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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018

OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             

Commission file number: 001-16111

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12518118&doc=15
GLOBAL PAYMENTS INC.
(Exact name of registrant as specified in charter)
Georgia
 
58-2567903
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
3550 Lenox Road, Atlanta, Georgia
 
30326
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (770) 829-8000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒
 
Accelerated filer ☐
Non-accelerated filer ☐
 
Smaller reporting company ☐
 
 
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes ☐   No ☒
 

The number of shares of the issuer’s common stock, no par value, outstanding as of October 28, 2018 was 158,212,663.


Table of Contents

GLOBAL PAYMENTS INC.
FORM 10-Q
For the quarterly period ended September 30, 2018

TABLE OF CONTENTS
 
 
 
Page
PART I - FINANCIAL INFORMATION
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
ITEM 3.
 
ITEM 4.
 
PART II - OTHER INFORMATION
ITEM 1.
 
ITEM 1A.
 
ITEM 2.
 
ITEM 6.
 
 
 



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PART 1 - FINANCIAL INFORMATION

ITEM 1—FINANCIAL STATEMENTS

GLOBAL PAYMENTS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)

 
Three Months Ended
 
September 30, 2018
 
September 30, 2017
 
 
 
 
Revenues
$
857,670

 
$
1,038,907

Operating expenses:
 
 
 
Cost of service
265,013

 
493,883

Selling, general and administrative
369,495

 
372,553

 
634,508

 
866,436

Operating income
223,162

 
172,471

 
 
 
 
Interest and other income
3,134

 
2,347

Interest and other expense
(46,356
)
 
(40,764
)
 
(43,222
)
 
(38,417
)
Income before income taxes
179,940

 
134,054

Benefit from (provision for) income taxes
6,089

 
(15,692
)
Net income
186,029

 
118,362

Net income attributable to noncontrolling interests, net of income tax
(9,659
)
 
(7,622
)
Net income attributable to Global Payments
$
176,370

 
$
110,740

 
 
 
 
Earnings per share attributable to Global Payments:
 
 
 
Basic earnings per share
$
1.12

 
$
0.72

Diluted earnings per share
$
1.11

 
$
0.71

See Notes to Unaudited Consolidated Financial Statements.

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GLOBAL PAYMENTS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)

 
Nine Months Ended
 
September 30, 2018
 
September 30, 2017
 
 
 
 
Revenues
$
2,485,811

 
$
2,920,910

Operating expenses:
 
 
 
Cost of service
781,943

 
1,418,969

Selling, general and administrative
1,133,799

 
1,092,648

 
1,915,742

 
2,511,617

Operating income
570,069

 
409,293

 
 
 
 
Interest and other income
17,397

 
5,787

Interest and other expense
(139,681
)
 
(130,422
)
 
(122,284
)
 
(124,635
)
Income before income taxes
447,785

 
284,658

Provision for income taxes
(46,441
)
 
(40,893
)
Net income
401,344

 
243,765

Net income attributable to noncontrolling interests, net of income tax
(24,506
)
 
(17,302
)
Net income attributable to Global Payments
$
376,838

 
$
226,463

 
 
 
 
Earnings per share attributable to Global Payments:
 
 
 
Basic earnings per share
$
2.37

 
$
1.48

Diluted earnings per share
$
2.36

 
$
1.47

See Notes to Unaudited Consolidated Financial Statements.




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GLOBAL PAYMENTS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)

 
Three Months Ended
 
September 30, 2018
 
September 30, 2017
 
 
 
 
Net income
$
186,029

 
$
118,362

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments
(15,395
)
 
42,417

Income tax benefit related to foreign currency translation adjustments
140

 

Unrealized gains on hedging activities
1,845

 
341

Reclassification of unrealized (gains) losses on hedging activities to interest expense
(1,663
)
 
1,172

Income tax provision related to hedging activities
(110
)
 
(670
)
Other, net
(58
)
 
18

Other comprehensive income (loss), net of tax
(15,241
)
 
43,278

 
 
 
 
Comprehensive income
170,788

 
161,640

Comprehensive income attributable to noncontrolling interests
(21,333
)
 
(9,950
)
Comprehensive income attributable to Global Payments
$
149,455

 
$
151,690


 
Nine Months Ended
 
September 30, 2018
 
September 30, 2017
 
 
 
 
Net income
$
401,344

 
$
243,765

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments
(80,620
)
 
133,921

Income tax provision related to foreign currency translation adjustments
(224
)
 

Unrealized gains (losses) on hedging activities
12,353

 
(2,214
)
Reclassification of unrealized (gains) losses on hedging activities to interest expense
(2,830
)
 
4,667

Income tax provision related to hedging activities
(2,420
)
 
(919
)
Other, net
(59
)
 
(196
)
Other comprehensive income (loss), net of tax
(73,800
)
 
135,259

 
 
 
 
Comprehensive income
327,544

 
379,024

Comprehensive income attributable to noncontrolling interests
(36,264
)
 
(32,352
)
Comprehensive income attributable to Global Payments
$
291,280

 
$
346,672

See Notes to Unaudited Consolidated Financial Statements.



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GLOBAL PAYMENTS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
September 30, 2018
 
December 31, 2017
 
(Unaudited)
 
 
ASSETS
 
  
 

Current assets:
 
  
 

Cash and cash equivalents
$
990,604

 
$
1,335,855

Accounts receivable, net of allowances for doubtful accounts of $3,495 and $1,827, respectively
321,664

 
301,887

Settlement processing assets
2,894,226

 
2,459,292

Prepaid expenses and other current assets
207,496

 
206,545

Total current assets
4,413,990

  
4,303,579

Goodwill
6,130,921

  
5,703,992

Other intangible assets, net
2,278,968

  
2,181,707

Property and equipment, net
640,976

  
588,348

Deferred income taxes
9,237

 
13,146

Other noncurrent assets
365,144

  
207,297

Total assets
$
13,839,236

  
$
12,998,069

LIABILITIES AND EQUITY
 
  
 
Current liabilities:
 
  
 
Settlement lines of credit
$
685,878

 
$
635,166

Current portion of long-term debt
92,689

 
100,308

Accounts payable and accrued liabilities
1,065,435

  
1,039,607

Settlement processing obligations
2,423,069

 
2,040,509

Total current liabilities
4,267,071

  
3,815,590

Long-term debt
4,707,510

 
4,559,408

Deferred income taxes
516,357

  
436,879

Other noncurrent liabilities
172,730

  
220,961

Total liabilities
9,663,668

  
9,032,838

Commitments and contingencies


  


Equity:
 
  
 
Preferred stock, no par value; 5,000,000 shares authorized and none issued

  

Common stock, no par value; 200,000,000 shares authorized; 158,186,371 issued and outstanding at September 30, 2018 and 159,180,317 issued and outstanding at December 31, 2017

  

Paid-in capital
2,250,828

  
2,379,774

Retained earnings
1,994,003

  
1,597,897

Accumulated other comprehensive loss
(270,545
)
  
(183,144
)
Total Global Payments shareholders’ equity
3,974,286

  
3,794,527

Noncontrolling interests
201,282

 
170,704

Total equity
4,175,568

 
3,965,231

Total liabilities and equity
$
13,839,236

  
$
12,998,069

See Notes to Unaudited Consolidated Financial Statements.

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GLOBAL PAYMENTS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Nine Months Ended
 
September 30, 2018
 
September 30, 2017
Cash flows from operating activities:
 
 
 
Net income
$
401,344

 
$
243,765

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization of property and equipment
105,734

 
80,868

Amortization of acquired intangibles
263,714

 
249,095

Share-based compensation expense
44,937

 
30,771

Provision for operating losses and bad debts
32,309

 
37,203

Amortization of capitalized contract costs
37,281

 
32,863

Deferred income taxes
(4,973
)
 
(51,093
)
Other, net
(17,185
)
 
34,190

Changes in operating assets and liabilities, net of the effects of acquisitions:
 
 
 
Accounts receivable
(27,696
)
 
(6,070
)
Settlement processing assets and obligations, net
(58,693
)
 
(232,713
)
Prepaid expenses and other assets
(117,824
)
 
(78,302
)
Accounts payable and other liabilities
2,058

 
19,546

Net cash provided by operating activities
661,006

 
360,123

Cash flows from investing activities:
 
 
 
Business and other acquisitions, net of cash acquired
(769,082
)
 
(563,009
)
Capital expenditures
(156,060
)
 
(136,612
)
Proceeds from sales of property and equipment
131

 
37,520

Other, net
(2,514
)
 
(48,056
)
Net cash used in investing activities
(927,525
)
 
(710,157
)
Cash flows from financing activities:
 
 
 
Net borrowings of settlement lines of credit
49,381

 
77,397

Proceeds from long-term debt
1,606,214

 
1,713,324

Repayments of long-term debt
(1,468,505
)
 
(1,386,721
)
Payment of debt issuance costs
(12,544
)
 
(9,520
)
Repurchase of common stock
(180,897
)
 
(32,811
)
Proceeds from stock issued under share-based compensation plans
12,571

 
7,068

Common stock repurchased - share-based compensation plans
(44,824
)
 
(21,171
)
Distributions to noncontrolling interests
(5,686
)
 
(9,301
)
Dividends paid
(4,750
)
 
(5,141
)
Net cash (used in) provided by financing activities
(49,040
)
 
333,124

Effect of exchange rate changes on cash
(29,692
)
 
40,181

(Decrease) increase in cash and cash equivalents
(345,251
)
 
23,271

Cash and cash equivalents, beginning of the period
1,335,855

 
1,162,779

Cash and cash equivalents, end of the period
$
990,604

 
$
1,186,050

See Notes to Unaudited Consolidated Financial Statements.

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GLOBAL PAYMENTS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
 (in thousands)

 
 
Number of Shares 
 
Paid-in Capital 
 
Retained Earnings 
 
Accumulated Other Comprehensive Loss
 
Total Global Payments Shareholders’ Equity
 
Noncontrolling Interests
 
Total Equity
Balance at December 31, 2017
159,180

 
$
2,379,774

 
$
1,597,897

 
$
(183,144
)
 
$
3,794,527

 
$
170,704

 
$
3,965,231

Net income
 
 
 
 
376,838

 
 
 
376,838

 
24,506

 
401,344

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
(85,558
)
 
(85,558
)
 
11,758

 
(73,800
)
Stock issued under share-based compensation plans
895

 
12,571

 
 
 
 
 
12,571

 
 
 
12,571

Common stock repurchased - share-based compensation plans
(277
)
 
(32,508
)
 


 
 
 
(32,508
)
 
 
 
(32,508
)
Share-based compensation expense
 
 
44,937

 
 
 
 
 
44,937

 
 
 
44,937

Distributions to noncontrolling interest
 
 
 
 
 
 
 
 

 
(5,686
)
 
(5,686
)
Cumulative effect of adoption of new accounting standard
 
 
 
 
50,969

 
(1,843
)
 
49,126

 
 
 
49,126

Repurchase of common stock
(1,612
)
 
(153,946
)
 
(26,951
)
 
 
 
(180,897
)
 
 
 
(180,897
)
Dividends paid ($0.03 per share)
 
 
 
 
(4,750
)
 
 
 
(4,750
)
 
 
 
(4,750
)
Balance at September 30, 2018
158,186

 
$
2,250,828

 
$
1,994,003

 
$
(270,545
)
 
$
3,974,286

 
$
201,282

 
$
4,175,568


 
Number of Shares 
 
Paid-in Capital 
 
Retained Earnings 
 
Accumulated Other Comprehensive Loss
 
Total Global Payments Shareholders’ Equity 
 
Noncontrolling Interests
 
Total Equity
Balance at December 31, 2016
152,186

 
$
1,816,278

 
$
1,137,230

 
$
(322,717
)
 
$
2,630,791

 
$
148,551

 
$
2,779,342

Net income
 
 
 
 
226,463

 
 
 
226,463

 
17,302

 
243,765

Other comprehensive income, net of tax
 
 
 
 
 
 
120,209

 
120,209

 
15,050

 
135,259

Stock issued under share-based compensation plans
851

 
7,068

 
 
 


 
7,068

 
 
 
7,068

Common stock repurchased - share-based compensation plans
(256
)
 
(24,078
)
 
 
 
 
 
(24,078
)
 
 
 
(24,078
)
Share-based compensation expense
 
 
30,771

 
 
 
 
 
30,771

 
 
 
30,771

Issuance of common stock in connection with a business combination
6,358

 
572,079

 
 
 
 
 
572,079

 
 
 
572,079

Dissolution of a subsidiary

 


 
7,998

 
 
 
7,998

 
(7,998
)
 

Distributions to noncontrolling interest
 
 
 
 
 
 
 
 

 
(9,301
)
 
(9,301
)
Repurchase of common stock
(376
)
 
(25,787
)
 
(9,024
)
 
 
 
(34,811
)
 
 
 
(34,811
)
Dividends paid ($0.03133 per share)
 
 
 
 
(5,141
)
 
 
 
(5,141
)
 
 
 
(5,141
)
Balance at September 30, 2017
158,763

 
$
2,376,331

 
$
1,357,526

 
$
(202,508
)
 
$
3,531,349

 
$
163,604

 
$
3,694,953

See Notes to Unaudited Consolidated Financial Statements.



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NOTES TO UNAUDITED 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 in 31 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 unaudited 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 unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). The consolidated balance sheet as of December 31, 2017 was derived from the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017 but does not include all disclosures required by GAAP for annual financial statements.

In the opinion of our management, all known adjustments necessary for a fair presentation of the results of the interim periods have been made. These adjustments consist of normal recurring accruals and estimates that affect the carrying amount of assets and liabilities. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017.

Use of estimatesThe 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.

Recently Adopted Accounting Pronouncements

New Revenue Accounting Standard

We adopted Accounting Standards Update ("ASU") 2014-09, as well as other clarifications and technical guidance issued by the Financial Accounting Standards Board ("FASB") related to this new revenue standard (collectively codified in Accounting Standards Codification ("ASC") Topic 606: Revenue from Contracts with Customers, "ASC 606" and ASC Subtopic 340-40: Other Assets and Deferred Costs - Contracts with Customers, "ASC 340-40"), on January 1, 2018. We elected the modified retrospective transition method, which resulted in a net increase to retained earnings of $51.0 million for the cumulative effect of applying the standard. The primary component of the cumulative-effect adjustment was the result of changes in the accounting for certain costs to obtain customer contracts and the related income tax effects, which resulted in increases to other noncurrent assets and deferred income tax liabilities of $64.6 million and $15.6 million, respectively. Previously, we amortized these assets to expense over the related contract term. Under ASC 340-40, we now amortize these assets over the expected period of benefit, which is generally longer than the initial contract term. Under the new standard, we also capitalized certain costs that were not previously capitalized, including certain commissions and related payroll taxes and certain costs incurred to fulfill a contract before the performance obligation has been satisfied, primarily compensation to employees engaged in customer implementation activities in our technology-enabled businesses.

Under the modified retrospective transition method, we are required to provide additional disclosures during 2018 of the amount by which each financial statement line item is affected in the current reporting period, as compared to the guidance that was in effect before the change, and an explanation of the reasons for significant changes, if any. For the three and nine months ended September 30, 2018, we presented revenue net of certain payments made to third parties, including payment networks. This change in presentation

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had the effect of reducing our revenues and operating expenses by the same amounts. As a result, revenues, cost of service and selling, general and administrative expenses were lower than the amounts without the effect of the new accounting standard by $291.3 million, $273.6 million and $17.7 million, respectively, during the three months ended September 30, 2018; and lower than the amounts without the effect of the new accounting standard by $825.5 million, $774.5 million and $51.0 million, respectively, during the nine months ended September 30, 2018. The adoption of ASC 606 did not have a material effect on any other line items in our consolidated statement of income for the three and nine months ended September 30, 2018 or consolidated balance sheet as of September 30, 2018, and had no effect on our cash flows from operating activities, investing activities or financing activities included in our consolidated statement of cash flows for the nine months ended September 30, 2018.

Other Recently Adopted 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 adopted ASU 2017-12 on January 1, 2018 with no 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 have been applied prospectively from the date of adoption. The effect of ASU 2017-01 is dependent upon the nature of future acquisitions or dispositions that we make.

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 adopted ASU 2016-16 on January 1, 2018 using the modified retrospective transition method with no effect 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 adopted ASU 2016-01 on January 1, 2018 using the modified retrospective transition method with no material effect on our consolidated financial statements.

Recently Issued Pronouncements Not Yet Adopted

New Lease Accounting Standard

In February 2016, the FASB issued ASU 2016-02, "Leases." This update requires 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.

Although early adoption is permitted, we expect to adopt ASU 2016-02, as well as other related clarifications and interpretive guidance issued by the FASB, when it becomes effective for us on January 1, 2019. We plan to elect the optional modified retrospective transition method to apply the provisions of the new standard at the adoption date, which will result in recognition and measurement

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of assets and liabilities for the rights and obligations created by leases in the period of adoption. Under this transition method, we would not recast the prior financial statements presented.

We have not completed our evaluation of the effect of ASU 2016-02 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. We plan to elect the transition package of three practical expedients, which among other things, allows for the carryforward of historical lease classifications, and we expect to make an accounting policy election to not apply the recognition requirements to leases with a term of less than twelve months.

Our existing leases consist primarily of real estate leases for office space throughout the markets in which we conduct business. We are currently finalizing the analysis of our existing lease arrangements to evaluate the potential effects of this new accounting standard on our consolidated financial statements. We expect 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 implementing a new technology solution to assist with the necessary calculations to support the accounting and disclosure requirements of the new accounting standard. We expect these evaluation and implementation activities will continue throughout the remainder of 2018 prior to the effective date of adoption on January 1, 2019.

SEC Rules and Other Accounting Standards Updates Not Yet Adopted

In August 2018, the SEC issued a final rule that amends certain of its disclosure requirements. The changes are generally intended to reduce or eliminate certain disclosures that have become redundant, duplicative, overlapping, outdated or superseded in light of other disclosures requirements or changes in the information environment. The rule also requires SEC registrants to present changes in stockholders' equity and the amount of dividends per share for each class of shares on a quarterly basis for the current and prior-year periods. The final rule is effective for SEC filings on Forms 10-Q and 10-K made on or after November 5, 2018.

In August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is Service Contract (A Consensus of the FASB Emerging Issues Task Force)." This ASU provides additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. The amendments in this update also provide additional disclosure requirements to disclose the nature of an entity’s hosting arrangements that are service contracts. This ASU is effective for annual and interim periods beginning after December 15, 2019. We are evaluating the effect of ASU 2018-15 on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement." This ASU provides an update to modify the disclosure requirements on fair value measurements in Topic 820. This ASU is effective for annual and interim periods beginning after December 15, 2019. We are evaluating the effect of ASU 2018-13 on our consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02, "Income Statement-Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." This ASU provides an option to reclassify stranded tax effects within accumulated other comprehensive income ("AOCI") to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the U.S. Tax Cuts and Jobs Act of 2017 (the "2017 U.S. Tax Act") (or portion thereof) is recorded. This ASU requires disclosure of a description of the accounting policy for releasing income tax effects from AOCI; whether election is made to reclassify the stranded income tax effects from the 2017 U.S. Tax Act; and information about the income tax effects that are reclassified. This ASU is effective for annual and interim periods beginning after December 15, 2018. Although we do not believe adoption of ASU 2018-02 will have a material effect on our consolidated financial statements, we are continuing to evaluate whether to elect the option.

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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.

NOTE 2—ACQUISITIONS

See "Note 14—Subsequent Events" for a discussion of an additional business acquisition we completed in October 2018.

AdvancedMD

On September 4, 2018, we acquired AdvancedMD, Inc. ("AdvancedMD"), a provider of cloud-based enterprise software solutions to small-to-medium sized ambulatory physician practices in the United States. We believe the acquisition will expand our software-driven payments strategy by enabling us to enter the healthcare vertical market, a large and fragmented market with strong payment fundamentals and attractive growth opportunities.

We paid the seller cash consideration of approximately $700 million, which we funded with cash on hand and by drawing on our Revolving Credit Facility (described in Note 6—Long-Term Debt and Lines of Credit).

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. Due to the timing of the acquisition, the accounting for this acquisition was not complete as of September 30, 2018. 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 determine the valuation of assets and liabilities and to evaluate the basis differences for assets and liabilities for financial reporting and tax purposes.

As of September 30, 2018, we provisionally estimated that substantially all of the total identifiable assets were comprised of goodwill and other intangible assets. We expect the intangible assets to be similar in nature to intangible assets we have acquired in other recent acquisitions, including customer-related intangible assets and acquired technology. Further, our methodology for estimating the acquisition-date fair values of identified intangible assets is consistent with the approach we have applied in other recent acquisitions of similar businesses.

Goodwill arising from the acquisition, included in the North America segment, was attributable to expected growth opportunities, potential synergies from combining our existing businesses and an assembled workforce. Due to the timing of the transaction, we have not allocated the provisional estimated goodwill of $469 million to a reporting unit. We expect that substantially all of the goodwill will not be deductible for income tax purposes.

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.


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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

 
$
1,171,576


We funded the cash consideration primarily by drawing on our Revolving Credit Facility (described in "Note 6Long-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 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:
 
December 31, 2017
 
Measurement-Period Adjustments
 
September 30, 2018
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
Cash and cash equivalents
$
42,913

 
$

 
$
42,913

Property and equipment
21,985

 
(133
)
 
21,852

Identified intangible assets
410,545

 

 
410,545

Other assets
87,240

 
(97
)
 
87,143

Deferred income taxes
(31,643
)
 
4,003

 
(27,640
)
Other liabilities
(144,132
)
 
(3,349
)
 
(147,481
)
Total identifiable net assets
386,908

 
424

 
387,332

Goodwill
784,668

 
(424
)
 
784,244

Total purchase consideration
$
1,171,576

 
$

 
$
1,171,576


The measurement-period adjustments were the result of continued refinement of certain estimates, primarily those regarding the measurement of certain contingencies and deferred income taxes.

Goodwill of $784.2 million arising from the acquisition, included in the North America 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.


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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
$
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.

NOTE 3—REVENUES

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. The following disclosures in this note are applicable for the three and nine months ended September 30, 2018.

The following tables present a disaggregation of our revenue from contracts with customers by distribution channel for the three and nine months ended September 30, 2018:

 
Three Months Ended September 30, 2018
 
North America
 
Europe
 
Asia-Pacific
 
Total
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
Direct:
 
 
 
 
 
 
 
Relationship-led
$
254,593

 
$
105,468

 
$
33,612

 
$
393,673

Technology-enabled
317,206

 
52,116

 
22,759

 
392,081

 
571,799

 
157,584

 
56,371

 
785,754

 
 
 
 
 
 
 
 
Wholesale
71,916

 

 

 
71,916

 
$
643,715

 
$
157,584

 
$
56,371

 
$
857,670


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Nine Months Ended September 30, 2018
 
North America
 
Europe
 
Asia-Pacific
 
Total
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
Direct:
 
 
 
 
 
 
 
Relationship-led
$
725,874

 
$
300,642

 
$
101,225

 
$
1,127,741

Technology-enabled
896,982

 
155,850

 
68,549

 
1,121,381

 
1,622,856

 
456,492

 
169,774

 
2,249,122

 
 
 
 
 
 
 
 
Wholesale
236,689

 

 

 
236,689

 
$
1,859,545

 
$
456,492

 
$
169,774

 
$
2,485,811


ASC 606 requires that we determine for each customer arrangement whether revenue should be recognized at a point in time or over time. For the three and nine months ended September 30, 2018, substantially all of our revenues were recognized over time.

Nature of our Customer Arrangements

Our payment services customers contract with us for payment services, which we provide in exchange for consideration for completed transactions. Our payment solutions are similar around the world in that we enable our customers to accept card, electronic and digital-based payments at the point of sale. Our comprehensive services include authorization services (including electronic draft capture), settlement and funding services, customer support and help-desk functions, chargeback resolution, payment security services, consolidated billing and statements and on-line reporting. In addition, we may sell or rent point-of-sale terminals or other equipment to customers.

At contract inception, we assess the goods and services promised in our contracts with customers and identify a performance obligation for each promise to transfer to the customer a good or service that is distinct. For our payment services specifically, the nature of our promise to the customer is that we stand ready to process transactions the customer requests on a daily basis over the contract term. Since the timing and quantity of transactions to be processed by us is not determinable, we view payment services to comprise an obligation to stand ready to process as many transactions as the customer requires. Under a stand-ready obligation, the evaluation of the nature of our performance obligation is focused on each time increment rather than the underlying activities. Therefore, we view payment services to comprise a series of distinct days of service that are substantially the same and have the same pattern of transfer to the customer. Accordingly, the promise to stand ready is accounted for as a single-series performance obligation.

In order to provide our payment services, we route and clear each transaction through the applicable payment network. We obtain authorization for the transaction and request funds settlement from the card issuing financial institution through the payment network. When third parties are involved in the transfer of goods or services to our customer, we consider the nature of each specific promised good or service and apply judgment to determine whether we control the good or service before it is transferred to the customer or whether we are acting as an agent of the third party. To determine whether or not we control the good or service before it is transferred to the customer, we assess indicators including whether we or the third party is primarily responsible for fulfillment and which party has discretion in determining pricing for the good or service, as well as other considerations. Based on our assessment of these indicators, we have concluded that our promise to our customer to provide our payment services is distinct from the services provided by the card issuing financial institutions and payment networks in connection with payment transactions. We do not have the ability to direct the use of and obtain substantially all of the benefits of the services provided by the card issuing financial institutions and payment networks before those services are transferred to our customer, and on that basis, we do not control those services prior to being transferred to our customer. As a result, we present our revenue net of the interchange fees charged by the card issuing financial institutions and the fees charged by the payment networks.

The majority of our processing services are priced as a percentage of transaction value or a specified fee per transaction, depending on the card type. We also charge other per occurrence fees based on specific services that may be unrelated to the number of transactions or transaction value. Given the nature of the promise and the underlying fees based on unknown quantities or outcomes of services to be performed over the contract term, the total consideration is determined to be variable consideration. The variable consideration for our payment processing service is usage-based and therefore it specifically relates to our efforts to satisfy our payment services obligation. In other words, the variability is satisfied each day the service is provided to the customer. We directly ascribe variable fees to the distinct day of service to which it relates, and we consider the services performed each

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day in order to ascribe the appropriate amount of total fees to that day. Therefore, we measure revenue for our payment processing service on a daily basis based on the services that are performed on that day.

Certain of our technology-enabled customer arrangements contain multiple promises, such as payment services (as aforementioned, a series of distinct days of service), perpetual software licenses, software-as-a-service ("SaaS"), maintenance, installation services, training and equipment, each of which is evaluated to determine whether it represents a separate performance obligation. SaaS arrangements are generally offered on a subscription basis, providing the customers with access to the SaaS platform along with general support and maintenance services. Because these promised services within our SaaS arrangements are delivered concurrently over the contract term, we account for these promises as if they are a single performance obligation that includes a series of distinct services with the same pattern of transfer to the customer. In addition, certain installation services are not considered distinct from the SaaS, and are therefore recognized over the expected period of benefit.

Once we determine the performance obligations and the transaction price, including an estimate of any variable consideration, we then allocate the transaction price to each performance obligation in the contract using a relative standalone selling price method. We determine standalone selling price based on the price at which the good or service is sold separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price by considering all reasonably available information, including market conditions, trends or other company- or customer-specific factors. Substantially all of the performance obligations described above are satisfied over time. Only equipment sales, perpetual software licenses and certain professional services are generally transferred to the customer at a point in time. For certain other professional services that represent separate performance obligations, we generally use the input method and recognize revenue based on the number of hours incurred or services performed to date in relation to the total services expected to be required to satisfy the performance obligation.

We satisfy the combined SaaS performance obligation by standing ready to provide access to the SaaS. Consideration for SaaS arrangements may consist of fixed- or usage-based fees. Revenue is recognized over the period for which the services are provided or by directly ascribing any variable fees to the distinct day of service based on the services that are performed on that day.

Transaction Price Allocated to Future Performance Obligations

ASC 606 requires disclosure of the aggregate amount of the transaction price allocated to unsatisfied performance obligations; however, as permitted by ASC 606, we have elected to exclude from this disclosure any contracts with an original duration of one year or less and any variable consideration that meets specified criteria. As described above, our most significant performance obligations consist of variable consideration under a stand-ready series of distinct days of service. Such variable consideration meets the specified criteria for the disclosure exclusion; therefore, the majority of the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied is variable consideration that is not required for this disclosure. The aggregate fixed consideration portion of customer contracts with an initial contract duration greater than one year is not material.

Accounts Receivable, Contract Assets and Contract Liabilities

A contract with a customer creates legal rights and obligations. As we perform under customer contracts, our right to consideration that is unconditional is considered to be accounts receivable. If our right to consideration for such performance is contingent upon a future event or satisfaction of additional performance obligations, the amount of revenues we have recognized in excess of the amount we have billed to the customer is recognized as a contract asset. Contract liabilities represent consideration received from customers in excess of revenues recognized. Contract assets and liabilities are presented net at the individual contract level in the consolidated balance sheet and are classified as current or noncurrent based on the nature of the underlying contractual rights and obligations.

Net contract liabilities included in accounts payable and accrued liabilities on our consolidated balance sheet were $114.1 million at September 30, 2018, $116.9 million at July 1, 2018 and $100.6 million at January 1, 2018. Net contract liabilities included in other noncurrent liabilities on our consolidated balance sheet were $7.9 million at September 30, 2018, $8.3 million at July 1, 2018 and $6.0 million at January 1, 2018. Revenues for the three months ended September 30, 2018 included $39.2 million that was in contract liabilities at July 1, 2018. Revenues for the nine months ended September 30, 2018 included $90.2 million that was in contract liabilities at January 1, 2018. Net contract assets were not material at September 30, 2018 or at January 1, 2018.


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Contract Costs

We incur costs to obtain contracts with customers, including employee sales commissions and fees to business partners. At contract inception, we capitalize such costs that we expect to recover and that would not have been incurred if the contract had not been obtained. We also capitalize certain costs incurred to fulfill our contracts with customers that (i) relate directly to the contract, (ii) are expected to generate resources that will be used to satisfy our performance obligation under the contract and (iii) are expected to be recovered through revenue generated under the contract. At September 30, 2018, we had net capitalized costs to obtain and to fulfill contracts of $181.8 million and $9.8 million, respectively, included in other noncurrent assets on our consolidated balance sheet.

Contract costs are amortized on a systematic basis consistent with the transfer to the customer of the goods or services to which the asset relates. A straight-line or proportional amortization method is used depending upon which method best depicts the pattern of transfer of the goods or services to the customer. In addition, these contract costs are evaluated for impairment by comparing, on a pooled basis, the expected future net cash flows from underlying customer relationships to the carrying amount of the capitalized contract costs. At September 30, 2018, none of our capitalized contract costs were impaired.

In order to determine the appropriate amortization period for contract costs, we consider a combination of factors, including customer attrition rates, estimated terms of customer relationships, the useful lives of technology we use to provide goods and services to our customers, whether future contract renewals are expected and if there is any incremental commission to be paid on a contract renewal. We amortize these assets over the expected period of benefit, which, based on the factors noted above, is typically 7 years. Costs to obtain a contract with an expected period of benefit of one year or less are recognized as an expense when incurred. During the three and nine months ended September 30, 2018, amortization of capitalized contract costs was $13.5 million and $37.3 million, respectively.

NOTE 4—SETTLEMENT PROCESSING ASSETS AND OBLIGATIONS

As of September 30, 2018 and December 31, 2017, settlement processing assets and obligations consisted of the following:
 
September 30, 2018
 
December 31, 2017
 
 
 
 
 
(in thousands)
 
 
 
 
Settlement processing assets:
 
 
 
Interchange reimbursement
$
262,487

 
$
304,964

Receivable from members
116,843

 
104,339

Receivable from networks
2,521,106

 
2,055,390

Exception items
10,558

 
7,867

Merchant reserves
(16,768
)
 
(13,268
)
 
$
2,894,226

 
$
2,459,292

 
 
 
 
Settlement processing obligations:
 
 
 
Interchange reimbursement
$
93,736

 
$
72,053

Liability to members
(23,693
)
 
(20,369
)
Liability to merchants
(2,352,216
)
 
(1,961,107
)
Exception items
6,307

 
6,863

Merchant reserves
(143,020
)
 
(133,907
)
Reserve for operating losses and sales allowances
(4,183
)
 
(4,042
)
 
$
(2,423,069
)
 
$
(2,040,509
)


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NOTE 5—GOODWILL AND OTHER INTANGIBLE ASSETS

As of September 30, 2018 and December 31, 2017, goodwill and other intangible assets consisted of the following:  
 
September 30, 2018
 
December 31, 2017
 
 
 
 
 
(in thousands)
 
 
 
 
Goodwill
$
6,130,921

 
$
5,703,992

Other intangible assets:
 
 
 
Customer-related intangible assets
$
2,123,046

 
$
2,078,891

Acquired technologies
1,027,842

 
722,466

Trademarks and trade names
245,814

 
247,688

Contract-based intangible assets
137,097

 
171,522

 
3,533,799

 
3,220,567

Less accumulated amortization:
 
 
 
Customer-related intangible assets
806,204

 
685,869

Acquired technologies
310,705

 
210,063

Trademarks and trade names
73,977

 
50,849

Contract-based intangible assets
63,945

 
92,079

 
1,254,831

 
1,038,860

 
$
2,278,968

 
$
2,181,707


The following table sets forth the changes in the carrying amount of goodwill for the nine months ended September 30, 2018:
 
North America
 
Europe
 
Asia-Pacific
 
Total
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
Balance at December 31, 2017
$
4,896,491

 
$
513,138

 
$
294,363

 
$
5,703,992

Goodwill acquired
468,798

 

 

 
468,798

Effect of foreign currency translation
(1,891
)
 
(20,063
)
 
(19,491
)
 
(41,445
)
Measurement-period adjustments
(424
)
 

 

 
(424
)
Balance at September 30, 2018
$
5,362,974

 
$
493,075

 
$
274,872

 
$
6,130,921


There was no accumulated impairment loss as of September 30, 2018 or December 31, 2017.


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NOTE 6—LONG-TERM DEBT AND LINES OF CREDIT

As of September 30, 2018 and December 31, 2017, long-term debt consisted of the following:
 
September 30, 2018
 
December 31, 2017
 
 
 
 
 
(in thousands)
 
 
 
 
Credit Facility:
 
 
 
Term loans (face amounts of $3,984,386 and $3,932,677 at September 30, 2018 and December 31, 2017, respectively, less unamortized debt issuance costs of $35,187 and $37,961 at September 30, 2018 and December 31, 2017, respectively)
$
3,949,199

 
$
3,894,716

Revolving Credit Facility
851,000

 
765,000

Total long-term debt
4,800,199

 
4,659,716

Less current portion of Credit Facility (face amounts of $101,174 and $108,979 at September 30, 2018 and December 31, 2017, respectively, less unamortized debt issuance costs of $8,485 and $8,671 at September 30, 2018 and December 31, 2017, respectively)
92,689

 
100,308

Long-term debt, excluding current portion
$
4,707,510

 
$
4,559,408


Maturity requirements on long-term debt as of September 30, 2018 by year are as follows (in thousands):
Years ending December 31,
 
2018
$
20,810

2019
119,109

2020
154,979

2021
190,848

2022
262,587

2023
4,087,053

Total
$
4,835,386


Credit Facility

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"). As of September 30, 2018, the Credit Facility provided for secured financing comprised of (i) a $1.5 billion revolving credit facility (the "Revolving Credit Facility"); (ii) a $1.5 billion term loan (the "Term A Loan"), (iii) a $1.37 billion term loan (the "Term A-2 Loan") and (iv) a $1.14 billion term loan (the "Term B-2 Loan"). Substantially all of the assets of our domestic subsidiaries are pledged as collateral under the Credit Facility.

The borrowings outstanding under our Credit Facility as of September 30, 2018 reflect activities we completed earlier in 2018, including a reduction to the interest rate margins applicable to our Term A Loan, Term A-2 Loan, Term B-2 Loan and the Revolving Credit Facility, an extension of the maturity dates of the Term A Loan, Term A-2 Loan and the Revolving Credit Facility, and an increase in the total financing capacity under the Credit Facility to approximately $5.5 billion in June 2018. 

In October 2018, we entered into an additional term loan in the amount of $500 million. See "Note 14—Subsequent Events" for discussion.

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 margin. As of September 30, 2018, the interest rates on the Term A Loan, the Term A-2 Loan and the Term B-2 Loan were 3.74%, 3.66% and 3.99%, respectively. As of September 30, 2018, the interest rate on the Revolving Credit Facility was 3.66%. 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.


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The Term A Loan and the Term A-2 Loan mature, and the Revolving Credit Facility expires, on January 20, 2023. The Term B-2 Loan matures on April 22, 2023. The Term A Loan and Term A-2 Loan principals must be repaid in quarterly installments in the amount of 0.625% of principal through June 2019, increasing to 1.25% of principal through June 2021, increasing to 1.875% of principal through June 2022 and increasing to 2.50% through December 2022, with the remaining principal balance due upon maturity in January 2023. 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.

We may 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 under the Revolving Credit Facility. 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 September 30, 2018 and December 31, 2017 were $636.4 million and $473.3 million, respectively.

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 September 30, 2018 and December 31, 2017, a total of $68.5 million and $59.3 million, respectively, of cash on deposit was used to determine the available credit.

As of September 30, 2018 and December 31, 2017, respectively, we had $685.9 million and $635.2 million outstanding under these lines of credit with additional capacity of $759.9 million as of September 30, 2018 to fund settlement. The weighted-average interest rate on these borrowings was 2.81% and 1.97% at September 30, 2018 and December 31, 2017, respectively. During the three months ended September 30, 2018, the maximum and average outstanding balances under these lines of credit were $828.2 million and $409.8 million, respectively.

Compliance with Covenants

The Credit Facility contains customary affirmative and restrictive covenants, including, among others, financial covenants based on our leverage and interest coverage ratios, as defined in the agreement. As of September 30, 2018, financial covenants under the Credit Facility required a leverage ratio no greater than: (i) 5.00 to 1.00 as of the end of any fiscal quarter ending during the period from April 1, 2018 through June 30, 2019; (ii) 4.75 to 1.00 as of the end of any fiscal quarter ending during the period from July 1, 2019 through June 30, 2020; and (iii) 4.50 to 1.00 as of the end of any fiscal quarter ending thereafter. The interest coverage ratio is required to be no less than 3.25 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 September 30, 2018.

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,

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unrealized gains or losses resulting from adjusting the swaps to fair value are recorded as components of other comprehensive income. 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:
Derivative Financial Instruments
 
Balance Sheet Location
 
Weighted-Average Fixed Rate of Interest at September 30, 2018
 
Range of Maturity Dates at
September 30, 2018
 
September 30, 2018
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps (Notional of $500 million at September 30, 2018)
 
Prepaid expenses and other current assets
 
1.52%
 
February 28, 2019
 
$
1,825

 
$

Interest rate swaps (Notional of $800 million at September 30, 2018 and $1,300 million at December 31, 2017)
 
Other noncurrent assets
 
1.63%
 
December 31, 2019 - March 31, 2021
 
$
16,900

 
$
9,202


The table below presents the effects of our interest rate swaps on the consolidated statements of income and comprehensive income for the three and nine months ended September 30, 2018 and 2017:
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
Amount of unrealized gains (losses) recognized in other comprehensive income (loss)
$
1,845

 
$
341

 
$
12,353

 
$
(2,214
)
Amount of unrealized (gains) losses reclassified out of other comprehensive income (loss) to interest expense
$
(1,663
)
 
$
1,172

 
$
(2,830
)
 
$
4,667


As of September 30, 2018, the amount of net unrealized gains 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 $9.9 million.

Interest Expense

Interest expense was approximately $46 million and $41 million for the three months ended September 30, 2018 and 2017, respectively, and approximately $140 million and $130 million for the nine months ended September 30, 2018 and 2017, respectively.

NOTE 7—INCOME TAX

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 of September 30, 2018, we have not completed our accounting for the effects of the 2017 U.S. Tax Act; however, we made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax as of December 31, 2017 pursuant to guidance provided in SEC Staff Accounting Bulletin No. 118, which in March 2018 was codified by the FASB in ASU 2018-05 Income Taxes (Topic 740). We have continued to analyze our foreign tax pools and resulting foreign tax credits and, during the three months ended September 30, 2018, reduced our estimated transition tax liability by $23.3

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million. We are continuing to gather additional information to complete our accounting for these items and expect to complete our accounting within the prescribed measurement period.

Our effective income tax rate for the three months ended September 30, 2018 was a benefit of 3.4%. Our effective income tax rate for the three months ended September 30, 2017 was 11.7%. Our effective income tax rates for the nine months ended September 30, 2018 and September 30, 2017 were 10.4% and 14.4%, respectively. Our 2017 effective income tax rates differed from the U.S. statutory rate primarily due to income generated in international jurisdictions with lower tax rates. Our 2018 effective income tax rates differed from the U.S. statutory rate primarily due to changes in estimates of prior year liabilities, including the aforementioned $23.3 million adjustment to the one-time transition tax liability recorded during the three months ended September 30, 2018.

We conduct business globally and file income tax returns in the U.S. 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, including, without limitation, the United States and the United Kingdom. We are no longer subject to state income tax examinations for years ended on or before May 31, 2008, U.S. federal income tax examinations for fiscal years prior to 2014 and U.K. federal income tax examinations for years ended on or before May 31, 2014.

NOTE 8—SHAREHOLDERS’ EQUITY

We make repurchases of our common stock mainly through open market repurchase plans and, at times, through accelerated share repurchase programs. As of September 30, 2018, we were authorized to repurchase up to $419.1 million of our common stock. During the nine months ended September 30, 2018, through open market repurchase plans, we repurchased and retired 1,612,174 shares of our common stock, respectively, at a cost of $180.9 million, or an average cost of $112.19 per share, including commissions.

During the three and nine months ended September 30, 2017, through open market repurchase plans, we repurchased and retired 311,593 and 376,309 shares of our common stock at a cost of $29.0 million and $34.8 million, or an average cost of $93.09 and $92.51 per share, including commissions.

On October 26, 2018, our board of directors declared a dividend of $0.01 per share payable on December 28, 2018 to common shareholders of record as of December 14, 2018.

NOTE 9—SHARE-BASED AWARDS AND OPTIONS

The following table summarizes share-based compensation expense and the related income tax benefit recognized for our share-based awards and stock options:
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
Share-based compensation expense
$
14,833

 
$
9,617

 
$
44,937

 
$
30,771

Income tax benefit
$
3,614

 
$
3,523

 
$
10,276

 
$
10,788

 

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Share-Based Awards

The following table summarizes the changes in unvested restricted stock and performance awards for the nine months ended September 30, 2018:
 
Shares
 
Weighted-Average
Grant-Date
Fair Value
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
Unvested at December 31, 2017
1,226

 

$78.29

Granted
600

 
107.16

Vested
(715
)
 
62.89

Forfeited
(55
)
 
90.40

Unvested at September 30, 2018
1,056

 
$104.52


The total fair value of restricted stock and performance awards vested during the nine months ended September 30, 2018 and September 30, 2017 was $45.0 million and $27.6 million, respectively.

For restricted stock and performance awards, we recognized compensation expense of $13.8 million and $8.6 million during the three months ended September 30, 2018 and September 30, 2017, respectively, and $41.1 million and $27.7 million during the nine months ended September 30, 2018 and September 30, 2017, respectively. As of September 30, 2018, there was $67.7 million of unrecognized compensation expense related to unvested restricted stock and performance awards that we expect to recognize over a weighted-average period of 2.1 years. Our restricted stock and performance award plans provide for accelerated vesting under certain conditions.

Stock Options

The following summarizes changes in stock option activity for the nine months ended September 30, 2018: 
 
Options
 
Weighted-Average Exercise Price
 
Weighted-Average Remaining Contractual Term
 
Aggregate Intrinsic Value
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
(years)
 
(in millions)
 
 
 
 
 
 
 
 
Outstanding at December 31, 2017
723

 

$47.79

 
6.4
 
$37.9
Granted
103

 
114.70

 
 
 
 
Forfeited
(9
)
 
81.68

 
 
 
 
Exercised
(188
)
 
39.40

 
 
 
 
Outstanding at September 30, 2018
629

 

$60.75

 
6.1
 
$41.8
 
 
 
 
 
 
 
 
Options vested and exercisable at September 30, 2018
457

 

$47.50

 
5.1
 
$36.5

We recognized compensation expense for stock options of $0.7 million during each of the three months ended September 30, 2018 and 2017, and $2.3 million and $2.0 million during the nine months ended September 30, 2018 and September 30, 2017, respectively. The aggregate intrinsic value of stock options exercised during the nine months ended September 30, 2018 and September 30, 2017 was $15.9 million and $9.9 million, respectively. As of September 30, 2018, we had $4.4 million of unrecognized compensation expense related to unvested stock options that we expect to recognize over a weighted-average period of 2.0 years.


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The weighted-average grant-date fair value of each stock option granted during the nine months ended September 30, 2018 and September 30, 2017 was $35.09 and $23.68, respectively. Fair value was estimated on the date of grant using the Black-Scholes valuation model with the following weighted-average assumptions:
 
Nine Months Ended
 
September 30, 2018
 
September 30, 2017
 
 
 
 
Risk-free interest rate
2.60%
 
1.99%
Expected volatility
29%
 
30%
Dividend yield
0.04%
 
0.06%
Expected term (years)
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 10—EARNINGS PER SHARE

Basic earnings per share ("EPS") is computed by dividing 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 EPS. 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.

The following table sets forth the computation of diluted weighted-average number of shares outstanding for the three and nine months ended September 30, 2018 and 2017:
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
Basic weighted-average number of shares outstanding
158,168

 
154,560

 
158,827

 
153,138

Plus: Dilutive effect of stock options and other share-based awards
538

 
842

 
632

 
941

Diluted weighted-average number of shares outstanding
158,706

 
155,402

 
159,459

 
154,079



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NOTE 11—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 three and nine months ended September 30, 2018 and September 30, 2017:

 
Foreign Currency Translation
 
Unrealized Gains on Hedging Activities
 
Other
 
Accumulated Other Comprehensive Loss
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
Balance at June 30, 2018
$
(253,372
)
 
$
14,030

 
$
(4,287
)
 
$
(243,629
)
Other comprehensive income (loss), net of tax
(26,930
)
 
72

 
(58
)
 
(26,916
)
Balance at September 30, 2018
$
(280,302
)
 
$
14,102

 
$
(4,345
)
 
$
(270,545
)
 
 
 
 
 
 
 
 
Balance at June 30, 2017
$
(239,669
)
 
$
51

 
$
(3,841
)
 
$
(243,459
)
Other comprehensive income, net of tax
40,090

 
843

 
18

 
40,951

Balance at September 30, 2017
$
(199,579
)
 
$
894

 
$
(3,823
)
 
$
(202,508
)

Other comprehensive income attributable to noncontrolling interests, which relates only to foreign currency translation, was $11.7 million and $2.3 million for the three months ended September 30, 2018 and September 30, 2017, respectively.

 
Foreign Currency Translation
 
Unrealized Gains (Losses) on Hedging Activities
 
Other
 
Accumulated Other Comprehensive Loss
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
Balance at December 31, 2017
$
(185,856
)
 
$
6,999

 
$
(4,287
)
 
$
(183,144
)
Other comprehensive income (loss), net of tax
(92,603
)
 
7,103

 
(58
)
 
(85,558
)
Cumulative effect of adoption of new accounting standard
(1,843
)
 

 

 
(1,843
)
Balance at September 30, 2018
$
(280,302
)
 
$
14,102

 
$
(4,345
)
 
$
(270,545
)
 
 
 
 
 
 
 
 
Balance at December 31, 2016
$
(318,450
)
 
$
(640
)
 
$
(3,627
)
 
$
(322,717
)
Other comprehensive income (loss), net of tax
118,871

 
1,534

 
(196
)
 
120,209

Balance at September 30, 2017
$
(199,579
)
 
$
894

 
$
(3,823
)
 
$
(202,508
)

Other comprehensive income attributable to noncontrolling interests, which relates only to foreign currency translation, was $11.8 million and $15.1 million for the nine months ended September 30, 2018 and September 30, 2017, respectively.

NOTE 12—SEGMENT INFORMATION

We operate in three reportable segments: North America, Europe and Asia-Pacific. 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 our Annual Report on Form 10-K for the year ended December 31, 2017 and our summary of significant accounting policies in "Note 1Basis of Presentation and Summary of Significant Accounting Policies."


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Information on segments and reconciliations to consolidated revenues and consolidated operating income was as follows for the three and nine months ended September 30, 2018 and 2017:
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
Revenues(1) (2):
 
 
 
 
 
 
 
North America
$
643,715

 
$
764,902

 
$
1,859,545

 
$
2,162,911

Europe
157,584

 
205,203

 
456,492

 
557,258

Asia-Pacific
56,371

 
68,802

 
169,774

 
200,741

 Consolidated revenues
$
857,670

 
$
1,038,907

 
$
2,485,811

 
$
2,920,910

 
 
 
 
 
 
 
 
Operating income (loss)(2):
 
 
 
 
 
 
 
North America
$
174,012

 
$
138,345

 
$
446,600

 
$
344,604

Europe
85,781

 
76,214

 
239,011

 
196,394

Asia-Pacific
23,692

 
20,032

 
67,043

 
57,321

Corporate(3)
(60,323
)
 
(62,120
)
 
(182,585
)
 
(189,026
)
 Consolidated operating income
$
223,162

 
$
172,471

 
$
570,069

 
$
409,293

 
 
 
 
 
 
 
 
Depreciation and amortization(2):
 
 
 
 
 
 
 
North America
$
106,022

 
$
95,056

 
$
313,980

 
$
277,219

Europe
11,660

 
11,863

 
36,180

 
34,926

Asia-Pacific
4,381

 
4,484

 
13,740

 
12,068

Corporate
1,994

 
2,246

 
5,548

 
5,750

 Consolidated depreciation and amortization
$
124,057

 
$
113,649

 
$
369,448

 
$
329,963


(1) As more fully described in "Note 1—Basis of Presentation and Summary of Significant Accounting Policies" and "Note 3—Revenues," we adopted a new revenue accounting standard on January 1, 2018 that results in revenue being presented net of certain fees that we pay to third parties. This change in presentation affected our reported revenues and operating expenses during the three and nine months ended September 30, 2018 by the same amount and had no effect on operating income.

(2) Revenues, operating income and depreciation and amortization reflect the effect of acquired businesses from the respective dates of acquisition. For further discussion, see "Note 2Acquisitions."

(3) During the three and nine months ended September 30, 2018, operating loss for Corporate included acquisition and integration expenses of $8.2 million and $34.6 million, respectively. During the three and nine months ended September 30, 2017, operating loss for Corporate included acquisition and integration expenses of $21.5 million and $69.5 million, respectively.

NOTE 13—COMMITMENTS AND CONTINGENCIES

Leases

In May 2017, we sold our operating facility in Jeffersonville, Indiana, which we acquired as part of the Heartland merger, for $37.5 million and simultaneously leased the property back for an initial term of 20 years, followed by four optional renewal terms of five 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.

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NOTE 14—SUBSEQUENT EVENTS

On October 17, 2018, we drew approximately $415 million from our Revolving Credit Facility to fund our acquisition of SICOM Systems, Inc. ("SICOM"), a provider of enterprise, cloud-based SaaS solutions and other technologies to quick service restaurants and food service management companies. 

On October 18, 2018, we entered into a new term loan under the Credit Facility in the amount of $500 million (the "Term B-4 Loan"). We used the proceeds from the Term B-4 Loan to pay down a portion of the balance outstanding under our Revolving Credit Facility. Like the other term loans issued under the Credit Facility, interest on the Term B-4 Loan will accrue at an interest rate, at our election, of either LIBOR or a base rate, in each case plus a margin. The Term B-4 Loan principal must be repaid in quarterly installments in the amount of 0.25% of principal through September 2025, with the remaining principal balance due upon maturity in October 2025.

ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

We are exposed to market risk related to changes in interest rates on our long-term debt and cash investments. We invest our excess cash in securities that we believe are highly liquid and marketable in the short term. These investments earn a floating rate of interest and are not held for trading or other speculative purposes.

We have a Credit Facility for general corporate purposes, as well as various lines of credit that we use to fund settlement in certain of our markets. Interest rates on these debt instruments and settlement lines of credit are based on market rates and fluctuate accordingly. As of September 30, 2018, $5.5 billion was outstanding under these variable-rate debt arrangements and settlement lines of credit.

The interest earned on our invested cash and the interest incurred on our debt are based on variable interest rates; therefore, the exposure of our net income to a change in interest rates is partially mitigated as an increase in rates would increase both interest income and interest expense, and a reduction in rates would decrease both interest income and interest expense. Under our current policies, we may selectively use derivative instruments, such as interest rate swaps or forward rate agreements, to manage all or a portion of our exposure to interest rate changes. We have interest rate swaps that reduce a portion of our exposure to market interest rate risk on our LIBOR-based debt as discussed in "Note 6Long-Term Debt and Lines of Credit" in the notes to our accompanying unaudited consolidated financial statements.

Based on balances outstanding under variable-rate debt agreements, with consideration given to the related interest rate swaps, and interest-earning cash balances at September 30, 2018, a hypothetical change of 50 basis points in applicable interest rates as of September 30, 2018 would change our annual interest expense by approximately $20.5 million and change our annual interest income by approximately $2.3 million.

Foreign Currency Exchange Rate Risk

A portion of our revenues and expenses may be affected by fluctuations in foreign currency exchange rates. We are also affected by fluctuations in exchange rates on assets and liabilities related to our foreign operations. We have not historically hedged our translation risk on foreign currency exposure, but we may do so in the future.

ITEM 2—MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes included in Item 1 of Part 1 of this Quarterly Report and the Management’s Discussion and Analysis of Financial Condition and Results of Operations and consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2017. This discussion and analysis contains forward-looking statements about our plans and expectations of what may happen in the future. Forward-looking statements are based on a number of assumptions and estimates that are inherently subject to significant risks and uncertainties, and our actual results could differ materially from the results anticipated by our forward-looking statements. See "Forward-Looking Statements" below for additional information.

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Executive Overview

We are a leading worldwide provider of payment technology services and software solutions delivering innovative solutions to our customers globally. Our technologies, services and employee expertise enable us to provide a broad range of services that allow our customers to accept various payment types and operate their businesses more efficiently. We distribute our services across a variety of channels in 31 countries throughout North America, Europe, the Asia-Pacific region and Brazil and operate in three reportable segments: North America, Europe and Asia-Pacific.

On September 1, 2017, we acquired the communities and sports divisions of Athlaction Topco, LLC ("ACTIVE Network"). On September 4, 2018, we acquired AdvancedMD, Inc. ("AdvancedMD"), a provider of cloud-based enterprise software solutions to small-to-medium sized ambulatory physician practices in the United States.

On October 17, 2018, we acquired SICOM Systems, Inc. ("SICOM"), a provider of enterprise, cloud-based SaaS solutions and other technologies to quick service restaurants and food service management companies. See "Note 2—Acquisitions" and "Note 14—Subsequent Events" in the notes to the accompanying unaudited consolidated financial statements for further discussion of our acquisitions.

As more fully described in "Note 1—Basis of Presentation and Summary of Significant Accounting Policies" and "Note 3—Revenues" in the notes to the accompanying unaudited consolidated financial statements, we adopted a new revenue accounting standard on January 1, 2018 that results in revenue being presented net of certain fees that we pay to third parties, including payment network fees. This change in presentation affected our reported revenues and operating expenses during the three and nine months ended September 30, 2018 by the same amount and had no effect on operating income.

Highlights related to our financial condition and results of operations for the three and nine months ended September 30, 2018 are provided below:

Consolidated revenues were $857.7 million and $2,485.8 million, respectively, for the three and nine months ended September 30, 2018, compared to $1,038.9 million and $2,920.9 million, respectively, for the prior-year periods. Consolidated revenues without the effect of the new revenue accounting standard increased by 10.6% and 13.3% to $1,149.2 million and $3,309.3 million for the three and nine months ended September 30, 2018, compared to $1,038.9 million and $2,920.9 million, respectively, for the prior-year periods, primarily due to organic growth.

Consolidated operating income was $223.2 million and $570.1 million, respectively, for the three and nine months ended September 30, 2018, compared to $172.5 million and $409.3 million, respectively, for the prior-year periods. Our operating margin for the three and nine months ended September 30, 2018 was 26.0% and 22.9%, respectively. Without the effect of the new accounting standard, our operating margin for the three and nine months ended September 30, 2018 was 18.6% and 16.3%, respectively, compared to 16.6% and 14.0% for the prior-year periods.

Net income attributable to Global Payments was $176.4 million and $376.8 million, respectively, for the three and nine months ended September 30, 2018, compared to $110.7 million and $226.5 million, respectively, for the prior-year periods.

Diluted earnings per share was $1.11 and $2.36, respectively, for the three and nine months ended September 30, 2018, compared to $0.71 and $1.47, respectively, for the prior-year periods.

Emerging Trends

The payments industry continues to grow worldwide and as a result, certain large payment technology companies, including us, have expanded operations globally by pursuing acquisitions and creating alliances and joint ventures. We expect to continue to expand into new markets and increase our scale and improve our competitiveness in existing markets by pursuing further acquisitions and joint ventures.

We believe electronic payment transactions will continue to grow and that an increasing percentage of these will be facilitated through emerging technologies.  As a result, we expect an increasing portion of our future capital investment will be allocated to

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support the development of new and emerging technologies; however, we do not expect our aggregate capital spending to increase materially from our current level of spending as a result of this.

We also believe new markets will continue to develop in areas that have been previously dominated by paper-based transactions. We expect industries such as education, government and healthcare, as well as payment types such as recurring payments and business-to-business payments, to continue to see transactions migrate to electronic-based solutions.  We anticipate that the continued development of new services and the emergence of new vertical markets will be a factor in the growth of our business and our revenue in the future.


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Results of Operations

The following table sets forth key selected financial data for the three months ended September 30, 2018 and 2017, this data as a percentage of total revenues and the changes between the periods in dollars and as a percentage of the prior-year amount.
 
Three Months Ended September 30, 2018
 
% of Revenue(1)
 
Three Months Ended September 30, 2017
 
% of Revenue(1)
 
Change
 
% Change
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollar amounts in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Revenues(2):
 
 
 
 
 
 
 
 
 
 
 
North America
$
643,715

 
75.1
%
 
$
764,902

 
73.6
%
 
$
(121,187
)
 
(15.8
)%
Europe
157,584

 
18.4
%
 
205,203

 
19.8
%
 
(47,619
)
 
(23.2
)%
Asia-Pacific
56,371

 
6.6
%
 
68,802

 
6.6
%
 
(12,431
)
 
(18.1
)%
Total revenues
$
857,670

 
100.0
%
 
$
1,038,907

 
100.0
%
 
$
(181,237
)
 
(17.4
)%
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated operating expenses(2):
 
 
 
 
 
 
 
 
 
 
 
Cost of service
$
265,013

 
30.9
%
 
$
493,883

 
47.5
%
 
$
(228,870
)
 
(46.3
)%
Selling, general and administrative
369,495

 
43.1
%
 
372,553

 
35.9
%
 
(3,058
)
 
(0.8
)%
Operating expenses
$
634,508

 
74.0
%
 
$
866,436

 
83.4
%
 
$
(231,928
)
 
(26.8
)%
 
 
 
 
 
 
 
 
 
 
 
 
Operating income:
 
 
 
 
 
 
 
 
 
 
 
North America
$
174,012

 


 
$
138,345

 
 
 
$
35,667

 
25.8
 %
Europe
85,781

 
 
 
76,214

 
 
 
9,567

 
12.6
 %
Asia-Pacific
23,692

 
 
 
20,032

 
 
 
3,660

 
18.3
 %
Corporate(3)
(60,323
)
 
 
 
(62,120
)
 
 
 
1,797

 
(2.9
)%
Operating income
$
223,162

 
26.0
%
 
$
172,471

 
16.6
%
 
$
50,691