DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

We maintain operations in various countries outside of the United States and have foreign subsidiaries that manufacture and sell our products in various global markets. The majority of our sales are transacted in U.S. dollars. However, we do generate revenues in other currencies, primarily the Euro, Japanese Yen, South Korean Won and Chinese Renminbi (RMB). As a result, our earnings, cash flows and cash balances are exposed to fluctuations in foreign currency exchange rates. We attempt to limit these exposures through financial market instruments. We utilize derivative instruments, primarily forward contracts with maturities of two months or less, to manage our exposure associated with anticipated cash flows and net asset and liability positions denominated in foreign currencies. Gains and losses on the forward contracts are mitigated by gains and losses on the underlying instruments. We do not use derivative financial instruments for speculative or trading purposes. The credit risk amounts represent the Company’s gross exposure to potential accounting loss on derivative instruments that are outstanding or unsettled if all counterparties failed to perform according to the terms of the contract, based on then-current currency rates at each respective date.

On August 1, 2016, we purchased forward contracts totaling 670.0 million Euro, with a value date of November 30, 2016, to limit our foreign exchange risk related to the commitment of our Euro Term Loan (denominated in Euros) in an amount of the Euro equivalent of $750.0 million to finance the U.S. dollar payment for our acquisition of Rofin. In the fourth quarter of fiscal 2016, we recognized an unrealized loss of $2.2 million on these forward contracts. In the first quarter of fiscal 2017, we settled these forward contracts at a net gain of $9.1 million, resulting in a realized gain of $11.3 million in the first quarter of fiscal 2017.

Non-Designated Derivatives

The outstanding notional contract and fair value asset (liability) amounts of non-designated hedge contracts, with maximum maturity of two months, are as follows (in thousands):



	U.S. Notional Contract Value						U.S. Fair Value
	June 30, 2018			September 30, 2017			June 30, 2018			September 30, 2017
Euro currency hedge contracts
Purchase	$	122,343		$	109,641		$	(359	)	$	(1,397	)
Sell	$	(5,492	)	$	—		$	72		$	—

Japanese Yen currency hedge contracts
Sell	$	(24,052	)	$	(25,126	)	$	459		$	591

South Korean Won currency hedge contracts
Sell	$	(36,772	)	$	(28,996	)	$	1,204		$	551

Chinese RMB currency hedge contracts
Purchase	$	6,589		$	—		$	(222	)	$	—
Sell	$	(49,399	)	$	(13,744	)	$	1,415		$	128

Singapore Dollar currency hedge contracts
Purchase	$	33,351		$	3,668		$	(598	)	$	(4	)

Other foreign currency hedge contracts
Purchase	$	2,783		$	—		$	(34	)	$	—
Sell	$	(3,508	)	$	(2,971	)	$	41		$	(74	)

The fair value of our derivative instruments is included in prepaid expenses and other assets and in other current liabilities in our Condensed Consolidated Balance Sheets. See Note 4, “Fair Values.”

During the three and nine months ended June 30, 2018, we recognized a loss of $4.6 million and a loss of $6.2 million, respectively, in other income (expense) for derivative instruments not designated as hedging instruments. During the three and nine months ended July 1, 2017, we recognized a gain of $5.6 million and a gain of $15.0 million, respectively, in other income (expense) for derivative instruments not designated as hedging instruments.

Designated Derivatives

Cash flow hedges related to anticipated transactions are designated and documented at the inception of the hedge when we enter into contracts for specific future transactions. Cash flow hedges are evaluated for effectiveness quarterly. The effective portion of the gain or loss on these hedges is reported as a component of OCI in stockholder’s equity and is reclassified into earnings when the underlying transaction affects earnings. We had no cash flow hedges outstanding at June 30, 2018 or September 30, 2017. Changes in the fair value of currency forward contracts due to changes in time value are excluded from the assessment of effectiveness and recognized in other income (expense) as incurred. We classify the cash flows from the foreign exchange forward contracts that are accounted for as cash flow hedges in the same section as the underlying item, primarily within cash flows from operating activities since we do not designate our cash flow hedges as investing or financing activities.

During the three and nine months ended June 30, 2018 and July 1, 2017, we did not have any activities related to designated cash flow hedges.

Master Netting Arrangements

To mitigate credit risk in derivative transactions, we enter into master netting arrangements that allow each counterparty in the arrangements to net settle amounts of multiple and separate derivative transactions under certain conditions. We present the fair value of derivative assets and liabilities within our condensed consolidated balance sheet on a gross basis even when derivative transactions are subject to master netting arrangements and may otherwise qualify for net presentation. The impact of netting derivative assets and liabilities is not material to our financial position for any of the periods presented. Our derivative contracts do not contain any credit risk related contingent features and do not require collateral or other security to be furnished by us or the counterparties.