Fair Value of Financial Instruments

Derivative Financial Instruments

We use derivative instruments primarily to manage exposures to foreign currency exchange rates and interest rates. Our primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with fluctuations in foreign exchange rates and changes in interest rates. Our derivatives expose us to credit risk to the extent that the counter-parties may be unable to meet the terms of the agreement. We, however, seek to mitigate such risks by limiting our counter-parties to major financial institutions. In addition, the potential risk of loss with any one counter-party resulting from this type of credit risk is monitored. Management does not expect material losses as a result of defaults by counter-parties.

Cash Flow Hedges of Interest Rate Risk

Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish these objectives, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for our making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. We have one interest rate swap agreement outstanding, which we have designated as a cash flow hedge, in order to reduce our exposure to variability in cash flows related to interest payments on a portion of our outstanding debt. The interest rate swap agreement has an amortizing notional amount, which was $325.0 million on March 31, 2018, and matures on September 30, 2019, giving us the contractual right to pay a fixed interest rate of 2.2625% plus the applicable margin under the term loan B facility (as defined in Note 6 below; see Note 6 for the applicable margin).

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) (AOCI) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the six months ended March 31, 2018, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized immediately in earnings. During the six months ended March 31, 2018, we did not record any hedge ineffectiveness in earnings. No portion of our interest rate swap agreements is excluded from the assessment of hedge effectiveness.

Amounts reported in AOCI related to derivatives and the related deferred tax are reclassified to interest expense as interest payments are made on our variable-rate debt. As of March 31, 2018, we expect to reclassify $0.3 million from accumulated other comprehensive gain and the related deferred tax to earnings as a decrease to interest expense over the next 12 months when the underlying hedged item impacts earnings.

Non-Designated Derivatives

On October 3 and October 5, 2016, we entered into two foreign currency forward contracts to partially reduce our exposure to foreign currency fluctuations for a subsidiary's net monetary assets, which are denominated in a foreign currency. Both foreign currency forward contracts expired on December 28, 2016. On January 6, 2017, we entered into one foreign currency forward contract to partially reduce our exposure to foreign currency fluctuations for a subsidiary's net monetary assets, which are denominated in a foreign currency. The foreign currency forward contract expired on March 30, 2017. The derivatives were not designated as a hedging instrument. The change in their fair value is recognized as periodic gain or loss in the other income (loss), net line of our consolidated statement of earnings and comprehensive income. We did not have foreign currency forward contracts as of March 31, 2018 and September 30, 2017.

The following table summarizes the notional principal amounts at March 31, 2018, and September 30, 2017 of our outstanding interest rate swap agreement discussed above (in thousands).



	Derivative Notional
	March 31, 2018		September 30, 2017
Instruments designated as accounting hedges:
Interest rate swap contract	$	325,000	$	375,000

The following table provides the location and fair value amounts of our financial instrument, which is reported in our consolidated balance sheets as of March 31, 2018 and September 30, 2017 (in thousands).



		Fair Value
	Balance Sheet Locations	March 31, 2018		September 30, 2017
Instrument designated as accounting hedge:
Interest rate swap contract	Other current assets	$	300	$	—
Interest rate swap contract	Other assets	400		—
Interest rate swap contract	Accrued expenses and other current liabilities	—		2,462
Interest rate swap contract	Other liabilities	—		903

The following table provides the losses of our cash flow hedging instruments (net of income tax benefit), which were transferred from AOCI to interest expense on our consolidated statement of comprehensive income during the three and six months ended March 31, 2018 and 2017 (in thousands).



	Location in Consolidated Statement of Comprehensive Income	Three Months Ended March 31,				Six Months Ended March 31,
		Three Months Ended March 31,				Six Months Ended March 31,
Cash Flow Hedge		2018		2017		2018		2017
Interest rate swap contracts	Interest expense, net	$	304	$	137	$	861	$	389

The following table provides the effective portion of the amount of gain recognized in other comprehensive income (net of income taxes) for the three and six months ended March 31, 2018 and 2017 (in thousands).



	Three Months Ended March 31,				Six Months Ended March 31,
	Three Months Ended March 31,				Six Months Ended March 31,
Cash Flow Hedge	2018		2017		2018		2017
Interest rate swap contracts	$	1,461	$	268	$	2,832	$	2,450

The following table provides a summary of changes to our AOCI related to our cash flow hedging instrument (net of income taxes) during the three and six months ended March 31, 2018 (in thousands).



AOCI - Unrealized Gain (Loss) on Hedging Instruments	Three Months Ended March 31, 2018			Six Months Ended March 31, 2018
Balance at beginning of period	$	(763	)	$	(2,133	)
Change in fair value of hedging instruments	1,157			1,970
Amounts reclassified to earnings	304			861
Net current period other comprehensive income	1,461			2,831
Balance at end of period	$	698		$	698

The following table provides the pretax effect of our derivative instruments not designated as hedging instruments on our consolidated statements of earnings and comprehensive income for the three and six months ended March 31, 2018 and 2017 (in thousands).



	Location in Consolidated Statement of Comprehensive Income	Three Months Ended March 31,				Six Months Ended March 31,
Instruments Not Designated As Hedging Instruments		Three Months Ended March 31,				Six Months Ended March 31,
Instruments Not Designated As Hedging Instruments		2018		2017		2018		2017
Foreign currency forward contracts	Other income (loss), net	$	—	$	752	$	—	$	(1,843	)

Other Financial Instruments

Our financial instruments consist of cash and cash equivalents, accounts receivable and payable, accrued expenses and other current liabilities, and a line of credit. The carrying amounts of these instruments approximate fair value because of their short-term duration. The fair value of the long-term debt instruments is determined using current applicable rates for similar instruments as of the balance sheet date, a Level 2 measurement (as defined below). The principal amounts and fair values of the debt instruments were as follows (in thousands):



	March 31, 2018				September 30, 2017
	Principal Amount		Fair Value		Principal Amount		Fair Value
Term loan A facility	$	370,000	$	367,410	$	380,000	$	376,960
Term loan B facility	440,562		429,989		440,562		428,667
Revolving facility	81,000		81,000		55,000		55,000
Total long-term debt	$	891,562	$	878,399	$	875,562	$	860,627

Fair Value Measurement

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To determine fair value, we primarily utilize reported market transactions and discounted cash flow analysis. We use a three-tier fair value hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs. The fair value hierarchy prioritizes the inputs to valuation techniques into three broad levels whereby the highest priority is given to Level 1 inputs and the lowest to Level 3 inputs. The three broad categories are:



Level 1:	Quoted prices in active markets for identical assets or liabilities.
Level 2:	Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.
Level 3:	Unobservable inputs for the asset or liability.

The definition of fair value includes the consideration of nonperformance risk. Nonperformance risk refers to the risk that an obligation (either by a counter party or us) will not be fulfilled. For financial assets traded in an active market (Level 1), the nonperformance risk is included in the market price. For certain other financial assets and liabilities (Level 2 and 3), our fair value calculations have been adjusted accordingly.

There were no transfers between the assets and liabilities under Level 1 and Level 2 during the six months ended March 31, 2018. The following tables provide the valuation hierarchy classification of assets and liabilities that are carried at fair value and measured on a recurring basis in our consolidated balance sheets as of March 31, 2018 and September 30, 2017 (in thousands).



March 31, 2018	Balance Sheet Locations	Total		Level 1		Level 2		Level 3

Instrument designated as accounting hedge:
Interest rate swap contract	Other current assets	$	300	$	—	$	300	$	—
Interest rate swap contract	Other assets	400		—		400		—



September 30, 2017	Balance Sheet Locations	Total		Level 1		Level 2		Level 3

Instrument designated as accounting hedge:
Interest rate swap contract	Accrued expenses and other current liabilities	$	2,462	$	—	$	2,462	$	—
Interest rate swap contract	Other liabilities	903		—		903		—

We use observable market-based inputs to calculate fair value of our interest rate swap agreements and outstanding debt instruments, in which case the measurements are classified within Level 2. If quoted or observable market prices are not available, fair value is based upon internally developed models that use, where possible, current market‑based parameters such as interest rates, yield curves and currency rates. These measurements are classified within Level 3.