Note K - Derivatives and Hedging

9 Months Ended

Mar. 31, 2020

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

K. 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 to other transactions of NAIE, our Swiss 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. 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

March 31, 2020,

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

August 2021.

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 income or expense. We measure effectiveness by comparing the cumulative change in the hedge contract with the cumulative change in the hedged item as well as ensuring the assumptions we made at hedge inception have

not

materially changed.

No

hedging relationships were terminated as a result of ineffective hedging for the

three

or

nine

months ended

March 31, 2020

and

March 31, 2019.

We monitor the probability of forecasted transactions as part of the hedge effectiveness testing on a quarterly basis. During the

three

and

nine

months ended

March 31, 2020

and

March 31, 2019,

we did

not

have any losses or gains related to the ineffective portion of our hedging instruments.

As of

March 31, 2020,

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

$30.4

million (EUR

26.0

million). As of

March 31, 2020,

a net gain of approximately

$713,000

related to derivative instruments designated as cash flow hedges was recorded in OCI. It is expected that

$633,000

will be reclassified into earnings in the next

12

months along with the earnings effects of the related forecasted transactions.

As of

March 31, 2020,

the fair value of our cash flow hedges was an asset of

$1.7

million, of which

$1.6

million was classified as forward contracts, and

$100,000

was classified in other non-current assets in our Consolidated Balance Sheets. During the

three

months ended

March 31, 2020,

we recognized

$990,000

of net gains in OCI, and reclassified

$554,000

of gains and forward point amortization from OCI to Net Sales. During the

nine

months ended

March 31, 2020,

we recognized

$1.9

million of net gains in OCI, reclassified

$2.1

million of gains and forward point amortization from OCI to Net Sales, and reclassified

$54,000

of gains from OCI to Other Income. As of

June 30, 2019,

$2.0

million of the fair value of our cash flow hedges was classified in forward contracts, and

$312,000

was classified in other non-current assets in our Consolidated Balance Sheets. During the

three

months ended

March 31, 2019,

we recognized

$1.4

million of net gains in OCI, reclassified

$450,000

of gains from OCI to Net Sales, and reclassified

$490,000

of gains from OCI to Other Income. During the

nine

months ended

March 31, 2019,

we recognized

$4.1

million of net gains in OCI, reclassified

$619,000

of gains from OCI to Net Sales and reclassified

$1.4

million of gains from OCI to Other Income.

On

July 1, 2019,

we adopted ASU

No.

2017

-

12,

“

Derivatives and Hedging (Topic

815

): Targeted Improvements to Accounting for Hedging Activities

.” The ASU attempts to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. We applied ASU

No.

2017

-

12

using a modified retrospective approach for cash flow and fair value hedges existing at the date of adoption and prospectively for the presentation and disclosure guidance. As a result of the adoption of this ASU, amortization of forward points is now included as a component of net sales while it was previously included as a component of other income. We included

$209,000

of forward point amortization in Net Sales for the

three

months ended

March 31, 2020,

and

$707,000

of forward point amortization in Net Sales for the

nine

months ended

March 31, 2020.

We included

$368,000

of forward point amortization in Other Income for the

three

months ended

March 31, 2019,

and

$1.3

million of forward point amortization in Other Income for the

nine

months ended

March 31, 2019.