10-Q
Table of Contents

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

FORM 10-Q
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 30, 2015

OR
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

Commission file number: 001-16111
GLOBAL PAYMENTS INC.
(Exact name of registrant as specified in charter)

Georgia
 
58-2567903
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
10 Glenlake Parkway, North Tower, Atlanta, Georgia
 
30328
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code: (770) 829-8000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý   No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ý   No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
 
Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes ¨   No x
 
The number of shares of the issuer’s common stock, no par value, outstanding as of January 7, 2016 was 129,348,466.

Table of Contents

GLOBAL PAYMENTS INC.
FORM 10-Q
For the quarterly period ended November 30, 2015

TABLE OF CONTENTS
 
 
 
Page
PART I - FINANCIAL INFORMATION
ITEM 1.
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
ITEM 3.
 
ITEM 4.
 
PART II - OTHER INFORMATION
ITEM 1.
 
ITEM 1A.
 
ITEM 2.
 
ITEM 6.
 
 
 



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PART 1 - FINANCIAL INFORMATION

ITEM 1—FINANCIAL STATEMENTS

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

 
Three Months Ended
 
November 30, 2015
 
November 30, 2014
 
 
 
 
Revenues
$
722,350

 
$
697,291

Operating expenses:
 
 
 
Cost of service
270,565

 
257,796

Selling, general and administrative
328,620

 
315,511

 
599,185

 
573,307

Operating income
123,165

 
123,984

 
 
 
 
Interest and other income
1,292

 
1,282

Interest and other expense
(14,126
)
 
(10,350
)
 
(12,834
)
 
(9,068
)
Income before income taxes
110,331

 
114,916

Provision for income taxes
(27,253
)
 
(29,660
)
Net income
83,078

 
85,256

Less: Net income attributable to noncontrolling interests, net of income tax
(4,307
)
 
(10,475
)
Net income attributable to Global Payments
$
78,771

 
$
74,781

 
 
 
 
Earnings per share attributable to Global Payments:
 
 
 
Basic earnings per share
$
0.61

 
$
0.55

Diluted earnings per share
$
0.60

 
$
0.55

See Notes to Unaudited Consolidated Financial Statements.
















 


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

 
Six Months Ended
 
November 30, 2015
 
November 30, 2014
 
 
 
 
Revenues
$
1,471,146

 
$
1,402,186

Operating expenses:
 
 
 
Cost of service
543,231

 
517,635

Selling, general and administrative
666,978

 
636,169

 
1,210,209

 
1,153,804

Operating income
260,937

 
248,382

 
 
 
 
Interest and other income
2,434

 
2,474

Interest and other expense
(27,369
)
 
(21,360
)
 
(24,935
)
 
(18,886
)
Income before income taxes
236,002

 
229,496

Provision for income taxes
(59,876
)
 
(59,806
)
Net income
176,126

 
169,690

Less: Net income attributable to noncontrolling interests, net of income tax
(10,708
)
 
(19,543
)
Net income attributable to Global Payments
$
165,418

 
$
150,147

 
 
 
 
Earnings per share attributable to Global Payments:
 
 
 
Basic earnings per share
$
1.27

 
$
1.11

Diluted earnings per share
$
1.27

 
$
1.10

See Notes to Unaudited Consolidated Financial Statements.


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

 
 
 
 
 
Three Months Ended
 
November 30, 2015
 
November 30, 2014
 
 
 
 
Net income
$
83,078

 
$
85,256

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments
(35,582
)
 
(92,634
)
Income tax (provision) benefit related to foreign currency translation adjustments
(2,256
)
 
4,774

Unrealized losses on hedging activities
(3,968
)
 
(4,419
)
Reclassification of losses on hedging activities to interest expense
2,467

 
531

Income tax benefit related to hedging activities
562

 
1,443

Other comprehensive loss, net of tax
(38,777
)
 
(90,305
)
 
 
 
 
Comprehensive income (loss)
44,301

 
(5,049
)
Comprehensive loss (income) attributable to noncontrolling interests
1,965

 
(3,546
)
Comprehensive income (loss) attributable to Global Payments
$
46,266

 
$
(8,595
)
 
 
 
 
 
Six Months Ended
 
November 30, 2015
 
November 30, 2014
 
 
 
 
Net income
$
176,126

 
$
169,690

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments
(72,599
)
 
(117,855
)
Income tax benefit related to foreign currency translation adjustments
8,844

 
7,291

Unrealized losses on hedging activities
(4,000
)
 
(4,419
)
Reclassification of losses on hedging activities to interest expense
4,201

 
531

Income tax (provision) benefit related to hedging activities
(60
)
 
1,443

Other comprehensive loss, net of tax
(63,614
)
 
(113,009
)
 
 
 
 
Comprehensive income
112,512

 
56,681

Comprehensive income attributable to noncontrolling interests
(6,336
)
 
(7,484
)
Comprehensive income attributable to Global Payments
$
106,176

 
$
49,197

See Notes to Unaudited Consolidated Financial Statements.



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GLOBAL PAYMENTS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
November 30, 2015
 
May 31, 2015
 
(Unaudited)
 
 
ASSETS
 
  
 

Current assets:
 
  
 

Cash and cash equivalents
$
988,457

  
$
650,739

Accounts receivable, net of allowances for doubtful accounts of $437 and $468, respectively
202,931

  
202,390

Claims receivable, net of allowances for doubtful accounts of $9,091 and $2,684, respectively
7,812

  
548

Settlement processing assets
1,403,914

  
2,394,822

Prepaid expenses and other current assets
52,707

  
41,416

Total current assets
2,655,821

  
3,289,915

Goodwill
1,577,455

  
1,491,833

Other intangible assets, net
665,667

  
560,136

Property and equipment, net
367,541

  
374,143

Deferred income taxes    
26,252

 
30,428

Other
35,365

  
32,846

Total assets
$
5,328,101

  
$
5,779,301

LIABILITIES AND EQUITY
 
  
 
Current liabilities:
 
  
 
Lines of credit
$
685,178

 
$
592,629

Current portion of long-term debt
—

 
61,784

Accounts payable and accrued liabilities
309,117

  
312,647

Settlement processing obligations
1,256,458

 
2,033,900

Income taxes payable
16,892

 
14,228

Total current liabilities
2,267,645

  
3,015,188

Long-term debt
1,915,803

 
1,678,283

Deferred income taxes    
202,630

  
202,855

Other noncurrent liabilities
15,924

  
19,422

Total liabilities
4,402,002

  
4,915,748

Commitments and contingencies


  


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

  
—

Common stock, no par value; 200,000,000 shares authorized; 129,362,187 issued and outstanding at November 30, 2015 and 130,557,676 issued and outstanding at May 31, 2015
—

  
—

Paid-in capital
132,401

  
148,742

Retained earnings
917,989

  
795,226

Accumulated other comprehensive loss
(245,234
)
  
(185,992
)
Total Global Payments shareholders’ equity
805,156

  
757,976

Noncontrolling interests
120,943

 
105,577

Total equity
926,099

 
863,553

Total liabilities and equity
$
5,328,101

  
$
5,779,301

See Notes to Unaudited Consolidated Financial Statements.

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GLOBAL PAYMENTS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Six Months Ended
 
November 30, 2015
 
November 30, 2014
Cash flows from operating activities:
 
 
 
Net income
$
176,126

 
$
169,690

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

 

Depreciation and amortization of property and equipment
35,697

 
33,055

Amortization of acquired intangibles
41,809

 
36,117

Share-based compensation expense
13,472

 
9,145

Provision for operating losses and bad debts
11,257

 
7,432

Deferred income taxes
2,900

 
(982
)
Other, net
2,198

 
(387
)
Changes in operating assets and liabilities, net of the effects of acquisitions:

 

Accounts receivable
(4,271
)
 
17,521

Claims receivable
(18,723
)
 
(4,881
)
Settlement processing assets and obligations, net
208,446

 
(13,778
)
Prepaid expenses and other assets
(14,097
)
 
3,903

Accounts payable and other liabilities
(3,329
)
 
(31,503
)
Income taxes payable
2,585

 
1,604

Net cash provided by operating activities
454,070

 
226,936

Cash flows from investing activities:
 
 
 
Business, intangible and other asset acquisitions, net of cash acquired
(241,934
)
 
(223,651
)
Capital expenditures
(36,246
)
 
(33,290
)
Principal collections on financing receivables
—

 
219

Net proceeds from sales of investments and business
—

 
10,528

Net cash used in investing activities
(278,180
)
 
(246,194
)
Cash flows from financing activities:
 
 
 
Net borrowings on lines of credit
101,464

 
90,593

Proceeds from issuance of long-term debt
3,030,175

 
1,080,000

Principal payments of long-term debt
(2,852,175
)
 
(872,679
)
Payment of debt issuance costs
(4,934
)
 
—

Repurchase of common stock
(71,748
)
 
(179,724
)
Proceeds from stock issued under share-based compensation plans
6,317

 
17,099

Common stock repurchased - share-based compensation plans
(11,579
)
 
(15,705
)
Tax benefit from share-based compensation plans
6,521

 
3,599

Purchase of subsidiary shares from noncontrolling interest
(7,550
)
 
—

Distributions to noncontrolling interests
(8,158
)
 
(15,485
)
Dividends paid
(2,602
)
 
(2,693
)
Net cash provided by financing activities
185,731

 
105,005

Effect of exchange rate changes on cash
(23,903
)
 
(23,150
)
Increase in cash and cash equivalents
337,718

 
62,597

Cash and cash equivalents, beginning of the period
650,739

 
581,872

Cash and cash equivalents, end of the period
$
988,457

 
$
644,469

See Notes to Unaudited Consolidated Financial Statements.

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


 
Number  of Shares 
 
Paid-in Capital 
 
Retained Earnings 
 
Accumulated Other Comprehensive Loss
 
Total Global Payments Shareholders’ Equity
 
Noncontrolling Interests
 
Total Equity
Balance at May 31, 2015
130,558

 
$
148,742

 
$
795,226

 
$
(185,992
)
 
$
757,976

 
$
105,577

 
$
863,553

Net income
 
 
 
 
165,418

 
 
 
165,418

 
10,708

 
176,126

Other comprehensive loss, net of tax
 
 
 
 
 
 
(59,242
)
 
(59,242
)
 
(4,372
)
 
(63,614
)
Stock issued under share-based compensation plans
1,079

 
6,317

 
 
 
 
 
6,317

 
 
 
6,317

Common stock repurchased - share-based compensation plans
(630
)
 
(11,997
)
 


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

 
 
 
 
 
6,521

 
 
 
6,521

Share-based compensation expense
 
 
13,472

 
 
 
 
 
13,472

 
 
 
13,472

Purchase of subsidiary shares from noncontrolling interest
 
 
(11
)
 
 
 
 
 
(11
)
 
(7,539
)
 
(7,550
)
Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
—

 
(8,158
)
 
(8,158
)
Contribution of subsidiary shares to noncontrolling interest as consideration in business combination
 
 
4,673

 
 
 
 
 
4,673

 
24,727

 
29,400

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

 
$
132,401

 
$
917,989

 
$
(245,234
)
 
$
805,156

 
$
120,943

 
$
926,099

See Notes to Unaudited Consolidated Financial Statements.


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

 
Number  of Shares 
 
Paid-in Capital 
 
Retained Earnings 
 
Accumulated Other Comprehensive Loss
 
Total Global Payments Shareholders’ Equity 
 
Noncontrolling Interests
 
Total Equity
Balance at May 31, 2014
137,692

 
$
183,023

 
$
815,980

 
$
(1,776
)
 
$
997,227

 
$
135,572

 
$
1,132,799

Net income
 
 
 
 
150,147

 
 
 
150,147

 
19,543

 
169,690

Other comprehensive loss, net of tax
 
 
 
 
 
 
(100,950
)
 
(100,950
)
 
(12,059
)
 
(113,009
)
Stock issued under share-based compensation plans
1,882

 
17,099

 
 
 


 
17,099

 
 
 
17,099

Common stock repurchased - share-based compensation plans
(632
)
 
(6,976
)
 
 
 


 
(6,976
)
 


 
(6,976
)
Tax benefit from employee share-based compensation, net
 
 
3,599

 
 
 
 
 
3,599

 
 
 
3,599

Share-based compensation expense
 
 
9,145

 
 
 
 
 
9,145

 
 
 
9,145

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
—

 
(15,485
)
 
(15,485
)
Repurchase of common stock
(4,880
)
 
(61,471
)
 
(110,462
)
 
 
 
(171,933
)
 
 
 
(171,933
)
Dividends paid ($0.02 per share)
 
 
 
 
(2,693
)
 
 
 
(2,693
)
 
 
 
(2,693
)
Balance at November 30, 2014
134,062

 
$
144,419

 
$
852,972

 
$
(102,726
)
 
$
894,665

 
$
127,571

 
$
1,022,236

See Notes to Unaudited Consolidated Financial Statements.



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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Business, consolidation and presentation— We are a leading worldwide provider of payment technology services delivering innovative solutions to our customers. Our technologies, partnerships and employee expertise enable us to provide a broad range of services that allow our customers to accept various payment types. We distribute our payment services and digital commerce services across a variety of channels to merchants and partners in 29 countries throughout North America, Europe, the Asia-Pacific region and Brazil. We operate in three reportable segments: North America, Europe and Asia-Pacific.
  
We were incorporated in Georgia as Global Payments Inc. in 2000 and spun-off from our former parent company in 2001. Including our time as part of our former parent company, we have been in the payments business since 1967. Global Payments Inc. and its consolidated subsidiaries are referred to collectively as "Global Payments," the "Company," "we," "our" or "us," unless the context requires otherwise.
 
These unaudited consolidated financial statements include our accounts and those of our majority-owned subsidiaries, and all intercompany balances and transactions have been eliminated in consolidation. These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). The consolidated balance sheet as of May 31, 2015 was derived from the audited financial statements included in our Annual Report on Form 10-K for the year ended May 31, 2015 but does not include all disclosures required by GAAP.

In the opinion of our management, all known adjustments necessary for a fair presentation of the results of the interim periods have been made.  These adjustments consist of normal recurring accruals and estimates that affect the carrying amount of assets and liabilities.  These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended May 31, 2015.

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.

Stock split— Our board of directors declared a two-for-one stock split effected in the form of a stock dividend of one additional share of common stock for each outstanding share of common stock (the "Stock Split"). The stock dividend was paid on November 2, 2015 to all shareholders of record as of October 21, 2015. Common share and per share data in the consolidated financial statements and in the notes to our consolidated financial statements for prior periods have been adjusted to reflect the Stock Split, except for authorized common shares which were not affected.

New accounting pronouncements— From time-to-time, new accounting pronouncements are issued by the Financial Accounting Standards Board ("FASB") or other standards setting bodies that may affect our current and/or future financial statements when adopted.

Recently Adopted Accounting Pronouncements

In November 2015, the FASB issued Accounting Standards Update ("ASU") 2015-17, "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes." To simplify the presentation of deferred income taxes, the amendments in this update require that deferred tax liabilities and assets be classified as noncurrent in a classified balance sheet. We adopted this ASU during the three months ended November 30, 2015 and, as a result, have presented prior-period amounts for deferred income taxes in a manner that conforms to the current-period presentation.

In September 2015, the FASB issued ASU 2015-16, "Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments." The update requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, including the cumulative effect of the change in provisional amount as if the accounting had been completed at the acquisition date. The adjustments

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related to prior reporting periods since the acquisition date must be disclosed by income statement line item either on the face of the income statement or in the notes to the financial statements. We adopted this ASU during the three months ended August 31, 2015. Accordingly, we applied the amendments in this update to the measurement period adjustments made during the six months ended November 30, 2015 with no material effect on prior-period or current-period earnings. See "Note 3—Business Intangible Asset Acquisition and Joint Ventures" for more information regarding adjustments to provisional amounts that occurred during the six months ended November 30, 2015.

In April 2015, the FASB issued ASU 2015-03, "Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs." The update requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset. In August 2015, the FASB issued ASU 2015-15, "Interest-Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements-Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting," to clarify that an entity may elect to present debt issuance costs related to a line-of-credit arrangement as an asset, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.

We adopted both ASUs as of June 1, 2015, electing to continue to present debt issuance costs related to our revolving credit facilities as an asset, and as a result, have presented prior-period amounts for debt issuance costs related to our term loans in a manner that conforms to the current-period presentation. The adoption of this standard did not affect our results of operations or cash flows in either the current or prior interim or annual periods. See "Note 6—Long-Term Debt and Credit Facilities" for more information about the presentation of debt issuance costs.

Recently Issued Pronouncements Not Yet Adopted

In April 2015, the FASB issued ASU 2015-05, "Intangibles—Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement." The amendments in this update provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change GAAP for a customer’s accounting for service contracts. The amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted for all entities. We are evaluating the effect of ASU 2015-05 on our consolidated financial statements and internal controls over financial reporting and have not yet adopted the new standard.

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)." The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP and permits the use of either the retrospective or cumulative effect transition method. The standard requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. The amendments are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted for annual reporting periods beginning after December 15, 2016. We are evaluating the impact of ASU 2014-09 on our consolidated financial statements and internal controls over financial reporting.


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NOTE 2—SETTLEMENT PROCESSING ASSETS AND OBLIGATIONS

As of November 30, 2015 and May 31, 2015, settlement processing assets and obligations consisted of the following (in thousands):
 
November 30, 2015
 
May 31, 2015
Settlement processing assets:
 
 
 
Interchange reimbursement
$
148

 
$
186,660

Receivable from member sponsors
254,635

 
294,837

Receivable from networks
1,147,397

 
1,919,148

Exception items
2,019

 
4,920

Merchant reserves
(285
)
 
(10,743
)
 
$
1,403,914

 
$
2,394,822

 
 
 
 
Settlement processing obligations:
 
 
 
Interchange reimbursement
$
238,314

 
$
68,444

Liability to member sponsors
(209,034
)
 
(628
)
Liability to merchants
(1,135,070
)
 
(1,931,390
)
Exception items
10,334

 
5,331

Merchant reserves
(159,370
)
 
(169,442
)
Reserve for operating losses
(1,316
)
 
(1,286
)
Reserve for sales allowances
(316
)
 
(4,929
)
 
$
(1,256,458
)
 
$
(2,033,900
)

NOTE 3—BUSINESS AND INTANGIBLE ASSET ACQUISITIONS AND JOINT VENTURES

Fiscal 2016

FIS Gaming Business
 
On September 30, 2014, we entered into an asset purchase agreement with Certegy Check Services, Inc., a wholly owned subsidiary of Fidelity National Information Services, Inc. ("FIS"), to acquire substantially all of the assets of its gaming business related to licensed gaming operators (the "FIS Gaming Business"), which consisted primarily of customer contracts. On June 1, 2015, we completed the acquisition, which included approximately 260 gaming client locations, for $237.5 million funded from borrowings on our revolving credit facility and cash on hand. We acquired the FIS Gaming Business to expand our direct distribution and service offerings in the gaming industry. This transaction was accounted for as a business combination. We recorded the assets acquired and liabilities assumed at their estimated fair values as of the acquisition date. Due to the timing of this transaction, we have not finalized the valuation of the intangible assets acquired; however, certain adjustments to estimated fair value were recorded during the three months ended November 30, 2015 based on new information obtained that existed as of the acquisition date. The adjustments associated with the revised valuation are detailed in the table below. FASB Accounting Standards Codification ("ASC") 805, "Business Combinations," as amended by ASU 2015-16, requires than an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. Measurement-period adjustments, which are reflected in the table below, had no material effect on earnings or other comprehensive income for the current or prior periods.

Acquisition costs associated with this business combination were not material. The revenue and earnings associated with the acquired business for the year ending May 31, 2016 are not expected to be material nor were the historical revenue and earnings of the acquired business material for the purpose of presenting pro forma information for the current or prior-year periods.


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The provisional estimated acquisition-date fair values of major classes of assets acquired and liabilities assumed as originally determined and as revised for measurement period adjustments, including a reconciliation to the total purchase consideration, are as follows (in thousands):
 
As Previously Determined
 
Measurement Period Adjustments
 
Revised
 
 
 
 
 
 
Customer-related intangible assets
$
135,200

 
$
8,200

 
$
143,400

Liabilities
(150
)
 
—

 
(150
)
Total identifiable net assets
135,050

 
8,200

 
143,250

Goodwill
102,450

 
(8,200
)
 
94,250

Total purchase consideration
$
237,500

 
$
—

 
$
237,500


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

We also entered into a gaming bureau license agreement and an outsourcing agreement with FIS on September 30, 2014. Under the license agreement, we acquired a perpetual software license for a gaming bureau application that we believe enhances our casino clients’ credit decision process. The software license was recorded in property and equipment in our consolidated balance sheet when acquired. Under the outsourcing agreement, which has a term of 10 years, we engaged FIS to provide a variety of services for our gaming clients, including: check and ACH verification services, collection services, claims management services, billing services and other gaming bureau services. The outsourcing agreement became effective on June 1, 2015.

Venture with Bank of the Philippine Islands

We provide merchant acquiring services in the Philippines through our subsidiary, Global Payments Asia-Pacific Philippines Incorporated ("GP Philippines"). On August 3, 2015, we made a cash payment of $3.6 million and contributed a 49% ownership interest in GP Philippines to Bank of the Philippines ("BPI") in return for BPI's contribution of its merchant acquiring business to GP Philippines, in which we have retained a controlling 51% interest.

The acquisition of BPI's merchant acquiring business was accounted for as a business combination. We recorded the assets acquired and liabilities assumed at their estimated fair values as of the acquisition date. The estimated total purchase consideration paid for BPI's merchant acquiring business was $33.0 million, consisting of $3.6 million in cash and an estimated acquisition-date fair value of $29.4 million in shares of GP Philippines. Due to the timing of this transaction, we have not finalized the valuation of shares issued to BPI for the noncontrolling interest or the intangible assets acquired and, therefore, we have recorded provisional estimated amounts.

Central and Eastern European Venture

On July 27, 2015, we announced an agreement with CaixaBank, S.A. ("CaixaBank") and Erste Group Bank AG (“Erste Group”) to form a venture to provide merchant acquiring and payment services in three Central and Eastern European markets: the Czech Republic, the Slovak Republic and Romania. As part of the agreement, Global Payments and CaixaBank will form an entity, in which we will have a 51% controlling interest. This newly formed entity will pay €30 million ($32 million equivalent as of November 30, 2015) in cash to acquire a 51% controlling ownership in the venture with Erste Group, which will contribute its existing merchant acquiring businesses in each of the three countries to the venture and hold a 49% interest. The transaction is expected to close in the second half of fiscal 2016, subject to receipt of regulatory approvals and satisfaction of customary closing conditions.

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Fiscal 2015

Realex Payments

On March 25, 2015, we acquired approximately 95% of the outstanding shares of Pay and Shop Limited for €110.2 million in cash ($118.9 million equivalent as of March 25, 2015) funded from borrowings on our revolving credit facility. Pay and Shop Limited, which does business as Realex Payments ("Realex"), is a leading European online payment gateway technology provider based in Dublin, Ireland. This transaction furthers our strategy to provide omnichannel solutions that combine gateway services, payment service provisioning and merchant acquiring across Europe. This transaction was accounted for as a business combination. We recorded the assets acquired, liabilities assumed and noncontrolling interest at their estimated fair values as of the acquisition date.

The estimated acquisition date fair values of the assets acquired, liabilities assumed and the noncontrolling interest, including a reconciliation to the total purchase consideration, are as follows (in thousands):
Cash
$
4,082

Customer-related intangible assets
16,079

Acquired technology
39,820

Trade name
3,453

Other intangible assets
399

Other assets
6,213

Liabilities
(3,479
)
Deferred income tax liabilities
(7,216
)
Total identifiable net assets
59,351

Goodwill
66,809

Noncontrolling interest
(7,280
)
Total purchase consideration
$
118,880


Goodwill arising from the acquisition was included in the Europe segment and was attributable to expected growth opportunities in Europe, potential synergies from combining our existing business with gateway services and payment service provisioning in certain markets and an assembled workforce to support the newly acquired technology. Goodwill associated with this acquisition is not deductible for income tax purposes. The customer-related intangible assets have an estimated amortization period of 16 years. The acquired technology has an estimated amortization period of 10 years. The trade name has an estimated amortization period of 7 years.

On October 5, 2015, we paid €6.7 million ($7.5 million equivalent as of October 5, 2015) to acquire the remaining shares of Realex after which we own 100% of the outstanding shares.




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Ezidebit

On October 10, 2014, we completed the acquisition of 100% of the outstanding stock of Ezi Holdings Pty Ltd ("Ezidebit") for AUD 302.6 million ($266.0 million equivalent as of the acquisition date). This acquisition was funded by a combination of cash on hand and borrowings on our revolving credit facility. Ezidebit is a leading integrated payments company focused on recurring payments verticals in Australia and New Zealand. Ezidebit markets its services through a network of integrated software vendors and direct channels to numerous vertical markets. We acquired Ezidebit to establish a direct distribution channel in Australia and New Zealand and to further enhance our existing integrated solutions offerings. This transaction was accounted for as a business combination. We recorded the assets acquired and liabilities assumed at their estimated fair values as of the acquisition date. Certain adjustments to estimated fair value were recorded during the six months ended November 30, 2015 based on new information obtained that existed as of the acquisition date. During the measurement period, management determined that deferred income taxes should be reflected for certain nondeductible intangible assets. Measurement-period adjustments, which are reflected in the table below, had no material effect on earnings or other comprehensive income for the current or prior periods.

The estimated acquisition-date fair values of major classes of assets acquired and liabilities assumed as originally determined and as revised for measurement period adjustments, including a reconciliation to the total purchase consideration, are as follows (in thousands):
 
As Previously Determined
 
Measurement Period Adjustments
 
Revised
 
 
 
 
 
 
Cash
$
45,826

 
$
—

 
$
45,826

Customer-related intangible assets
42,721

 
—

 
42,721

Acquired technology
27,954

 
—

 
27,954

Trade name
2,901

 
—

 
2,901

Other assets
2,337

 
—

 
2,337

Deferred income tax assets (liabilities)
1,815

 
(11,603
)
 
(9,788
)
Other liabilities
(49,797
)
 
—

 
(49,797
)
Total identifiable net assets
73,757

 
(11,603
)
 
62,154

Goodwill
192,225

 
11,603

 
203,828

Total purchase consideration
$
265,982

 
$
—

 
$
265,982


Goodwill arising from the acquisition was included in the Asia-Pacific segment and was attributable to expected future growth opportunities in Australia and New Zealand, growth and expansion of integrated payments in the Asia-Pacific region, economies of scale in our existing Asia-Pacific business and an assembled workforce. Neither the goodwill nor the customer-related intangible assets associated with this acquisition are deductible for income tax purposes. The customer-related intangible assets have an estimated amortization period of 15 years. The acquired technology has an estimated amortization period of 15 years. The trade name has an estimated amortization period of 5 years.


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NOTE 4—GOODWILL AND OTHER INTANGIBLE ASSETS

As of November 30, 2015 and May 31, 2015, goodwill and other intangible assets consisted of the following (in thousands):  
 
November 30, 2015
 
May 31, 2015
 
 
 
 
Goodwill
$
1,577,455

 
$
1,491,833

Other intangible assets:


 


Customer-related intangible assets
$
859,745

 
$
718,011

Contract-based intangible assets    
129,399

 
130,874

Acquired technologies
90,378

 
93,194

Trademarks and trade names
9,948

 
10,777

 
1,089,470

 
952,856

Less accumulated amortization:
 
 
 
Customer-related intangible assets    
365,507

 
342,488

Contract-based intangible assets
40,658

 
37,286

Acquired technologies
12,716

 
8,509

Trademarks and trade names
4,922

 
4,437

 
423,803

 
392,720

 
$
665,667

 
$
560,136



The following table sets forth the changes in the carrying amount of goodwill for the six months ended November 30, 2015 (in thousands):
 
North America
 
Europe
 
Asia-Pacific
 
Total
 
 
 
 
 
 
 
 
Balance at May 31, 2015
$
779,734

 
$
485,921

 
$
226,178

 
$
1,491,833

Goodwill acquired
102,450

 
—

 
16,500

 
118,950

Effect of foreign currency translation
(5,386
)
 
(17,054
)
 
(13,880
)
 
(36,320
)
Measurement-period adjustments
(8,200
)
 
(411
)
 
11,603

 
2,992

Balance at November 30, 2015
$
868,598

 
$
468,456

 
$
240,401

 
$
1,577,455


There were no accumulated impairment losses as of November 30, 2015 or May 31, 2015.

NOTE 5—OTHER ASSETS

On November 2, 2015, Visa Inc. (“Visa”) announced a proposed acquisition of Visa Europe Limited (“VE”) that is currently expected to close during our fourth quarter of fiscal 2016. Through certain of our subsidiaries in Europe, we are a member and shareholder of VE. Our member interests in VE are accounted for using the cost method of accounting. The preliminary estimate of the upfront consideration we will receive consists of cash of €30 million ($31.7 million equivalent at November 30, 2015) and Visa preferred stock which is convertible into Visa common shares with an approximate value of $21.4 million as of the announcement date. We could also receive contingent earn-out consideration. The amount and composition of the total consideration are not final and could be amended. In addition, approximately €23 million, or $24.3 million equivalent at November 30, 2015, of the cash consideration could be refundable, and the conversion factor of the preferred shares could be adjusted down based on the outcome of potential litigation in the United Kingdom and elsewhere in Europe such that the number of shares ultimately received could be as low as zero.


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NOTE 6—LONG-TERM DEBT AND CREDIT FACILITIES

As of November 30, 2015 and May 31, 2015, long-term debt consisted of the following (in thousands):
 
November 30, 2015
 
May 31, 2015
 
 
 
 
Term loan:
 
 
 
$1,750,000 face amount (less unamortized debt issuance costs of $4,697) at November 30, 2015 and $1,234,375 face amount (less unamortized debt issuance costs of $2,433) at May 31, 2015
$
1,745,303

 
$
1,231,942

Revolving credit facility
170,500

 
508,125

Total long-term debt
1,915,803

 
1,740,067

Less current portion of long-term debt ($62,500 face amount less unamortized debt issuance costs of $716 at May 31, 2015)
—

 
61,784

Long-term debt, excluding current portion
$
1,915,803

 
$
1,678,283


Maturity requirements on long-term debt as of November 30, 2015 by fiscal year are as follows (in thousands):
2016
$
—

2017
—

2018
131,250

2019
175,000

2020 and thereafter
1,614,250

Total
$
1,920,500


On July 31, 2015, we entered into a second amended and restated term loan agreement (the “Term Loan Agreement”) and a second amended and restated credit agreement (the “Revolving Credit Facility Agreement” and, together with the Term Loan Agreement, the “Agreements”), each with a syndicate of financial institutions. The Term Loan Agreement and the Revolving Credit Facility Agreement amended and restated our prior term loan agreement and revolving credit facility agreement, each dated February 28, 2014.

The Term Loan Agreement provides for a five-year senior unsecured $1.75 billion term loan (the “Term Loan”), and the Revolving Credit Facility Agreement provides for a senior unsecured $1.25 billion revolving credit facility (the “Revolving Credit Facility”). The available borrowings under the Revolving Credit Facility may be increased, at our option, by up to an additional $500 million, subject to our receipt of increased or new commitments from lenders and the satisfaction of certain conditions.

Pursuant to the Term Loan Agreement, the Term Loan must be repaid in equal quarterly installments of $43.8 million commencing in November 2017 and ending in May 2020, with the remaining principal balance due upon maturity in July 2020; provided, however, that the Term Loan may be prepaid without penalty. Each of the Agreements provides for an interest rate, at our election, of either London Interbank Offered Rate ("LIBOR") or a base rate, in each case plus a leverage-based margin. As of November 30, 2015, the interest rate on the Term Loan was 1.73%.

As of November 30, 2015, the outstanding balance on the Revolving Credit Facility was $170.5 million, and the interest rate was 1.66%. The Revolving Credit Facility allows us to issue standby letters of credit of up to $100 million in the aggregate. Outstanding letters of credit under the Revolving Credit Facility reduce the amount of borrowings available to us. Borrowings available to us under the Revolving Credit Facility are further limited by the covenants described below under "Compliance with Covenants." At November 30, 2015, we had standby letters of credit of $9.3 million. The total available incremental borrowings under our Revolving Credit Facility at November 30, 2015 was $424.7 million. We are required to pay a quarterly commitment fee on the unused portion of the Revolving Credit Facility. The Revolving Credit Facility Agreement expires in July 2020.


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Upon the closing of the Term Loan and the Revolving Credit Facility, which occurred on July 31, 2015, we used the proceeds of approximately $2.0 billion to repay the outstanding balances on our previously existing term loan and revolving credit facility together with accrued interest and fees on each.

We incurred fees and expenses associated with these new arrangements of approximately $4.9 million. The portion of the debt issuance costs related to the Revolving Credit Facility are included in prepaid expenses and other current assets and other noncurrent assets in our consolidated balance sheets at November 30, 2015. The portion of the debt issuance costs related to the Term Loan are reported as a reduction to the carrying amount of the debt. Debt issuance costs are amortized as an adjustment to interest expense over the terms of the Agreements.

The Agreements contain customary affirmative and restrictive covenants, including, among others, financial covenants based on our leverage and fixed charge coverage ratios. See "Compliance with Covenants" below. Each of the Agreements includes customary events of default, the occurrence of which, following any applicable cure period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations to be immediately due and payable.

Lines of Credit

We have lines of credit with banks in the United States and Canada as well as several countries in Europe and in the Asia-Pacific region where we do business. The lines of credit, which are restricted for use in funding settlement, generally have variable interest rates and are subject to annual review. The credit facilities are generally denominated in local currency but may, in some cases, facilitate borrowings in multiple currencies. For certain of our lines of credit, the line of credit balance is reduced by the amount of cash we have on deposit in specific accounts with the lender when determining the available credit. Accordingly, the amount of the outstanding line of credit may exceed the stated credit limit, while the net position is less than the credit limit. As of November 30, 2015 and May 31, 2015, a total of $115.6 million and $193.2 million, respectively, of cash on deposit was used to determine the available credit.

As of November 30, 2015 and May 31, 2015, respectively, we had $685.2 million and $592.6 million outstanding under these lines of credit with additional capacity of $574.7 million as of November 30, 2015 to fund settlement. The weighted-average interest rate on these borrowings was 1.70% and 1.50% at November 30, 2015 and May 31, 2015, respectively. We are required to pay commitment fees on unused portions of the lines of credit.

Compliance with Covenants

The Agreements include financial covenants requiring (i) a leverage ratio no greater than 3.50 to 1.00, or up to 3.75 to 1.00 if we were to complete an acquisition, subject to certain conditions, and (ii) a fixed charge coverage ratio no less than 2.50 to 1.00. The Agreements and lines of credit also include various other covenants that are customary in such borrowings. We complied with all applicable covenants as of and for the six months ended November 30, 2015.

Interest Rate Swap Agreements

We have interest rate swap agreements with financial institutions to hedge changes in cash flows attributable to interest rate risk on a portion of our variable-rate debt instruments. A $500 million notional interest rate swap agreement, which became effective on October 31, 2014, effectively converted $500 million of our variable-rate debt to a fixed rate of 1.52% plus a leverage-based margin and will mature on February 28, 2019. A $250 million notional interest rate swap, which became effective on August 28, 2015, effectively converted $250 million of our variable-rate debt to a fixed rate of 1.34% plus a leverage-based margin and will mature on July 31, 2020.

Net amounts to be received or paid under the swap agreements are reflected as adjustments to interest expense. Since we have designated the interest rate swap agreements as cash flow hedges, unrealized gains or losses resulting from adjusting the swaps to fair value are recorded as components of other comprehensive income, except for any ineffective portion of the change in fair value, which would be immediately recorded in interest expense. During the three and six months ended November 30, 2015, there was no ineffectiveness. The fair values of the interest rate swaps were determined based on the present value of the estimated future net cash flows using implied rates in the applicable yield curve as of the valuation date. These derivative instruments were classified within Level 2 of the valuation hierarchy.

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The table below presents the fair values of our derivative financial instruments designated as cash flow hedges included within the consolidated balance sheets (in thousands):
 
 
Consolidated Balance Sheet Location
 
November 30, 2015
 
May 31, 2015
Interest rate swap ($250 million notional)
 
Other assets
 
$
196

 
$
—

Interest rate swap ($500 million notional)
 
Accounts payable and accrued liabilities
 
$
6,152

 
$
6,157


The table below presents the effects of our interest rate swaps on the consolidated statements of income and other comprehensive income for the three and six months ended November 30, 2015 and 2014 (in thousands):
 
Three Months Ended
 
Six Months Ended
 
November 30, 2015
 
November 30, 2014
 
November 30, 2015
 
November 30, 2014
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
Amount of loss recognized in other comprehensive income
$
3,968

 
$
4,419

 
$
4,000

 
$
4,419

Amount of loss recognized in interest expense
$
2,467

 
$
531

 
$
4,201

 
$
531


At November 30, 2015, the amount in accumulated other comprehensive income related to our interest rate swaps that is expected to be reclassified into interest expense during the next 12 months was approximately $6.8 million.

Interest Expense

Interest expense was $13.4 million and $10.4 million for the three months ended November 30, 2015 and 2014, respectively. Interest expense was $26.8 million and $18.9 million for the six months ended November 30, 2015 and 2014, respectively. Interest expense is comprised primarily of interest on our long-term debt and lines of credit. Interest expense also includes settlements on our interest rate swaps, amortization of deferred debt issuance costs and commitment fees on the unused portions of our Revolving Credit Facility and lines of credit.

NOTE 7—INCOME TAX

Our effective income tax rates were 24.7% and 25.8% for the three months ended November 30, 2015 and November 30, 2014, respectively. Our effective income tax rates were 25.4% and 26.1% for the six months ended November 30, 2015 and November 30, 2014, respectively. Our effective income tax rates differ from the U.S. statutory rate primarily due to income generated in international jurisdictions with lower income tax rates.

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, the United Kingdom and Canada. We are no longer subject to state income tax examinations for years ended on or before May 31, 2008 and are no longer subject to U.S. federal income tax examinations for fiscal years prior to 2012 and U.K. federal income tax examinations for years ended on or before May 31, 2013, and Canada federal income tax examinations for years ended on or before May 31, 2012.

NOTE 8—SHAREHOLDERS’ EQUITY

On April 10, 2015, we entered into an accelerated share repurchase program (the ''ASR'') with a financial institution to repurchase an aggregate of $100 million of our common stock. In exchange for an up-front payment of $100 million, the financial institution committed to deliver a number of shares during the ASR's purchase period, which ended on June 16, 2015. On April 14, 2015, 1,630,988 shares were initially delivered to us. At May 31, 2015, we accounted for the variable component of remaining shares to be delivered under the ASR as a forward contract indexed to our common stock which met all of the applicable criteria for equity classification. On June 16, 2015, an additional 324,742 shares were delivered to us. The total number of shares delivered under the ASR was 1,955,730 shares at an average price of $51.13 per share.

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In addition to the ASR, we repurchased and retired 625,573 and 1,320,563 shares of our common stock at a cost of $37.5 million and $75.4 million, or an average cost of $59.87 and $57.07 per share, including commissions, during the three and six months ended November 30, 2015, respectively. During the three and six months ended November 30, 2014, we repurchased and retired 1,313,848 and 4,879,012 shares of our common stock at a cost of $47.4 million and $171.9 million, or an average cost of $36.11 and $35.23 per share, including commissions. As of November 30, 2015, we had a remaining authorized amount of $327.5 million for share repurchases.

NOTE 9—SHARE-BASED AWARDS AND OPTIONS

The following table summarizes share-based compensation expense and the related income tax benefit recognized for our share-based awards and stock options (in thousands):
 
Three Months Ended
 
Six Months Ended
 
November 30, 2015
 
November 30, 2014
 
November 30, 2015
 
November 30, 2014
 
 
 
 
 
 
 
 
Share-based compensation expense
$
7,005

 
$
5,079

 
$
13,472

 
$
9,145

Income tax benefit
$
2,279

 
$
1,720

 
$
4,637

 
$
2,824

 
Share-Based Awards

The following table summarizes the changes in unvested share-based awards for the six months ended November 30, 2015 (shares in thousands):
 
 
Shares
 
Weighted-Average
Grant-Date
Fair Value
 
 
 
 
 
Unvested at May 31, 2015
 
1,848

 
$
29

Granted
 
450

 
57

Vested
 
(620
)
 
27

Forfeited
 
(37
)
 
32

Unvested at November 30, 2015
 
1,641

 
$
37


The total fair value of share-based awards vested during the six months ended November 30, 2015 and November 30, 2014 was $17.6 million and $14.6 million, respectively.

For these share-based awards, we recognized compensation expense of $6.4 million and $4.7 million during the three months ended November 30, 2015 and November 30, 2014, respectively. We recognized compensation expense of $12.6 million and $8.5 million during the six months ended November 30, 2015 and November 30, 2014, respectively. As of November 30, 2015, there was $52.0 million of unrecognized compensation expense related to unvested share-based awards that we expect to recognize over a weighted-average period of 2.30 years.


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Employee Stock Purchase Plan

We have an employee stock purchase plan under which the sale of 4.8 million shares of our common stock has been authorized. Employees may designate up to the lesser of $25,000 or 20% of their annual compensation for the purchase of our common stock. The price for shares purchased under the plan is 85% of the market value on the last day of each calendar quarter. As of November 30, 2015, 2.3 million shares had been issued under this plan, with 2.5 million shares reserved for future issuance. We recognized compensation expense for the plan of $0.2 million and $0.1 million in the three months ended November 30, 2015 and November 30, 2014, respectively. We recognized compensation expense for the plan of $0.3 million and $0.3 million in the six months ended November 30, 2015 and November 30, 2014, respectively.
 
The weighted-average grant-date fair value of each designated share purchased under this plan during the six months ended November 30, 2015 and November 30, 2014 was approximately $7 and $4, respectively, which represents the fair value of the 15% discount.

Stock Options

Stock options are granted with an exercise price equal to 100% of fair market value on the date of grant and have a term of ten years. Stock options granted before fiscal 2015 vest in equal installments on each of the first four anniversaries of the grant date. Stock options granted during fiscal 2015 and thereafter vest in equal installments on each of the first three anniversaries of the grant date. During the six months ended November 30, 2015 and November 30, 2014, we granted 0.1 million and 0.4 million stock options, respectively. Our stock option plans provide for accelerated vesting under certain conditions.

The following is a summary of our stock option activity as of and for the six months ended November 30, 2015: 
 
 
Options
 
Weighted-Average Exercise Price
 
Weighted-Average Remaining Contractual Term
 
Aggregate Intrinsic Value
 
 
(in thousands)
 
 
 
(in years)
 
(in millions)
Outstanding at May 31, 2015
 
894

 
$
26

 
5.2
 
$
23.9

Granted
 
145

 
56

 
 
 
 
Forfeited
 
(6
)
 
16

 
 
 
 
Exercised
 
(128
)
 
23

 
 
 
 
Outstanding at November 30, 2015
 
905

 
$
31

 
5.7
 
$
37.3

 
 
 
 
 
 
 
 
 
Options vested and exercisable at November 30, 2015
 
586

 
$
23

 
4.0
 
$
28.6


We recognized compensation expense for stock options of $0.4 million and $0.2 million during the three months ended November 30, 2015 and November 30, 2014, respectively. We recognized compensation expense for stock options of $0.6 million and $0.3 million during the six months ended November 30, 2015 and November 30, 2014, respectively. The aggregate intrinsic value of stock options exercised during the six months ended November 30, 2015 and November 30, 2014 was $4.8 million and $10.4 million, respectively. As of November 30, 2015, we had $3.3 million of unrecognized compensation expense related to unvested stock options that we expect to recognize over a weighted-average period of 2.3 years.


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The weighted-average grant-date fair value of each stock option granted during the six months ended November 30, 2015 and November 30, 2014 was $16 and $9, respectively. Fair value was estimated on the date of grant using the Black-Scholes valuation model with the following weighted-average assumptions:
 
Six Months Ended
 
November 30, 2015
 
November 30, 2014
Risk-free interest rate
1.62%
 
1.57%
Expected volatility
28.65%
 
23.65%
Dividend yield
0.10%
 
0.13%
Expected life (years)
5
 
5

The risk-free interest rate is based on the yield of a zero coupon U.S. Treasury security with a maturity equal to the expected life of the option from the date of the grant. Our assumption on expected volatility is based on our historical volatility. The dividend yield assumption is calculated using our average stock price over the preceding year and the annualized amount of our most current quarterly dividend per share. We based our assumptions on the expected lives of the options on our analysis of the historical exercise patterns of the options and our assumption on the future exercise pattern of options.
 
NOTE 10—EARNINGS PER SHARE

Basic earnings per share is computed by dividing reported net income attributable to Global Payments by the weighted-average number of shares outstanding during the period. Earnings available to common shareholders is the same as reported net income attributable to Global Payments for all periods presented.

Diluted earnings per share is computed by dividing net income attributable to Global Payments by the weighted-average number of shares outstanding during the period, including the effect of share-based awards that would have a dilutive effect on earnings per share. All stock options with an exercise price lower than the average market share price of our common stock for the period are assumed to have a dilutive effect on earnings per share. For the six months ended November 30, 2015, the diluted share base excluded 0.1 million shares related to stock options that would have an antidilutive effect on the computation of diluted earnings per share. There were no such antidilutive stock options for the three months ended November 30, 2015 and November 30, 2014 and the six months ended November 30, 2014.

The following table sets forth the computation of diluted weighted-average shares outstanding for the three and six months ended November 30, 2015 and November 30, 2014 (in thousands):
 
Three Months Ended
 
Six Months Ended
 
November 30, 2015
 
November 30, 2014
 
November 30, 2015
 
November 30, 2014
 
 
 
 
 
 
 
 
Basic weighted-average shares outstanding
129,505

 
134,754

 
129,919

 
135,528

Plus: Dilutive effect of stock options and other share-based awards
848

 
720

 
833

 
830

Diluted weighted-average shares outstanding
130,353

 
135,474

 
130,752

 
136,358



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NOTE 11—ACCUMULATED OTHER COMPREHENSIVE LOSS

The changes in the accumulated balances for each component of other comprehensive loss were as follows for the three months ended November 30, 2015 and November 30, 2014 (in thousands):
 
Foreign Currency Translation
 
Unrealized Gains (Losses) on Hedging Activities
 
Defined Benefit Pension Plans
 
Accumulated Other Comprehensive Loss
 
 
 
 
 
 
 
 
Balance at August 31, 2014
$
(15,992
)
 
$
—

 
$
(3,359
)
 
$
(19,351
)
Other comprehensive loss, net of income tax
(80,930
)
 
(2,445
)
 
—

 
(83,375
)
Balance at November 30, 2014
$
(96,922
)
 
$
(2,445
)
 
$
(3,359
)
 
$
(102,726
)
 
 
 
 
 
 
 
 
Balance at August 31, 2015
$
(206,124
)
 
$
(2,794
)
 
$
(3,809
)
 
$
(212,727
)
Other comprehensive loss, net of income tax
(31,568
)
 
(939
)
 
—

 
(32,507
)
Balance at November 30, 2015
$
(237,692
)
 
$
(3,733
)
 
$
(3,809
)
 
$
(245,234
)

Other comprehensive loss attributable to noncontrolling interest, which relates only to foreign currency translation, was $6.3 million and $6.9 million for the three months ended November 30, 2015 and November 30, 2014, respectively.

The changes in the accumulated balances for each component of other comprehensive loss were as follows for the six months ended November 30, 2015 and November 30, 2014 (in thousands):
 
Foreign Currency Translation
 
Unrealized Gains (Losses) on Hedging Activities
 
Defined Benefit Pension Plans
 
Accumulated Other Comprehensive Loss
 
 
 
 
 
 
 
 
Balance at May 31, 2014
$
1,583

 
$
—

 
$
(3,359
)
 
$
(1,776
)
Other comprehensive loss, net of income tax
(98,505
)
 
(2,445
)
 
—

 
(100,950
)
Balance at November 30, 2014
$
(96,922
)
 
$
(2,445
)
 
$
(3,359
)
 
$
(102,726
)
 
 
 
 
 
 
 
 
Balance at May 31, 2015
$
(178,309
)
 
$
(3,874
)
 
$
(3,809
)
 
$
(185,992
)
Other comprehensive income (loss), net of income tax
(59,383
)
 
141

 
—

 
(59,242
)
Balance at November 30, 2015
$
(237,692
)
 
$
(3,733
)
 
$
(3,809
)
 
$
(245,234
)

Other comprehensive loss attributable to noncontrolling interest, which relates only to foreign currency translation, was $4.4 million and $12.1 million for the six months ended November 30, 2015 and November 30, 2014, respectively.

NOTE 12—SEGMENT INFORMATION

General Information

We are a leading worldwide provider of payment technology services delivering innovative solutions to our customers. Our partnerships, technologies and employee expertise enable us to provide a broad range of services that allow our customers to accept various payment types. We distribute our services across a variety of channels to merchants and partners in 29 countries throughout North America, Europe, the Asia-Pacific region and an equity method investment in Brazil. Commencing with fiscal 2016, we began reporting based on realigned segments (North America, Europe and Asia-Pacific) due to international investment and a realigned management structure. As a result, we have presented prior year segment data in a manner that conforms to our current year presentation.


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Information About Profit and Assets

We evaluate performance and allocate resources based on the operating income of each segment. The operating income of each segment includes the revenues of the segment less those expenses that are directly related to those revenues. Operating overhead, shared costs and certain compensation costs are included in Corporate in the following table. Interest and other income, interest and other expense, the financial results of equity method investments and provision for income taxes are not allocated to the individual segments. We do not evaluate performance or allocate resources using segment asset data. The accounting policies of the reportable segments are the same as those described in our Annual Report on Form 10-K for the year ended May 31, 2015 and our summary of significant accounting policies in "Note 1-Basis of Presentation and Summary of Significant Accounting Policies."

Information on segments and reconciliations to consolidated revenues and consolidated operating income are as follows for the three and six months ended November 30, 2015 and 2014 (in thousands):
 
Three Months Ended
 
Six Months Ended
 
November 30, 2015
 
November 30, 2014
 
November 30, 2015
 
November 30, 2014
Revenues:
 
 
 
 
 
 
 
North America
$
511,335

 
$
488,776

 
$
1,042,192

 
$
992,782

Europe
158,016

 
159,974

 
326,373

 
322,762

Asia-Pacific
52,999

 
48,541

 
102,581

 
86,642

 Consolidated revenues
$
722,350

 
$
697,291

 
$
1,471,146

 
$
1,402,186

 
 
 
 
 
 
 
 
Operating income (loss):
 
 
 
 
 
 
 
North America
$
79,121

 
$
74,246

 
$
162,635

 
$
152,183

Europe(1)
62,012

 
64,563

 
134,745

 
131,608

Asia-Pacific
11,857

 
11,880

 
24,089

 
18,437

Corporate
(29,825
)
 
(26,705
)
 
(60,532
)
 
(53,846
)
 Consolidated operating income
$
123,165

 
$
123,984

 
$
260,937

 
$
248,382

 
 
 
 
 
 
 
 
Depreciation and amortization:
 
 
 
 
 
 
 
North America
$
24,222

 
$
20,441

 
$
47,965

 
$
40,918

Europe
9,921

 
10,072

 
20,265

 
21,108

Asia-Pacific
3,358

 
2,494

 
6,415

 
3,948

Corporate
1,248

 
1,598

 
2,861

 
3,198

 Consolidated depreciation and amortization
$
38,749

 
$
34,605

 
$
77,506

 
$
69,172


(1) During the six months ended November 30, 2014, operating income for the Europe segment included a $2.9 million gain on the sale of a component of our Russia business that leased automated teller machines to our sponsor bank in Russia. The gain is included in selling, general and administrative expenses in the consolidated statement of income for the six months ended November 30, 2014.

NOTE 13—SUBSEQUENT EVENT

On December 15, 2015, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Heartland Payment Systems, Inc., a Delaware corporation (“Heartland”), pursuant to which we will acquire Heartland in a cash-and-stock transaction. Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, as a result of the transaction, each outstanding share of Heartland’s common stock will be converted into the right to receive $53.28 in cash and 0.6687 shares of our common stock, which at December 15, 2015 represented a transaction value of $4.3 billion, or $100.00 per share of Heartland’s common stock.

Concurrently with the signing of the Merger Agreement, we entered into a debt commitment letter for secured financing of up to $4.78 billion, the proceeds of which will be used, among other things, to (i) amend, backstop, refinance or replace certain of

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our existing credit facilities, (ii) repay certain portions of Heartland’s existing indebtedness and (iii) to finance, in part, the acquisition costs. We expect the merger to close in our fiscal 2016 fourth quarter, subject to regulatory approval and customary closing conditions, as well as approval by Heartland’s shareholders.


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Table of Contents

ITEM 2—MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes included in Item 1 of Part 1 of this Quarterly Report and the Management’s Discussion and Analysis of Financial Condition and Results of Operations and consolidated financial statements contained in our Annual Report on Form 10-K for the year ended May 31, 2015. This discussion and analysis contains forward-looking statements about our plans and expectations of what may happen in the future, including, without limitation, our proposed acquisition of Heartland Payment Systems, Inc. ("Heartland"). Forward-looking statements are based on a number of assumptions and estimates that are inherently subject to significant risks and uncertainties, and our actual results could differ materially from the results anticipated by our forward-looking statements. See “Forward-Looking Statements” below for additional information.

During the three months ended November 30, 2015, our board of directors declared a two-for-one stock split in the form of a stock dividend of one additional share of common stock for each outstanding share of common stock (the “Stock Split”). The stock dividend was paid on November 2, 2015. As a result, all share and per share information presented herein has been retrospectively adjusted for the Stock Split.

Executive Overview

We are a leading worldwide provider of payment technology services delivering innovative solutions to our customers. Our technologies, partnerships and employee expertise enable us to provide a broad range of services that allow our customers to accept various payment types. We distribute our payment services and digital commerce services across a variety of channels to merchants and partners in 29 countries throughout North America, Europe, the Asia-Pacific region and Brazil.

On December 15, 2015, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Heartland pursuant to which we will acquire Heartland in a cash-and-stock transaction. Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, as a result of the transaction, each outstanding share of Heartland’s common stock will be converted into the right to receive $53.28 in cash and 0.6687 shares of our common stock, which at December 15, 2015 represented a transaction value of $4.3 billion, or $100.00 per share of Heartland’s common stock. Concurrently with the signing of the Merger Agreement, we entered into a debt commitment letter for secured financing of up to $4.78 billion, the proceeds of which will be used, among other things, to (i) amend, backstop, refinance or replace certain of our existing credit facilities, (ii) repay certain portions of Heartland’s existing indebtedness and (iii) to finance, in part, the acquisition costs. We expect the merger to close in our fiscal 2016 fourth quarter, subject to regulatory approval and customary closing conditions, as well as approval by Heartland’s shareholders.

On November 2, 2015, Visa Inc. (“Visa”) announced a proposed acquisition of Visa Europe Limited (“VE”) that is currently expected to close during our fourth quarter of fiscal 2016. Through certain of our subsidiaries in Europe, we are a member and shareholder of VE. The preliminary estimate of the upfront consideration we will receive consists of cash of €30 million ($31.7 million equivalent at November 30, 2015) and Visa preferred stock, which is convertible into Visa common shares with an approximate value of $21.4 million as of the announcement date. We could also receive contingent earn-out consideration. The amount and composition of the total consideration are not final and could be amended. In addition, certain cash consideration could be refundable and the conversion factor of the preferred shares could be adjusted down as low as zero based on the outcome of potential litigation. See "Note 5-Other Assets" in the notes to the accompanying unaudited consolidated financial statements for further discussion.

Highlights related to our financial condition and results of operations for the three and six months ended November 30, 2015 are provided below:

•
Consolidated revenues increased by 3.6% to $722.4 million in the three months ended November 30, 2015 compared to
the prior year period and consolidated revenues increased by 4.9% to $1.5 billion in the six months ended November 30, 2015 compared to the prior year period despite the unfavorable effect of currency fluctuations of $36.0 million and $82.7 million, respectively;

•
Consolidated operating income was $123.2 million for the three months ended November 30, 2015 compared to $124.0 million for the prior year period, and our operating margin was 17.1% compared to 17.8% for the prior year period. Consolidated operating income was $260.9 million for the six months ended November 30, 2015 compared to $248.4 million

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for the prior year period, and our operating margin was 17.7% in both periods. The contribution of the revenue growth in local currency was partially offset by the unfavorable effect of currency fluctuation of $13.3 million and $31.8 million for the three and six months ended November 30, 2015, respectively;

•
Net income attributable to Global Payments increased by $4.0 million, or 5.3%, to $78.8 million for the three months ended November 30, 2015 from $74.8 million in the prior year period, and diluted earnings per share increased $0.05, or 9.1%, to $0.60 from $0.55 in the prior year period. Net income attributable to Global Payments increased by $15.3 million, or 10.2%, to $165.4 million for the six months ended November 30, 2015 from $150.1 million in the prior year period, and diluted earnings per share increased $0.17, or 15.5%, to $1.27 from $1.10 in the prior year period;

•
We completed a refinancing of our long-term debt that expanded our debt capacity to $3 billion in the aggregate and lowered our borrowing rates; and

•
We effected the two-for-one Stock Split.

Acquisitions

FIS Gaming Business

On September 30, 2014, we entered into an asset purchase agreement with Certegy Check Services, Inc., a wholly-owned subsidiary of Fidelity National Information Services, Inc. ("FIS"), to acquire substantially all of the assets of its gaming business related to licensed gaming operators (the "FIS Gaming Business"). On June 1, 2015, we completed the acquisition, which included approximately 260 gaming client locations, for $237.5 million, funded from borrowings on our revolving credit facility and cash on hand.

Venture with Bank of the Philippine Islands

We provide merchant acquiring services in the Philippines through our subsidiary Global Payments Asia-Pacific Philippines Incorporated ("GP Philippines"). On August 3, 2015, we made a cash payment of $3.6 million and contributed a 49% ownership interest in GP Philippines to Bank of the Philippines ("BPI") in return for its merchant acquiring business, which is now part of GP Philippines, in which we have retained a controlling 51% interest.

Central and Eastern European Venture

On July 27, 2015, we announced an agreement with CaixaBank, S.A. ("CaixaBank") and Erste Group Bank AG (“Erste Group”) to form a venture to provide merchant acquiring and payment services in three Central and Eastern European markets: the Czech Republic, the Slovak Republic and Romania. As part of the agreement, Global Payments and CaixaBank will form an entity, in which Global Payments will have a 51% controlling interest. This newly formed entity, to be included in our Europe segment, will pay €30 million ($32 million equivalent as of November 30, 2015) in cash to acquire a 51% controlling ownership in the venture with Erste Group, which will contribute its existing merchant acquiring businesses in each of the three countries to the venture and hold a 49% interest. The transaction is expected to close in the second half of fiscal 2016, subject to receipt of regulatory approvals and satisfaction of customary closing conditions.

See "Note 3—Business and Intangible Asset Acquisitions and Joint Ventures" in the notes to the accompanying unaudited consolidated financial statements for further discussion of these acquisitions.

Results of Operations

Commencing with fiscal 2016, we began reporting based on realigned segments (North America, Europe and Asia-Pacific) due to international investment and a realigned management structure. As a result, we have presented prior year segment data in a manner that conforms to our current year presentation.


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The following table sets forth key selected financial data for the three months ended November 30, 2015 and November 30, 2014, this data as a percentage of total revenues, and the changes between the three months ended November 30, 2015 and November 30, 2014 in dollars and as a percentage of the prior year amount.
 
Three Months Ended November 30, 2015
 
% of Revenue(1)
 
Three Months Ended November 30, 2014
 
% of Revenue(1)
 
Change
 
% Change
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollar amounts in thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
North America
$
511,335

 
70.8
%
 
$
488,776

 
70.1
%
 
$
22,559

 
4.6
 %
Europe
158,016

 
21.9
%
 
159,974

 
22.9
%
 
(1,958
)
 
(1.2
)%
Asia-Pacific
52,999

 
7.3
%
 
48,541

 
7.0
%
 
4,458

 
9.2
 %
Total revenues
$
722,350

 
100.0
%
 
$
697,291

 
100.0
%
 
$
25,059

 
3.6
 %
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of service
$
270,565

 
37.5
%
 
$
257,796

 
37.0
%
 
$
12,769

 
5.0
 %
Selling, general and administrative
328,620

 
45.5
%
 
315,511

 
45.2
%
 
13,109

 
4.2
 %
Operating expenses
$
599,185

 
82.9
%
 
$
573,307

 
82.2
%
 
$
25,878

 
4.5
 %
 
 
 
 
 
 
 
 
 
 
 
 
Operating income (loss):
 
 
 
 
 
 
 
 
 
 
 
North America
$
79,121

 


 
$
74,246

 
 
 
$
4,875

 
6.6
 %
Europe
62,012

 
 
 
64,563

 
 
 
(2,551
)
 
(4.0
)%
Asia-Pacific
11,857

 
 
 
11,880

 
 
 
(23
)
 
(0.2
)%
Corporate
(29,825
)
 
 
 
(26,705
)
 
 
 
(3,120
)
 
11.7
 %
Operating income
$
123,165

 
17.1
%
 
$
123,984

 
17.8
%
 
$
(819
)
 
(0.7
)%
 
 
 
 
 
 
 
 
 
 
 
 
Operating margin:
 
 
 
 
 
 
 
 
 
 
 
North America
15.5
%
 
 
 
15.2
%

 
 
0.3
 %
 
 
Europe
39.2
%
 
 
 
40.4
%
 
 
 
(1.2
)%
 
 
Asia-Pacific
22.4
%
 
 
 
24.5
%

 
 
(2.1
)%
 
 
(1)Percentage amounts may not sum to the total due to rounding.


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The following table sets forth key selected financial data for the six months ended November 30, 2015 and November 30, 2014, this data as a percentage of total revenues, and the changes between the six months ended November 30, 2015 and November 30, 2014 in dollars and as a percentage of the prior year amount.
 
Six Months Ended November 30, 2015
 
% of Revenue(1)
 
Six Months Ended November 30, 2014
 
% of Revenue(1)
 
Change
 
% Change
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollar amounts in thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
North America
$
1,042,192

 
70.8
%
 
$
992,782

 
70.8
%
 
$
49,410

 
5.0
%
Europe
326,373

 
22.2
%
 
322,762

 
23.0
%
 
3,611

 
1.1
%
Asia-Pacific
102,581

 
7.0
%
 
86,642

 
6.2
%
 
15,939

 
18.4
%
Total revenues
$
1,471,146

 
100.0
%
 
$
1,402,186

 
100.0
%
 
$
68,960

 
4.9
%
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of service
$
543,231

 
36.9
%
 
$
517,635

 
36.9
%
 
$
25,596

 
4.9
%
Selling, general and administrative
666,978

 
45.3
%
 
636,169

 
45.4
%
 
30,809

 
4.8
%
Operating expenses
$
1,210,209

 
82.3
%
 
$
1,153,804

 
82.3
%
 
$
56,405

 
4.9
%
 
 
 
 
 
 
 
 
 
 
 
 
Operating income (loss):
 
 
 
 
 
 
 
 
 
 
 
North America
$
162,635

 
 
 
$
152,183

 
 
 
$
10,452

 
6.9
%
Europe
134,745

 
 
 
131,608

 
 
 
3,137

 
2.4
%
Asia-Pacific
24,089

 
 
 
18,437

 
 
 
5,652

 
30.7
%
Corporate
(60,532
)
 
 
 
(53,846
)
 
 
 
(6,686
)
 
12.4
%
Operating income
$
260,937

 
17.7
%
 
$
248,382

 
17.7
%
 
$
12,555

 
5.1
%
 
 
 
 
 
 
 
 
 
 
 
 
Operating margin: