Derivatives
Our business is exposed to various market risks, including interest rate and foreign currency risks. We utilize derivative instruments to help us manage these risks. We do not hold or issue derivatives for speculative purposes.
Interest Rate Swaps
To mitigate interest rate exposure on our outstanding revolving facility debt, we utilize interest rate derivative contracts that effectively swap $400 million of floating rate debt at a 2.86 percent weighted-average fixed interest rate, plus the applicable spread on our floating rate debt. We entered into these swap contracts in November 2013 and January 2014, and the contracts expire between May and November 2020.
Because the terms of these swaps and the variable rate debt (as amended or extended over time) coincide, we do not expect any ineffectiveness. We have designated and accounted for these instruments as cash flow hedges, with changes in fair value being deferred in accumulated other comprehensive income/loss (AOCI) in our consolidated balance sheets.
Foreign Currency Forwards
To mitigate foreign currency exposure, we utilize the following derivative instruments:
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• | Foreign currency forward contracts that hedge the foreign currency exposure on Euro-denominated receipts and Singapore Dollar-denominated and Indian Rupee-denominated expenses. Because the critical terms of the forward contracts and the forecasted cash flows coincide, we do not expect any ineffectiveness associated with these contracts. We designated and accounted for these derivatives as cash flow hedges, with changes in fair value being deferred in AOCI in our consolidated balance sheets. The notional amount of outstanding foreign currency forwards under these agreements as of August 31, 2016 was approximately $63.2 million. There were no outstanding foreign currency forwards under these agreements as of November 30, 2015. |
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• | Short-term foreign currency forward contracts that manage market risks associated with fluctuations in balances that are denominated in currencies other than the local functional currency. We account for these forward contracts at fair value and recognize the associated realized and unrealized gains and losses in other expense, net, since we have not designated these contracts as hedges for accounting purposes. The following table summarizes the notional amounts of these outstanding foreign currency forward contracts as of August 31, 2016 and November 30, 2015 (in millions): |
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| | | | | | | | |
| | August 31, 2016 | | November 30, 2015 |
Notional amount of currency pair: | | | | |
Contracts to buy USD with CAD | | $ | 52.7 |
| | $ | — |
|
Contracts to buy CAD with USD | | C$ | 5.3 |
| | C$ | 9.3 |
|
Contracts to buy USD with EUR | | $ | 10.0 |
| | $ | 8.5 |
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Contracts to buy EUR with USD | | € | 13.0 |
| | € | — |
|
Contracts to buy CHF with USD | | CHF | 20.0 |
| | CHF | 19.0 |
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Contracts to buy GBP with EUR | | £ | — |
| | £ | 3.5 |
|
Contracts to buy EUR with GBP | | € | 9.0 |
| | € | — |
|
Contracts to buy GBP with USD | | £ | 181.1 |
| | £ | 7.2 |
|
Contracts to buy NOK with GBP | | NOK | 57.0 |
| | NOK |
|
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Fair Value of Derivatives
Since our derivative instruments are not listed on an exchange, we have evaluated fair value by reference to similar transactions in active markets; consequently, we have classified all of our derivative instruments within Level 2 of the fair value measurement hierarchy. The following table shows the classification, location, and fair value of our derivative instruments as of August 31, 2016 and November 30, 2015 (in millions):
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| | | | | | | | | | |
| | Fair Value of Derivative Instruments | | Location on consolidated balance sheets |
| | August 31, 2016 | | November 30, 2015 | |
Assets: | | | | | | |
Derivatives designated as accounting hedges: | | | | | | |
Foreign currency forwards | | $ | 1.2 |
| | $ | — |
| | Other current assets |
Derivatives not designated as accounting hedges: | | | | | | |
Foreign currency forwards | | 2.0 |
| | 0.1 |
| | Other current assets |
Total | | $ | 3.2 |
| | $ | 0.1 |
| | |
| | | | | | |
Liabilities: | | | | | | |
Derivatives designated as accounting hedges: | | | | | | |
Interest rate swaps | | $ | 26.5 |
| | $ | 24.3 |
| | Other accrued expenses and other liabilities |
Foreign currency forwards | | 0.5 |
| | — |
| | Other accrued expenses |
Derivatives not designated as accounting hedges: | | | | | | |
Foreign currency forwards | | 0.3 |
| | 0.4 |
| | Other accrued expenses |
Total | | $ | 27.3 |
| | $ | 24.7 |
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The net (gain) loss on foreign currency forwards that are not designated as hedging instruments for the three and nine months ended August 31, 2016 and the three and nine months ended August 31, 2015, respectively, was as follows (in millions):
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| | | | | | | | | | | | | | | | | | |
| | Amount of (gain) loss recognized in the consolidated statements of operations | | |
| | Three months ended August 31, | | Nine months ended August 31, | | Location on consolidated statements of operations |
| | 2016 | | 2015 | | 2016 | | 2015 | |
Foreign currency forwards | | $ | (11.3 | ) | | $ | 4.1 |
| | $ | (7.6 | ) | | $ | 3.1 |
| | Other expense (income), net |
The following table provides information about the cumulative amount of unrecognized hedge losses recorded in AOCI, net of tax, as of August 31, 2016 and August 31, 2015, respectively, as well as the activity on our cash flow hedging instruments for the three and nine months ended August 31, 2016 and the three and nine months ended August 31, 2015, respectively (in millions):
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| | | | | | | | | | | | | | | | |
| | Three months ended August 31, | | Nine months ended August 31, |
| | 2016 | | 2015 | | 2016 | | 2015 |
Beginning balance | | $ | (16.3 | ) | | $ | (12.5 | ) | | $ | (14.6 | ) | | $ | (9.5 | ) |
Amount of gain (loss) recognized in AOCI on derivative: | | | | | | | | |
Interest rate swaps | | (6.5 | ) | | (1.1 | ) | | (10.9 | ) | | (4.6 | ) |
Foreign currency forwards | | (0.2 | ) | | 0.1 |
| | (0.2 | ) | | 0.9 |
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Amount of loss (gain) reclassified from AOCI into income: | | | | | | | | |
Interest rate swaps (1) | | 1.5 |
| | 0.5 |
| | 4.4 |
| | 1.0 |
|
Foreign currency forwards (1) | | — |
| | (0.4 | ) | | (0.2 | ) | | (1.2 | ) |
Ending balance | | $ | (21.5 | ) | | $ | (13.4 | ) | | $ | (21.5 | ) | | $ | (13.4 | ) |
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(1) Pre-tax amounts reclassified from AOCI into income related to interest rate swaps are recorded in interest expense, and pre-tax amounts reclassified from AOCI into income related to foreign currency forwards are recorded in revenue. |
Approximately $7.4 million of the $26.5 million unrecognized pre-tax losses relating to the interest rate swaps are expected to be reclassified into interest expense within the next 12 months.