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 the following 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 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, 2018, denominated in Euros, Pounds Sterling and New Taiwan Dollars with set maturity dates ranging from May 2018 through April 2019. The contract amounts, expressed at forward rates in U.S. Dollars at April 30, 2018, were $41.0 million for Euros, $10.9 million for Pounds Sterling and $41.8 million for New Taiwan Dollars. At April 30, 2018, we had approximately $1.4 million of losses, net of tax, related to cash flow hedges deferred in Accumulated other comprehensive loss. Included in this amount were $339,000 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 April 2019, 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 2017. 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 derivative 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 2018. As of April 30, 2018, we had $637,000 of realized gains and $39,000 of unrealized losses, net of tax, recorded as cumulative translation adjustments in Accumulated other comprehensive loss related to this forward contract.

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 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, 2018, denominated in Euros, Pounds Sterling, South African Rand, and New Taiwan Dollar with set maturity dates ranging from May 2018 through October 2018. The contract amounts, expressed at forward rates in U.S. Dollars at April 30, 2018, totaled $58.1 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, 2018 and October 31, 2017, all derivative instruments were recorded at fair value on our Consolidated Balance Sheets as follows (in thousands):

	April 30, 2018			October 31, 2017
	Balance Sheet			Balance Sheet	Fair
Derivatives	Location	Fair Value		Location	Value
Designated as Hedging Instruments:
Foreign exchange forward contracts	Derivative assets	$	593	Derivative assets	$	305
Foreign exchange forward contracts	Derivative liabilities	$	1,139	Derivative liabilities	$	1,508
Not Designated as Hedging Instruments:
Foreign exchange forward contracts	Derivative assets	$	366	Derivative assets	$	291
Foreign exchange forward contracts	Derivative liabilities	$	738	Derivative liabilities	$	224

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, 2018 and 2017 (in thousands):

					Location of
					Gain (Loss)
	Amount of Gain				Reclassified	Amount of Gain (Loss)
	(Loss) Recognized in				from Other	Reclassified from Other
	Other Comprehensive				Comprehensive	Comprehensive
Derivatives	Income (Loss)				Income (Loss)	Income (Loss)
	Three Months Ended April 30,					Three Months Ended April 30,
	2018		2017			2018		2017
Designated as Hedging Instruments:
(Effective portion)
Foreign exchange forward contracts – Intercompany sales/purchases	$	316	$	95	Cost of sales and service	$	(415)	$	317
Foreign exchange forward contract – Net investment	$	89	$	(9)

We did not recognize any gains or losses as a result of hedges deemed ineffective for the three months ended April 30, 2018. We recognized a gain of $32,000 for the three months ended April 30, 2017 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, 2018 and 2017 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,
		2018		2017
Not Designated as Hedging Instruments:
Foreign exchange forward contracts	Other expense, net	$	(12)	$	165

The following table presents the changes in the components of Accumulated other comprehensive loss, net of tax, for the three months ended April 30, 2018 (in thousands:)

	Foreign
	Currency		Cash Flow
	Translation		Hedges		Total
Balance, January 31, 2018	$	(2,344)	$	(2,145)	$	(4,489)
Other comprehensive income (loss) before reclassifications		(2,222)		316		(1,906)
Reclassifications		—		415		415
Balance, April 30, 2018	$	(4,566)	$	(1,414)	$	(5,980)

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, 2018 and 2017 (in thousands):

Location of

Gain (Loss)

Amount of Gain

Reclassified

(Loss) Reclassified

(Loss) Recognized in

from Other

Other Comprehensive

Comprehensive

Derivatives

Income (Loss)

Six Months Ended

April 30,

April 30

2018

2017

2018

2017

Designated as Hedging Instruments:

(Effective portion)

Foreign exchange forward contracts – Intercompany sales/purchases

(826)

424

Cost of sales and service

(193)

108

Foreign exchange forward contract – Net investment

(77)

We did not recognize any gains or losses as a result of hedges deemed ineffective for the six months ended April 30, 2018. We recognized a gain of $168,000 for the six months ended April 30, 2017 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, 2018 and 2017 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,
		2018		2017
Not Designated as Hedging Instruments:
Foreign exchange forward contracts	Other expense, net	$	(1,268)	$	955

The following table presents the changes in the components of Accumulated other comprehensive loss, net of tax, for the six months ended April 30, 2018 (in thousands:)

	Foreign		Cash
	Currency		Flow
	Translation		Hedges		Total
Balance, October 31, 2017	$	(7,409)	$	(781)	$	(8,190)
Other comprehensive income (loss) before reclassifications		2,843		(826)		2,017
Reclassifications		—		193		193
Balance, April 30, 2018	$	(4,566)	$	(1,414)	$	(5,980)