DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

12 Months Ended

Sep. 30, 2014

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

NOTE 11—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

In order to manage our exposure to fluctuations in interest and foreign currency exchange rates we utilize derivative financial instruments such as forward starting swaps and foreign currency forwards. We do not use any derivative financial instruments for trading or other speculative purposes.

All derivatives are recorded at fair value, however, the classification of gains and losses resulting from changes in the fair values of derivatives are dependent on the intended use of the derivative and its resulting designation. If a derivative is designated as a fair value hedge, then a change in the fair value of the derivative is offset against the change in the fair value of the underlying hedged item and only the ineffective portion of the hedge, if any, is recognized in earnings. If a derivative is designated as a cash flow hedge, then the effective portion of a change in the fair value of the derivative is recognized as a component of accumulated other comprehensive income until the underlying hedged item is recognized in earnings, or the forecasted transaction is no longer probable of occurring. If a derivative does not qualify as a highly effective hedge, any change in fair value is immediately recognized in earnings. We formally document all hedging relationships for all derivative hedges and the underlying hedged items, as well as the risk management objectives and strategies for undertaking the hedge transactions. We classify the fair value of all derivative contracts as current or non- current assets or liabilities, depending on the realized and unrealized gain or loss position of the hedged contract at the balance sheet date, and the timing of future cash flows. The cash flows from derivatives treated as hedges are classified in the Consolidated Statements of Cash Flows in the same category as the item being hedged.

The following table shows the notional principal amounts of our outstanding derivative instruments as of September 30, 2014 and 2013 (in thousands):

	Notional Principal
September 30,	2014		2013
Instruments designated as accounting hedges:
Foreign currency forwards	$	249,628	$	231,051
Forward starting swap	—		58,415
Instruments not designated as accounting hedges:
Foreign currency forwards	$	136,955	$	130,687

Included in the amounts not designated as accounting hedges above at September 30, 2014 and 2013 are foreign currency forwards with notional principal amounts of $132.1 million and $128.1 million, respectively, that have been designed to manage exposure to foreign currency exchange risks, and for which the gains or losses of the changes in fair value of the forwards has approximately offset an equal and opposite amount of gains or losses related to the foreign currency exposure.

The notional principal amounts for outstanding derivative instruments provide one measure of the transaction volume outstanding and do not represent the amount of the Company’s exposure to credit or market loss. Credit risk represents 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 interest or currency exchange rates at each respective date. The Company’s exposure to credit loss and market risk will vary over time as a function of interest and currency exchange rates. The amount of credit risk from derivative instruments and hedging activities was not material for the fiscal years ended September 30, 2014 and 2013. Although the table above reflects the notional principal amounts of the Company’s forward starting swap and foreign exchange instruments, it does not reflect the gains or losses associated with the exposures and transactions that the forward starting swap and foreign exchange instruments are intended to hedge. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments.

The Company generally enters into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the same counterparty. The Company presents its derivative assets and derivative liabilities at their gross fair values. The Company did not have any derivative instruments with credit-risk related contingent features that would require it to post collateral as of September 30, 2014 or 2013.

The table below presents the fair value of the Company’s derivative financial instruments that qualify for hedge accounting as well as their classification on the consolidated balance sheets as of September 30, 2014 and 2013 (in thousands):

		Fair Value
		September 30,
	Balance Sheet Location	2014		2013
Asset derivatives:
Foreign currency forwards	Other current assets	$	7,389	$	1,597
Foreign currency forwards	Other noncurrent assets	5,920		4,957
Forward starting swap	Other noncurrent assets	—		1,139
		$	13,309	$	7,693
Liability derivatives:
Foreign currency forwards	Other current liabilities	$	6,645	$	2,360
Foreign currency forwards	Other noncurrent liabilities	5,878		5,366
Total		$	12,523	$	7,726

The tables below present gains and losses recognized in OCI for the years ended September 30, 2014, 2013, and 2012 related to derivative financial instruments designated as cash flow hedges, as well as the amount of gains and losses reclassified into earnings during those periods (in thousands):

Years ended September 30,	2014				2013
Derivative Type	Gains (losses) recognized in OCI		Gains (losses) reclassified into earnings - Effective Portion		Gains (losses) recognized in OCI		Gains (losses) reclassified into earnings - Effective Portion
Foreign currency forwards	$	820	$	330	$	4,581	$	(1,231	)
Forward starting swap	—		—		1,230		—
	$	820	$	330	$	5,811	$	(1,231	)

The amount of gains and losses from derivative instruments and hedging activities classified as not highly effective did not have a material impact on the results of operations for the years ended September 30, 2014, 2013, or 2012. The amount of estimated unrealized net losses from cash flow hedges which are expected to be reclassified to earnings in the next twelve months is $0.5 million, net of income taxes.

Foreign currency forwards

In order to limit our exposure to foreign currency exchange rate risk we generally hedge those commitments greater than $50,000 by using foreign currency exchange forward and option contracts that are denominated in currencies other than the functional currency of the subsidiary responsible for the commitment, typically the British pound, Canadian dollar, Singapore dollar, euro, Swedish krona, New Zealand dollar and Australian dollar. These contracts are designed to be effective hedges regardless of the direction or magnitude of any foreign currency exchange rate change, because they result in an equal and opposite income or cost stream that offsets the change in the value of the underlying commitment.

Forward starting swap

In July 2012 we entered into a forward-starting 10-year swap contract with a bank to reduce the interest rate variability exposure of the projected interest cash flows on a planned debt issuance to finance a contract in our CTS segment. The accrual period of the swap contract was designed to match the tenor of the planned debt issuance. Through the end of fiscal 2013, the forward starting swap was deemed to be a highly effective cash flow hedge, and changes in the fair value of the forward starting swap were recorded in other comprehensive income. In fiscal 2014, we determined that the planned issuance of debt was no longer probable; therefore, the forward starting swap was deemed to be ineffective. As such, in 2014 amounts previously reported in accumulated other comprehensive income related to this forward starting swap were reclassified into earnings, and subsequent changes in the fair value of the forward starting swap were recognized in earnings, within the other income (expense) line item. During 2014 the total net gain recognized on the forward starting swap was $0.2 million, and on July 1, 2014, at the termination date of the forward starting swap, we settled the forward starting swap and received $0.2 million from the counterparty.