Derivative Financial Instruments

Our earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. Our most significant foreign currency exposures relate to Western European countries, Japan, China and Canada. Our foreign currency risk management strategy is principally designed to mitigate the future potential financial impact of changes in the U.S. Dollar value of anticipated transactions and balances denominated in foreign currency, resulting from changes in foreign currency exchange rates. We enter into derivative transactions, specifically foreign currency forward contracts, to manage the exposures to foreign currency exchange risk to reduce earnings volatility. We do not enter into derivatives transactions for trading or speculative purposes.

Non-Designated Hedges

We hedge our net foreign currency monetary assets and liabilities primarily resulting from foreign currency denominated receivables and payables with foreign exchange forward contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. These contracts have maturities of up to approximately three months. Generally, we do not designate these foreign currency forward contracts as hedges for accounting purposes and changes in the fair value of these instruments are recognized immediately in earnings. Because we enter into forward contracts only as an economic hedge, any gain or loss on the underlying foreign-denominated balance would be offset by the loss or gain on the forward contract. Gains and losses on forward contracts and foreign denominated receivables and payables are included in interest income and other expense, net.

As of March 31, 2018 and September 30, 2017, we had outstanding forward contracts with notional amounts equivalent to the following:



Currency Hedged	March 31, 2018		September 30, 2017
	(in thousands)
Canadian / U.S. Dollar	$	7,500	$	12,809
Swiss Franc / Euro	—		7,157
Swiss Franc / U.S. Dollar	13,135		605
Chinese Yuan offshore / Euro	—		10,423
Euro / U.S. Dollar	320,627		244,000
Japanese Yen / Euro	18,864		17,694
Israeli Shekel / U.S. Dollar	6,684		8,820
Japanese Yen / U.S. Dollar	5,611		3,198
Swedish Krona / U.S. Dollar	12,619		4,627
Danish Krona / U.S. Dollar	4,629		1,743
Brazilian Real / U.S. Dollar	3,117		—
All other	8,725		7,443
Total	$	401,511	$	318,519

The following table shows the effect of our non-designated hedges in the Consolidated Statements of Operations for the three and six months ended March 31, 2018 and April 1, 2017:



Derivatives Not Designated as Hedging Instruments	Location of Gain or (Loss) Recognized in Income	Net realized and unrealized gain or (loss) (excluding the underlying foreign currency exposure being hedged)
		Three months ended				Six months ended
		March 31, 2018		April 1, 2017		March 31, 2018		April 1, 2017
		(in thousands)
Forward Contracts	Interest income and other expense, net	$	2,435	$	238	$	3,022	$	(8,091	)

In the three and six months ended March 31, 2018, foreign currency losses, net were $1.8 million and $3.2 million, respectively. In the three and six months ended April 1, 2017, foreign currency losses, net were$1.0 million and $2.5 million, respectively.

Cash Flow Hedges

Our foreign exchange risk management program objective is to identify foreign exchange exposures and implement appropriate hedging strategies to minimize earnings fluctuations resulting from foreign exchange rate movements. We designate certain foreign exchange forward contracts as cash flow hedges of Euro, Yen and SEK denominated intercompany forecasted revenue transactions (supported by third party sales). All foreign exchange forward contracts are carried at fair value on the Consolidated Balance Sheets and the maximum duration of foreign exchange forward contracts is 15 months.

Cash flow hedge relationships are designated at inception, and effectiveness is assessed prospectively and retrospectively using regression analysis on monthly. As the forward contracts are highly effective in offsetting changes to future cash flows on the hedged transactions, we record the effective portion of changes in these cash flow hedges in accumulated other comprehensive income and subsequently reclassify it into earnings in the period during which the hedged transactions are recognized in earnings. Changes in the fair value of foreign exchange forward contracts due to changes in time value are included in the assessment of effectiveness. Our derivatives are not subject to any credit contingent features. We manage credit risk with counterparties by trading among several counterparties and we review our counterparties’ credit at least quarterly.

As of March 31, 2018 and September 30, 2017, we had outstanding forward contracts designated as cash flow hedges with notional amounts equivalent to the following:



Currency Hedged	March 31, 2018		September 30, 2017
	(in thousands)
Euro / U.S. Dollar	$	55,744	$	64,831
Japanese Yen / U.S. Dollar	20,077		22,675
SEK / U.S. Dollar	15,116		14,091
Total	$	90,937	$	101,597

The following table shows the effect of our derivative instruments designated as cash flow hedges in the Consolidated Statements of Operations for the three and six months ended March 31, 2018 and April 1, 2017 (in thousands):



Derivatives Designated as Hedging Instruments	Gain or (Loss) Recognized in OCI-Effective Portion						Location of Gain or (Loss) Reclassified from OCI into Income-Effective Portion	Gain or (Loss) Reclassified from OCI into Income-Effective Portion					Location of Gain or (Loss) Recognized-Ineffective Portion	Gain or (Loss) Recognized-Ineffective Portion
	Three months ended							Three months ended						Three months ended
	March 31, 2018			April 1, 2017				March 31, 2018			April 1, 2017			March 31, 2018			April 1, 2017
Forward Contracts	$	(2,339	)	$	(589	)	Subscription, support and license revenue	$	(1,728	)	$	567	Interest income and other expense, net	$	(16	)	$	(4	)

	Six months ended							Six months ended						Six months ended
	March 31, 2018			April 1, 2017				March 31, 2018			April 1, 2017			March 31, 2018			April 1, 2017
Forward Contracts	$	(3,382	)	$	2,882		Subscription, support and license revenue	$	(2,382	)	$	974	Interest income and other expense, net	$	(35	)	$	5

As of March 31, 2018, we estimated that all amounts reported in accumulated other comprehensive income will be reclassified to income within the next twelve months.

If an underlying forecast transaction does not occur, or it becomes probable that it will not occur, the related hedge gains and losses on the cash flow hedge would be immediately reclassified to interest income and other expense, net on the Consolidated Statements of Operations. For the three and six months ended March 31, 2018 and April 1, 2017, there were no such gains or losses.

The following table shows our derivative instruments measured at gross fair value as reflected in the Consolidated Balance Sheets:



	Fair Value of Derivatives Designated As Hedging Instruments				Fair Value of Derivatives Not Designated As Hedging Instruments
	March 31, 2018		September 30, 2017		March 31, 2018		September 30, 2017
	(in thousands)				(in thousands)
Derivative assets (1):
Forward Contracts	$	296	$	540	$	531	$	623
Derivative liabilities (2):
Forward Contracts	$	3,119	$	2,352	$	1,718	$	1,995
(1) As of March 31, 2018, $827 thousand current derivative assets are recorded in other current assets, in the Consolidated Balance Sheets. As of September 30, 2017, $1,128 thousand current derivative assets are recorded in other current assets, and $35 thousand long-term derivative assets are recorded in other assets in the Consolidated Balance Sheets.
(2) As of March 31, 2018, $4,837 thousand current derivative liabilities are recorded in accrued expenses and other current liabilities in the Consolidated Balance Sheets. As of September 30, 2017, $4,329 thousand current derivative liabilities are recorded in accrued expenses and other current liabilities, and $18 thousand long term derivative liabilities are recorded in other liabilities in the Consolidated Balance Sheets.

Offsetting Derivative Assets and Liabilities

We have entered into master netting arrangements that allow net settlements under certain conditions. Although netting is permitted, it is currently our policy and practice to record all derivative assets and liabilities on a gross basis in the Consolidated Balance Sheets.

The following table sets forth the offsetting of derivative assets as of March 31, 2018:



	Gross Amounts Offset in the Consolidated Balance Sheets						Gross Amounts Not Offset in the Consolidated Balance Sheets
As of March 31, 2018	Gross Amount of Recognized Assets		Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts of Assets Presented in the Consolidated Balance Sheets		Financial Instruments			Cash Collateral Received		Net Amount
	(in thousands)
Forward Contracts	$	827	$	—	$	827	$	(827	)	$	—	$	—

The following table sets forth the offsetting of derivative liabilities as of March 31, 2018:



	Gross Amounts Offset in the Consolidated Balance Sheets						Gross Amounts Not Offset in the Consolidated Balance Sheets
As of March 31, 2018	Gross Amount of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts of Liabilities Presented in the Consolidated Balance Sheets		Financial Instruments			Cash Collateral Pledged		Net Amount
	(in thousands)
Forward Contracts	$	4,837	$	—	$	4,837	$	(827	)	$	—	$	4,010