Derivative Financial Instruments

12 Months Ended

Dec. 31, 2016

Derivative Financial Instruments

Derivative Financial Instruments

(15) Derivative Financial Instruments

Risk Management Objectives of Using Derivatives

The Company is exposed to certain risks related 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 operations outside the U.S. 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. However, the Company utilizes varying notional amount 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.

These interest rate swap contracts serve to mitigate interest rate risk exposure by converting a portion of the Company’s monthly floating-rate vault cash rental payments to monthly fixed-rate vault cash rental payments. Typically, the Company receives monthly floating-rate payments from its interest rate swap contract counterparties that correspond to, in all material respects, the monthly floating-rate payments required by the Company to its vault cash rental providers for the portion of the average outstanding vault cash balances that have been hedged. In return, the Company pays its counterparties a monthly fixed-rate amount based on the same notional amounts outstanding. By converting the vault cash rental obligation interest rate from a floating-rate to a fixed-rate, the impact of favorable and unfavorable changes in future interest rates on the monthly vault cash rental payments, and therefore, the Vault cash rental expense line item in the accompanying Consolidated Statement of Operations, has been reduced.

There is never an exchange of the underlying principal or notional amounts associated with the interest rate swap contracts described above. Additionally, none of the Company’s existing interest rate swap contracts contain credit-risk-related contingent features.

Accounting Policy

The interest rate swap contracts discussed above are derivative instruments used by the Company to hedge exposure to variability in expected future cash flows attributable to a particular risk; therefore, they are designated and qualify as cash flow hedging instruments. The Company does not currently hold any derivative instruments not designated as hedging instruments, fair value hedges, or hedges of a net investment in a foreign operation.

The Company reports the effective portion of a gain or loss related to the cash flow hedging instrument as a component of the Accumulated other comprehensive loss, net line item in the accompanying Consolidated Balance Sheets and reclassifies the gain or loss into earnings in the Vault cash rental expense line item in the accompanying Consolidated Statement of Operations in the same period or periods during which the hedged transaction affects and has been forecasted in earnings.

Gains and losses related to the cash flow hedging instrument that represent either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in the Other expense (income) line item in the accompanying Consolidated Statement of Operations. As discussed above, the Company generally utilizes fixed-for-floating interest rate swap contracts in which the underlying pricing terms of the cash flow hedging instrument agree, in all material respects, with the pricing terms of the vault cash rental obligations to the Company’s vault cash providers. Therefore, the amount of ineffectiveness associated with the interest rate swap contracts has historically been immaterial. If the Company concludes that it is no longer probable the expected vault cash obligations that have been hedged will occur, or if changes are made to the underlying contract terms of the vault cash rental agreements, the interest rate swap contract would be deemed ineffective. The Company does not currently anticipate terminating or modifying terms of its existing derivative instruments prior to their expiration dates.

Accordingly, the Company recognizes all of its interest rate swap contracts derivative instruments as assets or liabilities in the accompanying Consolidated Balance Sheets at fair value and any 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 unrealized gains and losses to the fair value related to the interest rate swap contracts have been reported net of estimated taxes in the Accumulated other comprehensive loss, net line item in the accompanying Consolidated Balance Sheets. For additional information related to the Company’s interest rate swap contracts with respect to its fair value measurements, see Note 16. Fair Value Measurements.

Cash Flow Hedges of Interest Rate Risk

During the year ended December 31, 2016, the Company entered into the following new forward-starting interest rate swap contracts to hedge its exposure to floating interest rates on its vault cash outstanding balances in future periods: (i) £550.0 million aggregate notional amount interest rate swap contracts that begin January 1, 2017, with £250.0 million terminating December 31, 2018 and £300.0 million terminating December 31, 2019, (ii) £250.0 million initial notional amount interest rate swap contract, that begins January 1, 2019 and increases to £500.0 million January 1, 2020, terminating December 31, 2022, and (iii) $400.0 million aggregate notional amount interest rate swap contracts that begin January 1, 2018 and terminate December 31, 2022.

Effective June 29, 2016, one of the Company’s interest rate swap contract counterparties exercised its right to terminate a $200.0 million notional amount, 2.40% fixed rate, interest rate swap 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 interest rate swap 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 contract 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 (income) line item in the accompanying Consolidated Statements of Operations during the year ended December 31, 2016.

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 this 2016 Form 10-K) 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)
$	1,000	2.53	%	£	550	0.82	%	January 1, 2017 – December 31, 2017
$	1,150	2.17	%	£	550	0.82	%	January 1, 2018 – December 31, 2018
$	1,000	2.06	%	£	550	0.90	%	January 1, 2019 – December 31, 2019
$	1,000	2.06	%	£	500	0.94	%	January 1, 2020 – December 31, 2020
$	400	1.46	%	£	500	0.94	%	January 1, 2021 – December 31, 2021
$	400	1.46	%	£	500	0.94	%	January 1, 2022 – December 31, 2022

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

Balance Sheet Data

	December 31, 2016			December 31, 2015
Asset (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	Prepaid expenses, deferred costs, and other noncurrent assets	$	14,137	Prepaid expenses, deferred costs, and other noncurrent assets	$	—
Interest rate swap contracts	Current portion of other long-term liabilities		(16,533)	Current portion of other long-term liabilities		(23,327)
Interest rate swap contracts	Other long-term liabilities		(14,456)	Other long-term liabilities		(21,872)
Total Derivatives		$	(16,852)		$	(45,199)

Statements of Operations Data

	Year Ended December 31,
Derivatives in Cash Flow Hedging Relationship	Amount of Loss Recognized in Accumulated Other Comprehensive Loss on Derivative Instruments (Effective Portion)				Location of Loss Reclassified 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	$	(12,580)	$	(28,173)	Cost of ATM operating revenues	$	(28,570)	$	(34,231)

As of December 31, 2016, the Company expects to reclassify $16.5 million of net derivative-related losses contained within the Accumulated comprehensive loss, net line item in its accompanying Consolidated Balance Sheets into earnings during the next twelve months concurrent with the recording of the related vault cash rental expense amounts.