Derivatives and Hedging Activities

12 Months Ended

Jun. 30, 2011

Derivatives and Hedging Activities

Derivatives and Hedging Activities

(8) Derivatives and Hedging Activities

The Company's results of operations could be materially impacted by significant changes in foreign currency exchange rates and interest rates. These risks and the management of these risks are discussed in greater detail below. In an effort to manage the exposure to these risks, the Company periodically enters into various derivative instruments. The Company's accounting policies for these instruments are based on whether the instruments are designated as hedge or non-hedge instruments in accordance with generally accepted accounting principles in the United States. The Company records all derivatives on the balance sheet at fair value. Derivatives that are not designated as hedging instruments or the ineffective portions of cash flow hedges are adjusted to fair value through earnings in other income and expense.

Foreign Currency – the Company conducts a portion of its business internationally in a variety of foreign currencies. The exposure to market risk for changes in foreign currency exchange rates arises from foreign currency denominated assets and liabilities, and transactions arising from non-functional currency financing or trading activities. The Company's objective is to preserve the economic value of non-functional currency denominated cash flows. The Company attempts to hedge transaction exposures with natural offsets to the fullest extent possible and, once these opportunities have been exhausted, through forward contracts or other hedging instruments with third parties. At June 30, 2011, the Company had contracts outstanding with notional amounts of $76.8 million to exchange foreign currencies, including the US Dollar, Euro, British Pound, Canadian Dollar, and Mexican Peso. To date, the Company has chosen not to designate these derivatives as hedging instruments, and accordingly, these instruments are adjusted to fair value through earnings in other income and expense. Summarized financial information related to these derivative contracts and changes in the underlying value of the foreign currency exposures are as follows:

		0000000000			0000000000			0000000000
	Fiscal Year Ended June 30,
	2011			2010			2009
	(in thousands)
Net foreign exchange derivative contract (loss) gain	$	(2,706	)	$	(1,065	)	$	5,147
Net foreign currency transactional and remeasurement gain (loss)	$	1,741		$	826		$	(6,734	)
Net foreign currency transactional and remeasurement (loss)	$	(965	)	$	(239	)	$	(1,587	)

Interest Rates – the Company's earnings are also affected by changes in interest rates due to the impact those changes have on interest expense from floating rate debt instruments. To manage the exposure to interest rates, the Company may enter into interest rate swap agreements. In January 2008, the Company entered into an interest rate swap agreement to hedge the variability in future cash flows of interest payments related to the $25 million promissory note payable discussed in Note 7. Interest rate differentials paid or received under the swap agreement are recognized as adjustments to interest expense. To the extent the swap is effective in offsetting the variability of the hedged cash flows, changes in the fair value of the swap are not included in current earnings but are reported as other comprehensive income (loss). The fair value of the swap was a liability of $0.2 million as of June 30, 2011. To date, there has not been any ineffectiveness associated with this instrument, and there are no other swap agreements outstanding.

The components of the cash flow hedge included in accumulated other comprehensive income (loss), net of income taxes, in the Consolidated Statements of Shareholders' Equity, are as follows:

		$(276)			$(276)
	Fiscal Year Ended June 30,
	2011			2010
	(in thousands)
Net interest expense recognized as a result of interest rate swap	$	859		$	859
Unrealized gain (loss) in fair value of interest swap rates		(119	)		(626	)
Net increase (decrease) in accumulated other comprehensive income (loss)	$	740		$	233
Income tax effect		(272	)		(85	)
Net increase (decrease) in accumulated other comprehensive income (loss), net of tax	$	468		$	148

The Company has the following derivative instruments located on the Consolidated Balance Sheets and Income Statements, utilized for the risk management purposes detailed above:

	As of June 30, 2011
	Fair Value of  Derivatives Designated as Hedge Instruments			Fair Value of  Derivatives Not Designated as Hedge Instruments
	(in thousands)
Derivative assets(a):
Foreign exchange contracts	$	-		$	165
Derivative liabilities(b):
Foreign exchange contracts	$	-		$	(236	)
Interest rate swap agreement	$	(215	)	$	-

 ^(a) All derivative assets are recorded as prepaid expense and other assets in the Consolidated Balance Sheets.

 ^(b) All derivative liabilities are recorded as accrued expenses and other liabilities in the Consolidated Balance Sheets.