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EX-32 - EXHIBIT 32 - Worldpay, Inc.wpex-32x2018331.htm
EX-31.2 - EXHIBIT 31.2 - Worldpay, Inc.wpex-312x2018331.htm
EX-31.1.2 - EXHIBIT 31.1.2 - Worldpay, Inc.wpex-3112x2018331.htm
EX-31.1.1 - EXHIBIT 31.1.1 - Worldpay, Inc.wpex-3111x2018331.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 March 31, 2018
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
Commission File Number: 001-35462 
 
 
 
Worldpay, 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)
Registrant’s telephone number, including area code:
(513) 900-5250
 
 
 

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 March 31, 2018, there were 297,407,507 shares of the registrant’s Class A common stock outstanding and 15,252,826 shares of the registrant’s Class B common stock outstanding.

 
 
 
 
 
 
 
 
 
 



WORLDPAY, INC.
FORM 10-Q
 
For the Quarterly Period Ended March 31, 2018
 
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 this report. 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

Worldpay, Inc.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Unaudited
(In millions, except share data)
 


 
Three Months Ended March 31,
 
 
2018
 
2017
Revenue
 
$
850.7

 
$
928.2

Network fees and other costs(1)
 

 
458.1

Sales and marketing
 
266.0

 
155.0

Other operating costs
 
155.1

 
75.9

General and administrative
 
250.1

 
89.3

Depreciation and amortization
 
207.2

 
76.1

(Loss) Income from operations
 
(27.7
)
 
73.8

Interest expense—net
 
(75.2
)
 
(29.2
)
Non-operating expense
 
(8.6
)
 
(4.1
)
(Loss) income before applicable income taxes
 
(111.5
)
 
40.5

Income tax (benefit) expense
 
(13.2
)
 
5.2

Net (loss) income
 
(98.3
)
 
35.3

Less: Net loss (income) attributable to non-controlling interests
 
0.7

 
(6.4
)
Net (loss) income attributable to Worldpay, Inc.
 
$
(97.6
)
 
$
28.9

Net (loss) income per share attributable to Worldpay, Inc. Class A common stock:
 
 
 
 
Basic
 
$
(0.36
)
 
$
0.18

Diluted
 
$
(0.36
)
 
$
0.17

Shares used in computing net (loss) income per share of Class A common stock:
 
 
 
 
Basic
 
274,098,480

 
160,876,177

Diluted
 
274,098,480

 
197,496,680


(1) See the Revenue Recognition section with Footnote 1 - Basis of Presentation and Summary of Significant Accounting Policies to the Notes to Unaudited Consolidated Financial Statements which addresses the change in presentation.

See Notes to Unaudited Consolidated Financial Statements.


4
 
 
 


Worldpay, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Unaudited
(In millions)
 
 
 
Three Months Ended March 31,
 
 
2018
 
2017
Net (loss) income
 
$
(98.3
)
 
$
35.3

Other comprehensive (loss) income, net of tax:
 
 

 
 

Gain on hedging activities and foreign currency translation
 
22.0

 
4.8

Comprehensive (loss) income
 
(76.3
)
 
40.1

Less: Comprehensive income attributable to non-controlling interests
 
(0.4
)
 
(7.6
)
Comprehensive (loss) income attributable to Worldpay, Inc.
 
$
(76.7
)
 
$
32.5

 
See Notes to Unaudited Consolidated Financial Statements.


5
 
 
 


Worldpay, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Unaudited
(In millions, except share data) 
 
March 31,
2018
 
December 31,
2017
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
459.4

 
$
126.5

Accounts receivable—net
1,491.8

 
986.6

Merchant float
1,894.3

 

Settlement assets
3,578.6

 
142.0

Prepaid expenses
77.1

 
33.5

Other
562.0

 
84.0

Total current assets
8,063.2

 
1,372.6

  Customer incentives
68.9

 
68.4

  Property, equipment and software—net
890.0

 
473.7

  Intangible assets—net
3,783.9

 
678.5

  Goodwill
15,188.9

 
4,173.0

  Deferred taxes
764.9

 
739.5

  Proceeds from senior unsecured notes

 
1,135.2

  Other assets
190.2

 
26.1

Total assets
$
28,950.0

 
$
8,667.0

Liabilities and equity
 

 
 

Current liabilities:
 

 
 

Accounts payable and accrued expenses
$
1,329.6


$
631.9

Settlement obligations
6,181.9

 
816.2

Current portion of notes payable
223.7


107.9

Current portion of tax receivable agreement obligations
179.1


245.5

Deferred income
32.5

 
18.9

Current maturities of capital lease obligations
32.8

 
8.0

Other
571.0

 
6.0

Total current liabilities
8,550.6

 
1,834.4

Long-term liabilities:
 

 
 

Notes payable
8,051.0

 
5,586.4

Tax receivable agreement obligations
506.0

 
535.0

Capital lease obligations
33.1

 
4.5

Deferred taxes
716.7

 
65.6

Other
100.4

 
40.5

Total long-term liabilities
9,407.2

 
6,232.0

Total liabilities
17,957.8

 
8,066.4

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


 


Equity:
 

 
 

Class A common stock, $0.00001 par value; 890,000,000 shares authorized; 297,407,507 shares outstanding at March 31, 2018; 162,595,981 shares outstanding at December 31, 2017

 

Class B common stock, no par value; 100,000,000 shares authorized; 15,252,826 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively

 

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

 

Paid-in capital
10,030.8

 
55.4

Retained earnings
482.7

 
558.0

Accumulated other comprehensive income
23.8

 
2.9

Treasury stock, at cost; 3,007,183 shares at March 31, 2018 and 2,861,671 shares at December 31, 2017
(95.0
)
 
(83.8
)
Total Worldpay, Inc. equity
10,442.3

 
532.5

Non-controlling interests
549.9

 
68.1

Total equity
10,992.2

 
600.6

Total liabilities and equity
$
28,950.0

 
$
8,667.0

See Notes to Unaudited Consolidated Financial Statements.

6
 
 
 


Worldpay, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In millions)
 
Three Months Ended March 31,
 
2018
 
2017
Operating Activities:
 

 
 

Net (loss) income
$
(98.3
)
 
$
35.3

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

 
 

Depreciation and amortization expense
207.2

 
76.1

Amortization of customer incentives
6.2

 
6.7

Amortization and write-off of debt issuance costs
59.9

 
1.2

Realized gain on foreign currency forward
(35.9
)
 

Share-based compensation expense
17.2

 
10.6

Deferred tax expense
(25.3
)
 
20.0

Tax receivable agreements non-cash items
(3.6
)
 
(5.1
)
Other
30.4

 
0.1

Change in operating assets and liabilities:
 

 
 

Accounts receivable
14.0

 
56.5

Net settlement assets and obligations
(12.2
)
 
(41.1
)
Customer incentives
(7.3
)
 
(7.2
)
Prepaid and other assets
(22.9
)
 
(7.0
)
Accounts payable and accrued expenses
(17.1
)
 
(8.5
)
Other liabilities
(28.2
)
 
(3.2
)
Net cash provided by operating activities
84.1

 
134.4

Investing Activities:
 

 
 

Purchases of property and equipment
(34.1
)
 
(27.9
)
Acquisition of customer portfolios and related assets and other
(37.1
)
 
(4.3
)
Proceeds from foreign currency forward
71.5

 

Cash acquired in acquisitions, net of cash used
1,405.8

 

Net cash provided by (used in) investing activities
1,406.1

 
(32.2
)
Financing Activities:
 

 
 

Proceeds from issuance of long-term debt
2,140.0

 

Repayment of debt and capital lease obligations
(1,662.2
)
 
(35.6
)
Borrowings on revolving credit facility
1,476.0

 
570.0

Repayment of revolving credit facility
(1,701.0
)
 
(570.0
)
Payment of debt issuance costs
(86.8
)
 
(1.1
)
Proceeds from issuance of Class A common stock under employee stock plans
7.6

 
6.6

Repurchase of Class A common stock (to satisfy tax withholding obligations)
(11.2
)
 
(5.7
)
Settlement of certain tax receivable agreements
(25.6
)
 
(15.1
)
Payments under tax receivable agreements
(55.3
)
 
(46.5
)
Distributions to non-controlling interests
(5.6
)
 
(5.8
)
Net cash provided by (used in) financing activities
75.9

 
(103.2
)
Net increase (decrease) in cash and cash equivalents
1,566.1

 
(1.0
)
Cash and cash equivalents—Beginning of period
1,272.2

 
139.1

Effect of exchange rate changes on cash
31.1

 

Cash and cash equivalents—End of period
$
2,869.4

 
$
138.1

Cash Payments:
 

 
 

Interest
$
58.2

 
$
27.5

Income taxes
0.6

 
0.3

See Notes to Unaudited Consolidated Financial Statements.


7
 
 
 


Worldpay, Inc.
CONSOLIDATED STATEMENT OF EQUITY
Unaudited
(In millions)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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, 2018
$
600.6

 
162.6

 

 
15.3

 
$

 
2.9

 
$
(83.8
)
 
$
55.4

 
$
558.0

 
$
2.9

 
$
68.1

Cumulative effect of accounting change
22.3

 

 

 

 

 

 

 

 
22.3

 

 

Net loss
(98.3
)
 

 

 

 

 

 

 

 
(97.6
)
 

 
(0.7
)
Issuance of Class A common stock for acquisition
10,429.4

 
134.4

 

 

 

 

 

 
10,429.4

 

 

 

Issuance of Class A common stock under employee stock plans, net of forfeitures
7.6

 
0.5

 

 

 

 

 

 
7.6

 

 

 

Repurchase of Class A common stock (to satisfy tax withheld obligation)
(11.2
)
 
(0.1
)
 

 

 

 
0.1

 
(11.2
)
 

 

 

 

Settlement of certain tax receivable agreements
8.2

 

 

 

 

 

 

 
8.2

 

 

 

Unrealized gain on hedging activities and foreign currency translation, net of tax
22.0

 

 

 

 

 

 

 

 

 
20.9

 
1.1

Distribution to non-controlling interests
(5.6
)
 

 

 

 

 

 

 

 

 

 
(5.6
)
Share-based compensation
17.2

 

 

 

 

 

 

 
16.3

 

 

 
0.9

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

 

 

 

 

 

 

 
(486.1
)
 

 

 
486.1

Ending Balance, March 31, 2018
$
10,992.2

 
297.4

 
$

 
15.3

 
$

 
3.0

 
$
(95.0
)
 
$
10,030.8

 
$
482.7

 
$
23.8

 
$
549.9


See Notes to Unaudited Consolidated Financial Statements.


8
 
 
 


Worldpay, Inc.
CONSOLIDATED STATEMENT OF EQUITY
Unaudited
(In millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
$
1,607.3

 
161.1

 
$

 
35.0

 
$

 
2.7

 
$
(73.7
)
 
$
706.1

 
$
689.5

 
$
(6.2
)
 
$
291.6

Cumulative effect of accounting change
0.5

 

 

 

 

 

 

 
1.3

 
(0.8
)
 

 

Net income
35.3

 

 

 

 

 

 

 

 
28.9

 

 
6.4

Issuance of Class A common stock under employee stock plans, net of forfeitures
6.6

 
1.0

 

 

 

 

 

 
6.6

 

 

 

Repurchase of Class A common stock (to satisfy tax withholding obligation)
(5.7
)
 
(0.1
)
 

 

 

 
0.1

 
(5.7
)
 

 

 

 

Settlement of certain tax receivable agreements
15.1

 

 

 

 

 

 

 
15.1

 

 

 

Unrealized gain on hedging activities, net of tax
4.8

 

 

 

 

 

 

 

 

 
3.6

 
1.2

Distribution to non-controlling interests
(5.8
)
 

 

 

 

 

 

 

 

 

 
(5.8
)
Share-based compensation
10.6

 

 

 

 

 

 

 
8.7

 

 

 
1.9

Ending Balance, March 31, 2017
$
1,668.7

 
162.0

 
$

 
35.0

 
$

 
2.8

 
$
(79.4
)
 
$
737.8

 
$
717.6

 
$
(2.6
)
 
$
295.3

 
See Notes to Unaudited Consolidated Financial Statements.


9
 
 
 


Worldpay, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Description of Business
 
Worldpay, Inc., formerly Vantiv, Inc., a Delaware corporation, is a holding company that conducts its operations through its majority-owned subsidiary, Vantiv Holding, LLC (“Vantiv Holding”). Worldpay, Inc. and Vantiv Holding are referred to collectively as the “Company,” “Worldpay,” “we,” “us” or “our,” unless the context requires otherwise.

On January 16, 2018, Worldpay completed the previously announced acquisition of all of the outstanding shares of Worldpay Group Limited, formerly Worldpay Group plc, a public limited company (“Legacy Worldpay”). Following the acquisition, the Vantiv, Inc. (“Legacy Vantiv”) name was changed to Worldpay, Inc. by amending its Second Amended and Restated Certificate of Incorporation. The effective date of the name change was January 16, 2018.

On January 16, 2018, the Company’s Class A common stock began trading on the New York Stock Exchange under the new symbol “WP” and on the London Stock Exchange via a secondary standard listing under the symbol “WPY.” Legacy Worldpay shares were delisted from the London Stock Exchange on the same day.

Worldpay is a leader in global payments providing a broad range of technology-led solutions to its clients to allow them to accept payments of almost any type, across multiple payment channels nearly anywhere in the world. The Company serves a diverse set of merchants including mobile, online and in-store, offering over 300 payment methods in 126 transaction currencies across 146 countries, while supporting various clients including large enterprises, corporates, small and medium sized businesses and eCommerce businesses. The Company operates in three reportable segments: Technology Solutions, Merchant Solutions and Issuer Solutions. For more information about the Company’s segments, refer to Note 11 - Segment Information. The Company markets its services through diverse distribution channels, including referral relationships with a broad range of partners that include merchant banks, independent software vendors (“ISVs”), value-added resellers (“VARs”), payment facilitators, independent sales organizations (“ISOs”), trade associations, and arrangements with core processors.
 
Basis of Presentation and Consolidation
 
The accompanying consolidated financial statements include those of Worldpay, 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”). All intercompany balances and transactions have been eliminated.
 
As of March 31, 2018, Worldpay, Inc. and Fifth Third Bank (“Fifth Third”) owned interests in Vantiv Holding of 95.12% and 4.88%, 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 Worldpay, Inc., including income tax expense attributable to Worldpay, 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 March 31, 2018 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.

10
 
 
 

Worldpay, 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

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue From Contracts With Customers (Topic 606) (“ASC 606”). This ASU supersedes the revenue recognition requirements in Accounting Standard Codification (“ASC”) 605, Revenue Recognition (“ASC 605”). 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 ASC.

The Company adopted ASC 606 on January 1, 2018, using the modified retrospective method. The new standard requires the Company to disclose the accounting policies in effect prior to January 1, 2018, as well as the policies it has applied starting January 1, 2018. Revenue is measured based on consideration specified in a contract with a customer. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a service or goods to a customer.

Periods prior to January 1, 2018

The Company has contractual agreements with its customers 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. ASC 605 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 followed the 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 recognized processing revenues net of interchange fees, which are assessed to its 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 was reported on a gross basis, as the Company contracts directly with the end customer, assumes the risk of loss and has pricing flexibility.

Periods commencing January 1, 2018

Revenue is recognized when a customer obtains control of promised services or goods. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services.

The Company has contractual agreements with its customers that set forth the general terms and conditions of the relationship including line item pricing, payment terms and contract duration. Revenue is recognized when the obligation under the terms of the Company’s contract with its customer is satisfied. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. The Company generates revenue primarily by processing electronic payment transactions. Set forth below is a description of the Company’s revenue by segment.


11
 
 
 

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


Technology Solutions

Technology Solutions provides merchant acquiring and payment processing services to a diverse set of merchants that primarily accept payments through eCommerce and integrated payment solutions.

Merchant Solutions

Merchant Solutions provides merchant acquiring and payment processing services to a diverse set of merchants that primarily accept payments through an omni-channel solution including terminal based.

Issuer Solutions

Issuer Solutions provides card issuer processing, payment network processing, fraud protection and card production to a diverse set of financial institutions, including regional banks, community banks, credit unions and regional personal identification number (“PIN”) networks.

Performance Obligations
    
Since the majority of the Company’s revenue relates to payment processing services for its customers, the Company’s core performance obligation is to provide continuous access to the Company’s system to process as much as its customers require. The Company’s payment processing services consist of variable consideration under a stand-ready service of distinct days of service that are substantially the same with the same pattern of transfer to the customer.

The Company’s revenue from products and services is recognized at a point in time or over time depending on the products or services, with the majority of the revenue recognized at a point in time.

Beginning in 2018, the Company records certain fees paid to third parties, including network fees and other costs, as a reduction of revenue. These fees were previously recorded on a gross basis. This change in presentation has no impact to income from operations. Under ASC 606, revenue of $850.7 million was reported for the three months ended March 31, 2018. Excluding the impact of the adoption of ASC 606, amounts recorded under ASC 605 include $1,472.4 million and $621.7 million of revenue and network fees and other costs, respectively. The adoption of ASC 606 did not have a material impact on any other line items of the Company’s Consolidated Statements of Income (Loss), Statements of Comprehensive Income (Loss), Statements of Financial Position, Statements of Equity and Statements of Cash Flows.
Disaggregation of Revenue
In the following table, revenue is disaggregated by source of revenue (in millions):
 
 
Three Months Ended March 31, 2018
 
 
Technology Solutions
 
Merchant Solutions
 
Issuer Solutions
 
Total
Major Products and Services
 
 
 
 
 
 
 

Processing services
 
$
230.1

 
$
340.0

 
$
46.8

 
$
616.9

Products and services
 
106.3

 
92.2

 
35.3

 
233.8

Total
 
$
336.4

 
$
432.2

 
$
82.1

 
$
850.7



12
 
 
 

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


 
 
Three Months Ended March 31, 2017
 
 
Technology Solutions
 
Merchant Solutions
 
Issuer Solutions
 
Total
Major Products and Services (1)
 
 
 
 
 
 
 
 
Processing services
 
$
242.1

 
$
488.0

 
$
69.9

 
$
800.0

Products and services
 
29.8

 
52.1

 
46.3

 
128.2

Total
 
$
271.9

 
$
540.1

 
$
116.2

 
$
928.2


(1) Revenue for the three months ended March 31, 2017 presented in the table above is prior to the Company’s adoption of ASC 606, which presents network fees and other costs net within revenue.

Processing Services

Processing services revenue is primarily derived from processing credit and debit card transactions comprised of fees charged to businesses for payment processing services. The fees charged consist of either a percentage of the dollar volume of the transaction or a fixed fee, or both.

Products and Services

Products and services revenue is primarily derived from ancillary services such as treasury management and foreign exchange, regulatory compliance, chargebacks and fraud services.

Costs to Obtain and Fulfill a Contract

ASC 606 requires capitalizing costs of obtaining a contract when those costs are incremental and expected to be recovered. Since incremental commission fees paid to sales teams as a result of obtaining contracts are recoverable, the Company recorded a $28.8 million ($22.3 million net of deferred taxes) cumulative catch-up capitalized asset on January 1, 2018. As of March 31, 2018, the amount capitalized as contract costs is $31.7 million, which is included in other non-current assets.

In order to determine the amortization period for sales commission contract costs, the Company applied the portfolio approach for “like-kind contracts” to which sales compensation earnings can be applied and allocated incentive payments to each portfolio accordingly. The Company evaluated each individual portfolio to determine the proper length of time over which the capitalized incentive should be amortized by analyzing customer attrition rates using historical data and other metrics.

The Company determined that straight-line amortization would best correspond to the transfer of services to customers since services are transferred equally over time and have limited predictable volatility. The amortization periods range from 3 to 10 years and are based on the expected life of a customer. In 2018, the amount of amortization was $2.5 million, which is included in sales and marketing expense. There was no impairment loss in relation to the costs capitalized.

The Company recognizes incremental sales commission costs of obtaining a contract as expense when the amortization period for those assets is one year or less per the practical expedient in ASC 606. These costs are included in sales and marketing expense.
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 expected life of the customer. Related amortization is recorded as contra-revenue.

The Company capitalizes conversion costs associated with enabling customers to receive its processing services. As of March 31, 2018 and December 31, 2017, the Company had $28.1 million and $21.1 million, respectively, of capitalized conversion costs included in Intangible assets - net in the Company’s Consolidated Statement of Financial Position. For the three months ended March 31, 2018 and 2017, the Company has $0.9 million and $0.4 million, respectively, of amortization expense related to these costs, which is recorded in depreciation and amortization expense in the Company’s Consolidated Statements of Income (Loss). These costs are amortized over the average life of the customer.




13
 
 
 

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


Contract Balances

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; as such, collectibility is reasonably assured. Aside from debiting a client’s bank account, the Company collects a majority of its revenue via net settlement with the remaining portion collected via billing the customer. 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 March 31, 2018 and December 31, 2017, the allowance for doubtful accounts was not material to the Company’s statements of financial position.

As of March 31, 2018 and December 31, 2017, accounts receivable, net of allowance for doubtful accounts on the Company’s Consolidated Statement of Financial Position was $1.5 billion and $1.0 billion, respectively. The Legacy Worldpay acquisition contributed $0.5 billion to the balance.

Contract Liabilities

Contract liabilities, which relate to advance consideration received from customers (deferred revenue) for which transfer of control occurs and therefore revenue is recognized, is not material to the Company’s consolidated financial statements.

Remaining Performance Obligations

ASC 606 requires disclosure of the aggregate amount of the transaction price allocated to unsatisfied performance obligations; however, as permitted by ASC 606, the Company has elected to exclude from this disclosure any contracts with an original duration of one year or less and any variable consideration that meets specified criteria. As discussed above, the Company’s core performance obligation consists of variable consideration under a stand-ready series of distinct days of service. Such variable consideration meets the specified criteria for the disclosure exclusion; therefore, the majority of the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied is variable consideration that is not required for disclosure. The aggregate fixed consideration portion of customer contracts with an initial contract duration greater than one year is not material.

Changes in Accounting Policies

As noted above, the Company adopted ASC 606, effective January 1, 2018, using the modified retrospective method, applying the standard to contracts that are not complete as of the date of initial application. Therefore, the comparative information has not been adjusted and continues to be reported under ASC 605. The details of the significant changes are set out below.

Under ASC 606, the Company capitalizes commission fees as costs of obtaining a contract when they are incremental and expected to be recovered. The Company amortizes these capitalized costs consistently with the pattern of transfer of the good or service to which the asset relates. If the expected amortization period is one year or less, the commission fee is expensed when incurred. The Company previously recognized sales commission fees related to contracts as sales and marketing expenses when incurred. Except for the change in revenue recognition, the Company has consistently applied the accounting policies to all periods presented in these consolidated financial statements.

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 the Company’s clients, including Visa and Mastercard network association fees and payment network fees and only relates to the three months ended March 31, 2017. Following the Company’s adoption of ASC 606 on January 1, 2018, network fees and other costs are presented net within revenue.


14
 
 
 

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


Sales and marketing expense primarily consists of salaries and benefits paid to sales personnel, sales management and other sales and marketing personnel, amortization of capitalized commission fees, 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, legal and risk management, share-based compensation costs, equipment and occupancy costs and consulting costs. The three months ended March 31, 2018 includes a significant amount of transition, acquisition and integration costs related to the Legacy Worldpay acquisition. The three months ended March 31, 2017 includes a charge related to a settlement agreement stemming from legacy litigation of an acquired company.

Non-operating expenses during three months ended March 31, 2018 primarily consists of expenses related to the Company’s financing arrangements entered into in connection with the Legacy Worldpay acquisition and the change in fair value of the Mercury tax receivable agreement (“TRA”) (see Note 8 - Fair Value Measurements), partially offset by a gain on the settlement of a deal contingent forward entered into in connection with the Company’s acquisition of Legacy Worldpay. Non-operating expenses for the three months ended March 31, 2017 primarily relate to the change in fair value of the Mercury TRA (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 as restricted stock, performance awards and under the Employee Stock Purchase Plan (“ESPP”) is measured based on the market price of the Company’s stock on the grant date.

For the three months ended March 31, 2018 and 2017 total share-based compensation expense was $17.2 million and $10.6 million, respectively.

Earnings per Share
 
Basic earnings per share is computed by dividing net income attributable to Worldpay, Inc. by the weighted average shares outstanding during the period. Diluted earnings per share is computed by dividing net income attributable to Worldpay, 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. Worldpay, Inc. is a holding company that does not conduct any business operations of its own. As a result, Worldpay, 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 Worldpay, 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 March 31, 2018.


15
 
 
 

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


Income Taxes

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. December 31, 2017, 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 11.8% and 12.8% respectively, for the three months ended March 31, 2018 and 2017. The effective tax rate for each period reflects the impact of the Company’s non-controlling interests not being taxed at the statutory U.S. corporate tax rates. The 2018 effective tax rate also reflects the impact of tax reform and the impact related to the addition of international taxing jurisdictions as a result of the Legacy Worldpay acquisition.

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (“Tax Reform”). Tax Reform amended the Internal Revenue Code to reduce tax rates and modify policies, credits and deductions as well as reduce the corporate federal tax rate from a maximum of 35% to a flat 21% rate with an effective date of January 1, 2018. As of December 31, 2017, the Company preliminarily revalued its net deferred tax asset based on Tax Reform. As of March 31, 2018, the Company has not adjusted this provisional amount and is continuing to gather additional information to complete its accounting for this item and expects to complete the accounting within the prescribed measurement period.

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. The Company has restricted cash held in money market accounts, which approximate fair value and therefore are a level 1 input in the fair value hierarchy.

Following the adoption of ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, the Company includes restricted cash in the cash and cash equivalents balance of the consolidated statements of cash flows. The reconciliation between the consolidated statement of financial position and the consolidated statement of cash flows is as follows (in millions):


March 31,
2018
December 31,
2017
Cash and cash equivalents on consolidated statement of financial position

$
459.4

$
126.5

Proceeds from senior unsecured notes - restricted for closing of Worldpay acquisition
 
 
1,135.2

Other restricted cash (other current assets)

515.7

10.5

Merchant Float

1,894.3


Total cash and cash equivalents on consolidated statement of cash flows

$
2,869.4

$
1,272.2


Property, Equipment and Software—net
 
Property, equipment and software consists of the Company’s facilities, furniture and equipment, software, land and leasehold improvements. 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 and 3 to 8 years for software. Leasehold improvements are depreciated on a straight-line basis over the lesser of the estimated useful life of the improvement which is 3 to 10 years 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 March 31, 2018 and December 31, 2017 was $373.2 million and $372.1 million, respectively.
 

16
 
 
 

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


The Company capitalizes certain costs related to computer software developed for internal use and amortizes such costs on a straight-line basis over an estimated useful life of 5 to 8 years. Research and development costs incurred prior to establishing technological feasibility are charged to operations as such costs are incurred. Once technological feasibility has been established, costs are capitalized until the software is placed in service.

Goodwill and Intangible Assets
 
In accordance with ASC 350, Intangibles—Goodwill and Other, the Company tests goodwill for impairment for each reporting unit on an annual basis, or when events occur or circumstances indicate the fair value of a reporting unit is below its carrying value. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that implied 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 was 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 March 31, 2018.

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 March 31, 2018, there have been no such events or circumstances that would indicate potential impairment of finite lived intangible assets.

Merchant Float and Settlement Assets and Obligations
     
Merchant Float represents surplus cash balances the Company holds on behalf of its merchant customers when the incoming amount from the card networks precedes when the funding to customers falls due. Such funds are held in a fiduciary capacity, and are not available for the Company to use to fund its cash requirements.

Settlement assets and obligations result 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.

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. Additionally, the effective portions of the Company’s net investment hedges, which act as economic hedges of the Company’s net investments in its foreign subsidiaries, are recorded in AOCI. The Company does not enter into derivative financial instruments for speculative purposes. See Note 5 - Derivatives and Hedging for further discussion.

Foreign Currencies

The U.S. dollar is the functional currency of the Company’s U.S.-based businesses. The Company has operations with a local currency as their functional currency, the most significant being in the United Kingdom. Foreign currency-denominated assets and liabilities for these units and other less significant operations are translated into U.S. dollars based on exchange rates prevailing at the end of the period, and revenues and expenses are translated at average exchange rates during each monthly period. The effects of foreign exchange gains and losses arising from the translation of assets and liabilities of those entities where the functional currency is not the U.S. dollar are included as a component of Other Comprehensive Income (Loss). Transaction gains and losses related to operating assets and liabilities are included in various line items in the Company’s Consolidated Statements of Income and were immaterial for the three months ended March 31, 2018. Non-operating transaction gains and losses derived from non-operating assets and liabilities are included in non-operating expense in the Company’s Consolidated Statements of Income.


17
 
 
 

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


Related Party Presentation

As a result of the Company closing the Legacy Worldpay acquisition on January 16, 2018, Fifth Third’s ownership percentage in Vantiv Holding decreased below 5% and Fifth Third no longer has board representation, therefore the Company no longer considers Fifth Third a related party. Related party revenue for the period of January 1, 2018 through January 15, 2018 was not material.

The Fifth Third related party activity within the Consolidated Statements of Income for the three months ended March 31, 2017 is as follows (in millions):

Consolidated Statement of Income Location
 
March 31, 2017
Revenue
 
$
16.2


The Fifth Third related party positions within the Consolidated Statements of Financial Position for the period ending December 31, 2017 are as follows (in millions):
Consolidated Statement of Financial Position Location
 
December 31,
2017
Assets
 
 
Accounts receivable—net
 
$
0.7

Liabilities
 
 
Accounts payable and accrued expenses
 
$
9.0

Current portion of notes payable
 
5.4

Current portion of tax receivable agreement obligations
 
190.2

Notes payable
 
158.4

Tax receivable agreement obligations
 
489.8


New Accounting Pronouncements

In August 2017, the FASB issued 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 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. As written, 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 FASB is currently considering an option that entities may elect not to restate their comparative periods in transition. This option would allow an entity to recognize the effects of applying the standard as a cumulative-effect adjustment to retained earnings as of the adoption date and not restate prior periods. The Company has formed a project team to review contracts to determine which qualify as a lease and then 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.

18
 
 
 

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


2. BUSINESS COMBINATIONS

Acquisition of Legacy Worldpay

On January 16, 2018, the Company completed the acquisition of Legacy Worldpay by acquiring 100% of the issued and outstanding shares (the “acquisition”). The approximately $11.9 billion purchase price consisted of Legacy Worldpay shareholders receiving a $1.5 billion cash payment and 134.4 million shares of the Company’s Class A common stock. The acquisition-date fair value of the 134.4 million shares of the Company’s Class A common stock issued was $10.4 billion and was determined based on the share price of $77.60 per share, the opening price of the Company’s Class A common stock on the New York Stock Exchange on January 16, 2018 since the acquisition closed before the market opened on January 16, 2018.

The acquisition creates a leading global integrated payment technology and international eCommerce payment provider and will enable the Company to take advantage of strategic and innovative opportunities to provide differentiated and diversified solutions to address clients’ needs.

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, none of which is deductible for tax purposes. Goodwill, assigned to Technology Solutions, Merchant and Issuer Solutions, 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 millions):
Cash acquired
$
584.2

Current assets (1)
4,138.9

Property, equipment and software
418.4

Intangible assets
3,154.0

Goodwill
11,015.4

Other non-current assets
138.6

Current liabilities (2)
(4,522.6
)
Long-term debt (3)
(2,300.8
)
Deferred tax liability
(656.2
)
Non-current liabilities
(21.9
)
Total purchase price
$
11,948.0


(1)  
Includes $1,947.6 million of merchant float and $511.1 million of other restricted cash.
(2)  
Includes $118.6 million of dividend payable to reflect the special dividend granted to the shareholders of Legacy Worldpay.
(3) 
Includes $1,649.9 million of debt which was paid off subsequent to the completion of acquisition.

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, software and a trade name with weighted average estimated useful lives of 7 years, 6 years and 10 years, respectively.    

From the acquisition date of January 16, 2018 through March 31, 2018, revenue and net loss included in the accompanying statements of income (loss) for the three months ended March 31, 2018 attributable to Legacy Worldpay was approximately $317.0 million and $2.8 million, respectively.
    


19
 
 
 

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


For the three months ended March 31, 2018, the Company incurred transaction expenses of approximately $120.8 million in conjunction with the acquisition of Legacy Worldpay. All transaction costs incurred for the three months ended March 31, 2018 are included in general and administrative expenses on the accompanying consolidated statement of income.

Under the terms of the Legacy Worldpay transaction agreement, the Company replaced equity awards held by certain employees of Legacy Worldpay. The weighted average fair value of the replacement awards was approximately $82.4 million. The portion of the fair value of the replacement awards related to the services provided prior to the acquisition of approximately $44.2 million was part of the consideration transferred to acquire Legacy Worldpay. The remaining portion of the fair value is associated with future service and will be recognized as expense over the future service period.

Unaudited Pro Forma Results Giving Effect to the Legacy Worldpay Acquisition
The following unaudited pro forma combined financial information presents the Company’s results of operations for the three months ended March 31, 2018 and 2017, as if the acquisition had occurred on January 1, 2017 (in millions, except per share amounts).
 
Three Months Ended March 31,
 
2018
 
2017
Total revenue(1)
$
914.5

 
$
1,416.9

Net income (loss) attributable to Worldpay, Inc.
33.6

 
(181.9
)
Net income (loss) per share attributable to Worldpay, Inc. Class A common stock:
 
 
 
Basic
$
0.11

 
$
(0.62
)
Diluted
$
0.11

 
$
(0.62
)
Shares used in computing net income (loss) per share of Class A common stock:
 
 
 
Basic
296,498,480

 
295,276,177

Diluted
298,027,972

 
295,276,177

(1) Revenue for the three months ended March 31, 2017 presented in the table above is prior to the Company’s adoption of ASC 606, which presents network fees and other costs net within revenue.
The unaudited pro forma results include certain pro forma adjustments that were directly attributable to the acquisition as follows:
additional amortization expense that would have been recognized relating to the acquired intangible assets; and
adjustment to interest expense to reflect the additional borrowings of the Company in conjunction with the acquisition and removal of Legacy Worldpay debt.
a reduction in expenses for the three months ended March 31, 2018 and a corresponding increase in the three months ended March 31, 2017 for acquisition-related transaction costs and debt refinancing costs incurred by the Company.

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.


20
 
 
 

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


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 Solutions, 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 millions):
Cash acquired
$
11.9

Current assets
7.2

Property, equipment and software
92.1

Intangible assets
47.8

Goodwill
434.2

Other assets
0.1

Current liabilities
(18.3
)
Deferred tax liability
(23.1
)
Non-current liabilities
(8.5
)
Total purchase price
$
543.4


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.

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 the Company’s financial results and therefore have not been presented.

21
 
 
 

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


3. GOODWILL AND INTANGIBLE ASSETS

Changes in the carrying amount of goodwill for the three months ended March 31, 2018 are as follows (in millions):
 
 
Consolidated Total
Balance as of December 31, 2017
 
$
4,173.0

Goodwill attributable to acquisition of Paymetric Solutions, Inc. (1)
 
0.2

Goodwill attributable to acquisition of Legacy Worldpay (2)
 
11,015.7

Balance as of March 31, 2018
 
$
15,188.9


(1) 
Amount represents adjustments to goodwill associated with the acquisition of Paymetric as a result an update to the purchase price allocation, primarily related to revisions of certain estimates from the preliminary amount reported as of December 31, 2017.
(2) 
Amount of goodwill attributable to the acquisition, including its allocation to reportable segments, is preliminary and subject to change.

As discussed in Note 11 - Segment Information, during the first quarter of 2018, the Company reorganized its reportable segments. In connection with this change, the Company is in the process of reallocating goodwill to the new reporting units using a relative fair value approach.

As of March 31, 2018 and December 31, 2017, the Company’s finite lived intangible assets consisted of the following (in millions):
 
 
March 31, 2018
 
December 31, 2017
Customer relationship intangible assets
 
$
4,644.4

 
$
1,712.7

Customer portfolios and related assets
 
290.2

 
249.8

Trade name
 
284.1

 

Patents
 
1.7

 
1.6

 
 
5,220.4

 
1,964.1

Less accumulated amortization on:
 
 
 
 
Customer relationship intangible assets
 
1,287.3

 
1,156.4

Customer portfolios and related assets
 
142.0

 
129.2

Trade name
 
7.2

 

 
 
1,436.5

 
1,285.6

Intangible assets, net
 
$
3,783.9

 
$
678.5


Customer portfolios and related assets acquired during the three months ended March 31, 2018 have weighted-average amortization periods of 4.6 years. Amortization expense on intangible assets for the three months ended March 31, 2018 and 2017 was $149.8 million and $55.2 million, respectively.
 
The estimated amortization expense of intangible assets for the next five years is as follows (in millions):
Nine months ended December 31, 2018
 
$
501.0

2019
 
650.7

2020
 
567.2

2021
 
515.1

2022
 
492.3

2023
 
476.5


22
 
 
 

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


4. LONG-TERM DEBT

As of March 31, 2018 and December 31, 2017, the Company’s long-term debt consisted of the following (in millions): 
 
March 31,
2018
 
December 31,
2017
Term A loan, maturing in January 2023(1)
$
3,771.7

 
$
2,166.7

Term A loan, maturing in October 2021(2)
176.8

 
179.2

Term B loan, maturing in October 2023(3)
755.4

 
757.4

Term B loan, maturing in August 2024(4)
1,805.0

 
1,270.0

Senior Unsecured Dollar Notes, maturing in November 2025(5)
500.0

 
500.0

Senior Unsecured Sterling Notes, maturing in November 2025(6)
660.2

 
635.2

Senior Unsecured Euro Note, expiring in November 2022(7)
677.7

 

Leasehold mortgage, expiring on August 10, 2021(8)
10.1

 
10.1

Revolving credit facility, expiring in January 2023

 
225.0

Less: Current portion of notes payable
(223.7
)
 
(107.9
)
Less: Original issue discount
(9.5
)
 
(3.0
)
Less: Debt issuance costs
(72.7
)
 
(46.3
)
Notes payable
$
8,051.0

 
$
5,586.4

 
(1) 
Interest at a variable base rate (LIBOR) plus a spread rate (200 basis points) (total rate of 3.78% at March 31, 2018) and amortizing on a basis of 1.25% per quarter during each of the first twelve quarters (June 2018 through March 2021), 1.875% per quarter during the next four quarters (June 2021 through March 2022) and 2.50% per quarter during the next three quarters (June 2022 through December 2022) with a balloon payment due at maturity.
(2) 
Interest at a variable base rate (LIBOR) plus a spread rate (200 basis points) (total rate of 3.78% at March 31, 2018) and amortizing on a basis of 1.32% per quarter during each of the first eight quarters (March 2018 through December 2019), 1.97% per quarter during the next four quarters (March 2020 through December 2020) and 2.63% per quarter during the next three quarters (March 2021 through September 2021) with a balloon payment due at maturity.
(3) 
Interest payable at a variable base rate (LIBOR) plus a spread rate 200 basis points) (total rate of 3.78% at March 31, 2018) and amortizing on a basis of 0.25% per quarter, with a balloon payment due at maturity.
(4) 
Interest payable at a variable base rate (LIBOR) plus a spread rate (200 basis points) (total rate of 3.78% at March 31, 2018) and amortizing on a basis of 0.25% per quarter, with a balloon payment due at maturity.
(5) 
$500 million principal senior unsecured notes with interest payable semi-annually at a fixed rate of 4.375% and principal due upon maturity.
(6) 
£470 million principal senior unsecured notes with interest payable semi-annually at a fixed rate of 3.875% and principal due upon maturity. The spot rate of 1.4048 U.S. dollars per Pound Sterling at March 31, 2018 was used to translate the Note to U.S. dollars.
(7) 
€500 million principal senior unsecured note with interest payable semi-annually at a fixed rate of 3.75% and principal due upon maturity. The spot rate of 1.2324 U.S. dollars per Euro at March 31, 2018 was used to translate the Note to U.S. dollars. Includes remaining unamortized fair value premium of $61.6 million at March 31, 2018.
(8) 
Interest payable monthly at a fixed rate of 6.22%.

2018 Debt Activity

The closing of the Legacy Worldpay acquisition on January 16, 2018 resulted in the effectiveness of several debt amendments to the Existing Loan Agreement entered into prior to the closing. The resulting incremental funding and availability was as follows:

$1,605 million of additional Term A loans maturing in January 2023
$535 million of additional Term B loans maturing in August 2024
$600 million of additional revolving credit commitments, resulting in total available revolving credit of $1,250 million
$594.5 million backstop (no outstanding balance as of March 31, 2018 and backstop expires on June 15, 2018)


23
 
 
 

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


As a result of the closing of the Legacy Worldpay acquisition, the Company expensed approximately $56.6 million primarily consisting of the write-offs of unamortized deferred financing fees and original issue discount (“OID”) and fees related to previously committed unused backstop facilities associated with the component of the debt activity accounted for as a debt extinguishment and certain third party costs incurred in connection with the debt activity. Amounts expensed in connection with the refinancing are recorded as a component of non-operating expenses in the accompanying consolidated statement of income for the three months ended March 31, 2018.

Additionally, as a result of new debt being issued in connection with the Company’s acquisition of Legacy Worldpay, the Company capitalized approximately $20.9 million of deferred financing costs for the three months ended March 31, 2018.

2017 Debt Activity

On August 7, 2017, the Company funded the Fifth Third share purchase by amending the Second Amended Loan Agreement to permit Vantiv Holding to obtain approximately $1,270.0 million of additional seven-year term B loans. As a result of this borrowing, the Company capitalized approximately $23.1 million of deferred financing fees during the year ended December 31, 2017.

In connection with the Legacy Worldpay acquisition, on December 7, 2017, the Company priced an offering of $500 million aggregate principal amount of 4.375% senior unsecured notes due 2025 and £470 million aggregate principal amount of 3.875% senior unsecured notes due 2025, listed in the table above. The spot rate of 1.3515 U.S. dollars per Pound Sterling at December 31, 2017 was used to translate the Senior Unsecured Sterling Notes to U.S. dollars. The proceeds received in the connection with the senior unsecured notes offering were held in escrow and restricted as of December 31, 2017 pending the consummation of the acquisition, which subsequently took place on January 16, 2018.

Guarantees and Security
The Company’s debt obligations at March 31, 2018 are unconditional and, with the exception of the Euro Note, 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 Third Amended and Restated Loan Agreement) by a lien on substantially all the tangible and intangible assets of the Company and the aforementioned subsidiaries, including 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 under the Third Amended and Restated Loan Agreement 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. The Euro Note is guaranteed by Worldpay Group Limited.

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 March 31, 2018, the Company was in compliance with these financial covenants.

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. As of March 31, 2018 and December 31, 2017, the Company’s interest rate derivative instruments for this purpose consist of interest rate swaps and interest rate cap agreements. The interest rate swaps hedge the variable rate debt by effectively 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. As of March 31, 2018 the interest rate cap agreements had a fair value of $27.8 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.


24
 
 
 

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


Additionally, during 2017 the Company entered into a deal contingent foreign currency forward contract. The foreign currency forward served as an economic hedge of the pound sterling denominated portion of the purchase price relating to the Legacy Worldpay acquisition. The foreign currency forward has not been designated as a hedge for accounting purposes and, discussed below, was settled in connection with the closing of the Legacy Worldpay acquisition.

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 March 31, 2018 the Company had a total of 2 outstanding interest rate swaps covering an exposure period from January 2018 through January 2019 with a combined notional balance of $500 million. Fifth Third is the counterparty to 1 of the 2 outstanding interest rate swaps with a $250 million notional balance for January 2018 to January 2019. Additionally, as of March 31, 2018, the Company had a total of 6 interest rate cap agreements with a combined notional balance of $1 billion, cap strike rate of 0.75%, covering an exposure period from January 2017 to January 2020.

The Company does not offset derivative positions in the accompanying consolidated financial statements. The table below presents the fair value of the Company’s derivative financial instruments designated as cash flow hedges included within the accompanying consolidated statements of financial position (in millions):
 
Consolidated Statement of
Financial Position Location
 
March 31, 2018
 
December 31, 2017
Interest rate contracts
Other current assets
 
$
13.1

 
$
9.7

Interest rate contracts
Other long-term assets
 
14.7

 
14.7

Interest rate contracts
Other current liabilities
 
2.3

 
4.2

Interest rate contracts
Other long-term liabilities
 

 
0.2


Any ineffectiveness associated with such derivative instruments will be recorded immediately as interest expense in the accompanying consolidated statements of income. As of March 31, 2018, the Company estimates that $3.6 million will be reclassified from accumulated other comprehensive income as a decrease to interest expense during the next 12 months.


25
 
 
 

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


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 months ended March 31, 2018 and 2017 (in millions): 
 
Three Months Ended March 31,
 
2018
 
2017
Derivatives in cash flow hedging relationships:
 

 
 

Amount of gain recognized in OCI (effective portion) (1)
$
6.3

 
$
2.7

Amount of loss reclassified from accumulated OCI into earnings (effective portion)
(0.6
)
 
(4.2
)
Amount of gain recognized in earnings (2)
0.1

 

 
(1) 
“OCI” represents other comprehensive income.
(2) 
For the three months ended March 31, 2018, amount represents hedge ineffectiveness.

Credit Risk Related Contingent Features

As of March 31, 2018, 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 $2.5 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 March 31, 2018, the Company had not posted any collateral related to these agreements. If the Company had breached any of these provisions at March 31, 2018, it could have been required to settle its obligations under the agreements at their termination value of $2.5 million.

Deal Contingent Forward

On August 9, 2017, the Company entered into a £1,150 million notional deal contingent forward to economically hedge a portion of the purchase price relating to the Legacy Worldpay acquisition. The deal contingent forward settled upon the closing of the Legacy Worldpay acquisition in January 2018 and the Company recognized a related realized gain of approximately $69.0 million, of which approximately $35.9 million of the gain relates to the three months ended March 31, 2018, which is recorded in non-operating expense.

Net Investment Hedges

To help protect the net investment in foreign operations from adverse changes in foreign currency exchange rates, the Company uses non-derivative financial instruments, such as its foreign currency-denominated debt, as economic hedges of its net investments in its Euro and GBP denominated subsidiaries (See Note 4 - Long Term Debt for more discussion on the Company’s foreign currency-denominated debt). The Company designated a portion of its Euro denominated debt and 100% of its GBP denominated debt as net investment hedges.

The effective portions of the net investment hedges are recorded in other comprehensive income (loss). During the three months ended March 31, 2018, the Company recognized in other comprehensive income pre-tax losses of $7.5 million relating to these net investment hedges. No ineffectiveness was recorded to earnings on the net investment hedges for three months ended March 31, 2018.

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, Worldpay, 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 Worldpay, Inc.


26
 
 
 

Worldpay, 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 March 31, 2018, Worldpay, Inc.’s interest in Vantiv Holding was 95.12%. Changes in units and related ownership interest in Vantiv Holding are summarized as follows:
 
Worldpay, Inc.
 
Fifth Third
 
Total
As of December 31, 2017
162,595,981

 
15,252,826

 
177,848,807

% of ownership
91.42
%
 
8.58
%
 
 

Shares issued for acquisition
134,400,000

 

 
134,400,000

Equity plan activity (1)
411,526

 

 
411,526

As of March 31, 2018
297,407,507

 
15,252,826

 
312,660,333

% of ownership
95.12
%
 
4.88
%
 
 
 
(1) 
Includes stock issued under the equity plans less 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.

The Company issued 134.4 million shares of Class A common stock in connection with its acquisition of 100% of the issued and outstanding shares of Legacy Worldpay on January 16, 2018.

As a result of the 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 those periods.

The table below provides a reconciliation of net income attributable to non-controlling interests based on relative ownership interests as discussed above (in millions):
 
Three Months Ended March 31,
 
2018
 
2017
Net (loss) income
$
(98.3
)
 
$
35.3

Items not allocable to non-controlling interests:
 

 
 

Worldpay, Inc. (expenses) income (1)
30.6

 
(1.1
)
Vantiv Holding net (loss) income
$
(67.7
)
 
$
34.2

 
 
 
 
Net (loss) income attributable to non-controlling interests of Fifth Third (2)
$
(1.0
)
 
$
6.0

Net income attributable to joint venture non-controlling interest (3)
0.3

 
0.4

Total net (loss) income attributable to non-controlling interests
$
(0.7
)
 
$
6.4

 
 
(1) 
Primarily represents acquisition related expenses for the three months ended March 31, 2018 and primarily relates to a tax benefit for the three months ended March 31, 2017 related to Worldpay, 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.

27
 
 
 

Worldpay, 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.

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 incurred a charge of $38.0 million for the three months ended March 31, 2017 related to the settlement. Final claims data resulted in the Company recording an additional $3.5 million charge for the settlement in the fourth quarter of 2017.

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.

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, 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.

The following table summarizes assets and liabilities measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017 (in millions):
 
March 31, 2018
 
December 31, 2017
 
Fair Value Measurements Using
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Assets:


 


 


 


 


 


Interest rate contracts
$

 
$
27.8

 
$

 
$

 
$
24.4

 
$

Deal contingent foreign currency forward

 

 

 

 
33.1

 

Liabilities:
 

 
 

 
 

 
 

 
 

 
 

Interest rate contracts
$

 
$
2.3

 
$

 
$

 
$
4.4

 
$

  Mercury TRA

 
85.9

 

 

 
100.5

 

 

28
 
 
 

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


Interest Rate Contracts

The Company uses interest rate contracts to manage interest rate risk. The fair value of interest rate swaps is determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on the expectation of future interest rates (forward curves) derived from observed market interest rate curves. The fair value of the interest rate caps is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected future cash flows of each interest rate cap. This analysis reflects the contractual terms of the interest rate caps, including the period to maturity, and uses observable market inputs including interest rate curves and implied volatilities. In addition, to comply with the provisions of ASC 820, Fair Value Measurement, 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 March 31, 2018 and December 31, 2017, 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 used a foreign currency contract to manage its foreign currency exposure relating to the Worldpay transaction (see Note 5 - Derivatives and Hedging Activities). The fair value of the foreign currency forward was 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.

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. Through 2016, the significant unobservable input used in the fair value measurement of the Mercury TRA was the discount rate. Any significant increase (decrease) in this input could potentially result in a significantly lower (higher) fair value measurement. Due to the passage of time, the discount rate is no longer a significant input at March 31, 2018 and December 31, 2017. 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, 2017 to March 31, 2018 consists of the increase in fair value of $2.8 million and the decrease from payments of $17.4 million related to the Mercury TRA obligations. The Company recorded non-operating expenses of $2.8 million and $4.1 million related to the change in fair value during the three months ended March 31, 2018 and 2017, respectively.


29
 
 
 

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



The following table summarizes carrying amounts and estimated fair values for the Company’s financial instrument liabilities that are not reported at fair value in our consolidated statements of financial position as of March 31, 2018 and December 31, 2017 (in millions):
 
March 31, 2018
 
December 31, 2017
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Liabilities:
 

 
 

 
 

 
 

Notes payable
$
8,274.7

 
$
8,377.9

 
$
5,694.3

 
$
5,772.1

 
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 notes 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 Worldpay, 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 Worldpay, 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 ended March 31, 2018 approximately 15.3 million weighted-average Class B units of Vantiv Holding were excluded in computing diluted net income per share because including them would have had 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 ended March 31, 2018. As of March 31, 2018 and 2017, 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 three months ended March 31, 2018 and 2017 included restricted stock awards, restricted stock units, stock options, performance share awards and ESPP purchase rights. Due to the net loss for the three months ended March 31, 2018, any potentially dilutive securities were also excluded from the denominator in computing dilutive net income per share.

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.


30
 
 
 

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


The following table sets forth the computation of basic and diluted net (loss) income per share (in millions, except share data):
 
Three Months Ended March 31,
 
2018
 
2017
Basic:
 
 
 

Net (loss) income attributable to Worldpay, Inc.
$
(97.6
)
 
$
28.9

Shares used in computing basic net income per share:
 
 
 
Weighted-average Class A common shares
274,098,480

 
160,876,177

Basic net (loss) income per share
$
(0.36
)
 
$
0.18

Diluted:
 
 
 
Consolidated income before applicable income taxes
$

 
$
40.5

Income tax expense excluding impact of non-controlling interest

 
6.0

Net (loss) income attributable to Worldpay, Inc.
$
(97.6
)
 
$
34.5

Shares used in computing diluted net income per share:
 
 
 
Weighted-average Class A common shares
274,098,480

 
160,876,177

Weighted-average Class B units of Vantiv Holding

 
35,042,826

Stock options

 
731,907

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

 
800,438

Performance awards

 
45,332

Diluted weighted-average shares outstanding
274,098,480

 
197,496,680

Diluted net (loss) income per share
$
(0.36
)
 
$
0.17


31
 
 
 

Worldpay, 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) (“AOCI”) related to hedging and other activities for the three months ended March 31, 2018, and 2017 is presented below (in millions):
 
 
 
 
Total Other Comprehensive Income (Loss)
 
 
 
 
 AOCI Beginning Balance
 
Pretax Activity
 
Tax Effect
 
 Net Activity
 
Attributable to non-controlling interests
 
Attributable to Worldpay, Inc.
 
AOCI Ending Balance
Three Months Ended March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Net change in fair value of cash flow hedge recorded in AOCI
 
$
(13.8
)
 
$
6.3

 
$
(1.5
)
 
$
4.8

 
$
(0.4
)
 
$
4.4

 
$
(9.4
)
 Net realized loss on cash flow hedge reclassified into earnings (a)
 
16.7

 
0.6

 
(0.1
)
 
0.5

 

 
0.5

 
17.2

 Translation adjustments on net investment hedge recorded in AOCI(b)
 

 
(7.5
)
 
2.0

 
(5.5
)
 
0.4

 
(5.1
)
 
(5.1
)
Foreign currency translation adjustments(c)
 

 
22.2

 

 
22.2

 
(1.1
)
 
21.1

 
21.1

 Net change
 
$
2.9

 
$
21.6

 
$
0.4

 
$
22.0

 
$
(1.1
)
 
$
20.9

 
$
23.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Net change in fair value recorded in accumulated OCI
 
$
(17.8
)
 
$
2.7

 
$
(0.8
)
 
$
1.9

 
$
(0.5
)
 
$
1.4

 
$
(16.4
)
 Net realized loss reclassified into earnings (a)
 
11.6

 
4.2

 
(1.3
)
 
2.9

 
(0.7
)
 
2.2

 
13.8

 Net change
 
$
(6.2
)
 
$
6.9

 
$
(2.1
)
 
$
4.8

 
$
(1.2
)
 
$
3.6

 
$
(2.6
)
 
(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 months ended March 31, 2018 and 2017 reflect amounts of losses reclassified from AOCI into earnings, representing the effective portion of the hedging relationships, and are recorded in interest expense-net.
(b) 
See Note 5 - Derivatives and Hedging Activities for more information on net investment hedge activity.
(c) 
There is no tax impact on the foreign translation adjustments due to the Tax Reform impact on distributions, enacted in 2017.

11. SEGMENT INFORMATION

As a result of the Company’s acquisition of Legacy Worldpay, the Company has reorganized its reportable segments and recast March 31, 2017 segment information to align with the new reportable segments. The new segments are Technology Solutions, Merchant Solutions and Issuer Solutions, which are organized based on the Company’s solution offerings. The reorganization consisted of separating the Company’s former Merchant segment into two separate segments, Technology Solutions and Merchant Solutions, with the Company’s Financial Institutions segment renamed Issuer Solutions. The Company’s Chairman of the Board and Co-Chief Executive Officer is the chief operating decision maker (“CODM”), who 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:

Technology Solutions - Technology Solutions provides merchant acquiring and payment processing services to a diverse set of merchants that primarily accept payments through eCommerce and integrated payment solutions.

32
 
 
 

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


Merchant Solutions - Merchant Solutions provides merchant acquiring and payment processing services to a diverse set of merchants that primarily accept payments through an omni-channel solution including terminal based.
Issuer Solutions - Issuer Solutions provides card issuer processing, payment network processing, fraud protection and card production to a diverse set of financial institutions, including regional banks, community banks, credit unions and regional PIN networks.
Segment operating results are presented below (in millions). 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 revenue less sales and marketing costs of the segment. The Company’s CODM evaluates this metric in analyzing the results of operations for each segment.