Derivative Instruments and Hedging Activities

12 Months Ended

May 31, 2012

Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities

3. Derivative Instruments and Hedging Activities

        We are exposed to interest rate risk associated with fluctuations in interest rates on our variable rate debt. During the first quarter of fiscal 2012, we entered into two derivative financial instruments in order to manage our variable interest rate exposure over a medium- to long-term period. In June 2011, we entered into a floating-to-fixed interest rate swap to hedge interest on $50,000 of notional principal balance under our revolving credit agreement. Also in June 2011, we entered into an interest rate cap agreement on $50,000 of notional principal interest under our revolving 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 May 31, 2012, all of our derivative instruments were classified as cash flow hedges. The fair value of the interest rate swap and interest 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.

        The fair value of the Company's interest rate derivatives are classified as Level 2 in the fair value hierarchy. At May 31, 2012, the fair value of our interest rate derivatives was recorded as follows:

		Derivative Assets
				Derivative Liabilities
	Balance Sheet Classification	May 31, 2012
Derivatives designated as hedging instruments:				May 31, 2012
Interest rate cap	Long-term assets	$	249	$	—
Interest rate swap	Long-term liabilities		—		(4,479	)

        We include gains and losses on the derivative instruments in other comprehensive income (loss). 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 for the year ended May 31, 2012 was a pre-tax loss of $5,981 recorded in accumulated other comprehensive income (loss). We expect minimal gain or loss to be reclassified into earnings within the next 12 months.