Derivative Instruments and Hedging Activities

9 Months Ended

Feb. 28, 2015

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.  We utilize two derivative financial instruments to manage our variable interest rate exposure over a medium- to long-term period.   We have a floating-to-fixed interest rate swap and an interest rate cap agreement, each hedging $50.0 million of notional principal interest under our 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 28, 2015, all of our derivative instruments were classified as cash flow hedges.  The fair value of the interest rate swap and interest rate 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.

We record the fair value of assets and liabilities in accordance with the hierarchy established by ASC 820, Fair Value Measurement.  The fair value of our interest rate derivatives is classified as Level 2, which refers to fair values estimated using significant other observable inputs including quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.  The following table summarizes the classification and fair values of our interest rate derivative instruments reported in the Condensed Consolidated Balance Sheets at February 28, 2015 and May 31, 2014.

Derivatives designated		February 28,			May 31,
as hedging instruments	Balance Sheet Classification	2015			2014
Interest rate cap	Long-term assets	$	0.1		$	0.1
Interest rate swap	Long-term liabilities	(2.3		)	(2.8		)

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 Comprehensive Income for the three-month periods ended February 28, 2015 and 2014 was an unrealized gain of $0.4 million and $0.3 million, respectively.  The impact of the interest rate swap and interest cap agreement on the Condensed Consolidated Statements of Operations for the nine-month periods ended February 28, 2015 and 2014 was an unrealized gain of $0.0 million and $0.6 million, respectively.  The unrealized gains and losses were recorded in accumulated other comprehensive income (loss). 

In connection with the Amendment of our Credit Agreement, we settled our floating-to-fixed interest rate swap and interest rate cap agreements for approximately $2.6 million.