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DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES | 9 Months Ended
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Jul. 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 for which we enter into derivative instruments in the form of foreign currency forward exchange contracts with a major financial institution. We enter into these forward exchange contracts 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 that are different than our 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 that is the subject of the related hedge contract is sold, 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 July 31, 2014, denominated in Euros, Pounds Sterling and New Taiwan Dollars with set maturity dates ranging from August 2014 through July 2015. The contract amounts, expressed at forward rates in U.S. Dollars at July 31, 2014, were $33.5 million for Euros, $12.7 million for Pounds Sterling and $23.9 million for New Taiwanese Dollars. At July 31, 2014, we had approximately $838,000 of losses, net of tax, related to cash flow hedges deferred in Accumulated other comprehensive loss. Included in this amount were $36,000 of unrealized gains, 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 July 2015, when the corresponding inventory that is the subject of the related hedge contracts is 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 July 31, 2014, we had $238,000 of realized gains and $27,000 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 also 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 (income) expense, net, in the Condensed Consolidated Statements of Income consistent with the transaction gain or loss on the related receivables and payables denominated in foreign currencies. We had forward contracts outstanding as of July 31, 2014, in Euros, Pounds Sterling, Canadian Dollars, the South African Rand, and the New Taiwan Dollar with set maturity dates ranging from August 2014 through October 2014. The contract amounts at forward rates in U.S. Dollars at July 31, 2014 totaled $53.8 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 July 31, 2014 and October 31, 2013, all derivative instruments were recorded at fair value on the balance sheets as follows (in thousands):
|  | July 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 |  | $ | 603 |  |  | Derivative assets |  | $ | 244 |
Foreign exchange forward contracts |  | Derivative liabilities |  | $ | 505 |  |  | Derivative liabilities |  | $ | 1,158 |
Not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange forward contracts |  | Derivative assets |  | $ | 586 |  |  | Derivative assets |  | $ | 455 |
Foreign exchange forward contracts |  | Derivative liabilities |  | $ | 163 |  |  | 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 July 31, 2014 and 2013 (in thousands):
|  | Amount of Gain (Loss) |  |  | Location of Gain |  | Amount of Gain (Loss) |
|  | Recognized in Other |  |  | (Loss) Reclassified from Other |  | Reclassified from Other |
Derivatives |  | Comprehensive Income |  |  | Comprehensive Income |  | Comprehensive Income |
|  | Three months ended |  |  |  |  | Three months ended |
|  | July 31, |  |  |  |  | July 31, |
|  | 2014 |  |  | 2013 |  |  |  |  | 2014 |  |  | 2013 |
Designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(Effective portion) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange forward contracts - Intercompany sales/purchases |  | $ | 959 |  |  | $ | (675 | ) |  | Cost of sales and service |  | $ | (377 | ) |  | $ | 77 |
Foreign exchange forward contract - Net investment |  | $ | 143 |  |  | $ | (49 | ) |  |  |  |  |  |  |  |  |  |
We recognized a gain of $19,000 for the three months ended July 31, 2014 as a result of contracts closed early that were deemed ineffective for financial reporting purposes and did not qualify as cash flow hedges. We did not recognize gains or losses as a result of hedges deemed ineffective for the three months ended July 31, 2013. We recognized the following gains and losses in our Condensed Consolidated Statements of Income during the three months ended July 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 July 31, |
|  |  |  | 2014 |  |  | 2013 |
Not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |
Foreign exchange forward contracts |  | Other (income) expense, net |  | $ | 971 |  |  | $ | (561 | )
The following table presents the changes in the components of Accumulated other comprehensive loss, net of tax, for the three months ended July 31, 2014 (in thousands):
|  | Foreign |  |  |  |  |  |  |
|  | Currency |  |  | Cash Flow |  |  |  |
|  | Translation |  |  | Hedges |  |  | Total |
Balance, April 30, 2014 |  | $ | (502 | ) |  | $ | (1,698 | ) |  | $ | (2,200 | )
Other comprehensive income (loss) before reclassifications |  |  | (886 | ) |  |  | 619 |  |  |  | (267 | )
Reclassifications |  |  | - |  |  |  | 243 |  |  |  | 243 |
Balance, July 31, 2014 |  | $ | (1,388 | ) |  | $ | (836 | ) |  | $ | (2,224 | )
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 nine months ended July 31, 2014 and 2013 (in thousands):
|  | Amount of Gain (Loss) |  |  | Location of Gain |  | Amount of Gain (Loss) |
|  | Recognized in Other |  |  | (Loss) Reclassified from Other |  | Reclassified from Other |
Derivatives |  | Comprehensive Income |  |  | Comprehensive Income |  | Comprehensive Income |
|  | Nine months ended |  |  |  |  | Nine months ended |
|  | July 31, |  |  |  |  | July 31, |
|  | 2014 |  |  | 2013 |  |  |  |  | 2014 |  |  | 2013 |
Designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(Effective portion) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange forward contracts - Intercompany sales/purchases |  | $ | (918 | ) |  | $ | (1,088 | ) |  | Cost of sales and service |  | $ | (1,122 | ) |  | $ | 1,723 |
Foreign exchange forward contract - Net investment |  | $ | 61 |  |  | $ | (100 | ) |  |  |  |  |  |  |  |  |  |
We recognized a loss of $10,000 for the nine months ended July 31, 2014, and a loss of $32,000 for the nine months ended July 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 nine months ended July 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 |
|  |  |  | Nine months ended July 31, |
|  |  |  | 2014 |  |  | 2013 |
Not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |
Foreign exchange forward contracts |  | Other (income) expense, net |  | $ | (2 | ) |  | $ | (1,148 | )
The following table presents the changes in the components of Accumulated other comprehensive loss, net of tax, for the nine months ended July 31, 2014 (in thousands):
|  | Foreign |  |  |  |  |  |  |
|  | Currency |  |  | Cash Flow |  |  |  |
|  | Translation |  |  | Hedges |  |  | Total |
Balance, October 31, 2013 |  | $ | (1,016 | ) |  | $ | (968 | ) |  | $ | (1,984 | )
Other comprehensive income (loss) before reclassifications |  |  | (372 | ) |  |  | (592 | ) |  |  | (964 | )
Reclassifications |  |  | - |  |  |  | 724 |  |  |  | 724 |
Balance, July 31, 2014 |  | $ | (1,388 | ) |  | $ | (836 | ) |  | $ | (2,224 | )

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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 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=35736893&loc=d3e80748-113994 Reference 2: 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=35706170&loc=SL5618551-113959 Reference 3: 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=35706170&loc=SL5708775-113959 Reference 4: 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 5: 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=35706170&loc=SL5624181-113959 Reference 6: 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 7: 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=35706170&loc=SL5624258-113959 Reference 8: 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=35706170&loc=SL5624163-113959 Reference 9: 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 Reference 10: 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=35706170&loc=SL5708773-113959 Reference 11: 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 12: 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=35706170&loc=SL5624177-113959 Reference 13: 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=35706170&loc=d3e41620-113959 Reference 14: 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=35706170&loc=SL5579245-113959 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=35706170&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 1 -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5579240-113959 Reference 17: 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=35706170&loc=d3e41641-113959 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=35706170&loc=d3e41638-113959 Reference 19: 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=35706170&loc=SL5624171-113959 + Details
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