Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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.

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. As of November 30, 2022, these forward contracts hedge a portion of our foreign currency transaction exposure ranging from 25% to 75% over their respective hedged periods. 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 the three months ended November 30, 2022, we recognized a loss on foreign currency forward contracts of $5.0 million, compared with a loss of $0.4 million in the same period a year ago. During three months ended November 30, 2022, foreign currency exchange rate fluctuations, net of hedge activity, increased operating income by $8.6 million, compared with a decrease of $4.3 million during the three months ended November 30, 2021.

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 November 30, 2022, relative to the other foreign currencies in which we transact. Based on the financial results for the three months ended November 30, 2022, the fair value of our outstanding forward contracts would have increased by $15.4 million and our operating income, excluding these forward contracts, would have decreased by $11.2 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 of this Quarterly Report for more information on our foreign currency exposures and our foreign currency forward contracts.

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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 our results of operations and our financial condition. We recorded a translation gain of $8.8 million and a loss of $18.7 million in AOCL for the three months ended November 30, 2022 and 2021, respectively.

Interest Rate Risk

Cash and Cash Equivalents and Investments

As of November 30, 2022, we had Cash and cash equivalents of $437.1 million and Investments of $32.6 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. As we have a restrictive investment policy, our financial exposure to fluctuations in interest rates is expected to remain low. Refer to Note 2, Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements included in Item 8. of our Annual Report on Form 10-K for more information on our cash and cash equivalents.

Debt

2022 Credit Agreement

As of November 30, 2022 our outstanding debt with a variable rate of interest included $625.0 million under the 2022 Term Facility and $250.0 million under the 2022 Revolving Facility. During the three months ended November 30, 2022, 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 a 0.1% credit spread adjustment). The spread remained consistent from the date of borrowing through November 30, 2022.

The variable rate of interest on our debt creates exposure to interest rate volatility due to changes in SOFR. To mitigate this exposure, on March 1, 2022, we entered into the 2022 Swap Agreement to hedge a portion of our outstanding floating SOFR rate debt with a fixed interest rate of 1.162%, to maintain an intended fixed to floating interest rate ratio. The notional amount of the 2022 Swap Agreement declines by $100.0 million on a quarterly basis and was $500.0 million as of November 30, 2022. The 2022 Swap Agreement is maturing on February 28, 2024.

Thus, our exposure is limited to fluctuations in SOFR on our borrowings from the 2022 Credit Facilities in excess of amounts that are not hedged, or $375.0 million of our outstanding principal balance. 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 provided exposure of $0.9 million to our annual interest expense.

Refer to Note 11, Debt for more information on our 2022 Term Facility and 2022 Revolving Facility. Refer to Note 5, Derivative Instruments for more information on our 2022 Swap Agreement.

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