INTEREST RATE SWAP AGREEMENTS

9 Months Ended

Sep. 30, 2011

INTEREST RATE SWAP AGREEMENTS

INTEREST RATE SWAP AGREEMENTS

(8) INTEREST RATE SWAP AGREEMENTS

The Company is exposed to certain risks related to its business operations.  The primary risks that the Company managed by using derivatives is interest rate risk.  The Company uses financial instruments, including interest rate swap agreements, to reduce the Company’s risk to this exposure.  The Company does not use derivatives for speculative trading purposes and is not a party to leveraged derivatives.  The Company recognizes all of its derivative instruments as either assets or liabilities at fair value.  Fair value is determined in accordance with the accounting guidance for Fair Value Measurements.  See Note 9 — Fair Value Measurements.  The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship.  For derivatives designated as hedges under the accounting guidance for Derivative Instruments and Hedging Activities, the Company formally assesses, both at inception and periodically thereafter, whether the hedging derivatives are highly effective in offsetting changes in either the fair value or cash flows of the hedged item.  The Company’s derivatives that are not designated and do not qualify as hedges under the accounting guidance for Derivative Instruments and Hedging Activities are adjusted to fair value through current earnings.

On October 15, 2007, the Company entered into a five-year interest rate swap agreement with a notional amount of $100.0 million from which it will receive periodic payments at the 3 month LIBOR-based variable rate (0.253% at September 30, 2011 based upon the July 31, 2011 reset date) and make periodic payments at a fixed rate of 5.135%, with settlement and rate reset dates every January 31, April 30, July 31, and October 31.  The interest rate swap agreement was effective beginning October 31, 2007 and expires on October 31, 2012.  On March 19, 2008, the Company entered into a 4.5 year interest rate swap agreement effective April 30, 2008 with a notional amount of $35.0 million from which it will receive periodic payments at the 3 month LIBOR-based variable rate (0.253% at September 30, 2011 based upon the July 31, 2011 reset date) and make periodic payments at a fixed rate of 3.430%, with settlement and rate reset dates every January 31, April 30, July 31, and October 31.  The interest rate swap was effective beginning April 30, 2008 and expires on October 31, 2012.  The fair value of the swap agreements were zero at inception.  The Company entered into the interest rate swap agreements to limit the effect of variable interest rates on the Company’s floating rate debt.  The interest rate swap agreements were designated as cash flow hedges of the variable rate interest payments due on $135.0 million of the term loans and the revolving credit facility issued June 24, 2003, and accordingly, the effective portion of gains and losses on the fair value of the interest rate swap agreements are reported in accumulated other comprehensive loss and reclassified to earnings in the same period in which the hedged interest payment affects earnings.

On June 11, 2009, the Company partially terminated the $35.0 million interest rate swap, subject to a partial termination fee of $0.6 million which was expensed.  The notional amount was reduced to $20.0 million.  All other terms of the interest rate swap agreement remained unchanged.  As a result, the amount included in other comprehensive income related to the $35.0 million interest rate swap was reduced prorata and included in earnings as a gain (loss) on derivative instrument.

Due to the issuance of fixed rate debt to replace the existing variable rate debt on November 30, 2010, the interest rate swaps no longer qualify as cash flow hedges as the underlying cash flows being hedged were no longer going to occur.  As a result, the net loss on the fair value of the interest rate swap agreements included in other comprehensive loss of $6.5 million related to previously effective cash flow hedges as of November 30, 2010, was reclassified to earnings as gain (loss) on derivative instrument and all future changes in the fair value of the interest rate swaps will be included in earnings as gain (loss) on derivative instrument.

The following is the location and amounts of derivative instruments fair values in the statement of financial position segregated between designated, qualifying hedging instruments and those that are not segregated by assets and liabilities as required by accounting guidance.

Derivatives not designated		Fair Value as of:
as hedging instruments	Balance Sheet Location	9/30/2011			12/31/2010
Interest rate swap contracts	Accrued liabilities	$	(4,702	)	$	(4,238	)
Interest rate swap contracts	Other long-term liabilities	(392		)	(3,532		)

The following is the location and amount of gains and losses on derivative instruments in the statement of operations for nine months ended September 30, 2011 and September 30, 2010 segregated between designated, qualifying hedging instruments and those that are not, and segregated by assets and liabilities as required by the accounting guidance for derivative instruments (in thousands):

	Interest Rate Swap Agreements
	9/30/2011		9/30/2010
Derivatives in Cash Flow Hedging Relationships:
Amount of gain or (loss) recognized in OCI on derivatives	$	—	$	(376	)
Location of gain (loss) recognized on derivatives	Other Comprehensive Loss
	9/30/2011		9/30/2010
Amount of gain or (loss) reclassified from OCI into statement of operations (effective portion)	$	—	$	(281	)
Location of gain (loss) reclassified from accumulated OCI into statement of operations (effective portion)	Gain (loss) on derivative instrument
	9/30/2011		9/30/2010
Amount of gain or (loss) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)	$	—	$	(417	)
Location of gain (loss) recognized in statement of operations on derivatives (ineffective portion and amount excluded from effectiveness testing)	Gain (loss) on derivative instrument
	9/30/2011		9/30/2010
Derivatives not designated as hedging instruments:
Amount of gain (loss) recognized in the statement of operations	$	2,676	$	—
Location of gain (loss) recognized in statement of operations	Gain (loss) on derivative instrument

The fair value of these swaps included in accrued liabilities and other long-term liabilities was $5.1 million of which $0 is in accumulated other comprehensive loss and $5.1 million has been recorded in the statement of operations in aggregate periods through September 30, 2011.