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’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.

To reduce its exposure to foreign currency exchange rate risk, the company actively manages the exposure of its foreign currency exchange rate 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 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 hedging activities primarily involve the use of forward currency contracts to hedge most foreign currency transactions, including forecasted sales and purchases denominated in foreign currencies. The company may also utilize forward currency contracts or cross currency swaps 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 fluctuations. 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.

Cash flow hedges. The company recognizes all derivative instruments as either assets or liabilities at fair value on the Condensed 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, foreign plant operations, and purchases from suppliers. Changes in fair values of outstanding cash flow hedge derivatives, except the ineffective portion, are recorded in other comprehensive income within accumulated other comprehensive loss ("AOCL") on the Condensed Consolidated Balance Sheets, 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 Condensed 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 Condensed Consolidated Balance Sheets, recognizing future changes in the fair value in other income, net. For the second quarter of fiscal 2017, the company did not discontinue hedge accounting on any forward currency contracts designated as cash flow hedging instruments. For the six months ended May 5, 2017, the company recognized immaterial gains on forward currency contracts reclassified into earnings as a result of the discontinuance of hedge accounting. As of May 5, 2017, the notional amount outstanding of forward contracts designated as cash flow hedges was $85.6 million.

Derivatives not designated as hedging instruments. The company also enters into foreign currency contracts that include forward currency contracts to mitigate the remeasurement of specific assets and liabilities on the Condensed 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 Condensed 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 Condensed Consolidated Balance Sheet location:



	Fair Value at		Fair Value at			Fair Value at
(Dollars in thousands)	May 5, 2017		April 29, 2016			October 31, 2016
Derivative assets:
Derivatives designated as cash flow hedging instruments
Prepaid expenses and other current assets
Forward currency contracts	$	2,008	$	(154	)	$	1,535
Cross currency contract	—		88			—
Derivatives not designated as cash flow hedging instruments
Prepaid expenses and other current assets
Forward currency contracts	823		194			432
Cross currency contract	—		1,847			—
Total assets	$	2,831	$	1,975		$	1,967
Derivative liabilities:
Derivatives designated as cash flow hedging instruments
Accrued liabilities
Forward currency contracts	$	—	$	3,070		$	973
Derivatives not designated as cash flow hedging instruments
Accrued liabilities
Forward currency contracts	—		683			792
Total liabilities	$	—	$	3,753		$	1,765

The following tables present the impact of derivative instruments on the Condensed Consolidated Statements of Earnings for the company’s derivatives designated as cash flow hedging instruments for the three and six months ended May 5, 2017 and April 29, 2016, respectively:



	Effective Portion													Ineffective Portion and Excluded from Effectiveness Testing
	Gain (Loss) Recognized in OCI on Derivatives						Location of Gain (Loss) Reclassified from AOCL into Income	Gain (Loss) Reclassified from AOCL into Income						Location of Gain (Loss) Recognized in Income on Derivatives	Gain (Loss) Recognized in Income on Derivatives
(Dollars in thousands)	May 5, 2017			April 29, 2016				May 5, 2017			April 29, 2016				May 5, 2017			April 29, 2016
Three months ended	May 5, 2017			April 29, 2016				May 5, 2017			April 29, 2016				May 5, 2017			April 29, 2016
Forward currency contracts	$	(526	)	$	(3,195	)	Net sales	$	1,627		$	921		Other income, net	$	(28	)	$	243
Forward currency contracts	2,267			1,439			Cost of sales	(561		)	(685		)
Cross currency contracts	—			221			Other income, net	—			(222		)
Total derivatives designated as cash flow hedging instruments	$	1,741		$	(1,535	)	Total	$	1,066		$	14		Total	$	(28	)	$	243



	Effective Portion													Ineffective Portion and Excluded from Effectiveness Testing
	Gain (Loss) Recognized in OCI on Derivatives						Location of Gain (Loss) Reclassified from AOCL into Income	Gain (Loss) Reclassified from AOCL into Income						Location of Gain (Loss) Recognized in Income on Derivatives	Gain (Loss) Recognized in Income on Derivatives
(Dollars in thousands)	May 5, 2017			April 29, 2016				May 5, 2017			April 29, 2016				May 5, 2017		April 29, 2016
Six months ended	May 5, 2017			April 29, 2016				May 5, 2017			April 29, 2016				May 5, 2017		April 29, 2016
Forward currency contracts	$	(154	)	$	(2,630	)	Net sales	$	2,066		$	2,001		Other income, net	$	369	$	231
Forward currency contracts	2,116			(220		)	Cost of sales	(1,323		)	(999		)
Cross currency contracts	—			255			Other income, net	—			(94		)
Total derivatives designated as cash flow hedging instruments	$	1,962		$	(2,595	)	Total	$	743		$	908		Total	$	369	$	231

As of May 5, 2017, the company expects to reclassify approximately $1.5 million of gains from AOCL to earnings during the next twelve months.

The following table presents the gain/(loss) of derivative instruments on the Condensed Consolidated Statements of Earnings for the company’s derivatives not designated as cash flow hedging instruments:



		Three Months Ended						Six Months Ended
	Location of Gain (Loss)	May 5, 2017			April 29, 2016			May 5, 2017		April 29, 2016
(Dollars in thousands)	Location of Gain (Loss)	May 5, 2017			April 29, 2016			May 5, 2017		April 29, 2016
Forward currency contracts	Other income, net	$	(590	)	$	(2,678	)	$	554	$	(1,341	)
Cross currency contracts	Other income, net	—			(313		)	—		(183		)
Total derivatives not designated as cash flow hedging instruments		$	(590	)	$	(2,991	)	$	554	$	(1,524	)

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 Condensed Consolidated Balance Sheets.

The following table shows the effects of the master netting arrangements on the fair value of the company’s derivative contracts that are recorded in the Condensed Consolidated Balance Sheets:



(Dollars in thousands)	May 5, 2017			April 29, 2016			October 31, 2016
Derivative assets:
Forward currency contracts
Gross amounts of recognized assets	$	2,918		$	194		$	2,264
Gross liabilities offset in the balance sheets	(87		)	(154		)	(297		)
Net amounts of assets presented in the balance sheets	2,831			40			1,967
Cross currency contracts
Gross amounts of recognized assets	—			1,935			—
Net amounts of assets presented in the balance sheets	—			1,935			—
Total assets	$	2,831		$	1,975		$	1,967
Derivative liabilities:
Forward currency contracts
Gross amounts of recognized liabilities	$	—		$	(3,807	)	$	(1,765	)
Gross assets offset in the balance sheets	—			54			—
Net amounts of liabilities presented in the balance sheets	—			(3,753		)	(1,765		)
Total liabilities	$	—		$	(3,753	)	$	(1,765	)