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Derivative Instruments and Hedging Activities | 9 Months Ended
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Jul. 29, 2016
Derivative Instruments and Hedging Activities |
Derivative Instruments and Hedging Activities | Note 12 — 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 statements of earnings classification of effective hedge results is the same as that of the underlying exposure. Results of hedges of sales and foreign plant operations are recorded in net sales and cost of sales, respectively, 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 sheets, recognizing future changes in the fair value in other income, net. For the third quarter and year-to-date periods of fiscal 201 6, there were immaterial losses on forward contracts reclassified into earnings as a result of the discontinuance of cash flow hedges. As of July 29, 201 6 and July 3 1, 2015, the notional amount outstanding of forward contracts designated as cash flow hedges was $86.0 million and $10 2.8 million, respectively. As of July 3 1, 2015, the company had one cross currency interest rate swap instrument outstanding for a fixed pay notional of 36.6 million Romanian New Leu and receive floating notional of 8.5 million Euros. During the third quarter of fiscal 2016, the company terminated its one cross currency interest rate swap instrument outstanding with gains on the instrument recorded in other income. 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.
|  | Fair Value at |  | Fair Value at |  | Fair Value at |
(Dollars in thousands) |  | July 29, 2016 |  | July 31, 2015 |  | October 31, 2015 |
Asset Derivatives |  |  |  |  |  |  |
Derivatives Designated as Hedging Instruments |  |  |  |  |  |  |
Prepaid expenses and other current assets |  |  |  |  |  |  |
Forward currency contracts |  | $ | 114 |  | $ | 2,957 |  | $ | 2,102 |
Cross currency contract |  | — |  | — |  | — |
Derivatives Not Designated as Hedging Instruments |  |  |  |  |  |  |
Prepaid expenses and other current assets |  |  |  |  |  |  |
Forward currency contracts |  | 532 |  | 2,663 |  | 1,071 |
Cross currency contract |  | — |  | 2,179 |  | 2,136 |
Total Assets |  | $ | 646 |  | $ | 7,799 |  | $ | 5,309 |
Liability Derivatives |  |  |  |  |  |  |
Derivatives Designated as Hedging Instruments |  |  |  |  |  |  |
Accrued liabilities |  |  |  |  |  |  |
Forward currency contracts |  | $ | 2,070 |  | $ | 1,986 |  | $ | 1,363 |
Cross currency contract |  | — |  | 243 |  | 134 |
Derivatives Not Designated as Hedging Instruments |  |  |  |  |  |  |
Accrued liabilities |  |  |  |  |  |  |
Forward currency contracts |  | 402 |  | 2 |  | 348 |
Cross currency contract |  | — |  | — |  | — |
Total Liabilities |  | $ | 2,472 |  | $ | 2,231 |  | $ | 1,845 |
The following table presents the impact of derivative instruments on the consolidated statements of earnings for the company’s derivatives designated as cash flow hedging instruments for the three and nine months ended July 29, 201 6 and July 3 1, 2015, respectively.
|  | Effective Portion |  | Ineffective Portion and excluded from Effectiveness Testing |
|  | Gain (Loss) |  | Location of Gain (Loss) |  |  |  | Location of Gain (Loss) |  |  |
|  | Recognized in OCI on |  | Reclassified from AOCL |  | Gain (Loss) Reclassified |  | Recognized in Income on |  | Gain (Loss) Recognized |
|  | Derivatives |  | into Income |  | from AOCL into Income |  | Derivatives |  | in Income on Derivatives |
(Dollars in thousands) |  | July 29, |  | July 31, |  |  |  | July 29, |  | July 31, |  |  |  | July 29, |  | July 31, |
For the three months ended |  | 2016 |  | 2015 |  |  |  | 2016 |  | 2015 |  |  |  | 2016 |  | 2015 |
Forward currency contracts |  | $ | 983 |  | $ | (654 | ) | Net sales |  | $ | (192 | ) | $ | 3,258 |  | Other income, net |  | $ | (69 | ) | $ | 280 |
Forward currency contracts |  | (317 | ) | (433 | ) | Cost of sales |  | (931 | ) | (817 | ) |  |  |  |  |  |
Cross currency contracts |  | — |  | 31 |  | Other income, net |  | — |  | (85 | ) |  |  |  |  |  |
Total derivatives designated as cash flow hedges |  | $ | 666 |  | $ | (1,056 | ) | Total |  | $ | (1,123 | ) | $ | 2,356 |  | Total |  | $ | (69 | ) | $ | 280 |
|  | July 29, |  | July 31, |  |  |  | July 29, |  | July 31, |  |  |  | July 29, |  | July 31, |
For the nine months ended |  | 2016 |  | 2015 |  |  |  | 2016 |  | 2015 |  |  |  | 2016 |  | 2015 |
Forward currency contracts |  | $ | (1,647 | ) | $ | (950 | ) | Net sales |  | $ | 1,809 |  | $ | 11,188 |  | Other income, net |  | $ | 162 |  | $ | 563 |
Forward currency contracts |  | (537 | ) | (1,615 | ) | Cost of sales |  | (1,930 | ) | (1,808 | ) |  |  |  |  |  |
Cross currency contracts |  | 255 |  | 167 |  | Other income, net |  | (94 | ) | (292 | ) |  |  |  |  |  |
Total derivatives designated as cash flow hedges |  | $ | (1,929 | ) | $ | (2,398 | ) | Total |  | $ | (215 | ) | $ | 9,088 |  | Total |  | $ | 162 |  | $ | 563 |
As of July 29, 201 6, the company expects to reclassify approximately $1.6 million 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.
|  |  |  | Gain (Loss) Recognized in Net Earnings |
|  | Location of Gain |  | Three Months Ended |  | Nine Months Ended |
|  | (Loss) Recognized in |  | July 29, |  | July 31, |  | July 29, |  | July 31, |
(Dollars in thousands) |  | Net Earnings |  | 2016 |  | 2015 |  | 2016 |  | 2015 |
Forward currency contracts |  | Other income, net |  | $ | 788 |  | $ | (2,891 | ) | $ | (553 | ) | $ | 8,459 |
Cross currency contracts |  | Other income, net |  | (8 | ) | 139 |  | (191 | ) | 1,441 |
Total derivatives not designated as hedges |  |  |  | $ | 780 |  | $ | (2,752 | ) | $ | (744 | ) | $ | 9,900 |
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:
(Dollars in thousands) |  | July 29, 2016 |  | July 31, 2015 |  | October 31, 2015 |
Assets |  |  |  |  |  |  |
Forward currency contracts |  |  |  |  |  |  |
Gross Amounts of Recognized Assets |  | $ | 885 |  | $ | 5,855 |  | $ | 3,380 |
Gross Liabilities Offset in the Balance Sheets |  | (239 | ) | (235 | ) | (207 | )
Net Amounts of Assets Presented in the Balance Sheets |  | 646 |  | 5,620 |  | 3,173 |
Cross currency contracts |  |  |  |  |  |  |
Gross Amounts of Recognized Assets |  | — |  | 2,179 |  | 2,136 |
Gross Liabilities Offset in the Balance Sheets |  | — |  | — |  | — |
Net Amounts of Assets Presented in the Balance Sheets |  | — |  | 2,179 |  | 2,136 |
Total Assets |  | $ | 646 |  | $ | 7,799 |  | $ | 5,309 |
Liabilities |  |  |  |  |  |  |
Forward currency contracts |  |  |  |  |  |  |
Gross Amounts of Recognized Liabilities |  | $ | (2,475 | ) | $ | (2,220 | ) | $ | (1,711 | )
Gross Assets Offset in the Balance Sheets |  | 3 |  | 232 |  | — |
Net Amounts of Liabilities Presented in the Balance Sheets |  | (2,472 | ) | (1,988 | ) | (1,711 | )
Cross currency contracts |  |  |  |  |  |  |
Gross Amounts of Recognized Liabilities |  | — |  | (243 | ) | (134 | )
Gross Assets Offset in the Balance Sheets |  | — |  | — |  | — |
Net Amounts of Liabilities Presented in the Balance Sheets |  | — |  | (243 | ) | (134 | )
Total Liabilities |  | $ | (2,472 | ) | $ | (2,231 | ) | $ | (1,845 | )

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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://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 45 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6441202&loc=d3e80720-113993 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4C -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624171-113959 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=64837297&loc=d3e41620-113959 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4B -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624163-113959 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5579240-113959 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4D -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624177-113959 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=35736893&loc=d3e80784-113994 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=64837297&loc=d3e41641-113959 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1A -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5579245-113959 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4H -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624258-113959 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=35736893&loc=d3e80748-113994 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4K -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5708775-113959 Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4J -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5708773-113959 Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4A -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5618551-113959 Reference 15: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1B -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5580258-113959 Reference 16: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4E -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624181-113959 Reference 17: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 25 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6886632&loc=d3e76258-113986 Reference 18: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=64837297&loc=d3e41638-113959 Reference 19: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(n)) -URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690 + Details
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