Long-Term Debt, Derivatives And Letters Of Credit

3 Months Ended

Aug. 31, 2011

Long-Term Debt, Derivatives And Letters Of Credit

Long-Term Debt, Derivatives And Letters Of Credit

7. LONG-TERM DEBT, DERIVATIVES AND LETTERS OF CREDIT

In July 2011, we renewed our Credit Facility with our banking syndicate. The Credit Facility has borrowing capacity of up to $150 million in multiple currencies, bears interest based on a variable Eurodollar rate option (LIBOR plus 1.75% margin at August 31, 2011) with the margin based on financial covenants set forth in the Credit Facility, and matures in July 2016. In connection with the renewal of the Credit Facility, we capitalized $0.8 million of associated debt issuance costs which are amortized over the life of the Credit Facility. At August 31, 2011, we were in compliance with all covenants of the Credit Facility.

A summary of long-term debt as of August 31, 2011 and May 31, 2011 is as follows (in thousands):

	August 31, 2011			May 31, 2011
	(unaudited)
Revolving loan portion of the Credit Facility	$	72,691		$	75,848
Vendor Financing and other		141			232
		72,832			76,080
Current maturities		(133	)		(212	)
Long-term debt, excluding current maturities	$	72,699		$	75,868

ASC 815, Derivatives and Hedging ("ASC 815") established accounting and reporting standards requiring that derivative instruments be recorded at fair value and included in the balance sheet as assets or liabilities. The accounting for changes in the fair value of a derivative instrument depends on the intended use of the derivative and the resulting designation, which is established at the inception date of a derivative. Special accounting for derivatives qualifying as fair value hedges allows a derivative's gains and losses to offset related results on the hedged item in the statement of income. For derivative instruments designated as cash flow hedges, changes in fair value, to the extent the hedge is effective, are recognized in other comprehensive income until the hedged item is recognized in earnings. Hedge effectiveness is measured at least quarterly based on the relative cumulative changes in fair value between the derivative contract and the hedged item over time. Credit risks related to derivatives include the possibility that the counterparty will not fulfill the terms of the contract. We considered counterparty credit risk to our derivative contracts when valuing our derivative instruments.

The amounts recognized in other comprehensive income, and reclassified into income, for the three months ended August 31, 2011 and 2010, are as follows (in thousands):

	Loss Recognized in Other Comprehensive Income						Loss Reclassified  from Other Comprehensive Income to Earnings
	Three Months Ended August 31,						Three Months Ended August 31,
	2011			2010			2011		2010
Economic hedge	$	(34	)	$	(526	)	$	—	$	—
	$	(34	)	$	(526	)	$	—	$	—

Our borrowing of €12.3 million under the Credit Facility serves as an economic hedge of our net investment in our European operations as fluctuations in the fair value of the borrowing attributable to the U.S. Dollar/Euro spot rate will offset translation gains or losses attributable to our investment in our European operations. At August 31, 2011, the €12.3 million borrowing had a U.S. Dollar value of $17.7 million.

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. Any ineffectiveness related to our hedges was not material for any of the periods presented.

The following table presents the fair value totals and balance sheet classification for derivatives designated as hedges under ASC 815 (in thousands):

August 31, 2011

May 31, 2011

Classification

Balance Sheet Location

Fair Value

Classification

Balance Sheet Location

Fair Value

Economic hedge

Liability

Long-term debt

$

259

Liability

Long-term debt

$

293

Total Derivatives

$

259

$

293

In order to secure our insurance programs we are required to post letters of credit generally issued by a bank as collateral. A letter of credit commits the issuer to remit specified amounts to the holder, if the holder demonstrates that we failed to meet our obligations under the letter of credit. If this were to occur, we would be obligated to reimburse the issuer for any payments the issuer was required to remit to the holder of the letter of credit. We were contingently liable for outstanding stand-by letters of credit totaling $13.5 million at August 31, 2011 and $8.8 million at May 31, 2011. Outstanding letters of credit reduce amounts available under our Credit Facility and are considered as having been funded for purposes of calculating our financial covenants under the Credit Facility.