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Derivatives and Hedging
 9 Months Ended
Apr. 30, 2014
Derivatives and Hedging [Abstract]  
Derivatives and Hedging

NOTE 4 – Derivatives and Hedging

The Company has entered into two interest rate swaps to exchange its variable interest rate payments commitment for fixed interest rate payments on the Term Loan balance, which at April 30, 2014 totaled $312.5 million. The first swap fixed the Company’s interest rate at 85 basis points plus the one month LIBOR rate on the first $250.0 million of the Term Loan. The second swap fixed the Company’s interest rate at 69 basis points plus the one month LIBOR rate on the next $62.5 million of the Term Loan.

The swaps are a designated effective cash flow hedge under ASC 815, Derivatives and Hedging. Each quarter, the Company measures hedge effectiveness using the “hypothetical derivative method” and records in earnings any hedge ineffectiveness with the effective portion of the change in fair value recorded in other comprehensive income or loss. The Company has reclassified $0.5 million and $0.6 million for the three months ended April 30, 2014 and 2013, respectively, out of other comprehensive income into interest expense and $1.7 million and $1.9 million for the nine months ended April 30, 2014 and 2013, respectively, out of other comprehensive income into interest expense.

The notional amount of the swap amortizes until all outstanding borrowings are due on the Term Loan on December 14, 2015. See Note 3 - Long-Term Debt. At April 30, 2014, the notional amount of the interest rate swaps was equal to the Term Loan balance of $312.5 million. The notional amount of the two derivative transactions amortizes $18.8 million per quarter through September 30, 2015 and $200.0 million on December 14, 2015.

 

The hedge provided by the swaps could prove to be ineffective for a number of reasons, including early retirement of the Term Loan, as allowed under the Credit Facility, or in the event the counterparty to the interest rate swaps is determined in the future to not be creditworthy. The Company has no plans for early retirement of the Term Loan.

 

The interest rate swaps are classified within Level II of the fair value hierarchy as the derivatives are valued using observable inputs. The Company determines fair value of the derivative utilizing observable market data of swap rates and basis rates. These inputs are placed into a pricing model using a discounted cash flow methodology in order to calculate the mark-to-market value of the interest rate swaps. As of April 30, 2014 and July 31, 2013, the Company’s fair value of the interest rate swaps were $2.2 million and $2.7 million, respectively, and were classified as other liabilities in the consolidated balance sheets.