Derivatives and Hedging

6 Months Ended

Dec. 31, 2011

Derivatives and Hedging

J. Derivatives and Hedging

We are exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to forecasted product sales denominated in foreign currencies and transactions of NAIE, our foreign subsidiary. As part of our overall strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates, we may use foreign exchange contracts in the form of forward contracts. There can be no guarantee any such contracts, to the extent we enter into such contracts, will be effective hedges against our foreign currency exchange risk.

During the three and six months ended December 31, 2011 we had forward contracts designated as cash flow hedges primarily to protect against the foreign exchange risks inherent in our forecasted sales of products at prices denominated in currencies other than the U.S. Dollar. These contracts are expected to be settled through July 2013. For derivative instruments that are designated and qualify as cash flow hedges, we record the effective portion of the gain or loss on the derivative in accumulated other comprehensive income (“OCI”) as a separate component of stockholders’ equity and subsequently reclassify these amounts into earnings in the period during which the hedged transaction is recognized in earnings.

For foreign currency contracts designated as cash flow hedges, hedge effectiveness is measured using the spot rate. Changes in the spot-forward differential are excluded from the test of hedge effectiveness and are recorded currently in earnings as interest expense. We measure effectiveness by comparing the cumulative change in the hedge contract with the cumulative change in the hedged item. During the three and six months ended December 31, 2011, we did not have any material losses or gains related to the ineffective portion of our hedging instruments. No hedging relationships were terminated as a result of ineffective hedging or forecasted transactions no longer probable of occurring for foreign currency forward contracts. We monitor the probability of forecasted transactions as part of the hedge effectiveness testing on a quarterly basis.

As of December 31, 2011, the notional amounts of our foreign exchange contracts designated as cash flow hedges were approximately $16.2 million (EUR 11.3 million). As of December 31, 2011, a net gain of approximately $1.3 million related to derivative instruments designated as cash flow hedges was recorded in OCI. We expect approximately $1.1 million will be reclassified into earnings in the next 12 months along with the earnings effects of the related forecasted transactions.

As of December 31, 2011, $1.2 million of the fair value of our cash flow hedges was classified in prepaids and other current assets and $248,000 was classified in other noncurrent assets, net in our Consolidated Balance Sheets. During the three months ended December 31, 2011 we recognized $942,000 of gains in OCI and reclassified $266,000 of gains from OCI to revenue. During the six months ended December 31, 2011 we recognized $1.7 million of gains in OCI and reclassified $363,000 of gains from OCI to revenue. During the three and six months ended December 31, 2010, we recognized $266,000 of gains in OCI and reclassified $54,000 of gains from OCI to revenue.