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EX-32 - EXHIBIT 32 CERTIFICATION OF CEO AND CFO - Worldpay, Inc.vntvex-32x2016630.htm
EX-31.1 - EXHIBIT 31.1 CERTIFICATION OF CEO - Worldpay, Inc.vntvex-311x2016630.htm
EX-31.2 - EXHIBIT 31.2 CERTIFICATION OF CFO - Worldpay, Inc.vntvex-312x2016630.htm
EX-10.2 - EXHIBIT 10.2 MASTER SERVICES AGR. - Worldpay, Inc.vntvex-102masterservicesag.htm
EX-10.3 - EXHIBIT 10.3 TAX RECEIVABLE PURCHASE ADDENDUM - Worldpay, Inc.vntvex-10353trapurchaseadd.htm
EX-10.1 - EXHIBIT 10.1 CLEARING, SETTLEMENT AND SPONSORSHIP SERVICES AGR. - Worldpay, Inc.vntvex-101clearingsettleme.htm

 
 
 
 
 
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 June 30, 2016
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
Commission File Number: 001-35462 
 
 
 
Vantiv, Inc.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
26-4532998
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
8500 Governor’s Hill Drive
Symmes Township, OH 45249
(Address of principal executive offices)
(513) 900-5250
(Registrant’s telephone number, including area code)
 
 
 

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 x  No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 x  No o
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 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 o
Non-accelerated filer o
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No x
As of June 30, 2016, there were 156,480,777 shares of the registrant’s Class A common stock outstanding and 35,042,826 shares of the registrant’s Class B common stock outstanding.

 
 
 
 
 
 
 
 
 
 


1
 
 
 


VANTIV, INC.
FORM 10-Q
 
For the Quarterly Period Ended June 30, 2016
 
TABLE OF CONTENTS
 
 
Page
 
 


2
 
 
 


NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q, including the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors,” contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  All statements other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, our objectives for future operations, and any statements of a general economic or industry specific nature, are forward-looking statements.  You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. Words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “continue,” “could,” “should,” “can have,” “likely,” or the negative or plural of these words and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe, based on information currently available to our management, may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs.  These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the “Risk Factors” section of our most recent Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
 
You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations and assumptions reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. We undertake no obligation to publicly update any forward-looking statement after the date of this report, whether as a result of new information, future developments or otherwise, or to conform these statements to actual results or revised expectations, except as may be required by law.


3
 
 
 


PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Vantiv, Inc.
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
(In thousands, except share data)
 


 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2016
 
2015
 
2016
 
2015
Revenue:
 
 
 
 
 
 

 
 

External customers
 
$
870,158

 
$
765,564

 
$
1,667,729

 
$
1,451,940

Related party revenues
 
21,059

 
20,431

 
42,111

 
39,666

Total revenue
 
891,217

 
785,995

 
1,709,840

 
1,491,606

Network fees and other costs
 
410,736

 
362,349

 
798,149

 
693,495

Sales and marketing
 
144,844

 
122,925

 
280,482

 
238,980

Other operating costs
 
73,599

 
76,551

 
147,302

 
145,290

General and administrative
 
49,120

 
47,060

 
93,104

 
94,903

Depreciation and amortization
 
65,234

 
67,659

 
133,464

 
135,461

Income from operations
 
147,684

 
109,451

 
257,339

 
183,477

Interest expense—net
 
(26,118
)
 
(25,714
)
 
(53,847
)
 
(51,725
)
Non-operating expenses
 
(4,664
)
 
(6,725
)
 
(10,316
)
 
(15,491
)
Income before applicable income taxes
 
116,902

 
77,012

 
193,176

 
116,261

Income tax expense
 
38,441

 
24,319

 
62,267

 
36,572

Net income
 
78,461

 
52,693

 
130,909

 
79,689

Less: Net income attributable to non-controlling interests
 
(19,134
)
 
(16,157
)
 
(31,844
)
 
(24,164
)
Net income attributable to Vantiv, Inc.
 
$
59,327

 
$
36,536

 
$
99,065

 
$
55,525

Net income per share attributable to Vantiv, Inc. Class A common stock:
 
 
 
 
 
 
 
 
Basic
 
$
0.38

 
$
0.25

 
$
0.64

 
$
0.38

Diluted
 
$
0.38

 
$
0.24

 
$
0.63

 
$
0.37

Shares used in computing net income per share of Class A common stock:
 
 
 
 
 
 

 
 

Basic
 
155,670,267

 
145,566,899

 
155,533,813

 
145,051,664

Diluted
 
197,258,209

 
201,831,467

 
197,018,018

 
201,276,166

 
See Notes to Unaudited Consolidated Financial Statements.


4
 
 
 


Vantiv, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Unaudited
(In thousands)
 
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2016
 
2015
 
2016
 
2015
Net income
 
$
78,461

 
$
52,693

 
$
130,909

 
$
79,689

Other comprehensive loss, net of tax:
 
 
 
 
 
 

 
 

Loss on cash flow hedges and other
 
(5,115
)
 
(330
)
 
(13,226
)
 
(7,700
)
Comprehensive income
 
73,346

 
52,363

 
117,683

 
71,989

Less: Comprehensive income attributable to non-controlling interests
 
(17,779
)
 
(16,051
)
 
(28,338
)
 
(21,683
)
Comprehensive income attributable to Vantiv, Inc.
 
$
55,567

 
$
36,312

 
$
89,345

 
$
50,306

 
See Notes to Unaudited Consolidated Financial Statements.



5
 
 
 


Vantiv, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Unaudited
(In thousands, except share data) 
 
June 30,
2016
 
December 31,
2015
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
202,724

 
$
197,096

Accounts receivable—net
721,703

 
680,033

Related party receivable
4,208

 
3,999

Settlement assets
132,304

 
143,563

Prepaid expenses
32,646

 
31,147

Other
69,556

 
61,661

Total current assets
1,163,141

 
1,117,499

  Customer incentives
64,043

 
57,984

  Property, equipment and software—net
338,755

 
308,009

  Intangible assets—net
764,181

 
863,066

  Goodwill
3,366,528

 
3,366,528

  Deferred taxes
715,078

 
731,622

  Other assets
31,602

 
20,718

Total assets
$
6,443,328

 
$
6,465,426

Liabilities and equity
 

 
 

Current liabilities:
 

 
 

Accounts payable and accrued expenses
$
379,118

 
$
364,878

Related party payable
3,394

 
4,698

Settlement obligations
635,161

 
677,502

Current portion of note payable to related party
10,353

 
10,353

Current portion of note payable
99,148

 
106,148

Current portion of tax receivable agreement obligations to related parties
35,659

 
31,232

Current portion of tax receivable agreement obligations
59,503

 
64,227

Deferred income
14,395

 
14,470

Current maturities of capital lease obligations
8,601

 
7,931

Other
20,104

 
13,940

Total current liabilities
1,265,436

 
1,295,379

Long-term liabilities:
 

 
 

Note payable to related party
175,993

 
181,169

Note payable
2,712,632

 
2,762,469

Tax receivable agreement obligations to related parties
766,170

 
801,829

Tax receivable agreement obligations
78,551

 
126,980

Capital lease obligations
17,536

 
21,801

Deferred taxes
26,659

 
15,836

Other
34,721

 
34,897

Total long-term liabilities
3,812,262

 
3,944,981

Total liabilities
5,077,698

 
5,240,360

Commitments and contingencies (See Note 6 - Commitments, Contingencies and Guarantees)


 


Equity:
 

 
 

Class A common stock, $0.00001 par value; 890,000,000 shares authorized; 156,480,777 shares outstanding at June 30, 2016; 155,488,326 shares outstanding at December 31, 2015
1

 
1

Class B common stock, no par value; 100,000,000 shares authorized; 35,042,826 shares issued and outstanding at June 30, 2016 and December 31, 2015

 

Preferred stock, $0.00001 par value; 10,000,000 shares authorized; no shares issued and outstanding

 

Paid-in capital
583,046

 
553,145

Retained earnings
575,369

 
476,304

Accumulated other comprehensive loss
(18,924
)
 
(9,204
)
Treasury stock, at cost; 2,702,744 shares at June 30, 2016 and 2,593,242 shares at December 31, 2015
(73,242
)
 
(67,458
)
Total Vantiv, Inc. equity
1,066,250

 
952,788

Non-controlling interests
299,380

 
272,278

Total equity
1,365,630

 
1,225,066

Total liabilities and equity
$
6,443,328

 
$
6,465,426

See Notes to Unaudited Consolidated Financial Statements.

6
 
 
 


Vantiv, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In thousands)
 
Six Months Ended June 30,
 
2016
 
2015
Operating Activities:
 

 
 

Net income
$
130,909

 
$
79,689

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

 
 

Depreciation and amortization expense
133,464

 
135,461

Amortization of customer incentives
12,581

 
8,183

Amortization and write-off of debt issuance costs
3,237

 
5,196

Share-based compensation expense
16,292

 
16,720

Deferred taxes
32,400

 
22,705

Excess tax benefit from share-based compensation
(8,067
)
 
(13,753
)
Tax receivable agreements non-cash items
10,252

 
13,733

Other
382

 

Change in operating assets and liabilities:
 

 
 

Accounts receivable and related party receivable
(41,879
)
 
30,348

Net settlement assets and obligations
(31,082
)
 
41,380

Customer incentives
(23,343
)
 
(13,342
)
Prepaid and other assets
(1,695
)
 
(2,163
)
Accounts payable and accrued expenses
17,867

 
24,043

Payable to related party
(1,304
)
 
595

Other liabilities
(1,528
)
 
3,582

Net cash provided by operating activities
248,486

 
352,377

Investing Activities:
 

 
 

Purchases of property and equipment
(62,883
)
 
(42,013
)
Acquisition of customer portfolios and related assets and other
(883
)
 
(37,154
)
Purchase of derivative instruments
(21,523
)
 

Net cash used in investing activities
(85,289
)
 
(79,167
)
Financing Activities:
 

 
 

Borrowings on revolving credit facility
855,000

 

Repayment of revolving credit facility
(855,000
)
 

Repayment of debt and capital lease obligations
(69,521
)
 
(262,946
)
Proceeds from issuance of Class A common stock under employee stock plans
8,538

 
9,628

Repurchase of Class A common stock (to satisfy tax withholding obligations)
(5,784
)
 
(15,867
)
Settlement of certain tax receivable agreements
(41,163
)
 

Payments under tax receivable agreements
(53,474
)
 
(22,805
)
Excess tax benefit from share-based compensation
8,067

 
13,753

Distributions to non-controlling interests
(4,220
)
 
(3,132
)
Other
(12
)
 

Decrease in cash overdraft

 
(2,627
)
Net cash used in financing activities
(157,569
)
 
(283,996
)
Net increase (decrease) in cash and cash equivalents
5,628

 
(10,786
)
Cash and cash equivalents—Beginning of period
197,096

 
411,568

Cash and cash equivalents—End of period
$
202,724

 
$
400,782

Cash Payments:
 

 
 

Interest
$
50,814

 
$
48,502

Taxes
13,443

 
5,054

See Notes to Unaudited Consolidated Financial Statements.

7
 
 
 


Vantiv, Inc.
CONSOLIDATED STATEMENT OF EQUITY
Unaudited
(In thousands)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
Common Stock
 
 
 
 
 
 
 
 
 
Other
 
Non-
 
Total
 
Class A
 
Class B
 
Treasury Stock
 
Paid-in
 
Retained
 
Comprehensive
 
Controlling
 
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Earnings
 
Income (Loss)
 
Interests
Beginning Balance, January 1, 2016
$
1,225,066

 
155,488

 
$
1

 
35,043

 
$

 
2,593

 
$
(67,458
)
 
$
553,145

 
$
476,304

 
$
(9,204
)
 
$
272,278

Net income
130,909

 

 

 

 

 

 

 

 
99,065

 

 
31,844

Issuance of Class A common stock under employee stock plans, net of forfeitures
8,538

 
1,103

 

 

 

 

 

 
8,538

 

 

 

Tax benefit from employee share-based compensation
8,067

 

 

 

 

 

 

 
8,067

 

 

 

Repurchase of Class A common stock (to satisfy tax withholding obligation)
(5,784
)
 
(110
)
 

 

 

 
110

 
(5,784
)
 

 

 

 

Unrealized loss on hedging activities and other, net of tax
(13,226
)
 

 

 

 

 

 

 

 

 
(9,720
)
 
(3,506
)
Distribution to non-controlling interests
(4,220
)
 

 

 

 

 

 

 

 

 

 
(4,220
)
Share-based compensation
16,292

 

 

 

 

 

 

 
13,308

 

 

 
2,984

Other
(12
)
 

 

 

 

 

 

 
(12
)
 

 

 

Ending Balance, June 30, 2016
$
1,365,630

 
156,481

 
$
1

 
35,043

 
$

 
2,703

 
$
(73,242
)
 
$
583,046

 
$
575,369

 
$
(18,924
)
 
$
299,380


See Notes to Unaudited Consolidated Financial Statements.



8
 
 
 


Vantiv, Inc.
CONSOLIDATED STATEMENT OF EQUITY
Unaudited
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
Common Stock
 
 
 
 
 
 
 
 
 
Other
 
Non-
 
Total
 
Class A
 
Class B
 
Treasury Stock
 
Paid-in
 
Retained
 
Comprehensive
 
Controlling
 
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Earnings
 
Income (Loss)
 
Interests
Beginning Balance, January 1, 2015
$
1,300,586

 
145,455

 
$
1

 
43,043

 
$

 
2,174

 
$
(50,931
)
 
$
629,353

 
$
328,358

 
$
(3,768
)
 
$
397,573

Net income
79,689

 

 

 

 

 

 

 

 
55,525

 

 
24,164

Issuance of Class A common stock under employee stock plans, net of forfeitures
9,628

 
1,129

 

 

 

 

 

 
9,628

 

 

 

Tax benefit from employee share-based compensation
13,753

 

 

 

 

 

 

 
13,753

 

 

 

Repurchase of Class A common stock (to satisfy tax withholding obligation)
(15,867
)
 
(405
)
 

 

 

 
405

 
(15,867
)
 

 

 

 

Unrealized loss on hedging activities and other, net of tax
(7,700
)
 

 

 

 

 

 

 

 

 
(5,219
)
 
(2,481
)
Distribution to non-controlling interests
(3,132
)
 

 

 

 

 

 

 

 

 

 
(3,132
)
Share-based compensation
16,720

 

 

 

 

 

 

 
12,912

 

 

 
3,808

Reallocation of non-controlling interests of Vantiv Holding due to change in ownership

 

 

 

 

 

 

 
2,732

 

 

 
(2,732
)
Ending Balance, June 30, 2015
$
1,393,677

 
146,179

 
$
1

 
43,043

 
$

 
2,579

 
$
(66,798
)
 
$
668,378

 
$
383,883

 
$
(8,987
)
 
$
417,200

 
See Notes to Unaudited Consolidated Financial Statements.


9
 
 
 


Vantiv, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Description of Business
 
Vantiv, Inc., a Delaware corporation, is a holding company that conducts its operations through its majority-owned subsidiary, Vantiv Holding, LLC (“Vantiv Holding”). Vantiv, Inc. and Vantiv Holding are referred to collectively as the “Company,” “Vantiv,” “we,” “us” or “our,” unless the context requires otherwise.
 
The Company provides electronic payment processing services to merchants and financial institutions throughout the United States of America. The Company markets its services through diverse distribution channels, including national, regional and mid-market sales teams, third-party reseller clients and a telesales operation. The Company also has relationships with a broad range of referral partners that include merchant banks, independent software vendors (“ISVs”), value-added resellers (“VARs”), payment facilitators, independent sales organizations (“ISOs”) and trade associations, as well as arrangements with core processors.
 
Segments
 
The Company’s segments consist of the Merchant Services segment and the Financial Institution Services segment. The Company’s Chief Executive Officer (“CEO”), who is the chief operating decision maker (“CODM”), evaluates the performance and allocates resources based on the operating results of each segment. Below is a summary of each segment:
 
Merchant Services—Provides merchant acquiring and payment processing services to large national merchants, regional and small-to-mid sized businesses. Merchant services are sold to small to large businesses through diverse distribution channels. Merchant Services includes all aspects of card processing including authorization and settlement, customer service, chargeback and retrieval processing and interchange management.
 
Financial Institution Services—Provides card issuer processing, payment network processing, fraud protection, card production, prepaid program management, automated teller machine (“ATM”) driving and network gateway and switching services that utilize the Company’s proprietary Jeanie debit payment network to a diverse set of financial institutions, including regional banks, community banks, credit unions and regional personal identification number (“PIN”) networks. Financial Institution Services also provides statement production, collections and inbound/outbound call centers for credit transactions, and other services such as credit card portfolio analytics, program strategy and support, fraud and security management and chargeback and dispute services.
 
Basis of Presentation and Consolidation
 
The accompanying consolidated financial statements include those of Vantiv, Inc. and all subsidiaries thereof, including its majority-owned subsidiary, Vantiv Holding, LLC. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and should be read in connection with the Company’s 2015 audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K. The accompanying consolidated financial statements are unaudited; however, in the opinion of management they include all normal and recurring adjustments necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the periods presented. Results of operations reported for interim periods are not necessarily indicative of results for the entire year. All intercompany balances and transactions have been eliminated.
 
As of June 30, 2016, Vantiv, Inc. and Fifth Third Bank (“Fifth Third”) owned interests in Vantiv Holding of 81.70% and 18.30%, respectively (see Note 5 - Controlling and Non-controlling Interests for changes in non-controlling interests).
 
The Company accounts for non-controlling interests in accordance with Accounting Standards Codification (“ASC”) 810, Consolidation. Non-controlling interests primarily represent Fifth Third’s minority share of net income or loss of and equity in Vantiv Holding. Net income attributable to non-controlling interests does not include expenses incurred directly by Vantiv, Inc., including income tax expense attributable to Vantiv, Inc. All of the Company’s non-controlling interests are presented after Vantiv Holding income tax expense in the accompanying consolidated statements of income as “Net income

10
 
 
 

Vantiv, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)


attributable to non-controlling interests.” Non-controlling interests are presented as a component of equity in the accompanying consolidated statements of financial position.

Share Repurchase Program

In February 2014, our board of directors authorized a program to repurchase up to $300 million of our Class A common stock. We have approximately $75 million of share repurchase authority remaining as of June 30, 2016 under this authorization. Purchases under the repurchase program are allowed from time to time in the open market, in privately negotiated transactions, or otherwise. The manner, timing, and amount of any purchases are determined by management based on an evaluation of market conditions, stock price, and other factors. The share repurchase program has no expiration date and the Company may discontinue purchases at any time that management determines additional purchases are not warranted.

Sponsorship
 
In order to provide electronic payment processing services, Visa, MasterCard and other payment networks require sponsorship of non-financial institutions by a member clearing bank. In June 2009, the Company entered into a 10-year agreement with Fifth Third (the “Sponsoring Member”), to provide sponsorship services to the Company. The Company also has agreements with certain other banks that provide sponsorship into the card networks.
 
Use of Estimates
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Revenue Recognition
 
The Company has contractual agreements with its clients that set forth the general terms and conditions of the relationship including line item pricing, payment terms and contract duration. Revenues are recognized as earned (i.e., for transaction based fees, when the underlying transaction is processed) in conjunction with ASC 605, Revenue Recognition. ASC 605, Revenue Recognition, establishes guidance as to when revenue is realized or realizable and earned by using the following criteria: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price is fixed or determinable; and (4) collectibility is reasonably assured.
 
The Company follows guidance provided in ASC 605-45, Principal Agent Considerations, which states that the determination of whether a company should recognize revenue based on the gross amount billed to a customer or the net amount retained is a matter of judgment that depends on the facts and circumstances of the arrangement and that certain factors should be considered in the evaluation. The Company recognizes processing revenues net of interchange fees, which are assessed to the Company’s merchant customers on all processed transactions. Interchange rates are not controlled by the Company, which effectively acts as a clearing house collecting and remitting interchange fee settlement on behalf of issuing banks, debit networks, credit card associations and its processing customers. All other revenue is reported on a gross basis, as the Company contracts directly with the end customer, assumes the risk of loss and has pricing flexibility.
 
The Company generates revenue primarily by processing electronic payment transactions. Set forth below is a description of the Company’s revenue by segment. 

Merchant Services
 
The Company’s Merchant Services segment revenue is primarily derived from processing credit and debit card transactions. Merchant Services revenue is primarily comprised of fees charged to businesses, net of interchange fees, for payment processing services, including authorization, capture, clearing, settlement and information reporting of electronic transactions. The fees charged consist of either a percentage of the dollar volume of the transaction or a fixed fee, or both, and are recognized at the time of the transaction. Merchant Services revenue also includes a number of revenue items that are incurred by the Company and are reimbursable as the costs are passed through to and paid by the Company’s clients. These items primarily consist of Visa, MasterCard and other payment network fees. In addition, for sales through ISOs and certain other referral sources in which the Company is the primary party to the contract with the merchant, the Company records the

11
 
 
 

Vantiv, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)


full amount of the fees collected from the merchant as revenue. Merchant Services segment revenue also includes revenue from ancillary services such as fraud management, equipment sales and terminal rent. Merchant Services revenue is recognized as services are performed. 

Financial Institution Services

The Company’s Financial Institution Services segment revenue is primarily derived from debit, credit and ATM card transaction processing, ATM driving and support, and PIN debit processing services. Financial Institution Services revenue associated with processing transactions includes per transaction and account related fees, card production fees and fees generated from the Company’s Jeanie network. Financial Institution Services revenue related to card transaction processing is recognized when consumers use their client-issued cards to make purchases. Financial Institution Services also generates revenue through other services, including statement production, collections and inbound/outbound call centers for credit transactions and other services such as credit card portfolio analytics, program strategy and support, fraud and security management and chargeback and dispute services. Financial Institution Services revenue is recognized as services are performed.
 
Financial Institution Services provides certain services to Fifth Third. Revenues related to these services are included in the accompanying statements of income as related party revenues.
 
Expenses
 
Set forth below is a brief description of the components of the Company’s expenses:
 
Network fees and other costs primarily consist of pass through expenses incurred by the Company in connection with providing processing services to its clients, including Visa and MasterCard network association fees, payment network fees, third party processing fees, telecommunication charges, postage and card production costs.
 
Sales and marketing expense primarily consists of salaries and benefits paid to sales personnel, sales management and other sales and marketing personnel, residual payments made to ISOs and referral partners, and advertising and promotional costs.
 
Other operating costs primarily consist of salaries and benefits paid to operational and IT personnel, costs associated with operating the Company’s technology platform and data centers, information technology costs for processing transactions, product development costs, software consulting fees and maintenance costs.

General and administrative expenses primarily consist of salaries and benefits paid to executive management and administrative employees, including finance, human resources, product development, legal and risk management, share-based compensation costs, equipment and occupancy costs and consulting costs.

Non-operating expenses during the three months and six months ended June 30, 2016 and 2015 primarily relate to the change in fair value of a tax receivable agreement (“TRA”) (see Note 7 - Fair Value Measurements).

Share-Based Compensation
 
The Company expenses employee share-based payments under ASC 718, Compensation—Stock Compensation, which requires compensation cost for the grant-date fair value of share-based payments to be recognized over the requisite service period. The Company estimates the grant date fair value of the share-based awards issued in the form of options using the Black-Scholes option pricing model. The fair value of restricted stock awards and performance awards is measured based on the market price of the Company’s stock on the grant date. For the six months ended June 30, 2016 and 2015 total share-based compensation expense was $16.3 million and $16.7 million, respectively.

In 2016 the Company began offering an Employee Stock Purchase Plan (“ESPP”). The ESPP has 2.5 million shares of common stock reserved for issuance. Full-time and benefits-eligible part-time employees who have completed at least one year of service are eligible to participate. Temporary, seasonal and employees subject to Section 16 reporting are excluded. Shares may be purchased at 85% of the market value at the end of the offering period through accumulation of payroll deductions. The ESPP provides for six month offerings commencing on January 1 and July 1 of each year with purchases on June 30 and

12
 
 
 

Vantiv, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)


December 31 of each year. The expense related to the ESPP’s 15% discount is included in total share based compensation expense above.

Earnings Per Share
 
Basic earnings per share is computed by dividing net income attributable to Vantiv, Inc. by the weighted average shares outstanding during the period. Diluted earnings per share is computed by dividing net income attributable to Vantiv, Inc., adjusted as necessary for the impact of potentially dilutive securities, by the weighted-average shares outstanding during the period and the impact of securities that would have a dilutive effect on earnings per share. See Note 8 - Net Income Per Share for further discussion.

Dividend Restrictions

The Company does not intend to pay cash dividends on its Class A common stock in the foreseeable future. Vantiv, Inc. is a holding company that does not conduct any business operations of its own. As a result, Vantiv, Inc.’s ability to pay cash dividends on its common stock, if any, is dependent upon cash dividends and distributions and other transfers from Vantiv Holding. The amounts available to Vantiv, Inc. to pay cash dividends are subject to the covenants and distribution restrictions in its subsidiaries’ loan agreements. As a result of the restrictions on distributions from Vantiv Holding and its subsidiaries, essentially all of the Company’s consolidated net assets are held at the subsidiary level and are restricted as of June 30, 2016.

Income Taxes
 
Vantiv, Inc. is taxed as a C corporation for U.S. income tax purposes and is therefore subject to both federal and state taxation at a corporate level.
 
Income taxes are computed in accordance with ASC 740, Income Taxes, and reflect the net tax effects of temporary differences between the financial reporting carrying amounts of assets and liabilities and the corresponding income tax amounts. The Company has deferred tax assets and liabilities and maintains valuation allowances where it is more likely than not that all or a portion of deferred tax assets will not be realized. To the extent the Company determines that it will not realize the benefit of some or all of its deferred tax assets, such deferred tax assets will be adjusted through the Company’s provision for income taxes in the period in which this determination is made. As of June 30, 2016 and December 31, 2015, the Company had recorded no valuation allowances against deferred tax assets.

The Company’s consolidated interim effective tax rate is based upon expected annual income from operations, statutory tax rates and tax laws in the various jurisdictions in which the Company operates. Significant or unusual items, including adjustments to accruals for tax uncertainties, are recognized in the quarter in which the related event occurs.

The Company’s effective tax rates were 32.2% and 31.5% respectively, for the six months ended June 30, 2016 and 2015. The effective tax rate for each period reflects the impact of the Company’s non-controlling interests not being taxed at the statutory corporate tax rates. As our non-controlling interest declines to the point Vantiv Holding is a wholly-owned subsidiary, we expect our effective rate to increase to approximately 36.0%.

Cash and Cash Equivalents
 
Cash on hand and investments with original maturities of three months or less (that are readily convertible to cash) are considered to be cash equivalents. Cash equivalents consist primarily of overnight EuroDollar sweep accounts which are maintained at reputable financial institutions with high credit quality and therefore are considered to bear minimal credit risk.
 
Accounts Receivable—net
 
Accounts receivable primarily represent processing revenues earned but not collected. For a majority of its customers, the Company has the authority to debit the client’s bank accounts through the Federal Reserve’s Automated Clearing House; as such, collectibility is reasonably assured. The Company records a reserve for doubtful accounts when it is probable that the accounts receivable will not be collected. The Company reviews historical loss experience and the financial position of its customers when estimating the allowance. As of June 30, 2016 and December 31, 2015, the allowance for doubtful accounts was not material to the Company’s statements of financial position.
 

13
 
 
 

Vantiv, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)


Customer Incentives
 
Customer incentives represent signing bonuses paid to customers. Customer incentives are paid in connection with the acquisition or renewal of customer contracts, and are therefore deferred and amortized using the straight-line method based on the contractual agreement. Related amortization is recorded as contra-revenue.
 
Property, Equipment and Software—net
 
Property, equipment and software consists of the Company’s facilities, furniture and equipment, software, land and leasehold improvements. These assets are depreciated on a straight-line basis over their respective useful lives, which are 15 to 40 years for the Company’s facilities and related improvements, 2 to 10 years for furniture and equipment, 3 to 8 years for software and 3 to 10 years for leasehold improvements or the lesser of the estimated useful life of the improvement or the term of lease. Also included in property, equipment and software is work in progress consisting of costs associated with software developed for internal use which has not yet been placed in service. Accumulated depreciation as of June 30, 2016 and December 31, 2015 was $274.4 million and $240.3 million, respectively.
 
The Company capitalizes certain costs related to computer software developed for internal use and amortizes such costs on a straight-line basis over an estimated useful life of 5 to 8 years. Research and development costs incurred prior to establishing technological feasibility are charged to operations as such costs are incurred. Once technological feasibility has been established, costs are capitalized until the software is placed in service.
 
Goodwill and Intangible Assets
 
In accordance with ASC 350, Intangibles—Goodwill and Other, the Company tests goodwill for impairment for each reporting unit on an annual basis, or when events occur or circumstances indicate the fair value of a reporting unit is below its carrying value. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that fair value of the goodwill within the reporting unit is less than its carrying value. The Company performed its most recent annual goodwill impairment test for all reporting units as of July 31, 2015 using market data and discounted cash flow analyses. Based on this analysis, it was determined that the fair value of all reporting units were substantially in excess of the carrying value. There have been no other events or changes in circumstances subsequent to the testing date that would indicate impairment of these reporting units as of June 30, 2016.

Intangible assets consist of acquired customer relationships, trade names and customer portfolios and related assets that are amortized over their estimated useful lives. The Company reviews finite lived intangible assets for possible impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. As of June 30, 2016, there have been no such events or circumstances that would indicate potential impairment of finite lived intangible assets.
 
Settlement Assets and Obligations
 
Settlement assets and obligations result from Financial Institution Services when funds are transferred from or received by the Company prior to receiving or paying funds to a different entity. This timing difference results in a settlement asset or obligation. The amounts are generally collected or paid the following business day.
 
The settlement assets and obligations recorded by Merchant Services represent intermediary balances due to differences between the amount the Sponsoring Member receives from the card associations and the amount funded to the merchants. Such differences arise from timing differences, interchange expenses, merchant reserves and exception items. In addition, certain card associations limit the Company from accessing or controlling merchant settlement funds and, instead, require that these funds be controlled by the Sponsoring Member. The Company follows a net settlement process whereby, if the settlement received from the card associations precedes the funding obligation to the merchant, the Company temporarily records a corresponding liability. Conversely, if the funding obligation to the merchant precedes the settlement from the card associations, the amount of the net receivable position is recorded by the Company, or in some cases, the Sponsoring Member may cover the position with its own funds in which case a receivable position is not recorded by the Company.
 

14
 
 
 

Vantiv, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)


Derivatives
 
The Company accounts for derivatives in accordance with ASC 815, Derivatives and Hedging. This guidance establishes accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the statement of financial position at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and the hedged item will be recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portion of the change in the fair value of the derivative will be recorded in accumulated other comprehensive income (loss) (“AOCI”) and will be recognized in the statement of income when the hedged item affects earnings. The Company does not enter into derivative financial instruments for speculative purposes.

Tax Receivable Agreements
 
As of June 30, 2016, the Company is party to several TRAs in which the Company agrees to make payments to various parties of 85% of the federal, state, local and foreign income tax benefits realized by the Company as a result of certain tax deductions. Payments under the TRAs will be based on the tax reporting positions of the Company and are only required to the extent the Company realizes cash savings as a result of the underlying tax attributes. The cash savings realized by the Company are computed by comparing the actual income tax liability of the Company to the amount of such taxes the Company would have been required to pay had there been no deductions related to the tax attributes discussed below. The Company will retain the benefit of the remaining 15% of the cash savings associated with the TRAs. The Company has entered into the following three TRAs:

TRAs with investors prior to the Company’s initial public offering (“IPO”) for its use of NPC Group, Inc. net operating losses (“NOLs”) and other tax attributes existing at the IPO date (the “NPC TRA”), all of which is currently held by Fifth Third.

A TRA with Fifth Third (the “Fifth Third TRA”) in which the Company realizes tax deductions as a result of the increases in tax basis from the purchase of Vantiv Holding units or from the exchange of Vantiv Holding units for cash or shares of Class A common stock, as well as the tax benefits attributable to payments made under such TRAs.

A TRA with Mercury Payment Systems, LLC (“Mercury”) shareholders (the “Mercury TRA”) as part of the acquisition of Mercury as a result of the increase in tax basis of the assets of Mercury resulting from the acquisition and the use of the net operating losses and other tax attributes of Mercury that were acquired as part of the acquisition.

Obligations recorded pursuant to the TRAs are based on estimates of future taxable income and future tax rates. On an annual basis, the Company evaluates the assumptions underlying the TRA obligations.

During 2015, the Company entered into a Repurchase Addendum to Tax Receivable Agreement (the “Mercury TRA Addendum”) with each of the pre-acquisition owners of Mercury ("Mercury TRA Holders"). The Mercury TRA Addendum contains the following provisions to acquire a significant portion of the Mercury TRA:

Beginning December 1st of each of 2015, 2016, 2017, and 2018, and ending June 30th of 2016, 2017, 2018, and 2019, respectively, the Company is granted call options (collectively, the "Call Options") pursuant to which certain additional obligations of the Company under the Mercury TRA would be terminated in consideration for cash payments of $41.4 million, $38.1 million, $38.0 million, and $43.0 million, respectively.

In the unlikely event the Company does not exercise the relevant Call Option, the Mercury TRA Holders are granted put options beginning July 10th and ending July 25th of each of 2016, 2017, 2018, and 2019, respectively (collectively, the "Put Options"), pursuant to which certain additional obligations of the Company would be terminated in consideration for cash payments with similar amounts to the Call Options.

In June 2016, the Company exercised the December 2015 Call Option and made a payment to the Mercury TRA Holders.

Except to the extent the Company’s obligations under the Mercury TRA have been terminated and settled in full in accordance with the terms of the Mercury TRA Addendum, the Mercury TRA will remain in effect, and the parties thereto will continue to have all rights and obligations thereunder.

15
 
 
 

Vantiv, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)


All TRA obligations are recorded based on the full and undiscounted amount of the expected future payments, except for the Mercury TRA which represents contingent consideration relating to an acquired business, and is recorded at fair value for financial reporting purposes (see Note 7 - Fair Value Measurements).
    
The timing and/or amount of aggregate payments due under the TRAs may vary based on a number of factors, including the amount and timing of the taxable income the Company generates in the future and the tax rate then applicable, the use of loss carryovers and amortizable basis.  Payments under the TRAs, if necessary, are required to be made no later than January 5th of the second year immediately following the taxable year in which the obligation occurred. The Company made payments under the TRA obligations of approximately $53.5 million and $22.8 million in January 2016 and January 2015, respectively. The term of the TRAs will continue until all such tax benefits have been utilized or expired, unless the Company exercises its right to terminate the TRA for an amount based on the agreed payments remaining to be made under the agreement. See Note 11 - Subsequent Events for discussion of the tax receivable purchase addendum with Fifth Third executed on July 27, 2016.

New Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-09, Compensation- Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The update simplifies several aspects of the accounting for share-based payment award transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The update is effective for public companies for annual reporting periods beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted in any interim or annual period. The Company is currently evaluating the impact of the adoption of this update on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU amends the existing guidance by recognizing all leases, including operating leases, with a term longer than 12 months on the balance sheet and disclosing key information about the lease arrangements. The effective date of this update is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The update requires modified retrospective transition, which requires application of the ASU at the beginning of the earliest comparative period presented in the year of adoption. The Company is currently evaluating the impact of the adoption of this principle on the Company’s consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The update simplifies the presentation of deferred income taxes by requiring that deferred tax liabilities and assets be classified as noncurrent in the balance sheet. The update is effective for public companies for annual reporting periods beginning after December 15, 2016, and interim periods within those fiscal years. The guidance may be adopted prospectively or retrospectively and early adoption is permitted. As of December 31, 2015, the Company elected to early adopt this ASU on a prospective basis and therefore, prior years were not retrospectively adjusted.

In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This standard was clarified in August 2015 with the issuance of ASU 2015-15. The update requires debt issuance costs related to a recognized debt liability to 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. Amortization of the costs will continue to be reported as interest expense. These updates require retrospective application and represent a change in accounting principle. The change in accounting principle, resulting from the Company’s adoption of this ASU in December 2015, has been implemented and the results are not material to the Company’s consolidated statement of financial position.
    
In May 2014, the FASB issued ASU 2014-09, "Revenue From Contracts With Customers." The ASU supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. The new standard provides a five-step analysis of transactions to determine when and how revenue is recognized, based upon the core principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard also requires additional disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard, as amended, is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The amendment allows companies to use either a full retrospective or a modified retrospective approach to adopt this ASU. The Company is currently evaluating which transition approach to use and assessing the impact of the adoption of this principle on the Company’s consolidated financial statements.    

16
 
 
 

Vantiv, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)



2. INTANGIBLE ASSETS

As of June 30, 2016 and December 31, 2015, the Company’s finite lived intangible assets consisted of the following (in thousands):
 
 
June 30, 2016
 
December 31, 2015
Customer relationship intangible assets
 
$
1,596,581

 
$
1,596,581

Trade name
 
21,733

 
21,733

Customer portfolios and related assets
 
129,965

 
129,734

Patents
 
568

 
366

 
 
1,748,847

 
1,748,414

Less accumulated amortization on:
 
 
 
 
  Customer relationship intangible assets
 
902,191

 
821,580

Trade name
 
19,035

 
14,350

  Customer portfolios and related assets
 
63,440

 
49,418

 
 
984,666

 
885,348

Intangible assets, net
 
$
764,181

 
$
863,066

  
Amortization expense on intangible assets for the three months ended June 30, 2016 and 2015 was $49.4 million and $49.6 million, respectively. Amortization expense on intangible assets for the six months ended June 30, 2016 and 2015 was $99.3 million and $98.8 million, respectively.

The estimated amortization expense of intangible assets for the remainder of 2016 and the next five years is as follows (in thousands):
Six months ending December 31, 2016
 
$
93,156

2017
 
172,052

2018
 
161,911

2019
 
153,537

2020
 
81,490

2021
 
36,595



17
 
 
 

Vantiv, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)


3. LONG-TERM DEBT

As of June 30, 2016 and December 31, 2015, the Company’s long-term debt consisted of the following (in thousands): 
 
June 30,
2016
 
December 31,
2015
Term A loan, maturing on June 13, 2019(1)
$
1,845,000

 
$
1,896,250

Term B loan, maturing on June 13, 2021(2)
1,165,000

 
1,179,000

Leasehold mortgage, expiring on August 10, 2021(3)
10,131

 
10,131

Less: Current portion of note payable and current portion of note payable to related party
(109,501
)
 
(116,501
)
Less: Original issue discount
(5,370
)
 
(6,024
)
Less: Debt issuance costs
(16,635
)
 
(19,218
)
Note payable and note payable to related party
$
2,888,625

 
$
2,943,638

(1) 
Interest at a variable base rate (LIBOR) plus a spread rate (175 basis points) (total rate of 2.19% at June 30, 2016) and amortizing on a basis of 1.25% per quarter during each of the first twelve quarters (September 2014 through June 2017), 1.875% per quarter during the next four quarters (September 2017 through June 2018) and 2.50% during the next three quarters (September 2018 through March 2019) with a balloon payment due at maturity.
(2) 
Interest at a variable base rate (LIBOR) with a floor of 75 basis points plus a spread rate (275 basis points) (total rate of 3.50% at June 30, 2016) and amortizing on a basis of 0.25% per quarter, with a balloon payment due at maturity.
(3) 
Interest payable monthly at a fixed rate of 6.22%.

As of June 30, 2016, in addition to the term A loan and term B loan listed in the table above, the Company has access to a $425 million revolving credit facility under our existing amended and restated loan agreement ("Amended Loan Agreement") entered into in June 2014. The revolving credit facility matures in June 2019 and includes a $100 million swing line facility and a $40 million letter of credit facility. The commitment fee rate for the unused portion of the revolving credit facility is 0.375% per year. During the three months ended June 30, 2016 the Company periodically borrowed under its revolving credit facility and repaid the amounts prior to quarter end. There were no outstanding borrowings on the revolving credit facility at June 30, 2016 and December 31, 2015.
    
As of June 30, 2016 and December 31, 2015, Fifth Third held $186.3 million and $191.5 million, respectively, of the term A loans, which were presented as note payable to related party on the Company’s consolidated statements of financial position.
    
On January 6, 2015, the Company made an early principal payment of $200 million on the term B loan. The Company expensed approximately $1.8 million in non-operating expenses related to the write-off of deferred financing fees and OID in connection with the early principal payment.
    
Guarantees and Security
 
The Company’s debt obligations at June 30, 2016 are unconditional and are guaranteed by Vantiv Holding and certain of Vantiv Holding’s existing and subsequently acquired or organized domestic subsidiaries. The refinanced debt and related guarantees are secured on a first-priority basis (subject to liens permitted under the Amended Loan Agreement) by substantially all the capital stock (subject to a 65% limitation on pledges of capital stock of foreign subsidiaries and domestic holding companies of foreign subsidiaries) and personal property of Vantiv Holding and any obligors as well as any real property in excess of $10 million in the aggregate held by Vantiv Holding or any obligors (other than Vantiv Holding), subject to certain exceptions. 

Covenants
 
There are certain financial and non-financial covenants contained in the Amended Loan Agreement for the refinanced debt, which are tested on a quarterly basis. The financial covenants require maintenance of certain leverage and interest coverage ratios. At June 30, 2016, the Company was in compliance with these financial covenants.


18
 
 
 

Vantiv, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)


4. DERIVATIVES AND HEDGING ACTIVITIES
 
Risk Management Objective of Using Derivatives
 
The Company enters into derivative financial instruments to manage differences in the amount, timing and duration of its known or expected cash payments related to its variable-rate debt. As of December 31, 2015, the Company’s derivative instruments consisted of interest rate swaps, which hedged the variable rate debt by converting floating-rate payments to fixed-rate payments. In addition to the interest rate swaps, in March the Company entered into interest rate cap agreements in exchange for an upfront premium of $21.5 million. These interest rate cap agreements cap a portion of the Company’s variable rate debt if interest rates rise above the strike rate on the contract. As of June 30, 2016 the interest rate cap agreements had a fair value of $10.5 million, classified within other current and non-current assets on the Company’s consolidated statements of financial position. The interest rate swaps and caps (collectively “interest rate contracts”) are designated as cash flow hedges for accounting purposes.
 
Accounting for Derivative Instruments
 
The Company recognizes derivatives in other current and non-current assets or liabilities in the accompanying consolidated statements of financial position at their fair values. Refer to Note 7 - Fair Value Measurements for a detailed discussion of the fair value of its derivatives. The Company designates its interest rate contracts as cash flow hedges of forecasted interest rate payments related to its variable-rate debt.
 
The Company formally documents all relationships between hedging instruments and underlying hedged transactions, as well as its risk management objective and strategy for undertaking hedge transactions. This process includes linking all derivatives that are designated as cash flow hedges to forecasted transactions. A formal assessment of hedge effectiveness is performed both at inception of the hedge and on an ongoing basis to determine whether the hedge is highly effective in offsetting changes in cash flows of the underlying hedged item. Hedge effectiveness is assessed using a regression analysis. If it is determined that a derivative ceases to be highly effective during the term of the hedge, the Company will discontinue hedge accounting for such derivative.
 
The Company’s interest rate contracts qualify for hedge accounting under ASC 815, Derivatives and Hedging. Therefore, the effective portion of changes in fair value were recorded in AOCI and will be reclassified into earnings in the same period during which the hedged transactions affected earnings.

Cash Flow Hedges of Interest Rate Risk
 
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Company uses a combination of interest rate swaps and caps as part of its interest rate risk management strategy. As of June 30, 2016, the Company had a total of 10 outstanding interest rate swaps that were designated as cash flow hedges of interest rate risk. Of the 10 outstanding interest rate swaps, 4 of them cover an exposure period from June 2016 through June 2017 and have a combined notional balance of $1.1 billion. The remaining 6 interest rate swaps cover an exposure period from January 2016 through January 2019 and have a combined notional balance of $500 million. Fifth Third is the counterparty to 4 of the 10 outstanding interest rate swaps with notional balances ranging from $262.5 million to $250.0 million. Additionally, as of June 30, 2016, the Company had a total of 6 interest rate cap agreements with a combined notional balance of $1.0 billion, cap strike rate of 0.75%, covering an exposure period from January 2017 to January 2020.
 
The Company does not offset derivative positions in the accompanying consolidated financial statements. The table below presents the fair value of the Company’s derivative financial instruments designated as cash flow hedges included within the accompanying consolidated statements of financial position (in thousands):
 
Consolidated Statement of
Financial Position Location
 
June 30, 2016
 
December 31, 2015
Interest rate contracts
Other current assets
 
$
186

 
$

Interest rate contracts
Other long-term assets
 
10,330

 

Interest rate contracts
Other current liabilities
 
16,260

 
9,343

Interest rate contracts
Other long-term liabilities
 
11,085

 
9,885

 

19
 
 
 

Vantiv, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)


Any ineffectiveness associated with such derivative instruments will be recorded immediately as interest expense in the accompanying consolidated statements of income. As of June 30, 2016, the Company estimates that $18.0 million will be reclassified from accumulated other comprehensive income as an increase to interest expense during the next 12 months.

The table below presents the pre-tax effect of the Company’s interest rate contracts on the accompanying consolidated statements of comprehensive income for the three and six months ended June 30, 2016 and 2015 (in thousands): 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 

 
 

Amount of (loss) recognized in OCI (effective portion) (1)
 
$
(10,117
)
 
$
(1,717
)
 
$
(24,211
)
 
$
(13,152
)
Amount of (loss) reclassified from accumulated OCI into earnings (effective portion)
 
(2,711
)
 
(1,252
)
 
(5,087
)
 
(2,293
)
Amount of gain recognized in earnings (2)
 

 
1

 

 

(1) 
“OCI” represents other comprehensive income.
(2) 
Amount represents hedge ineffectiveness and is recorded as a component of interest expense-net in the accompanying consolidated statement of income.

Credit Risk Related Contingent Features

The Company has agreements with each of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.

As of June 30, 2016, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $28.6 million. As of June 30, 2016, the Company had not posted any collateral related to these agreements. If the Company had breached any of these provisions at June 30, 2016, it could have been required to settle its obligations under the agreements at their termination value of $28.6 million.

5. CONTROLLING AND NON-CONTROLLING INTERESTS
 
The Company has various non-controlling interests that are accounted for in accordance with ASC 810, Consolidation (“ASC 810”). As discussed in Note 1 - Basis of Presentation and Summary of Significant Accounting Policies, Vantiv, Inc. owns a controlling interest in Vantiv Holding, and therefore consolidates the financial results of Vantiv Holding and its subsidiaries and records non-controlling interest for the economic interests in Vantiv Holding held by Fifth Third. The Exchange Agreement entered into prior to the IPO provides for a 1 to 1 ratio between the units of Vantiv Holding and the common stock of Vantiv, Inc.
 
In May 2014, the Company entered into a joint venture with a bank partner which provides customers a comprehensive suite of payment solutions. Vantiv Holding owns 51% and the bank partner owns 49% of the joint venture. The joint venture is consolidated by the Company in accordance with ASC 810, with the associated non-controlling interest included in “Net income attributable to non-controlling interests” in the consolidated statements of income.

As of June 30, 2016, Vantiv, Inc.’s interest in Vantiv Holding was 81.70%. Changes in units and related ownership interest in Vantiv Holding are summarized as follows:
 
Vantiv, Inc.
 
Fifth Third
 
Total
As of December 31, 2015
155,488,326

 
35,042,826

 
190,531,152

% of ownership
81.61
%
 
18.39
%
 
 

Equity plan activity (1)
992,451

 

 
992,451

As of June 30, 2016
156,480,777

 
35,042,826

 
191,523,603

% of ownership
81.70
%
 
18.30
%
 


(1) 
Includes stock issued under the equity plans net of Class A common stock withheld to satisfy employee tax withholding obligations upon vesting and forfeitures of restricted Class A common stock awards.


20
 
 
 

Vantiv, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)


As a result of changes in ownership interests in Vantiv Holding, periodic adjustments are made in order to reflect the portion of net assets of Vantiv Holding attributable to non-controlling unit holders based on changes in the proportionate ownership interests in Vantiv Holding during a period.
 
The table below provides a reconciliation of net income attributable to non-controlling interests based on relative ownership interests as discussed above (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
78,461

 
$
52,693

 
$
130,909

 
$
79,689

Items not allocable to non-controlling interests:
 
 
 
 
 

 
 

Vantiv, Inc. expenses (1)
21,253

 
12,587

 
34,391

 
20,397

Vantiv Holding net income
$
99,714

 
$
65,280

 
$
165,300

 
$
100,086

Net income attributable to non-controlling interests of Fifth Third (2)
$
18,053

 
$
14,468

 
$
29,927

 
$
22,371

Net income attributable to joint venture non-controlling interest (3)
1,081

 
1,689

 
1,917

 
1,793

Total net income attributable to non-controlling interests
$
19,134

 
$
16,157

 
$
31,844

 
$
24,164

 
(1)       Primarily represents income tax expense related to Vantiv, Inc.
(2)       Net income attributable to non-controlling interests of Fifth Third reflects the allocation of Vantiv Holding’s net income based on the proportionate ownership interests in Vantiv Holding held by the non-controlling unit holders. The net income attributable to non-controlling unit holders reflects the changes in ownership interests summarized in the table above.
(3)  
Reflects net income attributable to the non-controlling interest of the joint venture.

At June 30, 2016, Fifth Third holds the rights, under a warrant, to purchase 7.8 million Class C Non-Voting Units of Vantiv Holding at an exercise price of $15.98 per unit. The warrant is currently exercisable, in whole or in part, and from time to time. The warrant expires upon the earliest to occur of June 30, 2029 or a change of control where the price paid per unit in such change of control minus the exercise price of the warrant is less than zero. The warrant is recorded as a component of the non-controlling interest on the accompanying statements of financial position.

6. COMMITMENTS, CONTINGENCIES AND GUARANTEES

Legal Reserve
 
From time to time, the Company is involved in various litigation matters arising in the ordinary course of its business. While it is impossible to ascertain the ultimate resolution or range of financial liability with respect to these contingent matters, management believes none of these matters, either individually or in the aggregate, would have a material effect upon the Company’s consolidated financial statements.

7. 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 measurement date. The Company uses the hierarchy prescribed in ASC 820, Fair Value Measurement, based upon the available inputs to the valuation and the degree to which they are observable or not observable in the market. The three levels in the hierarchy are as follows:
 
Level 1 Inputs—Quoted prices (unadjusted) for identical assets or liabilities in active markets that are accessible as of the measurement date.
 
Level 2 Inputs—Inputs other than quoted prices within Level 1 that are observable either directly or indirectly, including but not limited to quoted prices in markets that are not active, quoted prices in active markets for similar assets or liabilities and observable inputs other than quoted prices such as interest rates or yield curves.
 
Level 3 Inputs—Unobservable inputs reflecting the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk.

21
 
 
 

Vantiv, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)



The following table summarizes assets and liabilities measured at fair value on a recurring basis as of June 30, 2016 and December 31, 2015 (in thousands):
 
June 30, 2016
 
December 31, 2015
 
Fair Value Measurements Using
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
$

 
$
10,516

 
$

 
$

 
$

 
$

Liabilities:
 

 
 

 
 

 
 

 
 

 
 

Interest rate contracts
$

 
$
27,345

 
$

 
$

 
$
19,228

 
$

  Mercury TRA

 

 
138,054

 

 

 
191,207

 
Interest Rate Contracts
 
The Company uses interest rate contracts to manage interest rate risk. The fair value of interest rate swaps is determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on the expectation of future interest rates (forward curves) derived from observed market interest rate curves. The fair value of the interest rate caps is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected future cash flows of each interest rate cap. This analysis reflects the contractual terms of the interest rate caps, including the period to maturity, and uses observable market inputs including interest rate curves and implied volatilities. In addition, to comply with the provisions of ASC 820, Fair Value Measurements, credit valuation adjustments, which consider the impact of any credit enhancements to the contracts, are incorporated in the fair values to account for potential nonperformance risk. In adjusting the fair value of its interest rate contracts for the effect of nonperformance risk, the Company has considered any applicable credit enhancements such as collateral postings, thresholds, mutual puts, and guarantees.
 
Although the Company determined that the majority of the inputs used to value its interest rate contracts fell within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its interest rate contracts utilized Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of June 30, 2016 and December 31, 2015, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its interest rate contracts and determined that the credit valuation adjustment was not significant to the overall valuation of its interest rate contracts. As a result, the Company classified its interest rate contract valuations in Level 2 of the fair value hierarchy. See Note 4 - Derivatives and Hedging Activities for further discussion of the Company’s interest rate contracts.

Mercury TRA

The Mercury TRA is considered contingent consideration as it is part of the consideration payable to the former owners of Mercury. Such contingent consideration is measured at fair value and is based on significant inputs not observable in the market, which is classified in Level 3 of the fair value hierarchy. The Mercury TRA is recorded at fair value based on estimates of discounted future cash flows associated with the estimated payments to the Mercury TRA Holders. The significant unobservable inputs used in the fair value measurement of the Mercury TRA are the discount rate, projections of taxable income and effective tax rates. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. The liability recorded is re-measured at fair value at each reporting period with the change in fair value recognized in earnings as a non-operating expense. The change in value of the Mercury TRA from December 31, 2015 to June 30, 2016 consists of the increase in fair value of $10.3 million and the decrease from payments of $63.4 million related to the Mercury TRA obligations and the exercised 2015 Call Option. The Company recorded non-operating expenses of $4.6 million and $6.7 million related to the change in fair value during the three months ended June 30, 2016 and 2015, respectively. The Company recorded non-operating expenses of $10.3 million and $13.7 million related to the change in fair value during the six months ended June 30, 2016 and 2015, respectively.


22
 
 
 

Vantiv, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)


The following table summarizes carrying amounts and estimated fair values for the Company’s financial instrument liabilities that are not reported at fair value in our consolidated statements of financial position as of June 30, 2016 and December 31, 2015 (in thousands):
 
June 30, 2016
 
December 31, 2015
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Liabilities:
 

 
 

 
 

 
 

Note payable
$
2,998,126

 
$
3,012,464

 
$
3,060,139

 
$
3,064,989

 
We consider that the carrying value of cash and cash equivalents, receivables, accounts payable and accrued expenses approximates fair value (level 1) given the short-term nature of these items. The fair value of the Company’s note payable was estimated based on rates currently available to the Company for bank loans with similar terms and maturities and is classified in Level 2 of the fair value hierarchy.

8.  NET INCOME PER SHARE
 
Basic net income per share is calculated by dividing net income attributable to Vantiv, Inc. by the weighted-average shares of Class A common stock outstanding during the period.

Diluted net income per share is calculated assuming that Vantiv Holding is a wholly-owned subsidiary of Vantiv, Inc., therefore eliminating the impact of Fifth Third’s non-controlling interest. Pursuant to the Exchange Agreement, the Class B units of Vantiv Holding (“Class B units”), which are held by Fifth Third and represent the non-controlling interest in Vantiv Holding, are convertible into shares of Class A common stock on a one-for-one basis. Based on this conversion feature, diluted net income per share is calculated assuming the conversion of the Class B units on an “if-converted” basis. Due to the Company’s structure as a C corporation and Vantiv Holding’s structure as a pass-through entity for tax purposes, the numerator in the calculation of diluted net income per share is adjusted accordingly to reflect the Company’s income tax expense assuming the conversion of the Fifth Third non-controlling interest into Class A common stock. The adjusted effective tax rate used in the calculation was 36.0% for 2016 and 2015, which is the effective rate we expect as our non-controlling interest declines to the point Vantiv Holding is a wholly-owned subsidiary. As of June 30, 2016 and 2015, there were approximately 35.0 million and 43.0 million Class B units outstanding, respectively.
 
In addition to the Class B units discussed above, potentially dilutive securities during the three and six months ended June 30, 2016 and 2015 included restricted stock awards, restricted stock units, the warrant held by Fifth Third which allows for the purchase of Class C units of Vantiv Holding, stock options, performance share awards and ESPP purchase rights, all calculated based on the treasury stock method.

The shares of Class B common stock do not share in the earnings or losses of the Company and are therefore not participating securities. Accordingly, basic and diluted net income per share of Class B common stock has not been presented.
 

23
 
 
 

Vantiv, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)


The following table sets forth the computation of basic and diluted net income per share (in thousands, except share data): 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Basic:
 
 
 
 
 
 
 

Net income attributable to Vantiv, Inc.
$
59,327

 
$
36,536

 
$
99,065

 
$
55,525

Shares used in computing basic net income per share:
 
 
 
 
 
 
 
Weighted-average Class A common shares
155,670,267

 
145,566,899

 
155,533,813

 
145,051,664

Basic net income per share
$
0.38

 
$
0.25

 
$
0.64

 
$
0.38

Diluted:
 
 
 
 
 
 
 
Consolidated income before applicable income taxes
$
116,902

 
$
77,012

 
$
193,176

 
$
116,261

Income tax expense excluding impact of non-controlling interest
42,085

 
27,724

 
69,543

 
41,854

Net income attributable to Vantiv, Inc.
$
74,817

 
$
49,288

 
$
123,633

 
$
74,407

Shares used in computing diluted net income per share:
 
 
 
 
 
 
 
Weighted-average Class A common shares
155,670,267

 
145,566,899

 
155,533,813

 
145,051,664

Weighted-average Class B units of Vantiv Holding
35,042,826

 
43,042,826

 
35,042,826

 
43,042,826

Warrant
5,488,673

 
12,171,352

 
5,367,931

 
11,774,401

Stock options
574,050

 
544,331

 
568,143

 
551,003

Restricted stock awards, restricted stock units and employee stock purchase plan
482,393

 
506,059

 
505,305

 
856,272

Diluted weighted-average shares outstanding
197,258,209

 
201,831,467

 
197,018,018

 
201,276,166

Diluted net income per share
$
0.38

 
$
0.24

 
$
0.63

 
$
0.37


24
 
 
 

Vantiv, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)



9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
 
The activity of the components of accumulated other comprehensive income (loss) related to cash flow hedging and other activities for the three and six months ended June 30, 2016 and 2015 is presented below (in thousands):
 
 
 
 
Total Other Comprehensive Income (Loss)
 
 
 
 
 AOCI Beginning Balance
 
Pretax Activity
 
Tax Effect
 
 Net Activity
 
Attributable to non-controlling interests
 
Attributable to Vantiv, Inc.
 
AOCI Ending Balance
Three Months Ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Net change in fair value recorded in accumulated OCI
 
$
(21,506
)
 
$
(10,117
)
 
$
3,128

 
$
(6,989
)
 
$
1,851

 
$
(5,138
)
 
$
(26,644
)
 Net realized loss reclassified into earnings (a)
 
6,342

 
2,711

 
(837
)
 
1,874

 
(496
)
 
1,378

 
7,720

 Net change
 
$
(15,164
)
 
$
(7,406
)
 
$
2,291

 
$
(5,115
)
 
$
1,355

 
$
(3,760
)
 
$
(18,924
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Net change in fair value recorded in accumulated OCI
 
$
(10,782
)
 
$
(1,717
)
 
$
502

 
$
(1,215
)
 
$
391

 
$
(824
)
 
$
(11,606
)
 Net realized loss reclassified into earnings (a)
 
2,231

 
1,252

 
(367
)
 
885

 
(285
)
 
600

 
2,831

 Other
 
(212
)
 

 

 

 

 

 
(212
)
 Net change
 
$
(8,763
)
 
$
(465
)
 
$
135

 
$
(330
)
 
$
106

 
$
(224
)
 
$
(8,987
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Net change in fair value recorded in accumulated OCI
 
$
(14,336
)
 
$
(24,211
)
 
$
7,466

 
$
(16,745
)
 
$
4,437

 
$
(12,308
)
 
$
(26,644
)
 Net realized loss reclassified into earnings (a)
 
5,132

 
5,087

 
(1,568
)
 
3,519

 
(931
)
 
2,588

 
7,720

 Net change
 
$
(9,204
)
 
$
(19,124
)
 
$
5,898

 
$
(13,226
)
 
$
3,506

 
$
(9,720
)
 
$
(18,924
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Net change in fair value recorded in accumulated OCI
 
$
(5,288
)
 
$
(13,152
)
 
$
3,831

 
$
(9,321
)
 
$
3,003

 
$
(6,318
)
 
$
(11,606
)
 Net realized loss reclassified into earnings (a)
 
1,732

 
2,293

 
(672
)
 
1,621

 
(522
)
 
1,099

 
2,831

 Other
 
(212
)
 

 

 

 

 

 
(212
)
 Net change
 
$
(3,768
)
 
$
(10,859
)
 
$
3,159

 
$
(7,700
)
 
$
2,481

 
$
(5,219
)
 
$
(8,987
)
(a)    The reclassification adjustment on cash flow hedge derivatives affected the following lines in the accompanying consolidated statements of income:    
 OCI Component
 
   Affected line in the accompanying consolidated statements of income
Pretax activity(1)
 
Interest expense-net
Tax effect
 
Income tax expense
OCI attributable to non-controlling interests
 
Net income attributable to non-controlling interests
 
 
 
 
 
 
 
 
 
 
 
 
(1)  The three and six months ended June 30, 2016 and 2015 reflect amounts of losses reclassified from AOCI into earnings, representing the effective portion of the hedging relationships, and are recorded in interest expense-net.

10. SEGMENT INFORMATION
     
Segment operating results are presented below (in thousands). The results reflect revenues and expenses directly related to each segment. The Company does not evaluate performance or allocate resources based on segment asset data, and therefore such information is not presented.
 

25
 
 
 

Vantiv, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)


Segment profit reflects total revenue less network fees and other costs and sales and marketing costs of the segment. The Company’s CODM evaluates this metric in analyzing the results of operations for each segment. 
 
Three Months Ended June 30, 2016
 
Merchant
Services
 
Financial
Institution
Services
 
Total
Total revenue
$
762,593

 
$
128,624

 
$
891,217

Network fees and other costs
374,820

 
35,916

 
410,736

Sales and marketing
139,108

 
5,736

 
144,844

Segment profit
$
248,665

 
$
86,972

 
$
335,637

 
 
Three Months Ended June 30, 2015
 
Merchant
Services
 
Financial
Institution
Services
 
Total
Total revenue
$
661,258

 
$
124,737

 
$
785,995

Network fees and other costs
324,166

 
38,183

 
362,349

Sales and marketing
116,860

 
6,065

 
122,925

Segment profit
$
220,232

 
$
80,489

 
$
300,721


 
Six Months Ended June 30, 2016
 
Merchant
Services
 
Financial
Institution
Services
 
Total
Total revenue
$
1,457,173

 
$
252,667

 
$
1,709,840

Network fees and other costs
728,154

 
69,995

 
798,149

Sales and marketing
268,444

 
12,038