CDW 2012 Annual Report Download - page 75

Table of Contents CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company is exposed to interest rate risk associated with fluctuations in the interest rates on its floating-rate debt. In order to
manage the risk associated with changes in interest rates on borrowings under the Term Loan, the Company has entered into interest
rate derivative agreements to economically hedge a portion of the cash flows associated with the Term Loan.
The Company’
s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest
rate fluctuations. To accomplish these objectives, the Company uses interest rate caps and swaps as part of its interest rate risk
management strategy. Interest rate caps involve the receipt of floating-rate amounts from a counterparty if interest rates rise above the
strike rate on the contract in exchange for an up-front premium. Interest rate swaps involve the receipt of floating-rate amounts from a
counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the
underlying notional amount.
Interest Rate Cap Agreements
In November 2012, the Company entered into six interest rate cap agreements with a combined $650.0 million notional amount. Under
these agreements, the Company made premium payments totaling $0.3 million to the counterparties in exchange for the right to receive
payments from them of the amount, if any, by which three-month LIBOR exceeds 1.5% during the agreement period. The cap
agreements are effective from January 14, 2013 through January 14, 2015.
During 2011, the Company entered into four interest rate cap agreements with a combined $500.0 million
notional amount. Under these
agreements, the Company made premium payments totaling $3.7 million to the counterparties in exchange for the right to receive
payments from them of the amount, if any, by which three-month LIBOR exceeds 3.5% during the agreement period. The cap
agreements are effective from January 14, 2013 through January 14, 2015.
In 2010, the Company entered into four interest rate cap agreements with a combined $1,100.0 million notional amount. Under these
agreements, the Company made premium payments totaling $5.9 million to the counterparties in exchange for the right to receive
payments from them of the amount, if any, by which three-month LIBOR exceeds 3.5% during the agreement period. The cap
agreements are effective from January 14, 2011 through January 14, 2013.
These cap agreements have not been designated as cash flow hedges of interest rate risk for GAAP accounting purposes. Instead, the
interest rate cap agreements are recorded at fair value on the Company’s consolidated balance sheet each period, with changes in fair
value recorded directly to interest expense, net in the Company’s consolidated statements of operations.
Interest Rate Swap Agreements
There were no interest rate swaps outstanding as of December 31, 2012 or 2011. On January 14, 2011, the Company's two existing
interest rate swap agreements terminated. The interest rate swaps hedged a portion of the cash flows associated with the Term Loan. On
October 24, 2007, the Company entered into the first swap agreement with a notional amount of $1,500.0 million , and later amended
this swap agreement effective July 14, 2009. On November 27, 2007, the Company entered into the second interest rate swap agreement
with a notional amount of $700.0 million , which was reduced to $500.0 million as of January 14, 2010.
For the Company’s interest rate swaps designated as cash flow hedges of interest rate risk for GAAP accounting purposes, the effective
portion of the changes in fair value of the swaps was initially recorded as a component of accumulated other comprehensive loss on the
Company’s consolidated balance sheets and subsequently reclassified into interest expense, net on the Company’s consolidated
statements of operations in the period that the hedged forecasted transaction affected earnings. The ineffective portion of the change in
fair value of the swaps was recognized directly in interest expense, net. For the Company’s interest rate swap not designated as a cash
flow hedge of interest rate risk, changes in fair value of the swap were recorded directly to interest expense, net in the Company’s
consolidated statements of operations.
Both of the Company’s interest rate swaps were initially designated as cash flow hedges. However, as a result of the amendment to the
$1,500.0 million interest rate swap agreement, the Company prospectively discontinued the hedge accounting on the original interest
rate swap agreement. Simultaneously, the Company designated the amended interest rate swap agreement as a cash flow hedge. On
December 17, 2010, the Company discontinued the hedge accounting on the amended $1,500.0 million interest rate swap agreement as
a result of an amendment to the Term
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8.
Derivative Instruments and Hedging Activities