Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Derivative Instruments and Hedging Activities

v3.8.0.1
Derivative Instruments and Hedging Activities
12 Months Ended
Dec. 31, 2017
Derivative Instruments And Hedging Activities Disclosure [Abstract]  
Derivative Instruments and Hedging Activities

Note G – Derivative Instruments and Hedging Activities

Cash Flow Hedges

In December of 2016, the Company entered into an interest rate swap agreement to reduce our exposure to interest rate fluctuations on our variable rate debt obligations.  This derivative financial instrument is accounted for at fair value as a cash flow hedge which effectively modifies our exposure to interest rate risk by converting a portion of our floating rate debt to a fixed rate obligation, thus reducing the impact of interest rate changes on future interest expense.

 

We account for derivatives in accordance with ASC Topic 815. See Note B for more information on our accounting policy related to derivative instruments and hedging activities.  

 

Under this agreement, we receive a variable rate of interest based on LIBOR (as discussed in Note F) and we pay a fixed rate of interest at 1.59%.  The interest rate swap agreement was effective as of December 30, 2016 and has a termination date of December 31, 2019. As of December 31, 2017 and 2016, the total notional amount of the Company’s interest rate swap was $50 million.   

 

The fair value of the interest rate swap will be included in other long term assets or liabilities, when applicable.  At December 31, 2017, the fair value of the derivative financial instrument was $352,000 which was included in the balance sheet as other assets and reflected in AOCI. At December 31, 2016, it was determined that the fair value of this instrument was not significant and therefore is not recorded on the balance sheet as an asset or liability, nor is the change in value reflected through AOCI.  The instrument will be evaluated on a monthly basis and resulting increases or decreases will be recorded as a component of AOCI and will be reclassified to interest expense in the period during which the hedged transaction affects earnings.  Cash flows from the interest rate swap are to be included in operating activities on the consolidated statement of cash flows. As the specific terms and notional amounts of the derivative financial instrument match those of the fixed-rate debt being hedged, the derivative instrument is assumed to be a perfectly effective hedge and accordingly, there is no impact to the Company's consolidated statements of operations. As of December 31, 2017, the Company estimates that it will reclassify gains or losses on derivative instruments of $115,000 from AOCI to earnings during the next twelve months as the anticipated cash flows occur.