filings.toolsItem 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Rate Risk
Certain of our operations are conducted in foreign currencies. Consequently, a portion of our revenues and expenses may be affected by fluctuations in foreign currency exchange rates. We have not historically hedged our translation risk on foreign currency exposure, but we may do so in the future. For the year ended December 31, 2019, currency exchange rate fluctuations reduced our consolidated revenues by approximately $44 million and reduced our operating income by approximately $21 million compared to the prior-year period, calculated by converting revenues and operating income, respectively, for the current year, excluding revenues and operating income from current year acquisitions, in local currencies using exchange rates for the prior-year period.
Generally, the functional currency of our various subsidiaries is their local currency. We are exposed to currency fluctuations on transactions that are not denominated in the functional currency. Gains and losses on such transactions are included in determining
net income for the period. We seek to mitigate our foreign currency risk through timely settlement of transactions and cash flow matching, when possible. For the year ended December 31, 2019, our transaction gains and losses were insignificant.
Additionally, we are affected by currency fluctuations in our funds settlement process on merchant payment, chargeback and card network settlement transactions that are not denominated in the currency of the underlying credit or debit card transaction. Gains and losses on these transactions are included in revenues for the period.
We are also affected by fluctuations in exchange rates on our investments in foreign operations. Relative to our net investment in foreign operations, the assets and liabilities of subsidiaries whose functional currency is a foreign currency are translated at the period-end rate of exchange. The resulting translation adjustment is recorded as a component of other comprehensive income and is included in shareholders' equity. Transaction gains and losses on intercompany balances of a long-term investment nature are also recorded as a component of other comprehensive income.
Interest Rate Risk
We are exposed to market risk related to changes in interest rates on certain of our long-term borrowings and cash investments. We invest our excess cash in securities that we believe are highly liquid and marketable in the short term. These investments earn a floating rate of interest and are not held for trading or other speculative purposes.
We have a senior unsecured $2.0 billion term loan facility and a senior unsecured $3.0 billion revolving credit facility, as well as various lines of credit that we use to fund settlement in certain of our markets, each of which bears interest at rates that are based on market rates and fluctuate accordingly. As of December 31, 2019, the amount outstanding under these variable-rate debt arrangements and settlement lines of credit was $3.4 billion.
The interest earned on our invested cash and the interest paid on our debt are based on variable interest rates; therefore, the exposure of our net income to a change in interest rates is partially mitigated as an increase in rates would increase both interest income and interest expense, and a reduction in rates would decrease both interest income and interest expense. Under our current policies, we may selectively use derivative instruments, such as interest rate swaps or forward rate agreements, to manage all or a portion of our exposure to interest rate changes. We have entered into interest rate swaps that reduce a portion of our exposure to market interest rate risk on certain of our variable-rate debt as discussed in "Note 7—Long-Term Debt and Lines of Credit" in the notes to our accompanying consolidated financial statements.
Based on balances outstanding under variable-rate debt agreements and invested cash balances at December 31, 2019, a hypothetical increase of 50 basis points in applicable interest rates as of December 31, 2019 would increase our annual interest expense by approximately $7.4 million and increase our annual interest income by approximately $2.8 million.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Global Payments Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Global Payments Inc. and subsidiaries (the "Company") as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2019, of the Company and our report dated February 21, 2020, expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company's change in its method of accounting for revenue from contracts with customers in fiscal year 2018, due to the adoption of Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers and an explanatory paragraph regarding the Company’s change in its method of accounting for leases in fiscal year 2019 due to the adoption of ASC Topic 842, Leases. As described in Management's Report on Internal Control over Financial Reporting, the Company consummated its merger with Total System Services, Inc. ("TSYS") on September 18, 2019, and management excluded from its assessment of internal control over financial reporting the acquired operations of TSYS, which constituted approximately 32% of consolidated assets, excluding goodwill, approximately 25% of consolidated revenues, and approximately 10% of consolidated operating income, as of and for the year ended December 31, 2019. Accordingly, our audit did not include the internal control over financial reporting of the acquired operations of TSYS that is excluded from management’s assessment.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Atlanta, Georgia
February 21, 2020
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Global Payments Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Global Payments Inc. and subsidiaries (the "Company") as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes in equity, and cash flows, for each of the three years in the period ended December 31, 2019, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with the applicable accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 21, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for revenue from contracts with customers in fiscal year 2018 due to the adoption of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers.
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases in fiscal year 2019 due to the adoption of Accounting Standards Codification Topic 842, Leases.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Merger with Total System Services, Inc. Merger - Refer to Note 2 to financial statements
Critical Audit Matter Description
The Company completed the merger with Total System Services, Inc. for consideration of $24.5 billion on September 18, 2019. The Company accounted for the transaction as a business combination by applying the acquisition method of accounting. Accordingly, the assets acquired and liabilities assumed were recognized at their respective fair values. Management estimated the fair value of the customer relationship intangible assets for the Issuer Solutions segment, the most significant intangible asset acquired, using the income approach, which is based on projected cash flows discounted to their present value using discount rates that consider the timing and risk of the future cash flows. The fair value determination of the customer relationship intangible asset required management to make significant estimates and assumptions related to future cash flows, including the forecasted rate of revenue growth, rate of customer attrition and the selection of the discount rate.
Designing and performing audit procedures to evaluate the reasonableness of these estimates and assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to revenue growth, future customer attrition and discount rates (key assumptions) for the Issuer Solutions customer relationship intangible asset included the following, among others:
| • | We tested the effectiveness of controls over the valuation of the customer relationship intangible asset, including management's controls over forecasts of future cash flows and the selection of the revenue growth rate, customer attrition rate and discount rate. |
| • | We assessed the reasonableness of management’s forecasts and assumptions related to the revenue growth rate by comparing projections to historical results and certain peer company data. |
| • | We tested the source information underlying the determination of the customer attrition rate and testing the mathematical accuracy of the calculation. |
| • | Our fair value specialists assisted us in considering the reasonableness of the (1) valuation methodology and (2) the discount rate by: |
| • | Testing the source information underlying the determination of the discount rate and testing the mathematical accuracy of the calculation. |
| • | Developing a range of independent estimates and comparing those to the discount rate selected by management. |
| • | We evaluated whether the projected revenue growth rates were consistent with evidence obtained in other areas of the audit. |
Revenue Recognition - Issuer Solutions - Refer to Notes 1 and 3 to the financial statements
Critical Audit Matter Description
The Company enters into long-term revenue contracts with its Issuer Solutions customers. Issuer Solutions customer contracts may include multiple promises including processing services, loyalty redemption services and professional services to financial institutions and other financial services providers. The Company has determined that the processing services and loyalty redemption services represent stand-ready performance obligations comprising a series of distinct days of services that are substantially the same and have the same pattern of transfer to the customer. These performance obligations include variable consideration. The Company determined that (a) the variable consideration relates specifically to its efforts to satisfy the performance obligation and (b) allocating the variable amount of consideration entirely to the performance obligation is consistent with the allocation objective when considering all of the performance obligations and payment terms in the contract. As a result, the Company recognizes variable consideration in the period in which it has the contractual right to invoice the customer. Professional services representing performance obligations are satisfied over time.
We identified the determination of performance obligations for Issuer Solutions revenue contracts as a critical audit matter, given the judgment required to determine whether promised services are capable of being distinct and are distinct within the context of the contract. A high degree of auditor judgment was required to evaluate the Company's identification of the performance obligations in the contract.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Company's Issuer Solutions revenue transactions, specifically its identification of the performance obligations in contracts with its customers:
| • | We evaluated the effectiveness of controls over Issuer Solutions contract revenue, including controls over the identification of performance obligations. |
| • | We selected a sample of Issuer Solutions contracts and performed the following: |
| • | Evaluated whether the performance obligations were appropriately identified in each of the selected contracts. |
| • | Evaluated whether the pattern of revenue recognition was correctly determined for each of the identified performance obligations. |
Revenues -Merchant Solutions - Refer to Note 1 to the financial statements
Critical Audit Matter Description
The Company's Merchant Solutions revenue from payment services consists of transaction-based fees made up of a significant volume of low-dollar transactions, sourced from multiple systems and applications. The processing of transactions and recording of revenue is highly automated and is based on contractual terms with merchants, financial institutions, payment networks, and other parties.
Accordingly, we identified Merchant Solutions revenue as a critical audit matter. This required an increased extent of effort, including the need for us to involve professionals with expertise in information technology (IT), to identify, test, and evaluate the Company's systems, software applications, and automated controls.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Company's systems to process Merchant Solutions payment services revenues included the following, among others:
| • | With the assistance of our IT specialists, we: |
| • | Identified the significant systems used to process revenue transactions and tested the general IT controls over each of these systems, including testing of user access controls, change management controls, and IT operations controls. |
| • | Tested system interface controls and automated controls within the relevant revenue streams, as well as the controls designed to ensure the accuracy and completeness of revenue. |
| • | We tested internal controls within the relevant revenue business processes, including those in place to reconcile the various reports extracted from the IT systems to the Company’s general ledger. |
| • | We evaluated trends in recorded revenue, including interchange fees and payment network fees. |
| • | For a sample of revenue transactions, we tested selected transactions by agreeing the amounts of revenue recognized to source documents and testing the mathematical accuracy of the recorded revenue. |
/s/ DELOITTE & TOUCHE LLP
Atlanta, Georgia
February 21, 2020
We have served as the Company's auditors since 2002.
GLOBAL PAYMENTS INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
| Years Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Revenues | $ | 4,911,892 | $ | 3,366,366 | $ | 3,975,163 | |||||
| Operating expenses: | |||||||||||
| Cost of service | 2,073,803 | 1,095,014 | 1,928,037 | ||||||||
| Selling, general and administrative | 2,046,672 | 1,534,297 | 1,488,258 | ||||||||
| 4,120,475 | 2,629,311 | 3,416,295 | |||||||||
| Operating income | 791,417 | 737,055 | 558,868 | ||||||||
| Interest and other income | 31,413 | 20,719 | 8,662 | ||||||||
| Interest and other expense | (304,905 | ) | (195,619 | ) | (174,847 | ) | |||||
| (273,492 | ) | (174,900 | ) | (166,185 | ) | ||||||
| Income before income taxes and equity in income of equity method investments | 517,925 | 562,155 | 392,683 | ||||||||
| Income tax (expense) benefit | (62,190 | ) | (77,488 | ) | 101,387 | ||||||
| Income before equity in income of equity method investments | 455,735 | 484,667 | 494,070 | ||||||||
| Equity in income of equity method investments, net of tax | 13,541 | — | — | ||||||||
| Net income | 469,276 | 484,667 | 494,070 | ||||||||
| Less: Net income attributable to noncontrolling interests | (38,663 | ) | (32,614 | ) | (25,645 | ) | |||||
| Net income attributable to Global Payments | $ | 430,613 | $ | 452,053 | $ | 468,425 | |||||
| Earnings per share attributable to Global Payments: | |||||||||||
| Basic earnings per share | $ | 2.17 | $ | 2.85 | $ | 3.03 | |||||
| Diluted earnings per share | $ | 2.16 | $ | 2.84 | $ | 3.01 |
See Notes to Consolidated Financial Statements.
GLOBAL PAYMENTS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
| Years Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Net income | $ | 469,276 | $ | 484,667 | $ | 494,070 | |||||
| Other comprehensive income (loss): | |||||||||||
| Foreign currency translation adjustments | 58,369 | (118,439 | ) | 146,401 | |||||||
| Income tax benefit (expense) related to foreign currency translation adjustments | 1,281 | (832 | ) | — | |||||||
| Net unrealized (losses) gains on hedging activities | (90,238 | ) | (7,553 | ) | 4,549 | ||||||
| Reclassification of net unrealized losses (gains) on hedging activities to interest expense | 2,257 | (4,792 | ) | 5,673 | |||||||
| Income tax benefit (expense) related to hedging activities | 21,036 | 2,972 | (2,583 | ) | |||||||
| Other, net of tax | 4,174 | 760 | (660 | ) | |||||||
| Other comprehensive income (loss) | (3,121 | ) | (127,884 | ) | 153,380 | ||||||
| Comprehensive income | 466,155 | 356,783 | 647,450 | ||||||||
| Less: comprehensive income attributable to noncontrolling interests | (35,938 | ) | (29,918 | ) | (39,452 | ) | |||||
| Comprehensive income attributable to Global Payments | $ | 430,217 | $ | 326,865 | $ | 607,998 |
See Notes to Consolidated Financial Statements.
GLOBAL PAYMENTS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| December 31, 2019 | December 31, 2018 | ||||||
| ASSETS | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 1,678,273 | $ | 1,210,878 | |||
| Accounts receivable, net | 895,232 | 348,400 | |||||
| Settlement processing assets | 1,353,778 | 1,600,222 | |||||
| Prepaid expenses and other current assets | 439,165 | 216,708 | |||||
| Total current assets | 4,366,448 | 3,376,208 | |||||
| Goodwill | 23,759,740 | 6,341,355 | |||||
| Other intangible assets, net | 13,154,655 | 2,488,618 | |||||
| Property and equipment, net | 1,382,802 | 653,542 | |||||
| Deferred income taxes | 6,292 | 8,128 | |||||
| Other noncurrent assets | 1,810,225 | 362,923 | |||||
| Total assets | $ | 44,480,162 | $ | 13,230,774 | |||
| LIABILITIES AND EQUITY | |||||||
| Current liabilities: | |||||||
| Settlement lines of credit | $ | 463,237 | $ | 700,486 | |||
| Current portion of long-term debt | 35,137 | 115,075 | |||||
| Accounts payable and accrued liabilities | 1,822,166 | 1,176,703 | |||||
| Settlement processing obligations | 1,258,806 | 1,276,356 | |||||
| Total current liabilities | 3,579,346 | 3,268,620 | |||||
| Long-term debt | 9,090,364 | 5,015,168 | |||||
| Deferred income taxes | 3,145,641 | 585,025 | |||||
| Other noncurrent liabilities | 609,822 | 175,618 | |||||
| Total liabilities | 16,425,173 | 9,044,431 | |||||
| Commitments and contingencies | |||||||
| Equity: | |||||||
| Preferred stock, no par value; 5,000,000 shares authorized and none issued | — | — | |||||
| Common stock, no par value; 400,000,000 shares authorized at December 31, 2019 and 200,000,000 shares authorized at December 31, 2018; 300,225,590 shares issued and outstanding at December 31, 2019 and 157,961,982 shares issued and outstanding at December 31, 2018 | — | — | |||||
| Paid-in capital | 25,833,307 | 2,235,167 | |||||
| Retained earnings | 2,333,011 | 2,066,415 | |||||
| Accumulated other comprehensive loss | (310,571 | ) | (310,175 | ) | |||
| Total Global Payments shareholders’ equity | 27,855,747 | 3,991,407 | |||||
| Noncontrolling interests | 199,242 | 194,936 | |||||
| Total equity | 28,054,989 | 4,186,343 | |||||
| Total liabilities and equity | $ | 44,480,162 | $ | 13,230,774 |
See Notes to Consolidated Financial Statements.
GLOBAL PAYMENTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Years Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 469,276 | $ | 484,667 | $ | 494,070 | |||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization of property and equipment | 211,200 | 145,128 | 113,273 | ||||||||
| Amortization of acquired intangibles | 667,135 | 377,685 | 337,878 | ||||||||
| Amortization of capitalized contract costs | 66,086 | 51,541 | 45,098 | ||||||||
| Share-based compensation expense | 89,634 | 57,826 | 39,095 | ||||||||
| Provision for operating losses and bad debts | 100,188 | 43,237 | 48,443 | ||||||||
| Noncash lease expense | 52,612 | — | — | ||||||||
| Deferred income taxes | (108,309 | ) | (1,451 | ) | (250,670 | ) | |||||
| Other, net | (570 | ) | (8,025 | ) | 44,070 | ||||||
| Changes in operating assets and liabilities, net of the effects of business combinations: | |||||||||||
| Accounts receivable | (115,528 | ) | (33,386 | ) | (14,096 | ) | |||||
| Settlement processing assets and obligations, net | 213,701 | 83,478 | (361,673 | ) | |||||||
| Prepaid expenses and other assets | (159,056 | ) | (160,800 | ) | (129,427 | ) | |||||
| Accounts payable and other liabilities | (95,091 | ) | 66,182 | 146,327 | |||||||
| Net cash provided by operating activities | 1,391,278 | 1,106,082 | 512,388 | ||||||||
| Cash flows from investing activities: | |||||||||||
| Acquisitions, net of cash acquired | (644,622 | ) | (1,259,692 | ) | (562,688 | ) | |||||
| Capital expenditures | (307,868 | ) | (213,290 | ) | (181,905 | ) | |||||
| Proceeds from sale-and-leaseback transaction | — | — | 37,565 | ||||||||
| Other, net | 35,404 | (3,305 | ) | (28,997 | ) | ||||||
| Net cash used in investing activities | (917,086 | ) | (1,476,287 | ) | (736,025 | ) | |||||
| Cash flows from financing activities: | |||||||||||
| Net (repayments of) borrowings from settlement lines of credit | (236,473 | ) | 70,783 | 221,532 | |||||||
| Proceeds from long-term debt | 7,203,903 | 2,774,214 | 1,994,324 | ||||||||
| Repayments of long-term debt | (6,484,689 | ) | (2,304,314 | ) | (1,781,541 | ) | |||||
| Payments of debt issuance costs | (43,599 | ) | (16,345 | ) | (9,520 | ) | |||||
| Repurchases of common stock | (311,383 | ) | (208,198 | ) | (34,811 | ) | |||||
| Proceeds from stock issued under share-based compensation plans | 24,514 | 14,318 | 10,115 | ||||||||
| Common stock repurchased - share-based compensation plans | (62,577 | ) | (31,510 | ) | (31,761 | ) | |||||
| Distributions to noncontrolling interests | (31,632 | ) | (5,686 | ) | (9,301 | ) | |||||
| Preacquisition dividends paid to former TSYS shareholders | (23,240 | ) | — | — | |||||||
| Dividends paid | (63,498 | ) | (6,332 | ) | (6,732 | ) | |||||
| Net cash (used in) provided by financing activities | (28,674 | ) | 286,930 | 352,305 | |||||||
| Effect of exchange rate changes on cash | 21,877 | (41,702 | ) | 44,408 | |||||||
| Increase (decrease) in cash and cash equivalents | 467,395 | (124,977 | ) | 173,076 | |||||||
| Cash and cash equivalents, beginning of the period | 1,210,878 | 1,335,855 | 1,162,779 | ||||||||
| Cash and cash equivalents, end of the period | $ | 1,678,273 | $ | 1,210,878 | $ | 1,335,855 |
See Notes to Consolidated Financial Statements.
GLOBAL PAYMENTS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands, except per share data)
| 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, 2018 | 157,962 | $ | 2,235,167 | $ | 2,066,415 | $ | (310,175 | ) | $ | 3,991,407 | $ | 194,936 | $ | 4,186,343 | ||||||||||||
| Net income | 430,613 | 430,613 | 38,663 | 469,276 | ||||||||||||||||||||||
| Other comprehensive loss | (396 | ) | (396 | ) | (2,725 | ) | (3,121 | ) | ||||||||||||||||||
| Stock issued under share-based compensation plans | 991 | 24,514 | 24,514 | 24,514 | ||||||||||||||||||||||
| Common stock repurchased - share-based compensation plans | (308 | ) | (63,333 | ) | (63,333 | ) | (63,333 | ) | ||||||||||||||||||
| Share-based compensation expense | 89,634 | 89,634 | 89,634 | |||||||||||||||||||||||
| Issuance of common stock in connection with a business combination | 143,909 | 23,771,389 | 23,771,389 | 23,771,389 | ||||||||||||||||||||||
| Distributions to noncontrolling interests | (31,632 | ) | (31,632 | ) | ||||||||||||||||||||||
| Repurchases of common stock | (2,328 | ) | (224,064 | ) | (100,519 | ) | (324,583 | ) | (324,583 | ) | ||||||||||||||||
| Cash dividends declared ($0.225 per common share) | (63,498 | ) | (63,498 | ) | (63,498 | ) | ||||||||||||||||||||
| Balance at December 31, 2019 | 300,226 | $ | 25,833,307 | $ | 2,333,011 | $ | (310,571 | ) | $ | 27,855,747 | $ | 199,242 | $ | 28,054,989 |
| Number of Shares | Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Global Payments Shareholders’ Equity | Noncontrolling Interests | Total Equity | ||||||||||||||||||||
| Balance at December 31, 2017 | 159,180 | $ | 2,379,774 | $ | 1,597,897 | $ | (183,144 | ) | $ | 3,794,527 | $ | 170,704 | $ | 3,965,231 | ||||||||||||
| Cumulative effect of adoption of new accounting standards | 50,969 | (1,843 | ) | 49,126 | 49,126 | |||||||||||||||||||||
| Net income | 452,053 | 452,053 | 32,614 | 484,667 | ||||||||||||||||||||||
| Other comprehensive loss | (125,188 | ) | (125,188 | ) | (2,696 | ) | (127,884 | ) | ||||||||||||||||||
| Stock issued under share-based compensation plans | 988 | 14,318 | 14,318 | 14,318 | ||||||||||||||||||||||
| Common stock repurchased - share-based compensation plans | (279 | ) | (32,727 | ) | (32,727 | ) | (32,727 | ) | ||||||||||||||||||
| Share-based compensation expense | 57,826 | 57,826 | 57,826 | |||||||||||||||||||||||
| Distributions to noncontrolling interests | (5,686 | ) | (5,686 | ) | ||||||||||||||||||||||
| Repurchases of common stock | (1,927 | ) | (184,024 | ) | (28,172 | ) | (212,196 | ) | (212,196 | ) | ||||||||||||||||
| Cash dividends declared ($0.04 per common share) | (6,332 | ) | (6,332 | ) | (6,332 | ) | ||||||||||||||||||||
| Balance at December 31, 2018 | 157,962 | $ | 2,235,167 | $ | 2,066,415 | $ | (310,175 | ) | $ | 3,991,407 | $ | 194,936 | $ | 4,186,343 |
See Notes to Consolidated Financial Statements.
GLOBAL PAYMENTS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands, except per share data)
| 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 | 468,425 | 468,425 | 25,645 | 494,070 | ||||||||||||||||||||||
| Other comprehensive income | 139,573 | 139,573 | 13,807 | 153,380 | ||||||||||||||||||||||
| Stock issued under share-based compensation plans | 1,350 | 10,115 | 10,115 | 10,115 | ||||||||||||||||||||||
| Common stock repurchased - share-based compensation plans | (338 | ) | (32,006 | ) | (32,006 | ) | (32,006 | ) | ||||||||||||||||||
| Share-based compensation expense | 39,095 | 39,095 | 39,095 | |||||||||||||||||||||||
| 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 interests | (9,301 | ) | (9,301 | ) | ||||||||||||||||||||||
| Repurchases of common stock | (376 | ) | (25,787 | ) | (9,024 | ) | (34,811 | ) | (34,811 | ) | ||||||||||||||||
| Cash dividends declared ($0.04 per common share) | (6,732 | ) | (6,732 | ) | (6,732 | ) | ||||||||||||||||||||
| Balance at December 31, 2017 | 159,180 | $ | 2,379,774 | $ | 1,597,897 | $ | (183,144 | ) | $ | 3,794,527 | $ | 170,704 | $ | 3,965,231 |
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1**—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
Business, consolidation and presentation— We are a leading pure play payments technology company delivering innovative software and services to our customers globally. Our technologies, services and employee expertise enable us to provide a broad range of solutions that allow our customers to operate their businesses more efficiently across a variety of channels around the world. We operate in three reportable segments: Merchant Solutions, Issuer Solutions and Business and Consumer Solutions, which are described in "Note 15—Segment Information." 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.
On September 18, 2019, we consummated our merger with Total System Services, Inc. ("TSYS") (the "Merger") for total purchase consideration of $24.5 billion, primarily funded with shares of our common stock. Prior to the Merger, TSYS was a leading global payments provider, offering seamless, secure and innovative solutions to issuers, merchants and consumers. See "Note 2—Acquisitions" for further discussion of the Merger and other acquisitions.
These consolidated financial statements include our accounts and those of our majority-owned subsidiaries and all intercompany balances and transactions have been eliminated in consolidation. Investments in entities that we do not control are accounted for using the equity or cost method, depending upon our ability to exercise significant influence over operating and financial policies. These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP").
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*—* The Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, "Leases", which requires recognition of assets and liabilities for the rights and obligations created by leases and new disclosures about leases. We adopted ASU 2016-02, as well as other related clarifications and interpretive guidance issued by the FASB, on January 1, 2019 using the modified retrospective transition method. Under this transition method, we did not recast the prior period financial statements presented. We elected the transition package of three practical expedients, which among other things, allowed for the carryforward of historical lease classifications. We made an accounting policy election to not recognize assets or liabilities for leases with a term of less than 12 months and to account for all components in a lease arrangement as a single combined lease component for all of our then existing asset classes. In connection with the Merger, we acquired right-of-use assets that represent an additional asset class for computer equipment, for which we account for lease and nonlease components separately.
The adoption of ASU 2016-02 resulted in the measurement and recognition of lease liabilities in the amount of $274.0 million and right-of-use assets in the amount of $236.0 million as of January 1, 2019. Lease liabilities were measured as the present value of remaining lease payments, and the corresponding right-of-use assets were measured at an amount equal to the lease liabilities adjusted by the amounts of certain assets and liabilities, such as prepaid rent and deferred lease obligations, that we previously recognized on the balance sheet prior to the initial application of ASU 2016-02. To calculate the present value of remaining lease payments, we elected to use an incremental borrowing rate based on the remaining lease term at transition.
We adopted ASU 2014-09, "Revenues from Contracts with Customers (Topic 606)" as well as other clarifications and technical guidance issued by the FASB related to this new revenue standard ("ASC 606") and ASC Subtopic 340-40: "Other Assets and Deferred Costs - Contracts with Customers" ("ASC 340-40") on January 1, 2018. We elected the modified retrospective transition method, which resulted in a net increase to retained earnings of $51.0 million for the cumulative effect of applying the standard. The primary components of the cumulative-effect adjustment were changes in the accounting for certain costs to obtain customer contracts and the related income tax effects, which resulted in increases to other noncurrent assets and deferred income tax liabilities of $64.6 million and $15.6 million, respectively. Previously, we amortized these assets to expense over the related contract term. Under ASC 340-40, we now amortize these assets over the expected period of benefit, which is generally longer than the initial contract term. Under the new standard, we also capitalized certain costs that were not previously capitalized,
including certain commissions and the related payroll taxes and certain costs incurred to fulfill a contract before the performance obligation has been satisfied, primarily compensation and related payroll taxes for employees engaged in customer implementation activities in our technology-enabled businesses.
Prior to the adoption of ASC 606, we presented payments made to certain third parties, including payment networks, as a component of operating expenses. For periods beginning on and after January 1, 2018, we present revenue net of these third-party payments. This change in presentation had the effect of reducing our revenues and operating expenses by the same amounts. As a result, revenues, cost of service and selling, general and administrative expenses were lower than the amounts that would have been presented if not for the effect of the new revenue accounting standard by $1,110.8 million, $1,042.9 million and $67.9 million, respectively, for the year ended December 31, 2018. The adoption of ASC 606 did not have a material effect on any other line items in our consolidated statement of income for year ended December 31, 2018 or on any other line items in our consolidated balance sheet as of December 31, 2018 and had no effect on our cash flows from operating activities, investing activities or financing activities included in our consolidated statement of cash flows for the year ended December 31, 2018.
Revenue recognition*—* Pursuant to ASC 606, at contract inception, we assess the goods and services promised in our contracts with customers and identify a performance obligation for each promise to transfer to the customer a good or service that is distinct. In accordance with ASC 606, we recognize revenue when a customer obtains control of promised services. The amount of revenue recognized reflects the consideration to which we expect to be entitled to receive in exchange for these services.
Merchant Solutions. Our customers in the Merchant Solutions segment contract with us for payment services, which we provide in exchange for consideration for completed transactions. Our payment solutions are similar around the world in that we enable our customers to accept card, electronic, check and digital-based payments. Our comprehensive offerings include, but are not limited to, authorization services, settlement and funding services, customer support and help-desk functions, chargeback resolution, payment security services, consolidated billing and statements and on-line reporting. In addition, we may sell or rent point-of-sale terminals or other equipment to customers.
For our payment services obligation, the nature of our promise to the customer is that we stand ready to process transactions the customer requests on a daily basis over the contract term. Since the timing and quantity of transactions to be processed by us is not determinable, we view payment services to comprise an obligation to stand ready to process as many transactions as the customer requests. Under a stand-ready obligation, the evaluation of the nature of our performance obligation is focused on each time increment rather than the underlying activities. Therefore, we view payment services to comprise a series of distinct days of service that are substantially the same and have the same pattern of transfer to the customer. Accordingly, the promise to stand ready is accounted for as a single-series performance obligation.
In order to provide our payment services, we route and clear each transaction through the applicable payment network. We obtain authorization for the transaction and request funds settlement from the card issuing financial institution through the payment network. When third parties are involved in the transfer of goods or services to our customer, we consider the nature of each specific promised good or service and apply judgment to determine whether we control the good or service before it is transferred to the customer or whether we are acting as an agent of the third party. To determine whether or not we control the good or service before it is transferred to the customer, we assess indicators including which party is primarily responsible for fulfillment and has discretion in determining pricing for the good or service, as well as other considerations. Based on our assessment of these indicators, we have concluded that our promise to our customer to provide our payment services is distinct from the services provided by the card issuing financial institutions and payment networks in connection with payment transactions. We do not have the ability to direct the use of and obtain substantially all of the benefits of the services provided by the card issuing financial institutions and payment networks before those services are transferred to our customer, and on that basis, we do not control those services prior to being transferred to our customer. As a result, upon adoption of ASC 606, we present our revenues net of the interchange fees retained by the card issuing financial institutions and the fees charged by the payment networks.
The majority of our payment services are priced as a percentage of transaction value or a specified fee per transaction, depending on the card type. We also charge other per occurrence fees based on specific services that may be unrelated to the number of transactions or transaction value. Given the nature of the promise and the underlying fees based on unknown quantities or outcomes of services to be performed over the contract term, the total consideration is determined to be variable consideration. The variable consideration for our payment service is usage-based and, therefore, it specifically relates to our efforts to satisfy our payment services obligation. The variability is satisfied each day the service is provided to the customer. We directly ascribe variable fees to the distinct day of service to which it relates, and we consider the services performed each day in order to ascribe
the appropriate amount of total fees to that day. Therefore, we measure revenues for our payment service on a daily basis based on the services that are performed on that day.
Certain of our technology-enabled customer arrangements contain multiple promises, such as payment services, perpetual software licenses, software-as-a-service ("SaaS"), maintenance, installation services, training and equipment, each of which is evaluated to determine whether it represents a separate performance obligation. SaaS arrangements are generally offered on a subscription basis, providing the customers with access to the SaaS platform along with general support and maintenance services. Because these promised services within our SaaS arrangements are delivered concurrently over the contract term, we account for these promises as if they are a single performance obligation that includes a series of distinct services with the same pattern of transfer to the customer. In addition, certain installation services are not considered distinct from the SaaS and are recognized over the expected period of benefit.
Once we determine the performance obligations and the transaction price, including an estimate of any variable consideration, we then allocate the transaction price to each performance obligation in the contract using a relative standalone selling price method. We determine standalone selling price based on the price at which the good or service is sold separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price by considering all reasonably available information, including market conditions, trends or other company- or customer-specific factors. Substantially all of the performance obligations described above are satisfied over time. The performance obligations associated with equipment sales, perpetual software licenses and certain professional services are generally satisfied at a point in time when they are transferred to the customer. For certain other professional services that represent separate performance obligations, we generally use the input method and recognize revenue based on the number of hours incurred or services performed to date in relation to the total services expected to be required to satisfy the performance obligation.
We satisfy the combined SaaS performance obligation by standing ready to provide access to the SaaS. Consideration for SaaS arrangements may consist of fixed or usage-based fees. Revenue is recognized over the period for which the services are provided or by directly ascribing any variable fees to the distinct day of service based on the services that are performed on that day.
Issuer Solutions. Issuer Solutions segment revenues are derived from long-term contracts with financial institutions and other financial service providers. Issuer Solutions customer contracts may include multiple promises. Payment processing services revenues are generated primarily from charges based on the number of accounts on file, transactions and authorizations processed, statements generated and/or mailed, managed services, cards embossed and mailed, and other processing services for cardholders accounts on file. Most of these contracts have prescribed annual minimums, penalties for early termination, and service level agreements that may affect contractual fees if specific service levels are not achieved. Issuer Solutions revenues also include loyalty redemption services and professional services. To the extent a contract includes multiple promised services, we must apply judgment to determine whether promised services are capable of being distinct and are distinct in the context of the contract. If these criteria are not met, the promised services are combined and accounted for as a single performance obligation.
Issuer Solutions customer contracts typically include an obligation to provide processing services to financial institutions and other financial services providers. We have determined that these processing services represent a stand-ready obligation comprising a series of distinct days of services that are substantially the same and have the same pattern of transfer to the customer. In many cases, Issuer Solutions arrangements may include additional performance obligations relating to loyalty redemption services and other professional services. Similar to processing services, we have determined that loyalty redemption services represent a stand-ready obligation comprising a series of distinct days of service that are substantially the same and have the same pattern of transfer to the customer.
The performance obligations to provide processing services and loyalty redemption services include variable consideration. With respect to these performance obligations, we have determined that (a) the variable consideration relates specifically to our efforts to satisfy the performance obligation and (b) allocating the variable amount of consideration entirely to the performance obligation is consistent with the allocation objective when considering all of the performance obligations and payment terms in the contract. As a result, we allocate and recognize variable consideration in the period in which we have the contractual right to invoice the customer.
Professional services representing performance obligations are satisfied over time. For professional services, we recognize revenue based on the labor hours incurred for time and materials projects or on a straight-line basis for fixed-fee projects.
In some cases, we pay certain of our customers a signing incentive at contract inception or renewal. Consideration paid to customers is accounted for as a reduction of the transaction price and recognized as a reduction in revenues as the related services are transferred to the customer over the contract term. The deferred portion of consideration paid to customers is classified within other assets in our consolidated balance sheets.
Business and Consumer Solutions. Business and Consumer Solutions segment revenues principally consist of fees collected from cardholders and fees generated by cardholder activity in connection with the programs that we manage. Customers are typically charged a fee for each purchase transaction made using their cards, unless the customer is on a monthly or annual service plan, in which case the customer is instead charged a monthly or annual subscription fee, as applicable. Customers are also charged a monthly maintenance fee after a specified period of inactivity. We also charge fees associated with additional services offered in connection with our accounts, including the use of overdraft features, a variety of bill payment options, card replacement, foreign exchange and card-to-card transfers of funds initiated through our call centers.
Business and Consumer Solutions revenues include a stand-ready performance obligation to provide account access and facilitate purchase transactions. We have determined that we have a right to consideration from a customer in an amount that corresponds directly with the value to the customer of our performance completed to date. As a result, we recognize revenue in the amount to which we have a right to invoice. Revenues are recognized net of fees charged by the payment networks for services they provide in processing transactions routed through them.
Revenue recognition prior to ASC 606. For periods prior to our adoption of ASC 606, we recognized revenue when services were performed. For arrangements with multiple elements, such as equipment, perpetual licenses, SaaS, maintenance, installation and training, we allocated consideration to each element based on the relative-selling-price method. In multiple element arrangements where more-than-incidental software elements were included, the entire amount of revenue under the arrangement was deferred until all elements were delivered or objective evidence of the fair value of the undelivered items was established.
Cash and cash equivalents*—* Cash and cash equivalents include cash on hand and all liquid investments with a maturity of three months or less when purchased. We consider certain portions of our cash and cash equivalents to be unrestricted but not available for general purposes. The amount of cash that we consider to be available for general purposes does not include the following: (i) settlement-related cash balances, (ii) funds held as collateral for merchant losses ("Merchant Reserves") and (iii) funds held for customers. Settlement-related cash balances represent funds that we hold when the incoming amount from the card networks precedes the funding obligation to the merchant. Settlement-related cash balances are not restricted; however, these funds are generally paid out in satisfaction of settlement processing obligations the following day. Merchant Reserves serve as collateral to minimize contingent liabilities associated with any losses that may occur under the merchant agreement. We record a corresponding liability in settlement processing assets and settlement processing obligations in our consolidated balance sheet. While this cash is not restricted in its use, we believe that designating this cash as Merchant Reserves strengthens our fiduciary standing with financial institutions that sponsor us and is in accordance with guidelines set by the card networks. Funds held for customers and the corresponding liability that we record in "customer deposits" include amounts collected prior to remittance on our customers' behalf.
Accounts receivable, contract assets and contract liabilities*—* A contract with a customer creates legal rights and obligations. As we perform under customer contracts, our right to consideration that is unconditional is considered to be accounts receivable. If our right to consideration for such performance is contingent upon a future event or satisfaction of additional performance obligations, the amount of revenues we have recognized in excess of the amount we have billed to the customer is recognized as a contract asset. Contract liabilities represent consideration received from customers in excess of revenues recognized. Contract assets and liabilities are presented net at the individual contract level in the consolidated balance sheet and are classified as current or noncurrent based on the nature of the underlying contractual rights and obligations.
Allowance for doubtful accounts*—* Accounts receivable balances are stated net of an allowance for doubtful accounts and billing adjustments. We record an allowance for doubtful accounts when it is probable that the accounts receivable balance will not be collected. Increases in the allowance for doubtful accounts are recorded as charges to bad debt expense and are reflected in selling, general and administrative expenses in our consolidated statements of income. Write-offs of uncollectible accounts are charged against the allowance for doubtful accounts. We record an allowance for billing adjustments for actual and potential billing discrepancies. Increases in the allowance for billing adjustments are recorded as a reduction of revenues in our consolidated statements of income and actual adjustments to invoices are charged against the allowance for billing adjustments.
Contract costs*—* Upon adoption of ASC 340-40, we capitalize costs to obtain contracts with customers, including employee sales commissions and fees to business partners. At contract inception, we capitalize such costs that we expect to recover and that would not have been incurred if the contract had not been obtained. In certain cases where costs related to obtaining customers are incurred after the inception of the customer contract, such costs are capitalized as the corresponding liability is recognized. We also capitalize certain costs incurred to fulfill our contracts with customers that (i) relate directly to the contract, (ii) are expected to generate resources that will be used to satisfy our performance obligation under the contract and (iii) are expected to be recovered through revenues generated under the contract. Capitalized costs to obtain and to fulfill contracts are included in other noncurrent assets.
Contract costs are amortized to operating expense in our consolidated statements of income on a systematic basis consistent with the transfer to the customer of the goods or services to which the asset relates. Amortization of capitalized costs to obtain customer contracts is included in selling, general and administrative expenses, while amortization of capitalized costs to fulfill customer contracts is included in cost of services. We utilize a straight-line or proportional amortization method depending upon which method best depicts the pattern of transfer of the goods or services to the customer. We amortize these assets over the expected period of benefit, which, based on the factors noted above, is typically three to seven years. In order to determine the appropriate amortization period for capitalized contract costs, we consider a combination of factors, including customer attrition rates, estimated terms of customer relationships, the useful lives of technology we use to provide goods and services to our customers, whether future contract renewals are expected and if there is any incremental commission to be paid associated with a contract renewal. Costs to obtain a contract with an expected period of benefit of one year or less are recognized as an expense when incurred. We evaluate contract costs for impairment by comparing, on a pooled basis, the expected future net cash flows from underlying customer relationships to the carrying amount of the capitalized contract costs.
Prior to our adoption of ASC 606, we capitalized certain customer acquisition costs that represented incremental, direct costs that were recoverable through merchant profitability. The capitalized customer acquisition costs were amortized using a proportional method over the initial term of the related merchant contract. The deferred customer acquisition cost asset was accrued over the first year of merchant processing, consistent with the build-up in the accrued buyout liability, as described below.
Up-front distributor and partner payments*—* We make up-front contractual payments to third-party distributors and partners that do not meet the criteria of a contract cost. If the payments meet the criteria to be recognized as an asset, we capitalize the up-front payment and recognize the capitalized amount as expense ratably over the period of benefit, which is generally the contract period. If the contract requires the distributor or partner to perform specific acts and no other conditions exist for the distributor or partner to earn or retain the up-front payment, then we recognize the capitalized amount as an expense when the performance conditions have been met. Up-front distributor and partner payments are classified on our consolidated balance sheet within prepaid expenses and other current assets and other noncurrent assets and the related expense is recorded within selling, general and administrative expenses in our consolidated statements of income.
Settlement processing assets and obligations — Funds settlement refers to the process of transferring funds for sales and credits between card issuers and merchants and relates to certain transactions processed in our Merchant Solutions segment. For transactions processed on our systems, we use our internal network to provide funding instructions to financial institutions that in turn fund the merchants. We process funds settlement under two models, a sponsorship model and a direct membership model.
Under the sponsorship model, we are designated as an independent sales organization by Mastercard and Visa, which means that member clearing banks ("Member") sponsor us and require our adherence to the standards of the payment networks. In certain markets, we have sponsorship or depository and clearing agreements with financial institution sponsors. These agreements allow us to route transactions under the Members' control and identification numbers to clear credit card transactions through Mastercard and Visa. In this model, the standards of the payment networks restrict us from performing funds settlement or accessing merchant settlement funds, and, instead, require that these funds be in the possession of the Member until the merchant is funded.
Under the direct membership model, we are members in various payment networks, allowing us to process and fund transactions without third-party sponsorship. In this model, we route and clear transactions directly through the card brand’s network and are not restricted from performing funds settlement. Otherwise, we process these transactions similarly to how we process transactions in the sponsorship model. We are required to adhere to the standards of the payment networks in which we are direct members. We maintain relationships with financial institutions, which may also serve as our Member sponsors for other card brands or in other markets, to assist with funds settlement.
Timing differences, interchange fees, merchant reserves and exception items cause differences between the amount received from the payment networks and the amount funded to the merchants. These intermediary balances arising in our settlement process are reflected as settlement processing assets and obligations on our consolidated balance sheets.
Settlement processing assets and obligations include the following components:
| • | Interchange reimbursement. Our receivable from merchants for the portion of the discount fee related to reimbursement of the interchange fee. |
| • | Receivable from Members. Our receivable from the Members for transactions in which we have advanced funding to the Members to fund merchants in advance of receipt of funding from networks. |
| • | Receivable from networks. Our receivable from a payment network for transactions processed on behalf of merchants where we are a direct member of that particular network. |
| • | Exception items. Items such as customer chargeback amounts received from merchants. |
| • | Merchant Reserves. Reserves held to minimize contingent liabilities associated with losses that may occur under the merchant agreement. |
| • | Liability to Members. Our liability to the Members for transactions for which funding from the payment network has been received by the Members but merchants have not yet been funded. |
| • | Liability to merchants. Our liability to merchants for transactions that have been processed but not yet funded where we are a direct member of a particular payment network. |
| • | Reserve for merchant losses and sales allowances. Our reserve for allowances, charges or losses that we do not expect to collect from the merchants due to concessions, merchant fraud, insolvency, bankruptcy or any other merchant-related reason. |
We apply offsetting to our settlement processing assets and obligations where a right of setoff exists. In the sponsorship model, we apply offsetting by Member agreement because the Member is ultimately responsible for funds settlement. With these Member transactions, we do not have access to the gross proceeds of the receivable from the payment networks and, thus, do not have a direct obligation or any ability to satisfy the payable to fund the merchant. In these situations, we apply offsetting to determine a net position for each Member agreement. If that net position is an asset, we reflect the net amount in settlement processing assets on our consolidated balance sheet. If that net position is a liability, we reflect the net amount in settlement processing obligations on our consolidated balance sheet. In the direct membership model, offsetting is not applied, and the individual components are presented as an asset or obligation based on the nature of that component.
Reserve for merchant losses and sales allowances*—* Our merchant customers are liable for any charges or losses that occur under the merchant agreement. We experience losses in our card processing services when we are unable to collect amounts from merchant customers for any charges properly reversed by the card issuing financial institutions. When we are not able to collect these amounts from the merchants due to merchant fraud, insolvency, bankruptcy or any other reason, we may be liable for the reversed charges. We require cash deposits, guarantees, letters of credit and other types of collateral from certain merchants to minimize any such contingent liability, and we also utilize a number of systems and procedures to manage merchant risk. We record an estimated liability for merchant losses comprised of estimated known losses and estimated incurred but not reported losses, which is included in settlement processing obligations in our consolidated balance sheet. The provision for merchant losses is included as a component of cost of service and the sales allowance provision is included as a reduction of revenue in our consolidated statements of income..
Reserve for check guarantee operating losses*—* We experience check guarantee losses when we are unable to collect the full amount of a guaranteed check from the checkwriter. In our check guarantee service offering, we charge our merchants a percentage of the gross amount of the check and guarantee payment of the check to the merchant in the event the check is not honored by the checkwriter's bank. We have the right to collect the full amount of the check from the checkwriter, but have not historically always recovered 100% of the guaranteed checks. We record a reserve for estimated losses on returned checks and estimated incurred but not reported losses, which is presented as a valuation allowance against claims receivable included in prepaid expenses and other current assets in the consolidated balance sheets. The provision for check guarantee losses is included as a component of cost of service in the consolidated statements of income.
Reserve for contract contingencies and processing errors*—* A significant number of our customer contracts in our Issuer Solutions segment contain service level agreements that can result in performance penalties payable by us if we do not meet
contractually required service levels. We record an accrual for estimated performance penalties and processing errors. When providing for these accruals, we consider such factors as our history of incurring performance penalties and processing errors, actual contractual penalty charge rates in our contracts, progress towards milestones and known processing errors. These accruals are included in accounts payable and accrued liabilities in our consolidated balance sheet. Depending on the nature of item, transaction processing provisions are included as a reduction of the transaction price and recognized as a reduction in revenues as the related services are transferred to the customer, or as a component of cost of service, in our consolidated statements of income.
Reserve for cardholder losses*—* Through services offered in our Business and Consumer Solutions segment, we are exposed to losses due to cardholder fraud, payment defaults and other forms of cardholder activity as well as losses due to nonperformance of third parties who receive cardholder funds for transmittal to the issuing financial institutions. We establish a reserve for losses we estimate will arise from processing customer transactions, debit card overdrafts, chargebacks for unauthorized card use and merchant-related chargebacks due to nondelivery of goods and services. These reserves are established based upon historical loss and recovery rates and cardholder activity for which specific losses can be identified. These reserves are included in accounts payable and accrued liabilities in our consolidated balance sheet, and the provision for cardholder losses is included as a component of cost of service in our consolidated statements of income.
Property and equipment— Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are generally calculated using the straight-line method. Leasehold improvements are amortized over the lesser of the remaining term of the lease and the useful life of the asset.
We develop software that is used to provide services to customers. Capitalization of internal-use software, primarily associated with operating platforms, occurs when we have completed the preliminary project stage, management authorizes the project, management commits to funding the project, it is probable the project will be completed and the project will be used to perform the function intended. The preliminary project stage consists of the conceptual formulation of alternatives, the evaluation of alternatives, the determination of existence of needed technology and the final selection of alternatives. Costs incurred during the preliminary project stage are expensed as incurred. Capitalized internal-use software is amortized over its estimated useful life, which is typically two to ten years, in a manner that best reflects the pattern of economic use of the assets.
Goodwill*—* We perform our annual goodwill impairment test as of October 1 each year. We test goodwill for impairment at the reporting unit level annually and more often if an event occurs or circumstances change that indicate the fair value of a reporting unit is below its carrying amount. We have the option of performing a qualitative assessment of impairment to determine whether any further quantitative assessment for impairment is necessary. The option of whether or not to perform a qualitative assessment is made annually and may vary by reporting unit.
Factors we consider in the qualitative assessment include general macroeconomic conditions, industry and market conditions, cost factors, overall financial performance of our reporting units, events or changes affecting the composition or carrying amount of the net assets of our reporting units, sustained decrease in our share price, and other relevant entity-specific events. If we elect to bypass the qualitative assessment or if we determine, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, a quantitative test would be required.
Prior to the Merger, our reporting units consisted of: North America Payments, Integrated Solutions and Vertical Markets, United Kingdom, Asia-Pacific, Central and Eastern Europe, Russia and Spain. As of October 1, 2019, we elected to perform a quantitative assessment of impairment for each of these reporting units, and determined on the basis of those assessments that the fair value of each reporting unit is greater than its respective carrying amount. As of October 1, 2019, we had not allocated goodwill associated with the Merger to any of our reporting units; however, no indicators of impairment existed that warranted further evaluation of the provisional goodwill.
After October 1, 2019, as a result of the Merger, we realigned our reporting units based on new executive management and organizational structures consisting of: North America Payment Solutions, Integrated Solutions, Vertical Market Software Solutions, Europe Merchant Solutions, Spain Merchant Solutions, Asia-Pacific Merchant Solutions, Issuer Solutions and Business and Consumer Solutions. After the reorganization of our reporting units, we performed a quantitative assessment of impairment for each of our new reporting units, and determined on the basis of those assessments that the fair value of each reporting unit is equal to or greater than its respective carrying amount. We believe that the fair value of each of our reporting units is substantially in excess of its carrying amount, except for Issuer Solutions and Business and Consumer Solutions for which the respective carrying amounts approximate fair value since they were acquired in the Merger.
Other intangible assets*—* Other intangible assets include customer-related intangible assets (such as customer lists, merchant contracts and distributor agreements), contract-based intangible assets (such as noncompete agreements, referral agreements and processing rights), acquired technologies, trademarks and trade names associated with business combinations. These assets are amortized over their estimated useful lives. The useful lives for customer-related intangible assets are determined based primarily on forecasted cash flows, which include estimates for the revenues, expenses, and customer attrition associated with the assets. The useful lives of contract-based intangible assets are equal to the terms of the agreements. The useful lives of amortizable trademarks and trade names are based on our plans to use the trademarks and trade names in the applicable markets. We use the straight-line method of amortization for our acquired technologies, trademarks and trade names and contract-based intangibles.
Amortization for most of our customer-related intangible assets is determined using an accelerated method. The first step in determining the amortization expense for any period is that we calculate the expected cash flows for that period that were used in determining the acquisition-date fair value of the asset divided by the expected total cash flows over the estimated life of the asset. We then multiply that percentage by the initial carrying amount of the asset to arrive at the amortization expense for that period. If the cash flow patterns that we experience differ significantly from our initial estimates, we adjust the amortization schedule prospectively. These cash flow patterns are derived using certain assumptions and cost allocations due to a significant number of asset interdependencies that exist in our business. We believe that our accelerated method reflects the expected pattern of the benefit to be derived from the acquired customer relationships.
Impairment of long-lived assets*—* We regularly evaluate whether events and circumstances have occurred that indicate the carrying amount of property and equipment and finite-life intangible assets may not be recoverable. When factors indicate that these long-lived assets should be evaluated for possible impairment, we assess the potential impairment by determining whether the carrying amount of such long-lived assets will be recovered through the future undiscounted cash flows expected from use of the asset and its eventual disposition. The evaluation is performed at the asset group level, which is the lowest level of identifiable cash flows. If the carrying amount of the asset group is determined not to be recoverable, a write-down to fair value is recorded. Fair values are determined based on quoted market prices or discounted cash flow analysis as applicable. We regularly evaluate whether events and circumstances have occurred that indicate the useful lives of property and equipment and finite-life intangible assets may warrant revision.
Leases*—* We evaluate each of our lease and service arrangements at inception to determine if the arrangement is, or contains, a lease and the appropriate classification of each identified lease. A lease exists if we obtain substantially all of the economic benefits of, and have the right to control the use of, an asset for a period of time. Right-of-use assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease agreement. We recognize right-of-use assets and lease liabilities at the lease commencement date based on the present values of fixed lease payments over the term of the lease. Right-of-use assets may also be adjusted to reflect any prepayments made or any incentive payments received. Operating lease costs and depreciation expense for finance leases are recognized as expense on a straight-line basis over the lease term. We consider a termination or renewal option in the determination of the lease term when it is reasonably certain that we will exercise that option. Because our leases generally do not provide a readily determinable implicit interest rate, we use an incremental borrowing rate to measure the lease liability and associated right-of-use asset at the lease commencement date. The incremental borrowing rate used is a fully collateralized rate that considers our credit rating, market conditions and the term of the lease at the lease commencement date.
Accrued buyout liability*—* Certain of our Merchant Solutions salespersons in the United States are paid residual commissions based on the profitability generated by certain merchants. We have the right, but not the obligation, to buy out some or all of these commissions and intend to do so periodically. Such purchases of the commissions are at a fixed multiple of the last 12 months of commissions. Because of our intent and ability to execute purchases of the residual commissions, and the mutual understanding between us and our salespersons, we have accounted for this deferred compensation arrangement pursuant to the substantive nature of the plan. Therefore, we recognize a liability for the amount that we would have to pay (the "settlement cost") to buy out related commissions in their entirety from vested salespersons, and an estimated amount for unvested salespersons based on their progress towards vesting and the expected percentage that will become vested. As noted above, as the liability increases over the first year of the related merchant contract, we record a related asset. Subsequent changes in the estimated accrued buyout liability due to merchant attrition, same-store sales growth or contraction and changes in profitability are included in the selling, general and administrative expense in the consolidated statements of income. The classification of the accrued buyout liability between current and noncurrent on the consolidated balance sheet is based upon our estimate of the amount of the accrued buyout liability that we reasonably expect to pay over the next 12 months.
Income taxes*—* Deferred income taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax laws and rates. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
We periodically assess our tax exposures related to periods that are open to examination. Based on the latest available information, we evaluate our tax positions to determine whether the position will more likely than not be sustained upon examination by the U.S. Internal Revenue Service or other taxing authorities. If we cannot reach a more-likely-than-not determination, no benefit is recorded. If we determine that the tax position is more likely than not to be sustained, we record the largest amount of benefit that is more likely than not to be realized when the tax position is settled. We record interest and penalties related to unrecognized income tax benefits in interest and selling, general and administrative expenses, respectively, in our consolidated statements of income.
Derivative instruments*—* We may use interest rate swaps or other derivative instruments to manage a portion of our exposure to the variability in interest rates. Our objective in managing our exposure to fluctuation in interest rates is to better control this element of cost and to mitigate the earnings and cash flow volatility associated with changes in applicable rates. We have established policies and procedures that encompass risk-management philosophy and objectives, guidelines for derivative instrument usage, counterparty credit approval, and the monitoring and reporting of derivative activity. We do not use derivative instruments for speculation.
At inception we formally designate and document instruments that qualify for hedge accounting of underlying exposures. When qualified for hedge accounting, these financial instruments are recognized at fair value in our consolidated balance sheets, and changes in fair value are recognized as a component of other comprehensive income (loss) and included in accumulated other comprehensive loss within equity in our consolidated balance sheets. Cash flows resulting from settlements are presented as a component of cash flows from operating activities within our consolidated statements of cash flows.
We formally assess, both at inception and at least quarterly, whether the financial instruments used in hedging transactions are effective at offsetting changes in cash flows of the related underlying exposure. Fluctuations in the value of these instruments generally are offset by changes in the forecasted cash flows of the underlying exposures being hedged. This offset is driven by the high degree of effectiveness between the exposure being hedged and the hedging instrument. We designated each of our interest rate swap agreements as a cash flow hedge of interest payments on variable rate borrowings. See "Note 7**—**Long-Term Debt and Lines of Credit" for more information about our interest rate swaps.
Fair value measurements*—* Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the reporting date. GAAP establishes a fair value hierarchy that categorizes the inputs to valuation techniques into three broad levels. Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities. Level 2 inputs are based on other observable market data, such as quoted prices for similar assets and liabilities, and inputs other than quoted prices that are observable such as interest rates and yield curves. Level 3 inputs are developed from unobservable data reflecting our assumptions and include situations where there is little or no market activity for the asset or liability.
Fair value of financial instruments*—* The carrying amounts of cash and cash equivalents, receivables, settlement lines of credit, accounts payable and accrued liabilities, approximate their fair value given the short-term nature of these items. The estimated fair value of our senior notes was based on quoted market prices in an active market and is considered to be a Level 1 measurement of the valuation hierarchy. Certain of our long-term debt includes variable interest rates. The carrying amount of long-term debt with variable interest rates, exclusive of debt issuance costs, approximated fair value, which is calculated using Level 2 inputs. The fair values of our swap agreements were determined based on the present value of the estimated future net cash flows using implied rates in the applicable yield curve as of the valuation date, and classified within Level 2 of the valuation hierarchy. See "Note 7**—**Long-Term Debt and Lines of Credit" for further information.
We also have investments in equity instruments without readily determinable fair value. As permitted, we have elected a measurement alternative for equity instruments that do not have readily determinable fair values. Under such alternative, these instruments are measured at cost plus or minus any changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Any resulting change in carrying amount would be reflected in net income.
Foreign currencies*—* We have significant operations in a number of foreign subsidiaries whose functional currency is the local currency. The assets and liabilities of subsidiaries whose functional currency is a foreign currency are translated into the reporting currency at the period-end rate of exchange. Income statement items are translated at the weighted-average rates prevailing during the period. The resulting translation adjustment is recorded as a component of other comprehensive income and is included in accumulated comprehensive income within equity in our consolidated balance sheets.
Gains and losses on transactions denominated in currencies other than the functional currency are generally included in determining net income for the period. For the years ended December 31, 2019, 2018 and 2017, our transaction gains and losses were insignificant. Transaction gains and losses on intercompany balances of a long-term investment nature are recorded as a component of other comprehensive income and included in accumulated comprehensive income within equity in our consolidated balance sheets.
Earnings per share*—* Basic earnings per share ("EPS") is computed by dividing reported net income attributable to Global Payments by the weighted-average number of shares outstanding during the period. Earnings available to common shareholders is the same as reported net income attributable to Global Payments for all periods presented.
Diluted EPS is computed by dividing net income attributable to Global Payments by the weighted-average number of shares outstanding during the period, including the effect of share-based awards that would have a dilutive effect on earnings per share. All stock options with an exercise price lower than the average market share price of our common stock for the period are assumed to have a dilutive effect on EPS. During the years ended December 31, 2019, 2018 and 2017, there were no stock options that would have an antidilutive effect on the computation of diluted EPS.
The following table sets forth the computation of the diluted weighted-average number of shares outstanding for all periods presented:
| Years Ended December 31, | ||||||||
| 2019 | 2018 | 2017 | ||||||
| (in thousands) | ||||||||
| Basic weighted-average number of shares outstanding | 198,298 | 158,672 | 154,652 | |||||
| Plus: Dilutive effect of stock options and other share-based awards | 836 | 599 | 876 | |||||
| Diluted weighted-average number of shares outstanding | 199,134 | 159,271 | 155,528 |
Repurchased shares*—* We account for the retirement of repurchased shares using the par value method under which the repurchase price is charged to paid-in capital up to the amount of the original issue proceeds of those shares. When the repurchase price is greater than the original issue proceeds, the excess is charged to retained earnings. We use a last-in, first-out cost flow assumption to identify the original issue proceeds of the shares repurchased.
Recently issued pronouncements not yet adopted*—* In August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (A Consensus of the FASB Emerging Issues Task Force)." ASU 2018-15 provides additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement (i.e., hosting arrangement) that is a service contract. The new guidance amends the definition of a hosting arrangement and requires a customer in a hosting arrangement that is a service contract to capitalize certain implementation costs as if the arrangement was an internal-use software project. The amendments in this update also provide additional presentation and disclosure requirements, including requirements to disclose the nature of an entity’s hosting arrangements that are service contracts, as well as quantitative information about capitalized implementation costs and related amortization expense. The guidance will become effective for us on January 1, 2020. We expect to apply the guidance prospectively to all implementation costs incurred after the date of adoption. We have completed our evaluation of the effect of ASU 2018-15 on our consolidated financial statements and internal controls. We do not expect the adoption of this standard to have a material effect on our consolidated financial statements. We have historically capitalized implementation costs associated with cloud computing arrangements that are service contracts following the guidance in Subtopic 350-40 and expect to continue to do so pursuant to the clarifications provided in the new guidance. We expect to amortize deferred implementation costs to expense on a straight-line basis over the term of the applicable hosting arrangement, and we will enhance our accounting processes and internal controls to meet the new disclosure requirements.
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 instruments measured at amortized cost. The new model for current expected credit losses ("CECL") will require us to recognize an estimate of credit losses expected to occur over the remaining life of the financial instruments that are within the scope of the update, including accounts receivable and certain settlement processing assets, each of which are short-term in nature. Under current GAAP, credit losses on these financial instruments are not recognized until their occurrence is deemed to be probable. The guidance will become effective for us on January 1, 2020. In general, the new guidance will require modified retrospective application to all outstanding financial assets that are within the scope of the update, with a cumulative-effect adjustment, if any, recorded to retained earnings as of the date of adoption. We are substantially complete with our evaluation of the effect of ASU 2016-13 on our consolidated financial statements. We do not expect adoption of this standard will have a material effect on our consolidated financial statements; however, it may require expanded qualitative disclosures about our financial assets and related allowance for credit losses, as well as new or modified internal controls.
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes," which is intended to enhance and simplify various aspects of the accounting for income taxes. The amendments in this update remove certain exceptions to the general principles in Topic 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also clarifies and amends existing guidance to improve consistent application of the accounting for franchise taxes, enacted changes in tax laws or rates and transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for annual and interim periods beginning after December 15, 2020, with early adoption permitted. We are evaluating the effect of ASU 2019-12 on our consolidated financial statements.
NOTE 2**— ACQUISITIONS**
The transactions described below were accounted for as business combinations, which generally requires that we record the assets acquired and liabilities assumed at fair value as of the acquisition date.
Total System Services, Inc.
On September 18, 2019, we acquired all of the outstanding common stock of TSYS. Prior to the Merger, TSYS was a leading global payments provider, offering seamless, secure and innovative solutions to issuers, merchants and consumers.
Holders of TSYS common stock received 0.8101 shares of Global Payments common stock for each share of TSYS common stock they owned at the effective time of the Merger (the "Exchange Ratio"). In addition, certain TSYS equity awards held by employees who were not executive officers, pursuant to their terms, vested automatically at closing ("Single-Trigger Awards") and were converted into the right to receive a number of shares of Global Payments common stock determined based on the Exchange Ratio. Also, pursuant to the Merger Agreement, we granted equity awards for approximately 2.2 million shares of Global Payments common stock to certain TSYS equity awards holders ("Replacement Awards"). Each such Replacement Award is subject to the same terms and conditions (including vesting and exercisability or payment terms) as applied to the corresponding TSYS equity award. We apportioned the fair value of the Replacement Awards between purchase consideration and amounts to be recognized in periods following the Merger as share-based compensation expense over the requisite service period of the Replacement Awards.
The purchase consideration transferred to TSYS shareholders was valued at $23.8 billion. Total purchase consideration also included the amount of borrowings outstanding under TSYS' unsecured revolving credit facility together with accrued interest and fees that we were required to repay upon consummation of the Merger.
The fair value of total purchase consideration was determined as follows (in thousands, except per share data):
| Shares of TSYS common stock issued and outstanding (including Single-Trigger Awards) | 177,643 | |||
| Exchange Ratio | 0.8101 | |||
| Shares of Global Payments common stock issued to TSYS shareholders | 143,909 | |||
| Price per share of Global Payments common stock | $ | 163.74 | ||
| Fair value of common stock issued to TSYS shareholders(1) | 23,563,568 | |||
| Value of Replacement Awards attributable to purchase consideration | 207,821 | |||
| Cash paid to TSYS shareholders in lieu of fractional shares | 1,352 | |||
| Total purchase consideration transferred to TSYS shareholders | 23,772,741 | |||
| Repayment of TSYS' unsecured revolving credit facility (including accrued interest and fees) | 702,212 | |||
| Total purchase consideration | $ | 24,474,953 |
(1) Fair value of common stock issued to TSYS shareholders does not equal the product of shares of Global Payments common stock issued to TSYS shareholders and price per share of Global Payments common stock as presented in the table above due to the rounding of the number of shares in thousands.
The provisional estimated acquisition-date fair values of major classes of assets acquired and liabilities assumed as of December 31, 2019, including a reconciliation to the total purchase consideration, were as follows (in thousands):
| Provisional Amounts at Acquisition Date | Measurement- Period Adjustments | Provisional Amounts at December 31, 2019 | ||||||||||
| (in thousands) | ||||||||||||
| Cash and cash equivalents | $ | 446,027 | $ | (18 | ) | $ | 446,009 | |||||
| Accounts receivable | 443,783 | (935 | ) | 442,848 | ||||||||
| Identified intangible assets | 11,020,000 | (40,000 | ) | 10,980,000 | ||||||||
| Property and equipment | 695,560 | (51,476 | ) | 644,084 | ||||||||
| Other assets | 1,476,290 | (1,465 | ) | 1,474,825 | ||||||||
| Accounts payable and accrued liabilities | (594,558 | ) | (19,502 | ) | (614,060 | ) | ||||||
| Debt | (3,295,284 | ) | (58 | ) | (3,295,342 | ) | ||||||
| Deferred income tax liabilities | (2,843,643 | ) | 155,794 | (2,687,849 | ) | |||||||
| Other liabilities | (313,782 | ) | (633 | ) | (314,415 | ) | ||||||
| Total identifiable net assets | 7,034,393 | 41,707 | 7,076,100 | |||||||||
| Goodwill | 17,440,560 | (41,707 | ) | 17,398,853 | ||||||||
| Total purchase consideration | $ | 24,474,953 | $ | — | $ | 24,474,953 |
As of December 31, 2019, we considered these amounts to be provisional because we were still in the process of gathering and reviewing information to support the valuations of the assets acquired and liabilities assumed. We made measurement-period adjustments, as shown in the table above, that decreased the amount of provisional goodwill by $41.7 million. The effects of the measurement-period adjustments on our consolidated statement of income for the fourth quarter of 2019 were not material.
As of December 31, 2019, provisional goodwill arising from the acquisition of $17.4 billion was included in our reportable segments as follows: $7.1 billion in the Merchant Solutions segment, $7.9 billion in the Issuer Solutions segment and $2.4 billion in the Business and Consumer Solutions segment. Goodwill was attributable to expected growth opportunities, an assembled workforce and potential synergies from combining the acquired business into our existing business. We expect that substantially all of the goodwill from this acquisition will not be deductible for income tax purposes.
The following table reflects the provisional estimated fair values of the identified intangible assets of TSYS and the respective weighted-average estimated amortization periods:
| Estimated Fair Values | Weighted-Average Estimated Amortization Periods | ||||
| (in thousands) | (years) | ||||
| Customer-related intangible assets | $ | 6,420,000 | 15 | ||
| Contract-based intangible assets | 1,800,000 | 18 | |||
| Acquired technologies | 1,810,000 | 7 | |||
| Trademarks and trade names | 950,000 | 11 | |||
| Total estimated identified intangible assets | $ | 10,980,000 | 13 |
From the acquisition date through December 31, 2019, the acquired operations of TSYS contributed $1,215.0 million to our consolidated revenues and $78.7 million to operating income. Transaction costs directly related to the Merger were $68.9 million for the year ended December 31, 2019, respectively.
The following unaudited pro forma information shows the results of our operations for the years ended December 31, 2019 and 2018 as if the Merger had occurred on January 1, 2018. The unaudited pro forma information is presented for informational
purposes only and is not necessarily indicative of what would have occurred if the Merger had occurred as of that date. The unaudited pro forma information is also not intended to be a projection of future results due to the integration of the acquired operations of TSYS. The unaudited pro forma information reflects the effects of applying our accounting policies and certain pro forma adjustments to the combined historical financial information of Global Payments and TSYS. The pro forma adjustments include:
| • | incremental amortization expense associated with identified intangible assets; |
| • | a reduction of revenues and operating expenses associated with fair value adjustments made to acquired assets and assumed liabilities, such as contract cost assets and contract liabilities; |
| • | a reduction of interest expense resulting from financing of the Merger, the repayment of TSYS' secured revolving credit facility and fair value adjustments applied to TSYS debt that we assumed; and |
| • | the income tax effects of the pro forma adjustments. |
In addition, the pro forma net income attributable to Global Payments includes recognition of transaction costs related to the Merger in earnings as of the beginning of the earliest period presented. Accordingly, pro forma net income attributable to Global Payments for the year ended December 31, 2018 includes approximately $150 million of transaction costs.
| Year Ended December 31, 2019 | Year Ended December 31, 2018 | ||||||||||||||
| Actual | Pro Forma | Actual | Pro Forma | ||||||||||||
| (in thousands) | |||||||||||||||
| Total revenues | $ | 4,911,892 | $ | 7,854,282 | $ | 3,366,366 | $ | 7,359,631 | |||||||
| Net income attributable to Global Payments | $ | 430,613 | $ | 711,658 | $ | 452,053 | $ | 510,795 |
SICOM Systems, Inc.
On October 17, 2018, we acquired SICOM Systems, Inc. ("SICOM") for total purchase consideration of $410.2 million, which we funded with cash on hand and incremental debt. SICOM is a provider of end-to-end enterprise, cloud-based software solutions and other technologies to quick service restaurants and food service management companies. Prior to the acquisition, SICOM was indirectly owned by a private equity investment firm where one of our board members was a partner and investor. His direct interest in the transaction was approximately $1.1 million, the amount distributed to him based on his investment interest in the fund of the private equity firm that sold SICOM to us. Based on consideration of all relevant information, the audit committee of our board of directors recommended that the board approve the acquisition of SICOM, which it did.
The estimated acquisition-date fair values of major classes of assets acquired and liabilities assumed, including a reconciliation to the total purchase consideration, were as follows:
| Provisional Amounts at December 31, 2018 | Measurement- Period Adjustments | Final | ||||||||||
| (in thousands) | ||||||||||||
| Cash and cash equivalents | $ | 7,540 | $ | — | $ | 7,540 | ||||||
| Property and equipment | 5,943 | (105 | ) | 5,838 | ||||||||
| Identified intangible assets | 188,294 | — | 188,294 | |||||||||
| Other assets | 22,278 | (3 | ) | 22,275 | ||||||||
| Deferred income tax liabilities | (48,448 | ) | 838 | (47,610 | ) | |||||||
| Other liabilities | (31,250 | ) | (100 | ) | (31,350 | ) | ||||||
| Total identifiable net assets | 144,357 | 630 | 144,987 | |||||||||
| Goodwill | 264,844 | 370 | 265,214 | |||||||||
| Total purchase consideration | $ | 409,201 | $ | 1,000 | $ | 410,201 |
Goodwill arising from the acquisition of $265.2 million, included in the Merchant Solutions segment, was attributable to expected growth opportunities, an assembled workforce and potential synergies from combining the acquired business into our existing business. We expect that approximately $40.0 million of the goodwill from this acquisition will be deductible for income tax purposes.
The following table reflects the estimated fair values of the identified intangible assets of SICOM and the respective weighted-average estimated amortization periods:
| Estimated Fair Values | Weighted-Average Estimated Amortization Periods | ||||
| (in thousands) | (years) | ||||
| Customer-related intangible assets | $ | 104,900 | 14 | ||
| Acquired technologies | 65,312 | 6 | |||
| Trademarks and trade names | 11,202 | 5 | |||
| Contract-based intangible assets | 6,880 | 5 | |||
| Total estimated acquired intangible assets | $ | 188,294 | 10 |
AdvancedMD
On September 4, 2018, we acquired AdvancedMD, Inc. ("AdvancedMD") for total purchase consideration of $706.9 million, which we funded with cash on hand and incremental debt. AdvancedMD is a provider of cloud-based enterprise software solutions to small-to-medium sized ambulatory-care physician practices.
The estimated acquisition-date fair values of major classes of assets acquired and liabilities assumed, including a reconciliation to the total purchase consideration, were as follows:
| Provisional Amounts at December 31, 2018 | Measurement- Period Adjustments | Final | ||||||||||
| (in thousands) | ||||||||||||
| Cash and cash equivalents | $ | 7,657 | $ | — | $ | 7,657 | ||||||
| Property and equipment | 5,672 | — | 5,672 | |||||||||
| Identified intangible assets | 419,500 | — | 419,500 | |||||||||
| Other assets | 11,958 | (173 | ) | 11,785 | ||||||||
| Deferred income tax liabilities | (98,979 | ) | 4,935 | (94,044 | ) | |||||||
| Other liabilities | (15,624 | ) | (23 | ) | (15,647 | ) | ||||||
| Total identifiable net assets | 330,184 | 4,739 | 334,923 | |||||||||
| Goodwill | 376,701 | (4,739 | ) | 371,962 | ||||||||
| Total purchase consideration | $ | 706,885 | $ | — | $ | 706,885 |
Goodwill arising from the acquisition of $372.0 million, included in the Merchant Solutions segment, was attributable to expected growth opportunities, an assembled workforce and potential synergies from combining the acquired business into our existing business. We expect that substantially all of the goodwill from this acquisition will not be deductible for income tax purposes.
The following table reflects the estimated fair values of the identified intangible assets of AdvancedMD and the respective weighted-average estimated amortization periods:
| Estimated Fair Values | Weighted-Average Estimated Amortization Periods | ||||
| (in thousands) | (years) | ||||
| Customer-related intangible assets | $ | 303,100 | 11 | ||
| Acquired technologies | 83,700 | 5 | |||
| Trademarks and trade names | 32,700 | 15 | |||
| Total estimated identified intangible assets | $ | 419,500 | 10 |
ACTIVE Network
We acquired the communities and sports divisions of Athlaction Topco, LLC ("ACTIVE Network") on September 1, 2017, for total purchase consideration of $1.2 billion. ACTIVE Network delivers cloud-based enterprise software, including payment technology solutions, to event organizers in the communities and health and fitness markets.
The following table summarizes the cash and noncash components of the consideration transferred on September 1, 2017 (in thousands):
| Cash consideration paid to ACTIVE Network stockholders | $ | 599,497 | ||
| Fair value of Global Payments common stock issued to ACTIVE Network stockholders | 572,079 | |||
| Total purchase consideration | $ | 1,171,576 |
We funded the cash consideration with cash on hand and incremental debt. The acquisition-date fair value of 6,357,509 shares of our common stock issued to the sellers was determined based on the share price of our common stock as of the acquisition date and the effect of certain transfer restrictions.
The estimated acquisition-date fair values of major classes of assets acquired and liabilities assumed, including a reconciliation to the total purchase consideration, were as follows (in thousands):
| Cash and cash equivalents | $ | 42,913 | ||
| Property and equipment | 21,852 | |||
| Identified intangible assets | 410,545 | |||
| Other assets | 87,143 | |||
| Deferred income taxes | (27,640 | ) | ||
| Other liabilities | (147,481 | ) | ||
| Total identifiable net assets | 387,332 | |||
| Goodwill | 784,244 | |||
| Total purchase consideration | $ | 1,171,576 |
Goodwill of $784.2 million arising from the acquisition, included in the Merchant Solutions segment, was attributable to expected growth opportunities, an assembled workforce and potential synergies from combining our existing businesses. We expect that approximately 80% of the goodwill will be deductible for income tax purposes.
The following table reflects the estimated fair values of the identified intangible assets and the respective weighted-average estimated amortization periods:
| Estimated Fair Values | Weighted-Average Estimated Amortization Periods | ||||
| (in thousands) | (years) | ||||
| Customer-related intangible assets | $ | 189,000 | 17 | ||
| Acquired technologies | 153,300 | 9 | |||
| Trademarks and trade names | 59,400 | 15 | |||
| Contract-based intangible assets | 8,845 | 3 | |||
| Total estimated acquired intangible assets | $ | 410,545 | 13 |
Valuation of Identified Intangible Assets
For the acquisitions discussed above, the estimated fair values of customer-related and contract-based intangible assets were generally determined using the income approach, which was based on projected cash flows discounted to their present value using discount rates that consider the timing and risk of the forecasted cash flows. The discount rates used represented the average estimated value of a market participant’s cost of capital and debt, derived using customary market metrics. Acquired technologies were valued using the replacement cost method, which required us to estimate the costs to construct an asset of equivalent utility at prices available at the time of the valuation analysis, with adjustments in value for physical deterioration and functional and economic obsolescence. Trademarks and trade names were valued using the "relief-from-royalty" approach. This method assumes that trademarks and trade names have value to the extent that their owner is relieved of the obligation to pay royalties for the benefits received from them. This method required us to estimate the future revenues for the related brands, the appropriate royalty rate and the weighted-average cost of capital.
NOTE 3**—REVENUES**
The disclosures in this note arose from our adoption of ASC 606 on January 1, 2018 and are applicable for the years ended December 31, 2019 and 2018.
The following tables present a disaggregation of our revenues from contracts with customers by geography for each of our reportable segments:
| Year Ended December 31, 2019 | |||||||||||||||||||
| Merchant Solutions | Issuer Solutions | Business and Consumer Solutions | Intersegment Revenues | Total | |||||||||||||||
| (in thousands) | |||||||||||||||||||
| Americas | $ | 3,240,233 | $ | 458,289 | $ | 227,440 | $ | (18,782 | ) | $ | 3,907,180 | ||||||||
| Europe | 614,747 | 146,365 | — | — | 761,112 | ||||||||||||||
| Asia Pacific | 243,600 | — | — | — | 243,600 | ||||||||||||||
| $ | 4,098,580 | $ | 604,654 | $ | 227,440 | $ | (18,782 | ) | $ | 4,911,892 |
| Year Ended December 31, 2018 | |||||||||||||||||||
| Merchant Solutions | Issuer Solutions | Business and Consumer Solutions | Intersegment Revenues | Total | |||||||||||||||
| (in thousands) | |||||||||||||||||||
| Americas | $ | 2,522,285 | $ | — | $ | — | $ | — | $ | 2,522,285 | |||||||||
| Europe | 589,744 | 21,185 | — | — | 610,929 | ||||||||||||||
| Asia Pacific | 233,152 | — | — | — | 233,152 | ||||||||||||||
| $ | 3,345,181 | $ | 21,185 | $ | — | $ | — | $ | 3,366,366 |
The following table presents a disaggregation of our Merchant Solutions segment revenues by distribution channel for the years ended December 31, 2019 and 2018:
| 2019 | 2018 | ||||||
| (in thousands) | |||||||
| Direct: | |||||||
| Relationship-led | $ | 2,218,559 | $ | 1,821,629 | |||
| Technology-enabled | 1,880,021 | 1,523,552 | |||||
| $ | 4,098,580 | $ | 3,345,181 |
ASC 606 requires that we determine for each customer arrangement whether revenues should be recognized at a point in time or over time. For the years ended December 31, 2019 and 2018 substantially all of our revenues were recognized over time.
Supplemental balance sheet information related to contracts from customers as of December 31, 2019 and 2018 was as follows:
| Balance Sheet Location | December 31, 2019 | December 31, 2018 | |||||||
| (in thousands) | |||||||||
| Assets: | |||||||||
| Capitalized costs to obtain customer contracts, net | Other noncurrent assets | $ | 226,945 | $ | 194,616 | ||||
| Capitalized costs to fulfill customer contracts, net | Other noncurrent assets | 38,150 | 12,954 | ||||||
| Liabilities: | |||||||||
| Contract liabilities, net (current) | Accounts payable and accrued liabilities | 193,405 | 146,947 | ||||||
| Contract liabilities, net (noncurrent) | Other noncurrent liabilities | 35,272 | 8,595 |
The increase in contract liabilities during the year ended December 31, 2019 was primarily attributable to contract liabilities assumed in the Merger. Net contract assets were not material at December 31, 2019 or December 31, 2018. Revenue recognized for the year ended December 31, 2019 and 2018 from contract liability balances at the beginning of each period was $137.2 million and $97.3 million, respectively.
ASC 606 requires disclosure of the aggregate amount of the transaction price allocated to unsatisfied performance obligations. The purpose of this disclosure is to provide additional information about the amounts and expected timing of revenue to be recognized from the remaining performance obligations in our existing contracts. The following table includes estimated revenues expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. However, as permitted by ASC 606, we have elected to exclude from this disclosure any contracts with an original duration of one year or less and any variable consideration that meets specified criteria. Accordingly, the total unsatisfied or partially unsatisfied performance obligations related to processing services is significantly higher than the amounts disclosed in table below. Estimated revenues expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied at December 31, 2019 were as follows (in thousands):
| Years ending December 31, | |||
| 2020 | $ | 883,415 | |
| 2021 | 746,773 | ||
| 2022 | 552,741 | ||
| 2023 | 332,602 | ||
| 2024 | 176,181 | ||
| 2025-2029 | 267,368 | ||
| Total | $ | 2,959,080 |
NOTE 4**—PROPERTY AND EQUIPMENT**
As of December 31, 2019 and 2018, property and equipment consisted of the following:
| Range of Depreciable Lives | 2019 | 2018 | |||||||
| (Years) | (in thousands) | ||||||||
| Software | 1-10 | $ | 828,249 | $ | 539,879 | ||||
| Equipment | 1-20 | 522,921 | 337,589 | ||||||
| Buildings | 2-43 | 196,430 | 27,179 | ||||||
| Leasehold improvements | 2-40 | 117,593 | 73,298 | ||||||
| Furniture and fixtures | 1-10 | 82,941 | 45,346 | ||||||
| Land | 14,037 | 3,518 | |||||||
| 1,762,171 | 1,026,809 | ||||||||
| Less accumulated depreciation and amortization | (615,104 | ) | (503,827 | ) | |||||
| Work-in-progress | 235,735 | 130,560 | |||||||
| $ | 1,382,802 | $ | 653,542 |
During the fourth quarter of 2019, we wrote-off capitalized software assets of $31.1 million related to legacy Global Payments technology that will no longer be utilized for the combined company.
NOTE 5—GOODWILL AND OTHER INTANGIBLE ASSETS
As of December 31, 2019 and 2018, goodwill and other intangible assets consisted of the following:
| 2019 | 2018 | ||||||
| (in thousands) | |||||||
| Goodwill | $ | 23,759,740 | $ | 6,341,355 | |||
| Other intangible assets: | |||||||
| Customer-related intangible assets | $ | 9,238,728 | $ | 2,486,217 | |||
| Acquired technologies | 2,732,218 | 896,701 | |||||
| Contract-based intangible assets | 1,974,429 | 178,391 | |||||
| Trademarks and trade names | 1,239,471 | 289,588 | |||||
| 15,184,846 | 3,850,897 | ||||||
| Less accumulated amortization: | |||||||
| Customer-related intangible assets | 1,225,785 | 860,715 | |||||
| Acquired technologies | 576,928 | 351,170 | |||||
| Contract-based intangible assets | 82,225 | 67,160 | |||||
| Trademarks and trade names | 145,253 | 83,234 | |||||
| 2,030,191 | 1,362,279 | ||||||
| $ | 13,154,655 | $ | 2,488,618 |
On December 31, 2019, we acquired a merchant portfolio from Desjardins Group, the leading cooperative financial group in Canada. We accounted for the acquisition as an asset purchase and recorded customer-related intangible assets of $307.9 million.
The following table sets forth the changes by reportable segment in the carrying amount of goodwill for the years ended December 31, 2019, 2018 and 2017:
| Merchant Solutions | Issuer Solutions | Business and Consumer Solutions | Total | ||||||||||||
| (in thousands) | |||||||||||||||
| Balance at December 31, 2016 | $ | 4,779,802 | $ | 27,792 | $ | — | $ | 4,807,594 | |||||||
| Goodwill acquired | 784,668 | — | — | 784,668 | |||||||||||
| Effect of foreign currency translation | 75,443 | 5,746 | — | 81,189 | |||||||||||
| Measurement-period adjustments | 30,541 | — | — | 30,541 | |||||||||||
| Balance at December 31, 2017 | 5,670,454 | 33,538 | — | 5,703,992 | |||||||||||
| Goodwill acquired | 698,870 | — | — | 698,870 | |||||||||||
| Effect of foreign currency translation | (59,374 | ) | (1,709 | ) | — | (61,083 | ) | ||||||||
| Measurement-period adjustments | (424 | ) | — | — | (424 | ) | |||||||||
| Balance at December 31, 2018 | 6,309,526 | 31,829 | — | 6,341,355 | |||||||||||
| Goodwill acquired | 7,095,167 | 7,945,029 | 2,358,657 | 17,398,853 | |||||||||||
| Effect of foreign currency translation | 10,030 | 8,873 | — | 18,903 | |||||||||||
| Measurement-period adjustments | 629 | — | 629 | ||||||||||||
| Balance at December 31, 2019 | $ | 13,415,352 | $ | 7,985,731 | $ | 2,358,657 | $ | 23,759,740 |
There were no accumulated impairment losses for goodwill at any balance sheet date reflected in the table above.
Customer-related intangible assets, acquired technologies, contract-based intangible assets and trademarks and trade names acquired during the year ended December 31, 2019 had weighted-average amortization periods of 15.1 years, 6.9 years, 17.7 years and 10.7 years, respectively. Customer-related intangible assets, acquired technologies, contract-based intangible assets and trademarks and trade names acquired during the year ended December 31, 2018 had weighted-average amortization periods of 11.5 years, 6.2 years, 19.3 years and 12.5 years, respectively. Customer-related intangible assets, acquired technologies, contract-based intangible assets and trademarks and trade names acquired during the year ended December 31, 2017 had weighted-average amortization periods of 16.8 years, 8.8 years, 3.0 years and 15.0 years, respectively. Amortization expense of acquired intangibles was $667.1 million for the year ended December 31, 2019, $377.7 million for the year ended December 31, 2018 and $337.9 million for the year ended December 31, 2017.
The estimated amortization expense of acquired intangibles as of December 31, 2019 for the next five years, calculated using the currency exchange rate at the date of acquisition, if applicable, is as follows (in thousands):
| 2020 | $ | 1,249,281 | |
| 2021 | 1,215,658 | ||
| 2022 | 1,202,279 | ||
| 2023 | 1,158,838 | ||
| 2024 | 1,102,224 |
NOTE 6**—LEASES**
Our leases consist primarily of operating real estate leases for office space and data centers in the markets in which we conduct business. We also have operating and finance leases for computer and other equipment. Many of our leases include escalating rental payments and incentives, as well as termination and renewal options. Certain of our lease agreements provide that we pay the cost of property taxes, insurance and maintenance. As described in "Note 1—Basis of Presentation and Summary of Significant Accounting Policies," we adopted ASU 2016-02 on January 1, 2019. Unless otherwise indicated, the following information in this footnote applies only to periods after December 31, 2018.
The effects of adopting ASU 2016-02 on our balance sheet as of January 1, 2019 are set forth in the table below. Adoption did not have a material effect on any line items in our consolidated statement of income or on our cash flows from operating activities, investing activities or financing activities included in our consolidated statement of cash flows.
As of December 31, 2019 and January 1, 2019, right-of-use assets and lease liabilities consisted of the following:
| Balance Sheet Location | December 31, 2019 | January 1, 2019 | ||||||||
| (in thousands) | ||||||||||
| Assets: | ||||||||||
| Operating lease right-of-use assets: | ||||||||||
| Real estate | Other noncurrent assets | $ | 355,063 | $ | 231,720 | |||||
| Computer equipment | Other noncurrent assets | 80,427 | — | |||||||
| Other | Other noncurrent assets | 1,310 | 4,259 | |||||||
| Total operating lease right-of-use-assets | $ | 436,800 | $ | 235,979 | ||||||
| Finance lease right-of-use assets: | ||||||||||
| Computer equipment | Property and equipment, net | $ | 21,901 | $ | — | |||||
| Other | Property and equipment, net | 4,808 | — | |||||||
| 26,709 | — | |||||||||
| Less accumulated depreciation: | ||||||||||
| Computer equipment | Property and equipment, net | (2,190 | ) | — | ||||||
| Other | Property and equipment, net | (234 | ) | — | ||||||
| Total accumulated depreciation | (2,424 | ) | — | |||||||
| Total finance lease right-of-use assets | 24,285 | — | ||||||||
| Total right-of-use assets(1) | $ | 461,085 | $ | 235,979 | ||||||
| Liabilities: | ||||||||||
| Operating lease liabilities (current) | Accounts payable and accrued liabilities | $ | 88,812 | $ | 37,339 | |||||
| Operating lease liabilities (noncurrent) | Other noncurrent liabilities | 397,488 | 236,697 | |||||||
| Finance lease liabilities (current) | Current portion of long-term debt | 6,570 | — | |||||||
| Finance lease liabilities (noncurrent) | Long-term debt | 26,426 | — | |||||||
| Total lease liabilities | $ | 519,296 | $ | 274,036 |
(1) Approximately 82% of our right-of-use assets are located in the United States.
The weighted-average remaining lease term for operating and finance leases at December 31, 2019 was 7.4 years and 5.1 years, respectively. As of December 31, 2019, the weighted-average discount rate used in the measurement of operating and finance lease liabilities was 4.1% and 2.8%, respectively.
As of December 31, 2019, maturities of lease liabilities were as follows:
| Operating Leases | Finance Leases | |||||||
| (in thousands) | ||||||||
| Years ending December 31, | ||||||||
| 2020 | $ | 106,787 | $ | 7,402 | ||||
| 2021 | 99,196 | 7,157 | ||||||
| 2022 | 87,500 | 7,123 | ||||||
| 2023 | 58,073 | 6,728 | ||||||
| 2024 | 47,994 | 6,728 | ||||||
| 2025 and thereafter | 177,119 | 203 | ||||||
| Total lease payments(1) | 576,669 | 35,341 | ||||||
| Imputed interest | (90,369 | ) | (2,345 | ) | ||||
| Total lease liabilities | $ | 486,300 | $ | 32,996 |
(1) Total operating lease payments did not include approximately $64 million for operating leases that had not yet commenced at December 31, 2019. We expect the lease commencement dates for these leases to occur in 2020.
Operating lease costs in our consolidated statement of income for the year ended December 31, 2019 were $85.9 million, including $71.0 million in selling, general and administrative expenses and $14.9 million in cost of services. Total lease costs for the year ended December 31, 2019 include variable lease costs of approximately $19.1 million, which are primarily comprised of the cost of property taxes, insurance and maintenance. Finance lease costs and lease costs for leases with a term of less than 12 months were not material for the year ended December 31, 2019.
Cash paid for amounts included in the measurement of operating lease liabilities for the year ended December 31, 2019 was $70.4 million, which is included as a component of cash provided by operating activities in the consolidated statement of cash flows. Operating lease liabilities arising from obtaining new or modified right-of-use assets, net of reductions resulting from certain lease modifications, were approximately $28.4 million for the year ended December 31, 2019. In connection with the Merger, we acquired right-of-use assets and assumed lease liabilities of $256.2 million and $272.0 million, respectively.
Future minimum payments at December 31, 2018 for noncancelable operating leases were as follows (in thousands):
| Years ending December 31: | ||||
| 2019 | $ | 50,095 | ||
| 2020 | 47,700 | |||
| 2021 | 40,035 | |||
| 2022 | 37,055 | |||
| 2023 | 33,298 | |||
| 2024 and thereafter | 225,225 | |||
| Total future minimum payments(1) | $ | 433,408 |
(1) Future minimum lease payments included approximately $70 million for operating leases that had not commenced at December 31, 2018.
Rent expense on all operating leases for the years ended December 31, 2018 and 2017 was $47.1 million and $44.7 million, respectively. During the year ended December 31, 2017, we sold our operating facility in Jeffersonville, Indiana for $37.5 million and simultaneously leased the property back for an initial term of 20 years, followed by four optional renewal terms of five years. The arrangement met the criteria to be treated as a sale for accounting purposes, and as a result, we derecognized the associated property. There was no resulting gain or loss on the sale because the proceeds received were equal to the carrying amount of the property.
NOTE 7**—LONG-TERM DEBT AND LINES OF CREDIT**
As of December 31, 2019 and 2018, long-term debt consisted of the following:
| December 31, 2019 | December 31, 2018 | ||||||
| (in thousands) | |||||||
| Long-term Debt | |||||||
| 3.800% senior notes due April 1, 2021 | $ | 760,996 | $ | — | |||
| 3.750% senior notes due June 1, 2023 | 567,330 | — | |||||
| 4.000% senior notes due June 1, 2023 | 572,522 | — | |||||
| 2.650% senior notes due February 15, 2025 | 991,423 | — | |||||
| 4.800% senior notes due April 1, 2026 | 820,623 | — | |||||
| 4.450% senior notes due June 1, 2028 | 486,982 | — | |||||
| 3.200% senior notes due August 15, 2029 | 1,234,843 | — | |||||
| 4.150% senior notes due August 15, 2049 | 739,431 | — | |||||
| Unsecured term loan facility | 1,981,758 | — | |||||
| Unsecured revolving credit facility | 903,000 | — | |||||
| Secured term loans | — | 4,426,243 | |||||
| Secured revolving credit facility | — | 704,000 | |||||
| Finance lease liabilities | 32,996 | — | |||||
| Other borrowings | 33,597 | — | |||||
| Total long-term debt | 9,125,501 | 5,130,243 | |||||
| Less current portion | 35,137 | 115,075 | |||||
| Long-term debt, excluding current portion | $ | 9,090,364 | $ | 5,015,168 |
The carrying amounts of our senior notes and term loans are presented net of unamortized discount and unamortized debt issuance costs, as applicable. At December 31, 2019, unamortized discount on senior notes was $5.9 million, and unamortized debt issuance costs on senior notes and the unsecured term loan facility were $46.6 million. Unamortized debt issuance costs on our secured term loans at December 31, 2018 were $37.4 million. The portion of unamortized debt issuance costs related to revolving credit facilities is included in other noncurrent assets. At December 31, 2019, unamortized debt issuance costs on the unsecured revolving credit facility were $17.6 million, and, at December 31, 2018, unamortized debt issuance costs on the secured revolving credit facility were $12.9 million. The debt discounts and debt issuance costs are recognized as an increase to interest expense over the terms of the respective debt instruments. Amortization of discounts and debt issuance costs was $11.9 million, $11.7 million and $11.8 million, respectively, for years ended December 31, 2019, 2018 and 2017.
At December 31, 2019, maturities of long-term debt (excluding finance lease liabilities) were as follows by year (in thousands):
| Years ending December 31, | |||
| 2020 | $ | 28,512 | |
| 2021 | 754,906 | ||
| 2022 | 50,038 | ||
| 2023 | 1,300,000 | ||
| 2024 | 2,653,000 | ||
| 2025 and thereafter | 4,200,000 | ||
| Total | $ | 8,986,456 |
See "Note 6—Leases" for more information about our finance lease liabilities, including maturities.
Bridge Facility
On May 27, 2019, in connection with our entry into the Merger Agreement described in "Note 2—Acquisitions," we obtained commitments for a $2.75 billion, 364-day senior unsecured bridge facility (the "Bridge Facility"). On July 9, 2019, upon our entry into the senior unsecured term loan and revolving credit facilities described below, the aggregate commitments under the Bridge Facility were reduced to approximately $2.1 billion. Concurrently with the issuance of our senior unsecured notes, the remaining aggregate commitments under the Bridge Facility were reduced to zero and terminated. During the year ended December 31, 2019, we recognized $11.7 million of fees associated with the Bridge Facility in interest expense.
Senior Unsecured Credit Facilities
On July 9, 2019, we entered into a term loan credit agreement ("Term Loan Credit Agreement") and a revolving credit agreement ("Unsecured Revolving Credit Agreement") in each case with Bank of America, N.A., as administrative agent, and a syndicate of financial institutions, as lenders and other agents. The Term Loan Credit Agreement provides for a senior unsecured $2.0 billion term loan facility, and the Unsecured Revolving Credit Agreement provides for a senior unsecured $3.0 billion revolving credit facility. We capitalized debt issuance costs of $12.8 million in connection with the issuances of these term loan and revolving credit facilities.
Borrowings under the term loan facility were made in U.S. dollars and borrowings under the revolving credit facility are available to be made in U.S. dollars, euros, sterling, Canadian dollars and, subject to certain conditions, certain other currencies at our option. Borrowings in U.S. dollars and certain other London Interbank Offered Rate ("LIBOR")-quoted currencies will bear interest, at our option, at a rate equal to either (1) the rate (adjusted for any statutory reserve requirements for eurocurrency liabilities) for eurodollar deposits in the London interbank market, (2) a floating rate of interest set forth on the applicable LIBOR screen page designated by Bank of America or (3) the highest of (a) the federal funds effective rate plus 0.5%, (b) the rate of interest as publicly announced by Bank of America as its "prime rate" or (c) LIBOR plus 1.0%, in each case, plus an applicable margin.
As of December 31, 2019, the interest rates on the term loan facility and the revolving credit facility were 3.2% and 3.0%, respectively. In addition, we are required to pay a quarterly commitment fee with respect to the unused portion of the revolving credit facility at an applicable rate per annum ranging from 0.125% to 0.300% depending on our credit rating. Beginning on December 31, 2022, and at the end of each quarter thereafter, the term loan facility must be repaid in quarterly installments in the amount of 2.50% of original principal through the maturity date with the remaining principal balance due upon maturity in September 2024. The revolving credit facility also matures in September 2024.
We may issue standby letters of credit of up to $250 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. The total available commitments under the revolving credit facility at December 31, 2019 were $2,077.5 million.
Senior Unsecured Notes
On August 14, 2019, we completed the public offering and issuance of $3.0 billion aggregate principal amount of senior unsecured notes, consisting of the following: (i) $1.0 billion aggregate principal amount of 2.650% senior notes due 2025; (ii) $1.25 billion aggregate principal amount of 3.200% senior notes due 2029; and (iii) $750.0 million aggregate principal amount of 4.150% senior notes due 2049. Interest on the senior notes is payable semi-annually in arrears on each February 15 and August 15, beginning on February 15, 2020. Each series of the senior notes is redeemable, at our option, in whole or in part, at any time and from time-to-time at the redemption prices set forth in the related indenture. We issued the senior notes at a total discount of $6.1 million and capitalized related debt issuance costs of $29.6 million.
From August 14, 2019 until the closing of the Merger on September 18, 2019, the proceeds from the issuance of the senior notes were held in escrow. Upon closing, the funds were released and used together with borrowings under the term loan facility and the revolving credit facility, as well as cash on hand, to repay TSYS' unsecured revolving credit facility, refinance certain of our existing indebtedness, fund cash payments made in lieu of fractional shares and pay transaction fees and costs related to the Merger.
In addition, in connection with the Merger, we assumed $3.0 billion aggregate principal amount of senior unsecured notes of TSYS, consisting of the following: (i) $750 million aggregate principal amount of 3.800% senior notes due 2021; (ii) $550 million aggregate principal amount of 3.750% senior notes due 2023; (iii) $550 million aggregate principal amount of 4.000% senior notes due 2023; (iv) $750 million aggregate principal amount of 4.800% senior notes due 2026; and (v) $450 million aggregate principal amount of 4.450% senior notes due 2028. For the 3.800% senior notes due 2021 and the 4.800% senior notes due 2026, interest is payable semi-annually each April 1 and October 1. For the 3.750% senior notes due 2023, the 4.000% senior notes due 2023 and the 4.450% senior notes due 2028, interest is payable semi-annually each June 1 and December 1.
The senior notes assumed in the Merger were measured at fair value of $3.2 billion at the acquisition date, which exceeded their aggregate face value by $169.0 million. The difference between the fair value and face value of the assumed senior notes is recognized over the terms of the respective notes as a reduction of interest expense. The amortization of this fair value adjustment was $10.5 million for the year ended December 31, 2019.
As of December 31, 2019, our senior notes had an estimated fair value of $6.3 billion. The fair value of other long-term debt approximated its carrying amount at December 31, 2019.
Prior Credit Facility
Prior to completion of the Merger, we were 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. The credit facility provided for secured financing comprised of (i) a $1.5 billion revolving credit facility; (ii) a $1.5 billion term loan; (iii) a $1.37 billion term loan; (iv) a $1.14 billion term loan; and (v) a $500.0 million term loan. Upon the consummation of the Merger, all borrowings outstanding and other amounts due under the credit facility were repaid and this credit facility was terminated. In connection with the extinguishment of this credit facility, we wrote off related unamortized debt issuance costs of $16.7 million to interest expense during the year ended December 31, 2019.
Compliance with Covenants
The senior unsecured term loan and revolving credit facilities contain customary conditions to funding, affirmative covenants, negative covenants, financial covenants and events of default. As of December 31, 2019, financial covenants under the term loan facility required a leverage ratio of 3.50 to 1.00 and an interest coverage ratio of 3.00 to 1.00. We were in compliance with all applicable covenants as of December 31, 2019.
Settlement Lines of Credit
In various markets where we do business, we have specialized lines of credit, which are restricted for use in funding settlement. The settlement lines of credit generally have variable interest rates, are subject to annual review and are denominated in local currency but may, in some cases, facilitate borrowings in multiple currencies. For certain of our lines of credit, the available credit is increased by the amount of cash we have on deposit in specific accounts with the lender. Accordingly, the amount of the outstanding line of credit may exceed the stated credit limit. As of December 31, 2019 and 2018, a total of $74.5 million and $70.6 million, respectively, of cash on deposit was used to determine the available credit.
As of December 31, 2019, we had $463.2 million outstanding under these lines of credit with additional capacity to fund settlement of $981.8 million. During the year ended December 31, 2019, the maximum and average outstanding balances under these lines of credit were $882.6 million and $423.2 million, respectively. The weighted-average interest rate on these borrowings was 3.16% at December 31, 2019.
Derivative Agreements
We have interest rate swap agreements with financial institutions to hedge changes in cash flows attributable to interest rate risk on a portion of our variable-rate debt instruments. Net amounts to be received or paid under the swap agreements are reflected as adjustments to interest expense. Since we have designated the interest rate swap agreements as portfolio cash flow hedges, unrealized gains or losses resulting from adjusting the swaps to fair value are recorded as components of other comprehensive income (loss).
In addition, in June 2019, we entered into forward-starting interest rate swap agreements with an aggregate notional amount of $1.0 billion. The forward-starting interest rate swaps, designated as cash flow hedges, were designed to manage the exposure to interest rate volatility in anticipation of the issuance of our senior unsecured notes. During the period from the commencement of the swaps through the date upon which our senior unsecured notes were issued, the effective portion of the unrealized losses on the swaps was included in other comprehensive loss. Upon issuance of our senior unsecured notes, we terminated the forward-starting swap agreements and made settlement payments of $48.3 million, which are included in cash flows from operating activities in our consolidated statement of cash flows for the year ended December 31, 2019 within the caption labeled "Other, net." We have and will continue to reclassify the effective portion of the realized loss from accumulated other comprehensive loss into interest expense over the terms of the related senior notes. The fair values of our 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 December 31, 2019, and classified within Level 2 of the valuation hierarchy.
The table below presents information about our derivative financial instruments as of December 31, 2019 and 2018:
| Weighted-Average Fixed Rate of Interest at | Range of Maturity Dates at | Fair Values at December 31, | ||||||||||||
| Derivative Financial Instruments | Balance Sheet Location | December 31, 2019 | December 31, 2019 | 2019 | 2018 | |||||||||
| (in thousands) | ||||||||||||||
| Interest rate swaps (Notional of $250 million at December 31, 2019 and $750 million at December 31, 2018) | Prepaid expenses and other current assets | 1.34% | July 31, 2020 | $ | 472 | $ | 3,200 | |||||||
| Interest rate swaps (Notional of $550 million at December 31, 2018) | Other noncurrent assets | N/A | N/A | $ | — | $ | 8,256 | |||||||
| Interest rate swaps (Notional of $1,550 million at December 31, 2019 and $950 million at December 31, 2018) | Other noncurrent liabilities | 2.57% | March 31, 2021 - December 31, 2022 | $ | 45,604 | $ | 14,601 |
N/A - not applicable.
The table below presents the effects of our interest rate swaps on the consolidated statements of income and comprehensive income for the years ended December 31, 2019, 2018 and 2017:
| Years Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in thousands) | |||||||||||
| Net unrealized gains (losses) recognized in other comprehensive loss | $ | (90,238 | ) | $ | (7,553 | ) | $ | 4,549 | |||
| Net unrealized losses (gains) reclassified out of other comprehensive loss to interest expense | $ | 2,257 | $ | (4,792 | ) | $ | 5,673 |
At December 31, 2019, the amount of net unrealized losses 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 $20.2 million.
Interest Expense
Interest expense was $301.2 million, $195.5 million and $174.3 million, respectively, for the years ended December 31, 2019, 2018 and 2017.
NOTE 8**—ACCOUNTS PAYABLE AND ACCRUED LIABILITIES**
As of December 31, 2019 and 2018, accounts payable and accrued liabilities consisted of the following:
| 2019 | 2018 | ||||||
| (in thousands) | |||||||
| Funds held for customers | $ | 392,375 | $ | 454,588 | |||
| Compensation and benefits | 266,967 | 117,739 | |||||
| Contract liabilities | 193,405 | 146,947 | |||||
| Payment network fees | 154,789 | 96,495 | |||||
| Trade accounts payable | 148,084 | 76,229 | |||||
| Operating lease liabilities | 88,812 | — | |||||
| Interest | 61,296 | 1,671 | |||||
| Income taxes payable | 56,426 | 51,108 | |||||
| Miscellaneous taxes and withholdings | 48,738 | 15,436 | |||||
| Third-party processing fees | 28,041 | 24,987 | |||||
| Unclaimed property | 26,331 | 24,369 | |||||
| Audit and legal fees | 26,080 | 7,543 | |||||
| Settlement of common share repurchases | 17,200 | 4,000 | |||||
| Current portion of accrued buyout liability(1) | 14,817 | 14,011 | |||||
| Third-party commissions | 13,641 | 24,998 | |||||
| Other | 285,164 | 116,582 | |||||
| $ | 1,822,166 | $ | 1,176,703 |
(1) The noncurrent portion of accrued buyout liability of $34.2 million and $59.4 million is included in other noncurrent liabilities on the consolidated balance sheets as of December 31, 2019 and 2018, respectively.
At December 31, 2019, accrued liabilities (compensation and benefits) included obligations totally $37.3 million for one-time employee termination benefits resulting from Merger-related integration activities. During the year ended December 31, 2019, we recognized charges of $57.1 million for actions taken to date, which included $17.3 million of share-based compensation expense based on accelerated vesting periods for equity awards held by terminated employees. These charges are recorded within selling, general and administrative expenses in our consolidated statements of income and included within Corporate expenses for segment reporting purposes. New obligations may arise as Merger-related integration activities continue in 2020.
NOTE 9**—INCOME TAX**
The income tax expense (benefit) for the years ended December 31, 2019, 2018 and 2017 consisted of the following:
| Years Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in thousands) | |||||||||||
| Current income tax expense (benefit): | |||||||||||
| Federal | $ | 50,048 | $ | (20,984 | ) | $ | 79,903 | ||||
| State | 29,788 | 21,122 | 3,468 | ||||||||
| Foreign | 90,895 | 79,320 | 67,851 | ||||||||
| 170,731 | 79,458 | 151,222 | |||||||||
| Deferred income tax expense (benefit): | |||||||||||
| Federal | (79,813 | ) | (8,760 | ) | (266,869 | ) | |||||
| State | (29,326 | ) | (1,684 | ) | 9,678 | ||||||
| Foreign | 598 | 8,474 | 4,582 | ||||||||
| (108,541 | ) | (1,970 | ) | (252,609 | ) | ||||||
| $ | 62,190 | $ | 77,488 | $ | (101,387 | ) |
Income tax expense allocated to noncontrolling interests was $12.3 million, $10.6 million and $8.6 million for the years ended December 31, 2019, 2018 and 2017, respectively.
The following table presents income before income taxes for the years ended December 31, 2019, 2018 and 2017:
| Years Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in thousands) | |||||||||||
| United States | $ | 60,000 | $ | 131,067 | $ | 29,692 | |||||
| Foreign | 457,925 | 431,088 | 362,991 | ||||||||
| $ | 517,925 | $ | 562,155 | $ | 392,683 |
On December 22, 2017, the United States enacted the U.S. Tax Cuts and Jobs Act of 2017 (the "2017 U.S. Tax Act"), which resulted in numerous changes, including a reduction in the U.S. federal tax rate from 35% to 21% effective January 1, 2018 and the transition of the U.S. federal tax system to a territorial regime. As part of this transition, the 2017 U.S. Tax Act imposed a one-time mandatory "transition" tax on foreign earnings not previously subjected to U.S. income tax.
Following the guidance in SAB 118, we made reasonable estimates of the effects of the 2017 U.S. Tax Act on our existing deferred tax balances and the one-time transition tax. For these items, which are further described below, we recognized a provisional net income tax benefit of $158.7 million, which was included as a component of income tax benefit in our consolidated statement of income for the year ended December 31, 2017.
We remeasured our U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse, which is now 21% instead of 35% and recorded a provisional income tax benefit of $222.4 million for the year ended December 31, 2017. The one-time transition tax established by the 2017 U.S. Tax Act is based on our total post-1986 foreign earnings and profits, offset by allowable foreign tax credits. The transition tax rate applied to our foreign earnings is based on the amount of those earnings held in cash and cash equivalents, as well as other assets. For the year ended December 31, 2017, we recorded a provisional income tax expense of $63.7 million for the transition tax on our previously deferred foreign earnings. During 2018, we continued to analyze other provisions of the 2017 U.S. Tax Act, including the effects on our foreign tax pools and resulting foreign tax credits, and reduced our estimated transition tax liability to $40.4 million, which resulted in an income tax benefit of $23.3 million. As of December 31, 2018, we had completed our accounting for the transition effects of the 2017 U.S. Tax Act.
Approximately $27.0 million of our undistributed foreign earnings are considered to be indefinitely reinvested outside the United States as of December 31, 2019. Because those earnings are considered to be indefinitely reinvested, no deferred income taxes have been provided thereon. If we were to make a distribution of any portion of those earnings in the form of dividends or otherwise, any such amounts would be subject to withholding taxes payable to various foreign jurisdictions; however, the amounts would not be subject to any additional U.S. income tax.
Our effective tax rates for the years ended December 31, 2019, 2018 and 2017 differ from the federal statutory rate for those periods as follows:
| Years Ended December 31, | ||||||||
| 2019 | 2018 | 2017 | ||||||
| Federal U.S. statutory rate | 21.0 | % | 21.0 | % | 35.0 | % | ||
| Valuation allowance | 4.6 | 1.4 | (3.2 | ) | ||||
| Foreign interest income not subject to tax | (4.5 | ) | (1.7 | ) | (2.2 | ) | ||
| Tax credits | (3.9 | ) | (0.5 | ) | (0.3 | ) | ||
| Foreign-derived intangible income deduction | (2.7 | ) | (1.6 | ) | — | |||
| Uncertain tax positions | (2.6 | ) | (0.9 | ) | (0.5 | ) | ||
| Share-based compensation expense | (2.5 | ) | (2.1 | ) | (4.2 | ) | ||
| State income taxes, net of federal income tax benefit | 1.0 | 2.7 | 1.9 | |||||
| Foreign income taxes | (0.7 | ) | (0.5 | ) | (12.0 | ) | ||
| Federal U.S. transition tax | — | (4.1 | ) | 16.2 | ||||
| Federal U.S. rate reduction | — | — | (55.6 | ) | ||||
| Other SAB 118 adjustments | — | (0.6 | ) | — | ||||
| Other | 2.3 | 0.7 | (0.9 | ) | ||||
| Effective tax rate | 12.0 | % | 13.8 | % | (25.8 | )% |
Deferred income taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax laws and rates. Deferred income taxes as of December 31, 2019 and 2018 reflect the effect of temporary differences between the amounts of assets and liabilities for financial accounting and income tax purposes. As of December 31, 2019 and 2018, principal components of deferred tax items were as follows:
| 2019 | 2018 | ||||||
| (in thousands) | |||||||
| Deferred income tax assets: | |||||||
| Lease liabilities | $ | 94,965 | $ | — | |||
| Financial instruments | 65,848 | 768 | |||||
| Share-based compensation expense | 48,204 | 11,333 | |||||
| Accrued expenses | 40,035 | 35,913 | |||||
| Foreign net operating loss carryforwards | 37,818 | 10,833 | |||||
| Income tax credit carryforwards | 37,057 | 3,102 | |||||
| Domestic net operating loss carryforwards | 22,254 | 20,096 | |||||
| Basis difference - U.K. business | 2,030 | 4,890 | |||||
| Other | 28,460 | 13,036 | |||||
| 376,671 | 99,971 | ||||||
| Less: valuation allowance | (72,042 | ) | (23,390 | ) | |||
| 304,629 | 76,581 | ||||||
| Deferred tax liabilities: | |||||||
| Acquired intangibles | 2,963,695 | 522,636 | |||||
| Property and equipment | 193,052 | 102,654 | |||||
| Partnership interests | 108,220 | — | |||||
| Right-of-use assets | 83,023 | — | |||||
| Other | 95,988 | 28,188 | |||||
| 3,443,978 | 653,478 | ||||||
| Net deferred income tax liability | $ | 3,139,349 | $ | 576,897 |
The net deferred income taxes reflected on our consolidated balance sheets as of December 31, 2019 and 2018 are as follows:
| 2019 | 2018 | ||||||
| (in thousands) | |||||||
| Noncurrent deferred income tax asset | $ | 6,292 | $ | 8,128 | |||
| Noncurrent deferred income tax liability | 3,145,641 | 585,025 | |||||
| Net deferred income tax liability | $ | 3,139,349 | $ | 576,897 |
A valuation allowance is provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Changes to our valuation allowance during the years ended December 31, 2019, 2018 and 2017 are summarized below (in thousands):
| Balance at December 31, 2016 | $ | (16,611 | ) |
| Allowance for foreign net operating loss carryforwards | (6,469 | ) | |
| Allowance for domestic net operating loss carryforwards | (3,793 | ) | |
| Allowance for state credit carryforwards | (685 | ) | |
| Rate change on domestic net operating loss and capital loss carryforwards | 3,868 | ||
| Utilization of foreign income tax credit carryforward | 7,140 | ||
| Balance at December 31, 2017 | (16,550 | ) | |
| Allowance for foreign net operating loss carryforwards | (7,979 | ) | |
| Allowance for domestic net operating loss carryforwards | 1,145 | ||
| Allowance for state credit carryforwards | (6 | ) | |
| Balance at December 31, 2018 | (23,390 | ) | |
| Allowance for foreign net operating loss carryforwards | (26,439 | ) | |
| Allowance for foreign credit carryforwards | (15,226 | ) | |
| Allowance for state credit carryforwards | (6,680 | ) | |
| Allowance for domestic net operating loss carryforwards | (307 | ) | |
| Balance at December 31, 2019 | $ | (72,042 | ) |
The increases in the valuation allowance related to both the state and foreign credit carryforwards for the year ended December 31, 2019 relate primarily to carryforward assets recognized in connection with the Merger.
Foreign net operating loss carryforwards of $176.9 million, domestic net operating loss carryforwards of $41.6 million and tax credit carryforwards of $36.1 million at December 31, 2019 will expire between December 31, 2024 and December 31, 2039, if not utilized.
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, 2010, U.S. federal income tax examinations for years ended on or before May 31, 2016 and U.K. federal income tax examinations for years ended on or before May 31, 2015.
A reconciliation of the beginning and ending amounts of unrecognized income tax benefits, excluding penalties and interest, for the years ended December 31, 2019, 2018 and 2017 as follows:
| Years Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in thousands) | |||||||||||
| Balance at the beginning of the year | $ | 21,197 | $ | 31,218 | $ | 17,916 | |||||
| Additions related to acquisitions | 22,283 | — | 13,061 | ||||||||
| Reductions for income tax positions of prior years | (14,235 | ) | (10,021 | ) | (7,285 | ) | |||||
| Settlements with income tax authorities | (2,583 | ) | — | (449 | ) | ||||||
| Additions for income tax positions of prior years | 1,803 | — | 411 | ||||||||
| Additions based on income tax positions related to the current year | 1,206 | — | 7,537 | ||||||||
| Effect of foreign currency fluctuations on income tax positions | — | — | 27 | ||||||||
| Balance at the end of the year | $ | 29,671 | $ | 21,197 | $ | 31,218 |
As of December 31, 2019, the total amount of gross unrecognized income tax benefits that, if recognized, would affect the provision for income taxes is $27.4 million.
NOTE 10**—SHAREHOLDERS’ EQUITY**
We make repurchases of our common stock mainly through the use of open market purchases. As of December 31, 2019, we were authorized to repurchase up to $473.4 million of our common stock. Information about shares repurchased and retired was as follows for the years ended December 31, 2019, 2018 and 2017:
| Years Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in thousands, except per share amounts) | |||||||||||
| Number of shares repurchased and retired | 2,328 | 1,927 | 376 | ||||||||
| Cost of shares repurchased, including commissions | $ | 324,583 | $ | 212,196 | $ | 34,811 | |||||
| Average cost per share | $ | 139.42 | $ | 110.11 | $ | 92.51 |
In connection with the completion of the Merger, our Articles of Incorporation were amended to increase the number of authorized shares of Global Payments common stock from 200 million to 400 million.
On February 5, 2019, the board of directors increased its authorization to repurchase shares of our common stock to $750 million, inclusive of prior share repurchase programs authorized by the board and repurchases made thereunder.
On February 19, 2020, the board of directors declared a cash dividend of $0.195 per share payable on March 27, 2020 to common shareholders of record on March 13, 2020.
NOTE 11**—SHARE-BASED AWARDS AND OPTIONS**
We have granted nonqualified stock options and restricted stock awards to key employees, officers and directors under a long-term incentive plan, which permits grants of equity to employees, officers, directors and consultants. A total of 14.0 million shares of our common stock has been reserved and made available for issuance pursuant to awards granted under the plan. The awards are held in escrow and released upon the grantee's satisfaction of conditions of the award certificate.
The following table summarizes share-based compensation expense and the related income tax benefit recognized for our share-based awards and stock options:
| Years Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in thousands) | |||||||||||
| Share-based compensation expense | $ | 89,634 | $ | 57,826 | $ | 39,095 | |||||
| Income tax benefit | $ | 20,519 | $ | 13,038 | $ | 13,849 |
Restricted Stock
Restricted stock awards vest in equal annual installments over a three-year period and in some cases vest at the end of a three-year service period. Restricted shares cannot be sold or transferred until they have vested. The grant date fair value of restricted stock awards, which is based on the quoted market value of our common stock on the grant date, is recognized as share-based compensation expense on a straight-line basis over the vesting period.
Performance Units
Certain of our executives have been granted performance units under our long-term incentive plan. Performance units are performance-based restricted stock units that, after a performance period, may convert into common shares, which may be restricted. The number of shares is dependent upon the achievement of certain performance measures during the performance period. The target number of performance units and any market-based performance measures are set by the compensation committee of our board of directors ("Compensation Committee"). Performance units are converted only after the compensation committee certifies performance based on pre-established goals.
The Compensation Committee may set a range of possible performance-based outcomes for performance units. For awards with only performance conditions, we recognize compensation expense on a straight-line basis over the performance period using the grant date fair value of the award, which is based on the number of shares expected to be earned according to the level of achievement of performance goals. If the number of shares expected to be earned were to change at any time during the performance period, we would make a cumulative adjustment to share-based compensation expense based on the revised number of shares expected to be earned. The performance periods for awards granted generally range from one to three years.
To the extent earned, these performance units convert into unrestricted shares after performance results are certified by the Compensation Committee. We recognize share-based compensation expense based on the grant-date fair value of the performance-based restricted stock units, as determined by use of a Monte Carlo model, on a straight-line basis over the performance period.
The following table summarizes the changes in unvested restricted stock awards and performance units for the years ended December 31, 2019, 2018 and 2017:
| Shares | Weighted-Average Grant-Date Fair Value | |||||
| (in thousands) | ||||||
| Unvested at December 31, 2016 | 1,263 | $49.55 | ||||
| Granted | 899 | 79.79 | ||||
| Vested | (858 | ) | 39.26 | |||
| Forfeited | (78 | ) | 59.56 | |||
| Unvested at December 31, 2017 | 1,226 | 78.29 | ||||
| Granted | 650 | 109.85 | ||||
| Vested | (722 | ) | 60.08 | |||
| Forfeited | (70 | ) | 91.47 | |||
| Unvested at December 31, 2018 | 1,084 | 108.51 | ||||
| Replacement Awards | 894 | 163.74 | ||||
| Granted | 784 | 142.26 | ||||
| Vested | (781 | ) | 105.04 | |||
| Forfeited | (137 | ) | 124.30 | |||
| Unvested at December 31, 2019 | 1,844 | $149.96 |
The total fair value of restricted stock and performance awards vested was $82.1 million, $43.4 million and $33.7 million for the years ended December 31, 2019, 2018 and 2017, respectively.
For restricted stock awards and performance units, we recognized compensation expense of $74.3 million, $53.2 million and $35.2 million for the years ended December 31, 2019, 2018 and 2017, respectively. As of December 31, 2019, there was $142.9 million of unrecognized compensation expense related to unvested restricted stock awards and performance units that we expect to recognize over a weighted-average period of 2.1 years. Our restricted stock and performance unit 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 vest in equal installments on each of the first three anniversaries of the grant date. Our stock option plans provide for accelerated vesting under certain conditions.
The following table summarizes changes in stock option activity for the years ended December 31, 2019, 2018 and 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 | (160 | ) | 23.50 | 10.1 | ||||||
| Outstanding at December 31, 2017 | 723 | 47.79 | 6.4 | 37.9 | ||||||
| Granted | 103 | 114.70 | ||||||||
| Forfeited | (22 | ) | 100.38 | |||||||
| Exercised | (206 | ) | 42.65 | 16.5 | ||||||
| Outstanding at December 31, 2018 | 598 | 59.16 | 6.2 | 27.3 | ||||||
| Replacement Awards | 1,336 | 68.96 | ||||||||
| Granted | 109 | 128.22 | ||||||||
| Forfeited | (23 | ) | 110.13 | |||||||
| Exercised | (265 | ) | 33.99 | 28.8 | ||||||
| Outstanding at December 31, 2019 | 1,755 | $74.06 | 6.5 | $190.3 | ||||||
| Options vested and exercisable at December 31, 2019 | 1,167 | $58.03 | 5.6 | $145.3 |
We recognized compensation expense for stock options of $12.5 million, $2.7 million and $2.6 million during the years ended December 31, 2019, 2018 and 2017, respectively. The aggregate intrinsic value of stock options exercised during the years ended December 31, 2019, 2018 and 2017 was $28.8 million, $16.5 million and $10.1 million. As of December 31, 2019, we had $10.3 million of unrecognized compensation expense related to unvested stock options that we expect to recognize over a weighted-average period of 1.7 years.
The weighted-average grant-date fair value of stock options granted, including Replacement Awards, during the years ended December 31, 2019, 2018 and 2017 was $99.56, $35.09, and $23.68, respectively. Fair value was estimated on the date of grant using the Black-Scholes valuation model with the following weighted-average assumptions:
| Years Ended December 31, | ||||||||
| 2019 | 2018 | 2017 | ||||||
| Risk-free interest rate | 1.72 | % | 2.60 | % | 1.99 | % | ||
| Expected volatility | 31 | % | 29 | % | 30 | % | ||
| Dividend yield | 0.04 | % | 0.04 | % | 0.06 | % | ||
| Expected term (years) | 5 | 5 | 5 |
The risk-free interest rate was based on the yield of a zero coupon U.S. Treasury security with a maturity equal to the expected life of the stock option from the date of the grant. Our assumption on expected volatility is based on our historical volatility. The dividend yield assumption was determined using our average common stock price over the preceding year and the annualized amount of our most current quarterly dividend per share. We based our assumption of the expected term of the stock options on the historical exercise patterns of our stock options and our expectations of future exercise patterns.
NOTE 12—SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow disclosures for the years ended December 31, 2019, 2018 and 2017 are as follows:
| Years Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in thousands) | |||||||||||
| Income taxes paid, net of refunds | $ | 146,739 | $ | 101,302 | $ | 97,002 | |||||
| Interest paid | $ | 206,562 | $ | 177,525 | $ | 154,200 |
NOTE 13—NONCONTROLLING INTERESTS
The following table presents the reconciliation of net income attributable to noncontrolling interests to comprehensive income attributable to noncontrolling interests for the years ended December 31, 2019, 2018 and 2017:
| Years Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in thousands) | |||||||||||
| Net income attributable to noncontrolling interests | $ | 38,663 | $ | 32,614 | $ | 25,645 | |||||
| Foreign currency translation attributable to noncontrolling interests | (2,725 | ) | (2,696 | ) | 13,807 | ||||||
| Comprehensive income attributable to noncontrolling interests | $ | 35,938 | $ | 29,918 | $ | 39,452 |
NOTE 14—ACCUMULATED OTHER COMPREHENSIVE LOSS
The changes in the accumulated balances for each component of other comprehensive income (loss), net of tax, were as follows for the years ended December 31, 2019, 2018 and 2017:
| Foreign Currency Translation | Net Unrealized Gains (Losses) on Hedging Activities | Other | Accumulated Other Comprehensive Loss | ||||||||||||
| (in thousands) | |||||||||||||||
| Balance at December 31, 2016 | $ | (318,450 | ) | $ | (640 | ) | $ | (3,627 | ) | $ | (322,717 | ) | |||
| Other comprehensive income (loss) | 132,594 | 7,639 | (660 | ) | 139,573 | ||||||||||
| Balance at December 31, 2017 | (185,856 | ) | 6,999 | (4,287 | ) | (183,144 | ) | ||||||||
| Cumulative effect of adoption of new accounting standards | (1,843 | ) | — | — | (1,843 | ) | |||||||||
| Other comprehensive income (loss) | (116,575 | ) | (9,373 | ) | 760 | (125,188 | ) | ||||||||
| Balance at December 31, 2018 | (304,274 | ) | (2,374 | ) | (3,527 | ) | (310,175 | ) | |||||||
| Other comprehensive income (loss) | 62,375 | (66,945 | ) | 4,174 | (396 | ) | |||||||||
| Balance at December 31, 2019 | $ | (241,899 | ) | $ | (69,319 | ) | $ | 647 | $ | (310,571 | ) |
NOTE 15**—SEGMENT INFORMATION**
Information About Profit and Assets
Prior to the completion of the Merger, we operated in three reportable segments: North America, Europe and Asia-Pacific. In the fourth quarter of 2019, as a result of the merger with TSYS, we realigned our executive management and organizational structures. Based on an evaluation performed in accordance with the guidance provided in Accounting Standards Codification Topic 280, Segment Reporting, we determined that our new reportable segments as of December 31, 2019 were: Merchant Solutions,
Issuer Solutions and Business and Consumer Solutions. In connection with the organizational realignment, the legacy Global Payments businesses are included in the Merchant Solutions segment with the exception of a small portion of our European business that is included in the Issuer Solutions segment. Certain operating expenses that prior to the Merger were considered "enterprise-wide" expenses and reported in Corporate are now reflected in the Merchant Solutions segment.
Our payment technology solutions are similar around the world in that we enable our customers to accept card, electronic, check and digital-based payments. Through our Merchant Solutions segment, our offerings include, but are not limited to, authorization services, settlement and funding services, customer support and help-desk functions, chargeback resolution, terminal rental, sales and deployment, payment security services, consolidated billing and statements and on-line reporting. In addition, we offer a wide array of enterprise software solutions that streamline business operations to customers in numerous vertical markets. We also provide a variety of value-added services, including analytic and engagement tools, payroll services and reporting that assist our customers with driving demand and operating their businesses more efficiently.
Through our Issuer Solutions segment, we provide solutions that enable financial institutions and retailers to manage their card portfolios, reduce technical complexity and overhead and offer a seamless experience for cardholders on a single platform. In addition, we provide flexible commercial payments and ePayables solutions that support business-to-business payment processes for businesses and governments. We also offer complementary services including account management and servicing, fraud solution services, analytics and business intelligence, cards, statements and correspondence, customer contact solutions and risk management solutions.
Through our Business and Consumer Solutions segment, we provide general purpose reloadable prepaid debit and payroll cards, demand deposit accounts and other financial service solutions to the underbanked and other consumers and businesses in the United States.
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 share-based compensation costs are included in Corporate. Interest and other income, interest and other expense, income tax expense and equity in income of equity method investments, net of tax, are not allocated to the individual segments. We do not evaluate the performance of or allocate resources to our operating segments using asset data. The accounting policies of the reportable operating segments are the same as those described in the Summary of Significant Accounting Policies in "Note 1 - Basis of Presentation and Summary of Significant Accounting Policies." The presentation of segment information for the years ended December 31, 2018 and 2017 has been recast to align with the segment presentation for the year ended December 31, 2019.
Information on segments and reconciliations to consolidated revenues, consolidated operating income and consolidated depreciation and amortization are as follows:
| Years Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in thousands) | |||||||||||
| Revenues (1)(2): | |||||||||||
| Merchant Solutions | $ | 4,098,580 | $ | 3,345,181 | $ | 3,955,988 | |||||
| Issuer Solutions | 604,654 | 21,185 | 19,175 | ||||||||
| Business and Consumer Solutions | 227,440 | — | — | ||||||||
| Segment revenues | 4,930,674 | 3,366,366 | 3,975,163 | ||||||||
| Less: intersegment revenues | (18,782 | ) | — | — | |||||||
| Consolidated revenues | $ | 4,911,892 | $ | 3,366,366 | $ | 3,975,163 | |||||
| Operating income (loss) (2)(3): | |||||||||||
| Merchant Solutions | $ | 1,148,975 | $ | 940,157 | $ | 771,911 | |||||
| Issuer Solutions | 82,172 | 14,084 | 12,710 | ||||||||
| Business and Consumer Solutions | 19,473 | — | — | ||||||||
| Corporate | (459,203 | ) | (217,186 | ) | (225,753 | ) | |||||
| Consolidated operating income | $ | 791,417 | $ | 737,055 | $ | 558,868 | |||||
| Depreciation and amortization (2): | |||||||||||
| Merchant Solutions | $ | 677,196 | $ | 516,731 | $ | 444,100 | |||||
| Issuer Solutions | 157,799 | 710 | 647 | ||||||||
| Business and Consumer Solutions | 34,914 | — | — | ||||||||
| Corporate | 8,426 | 5,372 | 6,404 | ||||||||
| Consolidated depreciation and amortization | $ | 878,335 | $ | 522,813 | $ | 451,151 |
(1) As more fully described in "Note 1—Basis of Presentation and Summary of Significant Accounting Policies" and "Note 3—Revenues" we adopted a new revenue accounting standard on January 1, 2018 that resulted in revenue being presented net of certain fees that we pay to third parties, including payment networks. This change in presentation affected our reported revenues and operating expenses for all periods after the year ended December 31, 2017 by the same amount and had no effect on operating income.
(2) Revenues, operating income and depreciation and amortization reflect the effects of acquired businesses from the respective dates of acquisition. For further discussion, see "Note 2—Acquisitions."
(3) During the year ended December 31, 2019, operating income for our Merchant Solutions segment reflected the effect of acquisition and integration expenses of $56.1 million. Operating loss for Corporate included acquisition and integration expenses of $199.5 million, $56.1 million and $94.6 million, respectively, during the years ended December 31, 2019, 2018 and 2017. Acquisition and integration expenses for 2019 were primarily related to the Merger.
Entity-Wide Information
As a percentage of our total consolidated revenues, revenues from external customers in the United States and the United Kingdom were 72% and 8%, respectively, for the year ended December 31, 2019, 67% and 9%, respectively, for the year ended December 31, 2018, and 66% and 11%, respectively, for the year ended December 31, 2017. Revenues from external customers
are attributed to individual countries based on the location of the customer arrangements. Our results of operations and our financial condition are not significantly reliant upon any single customer.
Long-lived assets, excluding goodwill and other intangible assets, by location as of December 31, 2019 and 2018 were as follows:
| 2019 | 2018 | ||||||
| (in thousands) | |||||||
| United States | $ | 950,567 | $ | 516,449 | |||
| Foreign countries | 432,235 | 137,093 | |||||
| $ | 1,382,802 | $ | 653,542 |
NOTE 16**—COMMITMENTS AND CONTINGENCIES**
Purchase Obligations
We have contractual obligations related to service arrangements with suppliers for fixed or minimum amounts. Future minimum payments at December 31, 2019 for purchase obligations were as follows (in thousands):
| Years ending December 31: | |||
| 2020 | $ | 125,533 | |
| 2021 | 89,198 | ||
| 2022 | 36,835 | ||
| 2023 | 30,843 | ||
| 2024 | 25,632 | ||
| Thereafter | 28,718 | ||
| Total future minimum payments | $ | 336,759 |
Legal Matters
We are party to a number of claims and lawsuits incidental to our business. In our opinion, the liabilities, if any, which may ultimately result from the outcome of such matters, individually or in the aggregate, are not expected to have a material adverse effect on our financial position, liquidity, results of operations or cash flows.
Six putative class action lawsuits challenging the Merger were filed. Two of these lawsuits, captioned Peters v. Total System Services, Inc. et al. (Case No. 4:19-cv-00114) and Wolf v. Total System Services, Inc., et al. (Case No. 4:19-cv-00115), were filed in the United States District Court for the Middle District of Georgia on July 18, 2019. The third lawsuit, captioned Drulias v. Global Payments Inc., et. al (Case No. 60774/2019) was filed in the Supreme Court of the State of New York, County of Westchester on July 19, 2019. The fourth lawsuit, captioned Hickey v. Total System Services, Inc., et al. (Civil Action No. 1:19-cv-03337-LMM) was filed in the United States District Court for the Northern District of Georgia, Atlanta Division, on July 23, 2019. The fifth lawsuit, captioned, Cason v. Total System Services, Inc., et al. (Case No. 1:19-cv-07471) was filed in the United States District Court for the Southern District of New York on August 9, 2019. The sixth lawsuit, captioned, Cheng v. Total System Services, et al. (Case No: 1:19-cv-01513-UNA) was filed in the United States District Court for the District of Delaware on August 13, 2019. The complaints filed in the lawsuits assert, among other matters, claims for filing a materially incomplete registration statement with the SEC. Global Payments and TSYS released supplemental disclosures relating to the Merger in late August 2019, and the Peters lawsuit, the Wolf lawsuit and the Cheng lawsuit have been voluntarily dismissed.
On September 23, 2019, a jury in the Superior Court of Dekalb County, Georgia, awarded Frontline Processing Corp. ("Frontline") $135.2 million in damages, costs and attorney's fees (plus interest) following a trial of a breach of contract dispute between Frontline and Global Payments, wherein Frontline alleged that Global Payments violated provisions of the parties' Referral Agreement and Master Services Agreement. The Superior Court entered a final judgment on the verdict in favor of Frontline on September 30, 2019. We believe the jury verdict is in error and Frontline’s case is completely without merit, and we are appealing
the decision to the Georgia Court of Appeals. While it is reasonably possible that we will incur some loss between zero and the judgment amount plus interest, we have determined that it is not probable that Global Payments has incurred a loss under the applicable accounting standard (ASC Topic 450, Loss Contingencies) as of December 31, 2019. As a result, we have not recorded a liability on the consolidated balance sheet with respect to this litigation.
Operating Taxes
We are subject to certain taxes that are not derived based on earnings (e.g., sales, gross receipts, property, value-added and other business taxes). During the course of operations, we must interpret the meaning of various operating tax regulations in the United States and in the foreign jurisdictions in which we do business. Taxing authorities in those various jurisdictions may arrive at different interpretations of applicable tax laws and regulations which could result in the payment of additional taxes in those jurisdictions.
BIN/ICA Agreements
We have entered into sponsorship or depository and processing agreements with certain banks. These agreements allow us to use the banks' identification numbers, referred to as Bank Identification Number ("BIN") for Visa transactions and an Interbank Card Association ("ICA") number for Mastercard transactions, to clear credit card transactions through Visa and Mastercard. Certain of these agreements contain financial covenants, and we were in compliance with all such covenants as of December 31, 2019.
NOTE 17—QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly results for the years ended December 31, 2019 and 2018 were as follows:
| Quarters Ended | |||||||||||||||
| March 31, 2019 | June 30, 2019 | September 30, 2019 | December 31, 2019 | ||||||||||||
| (in thousands, except per share data) | |||||||||||||||
| Revenues | $ | 883,039 | $ | 935,152 | $ | 1,105,941 | $ | 1,987,760 | |||||||
| Operating income | 199,492 | 221,726 | 174,037 | 196,162 | |||||||||||
| Net income | 119,205 | 130,039 | 105,731 | 114,301 | |||||||||||
| Net income attributable to Global Payments | 112,341 | 120,458 | 95,044 | 102,770 | |||||||||||
| Basic earnings per share attributable to Global Payments | 0.71 | 0.77 | 0.54 | 0.34 | |||||||||||
| Diluted earnings per share attributable to Global Payments | 0.71 | 0.77 | 0.54 | 0.34 | |||||||||||
| Quarters Ended | |||||||||||||||
| March 31, 2018 | June 30, 2018 | September 30, 2018 | December 31, 2018 | ||||||||||||
| (in thousands, except per share data) | |||||||||||||||
| Revenues | $ | 794,977 | $ | 833,164 | $ | 857,670 | $ | 880,555 | |||||||
| Operating income | 156,170 | 190,737 | 223,162 | 166,986 | |||||||||||
| Net income | 97,586 | 117,729 | 186,029 | 83,323 | |||||||||||
| Net income attributable to Global Payments | 91,399 | 109,069 | 176,370 | 75,215 | |||||||||||
| Basic earnings per share attributable to Global Payments | 0.57 | 0.69 | 1.12 | 0.48 | |||||||||||
| Diluted earnings per share attributable to Global Payments | 0.57 | 0.68 | 1.11 | 0.47 |
The quarterly financial data in the table above reflect the effects of business combinations and borrowings to fund certain of those business combinations. Notably, we completed our merger with TSYS during the quarter ended September 30, 2019. Additionally, our consolidated results reflected incremental expenses associated with the acquisition and integration of acquired businesses. See "Note 2—Acquisitions" for further discussion of our acquisitions.
Acquisition and integration expenses were $5.3 million, $14.2 million, $100.8 million and $135.3 million for the quarters ended March 31, 2019, June 30, 2019, September 30, 2019 and December 31, 2019, respectively. Acquisition and integration expenses were $18.3 million, $8.1 million, $8.2 million and $21.5 million for the quarters ended March 31, 2018, June 30, 2018, September 30, 2018 and December 31, 2018, respectively.
Results for the quarter ended September 30, 2018 reflect the effects of a net income tax benefit of $23.3 million in connection with adjustments made to accounting estimates associated with the 2017 U.S. Tax Act as further discussed in "Note 9—Income Tax."
GLOBAL PAYMENTS INC.
SCHEDULE II
Valuation & Qualifying Accounts
(in thousands)
| (a) | (b) | (c) | (d) | (e) | ||||||||||||
| Description | Balance at Beginning of Period | Additions: Charged to Costs and Expenses**(2)** | Deductions: Uncollectible Accounts Write-Offs (Recoveries) | Balance at End of Period | ||||||||||||
| Allowance for doubtful accounts | ||||||||||||||||
| December 31, 2017 | $ | 1,092 | $ | 6,113 | $ | 5,378 | $ | 1,827 | ||||||||
| December 31, 2018 | 1,827 | 10,430 | 9,093 | 3,164 | ||||||||||||
| December 31, 2019 | $ | 3,164 | $ | 20,375 | $ | 10,350 | $ | 13,189 | ||||||||
| Reserve for merchant losses and sales allowances (1) | ||||||||||||||||
| December 31, 2017 | $ | 2,939 | $ | 18,767 | $ | 17,666 | $ | 4,040 | ||||||||
| December 31, 2018 | 4,040 | 22,312 | 22,140 | 4,212 | ||||||||||||
| December 31, 2019 | $ | 4,212 | $ | 24,525 | $ | 25,049 | $ | 3,688 | ||||||||
| Reserve for check guarantee operating losses | ||||||||||||||||
| December 31, 2017 | $ | 5,786 | $ | 28,064 | $ | 28,112 | $ | 5,738 | ||||||||
| December 31, 2018 | 5,738 | 19,314 | 19,987 | 5,065 | ||||||||||||
| December 31, 2019 | $ | 5,065 | $ | 13,346 | $ | 14,490 | $ | 3,921 | ||||||||
| Reserve for contract contingencies and processing errors | ||||||||||||||||
| December 31, 2019 | $ | — | $ | 5,669 | $ | 1,453 | $ | 4,216 | ||||||||
| Reserve for cardholder losses | ||||||||||||||||
| December 31, 2019 | $ | — | $ | 24,391 | $ | 15,159 | $ | 9,232 | ||||||||
| Deferred income tax asset valuation allowance | ||||||||||||||||
| December 31, 2017 | $ | 16,611 | $ | 7,079 | $ | 7,140 | $ | 16,550 | ||||||||
| December 31, 2018 | 16,550 | 6,840 | — | 23,390 | ||||||||||||
| December 31, 2019 | $ | 23,390 | $ | 48,652 | $ | — | $ | 72,042 |
(1) Included in settlement processing obligations.
(2) In addition to amounts charged to costs and expenses, amounts in this column include additions, as applicable, resulting from business combinations.
Previous: Item 6. SELECTED FINANCIAL DATA · Next: Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE