Derivative Instruments and Hedging Activities

3 Months Ended

Aug. 31, 2012

Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities

Note 7 — 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.  We use a floating-to-fixed interest rate swap to hedge interest on $50 million of notional principal balance under our revolving credit agreement. We also use an interest rate cap agreement on $50 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 August 31, 2012, all of our derivative instruments were classified as cash flow hedges.  The fair value of our interest rate swap and our 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.

We record the fair value of assets and liabilities in accordance with the hierarchy established by the authoritative guidance for fair value measurements.  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 table summarizes the classification and fair values of our interest rate derivative instruments reported in the condensed consolidated balance sheet as of August 31, 2012.

		Derivative		Derivative
Derivatives designated		Assets		Liabilities
as hedging instruments	Balance Sheet Classification	August 31, 2012		August 31, 2012
Interest rate cap	Long-term assets	$	0.2	$	—
Interest rate swap	Long-term liabilities	—		(5.0		)

The following table summarizes the classification and fair values of our interest rate derivative instruments reported in the condensed consolidated balance sheet as of May 31, 2012.

		Derivative		Derivative
Derivatives designated		Assets		Liabilities
as hedging instruments	Balance Sheet Classification	May 31, 2012		May 31, 2012
Interest rate cap	Long-term assets	$	0.2	$	—
Interest rate swap	Long-term liabilities	—		(4.5		)

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 for the three-month periods ended August 31, 2012 and 2011 was an unrealized loss of $0.4 million and $2.5 million, respectively, recorded in accumulated other comprehensive income (loss).  We expect minimal gain or loss to be reclassified into earnings within the next 12 months.