Derivative Instruments and Hedging Activities

6 Months Ended

Mar. 31, 2020

Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities

Note 14 — 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 five 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, both the effective and ineffective portions of a change in the fair value of the derivative are 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. 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 noncurrent 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, 2020 and September 30, 2019 (in thousands):

	Notional Principal
	March 31, 2020		September 30, 2019
Instruments designated as accounting hedges:
Foreign currency forwards	$	137,113	$	143,164
Interest rate swaps		95,000		95,000
Instruments not receiving hedge accounting treatment:
Foreign currency forwards	$	34,303	$	24,220

Included in the amounts not receiving hedge accounting treatment at March 31, 2020 and September 30, 2019 were non-

designated foreign currency forwards with notional principal amounts of $34.1 million and $14.0 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 have approximately offset an equal and opposite amount of gains or losses related to the foreign currency exposure. These foreign currency forward contracts resulted in unrealized losses of $2.6 million and unrealized gains of $0.3 million for the three months ended March 31, 2020 and 2019, respectively, and resulted in unrealized losses of $1.8 million for the six months ended March 31, 2020. There were no material unrealized gains or losses for the six months ended March 31, 2019. Unrealized gains or losses are included in other income (expense), net in our condensed consolidated statements of operations.

In conjunction with the agreements related to the construction and leasing of two new buildings on our existing corporate campus, in August 2019, we entered into pay-fixed/receive-variable interest rate swaps with a group of financial institutions to mitigate variable interest rate risk associated with these future lease obligations. The interest rate swaps contain forward starting notional principal amounts which align with our expected lease payments. These interest rate swaps were designated as effective cash flow hedges and as such, unrealized gains (losses) are included in accumulated other comprehensive income (loss). Unrealized losses as a result of changes in the fair value of the interest rate swaps were $5.0 million and $3.6 million for the three and six months ended March 31, 2020, respectively.

On April 1, 2020, in conjunction with the Credit Facility described in Note 9, we entered into pay-fixed/receive-variable interest rate swaps with a group of financial institutions to mitigate variable interest rate risk associated with the Credit Facility. The interest rate swaps contain forward starting notional principal amounts of $550 million and will be designated as effective cash flow hedges in the third quarter of fiscal 2020.

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 March 31, 2020 or September 30, 2019. 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 March 31, 2020 or September 30, 2019.

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 (in thousands):

		Fair Value
	Balance Sheet Location	March 31, 2020		September 30, 2019
Asset derivatives:
Foreign currency forwards	Other current assets	$	5,540	$	2,635
Foreign currency forwards	Other assets		4,061		619
Forward starting swap	Other assets		—		240
Total		$	9,601	$	3,494
Liability derivatives:
Foreign currency forwards	Other current liabilities	$	1,657	$	529
Foreign currency forwards	Other noncurrent liabilities		1,418		228
Forward starting swap	Other noncurrent liabilities		3,605		—
Total		$	6,680	$	757

The tables below present gains and losses recognized in other comprehensive income (loss) related to derivative financial instruments designated as cash flow hedges, as well as the amount of gains and losses reclassified into earnings (in thousands):

	Three Months Ended
	March 31, 2020				March 31, 2019
	Gains (losses)		Gains (losses)				Gains (losses)
	recognized in		reclassified into		Gains (losses)		reclassified into
Derivative Type	OCI		earnings		recognized in OCI		earnings
Foreign currency forwards	$	1,438	$	1,306	$	1,079	$	405
	Six Months Ended
	March 31, 2020				March 31, 2019
	Gains (losses)		Gains (losses)				Gains (losses)
	recognized in		reclassified into		Gains (losses)		reclassified into
Derivative Type	OCI		earnings		recognized in OCI		earnings
Foreign currency forwards	$	(177)	$	1,273	$	(822)	$	373

Foreign currency forwards designated as accounting hedges had realized gains of $2.7 million and $2.8 million for the three- and six-month periods ended March 31, 2020, respectively.

The amount of unrealized 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-month periods ended March 31, 2020 or 2019. The amount of estimated unrealized net gains from cash flow hedges which are expected to be reclassified to earnings in the next 12 months is $2.8 million, net of income taxes.