Quarterly report pursuant to Section 13 or 15(d)

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
 9 Months Ended
Mar. 31, 2024
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The authoritative guidance requires companies to recognize all derivative instruments, including foreign exchange contracts and rate lock agreements (collectively “derivatives”), as either assets or liabilities at fair value on the Condensed Consolidated Balance Sheets. In accordance with the accounting guidance, we designate foreign currency forward transactions and options contracts and interest rate forward transactions as cash flow hedges. In accordance with the accounting guidance, we also designate certain foreign currency exchange contracts as net investment hedge transactions intended to mitigate the variability of the value of certain investments in foreign subsidiaries.
Our foreign subsidiaries operate and sell our products in various global markets. As a result, we are exposed to risks relating to changes in foreign currency exchange rates. We utilize foreign exchange contracts to hedge against future movements in foreign currency exchange rates that affect certain existing and forecasted foreign currency denominated sales and purchase transactions, such as the Japanese yen, the euro, the pound sterling and the new Israeli shekel.
We routinely hedge our exposures to certain foreign currencies with various financial institutions in an effort to minimize the impact of certain currency exchange rate fluctuations. These foreign exchange contracts, designated as cash flow hedges, generally have maturities of less than 18 months. Cash flow hedges are evaluated for effectiveness monthly, based on changes in total fair value of the derivatives. If a financial counterparty to any of our hedging arrangements experiences financial difficulties or is otherwise unable to honor the terms of the foreign currency hedge, we may experience material losses.
Since fiscal 2015, we have entered into five sets of forward contracts, generally to hedge the benchmark interest rate on portions of our Senior Notes prior to issuance (“Rate Lock Agreements”). Upon issuance of the associated debt, the Rate Lock Agreements were settled and their fair values were recorded within AOCI. The resulting gains and losses from these transactions are amortized to interest expense over the lives of the associated debt. We recognized net gains of $0.9 million and $2.8 million in the three and nine months ended March 31, 2024, respectively, and net gains of $0.9 million and $2.8 million in the three and nine months ended March 31, 2023, respectively, for the amortization of the net of the Rate Lock Agreements that had been recognized in AOCI, which decreased the interest expense on a net basis. As of March 31, 2024, the aggregate unamortized portion of the fair value of the forward contracts for the Rate Lock Agreements was a $48.7 million net gain.
For derivatives that are designated and qualify as cash flow hedges, the effective portion of the gains or losses is reported in AOCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. For derivative contracts executed after adopting the new accounting guidance in fiscal 2019, the election to include time value for the assessment of effectiveness is made on all forward contracts designated as cash flow hedges. The change in fair value of the derivative is recorded in AOCI until the hedged item is recognized in earnings. The assessment of effectiveness of options contracts designated as cash flow hedges exclude time value. The initial value of the component excluded from the assessment of effectiveness is recognized in earnings over the life of the derivative contract. Any differences between changes in the fair value of the excluded components and the amounts recognized in earnings are recorded in AOCI.
For derivatives that are designated and qualify as a net investment hedge in a foreign operation and that meet the effectiveness requirements, the net gains or losses attributable to changes in spot exchange rates are recorded in cumulative translation within AOCI. The remainder of the change in value of such instruments is recorded in earnings using the mark-to-market approach. Recognition in earnings of amounts previously recorded in cumulative translation is limited to circumstances such as complete or substantially complete liquidation or sale of the net investment in the hedged foreign operations.
For derivatives that are not designated as hedges, gains and losses are recognized in other expense (income), net. We use foreign exchange contracts to hedge certain foreign currency denominated assets or liabilities. The gains and losses on these derivative instruments are largely offset by the changes in the fair value of the assets or liabilities being hedged.
Derivatives in Hedging Relationships: Foreign Exchange Contracts and Rate Lock Agreements
The gains (losses) on derivatives in cash flow and net investment hedging relationships recognized in other comprehensive income for the indicated periods were as follows:
Three Months Ended March 31, Nine Months Ended March 31,
(In thousands) 2024 2023 2024 2023
Derivatives Designated as Cash Flow Hedging Instruments:
Rate lock agreements:
Amounts included in the assessment of effectiveness $ 3,800  $ —  $ 415  $ — 
Foreign exchange contracts:
Amounts included in the assessment of effectiveness $ (790) $ 6,008  $ 10,861  $ 16,720 
Amounts excluded from the assessment of effectiveness $ (7) $ 652  $ 52  $ (53)
Derivatives Designated as Net Investment Hedging Instruments:
Foreign exchange contracts(1):
$ 8,150  $ 154  $ 1,080  $ 1,986 
    __________________ 
(1)No amounts were reclassified from AOCI into earnings related to the sale of a subsidiary, as there were no such sales during the periods presented.
The locations and amounts of designated and non-designated derivatives’ gains and losses reported in the Condensed Consolidated Statements of Operations for the indicated periods were as follows:
Three Months Ended March 31, Three Months Ended March 31,
2024 2023
(In thousands) Revenues Costs of Revenues and Operating Expenses Interest Expense Other Expense (Income), Net Revenues Costs of Revenues and Operating Expenses Interest Expense Other Expense (Income), Net
Total amounts presented in the Condensed Consolidated Statements of Operations in which the effects of cash flow hedges are recorded $ 2,359,830  $ 1,623,463  $ 79,981  $ (45,622) $ 2,432,608  $ 1,572,015  $ 74,774  $ (14,864)
Gains (Losses) on Derivatives Designated as Hedging Instruments:
Rate lock agreements:
Amount of gains (losses) reclassified from AOCI to earnings $ —  $ —  $ 944  $ —  $ —  $ —  $ 936  $ — 
Foreign exchange contracts:
Amount of gains (losses) reclassified from AOCI to earnings $ 4,688  $ 2,221  $ —  $ —  $ 1,748  $ 467  $ —  $ — 
Amount excluded from the assessment of effectiveness recognized in earnings $ (249) $ —  $ —  $ (7) $ (327) $ —  $ —  $ 765 
Gains (Losses) on Derivatives Not Designated as Hedging Instruments:
Amount of gains (losses) recognized in earnings $ —  $ —  $ —  $ 5,762  $ —  $ —  $ —  $ (9,066)
Nine Months Ended March 31, Nine Months Ended March 31,
2024 2023
(In thousands) Revenues Costs of Revenues and Operating Expenses Interest Expense Other Expense (Income), Net Revenues Costs of Revenues and Operating Expenses Interest Expense Other Expense (Income), Net
Total amounts presented in the Condensed Consolidated Statements of Operations in which the effects of cash flow hedges are recorded $ 7,243,512  $ 4,874,621  $ 228,417  $ (104,515) $ 8,140,919  $ 4,970,444  $ 223,449  $ (79,944)
Gains (Losses) on Derivatives Designated as Hedging Instruments:
Rate lock agreements:
Amount of gains (losses) reclassified from AOCI to earnings $ —  $ —  $ 2,818  $ —  $ —  $ —  $ 2,810  $ — 
Foreign exchange contracts:
Amount of gains (losses) reclassified from AOCI to earnings $ 16,633  $ 4,976  $ —  $ —  $ 33,024  $ (8,804) $ —  $ — 
Amount excluded from the assessment of effectiveness recognized in earnings $ (762) $ —  $ —  $ 52  $ (1,070) $ —  $ —  $ 1,675 
Gains (Losses) on Derivatives Not Designated as Hedging Instruments:
Amount of gains (losses) recognized in earnings $ —  $ —  $ —  $ 7,427  $ —  $ —  $ —  $ (2,773)
The U.S. dollar equivalent of all outstanding notional amounts of foreign currency hedge contracts and rate lock agreements, with maximum remaining maturities of approximately 12 months as of the dates indicated below, were as follows:
As of As of
(In thousands) March 31, 2024 June 30, 2023
Cash flow hedge contracts - foreign currency
Purchase $ 472,467  $ 218,315 
Sell $ 81,828  $ 123,951 
Net investment hedge contracts - foreign currency
Sell $ 210,918  $ 87,157 
Other foreign currency hedge contracts
Purchase $ 589,764  $ 527,349 
Sell $ 368,664  $ 204,902 
The locations and fair value of our derivatives reported in our Condensed Consolidated Balance Sheets as of the dates indicated below were as follows:
  Asset Derivatives Liability Derivatives
Balance Sheet As of As of Balance Sheet As of As of
  Location March 31, 2024 June 30, 2023 Location March 31, 2024 June 30, 2023
(In thousands) Fair Value Fair Value
Derivatives designated as hedging instruments
Foreign exchange contracts Other current assets $ 9,967  $ 24,498  Other current liabilities $ (2,329) $ (442)
Total derivatives designated as hedging instruments 9,967  24,498  (2,329) (442)
Derivatives not designated as hedging instruments
Foreign exchange contracts Other current assets 25,871  11,214  Other current liabilities (14,387) (11,664)
Total derivatives not designated as hedging instruments 25,871  11,214  (14,387) (11,664)
Total derivatives $ 35,838  $ 35,712  $ (16,716) $ (12,106)
The changes in AOCI, before taxes, related to derivatives for the indicated periods were as follows:
Three Months Ended March 31, Nine Months Ended March 31,
(In thousands) 2024 2023 2024 2023
Beginning AOCI $ 66,805  $ 65,721  $ 81,611  $ 77,018 
Amount reclassified to earnings as net gains (7,604) (2,824) (23,665) (25,960)
Net change in unrealized gains 11,153  6,814  12,408  18,653 
Ending AOCI $ 70,354  $ 69,711  $ 70,354  $ 69,711 
Offsetting of Derivative Assets and Liabilities
We present derivatives at gross fair values in the Condensed Consolidated Balance Sheets. We have entered into arrangements with each of our counterparties, which reduce credit risk by permitting net settlement of transactions with the same counterparty under certain conditions. The information related to the offsetting arrangements for the periods indicated was as follows:
As of March 31, 2024 Gross Amounts of Derivatives Not Offset in the Condensed Consolidated Balance Sheets
(In thousands)
Gross Amounts of Derivatives
Gross Amounts of Derivatives Offset in the Condensed Consolidated Balance Sheets
Net Amount of Derivatives Presented in the Condensed Consolidated Balance Sheets
 Financial Instruments Cash Collateral Received Net Amount
Derivatives - assets $ 35,838  $ —  $ 35,838  $ (14,809) $ —  $ 21,029 
Derivatives - liabilities $ (16,716) $ —  $ (16,716) $ 14,809  $ —  $ (1,907)
As of June 30, 2023 Gross Amounts of Derivatives Not Offset in the Condensed Consolidated Balance Sheets
(In thousands)
Gross Amounts of Derivatives
Gross Amounts of Derivatives Offset in the Condensed Consolidated Balance Sheets
Net Amount of Derivatives Presented in the Condensed Consolidated Balance Sheets
 Financial Instruments Cash Collateral Received Net Amount
Derivatives - assets $ 35,712  $ —  $ 35,712  $ (8,968) $ —  $ 26,744 
Derivatives - liabilities $ (12,106) $ —  $ (12,106) $ 8,968  $ —  $ (3,138)