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 Consolidated Balance Sheets 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 decreased each quarter by an amount in proportion to our scheduled quarterly principal payment of debt. The interest rate swap agreements were terminated during the third quarter of fiscal 2018 in conjunction with the payoff of the Term Loan.

We designated these swap agreements as cash flow hedges pursuant to ASC 815, "Derivatives and Hedging". As cash flow hedges, unrealized gains were recognized as assets and unrealized losses were recognized as liabilities. Unrealized gains and losses were 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 was recorded as a component of accumulated other comprehensive income or loss, while the ineffective portion was recorded as a component of interest expense. Changes in the method by which we paid interest from one-month LIBOR to another rate of interest could create ineffectiveness in the swaps and result in amounts which were reclassified from other comprehensive income into net income. Hedge effectiveness was tested quarterly to determine if hedge treatment continued to be appropriate.

Foreign Currency Contracts Not Designated as Hedges

On a regular basis, 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. These 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, 2018 and September 30, 2017, the notional amounts of the forward contracts we held to purchase U.S. dollars in exchange for foreign currencies were $7,907 and $8,176, respectively, and the notional amounts of forward contracts we held to sell U.S. dollars in exchange for foreign currencies were $20,825 and $24,295, respectively.

Net Investment Hedge - Foreign Exchange Contracts

In September 2017, we entered into two forward foreign exchange contracts in an effort to protect the net investment of our South Korean subsidiary against potential adverse changes resulting from currency fluctuations in the Korean won. We entered into forward contracts to sell 100 billion Korean won and buy U.S. dollars, settling in September 2022. We had designated these forward contracts as an effective net investment hedge. As a result of cash repatriation facilitated by the Tax Act, the Company terminated these foreign exchange contracts in the third quarter of fiscal 2018.

Amounts recognized in the Consolidated Statements of Comprehensive Income for our net investment hedge during the nine months ended June 30, 2018 were as follows:

Balance at September 30, 2017	$	920
Loss on net investment hedge		8,440
Tax benefit		(2,183	)
Balance at June 30, 2018	$	7,177

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

		Asset Derivatives				Liability Derivatives
	Consolidated Balance Sheet Location	June 30, 2018		September 30, 2017		June 30, 2018		September 30, 2017
Derivatives designated as hedging instruments
Interest rate swap contracts	Other long-term assets	$	-	$	117	$	-	$	-
	Accrued expenses, income taxes payable and other current liabilities	$	-	$	-	$	-	$	31

Foreign exchange contracts designated as net investment hedge	Other long-term liabilities	$	-	$	-	$	-	$	1,442

Derivatives not designated as hedging instruments
Foreign exchange contracts	Prepaid expenses and other current assets	$	8	$	146	$	-	$	-
	Accrued expenses, income taxes payable and other current liabilities	$	-	$	-	$	44	$	408

The following table summarizes the effect of our derivative instruments on our Consolidated Statements of Income for the three and nine months ended June 30, 2018 and 2017:

		Gain (Loss) Recognized in Statement of Income
		Three Months Ended						Nine Months Ended
	Statement of Income Location	June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017
Derivatives not designated as hedging instruments
Foreign exchange contracts	Other income, net	$	(1,080	)	$	(235	)	$	(1,002	)	$	(1,709	)

We recorded a $532 gain in other income (expense) on our Consolidated Statements of Income as part of the termination of interest rate swap agreements.