Derivative Instruments and Hedging Activities

6 Months Ended

Aug. 31, 2011

Derivative Instruments and Hedging Activities [Abstract]

Derivative Instruments and Hedging Activities

Note 5. Derivative Instruments and Hedging Activities

As of August 31, 2011, the Company has no outstanding interest rate derivatives. The discussion below describes the Company’s interest rate derivatives that matured during the periods presented.

1 As defined in the Credit Agreement

Risk Management Objective of Using Derivatives

The Company is exposed to certain risk 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 interest rate exposure with the following objectives:

• manage current and forecasted interest rate risk while maintaining optimal financial flexibility and solvency

• proactively manage the Company’s cost of capital to ensure the Company can effectively manage operations and execute its business strategy, thereby maintaining a competitive advantage and enhancing shareholder value

• comply with covenant requirements in the Company’s Credit Agreement

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives were to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily used interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Under the terms of its Credit Agreement, the Company was required to fix or cap the interest rate on at least 30% of its debt outstanding (as defined in the Credit Agreement) for the three-year period ending November 2, 2009.

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 income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The Company’s interest rate derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivatives was recognized directly in earnings. The Company did not record any hedge ineffectiveness in earnings during the three or six months ended August 31, 2010 and 2011. Amounts reported in accumulated other comprehensive income related to derivatives were reclassified to interest expense as interest payments were made on the Company’s variable-rate debt.

In March 2007, the Company entered into a three-year interest rate exchange agreement (a “Swap”), whereby the Company paid a fixed rate of 4.795% on $165 million of notional principal to Bank of America, and Bank of America paid to the Company a variable rate on the same amount of notional principal based on the three-month London Interbank Offered Rate (“LIBOR”). This swap matured in March 2010, at which time the Company recognized a $2.0 million tax benefit that had previously been recorded in accumulated other comprehensive income. In March 2008, the Company entered into an additional three-year Swap, whereby the Company paid a fixed rate of 2.964% on $100 million of notional principal to Deutsche Bank, and Deutsche Bank paid to the Company a variable rate on the same amount of notional principal based on the three-month LIBOR. In January 2009, the Company entered into an additional two-year Swap effective as of March 28, 2009, whereby the Company paid a fixed rate of 1.771% on $75 million of notional principal to Deutsche Bank, and Deutsche Bank paid to the Company a variable rate on the same amount of notional principal based on the three-month LIBOR. The two swaps with Deutsche Bank matured in March 2011, at which time the Company recognized a $0.8 million tax benefit that had previously been recorded in accumulated other comprehensive income.

The Company does not use derivatives for trading or speculative purposes.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the balance sheet as of February 28, 2011. The accumulated other comprehensive income balance related to our derivative instruments at February 28, 2011 was $489. The fair values of the derivative instruments was estimated by obtaining quotations from the financial institution that were the counterparty to the instruments. The fair value was an estimate of the net amount that the Company would have been required to pay on February 28, 2011, if the agreements were transferred to other parties or cancelled by the Company, as further adjusted by a credit adjustment required by ASC Topic 820, Fair Value Measurements and Disclosures, discussed below. As discussed above, the derivative instruments matured in March 2011, thus no amounts related to derivative instruments remain on the condensed consolidated balance sheets as of August 31, 2011.

Tabular Disclosure of Fair Values of Derivative Instruments

Asset Derivatives

Liability Derivatives

As of February 28, 2011

As of August 31, 2011

As of February 28, 2011

As of August 31, 2011

Balance Sheet

Balance Sheet

Balance Sheet

Balance Sheet

Location

Fair Value

Location

Fair Value

Location

Fair Value

Location

Fair Value

Derivatives designated as hedging instruments

Interest Rate Swap Agreements (Current Portion)

N/A

—

N/A

—

Other Current Liabilities

297

N/A

—

Total derivatives designated as hedging instruments

$

—

$

—

$

297

$

—

The table below presents the effect of the Company’s derivative financial instruments on the condensed consolidated statements of operations for the three months and six months ended August 31, 2010 and 2011.

	For the Three Months Ended August 31,
													Location of Gain or (Loss)
						Location of Gain or							Recognized in Income on		Amount of Gain or (Loss)
						(Loss) Reclassified							Derivative (Ineffective		Recognized in Income on Derivative
	Amount of Gain or (Loss)					from Accumulated	Amount of Gain or (Loss)						Portion and Amount		(Ineffective Portion and Amount
Derivatives in Cash Flow	Recognized in OCI on Derivative					OCI into Income	Reclassified from Accumulated OCI						Excluded from		Excluded from Effectiveness
Hedging Relationships	(Effective Portion)					(Effective Portion)	into Income (Effective Portion)						Effectiveness Testing)		Testing)
	2010			2011			2010			2011					2010		2011
Interest Rate Swap Agreements	$	(551	)	$	—	Interest expense	$	(892	)	$	(297	)		N/A	$	—	$	—
Total	$	(551	)	$	—		$	(892	)	$	(297	)			$	—	$	—

							For the Six Months Ended August 31,
													Location of Gain or (Loss)
						Location of Gain or							Recognized in Income on		Amount of Gain or (Loss)
						(Loss) Reclassified							Derivative (Ineffective		Recognized in Income on Derivative
	Amount of Gain or (Loss)					from Accumulated	Amount of Gain or (Loss)						Portion and Amount		(Ineffective Portion and Amount
Derivatives in Cash Flow	Recognized in OCI on Derivative					OCI into Income	Reclassified from Accumulated OCI						Excluded from		Excluded from Effectiveness
Hedging Relationships	(Effective Portion)					(Effective Portion)	into Income (Effective Portion)						Effectiveness Testing)		Testing)
	2010			2011			2010			2011					2010		2011
Interest Rate Swap Agreements	$	(395	)	$	—	Interest expense	$	(2,469	)	$	(297	)		N/A	$	—	$	—
Total	$	(395	)	$	—		$	(2,469	)	$	(297	)			$	—	$	—

Credit-risk-related Contingent Features

The Company managed its counterparty risk by entering into derivative instruments with global financial institutions where it believed the risk of credit loss resulting from nonperformance by the counterparty is low. The Company’s counterparty on its outstanding interest rate swaps was Deutsche Bank.

In accordance with ASC Topic 820, the Company made Credit Value Adjustments (CVAs) to adjust the valuation of derivatives to account for our own credit risk with respect to all derivative liability positions. The CVA was accounted for as a decrease to the derivative position with the corresponding increase or decrease reflected in accumulated other comprehensive income (loss) for derivatives designated as cash flow hedges. The CVA also accounted for nonperformance risk of our counterparty in the fair value measurement of all derivative asset positions, when appropriate. As of February 28, 2011 , the fair value of our derivative instruments was net of less than $0.1 million in CVAs.

The Company did not post any collateral related to the interest rate swap agreements.