Derivative Instruments (Notes)

3 Months Ended

Apr. 30, 2020

Derivatives [Abstract]

Derivative Instruments and Hedging Activities Disclosure [Text Block]

NOTE 8 — DERIVATIVE INSTRUMENTS

In the ordinary course of business, the Company is exposed to movements in foreign currency exchange rates. The Company's foreign currency risk management objective has been to protect earnings and cash flows from the impact of exchange rate changes primarily through the use of foreign currency forward contracts and a cross-currency swap.

Net Investment Hedges

In fiscal 2020, the Company entered into foreign currency forward contracts to hedge a portion of its net investment in euro denominated foreign operations which were designated as net investment hedges. The Company entered into the net investment hedges to offset the risk of change in the U.S. dollar value of the Company's investment in a euro functional subsidiary due to fluctuating foreign exchange rates. The Company terminated these net investment hedge contracts during the three months ended April 30, 2020. Gains and losses on the net investment hedges have been recorded in other comprehensive income (loss) and will remain in other comprehensive income (loss) until the sale or substantial liquidation of the underlying assets of the Company's investment. The initial fair value of hedge components excluded from the assessment of effectiveness has been recognized in the Consolidated Statement of Income. The Company classifies cash flows related to the settlement of its net investment hedges as investing activities in the Consolidated Statement of Cash Flows.

The following tables present the effects of the Company's net investment hedges on accumulated other comprehensive income ("AOCI") and earnings for the three months ended April 30, 2020 and 2019:

	Three months ended April 30, 2020
Derivatives designated as net investment hedges:	Amount of gain (loss) recognized in other comprehensive income (loss)		Amount of gain (loss) reclassified from AOCI into income		Amount of gain (loss) recognized in income (amount excluded from effectiveness testing)		Location of gain (loss) recognized in income (amount excluded from effectiveness testing)
(in thousands)
Foreign currency forward contracts	$	24,934	$	—	$	3,316	Interest expense

	Three months ended April 30, 2019
Derivatives designated as net investment hedges:	Amount of gain (loss) recognized in other comprehensive income (loss)		Amount of gain (loss) reclassified from AOCI into income		Amount of gain (loss) recognized in income (amount excluded from effectiveness testing)		Location of gain (loss) recognized in income (amount excluded from effectiveness testing)
(in thousands)
Foreign currency forward contracts	$	2,496	$	—	$	316	Interest expense

Cash Flow Hedges

The Company entered into a cross-currency swap to hedge its cash flows related to certain foreign-currency denominated debt which was designated as a cash flow hedge. The notional value of this swap was $4.5 million at January 31, 2020 and the swap matured in February 2020. The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges was initially reported as a component of other comprehensive income (loss). Gains and losses were subsequently reclassified into earnings in the same period during which the hedged transaction affected earnings and have been presented in the same income statement line item as the earnings effect of the hedged item. The Company has classified cash flows related to the settlement of its cash flow hedges as financing activities in the Consolidated Statement of Cash Flows.

The following tables present the effects of the Company's cash flow hedges on AOCI and earnings for the three months ended April 30, 2020 and 2019:

	Three months ended April 30, 2020
Derivatives designated as cash flow hedges:	Amount of gain (loss) recognized in other comprehensive income (loss)		Amount of gain (loss) reclassified from AOCI into income			Location of gain (loss) reclassified from AOCI into income
(in thousands)
Cross-currency swap	$	402	$	(90	)	Interest expense
			507			Other expense (income), net
Total	$	402	$	417

	Three months ended April 30, 2019
Derivatives designated as cash flow hedges:	Amount of gain (loss) recognized in other comprehensive income (loss)			Amount of gain (loss) reclassified from AOCI into income			Location of gain (loss) reclassified from AOCI into income
(in thousands)
Cross-currency swap	$	(575	)	$	120		Interest expense
				(484		)	Other expense (income), net
Total	$	(575	)	$	(364	)

Derivatives Not Designated as Hedges

The Company additionally utilizes forward contracts that are not designated as hedging instruments to hedge intercompany loans, accounts receivable and accounts payable. The Company’s foreign currency exposure relates primarily to international transactions where the currency collected from customers can be different from the currency used to purchase the product. The Company’s transactions in its foreign operations are denominated primarily in the following currencies: Australian dollar, British pound, Canadian dollar, Czech koruna, Danish krone, euro, Indian rupee, Indonesian rupiah, Mexican peso, Norwegian krone, Polish zloty, Singapore dollar, Swedish krona, Swiss franc and U.S. dollar.

The Company considers inventory as an economic hedge against foreign currency exposure in accounts payable in certain circumstances. This practice offsets such inventory against corresponding accounts payable denominated in currencies other than the functional currency of the subsidiary buying the inventory when determining the net exposure to be hedged using traditional forward contracts. Under this strategy, the Company would expect to increase or decrease selling prices for products purchased in foreign currencies based on fluctuations in foreign currency exchange rates affecting the underlying accounts payable. To the extent the Company incurs a foreign currency exchange loss (gain) on the underlying accounts payable denominated in the foreign currency, a corresponding increase (decrease) in gross profit would be expected as the related inventory is sold. This strategy can result in a certain degree of quarterly earnings volatility as the underlying accounts payable is remeasured using the foreign currency exchange rate prevailing at the end of each period, or settlement date if earlier, whereas the corresponding increase (decrease) in gross profit is not realized until the related inventory is sold.

The Company recognizes foreign currency exchange gains and losses on its derivative instruments not designated as hedges that are used to manage its exposures to foreign currency denominated accounts receivable and accounts payable as a component of “cost of products sold” which is consistent with the classification of the change in fair value upon remeasurement of the underlying hedged accounts receivable or accounts payable. The Company recognizes foreign currency exchange gains and losses on its derivative instruments not designated as hedges that are used to manage its exposures to foreign currency denominated financing transactions as a component of “other expense (income), net,” which is consistent with the classification of the change in fair value upon remeasurement of the underlying hedged loans. The gains and losses on the Company's foreign currency forward contracts are largely offset by the change in the fair value of the underlying hedged assets or liabilities. The Company classifies cash flows related to the settlement of forward contracts that are not designated as hedging instruments as operating activities in the Consolidated Statement of Cash Flows.

The total amount of gains (losses) recognized in earnings on the Company's derivatives not designated as hedges for the three months ended April 30, 2020 and 2019 are as follows:

		Gains (losses) recognized in earnings
		Three months ended April 30,
Derivatives not designated as hedges	Income statement location	2020			2019
(in millions)
Foreign currency forward contracts	Cost of products sold	$	8.2		$	0.9
Foreign currency forward contracts	Other expense (income), net	(14.1		)	(0.3		)
Total		$	(5.9	)	$	0.6

The Company's average notional amounts of derivatives not designated as hedges outstanding during the three months ended April 30, 2020 and 2019 were approximately $1.3 billion and $1.3 billion, respectively, with average maturities of 22 days and 24 days, respectively. As discussed above, under the Company's hedging policies, gains and losses on these derivative financial instruments are largely offset by the gains and losses on the underlying assets or liabilities being hedged.

The Company’s derivatives are also discussed in Note 7 – Fair Value Measurements.