Derivative Financial Instruments

3 Months Ended

Dec. 31, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

9. Derivative Financial Instruments

We enter into derivative transactions, specifically foreign currency forward contracts and options, to manage our exposure to foreign currency exchange risk in order to reduce earnings volatility. We do not enter into derivative transactions for trading or speculative purposes.

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


(in thousands)	Fair Value of Derivatives Designated As Hedging Instruments				Fair Value of Derivatives Not Designated As Hedging Instruments
	December 31, 2022		September 30, 2022		December 31, 2022		September 30, 2022
Derivative assets(1):
Forward Contracts	$	—	$	1,960	$	824	$	7,098
Options	$	2,688	$	—	$	—	$	—
Derivative liabilities(2):
Forward Contracts	$	1,582	$	—	$	2,259	$	2,908

(1)

As of December 31, 2022 and September 30, 2022, current derivative assets of $3.5 million and $9.1 million, respectively, are recorded in Other current assets in the Consolidated Balance Sheets.

(2)

As of December 31, 2022 and September 30, 2022, current derivative liabilities of $3.8 million and $2.9 million, respectively, are recorded in Accrued expenses and other current liabilities in the Consolidated Balance Sheets.

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 Other income (expense), net.

We hedge our forecasted U.S. Dollar cash flows with foreign exchange options to reduce the risk that they will be adversely affected by changes in Euro or Japanese Yen exchange rates. These contracts have maturities of up to approximately nine months. We do not designate these foreign currency options as hedges for accounting purposes and changes in the fair value of these instruments are recognized immediately in earnings. Because we enter into options as an economic hedge, currency impacts on the Euro or Japanese Yen-denominated operations as compared to the forecasted plan rate may be partially offset by the gain on the put option. Gain on put options are included in Other income (expense), net.

As of December 31, 2022 and September 30, 2022, we had outstanding forward contracts and options with notional amounts equivalent to the following:


Currency Hedged (in thousands)	December 31, 2022		September 30, 2022
Canadian / U.S. Dollar	$	4,148	$	2,731
Euro / U.S. Dollar		511,944		316,869
British Pound / U.S. Dollar		5,857		7,368
Israeli Shekel / U.S. Dollar		9,105		12,052
Japanese Yen / U.S. Dollar		69,738		25,566
Swiss Franc / U.S. Dollar		23,481		25,559
Swedish Krona / U.S. Dollar		11,287		35,713
Singapore Dollar / U.S. Dollar		—		3,637
Chinese Renminbi / U.S. Dollar		6,547		23,965
New Taiwan Dollar / U.S. Dollar		7,090		13,906
Korean Won/ U.S. Dollar		—		4,919
Danish Krone/ U.S. Dollar		4,561		3,192
Australian Dollar/ U.S. Dollar		668		3,269
All other		3,904		4,432
Total	$	658,330	$	483,178

(1)

As of December 31, 2022, $319.6 million of the Euro to U.S. Dollar outstanding notional amount relates to forward contracts and $192.3 million relates to options. As of September 30, 2022, all the Euro to U.S. Dollar outstanding notional amount relates to forward contracts.

(2)

As of December 31, 2022, $14.5 million of the Japanese Yen to U.S. Dollar outstanding notional amount relates to forward contracts and $55.2 million relates to options. As of September 30, 2022, all the Japanese Yen to U.S. Dollar outstanding notional amount relates to forward contracts.

The following table shows the effect of our non-designated hedges in the Consolidated Statements of Operations for the three months ended December 31, 2022 and December 31, 2021:


(in thousands)		Three months ended
	Location of Gain (Loss)	December 31, 2022			December 31, 2021
Net realized and unrealized loss, excluding the underlying foreign currency exposure being hedged	Other income (expense), net	$	(11,009	)	$	(3,435	)

In the three months ended December 31, 2022, foreign currency losses, net were $3.2 million. In the three months ended December 31, 2021, foreign currency losses, net were $4.4 million.

Net Investment Hedges

We translate balance sheet accounts of subsidiaries with foreign functional currencies into the U.S. Dollar using the exchange rate at each balance sheet date. Resulting translation adjustments are reported as a component of accumulated other comprehensive loss on the Consolidated Balance Sheets. We designate certain foreign exchange forward contracts as net investment hedges against exposure on translation of balance sheet accounts of Euro and Japanese Yen functional subsidiaries. Net investment hedges partially offset the impact of foreign currency translation adjustment recorded in accumulated other comprehensive loss on the Consolidated Balance Sheets. All foreign exchange forward contracts are carried at fair value on the Consolidated Balance Sheets and the maximum duration of net investment hedge foreign exchange forward contracts is approximately three months.

Net investment hedge relationships are designated at inception, and effectiveness is assessed retrospectively on a quarterly basis using the net equity position of Euro and Japanese Yen functional subsidiaries. As the forward contracts are highly effective in offsetting exchange rate exposure, we record changes in these net investment hedges in accumulated other comprehensive loss and subsequently reclassify them to foreign currency translation adjustment in accumulated other comprehensive loss at the time of forward contract maturity. Changes in the fair value of foreign exchange forward contracts due to changes in time value are excluded from 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 December 31, 2022 and September 30, 2022, we had outstanding forward contracts designated as net investment hedges with notional amounts equivalent to the following:


Currency Hedged (in thousands)	December 31, 2022		September 30, 2022
Euro / U.S. Dollar	$	176,076	$	110,446
JPY/ U.S Dollar		11,437		—
Total	$	187,513	$	110,446

The following table shows the effect of our derivative instruments designated as net investment hedges in the Consolidated Statements of Operations for the three months ended December 31, 2022 and December 31, 2021:


(in thousands)		Three months ended
	Location of Gain (Loss)	December 31, 2022			December 31, 2021
Loss recognized in OCI	OCI	$	(4,510	)	$	(3,156	)
Gain (loss) reclassified from OCI	OCI	$	7,030		$	(5,735	)
Gain recognized, excluded portion	Other income (expense), net	$	969		$	267

As of December 31, 2022, we estimate that all amounts reported in accumulated other comprehensive loss will be applied against exposed balance sheet accounts upon translation within the next three months.

Offsetting Derivative Assets and Liabilities

We have entered into master netting arrangements for our forward contracts 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 December 31, 2022:


(in thousands)	Gross Amounts Offset in the Consolidated Balance Sheets						Gross Amounts Not Offset in the Consolidated Balance Sheets
As of December 31, 2022	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
Forward Contracts	$	824	$	—	$	824	$	(824	)	$	—	$	—

The following table sets forth the offsetting of derivative liabilities as of December 31, 2022:


(in thousands)	Gross Amounts Offset in the Consolidated Balance Sheets						Gross Amounts Not Offset in the Consolidated Balance Sheets
As of December 31, 2022	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
Forward Contracts	$	3,841	$	—	$	3,841	$	(824	)	$	—	$	3,017