Quarterly report pursuant to Section 13 or 15(d)

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
6 Months Ended
Jun. 30, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

NOTE 12.             DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Risk Management Objective of Using Derivatives

 

The Company is exposed to certain risks arising from both its business operations and economic conditions. To manage this risk, the Company enters into derivative financial instruments from time to time. Certain of the Company's foreign operations expose the Company to fluctuations of foreign interest rates and exchange rates. These fluctuations may impact the value of the Company's cash receipts and payments in terms of the Company's functional currency. The Company enters into derivative financial instruments from time to time to protect the value or fix the amount of certain obligations in terms of its functional currency, the U.S. dollar. 

 

Cash Flow Hedges of Interest Rate Risk

 

The Company's objectives in using interest rate derivatives are to add stability to interest and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable  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.  During 2019, such derivatives were used to hedge the cash flows associated with existing unsecured variable rate debt.

ROLLINS, INC. AND SUBSIDIARIES

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income and subsequently reclassified into interest expense/income in the same period(s) during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge components excluded from the assessment of effectiveness are recognized currently in earnings recognized over the life of the hedge on a systematic and rational basis, as documented at hedge inception in accordance with the Company's accounting policy election. The earnings recognition of excluded components is presented in interest expense/income. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense/income as interest payments are made/received on the Company's variable-rate debt/assets. During 2019, the Company estimates that an additional $0.4 million will be reclassified as a(n) increase to interest expense in the next 12 months.

 

As of June 30, 2019, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (dollar amounts in thousands):

 

    Number of     Notional  
Interest Rate Derivative   Instruments     Amount  
Interest Rate Floors     1     $ 100,000  

 

The table below presents the effect of fair value and cash flow hedge accounting on Accumulated Other Comprehensive Income as of June 30, 2019 and June 30 2018.

 

The Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income

Derivatives in Subtopic   Amount of Gain or (Loss)     Amount of Gain or (Loss)  
815-20 Hedging   Recognized in     Reclassified from Accumulated OCI  
Relationships   OCI on Derivative     into Income  
    Three Months Ended June 30,     Six Months Ended June 30,  
Derivatives in Cash Flow Hedging Relationships   2019     2018     2019     2018  
Interest Rate Products   $ 257     $     $ 257     $  
Total   $ 257     $     $ 257     $  

 

Hedges of Foreign Exchange Risk

 

The Company is exposed to fluctuations in various foreign currencies against its functional currency, the U.S. dollar. The Company uses foreign currency derivatives, specifically vanilla foreign currency forwards, to manage its exposure to fluctuations in the USD-CAD and AUD-USD exchange rates. Currency forward agreements involve fixing the foreign currency exchange rate for delivery of a specified amount of foreign currency on a specified date. The currency forward agreements are typically cash settled in U.S. dollars for their fair value at or close to their settlement date.

 

The Company does not currently designate any of these foreign exchange forwards under hedge accounting, but rather reflects the changes in fair value immediately in earnings. Derivatives not designated as hedges are not speculative and are used to manage the Company's exposure to foreign exchange rates. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings and were equal to a net loss of $0.1 million for the quarter ended June 30, 2019 and a net gain of $0.2 million for the same quarter in the prior year and were equal to a net loss of $0.2 million for the first six months ended June 30, 2019 and a net gain of $0.3 million for the same period in the prior year. As of June 30, 2019, the Company had the following outstanding derivatives that were not designated as hedges in qualifying hedging relationships (in thousands except for number of instruments):

Non-Designated Derivative Summary
FX Forward Contracts   Number of
Instruments
    Sell
Notional
    Buy
Notional
 
Sell AUD/Buy USD Fwd Contract     1     $ 100     $ 71  
Sell CAD/Buy USD Fwd Contract     3     $ 2,500     $ 1,869  
Total     4             $ 1,940  

ROLLINS, INC. AND SUBSIDIARIES

The table below presents the fair value of the Company's derivative financial instruments as well as their classification on the balance sheet as of June 30, 2019 and December 31, 2018 (in thousands):

 

    Tabular Disclosure of Fair Values of Derivative Instruments  
    Derivatives Asset     Derivative Liabilities  
          Fair Value as of:        
Derivatives Not Designated as Hedging Instruments   June 30,
2019
    December 31,
2018
    June 30,
2019
    December 31,
2018
 
FX Forward Contracts                                
Balance Sheet Location   Other
Assets
    Other
Assets
    Other
Current
Liabilities
    Other
Current
Liabilities
 
Sell AUD/Buy USD Fwd Contract   $     $ 18     $     $ (1 )
Sell CAD/Buy USD Fwd Contract     8       121       (91 )     (4 )
Total   $ 8     $ 139     $ (91 )   $ (5 )

 

Effect of Derivative Instruments on the Income Statement for Derivatives Not Designated

as Hedging Instruments for the Three and Six Months Ended June 30, 2019 and 2018

 

        Amount of Gain or (Loss)     Amount of Gain or (Loss)  
Derivatives Designated   Location of Gain or (Loss)   Recognized in Income     Recognized in Income  
as Hedging Instruments   Recognized in Income   Three Months Ended June 30,     Six Months Ended June 30,  
        2019     2018     2019     2018  
Swap   Other inc/(exp)   $ 1     $     $ 1     $  
Total       $ 1     $     $ 1     $  
                             
        Amount of Gain or (Loss)     Amount of Gain or (Loss)  
Derivatives Not Designated   Location of Gain or (Loss)   Recognized in Income     Recognized in Income  
as Hedging Instruments   Recognized in Income   Three Months Ended June 30,     Six Months Ended June 30,  
        2019     2018     2019     2018  
Sell AUD/Buy USD Fwd Contract   Other inc/(exp)   $ 4     $ 27     $     $ 38  
Sell CAD/Buy USD Fwd Contract   Other inc/(exp)     (71 )     123       (157 )     259  
Total       $ (67 )   $ 150     $ (157 )   $ 297  

 

The table below presents the total fair value classification within the fair value hierarchy for the complete portfolio of derivative transactions at June 30, 2019 (in thousands):

 

    Recurring Fair Value Measurements  
    Quoted Prices in Active                                      
    Markets for Identical     Significant Other     Significant Unobservable              
    Assets and Liabilities     Observable Inputs     Inputs        
    at June 30,     at June 30,     at June 30,     Total Fair Value  
    (Level 1)     (Level 2)     (Level 3)     at June 30,  
    2019     2018     2019     2018     2019     2018     2019     2018  
Assets                                                                
Derivative Financial Instruments   $     $     $ 8     $ 122     $     $     $ 8     $ 122  
Liabilities                                                                
Derivative Financial Instruments   $     $     $ (91 )   $ (10 )   $     $     $ (91 )   $ (10 )

ROLLINS, INC. AND SUBSIDIARIES

As of June 30, 2019, the fair value of derivatives in a net liability position was nine thousand dollars inclusive of counterparty credit risk. As of the balance sheet date, the Company has not posted any collateral related to these agreements. If the Company had breached any of these provisions at June 30, 2019, it could have been required to settle its obligations under the agreements at their termination value of nine thousand dollars.