Derivative Instruments and Hedging Activities

3 Months Ended

Dec. 31, 2017

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 exchange 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 income (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 December 31, 2017 and September 30, 2017 (in thousands):

	Notional Principal
	December 31, 2017		September 30, 2017
Instruments designated as accounting hedges:
Foreign currency forwards	$	123,575	$	125,486
Instruments not designated as accounting hedges:
Foreign currency forwards	$	43,264	$	35,117

Included in the amounts not designated as accounting hedges above at December 31, 2017 and September 30, 2017 are foreign currency forwards with notional principal amounts of $28.8 million and $18.5 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. Unrealized losses of $0.3 million and $3.3 million were recognized in other income (expense), net for the three months ended December 31, 2017 and 2016, respectively, related to these forwards.

The notional principal amounts for outstanding derivative instruments provide one measure of the transaction volume outstanding and do not represent the amount of our exposure to credit or market loss. Credit risk represents our 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. Our 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 December 31, 2017 and September 30, 2017. Although the table above reflects the notional principal amounts of our 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.

We generally enter into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the same counterparty. We present our derivative assets and derivative liabilities at their gross fair values. We did not have any derivative instruments with credit-risk related contingent features that would require us to post collateral as of December 31, 2017 or September 30, 2017.

The table below presents the fair value of our derivative financial instruments that qualify for hedge accounting as well as their classification on the Condensed Consolidated Balance Sheets as of December 31, 2017 and September 30, 2017 (in thousands):

		Fair Value
	Balance Sheet Location	December 31, 2017		September 30, 2017
Asset derivatives:
Foreign currency forwards	Other current assets	$	2,416	$	2,591
Foreign currency forwards	Other noncurrent assets		443		1,128
		$	2,859	$	3,719
Liability derivatives:
Foreign currency forwards	Other current liabilities	$	2,601	$	3,456
Foreign currency forwards	Other noncurrent liabilities		443		1,128
Total		$	3,044	$	4,584

The tables below present gains and losses recognized in other comprehensive loss for the three months ended December 31, 2017 and 2016 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):

	Three Months Ended
	December 31, 2017				December 31, 2016
			Gains (losses)				Gains (losses)
	Gains (losses)		reclassified into				reclassified into
	recognized in		earnings -		Gains (losses)		earnings -
Derivative Type	OCI		Effective Portion		recognized in OCI		Effective Portion
Foreign currency forwards	$	656	$	(774)	$	(614)	$	1,331

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-month periods ended December 31, 2017 and 2016. 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 $0.1 million, net of income taxes.