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 risk management tools to mitigate the potential impact of certain market risks. The primary market risks managed by the Company through the use of derivative 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 in earnings.

For a derivative instrument designated as an accounting hedge, the Company formally documents, at inception, the financial instrument 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 performs an assessment, both at inception and at least quarterly thereafter, to determine 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 anticipated foreign currency denominated revenues and expenses. A hedging relationship existed with an aggregate notional amount outstanding of $178.8 million and $176.0 million at May 31, 2012 and 2011, 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, 2012 and December 31, 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, 2012 and 2011 was $874.1 million and $686.9 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, 2012, aggregated by the level in the fair-value hierarchy in which those measurements are classified (in thousands):


	Level 1		Level 2			Level 3		Total
Assets:
Forward foreign exchange contracts	$	—	$	8,805		$	—	$	8,805

Liabilities:
Forward foreign exchange contracts		—		(14,481	)		—		(14,481	)

Total	$	—	$	(5,676	)	$	—	$	(5,676	)

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 tables present 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, 2012 and August 31, 2011 (in thousands):

Fair Values of Derivative Instruments

At May 31, 2012

Asset Derivatives

Liability Derivatives

Balance Sheet
Location

Fair
Value

Balance Sheet
Location

Fair
Value

Derivatives designated as hedging instruments:

Forward foreign exchange contracts

Prepaid expenses and other current assets

598

Other accrued expense

1,978

Derivatives not designated as hedging instruments:

Forward foreign exchange contracts

Prepaid expenses and other current assets

8,207

Other accrued expense

12,503

Fair Values of Derivative Instruments

At August 31, 2011

Asset Derivatives

Liability Derivatives

Balance Sheet
Location

Fair
Value

Balance Sheet
Location

Fair
Value

Derivatives designated as hedging instruments:

Forward foreign exchange contracts

Prepaid expenses and other current assets

2,825

Other accrued expense

2,798

Derivatives not designated as hedging instruments:

Forward foreign exchange contracts

Prepaid expenses and other current assets

3,517

Other accrued expense

3,979

The following tables present 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, 2012 and 2011 (in thousands):


Derivatives in Cash Flow Hedging Relationship during the Nine Months Ended May 31, 2012	Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)			Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)	Amount of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)			Location of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Forward foreign exchange contracts	$	3,053		Revenue	$	2,117		Revenue	$	(28	)
Forward foreign exchange contracts	$	(563	)	Cost of revenue	$	1,677		Cost of revenue	$	(1,421	)
Forward foreign exchange contracts	$	(2,238	)	Selling, general and administrative	$	(2,925	)	Selling, general and administrative	$	152


Derivatives in Cash Flow Hedging Relationship during the Nine Months Ended May 31, 2011	Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)		Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)	Amount of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)		Location of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness 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

As of May 31, 2012, the Company estimates that it will reclassify into earnings during the next 12 months existing losses related to foreign currency risk management hedging arrangements of approximately $0.7 million from the amounts recorded in AOCI as the anticipated cash flows occur.

The following tables present 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, 2012 and 2011 (in thousands):


Derivatives not designated as hedging instruments	Location of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Income on Derivative during the Nine Months Ended May 31, 2012
Forward foreign exchange contracts	Cost of revenue	$	2,954


Derivatives not designated as hedging instruments	Location of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Income on Derivative during the Nine Months 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 received fixed rate interest payments and paid interest at a variable rate based on LIBOR plus a spread. The effect of these swaps was 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 were recorded to interest expense and offset changes in the fair value of the hedged portion of the underlying 7.750% Senior Notes. Interest expense recorded in connection with the interest rate swaps for the three and nine months ended May 31, 2012 is $0.6 million and $1.8 million, respectively.

During the fourth quarter of fiscal year 2011, the Company terminated the interest rate swaps entered into in connection with the 7.750% Senior Notes with a fair value of $12.2 million, including accrued interest of $0.6 million at August 31, 2011. The portion of the fair value that is not accrued is recorded as a hedge accounting adjustment to the carrying amount of the 7.750% Senior Notes and is being amortized as a reduction to interest expense over the remaining term of the 7.750% Senior Notes. At May 31, 2012, the hedge accounting adjustment recorded is $9.8 million in the Condensed Consolidated Balance Sheets.

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 tables present 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 during the nine months ended May 31, 2012 and 2011 (in thousands):

Derivatives in Cash Flow

Hedging Relationship during the
Nine Months Ended

May 31, 2012

Amount of Gain
(Loss) Recognized
in OCI on
Derivative
(Effective Portion)

Location of Gain (Loss)
Reclassified from
Accumulated OCI
into Income
(Effective Portion)

Amount of Gain
or (Loss)
Reclassified from
Accumulated OCI
into Income
(Effective Portion)

Location of Gain or
(Loss) Recognized in
Income on Derivative
(Ineffective Portion
and Amount Excluded
from Effectiveness
Testing)

Amount of Gain or
(Loss) Recognized in
Income on Derivative
(Ineffective Portion
and Amount Excluded
from Effectiveness
Testing)

Interest rate swap

—

Interest expense

(2,963

)

Interest expense

—

Derivatives in Cash Flow

Hedging Relationship during the
Nine Months Ended

May 31, 2011

Amount of Gain
(Loss) Recognized
in OCI on
Derivative
(Effective Portion)

Location of Gain (Loss)
Reclassified from
Accumulated OCI
into Income
(Effective Portion)

Amount of Gain
or (Loss)
Reclassified from
Accumulated OCI
into Income
(Effective Portion)

Location of Gain or
(Loss) Recognized in
Income on Derivative
(Ineffective Portion
and Amount Excluded
from Effectiveness
Testing)

Amount of Gain or
(Loss) Recognized in
Income on Derivative
(Ineffective Portion
and Amount Excluded
from Effectiveness
Testing)

Interest rate swap

—

Interest expense

(2,963

)

Interest expense

—

As of May 31, 2012, 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 changes related to cash flow hedges (both forward foreign exchange contracts and interest rate swaps) included in AOCI net of tax are as follows (in thousands):


	Nine months ended May 31, 2011
Accumulated comprehensive loss, August 31, 2010	$	(16,086	)
Changes in fair value of derivative instruments		6,869
Adjustment for net losses realized and included in net income related to derivative instruments		(291	)

Accumulated comprehensive loss, May 31, 2011	$	(9,508	)


	Nine months ended May 31, 2012
Accumulated comprehensive loss, August 31, 2011	$	(11,172	)
Changes in fair value of derivative instruments		252
Adjustment for net losses realized and included in net income related to derivative instruments		2,094

Accumulated comprehensive loss, May 31, 2012	$	(8,826	)