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.

Foreign Currency Risk Management

Forward contracts are put in place to manage the foreign currency risk associated with the anticipated foreign currency denominated revenues and expenses. A hedging relationship existed with an aggregate notional amount outstanding of $293.4 million and $314.6 million as of August 31, 2018 and 2017, 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 September 3, 2018 and May 31, 2019.

In addition to derivatives that are designated as hedging instruments 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 as of August 31, 2018 and 2017, was $3.4 billion and $2.1 billion, respectively.

The following table presents the fair values of the Company’s derivative instruments located on the Consolidated Balance Sheets utilized for foreign currency risk management purposes as of August 31, 2018 and 2017 (in thousands):



	Fair Values of Derivative Instruments
	Asset Derivatives					Liability Derivatives
	Balance Sheet Location	Fair Value as of August 31, 2018⁽¹⁾		Fair Value as of August 31, 2017⁽¹⁾		Balance Sheet Location	Fair Value as of August 31, 2018⁽¹⁾		Fair Value as of August 31, 2017⁽¹⁾
Derivatives designated as hedging instruments:
Forward foreign exchange contracts	Prepaid expenses and other current assets	$	225	$	8,380	Accrued expenses	$	13,364	$	1,408
Derivatives not designated as hedging instruments:
Forward foreign exchange contracts	Prepaid expenses and other current assets	$	10,125	$	31,280	Accrued expenses	$	46,171	$	9,131

⁽¹⁾ Classified as Level 2 in the fair-value hierarchy.

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 gains and losses recognized in earnings due to hedge ineffectiveness and the amount excluded from effectiveness testing were not material for all periods presented and are included as components of net revenue, cost of revenue, selling, general and administrative expense, which are the same line items in which the hedged items are recorded.

During the fiscal year ended August 31, 2018, the Company recognized $29.6 million in foreign currency losses, which was offset by $48.7 million of gains from related forward contracts. Both the foreign currency losses and gains from forward contracts were recognized in cost of revenue. For the fiscal years ended August 31, 2017 and 2016, the amounts were immaterial and were recognized as components of cost of revenue.

Interest Rate Risk Management

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

Cash Flow Hedges

During the fourth quarter of fiscal year 2018, the Company entered into interest rate swap transactions to hedge the variable interest rate payments for the 2018 Term Loan Facility. In connection with this transaction, the Company pays interest based upon a fixed rate as agreed upon with the respective counterparties and receives variable rate interest payments based on the three-month LIBOR. The interest rate swaps have an aggregate notional amount of $350.0 million and have been designated as hedging instruments and accounted for as cash flow hedges. The interest rate swaps were effective on August 24, 2018 and are scheduled to expire on August 24, 2020. The contracts will be settled with the respective counterparties on a net basis at each settlement date.

During the fourth quarter of fiscal year 2016, the Company entered into interest rate swap transactions to hedge the variable interest rate payments for the 2017 Term Loan Facility. In connection with this transaction, the Company pays interest based upon a fixed rate as agreed upon with the respective counterparties and receives variable rate interest payments based on the one-month LIBOR. The interest rate swaps have an aggregate notional amount of $200.0 million and have been designated as hedging instruments and accounted for as cash flow hedges. The interest rate swaps were effective on September 30, 2016 and are scheduled to expire on June 30, 2019. The contracts will be settled with the respective counterparties on a net basis at each settlement date.

During the fourth quarter of fiscal year 2016, the Company entered into forward interest rate swap transactions to hedge the fixed interest rate payments for an anticipated debt issuance (the 3.950% Senior Notes). The swaps were accounted for as a cash flow hedge and had a notional amount of $200.0 million. Concurrently with the pricing of the 3.950% Senior Notes in the second quarter of fiscal year 2018, the Company settled the swaps. The fair value of the cash received for the swaps at settlement was $17.2 million. The effective portion of the swaps is recorded in the Company’s Consolidated Balance Sheets as a component of AOCI and is amortized as a reduction to interest expense in the Company's Consolidated Statement of Operations through January 2028. The effective portions of the swaps amortized as a reduction to interest expense during the fiscal year ended August 31, 2018 was not material.