Derivative Instruments and Hedging Activities

6 Months Ended

Aug. 31, 2014

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage interest rate exposure with the following objectives:

• manage current and forecasted interest rate risk while maintaining optimal financial flexibility and solvency

• proactively manage the Company’s cost of capital to ensure the Company can effectively manage operations and execute its business strategy, thereby maintaining a competitive advantage and enhancing shareholder value

• comply with covenant requirements in the Company’s credit facility

Cash Flow Hedges of Interest Rate Risk

The Company utilizes interest rate derivatives to add stability to cash payments for interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Under the terms of its 2012 Credit Agreement, the Company was required to fix or cap the interest rate on at least 50% of its Term Loan exposure for a two-year period ending December 28, 2014. Under the terms of its 2014 Credit Agreement, no such requirement exists. See Note 5 for more discussion of our new credit facility.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The Company’s interest rate derivatives are used to hedge the interest payment cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. The Company did not record any hedge ineffectiveness in earnings during the three or six months ended August 31, 2013 and 2014. Amounts reported in accumulated other comprehensive loss related to derivatives are reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During fiscal 2015, less than $0.1 million was reclassified as an increase to interest expense.

In February 2013, the Company entered into a two-year interest rate exchange agreement (a “Swap”), whereby the Company pays a fixed rate of 0.42% on $40 million of notional principal to Fifth Third Bank, and Fifth Third Bank pays to the Company a variable rate on the same amount of notional principal based on the one-month London Interbank Offered Rate (“LIBOR”). In connection with the Company's termination and repayment of its 2012 Credit Agreement on June 10, 2014, our interest rate exchange agreement was settled and terminated. Consequently, as of August 31, 2014, the Company had no interest rate exchange agreements outstanding.

The Company does not generally use derivatives for trading or speculative purposes.

The table below presents the fair value of the Company’s derivative financial instrument as well as its classification on the balance sheet as of February 28, 2014 and August 31, 2014. The fair value of the derivative instrument was estimated by obtaining quotations from the financial institution that was the counterparty to the instrument. The fair value was an estimate of the net amount that the Company would have been required to pay on the applicable date, assuming the agreement was transferred to another party or canceled by the Company, as further adjusted by a credit adjustment required by ASC Topic 820, Fair Value Measurements and Disclosures, as discussed below. For the six months ended August 31, 2014, this credit adjustment was immaterial.

	Tabular Disclosure of Fair Values of Derivative Instruments Liability Derivatives
	As of February 28, 2014			As of August 31, 2014
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
	(in 000's)
Derivatives designated as hedging instruments:
Interest Rate Swap Agreement	Other Current Liabilities	94		Other Current Liabilities	—
Total derivatives designated as hedging instruments		$	94		$	—

The table below presents the effect of the Company’s derivative financial instruments on the consolidated statements of operations for the three and six months ended August 31, 2013 and 2014 (in 000's).

	For the Three Months Ended August 31,
Derivatives in Cash Flow Hedging Relationships	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)						Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)						Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
	2013			2014				2013			2014				2013		2014
Interest Rate Swap
Agreement	$	(19	)	$	(72	)	Interest expense	$	(23	)	$	(25	)	N/A	$	—	$	—
Total	$	(19	)	$	(72	)		$	(23	)	$	(25	)		$	—	$	—
	For the Six Months Ended August 31,
Derivatives in Cash Flow Hedging Relationships	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)						Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)						Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
	2013			2014				2013			2014				2013		2014
Interest Rate Swap Agreement	$	3		$	(15	)	Interest expense	$	(45	)	$	(27	)	N/A	$	—	$	—
Total	$	3		$	(15	)		$	(45	)	$	(27	)		$	—	$	—

Credit-risk-related Contingent Features

The Company manages its counterparty risk by entering into derivative instruments with financial institutions where it believes the risk of credit loss resulting from nonperformance by the counterparty is low. As discussed above, the Company’s counterparty to the interest rate swap that was in effect from February 2013 to June 2014 was Fifth Third Bank.

In accordance with ASC Topic 820, the Company makes a Credit Value Adjustment (CVA) to adjust the valuation of a derivative to account for our own credit risk with respect to all derivative liability positions. The CVA is accounted for as a decrease to the derivative position with the corresponding increase or decrease reflected in other comprehensive income (loss) for derivatives designated as cash flow hedges. The CVA also accounts for nonperformance risk of our counterparties in the fair value measurement of all derivative asset positions, when appropriate. For each period presented, this CVA was immaterial to the fair value of our derivative instrument.