Derivatives Instrument and Hedging Activities

9 Months Ended

Sep. 30, 2015

Derivatives Instrument and Hedging Activities

Derivatives Instrument and Hedging Activities

5. Derivatives Instrument and Hedging Activities

Interest Rate Swap Agreement

As of September 30, 2015, the Company has one traditional interest rate swap agreement. The interest rate swap agreement has a notional amount of $200.0 million; matures on June 25, 2020; requires the Company to pay a fixed rate of interest of 1.645% per annum; a swap counterparty pays the Company a variable rate of interest based upon the three month LIBOR; and has interest settlement dates occurring on the 25th of January, April, July, and October through maturity to coincide with the interest payment dates of the 2015 Term Loan.

The Company designated the interest rate swap agreement above as qualifying cash flow hedge.

The Company did not have any such settlements for the three or nine months ended September 30, 2015.

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 exposures that arise from the payment of future uncertain cash amounts, which are determined by interest rates. The Company’s derivative financial instrument is used to manage differences in the amount of the Company’s expected cash payments related to the Company’s borrowings. The Company does not speculate using derivative instruments.

As of September 30, 2015, the Company did not have any derivatives outstanding that were not designated in hedge accounting relationships.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using an interest rate derivative are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Company uses an interest rate swap as part of its interest rate risk management strategy. During the three and nine months ended September 30, 2015, one derivative was used to hedge the variable cash flows associated with existing variable-rate debt. As of September 30, 2015, the Company had one outstanding interest rate swap agreement with a notional value of $200.0 million that was designated as a cash flow hedge of interest rate risk. 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 loss and subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the next twelve months, the Company estimates that $2.3 million will be reclassified to interest expense. This interest expense will also impact income tax expense.

Tabular Disclosure of Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the fair value of the Company’s derivative financial instrument as well as its classification on the unaudited condensed consolidated balance sheet as of September 30, 2015:

	As of September 30, 2015
	Liability Derivatives
	Balance Sheet Location	Fair Value (in thousands)
Interest rate swap designated as a hedging instrument	Derivative Payable	$	3,337

The unrealized loss on derivatives is recorded net of a tax benefit of $1.1 million for the three and nine months ended September 30, 2015.

Tabular Disclosure of the Effect of Derivative Instrument on the Statements of Operations and Comprehensive Income (Loss)

The table below presents the pre-tax effect of the Company’s derivative financial instrument on the unaudited condensed consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2015:

	Three Months Ended September 30, 2015 (in thousands)			Nine Months Ended September 30, 2015 (in thousands)
Derivative in Cash Flow Hedging Relationship:
Loss related to effective portion of derivative recognized in accumulated other comprehensive loss	$	(3,337	)	$	(3,337	)
Gain related to effective portion of derivative reclassified from accumulated other comprehensive loss to interest expense	$	362		$	362
Loss related to ineffective portion of derivative recognized in other expense (income), net	$	—		$	—

Credit Risk-Related Contingent Features

The Company has an agreement with its derivative counterparty that contains a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.

As of September 30, 2015, the termination value of derivative in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to this agreement was $3.3 million. As of September 30, 2015, the Company has posted no collateral related to this agreement. If the Company had breached any of these provisions at September 30, 2015, it could have been required to settle its obligation under the agreement at its termination value of $3.3 million.

Changes in Accumulated Other Comprehensive Loss

The following table reflects the changes in accumulated other comprehensive loss for the nine months ended September 30, 2015, net of tax:

Accumulated other comprehensive loss:	(Losses) Gains on Cash Flow Hedges (in thousands)
Balance at December 31, 2014	$	—
Other comprehensive loss before reclassifications, net of tax	(2,103		)
Amounts reclassified from accumulated other comprehensive loss to interest expense, net of tax	228
Unrealized loss on derivatives, net of tax	(1,875		)
Balance at September 30, 2015	$	(1,875	)