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DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
 3 Months Ended
Jan. 31, 2014
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES [Abstract]  
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
2. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

We are exposed to certain market risks relating to our ongoing business operations, including foreign currency risk, interest rate risk and credit risk. We manage our exposure to these and other market risks through regular operating and financing activities. Currently, the only risk that we manage through the use of derivative instruments is foreign currency risk in which we enter into derivative instruments in the form of foreign currency forward exchange contracts with a major financial institution.

 

These forward exchange contracts are entered into to reduce the potential effects of foreign exchange rate movements on our net equity investment in one of our foreign subsidiaries, to reduce the impact on gross profit and net earnings from sales and purchases denominated in foreign currencies, and to reduce the impact on our net earnings of foreign currency fluctuations on receivables and payables denominated in foreign currencies which are different than the subsidiaries functional currency. We are primarily exposed to foreign currency exchange rate risk with respect to transactions and net assets denominated in Euros, Pounds Sterling, Canadian Dollars, South African Rand, Singapore Dollars, Indian Rupee, Chinese Yuan, South Korean Won, Polish Zloty, and New Taiwan Dollars. We record all derivative instruments as assets or liabilities at fair value.

 

Derivatives Designated as Hedging Instruments

 

We enter into foreign currency forward exchange contracts periodically to hedge certain forecasted inter-company sales and purchases denominated in foreign currencies (the Pound Sterling, Euro and New Taiwan Dollar). The purpose of these instruments is to mitigate the risk that the U.S. Dollar net cash inflows and outflows resulting from sales and purchases denominated in foreign currencies will be adversely affected by changes in exchange rates. These forward contracts have been designated as cash flow hedge instruments, and are recorded in the Condensed Consolidated Balance Sheets at fair value in Derivative assets and Derivative liabilities. The effective portion of the gains and losses resulting from the changes in the fair value of these hedge contracts are deferred in Accumulated other comprehensive loss and recognized as an adjustment to Cost of sales and service in the period that the corresponding inventory sold that is the subject of the related hedge contract is recognized, thereby providing an offsetting economic impact against the corresponding change in the U.S. Dollar value of the inter-company sale or purchase being hedged. The ineffective portion of gains and losses resulting from the changes in the fair value of these hedge contracts is reported in Other (income) expense, net immediately. We perform quarterly assessments of hedge effectiveness by verifying and documenting the critical terms of the hedge instrument and determining that forecasted transactions have not changed significantly. We also assess on a quarterly basis whether there have been adverse developments regarding the risk of a counterparty default.

 

We had forward contracts outstanding as of January 31, 2014, denominated in Euros, Pounds Sterling and New Taiwan Dollars with set maturity dates ranging from February 2014 through January 2015. The contract amounts, expressed at forward rates in U.S. Dollars at January 31, 2014, were $31.7 million for Euros, $10.9 million for Pounds Sterling and $21.4 million for New Taiwan Dollars. At January 31, 2014, we had approximately $1.2 million of losses, net of tax, related to cash flow hedges deferred in Accumulated other comprehensive loss. Included in this amount were $640,000 of unrealized losses, net of tax, related to cash flow hedge instruments that remain subject to currency fluctuation risk. The majority of these deferred losses will be recorded as an adjustment to Cost of sales and service in periods through January 2015, when the corresponding inventory that is the subject of the related hedge contracts are sold, as described above.

 

We are also exposed to foreign currency exchange risk related to our investment in net assets in foreign countries. To manage this risk, we have maintained a forward contract with a notional amount of €3.0 million. We designated this forward contract as a hedge of our net investment in Euro denominated assets. We selected the forward method under Financial Accounting Standards Board, or FASB, guidance related to the accounting for derivatives instruments and hedging activities. The forward method requires all changes in the fair value of the contract to be reported as a cumulative translation adjustment in Accumulated other comprehensive loss, net of tax, in the same manner as the underlying hedged net assets. This forward contract matures in November 2014. At January 31, 2014, we had $235,000 of realized gains and $8,000 of unrealized gains, net of tax, recorded as cumulative translation adjustments in Accumulated other comprehensive loss related to these forward contracts.

 

Derivatives Not Designated as Hedging Instruments

 

We enter into foreign currency forward exchange contracts to protect against the effects of foreign currency fluctuations on receivables and payables denominated in foreign currencies. These derivative instruments are not designated as hedges under the FASB guidance and, as a result, changes in their fair value are reported currently as Other expense, net in the Condensed Consolidated Statements of Operations consistent with the transaction gain or loss on the related receivables and payables denominated in foreign currencies.

 

We had forward contracts outstanding as of January 31, 2014, in Euros, Pounds Sterling, Canadian Dollars, the South African Rand, and the New Taiwan Dollar with set maturity dates ranging from February 2014 through April 2014. The contract amounts at forward rates in U.S. Dollars at January 31, 2014 totaled $47.0 million.

 

Fair Value of Derivative Instruments

 

We recognize the fair value of derivative instruments as assets and liabilities on a gross basis on our Condensed Consolidated Balance Sheets. As of January 31, 2014 and October 31, 2013, all derivative instruments were recorded at fair value on the balance sheets as follows (in thousands):

 

    January 31, 2014         October 31, 2013      
    Balance sheet   Fair     Balance sheet   Fair  
Derivatives   Location   value     location   value  
                         
Designated as hedging instruments:                        
Foreign exchange forward contracts   Derivative assets   $ 195     Derivative assets   $ 244  
Foreign exchange forward contracts   Derivative liabilities   $ 1,191     Derivative liabilities   $ 1,158  
                         
Not designated as hedging instruments:                        
Foreign exchange forward contracts   Derivative assets   $ 541     Derivative assets   $ 455  
Foreign exchange forward contracts   Derivative liabilities   $ 256     Derivative liabilities   $ 54  

 

Effect of Derivative Instruments on the Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Changes in Shareholders' Equity and Condensed Consolidated Statements of Income

 

Derivative instruments had the following effects on our Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Changes in Shareholders' Equity and Condensed Consolidated Statements of Income during the three months ended January 31, 2014 and 2013 (in thousands):

 

Derivatives   Amount of Gain (Loss) 
Recognized in Other 
Comprehensive Income		     Location of Gain 
(Loss) Reclassified 
from Other 
Comprehensive Income		   Amount of Gain (Loss) 
Reclassified from Other 
Comprehensive Income		  
    Three months ended  
January 31,		         Three months ended  
January 31,		  
    2014     2013         2014     2013  
Designated as hedging instruments:                                    
(Effective portion)                                    
                                     
Foreign exchange forward contracts - Intercompany sales/purchases   $ (695 )   $ (1,544 )   Cost of sales and service   $ (403 )   $ 953  
Foreign exchange forward contract - Net investment   $ 31     $ (173 )                    

 

We recognized a loss of $19,000 for the three months ended January 31, 2014, and a loss of $64,000 for the three months ended January 31, 2013 as a result of contracts closed early that were deemed ineffective for financial reporting purposes and did not qualify as cash flow hedges. We recognized the following gains and losses in our Condensed Consolidated Statements of Income during the three months ended January 31, 2014 and 2013 (in thousands) on derivative instruments not designated as hedging instruments:

 

Derivatives   Location of gain
(loss) recognized in
operations		   Amount of gain (loss)
Recognized in operations		  
        Three months ended January 31,  
        2014     2013  
Not designated as hedging instruments:                    
                     
 Foreign exchange forward contracts   Other (income) expense, net   $ (38 )   $ (1,088 )

 

The following table presents the changes in the components of Accumulated other comprehensive loss, net of tax, for the three months ended January 31, 2014 (in thousands):

 

    Foreign
Currency
Translation		    

Cash Flow

Hedges

     Total  
Balance, October 31, 2013   $ (1,016 )   $ (968 )   $ (1,984 )
                         
Other comprehensive income (loss) before reclassifications     (713 )     (441 )     (1,154 )
                         
Reclassifications     -         256       256  
Balance, January 31, 2014   $ (1,729 )   $ (1,153 )   $ (2,882 )