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EX-32.1 - EXHIBIT 32.1 CERTIFICATION OF CEO AND CFO - Worldpay, Inc.vntvex-321x2017930.htm
EX-31.2 - EXHIBIT 31.2 CERTIFICATION OF CFO - Worldpay, Inc.vntvex-312x2017930.htm
EX-31.1 - EXHIBIT 31.1 CERTIFICATION OF CEO - Worldpay, Inc.vntvex-311x2017930.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 September 30, 2017
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, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer o
 
Smaller reporting company o
Emerging growth company o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 September 30, 2017, there were 162,506,630 shares of the registrant’s Class A common stock outstanding and 15,252,826 shares of the registrant’s Class B common stock outstanding.

 
 
 
 
 
 
 
 
 
 




VANTIV, INC.
FORM 10-Q
 
For the Quarterly Period Ended September 30, 2017
 
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
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2017
 
2016
 
2017
 
2016
Revenue:
 
 
 
 
 
 

 
 

External customers
 
$
1,017,030

 
$
897,800

 
$
2,910,601

 
$
2,565,529

Related party revenues
 
16,735

 
16,219

 
50,130

 
58,330

Total revenue
 
1,033,765

 
914,019

 
2,960,731

 
2,623,859

Network fees and other costs
 
479,533

 
423,361

 
1,406,358

 
1,221,510

Sales and marketing
 
173,779

 
153,248

 
497,082

 
433,730

Other operating costs
 
79,482

 
72,162

 
234,347

 
219,464

General and administrative
 
49,607

 
40,727

 
189,632

 
133,831

Depreciation and amortization
 
82,500

 
66,086

 
236,964

 
199,550

Income from operations
 
168,864

 
158,435

 
396,348

 
415,774

Interest expense—net
 
(38,521
)
 
(27,474
)
 
(97,441
)
 
(81,321
)
Non-operating income (expenses)
 
21,207

 
(4,633
)
 
13,672

 
(14,949
)
Income before applicable income taxes
 
151,550

 
126,328

 
312,579

 
319,504

Income tax expense
 
44,645

 
39,324

 
83,519

 
101,591

Net income
 
106,905

 
87,004

 
229,060

 
217,913

Less: Net income attributable to non-controlling interests
 
(14,787
)
 
(20,708
)
 
(39,280
)
 
(52,552
)
Net income attributable to Vantiv, Inc.
 
$
92,118

 
$
66,296

 
$
189,780

 
$
165,361

Net income per share attributable to Vantiv, Inc. Class A common stock:
 
 
 
 
 
 
 
 
Basic
 
$
0.57

 
$
0.43

 
$
1.18

 
$
1.06

Diluted
 
$
0.57

 
$
0.41

 
$
1.17

 
$
1.04

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

 
 

Basic
 
161,465,849

 
155,740,660

 
161,205,066

 
155,603,265

Diluted
 
162,882,396

 
197,342,169

 
162,617,782

 
197,126,571

 
See Notes to Unaudited Consolidated Financial Statements.


4
 
 
 


Vantiv, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Unaudited
(In thousands)
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2017
 
2016
 
2017
 
2016
Net income
 
$
106,905

 
$
87,004

 
$
229,060

 
$
217,913

Other comprehensive gain (loss), net of tax:
 
 
 
 
 
 

 
 

Gain (loss) on cash flow hedges
 
811

 
3,572

 
5,690

 
(9,654
)
Comprehensive income
 
107,716

 
90,576

 
234,750

 
208,259

Less: Comprehensive income attributable to non-controlling interests
 
(14,693
)
 
(21,654
)
 
(40,444
)
 
(49,992
)
Comprehensive income attributable to Vantiv, Inc.
 
$
93,023


$
68,922

 
$
194,306

 
$
158,267

 
See Notes to Unaudited Consolidated Financial Statements.



5
 
 
 


Vantiv, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Unaudited
(In thousands, except share data) 
 
September 30,
2017
 
December 31,
2016
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
92,638

 
$
139,148

Accounts receivable—net
899,389

 
940,052

Related party receivable
1,639

 
1,751

Settlement assets
135,043

 
152,490

Prepaid expenses
48,073

 
39,229

Other
118,664

 
15,188

Total current assets
1,295,446

 
1,287,858

  Customer incentives
64,023

 
67,288

  Property, equipment and software—net
470,308

 
348,553

  Intangible assets—net
732,431

 
787,820

  Goodwill
4,180,307

 
3,738,589

  Deferred taxes
1,322,679

 
771,139

  Other assets
24,740

 
42,760

Total assets
$
8,089,934

 
$
7,044,007

Liabilities and equity
 

 
 

Current liabilities:
 

 
 

Accounts payable and accrued expenses
$
528,473

 
$
471,979

Related party payable
3,037

 
3,623

Settlement obligations
788,261

 
801,381

Current portion of note payable to related party
7,557

 
7,557

Current portion of note payable
133,097

 
123,562

Current portion of tax receivable agreement obligations to related parties
261,844

 
191,014

Current portion of tax receivable agreement obligations
54,798

 
60,400

Deferred income
19,349

 
7,907

Current maturities of capital lease obligations
8,000

 
7,870

Other
6,790

 
13,719

Total current liabilities
1,811,206

 
1,689,012

Long-term liabilities:
 

 
 

Note payable to related party
170,097

 
143,577

Note payable
4,421,522

 
2,946,026

Tax receivable agreement obligations to related parties
876,434

 
451,318

Tax receivable agreement obligations
42,510

 
86,640

Capital lease obligations
6,666

 
13,223

Deferred taxes
98,097

 
62,148

Other
46,297

 
44,774

Total long-term liabilities
5,661,623

 
3,747,706

Total liabilities
7,472,829

 
5,436,718

Commitments and contingencies (See Note 7 - Commitments, Contingencies and Guarantees)


 


Equity:
 

 
 

Class A common stock, $0.00001 par value; 890,000,000 shares authorized; 162,506,630 shares outstanding at September 30, 2017; 161,134,831 shares outstanding at December 31, 2016
1

 
1

Class B common stock, no par value; 100,000,000 shares authorized; 15,252,826 shares issued and outstanding at September 30, 2017; 35,042,826 shares issued and outstanding at December 31, 2016

 

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

 

Paid-in capital
25,048

 
706,055

Retained earnings
617,683

 
689,512

Accumulated other comprehensive loss
(1,671
)
 
(6,197
)
Treasury stock, at cost; 2,849,275 shares at September 30, 2017 and 2,710,195 shares at December 31, 2016
(82,893
)
 
(73,706
)
Total Vantiv, Inc. equity
558,168

 
1,315,665

Non-controlling interests
58,937

 
291,624

Total equity
617,105

 
1,607,289

Total liabilities and equity
$
8,089,934

 
$
7,044,007

See Notes to Unaudited Consolidated Financial Statements.

6
 
 
 


Vantiv, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In thousands)
 
Nine Months Ended September 30,
 
2017
 
2016
Operating Activities:
 

 
 

Net income
$
229,060

 
$
217,913

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

 
 

Depreciation and amortization expense
236,964

 
199,550

Amortization of customer incentives
18,648

 
18,508

Amortization of debt issuance costs
3,941

 
4,818

Unrealized gain on deal contingent forward
(24,365
)
 

Share-based compensation expense
35,068

 
25,892

Deferred taxes
60,000

 
49,900

Excess tax benefit from share-based compensation

 
(11,193
)
Tax receivable agreements non-cash items
10,708

 
14,880

Other
2,304

 
433

Change in operating assets and liabilities:
 

 
 

Accounts receivable and related party receivable
46,682

 
(67,938
)
Net settlement assets and obligations
4,327

 
(16,558
)
Customer incentives
(17,703
)
 
(30,808
)
Prepaid and other assets
(82,916
)
 
6,183

Accounts payable and accrued expenses
22,924

 
24,859

Payable to related party
(586
)
 
(1,331
)
Other liabilities
(17,390
)
 
(4,713
)
Net cash provided by operating activities
527,666

 
430,395

Investing Activities:
 

 
 

Purchases of property and equipment
(81,882
)
 
(93,822
)
Acquisition of customer portfolios and related assets and other
(38,165
)
 
(2,179
)
Purchase of derivative instruments

 
(21,523
)
Cash used in acquisitions, net of cash acquired
(531,534
)
 

Net cash used in investing activities
(651,581
)
 
(117,524
)
Financing Activities:
 

 
 

Proceeds from issuance of long-term debt
1,270,000

 

Borrowings on revolving credit facility
5,405,000

 
1,180,000

Repayment of revolving credit facility
(5,046,000
)
 
(1,180,000
)
Repayment of debt and capital lease obligations
(107,969
)
 
(98,019
)
Payment of debt issuance costs
(24,148
)
 

Proceeds from issuance of Class A common stock under employee stock plans
10,847

 
12,340

Purchase and cancellation of Class A common stock
(1,268,057
)
 
(25,008
)
Repurchase of Class A common stock (to satisfy tax withholding obligations)
(9,187
)
 
(6,036
)
Settlement of certain tax receivable agreements
(84,878
)
 
(158,115
)
Payments under tax receivable agreements
(55,695
)
 
(53,474
)
Excess tax benefit from share-based compensation

 
11,193

Distributions to non-controlling interests
(12,508
)
 
(9,018
)
Other

 
(12
)
Net cash provided by (used in) financing activities
77,405

 
(326,149
)
Net decrease in cash and cash equivalents
(46,510
)
 
(13,278
)
Cash and cash equivalents—Beginning of period
139,148

 
197,096

Cash and cash equivalents—End of period
$
92,638

 
$
183,818

Cash Payments:
 

 
 

Interest
$
94,318

 
$
76,404

Taxes
31,585

 
35,709

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, 2017
$
1,607,289

 
161,135

 
$
1

 
35,043

 
$

 
2,710

 
$
(73,706
)
 
$
706,055

 
$
689,512

 
$
(6,197
)
 
$
291,624

Cumulative effect of accounting change
491

 

 

 

 

 

 

 
1,299

 
(808
)
 

 

Net income
229,060

 

 

 

 

 

 

 

 
189,780

 

 
39,280

Issuance of Class A common stock under employee stock plans, net of forfeitures
10,847

 
1,511

 

 

 

 

 

 
10,847

 

 

 

Repurchase of Class A common stock (to satisfy tax withholding obligation)
(9,187
)
 
(139
)
 

 

 

 
139

 
(9,187
)
 

 

 

 

Purchase and cancellation of Class A common stock
(1,270,589
)
 

 

 
(19,790
)
 

 

 

 
(1,009,788
)
 
(260,801
)
 

 

Settlement of certain tax receivable agreements
45,347

 

 

 

 

 

 

 
45,347

 

 

 

Issuance of tax receivable agreements
(24,403
)
 

 

 

 

 

 

 
(24,403
)


 

 

Unrealized gain on hedging activities, net of tax
5,690

 

 

 

 

 

 

 

 

 
4,526

 
1,164

Distribution to non-controlling interests
(12,508
)
 

 

 

 

 

 

 

 

 

 
(12,508
)
Share-based compensation
35,068

 

 

 

 

 

 

 
29,619

 

 

 
5,449

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

 

 

 

 

 

 

 
266,072

 

 

 
(266,072
)
Ending Balance, September 30, 2017
$
617,105

 
162,507

 
$
1

 
15,253

 
$

 
2,849

 
$
(82,893
)
 
$
25,048

 
$
617,683

 
$
(1,671
)
 
$
58,937


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, 2016
$
1,225,066

 
155,488

 
$
1

 
35,043

 
$

 
2,593

 
$
(67,458
)
 
$
553,145

 
$
476,304

 
$
(9,204
)
 
$
272,278

Net income
217,913

 

 

 

 

 

 

 

 
165,361

 

 
52,552

Issuance of Class A common stock under employee stock plans, net of forfeitures
12,340

 
1,371

 

 

 

 

 

 
12,340

 

 

 

Excess tax benefit from employee share-based compensation
11,193

 

 

 

 

 

 

 
11,193

 

 

 

Repurchase of Class A common stock
(25,008
)

(457
)











(25,008
)






Repurchase of Class A common stock (to satisfy tax withholding obligation)
(6,036
)
 
(114
)
 

 

 

 
114

 
(6,036
)
 

 

 

 

Termination of certain tax receivable agreements
129,538














129,538







Unrealized loss on hedging activities, net of tax
(9,654
)
 

 

 

 

 

 

 

 

 
(7,094
)
 
(2,560
)
Distribution to non-controlling interests
(9,018
)
 

 

 

 

 

 

 

 

 

 
(9,018
)
Share-based compensation
25,892

 

 

 

 

 

 

 
21,150

 

 

 
4,742

Other
(12
)
 

 

 

 

 

 

 
(12
)
 

 

 

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














7,501






(7,501
)
Ending Balance, September 30, 2016
$
1,572,214

 
156,288

 
$
1

 
35,043

 
$

 
2,707

 
$
(73,494
)
 
$
709,847

 
$
641,665

 
$
(16,298
)
 
$
310,493

 
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 and operates in two reportable segments, Merchant Services and Financial Institution Services. For more information about the Company’s segments, refer to Note 11 - Segment Information. 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.
 
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 2016 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 due to seasonal fluctuations in the Company’s revenue as a result of consumer spending patterns. All intercompany balances and transactions have been eliminated.
 
As of September 30, 2017, Vantiv, Inc. and Fifth Third Bank (“Fifth Third”) owned interests in Vantiv Holding of 91.42% and 8.58%, respectively (see Note 6 - 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 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. Non-controlling interests are presented as a component of equity in the accompanying consolidated statements of financial position.

Share Repurchase Program

In October 2016, our board of directors authorized a program to repurchase up to $250 million of our Class A common stock. The Company has approximately $243 million of share repurchase authority remaining as of September 30, 2017 under this authorization.

Purchases under the programs may be made from time to time in the open market, in privately negotiated transactions, or otherwise. The manner, timing and amount of any purchases will be determined by management based on an evaluation of market conditions, stock price and other factors. The Company’s share repurchase program does not obligate it to acquire any specific number or amount of shares, there is no guarantee as to the exact number or amount of shares that may be repurchased, if any, and the Company may discontinue purchases at any time that it 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. The Company has an agreement with Fifth Third (the “Sponsoring Member”) to provide sponsorship services to the Company through December 31, 2024. The Company also has agreements with certain other banks that provide sponsorship into the card networks.

10
 
 
 

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


 
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 referral partners in which the Company is the primary party to the contract with the merchant, the Company records the 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 revenues are primarily derived from debit, credit and automated teller machine (“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.
 

11
 
 
 

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


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 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 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, occupancy and consulting costs. The nine months ended September 30, 2017 includes a charge related to a settlement agreement stemming from legacy litigation of an acquired company.

Non-operating income for the three and nine months ended September 30, 2017 consists of an unrealized gain relating to the change in the fair value of a deal contingent forward entered into in connection with the pending Worldpay Group plc (“Worldpay”) acquisition (see Note 12 - Pending Worldpay Transaction), partially offset by the change in fair value of a tax receivable agreement (“TRA”) entered into as part of the acquisition of Mercury Payment Systems, LLC (“Mercury”). Non-operating expenses for the three and nine months ended September 30, 2016 primarily relate to the change in fair value of a TRA entered into as part of the acquisition of Mercury. (see Note 8 - 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 shares issued under the Employee Stock Purchase Plan (“ESPP”), as restricted stock awards and performance awards is measured based on the market price of the Company’s stock on the grant date. In 2017, the Compensation Committee of the Company’s Board of Directors approved a resolution that stock options, restricted shares and restricted stock units shall vest or become exercisable in three equal annual installments beginning on the first anniversary of the grant date.

In March 2016, the Financial Accounting Standards Board (“FASB”) issued 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 Company adopted this ASU on January 1, 2017. Under previous guidance, excess tax benefits and deficiencies from share-based compensation arrangements were recorded in equity when the awards vested or settled. ASU 2016-09 requires prospective recognition of excess tax benefits and deficiencies in the income statement, resulting in the recognition of excess tax benefits of $1.9 million and $16.0 million in income tax expense, rather than in paid-in capital, for the three and nine months ended September 30, 2017, respectively.

Additionally, under ASU 2016-09, excess income tax benefits from share-based compensation arrangements are classified as cash flow from operations, rather than as cash flow from financing activities. The Company has elected to apply the cash flow classification guidance of ASU 2016-09 prospectively, resulting in an increase to operating cash flow of $16.0 million for the nine months ended September 30, 2017, and the prior year period has not been adjusted. The presentation requirements for cash flows related to employee taxes paid for withheld shares have no impact to the periods presented in our consolidated cash flows statements since such cash flows have historically been presented as a financing activity.

12
 
 
 

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



Prior to adopting ASU 2016-09 the Company estimated forfeitures as part of share-based compensation expense. Under ASU 2016-09, an entity can make an election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur. The Company has elected to account for forfeitures as they occur. The cumulative-effect of this change in election resulted in an increase to additional paid-in capital of $1.3 million, an increase to deferred tax assets of $0.5 million, and a decrease to retained earnings of $0.8 million at the beginning of 2017.

ASU 2016-09 requires excess tax benefits and deficiencies to be prospectively excluded from assumed future proceeds in the calculation of diluted shares, resulting in an increase in diluted weighted average shares outstanding of approximately 364,000 shares and 412,000 shares for the three and nine months ended September 30, 2017, respectively.

For the nine months ended September 30, 2017 and 2016 total share-based compensation expense was $35.1 million and $25.9 million, respectively.
    
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 9 - 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 September 30, 2017.

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 September 30, 2017 and December 31, 2016, 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 26.7% and 31.8% respectively, for the nine months ended September 30, 2017 and 2016. 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. The effective tax rate for the nine months ended September 30, 2017 includes a $16.0 million credit to income tax expense relating to excess tax benefits as a result of the Company’s adoption of ASU 2016-09, Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting.


13
 
 
 

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


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.
 
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 September 30, 2017 and December 31, 2016, the allowance for doubtful accounts was not material to the Company’s statements of financial position.
 
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 facilities, furniture and equipment and software 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 the 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 September 30, 2017 and December 31, 2016 was $379.0 million and $309.7 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, at which time the Company begins to amortize such costs over their estimated useful life.
 
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, 2017 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 September 30, 2017.

Intangible assets consist of acquired customer relationships, trade names, 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 September 30, 2017, there have been no such events or circumstances that would indicate potential impairment of finite lived intangible assets.
 

14
 
 
 

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


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.
 
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 September 30, 2017, 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, generally, are only required to the extent the Company realizes cash savings as a result of the underlying tax attributes. Under the agreement between the Company and Fifth Third dated August 7, 2017, in certain specified circumstances, the Company may be required to make payments in excess of such cash savings. 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 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.

In connection with the Fifth Third Exchange and share purchase as discussed in Note 6 - Controlling and Non-controlling Interests, the Company recorded a liability of approximately $647.5 million during the quarter ending September 30, 2017 under the tax receivable agreements the Company entered into with Fifth Third Bank at the time of its

15
 
 
 

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


initial public offering. This liability is based on the closing share price of the Company’s Class A common stock on August 4, 2017.     

In 2016, the Company entered into a purchase addendum in connection with the Company’s TRA with Fifth Third (the “Fifth Third TRA Addendum”) to terminate and settle a portion of the Company’s obligations owed to Fifth Third under the Fifth Third TRA and the NPC TRA. Under the terms of the Fifth Third TRA Addendum, the Company paid approximately $116.3 million to Fifth Third to settle approximately $330.7 million of obligations under the Fifth Third TRA, the difference of which was recorded as an addition to paid-in capital, net of deferred taxes.

In addition to the 2016 Fifth Third TRA settlement discussed above, as of September 30, 2017, the Fifth Third TRA Addendum provides that the Company may be obligated to pay up to a total of approximately $123.9 million to Fifth Third to terminate and settle certain remaining obligations under the Fifth Third TRA and the NPC TRA, totaling an estimated $275.8 million, the difference of which will be recorded as an addition to paid-in capital upon the exercise of the Call Options or Put Options discussed below.

In March, June and September 2017, the Company made payments of $15.1 million, $15.6 million, and $16.1 million, respectively, pursuant to the Fifth Third TRA Holders under the terms of the Fifth Third TRA Addendum. These payments resulted in a net gain recorded in equity of approximately $45.3 million after taxes.
    
As of September 30, 2017, the following are the remaining terms of the Fifth Third TRA Addendum. Beginning December 1, 2017, March 1, 2018, June 1, 2018, September 1, 2018 and December 1, 2018, and ending December 10, 2017, March 10, 2018, June 10, 2018, September 10, 2018 and December 10, 2018, respectively, the Company is granted call options (collectively, the “Call Options”) pursuant to which certain additional obligations of the Company under the Fifth Third TRA and the NPC TRA would be terminated and settled in consideration for cash payments of $16.6 million, $25.6 million, $26.4 million, $27.2 million and $28.1 million, respectively.

Under the remaining terms of the Fifth Third TRA Addendum, in the unlikely event the Company does not exercise the relevant Call Option, Fifth Third is granted put options beginning December 20, 2017, March 20, 2018, June 20, 2018, September 20, 2018 and December 20, 2018, and ending December 31, 2017, March 31, 2018, June 30, 2018, September 30, 2018 and December 31, 2018, respectively (collectively, the “Put Options”), pursuant to which certain additional obligations of the Company would be terminated and settled in consideration for cash payments with similar amounts to the Call Options.

The full carrying amount of the Fifth Third callable/puttable TRA obligations for the options exercisable within 12 months of the balance sheet date have been classified as current obligations in the accompanying balance sheet ($216.8 million.)

Since Fifth Third is a significant stockholder, a special committee of the Company’s board of directors comprised of independent, disinterested directors authorized the TRA Addendum. 

During 2015, the Company entered into a Repurchase Addendum to the Mercury 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 the remaining Mercury TRA:

As of September 30, 2017, the following are the remaining terms under the Mercury TRA Addendum. Beginning December 1st of each of 2017 and 2018, and ending June 30th of 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 $38.0 million and $43.0 million, respectively.

In June 2017 and 2016, the Company exercised the December 2016 and December 2015 Call Options under the Mercury TRA Addendum and made the related $38.1 million and $41.4 million payments to the Mercury TRA Holders.

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 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.

16
 
 
 

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



Except to the extent our obligations under the Mercury TRA, the Fifth Third TRA and the NPC TRA have been terminated and settled in full in accordance with the terms of the Mercury TRA and Fifth Third TRA Addendums, the Mercury TRA, Fifth Third TRA and the NPC TRA will each remain in effect, and the parties thereto will continue to have all rights and obligations thereunder.

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 8 - Fair Value Measurements).
    
The timing and/or amount of aggregate payments due under the TRAs outside of the call/put structures 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 $55.7 million and $53.5 million in January 2017 and January 2016, respectively. Unless settled under the terms of the repurchase addenda, the term of the TRAs will continue until all the underlying tax benefits have been utilized or expired.

New Accounting Pronouncements

In August 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which amends and simplifies existing guidance to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. This ASU is effective for the Company in the first quarter of fiscal 2019, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this principle on the Company’s consolidated financial statements.
    
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The update clarifies how cash receipts and cash payments in certain transactions are presented and classified in the statement of cash flows. The effective date of this update is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The update requires retrospective application to all periods presented but may be applied prospectively if retrospective application is impracticable. The Company is currently evaluating the impact of the adoption of this principle 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 forming a project team to evaluate the impact of the adoption of this principle on the Company’s consolidated financial statements. The Company anticipates adopting this ASU on January 1, 2019.

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 has formed a project team and is currently assessing the impact of the adoption of this principle on the Company’s consolidated financial statements. Based on the Company’s analysis to date, the Company does not anticipate material changes to the amount and timing of its revenue recognition. The Company expects the primary impact to result from the requirement to capitalize and amortize costs to obtain and fulfill a contract, which are currently expensed as incurred. This analysis is subject to change as the Company continues to refine its assessment of the standard. The Company anticipates adopting this ASU on January 1, 2018 using the modified retrospective approach.

17
 
 
 

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


2. BUSINESS COMBINATIONS

Acquisition of Paymetric Holdings, Inc.

On May 25, 2017, the Company completed the acquisition of Paymetric Holdings, Inc. (“Paymetric”) by acquiring 100% of the issued and outstanding shares. Paymetric automates business-to-business payment workflows within enterprise systems and tokenizes payments data within these systems in order to enable secure storage of customer information and history. This acquisition helps to further accelerate the Company’s growth.

The acquisition was accounted for as a business combination under ASC 805, Business Combinations (“ASC 805”). The purchase price was allocated to the assets acquired and the liabilities assumed based on the estimated fair value at the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired was allocated to goodwill, of which approximately $7.8 million is deductible for tax purposes. Goodwill, assigned to Merchant Services, consists primarily of the acquired workforce and growth opportunities, none of which qualify as an intangible asset. The preliminary purchase price allocation is as follows (in thousands):
Cash acquired
$
11,864

Current assets
7,243

Property, equipment and software, net
92,121

Intangible assets
47,800

Goodwill
435,032

Other assets
67

Current liabilities
(17,702
)
Deferred tax liability
(24,492
)
Non-current liabilities
(8,535
)
Total purchase price
$
543,398


The above estimated fair values of assets acquired and liabilities assumed are preliminary and are based on the information that was available as of the reporting date to estimate the fair value of assets acquired and liabilities assumed. The Company believes that the information provides a reasonable basis for estimating the fair values of the acquired assets and assumed liabilities, but the potential for measurement period adjustments exists based on the Company’s continuing review of
matters related to the acquisition. The Company expects to complete the purchase price allocation as soon as practicable, but no later than one year from the acquisition date.

Intangible assets primarily consist of customer relationship assets with a weighted average estimated useful life of 10 years.

The Company incurred transaction expenses of approximately $7.1 million during the nine months ended September 30, 2017 in conjunction with the acquisition of Paymetric, which are included in general and administrative expenses on the accompanying consolidated statement of income. From the acquisition date of May 25, 2017 through September 30, 2017, revenue and net income included in the accompanying statement of income for the three months and nine months ended September 30, 2017 attributable to Paymetric is not material.

Under the terms of the Paymetric transaction agreement, the Company replaced employee stock options held by certain employees of Paymetric. The number of replacement awards was based on options outstanding at the acquisition date. The weighted average fair value of the replacement awards was $8.0 million and was calculated on the acquisition date using the Black-Scholes option pricing model. The portion of the fair value of the replacement awards related to the services provided prior to the acquisition of $5.9 million was part of the consideration transferred to acquire Paymetric. The remaining portion of the fair value is associated with future service and will be recognized as expense over the future service period.

The pro forma results of the Company reflecting the acquisition of Paymetric were not material to our financial results and therefore have not been presented.


18
 
 
 

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


Acquisition of Moneris Solutions, Inc.

On December 21, 2016, the Company completed the acquisition of Moneris Solutions, Inc. (“Moneris USA”) by acquiring 100% of the issued and outstanding shares. Moneris USA is a provider of payment processing solutions offering credit, debit, wireless and online payment services for merchants in virtually every industry segment. This acquisition helps to further accelerate the Company’s growth.

The acquisition was accounted for as a business combination under ASC 805. The purchase price was allocated to the assets acquired and the liabilities assumed based on the estimated fair value at the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired was allocated to goodwill, of which approximately $14.0 million is deductible for tax purposes. Goodwill, assigned to Merchant Services, consists primarily of the acquired workforce and growth opportunities, none of which qualify as an intangible asset. The preliminary purchase price allocation is as follows (in thousands):
Cash acquired
$
22,851

Current assets
44,047

Property and equipment
22

Intangible assets
72,000

Goodwill
378,747

Current liabilities
(65,966
)
Deferred tax liability
(19,192
)
Non-current liabilities
(2,881
)
Total purchase price
$
429,628


The above estimated fair values of assets acquired and liabilities assumed are preliminary and are based on the information that was available as of the reporting date to estimate the fair value of assets acquired and liabilities assumed. The Company believes that the information provides a reasonable basis for estimating the fair values of the acquired assets and assumed liabilities, but the potential for measurement period adjustments exists based on the Company’s continuing review of
matters related to the acquisition. The Company expects to complete the purchase price allocation as soon as practicable, but no later than one year from the acquisition date.

Intangible assets consist of customer relationship assets of $72.0 million with a weighted average estimated useful life of 5 years.

The pro forma results of the Company reflecting the acquisition of Moneris USA were not material to our financial results and therefore have not been presented.

3. GOODWILL AND INTANGIBLE ASSETS

Changes in the carrying amount of goodwill, by business segment, are as follows (in thousands):

 
 
Merchant Services
 
Financial Institution Services
 
Total
Balance as of December 31, 2016
 
$
3,163,739

 
$
574,850

 
$
3,738,589

Goodwill attributable to acquisition of Moneris USA (1)
 
6,686

 

 
6,686

Goodwill attributable to acquisition of Paymetric
 
435,032

 

 
435,032

Balance as of September 30, 2017
 
$
3,605,457

 
$
574,850

 
$
4,180,307

(1) Amount represents adjustments to goodwill associated with the acquisition of Moneris USA as a result of an update to the purchase price allocation, primarily related to revisions of certain estimates from the preliminary amounts reported as of December 31, 2016.

    



19
 
 
 

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


As of September 30, 2017 and December 31, 2016, the Company’s finite lived intangible assets consisted of the following (in thousands):
 
 
September 30, 2017
 
December 31, 2016
Customer relationship intangible assets
 
$
1,712,681

 
$
1,671,581

Customer portfolios and related assets
 
247,935

 
178,480

Patents
 
1,217

 
955

 
 
1,961,833

 
1,851,016

Less accumulated amortization on:
 
 
 
 
  Customer relationship intangible assets
 
1,112,851

 
980,595

  Customer portfolios and related assets
 
116,551

 
82,601

 
 
1,229,402

 
1,063,196

Intangible assets, net
 
$
732,431

 
$
787,820

  
Customer portfolios and related assets acquired during the nine months ended September 30, 2017 have weighted-average amortization periods of 4.8 years. Amortization expense on intangible assets for the three months ended September 30, 2017 and 2016 was $55.2 million and $49.7 million, respectively. Amortization expense on intangible assets for the nine months ended September 30, 2017 and 2016 was $166.5 million and $149.0 million, respectively.

The estimated amortization expense of intangible assets for the remainder of 2017 and the next five years is as follows (in thousands):
Three months ending December 31, 2017
 
$
55,393

2018
 
208,917

2019
 
192,553

2020
 
112,134

2021
 
62,906

2022
 
41,392


4. LONG-TERM DEBT

As of September 30, 2017 and December 31, 2016, the Company’s long-term debt consisted of the following (in thousands): 
 
September 30,
2017
 
December 31,
2016
Term A loan, maturing in October 2021(1)
$
2,376,773

 
$
2,469,375

Term B loan, maturing in October 2023(2)
759,263

 
765,000

Incremental Term B loan, maturing in August 2024(3)
1,270,000

 

Leasehold mortgage, expiring on August 10, 2021(4)
10,131

 
10,131

Revolving credit facility, expiring in October 2021(5)
359,000

 

Less: Current portion of note payable and current portion of note payable to related party
(140,654
)
 
(131,119
)
Less: Original issue discount
(3,197
)
 
(3,631
)
Less: Debt issuance costs
(39,697
)
 
(20,153
)
Note payable and note payable to related party
$
4,591,619

 
$
3,089,603

(1) 
Interest at a variable base rate (LIBOR) plus a spread rate (175 basis points) (total rate of 2.99% at September 30, 2017) and amortizing on a basis of 1.25% per quarter during each of the first twelve quarters (March 2017 through December 2019), 1.875% per quarter during the next four quarters (March 2020 through December 2020) and 2.50% during the next three quarters (March 2021 through September 2021) 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 (250 basis points) (total rate of 3.74% at September 30, 2017) and amortizing on a basis of 0.25% per quarter, with a balloon payment due at maturity.

20
 
 
 

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


(3) 
Interest at a variable base rate (LIBOR) plus a spread rate (225 base points) (total rate of 3.48% at September 30, 2017) and amortizing on a basis of 0.25% per quarter, with a balloon payment due at maturity.
(4) 
Interest payable monthly at a fixed rate of 6.22%.
(5) 
$100 million revolving credit facility borrowing interest at a variable base rate (LIBOR) plus a spread rate (175 basis points) (total rate of 2.95% at September 30, 2017); $259 million revolving credit facility borrowing interest at a variable base rate (Prime) with a spread rate (75 basis points) (total rate of 5.0% at September 30, 2017).

In October, 2016, Vantiv, LLC completed a debt refinancing by entering into a second amended and restated loan agreement (“Second Amended Loan Agreement”). The Second Amended Loan Agreement provided for senior secured credit facilities comprised of an approximately $2.5 billion term A loan, a $765.0 million term B loan and a $650 million revolving credit facility. The maturity date and debt service requirements relating to the term A and term B loans are listed in the table above. The revolving credit facility matures in October 2021 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 0.250% (or 0.375% if the total leverage ratio is greater than 3.75 to 1.00) per year.

On August 7, 2017, the Company funded the Fifth Third share purchase discussed in Note 6 - Controlling and Non-controlling Interests, by amending the Second Amended Loan Agreement to permit Vantiv LLC to obtain approximately $1.27 billion of additional seven-year term B loans (the Second Amended Loan Agreement, as so amended, the “Existing Loan Agreement”). As a result of this borrowing, the Company capitalized approximately $23.1 million of deferred financing fees during the three months ended September 30, 2017.
    
There were outstanding borrowings of $359.0 million on the revolving credit facility at September 30, 2017. There were no outstanding borrowings on the revolving credit facility at December 31, 2016.
    
As of September 30, 2017 and December 31, 2016, Fifth Third held $177.7 million and $151.1 million, respectively, of the term A loans and the revolving credit facility, which are presented as note payable to related party on the consolidated statements of financial position.    

Guarantees and Security
 
The Company’s debt obligations at September 30, 2017 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 Second 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 $25 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 Existing 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 September 30, 2017, the Company was in compliance with these financial covenants.


21
 
 
 

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


5. 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 and the pending Worldpay transaction (see Note 12 - Pending Worldpay Transaction). As of September 30, 2017 and December 31, 2016, the Company’s derivative instruments consisted of interest rate swaps and interest rate cap agreements. Additionally, during the three months ended September 30, 2017, the Company entered into a deal contingent forward, which is a foreign currency forward contract. The interest rate swaps hedge the variable rate debt by converting floating-rate payments to fixed-rate payments. The 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. The foreign currency forward serves as an economic hedge of the pound sterling denominated portion of the purchase price relating to the Worldpay acquisition. As of September 30, 2017, the interest rate cap agreements had a fair value of $20.8 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. As of September 30, 2017, the foreign currency forward had a fair value of approximately $24.4 million, classified within other current assets on the Company’s consolidated statements of financial position. The foreign currency forward has not been designated as a hedge 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 8 - 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 affect 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 September 30, 2017, the Company had a total of 4 outstanding interest rate swaps covering an exposure period from January 2017 through January 2019 with a combined notional balance of $500.0 million. Fifth Third is counterparty to 2 of the 4 outstanding interest rate swaps with a $250 million notional balance for January 2017 to January 2018 and another $250 million notional balance for January 2018 to January 2019. Additionally, as of September 30, 2017, 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.
 

22
 
 
 

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


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
 
September 30, 2017
 
December 31, 2016
Interest rate contracts
Other current assets
 
$
6,829

 
$
2,144

Interest rate contracts
Other long-term assets
 
13,934

 
21,085

Interest rate contracts
Other current liabilities
 
5,006

 
9,551

Interest rate contracts
Other long-term liabilities
 
1,479

 
5,507

 
Any ineffectiveness associated with such derivative instruments will be recorded immediately as interest expense in the accompanying consolidated statements of income. As of September 30, 2017, the Company estimates that $4.5 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 nine months ended September 30, 2017 and 2016 (in thousands): 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
Amount of gain (loss) recognized in OCI (effective portion) (1)
 
$
306

 
$
1,247

 
$
55

 
$
(22,964
)
Amount of (loss) reclassified from accumulated OCI into earnings (effective portion)
 
(1,057
)
 
(3,923
)
 
(8,377
)
 
(9,010
)
(1) 
“OCI” represents other comprehensive income.

Credit Risk Related Contingent Features

As of September 30, 2017, 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 $6.8 million.

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 September 30, 2017, the Company had not posted any collateral related to these agreements. If the Company had breached any of these provisions at September 30, 2017, it could have been required to settle its obligations under the agreements at their termination value of $6.8 million.

Deal Contingent Forward

On August 9, 2017, the Company entered into a 1.150 billion Pounds Sterling notional deal contingent forward to hedge a portion of the purchase price relating to the pending Worldpay acquisition (see Note 12 - Pending Worldpay Transaction). The deal contingent forward runs through March 31, 2018 and the change in fair value is reported in non-operating income (expense) in the Company’s Unaudited Consolidated Statements of Income, which is an unrealized gain of approximately $24.4 million for the three months and nine months ended September 30, 2017.

6. 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.
 

23
 
 
 

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


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 September 30, 2017, Vantiv, Inc.’s interest in Vantiv Holding was 91.42%. Changes in units and related ownership interest in Vantiv Holding are summarized as follows:
 
Vantiv, Inc.
 
Fifth Third
 
Total
As of December 31, 2016
161,134,831

 
35,042,826

 
196,177,657

% of ownership
82.14
%
 
17.86
%
 
 

Fifth Third exchange of Vantiv Holding units for shares of Class A common stock
19,790,000

 
(19,790,000
)
 

Purchase and cancellation of Class A common stock
(19,790,000
)
 

 
(19,790,000
)
Equity plan activity (1)
1,371,799

 

 
1,371,799

As of September 30, 2017
162,506,630

 
15,252,826

 
177,759,456

% of ownership
91.42
%
 
8.58
%
 


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

On August 7, 2017, the Company entered into a transaction agreement with Fifth Third Bank pursuant to which Fifth Third Bank agreed to exercise its right to exchange 19,790,000 Class B Units in Vantiv Holding, LLC for 19,790,000 shares of the Company’s Class A common stock and immediately thereafter, the Company purchased those newly issued shares of Class A common stock directly from Fifth Third Bank at a price of $64.04 per share, the closing share price of the Company’s Class A common stock on the New York Stock Exchange on August 4, 2017. The purchased shares were cancelled and are no longer outstanding.

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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
106,905

 
$
87,004

 
$
229,060

 
$
217,913

Items not allocable to non-controlling interests:
 
 
 
 
 

 
 

Vantiv, Inc. expenses (1)
14,219

 
23,628

 
25,095

 
58,019

Vantiv Holding net income
$
121,124

 
$
110,632

 
$
254,155

 
$
275,932

 
 
 
 
 
 
 
 
Net income attributable to non-controlling interests of Fifth Third (2)
$
14,092

 
$
20,155

 
$
37,549

 
$
50,082

Net income attributable to joint venture non-controlling interest (3)
695

 
553

 
1,731

 
2,470

Total net income attributable to non-controlling interests
$
14,787

 
$
20,708

 
$
39,280

 
$
52,552

 
(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.


24
 
 
 

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


7. 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, except as described below.

On April 17, 2017, the Company entered into a preliminary settlement agreement (the “Agreement”) to settle class action litigation filed by plaintiffs in the United States District Court for the Northern District of Georgia (the “Court”) under the caption Champs Sports Bar & Grill Co.et al. v. Mercury Payment Systems, LLC et al. regarding certain legacy business practices of the defendants, Mercury Payment Systems, LLC (“Mercury”) and Global Payments Direct, Inc., dating back to 2009. The Company acquired Mercury on June 13, 2014.

The Company has agreed to settle the lawsuit after engaging in a successful mediation session occurring on February 16, 2017, at which the parties first identified the potential for resolution, and subsequent negotiations between the parties. The parties agreed to such mediation session after a previous mediation session held in December 2016 ended without a potential path toward resolution.

Under the terms of the Agreement, in exchange for a release from all claims relating to such legacy business practices from the beginning of the applicable settlement class period through the date of preliminary approval of the settlement, the Company anticipates paying $38 million based on the estimated number of participants who opt-in to the settlement.
    
While the agreement contains no admission of wrongdoing and the Company believes it has meritorious defenses to the claims, the Company agreed to the structure of the settlement, in order to save costs and avoid the risks of on-going litigation.

In connection with the settlement, the Company recorded a charge of $38 million in the first quarter of 2017. The Company will pay the settlement amount from available resources.

On May 16, 2017, the Court determined the proposed Agreement satisfied the criteria for preliminary approval and issued a preliminary approval order. Pursuant to the terms of the Agreement, the preliminary approval order required that the Company fund an escrow account to pay all future class action claims, legal fees and administrative fees. The Company funded such account on July 5, 2017.

On August 29, 2017, a final approval hearing took place and the Agreement was approved.

8. 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 (“ASC 820”), 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.

25
 
 
 

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 September 30, 2017 and December 31, 2016 (in thousands):
 
September 30, 2017
 
December 31, 2016
 
Fair Value Measurements Using
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
$

 
$
20,763

 
$

 
$

 
$
23,229

 
$

  Deal contingent forward

 
24,365

 

 

 



Liabilities:
 

 
 

 
 

 
 

 
 

 
 

Interest rate contracts
$

 
$
6,485

 
$

 
$

 
$
15,058

 
$

  Mercury TRA

 

 
97,308

 

 

 
147,040

 
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, 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 September 30, 2017 and December 31, 2016, 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 5 - Derivatives and Hedging Activities for further discussion of the Company’s interest rate contracts.

Deal Contingent Forward

The Company uses a foreign currency contract to manage its foreign currency exposure relating to the pending Worldpay transaction (see Note 12 - Pending Worldpay Transaction). The fair value of the foreign currency forward is determined using the market standard methodology of discounting the projected settlement value of the instrument. The projected settlement value is based on the expectation of future foreign currency rates derived from observed market interest rate curves. In addition, to comply with the provisions of ASC 820, credit valuation adjustments are incorporated in the fair values to account for potential nonperformance risk. In adjusting the fair value of its foreign currency forward contract 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 foreign currency contract fell within Level 2 of the fair value hierarchy, certain Level 3 inputs were utilized, including the probability of successfully closing the Worldpay merger and certain other estimates required to compute the credit valuation analysis, such as the estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2017, the Company assessed the significance of the impact of the Level 3 inputs on the overall valuation of its foreign currency contract and determined that those inputs were in the aggregate not significant to the overall valuation of its foreign currency contract. As a result, the Company classified its foreign currency contract valuation in Level 2 of the fair value hierarchy. See Note 5 - Derivatives and Hedging Activities for further discussion of the Company’s foreign currency contract.


26
 
 
 

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


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 input used in the fair value measurement of the Mercury TRA is the discount rate, which was approximately 14% as of September 30, 2017 and December 31, 2016. Any significant increase (decrease) in this input 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, 2016 to September 30, 2017 consists of the increase in fair value of $10.7 million and the decrease from payments of $60.5 million related to the Mercury TRA obligations and the exercised 2016 Call Option. The Company recorded non-operating expenses of $3.1 million and $4.6 million related to the change in fair value during the three months ended September 30, 2017 and 2016, respectively. The Company recorded non-operating expenses of $10.7 million and $14.9 million related to the change in fair value during the nine months ended September 30, 2017 and 2016, respectively.

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 September 30, 2017 and December 31, 2016 (in thousands):
 
September 30, 2017
 
December 31, 2016
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Liabilities:
 

 
 

 
 

 
 

Note payable
$
4,732,273

 
$
4,785,387

 
$
3,220,722

 
$
3,250,025

 
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.

9.  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.

During the three months and nine months ended September 30, 2017, approximately 23.6 million and 31.2 million weighted-average Class B units of Vantiv Holding were excluded in computing diluted net income per share because including them would have an antidilutive effect. As the Class B units of Vantiv Holding were not included, the numerator used in the calculation of diluted net income per share was equal to the numerator used in the calculation of basic net income per share for the three months and nine months ended September 30, 2017. As of September 30, 2017 and 2016, there were approximately 15.3 million and 35.0 million Class B units outstanding, respectively.
 
In addition to the Class B units discussed above, potentially dilutive securities during the three and nine months ended September 30, 2017 included restricted stock awards, restricted stock units, stock options, performance share awards and ESPP purchase rights. Potentially dilutive securities during the three and nine months ended September 30, 2016 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 and ESPP purchase rights.


27
 
 
 

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


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 have not been presented.
 
The following table sets forth the computation of basic and diluted net income per share (in thousands, except share data): 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Basic:
 
 
 
 
 
 
 

Net income attributable to Vantiv, Inc.
$
92,118

 
$
66,296

 
$
189,780

 
$
165,361

Shares used in computing basic net income per share:


 


 
0

 
 
Weighted-average Class A common shares
161,465,849

 
155,740,660

 
161,205,066

 
155,603,265

Basic net income per share
$
0.57

 
$
0.43

 
$
1.18

 
$
1.06

Diluted:
 
 
 
 


 
 
Consolidated income before applicable income taxes
$

 
$
126,328

 
$

 
$
319,504

Income tax expense excluding impact of non-controlling interest

 
45,478

 

 
115,021

Net income attributable to Vantiv, Inc.
$
92,118

 
$
80,850

 
$
189,780

 
$
204,483

Shares used in computing diluted net income per share:


 
 
 


 
 
Weighted-average Class A common shares
161,465,849

 
155,740,660

 
161,205,066

 
155,603,265

Weighted-average Class B units of Vantiv Holding

 
35,042,826

 

 
35,042,826

Warrant

 
5,550,050

 

 
5,428,637

Stock options
739,835

 
506,635

 
706,632

 
547,640

Restricted stock awards, restricted stock units and employee stock purchase plan
645,508

 
501,998

 
664,275

 
504,203

Performance awards
31,204

 

 
41,809

 

Diluted weighted-average shares outstanding
162,882,396

 
197,342,169

 
162,617,782

 
197,126,571

Diluted net income per share
$
0.57

 
$
0.41

 
$
1.17

 
$
1.04


28
 
 
 

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


10. 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 nine months ended September 30, 2017 and 2016 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 September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Net change in fair value recorded in accumulated OCI
 
$
(17,942
)
 
$
306

 
$
(186
)
 
$
120

 
$
184

 
$
304

 
$
(17,638
)
 Net realized loss reclassified into earnings (a)
 
15,366

 
1,057

 
(366
)
 
691

 
(90
)
 
601

 
15,967

 Net change
 
$
(2,576
)
 
$
1,363

 
$
(552
)
 
$
811

 
$
94

 
$
905

 
$
(1,671
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Net change in fair value recorded in accumulated OCI
 
$
(26,644
)
 
$
1,247

 
$
(386
)
 
$
861

 
$
(227
)
 
$
634

 
$
(26,010
)
 Net realized loss reclassified into earnings (a)
 
7,720

 
3,923

 
(1,212
)
 
2,711

 
(719
)
 
1,992

 
9,712

 Net change
 
$
(18,924
)
 
$
5,170

 
$
(1,598
)
 
$
3,572

 
$
(946
)
 
$
2,626

 
$
(16,298
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Net change in fair value recorded in accumulated OCI
 
$
(17,819
)
 
$
55

 
$
(101
)
 
$
(46
)
 
$
227

 
$
181

 
$
(17,638
)
 Net realized loss reclassified into earnings (a)
 
11,622

 
8,377

 
(2,641
)
 
5,736

 
(1,391
)
 
4,345

 
15,967

 Net change
 
$
(6,197
)
 
$
8,432

 
$
(2,742
)
 
$
5,690

 
$
(1,164
)
 
$
4,526

 
$
(1,671
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Net change in fair value recorded in accumulated OCI
 
$
(14,336
)
 
$
(22,964
)
 
$
7,080

 
$
(15,884
)
 
$
4,210

 
$
(11,674
)
 
$
(26,010
)
 Net realized loss reclassified into earnings (a)
 
5,132

 
9,010

 
(2,780
)
 
6,230

 
(1,650
)
 
4,580

 
9,712

 Net change
 
$
(9,204
)
 
$
(13,954
)
 
$
4,300

 
$
(9,654
)
 
$
2,560

 
$
(7,094
)
 
$
(16,298
)
(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 nine months ended September 30, 2017 and 2016 reflect amounts of gain (loss) reclassified from AOCI into earnings, representing the effective portion of the hedging relationships, and are recorded in interest expense-net.
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
11. SEGMENT INFORMATION
     
The Company’s segments consist of the Merchant Services segment and the Financial Institution Services segment, which are organized by the products and services the Company provides. 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. The Company’s reportable segments are the same as the Company’s operating segments and there is no aggregation of the Company’s operating segments. Below is a summary of each segment:

29
 
 
 

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



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, 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.    

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.
 
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 September 30, 2017
 
Merchant Services
 
Financial Institution Services
 
Total
Total revenue
$
916,630

 
$
117,135

 
$
1,033,765

Network fees and other costs
447,863

 
31,670

 
479,533

Sales and marketing
168,022

 
5,757

 
173,779

Segment profit
$
300,745

 
$
79,708

 
$
380,453


 
Three Months Ended September 30, 2016
 
Merchant Services
 
Financial Institution Services
 
Total
Total revenue
$
793,860

 
$
120,159

 
$
914,019

Network fees and other costs
389,448

 
33,913

 
423,361

Sales and marketing
147,663

 
5,585

 
153,248

Segment profit
$
256,749

 
$
80,661

 
$
337,410


 
Nine Months Ended September 30, 2017
 
Merchant Services
 
Financial Institution Services
 
Total
Total revenue
$
2,615,341

 
$
345,390

 
$
2,960,731

Network fees and other costs
1,311,539

 
94,819

 
1,406,358

Sales and marketing
479,628

 
17,454

 
497,082

Segment profit
$
824,174

 
$
233,117

 
$
1,057,291


 
Nine Months Ended September 30, 2016
 
Merchant Services
 
Financial Institution Services
 
Total
Total revenue
$
2,251,033

 
$
372,826

 
$
2,623,859

Network fees and other costs
1,117,602

 
103,908

 
1,221,510

Sales and marketing
416,107

 
17,623

 
433,730

Segment profit
$
717,324

 
$
251,295

 
$
968,619



30
 
 
 

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


A reconciliation of total segment profit to the Company’s income before applicable income taxes is as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Total segment profit
$
380,453

 
$
337,410

 
$
1,057,291

 
$
968,619

Less: Other operating costs
(79,482
)
 
(72,162
)
 
(234,347
)
 
(219,464
)
Less: General and administrative
(49,607
)
 
(40,727
)
 
(189,632
)
 
(133,831
)
Less: Depreciation and amortization
(82,500
)
 
(66,086
)
 
(236,964
)
 
(199,550
)
Less: Interest expense—net
(38,521
)
 
(27,474
)
 
(97,441
)
 
(81,321
)
Less: Non-operating expenses
21,207

 
(4,633
)
 
13,672

 
(14,949
)
Income before applicable income taxes
$
151,550

 
$
126,328

 
$
312,579

 
$
319,504


12. PENDING WORLDPAY TRANSACTION

Firm Offer for Worldpay Group PLC

On August 9, 2017, the Company issued an announcement pursuant to Rule 2.7 of the U.K. City Code on Takeovers and Mergers disclosing the terms of a recommended offer (the “Offer”) by the Company to acquire the entire issued and to be issued ordinary share capital of Worldpay, a public limited company registered in England and Wales, in a cash and stock transaction (the “Business Combination”).

Under the terms of the Offer, Worldpay shareholders will be entitled to receive, for each Worldpay ordinary share held by such shareholders, 55 pence in cash and 0.0672 new shares of the Company’s Class A common stock. As of September 30, 2017, Worldpay has approximately 2.003 billion shares outstanding. The Business Combination is to be effected by means of a court-sanctioned scheme of arrangement between Worldpay and Worldpay shareholders under the UK Companies Act 2006, as amended. In addition to the consideration payable in connection with the Offer, Worldpay shareholders are also entitled to receive an interim dividend of 0.8 pence per Worldpay ordinary share that was paid on October 23, 2017.
    
In addition, Worldpay shareholders will be entitled to receive a special dividend of 4.2 pence per Worldpay ordinary share, which would be conditional on completion of the Business Combination and would be paid to Worldpay shareholders on the register of members of Worldpay at the scheme record time. Effective upon completion of the Business Combination, the combined company will amend its governance documents to adopt the “Worldpay” name. The Company will also seek a secondary standard listing on the Main Market of the London Stock Exchange in relation to the new shares of Company Stock following completion of the Business Combination.

The Business Combination is subject to conditions and certain further terms, including, among other things: (i) the approval of the Scheme by a majority in number of Worldpay shareholders representing not less than 75% in value of the Worldpay shareholders, in each case present and voting at the Worldpay shareholders’ meeting; (ii) the sanction of the Scheme by the High Court of Justice in England and Wales; (iii) the Scheme becoming effective no later than March 31, 2018; (iv) the issuance of the new shares of Company Stock to Worldpay shareholders in connection with the Business Combination being duly approved by the affirmative vote of the majority of the votes cast at the Company’s stockholder’s meeting; and (v) the receipt of certain required antitrust, regulatory and other approvals. It is expected that, subject to the satisfaction or waiver of all relevant conditions, the Business Combination will be completed in early 2018.

Financing Arrangements    

In connection with the Worldpay transaction, the Company entered into several amendments to its Existing Loan Agreement set forth below.

Incremental Amendment to Existing Loan Agreement and Bridge and Backstop Commitments    

On August 9, 2017, Vantiv, LLC executed an amendment (the “Incremental Amendment”), to the Existing Loan Agreement (as amended by the Incremental Amendment, the “Loan Agreement”) with various financial institutions and their affiliates. The Incremental Amendment provides Vantiv, LLC with committed funding as follows:

31
 
 
 

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



$1.605 billion of additional five-year term Tranche A-4 loans
$1.129 billion of additional seven-year term B loans, which consists of approximately $535 million of outstanding term loans (Tranche B-1) and a $594 million backstop (Tranche B-2)
$350.0 million of additional revolving credit commitments

The proceeds of the commitments provided under the Incremental Amendment will be used to, among other things, provide the cash consideration for the Worldpay acquisition, to refinance existing debt of Worldpay including a $594 million backstop for the Worldpay Euro bond, to pay fees and expenses in connection with the foregoing and for working capital and general corporate purposes. The obligations of the lenders party to the Incremental Amendment to provide the increased debt financing contemplated thereunder are subject to the consummation of the Worldpay acquisition.

In addition, on August 9, 2017, Vantiv, LLC and various financial institutions and their affiliates entered into a Bridge Commitment Letter, pursuant to which, subject to the satisfaction of the conditions set forth therein, the lenders thereunder agreed to provide an up to a $1.13 billion bridge term loan facility for the benefit of Vantiv, LLC and certain of its subsidiaries. This bridge term loan facility will only be used in the event the Company is not able to raise funds via an anticipated bond offering.

Further, on August 9, 2017, Vantiv, LLC, and various financial institutions, collectively, the “Backstop Lenders” entered into the Backstop Commitment Letter (the “Backstop Commitment”), pursuant to which, subject to the conditions set forth therein, the Backstop Lenders agreed to provide the following:

Up to a $1.0 billion revolving credit facility
Up to an approximately $4.01 billion term A loan facility
Up to an approximately $3.2 billion term B loan facility for the benefit of Vantiv, LLC and certain of its subsidiaries

Subsequently, the Backstop Commitment has been terminated as a result of the effectiveness of the third amendment and restatement agreement described below.

Third Amendment and Restatement Agreement

On September 8, 2017, Vantiv, LLC entered into a third amendment and restatement loan agreement (the “Third Amendment and Restatement Agreement”) pursuant to which the Existing Loan Agreement will be amended and restated as follows:

Amended the existing term A loans ($2.4 billion)
$181.5 million (Tranche A-3) amended, but did not extend the current maturity date of October 2021
$2.2 billion (Tranche A-5) amended and extended the maturity date to the fifth anniversary following the funding of the Business Combination
Amended and extended the maturity of, provide for borrowing under additional currencies, and increased by an additional $250.0 million the existing revolving credit facility

The effectiveness of the Third Amendment and Restatement Agreement is subject to, among other things, the consummation of the Worldpay acquisition.

The Third Amendment and Restatement Agreement requires Vantiv, LLC to maintain a maximum leverage ratio and a minimum interest coverage ratio, each of which will be tested quarterly based on the last four fiscal quarters, commencing on the first full fiscal quarter following the funding of the Worldpay acquisition. The maximum leverage ratio starts at 6.50:1.00 and becomes more restrictive over time. The minimum interest coverage ratio is 4.00:1.00 and is constant throughout the term of the agreement.

Fourth Amendment to Existing Credit Agreement

On October 3, 2017, Vantiv, LLC entered into a Fourth Amendment, which amends the Loan Agreement as follows:

The existing initial term B loan tranche was replaced with a $759.3 million new term Tranche B-3 loan maturing in October 2023

32
 
 
 

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


The existing incremental term B loan tranche was replaced with a $1.27 billion term Tranche B-4 loan maturing August 2024
The $535 million incremental term Tranche B-1 to be funded in connection with the closing of the Worldpay acquisition will, upon the funding thereof, be modified to have the same economic terms as the new term Tranche B-4 loan and become part of the same class of term Tranche B-4 loans

The term B loan tranches amortize in equal quarterly installments of 0.25% per quarter, with balloon payments at maturity. The amortization for the new term Tranche B-3 ($759.3 million) will commence on March 31, 2018 and for the new term Tranche B-4 ($1.27 billion) on June 30, 2018.

Interest on all loans under the senior secured credit facilities is payable either quarterly or at the expiration of any LIBOR interest period applicable thereto. Borrowings under the Credit Agreement accrue interest at a rate equal to, at Vantiv, LLC’s option, a base rate or LIBOR rate plus an applicable margin. The applicable margin for each of the new term Tranche B-3 loan ($759.3 million) and new term Tranche B-4 loan ($1.27 billion) is 100 basis points in the case of base rate loans (subject to a 0.0% floor) and 200 basis points in the case of LIBOR loans (subject to a 0.0% floor). The applicable margin for the incremental term B-2 loan tranche ($594 million) remains 125 basis points in the case of base rate loans (subject to a 0.0% floor) and 225 basis points in the case of LIBOR loans (subject to a 0.0% floor).


******


33
 
 
 


Vantiv, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
This management’s discussion and analysis provides a review of the results of operations, financial condition and liquidity and capital resources of Vantiv, Inc. (“Vantiv”, “we”, “us”, “our”, or the “company” refer to Vantiv, Inc. and its consolidated subsidiaries) and outlines the factors that affected recent results, as well as factors that may affect future results. Our actual results in the future may differ materially from those anticipated in these forward looking statements as a result of many factors, including those set forth under “Risk Factors,” “Forward Looking Statements” and elsewhere in this report, as well as in our 10-K filed with the SEC on February 8, 2017. The following discussion should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this report, as well as management’s discussion and analysis and consolidated financial statements for the year ended December 31, 2016 included in our most recent Annual Report on Form 10-K.

General

We are the largest merchant acquirer and PIN debit acquirer by number of transactions, according to the Nilson Report, and a leading payment processor in the United States differentiated by our integrated technology platform, breadth of distribution and superior cost structure. Our integrated technology platform enables us to efficiently provide a comprehensive suite of services to both merchants and financial institutions of all sizes as well as to innovate, develop and deploy new services, while providing us with significant economies of scale. Our broad and varied distribution provides us with a growing and diverse client base of merchants and financial institutions.

We offer a broad suite of payment processing services that enable our clients to meet their payment processing needs through a single provider, including in omni-channel environments that span point-of-sale, ecommerce and mobile devices. We enable merchants of all sizes to accept and process credit, debit and prepaid payments and provide them supporting value-added services, such as security solutions and fraud management, information solutions, and interchange management. We also provide mission critical payment services to financial institutions, such as card issuer processing, payment network processing, fraud protection, card production, prepaid program management, ATM driving and network gateway and switching services that utilize our proprietary Jeanie PIN debit payment network.

Our integrated technology platform provides our merchant and financial institution clients with differentiated payment processing solutions and provides us with significant strategic and operational benefits. Small and mid-sized merchants are able to easily connect to our integrated technology platform using our application process interfaces, or APIs, software development kits, or SDKs, and other tools we make available to technology partners, which we believe enhances our capacity to sell to such merchants. Our integrated technology platform allows us to collect, manage and analyze data across both our Merchant Services and our Financial Institution Services segments that we can then package into information solutions for our clients. It provides insight into market trends and opportunities as they emerge, which enhances our ability to innovate and develop new value-added services, including security solutions and fraud management, and it allows us to easily deploy new solutions that span the payment processing value chain, such as ecommerce and mobile services, which are high growth market opportunities. It is highly scalable, which enables us to efficiently manage, update and maintain our technology, increase capacity and speed, and realize significant operating leverage. We believe our integrated technology platform is a key differentiator from payment processors that operate on multiple technology platforms and provides us with a significant competitive advantage.

We distribute our services through multiple sales channels that enable us to efficiently and effectively target a broad range of merchants and financial institutions. Our sales channels include direct and indirect sales forces, which include our referral partner relationships, which provide us with a growing and diverse client base of merchants and financial institutions. We have a national sales force that targets financial institutions and large national merchants, a regional and mid-market sales team that sells solutions to merchants and third-party reseller clients and a telesales operation that targets small and mid-sized merchants. Our indirect sales force includes Independent Sales Organizations, or ISOs, that target small and mid-sized merchants. We have referral partner relationships with merchant banks, independent software vendors, or ISVs, value-added resellers, or VARs, payment facilitators, and trade associations that target a broad range of merchants, including difficult to reach small and mid-sized merchants. We also have relationships with third-party reseller partners and arrangements with core processors that target small and mid-sized financial institutions.


34
 
 
 


Executive Overview

Revenue for the three months ended September 30, 2017 increased 13% to $1,033.8 million from $914.0 million in 2016. Revenue for the nine months ended September 30, 2017 increased 13% to $2,960.7 million from $2,623.9 million in 2016.    

Income from operations for the three months ended September 30, 2017 increased to $168.9 million from $158.4 million in 2016. Income from operations for the nine months ended September 30, 2017 decreased to $396.3 million from $415.8 million in 2016.

Net income for the three months ended September 30, 2017 increased to $106.9 million from $87.0 million in 2016. Net income attributable to Vantiv, Inc. for the three months ended September 30, 2017 increased to $92.1 million from $66.3 million in 2016. Net income for the nine months ended September 30, 2017 increased to $229.1 million from $217.9 million in 2016. Net income attributable to Vantiv, Inc. for the nine months ended September 30, 2017 increased to $189.8 million from $165.4 million in 2016. See the “Results of Operations” section of this Management’s Discussion and Analysis for a discussion of our financial results.

In October 2016, our board of directors authorized a program to repurchase up to $250 million of our Class A common stock. We currently have approximately $243 million of share repurchase authority remaining as of September 30, 2017 under this authorization.

See Note 12 - Pending Worldpay Transaction in the Notes to Unaudited Consolidated Financial Statements for details on the pending Worldpay Group plc (“Worldpay”) acquisition.

Paymetric Acquisition

On May 25, 2017, we acquired Paymetric Holdings, Inc. (“Paymetric”) for $532 million in cash, which is net of cash acquired. We funded the acquisition with cash on hand and borrowings under our revolving credit facility. Paymetric automates business-to-business payment workflows within enterprise systems and tokenizes payments data within these systems in order to enable secure storage of customer information and history. This acquisition helps to further accelerate our growth. The operations of Paymetric are included in our Merchant Services segment operating results.

Fifth Third Share Purchase

On August 9, 2017, pursuant to a transaction agreement with Fifth Third Bank, we purchased 19,790,000 shares of our Class A common stock directly from Fifth Third Bank at a price of $64.04 per share. The total purchase price of approximately $1.27 billion was funded with an additional Term B Loan. In connection with the purchase, we recorded a liability of approximately $647.5 million during the quarter ended September 30, 2017 under the tax receivable agreement the we entered into with Fifth Third Bank at the time of our initial public offering.

Our Segments, Revenue and Expenses
 
Segments
 
We report our results of operations in two segments, Merchant Services and Financial Institution Services. We evaluate segment performance based upon segment profit, which is defined as net revenue and represents total revenue less network fees and other costs, less sales and marketing expense attributable to that segment.

Merchant Services

We have a broad and diversified merchant client base. Our merchant client base has low client concentration and is heavily weighted in non-discretionary everyday spend categories, such as grocery and pharmacy, and includes large national retailers. We provide a comprehensive suite of payment processing services to our merchant services clients. We authorize, clear, settle and provide reporting for electronic payment transactions, as further discussed below.

Acquiring and Processing. We provide merchants with a broad range of credit, debit and prepaid payment processing services. We give them the ability to accept and process Visa, Mastercard, American Express, Discover and PIN debit network card transactions originated at the point of sale as well as for ecommerce and mobile transactions. This service includes all

35
 
 
 


aspects of card processing, including authorization and settlement, customer service, chargeback and retrieval processing and network fee and interchange management.

Value-added Services. We offer value-added services that help our clients operate and manage their businesses including omni-channel acceptance, prepaid services and gift card solutions. We also provide security solutions such as point-to-point encryption and tokenization both at the point of sale and for ecommerce transactions.

We provide our services to merchants of varying sizes, which provides us with a number of key benefits. Due to the large transaction volume that they generate, large national merchants provide us with significant operating scale efficiencies and recurring revenues. Small and mid-sized merchants generally generate higher per transaction fees.
    
We distribute our comprehensive suite of services to a broad range of merchants, including large, mid-sized and small merchants, through multiple sales channels as further discussed below.

Direct: Includes a national sales force that targets large national merchants, a regional and mid-market sales team that sells solutions to merchants and third party reseller clients, and a telesales operation that targets small and mid-sized merchants.
Indirect: Includes Independent Sales Organizations (ISOs) that target small and mid-sized merchants.
Merchant Bank: Includes referral partner relationships with financial institutions that target their financial services customers as merchant referrals to us.
Integrated Payments (IP): Includes referral partner relationships with independent software vendors (ISVs), value-added resellers (VARs), and payment facilitators that target their technology customers as merchant referrals to us.
eCommerce: Includes a sales force that targets internet retail, online services and direct marketing merchants.

These sales channels utilize multiple strategies and leverage relationships with referral partners that sell our solutions to small and mid-sized merchants. We offer certain services on a white-label basis which enables them to be marketed under our partners’ brand. We select referral partners that enhance our distribution and augment our services with complimentary offerings. We believe our sales structure provides us with broad geographic coverage and access to various industries and verticals.

Financial Institution Services

Our financial institution client base is also generally well diversified and includes regional banks, community banks, credit unions and regional PIN debit networks. We generally focus on small to mid-sized institutions with less than $15 billion in assets. Smaller financial institutions generally do not have the scale or infrastructure typical of large institutions and are more likely to outsource their payment processing needs. We provide integrated card issuer processing, payment network processing and value-added services to our financial institutions clients. These services are discussed further below.

Integrated Card Issuer and Processing. We process and service credit, debit, ATM and prepaid transactions. We process and provide statement production, collections and inbound/outbound call centers. Our card processing solution includes processing and other services such as card portfolio analytics, program strategy and support, fraud and security management and chargeback and dispute services. We provide authorization support in the form of online or batch settlement, as well as real-time transaction research capability and archiving and daily and monthly cardholder reports for statistical analysis.

Value-added Services. We provide additional services to our financial institution clients that complement our issuing and processing services. These services include fraud protection, card production, prepaid cards, ATM driving, portfolio optimization, data analytics and card program marketing. We also provide network gateway and switching services that utilize our Jeanie PIN network. Our Jeanie network offers real-time electronic payment, network bill payment, single point settlement, shared deposit taking and customer select PINs.

We distribute our services to financial institutions by utilizing direct sales forces as well as a diverse group of referral partner relationships. These sales channels utilize multiple strategies and leverage relationships with core processors that sell our solutions to small and mid-sized financial institutions. We offer certain of our services on a white-label basis which enables them to be marketed under our client’s brand. We select resellers that enhance our distribution and augment our services with complementary offerings. Our relationships with core processors are necessary for developing the processing environments required by our financial institution clients. Many of our core processing relationships are non-contractual and continue for so long as an interface between us and the core processor is needed to accommodate one or more common financial institution customers.


36
 
 
 


Revenue
 
We generate revenue primarily by processing electronic payment transactions. Set forth below is a description of our revenues by segment and factors impacting segment revenues.

 Our Merchant Services segment revenues are 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 us and are reimbursable as the costs are passed through to and paid by our clients. These items primarily consist of Visa, Mastercard and other payment network fees. In addition, for sales through referral partners in which we are the primary party to the contract with the merchant, we record the full amount of the fees collected from the merchant as revenue. Associated residual payments made to referral partners are included in sales and marketing expenses. Merchant Services revenue also includes revenue from ancillary services such as fraud management, equipment sales and terminal rent. Revenue in our Merchant Services segment is impacted primarily by transaction volume, average transaction size, the mix of merchant types in our client portfolio, the performance of our merchant clients and the effectiveness of our distribution channels.
    
Our Financial Institution Services revenues are 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 our Jeanie network. Financial Institution Services revenue is impacted by the number of financial institutions using our services as well as their transaction volume. The number of financial institutions in the United States has declined as a result of prevailing economic conditions and consolidation, as well as other market and regulatory pressures. These factors have contributed to industry-wide pricing compression of the fees that financial institutions are willing to pay for payment processing.
 
Network Fees and Other Costs
 
Network fees and other costs primarily consist of pass through expenses incurred by us in connection with providing processing services to our clients, including Visa and Mastercard network association fees, payment network fees, third party processing expenses, telecommunication charges, postage and card production costs.
 
Net Revenue
 
Net revenue is revenue, less network fees and other costs and reflects revenue generated from the services we provide to our clients. Management uses net revenue to assess our operating performance. We believe that net revenue, when reviewed together with revenue, is meaningful to our investors in order to understand our performance.
 
Expenses
 
Set forth below is a brief description of the components of our expenses, aside from the network fees and other costs discussed above:
 
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 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 our technology platform and data centers, information technology costs for processing transactions, product development costs, software 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, occupancy and consulting costs. The nine months ended September 30, 2017 includes a charge related to a settlement agreement stemming from legacy litigation of an acquired company.

Depreciation and amortization expense consists of our depreciation expense related to investments in property, equipment and software as well as our amortization of intangible assets.

37
 
 
 



Interest expense—net consists primarily of interest on borrowings under our senior secured credit facilities less interest income earned on our cash and cash equivalents.

Income tax expense represents federal, state and local taxes based on income in multiple jurisdictions.

Non-operating income for the three and nine months ended September 30, 2017 consists of an unrealized gain relating to the change in the fair value of a deal contingent forward entered into in connection with the pending Worldpay acquisition, partially offset by the change in fair value of a tax receivable agreement (“TRA”) entered into as part of the acquisition of Mercury Payment Systems, LLC (“Mercury”). Non-operating expenses for the three and nine months ended September 30, 2016 primarily relate to the change in fair value of a TRA entered into as part of the acquisition of Mercury.

Non-Controlling Interest
 
As a result of the non-controlling ownership interests in Vantiv Holding held by Fifth Third, our results of operations include net income attributable to non-controlling interests. Future sales or redemptions of ownership interests in Vantiv Holding by Fifth Third will continue to reduce the amount recorded as non-controlling interest and increase net earnings attributable to our Class A stockholders. In addition, net income attributable to non-controlling interests includes the non-controlling interest related to a joint venture with a bank partner. See Note 6 - Controlling and Non-Controlling Interests in “Item 1 - Unaudited Consolidated Financial Statements” for more information.

Factors and Trends Impacting Our Business and Results of Operations
 
We expect a number of factors will impact our business, results of operations and financial condition. In general, our revenue is impacted by the number and dollar volume of card based transactions which in turn are impacted by general economic conditions, consumer spending and the emergence of new technologies and payment types, such as ecommerce, mobile payments, and prepaid cards. In our Merchant Services segment, our net revenues are impacted by the mix of the size of merchants that we provide services to as well as the mix of transaction volume by merchant category. In our Financial Institution Services segment, our net revenues are also impacted by the mix of the size of financial institutions to which we provide services as well as consolidation and market and industry pressures, which have contributed and are expected to continue to contribute to pricing compression of payment processing fees in this segment. We also expect our results of operations to be impacted by the factors discussed below.
 
Pro Forma Adjusted Net Income
 
We use pro forma adjusted net income for financial and operational decision making as a means to evaluate period-to-period comparisons of our performance and results of operations. Pro forma adjusted net income is also incorporated into performance metrics underlying certain share-based payments issued under the 2012 Vantiv, Inc. Equity Incentive Plan and our annual incentive plan. We believe pro forma adjusted net income provides useful information about our performance and operating results, enhances the overall understanding of past financial performance and future prospects and allows for greater transparency with respect to key metrics used by management in its financial and operational decision making.

In calculating pro forma adjusted net income, we make certain non-GAAP adjustments, as well as pro forma adjustments, to adjust our GAAP operating results for the items discussed below. This non-GAAP measure should be considered together with GAAP operating results.
 
Non-GAAP Adjustments

Transition, Acquisition and Integration Costs
 
In connection with our acquisitions, we incur costs associated with the acquisitions and related integration activities, consisting primarily of consulting fees for advisory, conversion and integration services and related personnel costs. Also included in these expenses are costs related to employee termination benefits and other transition activities. These transition, acquisition and integration costs are included in other operating costs and general and administrative expenses. Included in transition, acquisition and integration costs in the nine months ended September 30, 2017 is a $38 million charge to general and administrative expense related to a settlement agreement stemming from legacy litigation of an acquired company.


38
 
 
 


Share-Based Compensation
 
We have granted share-based awards to certain employees and members of our board of directors and intend to continue to grant additional share-based awards in the future. Share-based compensation is included in general and administrative expense.
 
Intangible Amortization Expense

These expenses represent amortization of intangible assets acquired through business combinations and customer portfolio and related asset acquisitions.

Non-operating (Income) Expense
 
Non-operating income for the three and nine months ended September 30, 2017 consists of an unrealized gain relating to the change in the fair value of a deal contingent forward entered into in connection with the pending Worldpay acquisition, partially offset by the change in fair value of a TRA entered into as part of the acquisition of Mercury. Non-operating expenses for the three and nine months ended September 30, 2016 primarily relate to the change in fair value of a TRA entered into as part of the acquisition of Mercury.
 

Pro Forma Adjustments

Income Tax Expense Adjustments
 
Our effective tax rate reported in our results of operations reflects the impact of our non-controlling interest not being taxed at the statutory corporate tax rate. For purposes of calculating pro forma adjusted net income, income tax expense is adjusted to reflect an effective tax rate assuming conversion of Fifth Third’s non-controlling interests into shares of Class A common stock, including the income tax effect of the non-GAAP adjustments described above. The adjusted effective tax rate for the three and nine months ended September 30, 2017 is 34.0% and includes the impact of excess tax benefits relating to the Company’s adoption of ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The adjusted effective tax rate is expected to remain at 34.0% for the remainder of 2017. This rate was 36% for the three and nine months ended September 30, 2016.

Tax Adjustments

In addition to the adjustment described above, income tax expense is also adjusted for the cash tax benefits resulting from certain tax attributes, primarily the amortization of tax intangible assets resulting from or acquired with our acquisitions, the tax basis step up associated with our separation from Fifth Third and the purchase or exchange of units of Vantiv Holding, net of payment obligations under TRAs established at the time of our initial public offering (“IPO”) and in connection with our acquisition of Mercury. The estimate of the cash tax benefits is based on the consistent and highly predictable realization of the underlying tax attributes.

The following table provides a schedule of the tax adjustments discussed above which are reflected in the pro forma adjusted net income table below:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Fifth Third Tax Benefit (a)
$
6,382

 
$
11,927

 
$
10,918

 
$
35,781

Mercury Tax Benefit (b)
3,168

 
4,665

 
9,506

 
13,995

Total Tax Benefits
9,550

 
16,592

 
20,424

 
49,776

Less: TRA payments (c)
(7,662
)
 
(14,103
)
 
(16,904
)
 
(42,309
)
TRA Tax Benefits (d)
1,888

 
2,489

 
3,520

 
7,467

Acquired Tax Benefits (e)
31,676

 
16,413

 
93,201

 
47,575

Pro Forma Tax Benefits (f)
$
33,564

 
$
18,902

 
$
96,721

 
$
55,042

(a) Represents the cash tax benefits which are shared with Fifth Third Bank pursuant to a TRA.
(b) Represents the cash tax benefits shared with Mercury former shareholders pursuant to a TRA.

39
 
 
 


(c) Represents the amount of the TRA payment to be made to Fifth Third Bank and Mercury shareholders (85% payment).
(d) Represents the 15% benefit that we retain for the shared tax benefits related to the TRAs.
(e) Represents the tax benefits wholly owned by us, acquired through acquisition or termination of TRAs in which we retain 100% of the benefit.
(f) Represents the net cash tax benefit retained by us from the use of the tax attributes, as reflected in the Pro Forma Tax Adjustments.
 
The table below provides a reconciliation of GAAP income before applicable income taxes to pro forma adjusted net income for the three and nine months ended September 30, 2017 and 2016:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
 
 
 
 
Income before applicable income taxes
$
151,550

 
$
126,328

 
$
312,579

 
$
319,504

Non-GAAP Adjustments:
 
 
 
 
 
 
 
Transition, acquisition and integration costs
5,116

 
2,761

 
67,886

 
22,332

Share-based compensation
13,607

 
9,600

 
35,068

 
25,892

Intangible amortization
55,280

 
47,797

 
161,480

 
142,704

Non-operating (income) expenses
(21,207
)
 
4,633

 
(13,672
)
 
14,949

Non-GAAP Adjusted Income Before Applicable Taxes
204,346

 
191,119

 
563,341

 
525,381

Less: Pro Forma Adjustments
 
 
 
 
 
 
 
Income tax expense
69,478

 
68,803

 
191,536

 
189,137

Tax adjustments
(33,564
)
 
(18,902
)
 
(96,721
)
 
(55,042
)
Total pro forma tax expense
35,914

 
49,901

 
94,815

 
134,095

Pro forma tax rate
18
%
 
26
%
 
17
%
 
26
%
 
 
 
 
 
 
 
 
   JV non-controlling interest
459

 
354

 
1,143

 
1,581

Pro Forma Adjusted Net Income
$
167,973

 
$
140,864

 
$
467,383

 
$
389,705


Results of Operations
 
The following tables set forth our statements of income in dollars and as a percentage of net revenue for the periods presented.
 
Three Months Ended September 30,
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
 
(dollars in thousands)
Revenue
$
1,033,765

 
$
914,019

 
$
119,746

 
13
%
Network fees and other costs
479,533

 
423,361

 
56,172

 
13
%
Net revenue
554,232

 
490,658

 
63,574

 
13
%
Sales and marketing
173,779

 
153,248

 
20,531

 
13
%
Other operating costs
79,482

 
72,162

 
7,320

 
10
%
General and administrative
49,607

 
40,727

 
8,880

 
22
%
Depreciation and amortization
82,500

 
66,086

 
16,414

 
25
%
Income from operations
$
168,864

 
$
158,435

 
$
10,429

 
7
%
Non-financial data:
 

 
 

 
 

 
 

Transactions (in millions)
6,550

 
6,270

 
 

 
4
%


40
 
 
 


As a Percentage of Net Revenue
Three Months Ended September 30,
 
2017
 
2016
Net revenue
100.0
%
 
100.0
%
Sales and marketing
31.4
%
 
31.2
%
Other operating costs
14.3
%
 
14.7
%
General and administrative
9.0
%
 
8.3
%
Depreciation and amortization
14.9
%
 
13.5
%
Income from operations
30.4
%
 
32.3
%

 
Nine Months Ended September 30,
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
 
(dollars in thousands)
Revenue
$
2,960,731

 
$
2,623,859

 
$
336,872

 
13
 %
Network fees and other costs
1,406,358

 
1,221,510

 
184,848

 
15
 %
Net revenue
1,554,373

 
1,402,349

 
152,024

 
11
 %
Sales and marketing
497,082

 
433,730

 
63,352

 
15
 %
Other operating costs
234,347

 
219,464

 
14,883

 
7
 %
General and administrative
189,632

 
133,831

 
55,801

 
42
 %
Depreciation and amortization
236,964

 
199,550

 
37,414

 
19
 %
Income from operations
$
396,348

 
$
415,774

 
$
(19,426
)
 
(5
)%
Non-financial data:
 
 
 
 
 
 
 
Transactions (in millions)
19,412

 
18,273

 
 
 
6
 %

As a Percentage of Net Revenue
Nine Months Ended September 30,
 
2017
 
2016
Net revenue
100.0
%
 
100.0
%
Sales and marketing
32.0
%
 
30.9
%
Other operating costs
15.1
%
 
15.7
%
General and administrative
12.2
%
 
9.5
%
Depreciation and amortization
15.2
%
 
14.2
%
Income from operations
25.5
%
 
29.7
%


Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016 and Nine Months Ended September 30, 2017 Compared to the Nine Months Ended September 30, 2016

Revenue

Revenue increased 13% to $1,033.8 million for the three months ended September 30, 2017 from $914.0 million for the three months ended September 30, 2016. The increase during the three months ended September 30, 2017 was due primarily to transaction growth of 4%. Additionally, growth in our Merchant Services segment as a result of our continued penetration of small and mid-sized merchants contributed to higher net revenue per transaction.

Revenue increased 13% to $2,960.7 million for the nine months ended September 30, 2017 from $2,623.9 million for the nine months ended September 30, 2016. The increase during the nine months ended September 30, 2017 was due primarily to transaction growth of 6%. Additionally, growth in our Merchant Services segment as a result of our continued penetration of small and mid-sized merchants contributed to higher net revenue per transaction.


41
 
 
 


Network Fees and Other Costs

Network fees and other costs increased 13% to $479.5 million for the three months ended September 30, 2017 from $423.4 million for the three months ended September 30, 2016. The increase was due primarily to transaction growth of 4% and an increase in third party processing costs.

Network fees and other costs increased 15% to $1,406.4 million for the nine months ended September 30, 2017 from $1,221.5 million for the nine months ended September 30, 2016. The increase was due primarily to transaction growth of 6% and an increase in third party processing costs.

Net Revenue

Net revenue, which is revenue less network fees and other costs, increased 13% to $554.2 million for the three months ended September 30, 2017 from $490.7 million for the three months ended September 30, 2016 due to the factors discussed above.

Net revenue, which is revenue less network fees and other costs, increased 11% to $1,554.4 million for the nine months ended September 30, 2017 from $1,402.3 million for the nine months ended September 30, 2016 due to the factors discussed above.

Sales and Marketing

Sales and marketing expense increased 13% to $173.8 million for the three months ended September 30, 2017 from $153.2 million for the three months ended September 30, 2016. The increase was primarily attributable to higher residual payments to referral partners as a result of increased revenue in our Merchant Services segment in connection with the continued penetration of small and mid-sized merchants.

Sales and marketing expense increased 15% to $497.1 million for the nine months ended September 30, 2017 from $433.7 million for the nine months ended September 30, 2016. The increase was primarily attributable to higher residual payments to referral partners as a result of increased revenue in our Merchant Services segment in connection with the continued penetration of small and mid-sized merchants.
    
Other Operating Costs
 
Other operating costs increased 10% to $79.5 million for the three months ended September 30, 2017 from $72.2 million for the three months ended September 30, 2016. When excluding transition, acquisition and integration costs, other operating costs increased 9% to $76.9 million for the three months ended September 30, 2017 from $70.4 million for the three months ended September 30, 2016. The increase is primarily attributable to an increase in information technology and operation costs, in support of our revenue growth and the acquisition of Paymetric.

Other operating costs increased 7% to $234.3 million for the nine months ended September 30, 2017 from $219.5 million for the nine months ended September 30, 2016. When excluding transition, acquisition and integration costs, other operating costs increased 6% to $223.5 million for the nine months ended September 30, 2017 from $211.7 million for the nine months ended September 30, 2016. The increase is primarily attributable to an increase in information technology and operation costs, in support of our revenue growth and the acquisition of Paymetric.
 

42
 
 
 


General and Administrative

General and administrative expenses increased 22% to $49.6 million for the three months ended September 30, 2017 from $40.7 million for the three months ended September 30, 2016. When excluding transition, acquisition and integration costs and share-based compensation costs, general and administrative expenses increased 11% to $33.5 million for the three months ended September 30, 2017 from $30.1 million for the three months ended September 30, 2016. The increase is primarily attributable to the acquisition of Paymetric.

General and administrative expenses increased 42% to $189.6 million for the nine months ended September 30, 2017 from $133.8 million for the nine months ended September 30, 2016. When excluding transition, acquisition and integration costs, which include a $38 million charge related to a settlement agreement stemming from legacy litigation of an acquired company, as well as share-based compensation costs, general and administrative expenses increased 4% to $97.5 million for the nine months ended September 30, 2017 from $93.4 million for the nine months ended September 30, 2016. The increase is primarily attributable to the acquisition of Paymetric.

Depreciation and Amortization

Depreciation expense associated with our property, equipment and software increased to $27.3 million for the three months ended September 30, 2017 from $16.4 million for the three months ended September 30, 2016. The increase is primarily attributable to our recent acquisitions.

Depreciation expense associated with our property, equipment and software increased to $70.5 million for nine months ended September 30, 2017 from $50.5 million for the nine months ended September 30, 2016. The increase is primarily attributable to our recent acquisitions.

Amortization expense associated with intangible assets, which consist primarily of customer relationship intangible assets, increased to $55.2 million for the three months ended September 30, 2017 from $49.7 million for the three months ended September 30, 2016. The increase is primarily attributable to an increase in amortization of customer relationship intangible assets as a result of recent acquisitions.

Amortization expense associated with intangible assets, which consist primarily of customer relationship intangible assets, increased to $166.5 million for the nine months ended September 30, 2017 from $149.0 million for the nine months ended September 30, 2016. The increase is primarily attributable to an increase in amortization of customer relationship intangible assets as a result of recent acquisitions.
 
Income from Operations

Income from operations increased 7% to $168.9 million for the three months ended September 30, 2017 from $158.4 million for the three months ended September 30, 2016.

Income from operations decreased 5% to $396.3 million for the nine months ended September 30, 2017 from $415.8 million for the nine months ended September 30, 2016.

Interest Expense—Net

Interest expense—net increased to $38.5 million for the three months ended September 30, 2017 from $27.5 million for the three months ended September 30, 2016. The increase in interest expense—net is primarily attributable to our October 2016 debt refinancing, which resulted in an increase in the amount of outstanding debt, our recent incremental Term B loan and our interest rate swaps.

Interest expense—net increased to $97.4 million for the nine months ended September 30, 2017 from $81.3 million for the nine months ended September 30, 2016. This increase in interest expense—net is primarily attributable to our October 2016 debt refinancing, which resulted in an increase in the amount of outstanding debt, our recent incremental Term B loan and our interest rate swaps.


43
 
 
 


Non-Operating Income (Expense)

Non-operating income was $21.2 million and $13.7 million for the three and nine months ended September 30, 2017, respectively, consisting of an unrealized gain relating to the change in the fair value of a deal contingent forward entered into in connection with the pending Worldpay acquisition, partially offset by the change in fair value of a TRA entered into as part of the acquisition of Mercury.

Non-operating expense was $4.6 million and $14.9 million for the three and nine months ended September 30, 2016, respectively, primarily relating to the change in fair value of the TRA entered into as part of the acquisition of Mercury.

Income Tax Expense

Income tax expense for the three months ended September 30, 2017 was $44.6 million compared to $39.3 million for the three months ended September 30, 2016, reflecting effective rates of 29.5% and 31.1%, respectively. Income tax expense for the nine months ended September 30, 2017 was $83.5 million compared to $101.6 million for the nine months ended September 30, 2016, reflecting effective rates of 26.7% and 31.8%, respectively. Our effective rate reflects the impact of our non-controlling interests not being taxed at the statutory corporate tax rates. The effective tax rate for the three and nine months ended September 30, 2017, includes a $1.9 million and a $16.0 million credit, respectively, to income tax expense as a result of our adoption of ASU 2016-09, Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting.

Segment Results

The following tables provide a summary of the components of segment profit for our two segments for the three and nine months ended September 30, 2017 and 2016.

Merchant Services


Three Months Ended September 30,
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
 
(dollars in thousands)
Total revenue
$
916,630

 
$
793,860

 
$
122,770

 
15
%
Network fees and other costs
447,863

 
389,448

 
58,415

 
15
%
Net revenue
468,767

 
404,412

 
64,355

 
16
%
Sales and marketing
168,022

 
147,663

 
20,359

 
14
%
Segment profit
$
300,745

 
$
256,749

 
$
43,996

 
17
%
Non-financial data:
 

 
 

 
 

 
 
Transactions (in millions)
5,702

 
5,241

 
 

 
9
%

 
Nine Months Ended September 30,
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
 
(dollars in thousands)
Total revenue
$
2,615,341

 
$
2,251,033

 
$
364,308

 
16
%
Network fees and other costs
1,311,539

 
1,117,602

 
193,937

 
17
%
Net revenue
1,303,802

 
1,133,431

 
170,371

 
15
%
Sales and marketing
479,628

 
416,107

 
63,521

 
15
%
Segment profit
$
824,174

 
$
717,324

 
$
106,850

 
15
%
Non-financial data:
 
 
 
 
 
 
 
Transactions (in millions)
16,716

 
15,244

 
 
 
10
%


44
 
 
 


Net Revenue

Net revenue in this segment increased 16% to $468.8 million for the three months ended September 30, 2017 from $404.4 million for the three months ended September 30, 2016. The increase during the three months ended September 30, 2017 was due primarily to transaction growth of 9% and a 6% increase in net revenue per transaction associated with our continued penetration of small and mid-sized merchants.

Net revenue in this segment increased 15% to $1,303.8 million for the nine months ended September 30, 2017 from $1,133.4 million for the nine months ended September 30, 2016. The increase during the nine months ended September 30, 2017 was primarily due to transaction growth of 10% and a 5% increase in net revenue per transaction associated with our continued penetration of small and mid-sized merchants.

Sales and Marketing
 
Sales and marketing expense increased 14% to $168.0 million for the three months ended September 30, 2017 from $147.7 million for the three months ended September 30, 2016. The increase was primarily attributable to higher residual payments to referral partners as a result of increased revenue in connection with the continued penetration of small and mid-sized merchants.

Sales and marketing expense increased 15% to $479.6 million for the nine months ended September 30, 2017 from $416.1 million for the nine months ended September 30, 2016. The increase was primarily attributable to higher residual payments to referral partners as a result of increased revenue in connection with the continued penetration of small and mid-sized merchants.

Financial Institution Services
 
Three Months Ended September 30,
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
 
(dollars in thousands)
Total revenue
$
117,135

 
$
120,159

 
$
(3,024
)
 
(3
)%
Network fees and other costs
31,670

 
33,913

 
(2,243
)
 
(7
)%
Net revenue
85,465

 
86,246

 
(781
)
 
(1
)%
Sales and marketing
5,757

 
5,585

 
172

 
3
 %
Segment profit
$
79,708

 
$
80,661

 
$
(953
)
 
(1
)%
Non-financial data:
 

 
 

 
 

 
 

Transactions (in millions)
848

 
1,029

 
 

 
(18
)%

 
Nine Months Ended September 30,
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
 
(dollars in thousands)
Total revenue
$
345,390

 
$
372,826

 
$
(27,436
)
 
(7
)%
Network fees and other costs
94,819

 
103,908

 
(9,089
)
 
(9
)%
Net revenue
250,571

 
268,918

 
(18,347
)
 
(7
)%
Sales and marketing
17,454

 
17,623

 
(169
)
 
(1
)%
Segment profit
$
233,117

 
$
251,295

 
$
(18,178
)
 
(7
)%
Non-financial data:
 
 
 
 
 
 
 
Transactions (in millions)
2,696

 
3,029

 
 
 
(11
)%


Net Revenue

Net revenue in this segment decreased slightly for the three months ended September 30, 2017 when compared to the three months ended September 30, 2016. The decrease during the three months ended September 30, 2017 was due to an 18% decrease in transactions resulting from the de-conversion of a major client.


45
 
 
 


Net revenue in this segment decreased 7% to $250.6 million for the nine months ended September 30, 2017 from $268.9 million for the nine months ended September 30, 2016. The decrease during the nine months ended September 30, 2017 was due to an 11% decrease in transactions impacted by the de-conversion of a major client and compression from the Fifth Third contract renewal.

Sales and Marketing
 
Sales and marketing expense increased $0.2 million to $5.8 million for the three months ended September 30, 2017 from $5.6 million for the three months ended September 30, 2016.

Sales and marketing expense decreased $0.2 million to $17.5 million for the nine months ended September 30, 2017 from $17.6 million for the nine months ended September 30, 2016.

Liquidity and Capital Resources
 
Our liquidity is funded primarily through cash provided by operations, debt and a line of credit, which is generally sufficient to fund our operations, planned capital expenditures, tax distributions made to our non-controlling interest holders, required payments under TRAs, debt service and acquisitions. As of September 30, 2017, our principal sources of liquidity consisted of $92.6 million of cash and cash equivalents and $291.0 million of availability under the revolving portion of our senior secured credit facilities. Our total indebtedness, including capital leases, was $4.7 billion as of September 30, 2017.

We have approximately $243 million of share repurchase authority remaining as of September 30, 2017 under a program authorized by the board of directors in October 2016 to repurchase up to an additional $250 million of our Class A common stock.

Purchases under the repurchase programs 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 programs have no expiration date and we may discontinue purchases at any time that management determines additional purchases are not warranted.

In connection with our IPO, we entered into the Exchange Agreement with Fifth Third, under which Fifth Third has the right, from time to time, to exchange their units in Vantiv Holding for shares of our Class A common stock or, at our option, cash. If we choose to satisfy the exchange in cash, we anticipate that we will fund such exchange through cash from operations, funds available under the revolving portion of our senior secured credit facilities, equity financings or a combination thereof.

We do not intend to pay cash dividends on our 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.
 
In addition to principal needs for liquidity discussed above, our strategy includes investing in and leveraging our integrated business model and technology platform, broadening and deepening our distribution channels, entry into new geographic markets and development of additional payment processing services. Our near-term priorities for capital allocation include debt reduction, investing in our operations to support organic growth and share repurchases. Long-term priorities remain unchanged and include investing for growth through strategic acquisitions and returning excess capital to shareholders.

 We anticipate that to the extent that we require additional liquidity, it will be funded through the incurrence of other indebtedness, equity financings or a combination thereof. We cannot assure that we will be able to obtain this additional liquidity on reasonable terms, or at all. Additionally, our liquidity and our ability to meet our obligations and fund our capital requirements are also dependent on our future financial performance, which is subject to general economic, financial and other factors that are beyond our control. Accordingly, we cannot assure that our business will generate sufficient cash flow from operations or that future borrowings will be available under our credit facilities or otherwise to meet our liquidity needs. If we decide to pursue one or more significant acquisitions, we may incur additional debt or sell additional equity to finance such acquisitions.



46
 
 
 


Cash Flows
 
The following table presents a summary of cash flows from operating, investing and financing activities for the nine months ended September 30, 2017 and 2016 (in thousands).
 
Nine Months Ended September 30,
 
2017
 
2016
Net cash provided by operating activities
$
527,666

 
$
430,395

Net cash used in investing activities
(651,581
)
 
(117,524
)
Net cash provided by (used in) financing activities
77,405

 
(326,149
)
 
Cash Flow from Operating Activities
 
Net cash provided by operating activities was $527.7 million for the nine months ended September 30, 2017 as compared to $430.4 million for the nine months ended September 30, 2016. The increase is due primarily to a decrease in the accounts receivable balance and changes in net settlement asset and obligations. Settlement assets and obligations can fluctuate due to seasonality as well as day of the month end.

Cash Flow from Investing Activities
 
Net cash used in investing activities was $651.6 million for the nine months ended September 30, 2017 as compared to $117.5 million for the nine months ended September 30, 2016. The increase was primarily due to the acquisition of Paymetric.

Cash Flow from Financing Activities
 
Net cash provided by financing activities was $77.4 million for the nine months ended September 30, 2017 as compared to net cash used of $326.1 million for the nine months ended September 30, 2016. Cash provided by financing activities for the nine months ended September 30, 2017 consisted primarily of proceeds from issuance of additional seven-year term B loans and borrowings under our revolving credit facility partially offset by the repurchase of Class A common stock, repayment of debt and capital leases, payments under the tax receivable agreements and addendums and distributions to non-controlling interests. Cash used in financing activities for the nine months ended September 30, 2016 consisted primarily of the repayment of debt and capital leases, repurchases of Class A common stock, and payments under the tax receivable agreements and addendums an distributions to non-controlling interests.
  
Credit Facilities

In October 2016, Vantiv, LLC completed a debt refinancing by entering into a second amended and restated loan agreement (“Second Amended Loan Agreement”). The Second Amended Loan Agreement provides for senior secured credit facilities comprised of a $2.5 billion tranche A loan maturing in October 2021, a $765.0 million tranche B loan maturing in October 2023 and a $650.0 million revolving credit facility maturing in October 2021.

On August 7, 2017, we funded the Fifth Third share purchase discussed in Note 6 - Controlling and Non-controlling Interests in “Item 1 - Unaudited Consolidated Financial Statements”, by amending the Second Amended Loan Agreement to permit Vantiv LLC to obtain approximately $1.27 billion of additional seven-year term B loans (the Second Amended Loan Agreement, as so amended, the “Existing Loan Agreement”).

At September 30, 2017, we have $2.4 billion and $2.0 billion outstanding under the term A and term B loans, respectively, and there was approximately $359.0 million outstanding borrowings on the revolving credit facility. See additional discussion in Note 4 – Long-term Debt in “Item 1 - Unaudited Consolidated Financial Statements”.

See Note 12 - Pending Worldpay Transaction in “Item 1 - Unaudited Consolidated Financial Statements” for details on the financing relating to the transaction.


47
 
 
 


The Existing Loan Agreement requires us to maintain a leverage ratio no greater than established thresholds (based upon the ratio of total funded debt to consolidated EBITDA, as defined in the loan agreement) and a minimum interest coverage ratio (based upon the ratio of consolidated EBITDA to interest expense), which are tested quarterly based on the last four fiscal quarters, commencing on September 30, 2016. The required financial ratios become more restrictive over time, with the specific ratios required by period set forth in the below table.

Period
 
Leverage
Ratio
(must not exceed)
 
Interest Coverage
Ratio
(must exceed)
July 1, 2016 to September 30, 2016
 
6.25 to 1.00
 
4.00 to 1.00
December 31, 2016 to September 30, 2017
 
5.50 to 1.00
 
4.00 to 1.00
December 31, 2017 to September 30, 2018
 
4.75 to 1.00
 
4.00 to 1.00
December 31, 2018 and thereafter
 
4.25 to 1.00
 
4.00 to 1.00
 
As of September 30, 2017, we were in compliance with these covenants with a leverage ratio of 4.75 and an interest coverage ratio of 8.50.

Interest Rate Swaps and Caps

As of September 30, 2017, we have a total of 4 outstanding interest rate swaps and 6 interest rate cap agreements that were designated as cash flow hedges of interest rate risk. See Note 5 - Derivatives and Hedging Activities in “Item 1 - Unaudited Consolidated Financial Statements” for more information about the interest rate swaps and caps.

Tax Receivable Agreements
 
As of September 30, 2017, we are party to several TRAs in which we agree to make payments to various parties of 85% of the federal, state, local and foreign income tax benefits realized by us as a result of certain tax deductions. Payments under the TRAs will be based on our tax reporting positions and are only required to the extent we realize cash savings as a result of the underlying tax attributes. The cash savings realized by us are computed by comparing our actual income tax liability to the amount of such taxes we would have been required to pay had there been no deductions related to the tax attributes discussed below. We will retain the benefit of the remaining 15% of the cash savings associated with the TRAs. We currently have the following three TRAs:

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

The Fifth Third TRA in which we realize 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 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, we evaluate the assumptions underlying the TRA obligations.

In connection with the Fifth Third share purchase discussed in Note 6 - Controlling and Non-controlling Interests in “Item 1 - Unaudited Consolidated Financial Statements”, we recorded a liability of approximately $647.5 million during the quarter ending September 30, 2017 under the tax receivable agreements we entered into with Fifth Third Bank at the time of its initial public offering. This liability is based on the closing share price of our Class A common stock on August 4, 2017.
    
During 2016, we terminated a portion of the obligations under the Fifth Third TRA. In addition to the Fifth Third TRA settlement, the Fifth Third TRA Addendum contains the following provisions to acquire a significant portion of the remaining Fifth Third TRA:

As of September 30, 2017, the Fifth Third TRA Addendum provides that we may be obligated to pay up to a total of

48
 
 
 


approximately $123.9 million to Fifth Third to terminate and settle certain remaining obligations under the Fifth Third TRA and the NPC TRA, totaling an estimated $275.8 million, the difference of which will be recorded as an addition to paid-in capital upon the exercise of the Call Options or Put Options (as defined below).
    
As of September 30, 2017, the following are the remaining terms under the Fifth Third TRA Addendum. Beginning December 1, 2017, March 1, 2018, June 1, 2018, September 1, 2018 and December 1, 2018, and ending December 10, 2017, March 10, 2018, June 10, 2018, September 10, 2018 and December 10, 2018, respectively, we are granted call options (collectively, the “Call Options”) pursuant to which certain of our additional obligations under the Fifth Third TRA and the NPC TRA would be terminated and settled in consideration for cash payments of $16.6 million, $25.6 million, $26.4 million, $27.2 million and $28.1 million, respectively.

Under the remaining terms of the Fifth Third TRA Addendum, in the unlikely event we do not exercise the relevant Call Option, Fifth Third is granted put options beginning December 20, 2017, March 20, 2018, June 20, 2018, September 20, 2018 and December 20, 2018, and ending December 31, 2017, March 31, 2018, June 30, 2018, September 30, 2018 and December 31, 2018, respectively (collectively, the “Put Options”), pursuant to which certain of our additional obligations would be terminated and settled in consideration for cash payments with similar amounts to the Call Options.

In March, June and September 2017, we made payments of $15.1 million, $15.6 million and $16.1, respectively, pursuant to the Fifth Third TRA Holders under the terms of the Fifth Third TRA Addendum. These payments resulted in a net gain recorded in equity of approximately $45.3 million after taxes.
        
Since Fifth Third is a significant stockholder, a special committee of our board of directors comprised of independent, disinterested directors authorized the TRA Addendum.

During 2015, we entered into 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 the remaining Mercury TRA:

As of September 30, 2017, the following are the remaining terms under the Mercury TRA Addendum. Beginning December 1st of each of 2017 and 2018, and ending June 30th of 2018 and 2019, respectively, we are granted call options (collectively, the "Call Options") pursuant to which certain of our additional obligations under the Mercury TRA would be terminated in consideration for cash payments of $38.0 million and $43.0 million, respectively.

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

In June 2017 and 2016, we exercised the December 2016 and 2015 Call Options under the Mercury TRA Addendum and we made the related $38.1 million and $41.4 million payments to the Mercury TRA Holders.

Except to the extent our obligations under the Mercury TRA, the Fifth Third TRA and the NPC TRA have been terminated and settled in full in accordance with the terms of the Mercury TRA and Fifth Third TRA Addendums, the Mercury TRA, Fifth Third TRA and the NPC TRA will each remain in effect, and the parties thereto will continue to have all rights and obligations thereunder.

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 8 - Fair Value Measurements in “Item 1 - Unaudited Consolidated Financial Statements”).
    
The timing and/or amount of aggregate payments due under the TRAs outside of the call/put structures may vary based on a number of factors, including the amount and timing of the taxable income we generate 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. We made payments under the TRA obligations of approximately $55.7 million and $53.5 million in January 2017 and January 2016, respectively. Unless settled under the terms of the repurchase addenda, the terms of the TRAs will continue until all underlying tax benefits have been utilized or expired.

49
 
 
 



If Fifth Third had exchanged its remaining Class B units of Vantiv Holding all for shares of Class A common stock on September 30, 2017, we would have recorded an additional full and undiscounted TRA obligation of approximately $0.6 billion. This estimate is subject to material change based on changes in Fifth Third’s tax basis in the partnership interest, changes in tax rates, or significant changes in our stock price.

Contractual Obligations
 
Except for the August 2017 $1.27 billion incremental Term B loan borrowing presented in Note 4 - Long-Term Debt in “Item 1 - Unaudited Consolidated Financial Statements”, there have been no significant changes to contractual obligations and commitments compared to those disclosed in our Annual Report on Form 10-K as of December 31, 2016 filed with the SEC on February 8, 2017.

Critical Accounting Policies and Estimates
 
Our discussion and analysis of our financial condition and results of operations are based upon our unaudited consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our critical estimates giving consideration to a combination of factors, including historical experience, current conditions and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

During the nine months ended September 30, 2017, we have not adopted any new critical accounting policies, have not changed any critical accounting policies and have not changed the application of any critical accounting policies from the year ended December 31, 2016. Our critical accounting policies and estimates are described fully within Management’s Discussion and Analysis of Financial Condition and Results of Operations included within our Annual Report on Form 10-K filed with the SEC on February 8, 2017.

Off-Balance Sheet Arrangements
 
We have no off-balance sheet financing arrangements.

50
 
 
 



Item 3. Quantitative and Qualitative Disclosure About Market Risk
 
We are exposed to interest rate risk in connection with our senior secured credit facilities, which are subject to variable interest rates. We hedge a portion of our exposure to interest rate fluctuations through the utilization of interest rate swaps and caps in order to mitigate the risk of this exposure.

As of September 30, 2017 we had a total of 4 outstanding interest rate swaps covering an exposure period from January 2017 through January 2019 and have a combined notional balance of $500 million. In addition, we have 6 interest rate cap agreements with a combined $1.0 billion notional balance and a cap strike rate of 0.75% covering an exposure period from January 2017 to January 2020.
 
Based on the amount outstanding under our senior secured credit facilities at September 30, 2017, a change in one percentage point in variable interest rates, after the effect of our interest rate swaps and caps effective at September 30, 2017, would cause an increase or decrease in interest expense of $32.7 million on an annual basis.

51
 
 
 



Item 4. Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2017. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives. Based on the evaluation of our disclosure controls and procedures as of September 30, 2017, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.
 
There were no changes in our internal control over financial reporting that occurred during the three months ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



52
 
 
 


PART II - OTHER INFORMATION

Item 1. Legal Proceedings
 
From time to time, we are involved in various litigation matters arising in the ordinary course of our 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 adverse effect on us, except as discussed in Note 7 - Commitments, Contingencies and Guarantees in Part I, Item 1. See the information under Legal Reserve in Note 7 - Commitments, Contingencies and Guarantees, which we incorporate herein by reference.

Item 1A. Risk Factors
 
You should carefully consider the risks described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016. Additionally, our Preliminary Proxy Statement filed September 22, 2017, includes “Risk Factors” related to the pending Worldpay transaction. These risks could materially affect our business, results of operations or financial condition, cause the trading price of our common stock to decline materially or cause our actual results to differ materially from those expected or those expressed in any forward looking statements made by or on behalf of Vantiv. These risks are not exclusive, and additional risks to which we are subject include, but are not limited to, the risks of our businesses described elsewhere in this Quarterly Report on Form 10-Q. There have been no material changes from the risk factors disclosed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016 or in our Preliminary Proxy Statement.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
The following table sets forth information regarding shares of Class A common stock repurchased by us during the three months ended September 30, 2017:
Period
 
Total Number
of Shares
Purchased
(1)(2)
 
Average Price
Paid per
Share
 
Total Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
(2)
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in millions) (2)
July 1, 2017 to July 31, 2017
 
6,254

 
$
64.18

 

 
$
243.2

August 1, 2017 to August 31, 2017
 
43,336

 
$
70.69

 

 
$
243.2

September 1, 2017 to September 30, 2017
 

 
$

 

 
$
243.2

(1) 
Includes shares of Class A common stock surrendered to us to satisfy tax withholding obligations in connection with the vesting of restricted stock awards.
(2) 
In October 2016, our board of directors authorized a program to repurchase up to $250 million of our Class A common stock. 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 we may discontinue purchases at any time that management determines additional purchases are not warranted.

Item 5. Other Information
None.
    

53
 
 
 



Item 6. Exhibits
 
See the Exhibit Index immediately following the signature page of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.



54
 
 
 


SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
VANTIV, INC.
 
 
 
 
Dated:
October 26, 2017
By:
/s/ STEPHANIE L. FERRIS
 
 
 
Name: Stephanie L. Ferris
 
 
 
Title: Chief Financial Officer
 
 
 
 
 
 
 
 
Dated:
October 26, 2017
By:
/s/ CHRISTOPHER THOMPSON
 
 
 
Name: Christopher Thompson
 
 
 
Title: SVP, Controller and Chief Accounting Officer









































55
 
 
 


EXHIBIT INDEX
 




56