Note J - Derivatives and Hedging

6 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

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 st

rategy 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. To the extent we enter into such contracts, there can be no guarantee any such contracts will be effective hedges against our foreign currency exchange risk.

As of

December

31,

2016,

we had forward contracts designated as cash flow hedges primarily to protect against the foreign exchange risks inherent in our forecasted sales of prod

ucts at prices denominated in currencies other than the U.S. Dollar. These contracts are expected to be settled through

February

2018.

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 in

terest expense or income. 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,

2016,

we recorded a

$92,000

gain related to the ineffective portion of our hedging instruments to other income. We did not have any losses or gains related to the ineffective portion of our hedging instruments during the

three

and

six

months ended

December

31,

2015.

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,

2016,

the notional amounts of our foreign exchange contracts designated as cash flow hedges were approximately

$35.2

million (EUR

31.1

million). As of

December

31,

2016,

a net gain of approximately

$1.5

million related to derivative ins

truments designated as cash flow hedges was recorded in OCI. It is expected that

$1.3

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,

2016,

the fair

value of our cash flow hedges was an asset of

$2.0

million, which was classified in prepaids and other current assets in our Consolidated Balance Sheets. During the

three

months ended

December

31,

2016,

we recognized

$2.3

million of net gains in OCI and reclassified

$213,000

of gains from OCI to revenue. During the

six

months ended

December

31,

2016,

we recognized

$1.8

million of net gains in OCI and reclassified

$271,000

of gains from OCI to revenue. As of

June

 

30,

2016,

$226,000

of the fair value of our cash flow hedges was classified in prepaids and other current assets in our Consolidated Balance Sheets. During the

three

months ended

December

31,

2015,

we recognized

$424,000

of gains in OCI and reclassified

$45,000

of gains from OCI to revenue. During the

six

months ended

December

31,

2015,

we recognized

$482,000

of gains in OCI and reclassified

$7,000

of gains from OCI to revenue.