Derivative Instruments and Hedging Activities

6 Months Ended

Mar. 31, 2021

Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities

Note 13 — 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.

The following table shows the notional principal amounts of our outstanding derivative instruments as of March 31, 2021 and September 30, 2020 (in thousands):

	Notional Principal
	March 31, 2021		September 30, 2020
Instruments receiving hedge accounting treatment:
Foreign currency forwards	$	128,920	$	92,931
Interest rate swaps		595,000		595,000
Instruments not receiving hedge accounting treatment:
Foreign currency forwards	$	4,538	$	4,298

Included in the amounts not receiving hedge accounting treatment at March 31, 2021 and September 30, 2020 were foreign currency forwards with notional principal amounts of $3.5 million and $4.3 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 $0.2 million and $2.6 million for the three months ended March 31, 2021 and 2020, respectively, and resulted in unrealized gains of $0.6 million and unrealized losses of $1.8 million for the six months ended March 31, 2021 and 2020, respectively. Unrealized gains or losses are included in other income (expense), net in our condensed consolidated statements of operations.

We hold pay-fixed/receive-variable interest rate swaps with a group of financial institutions to mitigate variable interest rate risk associated with the lease obligations for our two new buildings located on our existing corporate campus. At March 31, 2021 and September 30, 2020, the outstanding notional principal amounts on these interest rate swaps were $95.0 million 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). As a result of changes in the fair value of the interest rate swaps, unrealized gains were $2.6 million and unrealized losses were $5.0 million for the three months ended March 31, 2021, and 2020, respectively, and resulted in unrealized gains of $2.7 million and unrealized losses of $3.6 million for the six months ended March 31, 2021 and 2020, respectively.

In April 2020, we entered into interest rate swaps with a group of financial institutions to mitigate variable interest rate risk associated with the Credit Facility. At March 31, 2021 and September 30, 2020, the interest rate swaps contain outstanding notional principal amounts of $500.0 million and were designated as effective cash flow hedges, and as such, unrealized gains (losses) are included in accumulated other comprehensive income (loss). Unrealized gains as a result of changes in the fair value of the interest rate swaps were $7.3 million and $8.3 million for the three and six months ended March 31, 2021, respectively.

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 as of March 31, 2021 and September 30, 2020. 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, 2021 or September 30, 2020.

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, 2021		September 30, 2020
Asset derivatives:
Foreign currency forwards	Other current assets	$	2,177	$	1,398
Foreign currency forwards	Other assets		229		222
Total		$	2,406	$	1,620
Liability derivatives:
Foreign currency forwards	Accrued compensation and current liabilities	$	6,350	$	4,557
Foreign currency forwards	Other noncurrent liabilities		1,344		866
Interest rate swaps	Other noncurrent liabilities		3,193		13,204
Total		$	10,887	$	18,627

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, 2021				March 31, 2020
	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	$	434	$	295	$	1,438	$	1,306
Interest rate swaps		9,878		—		—		—
	$	10,312	$	295	$	1,438	$	1,306
	Six Months Ended
	March 31, 2021				March 31, 2020
	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	$	(665)	$	550	$	(177)	$	1,273
Interest rate swaps		11,036		—		—		—
Total	$	10,371	$	550	$	(177)	$	1,273

Foreign currency forwards designated as accounting hedges had realized losses of $0.2 million and unrealized gains of $2.7 million for the three-months ended March 31, 2021 and 2020, respectively. The amounts of realized gains were immaterial for the six-months ended March 31, 2021 and were $2.8 million for the six-months ended March 31, 2020.

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, 2021 or 2020. 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 $3.0 million, net of income taxes.