Derivative Instrument And Hedging Activity

6 Months Ended

Jun. 30, 2011

Derivative Instrument And Hedging Activity

Derivative Instrument And Hedging Activity

NOTE 8 Derivative Instrument and Hedging Activity

On January 27, 2009, we entered into an interest rate swap agreement (the "Swap Agreement"), which hedges the interest rate risk on our variable rate debt. The Swap Agreement matured on October 20, 2010 and was used to manage the variable interest rate of our borrowings and related overall cost of borrowing. We mitigated the risk of counterparty nonperformance by choosing as our counterparty a major reputable financial institution with an investment grade credit rating.

The derivative was recognized as either an asset or liability on our Condensed Consolidated Balance Sheets with measurement at fair value, and changes in the fair value of the derivative instrument were reported in either net income, included as part of interest expense, or other comprehensive income, depending on the designated use of the derivative and whether or not it met the criteria for hedge accounting. The fair value of this instrument reflected the net amount required to settle the position. The accounting for gains and losses associated with changes in fair value of the derivative and the related effects on the condensed consolidated financial statements was subject to their hedge designation and whether they met effectiveness standards.

We paid a fixed rate on the Swap Agreement of 2.225% and received a floating rate of 30 day LIBOR on the notional amount. A portion of the interest rate swap had been designated as an effective cash flow hedge, whereby changes in the cash flows from the swap perfectly offset the changes in the cash flows associated with the floating rate of interest (see Note 7, "Debt"). The fair value of the interest rate swap at June 30, 2010 was a net liability of $0.5 million. This liability reflected the interest rate swap's termination value as the credit value adjustment for counterparty nonperformance was immaterial. We had no obligation to post any collateral related to this derivative. The fair value of the interest rate swap was based upon the valuation technique known as the market standard methodology of netting the discounted future fixed cash flows and the discounted expected variable cash flows. The variable cash flows were based on an expectation of future interest rates (forward curves) derived from observable interest rate curves. In addition, we had incorporated a credit valuation adjustment into our calculation of fair value of the interest rate swap. This adjustment recognized both our nonperformance risk and the counterparty's nonperformance risk. The net liability was included in "Other accrued expenses and liabilities" on our Condensed Consolidated Balance Sheet. Accumulated other comprehensive loss at June 30, 2010 included the accumulated loss, net of income taxes, on the cash flow hedge, of $0.3 million. For the three and six months ended June 30, 2010, we recognized $0.1 million and $0.2 million, respectively, of income associated with the ineffective portion of the interest rate swap as part of interest expense.

As of June 30, 2011 and December 31, 2010, we had no derivatives and/or hedging instruments outstanding.