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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2023-10-27 compared with 2022-10-21 · 41 added, 28 removed, 15 unchanged (82% of the section changed)

1 unchanged sentence

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.

Current market events have not required us to materially modify 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.

As of August 31, 2023, we maintained a series of foreign currency forward contracts to hedge a portion of our primary currency exposures of the Indian Rupee, Euro, British Pound Sterling and Philippine Peso.

To mitigate our currency exposure, we entered into these contracts to hedge between 25% to 75% of our projected primary currency operating expenses over their respective hedge periods, which range from the first quarter of fiscal 2024 through the fourth quarter of fiscal 2024.

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.

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.

The changes in fair value for these foreign currency forward contracts are initially reported as a component of Accumulated other comprehensive loss ("AOCL") on the Consolidated Balance Sheets and subsequently reclassified into SG&A in the Consolidated Statements of Income when the hedged exposure affects earnings.

The following table reflects the foreign currency forward contracts gain (loss) reclassified from AOCL into income and the impact of foreign currency exchange rate fluctuations, net of hedge activity, to operating income:

Years ended August 31,

(in thousands) 2023 2022

Foreign currency forward contracts gain (loss) reclassified from AOCL into SG&A

$ (3,176) $ (7,867)

Foreign currency exchange rate fluctuations increase (decrease) to operating income (1)

$ 25,719 $ (3,059)

(1) Impact to operating income is net of hedge activity.

We performed a sensitivity analysis to determine the effects on both the fair value of our outstanding foreign currency forward contracts and our operating income, excluding these forward contracts, of a hypothetical devaluation of the U.S.

dollar by 10% as of August 31, 2023, relative to the other foreign currencies in which we transact.

Based on the financial results for fiscal 2023, the fair value of our outstanding forward contracts would have increased by $17.0 million and our operating income, excluding these forward contracts, would have decreased by $42.9 million.

This sensitivity analysis has inherent limitations as it disregards the possibility that rates of multiple foreign currencies will not always move in the same direction relative to the value of the U.S.

dollar over time and does not account for our forward contracts that we utilize to mitigate fluctuations in exchange rates.

Refer to Note 5, Derivative Instruments in the Notes to the Consolidated Financial Statements included in Part II, 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

Foreign Currency Translation Risk

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.

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

Ta ble of C onte nts

The following table reflects the foreign currency translation adjustment gains and losses recorded in Other comprehensive income (loss):

Years ended August 31,

(in thousands) 2023 2022

Foreign currency translation adjustment gains (losses) $ 21,511 $ (74,666)

Interest Rate Risk

1 unchanged sentence

As of August 31, 2023, we had Cash and cash equivalents of $425.4 million and Investments of $32.2 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.

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

Our Investments consist of mutual funds.

We are exposed to interest rate risk due to fluctuations in interest rates, which may affect our interest income and the fair market value of 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 2, Significant Accounting Policies in the Notes to the Consolidated Financial Statements included in Item 8.

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

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

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.

As of August 31, 2023, our outstanding variable interest rate debt included $375.0 million under the 2022 Term Facility and $250.0 million under the 2022 Revolving Facility.

During fiscal 2023, the outstanding borrowings under the 2022 Credit Facilities bore interest at a rate equal to the applicable one-month Term SOFR rate plus a spread using a debt leverage pricing grid, currently at 1.1% (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 from the date of borrowing through August 31, 2023.

To mitigate our exposure to interest rate volatility due to changes in SOFR, we entered into the 2022 Swap Agreement on March 1, 2022, to hedge a portion of our outstanding floating 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 beginning May 31, 2022.

Effective December 30, 2022, we apportioned the then-outstanding notional amount of the 2022 Swap Agreement between two counterparties.

As of August 31, 2023, the notional amount of the 2022 Swap Agreement was $200.0 million, maturing on February 28, 2024.

As our Senior Notes have a fixed interest rate, they are not subject to interest rate changes.

As a result of the 2022 Swap Agreement, our exposure to fluctuations in SOFR is limited to our borrowings from the 2022 Credit Facilities in excess of amounts that are hedged, which was $425.0 million of our outstanding principal balance as of August 31, 2023.

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 $1.1 million change to our annual interest expense.

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

Refer to Note 12, Debt in the Notes to the Consolidated Financial Statements included in Part II, Item 8.

of this Annual Report on Form 10-K for more information on our outstanding borrowings as of August 31, 2023.

Ta ble of C onte nts

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