Note 14 - Derivative Instruments

Foreign operations give rise to market risks from changes in foreign currency exchange rates. Foreign currency forward exchange contracts with established financial institutions are utilized to hedge a portion of that risk. Interest rate swap agreements are used to reduce the impact of changes in interest rates on certain debt. The Company’s foreign currency forward exchange contracts and interest rate swap agreements are designated as cash flow hedges, and therefore the effective portion of unrealized gains and losses is recorded in accumulated other comprehensive income or loss.

At August 31, 2017 exchange rates, forward exchange contracts for the purchase of Polish Zlotys and the sale of Euros and U.S. Dollars; the purchase of Mexican Pesos and the sale of U.S. Dollars; and for the purchase of U.S. Dollars and the sale of Saudi Riyals aggregated to $287.3 million. The fair value of the contracts is included on the Consolidated Balance Sheets as Accounts payable and accrued liabilities when there is a loss, or as Accounts receivable, net when there is a gain. As the contracts mature at various dates through July 2019, any such gain or loss remaining will be recognized in manufacturing revenue or cost of revenue along with the related transactions. In the event that the underlying transaction does not occur or does not occur in the period designated at the inception of the hedge, the amount classified in accumulated other comprehensive loss would be reclassified to the results of operations in Interest and foreign exchange at the time of occurrence. At August 31, 2017 exchange rates, approximately $0.8 million would be reclassified to revenue or cost of revenue in the next 12 months.

At August 31, 2017, an interest rate swap agreement maturing in March 2020 had a notional amount of $88.6 million. The fair value of the contract is included in Accounts payable and accrued liabilities on the Consolidated Balance Sheets. As interest expense on the underlying debt is recognized, amounts corresponding to the interest rate swap are reclassified from Accumulated other comprehensive loss and charged or credited to interest expense. At August 31, 2017 interest rates, approximately $0.7 million would be reclassified to interest expense in the next 12 months.

Fair Values of Derivative Instruments


	Asset Derivatives					Liability Derivatives
		August 31,					August 31,
		2017		2016			2017		2016
(In thousands)	Balance sheet caption	Fair Value		Fair Value		Balance sheet caption	Fair Value		Fair Value
Derivatives designated as hedging instruments
Foreign forward exchange contracts	Accounts receivable, net	$	2,341	$	1,570	Accounts payable and accrued liabilities	$	1,761	$	4,287
Interest rate swap contracts	Intangibles and other assets, net		–		–	Accounts payable and accrued liabilities		1,125		3,157

		$	2,341	$	1,570		$	2,886	$	7,444

Derivatives not designated as hedging instruments
Foreign forward exchange contracts	Accounts receivable, net	$	1,473	$	25	Accounts payable and accrued liabilities	$	–	$	22

The Effect of Derivative Instruments on the Consolidated Statements of Income


Derivatives in cash flow hedging relationships	Financial statement caption of gain recognized in income on derivative	Gain recognized in income on derivatives Years ended August 31,
		2017		2016
Foreign forward exchange contract	Interest and foreign exchange	$	3,207	$	336
Interest rate swap contracts	Interest and foreign exchange		23		90

		$	3,230	$	426


Derivatives in cash flow hedging relationships	Gain (loss) recognized in OCI on derivatives (effective portion) Years ended August 31,					Financial statement caption of gain (loss) reclassified from accumulated OCI into income	Gain (loss) reclassified from accumulated OCI into income (effective portion) Years ended August 31,						Financial statement caption of gain (loss) in income on derivative (ineffective portion and amount excluded from effectiveness testing)	Gain (loss) recognized on derivative (ineffective portion and amount excluded from effectiveness testing) Years ended August 31,
	2017		2016				2017			2016				2017			2016
Foreign forward exchange contracts	$	1,746	$	(4,698	)	Revenue	$	(3,980	)	$	(1,224	)	Revenue	$	(2,843	)	$	138
Foreign forward exchange contracts		385		(944	)	Cost of revenue		336			(911	)	Cost of revenue		248			121
Interest rate swap contracts		1,042		(2,354	)	Interest and foreign exchange		(1,057	)		(1,561	)	Interest and foreign exchange		–			–

	$	3,173	$	(7,996	)		$	(4,701	)	$	(3,696	)		$	(2,595	)	$	259