Fair Value of Financial Instruments

3 Months Ended

Dec. 31, 2015

Fair Value of Financial Instruments

Fair Value of Financial Instruments

7. Fair Value of Financial Instruments

        Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

•           Level 1—Quoted prices in active markets for identical assets or liabilities.

•           Level 2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

•           Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

        The following table summarizes the assets / (liabilities) measured at fair value on a recurring basis at December 31, 2015:

	Level 1		Level 2		Level 3
Current (included in accrued expenses and other current liabilities):
Cross currency swaps	$	—	$	—	$	(2,174	)
Non-current (included in other assets):
Cross currency swaps	$	—	$	—	$	14,145

        The following table summarizes the assets / (liabilities) measured at fair value on a recurring basis at September 30, 2015:

	Level 1		Level 2		Level 3
Current (included in accrued expenses and other current liabilities):
Cross currency swaps	$	—	$	—	$	(2,715	)
Non-current (included in other assets):
Cross currency swaps	$	—	$	—	$	6,852

        The Company's swap contracts are measured at fair value based on a market approach valuation technique. With the market approach, fair value is derived using prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. As non-performance risk of the Company and the counterparty is present in all swap contracts and is a component of the estimated fair values, and is a significant input to the fair value for our cross currency swap contracts, the Company classifies these swap contracts as "Level 3" in the fair value hierarchy and, accordingly, records estimated fair value adjustments based on internal projections and views of those contracts. The performance risk for the cross currency swap contracts as a percentage of the unadjusted assets / (liabilities) ranged from 2.0% to 3.0% (2.7% weighted average) as of December 31, 2015 and 6.1% to 11.4% (9.5% weighted average) as of September 30, 2015.

        The following table shows the Level 3 activity related to our cross currency swaps for the three months ended December 31, 2015 and 2014:

	Three Months Ended December 31,
	2015		2014
Beginning balance:	$	4,137	$	(18,630	)
Unrealized gain on cross currency swaps		7,834		11,748
Ending balance:	$	11,971	$	(6,882	)

Interest Rate Swaps

        During March 2011, we entered into three interest rate swap contracts to fix the LIBOR indexed interest rates on a portion of our senior secured credit facilities until the indicated expiration dates of these swap contracts. Each swap contract had a declining notional amount with a fixed interest rate of 1.92% for a four-year term and matured in December 2014. Under the terms of the swap contracts, variable interest payments for a portion of our senior secured credit facilities were swapped for fixed interest payments. These interest rate swap contracts were designated as a cash flow hedge of the variable interest payments on a portion of our term loan debt. Hedge effectiveness was assessed based on the overall changes in the fair value of the interest rate swap contracts. Hedge ineffectiveness was insignificant, and was recorded in Miscellaneous, net.

Cross Currency Swaps

        To manage the potential exposure from adverse changes in currency exchange rates, specifically the British pound sterling, arising from our net investment in British pound sterling denominated operations, we entered into three cross currency swap contracts in December 2010, to hedge a portion of the net investment in our British pound denominated foreign operations. The aggregate notional amount of the swap contracts is £194,200 British pounds sterling (approximately $300,000 U.S. dollars), with a forward rate of 1.565, and a termination date of September 30, 2017.

        These cross currency contracts were designated as a net investment hedge to the net investment in our British pound sterling denominated operations. Hedge effectiveness is assessed based on the overall changes in the fair value of the cross currency swap contracts. Any potential hedge ineffectiveness is measured using the hypothetical derivative method and is recognized in current earnings. Hedge ineffectiveness loss for the three months ended December 31, 2015 and 2014 was $751 and $1,934, respectively, and is recorded in Miscellaneous, net.

        The following table shows the effect, net of tax impact, of the Company's derivative instruments designated as cash flow and net investment hedging instruments:

	Three Months Ended December 31,
	2015				2014
	Amount of Gain or (Loss) Recognized in Accumulated OCI on Derivative (Effective Portion)		Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)		Amount of Gain or (Loss) Recognized in Accumulated OCI on Derivative (Effective Portion)			Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
Cash Flow Hedges:
Interest rate swaps	$	—	$	—	$	(438	)	$	(1,159	)
Net Investment Hedges:
Cross currency swaps		5,467		—		9,171			—
Total	$	5,467	$	—	$	8,733		$	(1,159	)

Notes

        The fair value of the Notes, based on quoted market prices (Level 2), was approximately $656,000 as of December 31, 2015.

Completion Loan Notes (See Note 2)

        The face value of the completion loan notes issued in connection with the acquisition of Doctor Organic (see Note 2) is £20,000 (approximately $30,166). These notes were recorded at fair value in our Consolidated Balance Sheet on December 7, 2015, the date of acquisition of Doctor Organic, and as a result their carrying value continues to approximate fair value as of December 31, 2015.

Term loan B-2

        The face amount of the term loan B-2 is $1,450,559, which approximates fair value based on Level 2 inputs, as this loan accrues interest at a variable interest rate.

Assets Re-measured at Fair Value on a Non-recurring Basis

        In connection with the sale of Vitamin World, the Company performed an impairment analysis with respect to the assets that will be sold, resulting in an impairment of $11,656 relating to the furniture and fixtures at the retail locations. This impairment analysis utilized unobservable inputs primarily with respect to the future cash flows of the Vitamin World business as well as potential cash flows from a sale transaction. (See Note 14).