DERIVATIVE FINANCIAL INSTRUMENTS

9 Months Ended

Jun. 30, 2017

DERIVATIVE FINANCIAL INSTRUMENTS [Abstract]

DERIVATIVE FINANCIAL INSTRUMENTS

9. DERIVATIVE FINANCIAL INSTRUMENTS

We are exposed to various market risks, including risks associated with interest rates and foreign currency exchange rates.  We enter into certain derivative transactions to mitigate the volatility associated with these exposures.  We have policies in place that define acceptable instrument types we may enter into and we have established controls to limit our market risk exposure.  We do not use derivative financial instruments for trading or speculative purposes.  In addition, all derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value on a gross basis.

Cash Flow Hedges – Interest Rate Swap Agreements

In the first quarter of fiscal 2015, we entered into floating-to-fixed interest rate swap agreements to hedge the variability in LIBOR-based interest payments on $86,406 of our outstanding variable rate debt.  The notional amount of the swaps decreases each quarter by an amount in proportion to our scheduled quarterly principal repayment of debt. The notional value of the swaps was $73,828 as of June 30, 2017, and the swaps are scheduled to expire on June 27, 2019.

We have designated these swap agreements as cash flow hedges pursuant to ASC 815, "Derivatives and Hedging".  As cash flow hedges, unrealized gains are recognized as assets and unrealized losses are recognized as liabilities.  Unrealized gains and losses are designated as effective or ineffective based on a comparison of the changes in fair value of the interest rate swaps and changes in fair value of the underlying exposures being hedged.  The effective portion is recorded as a component of accumulated other comprehensive income or loss, while the ineffective portion is recorded as a component of interest expense.  Changes in the method by which we pay interest from one-month LIBOR to another rate of interest could create ineffectiveness in the swaps, and result in amounts being reclassified from other comprehensive income into net income.  Hedge effectiveness is tested quarterly to determine if hedge treatment continues to be appropriate.

Foreign Currency Contracts Not Designated as Hedges

Periodically we enter into forward foreign exchange contracts in an effort to mitigate the risks associated with currency fluctuations on certain foreign currency balance sheet exposures.  Our foreign exchange contracts do not qualify for hedge accounting; therefore, the gains and losses resulting from the impact of currency exchange rate movements on our forward foreign exchange contracts are recognized as other income or expense in the accompanying consolidated income statements in the period in which the exchange rates change.  As of June 30, 2017 and September 30, 2016, the notional amounts of the forward contracts we held to purchase U.S. dollars in exchange for other international currencies were $6,304 and $8,858, respectively, and the notional amounts of forward contracts we held to sell U.S. dollars in exchange for other international currencies were $20,145 and $15,635, respectively.

The fair value of our derivative instruments included in the Consolidated Balance Sheet, which was determined using level 2 inputs, was as follows:

		Asset Derivatives				Liability Derivatives
Balance Sheet Location		Fair Value at June 30, 2017		Fair Value at September 30, 2016		Fair Value at June 30, 2017		Fair Value at September 30, 2016
Derivatives designated as hedging instruments
Interest rate swap contracts	Other noncurrent assets	$	152	$	-	$	-	$	-
	Accrued expenses and other current liabilities	$	-	$	-	$	724	$	612
	Other long-term liabilities	$	-	$	-	$	-	$	655
Derivatives not designated as hedging instruments
Foreign exchange contracts	Prepaid expenses and other current assets	$	109	$	28	$	-	$	-
	Accrued expenses and other current liabilities	$	-	$	-	$	98	$	202

The following table summarizes the effect of our derivative instruments on our Consolidated Statement of Income for the three and nine months ended June 30, 2017 and 2016:

		Gain (Loss) Recognized in Statement of Income
		Three Months Ended							Nine Months Ended
Statement of Income Location		June 30, 2017				June 30, 2016			June 30, 2017				June 30, 2016
Derivatives not designated as hedging instruments
Foreign exchange contracts	Other income (loss), net		$	(235	)		$	440		$	(1,709	)		$	952

The interest rate swap agreements were deemed to be effective since inception, so there was no impact on our Consolidated Statement of Income. We recorded a $819 unrealized gain in accumulated comprehensive income during the nine months ended June 30, 2017 for these interest rate swaps.  During the next 12 months, we expect approximately $98 may be reclassified from accumulated other comprehensive income into interest expense related to our interest rate swaps based on projected rates using the LIBOR forward curve as of June 30, 2017.