Derivative Financial Instruments

Interest Rate Risk Management

The Company is subject to market risk exposure arising from changes in interest rates on our senior secured credit facilities, which bear interest at rates that are indexed against LIBOR. The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to mitigate its exposure to rising interest rates. To accomplish these objectives, the Company entered into an interest rate cap, designated as a cash flow hedge, to mitigate risks associated with variable rate debt effective November 28, 2018. The LIBOR interest rate cap covers a notional amount of $600,000 of the Company’s senior secured debt, is effective for a period of three years and has a strike rate of 3.5%. Interest rate caps designated as cash flow hedges involve the receipt of stipulated amounts from a counterparty if interest rates rise above the strike rate defined in the contract. The premium paid for the interest rate cap was $2,235 and is being amortized to interest expense over its three-year term using the caplet method. At December 31, and September 30, 2019, the unamortized premium was $1,428 and $1,614, respectively, of which $683 and $869, respectively, is included in Other non‑current assets and the remaining $745 is included in Prepaid and other current assets. The Company recorded $186 and $62 of premium amortization to interest expense during the three months ended December 31, 2019 and 2018, respectively.

Foreign Currency Risk Management

The Company’s functional currency is the U.S. dollar. By operating internationally, the Company is subject to foreign currency risk from transactions denominated in currencies other than the U.S. dollar (“foreign currencies”). To mitigate cross-currency transaction risk, the Company analyzes significant exposures where it has receipts or payments in a currency other than the functional currency of its operations, and from time to time may strategically enter into short-term foreign currency forward contracts to lock in some or all of the cash flows associated with these transactions. The Company is also subject to currency translation risk associated with converting the foreign operations’ financial statements into U.S. dollars. The Company uses foreign currency derivative contracts in order to manage the effect of exchange fluctuations on forecasted sales and purchases that are denominated in foreign currencies. To mitigate the impact of foreign exchange rate risk, the Company entered into a series of forward contracts designated as cash flow hedges. As of December 31, 2019, the notional amount of the forward contracts held to sell foreign currencies was $9,516.

Credit Risk Management

The counterparties to the Company’s derivative contracts are highly rated financial institutions. The Company regularly reviews the creditworthiness of its financial counterparties and does not expect to incur a significant failure of any counterparties to perform under any agreements. The Company is not subject to any obligations to post collateral under derivative instrument contracts. The Company records all derivative instruments on a gross basis in the Consolidated Balance Sheets. Accordingly, there are no offsetting amounts that net assets against liabilities.

Derivatives Designated as Cash Flow Hedges

The Company accounts for derivatives and hedging activities in accordance with ASC Topic No. 815, “Derivatives and Hedging” (Topic No. 815). As required by Topic No. 815, the Company records all derivatives on the balance sheet at fair value and adjusts to market on a quarterly basis. The Company’s interest rate cap is valued based on readily observable market inputs, such as quotations on interest rates and LIBOR yield curves at the reporting date. The Company’s foreign currency forward contracts are valued based on quoted forward foreign exchange prices and spot rates at the reporting date. For a derivative that is designated as a cash flow hedge, changes in the fair value of the derivative are recognized in AOCI until the hedged item affects earnings. The Company does not use derivative financial instruments for trading or speculative purposes.

The following represents the fair value recorded for derivatives designated as cash flow hedges for the periods presented:



		Asset Derivatives
	Balance Sheet Location	December 31, 2019		September 30, 2019
Interest rate cap	Prepaid and other current assets	$	5	$	19
Foreign currency forward contracts	Prepaid and other current assets	148		269



		Liability Derivative
	Balance Sheet Location	December 31, 2019		September 30, 2019
Foreign currency forward contracts	Accrued expenses and other current liabilities	$	68	$	154

The following represents the amount of (loss) gain recognized in AOCI (net of tax) during the periods presented:



	Three Months Ended December 31,
	2019			2018
Interest rate cap	$	(14	)	$	780
Foreign currency forward contracts	19			(334		)

The following represents the amount of (loss) gain reclassified from AOCI into earnings during the periods presented:



		Three Months Ended December 31,
	Location of (Loss) Gain	2019		2018
Foreign currency forward contracts	Cost of product sales and services	$	—	$	(126	)
Foreign currency forward contracts	General and administrative expense	54		—
Foreign currency forward contracts	Research and development expense	—		15
		$	54	$	(111	)

Based on the fair value amounts of the Company’s cash flow hedges at December 31, 2019, the Company expects that approximately $97 of pre-tax net losses will be reclassified from AOCI into earnings during the next twelve months. The amount ultimately realized, however, will differ as exchange rates vary and the underlying contracts settle. In addition, $745 of caplet amortization will be amortized into interest expense during the next twelve months.

Derivatives Not Designated as Cash Flow Hedges

The following represents the fair value recorded for derivatives not designated as cash flow hedges for the periods presented:



		Asset Derivative
	Balance Sheet Location	December 31, 2019		September 30, 2019
Foreign currency forward contracts	Prepaid and other current assets	$	—	$	9



		Liability Derivative
	Balance Sheet Location	December 31, 2019		September 30, 2019
Foreign currency forward contracts	Accrued expenses and other current liabilities	$	55	$	—