Derivative Instruments and Hedging Activities

6 Months Ended

Mar. 31, 2016

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 for periods typically up to three years. 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 loss 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 Condensed 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 March 31, 2016 and September 30, 2015 (in thousands):

	Notional Principal
	March 31, 2016		September 30, 2015
Instruments designated as accounting hedges:
Foreign currency forwards	$	172,127	$	217,796
Instruments not designated as accounting hedges:
Foreign currency forwards	$	153,137	$	142,820

Included in the amounts not designated as accounting hedges above at March 31, 2016 and September 30, 2015 are foreign currency forwards with notional principal amounts of $126.0 million and $117.8 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 periods ended March 31, 2016 and September 30, 2015. Although the table above reflects the notional principal amounts of the Company’s foreign exchange instruments, it does not reflect the gains or losses associated with the exposures and transactions that the 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 March 31, 2016 or September 30, 2015.

The table below presents the fair value of our derivative financial instruments that qualify for hedge accounting as well as their classification in the Condensed Consolidated Balance Sheets as of March 31, 2016 and September 30, 2015 (in thousands):

		Fair Value
	Balance Sheet Location	March 31, 2016		September 30, 2015
Asset derivatives:
Foreign currency forwards	Other current assets	$	13,613	$	11,321
Foreign currency forwards	Other noncurrent assets		841		13,909
		$	14,454	$	25,230
Liability derivatives:
Foreign currency forwards	Other current liabilities	$	13,002	$	9,370
Foreign currency forwards	Other noncurrent liabilities		918		13,909
Total		$	13,920	$	23,279

The tables below present gains and losses recognized in other comprehensive loss for the three and six months ended March 31, 2016 and 2015 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):

Six Months Ended

March 31, 2016

March 31, 2015

March 31, 2016

March 31, 2015

Gains (losses)

Gains (losses)

Gains (losses)

reclassified into

reclassified into

Gains (losses) recognized - Ineffective

recognized in

earnings -

Gains (losses)

earnings -

Portion and amount excluded from

Derivative Type

OCI

Effective Portion

recognized in OCI

Effective Portion

Location of gain (loss)

effectiveness testing

Foreign currency forwards

$

(1,417)

$

883

$

152

$

1,336

Other income (expense), net

$

(121)

$

—

Three Months Ended

March 31, 2016

March 31, 2015

March 31, 2016

March 31, 2015

Gains (losses)

Gains (losses)

Gains (losses)

reclassified into

reclassified into

Gains (losses) recognized - Ineffective

recognized in

earnings -

Gains (losses)

earnings -

Portion and amount excluded from

Derivative Type

OCI

Effective Portion

recognized in OCI

Effective Portion

Location of gain (loss)

effectiveness testing

Foreign currency forwards

$

30

$

(607)

$

(142)

$

604

Other income (expense), net

$

39

$

—

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 three and six months ended March 31, 2016 and 2015. The amount of estimated unrealized net gains from cash flow hedges which are expected to be reclassified to earnings in the next twelve months is $0.4 million, net of income taxes.