(15) Derivative Financial Instruments

Risk Management Objectives of Using Derivatives

The Company is exposed to interest rate risk associated with its vault cash rental obligations and, to a lesser extent, borrowings under its revolving credit facility. 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., the U.K., and Australia. The Company does not currently utilize derivative instruments to manage the interest rate risk associated with its borrowings. The Company is also exposed to foreign currency exchange rate risk with respect to its operations outside the U.S. The Company has not historically utilized derivative instruments to hedge its foreign currency exchange rate risk; however, during the fourth quarter of 2017 the Company entered into a series of short-term foreign currency forward contracts to hedge its foreign exchange rate risk associated with certain anticipated transactions.

The Company’s 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 and foreign currency forward 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 each 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 same period or periods that the hedged transaction affects and has been forecasted in earnings. Gains or losses on the Company’s interest rate swaps are recognized with the hedged item in the Vault cash rental expense line item in the accompanying Consolidated Statement of Operations, while gains and losses on our foreign currency forward contracts are recognized with the associated hedged item, in the Other expense (income) line item.

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 and foreign currency forward 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 and foreign currency forward 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 and foreign currency forward contracts 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 and foreign currency forward 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 and foreign currency forward 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 and foreign currency forward 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 and foreign currency forward contracts with respect to its fair value measurements, see Note 16. Fair Value Measurements.

Cash Flow Hedges

During the three months ended December 31, 2017, the company entered into a series of short-term foreign currency forward contracts with an aggregate notional amount of approximately $9.5 million Canadian dollars to hedge its foreign exchange rate risk associated with certain anticipated transactions. Approximately $6.8 million Canadian dollars in notional amount was outstanding as of December 31, 2017, having quarterly settlement dates through December 31, 2018 and forward rates of approximately 1.29 CAD/USD.

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 remained 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 were in place for the U.S. ($300 million was entered into in January 2018) and U.K. (as of the date of the issuance of this 2017 Form 10-K) are as follows:

Summary of outstanding interest rate swaps in the U.S. and U.K.


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)
$	300	1.88	%		—	—		January 16, 2018 – December 31, 2018
$	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 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 for Australia (as of the date of the issuance of this 2017 Form 10-K) are as follows:

Summary of outstanding interest rate swaps in Australia


Notional Amounts AUS $		Weighted Average Fixed Rate		Term
(In millions)
$	135	2.98	%	January 1, 2018 – February 27, 2018
$	85	3.11	%	February 28, 2018 – September 28, 2018
$	35	2.98	%	September 29, 2018 – February 28, 2019

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


	December 31, 2017			December 31, 2016
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 current assets	$	1,154	Prepaid expenses, deferred costs, and other current assets	$	—
Interest rate swap contracts	Prepaid expenses, deferred costs, and other noncurrent assets		14,467	Prepaid expenses, deferred costs, and other noncurrent assets		14,137
Interest rate swap contracts	Current portion of other long-term liabilities		(7,314)	Current portion of other long-term liabilities		(16,533)
Interest rate swap contracts	Other long-term liabilities		(3,547)	Other long-term liabilities		(14,456)
Total derivative instruments, net		$	4,760		$	(16,852)

As of December 31, 2017, the Interest rate swap contract – Current portion of long-term liabilities balance above also includes approximately $0.1 million related to foreign currency forward contracts.

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)
	2017 (1)		2016			2017		2016
	(In thousands)					(In thousands)
Interest rate swap contracts	$	(3,007)	$	(12,580)	Cost of ATM operating revenues	$	(20,036)	$	(28,570)

⁽¹⁾

Includes a loss of $0.1 million related to foreign currency forward contracts.

As of December 31, 2017, the Company expects to reclassify $7.3 million of net derivative-related losses 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.