Derivative Instruments and Hedging Activities

9 Months Ended

Feb. 29, 2012

Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities

Note 8 — Derivative Instruments and Hedging Activities

We are exposed to interest rate risk associated with fluctuations in interest rates on our variable rate debt.  During the first quarter of fiscal 2012, we entered into two derivative financial instruments in order to manage our variable interest rate exposure over a medium- to long-term period.  In June, we entered into a floating-to-fixed interest rate swap to hedge interest on $50,000 of notional principal balance under our revolving credit agreement.  Also in June, we entered into an interest rate cap agreement on $50,000 of notional principal interest under our revolving credit agreement.

We do not hold or issue derivative instruments for trading purposes and are not a party to any instruments with leverage or prepayment features.  In connection with derivative financial instruments, there exists the risk of the possible inability of counterparties to meet the terms of their contracts.  We mitigate this risk by performing financial reviews before the contract is entered into, as well as on-going periodic evaluations.  We do not expect any significant losses from counterparty defaults.

We classify the derivatives as assets or liabilities on the balance sheet.  Accounting for the change in fair value of the derivatives is a function of whether the instrument qualifies for, and has been designated as, a hedging relationship, and the type of hedging relationship.  As of February 29, 2012, all of our derivative instruments were classified as cash flow hedges.  The fair value of the interest rate swap and interest cap agreements represents the difference in the present values of cash flows calculated at the contracted interest rates and at current market interest rates at the end of the reporting period.

The fair value of the Company’s interest rate derivatives are classified as Level 2 in the fair value hierarchy.  At February 29, 2012, the fair value of the Company’s interest rate derivatives was recorded as follows:

		Derivative		Derivative
		Assets		Liabilities
	Balance Sheet Classification	February 29, 2012		February 29, 2012
Derivatives designated as hedging instruments:
Interest rate cap	Long-term assets	$	409	$	—
Interest rate swap	Long-term liabilities	$	—	$	(3,805	)

We include gains and losses on the derivative instruments in other comprehensive income.  We recognize the gains and losses on our derivative instruments as an adjustment to interest expense in the period the hedged interest payment affects earnings.  The impact of the interest rate swap and interest cap agreement on the condensed consolidated statement of income for the three- and nine-month periods ended February 29, 2012 was as follows:

	Three Months Ended			Nine Months Ended
	February 29, 2012			February 29, 2012
Amount of pre-tax loss recorded in accumulated other comprehensive income (loss)	$	(937	)	$	(5,146	)
Amount of pre-tax loss reclassified from accumulated other comprehensive income (loss) to earnings	$	—		$	—
Amount of pre-tax loss recorded in earnings	$	—		$	—

We expect minimal gain or loss to be reclassified into earnings within the next 12 months.