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Derivative Financial Instruments
 9 Months Ended
Jun. 30, 2015
Derivative Financial Instruments  
Derivative Financial Instruments

 

8.Derivative Financial Instruments

 

The Company uses certain interest rate derivative contracts to hedge interest rate exposures on the Company’s variable rate debt. The Company enters into foreign currency derivative contracts with financial institutions to reduce the risk that its cash flows and earnings will be adversely affected by foreign currency exchange rate fluctuations. The Company’s hedging program is not designated for trading or speculative purposes.

 

The Company recognizes derivative instruments as either assets or liabilities on the accompanying consolidated balance sheets at fair value. The Company records changes in the fair value (i.e., gains or losses) of the derivatives that have been designated as accounting hedges in the accompanying consolidated statements of income as cost of revenue, interest expense, net, or to accumulated other comprehensive loss in the accompanying consolidated balance sheets.

 

Cash Flow Hedges

 

The Company uses interest rate swap agreements designated as cash flow hedges to fix the variable interest rates on portions of the Company’s debt. The Company also uses foreign currency forward contracts designated as cash flow hedges to hedge forecasted transactions denominated in currencies other than the U.S. dollar. The Company initially reports any gain or loss on the effective portion of a cash flow hedge as a component of accumulated other comprehensive loss. Depending on the type of cash flow hedge, the gain or loss is subsequently reclassified to either interest expense when the interest expense on the variable rate debt is recognized, or to cost of revenue when the hedged transactions denominated in currencies other than the U.S. dollar are recorded. If the hedged transaction becomes probable of not occurring, any gain or loss related to interest rate swap agreements or foreign currency forward contracts would be recognized in other income (expense). Further, the Company excludes the change in the time value of the foreign currency forward contracts from the assessment of hedge effectiveness. The Company records the premium paid or time value of a hedge on the date of purchase as an asset. Thereafter, the Company recognizes any change to this time value in cost of revenue.

 

The notional principal, fixed rates and related expiration dates of the Company’s outstanding interest rate swap agreements were as follows:

 

June 30, 2015

 

Notional Amount
(in millions)

 

Fixed
Rate

 

Expiration
Date

 

$
300.0 

 
1.54 

%

September 2018(1)

 
300.0 

 
1.63 

%

June 2018

 
250.0 

 
0.95 

%

September 2015

 

 

(1) Effective date of October 5, 2015.

 

September 30, 2014

 

Notional Amount
(in millions)

 

Fixed
Rate

 

Expiration
Date

 

$
300.0 

 
1.63 

%

June 2018

 
250.0 

 
0.95 

%

September 2015

 
200.0 

 
0.68 

%

December 2014

 

 

The notional principal of foreign currency forward contracts to purchase Australian dollars (AUD) with U.S. dollars was AUD 102.6 million (or approximately $77.9 million) at June 30, 2015.

 

Foreign Currency Forward Contracts

 

The Company uses foreign currency forward contracts, which are not designated as accounting hedges, to hedge intercompany transactions and other monetary assets or liabilities denominated in currencies other than the functional currency of a subsidiary. Gains and losses on these contracts are recognized in cost of revenue for those instruments related to the provision of their respective services or in general and administrative expenses, along with the offsetting losses and gains of the related hedged items. The notional principal of foreign currency forward contracts to purchase U.S. dollars with foreign currencies was $95.6 million and $69.5 million at June 30, 2015 and September 30, 2014, respectively. The notional principal of foreign currency forward contracts to sell U.S. dollars for foreign currencies was $69.0 million and $71.5 million at June 30, 2015 and September 30, 2014, respectively. The notional principal of foreign currency forward contracts to purchase GBP with BRL was BRL 1.1 million (or approximately $0.4 million) at September 30, 2014 and there were none outstanding at June 30, 2015. The notional principal of foreign currency forward contracts to sell GBP for BRL was BRL 4.0 million (or approximately $1.3 million) at June 30, 2015 and there were none outstanding at September 30, 2014.

 

Other Derivatives

 

Other derivatives that are not designated as hedging instruments consist of option contracts that the Company uses to hedge anticipated transactions in currencies other than the functional currency of a subsidiary. The Company recognizes gains and losses on these contracts as well as the offsetting losses and gains of the related hedged item costs in cost of sales. The Company records the premium paid or time value of an option on the date of purchase as an asset. Thereafter, the Company recognizes any change to this time value in cost of revenue. There was no such option contract outstanding during the periods presented.

 

The fair values of our outstanding derivative instruments were as follows (in millions):

 

 

 

 

 

Fair Value of Derivative
Instruments as of

 

 

 

Balance Sheet Location

 

Jun 30,
2015

 

Sep 30,
2014

 

Derivative assets

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

Interest rate swap agreements

 

Other non-current asset

 

$

—

 

$
1.7 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

Foreign currency forward contracts

 

Prepaid expenses and other current assets

 
1.5 

 
3.1 

 

 

 

 

 

 

 

 

 

Total

 

 

 

$
1.5 

 

$
4.8 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

Interest rate swap agreements

 

Accrued expenses and other current liabilities

 

$
6.5 

 

$
4.8 

 

Interest rate swap agreements

 

Other long-term liabilities

 
1.0 

 

—

 

Foreign currency forward contracts

 

Accrued expenses and other current liabilities

 
1.4 

 

—

 

Foreign currency forward contracts

 

Other long-term liabilities

 
1.0 

 

—

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

Foreign currency forward contracts

 

Accrued expenses and other current liabilities

 
0.9 

 
3.7 

 

 

 

 

 

 

 

 

 

Total

 

 

 

$
10.8 

 

$
8.5 

 

 

 

 

 

 

 

 

 

 

 

 

At June 30, 2015, the effective portion of the Company’s interest rate swap agreements designated as cash flow hedges before tax effect was $7.5 million, of which $6.5 million is expected to be reclassified from accumulated other comprehensive loss to interest expense within the next 12 months. At June 30, 2015, the effective portion of the Company’s foreign currency forward contracts designated as cash flow hedges before tax effect was $1.5 million, of which $0.8 million is expected to be reclassified from accumulated other comprehensive loss to cost of revenue within the next 12 months.

 

The effect of derivative instruments in cash flow hedging relationships on income and other comprehensive income is summarized below (in millions):

 

 

 

Decrease (Increase) in Losses
Recognized in Accumulated
Other Comprehensive Loss
on Derivatives Before Tax
Effect (Effective Portion)
Three Months Ended Jun 30,

 

Increase in Losses
Recognized in Accumulated
Other Comprehensive Loss
on Derivatives Before Tax
Effect (Effective Portion)
Nine Months Ended Jun 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Derivatives in cash flow hedging relationship:

 

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

$
1.7

 

$
(2.9

)

$
(8.2

)

$
(3.2

)

Foreign currency forward contracts

 
(1.0

)

—

 
(2.4

)

—

 

 

 

 

 

 

Losses Reclassified from
Accumulated Other
Comprehensive Loss into
Income (Effective Portion)
Three Months Ended Jun 30,

 

Losses Reclassified from
Accumulated Other
Comprehensive Loss into
Income (Effective Portion)
Nine Months Ended Jun 30,

 

 

 

Location

 

2015

 

2014

 

2015

 

2014

 

Derivatives in cash flow hedging relationship:

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

Interest expense

 

$
(1.5

)

$
(0.7

)

$
(3.8

)

$
(2.3

)

Foreign currency forward contracts

 

Cost of revenue

 
(0.5

)

—

 
(0.9

)

—

 

 

The losses recognized in income due to amounts excluded from effectiveness testing from the Company’s interest rate swap agreements were immaterial during the three and nine months ended June 30, 2015 and 2014. The losses recognized in income due to amounts excluded from effectiveness testing from the Company’s foreign currrency forward contracts were $0.3 million for both the three and nine months ended June 30, 2015 and immaterial for the three and nine months ended June 30, 2014.

 

The effect of derivative instruments not designated as hedging instruments on income is summarized below (in millions):

 

 

 

 

 

Gains / (Losses) Recognized
in Income on Derivatives
(Amount Excluded from
Effectiveness Testing and
Ineffective Portion)(1)
Three Months Ended Jun 30,

 

Gains / (Losses) Recognized
in Income on Derivatives
(Amount Excluded from
Effectiveness Testing and
Ineffective Portion)(1)
Nine Months Ended Jun 30,

 

 

 

Location

 

2015

 

2014

 

2015

 

2014

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

General and administrative expenses

 

$
2.4 

 

$
0.6 

 

$
2.4 

 

$

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$
2.4 

 

$
0.6 

 

$
2.4 

 

$

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Losses related to the ineffective portion of the hedges were not material in all periods presented.