Derivative Instruments and Hedging Activities

9 Months Ended

Mar. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

As part of our financial risk management program, we use certain derivative financial instruments. We do not enter into derivative transactions for speculative purposes and, therefore, hold no derivative instruments for trading purposes. We account for derivative instruments as a hedge of the related asset, liability, firm commitment or anticipated transaction, when the derivative is specifically designated and qualifies as a hedge of such items. Our objective in managing foreign exchange exposures with derivative instruments is to reduce volatility in cash flow. We measure hedge effectiveness by assessing the changes in the fair value or expected future cash flows of the hedged item.

The fair value of derivatives designated and not designated as hedging instruments in the condensed consolidated balance sheet are as follows:



(in thousands)	March 31, 2020			June 30, 2019
Derivatives designated as hedging instruments
Other current assets - range forward contracts	$	170		$	145
Other assets - forward starting interest rate swap contracts	89			—
Other liabilities - forward starting interest rate swap contracts	(1,614		)	—
Total derivatives designated as hedging instruments	(1,355		)	145
Derivatives not designated as hedging instruments
Other current assets - currency forward contracts	30			8
Other current liabilities - currency forward contracts	(264		)	(56		)
Total derivatives not designated as hedging instruments	(234		)	(48		)
Total derivatives	$	(1,589	)	$	97

Certain currency forward contracts that hedge significant cross-border intercompany loans are considered as other derivatives and therefore do not qualify for hedge accounting. These contracts are recorded at fair value in the condensed consolidated balance sheet, with the offset to other income, net. Losses (gains) related to derivatives not designated as hedging instruments have been recognized as follows:



	Three Months Ended March 31,					Nine Months Ended March 31,
(in thousands)	2020		2019			2020		2019
Other income, net - currency forward contracts	$	220	$	(11	)	$	231	$	65

CASH FLOW HEDGES

Range forward contracts (a transaction where both a put option is purchased and a call option is sold) are designated as cash flow hedges and hedge anticipated cash flows from cross-border intercompany sales of products and services. Gains and losses realized on these contracts are recorded in accumulated other comprehensive loss and are recognized as a component of cost of goods sold and other income, net when the underlying sale of products or services is recognized into earnings. The notional amount of the contracts translated into U.S. dollars at March 31, 2020 and June 30, 2019 was $12.1 million and $61.5 million, respectively. The time value component of the fair value of range forward contracts is excluded from the assessment of hedge effectiveness. Assuming the market rates remain constant with the rates at March 31, 2020, we expect to recognize into earnings $0.1 million of income on outstanding derivatives in the next 12 months.

During the third quarter of fiscal 2020, we entered into forward starting interest rate swap contracts to hedge a portion of the interest rate risk related to our anticipated refinancing of the Senior Unsecured Notes due fiscal 2022. We recorded the fair value of these contracts as an asset or a liability, as applicable, in the balance sheet, with the offset to accumulated other comprehensive income, net of tax. The notional amount of the contracts at March 31, 2020 was $200.0 million. As of March 31, 2020, we recorded an asset of $0.1 million and a liability of $1.6 million on these contracts, the net effect of which was recorded as a decrease to other comprehensive income, net of tax.

The following represents gains and losses related to cash flow hedges:



	Three Months Ended March 31,					Nine Months Ended March 31,
(in thousands)	2020			2019		2020			2019
(Losses) gains recognized in other comprehensive (loss) income, net	$	(999	)	$	695	$	(143	)	$	603
Losses reclassified from accumulated other comprehensive loss into cost of goods sold and other income, net	$	457		$	403	$	1,007		$	1,500

No portion of the gains or losses recognized in earnings was due to ineffectiveness and no amounts were excluded from our effectiveness testing for the nine months ended March 31, 2020 and 2019.

NET INVESTMENT HEDGES

As of March 31, 2020, we had certain foreign currency-denominated intercompany loans payable with total aggregate principal amounts of €42.5 million as net investment hedges to hedge the foreign exchange exposure of our net investment in our Euro-based subsidiaries. We recorded gains of $1.1 million and $2.3 million as a component of foreign currency translation adjustments in other comprehensive (loss) income for the three months ended March 31, 2020 and 2019, respectively. We recorded gains of $1.0 million and $2.8 million as a component of foreign currency translation adjustments in other comprehensive loss for the nine months ended March 31, 2020 and 2019, respectively.

As of March 31, 2020, the foreign currency-denominated intercompany loans payable designated as net investment hedges consisted of:



Instrument	Notional (EUR in thousands)⁽²⁾		Notional (USD in thousands)⁽²⁾		Maturity
Foreign currency-denominated intercompany loan payable	€	28,727	$	31,517	June 26, 2022
Foreign currency-denominated intercompany loan payable	20,091		22,043		November 22, 2021

⁽²⁾ Includes principal and accrued interest.