Note 13 – Derivatives

We are exposed to market risk from changes in foreign currency exchange rates and interest rates, which could affect our operating results, financial condition and cash flows. We manage our exposure to these risks through our regular operating and financial activities and, when appropriate, through the use of derivative financial instruments. These derivative instruments are utilized to hedge economic exposures, as well as to reduce earnings and cash flow volatility resulting from shifts in market rates. We enter into limited types of derivative contracts, including foreign currency spot, forward and option contracts and an interest rate swap, to manage foreign currency and interest rate exposures. Our primary foreign currency exposure is the Euro. The fair market values of all our derivative contracts change with fluctuations in interest rates and currency rates and are designed so that any changes in their values are offset by changes in the values of the underlying exposures. Derivative financial instruments are held solely as risk management tools and not for trading or speculative purposes.

We record all derivative instruments as either assets or liabilities at fair value in our Condensed Consolidated Balance Sheets. Certain of these derivative contracts have been designated as cash flow hedges, whereby gains and losses are reported within AOCI in our Condensed Consolidated Balance Sheets, until the underlying transaction occurs, at which point they are reported in earnings as gains and losses in our Condensed Consolidated Statements of Income. Certain of our derivatives, for which hedge accounting is not applied, are effective as economic hedges. These derivative contracts are required to be recognized each period at fair value, with gains and losses reported in earnings in our Condensed Consolidated Statements of Income and therefore do result in some level of earnings volatility. The level of volatility will vary with the type and amount of derivative hedges outstanding, as well as fluctuations in the currency and interest rate markets during the period. The related cash flow impacts of all our derivative activities are reflected as cash flows from operating activities.

Derivatives, by their nature, involve varying degrees of market and credit risk. The market risk associated with these instruments resulting from currency exchange and interest rate movements is expected to offset the market risk of the underlying transactions, assets and liabilities being hedged. We do not believe there is significant risk of loss in the event of non-performance by the counterparties associated with these instruments, because these transactions are executed with a diversified group of major financial institutions. Furthermore, our policy is to contract only with counterparties having a minimum investment grade or better credit rating. Credit risk is managed through the continuous monitoring of exposure to such counterparties.

Foreign Exchange Risk Management

We use foreign exchange contracts to hedge the price risk associated with foreign denominated forecasted purchases of materials used in our manufacturing process and to manage currency risk associated with operating costs in certain operating units, including foreign currency denominated intercompany loans and other foreign currency denominated assets. These contracts generally mature in one year or less. The majority of these contracts are designated as cash flow hedges.

At September 30, 2012 and June 30, 2012, we had outstanding foreign exchange contracts, including forward and option contracts, which are summarized below:


	September 30, 2012					June 30, 2012
	Gross Notional Value		Fair Value Asset/ (Liability)⁽¹⁾			Gross Notional Value		Fair Value Asset/ (Liability)⁽¹⁾
Currency Hedged (Buy/Sell):
U.S. Dollar/Euro	$	506,500	$	17,164		$	686,500	$	37,962
Chinese Yuan/U.S. Dollar		42,643		10			36,040		(428	)
Japanese Yen/Euro		32,096		1,670			31,280		1,695
Euro/U.S. Dollar		28,750		658			28,750		(1,056	)
U.S. Dollar/Japanese Yen		1,350		(25	)		1,800		2
Hungarian Forint/Euro		6,734		414			8,816		414
British Pound/U.S. Dollar		7,275		277			0		0
British Pound/Swiss Franc		4,365		54			0		0

Total	$	629,713	$	20,222		$	793,186	$	38,589

⁽¹⁾	Represents the net receivable/(payable) included in our Condensed Consolidated Balance Sheets.

Cash Flow Hedges

We designate a portion of our foreign exchange contracts as cash flow hedges of foreign currency denominated purchases. As of September 30, 2012 and June 30, 2012, we had $468.0 million and $638.3 million of forward contracts maturing through June 2013. These contracts are recorded at fair value in the accompanying Condensed Consolidated Balance Sheets. The changes in fair value for these contracts on a spot to spot basis are reported in AOCI, and are reclassified to either Cost of sales or Selling, general and administrative expense (“SG&A”), depending on the nature of the underlying asset or liability that is being hedged, in our Condensed Consolidated Statements of Income, in the period or periods during which the underlying transaction occurs. If it becomes apparent that an underlying forecasted transaction will not occur, the amount recorded in AOCI related to the hedge is reclassified to Foreign exchange losses, net in our Condensed Consolidated Statements of Income in the then-current period. Amounts relating to such reclassifications were immaterial in the three months ended September 30, 2012 and 2011.

Changes in the fair value of the derivatives are highly effective in offsetting changes in the cash flows of the hedged items because the amounts and the maturities of the derivatives approximate those of the forecasted exposures. Any ineffective portion of the derivative is recognized in the current period in our Condensed Consolidated Statements of Income, in the same line item in which the foreign currency gain or loss on the underlying hedged transaction was recorded. No amount of ineffectiveness was recognized in the Condensed Consolidated Statements of Income in the three months ended September 30, 2012 and 2011. All components of each derivative’s gain or loss, with the exception of forward points (see below), were included in the assessment of hedge ineffectiveness. At September 30, 2012 and June 30, 2012, the fair value of these contracts was a net asset of $11.5 million and $29.8 million, respectively. The amount associated with these hedges that is expected to be reclassified from AOCI to earnings within the next 12 months is a gain of $17.9 million.

We elected to exclude forward points from the effectiveness assessment. At the end of the reporting period, we calculate the excluded amount, which is the fair value relating to the change in forward points that is recorded in current earnings as Foreign exchange losses, net in our Condensed Consolidated Statements of Income. For the three months ended September 30, 2012 and 2011, we recognized a $0.6 million gain and a $3.6 million loss, respectively, related to the change in forward points.

Economic Hedges

When hedge accounting is not applied to derivative contracts, or after former cash flow hedges have been de-designated as balance sheet hedges, we recognize the gain or loss on the associated contracts directly in current period earnings in our Condensed Consolidated Statements of Income, as either Foreign exchange losses, net or Cost of sales according to the underlying exposure. As of September 30, 2012 and June 30, 2012, we had $161.7 million and $154.8 million, respectively, of forward contracts maturing through February 2013 and August 2012, respectively, in various currencies to hedge foreign currency denominated intercompany loans and other foreign currency denominated assets. At September 30, 2012 and June 30, 2012, the fair value of these contracts was an asset of $8.7 million and $8.8 million, respectively. Adjustments to the carrying value of the foreign currency forward contracts offset the gains and losses on the underlying loans and other foreign denominated assets in other Foreign exchange losses, net.

Interest Rate Risk Management

We have one interest rate swap contract with a notional amount of $20.3 million at September 30, 2012 and June 30, 2012 in order to manage our interest rate exposure and effectively convert interest on an operating lease from a variable rate to a fixed rate. The objective of the swap is to offset changes in rent expenses caused by interest rate fluctuations. The interest rate swap contract is designated as a cash flow hedge. At the end of each reporting period, the discounted fair value of the swap contract is calculated and recorded in AOCI and reclassified to rent expense within SG&A in our Condensed Consolidated Statements of Income, in the then current period. If the hedge is determined to be ineffective, the ineffective portion will be reclassified from AOCI and recorded as rent expense within SG&A. We recognized less than $0.2 million and $0.1 million of ineffectiveness in each of the three months ended September 30, 2012 and 2011, respectively, in our Condensed Consolidated Statements of Income. All components of the derivatives were included in the assessment of the hedges’ effectiveness. The amount associated with the swap contract that is expected to be recorded as rent expense in the next 12 months is a loss of $0.6 million.

Fair Value of Derivatives

The following tables provide a summary of the fair value amounts of our derivative instruments at September 30, 2012 and June 30, 2012:


		Fair Value
	Balance Sheet Location	September 30, 2012		June 30, 2012
Derivatives Designated as Cash Flow Hedges, Gross:
Other assets:
Foreign exchange contracts	Other current assets	$	13,963	$	30,761

Other liabilities:
Foreign exchange contracts	Accrued liabilities		2,461		979
Interest rate swap	Accrued liabilities		890		712
Interest rate swap	Other non-current liabilities		0		285

Total liabilities			3,351		1,976

Net asset for derivatives designated as hedging instruments			10,612		28,785

Derivatives Designated as Economic Hedges, Gross:
Other assets:
Foreign exchange contracts	Other current assets		8,724		9,864
Other liabilities:
Foreign exchange contracts	Accrued liabilities		4		1,057

Net asset for economic hedges:			8,720		8,807

Total net derivative asset		$	19,332	$	37,592

Derivative Activity

The following tables show derivative activity for derivatives designated as cash flow hedges for the three months ended September 30, 2012 and 2011:


Derivative	Location of Derivative Gain/(Loss) Recognized in Income	Gain/(Loss) Reclassified from AOCI into Income (Effective Portion)						Gain/(Loss) Recognized in Income on Derivatives (Ineffective Portion)						Gain/(Loss) from Amounts Excluded from Effectiveness Testing
		Three Months Ended September 30,
		2012			2011			2012			2011			2012		2011
Foreign exchange contracts	Cost of sales	$	17,834		$	(10,866	)	$	0		$	0		$	0	$	0
Foreign exchange contracts	SG&A		(63	)		0			0			0			0		0
Foreign exchange contracts racts	Foreign exchange losses, net		0			0			0			0			554		(3,648	)
Interest rate swap	SG&A		(173	)		(163	)		(2	)		(1	)		0		0

Total cash flow hedges		$	17,598		$	(11,029	)	$	(2	)	$	(1	)	$	554	$	(3,648	)


Derivative	Gain/(Loss) Recognized in AOCI (Effective Portion)
	Three Months Ended September 30,
	2012			2011
Foreign exchange contracts	$	(1,664	)	$	34,748
Interest rate swap		(62	)		(298	)

Total cash flow hedges	$	(1,726	)	$	34,450

The following table summarizes gains and losses from our derivative instruments that are not designated as hedging instruments for the three months ended September 30, 2012 and 2011:


		Three Months Ended September 30,
Derivative	Location of Derivative Gain/(Loss)	2012			2011
Foreign exchange contracts—forwards	Cost of sales	$	(1,858	)	$	1,247
Foreign exchange contracts—forwards	Foreign exchange losses, net		389			1,551