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DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
 6 Months Ended
Apr. 30, 2017
Derivative Instruments and Hedging Activities Disclosure [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 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, Indian Rupee, South African Rand, Singapore Dollars, Chinese Yuan, 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 is 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, 2017, denominated in Euros, Pounds Sterling and New Taiwan Dollars with set maturity dates ranging from May 2017 through April 2018. The contract amounts, expressed at forward rates in U.S. Dollars at April 30, 2017, were $23.7 million for Euros, $7.3 million for Pounds Sterling and $21.5 million for New Taiwan Dollars. At April 30, 2017, we had approximately $1.6 million of gains, net of tax, related to cash flow hedges deferred in Accumulated other comprehensive loss. Included in this amount were $372,000 of unrealized gains, net of tax, related to cash flow hedge instruments that remain subject to currency fluctuation risk. The majority of these deferred gains will be recorded as an adjustment to Cost of sales and service in periods through April 2018, 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 entered into a forward contract with a notional amount of €3.0 million in November 2016. 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 2017. As of April 30, 2017, we had $809,000 of realized gains and $14,000 of unrealized losses, 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 April 30, 2017, denominated in Euros, Pounds Sterling, South African Rand, and New Taiwan Dollars with set maturity dates ranging from May 2017 through October 2017. The contract amounts at forward rates in U.S. Dollars at April 30, 2017 totaled $57.7 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, 2017 and October 31, 2016, all derivative instruments were recorded at fair value on the balance sheets as follows (in thousands):
 
 
 
April 30, 2017
 
October 31, 2016
 
 
 
Balance Sheet
 
 
 
Balance Sheet
 
 
 
Derivatives
 
Location
 
Fair Value
 
Location
 
Fair Value
 
Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
Derivative assets
 
$
997
 
Derivative assets
 
$
1,721
 
Foreign exchange forward contracts
 
Derivative liabilities
 
$
442
 
Derivative liabilities
 
$
173
 
Not Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
Derivative assets
 
$
230
 
Derivative assets
 
$
4
 
Foreign exchange forward contracts
 
Derivative liabilities
 
$
75
 
Derivative liabilities
 
$
365
 
 
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, 2017 and 2016 (in thousands):
 
Derivatives
 
Amount of Gain
(Loss) Recognized in
Other Comprehensive
Income (Loss)
 
Location of
Gain (Loss)
Reclassified
from Other
Comprehensive
Income (Loss)
 
Amount of Gain (Loss)
Reclassified from Other
Comprehensive 
Income (Loss)
 
 
 
Three Months Ended 
April 30,
 
 
 
Three Months Ended 
April 30,
 
 
 
2017
 
2016
 
 
 
2017
 
2016
 
Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Effective portion)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts – Intercompany sales/purchases
 
$
95
 
$
(736)
 
Cost of sales and service
 
$
317
 
$
546
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contract – Net investment
 
$
(9)
 
$
(116)
 
 
 
 
 
 
 
 
 
 
We recognized a gain of $32,000 for each of the three months ended April 30, 2017 and April 30, 2016 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 losses and gains in our Condensed Consolidated Statements of Income during the three months ended April 30, 2017 and 2016 on derivative instruments not designated as hedging instruments (in thousands):
 
 
 
Location of Gain
 
 
 
 
 
(Loss) Recognized
 
Amount of Gain (Loss)
 
Derivatives
 
in Operations
 
Recognized in Operations
 
 
 
 
 
Three Months Ended
 
 
 
 
 
April 30,
 
Not Designated as Hedging Instruments:
 
 
 
2017
 
2016
 
Foreign exchange forward contracts
 
Other (income) expense, net
 
$
165
 
$
(1,239)
 
 
The following table presents the changes in the components of Accumulated other comprehensive loss, net of tax, for the three months ended April 30, 2017 (in thousands:)
 
 
 
Foreign
Currency
Translation
 
Cash
Flow
Hedges
 
Total
 
Balance, January 31, 2017
 
$
(12,428)
 
$
1,820
 
$
(10,608)
 
Other comprehensive income before reclassifications
 
 
2,259
 
 
95
 
 
2,354
 
Reclassifications
 
 
—
 
 
(317)
 
 
(317)
 
Balance, April 30, 2017
 
$
(10,169)
 
$
1,598
 
$
(8,571)
 
 
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, 2017 and 2016 (in thousands):
 
 
 
 
 
Location of
 
 
 
 
 
 
 
Gain (Loss)
 
Amount of Gain
 
 
 
Amount of Gain
 
Reclassified
 
(Loss) Reclassified
 
 
 
(Loss) Recognized in
 
from Other
 
from Other
 
 
 
Other Comprehensive
 
Comprehensive
 
Comprehensive
 
Derivatives
 
Income (Loss)
 
Income (Loss)
 
Income (Loss)
 
 
 
Six Months Ended
 
 
 
Six Months Ended
 
 
 
April 30,
 
 
 
April 30,
 
 
 
2017
 
2016
 
 
 
2017
 
2016
 
Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
(Effective portion)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts  – Intercompany sales/purchases
 
$
424
 
$
(567)
 
Cost of sales and service
 
$
108
 
$
1,474
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contract – Net investment
 
$
30
 
$
(80)
 
 
 
 
 
 
 
 
 
 
We recognized a gain of $168,000 for the six months ended April 30, 2017 and a gain of $32,000 for the six months ended April 30, 2016 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 losses and gains in our Condensed Consolidated Statements of Income during the six months ended April 30, 2017 and 2016 on derivative instruments not designated as hedging instruments (in thousands):
 
 
 
Location of Gain
 
 
 
 
 
(Loss) Recognized
 
Amount of Gain (Loss)
 
Derivatives
 
in Operations
 
Recognized in Operations
 
 
 
 
 
Six Months Ended
 
 
 
 
 
April 30,
 
 
 
 
 
2017
 
2016
 
Not Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
Other (income) expense, net
 
$
955
 
$
(1,100)
 
 
The following table presents the changes in the components of Accumulated other comprehensive loss, net of tax, for the six months ended April 30, 2017 (in thousands:)
 
 
 
Foreign
 
Cash
 
 
 
 
 
Currency
 
Flow
 
 
 
 
 
Translation
 
Hedges
 
Total
 
Balance, October 31, 2016
 
$
(12,325)
 
$
1,282
 
$
(11,043)
 
Other comprehensive income before reclassifications
 
 
2,156
 
 
424
 
 
2,580
 
Reclassifications
 
 
—
 
 
(108)
 
 
(108)
 
Balance, April 30, 2017
 
$
(10,169)
 
$
1,598
 
$
(8,571)