(11) Derivative Financial Instruments

Cash Flow Hedging Strategy

The Company is exposed to certain risks relating to its ongoing business operations, including interest rate risk associated with its vault cash rental obligations and, to a lesser extent, borrowings under its revolving credit facility. The Company is also exposed to foreign currency exchange rate risk with respect to its investments in its foreign subsidiaries. While the Company does not currently utilize derivative instruments to hedge its foreign currency exchange rate risk or to manage the interest rate risk associated with its borrowings, the Company does utilize interest rate swap contracts to manage the interest rate risk associated with its vault cash rental obligations in the U.S. and the U.K.

The interest rate swap contracts entered into with respect to the Company’s vault cash rental obligations serve to mitigate the Company’s exposure to interest rate risk by converting a portion of the Company’s monthly floating rate vault cash rental obligations to a fixed-rate. The Company has contracts in varying notional amounts through December 31, 2020 for the Company’s U.S. and U.K. vault cash rental obligations. By converting such amounts to a fixed rate, the impact of future interest rate changes (both favorable and unfavorable) on the Company’s monthly vault cash rental expense amounts has been reduced. The interest rate swap contracts typically involve the receipt of floating rate amounts from the Company’s counterparties that match, in all material respects, the floating rate amounts required to be paid by the Company to its vault cash providers for the portions of the Company’s outstanding vault cash obligations that have been hedged. In return, the Company typically pays the interest rate swap counterparties a fixed-rate amount per month based on the same notional amounts outstanding. At no point is there an exchange of the underlying principal or notional amounts associated with the interest rate swaps. Additionally, none of the Company’s existing interest rate swap contracts contain credit-risk-related contingent features.

For each derivative instrument that is designated and qualifies as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of the Accumulated other comprehensive loss, net line item on the accompanying Consolidated Balance Sheets and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged item affects earnings. Gains and losses on the derivative instrument representing either hedge ineffectiveness or hedge components that are excluded from the assessment of effectiveness are recognized in earnings. However, because the Company generally utilizes fixed-for-floating interest rate swaps in which the underlying pricing terms agree, in all material respects, with the pricing terms of the Company’s vault cash rental obligations, the amount of ineffectiveness associated with such interest rate swap contracts has historically been immaterial. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in the Consolidated Statements of Operations during the current period.

During the three months ended March 31, 2016, the Company entered into new forward-starting interest rate swap agreements with an aggregate notional amount of £550.0 million. These swap agreements begin on January 1, 2017, with £250.0 million terminating December 31, 2019 and £300.0 million terminating December 31, 2020.

Effective June 29, 2016, one of the Company’s interest rate swap counterparties exercised its right to terminate a $200.0 million notional amount, 2.40% fixed-rate, contract that was previously designated as a cash flow hedge of the Company’s 2019 and 2020 vault cash rental payments. The designated vault cash rental payments remain probable; therefore upon termination and as of that date, the Company recognized an unrealized loss of $4.9 million in the Accumulated other comprehensive loss, net line item in the accompanying Consolidated Balance Sheets. The Company will amortize this unrealized loss into Vault cash rental expense, a component of the Cost of ATM operating revenues line item in the accompanying Consolidated Statements of Operations, over the 2019 and 2020 periods. The terminated contract was effectively novated by the previous counterparty and the Company entered into a similar $200.0 million notional amount, 2.52% fixed-rate interest rate swap with a new counterparty, which the Company designated as a cash flow hedge of its 2019 and 2020 vault cash rental payments. The modified terms resulted in ineffectiveness of $0.4 million recognized in the Other expense line item in the accompanying Consolidated Statements of Operations.

The notional amounts, weighted average fixed rates, and terms associated with the Company’s interest rate swap contracts accounted for as cash flow hedges that are currently in place (as of the date of the issuance of these financial statements) are as follows:


Notional Amounts		Weighted Average Fixed Rate		Notional Amounts		Weighted Average Fixed Rate
U.S.		U.S.		U.K.		U.K.		Term
(In millions)				(In millions)
$	1,300	2.74	%	£	—	—	%	July 1, 2016 – December 31, 2016
$	1,000	2.53	%	£	550	0.82	%	January 1, 2017 – December 31, 2017
$	750	2.54	%	£	550	0.82	%	January 1, 2018 – December 31, 2018
$	600	2.45	%	£	300	0.86	%	January 1, 2019 – December 31, 2019
$	600	2.45	%	£	—	—	%	January 1, 2020 – December 31, 2020

Accounting Policy

The Company recognizes all of its derivative instruments as either assets or liabilities in the accompanying Consolidated Balance Sheets at fair value. The accounting for changes in the fair value (i.e., gains or losses) of those derivative instruments depends on: (i) whether these instruments have been designated (and qualify) as part of a hedging relationship and (ii) the type of hedging relationship actually designated. For derivative instruments that are designated and qualify as hedging instruments, the Company designates the hedging instrument, based upon the exposure being hedged, as a cash flow hedge, a fair value hedge, or a hedge of a net investment in a foreign operation.

The Company has designated all of its interest rate swap contracts as cash flow hedges of the Company’s forecasted vault cash rental obligations. Accordingly, changes in the fair values of the related interest rate swap contracts have been reported in the Accumulated other comprehensive loss, net line item in the accompanying Consolidated Balance Sheets.

The Company believes that it is more likely than not that it will be able to realize the benefits associated with its net deferred tax asset positions in the future. Therefore, the Company records the unrealized gains and losses related to its interest rate swaps net of estimated taxes in the Accumulated other comprehensive loss, net line item in the accompanying Consolidated Balance Sheets.

Tabular Disclosures

The following tables depict the effects of the use of the Company’s derivative contracts in the accompanying Consolidated Balance Sheets and Consolidated Statements of Operations.

Balance Sheet Data


	June 30, 2016			December 31, 2015
Liability Derivative Instruments	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
		(In thousands)			(In thousands)
Derivatives Designated as Hedging Instruments:
Interest rate swap contracts	Current portion of other long-term liabilities	$	24,563	Current portion of other long-term liabilities	$	23,327
Interest rate swap contracts	Other long-term liabilities		48,771	Other long-term liabilities		21,872
Total Derivatives		$	73,334		$	45,199

Statements of Operations Data


	Three Months Ended June 30,
Derivatives in Cash Flow Hedging Relationship	Amount of Loss Recognized in Accumulated Other Comprehensive Loss on Derivative Instruments (Effective Portion)				Location of Loss Reclassed from Accumulated Other Comprehensive Loss Into Income (Effective Portion)	Amount of Loss Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)
	2016		2015			2016		2015
	(In thousands)					(In thousands)
Interest rate swap contracts	$	(16,617)	$	(620)	Cost of ATM operating revenues	$	(7,280)	$	(8,618)


	Six Months Ended June 30,
Derivatives in Cash Flow Hedging Relationship	Amount of Loss Recognized in Accumulated Other Comprehensive Loss on Derivative Instruments (Effective Portion)				Location of Loss Reclassed from Accumulated Other Comprehensive Loss Into Income (Effective Portion)	Amount of Loss Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)
	2016		2015			2016		2015
	(In thousands)					(In thousands)
Interest rate swap contracts	$	(34,631)	$	(14,345)	Cost of ATM operating revenues	$	(14,608)	$	(17,189)

The Company does not currently have any derivative instruments that have been designated as fair value or net investment hedges. The Company does not currently anticipate terminating its existing derivative instruments prior to their expiration dates. If the Company concludes that it is no longer probable that the anticipated future vault cash rental obligations that have been hedged will occur, or if changes are made to the underlying terms and conditions of the Company’s vault cash rental agreements, thus creating some amount of ineffectiveness associated with the Company’s current interest rate swap contracts, any resulting gains or losses will be recognized in the Other expense line item of the accompanying Consolidated Statements of Operations.

As of June 30, 2016, the Company expects to reclassify $24.6 million of net derivative-related losses contained within Accumulated other comprehensive loss, net line item into earnings during the next twelve months concurrent with the recording of the related vault cash rental expense amounts.

See Note 12. Fair Value Measurements for additional disclosures on the Company’s interest rate swap contracts in respect to its fair value measurements.