Global Payments Inc.
GLOBAL PAYMENTS INC (Form: 10-Q, Received: 11/08/2017 09:20:23)
Table of Contents

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, 2017

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
IMAGE1A02A14.GIF
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 ☐ (Do not check if a smaller reporting company)
 
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 November 2, 2017 was 159,142,431 .


Table of Contents

GLOBAL PAYMENTS INC.
FORM 10-Q
For the quarterly period ended September 30, 2017

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.
 
 
 



2

Table of Contents

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, 2017
 
September 30, 2016
 
 
 
 
Revenues
$
1,038,907

 
$
951,885

Operating expenses:
 
 
 
Cost of service
493,883

 
469,980

Selling, general and administrative
372,553

 
361,516

 
866,436

 
831,496

Operating income
172,471

 
120,389

 
 
 
 
Interest and other income
2,347

 
1,465

Interest and other expense
(40,764
)
 
(45,609
)
 
(38,417
)
 
(44,144
)
Income before income taxes
134,054

 
76,245

Provision for income taxes
(15,692
)
 
(14,021
)
Net income
118,362

 
62,224

Less: Net income attributable to noncontrolling interests, net of income tax
(7,622
)
 
(6,714
)
Net income attributable to Global Payments
$
110,740

 
$
55,510

 
 
 
 
Earnings per share attributable to Global Payments:
 
 
 
Basic earnings per share
$
0.72

 
$
0.36

Diluted earnings per share
$
0.71

 
$
0.36

See Notes to Unaudited Consolidated Financial Statements.
















 


3


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

 
Nine Months Ended
 
September 30, 2017
 
September 30, 2016
 
 
 
 
Revenues
$
2,920,910

 
$
2,420,789

Operating expenses:
 
 
 
Cost of service
1,418,969

 
1,125,041

Selling, general and administrative
1,092,648

 
1,019,626

 
2,511,617

 
2,144,667

Operating income
409,293

 
276,122

 
 
 
 
Interest and other income
5,787

 
45,312

Interest and other expense
(130,422
)
 
(95,280
)
 
(124,635
)
 
(49,968
)
Income before income taxes
284,658

 
226,154

Provision for income taxes
(40,893
)
 
(33,350
)
Net income
243,765

 
192,804

Less: Net income attributable to noncontrolling interests, net of income tax
(17,302
)
 
(15,150
)
Net income attributable to Global Payments
$
226,463

 
$
177,654

 
 
 
 
Earnings per share attributable to Global Payments:
 
 
 
Basic earnings per share
$
1.48

 
$
1.24

Diluted earnings per share
$
1.47

 
$
1.23

See Notes to Unaudited Consolidated Financial Statements.


4


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

 
Three Months Ended
 
September 30, 2017
 
September 30, 2016
 
 
 
 
Net income
$
118,362

 
$
62,224

Other comprehensive income:
 
 
 
Foreign currency translation adjustments
42,417

 
1,694

Unrealized gains on hedging activities
341

 
3,429

Reclassification of unrealized losses on hedging activities to net income
1,172

 
1,853

Income tax provision related to hedging activities
(670
)
 
(1,951
)
Other
18

 
23

Other comprehensive income, net of tax
43,278

 
5,048

 
 
 
 
Comprehensive income
161,640

 
67,272

Less: comprehensive income attributable to noncontrolling interests
(9,950
)
 
(5,902
)
Comprehensive income attributable to Global Payments
$
151,690

 
$
61,370


 
Nine Months Ended
 
September 30, 2017
 
September 30, 2016
 
 
 
 
Net income
$
243,765

 
$
192,804

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

 
(9,259
)
Income tax benefit related to foreign currency translation adjustments

 
5,816

Unrealized losses on hedging activities
(2,214
)
 
(12,665
)
Reclassification of unrealized losses on hedging activities to net income
4,667

 
5,733

Income tax (provision) benefit related to hedging activities
(919
)
 
2,618

Other
(196
)
 
(803
)
Other comprehensive income (loss), net of tax
135,259

 
(8,560
)
 
 
 
 
Comprehensive income
379,024

 
184,244

Less: comprehensive income attributable to noncontrolling interests
(32,352
)
 
(18,926
)
Comprehensive income attributable to Global Payments
$
346,672

 
$
165,318

See Notes to Unaudited Consolidated Financial Statements.



5


GLOBAL PAYMENTS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
September 30, 2017
 
December 31, 2016
 
(Unaudited)
 
 
ASSETS
 
  
 

Current assets:
 
  
 

Cash and cash equivalents
$
1,186,050

  
$
1,162,779

Accounts receivable, net of allowances for doubtful accounts of $1,423 and $1,092, respectively
296,366

  
275,032

Settlement processing assets
1,847,232

  
1,546,854

Prepaid expenses and other current assets
220,649

  
131,341

Total current assets
3,550,297

  
3,116,006

Goodwill
5,616,414

  
4,807,594

Other intangible assets, net
2,328,709

  
2,085,292

Property and equipment, net
577,188

  
526,370

Deferred income taxes
16,736

 
15,789

Other noncurrent assets
192,205

  
113,299

Total assets
$
12,281,549

  
$
10,664,350

LIABILITIES AND EQUITY
 
  
 
Current liabilities:
 
  
 
Settlement lines of credit
$
487,513

 
$
392,072

Current portion of long-term debt
93,408

 
177,785

Accounts payable and accrued liabilities
992,363

  
804,887

Settlement processing obligations
1,550,627

 
1,477,212

Total current liabilities
3,123,911

  
2,851,956

Long-term debt
4,677,910

 
4,260,827

Deferred income taxes
632,648

  
676,472

Other noncurrent liabilities
152,127

  
95,753

Total liabilities
8,586,596

  
7,885,008

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; 158,762,894 issued and outstanding at September 30, 2017 and 152,185,616 issued and outstanding at December 31, 2016

  

Paid-in capital
2,376,331

  
1,816,278

Retained earnings
1,357,526

  
1,137,230

Accumulated other comprehensive loss
(202,508
)
  
(322,717
)
Total Global Payments shareholders’ equity
3,531,349

  
2,630,791

Noncontrolling interests
163,604

 
148,551

Total equity
3,694,953

 
2,779,342

Total liabilities and equity
$
12,281,549

  
$
10,664,350

See Notes to Unaudited Consolidated Financial Statements.

6


GLOBAL PAYMENTS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Nine Months Ended
 
September 30, 2017
 
September 30, 2016
Cash flows from operating activities:
 
 
 
Net income
$
243,765

 
$
192,804

Adjustments to reconcile net income to net cash provided by operating activities:

 

Depreciation and amortization of property and equipment
80,868

 
62,964

Amortization of acquired intangibles
249,095

 
173,345

Share-based compensation expense
30,771

 
26,060

Provision for operating losses and bad debts
37,203

 
26,069

Amortization of capitalized customer acquisition costs
32,863

 
9,337

Deferred income taxes
(51,093
)
 
(30,504
)
Gain on sale of investments

 
(41,150
)
Other, net
34,190

 
26,790

Changes in operating assets and liabilities, net of the effects of acquisitions:
 
 
 
Accounts receivable
(6,070
)
 
14,216

Settlement processing assets and obligations, net
(232,713
)
 
(109
)
Prepaid expenses and other assets
(12,605
)
 
(27,474
)
Capitalized customer acquisition costs
(65,697
)
 
(45,425
)
Accounts payable and other liabilities
19,546

 
(19,491
)
Net cash provided by operating activities
360,123

 
367,432

Cash flows from investing activities:
 
 
 
Business acquisitions, net of cash acquired
(563,009
)
 
(1,825,975
)
Capital expenditures
(136,612
)
 
(102,442
)
Proceeds from sale of investments

 
37,783

Proceeds from sales of property and equipment
37,520

 

Other, net
(48,056
)
 
(1,409
)
Net cash used in investing activities
(710,157
)
 
(1,892,043
)
Cash flows from financing activities:
 
 
 
Net proceeds from (repayments of) settlement lines of credit
77,397

 
(952
)
Proceeds from long-term debt
1,713,324

 
3,263,045

Repayments of long-term debt
(1,386,721
)
 
(1,110,258
)
Payment of debt issuance costs
(9,520
)
 
(58,448
)
Repurchase of common stock
(32,811
)
 
(130,314
)
Proceeds from stock issued under share-based compensation plans
7,068

 
5,614

Common stock repurchased - share-based compensation plans
(21,171
)
 
(15,622
)
Proceeds from sale of subsidiary shares to noncontrolling interest

 
16,374

Distributions to noncontrolling interests
(9,301
)
 
(10,216
)
Dividends paid
(5,141
)
 
(4,376
)
Net cash provided by financing activities
333,124

 
1,954,847

Effect of exchange rate changes on cash
40,181

 
(7,142
)
Increase in cash and cash equivalents
23,271

 
423,094

Cash and cash equivalents, beginning of the period
1,162,779

 
587,751

Cash and cash equivalents, end of the period
$
1,186,050

 
$
1,010,845

See Notes to Unaudited Consolidated Financial Statements.

7


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, 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


 
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, 2015
129,274

 
$
133,345

 
$
943,879

 
$
(247,190
)
 
$
830,034

 
$
112,176

 
$
942,210

Net income
 
 
 
 
177,654

 
 
 
177,654

 
15,150

 
192,804

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
(12,336
)
 
(12,336
)
 
3,776

 
(8,560
)
Stock issued under share-based compensation plans
761

 
5,614

 
 
 


 
5,614

 
 
 
5,614

Common stock repurchased - share-based compensation plans
(258
)
 
(19,850
)
 
 
 


 
(19,850
)
 


 
(19,850
)
Tax benefit from employee share-based compensation plans
 
 
13,896

 
 
 
 
 
13,896

 
 
 
13,896

Share-based compensation expense
 
 
26,060

 
 
 
 
 
26,060

 
 
 
26,060

Issuance of common stock in connection with a business combination
25,644

 
1,879,458

 
 
 
 
 
1,879,458

 
 
 
1,879,458

Purchase of subsidiary shares from noncontrolling interest
 
 
 
 
 
 
 
 

 
42,027

 
42,027

Contribution of subsidiary shares to noncontrolling interest related to a business combination
 
 
(820
)
 
 
 
 
 
(820
)
 
(3,925
)
 
(4,745
)
Distributions to noncontrolling interest
 
 
 
 
 
 
 
 

 
(10,216
)
 
(10,216
)
Repurchase of common stock
(1,816
)
 
(127,816
)
 
(2,498
)
 
 
 
(130,314
)
 
 
 
(130,314
)
Dividends paid ($0.03 per share)
 
 
 
 
(4,376
)
 
 
 
(4,376
)
 
 
 
(4,376
)
Balance at September 30, 2016
153,605

 
$
1,909,887

 
$
1,114,659

 
$
(259,526
)
 
$
2,765,020

 
$
158,988

 
$
2,924,008

See Notes to Unaudited Consolidated Financial Statements.



8


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 services delivering innovative solutions to our customers globally. Our technologies and employee expertise enable us to provide a broad range of services that allow our customers to accept various payment types. 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 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, 2016 was derived from the audited financial statements included in our Transition Report on Form 10-K for the seven months ended December 31, 2016 but does not include all disclosures required by GAAP for annual financial statements. As a result of the change in our fiscal year end from May 31 to December 31, we presented our interim financial information for the three and nine months ended September 30, 2016 on the basis of the new fiscal year for comparative purposes. 

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 Transition Report on Form 10-K for the seven months ended December 31, 2016 .

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.

Recently Adopted Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 unaudited 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 have elected to account for forfeitures of share-based awards with service conditions as they occur.

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 unaudited 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

9


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. The adoption of this standard had no effect on our unaudited consolidated financial statements.

Recently Issued Pronouncements Not Yet Adopted

Accounting Standard Codification ( " ASC " ) 606 - New Revenue 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 are monitoring the activity of the FASB and the transition resource group as it relates to specific interpretive guidance. We have 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. We are nearing completion of the second phase, which includes quantifying the potential effects, assessing additional contract categories and principal agent considerations, revising accounting policies and considering 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 could 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 may be required within the process of 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 customer lives. We have not completed our assessment or quantified the effect the new guidance will have on our consolidated financial statements, related disclosures and/or our internal control over financial reporting. This will occur during the third and final phase of our implementation as discussed in the previous paragraph. Our preliminary view is that we expect the amount and timing of revenue to be recognized under ASU 2014-09 for our most significant contract category, core payment services, will be similar to the amount and timing of revenue recognized under our current accounting practices. However, we are still evaluating principal agent considerations for certain amounts that we pay to third parties and currently recognize as a component of operating expense, which could result in such amounts being recorded as a reduction of revenue under ASU 2014-09. This change would not affect operating income. We also expect to be required to capitalize additional costs to obtain contracts with customers, 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 time period. Finally, we expect disclosures about our revenues and related customer acquisition costs will be more extensive.

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, on January 1, 2018. We will likely apply the modified retrospective transition method, which would result in an adjustment to retained earnings for the cumulative effect, if any, of applying the standard to contracts that are not completed at the

10


date of initial application. Under this method, we would not restate 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.

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. The ASU will become effective for us on January 1, 2019. Early application is permitted for all hedging relationships that exist at the date of adoption. We are evaluating the effect of ASU 2017-12 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 will become 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. The amendments in this update will become effective for us on January 1, 2018. The amendments in this update should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We do not expect that the adoption of ASU 2016-16 will have a material effect on our consolidated financial statements and related disclosures.

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 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. Although early adoption is permitted, we expect to adopt ASU 2016-02 when it becomes effective for us on January 1, 2019. Adoption will require a modified retrospective transition where the lessees are required to recognize and measure leases at the beginning of the earliest period presented. 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. 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.

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

11


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. The guidance will become effective for us on January 1, 2018. We do not expect that the adoption of ASU 2016-01 will have a material effect on our consolidated financial statements and related disclosures.

NOTE 2 —ACQUISITIONS

ACTIVE Network

On September 1, 2017 , we acquired the communities and sports divisions of Athlaction Topco, LLC ("ACTIVE Network") in a cash-and-stock transaction with Vista Equity Partners. We paid the sellers consideration of $600 million in cash, which we funded primarily by drawing on our revolving credit facility, and 6,357,509 shares of our common stock having an estimated fair value of approximately $572 million . The acquisition-date fair value of 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 September 30, 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, including a reconciliation to the total purchase consideration, are as follows (in thousands):
Cash and cash equivalents
$
42,866

Property and equipment
22,889

Identified intangible assets
471,120

Other assets
80,485

Deferred income taxes
(26,757
)
Other liabilities
(123,047
)
Total identifiable net assets
467,556

Goodwill
704,020

Total purchase consideration
$
1,171,576


ACTIVE Network delivers cloud-based, mission critical enterprise software, including payment technology solutions, to event organizers in the communities and health and fitness verticals. This acquisition aligns with our technology-enabled, software driven strategy and adds an enterprise software business operating in two new vertical markets that we believe offer attractive growth fundamentals. Goodwill of $704.0 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.

We are still evaluating information to separately identify and value the intangible assets acquired. We expect such assets to include primarily customer-related intangible assets and acquired technology as well as other identifiable intangible assets that are similar to those we have identified in previous acquisitions. We estimate the amortization periods for the more significant intangible assets to be in a range of 5 to 15 years.

12



Heartland

We merged with Heartland Payment Systems, Inc. ("Heartland") in a cash-and-stock transaction on April 22, 2016 for total purchase consideration of $3.9 billion . The following table summarizes the 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


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 previously determined as of December 31, 2016 and as subsequently revised, including a reconciliation to the total purchase consideration, are as follows:
 
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 nine months ended September 30, 2016 , we incurred transaction costs in connection with the merger of $24.7 million , which are recorded in selling, general and administrative expenses in the consolidated statements of income.


13


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

NOTE 3 —SETTLEMENT PROCESSING ASSETS AND OBLIGATIONS

As of September 30, 2017 and December 31, 2016 , settlement processing assets and obligations consisted of the following:
 
September 30, 2017
 
December 31, 2016
 
 
 
 
 
(in thousands)
 
 
 
 
Settlement processing assets:
 
 
 
Interchange reimbursement
$
288,923

 
$
150,612

Receivable from members
14,483

 
71,590

Receivable from networks
1,546,821

 
1,325,029

Exception items
9,570

 
6,450

Merchant reserves
(12,565
)
 
(6,827
)
 
$
1,847,232

 
$
1,546,854

 
 
 
 
Settlement processing obligations:
 
 
 
Interchange reimbursement
$
74,970

 
$
199,202

Liability to members
(20,340
)
 
(177,979
)
Liability to merchants
(1,472,221
)
 
(1,358,271
)
Exception items
11,018

 
21,194

Merchant reserves
(140,327
)
 
(158,419
)
Reserve for operating losses and sales allowances
(3,727
)
 
(2,939
)
 
$
(1,550,627
)
 
$
(1,477,212
)


14


NOTE 4 —GOODWILL AND OTHER INTANGIBLE ASSETS

As of September 30, 2017 and December 31, 2016 , goodwill and other intangible assets consisted of the following:  
 
September 30, 2017
 
December 31, 2016
 
 
 
 
 
(in thousands)
 
 
 
 
Goodwill
$
5,616,414

 
$
4,807,594

Other intangible assets:
 
 
 
Customer-related intangible assets
$
2,119,873

 
$
1,864,731

Acquired technologies
804,485

 
547,151

Trademarks and trade names
190,021

 
188,311

Contract-based intangible assets
162,107

 
157,882

 
3,276,486

 
2,758,075

Less accumulated amortization:
 
 
 
Customer-related intangible assets
635,574

 
487,729

Acquired technologies
179,006

 
89,633

Trademarks and trade names
44,586

 
24,142

Contract-based intangible assets
88,611

 
71,279

 
947,777

 
672,783

 
$
2,328,709

 
$
2,085,292


The following table sets forth the changes in the carrying amount of goodwill for the nine months ended September 30, 2017 :
 
North America
 
Europe
 
Asia-Pacific
 
Total
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
Balance at December 31, 2016
$
4,083,252

 
$
455,300

 
$
269,042

 
$
4,807,594

Goodwill acquired
704,020

 

 

 
704,020

Effect of foreign currency translation
5,559

 
50,515

 
18,185

 
74,259

Measurement-period adjustments
23,511

 

 
7,030

 
30,541

Balance at September 30, 2017
$
4,816,342

 
$
505,815

 
$
294,257

 
$
5,616,414


There was no accumulated impairment loss as of September 30, 2017 or December 31, 2016 .

NOTE 5 —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 nine months ended September 30, 2016 . 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. On the third anniversary of the closing of the acquisition by Visa, we will also 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).


15


NOTE 6 —LONG-TERM DEBT AND LINES OF CREDIT

As of September 30, 2017 and December 31, 2016 , long-term debt consisted of the following:
 
September 30, 2017
 
December 31, 2016
 
 
 
 
 
(in thousands)
 
 
 
 
Corporate credit facility:
 
 
 
Term loans (face amounts of $3,956,497 and $3,728,857 at September 30, 2017 and December 31, 2016, respectively, less unamortized debt issuance costs of $40,180 and $46,282 at September 30, 2017 and December 31, 2016, respectively)
$
3,916,317

 
$
3,682,575

Revolving Credit Facility
855,000

 
756,000

Capital lease obligations
1

 
37

Total long-term debt
4,771,318

 
4,438,612

Less current portion of corporate credit facility (face amounts of $102,129 and $187,274 at September 30, 2017 and December 31, 2016, respectively, less unamortized debt issuance costs of $8,722 and $9,526 at September 30, 2017 and December 31, 2016, respectively) and current portion of capital lease obligations of $1 and $37 at September 30, 2017 and December 31, 2016, respectively
93,408

 
177,785

Long-term debt, excluding current portion
$
4,677,910

 
$
4,260,827


Maturity requirements on long-term debt as of September 30, 2017 by year are as follows (in thousands):
Years ending December 31,
 
2017
$
23,821

2018
108,979

2019
141,912

2020
161,144

2021
180,376

2022
3,111,391

2023 and thereafter
1,083,875

Total
$
4,811,498


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 Agreement"). On May 2, 2017, we entered into the Fourth Amendment to the Credit Facility Agreement (the "Fourth Amendment"), which increased the total financing capacity available under the Credit Facility Agreement to $5.2 billion ; however, the aggregate outstanding debt under the Credit Facility Agreement 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 September 30, 2017 , the Credit Facility Agreement provided for secured financing comprised of (i) a $1.5 billion term loan (the "Term A Loan"), (ii) a $1.3 billion term loan (the "Term A-2 Loan"), (iii) a $1.2 billion term loan facility, (the "Term B-2 Loan") and (iv) a $1.25 billion revolving credit facility (the "Revolving Credit Facility"). Substantially all of the assets of our domestic subsidiaries are pledged as collateral under the Credit Facility Agreement.

The Credit Facility Agreement 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 September 30, 2017 , the interest rates on the Term A Loan, the Term A-2 Loan and the Term B-2 Loan were 2.99% , 2.95% and 3.23% , respectively.

The Term A Loan and the Term A-2 Loan mature, and the Revolving Credit Facility Agreement 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

16


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 Agreement 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 September 30, 2017 and December 31, 2016 were $383.1 million and $446.3 million , respectively. As of September 30, 2017 , the interest rate on the Revolving Credit Facility was 2.95% . 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 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, 2017 and December 31, 2016 , a total of $55.5 million and $51.0 million , respectively, of cash on deposit was used to determine the available credit.

As of September 30, 2017 and December 31, 2016 , respectively, we had $487.5 million and $392.1 million outstanding under these lines of credit with additional capacity of $669.9 million as of September 30, 2017 to fund settlement. The weighted-average interest rate on these borrowings was 2.11% and 1.90% at September 30, 2017 and December 31, 2016 , respectively. During the three months ended September 30, 2017 , the maximum and average outstanding balances under these lines of credit were $627.3 million and $334.2 million , respectively.

Compliance with Covenants

The Credit Facility Agreement 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 September 30, 2017 , financial covenants under the Credit Facility Agreement 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 Agreement and settlement lines of credit also include various other covenants that are customary in such borrowings. The Credit Facility Agreement 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 Agreement 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 nine months ended September 30, 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

17


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 three and nine months ended September 30, 2017 and 2016 , 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:
Derivative Financial Instruments
 
Balance Sheet Location
 
Weighted-Average Fixed Rate of Interest at September 30, 2017
 
Range of Maturity Dates
 
September 30, 2017
 
December 31, 2016
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps (Notional of $1,000 million at September 30, 2017, $250 million at December 31, 2016)
 
Other assets
 
1.49%
 
February 28, 2019 - July 31, 2020
 
$
2,923

 
$
2,147

Interest rate swaps (Notional of $300 million at September 30, 2017, $750 million at December 31, 2016)
 
Accounts payable and accrued liabilities
 
1.91%
 
March 31, 2021
 
$
1,495

 
$
3,175


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, 2017 and 2016 :
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
Amount of gain (loss) recognized in other comprehensive income
$
341

 
$
3,429

 
$
(2,214
)
 
$
(12,665
)
Amount reclassified out of other comprehensive income to interest expense
$
1,172

 
$
1,853

 
$
4,667

 
$
5,733


As of September 30, 2017 , the amount 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 $1.7 million .

Interest Expense

Interest expense was $41.8 million and $44.6 million for the three months ended September 30, 2017 and 2016 , respectively, and $130.3 million and $95.6 million for the nine months ended September 30, 2017 and 2016 , respectively.


18


NOTE 7—INCOME TAX

Our effective income tax rates were 11.7% and 18.4% for the three months ended September 30, 2017 and September 30, 2016 , respectively. Our effective income tax rates were 14.4% and 14.7% for the nine months ended September 30, 2017 and September 30, 2016 , respectively. Our effective income tax rates differ from the U.S. statutory rate primarily due to income generated in international jurisdictions with lower tax rates. In addition, as a result of adopting ASU 2016-09 on January 1, 2017, as described in "Note 1 — Basis of Presentation and Summary of Significant Accounting Policies," we recognize the income tax effects of the excess benefits or deficiencies of share-based awards in the statement of income when share-based awards vest or are settled, which contributed to lower effective income tax rates in the current year periods. During the nine months ended September 30, 2016 , we recorded an income tax benefit of $12.7 million associated with the elimination of certain net deferred tax liabilities associated with undistributed earnings from Canada as a result of management's plans to reinvest these earnings outside the United States indefinitely.

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 2013 and U.K. federal income tax examinations for years ended on or before May 31, 2013 .

NOTE 8—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. As of September 30, 2017 , we were authorized to repurchase up to $264.9 million of our common stock. During the three and nine months ended September 30, 2017 , respectively, 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.

During the three and nine months ended September 30, 2016 , respectively, through open market repurchase plans, we repurchased and retired 484,256 and 1,142,415 shares of our common stock at a cost of $35.5 million and $80.3 million , or an average cost of $73.25 and $70.29 per share, including commissions. In addition to shares repurchased through open market repurchase plans, we repurchased 673,212 shares of our common stock at a cost of $50.0 million , or an average cost of $74.27 per share, including commissions, through an accelerated share repurchase program during the nine months ended September 30, 2016 .

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, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
Share-based compensation expense
$
9,617

 
$
8,688

 
$
30,771

 
$
26,060

Income tax benefit
$
3,523

 
$
2,968

 
$
10,788

 
$
8,679

 

19


Share-Based Awards

The following table summarizes the changes in unvested share-based awards for the nine months ended September 30, 2017 :
 
Shares
 
Weighted-Average
Grant-Date
Fair Value
 
(in thousands)
 
 
 
 
 
 
Unvested at December 31, 2016
1,263

 

$49.55

Granted
611

 
71.77

Vested
(685
)
 
40.35

Forfeited
(71
)
 
60.36

Unvested at September 30, 2017
1,118

 

$66.74


The total fair value of share-based awards vested during the nine months ended September 30, 2017 and September 30, 2016 was $27.6 million and $22.2 million , respectively.

For these share-based awards, we recognized compensation expense of $8.6 million and $8.0 million during the three months ended September 30, 2017 and September 30, 2016 , respectively, and $27.7 million and $24.3 million during the nine months ended September 30, 2017 and September 30, 2016 , respectively. As of September 30, 2017 , there was $ 53.2 million of unrecognized compensation expense related to unvested share-based awards that we expect to recognize over a weighted-average period of 2.1 years. Our share-based 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. During the nine months ended September 30, 2017 and September 30, 2016 , we granted stock options to purchase 123,958 and 72,733 shares of our common stock. Our stock option plans provide for accelerated vesting under certain conditions.

The following summarizes changes in stock option activity for the nine months ended September 30, 2017 :  
 
Options
 
Weighted-Average Exercise Price
 
Weighted-Average Remaining Contractual Term
 
Aggregate Intrinsic Value
 
(in thousands)
 
 
 
(years)
 
(in millions)
 
 
 
 
 
 
 
 
Outstanding at December 31, 2016
759

 
$37.51
 
6.0
 
$24.5
Granted
124

 
79.45
 
 
 
 
Exercised
(156
)
 
23.56
 
 
 
 
Outstanding at September 30, 2017
727

 
$47.67
 
6.6
 
$34.4
 
 
 
 
 
 
 
 
Options vested and exercisable at September 30, 2017
505

 
$36.49
 
5.6
 
$29.6

We recognized compensation expense for stock options of $0.7 million and $0.5 million during the three months ended September 30, 2017 and September 30, 2016 , respectively, and $2.0 million and $1.2 million during the nine months ended September 30, 2017 and September 30, 2016 , respectively. The aggregate intrinsic value of stock options exercised during the nine months ended September 30, 2017 and September 30, 2016 was $9.9 million and $10.6 million , respectively. As of September 30,

20


2017 , we had $4.0 million of unrecognized compensation expense related to unvested stock options that we expect to recognize over a weighted-average period of 2.0 years.

The weighted-average grant-date fair value of each stock option granted during the nine months ended September 30, 2017 was $23.68 . 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, 2017
Risk-free interest rate
1.99%
Expected volatility
30%
Dividend yield
0.06%
Expected term (years)
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 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 earnings per share 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 earnings per share.

The following table sets forth the computation of diluted weighted-average number of shares outstanding for the three and nine months ended September 30, 2017 and September 30, 2016 :
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
Basic weighted-average number of shares outstanding
154,560

 
153,668

 
153,138

 
143,794

Plus: Dilutive effect of stock options and other share-based awards
842

 
862

 
941

 
937

Diluted weighted-average number of shares outstanding
155,402

 
154,530

 
154,079

 
144,731



21


NOTE 11—ACCUMULATED OTHER COMPREHENSIVE LOSS

The changes in the accumulated balances for each component of other comprehensive loss, net of tax, were as follows for the three and nine months ended September 30, 2017 and September 30, 2016 :
 
Foreign Currency Translation
 
Unrealized Gains (Losses) on Hedging Activities
 
Other
 
Accumulated Other Comprehensive Loss
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
Balance at June 30, 2016
$
(249,374
)
 
$
(11,377
)
 
$
(4,634
)
 
$
(265,385
)
Other comprehensive income, net of tax
2,505

 
3,331

 
23

 
5,859

Balance at September 30, 2016
$
(246,869
)
 
$
(8,046
)
 
$
(4,611
)
 
$
(259,526
)
 
 
 
 
 
 
 
 
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 (loss) attributable to noncontrolling interest, which relates only to foreign currency translation, was approximately $2.3 million and $(0.8) million for the three months ended September 30, 2017 and September 30, 2016 , respectively.
 
Foreign Currency Translation
 
Unrealized Gains (Losses) on Hedging Activities
 
Other
 
Accumulated Other Comprehensive Loss
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
Balance at December 31, 2015
$
(239,650
)
 
$
(3,732
)
 
$
(3,808
)
 
$
(247,190
)
Other comprehensive loss, net of tax
(7,219
)
 
(4,314
)
 
(803
)
 
(12,336
)
Balance at September 30, 2016
$
(246,869
)
 
$
(8,046
)
 
$
(4,611
)
 
$
(259,526
)
 
 
 
 
 
 
 
 
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 interest, which relates only to foreign currency translation, was approximately $15.1 million and $3.8 million for the nine months ended September 30, 2017 and September 30, 2016 , respectively.

NOTE 12—SEGMENT INFORMATION

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 Transition Report on Form 10-K for the seven months ended December 31, 2016 and our summary of significant accounting policies in "Note 1 Basis of Presentation and Summary of Significant Accounting Policies."


22


Information on segments and reconciliations to consolidated revenues and consolidated operating income are as follows for the three and nine months ended September 30, 2017 and September 30, 2016 :
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
Revenues (1) :
 
 
 
 
 
 
 
North America
$
764,902

 
$
718,977

 
$
2,162,911

 
$
1,770,957

Europe
205,203

 
173,246

 
557,258

 
479,620

Asia-Pacific
68,802

 
59,662

 
200,741

 
170,212

 Consolidated revenues
$
1,038,907

 
$
951,885

 
$
2,920,910

 
$
2,420,789

 
 
 
 
 
 
 
 
Operating income (loss) (1) :
 
 
 
 
 
 
 
North America
$
138,345

 
$
110,983

 
$
344,604

 
$
258,648

Europe
76,214

 
63,727

 
196,394

 
172,293

Asia-Pacific
20,032

 
14,657

 
57,321

 
40,266

Corporate (2)
(62,120
)
 
(68,978
)
 
(189,026
)
 
(195,085
)
 Consolidated operating income
$
172,471

 
$
120,389

 
$
409,293

 
$
276,122

 
 
 
 
 
 
 
 
Depreciation and amortization (1) :
 
 
 
 
 
 
 
North America
$
95,056

 
$
91,790

 
$
277,219

 
$
189,585

Europe
11,863

 
11,019

 
34,926

 
30,780

Asia-Pacific
4,484

 
4,450

 
12,068

 
12,204

Corporate
2,246

 
1,296

 
5,750

 
3,740

 Consolidated depreciation and amortization
$
113,649

 
$
108,555

 
$
329,963

 
$
236,309


(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 three and nine months ended September 30, 2017 , respectively, operating loss for Corporate included acquisition and integration expenses of $21.5 million and $69.5 million . During the three and nine months ended September 30, 2016 , respectively, operating loss for Corporate included acquisition and integration expenses of $34.0 million and $93.0 million .

NOTE 13 —COMMITMENTS AND CONTINGENCIES

Leases

In May 2017 , we received $37.5 million from the sale of our operating facility in Jeffersonville, Indiana, which we acquired as part of the Heartland merger, 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.


23


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 Transition Report on Form 10-K for the seven months ended December 31, 2016 . 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.

Executive Overview

We are a leading worldwide provider of payment technology services delivering innovative solutions to our customers globally. Our technologies and employee expertise enable us to provide a broad range of services that allow our customers to accept various payment types. 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 merged with Heartland Payments Systems, Inc. ("Heartland") in a cash-and-stock transaction on April 22, 2016 for total purchase consideration of $3.9 billion . See "Note 2 —Acquisitions" in the notes to the accompanying unaudited consolidated financial statements for further discussion of our merger with Heartland.

On September 1, 2017 , we acquired the communities and sports divisions of Athlaction Topco, LLC ("ACTIVE Network") in a cash-and-stock transaction with Vista Equity Partners. We paid the sellers consideration of $600 million in cash, which we funded primarily by drawing on our Revolving Credit Facility (as defined in "Liquidity and Capital Resources - Long-Term Debt and Lines of Credit" below), and 6,357,509 shares of our common stock having an estimated fair value of approximately $572 million .

Highlights related to our financial condition and results of operations for the three and nine months ended September 30, 2017 are provided below:

Consolidated revenues increased by 9.1% and 20.7% to $1,038.9 million and $2,920.9 million , respectively, for the three and nine months ended September 30, 2017 , compared to $951.9 million and $2,420.8 million , respectively, for the prior-year periods. The increase for the three month-period was primarily due to organic growth across our operating segments and the increase for the nine month-period was primarily due to our merger with Heartland.

Consolidated operating income was $172.5 million and $409.3 million , respectively, for the three and nine months ended September 30, 2017 compared to $120.4 million and $276.1 million , respectively, for the prior-year periods. Our operating margin for the three and nine months ended September 30, 2017 was 16.6% and 14.0% , respectively, compared to 12.6% and 11.4% , respectively, for the prior-year periods. The contribution of the revenue growth was partially offset by an increase in depreciation and amortization expense of $5.1 million and $93.7 million , respectively.

Net income attributable to Global Payments was $110.7 million and $226.5 million , respectively, for the three and nine months ended September 30, 2017 compared to $55.5 million and $177.7 million , respectively, for the prior-year periods. The nine months ended September 30, 2016 included a gain of $41.2 million from the sale of all of our membership interests in Visa Europe Limited ("Visa Europe") to Visa Inc. ("Visa").

Diluted earnings per share was $0.71 and $1.47 , respectively, for the three and nine months ended September 30, 2017 compared to $0.36 and $1.23 , respectively, for the prior-year periods.

Emerging Trends

We believe that 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

24


allocated to 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.

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 internationally or increase our scale and improve our competitiveness in existing markets by pursuing further acquisitions and joint ventures.

Results of Operations

The following table sets forth key selected financial data for the three months ended September 30, 2017 and September 30, 2016 , 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. The income statement data for the three months ended September 30, 2016 are derived from our unaudited consolidated financial statements for that period.
 
Three Months Ended September 30, 2017
 
% of Revenue (1)
 
Three Months Ended September 30, 2016
 
% of Revenue (1)
 
Change
 
% Change
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollar amounts in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Revenues (2) :
 
 
 
 
 
 
 
 
 
 
 
North America
$
764,902

 
73.6
%
 
$
718,977

 
75.5
%
 
$
45,925

 
6.4
 %
Europe
205,203

 
19.8
%
 
173,246

 
18.2
%
 
31,957

 
18.4
 %
Asia-Pacific
68,802

 
6.6
%
 
59,662

 
6.3
%
 
9,140

 
15.3
 %
Total revenues
$
1,038,907

 
100.0
%
 
$
951,885

 
100.0
%
 
$
87,022

 
9.1
 %
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated operating expenses :
 
 
 
 
 
 
 
 
 
 
 
Cost of service
$
493,883

 
47.5
%
 
$
469,980

 
49.4
%
 
$
23,903

 
5.1
 %
Selling, general and administrative
372,553

 
35.9
%
 
361,516

 
38.0
%
 
11,037

 
3.1
 %
Operating expenses
$
866,436

 
83.4
%
 
$
831,496

 
87.4
%
 
$
34,940

 
4.2
 %
 
 
 
 
 
 
 
 
 
 
 
 
Operating income (loss) :
 
 
 
 
 
 
 
 
 
 
 
North America
$
138,345

 


 
$
110,983

 
 
 
$
27,362

 
24.7
 %
Europe
76,214

 
 
 
63,727

 
 
 
12,487

 
19.6
 %
Asia-Pacific
20,032

 
 
 
14,657

 
 
 
5,375

 
36.7
 %
Corporate (2)
(62,120
)
 
 
 
(68,978
)
 
 
 
6,858

 
(9.9
)%
Operating income
$
172,471

 
16.6
%
 
$
120,389

 
12.6
%
 
$
52,082

 
43.3
 %
 
 
 
 
 
 
 
 
 
 
 
 
Operating margin :
 
 
 
 
 
  </