Annual report pursuant to Section 13 and 15(d)

INTEREST RATE SWAP AGREEMENTS

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INTEREST RATE SWAP AGREEMENTS
12 Months Ended
Dec. 31, 2012
INTEREST RATE SWAP AGREEMENTS
14. INTEREST RATE SWAP AGREEMENTS

The Company is currently a party to three interest rate swap agreements that qualify for cash flow hedge accounting. No premium or discount was incurred upon the Company entering into any of its interest rate swap agreements because the pay rates and receive rates on the interest rate swap agreements represented prevailing rates for each counterparty at the time each of the interest rate swap agreements was consummated. The fair values of the interest rate swaps are recorded on the Company’s consolidated balance sheet as an asset or liability with the effective portion of the interest rate swaps’ gains or losses reported as a component of accumulated other comprehensive loss and the ineffective portion reported in earnings. The changes in fair values are reclassified from accumulated other comprehensive loss into earnings in the same period that the hedged items affect earnings. For the years ended December 31, 2010, 2011 and 2012, the Company reclassified $11,771, $15,929 and $12,979, respectively, from accumulated other comprehensive loss into earnings.

The valuation technique used to determine fair value is the income approach and under this approach, the Company uses projected future interest rates as provided by counterparties to the interest rate swap agreements and the fixed rates that the Company is obligated to pay under these agreements. Therefore, the Company’s measurements use significant unobservable inputs, which fall in Level 3 of the U.S. GAAP hierarchy as defined by FASB ASC Topic 820-10-35.

Below is a summary of the Company’s interest rate swap agreements, all of which are designated as cash flow hedges, as of December 31, 2012:

 

Nominal

Amount

  Effective Date     Pay Rate     Receive Rate     Expiration Date     Current
Liability  (1)
    Long-Term
Liability (2)
    Estimated
Total Fair
Value at
December 31,
2012
 

$175,000

    December 2010        1.3975     1-Month LIBOR        September 2015      $ 1,959      $ 2,991      $ 4,950   

$175,000

    December 2010        1.4000     1-Month LIBOR        September 2015        1,978        3,004        4,982   

$100,000

    November 2011        1.7150     1-Month LIBOR        April 2016        1,566        2,694        4,260   

 

         

 

 

   

 

 

   

 

 

 

$450,000

          $ 5,503      $ 8,689      $ 14,192   

 

         

 

 

   

 

 

   

 

 

 

 

(1) 

Included in accrued other current liabilities on the consolidated balance sheet as of December 31, 2012.

(2) 

Included in other long-term liabilities on the consolidated balance sheet as of December 31, 2012.

The Company was previously a party to an interest rate swap agreement that was effective during 2007 with a counterparty that filed for bankruptcy during September 2008 and whose credit rating was downgraded as a result. Prior to the counterparty’s credit rating downgrade, the change in fair value of the interest rate swap was recorded as a component of accumulated other comprehensive loss. Subsequent to the counterparty’s credit rating downgrade, the change in fair value of the interest rate swap was recorded in earnings as a component of interest expense. The Company terminated the interest rate swap agreement during October 2008. The Company determined that the forecasted transactions hedged by this interest rate swap are still probable to occur, thus the total amount previously reported in accumulated other comprehensive loss related to this interest rate swap agreement of $18,147 was amortized on a straight-line basis to interest expense over the period during which the forecasted transactions were expected to occur, which was September 15, 2008 through August 13, 2012. The Company amortized approximately $4,633, $4,236 and $2,470 to interest expense during the years ended December 31, 2010, 2011 and 2012, respectively.

See Note 15 for additional information about the Company’s fair value measurements related to its interest rate swap agreements.