Derivative Instruments and Hedging Activities

9 Months Ended

Aug. 02, 2013

Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities

The company is exposed to foreign currency exchange rate risk arising from transactions in the normal course of business, such as sales to third party customers, sales and loans to wholly owned foreign subsidiaries, foreign plant operations, and purchases from suppliers. The company actively manages the exposure of its foreign currency exchange rate market risk by entering into various hedging instruments, authorized under company policies that place controls on these activities, with counterparties that are highly rated financial institutions. The company’s hedging activities primarily involve the use of forward currency contracts, as well as a cross currency swaps that are intended to offset intercompany loan exposures. The company uses derivative instruments only in an attempt to limit underlying exposure from foreign currency exchange rate fluctuations and to minimize earnings and cash flow volatility associated with foreign currency exchange rate changes. Decisions on whether to use such contracts are primarily based on the amount of exposure to the currency involved and an assessment of the near-term market value for each currency. The company’s policy does not allow the use of derivatives for trading or speculative purposes. The company also has made an accounting policy election to use the portfolio exception with respect to measuring counterparty credit risk for derivative instruments, and to measure the fair value of a portfolio of financial assets and financial liabilities on the basis of the net open risk position with each counterparty. The company’s primary foreign currency exchange rate exposures are with the Euro, the Australian dollar, the Canadian dollar, the British pound, the Mexican peso, the Japanese yen, the Chinese Yuan, and the Romanian New Leu against the U.S. dollar, as well as the Romanian New Leu against the Euro.

Cash flow hedges. The company recognizes all derivative instruments as either assets or liabilities at fair value on the consolidated balance sheet and formally documents relationships between cash flow hedging instruments and hedged transactions, as well as its risk-management objective and strategy for undertaking hedge transactions. This process includes linking all derivatives to the forecasted transactions, such as sales to third parties and foreign plant operations. Changes in fair values of outstanding cash flow hedge derivatives, except the ineffective portion, are recorded in other comprehensive income (“OCI”), until net earnings is affected by the variability of cash flows of the hedged transaction. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in net earnings. The consolidated statement of earnings classification of effective hedge results is the same as that of the underlying exposure. Results of hedges of sales and foreign plant operations are recorded in net sales and cost of sales, respectively, when the underlying hedged transaction affects net earnings. The maximum amount of time the company hedges its exposure to the variability in future cash flows for forecasted trade sales and purchases is two years. Results of hedges of intercompany loans are recorded in other income, net as an offset to the remeasurement of the foreign loan balance.

The company formally assesses, at a hedge’s inception and on an ongoing basis, whether the derivatives that are designated as hedges have been highly effective in offsetting changes in the cash flows of the hedged transactions and whether those derivatives may be expected to remain highly effective in future periods. When it is determined that a derivative is not, or has ceased to be, highly effective as a hedge, the company discontinues hedge accounting prospectively. When the company discontinues hedge accounting because it is no longer probable, but it is still reasonably possible that the forecasted transaction will occur by the end of the originally expected period or within an additional two-month period of time thereafter, the gain or loss on the derivative remains in accumulated other comprehensive loss (“AOCL”) and is reclassified to net earnings when the forecasted transaction affects net earnings. However, if it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter, the gains and losses that were in AOCL are recognized immediately in net earnings. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the company carries the derivative at its fair value on the consolidated balance sheet, recognizing future changes in the fair value in other income, net. For the third quarter and year-to-date periods of fiscal 2013, there were no losses on contracts reclassified into earnings as a result of the discontinuance of cash flow hedges. As of August 2, 2013, the notional amount outstanding of forward contracts designated as cash flow hedges was $80.4 million. Additionally, the company has one cross currency interest rate swap instrument outstanding as of August 2, 2013 for a fixed pay notional of 36.6 million Romanian New Leu and receive floating notional of 8.5 million Euro.

Derivatives not designated as hedging instruments. The company also enters into foreign currency contracts that include forward currency contracts and cross currency swaps to mitigate the change in fair value of specific assets and liabilities on the consolidated balance sheet. These contracts are not designated as hedging instruments. Accordingly, changes in the fair value of hedges of recorded balance sheet positions, such as cash, receivables, payables, intercompany notes, and other various contractual claims to pay or receive foreign currencies other than the functional currency, are recognized immediately in other income, net, on the consolidated statements of earnings together with the transaction gain or loss from the hedged balance sheet position.

The following table presents the fair value of the company’s derivatives and consolidated balance sheet location.

Asset Derivatives

Liability Derivatives

August 2, 2013

August 3, 2012

August 2, 2013

August 3, 2012

Balance

Balance

Balance

Balance

Sheet

Fair

Sheet

Fair

Sheet

Fair

Sheet

Fair

(Dollars in thousands)

Location

Value

Location

Value

Location

Value

Location

Value

Derivatives Designated as Hedging Instruments

Forward currency contracts

Prepaid expenses

$

796

Prepaid expenses

$

3

Accrued liabilities

$

178

Accrued liabilities

$

—

Cross currency swaps

Prepaid expenses

—

Prepaid expenses

624

Accrued liabilities

428

Accrued liabilities

—

Derivatives Not Designated as Hedging Instruments

Forward currency contracts

Prepaid expenses

2,305

Prepaid expenses

970

Accrued liabilities

178

Accrued liabilities

175

Cross currency swaps

Prepaid expenses

83

Prepaid expenses

1,019

Accrued liabilities

—

Accrued liabilities

—

Total Derivatives

$

3,184

$

2,616

$

784

$

175

The following table presents the impact of derivative instruments on the consolidated statements of earnings for the company’s derivatives designated as cash flow hedging instruments for the three and nine months ended August 2, 2013 and August 3, 2012, respectively.

														Location of Gain (Loss)	Gain (Loss)
							Location of Gain							Recognized in Income	Recognized in Income
	Gain (Loss)						(Loss) Reclassified	Gain (Loss)						on Derivatives	on Derivatives
	Recognized in OCI on						from AOCL	Reclassified from						(Ineffective Portion	(Ineffective Portion and
	Derivatives						into Income	AOCL into Income						and excluded from	Excluded from
	(Effective Portion)						(Effective Portion)	(Effective Portion)						Effectiveness Testing)	Effectiveness Testing)
(Dollars in thousands)	August 2,			August 3,				August 2,			August 3,				August 2,		August 3,
For the three months ended	2013			2012				2013			2012				2013		2012
Forward currency contracts	$	459		$	(463	)	Net sales	$	(114	)	$	1,033		Other income, net	$	5	$	394
Forward currency contracts	(491		)	(16		)	Cost of sales	185			(475		)
Cross currency contracts	(97		)	387			Other income, net	126			386
Total	$	(129	)	$	(92	)		$	197		$	944

	August 2,			August 3,				August 2,			August 3,				August 2,		August 3,
For the nine months ended	2013			2012				2013			2012				2013		2012
Forward currency contracts	$	1,133		$	(222	)	Net sales	$	(1,456	)	$	2,738		Other income, net	$	706	$	597
Forward currency contracts	110			675			Cost of sales	426			(1,120		)
Cross currency contracts	(702		)	387			Other income, net	(713		)	386
Total	$	541		$	840			$	(1,743	)	$	2,004

As of August 2, 2013, the company expects to reclassify approximately $0.1 million of losses from AOCL to earnings during the next 12 months.

The following table presents the impact of derivative instruments on the consolidated statements of earnings for the company’s derivatives not designated as hedging instruments.

		Gain (Loss) Recognized in Net Earnings
		Three Months Ended					Nine Months Ended
	Location of Gain (Loss)	August 2,			August 3,		August 2,			August 3,
(Dollars in thousands)	Recognized in Net Earnings	2013			2012		2013			2012
Forward currency contracts	Other income, net	$	3,227		$	2,233	$	2,267		$	6,930
Cross currency swaps	Other income, net	(100		)	899		(281		)	997
		$	3,127		$	3,132	$	1,986		$	7,927