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v2.3.0.11
Hedging Instruments
3 Months Ended
Apr. 30, 2011
Hedging Instruments [Abstract]  
HEDGING INSTRUMENTS
6.  
HEDGING INSTRUMENTS
Background Information
The Company uses derivative financial instruments, including interest rate swap agreements, forward contracts, put option contracts and net-zero-cost collar arrangements (combination of call and put option contracts) to mitigate its exposures to changes in interest rates, foreign currency and precious metal prices. Derivative instruments are recorded on the consolidated balance sheet at their fair values, as either assets or liabilities, with an offset to current or comprehensive earnings, depending on whether the derivative is designated as part of an effective hedge transaction and, if it is, the type of hedge transaction. If a derivative instrument meets certain hedge accounting criteria, the derivative instrument is designated as one of the following on the date the derivative is entered into:
   
Fair Value Hedge — A hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment. For fair value hedge transactions, both the effective and ineffective portions of the changes in the fair value of the derivative and changes in the fair value of the item being hedged are recorded in current earnings.
   
Cash Flow Hedge — A hedge of the exposure to variability in the cash flows of a recognized asset, liability or a forecasted transaction. For cash flow hedge transactions, the effective portion of the changes in fair value of derivatives are reported as other comprehensive income (“OCI”) and are recognized in current earnings in the period or periods during which the hedged transaction affects current earnings. Amounts excluded from the effectiveness calculation and any ineffective portions of the change in fair value of the derivative are recognized in current earnings.
The Company formally documents the nature and relationships between the hedging instruments and hedged items for a derivative to qualify as a hedge at inception and throughout the hedged period. The Company also documents its risk management objectives, strategies for undertaking the various hedge transactions and method of assessing hedge effectiveness. Additionally, for hedges of forecasted transactions, the significant characteristics and expected terms of a forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction will occur. If it were deemed probable that the forecasted transaction would not occur, the gain or loss on the derivative financial instrument would be recognized in current earnings. Derivative financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedge instrument and the item being hedged, both at inception and throughout the hedged period.
The Company does not use derivative financial instruments for trading or speculative purposes.
Types of Derivative Instruments
Interest Rate Swap Agreements — The Company entered into interest rate swap agreements to convert its fixed rate 2002 Series D and 2008 Series A obligations to floating rate obligations. Since the fair value of the Company’s fixed rate long-term debt is sensitive to interest rate changes, the interest rate swap agreements serve as a hedge to changes in the fair value of these debt instruments. The Company hedges its exposure to changes in interest rates over the remaining maturities of the debt agreements being hedged. The Company accounts for the interest rate swaps as fair value hedges. As of April 30, 2011, the notional amount of interest rate swap agreements outstanding was $160,000,000.
Foreign Exchange Forward and Put Option Contracts — The Company uses foreign exchange forward contracts or put option contracts to offset the foreign currency exchange risks associated with foreign currency-denominated liabilities, intercompany transactions and forecasted purchases of merchandise between entities with differing functional currencies. For put option contracts, if the market exchange rate at the time of the put option contract’s expiration is stronger than the contracted exchange rate, the Company allows the put option contract to expire, limiting its loss to the cost of the put option contract. The Company assesses hedge effectiveness based on the total changes in the put option contracts’ cash flows. These foreign exchange forward contracts and put option contracts are designated and accounted for as either cash flow hedges or economic hedges that are not designated as hedging instruments.
In 2010, the Company de-designated all of its outstanding put option contracts (notional amount of $37,000,000 outstanding at April 30, 2011) and entered into offsetting call option contracts. These put and call option contracts are accounted for as undesignated hedges. Any gains or losses on these de-designated put option contracts are substantially offset by losses or gains on the call option contracts.
As of April 30, 2011, the notional amount of foreign exchange forward contracts accounted for as cash flow hedges was $170,200,000 and the notional amount of foreign exchange forward contracts accounted for as undesignated hedges was $22,806,000. The term of all outstanding foreign exchange forward contracts as of April 30, 2011 ranged from less than one month to 16 months.
Precious Metal Collars & Forward Contracts — The Company periodically hedges a portion of its forecasted purchases of precious metals for use in its internal manufacturing operations in order to minimize the effect of volatility in precious metal prices. The Company may use a combination of call and put option contracts in net-zero-cost collar arrangements (“precious metal collars”) or forward contracts. For precious metal collars, if the price of the precious metal at the time of the expiration of the precious metal collar is within the call and put price, the precious metal collar expires at no cost to the Company. The Company accounts for its precious metal collars and forward contracts as cash flow hedges. The Company assesses hedge effectiveness based on the total changes in the precious metal collars and forward contracts’ cash flows. The maximum term over which the Company is hedging its exposure to the variability of future cash flows for all forecasted transactions is 12 months. As of April 30, 2011, there were approximately 10,300 ounces of platinum and 318,000 ounces of silver precious metal derivative instruments outstanding.
Information on the location and amounts of derivative gains and losses in the Condensed Consolidated Statements of Earnings is as follows:
                                 
    Three Months Ended April 30,  
    2011     2010  
    Pre-Tax Loss     Pre-Tax Loss     Pre-Tax Gain     Pre-Tax Loss  
    Recognized in     Recognized in     Recognized in     Recognized in  
    Earnings on     Earnings on     Earnings on     Earnings on  
(in thousands)   Derivatives     Hedged Item     Derivatives     Hedged Item  
Derivatives in Fair Value Hedging Relationships:
                               
Interest rate swap agreements a
  $ (25 )   $ (6 )   $ 465     $ (398 )
 
                       
                                 
    Three Months Ended April 30,  
    2011     2010  
            (Loss) Gain     Pre-Tax     (Loss) Gain  
    Pre-Tax     Reclassified from     Gain     Reclassified from  
    (Loss) Gain     Accumulated OCI     Recognized in     Accumulated OCI  
    Recognized in OCI     to Earnings     OCI (Effective     to Earnings  
(in thousands)   (Effective Portion)     (Effective Portion)     Portion)     (Effective Portion)  
Derivatives in Cash Flow Hedging Relationships:
                               
Foreign exchange forward contracts a, b
  $ (1,199 )   $ (897 )   $ 2,611     $ (229 )
Put option contracts b
    (10 )     (638 )     353       (815 )
Precious metal collars b
          394       277       (712 )
Precious metal forward contracts b
    2,591       905       2,805       138  
 
                       
 
  $ 1,382     $ (236 )   $ 6,046     $ (1,618 )
 
                       
                 
    Pre-Tax Gain (Loss) Recognized in Earnings  
    on Derivative  
    Three Months Ended     Three Months Ended  
(in thousands)   April 30, 2011     April 30, 2010  
Derivatives Not Designated as Hedging Instruments:
               
Foreign exchange forward contracts a
  $ 447 c   $ (515 )c
Call option contracts b
    67       66  
Put option contracts b
    (67 )     (66 )
 
           
 
  $ 447     $ (515 )
 
           
a  
The gain or loss recognized in earnings is included within Interest and other expenses, net on the Company’s Condensed Consolidated Statement of Earnings.
 
b  
The gain or loss recognized in earnings is included within Cost of sales on the Company’s Condensed Consolidated Statement of Earnings.
 
c  
Gains or losses on the undesignated foreign exchange forward contracts substantially offset foreign exchange losses or gains on the liabilities and transactions being hedged.
There was no material ineffectiveness related to the Company’s hedging instruments for the periods ended April 30, 2011 and 2010. The Company expects approximately $622,000 of net pre-tax derivative gains included in accumulated other comprehensive income at April 30, 2011 will be reclassified into earnings within the next 12 months. This amount will vary due to fluctuations in foreign currency exchange rates and precious metal prices.
For information regarding the location and amount of the derivative instruments in the Condensed Consolidated Balance Sheet, refer to “Note 7. Fair Value of Financial Instruments.”
Concentration of Credit Risk
A number of major international financial institutions are counterparties to the Company’s derivative financial instruments. The Company enters into derivative financial instrument agreements only with counterparties meeting certain credit standards (a credit rating of A/A2 or better at the time of the agreement) and limits the amount of agreements or contracts it enters into with any one party. The Company may be exposed to credit losses in the event of non-performance by individual counterparties or the entire group of counterparties.