Derivative Financial Instruments and Hedging Activities

9 Months Ended

May 31, 2011

Derivative Financial Instruments and Hedging Activities [Abstract]

Derivative Financial Instruments and Hedging Activities

Note 11. Derivative Financial Instruments and Hedging Activities

     The Company is directly and indirectly affected by changes in certain market conditions. These changes in market conditions may adversely impact the Company’s financial performance and are referred to as market risks. The Company, where deemed appropriate, uses derivatives as a risk management tool to mitigate the potential impact of certain market risks. The primary market risks managed by the Company through the use of derivatives instruments are foreign currency fluctuation risk and interest rate risk.

     All derivative instruments are recorded gross on the Condensed Consolidated Balance Sheets at their respective fair values. The accounting for changes in the fair value of a derivative instrument depends on the intended use and designation of the derivative instrument. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative and the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current earnings. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is initially reported as a component of accumulated other comprehensive income (“AOCI”), net of tax, and is subsequently reclassified into the line item within the Condensed Consolidated Statements of Operations in which the hedged items are recorded in the same period in which the hedged item affects earnings. The ineffective portion of the gain or loss is recognized immediately in current earnings. For derivative instruments that are not designated as hedging instruments, gains and losses from changes in fair values are recognized currently in earnings.

     For derivatives accounted for as hedging instruments, the Company formally designates and documents, at inception, the financial instruments as a hedge of a specific underlying exposure, the risk management objective and the strategy for undertaking the hedge transaction. In addition, the Company formally assesses, both at inception and at least quarterly thereafter, whether the financial instruments used in hedging transactions are effective at offsetting changes in the cash flows on the related underlying exposures.

a. Foreign Currency Risk Management Forward contracts are put in place to manage the foreign currency risk associated with various commitments arising from trade accounts receivable, trade accounts payable and fixed purchase obligations. A hedging relationship existed that related to certain anticipated foreign currency denominated revenues and expenses, with an aggregate notional amount outstanding of $176.0 million and $67.1 million at May 31, 2011 and 2010, respectively. The related forward foreign exchange contracts have been designated as hedging instruments and are accounted for as cash flow hedges. The forward foreign exchange contract transactions will effectively lock in the value of anticipated foreign currency denominated revenues and expenses against foreign currency fluctuations. The anticipated foreign currency denominated revenues and expenses being hedged are expected to occur between June 1, 2011 and April 30, 2012.

     In addition to derivatives that are designated and qualify for hedge accounting, the Company also enters into forward contracts to economically hedge transactional exposure associated with commitments arising from trade accounts receivable, trade accounts payable, fixed purchase obligations and intercompany transactions denominated in a currency other than the functional currency of the respective operating entity. The aggregate notional amount of these outstanding contracts at May 31, 2011 and 2010 was $686.9 million and $320.8 million, respectively.

     The following table presents the Company’s assets and liabilities related to forward foreign exchange contracts measured at fair value on a recurring basis as of May 31, 2011, aggregated by the level in the fair-value hierarchy within which those measurements fall (in thousands):

	Level 1		Level 2			Level 3		Total
Assets:
Forward foreign exchange contracts	$	—	$	9,871		$	—	$	9,871
Liabilities:
Forward foreign exchange contracts		—		(4,724	)		—		(4,724	)
Total	$	—	$	5,147		$	—	$	5,147

     The Company’s forward foreign exchange contracts are measured on a recurring basis at fair value, based on foreign currency spot rates and forward rates quoted by banks or foreign currency dealers.

     The following table presents the fair value of the Company’s derivative instruments located on the Condensed Consolidated Balance Sheets utilized for foreign currency risk management purposes at May 31, 2011 (in thousands):

	Fair Values of Derivative Instruments
	At May 31, 2011
	Asset Derivatives			Liability Derivatives
	Balance Sheet	Fair		Balance Sheet	Fair
	Location	Value		Location	Value
Derivatives designated as hedging instruments
Forward foreign exchange contracts	Prepaid expenses and other current assets	$	3,571	Accrued expense	$	93
Derivatives not designated as hedging instruments
Forward foreign exchange contracts	Prepaid expenses and other current assets	$	6,300	Accrued expense	$	4,631

     The following table presents the fair value of the Company’s derivative instruments located on the Condensed Consolidated Balance Sheets utilized for foreign currency risk management purposes at August 31, 2010 (in thousands):

	Fair Values of Derivative Instruments
	At August 31, 2010
	Asset Derivatives			Liability Derivatives
	Balance Sheet	Fair		Balance Sheet	Fair
	Location	Value		Location	Value
Derivatives designated as hedging instruments
Forward foreign exchange contracts	Prepaid expenses and other current assets	$	669	Accrued expense	$	1,046
Derivatives not designated as hedging instruments
Forward foreign exchange contracts	Prepaid expenses and other current assets	$	4,814	Accrued expense	$	3,268

          The following table presents the impact that changes in fair value of derivatives utilized for foreign currency risk management purposes and designated as hedging instruments had on AOCI and earnings during the nine months ended May 31, 2011 (in thousands):

						Location of Gain	Amount of Gain
				Amount of Gain		(Loss) Recognized in	(Loss) Recognized in
Derivatives in Cash	Amount of Gain		Location of Gain (Loss)	(Loss)		Income on Derivative	Income on Derivative
Flow Hedging	(Loss) Recognized		Reclassified from	Reclassified from		(Ineffective Portion	(Ineffective Portion
Relationship for the	in OCI on		AOCI	AOCI		and Amount Excluded	and Amount Excluded
Nine Months Ended	Derivative		into Income	into Income		from Effectiveness	from Effectiveness
May 31, 2011	(Effective Portion)		(Effective Portion)	(Effective Portion)		Testing)	Testing)
Forward foreign exchange contracts	$	1,624	Revenue	$	1,506	Revenue	$	344
Forward foreign exchange contracts	$	4,212	Cost of revenue	$	1,423	Cost of revenue	$	345
Forward foreign exchange contracts	$	1,033	Selling, general and administrative	$	482	Selling, general and administrative	$	200

          The following table presents the impact that changes in fair value of derivatives utilized for foreign currency risk management purposes and designated as hedging instruments had on AOCI and earnings during the nine months ended May 31, 2010 (in thousands):

								Location of Gain	Amount of Gain
					Amount of Gain			(Loss) Recognized in	(Loss) Recognized in
Derivatives in Cash	Amount of Gain			Location of Gain (Loss)	(Loss)			Income on Derivative	Income on Derivative
Flow Hedging	(Loss) Recognized			Reclassified from	Reclassified from			(Ineffective Portion	(Ineffective Portion
Relationship for	in OCI on			AOCI	AOCI			and Amount Excluded	and Amount Excluded
the Nine Months	Derivative			into Income	into Income			from Effectiveness	from Effectiveness
Ended May 31, 2010	(Effective Portion)			(Effective Portion)	(Effective Portion)			Testing)	Testing)
Forward foreign exchange contracts	$	(11,484	)	Revenue	$	(11,484	)	Revenue	$	42
Forward foreign exchange contracts	$	9,635		Cost of revenue	$	11,498		Cost of revenue	$	2,437
Forward foreign exchange contracts	$	(14	)	Selling, general and administrative	$	(14	)	Selling, general and administrative	$	29

          As of May 31, 2011, the Company estimates that it will reclassify into earnings during the next 12 months existing gains related to foreign currency risk management hedging arrangements of approximately $2.9 million from the amounts recorded in AOCI as the anticipated cash flows occur.

          The following table presents the impact that changes in fair value of derivatives utilized for foreign currency risk management purposes and not designated as hedging instruments had on earnings during the nine months ended May 31, 2011 (in thousands):

		Amount of Gain (Loss) Recognized in
	Location of Gain (Loss) Recognized in	Income on Derivative for the Nine months
Derivatives not designated as hedging instruments	Income on Derivative	ended May 31, 2011
Forward foreign exchange contracts	Cost of revenue	$	(2,483	)

b. Interest Rate Risk Management

     The Company periodically enters into interest rate swaps to manage interest rate risk associated with the Company’s borrowings.

Fair Value Hedges

               During the second quarter of fiscal year 2011, the Company entered into a series of interest rate swaps with an aggregate notional amount of $200.0 million designated as fair value hedges of a portion of the Company’s 7.750% Senior Notes. Under these interest rate swaps, the Company receives fixed rate interest payments and pays interest at a variable rate based on LIBOR plus a spread. The effect of these swaps is to convert fixed rate interest expense on a portion of the 7.750% Senior Notes to floating rate interest expense. Gains and losses related to changes in the fair value of the interest rate swaps are recorded to interest expense and offset changes in the fair value of the hedged portion of the underlying 7.750% Senior Notes. The fair value of the interest rate swaps, based on observable market data (Level 2), was $6.7 million as of May 31, 2011 and was recorded to other assets on the Company’s Condensed Consolidated Balance Sheets. As of May 31, 2010, the Company had not entered into these interest rate swaps so there were no amounts outstanding.

          The gains (losses) on the interest rate swaps and the underlying 7.750% Senior Notes recorded to interest expense within the Company’s Condensed Consolidated Statement of Operations were as follows (in thousands):

	Gain/(Loss) for the					Gain/(Loss) for the
	Three months ended					Nine months ended
	May 31,			May 31,		May 31,			May 31,
	2011			2010		2011			2010
Interest Rate Swaps	$	6,111		$	—	$	6,695		$	—
7.750% Senior Notes	$	(6,111	)	$	—	$	(6,695	)	$	—

Cash Flow Hedges

     During the fourth quarter of fiscal year 2007, the Company entered into forward interest rate swap transactions to hedge the fixed interest rate payments for an anticipated debt issuance, which was the issuance of the 8.250% Senior Notes. The swaps were accounted for as a cash flow hedge and had a notional amount of $400.0 million. Concurrently with the pricing of the 8.250% Senior Notes, the Company settled the swaps by its payment of $43.1 million. The ineffective portion of the swaps was immediately recorded to interest expense within the Condensed Consolidated Statements of Operations. The effective portion of the swaps is recorded on the Company’s Condensed Consolidated Balance Sheets as a component of AOCI and is being amortized to interest expense within the Company’s Condensed Consolidated Statements of Operations over the life of the 8.250% Senior Notes, which is through March 15, 2018.

     The following table presents the impact that changes in the fair value of the derivative utilized for interest rate risk management and designated as a hedging instrument had on AOCI and earnings for the nine months ended May 31, 2011 (in thousands):

							Location of Gain or	Amount of Gain or
				Amount of Gain			(Loss) Recognized in	(Loss) Recognized in
	Amount of Gain		Location of Gain (Loss)	or (Loss)			Income on Derivative	Income on Derivative
	(Loss) Recognized		Reclassified from	Reclassified from			(Ineffective Portion	(Ineffective Portion
Derivatives in Cash Flow	in OCI on		Accumulated OCI	Accumulated OCI			and Amount Excluded	and Amount Excluded
Hedging Relationship for the Nine	Derivative		into Income	into Income			from Effectiveness	from Effectiveness
Months Ended May 31, 2011	(Effective Portion)		(Effective Portion)	(Effective Portion)			Testing)	Testing)
Interest rate swap	$	—	Interest expense	$	(2,963	)	Interest expense	$	—

     The following table presents the impact that changes in the fair value of the derivative utilized for interest rate risk management and designated as a hedging instrument had on AOCI and earnings for the nine months ended May 31, 2010 (in thousands):

								Location of Gain or	Amount of Gain or
					Amount of Gain			(Loss) Recognized in	(Loss) Recognized in
	Amount of Gain			Location of Gain (Loss)	or (Loss)			Income on Derivative	Income on Derivative
	(Loss) Recognized			Reclassified from	Reclassified from			(Ineffective Portion	(Ineffective Portion
Derivatives in Cash Flow	in OCI on			Accumulated OCI	Accumulated OCI			and Amount Excluded	and Amount Excluded
Hedging Relationship for the Nine	Derivative			into Income	into Income			from Effectiveness	from Effectiveness
Months Ended May 31, 2010	(Effective Portion)			(Effective Portion)	(Effective Portion)			Testing)	Testing)
Interest rate swap	$	(13	)	Interest expense	$	(3,178	)	Interest expense	$	—

     As of May 31, 2011, the Company estimates that it will reclassify into earnings during the next 12 months existing losses related to interest rate risk management hedging arrangements of approximately $4.0 million from the amounts recorded in AOCI as the anticipated cash flows occur.

     The following table presents the changes related to cash flow hedges included in AOCI net of tax for the nine months ended May 31, 2011 and 2010 (in thousands):

	Nine months ended
	May 31, 2011
Accumulated comprehensive loss, August 31, 2010	$	(16,086	)
Net gain for the period		6,869
Net gain transferred to earnings		(291	)
Accumulated comprehensive loss, May 31, 2011	$	(9,508	)

	Nine months
	ended May 31, 2010
Accumulated comprehensive loss, August 31, 2009	$	(18,861	)
Net loss for the period		(1,877	)
Net loss transferred to earnings		3,178
Accumulated comprehensive loss, May 31, 2010	$	(17,560	)