forward currency contracts |  | $ | 6,265 |  | $ | (235 | ) | $ | 6,030 |  | $ | (9 | ) |  | – |  | $ | (9 | )
Cross currency contracts |  |  | 831 |  |  | – |  |  | 831 |  |  | (536 | ) |  | – |  |  | (536 | )
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Total |  | $ | 7,096 |  | $ | (235 | ) | $ | 6,861 |  | $ | (545 | ) |  | – |  | $ | (545 | )
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Fair Value The company categorizes its assets and liabilities into one of three levels based on the assumptions (inputs) used in valuing the asset or liability. Estimates of fair value for financial assets and financial liabilities are based on the framework established in the accounting guidance for fair value measurements. The framework defines fair value, provides guidance for measuring fair value, and requires certain disclosures. The framework discusses valuation techniques such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The framework utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment. The three levels are defined as follows: Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 – Unobservable inputs reflecting management's assumptions about the inputs used in pricing the asset or liability. Cash balances are valued at their carrying amounts in the consolidated balance sheets, which are reasonable estimates of their fair value due to their short-term nature. Forward currency contracts are valued based on observable market transactions of forward currency prices and spot currency rates as of the reporting date. The fair value of cross currency contracts is determined using discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs such as interest rates and foreign currency exchange rates. In addition, credit valuation adjustments, which consider the impact of any credit enhancements to the contracts, such as collateral postings, thresholds, mutual puts, and guarantees, are incorporated in the fair values to account for potential nonperformance risk. The unfunded deferred compensation liability is primarily subject to changes in fixed-income investment contracts based on current yields. For accounts receivable and accounts payable, carrying amounts are a reasonable estimate of fair value given their short-term nature. Assets and liabilities measured at fair value on a recurring basis, as of October 31, 2015 and 2014, respectively, are summarized below:
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October 31, 2015 |  |  | Fair Value |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
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Assets: |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 126,275 |  | $ | 126,275 |  | $ | – |  |  | – |
Forward currency contracts |  |  | 3,173 |  |  | – |  |  | 3,173 |  |  | – |
Cross currency contracts |  |  | 2,136 |  |  | – |  |  | 2,136 |  |  | – |
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Total assets |  | $ | 131,584 |  | $ | 126,275 |  | $ | 5,309 |  |  | – |
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Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |
Forward currency contracts |  | $ | 1,711 |  |  | – |  | $ | 1,711 |  |  | – |
Cross currency contracts |  |  | 134 |  |  | – |  |  | 134 |  |  | – |
Deferred compensation liabilities |  |  | 1,652 |  |  | – |  |  | 1,652 |  |  | – |
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Total liabilities |  | $ | 3,497 |  |  | – |  | $ | 3,497 |  |  | – |
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October 31, 2014 |  |  | Fair Value |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
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Assets: |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 314,873 |  | $ | 314,873 |  | $ | – |  |  | – |
Forward currency contracts |  |  | 6,030 |  |  | – |  |  | 6,030 |  |  | – |
Cross currency contracts |  |  | 831 |  |  | – |  |  | 831 |  |  | – |
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Total assets |  | $ | 321,734 |  | $ | 314,873 |  | $ | 6,861 |  |  | – |
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Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |
Forward currency contracts |  | $ | 9 |  |  | – |  | $ | 9 |  |  | – |
Cross currency contracts |  |  | 536 |  |  | – |  |  | 536 |  |  | – |
Deferred compensation liabilities |  |  | 2,141 |  |  | – |  |  | 2,141 |  |  | – |
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Total liabilities |  | $ | 2,686 |  |  | – |  | $ | 2,686 |  |  | – |
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The company measures certain assets and liabilities at fair value on a non-recurring basis. Assets acquired and liabilities assumed as part of acquisitions are measured at fair value. Refer to Note 2 for additional information. There were no transfers between Level 1 and Level 2 during the fiscal years ended October 31, 2015 and 2014. As of October 31, 2015, the estimated fair value of long-term debt with fixed interest rates was $298,541 compared to its carrying amount of $254,452. As of October 31, 2014, the estimated fair value of long-term debt with fixed interest rates was $260,970 compared to its carrying amount of $223,956. The fair value is estimated by discounting the projected cash flows using the rate at which similar amounts of debt could currently be borrowed. Long-term debt is a Level 2 liability in the fair value hierarchy.

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- Definition The entire disclosure for financial instruments. This disclosure includes, but is not limited to, fair value measurements of short and long term marketable securities, international currencies forward contracts, and auction rate securities. Financial instruments may include hedging and non-hedging currency exchange instruments, derivatives, securitizations and securities available for sale at fair value. Also included are investment results, realized and unrealized gains and losses as well as impairments and risk management disclosures. + References No definition available. + Details
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