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 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 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 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 Renminbi, 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 statements 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 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 sheets, recognizing future changes in the fair value in other income, net. For the second quarter and year-to-date periods of fiscal 2015, there were immaterial losses on contracts reclassified into earnings as a result of the discontinuance of cash flow hedges. As of May 1, 2015 and May 2, 2014, the notional amount outstanding of forward contracts designated as cash flow hedges was $101.8 million and $95.8 million, respectively. Additionally, as of May 1, 2015 and May 2, 2014, the company had one cross currency interest rate swap instrument outstanding for a fixed pay notional of 36.6 million Romanian New Leu and receive floating notional of 8.5 million Euros.

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 remeasurement 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

May 1, 2015

May 2, 2014

May 1, 2015

May 2, 2014

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

2,865

Prepaid expenses

—

Accrued liabilities

1,427

Accrued liabilities

(156

)

Cross currency contract

Prepaid expenses

—

Prepaid expenses

—

Accrued liabilities

319

Accrued liabilities

295

Derivatives Not Designated as Hedging Instruments

Forward currency contracts

Prepaid expenses

4,965

Prepaid expenses

—

Accrued liabilities

(442

)

Accrued liabilities

2,199

Cross currency contract

Prepaid expenses

2,070

Prepaid expenses

—

Accrued liabilities

—

Accrued liabilities

358

Total Derivatives

9,900

—

1,304

2,696

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 six months ended May 1, 2015 and May 2, 2014, 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)	May 1,			May 2,				May 1,			May 2,				May 1,		May 2,
For the three months ended	2015			2014				2015			2014				2015		2014
Forward currency contracts	$	(4,474	)	$	(1,152	)	Net sales	$	5,926		$	(318	)	Other income, net	$	56	$	(230	)
Forward currency contracts	202			282			Cost of sales	(678		)	(15		)
Cross currency contracts	154			148			Other income, net	(194		)	(350		)
Total	$	(4,118	)	$	(722	)		$	5,054		$	(683	)

	May 1,			May 2,				May 1,			May 2,				May 1,		May 2,
For the six months ended	2015			2014				2015			2014				2015		2014
Forward currency contracts	$	(296	)	$	742		Net sales	$	7,930		$	(771	)	Other income, net	$	283	$	(141	)
Forward currency contracts	(1,182		)	(117		)	Cost of sales	(991		)	32
Cross currency contracts	136			(38		)	Other income, net	(207		)	(227		)
Total	$	(1,342	)	$	587			$	6,732		$	(966	)

As of May 1, 2015, the company expects to reclassify approximately $2.1 million of gains from AOCL to earnings during the next twelve 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					Six Months Ended
	Location of Gain (Loss)	May 1,		May 2,			May 1,		May 2,
(Dollars in thousands)	Recognized in Net Earnings	2015		2014			2015		2014
Forward currency contracts	Other income, net	$	3,089	$	(3,434	)	$	11,350	$	(3,027	)
Cross currency contracts	Other income, net	167		(192		)	1,302		(240		)
		$	3,256	$	(3,626	)	$	12,652	$	(3,267	)

The company entered into an International Swap Dealers Association (“ISDA”) Master Agreement with each counterparty that permits the net settlement of amounts owed under their respective contracts. The ISDA Master Agreement is an industry standardized contract that governs all derivative contracts entered into between the company and the respective counterparty. Under these master netting agreements, net settlement generally permits the company or the counterparty to determine the net amount payable or receivable for contracts due on the same date or in the same currency for similar types of derivative transactions. The company records the fair value of its derivative contracts at the net amount in its consolidated balance sheets.

The following tables show the effects of the master netting arrangements on the fair value of the company’s derivative contracts that are recorded in the consolidated balance sheets:

	Assets							Liabilities
	Gross Amounts		Gross Liabilities			Net Amounts		Gross Amounts			Gross Assets		Net Amounts of
(Dollars in thousands)	of Recognized		Offset in the			of Assets Presented		of Recognized			offset in the		Liabilities Presented
May 1, 2015	Assets		Balance Sheet			in the Balance Sheet		Liabilities			Balance Sheet		in the Balance Sheet
Forward currency contracts	$	8,370	$	(540	)	$	7,830	$	(1,741	)	$	756	$	(985	)
Cross currency contracts	2,070		—			2,070		(319		)	—		(319		)
	$	10,440	$	(540	)	$	9,900	$	(2,060	)	$	756	$	(1,304	)

	Assets						Liabilities
	Gross Amounts		Gross Liabilities		Net Amounts		Gross Amounts			Gross Assets		Net Amounts of
(Dollars in thousands)	of Recognized		Offset in the		of Assets Presented		of Recognized			offset in the		Liabilities Presented
May 2, 2014	Assets		Balance Sheet		in the Balance Sheet		Liabilities			Balance Sheet		in the Balance Sheet
Forward currency contracts	$	—	$	—	$	—	$	(2,650	)	$	607	$	(2,043	)
Cross currency contracts	—		—		—		(653		)	—		(653		)
	$	—	$	—	$	—	$	(3,303	)	$	607	$	(2,696	)