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Derivatives and Hedging Activities
 3 Months Ended
Mar. 31, 2013
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivatives and Hedging Activities
Derivatives and Hedging Activities
We are exposed to certain risks arising from both our business operations and economic conditions. We primarily manage our exposures to a wide variety of business and operational risks through management of our core business activities.
We manage certain economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of our debt funding, as well as through the use of derivative financial instruments. Specifically, we have entered into interest rate swaps to manage our exposure to interest rate movements.
Our foreign operations expose us to fluctuations of foreign exchange rates. These fluctuations may impact the value of our cash receipts and payments as compared to our reporting currency, the U.S. Dollar. To manage this exposure, we sometimes enter into foreign currency forward contracts to minimize currency exposure due to cash flows from foreign operations.
Cash Flow Hedge of Interest Rate Risk
In January 2010, we entered into an interest rate swap to manage our exposure to interest rate movements on the mortgage loan and to reduce variability in interest expense. This mortgage loan interest rate swap terminated with the payoff of the mortgage loan on May 1, 2012. Further information on the mortgage loan is in Note 12 of our 2012 Annual Report. We also had an interest rate swap to manage our exposure to interest rate movements on the Foundry Park I construction loan and to add stability to capitalized interest expense. The Foundry Park I construction loan interest rate swap matured on January 1, 2010. Both interest rate swaps were designated and qualified as cash flow hedges. As such, the effective portion of changes in the fair value of the swaps was recorded in accumulated other comprehensive loss and is subsequently being reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Any ineffective portion of changes in the fair value of the swap was recognized immediately in earnings.
The accumulated unrealized loss, net of tax, related to the fair value of the mortgage loan interest rate swap is recorded in accumulated other comprehensive loss in shareholders’ equity on the Consolidated Balance Sheets and amounted to approximately $1.5 million at March 31, 2013 and $1.7 million at December 31, 2012. The amount remaining in accumulated other comprehensive loss related to the mortgage loan interest rate swap is being recognized in the Consolidated Statements of Income over the original term of the mortgage loan agreement through January 29, 2015. Also recorded as a component of accumulated other comprehensive loss in shareholders’ equity on the Consolidated Balance Sheets is the accumulated loss related to the construction loan interest rate swap of approximately $2.5 million, net of tax, at both March 31, 2013 and December 31, 2012. The amount remaining in accumulated other comprehensive loss related to the construction loan interest rate swap is being recognized in the Consolidated Statements of Income over the depreciable life of the office building. Approximately $900 thousand, net of tax, currently recognized in accumulated other comprehensive loss related to both the construction loan interest rate swap and the mortgage loan interest rate swap is expected to be reclassified into earnings over the next twelve months.
Non-designated Hedges
On June 25, 2009, we entered into an interest rate swap with Goldman Sachs in the notional amount of $97 million and with a maturity date of January 19, 2022 (Goldman Sachs interest rate swap). NewMarket entered into the Goldman Sachs interest rate swap in connection with the termination of a loan application and related rate lock agreement between Foundry Park I and Principal Commercial Funding II, LLC (Principal). When the rate lock agreement was originally executed in 2007, Principal simultaneously entered into an interest rate swap with a third party to hedge Principal’s exposure to fluctuation in the ten-year United States Treasury Bond rate. Upon the termination of the rate lock agreement on June 25, 2009, Goldman Sachs both assumed Principal’s position with the third party and entered into an offsetting interest rate swap with NewMarket. Under the terms of this interest rate swap, NewMarket is making fixed rate payments at 5.3075% and Goldman Sachs makes variable rate payments based on three-month LIBOR. We have collateralized this exposure through cash deposits posted with Goldman Sachs amounting to $33.8 million at March 31, 2013 and $37.7 million at December 31, 2012.
We have made an accounting policy election to not offset derivative fair value amounts with the fair value amounts for the right to reclaim cash collateral under our master netting arrangement. We elected not to use hedge accounting for the Goldman Sachs interest rate swap, and therefore, immediately recognize any change in the fair value of this derivative financial instrument directly in earnings.
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The table below presents the fair value of our derivative financial instruments, as well as their classification on the Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012.
 
 
Asset Derivatives
 
Liability Derivatives
 
 
March 31, 2013
 
December 31, 2012
 
March 31, 2013
 
December 31, 2012
(in thousands)
 
Balance
Sheet
Location
 
Fair Value
 
Balance
Sheet
Location
 
Fair Value
 
Balance
Sheet
Location
 
Fair Value
 
Balance
Sheet
Location
 
Fair Value

Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Goldman Sachs interest rate swap
 
 
 
$
0

 
 
 
$
0

 
Accrued expenses and Other noncurrent liabilities
 
$
29,548

 
Accrued expenses and Other noncurrent liabilities
 
$
32,761



The total fair value reflected in the table above includes amounts recorded in accrued expenses of approximately $0.9 million at March 31, 2013 and $2.3 million at December 31, 2012 for the Goldman Sachs interest rate swap.
The tables below present the effect of our derivative financial instruments on the Consolidated Statements of Income.
Effect of Derivative Instruments on the Consolidated Statements of Income
Designated Cash Flow Hedges
(in thousands)
Derivatives in Cash Flow Hedging Relationship
Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)
 
Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Location of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
Amount of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
Three Months Ended
March 31,
 
 
 
Three Months Ended
March 31,
 
 
 
Three Months Ended
March 31,
 
2013
 
2012
 
 
 
2013
 
2012
 
 
 
2013
 
2012
Mortgage loan interest rate swap
$
0

 
$
(228
)
 
Interest and
financing expenses
 
$
(327
)
 
$
(378
)
 
 
 
$
0

 
$
0

Construction loan interest rate swap
$
0

 
$
0

 
Cost of rental
 
$
(21
)
 
$
(21
)
 
 
 
$
0

 
$
0


Effect of Derivative Instruments on the Consolidated Statements of Income
Non-Designated Derivatives
(in thousands)
Derivatives Not Designated as Hedging Instruments
 
Location of Gain (Loss) Recognized in 
Income on Derivatives
 
Amount of Gain (Loss) Recognized in 
Income on Derivatives
 
 
 
 
Three Months Ended
March 31,
 
 
 
 
2013
 
2012
Goldman Sachs interest rate swap
 
Other income, net
 
$
678

 
$
1,735



Credit-risk Related Contingent Features
The agreement we have with our current derivative counterparty contains a provision where we could be declared in default on our derivative obligation if repayment of indebtedness is accelerated by our lender(s) due to our default on the indebtedness.
As of March 31, 2013, the fair value of the derivative in a net liability position related to this agreement, which includes accrued interest but excludes any adjustment for nonperformance risk, was $29.4 million. We have minimum collateral posting thresholds with the counterparty and have posted cash collateral of $33.8 million as of March 31, 2013. If required, we could have settled our obligations under the agreement at the termination value of $29.4 million at March 31, 2013.