Note K - Derivatives and Hedging

3 Months Ended

Sep. 30, 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 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. 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

September 30, 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 2022.

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.

No

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

three

months ended

September 30, 2020

and

September 30, 2019.

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

three

months ended

September 30, 2020

and

September 30, 2019,

we did

not

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

As of

September 30, 2020,

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

$75.7

million (EUR

66.2

million). As of

September 30, 2020,

a net loss of approximately

$1.8

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

$1.9

million will be reclassified into earnings in the next

12

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

As of

September 30, 2020,

$2.5

million of the fair value of our cash flow hedges was classified as a short term liability, and

$0.1

million was classified as other noncurrent assets in our Consolidated Balance Sheets. During the

three

months ended

September 30, 2020,

we recognized

$2.1

million of net losses in OCI, and reclassified

$0.6

million of losses and forward point amortization from OCI to Sales. As of

June 30, 2020,

$0.5

million of the fair value of our cash flow hedges was classified as a current asset, and

$0.2

million was classified as a long-term liability in our Consolidated Balance Sheets. During the

three

months ended

September 30, 2019,

we recognized

$1.3

million of net gains in OCI, reclassified

$0.8

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

$54,000

of gains from OCI to Other Income.