Note 11 – 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 February 28, 2018 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 $205.7 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 December 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 February 28, 2018 exchange rates, approximately $0.7 million would be reclassified to revenue or cost of revenue in the next 12 months.

At February 28, 2018, an interest rate swap agreement maturing in March 2020 had a notional amount of $86.9 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 February 28, 2018 interest rates, approximately $0.4 million would be reclassified to interest expense in the next 12 months.

Fair Values of Derivative Instruments


	Asset Derivatives					Liability Derivatives
		February 28, 2018		August 31, 2017			February 28, 2018		August 31, 2017
(In thousands)	Balance sheet location	Fair Value		Fair Value		Balance sheet location	Fair Value		Fair Value
Derivatives designated as hedging instruments
Foreign forward exchange contracts	Accounts receivable, net	$	2,158	$	2,341	Accounts payable and accrued liabilities	$	685	$	1,761
Interest rate swap contracts	Accounts receivable, net		598		—	Accounts payable and accrued liabilities		1		1,125

		$	2,756	$	2,341		$	686	$	2,886


Derivatives not designated as hedging instruments
Foreign forward exchange contracts	Accounts receivable, net	$	1,722	$	1,473	Accounts payable and accrued liabilities	$	30	$	—

The Effect of Derivative Instruments on the Statements of Income


Derivatives in cash flow hedging relationships	Location of gain (loss) recognized in income on derivatives	Gain (loss) recognized in income on derivatives six months ended February 28,
		2018			2017
Foreign forward exchange contract	Interest and foreign exchange	$	1,933		$	520
Interest rate swap contracts	Interest and foreign exchange		(1	)		23

		$	1,932		$	543


Derivatives in cash flow hedging relationships	Gain (loss) recognized in OCI on derivatives (effective portion) six months ended February 28,						Location of gain (loss) reclassified from accumulated OCI into income		Gain (loss) reclassified from accumulated OCI into income (effective portion) six months ended February 28,						Location of gain (loss) on derivative (ineffective portion and amount excluded from effectiveness testing)		Gain (loss) recognized on derivative (ineffective portion and amount excluded from effectiveness testing) six months ended February 28,
	2018			2017					2018			2017					2018		2017
Foreign forward exchange contracts	$	1,222		$	(3,592	)		Revenue	$	1,430		$	(3,096	)		Revenue	$	282	$	(3,355	)
Foreign forward exchange contracts		(223	)		(435	)		Cost of revenue		(373	)		(346	)		Cost of revenue		196		100
Interest rate swap contracts		1,473			1,464			Interest and foreign exchange		(273	)		(626	)		Interest and foreign exchange		—		—

	$	2,472		$	(2,563	)			$	784		$	(4,068	)			$	478	$	(3,255	)