Note L - Derivatives and Hedging

12 Months Ended

Jun. 30, 2021

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

L. 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 year ended

June 

30,

2021

and prior, we entered into 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 revenue. 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 years ended

June 30, 2021

and

June 30, 2020.

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

As of

June 

30,

2021,

the notional amounts of our foreign exchange contracts were

$60.4

million (

€51.3

million). As of

June 

30,

2021,

a net loss of approximately

$33,000

offset by

$8,000

of deferred taxes, related to derivative instruments designated as cash flow hedges was recorded in OCI. As of

June 

30,

2020,

a net loss of approximately

$0.4

million, offset by

$0.1

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

$6,000

of the gross loss as of

June 30, 2021,

will be reclassified into earnings in the next

12

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

As of

June 

30,

2021,

$0.6

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

$4,000

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

June 

30,

2021,

we recognized

$2.8

million of net losses in OCI, reclassified

$3.2

million of losses and forward point amortization from OCI to Net Sales. During the year ended

June 

30,

2020,

we recognized

$1.4

million of net gains in OCI, reclassified

$2.7

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

$0.1

million of gains from OCI to Other Income.

For foreign currency contracts

not

designated as cash flow hedges, changes in the fair value of the hedge are recorded directly to foreign exchange gain or loss in other income in an effort to offset the change in valuation of the underlying hedged item. During the year ended

June 30, 2021

we entered into forward contracts in order to hedge foreign exchange risk associated with our lease liability at NAIE, which is denominated in Swiss Francs (CHF). As of

June 30, 2021,

the notional amounts of our foreign exchange contracts

not

designated as cash flow hedges were approximately

$6.2

million (CHF

5.5

million). As of

June 30, 2021,

$0.2

million of the fair value of our foreign exchange contracts

not

designated as cash flow hedges was classified as a current liability in our Consolidated Balance Sheets.