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Derivative Instruments and Hedging Activities | 9 Months Ended
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Jul. 29, 2022
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Instruments and Hedging Activities |
16 | Derivative Instruments and Hedging Activities
Risk Management Objective of Using Derivatives 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, costs associated with foreign plant operations, and purchases from suppliers. 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. To reduce its exposure to foreign currency exchange rate risk, the company enters into various derivative instruments to hedge against such risk, authorized under a company policy that places controls on these hedging activities, with counterparties that are highly rated financial institutions. The company’s policy does not allow the use of derivative instruments for trading or speculative purposes. The company has 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 hedging activities primarily involve the use of forward currency contracts to hedge most foreign currency transactions, including forecasted sales and purchases denominated in foreign currencies. 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 fluctuations. Decisions on whether to use such derivative instruments 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 recognizes all derivative instruments at fair value on the Condensed Consolidated Balance Sheets as either assets or liabilities. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as a cash flow hedging instrument. Cash Flow Hedging Instruments The company formally documents relationships between cash flow hedging instruments and the related hedged transactions, as well as its risk-management objective and strategy for undertaking cash flow hedging instruments. This process includes linking all cash flow hedging instruments to the forecasted transactions, such as sales to third-parties and costs associated with foreign plant operations, including purchases from suppliers. At the cash flow hedge’s inception and on an ongoing basis, the company formally assesses whether the cash flow hedging instruments have been highly effective in offsetting changes in the cash flows of the hedged transactions and whether those cash flow hedging instruments may be expected to remain highly effective in future periods. Changes in the fair values of the spot rate component of outstanding, highly effective cash flow hedging instruments included in the assessment of hedge effectiveness are recorded in other comprehensive income within AOCL on the Condensed Consolidated Balance Sheets and are subsequently reclassified to net earnings within the Condensed Consolidated Statements of Earnings during the same period in which the cash flows of the underlying hedged transaction affect net earnings. Changes in the fair values of hedge components excluded from the assessment of effectiveness are recognized immediately in net earnings under the mark-to-market approach. The classification of gains or losses recognized on cash flow hedging instruments and excluded components within the Condensed Consolidated Statements of Earnings is the same as that of the underlying exposure. Results of cash flow hedging instruments, and the related excluded components, of sales and costs associated with foreign plant operations, including purchases from suppliers, are recorded in net sales and cost of sales, respectively. 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. When it is determined that a derivative instrument is not, or has ceased to be, highly effective as a cash flow hedge, the company discontinues cash flow hedge accounting prospectively. The gain or loss on the dedesignated derivative instrument remains in AOCL and is reclassified to net earnings within the same Condensed Consolidated Statements of Earnings line item as the underlying exposure when the forecasted transaction affects net earnings. When the company discontinues cash flow 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 instrument remains in AOCL and is reclassified to net earnings within the same Condensed Consolidated Statements of Earnings line item as the underlying exposure 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 immediately recognized in net earnings within other income, net in the Condensed Consolidated Statements of Earnings. In all situations in which cash flow hedge accounting is discontinued and the derivative instrument remains outstanding, the company carries the derivative instrument at its fair value on the Condensed Consolidated Balance Sheets, recognizing future changes in the fair value within other income, net in the Condensed Consolidated Statements of Earnings. As of July 29, 2022, the notional amount outstanding of forward currency contracts designated as cash flow hedging instruments was $293.0 million. Derivatives Not Designated as Cash Flow Hedging Instruments The company also enters into foreign currency contracts that include forward currency contracts to mitigate the remeasurement of specific assets and liabilities on the Condensed Consolidated Balance Sheets. These contracts are not designated as cash flow 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 Condensed Consolidated Statements of Earnings together with the transaction gain or loss from the hedged balance sheet position. The following table presents the fair value and location of the company’s derivative instruments on the Condensed Consolidated Balance Sheets:
(Dollars in thousands) |  | July 29, 2022 |  | July 30, 2021 |  | October 31, 2021
Derivative assets: |  |  |  |  |  |
Derivatives designated as cash flow hedging instruments: |  |  |  |  |  |
Prepaid expenses and other current assets |  |  |  |  |  |
Forward currency contracts |  | $ | 17,723 |  |  | $ | 1,235 |  |  | $ | 189 |
Derivatives not designated as cash flow hedging instruments: |  |  |  |  |  |
Prepaid expenses and other current assets |  |  |  |  |  |
Forward currency contracts |  | 4,618 |  |  | 309 |  |  | 133 |
Total derivative assets |  | $ | 22,341 |  |  | $ | 1,544 |  |  | $ | 322 |
Derivative liabilities: |  |  |  |  |  |
Derivatives designated as cash flow hedging instruments: |  |  |  |  |  |
Accrued liabilities |  |  |  |  |  |
Forward currency contracts |  | $ | — |  |  | $ | 3,682 |  |  | $ | 1,260 |
Derivatives not designated as cash flow hedging instruments: |  |  |  |  |  |
Accrued liabilities |  |  |  |  |  |
Forward currency contracts |  | 18 |  |  | 1,554 |  |  | 872 |
Total derivative liabilities |  | $ | 18 |  |  | $ | 5,236 |  |  | $ | 2,132 |
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 instruments at the net amount on its Condensed Consolidated Balance Sheets. The following table presents the effects of the master netting arrangements on the fair value of the company’s derivative instruments that are recorded on the Condensed Consolidated Balance Sheets:
(Dollars in thousands) |  | July 29, 2022 |  | July 30, 2021 |  | October 31, 2021
Derivative assets: |  |  |  |  |  |
Forward currency contracts: |  |  |  |  |  |
Gross amount of derivative assets |  | $ | 22,424 |  |  | $ | 1,544 |  |  | $ | 423 |
Derivative liabilities offsetting derivative assets |  | 83 |  |  | — |  |  | 101 |
Net amount of derivative assets |  | $ | 22,341 |  |  | $ | 1,544 |  |  | $ | 322 |
Derivative liabilities: |  |  |  |  |  |
Forward currency contracts: |  |  |  |  |  |
Gross amount of derivative liabilities |  | $ | 18 |  |  | $ | 5,849 |  |  | $ | 4,853 |
Derivative assets offsetting derivative liabilities |  | — |  |  | 613 |  |  | 2,721 |
Net amount of derivative liabilities |  | $ | 18 |  |  | $ | 5,236 |  |  | $ | 2,132 |
The following table presents the impact and location of the amounts reclassified from AOCL into net earnings on the Condensed Consolidated Statements of Earnings and the impact of derivative instruments on the Condensed Consolidated Statements of Comprehensive Income for the company's derivatives designated as cash flow hedging instruments for the three and nine months ended July 29, 2022 and July 30, 2021:
|  | Three Months Ended
|  | Gain (Loss) Reclassified from AOCL into Earnings |  | Gain (Loss) Recognized in OCI on Derivatives
(Dollars in thousands) |  | July 29, 2022 |  | July 30, 2021 |  | July 29, 2022 |  | July 30, 2021
Derivatives designated as cash flow hedging instruments: |  |  |  |  |  |  |  |
Forward currency contracts: |  |  |  |  |  |  |  |
Net sales |  | $ | 1,640 |  |  | $ | (3,113) |  |  | $ | 2,508 |  |  | $ | 7,350 |
Cost of sales |  | 200 |  |  | 31 |  |  | (36) |  |  | 685 |
Total derivatives designated as cash flow hedging instruments |  | $ | 1,840 |  |  | $ | (3,082) |  |  | $ | 2,472 |  |  | $ | 8,035 |
|  | Nine Months Ended
|  | Gain (Loss) Reclassified from AOCL into Earnings |  | Gain Recognized in OCI on Derivatives
(Dollars in thousands) |  | July 29, 2022 |  | July 30, 2021 |  | July 29, 2022 |  | July 30, 2021
Derivatives designated as cash flow hedging instruments: |  |  |  |  |  |  |  |
Forward currency contracts: |  |  |  |  |  |  |  |
Net sales |  | $ | 1,431 |  |  | $ | (9,325) |  |  | $ | 14,836 |  |  | $ | 620 |
Cost of sales |  | 164 |  |  | 60 |  |  | 1,207 |  |  | 266 |
Total derivatives designated as cash flow hedging instruments |  | $ | 1,595 |  |  | $ | (9,265) |  |  | $ | 16,043 |  |  | $ | 886 |
The company recognized immaterial gains within other income, net in the Condensed Consolidated Statements of Earnings during the third quarter and first nine months of fiscal 2022, and recognized immaterial losses within other income, net in the Condensed Consolidated Statements of Earnings during third quarter and first nine months of fiscal 2021, respectively, due to the discontinuance of cash flow hedge accounting on certain forward currency contracts designated as cash flow hedging instruments. As of July 29, 2022, the company expects to reclassify approximately $12.4 million of gains from AOCL to earnings during the next twelve months. The following tables present the impact and location of derivative instruments on the Condensed Consolidated Statements of Earnings for the company’s derivatives designated as cash flow hedging instruments and the related components excluded from effectiveness testing:
|  | Gain (Loss) Recognized in Earnings on Cash Flow Hedging Instruments
(Dollars in thousands) |  | July 29, 2022 |  | July 30, 2021
Three Months Ended |  | Net Sales |  | Cost of Sales |  | Net Sales |  | Cost of Sales
Condensed Consolidated Statements of Earnings income (expense) amounts in which the effects of cash flow hedging instruments are recorded |  | $ | 1,160,550 |  |  | $ | (760,644) |  |  | $ | 976,836 |  |  | $ | (645,719) |
Gain (loss) on derivatives designated as cash flow hedging instruments: |  |  |  |  |  |  |  |
Forward currency contracts: |  |  |  |  |  |  |  |
Amount of gain (loss) reclassified from AOCL into earnings |  | 1,640 |  |  | 200 |  |  | (3,113) |  |  | 31 |
Gain on components excluded from effectiveness testing recognized in earnings based on changes in fair value |  | $ | 646 |  |  | $ | 627 |  |  | $ | 322 |  |  | $ | 70 |
|  | Gain (Loss) Recognized in Earnings on Cash Flow Hedging Instruments
(Dollars in thousands) |  | July 29, 2022 |  | July 30, 2021
Nine Months Ended |  | Net Sales |  | Cost of Sales |  | Net Sales |  | Cost of Sales
Condensed Consolidated Statements of Earnings income (expense) amounts in which the effects of cash flow hedging instruments are recorded |  | $ | 3,342,678 |  |  | $ | (2,236,927) |  |  | $ | 2,998,929 |  |  | $ | (1,949,823) |
Gain (loss) on derivatives designated as cash flow hedging instruments: |  |  |  |  |  |  |  |
Forward currency contracts: |  |  |  |  |  |  |  |
Amount of gain (loss) reclassified from AOCL into earnings |  | 1,431 |  |  | 164 |  |  | (9,325) |  |  | 60 |
Gain (loss) on components excluded from effectiveness testing recognized in earnings based on changes in fair value |  | $ | (930) |  |  | $ | 1,180 |  |  | $ | 784 |  |  | $ | 366 |
The following table presents the impact and location of derivative instruments on the Condensed Consolidated Statements of Earnings for the company’s derivatives not designated as cash flow hedging instruments:
|  | Three Months Ended |  | Nine Months Ended
(Dollars in thousands) |  | July 29, 2022 |  | July 30, 2021 |  | July 29, 2022 |  | July 30, 2021
Gain (loss) on derivatives not designated as cash flow hedging instruments |  |  |  |  |  |  |  |
Forward currency contracts: |  |  |  |  |  |  |  |
Other income, net |  | $ | (344) |  |  | $ | 1,972 |  |  | $ | 3,639 |  |  | $ | (4,511) |
Total gain (loss) on derivatives not designated as cash flow hedging instruments |  | $ | (344) |  |  | $ | 1,972 |  |  | $ | 3,639 |  |  | $ | (4,511) |

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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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