DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

3 Months Ended

Sep. 30, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Cash Flow Hedge

We are engaged in hedging programs with various banks to limit the potential foreign exchange fluctuations incurred on future cash flows relating to a portion of our Canadian dollar payroll expenses. We operate internationally and are therefore exposed to foreign currency exchange rate fluctuations in the normal course of our business, in particular to changes in the Canadian dollar on account of large costs that are incurred from our centralized Canadian operations, which are denominated in Canadian dollars. As part of our risk management strategy, we use foreign currency forward contracts to hedge portions of our payroll exposure with typical maturities of between one and twelve months. We do not use foreign currency forward contracts for speculative purposes.

We have designated these transactions as cash flow hedges of forecasted transactions under ASC Topic 815 “Derivatives and Hedging” (Topic 815). As the critical terms of the hedging instrument and of the entire hedged forecasted transaction are the same, in accordance with Topic 815, we have been able to conclude that changes in fair value or cash flows attributable to the risk being hedged are expected to completely offset at inception and on an ongoing basis. Accordingly, quarterly unrealized gains or losses on the effective portion of these forward contracts have been included within “Other Comprehensive Income (Loss) - net.” As of September 30, 2022, the fair value of the contracts is recorded within “Accounts payable and accrued liabilities” and represents the net loss before tax effect that is expected to be reclassified from accumulated other comprehensive income (loss) into earnings with the next twelve months.

As of September 30, 2022, the notional amount of forward contracts we held to sell U.S. dollars in exchange for Canadian dollars was $79.0 million (June 30, 2022—$66.5 million).

Non-designated Hedges

In connection with the Micro Focus Acquisition, in August 2022, the Company entered into certain derivative transactions to meet certain foreign currency obligations under UK cash confirmation requirements related to the purchase price of the proposed Micro Focus Acquisition, mitigate the risk of foreign currency appreciation in the GBP denominated purchase price and mitigate the risk of foreign currency appreciation in the EUR denominated existing debt held by Micro Focus. The Company entered into the following derivatives: (i) three deal-contingent forward contracts, (ii) a non-contingent forward contract, and (iii) EUR/USD cross currency swaps.

The deal-contingent forward contracts have an aggregate notional amount of £1.475 billion, and settlement is contingent upon closing the Micro Focus Acquisition. The non-contingent forward contract has a notional amount of £350 million. The cross currency swaps are comprised of a 5 year EUR/USD cross currency swap with a notional amount of €690 million and a 7 year EUR/USD cross currency swap with a notional amount of €690 million.

These instruments were entered into as economic hedges to mitigate foreign currency risks associated with the proposed Micro Focus Acquisition. The instruments do not qualify for hedge accounting at inception. Derivative financial instruments that do not apply hedge accounting are recognized on the Condensed Consolidated Balance Sheets as either assets or liabilities. As of September 30, 2022, the forward contracts and the foreign currency swaps are in a net liability position and are classified within “Accounts payable and accrued liabilities.” The forward contracts and cross currency swaps are measured at fair value with changes to fair value being recognized in the Condensed Consolidated Statements of Income within “Other income (expense), net.”

Fair Value of Derivative Instruments and Effect of Derivative Instruments on Financial Performance

The fair values of outstanding derivative instruments are as follows:


		As of September 30, 2022				As of June 30, 2022
Instrument	Balance Sheet Location	Asset		Liability		Asset		Liability
Derivatives designated as hedges:
Cash flow hedge	Accounts payable and accrued liabilities	$	—	$	(4,637)	$	—	$	(892)
Total derivatives designated as hedges:		$	—	$	(4,637)	$	—	$	(892)

Derivatives not designated as hedges:
Deal-contingent forward contracts	Accounts payable and accrued liabilities	—		(125,331)		—		—
Non-contingent forward contract	Accounts payable and accrued liabilities	—		(26,203)		—		—
Cross currency swap contracts	Accounts payable and accrued liabilities	—		(29,927)		—		—
Total derivatives not designated as hedges:		$	—	$	(181,461)	$	—	$	—
Total derivatives		$	—	$	(186,098)	$	—	$	(892)

The effects of gains (losses) from derivative instruments on our Condensed Consolidated Statements of Income is as follows:


		Three Months Ended September 30,
Instrument	Income Statement Location	2022		2021
Derivatives designated as hedges:
Cash flow hedges	Operating expenses	$	(800)	$	390

Derivatives not designated as hedges:
Deal-contingent forward contract	Other income (expense), net	(125,331)		—
Non-contingent forward contract	Other income (expense), net	(26,203)		—
Cross currency swap contracts	Other income (expense), net	(29,927)		—
Total		$	(182,261)	$	390

The effects of the cash flow hedges on our Condensed Consolidated Statements of Comprehensive Income:


		Three Months Ended September 30,
	Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Comprehensive Income Location	2022		2021
Gain (loss) recognized in OCI (loss) on derivatives (effective portion)	Unrealized gain (loss) on cash flow hedges	$	(4,546)	$	(1,477)
Gain (loss) reclassified from AOCI into income (effective portion)	Operating expenses	$	(800)	$	390