)

Derivative Financial Instruments

August 2017,

the FASB issued ASU

2017

12,

Derivatives and Hedging (Topic

815

); Targeting Improvements to Accounting for Hedging Activities

, which improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and to make certain targeted improvements to simplify the application of hedge accounting guidance. Given the improvements made to the application of hedge accounting under the guidance, the Company has decided to early adopt the ASU in the

second

quarter of fiscal

2019,

or on

December 1, 2018.

As of the adoption date, the Company had both foreign currency swaps and interest rate swaps which are designated and accounted for as cash flow hedges with

hedge ineffectiveness historically recorded. As the Company had historically determined its foreign currency exchange contracts and interest rate swaps to be perfectly effective it did

not

record any hedge ineffectiveness in earnings related to the swaps historically or on the initial application date. Therefore, there is

cumulative-effect adjustment necessary to apply this change in accounting principle. In addition to the above, the Company reviewed the ASU and identified

other provisions of the standard which would result in a quantitative impact as a result of applying the new guidance.

Interest Rate Swaps

From time to time as dictated by market opportunities, the Company enters into interest rate swap agreements designed to manage exposure to interest rates on the Company’s variable rate indebtedness. The Company recognizes all derivatives on its balance sheet at fair value. The Company has designated its interest rate swap agreements, including those that are forward-dated, as cash flow hedges, and changes in the fair value of the swaps are recognized in other comprehensive income until the hedged items are recognized in earnings. Hedge ineffectiveness, if any, associated with the swaps will be reported by the Company in interest expense.

The Company’s effective swap agreements convert the base borrowing rate on

$85

million of debt due under our revolving credit agreement from a variable rate equal to LIBOR to a weighted average fixed rate of

2.11%

December 31, 2018.

The fair value of the swaps, recognized in accrued expenses and in other comprehensive income, is as follows (in thousands, except percentages):

Effective Date	Notional Amount		Fixed Interest Rate			Maturity	December 31 , 2018			June 30, 2018
December 18, 2015		15,000		1.46	%	December 19, 2018		-			55
December 19, 2015		10,000		2.01	%	December 19, 2019		53			74
May 24, 2017		25,000		1.88	%	April 24, 2022		448			764
May 24, 2017		25,000		1.67	%	May 24, 2020		302			432
August 6, 2018		25,000		2.83	%	August 6, 2023		(454	)		-
							$	349		$	1,325

The Company reported

losses for the

three

and

six

months ended

December 31, 2018,

as a result of hedge ineffectiveness. Future changes in these swap arrangements, including termination of the agreements,

may

result in a reclassification of any gain or loss reported in accumulated other comprehensive income (loss) into earnings as an adjustment to interest expense. Accumulated other comprehensive income (loss) related to these instruments is being amortized into interest expense concurrent with the hedged exposure.

Foreign Exchange Contracts

Forward foreign currency exchange contracts are used to limit the impact of currency fluctuations on certain anticipated foreign cash flows, such as collections from customers and loan payments between subsidiaries. The Company enters into such contracts for hedging purposes only. The Company has designated certain of these currency contracts as hedges, and changes in the fair value of these contracts are recognized in other comprehensive income until the hedged items are recognized in earnings. Hedge ineffectiveness, if any, associated with these contracts will be reported in net income. At

December 31, 2018

and

June 30, 2018,

the Company had outstanding forward contracts related to hedges of intercompany loans with net unrealized losses of $(

5.9

) million and $(

2.9

) million, respectively, which approximate the unrealized gains and losses on the related loans. The contracts have maturity dates ranging from

2019

2023,

which correspond to the related intercompany loans. The notional amounts of the Company’s forward contracts, by currency, are as follows:

Currency	December 31 , 201 8		June 30, 201 8
USD		59,786		64,558
Euro		12,150		21,300
Pound Sterling		6,750		6,826
Peso		54,000		54,000
Canadian		20,600		20,600

The table below presents the fair value of derivative financial instruments as well as their classification on the balance sheet (in thousands):

	Asset Derivatives
	December 31 , 201 8			June 30, 2 01 8
Derivative designated as hedging instruments	Balance Sheet Line Item	Fair Value		Balance Sheet Line Item	Fair Value
Interest rate swaps	Other Assets	$	803	Other Assets	$	1,325
Foreign exchange contracts	Other Assets		-	Other Assets		1,357
		$	803		$	2,682

	Liability Derivatives
	December 31 , 201 8			June 30, 201 8
Derivative designated as hedging instruments	Balance Sheet Line Item	Fair Value		Balance Sheet Line Item	Fair Value
Interest rate swaps	Accrued Liabilities		454	Accrued Liabilities		-
Foreign exchange contracts	Accrued Liabilities		5,853	Accrued Liabilities		4,204
		$	6,307		$	4,204

The table below presents the amount of gain (loss) recognized in comprehensive income on our derivative financial instruments (effective portion) designated as hedging instruments and their classification within comprehensive income for the periods ended (in thousands):

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2018			2017			2018			2017
Interest rate swaps	$	(1,768	)	$	131		$	(1,371	)	$	417
Foreign exchange contracts		(2,969	)		(2,482	)		(3,003	)		(1,994	)
	$	(4,737	)	$	(2,351	)	$	(4,374	)	$	(1,577	)

The table below presents the amount reclassified from accumulated other comprehensive income (loss) to Net Income for the periods ended (in thousands):

Details about Accumulated Other Comprehensive Income (Loss) Components	Three Months Ended December 31,					Six Months Ended December 31,					Affected line item in the Unaudited Condensed Statements
	2018			2017		2018			2017		of Operations
Interest rate swaps	$	(101	)	$	913	$	(162	)	$	1,064	Interest expense
Foreign exchange contracts		3,032			-		2,434			-	Interest expense
	$	2,931		$	913	$	2,272		$	1,064