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DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES | 6 Months Ended
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Apr. 30, 2015
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. 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 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 April 30, 2015, denominated in Euros, Pounds Sterling and New Taiwan Dollars with set maturity dates ranging from May 2015 through April 2016. The contract amounts, expressed at forward rates in U.S. Dollars at April 30, 2015, were $28.4 million for Euros, $10.3 million for Pounds Sterling and $22.1 million for New Taiwan Dollars. At April 30, 2015, we had approximately $3.3 million of gains, net of tax, related to cash flow hedges deferred in Accumulated other comprehensive loss. Included in this amount were $1.6 million of unrealized gains, net of tax, related to cash flow hedge instruments that remain subject to currency fluctuation risk. The majority of these deferred gains will be recorded as an adjustment to Cost of sales and service in periods through April 2016, when the corresponding inventory that is the subject of the related hedge contracts is sold, as described above. We are exposed to foreign currency exchange risk related to our investment in net assets in foreign countries. To manage this risk, we entered into a forward contract with a notional amount of €3.0 million in November 2014. 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 2015. As of April 30, 2015, we had $452,000 of realized gains and $229,000 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 (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 April 30, 2015, in Euros, Pounds Sterling, Canadian Dollars, the South African Rand, and the New Taiwan Dollar with set maturity dates ranging from May 2015 through October 2015. The contract amounts at forward rates in U.S. Dollars at April 30, 2015 totaled $39.7 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 April 30, 2015 and October 31, 2014, all derivative instruments were recorded at fair value on the balance sheets as follows (in thousands):
|  | April 30, 2015 |  | October 31, 2014
|  | Balance Sheet |  | Fair |  |  | Balance Sheet |  | Fair |
Derivatives |  | Location |  | Value |  |  | Location |  | Value |
Designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange forward contracts |  | Derivative assets |  | $ | 3,265 |  |  | Derivative assets |  | $ | 2,596 |
Foreign exchange forward contracts |  | Derivative liabilities |  | $ | 440 |  |  | Derivative liabilities |  | $ | 401 |
Not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange forward contracts |  | Derivative assets |  | $ | 253 |  |  | Derivative assets |  | $ | 531 |
Foreign exchange forward contracts |  | Derivative liabilities |  | $ | 676 |  |  | Derivative liabilities |  | $ | 304 |
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, net of tax, during the three months ended April 30, 2015 and 2014 (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 April 30 |  |  |  |  | Three Months Ended April 30, |
|  | 2015 |  |  | 2014 |  |  |  |  | 2015 |  |  | 2014 |
Designated as hedging instruments: (Effective portion) |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange forward contracts – Intercompany sales/purchases |  | $ | 296 |  |  | $ | (770 | ) |  | Cost of sales and service |  | $ | (8 | ) |  | $ | (225 | )
Foreign exchange forward contract – Net investment |  | $ | 9 |  |  | $ | (73 | ) |  |  |  |  |  |  |  |  |  |
We did not recognize gains or losses as a result of hedges deemed ineffective for the three months ended April 30, 2015. We recognized a loss of $10,000 for the three months ended April 30, 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 recognized the following gains and losses in our Condensed Consolidated Statements of Income during the three months ended April 30, 2015 and 2014 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 April 30, |
|  |  |  | 2015 |  |  | 2014 |
|  |  |  | (in thousands) |
Not Designated as Hedging Instruments: |  |  |  |  |  |  |  |
Foreign exchange forward contracts |  | Other (income) expense, net |  | $ | 333 |  |  | $ | (935 | )
The following table presents the changes in the components of Accumulated other comprehensive loss, net of tax, for the three months ended April 30, 2015 (in thousands):
|  | Foreign Currency Translation |  |  | Cash Flow Hedges |  |  | Total |
Balance, January 31, 2015 |  | $ | (9,607 | ) |  | $ | 2,911 |  |  | $ | (6,696 | )
Other comprehensive income (loss) before reclassifications |  |  | 1,020 |  |  |  | 296 |  |  |  | 1,316 |
Reclassifications |  |  | — |  |  |  | 8 |  |  |  | 8 |
Balance, April 30, 2015 |  | $ | (8,587 | ) |  | $ | 3,215 |  |  | $ | (5,372 | )
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, net of tax, during the six months ended April 30, 2015 and 2014 (in thousands):
|  | Amount of Gain (Loss) Recognized in Other |  |  | Location of Gain (Loss) Reclassified from Other |  |  | Amount of Gain (Loss) Reclassified from Other |
Derivatives |  | Comprehensive Income |  |  | Comprehensive Income |  |  | Comprehensive Income |
|  | Six Months Ended |  |  |  |  |  | Six Months Ended |
|  | April 30, |  |  |  |  |  | April 30, |
|  | 2015 |  |  | 2014 |  |  |  |  |  | 2015 |  |  | 2014 |
Designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(Effective portion) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange forward contracts – Intercompany sales/purchases |  | $ | 1,852 |  |  | $ | (1,211 | ) |  |  | Cost of sales and service |  |  | $ | (372 | ) |  | $ | (481 | )
Foreign exchange forward contract – Net investment |  | $ | 248 |  |  | $ | (53 | ) |  |  |  |  |  |  |  |  |  |  |  |
We did not recognize gains or losses as a result of hedges deemed ineffective for the six months ended April 30, 2015. We recognized a loss of $29,000 for the six months ended April 30, 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 recognized the following gains and losses in our Condensed Consolidated Statements of Income during the six months ended April 30, 2015 and 2014 on derivative instruments not designated as hedging instruments:
Derivatives |  | Location of Gain (Loss) Recognized in Operations |  | Amount of Gain (Loss) Recognized in Operations |
|  |  |  | Six Months Ended April 30, |
|  |  |  | 2015 |  |  | 2014 |
|  |  |  | (in thousands) |
Not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |
Foreign exchange forward contracts |  | Other (income) expense, net |  | $ | 3,045 |  |  | $ | (973 | )
The following table presents the changes in the components of Accumulated other comprehensive loss, net of tax, for the six months ended April 30, 2015 (in thousands):
|  | Foreign Currency Translation |  |  | Cash Flow Hedges |  |  | Total |
Balance, October 31, 2014 |  | $ | (4,551 | ) |  | $ | 991 |  |  | $ | (3,560 | )
Other comprehensive income (loss) before reclassifications |  |  | (4,036 | ) |  |  | 1,852 |  |  |  | (2,184 | )
Reclassifications |  |  | — |  |  |  | 372 |  |  |  | 372 |
Balance, April 30, 2015 |  | $ | (8,587 | ) |  | $ | 3,215 |  |  | $ | (5,372 | )

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