Global Payments Inc.
GLOBAL PAYMENTS INC (Form: 10-Q, Received: 01/09/2017 16:31:26)
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 November 30, 2016

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
IMAGE1A02A07.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.)
10 Glenlake Parkway, North Tower, Atlanta, Georgia
 
30328
(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, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting 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 ☐

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 January 4, 2017 was 152,263,156 .


Table of Contents

GLOBAL PAYMENTS INC.
FORM 10-Q
For the quarterly period ended November 30, 2016

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
 
November 30, 2016
 
November 30, 2015
 
 
 
 
Revenues
$
941,821

 
$
722,350

Operating expenses:
 
 
 
Cost of service
468,383

 
270,565

Selling, general and administrative
368,171

 
328,620

 
836,554

 
599,185

Operating income
105,267

 
123,165

 
 
 
 
Interest and other income
1,353

 
1,292

Interest and other expense
(52,448
)
 
(14,126
)
 
(51,095
)
 
(12,834
)
Income before income taxes
54,172

 
110,331

Provision for income taxes
(1,557
)
 
(27,253
)
Net income
52,615

 
83,078

Less: Net income attributable to noncontrolling interests, net of income tax
(3,163
)
 
(4,307
)
Net income attributable to Global Payments
$
49,452

 
$
78,771

 
 
 
 
Earnings per share attributable to Global Payments:
 
 
 
Basic earnings per share
$
0.32

 
$
0.61

Diluted earnings per share
$
0.32

 
$
0.60

See Notes to Unaudited Consolidated Financial Statements.
















 


3

Table of Contents

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

 
Six Months Ended
 
November 30, 2016
 
November 30, 2015
 
 
 
 
Revenues
$
1,881,313

 
$
1,471,146

Operating expenses:
 
 
 
Cost of service
931,009

 
543,231

Selling, general and administrative
723,931

 
666,978

 
1,654,940

 
1,210,209

Operating income
226,373

 
260,937

 
 
 
 
Interest and other income
43,826

 
2,434

Interest and other expense
(95,524
)
 
(27,369
)
 
(51,698
)
 
(24,935
)
Income before income taxes
174,675

 
236,002

Provision for income taxes
(29,601
)
 
(59,876
)
Net income
145,074

 
176,126

Less: Net income attributable to noncontrolling interests, net of income tax
(10,529
)
 
(10,708
)
Net income attributable to Global Payments
$
134,545

 
$
165,418

 
 
 
 
Earnings per share attributable to Global Payments:
 
 
 
Basic earnings per share
$
0.88

 
$
1.27

Diluted earnings per share
$
0.87

 
$
1.27

See Notes to Unaudited Consolidated Financial Statements.


4

Table of Contents

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

 
 
 
 
 
Three Months Ended
 
November 30, 2016
 
November 30, 2015
 
 
 
 
Net income
$
52,615

 
$
83,078

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments
(58,008
)
 
(35,582
)
Income tax provision related to foreign currency translation adjustments

 
(2,256
)
Unrealized gains (losses) on hedging activities
7,089

 
(3,968
)
Reclassification of losses on hedging activities to interest expense
1,768

 
2,467

Income tax (expense) benefit related to hedging activities
(3,328
)
 
562

Other
(246
)
 

Other comprehensive loss, net of tax
(52,725
)
 
(38,777
)
 
 
 
 
Comprehensive income
(110
)
 
44,301

Comprehensive loss attributable to noncontrolling interests
5,356

 
1,965

Comprehensive income attributable to Global Payments
$
5,246

 
$
46,266



 
Six Months Ended
 
November 30, 2016
 
November 30, 2015
 
 
 
 
Net income
$
145,074

 
$
176,126

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments
(76,789
)
 
(72,599
)
Income tax benefit related to foreign currency translation adjustments

 
8,844

Unrealized gains (losses) on hedging activities
3,884

 
(4,000
)
Reclassification of losses on hedging activities to interest expense
3,665

 
4,201

Income tax expense related to hedging activities
(2,810
)
 
(60
)
Other
(139
)
 

Other comprehensive loss, net of tax
(72,189
)
 
(63,614
)
 
 
 
 
Comprehensive income
72,885

 
112,512

Comprehensive income attributable to noncontrolling interests
(2,007
)
 
(6,336
)
Comprehensive income attributable to Global Payments
$
70,878

 
$
106,176

See Notes to Unaudited Consolidated Financial Statements.



5

Table of Contents

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

Current assets:
 
  
 

Cash and cash equivalents
$
995,816

  
$
1,044,728

Accounts receivable, net of allowances for doubtful accounts of $294 and $353, respectively
266,245

  
281,612

Claims receivable, net of allowances for doubtful accounts of $4,771 and $4,868, respectively
8,772

  
6,799

Settlement processing assets
1,117,666

  
1,336,326

Prepaid expenses and other current assets
186,464

  
181,848

Total current assets
2,574,963

  
2,851,313

Goodwill
4,823,756

  
4,829,405

Other intangible assets, net
2,115,842

  
2,264,708

Property and equipment, net
520,714

  
493,678

Deferred income taxes
20,419

 
22,719

Other
57,420

  
48,129

Total assets
$
10,113,114

  
$
10,509,952

LIABILITIES AND EQUITY
 
  
 
Current liabilities:
 
  
 
Settlement lines of credit
$
467,293

 
$
378,436

Current portion of long-term debt
177,759

 
135,542

Accounts payable and accrued liabilities
681,356

  
696,414

Settlement processing obligations
883,447

 
1,220,315

Total current liabilities
2,209,855

  
2,430,707

Long-term debt
4,316,391

 
4,379,744

Deferred income taxes
695,258

  
744,862

Other noncurrent liabilities
89,773

  
77,235

Total liabilities
7,311,277

  
7,632,548

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; 152,267,428 issued and outstanding at November 30, 2016 and 154,421,585 issued and outstanding at May 31, 2016

  

Paid-in capital
1,818,487

  
1,976,715

Retained earnings
1,146,844

  
1,015,811

Accumulated other comprehensive loss
(309,717
)
  
(246,050
)
Total Global Payments shareholders’ equity
2,655,614

  
2,746,476

Noncontrolling interests
146,223

 
130,928

Total equity
2,801,837

 
2,877,404

Total liabilities and equity
$
10,113,114

  
$
10,509,952

See Notes to Unaudited Consolidated Financial Statements.

6

Table of Contents

GLOBAL PAYMENTS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Six Months Ended
 
November 30, 2016
 
November 30, 2015
Cash flows from operating activities:
 
 
 
Net income
$
145,074

 
$
176,126

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

 

Depreciation and amortization of property and equipment
45,681

 
35,697

Amortization of acquired intangibles
166,188

 
41,809

Share-based compensation expense
16,366

 
13,472

Provision for operating losses and bad debts
19,024

 
11,257

Amortization of capitalized customer acquisition costs
12,291

 

Deferred income taxes
(52,710
)
 
2,900

Gain on sale of investments
(41,150
)
 

Other, net
18,784

 
2,198

Changes in operating assets and liabilities, net of the effects of acquisitions:

 

Accounts receivable
9,693

 
(4,271
)
Claims receivable
(14,067
)
 
(18,723
)
Settlement processing assets and obligations, net
(113,359
)
 
208,446

Prepaid expenses and other assets
(5,846
)
 
(14,097
)
Accounts payable and other liabilities
(12,426
)
 
(744
)
Net cash provided by operating activities
193,543

 
454,070

Cash flows from investing activities:
 
 
 
Business acquisitions, net of cash acquired
(35,260
)
 
(241,934
)
Capital expenditures
(83,268
)
 
(36,246
)
Proceeds from sale of investments
37,717

 

Net cash used in investing activities
(80,811
)
 
(278,180
)
Cash flows from financing activities:
 
 
 
Net borrowings on settlement lines of credit
94,757

 
101,464

Proceeds from issuance of long-term debt
1,289,000

 
3,030,175

Principal payments of long-term debt
(1,314,799
)
 
(2,852,175
)
Payment of debt issuance costs
(9,279
)
 
(4,934
)
Repurchase of common stock
(172,405
)
 
(71,748
)
Proceeds from stock issued under share-based compensation plans
4,882

 
6,317

Common stock repurchased - share-based compensation plans
(20,390
)
 
(11,579
)
Tax benefit from share-based compensation plans
13,017

 
6,521

Purchase of subsidiary shares from noncontrolling interest

 
(7,550
)
Distributions to noncontrolling interests
(12,365
)
 
(8,158
)
Dividends paid
(3,069
)
 
(2,602
)
Net cash (used in) provided by financing activities
(130,651
)
 
185,731

Effect of exchange rate changes on cash
(30,993
)
 
(23,903
)
(Decrease) increase in cash and cash equivalents
(48,912
)
 
337,718

Cash and cash equivalents, beginning of the period
1,044,728

 
650,739

Cash and cash equivalents, end of the period
$
995,816

 
$
988,457

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 May 31, 2016
154,422

 
$
1,976,715

 
$
1,015,811

 
$
(246,050
)
 
$
2,746,476

 
$
130,928

 
$
2,877,404

Net income
 
 
 
 
134,545

 
 
 
134,545

 
10,529

 
145,074

Other comprehensive loss, net of tax
 
 
 
 
 
 
(63,667
)
 
(63,667
)
 
(8,522
)
 
(72,189
)
Stock issued under share-based compensation plans
671

 
4,882

 
 
 
 
 
4,882

 
 
 
4,882

Common stock repurchased - share-based compensation plans
(267
)
 
(20,531
)
 


 
 
 
(20,531
)
 
 
 
(20,531
)
Tax benefit from employee share-based compensation
 
 
13,017

 
 
 
 
 
13,017

 
 
 
13,017

Share-based compensation expense
 
 
16,366

 
 
 
 
 
16,366

 
 
 
16,366

Contribution of subsidiary shares to noncontrolling interest related to a business combination
 
 
 
 
 
 
 
 

 
25,653

 
25,653

Distributions to noncontrolling interest
 
 


 
 
 
 
 

 
(12,365
)
 
(12,365
)
Repurchase of common stock
(2,559
)
 
(171,962
)
 
(443
)
 
 
 
(172,405
)
 
 
 
(172,405
)
Dividends paid ($0.02 per share)
 
 
 
 
(3,069
)
 
 
 
(3,069
)
 
 
 
(3,069
)
Balance at November 30, 2016
152,267

 
$
1,818,487

 
$
1,146,844

 
$
(309,717
)
 
$
2,655,614

 
$
146,223

 
$
2,801,837


See Notes to Unaudited Consolidated Financial Statements.


8


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 May 31, 2015
130,558

 
$
148,742

 
$
795,226

 
$
(185,992
)
 
$
757,976

 
$
105,577

 
$
863,553

Net income
 
 
 
 
165,418

 
 
 
165,418

 
10,708

 
176,126

Other comprehensive loss, net of tax
 
 
 
 
 
 
(59,242
)
 
(59,242
)
 
(4,372
)
 
(63,614
)
Stock issued under employee stock plans
644

 
6,317

 
 
 


 
6,317

 
 
 
6,317

Common stock repurchased - share-based compensation plans
(195
)
 
(11,997
)
 
 
 


 
(11,997
)
 


 
(11,997
)
Tax benefit from employee share-based compensation
 
 
6,521

 
 
 
 
 
6,521

 
 
 
6,521

Share-based compensation expense
 
 
13,472

 
 
 
 
 
13,472

 
 
 
13,472

Purchase of subsidiary shares from noncontrolling interest
 
 
(11
)
 
 
 
 
 
(11
)
 
(7,539
)
 
(7,550
)
Contribution of subsidiary shares to noncontrolling interest related to a business combination
 
 
4,673

 
 
 
 
 
4,673

 
24,727

 
29,400

Distributions to noncontrolling interest
 
 
 
 
 
 
 
 

 
(8,158
)
 
(8,158
)
Repurchase of common stock
(1,645
)
 
(35,316
)
 
(40,053
)
 
 
 
(75,369
)
 
 
 
(75,369
)
Dividends paid ($0.02 per share)
 
 
 
 
(2,602
)
 
 
 
(2,602
)
 
 
 
(2,602
)
Balance at November 30, 2015
129,362

 
$
132,401

 
$
917,989

 
$
(245,234
)
 
$
805,156

 
$
120,943

 
$
926,099


See Notes to Unaudited Consolidated Financial Statements.



9


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, partnerships 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 merchants and partners in 30 countries throughout North America, Europe, the Asia-Pacific region and in 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 May 31, 2016 was derived from the audited financial statements for the year ended May 31, 2016 included in our Annual Report on Form 10-K for the year ended May 31, 2016 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 May 31, 2016 .

On July 27, 2016, the Board of Directors authorized a change in our fiscal year-end from May 31 to December 31. As a result of the change, we will file a Transition Report on Form 10-K for the seven-month transition period 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 April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-05, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement ." The amendments in this update provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance does not change GAAP for a customer’s accounting for service contracts. We adopted this standard as of June 1, 2016 on a prospective basis, and it was not material to our balance sheet and/or our results of operations or cash flows.

Recently Issued Accounting 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

10


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 clarify 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 are reviewing customer contracts and are in the process of applying the five-step model of the new standard to each contact category we have identified and will compare the results to our current accounting practices. 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 in process as of the adoption date. 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.

The new standard could change the amount and timing of revenue and costs under certain arrangement types and could increase the administrative burden on our operations to properly account for customer contracts and provide the more expansive required disclosures. We have not yet determined what effect, if any, the new guidance will have on our consolidated financial statements and/or related disclosures.

Other Accounting Standards Updates

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 be effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those periods. Early adoption is permitted as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued. 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 are evaluating the effect of ASU 2016-16 on our consolidated financial statements.
 
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments ," which makes clarifications to how cash receipts and cash payments in certain transactions are presented and classified in the statement of cash flows. ASU 2016-15 will be effective for years beginning after December 15, 2017, including interim periods, and will require adoption on a retrospective basis unless it is impracticable to apply, in which case we would be required to apply the amendments prospectively as of the earliest date practicable. Early adoption is permitted. We are evaluating the effect of ASU 2016-15 on our consolidated financial statements and 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 be effective for years beginning after December 15, 2019 and interim periods within those years. Early adoption is permitted for annual and interim periods in years beginning after December 15, 2018. We are evaluating the effect of ASU 2016-13 on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. " The amendments in this update will change how companies account for certain aspects of share-based payments to employees. Entities will be required to recognize the income tax effects the excess deficiencies or shortfalls of awards in the statement of income when the awards vest or are settled. This update also changes the guidance on employers’ accounting

11


for an employee’s use of shares to satisfy the employer’s statutory income tax withholding obligation and permits entities to elect to recognize forfeitures based on actuals or estimates. Finally, the update eliminates the hypothetical additional paid-in capital pool, permits stock option deductions even if not realized in the current year on a return, requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity and potentially has a dilutive effect on earnings per share ("EPS") to the extent that excess tax benefits have historically been included in the calculation of diluted EPS. We will adopt the various amendments in ASU 2016-09 in our consolidated financial statements for the quarterly period ending March 31, 2017 with an effective date of January 1, 2017. As required, we will use the modified retrospective transition method for amendments related to the timing of when excess tax benefits are recognized by means of a cumulative-effect adjustment to shareholders' equity as of January 1, 2017. In addition, the excess tax benefits from our share-based compensation plans are currently presented as a financing activity in our consolidated statement of cash flows and will be presented as an operating activity using a retrospective transition method. We do not expect the adoption of these amendments will have a material effect 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. Accounting by lessors will remain largely unchanged. The guidance will be effective for years, including interim periods, beginning after December 15, 2018, with early adoption permitted. Adoption will require a modified retrospective transition where the lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented. We are evaluating the effect of ASU 2016-02 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. The guidance will be effective for years beginning after December 15, 2017, including interim periods within those years. Except for specific aspects of this pronouncement, early adoption of the amendments in this update is not permitted. We are evaluating the effect of ASU 2016-01 on our consolidated financial statements.

NOTE 2 —ACQUISITIONS

Heartland

On December 15, 2015, we entered into a merger agreement with Heartland, pursuant to which we merged with Heartland in a cash-and-stock transaction that we completed on April 22, 2016 for total purchase consideration of $3.9 billion .

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 initial accounting for these acquisitions was not complete as of November 30, 2016 . 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. See Note 4 - Goodwill and Other Intangible Assets for measurement-period adjustments by segment during the six months ended November 30, 2016 . 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. Also, we are still in the process of assigning goodwill to our reporting units.


12


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
$
304,747

Accounts receivable
68,585

Prepaid expenses and other assets
106,442

Identified intangible assets
1,639,040

Property and equipment
106,525

Debt
(437,933
)
Accounts payable and accrued liabilities
(454,225
)
Settlement processing obligations
(20,978
)
Deferred income taxes
(553,454
)
Other liabilities
(58,542
)
Total identifiable net assets
700,207

Goodwill
3,222,613

Total purchase consideration
$
3,922,820


FIS Gaming Business

On June 1, 2015 , we acquired certain assets of Certegy Check Services, Inc., a wholly owned subsidiary of Fidelity National Information Services, Inc. ("FIS"). Under the purchase agreement, we acquired substantially all of the assets of its gaming business related to licensed gaming operators (the "FIS Gaming Business"), including approximately 260 gaming client locations, for $237.5 million , funded from borrowings on our revolving credit facility and cash on hand. We acquired the FIS Gaming Business to expand our direct distribution and service offerings in the gaming industry. This transaction was accounted for as a business combination. We recorded the assets acquired and liabilities assumed at their estimated fair values as of the acquisition date. Transaction costs associated with this business combination were not material. The revenue and earnings of the FIS Gaming Business for the year ended May 31, 2016 were not material nor were the historical revenue and earnings of the acquired business material for the purpose of presenting pro forma information.

The estimated acquisition-date fair values of major classes of assets acquired and liabilities assumed including a reconciliation to the total purchase consideration, are as follows (in thousands):
Customer-related intangible assets
$
143,400

Liabilities
(150
)
Total identifiable net assets
143,250

Goodwill
94,250

Total purchase consideration
$
237,500


Goodwill arising from the acquisition, included in the North America segment, was attributable to expected growth opportunities, including cross-selling opportunities at existing and acquired gaming client locations, operating synergies in the gaming business and assembled workforce. Goodwill associated with this acquisition is deductible for income tax purposes. The customer-related intangible assets have an estimated amortization period of 15 years.


13


NOTE 3 —SETTLEMENT PROCESSING ASSETS AND OBLIGATIONS

As of November 30, 2016 and May 31, 2016 , settlement processing assets and obligations consisted of the following:
 
November 30, 2016
 
May 31, 2016
 
 
 
 
 
(in thousands)
Settlement processing assets:
 
 
 
Interchange reimbursement
$
260,227

 
$
150,644

Liability to Members
(120,422
)
 
(14,997
)
Receivable from networks
1,003,108

 
1,203,308

Exception items
5,420

 
3,003

Merchant Reserves
(30,667
)
 
(5,632
)
 
$
1,117,666

 
$
1,336,326

 
 
 
 
Settlement processing obligations:
 
 
 
Interchange reimbursement
$
66,519

 
$
193,989

Liability to Members
(33,566
)
 
(261,945
)
Liability to merchants
(771,239
)
 
(1,005,009
)
Exception items
8,742

 
5,827

Merchant Reserves
(150,260
)
 
(149,667
)
Reserves for operating losses and sales allowances
(3,643
)
 
(3,510
)
 
$
(883,447
)
 
$
(1,220,315
)

NOTE 4 —GOODWILL AND OTHER INTANGIBLE ASSETS

As of November 30, 2016 and May 31, 2016 , goodwill and other intangible assets consisted of the following:  
 
November 30, 2016
 
May 31, 2016
 
 
 
 
 
(in thousands)
 
 
 
 
Goodwill
$
4,823,756

 
$
4,829,405

Other intangible assets:
 
 
 
Customer-related intangible assets
$
1,867,753

 
$
1,864,709

Acquired technologies
548,007

 
549,293

Trademarks and trade names
188,360

 
188,763

Contract-based intangible assets
158,103

 
159,890

 
2,762,223

 
2,762,655

Less accumulated amortization:
 
 
 
Customer-related intangible assets
476,322

 
414,979

Acquired technologies
79,263

 
26,403

Trademarks and trade names
21,835

 
7,830

Contract-based intangible assets
68,961

 
48,735

 
646,381

 
497,947

 
$
2,115,842

 
$
2,264,708




14


The following table sets forth the changes in the carrying amount of goodwill for the six months ended November 30, 2016 :
 
North America
 
Europe
 
Asia-Pacific
 
Total
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
Balance at May 31, 2016
$
4,086,430

 
$
471,773

 
$
271,202

 
$
4,829,405

Goodwill acquired

 
28,820

 

 
28,820

Effect of foreign currency translation
(1,925
)
 
(41,863
)
 
2,924

 
(40,864
)
Measurement-period adjustments
6,395

 

 

 
6,395

Balance at November 30, 2016
$
4,090,900

 
$
458,730

 
$
274,126

 
$
4,823,756


There was no accumulated impairment loss as of November 30, 2016 or May 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 statement of income for the six months ended November 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, which we account for using the cost method, have been assigned a value of zero as of June 21, 2016 , based on transfer restrictions, Visa's ability to adjust the conversion rate, and the estimation uncertainty associated with those factors. The fair value was determined using inputs classified as Level 3 within the fair value hierarchy due to the absence of quoted market prices, lack of liquidity and the fact that inputs used to measure fair value are unobservable and require management’s judgment. The preferred shares will convert into Visa common shares at periodic intervals over a 12 -year period. 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 ultimately received 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 at June 21, 2016 ) of deferred consideration (plus compounded interest at a rate of 4.0% per annum).

NOTE 6 —LONG-TERM DEBT AND CREDIT FACILITIES

As of November 30, 2016 and May 31, 2016 , long-term debt consisted of the following:
 
November 30, 2016
 
May 31, 2016
 
 
 
 
 
(in thousands)
Term loans (face amounts of $3,730,213 and $3,530,000 at November 30, 2016 and May 31, 2016, respectively, less unamortized debt issuance costs of $47,102 and $51,770 at November 30, 2016 and May 31, 2016, respectively)
$
3,683,111

 
$
3,478,230

Revolving credit facility
811,000

 
1,037,000

Capital lease obligations
39

 
56

Total long-term debt
4,494,150

 
4,515,286

Less current portion of long-term debt (face amounts of $187,274 and $145,938 at November 30, 2016 and May 31, 2016, respectively, less unamortized debt issuance costs of $9,551 and $10,442 at November 30, 2016 and May 31, 2016, respectively) and current portion of capital lease obligations of $36 and $46 at November 30, 2016 and May 31, 2016, respectively
177,759

 
135,542

Long-term debt, excluding current portion
$
4,316,391

 
$
4,379,744



15


Maturity requirements on long-term debt as of November 30, 2016 are as follows (in thousands):
Fiscal years ending May 31,
 
2017
$
93,637

2018
187,274

2019
214,674

2020
214,674

2021
214,674

2022
3,103,724

2023 and thereafter
512,556

Total
$
4,541,213


July 2015 Refinancing

On July 31, 2015 , we entered into a second amended and restated term loan agreement (the "2015 Term Loan Agreement") and a second amended and restated credit agreement (the "2015 Revolving Credit Facility Agreement" and collectively, the "2015 Credit Facility Agreements") to provide for a $1.75 billion term loan (the "Term A Loan") and a $1.25 billion revolving credit facility (the "Revolving Credit Facility"), each with a syndicate of financial institutions. We used the proceeds of approximately $2.0 billion to repay the then-outstanding balances on our previously existing term loan and revolving credit facility.

February 2016 Refinancing

On February 26, 2016 , we entered into an amendment to the 2015 Credit Facility Agreements (as amended, the "2016 Credit Facility Agreement") to, among other things, (i) accelerate our repayment schedule for the Term A Loan, effective as of February 26, 2016 , and (ii) provide security for the Term A Loan and the Revolving Credit Facility and modify the applicable financial covenants and interest rate margins. In addition, the 2016 Credit Facility Agreement provided for a $735 million delayed draw term loan facility (the "Delayed Draw Facility").

We also entered into a $1.045 billion term B loan ("Term B Loan"). The Delayed Draw Facility and Term B Loan were issued on April 22, 2016 in connection with our merger with Heartland, resulting in total financing of approximately $4.78 billion . The incremental proceeds from the new loans were used, among other things, to repay certain portions of Heartland's existing indebtedness and to finance, in part, the cash consideration and the merger-related costs. Substantially all of the assets of our domestic subsidiaries are pledged as collateral under the 2016 Credit Facility Agreement.

October 2016 Refinancing

On October 31, 2016, we entered into the Second Amendment to the 2016 Credit Facility Agreement (the "October 2016 Refinancing"), which (i) increased our borrowing capacity under the Delayed Draw Facility (which we now refer to as "Term A-2 Loan") by $750 million to $1.48 billion , (ii) decreased our outstanding borrowings under the Term B Loan by $500 million to $542 million , (iii) extended the maturity dates for the Term A Loan, the Term A-2 Loan and the Revolving Credit Facility and (iv) decreased the interest rate margin on our term loans and Revolving Credit Facility . The October 2016 Refinancing increased the total financing capacity available under the 2016 Credit Facility Agreement from $4.78 billion to $5.03 billion ; although, the aggregate outstanding debt did not change as we repaid $250 million outstanding under the Revolving Credit Facility in connection with the October 2016 Refinancing.

The 2016 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 November 30, 2016 , the interest rates on the Term A Loan, the Term A-2 Loan and the Term B Loan were 2.86% , 2.71% and 3.11% , respectively.

The Term A Loan must be repaid in equal quarterly installments of $43.8 million through August 2021, with the remaining principal balance due upon maturity in October 2021. The Term A-2 Loan must be repaid in quarterly installments of $1.7 million , the first installment of which was made in August 2016, increasing to quarterly installments of $8.6 million in August 2018 and

16


ending in August 2021, with the remaining balance due upon maturity in October 2021. The Term B Loan must be repaid in quarterly installments of $1.4 million , the first installment commencing in December 2016, ending in March 2023, with the remaining principal balance due upon maturity in April 2023.

As of November 30, 2016 , the outstanding balance on the Revolving Credit Facility was $811.0 million . The 2016 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." At November 30, 2016 and May 31, 2016, we had outstanding standby letters of credit of $20.5 million and $8.5 million , respectively. The total available commitments under the Revolving Credit Facility at November 30, 2016 and May 31, 2016 were $418.5 million and $204.5 million , respectively. As of November 30, 2016 , the interest rate on the Revolving Credit Facility was 2.71% . In addition, w e are required to pay a quarterly commitment fee on the unused portion of the Revolving Credit Facility. The Revolving Credit Facility expires in October 2021.

We incurred fees and expenses associated with the July 2015 refinancing, the February 2016 refinancing and October 2016 refinancing of $74.5 million , in the aggregate. The portion of the debt issuance costs related to the Revolving Credit Facility is included in other noncurrent assets, and the portion of the debt issuance costs related to the Term A Loan, the Term B Loan and the Delayed Draw Facility is reported as a reduction to the carrying amount of the debt. Debt issuance costs are amortized as an adjustment to interest expense over the terms of the respective facilities.

Settlement Lines of Credit

We have lines of credit with banks in various markets where we do business. The lines of credit, which are restricted for use in funding settlement, generally have variable interest rates and are subject to annual review. The credit facilities are generally denominated in local currency but may, in some cases, facilitate borrowings in multiple currencies. For certain of our 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 November 30, 2016 and May 31, 2016 , a total of $49.6 million and $42.9 million , respectively, of cash on deposit was used to determine the available credit.

As of November 30, 2016 and May 31, 2016 , respectively, we had $467.3 million and $378.4 million outstanding under these lines of credit with additional capacity of $776.6 million as of November 30, 2016 to fund settlement. The weighted-average interest rate on these borrowings was 2.05% and 1.80% at November 30, 2016 and May 31, 2016 , respectively.

During the three months ended November 30, 2016 , the maximum and average outstanding balances under these lines of credit were $691.7 million and $402.4 million , respectively.

Compliance with Covenants

The 2016 Credit Facility Agreement contains customary affirmative and restrictive covenants, including, among others, financial covenants based on our leverage and fixed charge coverage ratios. Financial covenants require a leverage ratio no greater than (i) 4.75 to 1.00 as of the end of any fiscal quarter ending during the period from September 1, 2016 through February 28, 2017, (ii) 4.50 to 1.00 as of the end of any fiscal quarter ending during the period from March 1, 2017 through August 31, 2017, (iii) 4.25 to 1.00 as of the end of any fiscal quarter ending during the period from September 1, 2017 to February 28, 2018 and (iv) 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 2016 Credit Facility Agreement and settlement lines of credit also include various other covenants that are customary in such borrowings. The 2016 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 2016 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 six months ended November 30, 2016 .

17



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. A $500 million notional interest rate swap agreement, which became effective on October 31, 2014 , effectively converted $500 million of our variable-rate debt to a fixed rate of 1.52% plus a leverage-based margin and will mature on February 28, 2019 . A $250 million notional interest rate swap, which became effective on August 28, 2015 , effectively converted $250 million of our variable-rate debt to a fixed rate of 1.34% plus a leverage-based margin and will mature on July 31, 2020 .

Net amounts to be received or paid under the swap agreements are reflected as adjustments to interest expense. Since we have designated the interest rate swap agreements as portfolio cash flow hedges, unrealized gains or losses resulting from adjusting the swaps to fair value are recorded as components of other comprehensive income, except for any ineffective portion of the change in fair value, which would be immediately recorded in interest expense. During the three and six months ended November 30, 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 within the consolidated balance sheets:
 
 
 
November 30, 2016
 
May 31, 2016
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
Interest rate swaps ($250 million notional)
Other assets
 
$
827

 
$

Interest rate swaps ($500 million notional)
Accounts payable and accrued liabilities
 
$
4,054

 
$
10,775


The table below presents the effects of our interest rate swaps on the consolidated statements of income and other comprehensive loss for the three and six months ended November 30, 2016 and 2015 :
 
Three Months Ended
 
Six Months Ended
 
November 30, 2016
 
November 30, 2015
 
November 30, 2016
 
November 30, 2015
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Amount of gain (loss) recognized in other comprehensive loss
$
7,089

 
$
(3,968
)
 
$
3,884

 
$
(4,000
)
Amount of loss recognized in interest expense
$
1,768

 
$
2,467

 
$
3,665

 
$
4,201


At November 30, 2016 , 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 $4.4 million .

Interest Expense

Interest expense was $50.8 million and $13.4 million for the three months ended November 30, 2016 and 2015 , respectively, and $95.3 million and $26.8 million for the six months ended November 30, 2016 and 2015 , respectively.


18


NOTE 7—INCOME TAX

Our effective income tax rates were 2.9% and 24.7% for the three months ended November 30, 2016 and November 30, 2015 , respectively. Our effective income tax rates were 16.9% and 25.4% for the six months ended November 30, 2016 and November 30, 2015 , 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. We also changed our estimate of the mix of earnings by jurisdiction in determining our annual estimated effective tax rate and our estimate of certain U.S. inclusion items during the three months ended November 30, 2016.

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

From time-to-time, we make repurchases of our common stock mainly through the use of open market purchases and accelerated share repurchase programs ("ASR's"). As of November 30, 2016 , we were authorized to repurchase up to $94.5 million of our common stock.

During the six months ended November 30, 2016 , 127,435 shares were delivered to us in connection with the completion of an ASR initiated on April 25, 2016. In addition, through open market repurchase plans, we repurchased and retired 1,470,643 and 2,431,359 shares of our common stock at a cost of $104.8 million and $172.4 million , or an average cost of $71.24 and $70.91 per share, including commissions, during the three and six months ended November 30, 2016 , respectively.

During the six months ended November 30, 2015 , 324,742 shares were delivered to us in connection with the completion of an ASR initiated on April 10, 2015 . In addition, through open market repurchase plans, we repurchased and retired 625,573 and 1,320,563 shares of our common stock at a cost of $37.5 million and $75.4 million , or an average cost of $59.87 and $57.07 per share, including commissions, during the three and six months ended November 30, 2015 , respectively.

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
 
Six Months Ended
 
November 30, 2016
 
November 30, 2015
 
November 30, 2016
 
November 30, 2015
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
Share-based compensation expense
$
8,747

 
$
7,005

 
$
16,366

 
$
13,472

Income tax benefit
$
2,206

 
$
2,279

 
$
5,778

 
$
4,637

 

19


Share-Based Awards

The following table summarizes the changes in unvested share-based awards for the six months ended November 30, 2016 :
 
Shares
 
Weighted-Average
Grant-Date
Fair Value
 
(in thousands)
 
 
 
 
 
 
Unvested at May 31, 2016
1,606

 
$
37.25

Granted
436

 
74.29

Vested
(730
)
 
31.38

Forfeited
(39
)
 
44.87

Unvested at November 30, 2016
1,273

 
$
49.46


The total fair value of share-based awards vested during the six months ended November 30, 2016 and November 30, 2015 was $22.9 million and $17.6 million , respectively.

For these share-based awards, we recognized compensation expense of $8.1 million and $6.4 million during the three months ended November 30, 2016 and November 30, 2015 , respectively, and $15.0 million and $12.6 million during the six months ended November 30, 2016 and November 30, 2015 , respectively. As of November 30, 2016 , there was $ 49.1 million of unrecognized compensation expense related to unvested share-based awards that we expect to recognize over a weighted-average period of 2.08 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 fiscal 2015 vest in equal installments on each of the first four anniversaries of the grant date. Stock options granted during fiscal 2015 and thereafter vest in equal installments on each of the first three anniversaries of the grant date. During each of the six months ended November 30, 2016 and November 30, 2015 , we granted 0.1 million stock options. Our stock option plans provide for accelerated vesting under certain conditions.

The following summarizes changes in unvested stock option activity for the six months ended November 30, 2016 :  
 
Options
 
Weighted-Average Exercise Price
 
Weighted-Average Remaining Contractual Term
 
Aggregate Intrinsic Value
 
(in thousands)
 
 
 
(years)
 
(in millions)
Outstanding at May 31, 2016
811

 
$
31.81

 
5.8
 
$
36.8

Granted
73

 
74.66

 
 
 
 
Forfeited
(1
)
 
22.93

 
 
 
 
Exercised
(124
)
 
22.26

 
 
 
 
Outstanding at November 30, 2016
759

 
$
37.51

 
6.1
 
$
25.0

 
 
 
 
 
 
 
 
Options vested and exercisable at November 30, 2016
502

 
$
28.88

 
4.8
 
$
20.6


We recognized compensation expense for stock options of $0.5 million and $0.4 million during the three months ended November 30, 2016 and November 30, 2015 , respectively, and $0.9 million and $0.6 million during the six months ended November 30, 2016 and November 30, 2015 , respectively. The aggregate intrinsic value of stock options exercised during the six months ended November 30, 2016 and November 30, 2015 was $6.5 million and $4.8 million , respectively. As of November 30,

20


2016 , we had $1.8 million of unrecognized compensation expense related to unvested stock options that we expect to recognize over a weighted-average period of 1.9 years.

The weighted-average grant-date fair value of each stock option granted during the six months ended November 30, 2016 and November 30, 2015 was $21.87 and $15.60 , respectively. Fair value was estimated on the date of grant using the Black-Scholes valuation model with the following weighted-average assumptions:
 
Six Months Ended
 
November 30, 2016
 
November 30, 2015
Risk-free interest rate
1.05%
 
1.62%
Expected volatility
31.58%
 
28.65%
Dividend yield
0.06%
 
0.10%
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 is computed by dividing reported net income attributable to Global Payments by the weighted-average number of shares outstanding during the period. Earnings available to common shareholders is the same as reported net income attributable to Global Payments for all periods presented.

Diluted 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. There were less than 0.1 million stock options that would have an antidilutive effect on the computation of diluted earnings per share for the three and six months ended November 30, 2016 and for the six months ended November 30, 2015 . There were no such antidilutive stock options for the three months ended November 30, 2015 .

The following table sets forth the computation of diluted weighted-average number of shares outstanding for the three and six months ended November 30, 2016 and November 30, 2015 :
 
Three Months Ended
 
Six Months Ended
 
November 30, 2016
 
November 30, 2015
 
November 30, 2016
 
November 30, 2015
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
Basic weighted-average number of shares outstanding
153,173

 
129,505

 
153,539

 
129,919

Plus: Dilutive effect of stock options and other share-based awards
818

 
848

 
896

 
833

Diluted weighted-average number of shares outstanding
153,991

 
130,353

 
154,435

 
130,752



21


NOTE 11—ACCUMULATED OTHER COMPREHENSIVE LOSS

The changes in the accumulated balances for each component of other comprehensive loss were as follows for the three and six months ended November 30, 2016 and November 30, 2015 :
 
Foreign Currency Translation
 
Unrealized Gains (Losses) on Hedging Activities
 
Other
 
Accumulated Other Comprehensive Loss
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
Balance at August 31, 2015
$
(206,124
)
 
$
(2,794
)
 
$
(3,809
)
 
$
(212,727
)
Other comprehensive loss
(31,568
)
 
(939
)
 

 
(32,507
)
Balance at November 30, 2015
$
(237,692
)
 
$
(3,733
)
 
$
(3,809
)
 
$
(245,234
)
 
 
 
 
 
 
 
 
Balance at August 31, 2016
$
(253,417
)
 
$
(7,545
)
 
$
(4,549
)
 
$
(265,511
)
Other comprehensive income (loss)
(49,488
)
 
5,529

 
(247
)
 
(44,206
)
Balance at November 30, 2016
$
(302,905
)
 
$
(2,016
)
 
$
(4,796
)
 
$
(309,717
)

Other comprehensive loss attributable to noncontrolling interest, which relates only to foreign currency translation, was approximately $8.5 million and $ 6.3 million for the three months ended November 30, 2016 and November 30, 2015 , respectively.
 
Foreign Currency Translation
 
Unrealized Gains (Losses) on Hedging Activities
 
Other
 
Accumulated Other Comprehensive Loss
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
Balance at May 31, 2015
$
(178,309
)
 
$
(3,874
)
 
$
(3,809
)
 
$
(185,992
)
Other comprehensive income (loss)
(59,383
)
 
141

 

 
(59,242
)
Balance at November 30, 2015
$
(237,692
)
 
$
(3,733
)
 
$
(3,809
)
 
$
(245,234
)
 
 
 
 
 
 
 
 
Balance at May 31, 2016
$
(234,638
)
 
$
(6,755
)
 
$
(4,657
)
 
$
(246,050
)
Other comprehensive income (loss)
(68,267
)
 
4,739

 
(139
)
 
(63,667
)
Balance at November 30, 2016
$
(302,905
)
 
$
(2,016
)
 
$
(4,796
)
 
$
(309,717
)

Other comprehensive loss attributable to noncontrolling interest, which relates only to foreign currency translation, was approximately $8.5 million and $4.4 million for the six months ended November 30, 2016 and November 30, 2015 , 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 operating 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 May 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 six months ended November 30, 2016 and November 30, 2015 :
 
Three Months Ended
 
Six Months Ended
 
November 30, 2016
 
November 30, 2015
 
November 30, 2016
 
November 30, 2015
 
 
 
 
 
 
 
 
 
(in thousands)
Revenues (1) :
 
 
 
 
 
 
 
North America
$
701,300

 
$
511,335

 
$
1,413,064

 
$
1,042,192

Europe
174,904

 
158,016

 
344,469

 
326,373

Asia-Pacific
65,617

 
52,999

 
123,780

 
102,581

 Consolidated revenues
$
941,821

 
$
722,350

 
$
1,881,313

 
$
1,471,146

 
 
 
 
 
 
 
 
Operating income (loss) (1) :
 
 
 
 
 
 
 
North America
$
105,746

 
$
79,121

 
$
211,446

 
$
162,635

Europe
60,875

 
62,012

 
126,414

 
134,745

Asia-Pacific
16,658

 
11,857

 
30,680

 
24,089

Corporate (2)
(78,012
)
 
(29,825
)
 
(142,167
)
 
(60,532
)
 Consolidated operating income
$
105,267

 
$
123,165

 
$
226,373

 
$
260,937

 
 
 
 
 
 
 
 
Depreciation and amortization (1) :
 
 
 
 
 
 
 
North America
$
90,964

 
$
24,222

 
$
177,880

 
$
47,965

Europe
12,188

 
9,921

 
22,601

 
20,265

Asia-Pacific
4,476

 
3,358

 
8,902

 
6,415

Corporate
1,054

 
1,248

 
2,486

 
2,861

 Consolidated depreciation and amortization
$
108,682

 
$
38,749

 
$
211,869

 
$
77,506


(1) Revenues, operating income and depreciation and amortization reflect the effect of acquired businesses from the respective dates of acquisition. Notably, on April 22, 2016, we merged with Heartland as further discussed in "Note 2 - Acquisitions."

(2) During the three and six months ended November 30, 2016 , operating loss for Corporate included expenses of $36.6 million and $67.2 million incurred in connection with the integration of Heartland. These expenses are included in selling, general and administrative expenses in the consolidated statements of income.

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 May 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, partnerships and employee expertise enable us to provide a broad range of services that allow our customers to

23

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accept various payment types. We distribute our services across a variety of channels to merchants and partners 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.

On December 15, 2015, we entered into a merger agreement with Heartland, pursuant to which we merged with Heartland in a cash-and-stock transaction that we completed 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.

Highlights related to our financial condition and results of operations for the three and six months ended November 30, 2016 are provided below:

Consolidated revenues increased by 30.4% and 27.9% to $941.8 million and $1.9 billion , respectively, in the three and six months ended November 30, 2016 compared to $722.4 million and $1.5 billion for the prior-year periods primarily due to the inclusion of Heartland, partially offset by the unfavorable effect of currency fluctuations in foreign markets of $16.0 million and $30.4 million , respectively.

Consolidated operating income was $105.3 million and $226.4 million , respectively, for the three and six months ended November 30, 2016 compared to $123.2 million and $260.9 million , respectively, for the prior-year periods. Our operating margin for the three and six months ended November 30, 2016 was 11.2% and 12.0% , respectively, compared to 17.1% and 17.7% , respectively, for the prior-year periods. The contribution of the revenue growth in local currency was more than offset by an increase in depreciation and amortization expense of $69.9 million and $134.4 million , respectively, and Heartland integration expenses of $36.6 million and $67.2 million , respectively, for the three and six months ended November 30, 2016 .

On October 31, 2016, we amended our 2016 Credit Facility Agreement, which among other things reduced the interest rate spread on our term loans and revolving credit facility. We expect this refinancing to yield $10 million to $12 million of annual interest expense savings, net of additional anticipated expense associated with future interest rate hedging activities.

On June 21, 2016 , Visa Inc. ("Visa") acquired all of the membership interests in Visa Europe Limited ("Visa Europe"), including ours, and we recorded a gain on the sale of those investments of $41.2 million .

Net income attributable to Global Payments was $49.5 million and $134.5 million , respectively, for the three and six months ended November 30, 2016 compared to $78.8 million and $165.4 million , respectively, in the prior-year periods. Diluted earnings per share was $0.32 and $0.87 , respectively, for the three and six months ended November 30, 2016 compared to $0.60 and $1.27 , respectively, in 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 to new markets internationally or increase our scale and improve our competitiveness in existing markets by pursuing further acquisitions and joint ventures in the future.

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 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.

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Results of Operations

The following table sets forth key selected financial data for the three months ended November 30, 2016 and November 30, 2015 , 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 November 30, 2016
 
% of Revenue (1)
 
Three Months Ended November 30, 2015
 
% of Revenue (1)
 
Change
 
% Change
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollar amounts in thousands)
Revenues (2) :
 
 
 
 
 
 
 
 
 
 
 
North America
$
701,300

 
74.5
%
 
$
511,335

 
70.8
%
 
$
189,965

 
37.2
 %
Europe
174,904

 
18.6
%
 
158,016

 
21.9
%
 
16,888

 
10.7
 %
Asia-Pacific
65,617

 
7.0
%
 
52,999

 
7.3
%
 
12,618

 
23.8
 %
Total revenues
$
941,821

 
100.0
%
 
$
722,350

 
100.0
%
 
$
219,471

 
30.4
 %
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated operating expenses (2) :
 
 
 
 
 
 
 
 
 
 
 
Cost of service
$
468,383

 
49.7
%
 
$
270,565

 
37.5
%
 
$
197,818

 
73.1
 %
Selling, general and administrative
368,171

 
39.1
%
 
328,620

 
45.5
%
 
39,551

 
12.0
 %
Operating expenses
$
836,554

 
88.8
%
 
$
599,185

 
82.9
%
 
$
237,369

 
39.6
 %
 
 
 
 
 
 
 
 
 
 
 
 
Operating income (loss) (2) :
 
 
 
 
 
 
 
 
 
 
 
North America
$
105,746

 


 
$
79,121

 
 
 
$
26,625

 
33.7
 %
Europe
60,875

 
 
 
62,012

 
 
 
(1,137
)
 
(1.8
)%
Asia-Pacific
16,658

 
 
 
11,857

 
 
 
4,801

 
40.5
 %
Corporate
(78,012
)
 
 
 
(29,825
)
 
 
 
(48,187
)
 
161.6
 %
Operating income
$
105,267

 
11.2
%
 
$
123,165

 
17.1
%
 
$
(17,898
)
 
(14.5
)%
 
 
 
 
 
 
 
 
 
 
 
 
Operating margin (2) :
 
 
 
 
 
 
 
 
 
 
 
North America
15.1
%
 
 
 
15.5
%

 
 
(0.4
)%
 
 
Europe
34.8
%
 
 
 
39.2
%
 
 
 
(4.4
)%
 
 
Asia-Pacific
25.4
%
 
 
 
22.4
%

 
 
3.0
 %
 
 
(1) Percentage amounts may not sum to the total due to rounding.

(2) Revenues, operating expenses, operating income and operating margin reflect the effect of acquired businesses from the respective dates of acquisition. Notably, on April 22, 2016, we merged with Heartland as further discussed in "Note 2 - Acquisitions" in the notes to the accompanying unaudited consolidated financial statements.

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Table of Contents


The following table sets forth key selected financial data for the six months ended November 30, 2016 and November 30, 2015 , 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.
 
Six Months Ended November 30, 2016
 
% of Revenue (1)
 
Six Months Ended November 30, 2015
 
% of Revenue (1)
 
Change
 
% Change
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollar amounts in thousands)
Revenues (2) :
 
 
 
 
 
 
 
 
 
 
 
North America
$
1,413,064

 
75.1
%
 
$
1,042,192

 
70.8
%
 
$
370,872

 
35.6
 %
Europe
344,469

 
18.3
%
 
326,373

 
22.2
%
 
18,096

 
5.5
 %
Asia-Pacific
123,780

 
6.6
%
 
102,581

 
7.0
%
 
21,199

 
20.7
 %
Total revenues
$
1,881,313

 
100.0
%
 
$
1,471,146

 
100.0
%
 
$
410,167

 
27.9
 %
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated operating expenses (2) :
 
 
 
 
 
 
 
 
 
 
 
Cost of service
$