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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2022-10-21 compared with 2021-10-22 · 35 added, 25 removed, 8 unchanged (88% of the section changed)

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange Risk

In the normal course of business, we are exposed to foreign currency exchange risk as we conduct business outside the U.S.

in several currencies including the British Pound Sterling, Euro, Indian Rupee, and Philippine Peso.

Changes in the exchange rates for such currencies into U.S.

dollars can affect our revenues, earnings, and the carrying values of our assets and liabilities in our consolidated balance sheet, either positively or negatively.

To manage the exposures related to the effects of foreign exchange rate fluctuations, we utilize derivative instruments (foreign currency forward contracts).

In the normal course of business, we are exposed to foreign currency exchange risk and interest rate risk that could impact our financial position and results of operations.

Current market events have not required us to modify materially or change our financial risk management strategies with respect to our exposures to foreign currency exchange risk or interest rate risk.

Foreign Currency Transaction Risk

We operate on a global basis and are exposed to the risk that our financial condition, results of operations and cash flows could be impacted by changes in foreign currency exchange rates.

To mitigate the volatility and uncertainty of our exchange rate risk, we entered into foreign currency forward contracts with major institutions related to our primary currencies of the British Pound Sterling, Euro, Indian Rupee and Philippine Peso.

These forward contracts are designed to hedge anticipated foreign currency transaction exposure ranging from 25% to 75% over the hedge term.

We do not enter into cash flow hedges for trading or speculative purposes.

The changes in fair value for these foreign currency forward contracts are initially reported as a component of Accumulated other comprehensive loss ("AOCL") and subsequently reclassified into operating expenses when the hedged exposure affects earnings.

A sensitivity analysis was performed based on the estimated fair value of all foreign currency forward contracts outstanding at August 31, 2021.

dollar had been 10% weaker, the fair value of outstanding foreign currency forward contracts would have increased by $15.3 million, which would have had an immaterial impact on our Consolidated Balance Sheet.

Such a change in fair value of our financial instruments would be substantially offset by changes in our expense base.

If we had no hedges in place as of August 31, 2021, a hypothetical 10% weaker U.S.

dollar against all foreign currencies from the quoted foreign currency exchange rates at August 31, 2021, with operating results held constant in local currencies, would result in a decrease in operating income of $38.2 million over the next 12 months.

A hypothetical 10% weaker U.S.

dollar against all foreign currencies at August 31, 2021 would have increased the fair value of total assets by $71.4 million and equity by $46.7 million.

Refer to Note 6, Derivative Instruments in the Notes to the Consolidated Financial Statements included in Item 8.

During fiscal 2022, we recognized a loss on foreign currency forward contracts of $7.9 million, compared with a gain of $5.0 million in fiscal 2021.

During fiscal 2022, foreign currency exchange rate fluctuations, net of hedge activity, decreased operating income by $3.1 million, compared with a decrease of $5.4 million in fiscal 2021.

As of August 31, 2022 , a hypothetical 10% weaker U.S.

dollar would have increased the fair value of our outstanding foreign currency forward contracts by $ 14.5 million.

If we had no hedges in place as of August 31, 2022 , with operating results and exchange rates held constant in local currency, the same hypothetical 10% weaker U.S.

dollar against all foreign currencies would have resulted in a decrease in operating income by $39.0 million.

Refer to Note 5, Derivative Instruments in t he Notes to the Consolidated Financial Statements included in Item 8.

of this Annual Report on Form 10-K for more information on our foreign currency exposures and our foreign currency forward contracts.

Foreign Currency Translation

We are exposed to foreign currency risk due to the translation of our results from certain international operations into U.S.

Dollars, as part of the consolidation process.

Fluctuations in foreign currency exchange rates can create volatility in the results of operations and our financial condition.

We recorded a translation loss of $74.7 million and a gain of $0.8 million in AOCL for the years ended August 31, 2022 and 2021, respectively.

Interest Rate Risk

Cash and Cash Equivalents and Investments

The fair market value of our cash and cash equivalents and investments at August 31, 2021 was $717.8 million.

Our cash and cash equivalents consist of demand deposits and money market funds with original maturities of three months or less and are reported at fair value.

As of August 31, 2022 we had Cash and cash equivalents of $503.3 million and Investments of $33.2 million.

Our Cash and cash equivalents consist of cash and highly liquid investments including demand deposits and money market funds and our Investments consist of mutual funds.

We are exposed to interest rate risk through fluctuations of interest rates on our investments.

As we have a restrictive investment policy, our financial exposure to fluctuations in interest rates is expected to remain low.

Refer to Note 3, Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements included in Item 8.

Refer to Note 2, Significant Accounting Policies in the Notes to the Consolidated Financial Statements included in Item 8.

of this Annual Report on Form 10-K for more information on our cash and cash equivalents.

As of August 31, 2021, we had long term debt outstanding under the 2019 Revolving Credit Facility with a principal balance of $575.0 million.

The debt bears interest on the outstanding principle at a rate equal to LIBOR plus a spread, using a debt leverage pricing grid.

The variable rate of interest on our long-term debt can expose us to interest rate volatility due to changes in LIBOR.

To mitigate this exposure, on March 5, 2020, we entered into an interest rate swap agreement with a notional amount of $287.5 million to hedge the variable interest rate obligation, effectively converting the floating interest rate to fixed for the hedged portion.

Thus, we are only exposed to base interest rate risk on floating rate borrowings in excess of any amounts that are not hedged, or $287.5 million of our outstanding principal balance.

Assuming all terms of our outstanding long-term debt remained the same, a hypothetical 25 basis point change (up or down) in the one-month LIBOR would result in a $0.7 million change to our annual interest expense for the portion of the long-term debt not hedged by the interest rate swap agreement.

Refer to Note 13, Debt in the Notes to the Consolidated Financial Statements included in Item 8.

of this Annual Report on Form 10-K for additional information regarding our outstanding debt obligations.

2022 Credit Agreement

On March 1, 2022, we borrowed $1.0 billion under the 2022 Term Facility and $250.0 million of the available $500.0 million under the 2022 Revolving Facility.

As of August 31, 2022 we had an outstanding principal balance of $750.0 million under the 2022 Term Facility and $250.0 million under the 2022 Revolving Facility.

The outstanding borrowings under the 2022 Credit Facilities bore interest at rates equal to the applicable one-month Term SOFR rate plus a 1.1% spread (comprised of a 1.0% interest rate margin based on a debt leverage pricing grid plus 0.1% credit spread adjustment).

The spread remained consistent through August 31, 2022.

The variable rate of interest on our debt creates exposure to interest rate volatility due to changes in SOFR.

To mitigate this risk, on March 1, 2022, we entered into the 2022 Swap Agreement with a notional amount of $800.0 million, to hedge a portion of our SOFR rate debt with a fixed interest rate of 1.162%.

The notional amount of the 2022 Swap Agreement declines by

$100.0 million on a quarterly basis as of May 31, 2022 and is maturing on February 28, 2024 .

As of August 31, 2022, the notional amount was $600.0 million.

Thus, our exposure is limited to fluctuations in SOFR related to our outstanding SOFR borrowings in excess of amounts not hedged, or $400.0 million of our outstanding principal balance.

Assuming all terms of our outstanding long-term debt remained the same, a hypothetical 25 basis point change (up or down) in the one-month SOFR would result in a $1.0 million change to our annual interest expense.

Refer to Note 12, Debt for more information on our outstanding borrowings as of August 31, 2022.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk