Derivative Financial Instruments

6 Months Ended

Jun. 30, 2013

Derivative Financial Instruments

8. Derivative Financial Instruments

Interest rate movements create a degree of risk to the Company’s operations by affecting the amount of interest payments. Interest rate swap agreements are used to manage the Company’s exposure to interest rate changes. The Company designates its floating-to-fixed interest rate swaps as cash flow hedges of the variability of future cash flows at the inception of the swap contract to support hedge accounting.

USSC entered into five separate swap transactions to mitigate USSC’s floating rate risk on the noted aggregate notional amount of LIBOR-based interest rate risk noted in the table below. These swap transactions occurred as follows:

• On November 6, 2007, USSC entered into an interest rate swap transaction (the “November 2007 Swap Transaction”) with U.S. Bank National Association as the counterparty. This swap matured on January 15, 2013.

• On December 20, 2007, USSC entered into another interest rate swap transaction (the “December 2007 Swap Transaction”) with Key Bank National Association as the counterparty. This swap transaction matured on June 21, 2012.

• On March 13, 2008, USSC entered into an interest rate swap transaction (the “March 2008 Swap Transaction”) with U.S. Bank National Association as the counterparty. This swap transaction matured on June 29, 2012.

• On July 18, 2012, USSC entered into a two-year forward, three-year interest rate swap transaction (the “July 2012 Swap Transaction”) with U.S. Bank National Association as the counterparty. The swap transaction has an effective date of July 18, 2014 and a maturity date of July 18, 2017.

• On June 11, 2013, USSC entered into a seven-month forward, seven-year interest rate swap transaction (the “June 2013 Swap Transaction”) with J.P. Morgan Chase Bank as the counterparty. The swap transaction has an effective date of January 15, 2014 and a maturity date of January 15, 2021.

As of June 30, 2013, none of the Company’s current outstanding debt interest payments were designated as hedged forecasted transactions.

The Company’s outstanding swap transactions were accounted for as cash flow hedges and were recorded at fair value on the statement of financial position as of June 30, 2013, at the following amounts (in thousands):

As of June 30, 2013	Notional Amount		Receive	Pay			Maturity Date		Fair Value Net Asset  (1)
July 2012 Swap Transaction	$	150,000	Floating 1-month LIBOR		1.054	%		July 18, 2017	$	1,539
June 2013 Swap Transaction	$	150,000	Floating 3-month LIBOR		2.125	%		January 15, 2021	$	2,785

(1) These interest rate derivatives qualify for hedge accounting, and are in a net asset position. Therefore, the fair value of the interest rate derivatives are included in the Company’s Condensed Consolidated Balance Sheets as a component of “Other Assets”, with an offsetting component in “Stockholders’ Equity” as part of “Accumulated Other Comprehensive Loss”.

Under the terms of the July 2012 Swap Transaction, USSC will be required to make monthly fixed rate payments to the counterparty calculated based on the notional amounts noted in the table above at a fixed rate also noted in the table above, while the counterparty is obligated to make monthly floating rate payments to USSC based on the one-month LIBOR on the same referenced notional amount. Under the terms of the June 2013 Swap Transaction, USSC will be required to make semi-annual fixed rate payments to the counterparty calculated based on the notional amounts noted in the table above at a fixed rate also noted in the table above, while the counterparty is obligated to make quarterly floating rate payments to USSC based on the three-month LIBOR on the same referenced notional amount.

The hedged transactions described above qualify as cash flow hedges in accordance with accounting guidance on derivative instruments. This guidance requires companies to recognize all of their derivative instruments as either assets or liabilities in the statement of financial position at fair value. The Company does not offset fair value amounts recognized for interest rate swaps executed with the same counterparty.

For derivative instruments that are designated and qualify as a cash flow hedge (for example, hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction in the same period or periods during which the hedged transaction affects earnings (for example, in “interest expense” when the hedged transactions are interest cash flows associated with floating-rate debt).

The July 2012 Swap Transaction effectively converts a portion of the Company’s future floating-rate debt to a fixed-rate basis. The June 2013 Swap Transaction reduces the exposure to variability in interest rates between the date the Company entered into the hedge and the future date of a debt issuance by the Company. Both swap transactions, reduce the impact of interest rate changes on future interest expense. By using such derivative financial instruments, the Company exposes itself to credit risk and market risk. Credit risk is the risk that the counterparty to the interest rate swap (as noted above) will fail to perform under the terms of the agreement. The Company attempts to minimize the credit risk in these agreements by only entering into transactions with counterparties the Company determines are creditworthy. The market risk is the adverse effect on the value of a derivative financial instrument that results from a change in interest rates.

The Company’s agreements with its derivative counterparties provides that if an event of default occurs on any Company debt of $25 million or more, the counterparties can terminate the swap agreement. If an event of default had occurred and the counterparties had exercised its early termination rights under the outstanding swap transactions as of June 30, 2013, the Company would have been entitled to receive the aggregate fair value net asset of $4.3 million plus accrued interest from the counterparties.

The swap transactions that were in effect as of June 30, 2013 and the swap transaction that was in effect as of June 30, 2012 contained no ineffectiveness; therefore, all gains or losses on those derivative instruments were reported as a component of other comprehensive income (“OCI”) and reclassified into earnings as “interest expense” in the same period or periods during which they affected earnings. The following table depicts the effect of these derivative instruments on the statements of income and comprehensive income for the three and six month periods ended June 30, 2013 and June 30, 2012.

	Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)					Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
	For the Three Months Ended June 30, 2013		For the Six Months Ended June 30, 2013				For the Three Months Ended June 30, 2013		For the Six Months Ended June 30, 2013
November 2007 Swap Transaction	$	—	$	(77	)	Interest expense, net	$	—	$	(228	)
December 2007 Swap Transaction		—		—		Interest expense, net		—		—
March 2008 Swap Transaction		—		—		Interest expense, net		—		—
July 2012 Swap Transaction		1,459		1,452		Interest expense, net		—		—
June 2013 Swap Transaction		1,699		1,699		Interest expense, net		—		—

	Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)						Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
	For the Three Months Ended June 30, 2012			For the Six Months Ended June 30, 2012				For the Three Months Ended June 30, 2012			For the Six Months Ended June 30, 2012
November 2007 Swap Transaction	$	(578	)	$	(1,276	)	Interest expense, net	$	(1,430	)	$	(2,839	)
December 2007 Swap Transaction		(605	)		(1,335	)	Interest expense, net		(1,621	)		(3,400	)
March 2008 Swap Transaction		(253	)		(535	)	Interest expense, net		(678	)		(1,344	)
July 2012 Swap Transaction		—			—		Interest expense, net		—			—
June 2013 Swap Transaction		—			—		Interest expense, net		—			—