NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1
—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business, consolidation and presentation
— We are a leading worldwide provider of payment technology and software solutions delivering innovative services to our customers globally. Our technologies, services and employee expertise enable us to provide a broad range of solutions that allow our customers to accept various payment types and operate their businesses more efficiently. We distribute our services across a variety of channels to customers in
30
countries throughout North America, Europe, the Asia-Pacific region and Brazil and operate in
three
reportable segments: North America, Europe and Asia-Pacific.
We were incorporated in Georgia as Global Payments Inc. in
2000
and spun-off from our former parent company in
2001
. Including our time as part of our former parent company, we have been in the payment technology services business since
1967
. Global Payments Inc. and its consolidated subsidiaries are referred to collectively as "Global Payments," the "Company," "we," "our" or "us," unless the context requires otherwise.
These consolidated financial statements include our accounts and those of our majority-owned subsidiaries and all intercompany balances and transactions have been eliminated in consolidation. These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and present our financial position, results of operations and cash flows.
On July 27, 2016, the board of directors authorized a
change in our fiscal year end from May 31 to December 31. As a result, we refer to the period consisting of the seven months ended December 31, 2016 as the "2016 fiscal transition period."
Use of estimates
—
The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reported period. Actual results could differ materially from those estimates.
Revenue recognition
—
We provide payment technology services for credit cards, debit cards, electronic payments and check-related services. Revenue is recognized when such services are performed. Revenue for services provided directly to merchants is recorded net of interchange fees charged by card issuing banks. Our primary business model is to provide our payment services, enterprise software solutions and other value-added services directly to our customers. We also provide certain of our payment services through a wholesale distribution channel comprised of independent sales organizations ("ISOs"). The majority of our revenues is generated by services priced as a percentage of transaction value or a specified fee per transaction, depending on card type or the vertical. We also charge software licensing and subscription fees and other fees based on specific services that are unrelated to the number of transactions or the transaction value. Revenue from credit cards and signature debit cards is generally based on a percentage of transaction value along with other related fees, while revenue from PIN-based debit cards is typically based on a fee per transaction.
Certain of our integrated and vertical market solutions arrangements contain multiple elements, such as equipment, perpetual licenses, software-as-a-service, maintenance, installation and training. We allocate consideration to each element based on the relative-selling-price method. For certain arrangements, customers pay in advance, but revenue is recognized over the service period. In multiple element arrangements where more-than-incidental software elements are included, the entire amount of revenue under the arrangement is deferred until all elements have been delivered or objective evidence of the fair value of the undelivered items can be established. The amounts paid in advance by customers and amounts deferred for software arrangements are reflected as unearned revenue in the consolidated balance sheets with the portion estimated to be recognized as revenue within the next twelve months reflected in current liabilities and the remainder reflected in other noncurrent liabilities.
Cash and cash equivalents
—
Cash and cash equivalents include cash on hand and all liquid investments with a maturity of three months or less when purchased. We consider certain portions of our cash and cash equivalents to be unrestricted but not available for general purposes. The amount of cash that we consider to be available for general purposes does not include the following: (i) settlement-related cash balances, (ii) funds held as collateral for merchant losses ("Merchant Reserves") and (iii) funds held for customers. Settlement-related cash balances represent funds that we hold when the incoming amount from the card networks precedes the funding obligation to the merchant. Settlement-related cash balances are not restricted; however, these funds are generally paid out in satisfaction of settlement processing obligations the following day. Merchant Reserves serve as collateral
to minimize contingent liabilities associated with any losses that may occur under the merchant agreement. We record a corresponding liability in settlement processing assets and settlement processing obligations in our consolidated balance sheet. While this cash is not restricted in its use, we believe that designating this cash as Merchant Reserves strengthens our fiduciary standing with financial institutions that sponsor us and is in accordance with guidelines set by the card networks. See "Note
3
—
Settlement Processing Assets and Obligations" and discussion below for further information. Funds held for customers and the corresponding liability that we record in "customer deposits" include amounts collected prior to remittance on our customers' behalf.
Settlement processing assets and obligations
—
Settlement processing assets and obligations represent intermediary balances arising in our settlement process for direct merchants. In accordance with Accounting Standards Codification ("ASC") Subtopic 210-20,
Offsetting
, we apply offsetting to our settlement processing assets and obligations where a right of setoff exists. See "Note
3
—
Settlement Processing Assets and Obligations" for further information
.
Reserve for operating losses
—
Our merchant customers are liable for any charges or losses that occur under the merchant agreement. We experience losses in our card processing services when we are unable to collect amounts from merchant customers for any charges properly reversed by the card issuing financial institutions. When we are not able to collect these amounts from the merchants due to merchant fraud, insolvency, bankruptcy or any other reason, we may be liable for the reversed charges. We require cash deposits, guarantees, letters of credit and other types of collateral from certain merchants to minimize any such contingent liability, and we also utilize a number of systems and procedures to manage merchant risk. We experience check guarantee losses when we are unable to collect the full amount of a guaranteed check from the checkwriter. We refer to both merchant credit losses and check guarantee losses as "operating losses." We record an estimated liability for operating losses comprised of estimated known losses and estimated incurred but not reported losses.
Capitalized customer acquisition costs
— Capitalized customer acquisition costs, which are included in other noncurrent assets, consist of (1) up-front signing bonus payments made to certain salespersons for the establishment of certain of our new merchant relationships and (2) a deferred acquisition cost representing the estimated cost of buying out the residual commissions of certain vested salespersons. Capitalized customer acquisition costs represent incremental, direct customer acquisition costs that are recoverable through merchant profitability. The capitalized customer acquisition costs are amortized using a method which approximates a proportional revenue approach over the initial term of the related merchant contract.
Up-front signing bonuses paid for certain new accounts are based on the estimated profitability for the first year of the merchant contract. The signing bonus, amount capitalized, and related amortization are adjusted after the first year to reflect the actual profitability generated by the merchant contract during that year. The deferred customer acquisition cost asset is accrued over the first year of merchant processing, consistent with the build-up in the accrued buyout liability, as described below.
We evaluate the capitalized customer acquisition costs for impairment on an annual basis by comparing, on a pooled basis by vintage month of origination, the expected future net cash flows from underlying merchant relationships to the carrying amount of the capitalized customer acquisition costs. If the estimated future net cash flows are lower than the recorded carrying amount, indicating an impairment of the value of the capitalized customer acquisition costs, the impairment loss would be charged to operations. Based on our evaluation, we determined that no impairment of capitalized customer acquisition costs had occurred as of
December 31, 2017
.
Property and equipment
— Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method, except for certain technology assets discussed below. Leasehold improvements are amortized over the lesser of the remaining term of the lease and the useful life of the asset.
We develop software that is used to provide services to customers. Capitalization of internal-use software, primarily associated with operating platforms, occurs when we have completed the preliminary project stage, management authorizes the project, management commits to funding the project, and it is probable the project will be completed and used to perform the function intended. The preliminary project stage consists of the conceptual formulation of alternatives, the evaluation of alternatives, the determination of existence of needed technology and the final selection of alternatives. Costs incurred during the preliminary project stage are expensed as incurred. Internal-use software is amortized over its estimated useful life, which is typically
2
to
10
years, in a manner that best reflects the pattern of economic use of the assets.
Goodwill
—
We have historically performed our annual goodwill impairment test as of January 1. As a result of the change in our fiscal year end from May 31 to December 31, we elected to change our annual goodwill impairment test date from January 1 to October 1 to give us sufficient time to complete our assessment in conjunction with our year-end reporting. We performed an annual goodwill impairment test on January 1, 2017 and on
October 1, 2017
.
We test goodwill for impairment at the reporting unit level annually and more often if an event occurs or circumstances change that indicate the fair value of a reporting unit is below its carrying amount. We have the option of performing a qualitative assessment of impairment to determine whether any further quantitative testing for impairment is necessary. The option of whether or not to perform a qualitative assessment is made annually and may vary by reporting unit.
Factors we consider in the qualitative assessment include general macroeconomic conditions, industry and market conditions, cost factors, overall financial performance of our reporting units, events or changes affecting the composition or carrying amount of the net assets of our reporting units, sustained decrease in our share price, and other relevant entity-specific events. If we elect to bypass the qualitative assessment or if we determine, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, a quantitative test would be required.
During the first quarter of 2017, we revised our reporting unit structure within our North America segment to reflect changes made in connection with the integration of Heartland Payment Systems, Inc. ("Heartland"). Under the revised reporting unit structure, we operate two reporting units in our North America segment: (i) Payments and (ii) Integrated Solutions and Vertical Markets. We reassigned the goodwill previously allocated to North America merchant services and Heartland to the two new reporting units using a relative fair value approach. As a result of the change in reporting units, we performed goodwill impairment tests immediately before and after this change in reporting units and determined that there was no impairment.
Following the revision described above, we now have
seven
reporting units: North America Payments, North America Integrated Solutions and Vertical Markets, U.K. merchant services, Asia-Pacific merchant services, Central and Eastern Europe merchant services, Russia merchant services and Spain merchant services. As of
October 1, 2017
, we elected to perform a qualitative assessment of impairment for each of our reporting units. We determined on the basis of qualitative factors that the fair value of each reporting unit was not more likely than not less than the respective carrying amount. We believe that the fair value of each of our reporting units is substantially in excess of its carrying amount.
Other intangible assets
—
Other intangible assets include customer-related intangible assets (such as customer lists and merchant contracts), contract-based intangible assets (such as noncompete agreements, referral agreements and processing rights), acquired technologies, trademarks and trade names associated with acquisitions. These assets are amortized over their estimated useful lives. The useful lives for customer-related intangible assets are determined based primarily on forecasted cash flows, which include estimates for the revenues, expenses, and customer attrition associated with the assets. The useful lives of contract-based intangible assets are equal to the terms of the agreements. The useful lives of amortizable trademarks and trade names are based on our plans to use the trademarks and trade names in the applicable markets. Acquired technology is amortized on a straight-line basis over its estimated useful life.
Amortization for most of our customer-related intangible assets is calculated using an accelerated method. In determining amortization expense under our accelerated method for any given period, we calculate the expected cash flows for that period that were used in determining the acquisition-date fair value of the asset and divide that amount by the expected total cash flows over the estimated life of the asset. We multiply that percentage by the initial carrying amount of the asset to arrive at the amortization expense for that period. If the cash flow patterns that we experience differ significantly from our initial estimates, we adjust the amortization schedule prospectively. These cash flow patterns are derived using certain assumptions and cost allocations due to a significant number of asset interdependencies that exist in our business. We believe that our accelerated method reflects the expected pattern of the benefit to be derived from the acquired customer relationships.
We use the straight-line method of amortization for our contract-based intangibles, amortizable trademarks and trade names and acquired technologies.
Impairment of long-lived assets
—
We regularly evaluate whether events and circumstances have occurred that indicate the carrying amount of property and equipment and finite-life intangible assets may not be recoverable. When factors indicate that these long-lived assets should be evaluated for possible impairment, we assess the potential impairment by determining whether the carrying amount of such long-lived assets will be recovered through the future undiscounted cash flows expected from use of
the asset and its eventual disposition. If the carrying amount of the asset is determined not to be recoverable, a write-down to fair value is recorded. Fair values are determined based on quoted market prices or discounted cash flow analysis as applicable. We regularly evaluate whether events and circumstances have occurred that indicate the useful lives of property and equipment and finite-life intangible assets may warrant revision. The carrying amounts of our long-lived assets, including property and equipment and finite-life intangible assets, were not impaired at
December 31, 2017
and 2016.
Accrued buyout liability
—
Certain of our salespersons are paid residual commissions based on the profitability generated by certain merchants. We have the right, but not the obligation, to buy out some or all of these commissions and intend to do so periodically. Such purchases of the commissions are at a fixed multiple of the last
12
months' commissions. Because of our intent and ability to execute purchases of the residual commissions, and the mutual understanding between us and our salespersons, we have accounted for this deferred compensation arrangement pursuant to the substantive nature of the plan. We therefore record the amount that we would have to pay (the "settlement cost") to buy out non-servicing related commissions in their entirety from vested salespersons, and an estimated amount for unvested salespersons, based on their progress towards vesting and the expected percentage that will become vested. As noted above, as the liability increases over the first year of the related merchant contract, we record a related asset for currently vested salespersons. Subsequent changes in the estimated accrued buyout liability due to merchant attrition, same-store sales growth or contraction and changes in profitability are included in the selling, general and administrative expense in the consolidated statement of income.
The accrued buyout liability is based on merchants under contract at the balance sheet date, the gross margin generated by those merchants over the prior
12
months, and the contractual buyout multiple. The liability related to a new merchant is therefore
zero
when the merchant is installed, and increases over the
12
months following the installation date. The same procedure is applied to unvested commissions over the expected vesting period, but is further adjusted to reflect our estimate of the percentage of unvested salespersons that will become vested.
The classification of the accrued buyout liability between current and noncurrent on the consolidated balance sheet is based upon our estimate of the amount of the accrued buyout liability that we reasonably expect to pay over the next
12
months.
Income taxes
—
Deferred income taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax laws and rates. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Accounting Standards Codification ("ASC") Topic 740, "Income Taxes" ("ASC 740") requires companies to recognize the effect of tax law changes in the period of enactment. To address the application of GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed in reasonable detail to complete the accounting for certain income tax effects of the U.S. Tax Cuts and Jobs Act of 2017 (the "2017 U.S. Tax Act"), which was enacted on December 22, 2017, the U.S. Securities and Exchange Commission (the "SEC") issued Staff Accounting Bulletin No. 118 ("SAB 118"), which provides guidance for registrants regarding the application of ASC Topic 740 in the reporting period that includes
December 22, 2017
under three scenarios:
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Measurement of certain income tax effects is complete
. Registrants must reflect the tax effects of the 2017 U.S. Tax Act for which the accounting is complete.
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Measurement of certain income tax effects can be reasonably estimated
. Registrants must report provisional amounts for those specific income tax effects of the 2017 U.S. Tax Act for which the accounting is incomplete but a reasonable estimate can be determined. Provisional amounts or adjustments to provisional amounts identified in the measurement period, as defined, should be included as an adjustment to tax expense or benefit from continuing operations in the period the amounts are determined.
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Measurement of certain income tax effects cannot be reasonably estimated
. Registrants are not required to report provisional amounts for any specific income tax effects of the 2017 U.S. Tax Act for which a reasonable estimate cannot be determined, and would continue to apply ASC 740 based on the provisions of the tax laws that were in effect immediately prior to the enactment of the 2017 U.S. Tax Act. Registrants would report the provisional amounts of the tax effects of the 2017 U.S. Tax Act in the first reporting period in which a reasonable estimate can be determined.
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SAB 118 provides that the measurement period is complete when a company's accounting is complete and in no circumstances should the measurement period extend beyond one year from the enactment date. Due to the timing of enactment of this new tax legislation, certain details of the 2017 U.S. Tax Act were not fully understood or operationalized by the time we issued this Annual Report on Form 10-K.
In February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-02 "Income Statement-Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.
" ASU 2018-02. The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the 2017 U.S. Tax Act and require certain disclosures about stranded tax effects. This update is effective January 1, 2019, and we are still evaluating the effect of the update on our consolidated financial statements. Further guidance could be forthcoming from the FASB, the U.S. Treasury or the SEC that could give rise to further effects of the 2017 U.S. Tax Act on our consolidated financial statements in future periods.
We periodically assess our tax exposures related to periods that are open to examination. Based on the latest available information, we evaluate our tax positions to determine whether the position will more likely than not be sustained upon examination by the U.S. Internal Revenue Service or other taxing authorities. If we cannot reach a more-likely-than-not determination, no benefit is recorded. If we determine that the tax position is more likely than not to be sustained, we record the largest amount of benefit that is more likely than not to be realized when the tax position is settled. We record interest and penalties related to unrecognized income tax benefits in interest and selling, general and administrative expenses, respectively, in our consolidated statements of income.
Derivative instruments
—
We may use interest rate swaps or other derivative instruments to manage a portion of our exposure to the variability in interest rates. Our objective in managing our exposure to fluctuation in interest rates is to better control this element of cost and to mitigate the earnings and cash flow volatility associated with changes in applicable rates. We have established policies and procedures that encompass risk-management philosophy and objectives, guidelines for derivative instrument usage, counterparty credit approval, and the monitoring and reporting of derivative activity. We do not enter into derivative instruments for the purpose of speculation.
We formally designate and document instruments at inception that qualify for hedge accounting of underlying exposures. When qualified for hedge accounting, these financial instruments are recognized at fair value in our consolidated balance sheets, and changes in fair value are recognized as a component of other comprehensive income and included in accumulated other comprehensive income within equity in our consolidated balance sheets. Cash flows resulting from settlements are presented as a component of cash flows from operating activities within our consolidated statements of cash flows.
We formally assess, both at inception and at least quarterly, whether the financial instruments used in hedging transactions are effective at offsetting changes in cash flows of the related underlying exposure. Fluctuations in the value of these instruments generally are offset by changes in the cash flows of the underlying exposures being hedged. This offset is driven by the high degree of effectiveness between the exposure being hedged and the hedging instrument. We designated each of our interest rate swap agreements as a cash flow hedge of interest payments on variable rate borrowings. Any ineffective portion of a change in the fair value of a qualifying instrument would be immediately recognized in earnings. See "Note
7
—
Long-Term Debt and Lines of Credit" for more information about our interest rate swaps.
Fair value measurements
—
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the reporting date. GAAP establishes a fair value hierarchy that categorizes the inputs to valuation techniques into three broad levels. Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities. Level 2 inputs are based on other observable market data, such as quoted prices for similar assets and liabilities, and inputs other than quoted prices that are observable such as interest rates and yield curves. Level 3 inputs are developed from unobservable data reflecting our assumptions and include situations where there is little or no market activity for the asset or liability.
Fair value of financial instruments
—
The carrying amounts of cash and cash equivalents, receivables, settlement lines of credit, accounts payable and accrued liabilities, approximate their fair value given the short-term nature of these items. Our long-term debt includes variable interest rates based on the
London Interbank Offered Rate ("LIBOR")
, the Federal Funds Effective Rate (as defined in the debt agreements) or the prime rate, plus a margin based on our leverage position. At December 31, 2017, the carrying amount of our long-term debt exclusive of debt issuance costs approximated fair value, which is calculated using
Level 2 inputs. The fair values of our swap agreements were determined based on the present value of the estimated future net cash flows using implied rates in the applicable yield curve as of the valuation date, and classified within Level 2 of the valuation hierarchy. See "Note
7
—
Long-Term Debt and Lines of Credit" for further information.
Foreign currencies
—
We have significant operations in a number of foreign subsidiaries whose functional currency is the local currency. The assets and liabilities of subsidiaries whose functional currency is a foreign currency are translated into the reporting currency at the period-end rate of exchange. Income statement items are translated at the weighted-average rates prevailing during the period. The resulting translation adjustment is recorded as a component of other comprehensive income and is included in accumulated comprehensive income within equity in our consolidated balance sheets.
Gains and losses on transactions denominated in currencies other than the functional currency are generally included in determining net income for the period. For the year ended
December 31, 2017
, the 2016 fiscal transition period and the years ended
May 31, 2016
and
2015
, our transaction gains and losses were insignificant. Transaction gains and losses on intercompany balances of a long-term investment nature are recorded as a component of other comprehensive income and included in accumulated comprehensive income within equity in our consolidated balance sheets.
Earnings per share
—
Basic earnings per share ("EPS") is computed by dividing reported net income attributable to Global Payments by the weighted-average number of shares outstanding during the period. Earnings available to common shareholders is the same as reported net income attributable to Global Payments for all periods presented.
Diluted EPS is computed by dividing net income attributable to Global Payments by the weighted-average number of shares outstanding during the period, including the effect of share-based awards that would have a dilutive effect on earnings per share. All stock options with an exercise price lower than the average market share price of our common stock for the period are assumed to have a dilutive effect on EPS. There were
no
stock options that would have an antidilutive effect on the computation of diluted EPS for the year ended
December 31, 2017
, the 2016 fiscal transition period or for the years ended
May 31, 2016
and
2015
.
The following table sets forth the computation of the diluted weighted-average number of shares outstanding for all periods presented:
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Year Ended December 31,
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Seven Months Ended December 31,
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Years Ended May 31,
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2017
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2016
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2016
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2015
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(in thousands)
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Basic weighted-average number of shares outstanding
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154,652
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153,342
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132,284
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134,072
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Plus: Dilutive effect of stock options and other share-based awards
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876
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889
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883
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850
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Diluted weighted-average number of shares outstanding
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155,528
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154,231
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133,167
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134,922
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Repurchased shares
—
We account for the retirement of repurchased shares using the par value method under which the repurchase price is charged to paid-in capital up to the amount of the original issue proceeds of those shares. When the repurchase price is greater than the original issue proceeds, the excess is charged to retained earnings. We use a last-in, first-out cost flow assumption to identify the original issue proceeds of the shares repurchased.
Reclassifications
—
To conform to the presentation as of
December 31, 2017
, we made a reclassification in the consolidated balance sheet as of
December 31, 2016
to include
$8.2 million
of "claims receivable, net" within "prepaid expenses and other current assets." This reclassification had no effect on current assets or total assets as of
December 31, 2016
. We also made a corresponding reclassification in the statements of cash flows for the 2016 fiscal transition period and for the years ended May 31, 2016 and 2015 to include changes in "claims receivable" of
$16.6 million
,
$29.1 million
and
$9.3 million
, respectively, within "prepaid expenses and other" among the changes in operating assets and liabilities. These reclassifications had no effect on net cash provided by operating activities for any period.
Recently Adopted Accounting Pronouncements
In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting
." The amendments in this update changed how companies account for certain aspects of share-based payments to employees. We adopted the various amendments in ASU 2016-09 in our consolidated financial statements effective January 1, 2017 with no material effect at the date of adoption. On a prospective basis, as required, we recognize the income tax effects of the excess benefits or deduction deficiencies of share-based awards in the statement of income when the awards vest or are settled. Previously, these amounts were recorded as an adjustment to additional paid-in capital. In addition, these excess tax benefits or deduction deficiencies from share-based compensation plans, which were previously presented as a financing activity in our consolidated statement of cash flows, are now presented as an operating activity using a retrospective transition method for all periods presented. Finally, we elected to account for forfeitures of share-based awards with service conditions as they occur, which had no material effect on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments
," which makes clarifications to how cash receipts and cash payments in certain transactions are presented and classified in the statement of cash flows. We adopted ASU 2016-15 on a retrospective basis effective January 1, 2017 with no effect on our consolidated statements of cash flows for any period presented.
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment
." The ASU eliminates Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. We adopted ASU 2017-04 on a prospective basis effective January 1, 2017 with no effect on our consolidated financial statements.
Recently Issued Pronouncements Not Yet Adopted
ASC 606 - New Revenue Accounting Standard
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)." The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP and permits the use of either the retrospective or modified retrospective transition method. The update requires significant additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. ASU 2014-09, as amended by ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," is effective for years beginning after December 15, 2017, including interim periods, with early adoption permitted for years beginning after December 15, 2016. Since the issuance of ASU 2014-09, the FASB has issued additional interpretive guidance, including new accounting standards updates, that clarifies certain points of the standard and modifies certain requirements.
We have performed a review of the requirements of the new revenue standard and have monitored the activity of the FASB and the transition resource group as it relates to specific interpretive guidance. We established a cross-functional implementation team to assess the effects of the new revenue standard in a multi-phase approach. In the first phase, we analyzed customer contracts for our most significant contract categories, applied the five-step model of the new standard to each contract category and compared the results to our current accounting practices. In the second phase, we quantified the potential effects, assessed additional contract categories and principal agent considerations, revised accounting policies and considered the effects on related disclosures and/or internal control over financial reporting. The third phase, which will complete our adoption and implementation of the new revenue standard, includes activities such as implementing parallel accounting and reporting for areas affected by the new standard, quantifying the cumulative-effect adjustment (including tax effects), evaluating and testing modified and newly implemented internal controls and revising financial statement disclosures.
The new standard will change the amount and timing of revenue and expenses to be recognized under certain of our arrangement types. In addition, it could increase the administrative burden on our operations to properly account for customer contracts and provide the more expansive required disclosures. More judgment and estimates will be required when applying the requirements of the new standard than are required under existing GAAP, such as identifying performance obligations in contracts, estimating the amount of variable consideration to include in transaction price, allocating transaction price to each separate performance obligation and estimating expected periods of benefit for certain costs. We expect the timing of revenue to be recognized under ASU 2014-09 for our most significant contract category, core payment services, will be similar to the timing of revenue recognized under our current accounting practices. However, under the new standard, we will reflect revenue net of certain fees that we pay to third parties, including payment network fees, that we currently recognize as a component of operating expense under existing standards. This change in presentation will have no effect on the reported amount of operating income. We will also capitalize additional costs to obtain contracts with customers, as well as certain implementation and set-up costs, and, in some cases, may be required to amortize these costs and costs that we currently capitalize (such as capitalized customer acquisition costs) over a longer period. Finally, the new standard requires additional disclosures regarding our revenues and related capitalized contract costs.
We plan to adopt ASU 2014-09, as well as other clarifications and technical guidance issued by the FASB related to this new revenue standard, effective as of January 1, 2018 applying the modified retrospective transition method, which will result in an adjustment to equity for the cumulative-effect of applying the standard to active customer contracts for which certain performance obligations were not completed at the date of initial application. Under this transition method, we would not recast the prior financial statements presented, therefore the new standard requires us to provide additional disclosures of the amount by which each financial statement line item is affected in the current reporting period during 2018, as compared to the guidance that was in effect before the change, and an explanation of the reasons for significant changes, if any.
Our preliminary estimate is that we will record a net increase to retained earnings of approximately
$50 million
as of January 1, 2018, primarily due to the requirement to utilize longer amortization periods for signing bonuses and other sales commissions that are capitalized in connection with obtaining customer contracts. Previously, we amortized these capitalized costs over the term of the related contract. Under ASU 2014-09, we now expect to amortize these capitalized costs over the expected period of benefit, which is generally longer. The expected increase in retained earnings also reflects the capitalization of sales commissions and certain implementation and setup costs for new customers that were not previously capitalized. The expected adjustment to retained earnings is net of the estimated effect of income taxes related to the adjustments described above.
ASC 842 - New Lease Accounting Standard
In February 2016, the FASB issued ASU 2016-02, "Leases." The amendments in this update require lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by leases. In addition, several new disclosures will be required. In September 2017, the FASB issued ASU 2017-13, "Revenue Recognition" (Topic 605), "Revenue from Contracts with Customers" (Topic 606), "Leases" (Topic 840) and "Leases" (Topic 842), which provides additional implementation guidance on the previously issued ASU 2016-02.
Although early adoption is permitted, we expect to adopt ASU 2016-02 when it becomes effective for us on January 1, 2019. As written, the standard would require a modified retrospective transition under which lessees must recognize and measure leases at the beginning of the earliest period presented. The FASB is currently considering an option to allow these entities to choose that transition method or to recognize the effects of applying the new standard as a cumulative-effect adjustment to retained earnings as of the adoption date, which would not require a recast of comparative periods. We have not completed our evaluation of the effect of ASU 2016-02 or ASU 2017-13 on our consolidated financial statements; however, we expect to recognize right of use assets and liabilities for our operating leases in the balance sheet upon adoption.
To evaluate the potential effects of this new accounting standard on our consolidated financial statements, we are currently gathering information about our existing leases, which primarily include real estate leases for office space throughout the various global markets in which we conduct business. We expect that we will have to implement new accounting processes and internal controls to meet the requirements for financial reporting and disclosures of our leases and are coordinating with various internal stakeholders to evaluate, design and implement these new processes and controls. We are also evaluating the process by which we will maintain the necessary information about our leases and make the required calculations to support the requirements of the new accounting standard. We further expect these evaluation and implementation activities will continue throughout most of 2018 prior to the effective date of adoption on January 1, 2019.
Other Accounting Standards Updates
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815):
Targeted Improvements to Accounting for Hedging Activities
." The ASU expands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. In addition, the amendments in this update modify disclosure requirements for presentation of hedging activities. Those modifications include a tabular disclosure related to the effect on the income statement of fair value and cash flow hedges and eliminate the requirement to disclose the ineffective portion of the change in fair value of hedging instruments, if any. We will adopt ASU 2017-12 effective January 1, 2018 with no expected effect on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805):
Clarifying the Definition of a Business
." The ASU clarifies the definition of a business, which affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. The new standard is intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses, with the expectation that fewer will qualify as acquisitions (or disposals) of businesses. The ASU became effective for us on January 1, 2018. These amendments will be applied prospectively from the date of adoption. The effect of ASU 2017-01 will be dependent upon the nature of future acquisitions or dispositions that we make, if any.
In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740):
Intra-Entity Transfers of Assets Other Than Inventory
." The amendments in this update state that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory, such as intellectual property and property and equipment, when the transfer occurs. We will adopt ASU 2016-16 effective January 1, 2018 with no expected effect on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments
." The amendments in this update change how companies measure and recognize credit impairment for many financial assets. The new expected credit loss model will require companies to immediately recognize an estimate of credit losses expected to occur over the remaining life of the financial assets (including trade receivables) that are in the scope of the update. The update also made amendments to the current impairment model for held-to-maturity and available-for-sale debt securities and certain guarantees. The guidance will become effective for us on January 1, 2020. Early adoption is permitted for periods beginning on or after January 1, 2019. We are evaluating the effect of ASU 2016-13 on our consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities
." The amendments in this update address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The amendments in this update supersede the guidance to classify equity securities with readily determinable fair values into different categories (that is, trading or available-for-sale) and require equity securities (including other ownership interests, such as partnerships, unincorporated joint ventures and limited liability companies) to be measured at fair value with changes in the fair value recognized through earnings. Equity investments that are accounted for under the equity method of accounting or result in consolidation of an investee are not included within the scope of this update. The amendments allow equity investments that do not have readily determinable fair values to be remeasured at fair value either upon the occurrence of an observable price change or upon identification of an impairment. The amendments also require enhanced disclosures about those investments. We will adopt ASU 2016-01 effective January 1, 2018 with no expected effect on our consolidated financial statements.
NOTE
2
— ACQUISITIONS
ACTIVE Network
We acquired the communities and sports divisions of Athlaction Topco, LLC ("ACTIVE Network") on
September 1, 2017
, for total purchase consideration of
$1.2 billion
. ACTIVE Network delivers cloud-based enterprise software, including payment technology solutions, to event organizers in the communities and health and fitness markets. This acquisition aligns with our technology-enabled, software driven strategy and adds an enterprise software business operating in two additional vertical markets that we believe offer attractive growth fundamentals.
The following table summarizes the cash and non-cash components of the consideration transferred on
September 1, 2017
(in thousands):
|
|
|
|
|
|
Cash consideration paid to ACTIVE Network stockholders
|
|
$
|
599,497
|
|
Fair value of Global Payments common stock issued to ACTIVE Network stockholders
|
|
572,079
|
|
Total purchase consideration
|
|
$
|
1,171,576
|
|
We funded the cash portion of the total purchase consideration primarily by drawing on our Revolving Credit Facility (described in "Note
7
—Long-term Debt and Lines of Credit"). The acquisition-date fair value of
6,357,509
shares of our common stock issued to the sellers was determined based on the share price of our common stock as of the acquisition date and the effect of certain transfer restrictions.
This transaction was accounted for as a business combination, which requires that we record the assets acquired and liabilities assumed at fair value as of the acquisition date. The accounting for this acquisition was not complete as of
December 31, 2017
. The fair values of the assets acquired and the liabilities assumed have been determined provisionally and are subject to adjustment as we obtain additional information. In particular, additional time is needed to refine and review the results of the valuation of assets and liabilities and to evaluate the basis differences for assets and liabilities for financial reporting and tax purposes.
The provisional estimated acquisition-date fair values of major classes of assets acquired and liabilities assumed provisionally determined as of September 30, 2017 and as subsequently revised for measurement-period adjustments, including a reconciliation to the total purchase consideration, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provisional at September 30, 2017
|
|
Measurement- Period Adjustments
|
|
Provisional at December 31, 2017
|
|
|
|
|
|
|
|
(in thousands)
|
Cash and cash equivalents
|
$
|
42,866
|
|
|
$
|
47
|
|
|
$
|
42,913
|
|
Property and equipment
|
22,889
|
|
|
(904
|
)
|
|
21,985
|
|
Identified intangible assets
|
471,120
|
|
|
(60,575
|
)
|
|
410,545
|
|
Other assets
|
80,485
|
|
|
6,755
|
|
|
87,240
|
|
Deferred income taxes
|
(26,757
|
)
|
|
(4,886
|
)
|
|
(31,643
|
)
|
Other liabilities
|
(123,047
|
)
|
|
(21,085
|
)
|
|
(144,132
|
)
|
Total identifiable net assets
|
467,556
|
|
|
(80,648
|
)
|
|
386,908
|
|
Goodwill
|
704,020
|
|
|
80,648
|
|
|
784,668
|
|
Total purchase consideration
|
$
|
1,171,576
|
|
|
$
|
—
|
|
|
$
|
1,171,576
|
|
The measurement-period adjustments were the result of continued refinement of certain estimates, particularly regarding the valuation of identified intangible assets, certain tax positions and deferred income taxes. As of December 31, 2017, we still consider these balances to be provisional because we are still in the process of gathering and reviewing information to support the valuation of identified intangible assets, certain tax positions and deferred income taxes.
Goodwill of
$784.7 million
arising from the acquisition, included in the North America operating segment, was attributable to expected growth opportunities, potential synergies from combining our existing businesses and an assembled workforce. We expect that approximately
80%
of the goodwill will be deductible for income tax purposes.
The following reflects the provisional estimated fair values of the identified intangible assets and the respective weighted-average estimated amortization periods:
|
|
|
|
|
|
|
|
Provisional Estimated Fair Values
|
|
Weighted-Average Estimated Amortization Periods
|
|
|
|
|
|
(in thousands)
|
|
(years)
|
Customer-related intangible assets
|
$
|
189,000
|
|
|
17
|
Acquired technology
|
153,300
|
|
|
9
|
Trademarks and trade names
|
59,400
|
|
|
15
|
Covenants-not-to-compete
|
8,845
|
|
|
3
|
Total estimated acquired intangible assets
|
$
|
410,545
|
|
|
13
|
The estimated fair value of customer-related intangible assets was determined using the income approach, which is based on projected cash flows discounted to their present value using discount rates that consider the timing and risk of the forecasted cash flows. The discount rate used is the average estimated value of a market participant’s cost of capital and debt, derived using customary market metrics. Acquired technology was valued using the replacement cost method, which required us to estimate the cost to construct an asset of equivalent utility at prices available at the time of the valuation analysis, with adjustments in value for physical deterioration and functional and economic obsolescence. Trademarks and trade names were valued using the relief-from-royalty approach. This method assumes that trademarks and trade names have value to the extent that their owner is relieved of the obligation to pay royalties for the benefits received from them. This method required us to estimate the future revenue for the related brands, the appropriate royalty rate and the weighted-average cost of capital. The discount rate used is the average estimated value of a market participant’s cost of capital and debt, derived using customary market metrics.
Heartland
We merged with Heartland on
April 22, 2016
for total purchase consideration of
$3.9 billion
. The merger significantly expanded our small and medium-sized enterprise distribution, customer base and vertical reach in the United States. The following table summarizes the cash and non-cash components of the consideration transferred on
April 22, 2016
(in thousands):
|
|
|
|
|
|
Cash consideration paid to Heartland stockholders
|
|
$
|
2,043,362
|
|
Fair value of Global Payments common stock issued to Heartland stockholders
|
|
1,879,458
|
|
Total purchase consideration
|
|
$
|
3,922,820
|
|
The merger date fair value of common stock issued to Heartland stockholders and equity award holders was determined based on
38.4 million
shares of Heartland common stock, including common stock outstanding and equity awards for which vesting accelerated in accordance with the Merger Agreement, multiplied by the exchange ratio of
0.6687
and the closing share price of Global Payments common stock as of
April 22, 2016
of
$73.29
per share.
This transaction was accounted for as a business combination, which requires that we record the assets acquired and liabilities assumed at fair value as of the acquisition date. The estimated acquisition-date fair values of major classes of assets acquired and liabilities assumed provisionally determined as of December 31, 2016 and as subsequently revised for measurement-period adjustments, including a reconciliation to the total purchase consideration, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provisional at December 31, 2016
|
|
Measurement- Period Adjustments
|
|
Final
|
|
|
|
|
|
|
|
(in thousands)
|
Cash and cash equivalents
|
$
|
304,747
|
|
|
$
|
—
|
|
|
$
|
304,747
|
|
Accounts receivable
|
70,385
|
|
|
—
|
|
|
70,385
|
|
Prepaid expenses and other assets
|
103,090
|
|
|
(5,131
|
)
|
|
97,959
|
|
Identified intangible assets
|
1,639,040
|
|
|
—
|
|
|
1,639,040
|
|
Property and equipment
|
106,583
|
|
|
—
|
|
|
106,583
|
|
Debt
|
(437,933
|
)
|
|
—
|
|
|
(437,933
|
)
|
Accounts payable and accrued liabilities
|
(457,763
|
)
|
|
(65
|
)
|
|
(457,828
|
)
|
Settlement processing obligations
|
(36,578
|
)
|
|
(3,727
|
)
|
|
(40,305
|
)
|
Deferred income taxes
|
(518,794
|
)
|
|
18,907
|
|
|
(499,887
|
)
|
Other liabilities
|
(64,938
|
)
|
|
(33,495
|
)
|
|
(98,433
|
)
|
Total identifiable net assets
|
707,839
|
|
|
(23,511
|
)
|
|
684,328
|
|
Goodwill
|
3,214,981
|
|
|
23,511
|
|
|
3,238,492
|
|
Total purchase consideration
|
$
|
3,922,820
|
|
|
$
|
—
|
|
|
$
|
3,922,820
|
|
The measurement-period adjustments were the result of continued refinement of certain estimates, particularly regarding certain tax positions and deferred income taxes.
Goodwill of
$3.2 billion
arising from the merger, included in the North America segment, was attributable to expected growth opportunities, potential synergies from combining our existing businesses and an assembled workforce, and is not deductible for income tax purposes. During the year ended
December 31, 2016
, we incurred transaction costs in connection with the merger of
$24.7 million
, which were recorded in selling, general and administrative expenses in the consolidated statements of income.
The following reflects the estimated fair values of the identified intangible assets and the respective weighted-average estimated amortization periods:
|
|
|
|
|
|
|
|
Estimated Fair Values
|
|
Weighted-Average Estimated Amortization Periods
|
|
|
|
|
|
(in thousands)
|
|
(years)
|
Customer-related intangible assets
|
$
|
977,400
|
|
|
15
|
Acquired technology
|
457,000
|
|
|
5
|
Trademarks and trade names
|
176,000
|
|
|
7
|
Covenants-not-to-compete
|
28,640
|
|
|
1
|
Total estimated acquired intangible assets
|
$
|
1,639,040
|
|
|
11
|
FIS Gaming Business
On
June 1, 2015
, we acquired certain assets of Certegy Check Services, Inc., a wholly-owned subsidiary of Fidelity National Information Services, Inc. ("FIS"). Under the purchase arrangement, we acquired substantially all of the assets of its gaming business related to licensed gaming operators (the "FIS Gaming Business"), including relationships with gaming clients in approximately
260
locations as of the acquisition date, for
$237.5 million
, funded from borrowings on our revolving credit facility and cash on hand. We acquired the FIS Gaming Business to expand our direct distribution and service offerings in the gaming market.
This transaction was accounted for as a business combination. The estimated acquisition-date fair values of major classes of assets acquired and liabilities assumed, including a reconciliation to the total purchase consideration, are as follows (in thousands):
|
|
|
|
|
|
Customer-related intangible assets
|
|
$
|
143,400
|
|
Liabilities
|
|
(150
|
)
|
Total identifiable net assets
|
|
143,250
|
|
Goodwill
|
|
94,250
|
|
Total purchase consideration
|
|
$
|
237,500
|
|
Goodwill arising from the acquisition, included in the North America segment, was attributable to expected growth opportunities, including cross-selling opportunities at existing and acquired gaming client locations, operating synergies in the gaming business and assembled workforce. Goodwill associated with this acquisition is deductible for income tax purposes. The customer-related intangible assets have an estimated amortization period of
15
years.
Realex Payments
On
March 25, 2015
, we acquired approximately
95%
of the outstanding shares of Pay and Shop Limited, which does business as Realex Payments ("Realex"), for €
110.2 million
in cash (
$118.9 million
equivalent as of the acquisition date). Realex is a leading European online payment gateway technology provider. This acquisition furthered our strategy to provide omnichannel solutions that combine gateway services, payment service provisioning and payment technology services across Europe.
This transaction was accounted for as a business combination. We recorded the assets acquired, liabilities assumed and noncontrolling interest at their estimated fair values as of the acquisition date. On October 5, 2015, we paid €
6.7 million
(
$7.5 million
equivalent as of October 5, 2015) to acquire the remaining shares of Realex, after which we own
100%
of the outstanding shares.
The estimated acquisition date fair values of the assets acquired, liabilities assumed and the noncontrolling interest, including a reconciliation to the total purchase consideration, are as follows (in thousands):
|
|
|
|
|
|
Cash
|
|
$
|
4,082
|
|
Customer-related intangible assets
|
|
16,079
|
|
Acquired technology
|
|
39,820
|
|
Trade name
|
|
3,453
|
|
Other intangible assets
|
|
399
|
|
Other assets
|
|
6,213
|
|
Liabilities
|
|
(3,479
|
)
|
Deferred income tax liabilities
|
|
(7,216
|
)
|
Total identifiable net assets
|
|
59,351
|
|
Goodwill
|
|
66,809
|
|
Noncontrolling interest
|
|
(7,280
|
)
|
Total purchase consideration
|
|
$
|
118,880
|
|
Goodwill of
$66.8 million
arising from the acquisition, included in the Europe segment, was attributable to expected growth opportunities in Europe, potential synergies from combining our existing business with gateway services and payment service provisioning in certain markets and an assembled workforce to support the newly acquired technology. Goodwill associated with this acquisition is not deductible for income tax purposes. The customer-related intangible assets have an estimated amortization period of
16
years. The acquired technology has an estimated amortization of
10
years. The trade name has an estimated amortization period of
7
years.
Ezidebit
On
October 10, 2014
, we completed the acquisition of
100%
of the outstanding stock of Ezi Holdings Pty Ltd ("Ezidebit") for AUD
302.6 million
in cash (
$266.0 million
equivalent as of the acquisition date). This acquisition was funded by a combination of cash on hand and borrowings on our revolving credit facility. Ezidebit is a leading integrated payments company focused on recurring payments verticals in Australia and New Zealand. The acquisition of Ezidebit further enhanced our existing integrated solutions offerings. This transaction was accounted for as a business combination. We recorded the assets acquired and liabilities assumed at their estimated fair values as of the acquisition date.
The estimated acquisition-date fair values of major classes of assets acquired and liabilities assumed, including a reconciliation to the total purchase consideration, are as follows (in thousands):
|
|
|
|
|
Cash
|
$
|
45,826
|
|
Customer-related intangible assets
|
42,721
|
|
Acquired technology
|
27,954
|
|
Trade name
|
2,901
|
|
Other assets
|
2,337
|
|
Deferred income tax assets (liabilities)
|
(9,788
|
)
|
Other liabilities
|
(49,797
|
)
|
Total identifiable net assets
|
62,154
|
|
Goodwill
|
203,828
|
|
Total purchase consideration
|
$
|
265,982
|
|
Goodwill of
$203.8 million
arising from the acquisition, included in the Asia-Pacific segment, was attributable to expected growth opportunities in Australia and New Zealand, as well as growth opportunities and operating synergies in integrated payments in our existing Asia-Pacific and North America markets. Goodwill associated with this acquisition is not deductible for income
tax purposes. The customer-related intangible assets have an estimated amortization period of
15
years. The acquired technology has an estimated amortization period of
15
years. The trade name has an estimated amortization period of
5
years.
NOTE
3
—SETTLEMENT PROCESSING ASSETS AND OBLIGATIONS
Funds settlement refers to the process of transferring funds for sales and credits between card issuers and merchants. For transactions processed on our systems, we use our internal network to provide funding instructions to financial institutions that in turn fund the merchants. We process funds settlement under two models, a sponsorship model and a direct membership model.
Under the sponsorship model, we are designated as a Merchant Service Provider by MasterCard and an Independent Sales Organization by Visa, which means that member clearing banks ("Member") sponsor us and require our adherence to the standards of the payment networks. In certain markets, we have sponsorship or depository and clearing agreements with financial institution sponsors. These agreements allow us to route transactions under the Members' control and identification numbers to clear credit card transactions through MasterCard and Visa. In this model, the standards of the payment networks restrict us from performing funds settlement or accessing merchant settlement funds, and, instead, require that these funds be in the possession of the Member until the merchant is funded.
Under the direct membership model, we are members in various payment networks, allowing us to process and fund transactions without third-party sponsorship. In this model, we route and clear transactions directly through the card brand’s network and are not restricted from performing funds settlement. Otherwise, we process these transactions similarly to how we process transactions in the sponsorship model. We are required to adhere to the standards of the payment networks in which we are direct members. We maintain relationships with financial institutions, which may also serve as our Member sponsors for other card brands or in other markets, to assist with funds settlement.
Timing differences, interchange fees, Merchant Reserves and exception items cause differences between the amount received from the payment networks and the amount funded to the merchants. These intermediary balances arising in our settlement process for direct merchants are reflected as settlement processing assets and obligations on our consolidated balance sheets. Settlement processing assets and obligations include the components outlined below:
|
|
•
|
Interchange reimbursement
. Our receivable from merchants for the portion of the discount fee related to reimbursement of the interchange fee.
|
|
|
•
|
Receivable from Members.
Our receivable from the Members for transactions in which we have advanced funding to the Members to fund merchants in advance of receipt of funding from networks.
|
|
|
•
|
Receivable from networks
. Our receivable from a payment network for transactions processed on behalf of merchants where we are a direct member of that particular network.
|
|
|
•
|
Exception items
. Items such as customer chargeback amounts received from merchants.
|
|
|
•
|
Merchant Reserves
. Reserves held to minimize contingent liabilities associated with losses that may occur under the merchant agreement.
|
|
|
•
|
Liability to Members
. Our liability to the Members for transactions for which funding from the payment network has been received by the Members but merchants have not yet been funded.
|
|
|
•
|
Liability to merchants
. Our liability to merchants for transactions that have been processed but not yet funded where we are a direct member of a particular payment network.
|
|
|
•
|
Reserve for operating losses and sales allowances
. Our reserve for allowances, charges or losses that we do not expect to collect from the merchants due to concessions, merchant fraud, insolvency, bankruptcy or any other merchant-related reason.
|
We apply offsetting to our settlement processing assets and obligations where a right of setoff exists. In the sponsorship model, we apply offsetting by Member agreement because the Member is ultimately responsible for funds settlement. With these Member transactions, we do not have access to the gross proceeds of the receivable from the payment networks and, thus, do not have a direct obligation or any ability to satisfy the payable to fund the merchant. In these situations, we apply offsetting to determine a net position for each Member agreement. If that net position is an asset, we reflect the net amount in settlement processing assets on our consolidated balance sheet, and we present the individual components in the settlement processing assets table below. If that net position is a liability, we reflect the net amount in settlement processing obligations on our consolidated balance sheet, and we present the individual components in the settlement processing obligations table below. In the direct
membership model, offsetting is not applied, and the individual components are presented as an asset or obligation based on the nature of that component.
As of
December 31, 2017
and 2016 settlement processing assets and obligations consisted of the following:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
|
|
|
(in thousands)
|
Settlement processing assets:
|
|
|
|
Interchange reimbursement
|
$
|
304,964
|
|
|
$
|
150,612
|
|
Receivable from Members
|
104,339
|
|
|
71,590
|
|
Receivable from networks
|
2,055,390
|
|
|
1,325,029
|
|
Exception items
|
7,867
|
|
|
6,450
|
|
Merchant Reserves
|
(13,268
|
)
|
|
(6,827
|
)
|
|
$
|
2,459,292
|
|
|
$
|
1,546,854
|
|
|
|
|
|
Settlement processing liabilities:
|
|
|
|
Interchange reimbursement
|
$
|
72,053
|
|
|
$
|
199,202
|
|
Liability to Members
|
(20,369
|
)
|
|
(177,979
|
)
|
Liability to merchants
|
(1,961,107
|
)
|
|
(1,358,271
|
)
|
Exception items
|
6,863
|
|
|
21,194
|
|
Merchant Reserves
|
(133,907
|
)
|
|
(158,419
|
)
|
Reserve for operating losses and sales allowances
|
(4,042
|
)
|
|
(2,939
|
)
|
|
$
|
(2,040,509
|
)
|
|
$
|
(1,477,212
|
)
|
NOTE
4
—PROPERTY AND EQUIPMENT
As of
December 31, 2017
and 2016, property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Range of Depreciable Lives
|
|
|
|
(Years)
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Land
|
N/A
|
|
$
|
2,742
|
|
|
$
|
6,159
|
|
Buildings
|
25-30
|
|
29,309
|
|
|
61,135
|
|
Equipment
|
2-20
|
|
280,774
|
|
|
224,460
|
|
Software
|
2-10
|
|
411,975
|
|
|
319,214
|
|
Leasehold improvements
|
3-15
|
|
63,154
|
|
|
40,158
|
|
Furniture and fixtures
|
3-7
|
|
24,054
|
|
|
15,913
|
|
|
|
|
812,008
|
|
|
667,039
|
|
Less accumulated depreciation and amortization
|
|
|
(314,336
|
)
|
|
(226,570
|
)
|
Work-in-progress
|
|
|
90,676
|
|
|
85,901
|
|
|
|
|
$
|
588,348
|
|
|
$
|
526,370
|
|
NOTE 5—GOODWILL AND INTANGIBLE ASSETS
As of
December 31, 2017
and 2016, goodwill and other intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
|
|
|
(in thousands)
|
Goodwill
|
$
|
5,703,992
|
|
|
$
|
4,807,594
|
|
Other intangible assets:
|
|
|
|
Customer-related intangible assets
|
$
|
2,078,891
|
|
|
$
|
1,864,731
|
|
Acquired technologies
|
722,466
|
|
|
547,151
|
|
Trademarks and trade names
|
247,688
|
|
|
188,311
|
|
Contract-based intangible assets
|
171,522
|
|
|
157,882
|
|
|
3,220,567
|
|
|
2,758,075
|
|
Less accumulated amortization:
|
|
|
|
Customer-related intangible assets
|
685,869
|
|
|
487,729
|
|
Acquired technologies
|
210,063
|
|
|
89,633
|
|
Trademarks and trade names
|
50,849
|
|
|
24,142
|
|
Contract-based intangible assets
|
92,079
|
|
|
71,279
|
|
|
1,038,860
|
|
|
672,783
|
|
|
$
|
2,181,707
|
|
|
$
|
2,085,292
|
|
The following table sets forth the changes in the carrying amount of goodwill for the year ended
December 31, 2017
, the 2016 fiscal transition period and the years ended May 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
Europe
|
|
Asia-Pacific
|
|
Total
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Balance at May 31, 2015
|
$
|
779,734
|
|
|
$
|
485,921
|
|
|
$
|
226,178
|
|
|
$
|
1,491,833
|
|
Goodwill acquired
|
3,318,768
|
|
|
—
|
|
|
53,402
|
|
|
3,372,170
|
|
Effect of foreign currency translation
|
(3,872
|
)
|
|
(13,737
|
)
|
|
(15,397
|
)
|
|
(33,006
|
)
|
Measurement-period adjustments
|
(8,200
|
)
|
|
(411
|
)
|
|
7,019
|
|
|
(1,592
|
)
|
Balance at May 31, 2016
|
4,086,430
|
|
|
471,773
|
|
|
271,202
|
|
|
4,829,405
|
|
Goodwill acquired
|
—
|
|
|
28,820
|
|
|
—
|
|
|
28,820
|
|
Effect of foreign currency translation
|
(1,911
|
)
|
|
(45,265
|
)
|
|
(2,160
|
)
|
|
(49,336
|
)
|
Measurement-period adjustments
|
(1,267
|
)
|
|
(28
|
)
|
|
—
|
|
|
(1,295
|
)
|
Balance at December 31, 2016
|
4,083,252
|
|
|
455,300
|
|
|
269,042
|
|
|
4,807,594
|
|
Goodwill acquired
|
784,668
|
|
|
—
|
|
|
—
|
|
|
784,668
|
|
Effect of foreign currency translation
|
5,060
|
|
|
57,838
|
|
|
18,291
|
|
|
81,189
|
|
Measurement-period adjustments
|
23,511
|
|
|
—
|
|
|
7,030
|
|
|
30,541
|
|
Balance at December 31, 2017
|
$
|
4,896,491
|
|
|
$
|
513,138
|
|
|
$
|
294,363
|
|
|
$
|
5,703,992
|
|
There was
no
accumulated impairment loss at any date reflected in the above table.
Customer-related intangible assets, acquired technologies, contract-based intangible assets, and trademarks and trade names acquired during the year ended
December 31, 2017
had weighted-average amortization periods of
16.8
years,
8.8
years,
3
years, and
15
years, respectively. Customer-related intangible assets acquired during the 2016 fiscal transition period had a weighted-average amortization period of
12.1
years. Customer-related intangible assets, acquired technologies and trademarks and trade names acquired during the year ended
May 31, 2016
had weighted-average amortization periods of
13.9
years,
5.0
years and
7.0
years, respectively. Customer-related intangible assets, acquired technologies and trademarks and trade names acquired during the year ended
May 31, 2015
had weighted-average amortization periods of
15.1
years,
9.1
years and
6.1
years, respectively.
Amortization expense of acquired intangibles was
$337.9 million
for the year ended
December 31, 2017
,
$194.3 million
for the 2016 fiscal transition period and $
113.7 million
and $
72.6 million
for the years ended
May 31, 2016
and
2015
, respectively.
The estimated amortization expense of acquired intangibles as of
December 31, 2017
for the next five years, calculated using the currency exchange rate at the date of acquisition, if applicable, is as follows (in thousands):
|
|
|
|
|
2018
|
$
|
345,351
|
|
2019
|
323,457
|
|
2020
|
298,135
|
|
2021
|
216,758
|
|
2022
|
177,891
|
|
NOTE
6
—OTHER ASSETS
Through certain of our subsidiaries in Europe, we were a member and shareholder of Visa Europe Limited ("Visa Europe"). On
June 21, 2016
, Visa Inc. ("Visa") acquired all of the membership interests in Visa Europe, including ours, upon which we recorded a gain of
$41.2 million
included in interest and other income in our consolidated statements of income for the 2016 fiscal transition period. We received up-front consideration comprised of €
33.5 million
(
$37.7 million
equivalent at
June 21, 2016
) in cash and Series B and C convertible preferred shares whose initial conversion rate equates to Visa common shares valued at
$22.9 million
as of
June 21, 2016
. However, the preferred shares were assigned a value of
zero
based on transfer restrictions, Visa's ability to adjust the conversion rate, and the estimation uncertainty associated with those factors. Based on the outcome of potential litigation involving Visa Europe in the United Kingdom and elsewhere in Europe, the conversion rate of the preferred shares could be adjusted down such that the number of Visa common shares we ultimately receive could be as low as zero, and approximately €
25.6 million
(
$28.8 million
equivalent at
June 21, 2016
) of the up-front cash consideration could be refundable. We account for the preferred shares using the cost method. On the third anniversary of the closing of the acquisition by Visa, we are contractually entitled to receive €
3.1 million
(
$3.5 million
equivalent at
June 21, 2016
) of deferred consideration (plus compounded interest at a rate of
4.0%
per annum).
NOTE
7
—LONG-TERM DEBT AND LINES OF CREDIT
As of
December 31, 2017
and 2016, long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
|
|
|
(in thousands)
|
Credit Facility:
|
|
|
|
Term loans (face amounts of $3,932,677 and $3,728,857 at December 31, 2017 and 2016, respectively, less unamortized debt issuance costs of $37,961 and $46,282 at December 31, 2017 and 2016, respectively)
|
$
|
3,894,716
|
|
|
$
|
3,682,575
|
|
Revolving Credit Facility
|
765,000
|
|
|
756,000
|
|
Capital lease obligations
|
—
|
|
|
37
|
|
Total long-term debt
|
4,659,716
|
|
|
4,438,612
|
|
Less current portion of Credit Facility (face amounts of $108,979 and $187,274 at December 31, 2017 and 2016, respectively, less unamortized debt issuance costs of $8,671 and $9,526 at December 31, 2017 and 2016, respectively) and current portion of capital lease obligations of $37 at December 31, 2016
|
100,308
|
|
|
177,785
|
|
Long-term debt, excluding current portion
|
$
|
4,559,408
|
|
|
$
|
4,260,827
|
|
Maturity requirements on long-term debt as of
December 31, 2017
by year are as follows (in thousands):
|
|
|
|
|
Years ending December 31,
|
|
2018
|
$
|
108,979
|
|
2019
|
141,912
|
|
2020
|
161,144
|
|
2021
|
180,376
|
|
2022
|
3,021,391
|
|
2023 and thereafter
|
1,083,875
|
|
Total
|
$
|
4,697,677
|
|
We are party to a credit facility agreement with Bank of America, N.A., as administrative agent, and a syndicate of financial institutions as lenders and other agents (as amended from time to time, the "Credit Facility"). On
May 2, 2017
, we entered into the Fourth Amendment to the Credit Facility (the "Fourth Amendment"), which increased the total financing capacity available under the Credit Facility to
$5.2 billion
; however, the aggregate outstanding debt under the Credit Facility did not change as we repaid certain outstanding amounts under the Term A Loan, the Term A-2 Loan and the Revolving Credit Facility (each as defined below) in connection with the Fourth Amendment. As of
December 31, 2017
, the Credit Facility provided for secured financing comprised of (i) a
$1.25 billion
revolving credit facility (the "Revolving Credit Facility"); (ii) a
$1.5 billion
term loan (the "Term A Loan"), (iii) a
$1.3 billion
term loan (the "Term A-2 Loan"); and (iv) a
$1.2 billion
term loan facility, which replaced the Term B Loan (the "Term B-2 Loan"). Substantially all of the assets of our domestic subsidiaries are pledged as collateral under the Credit Facility.
The Credit Facility provides for an interest rate, at our election, of either London Interbank Offered Rate ("LIBOR") or a base rate, in each case plus a leverage-based margin. As of
December 31, 2017
, the interest rates on the Term A Loan, the Term A-2 Loan and the Term B Loan were
3.32%
,
3.24%
and
3.57%
, respectively.
The Term A Loan and the Term A-2 Loan mature, and the Revolving Credit Facility expires, on
May 2, 2022
. The Term B-2 Loan matures on
April 22, 2023
. The Term A Loan principal must be repaid in quarterly installments in the amount of
1.25%
of principal through
June 2019
, increasing to
1.875%
of principal through
June 2021
, and increasing to
2.50%
of principal through
March 2022
, with the remaining principal balance due upon maturity in
May 2022
. The Term A-2 Loan principal must be repaid in quarterly installments of
$1.7 million
through
June 2018
, increasing to quarterly installments of
$8.6 million
through
March 2022
, with the remaining balance due upon maturity in
May 2022
. The Term B-2 Loan principal must be repaid in quarterly installments in the amount of
0.25%
of principal through
March 2023
, with the remaining principal balance due upon maturity in
April 2023
.
The Credit Facility allows us to issue standby letters of credit of up to
$100 million
in the aggregate under the Revolving Credit Facility. Outstanding letters of credit under the Revolving Credit Facility reduce the amount of borrowings available to us. Borrowings available to us under the Revolving Credit Facility are further limited by the covenants described below under "Compliance with Covenants." The total available commitments under the Revolving Credit Facility at
December 31, 2017
were
$473.3 million
. As of
December 31, 2017
, the interest rate on the Revolving Credit Facility was
3.24%
. In addition, we are required to pay a quarterly commitment fee on the unused portion of the Revolving Credit Facility at an applicable rate per annum ranging from
0.20%
to
0.30%
depending on our leverage ratio.
The portion of deferred debt issuance costs related to the Revolving Credit Facility is included in other noncurrent assets, and the portion of deferred debt issuance costs related to the term loans is reported as a reduction to the carrying amount of the term loans. Debt issuance costs are amortized as an adjustment to interest expense over the terms of the respective facilities.
Settlement Lines of Credit
In various markets where we do business, we have specialized lines of credit, which are restricted for use in funding settlement. The settlement lines of credit generally have variable interest rates, are subject to annual review and are denominated in local currency but may, in some cases, facilitate borrowings in multiple currencies. For certain of our settlement lines of credit, the available credit is increased by the amount of cash we have on deposit in specific accounts with the lender. Accordingly, the amount
of the outstanding line of credit may exceed the stated credit limit. As of
December 31, 2017
and 2016, a total of
$59.3 million
and
$51.0 million
, respectively, of cash on deposit was used to determine the available credit.
As of
December 31, 2017
and 2016, respectively, we had
$635.2 million
and
$392.1 million
outstanding under these lines of credit with additional capacity of
$689.4 million
as of
December 31, 2017
to fund settlement. The weighted-average interest rate on these borrowings was
1.97%
and
1.90%
at
December 31, 2017
and 2016, respectively. During the year ended
December 31, 2017
, the maximum and average outstanding balances under these lines of credit were
$863.6 million
and
$334.0 million
, respectively.
Compliance with Covenants
The Credit Facility contains customary affirmative and restrictive covenants, including, among others, financial covenants based on our leverage and fixed charge coverage ratios, as defined in the agreement. As of
December 31, 2017
, financial covenants under the Credit Facility required a leverage ratio no greater than: (i)
4.50
to
1.00
as of the end of any fiscal quarter ending during the period from July 1, 2017 through June 30, 2018; (ii)
4.25
to
1.00
as of the end of any fiscal quarter ending during the period from July 1, 2018 through June 30, 2019; and (iii)
4.00
to
1.00
as of the end of any fiscal quarter ending thereafter. The fixed charge coverage ratio is required to be no less than
2.25
to
1.00
.
The Credit Facility and settlement lines of credit also include various other covenants that are customary in such borrowings. The Credit Facility includes covenants, subject in each case to exceptions and qualifications that may restrict certain payments, including, in certain circumstances, the payment of cash dividends in excess of our current rate of
$0.01
per share per quarter.
The Credit Facility also includes customary events of default, the occurrence of which, following any applicable cure period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations to be immediately due and payable. We were in compliance with all applicable covenants as of and for the year ended
December 31, 2017
.
Interest Rate Swap Agreements
We have interest rate swap agreements with financial institutions to hedge changes in cash flows attributable to interest rate risk on a portion of our variable-rate debt instruments. Net amounts to be received or paid under the swap agreements are reflected as adjustments to interest expense. Since we have designated the interest rate swap agreements as portfolio cash flow hedges, unrealized gains or losses resulting from adjusting the swaps to fair value are recorded as components of other comprehensive income, except for any ineffective portion of the change in fair value, which would be immediately recorded in interest expense. During the year ended
December 31, 2017
, the 2016 fiscal transition period and the years ended
May 31, 2016
and 2015, there was no ineffectiveness. The fair values of the interest rate swaps were determined based on the present value of the estimated future net cash flows using implied rates in the applicable yield curve as of the valuation date. These derivative instruments were classified within Level 2 of the valuation hierarchy.
The table below presents the fair values of our derivative financial instruments designated as cash flow hedges included in the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Fixed Rate of Interest at
|
|
Range of Maturity Dates at
|
|
December 31,
|
Derivative Financial Instruments
|
|
Balance Sheet Location
|
|
December 31, 2017
|
|
December 31, 2017
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
(in thousands)
|
Interest rate swaps (Notional of $1,300 and $250 million at December 31, 2017 and 2016, respectively)
|
|
Other noncurrent assets
|
|
1.59%
|
|
February 28, 2019 - March 31, 2021
|
|
$
|
9,202
|
|
|
$
|
2,147
|
|
Interest rate swaps (Notional of $0 million and $750 million at December 31, 2017 and 2016, respectively)
|
|
Accounts payable and accrued liabilities
|
|
NA
|
|
NA
|
|
$
|
—
|
|
|
$
|
3,175
|
|
NA = Not applicable.
As of
December 31, 2017
, the interest rate swap agreements effectively convert
$1.3 billion
of our variable-rate debt to the weighted-average fixed rates shown in the table above plus a leverage-based margin.
The table below presents the effects of our interest rate swaps on the consolidated statements of income and comprehensive income for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Seven Months Ended December 31,
|
|
Year Ended May 31,
|
|
2017
|
|
2016
|
|
2016
|
|
2015
|
|
(in thousands)
|
Amount of net unrealized gain (loss) recognized in other comprehensive income
|
$
|
4,549
|
|
|
$
|
5,532
|
|
|
$
|
(12,859
|
)
|
|
$
|
(10,116
|
)
|
Amount of net losses reclassified out of other comprehensive income to interest expense
|
$
|
5,673
|
|
|
$
|
4,222
|
|
|
$
|
8,240
|
|
|
$
|
3,958
|
|
At
December 31, 2017
, the amount of gain in accumulated other comprehensive loss related to our interest rate swaps that is expected to be reclassified into interest expense during the next 12 months was approximately
$2.4 million
.
Interest Expense
Interest expense was
$174.3 million
,
$108.6 million
,
$67.9 million
and
$39.9 million
for the year ended
December 31, 2017
, the 2016 fiscal transition period and the years ended
May 31, 2016
and
2015
, respectively.
NOTE
8
—ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
As of
December 31, 2017
and 2016, accounts payable and accrued liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
|
|
|
(in thousands)
|
Customer deposits
|
$
|
397,085
|
|
|
$
|
303,353
|
|
Compensation and benefits
|
102,187
|
|
|
94,190
|
|
Unearned revenue
|
101,029
|
|
|
69,437
|
|
Payment network fees
|
97,304
|
|
|
87,591
|
|
Trade accounts payable
|
47,391
|
|
|
28,178
|
|
Commissions payable to third parties
|
35,855
|
|
|
39,370
|
|
Income taxes payable
(1)
|
35,405
|
|
|
16,810
|
|
Unclaimed property
|
26,468
|
|
|
15,156
|
|
Third-party processing fees
|
24,267
|
|
|
24,971
|
|
Current portion of accrued buyout liability
(2)
|
20,739
|
|
|
19,392
|
|
Other
|
151,877
|
|
|
106,439
|
|
|
$
|
1,039,607
|
|
|
$
|
804,887
|
|
(1)
The 2017 U.S. Tax Act creates a territorial tax system (with a one-time mandatory "transition" tax on previously deferred foreign earnings), effective January 1, 2018. The transition tax on those deemed repatriated earnings may be paid over eight years. We recorded income taxes payable of
$63.7 million
on previously deferred foreign earnings, of which
$55.7 million
is included in other noncurrent liabilities on the consolidated balance sheet as of
December 31, 2017
since those payments are not due within the next 12 months.
(2)
The noncurrent portion of accrued buyout liability of
$64.1 million
and
$58.6 million
is included in other noncurrent liabilities on the consolidated balance sheets as of
December 31, 2017
and 2016, respectively.
NOTE
9
—INCOME TAX
The income tax provision (benefit) for the year ended
December 31, 2017
, the 2016 fiscal transition period and the years ended
May 31, 2016
and
2015
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
Seven Months Ended December 31,
|
|
Year Ended May 31,
|
|
2017
|
|
2016
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Current income tax provision (benefit):
|
|
|
|
|
|
|
|
Federal
|
$
|
79,903
|
|
|
$
|
22,859
|
|
|
$
|
26,493
|
|
|
$
|
25,022
|
|
State
|
3,468
|
|
|
3,443
|
|
|
5,454
|
|
|
3,905
|
|
Foreign
|
67,851
|
|
|
42,681
|
|
|
56,689
|
|
|
(10,346
|
)
|
|
151,222
|
|
|
68,983
|
|
|
88,636
|
|
|
18,581
|
|
Deferred income tax provision (benefit):
|
|
|
|
|
|
|
|
Federal
|
(266,869
|
)
|
|
(36,447
|
)
|
|
(18,205
|
)
|
|
14,822
|
|
State
|
9,678
|
|
|
(1,842
|
)
|
|
(3,620
|
)
|
|
3,606
|
|
Foreign
|
4,582
|
|
|
4,967
|
|
|
3,884
|
|
|
70,986
|
|
|
(252,609
|
)
|
|
(33,322
|
)
|
|
(17,941
|
)
|
|
89,414
|
|
|
$
|
(101,387
|
)
|
|
$
|
35,661
|
|
|
$
|
70,695
|
|
|
$
|
107,995
|
|
The income tax provision allocated to noncontrolling interests was
$8.6 million
for the year ended
December 31, 2017
,
$4.4 million
for the 2016 fiscal transition period and
$7.3 million
and
$8.6 million
for the years ended
May 31, 2016
and
2015
, respectively.
The following presents income (loss) before income taxes for the year ended
December 31, 2017
, the 2016 fiscal transition period and the years ended
May 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
Seven Months Ended December 31,
|
|
Year Ended May 31,
|
|
2017
|
|
2016
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
United States
|
$
|
29,692
|
|
|
$
|
(55,279
|
)
|
|
$
|
59,876
|
|
|
$
|
135,901
|
|
Foreign
|
362,991
|
|
|
228,623
|
|
|
301,036
|
|
|
281,209
|
|
|
$
|
392,683
|
|
|
$
|
173,344
|
|
|
$
|
360,912
|
|
|
$
|
417,110
|
|
On
December 22, 2017
, the United States enacted the 2017 U.S. Tax Act, which resulted in numerous changes, including a reduction in the U.S. federal tax rate from
35%
to
21%
effective
January 1, 2018
and the transition of the U.S. federal tax system to a territorial regime. As part of this transition, the 2017 U.S. Tax Act imposed a one-time mandatory "transition" tax on foreign earnings not previously subjected to U.S. income tax, payable over
eight years
.
As of
December 31, 2017
, pursuant to guidance provided in SAB 118, we have not completed our accounting for the effects of the 2017 U.S. Tax Act; however, we have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax. For these items, which are further described below, we have recognized a provisional net income tax benefit of
$158.7 million
, which is included as a component of income tax benefit in our consolidated statement of income for the year ended
December 31, 2017
. To the extent that any other provisions of the 2017 U.S. Tax Act are determined to affect our December 31, 2017 provision, we have not recorded provisional amounts.
We remeasured our U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse, which is now
21%
instead of
35%
. We are still analyzing certain aspects of the 2017 U.S. Tax Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts during the measurement period. The provisional income tax benefit recorded as a result of remeasuring our deferred tax assets and liabilities at the lower income tax rate was
$222.4 million
.
The one-time transition tax established by the 2017 U.S. Tax Act is based on our total post-1986 foreign earnings and profits, offset by allowable foreign tax credits. The transition tax rate applied to our foreign earnings is based on the amount of those earnings held in cash and cash equivalents, as well as other assets. We recorded a provisional income tax expense of
$63.7 million
for the transition tax on our previously deferred foreign earnings. We have not yet finalized our calculation of the post-1986 earnings and profits for our foreign subsidiaries, on which the transition tax is based. We are continuing to gather additional information to more precisely compute the amount of the transition tax.
Prior to the enactment of the 2017 U.S. Tax Act, the undistributed earnings of all foreign subsidiaries were considered to be indefinitely reinvested outside the United States (approximately
$1.4 billion
at December 31, 2016). As a result of the enactment of the 2017 U.S. Tax Act, our provisional position is that we now only consider approximately
$60 million
of our undistributed foreign earnings to be indefinitely reinvested outside the United States as of
December 31, 2017
. Because those earnings are considered to be indefinitely reinvested, no deferred income taxes have been provided thereon. If we were to make a distribution of any portion of those earnings in the form of dividends or otherwise, any such amounts would be subject to withholding taxes payable to various foreign jurisdictions; however, the amounts would not be subject to any additional U.S. income tax.
Our effective tax rates for periods presented differ from the federal statutory rate for the year ended
December 31, 2017
, the 2016 fiscal transition period and the years ended
May 31, 2016
and
2015
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
Seven Months Ended December 31,
|
|
Year Ended May 31,
|
|
2017
|
|
2016
|
|
2016
|
|
2015
|
Federal U.S. statutory rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State income taxes, net of federal income tax benefit
|
1.9
|
|
|
0.6
|
|
|
0.4
|
|
|
1.1
|
|
Federal U.S. transition tax
|
16.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Federal U.S. rate reduction
|
(55.6
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Foreign income taxes (primarily U.K.)
|
(12.0
|
)
|
|
(12.6
|
)
|
|
(10.1
|
)
|
|
(8.5
|
)
|
Foreign interest income not subject to tax
|
(2.2
|
)
|
|
(2.3
|
)
|
|
(2.6
|
)
|
|
(1.8
|
)
|
Taxes on unremitted earnings
|
—
|
|
|
—
|
|
|
(3.5
|
)
|
|
—
|
|
Share-based compensation expense
|
(4.2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Valuation allowance
|
(3.2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Other
|
(1.7
|
)
|
|
(0.1
|
)
|
|
0.4
|
|
|
1.0
|
|
Effective tax rate attributable to Global Payments
|
(25.8
|
)
|
|
20.6
|
|
|
19.6
|
|
|
26.8
|
|
Effective tax rate allocated to noncontrolling interests
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.9
|
)
|
Effective tax rate
|
(25.8
|
)%
|
|
20.6
|
%
|
|
19.6
|
%
|
|
25.9
|
%
|
Deferred income taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax laws and rates. Deferred income taxes as of
December 31, 2017
and 2016 reflect the effect of temporary differences between the amounts of assets and liabilities for financial accounting and income tax purposes. As of
December 31, 2017
and 2016, principal components of deferred tax items were as follows:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
|
|
|
(in thousands)
|
Deferred income tax assets:
|
|
|
|
Basis difference - U.K. business
|
$
|
8,961
|
|
|
$
|
11,145
|
|
Domestic net operating loss carryforwards
|
17,228
|
|
|
12,723
|
|
Foreign income tax credit carryforwards
|
—
|
|
|
7,140
|
|
Foreign net operating loss carryforwards
|
3,819
|
|
|
2,559
|
|
Share-based compensation expense
|
7,856
|
|
|
11,656
|
|
Accrued expenses
|
34,582
|
|
|
54,030
|
|
Other
|
18,502
|
|
|
9,101
|
|
|
90,948
|
|
|
108,354
|
|
Less valuation allowance
|
(16,550
|
)
|
|
(16,611
|
)
|
|
74,398
|
|
|
91,743
|
|
Deferred tax liabilities:
|
|
|
|
Acquired intangibles
|
410,563
|
|
|
663,922
|
|
Property and equipment
|
77,481
|
|
|
86,548
|
|
Other
|
10,087
|
|
|
1,956
|
|
|
498,131
|
|
|
752,426
|
|
Net deferred income tax liability
|
$
|
(423,733
|
)
|
|
$
|
(660,683
|
)
|
The net deferred income taxes reflected on our consolidated balance sheets as of
December 31, 2017
and 2016 are as follows:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
|
|
|
(in thousands)
|
Noncurrent deferred income tax asset
|
$
|
13,146
|
|
|
$
|
15,789
|
|
Noncurrent deferred income tax liability
|
(436,879
|
)
|
|
(676,472
|
)
|
|
$
|
(423,733
|
)
|
|
$
|
(660,683
|
)
|
A valuation allowance is provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Changes to our valuation allowance during the year ended
December 31, 2017
, the 2016 fiscal transition period and the years ended
May 31, 2016
and
2015
are summarized below (in thousands):
|
|
|
|
|
Balance at May 31, 2014
|
$
|
(7,199
|
)
|
Utilization of foreign net operating loss carryforwards
|
3,387
|
|
Other
|
(11
|
)
|
Balance at May 31, 2015
|
(3,823
|
)
|
Allowance for foreign income tax credit carryforward
|
(7,140
|
)
|
Allowance for domestic net operating loss carryforwards
|
(4,474
|
)
|
Allowance for domestic net unrealized capital loss
|
(1,526
|
)
|
Release of allowance of domestic capital loss carryforward
|
1,746
|
|
Other
|
98
|
|
Balance at May 31, 2016
|
(15,119
|
)
|
Allowance for domestic net operating loss carryforwards
|
(1,504
|
)
|
Release of allowance of domestic net unrealized capital loss
|
12
|
|
Balance at December 31, 2016
|
(16,611
|
)
|
Allowance for foreign net operating loss carryforwards
|
(6,469
|
)
|
Allowance for domestic net operating loss carryforwards
|
(3,793
|
)
|
Allowance for state credit carryforwards
|
(685
|
)
|
Rate change on domestic net operating loss and capital loss carryforwards
|
3,868
|
|
Utilization of foreign income tax credit carryforward
|
7,140
|
|
Balance at December 31, 2017
|
$
|
(16,550
|
)
|
The increase in the valuation allowance related to net operating loss carryforwards of
$10.3 million
for the year ended
December 31, 2017
relates primarily to carryforward assets recorded as part of the acquisition of ACTIVE Network. The increase in the valuation allowance related to domestic net operating loss carryforwards of
$1.5 million
and
$4.5 million
for the 2016 fiscal transition period and the year ended
May 31, 2016
, respectively, relates to acquired carryforwards from the merger with Heartland.
Foreign net operating loss carryforwards of
$43.2 million
and domestic net operating loss carryforwards of
$28.9 million
at
December 31, 2017
will expire between
December 31, 2026
and
December 31, 2037
if not utilized.
We conduct business globally and file income tax returns in the domestic federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities around the world. We are no longer subjected to state income tax examinations for years ended on or before
May 31, 2008
, U.S. federal income tax examinations for years ended on or before December 31, 2013 and U.K. federal income tax examinations for years ended on or before May 31, 2014.
A reconciliation of the beginning and ending amounts of unrecognized income tax benefits, excluding penalties and interest, for the year ended
December 31, 2017
, the 2016 fiscal transition period and the years ended
May 31, 2016
and 2015 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
Seven Months Ended December 31,
|
|
Year Ended May 31,
|
|
2017
|
|
2016
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Balance at the beginning of the year
|
$
|
17,916
|
|
|
$
|
7,803
|
|
|
$
|
2,559
|
|
|
$
|
67,576
|
|
Additions based on income tax positions related to the current year
|
7,537
|
|
|
4,626
|
|
|
287
|
|
|
6,311
|
|
Additions related to acquisition
|
13,061
|
|
|
6,149
|
|
|
6,151
|
|
|
—
|
|
Additions for income tax positions of prior years
|
411
|
|
|
247
|
|
|
753
|
|
|
512
|
|
Effect of foreign currency fluctuations on income tax positions
|
27
|
|
|
(3
|
)
|
|
2
|
|
|
(5,713
|
)
|
Reductions for income tax positions of prior years
|
(7,285
|
)
|
|
(906
|
)
|
|
(123
|
)
|
|
(32
|
)
|
Settlements with income tax authorities
|
(449
|
)
|
|
—
|
|
|
(1,826
|
)
|
|
(504
|
)
|
Changes in judgment regarding tax position
|
—
|
|
|
—
|
|
|
—
|
|
|
(65,591
|
)
|
Balance at the end of the year
|
$
|
31,218
|
|
|
$
|
17,916
|
|
|
$
|
7,803
|
|
|
$
|
2,559
|
|
As of
December 31, 2017
, the total amount of gross unrecognized income tax benefits that, if recognized, would affect the provision for income taxes is
$24.1 million
.
NOTE
10
—SHAREHOLDERS’ EQUITY
We make repurchases of our common stock mainly through the use of open market purchases and, at times, through accelerated share repurchase programs ("ASR's"). As of
December 31, 2017
, we were authorized to repurchase up to
$264.9 million
of our common stock. On
February 6, 2018
, the board increased its authorization to repurchase shares to
$600 million
.
Year Ended December 31, 2017
During the year ended
December 31, 2017
, through open market repurchase plans, we repurchased and retired
376,309
shares of our common stock at a cost of
$34.8 million
, or an average cost of
$92.51
per share, including commissions.
2016 Fiscal Transition Period
During the 2016 fiscal transition period, through open market repurchase plans, we repurchased and retired
2.5 million
shares of our common stock at a cost of
$178.2 million
, or an average cost of
$70.77
per share, including commissions.
Year Ended May 31, 2016
On
April 25, 2016
, we entered into an ASR with a financial institution to repurchase an aggregate of
$50 million
of our common stock. In exchange for an up-front payment of
$50 million
, the financial institution committed to deliver a number of shares during the ASR's purchase period, which ended on
June 23, 2016
. On
April 26, 2016
,
545,777
shares were initially delivered to us. At
May 31, 2016
, we accounted for the variable component of remaining shares to be delivered under the ASR as a forward contract indexed to our common stock which met all of the applicable criteria for equity classification. On
June 23, 2016
, an additional
127,435
shares were delivered to us. The total number of shares delivered under this ASR was
673,212
shares at an average price of
$74.27
per share.
In addition to shares repurchased under the ASR during the year ended
May 31, 2016
, we repurchased and retired
1.5 million
shares of our common stock at a cost of
$85.9 million
, or an average cost of
$58.12
per share, including commissions, through open market repurchase plans.
Year Ended May 31, 2015
On
April 10, 2015
, we entered into an ASR with a financial institution to repurchase an aggregate of
$100 million
of our common stock. In exchange for an up-front payment of
$100 million
, we repurchased
1,955,730
shares at an average price of
$51.13
per share. In addition to shares repurchased under the ASR during the year ended May 31, 2015, we repurchased and retired
7.0 million
shares of our common stock at a cost of
$269.0 million
, or an average cost of
$38.19
per share, including commissions, through open market repurchase plans.
NOTE 11—SHARE-BASED AWARDS AND OPTIONS
We have granted nonqualified stock options and restricted stock awards to key employees, officers and directors under a long-term incentive plan, which permits grants of equity to employees, officers, directors and consultants. A total of
14.0 million
shares of our common stock was reserved and made available for issuance pursuant to awards granted under the plan. The awards are held in escrow and released upon the grantee's satisfaction of conditions of the award certificate.
The following table summarizes share-based compensation expense and the related income tax benefit recognized for our share-based awards and stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
Seven Months Ended December 31,
|
|
Year Ended May 31,
|
|
2017
|
|
2016
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Share-based compensation expense
|
$
|
39,095
|
|
|
$
|
18,707
|
|
|
$
|
30,809
|
|
|
$
|
21,056
|
|
Income tax benefit
|
$
|
13,849
|
|
|
$
|
6,582
|
|
|
$
|
9,879
|
|
|
$
|
6,907
|
|
Restricted Stock
Restricted stock awards vest in equal annual installments over a
three
- or
four
-year period and in some cases vest at the end of a
three
-year service period. Restricted shares cannot be sold or transferred until they have vested. The grant date fair value of restricted stock awards, which is based on the quoted market value of our common stock on the grant date, is recognized as share-based compensation expense on a straight-line basis over the vesting period.
Performance Units
Certain of our executives have been granted performance units under our long-term incentive plan. Performance units are performance-based restricted stock units that, after a performance period, may convert into common shares, which may be restricted. The number of shares is dependent upon the achievement of certain performance measures during the performance period. The target number of performance units and any market-based performance measures ("at threshold," "target," and "maximum") are set by the compensation committee of our board of directors. Performance units are converted only after the compensation committee certifies performance based on pre-established goals.
The compensation committee may set a range of possible performance-based outcomes for performance units. For awards with only performance conditions, we recognize compensation expense on a straight-line basis over the performance period using the grant date fair value of the award, which is based on the number of shares expected to be earned according to the level of achievement of performance goals. If the number of shares expected to be earned were to change at any time during the performance period, we would make a cumulative adjustment to share-based compensation expense based on the revised number of shares expected to be earned. The performance period for awards granted range from
28
months to
three
years.
Leveraged Performance Units
During the year ended May 31, 2015, certain executives were granted performance units that we refer to as "leveraged performance units," or "LPUs." LPUs contain a market condition based on our relative stock price growth over a
three
-year performance period. The LPUs contain a minimum threshold performance which, if not met, would result in no payout. The LPUs also contain a maximum award opportunity set as a fixed dollar and fixed number of shares. After the
three
-year performance period, which concluded in October 2017,
one-third
of the earned units converted to unrestricted common stock. The remaining
two-thirds
converted to restricted stock that will vest in equal installments on each of the first
two
anniversaries of the conversion date. We recognize share-based compensation expense based on the grant date fair value of the LPUs, as determined by use of a Monte Carlo model, on a straight-line basis over the requisite service period for each separately vesting portion of the LPU award.
The following table summarizes the changes in unvested restricted stock and performance awards for the year ended
December 31, 2017
, the 2016 fiscal transition period and for the years ended
May 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average
Grant-Date
Fair Value
|
|
|
(in thousands)
|
|
|
Unvested at May 31, 2014
|
|
1,754
|
|
|
$
|
22.72
|
|
Granted
|
|
954
|
|
|
36.21
|
|
Vested
|
|
(648
|
)
|
|
23.17
|
|
Forfeited
|
|
(212
|
)
|
|
27.03
|
|
Unvested at May 31, 2015
|
|
1,848
|
|
|
28.97
|
|
Granted
|
|
461
|
|
|
57.04
|
|
Vested
|
|
(633
|
)
|
|
27.55
|
|
Forfeited
|
|
(70
|
)
|
|
34.69
|
|
Unvested at May 31, 2016
|
|
1,606
|
|
|
37.25
|
|
Granted
|
|
348
|
|
|
74.26
|
|
Vested
|
|
(639
|
)
|
|
31.38
|
|
Forfeited
|
|
(52
|
)
|
|
45.27
|
|
Unvested at December 31, 2016
|
|
1,263
|
|
|
49.55
|
|
Granted
|
|
899
|
|
|
79.79
|
|
Vested
|
|
(858
|
)
|
|
39.26
|
|
Forfeited
|
|
(78
|
)
|
|
59.56
|
|
Unvested at December 31, 2017
|
|
1,226
|
|
|
$
|
78.29
|
|
The total fair value of restricted stock and performance awards vested was
$33.7 million
for the year ended
December 31, 2017
,
$20.0 million
for the 2016 fiscal transition period and
$17.4 million
and
$15.0 million
, respectively, for the years ended
May 31, 2016
and
2015
.
For restricted stock and performance awards, we recognized compensation expense of
$35.2 million
for the year ended
December 31, 2017
,
$17.2 million
for the 2016 fiscal transition period and
$28.8 million
and
$19.8 million
, respectively, for the years ended
May 31, 2016
and
2015
. As of
December 31, 2017
, there was
$46.1 million
of unrecognized compensation expense related to unvested restricted stock and performance awards that we expect to recognize over a weighted-average period of
1.8
years. Our restricted stock and performance award plans provide for accelerated vesting under certain conditions.
Stock Options
Stock options are granted with an exercise price equal to
100%
of fair market value of our common stock on the date of grant and have a term of
ten
years. Stock options granted before the year ended May 31, 2015 vest in equal installments on each of the first
four
anniversaries of the grant date. Stock options granted during the year ended May 31, 2015 and thereafter vest in
equal installments on each of the first
three
anniversaries of the grant date. Our stock option plans provide for accelerated vesting under certain conditions.
The following summarizes changes in stock option activity for the year ended
December 31, 2017
, the 2016 fiscal transition period and the years ended
May 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted-Average Exercise Price
|
|
Weighted-Average Remaining Contractual Term
|
|
Aggregate Intrinsic Value
|
|
(in thousands)
|
|
|
|
(years)
|
|
(in millions)
|
Outstanding at May 31, 2014
|
1,532
|
|
|
$
|
20.36
|
|
|
3.8
|
|
$
|
21.3
|
|
Granted
|
306
|
|
|
35.78
|
|
|
|
|
|
Forfeited
|
(48
|
)
|
|
27.42
|
|
|
|
|
|
Exercised
|
(896
|
)
|
|
20.15
|
|
|
|
|
16.6
|
|
Outstanding at May 31, 2015
|
894
|
|
|
25.47
|
|
|
5.2
|
|
23.9
|
|
Granted
|
145
|
|
|
55.92
|
|
|
|
|
|
Forfeited
|
(8
|
)
|
|
16.10
|
|
|
|
|
|
Exercised
|
(220
|
)
|
|
22.46
|
|
|
|
|
9.4
|
|
Outstanding at May 31, 2016
|
811
|
|
|
31.81
|
|
|
5.8
|
|
36.8
|
|
Granted
|
73
|
|
|
74.66
|
|
|
|
|
|
Forfeited
|
(1
|
)
|
|
22.93
|
|
|
|
|
|
Exercised
|
(124
|
)
|
|
22.26
|
|
|
|
|
6.5
|
|
Outstanding at December 31, 2016
|
759
|
|
|
37.51
|
|
|
6.0
|
|
24.5
|
|
Granted
|
124
|
|
|
79.45
|
|
|
|
|
|
Forfeited
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
(160
|
)
|
|
23.50
|
|
|
|
|
10.1
|
|
Outstanding at December 31, 2017
|
723
|
|
|
$
|
47.79
|
|
|
6.4
|
|
$
|
37.9
|
|
|
|
|
|
|
|
|
|
Options vested and exercisable at December 31, 2017
|
502
|
|
|
$
|
36.60
|
|
|
5.4
|
|
$
|
31.9
|
|
We recognized compensation expense for stock options of
$2.6 million
during the year ended December 31, 2017 and
$1.1 million
,
$1.4 million
and
$0.7 million
during the 2016 fiscal transition period and the fiscal years ended
May 31, 2016
and
2015
, respectively. As of
December 31, 2017
, we had
$3.4 million
of unrecognized compensation expense related to unvested stock options that we expect to recognize over a weighted-average period of
1.8
years.
The weighted-average grant-date fair value of stock options granted during the year ended
December 31, 2017
, the 2016 fiscal transition period and during the years ended
May 31, 2016
and 2015 was
$23.68
,
$21.87
,
$15.60
and
$8.45
, respectively. Fair value was estimated on the date of grant using the Black-Scholes valuation model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
Seven Months Ended December 31,
|
|
Year Ended May 31,
|
|
2017
|
|
2016
|
|
2016
|
|
2015
|
Risk-free interest rate
|
1.99
|
%
|
|
1.05
|
%
|
|
1.62
|
%
|
|
1.57
|
%
|
Expected volatility
|
30.00
|
%
|
|
31.58
|
%
|
|
28.65
|
%
|
|
23.65
|
%
|
Dividend yield
|
0.06
|
%
|
|
0.06
|
%
|
|
0.10
|
%
|
|
0.13
|
%
|
Expected term (years)
|
5
|
|
|
5
|
|
|
5
|
|
|
5
|
|
The risk-free interest rate is based on the yield of a zero coupon U.S. Treasury security with a maturity equal to the expected life of the option from the date of the grant. Our assumption on expected volatility is based on our historical volatility. The dividend yield assumption is calculated using our average stock price over the preceding year and the annualized amount of our most current quarterly dividend per share. We based our assumptions on the expected term of the options on our analysis of the historical exercise patterns of the options and our assumption on the future exercise pattern of options.
NOTE 12—SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow disclosures for the periods presented are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
Seven Months Ended December 31,
|
|
Year Ended May 31,
|
|
2017
|
|
2016
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Income taxes paid (refunded), net
|
$
|
97,002
|
|
|
$
|
(3,680
|
)
|
|
$
|
89,684
|
|
|
$
|
66,726
|
|
Interest paid
|
$
|
154,200
|
|
|
$
|
93,624
|
|
|
$
|
58,730
|
|
|
$
|
36,537
|
|
NOTE 13—NONCONTROLLING INTERESTS
The following table is the reconciliation of net income attributable to noncontrolling interests to comprehensive income attributable to noncontrolling interests for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
Seven Months Ended December 31,
|
|
Year Ended May 31,
|
|
2017
|
|
2016
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Net income attributable to noncontrolling interests
|
$
|
25,645
|
|
|
$
|
12,752
|
|
|
$
|
18,551
|
|
|
$
|
31,075
|
|
Foreign currency translation attributable to noncontrolling interests
|
13,807
|
|
|
(8,417
|
)
|
|
471
|
|
|
(28,597
|
)
|
Comprehensive income attributable to noncontrolling interests
|
$
|
39,452
|
|
|
$
|
4,335
|
|
|
$
|
19,022
|
|
|
$
|
2,478
|
|
NOTE 14—ACCUMULATED OTHER COMPREHENSIVE LOSS
The changes in the accumulated balances for each component of other comprehensive income (loss), net of tax, were as follows for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation
|
|
Unrealized Losses on Hedging Activities
|
|
Other
|
|
Accumulated Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Balance at May 31, 2014
|
$
|
1,583
|
|
|
$
|
—
|
|
|
$
|
(3,359
|
)
|
|
$
|
(1,776
|
)
|
Other comprehensive loss, net of tax
|
(179,892
|
)
|
|
(3,874
|
)
|
|
(450
|
)
|
|
(184,216
|
)
|
Balance at May 31, 2015
|
(178,309
|
)
|
|
(3,874
|
)
|
|
(3,809
|
)
|
|
(185,992
|
)
|
Other comprehensive loss, net of tax
|
(56,329
|
)
|
|
(2,881
|
)
|
|
(848
|
)
|
|
(60,058
|
)
|
Balance at May 31, 2016
|
(234,638
|
)
|
|
(6,755
|
)
|
|
(4,657
|
)
|
|
(246,050
|
)
|
Other comprehensive income (loss), net of tax
|
(83,812
|
)
|
|
6,115
|
|
|
1,030
|
|
|
(76,667
|
)
|
Balances at December 31, 2016
|
(318,450
|
)
|
|
(640
|
)
|
|
(3,627
|
)
|
|
(322,717
|
)
|
Other comprehensive income (loss), net of tax
|
132,594
|
|
|
7,639
|
|
|
(660
|
)
|
|
139,573
|
|
Balances at December 31, 2017
|
$
|
(185,856
|
)
|
|
$
|
6,999
|
|
|
$
|
(4,287
|
)
|
|
$
|
(183,144
|
)
|
NOTE
15
—SEGMENT INFORMATION
Information About Profit and Assets
We evaluate performance and allocate resources based on the operating income of each operating segment. The operating income of each operating segment includes the revenues of the segment less expenses that are directly related to those revenues. Operating overhead, shared costs and certain compensation costs are included in Corporate in the following table. Interest and other income, interest and other expense and provision for income taxes are not allocated to the individual segments. We do not evaluate the performance of or allocate resources to our operating segments using asset data. The accounting policies of the reportable operating segments are the same as those described in the Summary of Significant Accounting Policies in "Note
1
- Basis of Presentation and Summary of Significant Accounting Policies."
Information on segments and reconciliations to consolidated revenues and consolidated operating income are as follows for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
Seven Months Ended December 31,
|
|
Year Ended May 31,
|
|
2017
|
|
2016
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Revenues
(1)
:
|
|
|
|
|
|
|
|
North America
|
$
|
2,929,522
|
|
|
$
|
1,650,616
|
|
|
$
|
2,052,623
|
|
|
$
|
1,968,890
|
|
Europe
|
767,524
|
|
|
403,823
|
|
|
631,900
|
|
|
615,966
|
|
Asia-Pacific
|
278,117
|
|
|
148,457
|
|
|
213,627
|
|
|
188,862
|
|
Consolidated revenues
|
$
|
3,975,163
|
|
|
$
|
2,202,896
|
|
|
$
|
2,898,150
|
|
|
$
|
2,773,718
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
(1)
:
|
|
|
|
|
|
|
|
North America
|
$
|
457,009
|
|
|
$
|
233,850
|
|
|
$
|
307,626
|
|
|
$
|
293,139
|
|
Europe
|
272,769
|
|
|
145,767
|
|
|
244,837
|
|
|
240,014
|
|
Asia-Pacific
|
81,273
|
|
|
37,530
|
|
|
50,743
|
|
|
39,697
|
|
Corporate
(2)
|
(252,183
|
)
|
|
(179,196
|
)
|
|
(178,262
|
)
|
|
(116,253
|
)
|
Consolidated operating income
|
$
|
558,868
|
|
|
$
|
237,951
|
|
|
$
|
424,944
|
|
|
$
|
456,597
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
(1)
:
|
|
|
|
|
|
|
|
North America
|
$
|
379,953
|
|
|
$
|
208,198
|
|
|
$
|
128,618
|
|
|
$
|
81,051
|
|
Europe
|
46,928
|
|
|
26,178
|
|
|
40,194
|
|
|
39,910
|
|
Asia-Pacific
|
16,466
|
|
|
10,385
|
|
|
13,935
|
|
|
9,973
|
|
Corporate
|
7,804
|
|
|
2,810
|
|
|
5,134
|
|
|
6,571
|
|
Consolidated depreciation and amortization
|
$
|
451,151
|
|
|
$
|
247,571
|
|
|
$
|
187,881
|
|
|
$
|
137,505
|
|
(1)
Revenues, operating income and depreciation and amortization reflect the effect of acquired businesses from the respective dates of acquisition. For further discussion, see "Note
2
—
Acquisitions."
(2)
During the year ended
December 31, 2017
, the seven months ended
December 31, 2016
and the year ended
May 31, 2016
, operating loss for Corporate included acquisition and integration expenses of
$94.6 million
,
$91.6 million
and
$51.3 million
, respectively.
Enterprise-Wide Information
As a percentage of our total consolidated revenues, revenues from external customers in the United States and the United Kingdom were
66%
and
11%
, respectively, for the year ended December 31, 2017. Revenues from external customers in the United States and the United Kingdom were
67%
and
10%
, respectively, for the 2016 transition period. Revenues from external customers in the United States, the United Kingdom, and Canada were
61%
,
10%
and
10%
, respectively, for the year ended
May 31, 2016
; and
60%
,
13%
and
11%
, respectively, for the year ended
May 31, 2015
. Revenues from external customers are attributed to individual countries based on the location of the customer arrangements. Our results of operations and our financial condition are not significantly reliant upon any single customer.
Long-lived assets, excluding goodwill and other intangible assets, by location as of
December 31, 2017
and 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
|
|
|
(in thousands)
|
United States
|
$
|
451,436
|
|
|
$
|
413,499
|
|
Foreign countries
|
136,912
|
|
|
112,871
|
|
|
$
|
588,348
|
|
|
$
|
526,370
|
|
NOTE 16—COMMITMENTS AND CONTINGENCIES
Leases and Purchase Obligations
We conduct a major part of our operations using leased facilities and equipment. Many of these operating leases have renewal and purchase options and provide that we pay the cost of property taxes, insurance and maintenance. Rent expense on all operating leases for the year ended
December 31, 2017
, the 2016 fiscal transition period and the years ended
May 31, 2016
and
2015
was
$44.7 million
,
$19.2 million
,
$19.7 million
and
$17.5 million
, respectively. We also have contractual obligations related to service arrangements with suppliers for fixed or minimum amounts.
In
May 2017
, we sold our operating facility in Jeffersonville, Indiana for
$37.5 million
and simultaneously leased the property back for an initial term of
20 years
, followed by
four
optional renewal terms of
5 years
. The arrangement met the criteria to be treated as a sale for accounting purposes, and as a result, we derecognized the associated property. There was no resulting gain or loss on the sale because the proceeds received were equal to the carrying amount of the property. We are accounting for the lease as an operating lease.
Future minimum payments at
December 31, 2017
for noncancelable operating leases and purchase obligations were as follows:
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Purchase Obligations
|
|
|
|
|
|
(in thousands)
|
Years ending December 31:
|
|
|
|
2018
|
$
|
41,542
|
|
|
$
|
70,663
|
|
2019
|
35,916
|
|
|
58,494
|
|
2020
|
28,149
|
|
|
51,850
|
|
2021
|
25,436
|
|
|
42,699
|
|
2022
|
23,946
|
|
|
13,734
|
|
Thereafter
|
179,295
|
|
|
31,511
|
|
Total future minimum payments
|
$
|
334,284
|
|
|
$
|
268,951
|
|
Legal
We are party to a number of claims and lawsuits incidental to our business. In our opinion, the liabilities, if any, which may ultimately result from the outcome of such matters, individually or in the aggregate, are not expected to have a material adverse effect on our financial position, liquidity, results of operations or cash flows.
Heartland, Heartland’s board of directors, Global Payments, Data Merger Sub One, Inc. (a wholly owned subsidiary of Global Payments) and Data Merger Sub Two, LLC (a wholly owned subsidiary of Global Payments) were named as defendants in a putative class action lawsuit challenging the merger with Heartland. The suit was filed on January 8, 2016 in the New Jersey Superior Court, Mercer County, Civil Division, and is captioned Kevin Merchant v. Heartland Payment Systems, et al, L-45-16. The complaint alleged, among other things, that the directors of Heartland breached their fiduciary duties to Heartland stockholders by agreeing to sell Heartland for inadequate consideration, agreeing to improper deal protection terms in the merger agreement,
failing to properly value Heartland, and filing a materially incomplete registration statement with the Securities and Exchange Commission. In addition, the complaint alleged that Heartland, Global Payments, Data Merger Sub One, and Data Merger Sub Two aided and abetted these purported breaches of fiduciary duty. On April 12, 2016, solely to avoid the costs, disruption and distraction of further litigation, and without admitting the validity of any allegations made by the plaintiff, Heartland and Global Payments reached an agreement to settle the suit and entered into a Memorandum of Understanding to document the terms and conditions for settlement of the suit. On April 7, 2017, the court approved the parties' settlement agreement under which Heartland agreed to pay Plaintiffs’ counsel an immaterial amount of attorney’s fees. The settlement releases all claims that were or could have been brought challenging any aspect of the merger with Heartland or the merger agreement related thereto.
We have reached preliminary agreement to resolve an SEC investigation against Heartland, which commenced prior to the acquisition of Heartland by us and concerns certain non-financial disclosures made by prior Heartland management between 2013 and 2015. We expect the final resolution of the investigation to be immaterial to our business, financial condition and results of operations.
Operating Taxes
We are subject to certain taxes that are not derived based on earnings (e.g., sales, gross receipts, property, value-added and other business taxes). During the course of operations, we must interpret the meaning of various operating tax regulations in the United States and in the foreign jurisdictions in which we do business. Taxing authorities in those various jurisdictions may arrive at different interpretations of applicable tax laws and regulations which could result in the payment of additional taxes in those jurisdictions.
BIN/ICA Agreements
We have entered into sponsorship or depository and processing agreements with certain banks. These agreements allow us to use the banks' identification numbers ("BIN") for Visa transactions and an Interbank Card Association ("ICA") number for MasterCard transactions, to clear credit card transactions through Visa and MasterCard. Certain of these agreements contain financial covenants, and we were in compliance with all such covenants as of
December 31, 2017
.
NOTE 17—COMPARATIVE DATA FOR THE YEAR ENDED DECEMBER 31, 2016 AND THE SEVEN MONTHS ENDED DECEMBER 31, 2015 (UNAUDITED)
The condensed consolidated statement of income for the year ended December 31, 2016 and the seven months ended December 31, 2015 is as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Seven Months Ended December 31,
|
|
2016
|
|
2015
|
|
|
|
|
Revenues
|
$
|
3,370,976
|
|
|
$
|
1,730,070
|
|
Operating expenses:
|
|
|
|
Cost of service
|
1,603,532
|
|
|
638,700
|
|
Selling, general and administrative
|
1,411,096
|
|
|
784,823
|
|
|
3,014,628
|
|
|
1,423,523
|
|
|
|
|
|
Operating income
|
356,348
|
|
|
306,547
|
|
|
|
|
|
Interest and other income
|
46,780
|
|
|
2,886
|
|
Interest and other expense
|
(146,156
|
)
|
|
(32,149
|
)
|
|
(99,376
|
)
|
|
(29,263
|
)
|
|
|
|
|
Income before income taxes
|
256,972
|
|
|
277,284
|
|
Provision for income taxes
|
(36,267
|
)
|
|
(70,089
|
)
|
Net income
|
220,705
|
|
|
207,195
|
|
Less: Net income attributable to noncontrolling interests
|
(18,952
|
)
|
|
(12,351
|
)
|
Net income attributable to Global Payments
|
$
|
201,753
|
|
|
$
|
194,844
|
|
|
|
|
|
Earnings per share attributable to Global Payments:
|
|
|
|
Basic earnings per share
|
$
|
1.38
|
|
|
$
|
1.50
|
|
Diluted earnings per share
|
$
|
1.37
|
|
|
$
|
1.49
|
|
NOTE 18—QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly results for the years ended
December 31, 2017
and
2016
are as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
March 31, 2017
|
|
June 30, 2017
|
|
September 30, 2017
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
|
|
|
|
|
|
Revenues
|
$
|
919,762
|
|
|
$
|
962,240
|
|
|
$
|
1,038,907
|
|
|
$
|
1,054,253
|
|
Operating income
|
104,970
|
|
|
131,852
|
|
|
172,471
|
|
|
149,575
|
|
Net income
|
52,959
|
|
|
72,443
|
|
|
118,362
|
|
|
250,305
|
|
Net income attributable to Global Payments
|
48,813
|
|
|
66,909
|
|
|
110,740
|
|
|
241,962
|
|
Basic earnings per share attributable to Global Payments
|
0.32
|
|
|
0.44
|
|
|
0.72
|
|
|
1.52
|
|
Diluted earnings per share attributable to Global Payments
|
0.32
|
|
|
0.44
|
|
|
0.71
|
|
|
1.51
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
March 31, 2016
|
|
June 30, 2016
|
|
September 30, 2016
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
|
|
|
|
|
|
Revenues
|
$
|
626,259
|
|
|
$
|
842,644
|
|
|
$
|
951,885
|
|
|
$
|
950,187
|
|
Operating income
|
94,573
|
|
|
61,161
|
|
|
120,389
|
|
|
80,226
|
|
Net income
|
63,447
|
|
|
67,133
|
|
|
62,224
|
|
|
27,902
|
|
Net income attributable to Global Payments
|
59,911
|
|
|
62,233
|
|
|
55,510
|
|
|
24,101
|
|
Basic earnings per share attributable to Global Payments
|
0.46
|
|
|
0.42
|
|
|
0.36
|
|
|
0.16
|
|
Diluted earnings per share attributable to Global Payments
|
0.46
|
|
|
0.42
|
|
|
0.36
|
|
|
0.16
|
|
The quarterly financial data in the table above reflect the effects of acquisitions and borrowings to fund certain of those acquisitions. Notably, we acquired Heartland during the quarter ended June 30, 2016 and ACTIVE Network during the quarter ended September 30, 2017. Additionally, our consolidated results reflected incremental expenses associated with the acquisition and integration of Heartland and ACTIVE Network. See "Note
2
—Acquisitions" for further discussion of our acquisitions.
Acquisition and integration expenses were
$26.1 million
,
$21.9 million
,
$21.5 million
and
$25.1 million
for the quarters ended March 31, 2017, June 30, 2017, September 30, 2017 and December 31, 2017, respectively. Acquisition and integration expenses were
$8.5 million
,
$50.5 million
,
$34.0 million
, and
$49.1 million
for the quarters ended March 31, 2016, June 30, 2016, September 30, 2016 and December 31, 2016, respectively.
Results for the quarter ended June 30, 2016 reflect a gain of
$41.2 million
recorded in connection with the sale of our membership interests in Visa Europe. See "Note
6
—Other Assets" for further discussion of this transaction.
Results for the quarter ended
December 31, 2017
reflect the effects of a net income tax benefit of
$158.7 million
in connection with the 2017 U.S. Tax Act, which was enacted on December 22, 2017. See "Note
9
—Income Tax" for further discussion of the new tax legislation.