DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

6 Months Ended

Apr. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

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 few major financial institutions.

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 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, 2019, denominated in Euros, Pounds Sterling and New Taiwan Dollars with set maturity dates ranging from May 2019 through April 2020. The contract amounts, expressed at forward rates in U.S. Dollars at April 30, 2019, were $24.9 million for Euros, $9.5 million for Pounds Sterling and $26.0 million for New Taiwan Dollars. At April 30, 2019, we had approximately $702,000 of gains, net of tax, related to cash flow hedges deferred in Accumulated other comprehensive loss. Included in this amount were $195,000 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 April 2020, 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 2018. We designated this forward contract as a hedge of our net investment in Euro denominated assets. We selected the forward method under 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 2019. As of April 30, 2019, we had $804,000 of realized gains and $72,000 of unrealized gains, 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 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, 2019, denominated in Euros, South African Rand, and New Taiwan Dollar with set maturity dates ranging from May 2019 through April 2020. The contract amounts, expressed at forward rates in U.S. Dollars at April 30, 2019, totaled $61.4 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, 2019 and October 31, 2018, all derivative instruments were recorded at fair value on our Consolidated Balance Sheets as follows (in thousands):

	April 30, 2019			October 31, 2018
Derivatives	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Designated as Hedging Instruments:
Foreign exchange forward contracts	Derivative assets	$	1,074	Derivative assets	$	2,654
Foreign exchange forward contracts	Derivative liabilities	$	729	Derivative liabilities	$	1,616
Not Designated as Hedging Instruments:
Foreign exchange forward contracts	Derivative assets	$	440	Derivative assets	$	431
Foreign exchange forward contracts	Derivative liabilities	$	232	Derivative liabilities	$	404

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, 2019 and 2018 (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,
	2019		2018			2019		2018
Designated as Hedging Instruments:
(Effective portion)
Foreign exchange forward contracts – Intercompany sales/purchases	$	289	$	316	Cost of sales and service	$	48	$	(415	)

Foreign exchange forward contract – Net investment	$	74	$	89

We did not recognize any gains or losses as a result of hedges deemed ineffective for the three months ended April 30, 2019 and 2018.

We recognized the following gains and losses in our Condensed Consolidated Statements of Income during the three months ended April 30, 2019 and 2018 on derivative instruments not designated as hedging instruments (in thousands):

Derivatives	Location of Gain (Loss) Recognized in Operations	Amount of Gain (Loss) Recognized in Operations
		Three Months Ended April 30,
		2019		2018
Not Designated as Hedging Instruments:
Foreign exchange forward contracts	Other income (expense), net	$	345	$	(12	)

The following table presents the changes in the components of Accumulated other comprehensive loss, net of tax, for the three months ended April 30, 2019 (in thousands):

	Foreign Currency Translation			Cash Flow Hedges			Total
Balance, January 31, 2019	$	(9,283	)	$	471		$	(8,812	)
Other comprehensive income (loss) before reclassifications		(1,386	)		289			(1,097	)
Reclassifications		—			(48	)		(48	)
Balance, April 30, 2019	$	(10,669	)	$	712		$	(9,957	)

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, 2019 and 2018 (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)
	Six Months Ended April 30,						Six Months Ended April 30,
	2019		2018				2019		2018
Designated as Hedging Instruments:
(Effective portion)
Foreign exchange forward contracts – Intercompany sales/purchases	$	19	$	(826	)	Cost of sales and service	$	36	$	(193	)

Foreign exchange forward contract – Net investment	$	72	$	(77	)

We did not recognize any gains or losses as a result of hedges deemed ineffective for the six months ended April 30, 2019 and 2018.

We recognized the following gains and losses in our Condensed Consolidated Statements of Income during the six months ended April 30, 2019 and 2018 on derivative instruments not designated as hedging instruments (in thousands):

Derivatives	Location of Gain (Loss) Recognized in Operations	Amount of Gain (Loss) Recognized in Operations
		Six Months Ended April 30,
		2019		2018
Not Designated as Hedging Instruments:
Foreign exchange forward contracts	Other income (expense), net	$	111	$	(1,268	)

The following table presents the changes in the components of Accumulated other comprehensive loss, net of tax, for the six months ended April 30, 2019 (in thousands:)

	Foreign Currency Translation			Cash Flow Hedges			Total
Balance, October 31, 2018	$	(10,592	)	$	729		$	(9,863	)
Other comprehensive income (loss) before reclassifications		(77	)		19			(58	)
Reclassifications		—			(36	)		(36	)
Balance, April 30, 2019	$	(10,669	)	$	712		$	(9,957	)