DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
|9 Months Ended|
Sep. 30, 2020
|Derivative Instruments and Hedging Activities Disclosure [Abstract]|
|DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES||
Risk Management Objective of Using Derivatives
The Company is exposed to certain interest rate risks on our outstanding debt and foreign currency risks arising from our international business operations and global economic conditions. The Company enters into certain derivative financial instruments to lock in certain interest rates, as well as 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 uses interest rate swap arrangements to manage or hedge its interest rate risk. Notwithstanding the terms of the swaps, the Company is ultimately obligated for all amounts due and payable under the Revolving Commitment and the Term Loan (“Credit Facility”). The Company does not use such instruments for speculative or trading purposes.
On June 19, 2019, the Company entered into a floating-to-fixed interest rate swap for an aggregate notional amount of $100.0 million in order to hedge a portion of the Company’s floating rate indebtedness under the Credit Facility. The Company designated the swap as a cash flow hedge. The swap requires us to pay a fixed rate of 1.94% per annum on the notional amount. The cash flows from the swap began June 30, 2019 and ends on December 31, 2021. As of December 31, 2019, $0.3 million had been recorded as an Accumulated Loss in Other Comprehensive Income (“AOCI”). An additional loss of $0.3 million was recorded in AOCI in the nine months ended September 30, 2020. Realized gains and losses in connection with each required interest payment are reclassified from AOCI to interest expense during the period of the cash flows. During the quarter and nine months ended September 30, 2020, the Company reclassified into interest expense $0.3 million and $0.5 million, respectively. The fair value of the Company’s interest rate swaps was recorded as $0.7 million in Other Current Liabilities at September 30, 2020. The fair value of the Company’s interest rate swaps was recorded as $0.2 million in Other Current Liabilities and $0.1 in Long-Term Liabilities for a combined obligation of $0.3 million at December 31, 2019. On a quarterly basis, management evaluates any swap agreement to determine its effectiveness or ineffectiveness and records the change in fair value as an adjustment to AOCI. Management intends that the swap remains effective.
ROLLINS, INC. AND SUBSIDIARIES
Hedges of Foreign Exchange Risk
The Company is exposed to fluctuations in various foreign currencies against its functional currency, the US dollar. We use foreign currency derivatives, specifically vanilla foreign currency forward contracts (“FX Forwards”), to manage our exposure to fluctuations in the USD-CAD and AUD-USD exchange rates. FX Forwards involve fixing the foreign currency exchange rate for delivery of a specified amount of foreign currency on a specified date. The FX Forwards are typically settled in US dollars for their fair value at or close to their settlement date. We do not currently designate any of these FX Forwards under hedge accounting, but rather reflect the changes in fair value immediately in earnings. We do not use such instruments for speculative or trading purposes, but rather use them to manage our exposure to foreign exchange rates. Changes in the fair value of FX Forwards were recorded in other income/expense and were equal to a net loss of $0.1 million and a net gain of $0.1 million for the quarter ended September 30, 2020 and 2019, respectively and a net loss of $0.4 million and a net loss of $12 thousand for the nine months ended September 30, 2020 and 2019, respectively. The fair value of the Company’s FX Forwards was recorded as $0.1 million in Other Current Liabilities at September 30, 2020 and was a net obligation of $0.2 million in Other Current Liabilities at December 31, 2019.
As of September 30, 2020, the Company had the following outstanding FX Forwards (in thousands except for number of instruments):
The financial statement impact related to these derivative instruments was insignificant for the nine months ended September 30, 2020 and year ended December 31, 2019.
The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef