Derivative Financial Instruments

6 Months Ended

Jun. 30, 2013

Derivative Financial Instruments

Derivative Financial Instruments

4. Derivative Financial Instruments

In March 2012, we entered into a floating-to-fixed interest rate agreement in order to limit exposure to an increase in the LIBOR interest rate on $470.0 million of the Term Loan B (see Note 6).  Our Term Loan B borrowings bear interest based on LIBOR plus an applicable margin.  The interest rate agreement capped the LIBOR component of the interest rate at 1.00%.  The term of the agreement began in March 2012 and expires in March 2014.  Upon executing the agreement, we designated and documented the interest rate agreement as a cash flow hedge.

By utilizing a derivative instrument to hedge our exposure to LIBOR rate changes, we are exposed to credit risk and market risk.  Credit risk is the failure of the counterparty to perform under the terms of the derivative contract.  To mitigate this risk, the hedging instrument was placed with a counterparty that we believe poses minimal credit risk.  Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates, commodity prices, or currency exchange rates.  The market risk associated with the interest rate cap agreement is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.

We do not hold or issue derivative instruments for trading or other speculative purposes.

We record derivative instruments on our condensed consolidated balance sheet at fair value.  Our derivatives are measured on a recurring basis using Level 2 inputs.  The fair value measurements of our derivatives are based on market prices that generally are observable for similar assets or liabilities at commonly quoted intervals.  Derivative assets and derivative liabilities that have maturity dates equal to or less than twelve months from the balance sheet date are included in prepaid and other current assets and other accrued liabilities, respectively.  Derivative assets and derivative liabilities that have maturity dates greater than twelve months from the balance sheet date are included in deposits and other assets and other long-term liabilities, respectively.

Derivatives recorded at fair value in our condensed consolidated balance sheets as of June 30, 2013 and December 31, 2012 consisted of the following (in thousands):

	Derivative Assets
	June 30,		December 31,
	2013		2012
Derivatives Designated as Cash Flow Hedges
Interest rate contract — current	$	5	$	2
Interest rate contract — non-current	—		30
	$	5	$	32

At June 30, 2013 and December 31, 2012, we held no derivative liabilities.  At June 30, 2013 and December 31, 2012, we held no derivatives not designated as hedging instruments.

Changes in the fair value of derivatives that are designated as hedges are reported on the condensed consolidated balance sheet in accumulated other comprehensive income (“AOCI”) when in qualifying effective relationships and directly in other (income) expense, net when they are not designated as hedges.  These amounts are reclassified to interest expense when the forecasted transaction takes place.

Gains and losses, net of tax, on derivatives designated as cash flow hedges included in our condensed consolidated statement of operations for the three-month and six-month periods ended June 30, 2013 and 2012 were as follows (in thousands):

Three Months Ended June 30, 2013 and 2012

												Loss Recognized
												in Operations on
							Loss					Derivatives (Ineffective
	Loss Recognized in						Reclassified from					Portion and Amount
	OCI						AOCI into Operations					Excluded from
Derivatives Designated	(Effective Portion)						(Effective Portion)					Effectiveness Testing)
as Cash Flow Hedges	2013			2012			2013			2012		2013		2012
Interest rate contract	$	(20	)	$	(383	)	$	(105	)	$	—	$	—	$	—
Total	$	(20	)	$	(383	)	$	(105	)	$	—	$	—	$	—

Six Months Ended June 30, 2013 and 2012

												Loss Recognized
												in Operations on
							Loss					Derivatives (Ineffective
	Loss Recognized in						Reclassified from					Portion and Amount
	OCI						AOCI into Operations					Excluded from
Derivatives Designated	(Effective Portion)						(Effective Portion)					Effectiveness Testing)
as Cash Flow Hedges	2013			2012			2013			2012		2013			2012
Interest rate contract	$	(25	)	$	(650	)	$	(170	)	$	—	$	(1	)	$	—
Total	$	(25	)	$	(650	)	$	(170	)	$	—	$	(1	)	$	—

As of June 30, 2013, approximately $683,000 of unrealized losses associated with our interest rate contract derivative instrument are expected to be reclassified from AOCI to operations during the next twelve months.  Transactions and events expected to occur over the next twelve months that will necessitate reclassifying these unrealized losses to operations are the periodic interest payments that are required to be made on the Term Loan B.  For the six months ended June 30, 2013, $1,000 of hedge ineffectiveness was recorded for the interest rate agreement.