Derivative Instruments and Hedging Activities

12 Months Ended

May 31, 2014

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. We utilize two derivative financial instruments to manage our variable interest rate exposure over a medium- to long-term period. We have a floating-to-fixed interest rate swap and an interest rate cap agreement, each hedging $50.0 million 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, 2014, all of our derivative instruments were classified as cash flow hedges. The fair value of the interest rate swap and interest rate 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. We record the fair value of assets and liabilities in accordance with the hierarchy established by the ASC 820, Fair Value Measurement. The fair value of our interest rate derivatives are classified as Level 2, which refers to fair values estimated using significant other observable inputs including quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. The following tables summarize the classification and fair values of our interest rate derivative instruments reported in the Consolidated Balance Sheet at May 31, 2014 and 2013.

		Derivative Assets		Derivative Liabilities
	Balance Sheet Classification
Derivatives designated as hedging instruments:		May 31, 2014		May 31, 2014
Interest rate cap	Long-term assets	$	0.1	$	—
Interest rate swap	Long-term liabilities		—		(2.8	)

		Derivative Assets		Derivative Liabilities
	Balance Sheet Classification
Derivatives designated as hedging instruments:		May 31, 2013		May 31, 2013
Interest rate cap	Long-term assets	$	0.1	$	—
Interest rate swap	Long-term liabilities		—		(3.6	)

        We include gains and losses on the derivative instruments in other comprehensive income. 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 on the Consolidated Statement of Comprehensive Income for the years ended May 31, 2014, 2013 and 2012 was an unrealized gain of $0.7 million, an unrealized gain of $0.6 million and an unrealized loss of $3.9 million, respectively. We expect minimal gain or loss to be reclassified into earnings within the next 12 months.