The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Item 8 - Financial Statements and Supplementary Data." This discussion and analysis contains forward-looking statements about our plans and expectations of what may happen in the future. Forward-looking statements are based on a number of assumptions and estimates that are inherently subject to significant risks and uncertainties, and our actual results could differ materially from the results anticipated by our forward-looking statements as a result of many known and unknown factors, including but not limited to, those discussed in "Item 1A - Risk Factors." See "Cautionary Notice Regarding Forward-Looking Statements" located above in "Item 1 - Business." Discussions of our results of operations for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 that have been omitted under this item can be found in "Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Form 10-K for the year endedDecember 31, 2020 , which was filed with theUnited States Securities and Exchange Commission onFebruary 19, 2021 . OnSeptember 18, 2019 , we consummated our merger with Total System Services, Inc. ("TSYS") (the "Merger") for total purchase consideration of$24.5 billion , primarily funded with shares of our common stock. Consolidated operating results for the years endedDecember 31, 2020 and 2021 each reflect a full year of the acquired operations of TSYS, while consolidated operating results for the year endedDecember 31, 2019 include the acquired operations of TSYS only from the acquisition date throughDecember 31, 2019 . See "Note 2-Acquisitions" in the notes to the accompanying consolidated financial statements for further discussion of the Merger. 32 -------------------------------------------------------------------------------- Table of Contents Executive Overview We are a leading payments technology company delivering innovative software and services to our customers globally. Our technologies, services and team member expertise allow us to provide a broad range of solutions that enable our customers to operate their businesses more efficiently across a variety of channels around the world. We operate in three reportable segments: Merchant Solutions, Issuer Solutions and Business and Consumer Solutions. See "Note 16-Segment Information" in the notes to the accompanying consolidated financial statements for additional information about our segments. We have grown organically as well as through acquisitions. We also continue to invest in new technology solutions, infrastructure to support our growing business and the continued consolidation and enhancement of our operating platforms. These investments include new product development and innovation to further enhance and differentiate our suite of technology and cloud-based solutions available to customers, along with migration of certain underlying technology platforms to cloud environments to enhance performance and drive cost efficiencies. We also continue to execute on merger and integration activities, primarily related to the Merger, such as combining business operations, streamlining technology infrastructure, eliminating duplicative corporate and operational support structures and realizing scale efficiencies.
Highlights related to our financial situation as of
•Consolidated revenues for the year endedDecember 31, 2021 increased to$8,523.8 million , compared to$7,423.6 million for the prior year. The increase in consolidated revenues is primarily due to an increase in transaction volumes from continued economic recovery as COVID-19 restrictions eased and acceleration in the use of digital payment solutions. •Consolidated operating income for the year endedDecember 31, 2021 increased to$1,358.9 million , compared to$894.0 million for the prior year. Operating margin for the year endedDecember 31, 2021 increased to 15.9% compared to 12.0% for the prior year. The increase in consolidated operating income and operating margin for the year endedDecember 31, 2021 is primarily due to the increase in revenues and favorable effects of Merger-related cost synergies.
•We have expanded our business through the completion of several strategic acquisitions.
•OnJune 10, 2021 , we acquired Zego, a real estate technology company that provides a comprehensive resident experience management software and digital commerce solutions to property managers, primarily inthe United States , for cash consideration of approximately$933 million . This acquisition aligns with our technology-enabled, software driven strategy and expands our business into a new vertical market. •During the year endedDecember 31, 2021 , we completed other strategic business acquisitions for an aggregate purchase price of approximately$963 million . Our acquisition of MineralTree, a leading provider of accounts payable automation and B2B payments solutions, expands our target addressable market and provides incremental avenues for growth in one of the most attractive technology markets. Our acquisitions of the Bankia merchant services business and Worldline'sPayOne Austrian acquiring business deepen our presence inEurope and expand the scale of our distribution and technologies.
•Our capital allocation priorities were supported by the successful issuance of new senior unsecured notes.
•OnNovember 22, 2021 , we issued$2.0 billion aggregate principal amount of senior unsecured notes consisting of the following: (i)$500.0 million aggregate principal amount of 1.500% senior notes dueNovember 2024 ; (ii)$750.0 million aggregate principal amount of 2.150% senior notes dueJanuary 2027 ; and (iii)$750.0 million aggregate principal amount of 2.900% senior notes dueNovember 2031 . We used the net proceeds from the offering to repay the outstanding indebtedness under our revolving credit facility and for general corporate purposes. •OnFebruary 26, 2021 , we issued$1.1 billion aggregate principal amount of 1.200% senior unsecured notes dueMarch 2026 . We used the net proceeds from the offering to fund the redemption in full of the 3.800% senior unsecured notes dueApril 2021 , to repay a portion of the outstanding indebtedness under our revolving credit facility and for general corporate purposes. 33 -------------------------------------------------------------------------------- Table of Contents Emerging Trends The payments technology industry continues to grow worldwide and as a result, certain large payment technology companies, including us, have expanded operations globally by pursuing acquisitions and creating alliances and joint ventures. We expect to continue to expand into new markets internationally and increase our scale and improve our competitiveness in existing markets by pursuing additional acquisitions and joint ventures. The industry continues to grow as a result of wider merchant acceptance and increased use of credit and debit cards, advances in payment processing technology and migration to ecommerce, omnichannel and contactless payment solutions. The proliferation of credit and debit cards, as well as other digital payment solutions, has made the acceptance of digital payments a virtual necessity for many businesses, regardless of size, in order to remain competitive. Further, the expanding digitization of the economy and availability and access to financial services increases the demand for cards and digital payment solutions, which in turn drives growth in acceptance and transaction volumes. The use of digital payment solutions, the need for development of technologies and digital-based solutions and expansion of ecommerce, omnichannel and contactless payment solutions has accelerated, in part as a result of the COVID-19 pandemic. We believe that the number of digital payment transactions will continue to grow and that an increasing percentage of these will be facilitated through emerging technologies. As a result, we expect an increasing portion of our future capital investment will be allocated to support the development of new and emerging technologies, including technology modernization, innovation and integration through strategic partnerships. We also believe new markets will continue to develop and expand in areas that have been previously dominated by paper-based transactions. We expect industries such as education, government and healthcare, as well as recurring payments and B2B payments, to continue to see transactions migrate to digital-based solutions. We anticipate that the continued development of new services and technologies, the emergence of new vertical markets and continued expansion of technology-enabled ecommerce and omnichannel solutions, including expanded scale and market reach through new innovative cloud-based capabilities and strategic partnerships, will be a factor in the growth of our business and our revenue in the future. For a further discussion of trends, uncertainties and other factors that could affect our continuing operating results, see the section entitled "Risk Factors" in Item 1A in this Annual Report on Form 10-K.
COVID-19 Update
Since early 2020, the global economy has been affected by the COVID-19 pandemic. The pandemic has caused and may continue to cause significant disruptions to businesses and markets worldwide through the continued spread of the virus, including through a resurgence of COVID-19 cases or emergence of new more contagious or vaccine-resistant virus variants in certain jurisdictions. Beginning inmid-March 2020 , our financial results were affected by decreased spending and transaction volumes, as governments implemented measures in an effort to contain the virus, including lockdowns, physical distancing, travel restrictions, limitations on public gatherings, work from home and restrictions on nonessential businesses. We saw improvement in our financial results during the latter half of 2020 and in 2021, driven by an increase in spending and transaction volumes as a result of an ease in restrictions and distribution of economic stimulus provided by certain governments and continued vaccine distribution. While we continue to see signs of economic recovery, which has positively affected our financial results in 2021 compared to the prior year, the rate of recovery on a global basis has been and may continue to be affected by additional developments related to COVID-19. At the onset of the pandemic, we took early actions to preserve our available capital and provide financial flexibility in response to the effects of COVID-19 on our business, including the temporary reduction of certain operating expenses, employee compensation costs, other discretionary spending and planned capital expenditures, adding to the strength of our financial profile. Certain operating expenses, capital expenditures and other investments in the business have recently returned to more normalized levels. We expect to continue to make significant capital investments in the business while also continuing to manage other discretionary spending. We continue to closely monitor the COVID-19 pandemic; however, the implications on future global economic conditions and related effects on our business and financial condition are difficult to predict due to continuing uncertainties around the ultimate severity, scope and duration of the pandemic, vaccine administration rates and efficacy, resurgence of COVID-19 cases and emergence of new more contagious or vaccine-resistant virus variants and the direction or extent of current or future restrictive actions that may be imposed by governments or public health authorities.
For a more in-depth discussion of trends, uncertainties and other factors that could affect our future results of operations related to the effects of the COVID-19 pandemic, see “Item 1A – Risk Factors”.
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Table of Contents
Results of Operations
Revenues
Merchant Solutions. The majority of our Merchant Solutions segment revenues is
generated by services priced as a percentage of transaction value or a specified
fee per transaction, depending on card type or industry vertical. We also earn
software subscription and licensing fees, as well as other fees based on
specific value-added services that may be unrelated to the number or value of
transactions. These revenues depend upon a number of factors, such as demand for
and price of our services, the technological competitiveness of our offerings,
our reputation for providing timely and reliable service, competition within our
industry and general economic conditions.
We provide payment technology and software solutions to customers and fund
settlement either directly, in markets where we have direct membership with the
payment networks, or through our relationship with a member financial
institution in markets where we are sponsored. Revenues are generally recognized
in the amount of customer billing, net of interchange fees and payment network
fees. We market our services through a variety of relationship-led and
technology-enabled distribution channels, including a direct sales force, trade
associations, agent and enterprise software providers and referral arrangements
with value-added resellers ("VARs"). We also sell services to ISOs and financial
institutions. In certain of these arrangements, the ISO receives a share of the
customer profitability in the form of a monthly residual payment, which is
reflected as a component of selling, general and administrative expenses in the
consolidated statements of income.
Issuer Solutions. Issuer Solutions segment revenues are derived from long-term
processing contracts with financial institutions and other financial services
providers. Payment processing services revenues are generated primarily from
charges based on the number of accounts on file, transactions and authorizations
processed, statements generated and/or mailed, managed services, cards embossed
and mailed, and other processing services for cardholder accounts on file. Most
of these contracts have prescribed annual minimums, penalties for early
termination, and service level agreements that may affect contractual fees if
specific service levels are not achieved. Issuer Solutions revenues also include
loyalty redemption services and professional services.
Business and Consumer Solutions. Business and Consumer Solutions segment
revenues principally consist of fees collected from cardholders and fees
generated by cardholder activity in connection with the programs that we manage.
Customers are typically charged a fee for each purchase transaction made using
their cards, unless the customer is on a monthly or annual service plan, in
which case the customer is instead charged a monthly or annual subscription fee,
as applicable. Customers are also charged a monthly maintenance fee after a
specified period of inactivity. We also charge fees associated with additional
services offered in connection with certain cards, including the use of
overdraft features, a variety of bill payment options, card replacement, foreign
exchange and card-to-card transfers of funds initiated through our call centers.
Revenues are recognized net of fees charged by the payment networks for services
they provide in processing transactions routed through them. Additionally,
revenues include fees from B2B payment services and software-as-a-service
("SaaS") offerings that automate key procurement processes and enable virtual
cards and integrated payments options. We have recently commenced a strategic
evaluation of the consumer portion of this segment with the intent to focus on
our growing B2B portfolio.
Operating Expenses
Cost of Service
Cost of service consists primarily of salaries, wages and related expenses paid
to operations and technology-related personnel, including those who monitor our
transaction processing systems and settlement functions; the cost of transaction
processing systems, including third-party services; the cost of network
telecommunications capability; depreciation and occupancy costs associated with
the facilities supporting these functions; amortization of intangible assets;
amortization of costs to fulfill customer contracts; provisions for operating
losses; and, when applicable, integration expenses.
Selling, general and administrative expenses
Selling, general and administrative expenses consist primarily of salaries,
wages, commissions and related expenses paid to sales personnel, customer
support functions other than those supporting revenue, administrative employees
and management; share-based compensation expense; amortization of costs to
obtain customer contracts; residuals paid to ISOs; fees paid to VARs,
independent contractors and other third parties; other selling expenses;
occupancy costs of leased space directly related to these functions; advertising
costs; and, when applicable, acquisition and integration expenses.
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Table of Contents
Operating Income and Operating Margin
For the purpose of discussing segment operations, we refer to "operating
income," which is calculated by subtracting segment direct expenses from segment
revenues. Overhead and shared expenses, including share-based compensation, are
not allocated to segment operations; they are reported in the caption
"Corporate." Similarly, we refer to "operating margin" regarding segment
operations, which is calculated by dividing segment operating income by segment
revenues.
Equity in investment income under the equity method
We have equity method investments, including a 45% interest inChina UnionPay Data Co., Ltd. , which we account for using the equity method of accounting. Equity in income of equity method investments reflects our proportional share of earnings from these investments. 36 -------------------------------------------------------------------------------- Table of Contents Year EndedDecember 31, 2021 Compared to Year EndedDecember 31, 2020 The following table sets forth key selected financial data for the years endedDecember 31, 2021 and 2020, this data as a percentage of total revenues, and the changes between periods in dollars and as a percentage of the prior-period amount. The income statement data for the years endedDecember 31, 2021 and 2020 are derived from the accompanying consolidated financial statements included in "Item 8 - Financial Statements and Supplementary Data." Year Ended December 31, Year Ended December 31, (dollar amounts in thousands) 2021 % of Revenue(1) 2020 % of Revenue(1) Change % Change Revenues(2): Merchant Solutions $ 5,665,557 66.5 % $ 4,688,335 63.2 %$ 977,222 20.8 % Issuer Solutions 2,065,971 24.2 % 1,981,435 26.7 % 84,536 4.3 % Business and Consumer Solutions 886,443 10.4 % 829,505 11.2 % 56,938 6.9 % Intersegment eliminations (94,209) (1.1) % (75,717) (1.0) % (18,492) 24.4 % Consolidated revenues $ 8,523,762 100.0 % $ 7,423,558 100.0 %$ 1,100,204 14.8 % Consolidated operating expenses(2): Cost of service $ 3,773,725 44.3 % $ 3,650,727 49.2 %$ 122,998 3.4 % Selling, general and administrative 3,391,161 39.8 % 2,878,878 38.8 % 512,283 17.8 % Operating expenses $ 7,164,886 84.1 % $ 6,529,605 88.0 %$ 635,281 9.7 % Operating income (loss)(2)(3): Merchant Solutions $ 1,725,990 20.2 % $ 1,162,741 15.7 %$ 563,249 48.4 % Issuer Solutions 301,119 3.5 % 277,651 3.7 % 23,468 8.5 % Business and Consumer Solutions 167,777 2.0 % 138,630 1.9 % 29,147 21.0 % Corporate (836,010) (9.8) % (685,069) (9.2) % (150,941) 22.0 % Operating income $ 1,358,876 15.9 % $ 893,953 12.0 %$ 464,923 52.0 % Operating margin(2): Merchant Solutions 30.5 % 24.8 % 5.7 % Issuer Solutions 14.6 % 14.0 % 0.6 % Business and Consumer Solutions 18.9 % 16.7 % 2.2 %
(1) Percentages may not add up to total due to rounding.
(2) Revenues, consolidated operating expenses, operating profit (loss) and operating margin reflect the effects of the businesses acquired from the respective acquisition dates.
(3) Operating loss for Corporate included acquisition and integration expenses of$335.5 million and$313.0 million during the years endedDecember 31, 2021 and 2020, respectively. During the year endedDecember 31, 2021 , operating loss for Corporate also included$56.8 million of other charges related to facilities exit activities in response to the transition to remote and flexible work arrangements.
Revenue
Consolidated revenues for the year endedDecember 31, 2021 increased by 14.8% to$8,523.8 million , compared to$7,423.6 million for the prior year. Starting inmid-March 2020 , COVID-19 began to have an unfavorable effect on transaction volumes and on our revenues. We saw improvements during the latter half of 2020 and in 2021, and revenues for the year endedDecember 31, 2021 increased compared to the prior year primarily due to an increase in transaction volumes from continued economic recovery as COVID-19 restrictions eased and acceleration in the use of digital payment solutions. While we continue to see signs of economic recovery, which has positively affected our financial results in 2021 compared to the prior year, the rate of recovery on a global basis has been and may continue to be affected by additional developments related to COVID-19. 37 -------------------------------------------------------------------------------- Table of Contents Merchant Solutions Segment. Revenues from our Merchant Solutions segment for the year endedDecember 31, 2021 increased by 20.8% to$5,665.6 million , compared to$4,688.3 million for the prior year. Starting inmid-March 2020 , COVID-19 began to have an unfavorable effect on our revenues as a result of a reduction in transaction volumes and restrictions on certain of our customer businesses throughoutNorth America ,Europe andAsia Pacific . We saw improvement in our financial results during the latter half of 2020 and in 2021 as certain governments eased pandemic-related restrictions and consumer and business spending increased. Revenues for the year endedDecember 31, 2021 increased compared to the prior year due to an increase in transaction volumes from continued economic recovery as COVID-19 restrictions eased and acceleration in the use of digital payment solutions. While we continue to see signs of economic recovery, which has positively affected our financial results in 2021 compared to the prior year, additional developments related to COVID-19 slowed the rate of recovery during the fourth quarter of 2021. Issuer Solutions Segment. Revenues from our Issuer Solutions segment for the year endedDecember 31, 2021 increased by 4.3% to$2,066.0 million , compared to$1,981.4 million for the prior year. Starting inmid-March 2020 , COVID-19 began to have an unfavorable effect on our revenues as a result of lower transaction volumes, particularly related to the processing of commercial cards. We saw improvement in our financial results during the latter half of 2020 and in 2021 as certain governments began to gradually ease pandemic-related restrictions. The increase in revenues for the year endedDecember 31, 2021 was primarily due to an increase in transaction volumes from continued economic recovery as COVID-19 restrictions eased and growth in our output services of card and statement production. Business and Consumer Solutions Segment. Revenues from our Business and Consumer Solutions segment for the year endedDecember 31, 2021 increased by 6.9% to$886.4 million , compared to$829.5 million for the prior year. Our Business and Consumer Solutions segment experienced an unfavorable effect on revenues starting inmid-March 2020 due to reduced consumer spending as a result of COVID-19. We saw improvement in our financial results throughout the latter half of 2020 and in 2021 from increases in consumer spending driven by government stimulus programs and the easing of COVID-19 related restrictions. Increases in consumer spending and additional spending volumes driven by further individual stimulus payments distributed to our customers bythe United States government had a favorable effect on revenues for the year endedDecember 31, 2021 . Our revenues for the year endedDecember 31, 2020 also included the favorable effect of revenues from individual stimulus payments and supplementary unemployment insurance distributions to our customers resulting from the Coronavirus Aid, Relief and Economic Security Act. To a lesser extent, revenues from recently acquired businesses contributed to the increase in revenues for the year endedDecember 31, 2021 . We do not expect any recurring effect on our revenues in 2022 related to government stimulus payment distributions.
Functionnary costs
Cost of Service. Cost of service for the year endedDecember 31, 2021 increased by 3.4% to$3,773.7 million , compared to$3,650.7 million for the prior year. Cost of service as a percentage of revenues decreased to 44.3% for the year endedDecember 31, 2021 , compared to 49.2% for the prior year. The increase in cost of service is primarily due to higher variable costs associated with the increase in revenues. The increase in costs of service also reflects an increase in amortization of acquired intangibles, which were$1,295.0 million and$1,256.9 million for the years endedDecember 31, 2021 and 2020, respectively. The decrease in cost of service as a percentage of revenues is primarily due to the favorable effects of the increases in revenues, since certain fixed costs do not vary with revenues, and Merger-related cost synergies. Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year endedDecember 31, 2021 increased by 17.8% to$3,391.2 million , compared to$2,878.9 million for the prior year. Selling, general and administrative expenses as a percentage of revenues was 39.8% for the year endedDecember 31, 2021 , compared to 38.8% for the prior year. The increase in selling, general and administrative expenses is primarily due to an increase in variable selling and other costs related to the increase in revenues. The increase in selling, general and administrative expenses as a percentage of revenues is primarily due to higher employee compensation expense, including an increase in share-based compensation expense of$32.0 million , and higher acquisition and integration expenses, which were$340.2 million for the year endedDecember 31, 2021 , compared to$319.5 million for the prior year. Employee compensation costs were lower in the prior year as a result of certain temporary cost-saving actions taken to help mitigate the financial effects of the COVID-19 pandemic. Additionally, share-based compensation expense was higher in the current year primarily driven by the vesting of certain performance-based restricted stock units upon achievement of performance measures during the period. In addition, opportunities were identified during the fourth quarter of 2021 to reduce our facility footprint in certain markets around the world given the success of remote work and flexible arrangements implemented during the COVID-19 pandemic. Actions taken to exit certain leased facilities resulted in charges of$56.8 million during the year endedDecember 31, 2021 , primarily to reduce the carrying amount of the affected asset groups to estimated fair value. We continue to evaluate our physical footprint and additional charges may be incurred as these facilities exit activities continue in 2022. Corporate. Corporate expenses for the year endedDecember 31, 2021 increased by$150.9 million to$836.0 million , compared to$685.1 million for the prior year. The increase for the year endedDecember 31, 2021 is primarily due to higher employee compensation expense, including an increase in share-based compensation expense of$32.0 million as described 38 -------------------------------------------------------------------------------- Table of Contents above, higher acquisition and integration expenses, which were$335.5 million for the year endedDecember 31, 2021 compared to$313.0 million for the prior year, and other charges related to facilities exit activities in the fourth quarter of 2021 as described above. Certain of the Merger-related integration activities resulted in the recognition of employee termination benefits. During the years endedDecember 31, 2021 and 2020, Corporate expenses included charges for employee termination benefits of$43.4 million and$83.3 million , respectively, which included$1.2 million and$6.7 million , respectively, of share-based compensation expense. As ofDecember 31, 2021 , the cumulative amount of recognized charges for employee termination benefits resulting from Merger-related integration activities was$183.8 million , which included$25.2 million of share-based compensation expense. Employee termination benefits from Merger-related integration activities are substantially complete as ofDecember 31, 2021 .
Operating profit and operating margin
Consolidated operating income for the year endedDecember 31, 2021 increased to$1,358.9 million , compared to$894.0 million for the prior year. Operating margin for the year endedDecember 31, 2021 increased to 15.9%, compared to 12.0% for the prior year. The increase in consolidated operating income and operating margin for the year endedDecember 31, 2021 was primarily due to the increases in revenues, the operating margin effect in part being driven by the fact that certain fixed costs do not vary with revenues. The unfavorable effects of COVID-19 on our revenues and incremental expenses directly related to COVID-19 contributed to the lower consolidated operating income and operating margin in the prior year. We saw improvement in our financial results and positive trends during the latter half of 2020 and in 2021 as a result of the recovery seen across our markets as COVID-19 restrictions eased. Further, Merger-related cost synergies and lower credit loss expense had a favorable effect on operating income and operating margin for the year endedDecember 31, 2021 . The increase in consolidated operating income and operating margin for the year endedDecember 31, 2021 was partially offset by an increase in acquisition and integration expenses of$20.3 million compared to the prior year, charges related to facilities exit activities in the fourth quarter of 2021 as described above and an increase in amortization of acquired intangibles of$38.1 million compared to the prior year. Operating income and operating margin for the year endedDecember 31, 2021 also reflects an increase in employee compensation expense compared to the prior year as a result of certain temporary cost-saving actions taken in the prior year to help mitigate the financial effects of the COVID-19 pandemic and higher share-based compensation expense in the current year associated with performance-based awards. Segment Operating Income and Operating Margin. Operating income and operating margin in each of our Merchant Solutions, Issuer Solutions and Business and Consumer Solutions segments for the year endedDecember 31, 2021 increased compared to the prior year due to the increase in revenues. We saw improvement in our financial results and positive trends during the latter half of 2020 and in 2021 as a result of the recovery seen across our geographic markets as COVID-19 restrictions eased and consumer and business spending increased, in part as a result of government stimulus payments. Further, across all of our segments, Merger-related cost synergies had a favorable effect on segment operating income and operating margin for the year endedDecember 31, 2021 . In our Business and Consumer Solutions segment, operating income and operating margin for the year endedDecember 31, 2021 were favorably affected by spending volumes driven by additional stimulus payments distributed bythe United States government in early 2021, and operating income and operating margin for the year endedDecember 31, 2020 included the favorable effect from our customers loading individual stimulus payments and supplementary unemployment insurance distributions during the second quarter of 2020.
Other income/expenses, net
Interest and other income for the year endedDecember 31, 2021 decreased by$24.2 million to$19.3 million , compared to$43.6 million for the prior year. Interest and other income for the year endedDecember 31, 2020 included a gain of$27.7 million in connection with the release and conversion of a portion of ourVisa convertible preferred shares. See "Note 7-Other Assets" in the notes to the accompanying consolidated financial statements for further discussion of this transaction. Interest and other expense for the year endedDecember 31, 2021 decreased by$9.9 million to$333.7 million , compared to$343.5 million for the prior year, as a result of lower average interest rates on outstanding borrowings in 2021 as we replaced higher interest rate senior notes with lower interest rates senior notes and the average LIBOR rate year over year was lower. 39 -------------------------------------------------------------------------------- Table of Contents Income Tax Expense Our effective income tax rates for the years endedDecember 31, 2021 and 2020 were 16.2% and 13.0%, respectively. The increase in our effective tax rate for the year endedDecember 31, 2021 from the prior year was primarily due to the geographical mix of earnings compared to the prior year and a change in theU.K. statutory income tax rate that was enacted during the year endedDecember 31, 2021 , which required a remeasurement of deferred tax balances to increase the effective tax rate. The effective tax rate for the year endedDecember 31, 2020 also included the effect of a change in theU.K. statutory income tax rate that took effect during the year, which required a remeasurement of deferred tax balances to increase the effective tax rate; however, the 2021 U.K. tax rate change had a more significant effect on our effective tax rate than the 2020U.K. tax rate change. These effects were partially offset by a change in the assessment of the need for a valuation allowance related to foreign net operating losses and foreign tax credit carryforwards during the year endedDecember 31, 2021 . In addition, the lower effective tax rate in 2020 reflects the effect of permanent differences on lower income before income taxes, since the amounts of certain of our permanent differences do not vary with income before income taxes.
Equity in investment income under the equity method
The share of income from equity-accounted investments increased to
compared to
Net income attributable to
Net income attributable to
Diluted earnings per share
Diluted earnings per share was$3.29 compared to$1.95 for the prior year. Diluted earnings per share for the year endedDecember 31, 2021 reflects the increase in net income and a decrease in the weighted-average number of shares outstanding.
Cash and capital resources
We have many sources of capital, including cash and cash flow generated from operations as well as various sources of financing. In the normal course of our business, a significant portion of our liquidity comes from operating cash flow and borrowings, including capacity under our credit facilities.
Our capital allocation priorities are to make planned capital investments in our business, to pursue acquisitions that meet our corporate objectives, to pay dividends, to pay principal and interest on our outstanding debt and to repurchase shares of our common stock. Our significant contractual cash requirements also include ongoing payments for lease liabilities and contractual obligations related to service arrangements with suppliers for fixed or minimum amounts, which primarily relate to software, technology infrastructure and related services. For additional information regarding our cash commitments and contractual obligations, see "Note 6-Leases," "Note 8-Long-Term Debt and Lines of Credit" and "Note 17-Commitments and Contingencies" in the notes to the accompanying consolidated financial statements. Our capital plan objectives are to support our operational needs and strategic plan for long-term growth while maintaining a low cost of capital. To supplement cash from operating activities, we use a combination of bank financing, such as borrowings under our credit facilities and senior note issuances, for general corporate purposes and to fund acquisitions. In addition, specialized lines of credit are also used in certain of our markets to fund merchant settlement prior to receipt of funds from the card networks. We believe that our current level of cash and borrowing capacity under our senior unsecured revolving credit facility, together with expected future cash flows from operations, will be sufficient to meet both the near-term and long-term needs of our existing operations and planned requirements. Early actions taken to preserve our available capital and provide financial flexibility in response to the effects of COVID-19 on our business, including the temporary reduction of certain operating expenses, employee compensation costs, other discretionary spending and planned capital expenditures, added to the strength of our financial profile. We regularly evaluate our liquidity and capital position relative to cash requirements, and we may elect to raise additional funds in the future, through the issuance of debt or equity or by other means.
AT
40 -------------------------------------------------------------------------------- Table of Contents customers. Settlement-related cash balances represent funds that we hold when the incoming amount from the card networks precedes the funding obligation to the merchant. Settlement-related cash balances are not restricted in their use; however, these funds are generally paid out in satisfaction of settlement processing obligations the following day. Merchant Reserves serve as collateral to minimize contingent liabilities associated with any losses that may occur under the merchant's agreement. While this cash is not restricted in its use, we believe that designating this cash as a Merchant Reserve strengthens our fiduciary standing with our member sponsors. Funds held for customers, which are not restricted in their use, include amounts collected before the corresponding obligation is due to be settled to or at the direction of our customers. Accumulated cash balances are invested in high-quality, marketable short-term instruments.
We also had tight cash of
Operating activities provided net cash of$2,780.8 million and$2,314.2 million for the years endedDecember 31, 2021 and 2020, respectively, which reflect net income adjusted for noncash items, including depreciation and amortization, facility exit charges and changes in operating assets and liabilities. Fluctuations in operating assets and liabilities are affected primarily by timing of month-end and transaction volume, including changes in settlement processing assets and obligations and accounts payable and other liabilities balances, and by the effects of businesses we acquire that have different working capital requirements. The increase in cash flows from operating activities from the prior year was primarily due to an increase in earnings, an increase in accounts payable and other liabilities balances due to timing of month-end and transaction volume, partially offset by an increase in accounts receivable as a result of higher revenues in the current year. We used net cash in investing activities of$2,293.8 million and$438.3 million during the years endedDecember 31, 2021 and 2020, respectively. Cash used for investing activities primarily represents cash used to fund acquisitions, net of cash and restricted cash acquired, and capital expenditures. During the year endedDecember 31, 2021 , we used cash of$1,904.7 million for acquisitions. During the year endedDecember 31, 2020 , we used cash of$167.9 million for acquisitions and recorded a cash inflow of$119.4 million from restricted cash balances acquired during the year. Cash from investing activities for the year endedDecember 31, 2020 also reflects cash received from the sale ofVisa common shares of$27.7 million . We made capital expenditures of$493.2 million and$436.2 million during the years endedDecember 31, 2021 and 2020, respectively. These investments include software and hardware to support the development of new technologies, infrastructure to support our growing business and the continued consolidation and enhancement of our operating platforms. These investments also include new product development and innovation to further enhance and differentiate our suite of technology and cloud-based solutions available to customers, along with the migration of certain underlying technology platforms to cloud environments to enhance performance and drive cost efficiencies. Capital expenditures and other investments in the business have recently returned to more normalized levels, and we expect to continue to make significant capital investments in the business. We anticipate capital expenditures to grow at a similar rate as our revenue growth for the year endingDecember 31, 2022 . Financing activities include borrowings and repayments made under our various debt arrangements, as well as borrowings and repayments made under specialized lines of credit to fund daily settlement activities. Our borrowing arrangements are further described in "Note 8-Long-Term Debt and Lines of Credit" in the notes to the accompanying consolidated financial statements and below under "Long-Term Debt and Lines of Credit." Financing activities also include cash flows associated with common stock repurchase programs and share-based compensation programs, cash distributions made to our shareholders, and cash contributions from and distributions to noncontrolling interests. We used net cash in financing activities of$405.4 million and$1,546.1 million during the years endedDecember 31, 2021 and 2020, respectively. Proceeds from long-term debt were$7,057.7 million and$2,401.1 million for the years endedDecember 31, 2021 and 2020, respectively. Repayments of long-term debt were$4,826.8 million and$2,342.1 million for the years endedDecember 31, 2021 and 2020, respectively. Proceeds from and repayments of long-term debt consist of borrowings and repayments that we make with available cash, from time-to-time, under our revolving credit facility, as well as scheduled principal repayments we make on our term loans. OnFebruary 26, 2021 , we issued$1.1 billion aggregate principal amount of 1.200% senior unsecured notes dueMarch 2026 . We used the net proceeds from this offering to fund the redemption in full of the 3.800% senior unsecured notes dueApril 2021 , to repay a portion of the outstanding indebtedness under our revolving credit facility and for general corporate purposes. OnNovember 22, 2021 , we issued$2.0 billion aggregate principal amount of senior unsecured notes consisting of the following: (i)$500.0 million aggregate principal amount of 1.5% senior notes dueNovember 2024 ; (ii)$750.0 million aggregate principal amount of 2.150% senior notes dueJanuary 2027 ; and (iii)$750.0 million aggregate principal amount of 2.900% senior notes dueNovember 2031 . We used the net proceeds from the offering to repay the outstanding indebtedness under our revolving credit facility and for general corporate purposes. 41 -------------------------------------------------------------------------------- Table of Contents Activity under our settlement lines of credit is affected primarily by timing of month-end and transaction volume. During the year endedDecember 31, 2021 , we had net borrowings from settlement lines of credit of$149.5 million . During the year endedDecember 31, 2020 , we had net repayments of settlement lines of credit of$133.3 million . We repurchase our common stock, mainly through open market repurchase plans and, at times, through accelerated share repurchase ("ASR") programs. During the years endedDecember 31, 2021 and 2020, we used cash of$2,533.6 million and$631.1 million , respectively, to repurchase shares of our common stock. The share repurchase activity for the year endedDecember 31, 2021 , included the repurchase of 2,491,161 shares at an average price of$200.71 per share under an ASR agreement we entered into onFebruary 10, 2021 with a financial institution to repurchase an aggregate of$500.0 million of our common stock during the ASR program purchase period, which ended onMarch 31, 2021 . We temporarily suspended repurchases of our common stock during the second and third quarters of 2020, and reactivated our repurchase program in the fourth quarter of 2020. As ofDecember 31, 2021 , we had$1,540.0 million of share repurchase authority remaining under a share repurchase program authorized by our board of directors. OnJanuary 27, 2022 , our board of directors approved an increase to our existing share repurchase program authorization, which raised the total available authorization to$2.0 billion .
We paid dividends to our common shareholders in the amount of
and
During the year endedDecember 31, 2021 ,Global Payments and noncontrolling shareholders made contributions of$209.6 million and$70.0 million , respectively, to certain of our majority-owned subsidiaries based on each shareholder's proportionate ownership, primarily to fund acquisitions that closed in the fourth quarter of 2021. During the year endedDecember 31, 2020 , we paid$578.2 million to noncontrolling interest holders to increase our controlling financial interest inComercia Global Payments Entidad de Pago, S.L . ("Comercia") from 51% to 80%, which was funded through a combination of available cash resources and borrowings on our unsecured revolving credit facility. Additionally, during the year endedDecember 31, 2020 , we made distributions to noncontrolling interests in the amount of$26.2 million .
Long-term debt and lines of credit
Senior Unsecured Notes
We have$9.4 billion in aggregate principal amount of senior unsecured notes, which mature at various dates ranging fromJune 2023 toAugust 2049 . Interest on the senior notes is payable semi-annually at various dates. Each series of the senior notes is redeemable, at our option, in whole or in part, at any time and from time-to-time at the redemption prices set forth in the related indenture. OnNovember 22, 2021 , we issued$2.0 billion aggregate principal amount of senior unsecured notes consisting of the following: (i)$500.0 million aggregate principal amount of 1.500% senior notes dueNovember 2024 ; (ii)$750.0 million aggregate principal amount of 2.150% senior notes dueJanuary 2027 ; and (iii)$750.0 million aggregate principal amount of 2.900% senior notes dueNovember 2031 . We incurred debt issuance costs of approximately$14.4 million , including underwriting fees, fees for professional services and registration fees, which were capitalized and reflected as a reduction of the related carrying amount of the notes in our consolidated balance sheet atDecember 31, 2021 . Interest on the senior unsecured notes is payable semi-annually in arrears onMay 15 andNovember 15 for the 2024 and 2031 notes andJanuary 15 andJuly 15 on the 2027 note, commencingMay 15, 2022 for the 2024 note and the 2031 note andJuly 15, 2022 for the 2027 note. The notes are unsecured and unsubordinated indebtedness and rank equally in right of payment with all of our other outstanding unsecured and unsubordinated indebtedness. We used the net proceeds from the offering to repay the outstanding indebtedness under our revolving credit facility and for general corporate purposes. OnFebruary 26, 2021 , we issued$1.1 billion aggregate principal amount of 1.200% senior unsecured notes dueMarch 2026 . We incurred debt issuance costs of approximately$8.6 million , including underwriting fees, fees for professional services and registration fees, which were capitalized and reflected as a reduction of the related carrying amount of the notes in our consolidated balance sheet atDecember 31, 2021 . Interest on the notes is payable semi-annually in arrears onMarch 1 andSeptember 1 of each year, commencingSeptember 1, 2021 . The notes are unsecured and unsubordinated indebtedness and rank equally in right of payment with all of our other outstanding unsecured and unsubordinated indebtedness. We used the net proceeds from this offering to fund the redemption in full of the 3.800% senior unsecured notes dueApril 2021 , to repay a portion of the outstanding indebtedness under our revolving credit facility and for general corporate purposes. 42
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OnMay 15, 2020 , we issued$1.0 billion aggregate principal amount of 2.900% senior unsecured notes dueMay 2030 and received proceeds of$996.7 million . We incurred debt issuance costs of approximately$8.4 million , including underwriting fees, fees for professional services and registration fees, which were capitalized and reflected as a reduction of the related carrying amount of the notes in our consolidated balance sheet atDecember 31, 2021 . Interest on the notes is payable semi-annually in arrears onMay 15 andNovember 15 of each year, commencingNovember 15, 2020 . The notes are unsecured and unsubordinated indebtedness and rank equally in right of payment with all of our other outstanding unsecured and unsubordinated indebtedness. We used the net proceeds from the offering to repay a portion of the outstanding indebtedness on our revolving credit facility and for general corporate purposes. OnAugust 14, 2019 , we issued$3.0 billion aggregate principal amount of senior unsecured notes consisting of the following: (i)$1.0 billion aggregate principal amount of 2.650% senior notes due 2025; (ii)$1.25 billion aggregate principal amount of 3.200% senior notes due 2029; and (iii)$750.0 million aggregate principal amount of 4.150% senior notes due 2049. Interest on the senior notes is payable semi-annually in arrears on eachFebruary 15 andAugust 15 , beginning onFebruary 15, 2020 . Each series of the senior notes is redeemable, at our option, in whole or in part, at any time and from time-to-time at the redemption prices set forth in the related indenture. We issued the senior notes at a total discount of$6.1 million and capitalized related debt issuance costs of$29.6 million . FromAugust 14, 2019 until the closing of the Merger onSeptember 18, 2019 , the proceeds from the issuance of the senior notes were held in escrow. Upon closing, the funds were released and used together with borrowings under the term loan facility and the revolving credit facility, as well as cash on hand, to repay TSYS' unsecured revolving credit facility, refinance certain of our existing indebtedness, fund cash payments made in lieu of fractional shares and pay transaction fees and costs related to the Merger. In addition, in connection with the Merger, we assumed$3.0 billion aggregate principal amount of senior unsecured notes of TSYS, consisting of the following: (i)$750.0 million aggregate principal amount of 3.800% senior notes due 2021, which were redeemed inFebruary 2021 ; (ii)$550.0 million aggregate principal amount of 3.750% senior notes due 2023; (iii)$550.0 million aggregate principal amount of 4.000% senior notes due 2023; (iv)$750 million aggregate principal amount of 4.800% senior notes due 2026; and (v)$450 million aggregate principal amount of 4.450% senior notes due 2028. For the 3.800% senior notes due 2021 and the 4.800% senior notes due 2026, interest is payable semi-annually eachApril 1 andOctober 1 . For the 3.750% senior notes due 2023, the 4.000% senior notes due 2023 and the 4.450% senior notes due 2028, interest is payable semi-annually eachJune 1 andDecember 1 . The difference between the acquisition-date fair value and face value of senior notes assumed in the Merger is recognized over the terms of the respective notes as a reduction of interest expense. The amortization of this fair value adjustment was$29.6 million and$36.2 million for the years endedDecember 31, 2021 and 2020, respectively.
Senior unsecured credit facilities
We have a term loan credit agreement ("Term Loan Credit Agreement") and a
revolving credit agreement ("Unsecured Revolving Credit Agreement") in each case
with Bank of America, N.A ., as administrative agent, and a syndicate of
financial institutions, as lenders and other agents. The Term Loan Credit
Agreement provides for a senior unsecured $2.0 billion term loan facility, and
the Unsecured Revolving Credit Agreement provides for a senior unsecured $3.0
billion revolving credit facility. Borrowings under the term loan facility were
made in U.S. dollars and borrowings under the revolving credit facility are
available to be made in U.S. dollars, euros, sterling, Canadian dollars and,
subject to certain conditions, certain other currencies at our option.
Borrowings in U.S. dollars and certain other London Interbank Offered Rate
("LIBOR")-quoted currencies will bear interest, at our option, at a rate equal
to either (1) the rate (adjusted for any statutory reserve requirements for
eurocurrency liabilities) for eurodollar deposits in the London interbank
market, (2) a floating rate of interest set forth on the applicable LIBOR screen
page designated by Bank of America or (3) the highest of (a) the federal funds
effective rate plus 0.5%, (b) the rate of interest as publicly announced by Bank
of America as its "prime rate" or (c) LIBOR plus 1.0%, in each case, plus an
applicable margin. In connection with the sunset of certain LIBOR reference
rates occurring at the end of 2021, we amended the Unsecured Revolving Credit
Agreement in December 2021 to replace the London Interbank Offered Rate as
administered by the ICE Benchmark Administration with the Sterling Overnight
Index Average Reference Rate and the Euro Interbank Offered Rate for any
extension of credit denominated in sterling or euros, respectively. As of
December 31, 2021 , borrowings outstanding under the term loan facility were $2.0
billion and there were no outstanding borrowings under the revolving credit
facility.
As described in "Note 1-Basis of Presentation and Summary of Significant
Accounting Policies" in the notes to the accompanying consolidated financial
statements, we continue to monitor developments related to the upcoming
transition from USD LIBOR to an alternative benchmark reference rate after June
30, 2023 . Additionally, we maintain contact with our lenders and other
stakeholders to evaluate the potential effects of these changes on any future
financing activities.
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As ofDecember 31, 2021 , the interest rate on the term loan facility was 1.48%. In addition, we are required to pay a quarterly commitment fee with respect to the unused portion of the revolving credit facility at an applicable rate per annum ranging from 0.125% to 0.300% depending on our credit rating. Beginning onDecember 31, 2022 , and at the end of each quarter thereafter, the term loan facility must be repaid in quarterly installments in the amount of 2.50% of original principal through the maturity date with the remaining principal balance due upon maturity inSeptember 2024 . The revolving credit facility also matures inSeptember 2024 . We may issue standby letters of credit of up to$250 million in the aggregate under the revolving credit facility. Outstanding letters of credit under the revolving credit facility reduce the amount of borrowings available to us. The amounts available to borrow under the revolving credit facility are also determined by a financial leverage covenant. As ofDecember 31, 2021 , the total available commitments under the revolving credit facility were$1.9 billion .
Compliance with commitments
The term loan facility and the revolving credit facility contain customary conditions to funding, affirmative covenants, negative covenants, financial covenants and events of default. As ofDecember 31, 2021 , financial covenants under the term loan facility required a leverage ratio of 3.50 to 1.00 and an interest coverage ratio of 3.00 to 1.00. We were in compliance with all applicable covenants as ofDecember 31, 2021 .
Settlement credit lines
In various markets where we do business, we have specialized lines of credit, that are restricted for use in funding settlement. The settlement lines of credit generally have variable interest rates, are subject to annual review and are denominated in local currency but may, in some cases, facilitate borrowings in multiple currencies. For certain of our lines of credit, the available credit is increased by the amount of cash we have on deposit in specific accounts with the lender. Accordingly, the amount of the outstanding lines of credit may exceed the stated credit limit. As ofDecember 31, 2021 and 2020, a total of$76.3 million and$64.5 million , respectively, of cash on deposit was used to determine the available credit. As ofDecember 31, 2021 , we had$484.2 million outstanding under these lines of credit with additional capacity to fund settlement of$1,693.2 million . During the year endedDecember 31, 2021 , the maximum and average outstanding balances under these lines of credit were$1,267.4 million and$487.7 million , respectively. The weighted-average interest rate on these borrowings was 2.22% atDecember 31, 2021 . See "Note 8-Long-Term Debt and Lines of Credit" in the notes to the accompanying consolidated financial statements for further information about our borrowing agreements. BIN/ICA Agreements We have entered into sponsorship or depository and processing agreements with certain banks. These agreements allow us to use the banks' identification numbers, referred to as Bank Identification Number ("BIN") forVisa transactions andInterbank Card Association ("ICA") number for Mastercard transactions, to clear credit card transactions throughVisa and Mastercard. Certain of such agreements contain financial covenants, and we were in compliance with all such covenants as ofDecember 31, 2021 .
Significant Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted inthe United States , which often require the judgment of management in the selection and application of certain accounting principles and methods. We consider the following accounting policies to be critical to understanding our consolidated financial statements because the application of these policies requires significant judgment on the part of management, and as a result, actual future developments may be different from those expected at the time that we make these critical judgments. We have discussed these critical accounting policies with the audit committee of the board of directors. Accounting estimates necessarily require subjective determinations about future events and conditions. Therefore, the following descriptions of our critical accounting policies are forward-looking statements, and actual results could differ materially from the results anticipated by these forward-looking statements. You should read the following in conjunction with "Note 1-Basis of Presentation and Summary of Significant Accounting Policies" of the notes to the accompanying 44 -------------------------------------------------------------------------------- Table of Contents consolidated financial statements and the risk factors contained in "Item 1A - Risk Factors" of this Annual Report on Form 10-K.
Business combinations
From time to time, we make strategic acquisitions that may have a material effect on our consolidated results of operations and financial position. The measurement principle for the assets acquired and the liabilities assumed in a business combination is at estimated fair value as of the acquisition date, with certain exceptions. The excess of the total consideration transferred over the amount of the net identifiable assets acquired determined in accordance with the measurement guidance for such items is recorded as goodwill. The estimates we use to determine the fair value of long-lived assets, such as intangible assets, can be complex and require significant judgments. We use information available to us to make fair value determinations and engage independent valuation specialists, when necessary, to assist in the fair value determination of significant acquired long-lived assets. The estimated fair values of customer-related and contract-based intangible assets are generally determined using the income approach, which is based on projected cash flows discounted to their present value using discount rates that consider the timing and risk of the forecasted cash flows. The discount rates used represented a risk adjusted market participant weighted-average cost of capital, derived using customary market metrics. These measures of fair value also require considerable judgments about future events, including forecasted revenue growth rates, forecasted customer attrition rates, contract renewal estimates and technology changes. Acquired technologies are generally valued using the replacement cost method, which requires us to estimate the costs to construct an asset of equivalent utility at prices available at the time of the valuation analysis, with adjustments in value for physical deterioration and functional and economic obsolescence. Trademarks and trade names are generally valued using the "relief-from-royalty" approach. This method assumes that trademarks and trade names have value to the extent that their owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires us to estimate the future revenues for the related brands, the appropriate royalty rate and the weighted-average cost of capital. This measure of fair value requires considerable judgment about the value a market participant would be willing to pay in order to achieve the benefits associated with the trade name. While we use our best estimates and assumptions to determine the fair values of the assets acquired and the liabilities assumed, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to our consolidated statements of income. We are also required to estimate the useful lives of intangible assets to determine the period over which to recognize the amount of acquisition-related intangible assets as an expense. We periodically review the estimated useful lives assigned to our intangible assets to determine whether such estimated useful lives continue to be appropriate.Goodwill - We perform our annual goodwill impairment test as ofOctober 1 each year. We test goodwill for impairment at the reporting unit level annually and more often if an event occurs or circumstances change that indicate the fair value of a reporting unit is below its carrying amount. We have the option of performing a qualitative assessment of impairment to determine whether any further quantitative assessment for impairment is necessary. The option of whether or not to perform a qualitative assessment is made annually and may vary by reporting unit. Factors we consider in the qualitative assessment include general macroeconomic conditions, industry and market conditions, cost factors, overall financial performance of our reporting units, events or changes affecting the composition or carrying amount of the net assets of our reporting units, sustained decrease in our share price, and other relevant entity-specific events. If we elect to bypass the qualitative assessment or if we determine, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, a quantitative test would be required. The quantitative assessment compares the estimated fair value of the reporting unit to its carrying amount, and recognizes an impairment loss for the amount by which a reporting unit's carrying amount exceeds its fair value, without exceeding the total amount of goodwill allocated to that reporting unit. When applying the quantitative assessment, we determine the fair value of our reporting units based on a weighted average of multiple valuation techniques, principally a combination of an income approach and a market approach. The income approach calculates a value based upon the present value of estimated future cash flows, while the market approach uses earnings multiples of similarly situated guideline public companies. Determining the fair value of a reporting unit involves judgment and the use of significant estimates and assumptions, which include assumptions regarding the revenue growth rates and operating margins used to calculate estimated future cash flows, risk-adjusted discount rates and future economic and market conditions. 45 -------------------------------------------------------------------------------- Table of Contents Our reporting units consist of the following: North America Payment Solutions, Integrated Solutions, Vertical Market Software Solutions, Europe Merchant Solutions, Spain Merchant Solutions, Asia-Pacific Merchant Solutions, Issuer Solutions and Business and Consumer Solutions. As ofOctober 1, 2021 , we performed a quantitative assessment of impairment for our Vertical Market Software Solutions, Issuer Solutions and Business and Consumer Solutions reporting units and a qualitative assessment for all other reporting units. We determined on the basis of the quantitative assessment of our Vertical Market Software Solutions, Issuer Solutions and Business and Consumer Solutions reporting units that the fair value of each reporting unit is greater than its respective carrying amount. Additionally, we determined on the basis of the qualitative factors that the fair value of other reporting units was not more likely than not less than the respective carrying amounts. We believe that the fair value of each of our reporting units is substantially in excess of its carrying amount, except for Issuer Solutions and Business and Consumer Solutions, which have smaller excess compared to the other reporting units since they were recently acquired in the Merger. Our current year assessments, performed as ofOctober 1, 2021 , included consideration of the expected effects of the COVID-19 pandemic on revenues and our cost mitigation efforts, as well as longer term performance expectations. We continue to closely monitor developments related to COVID-19. The future magnitude, duration and effects of the pandemic are difficult to predict at this time, and it is reasonably possible that future developments could have a negative effect on the estimates and assumptions utilized in our goodwill impairment assessments and could result in material impairment charges in future periods.
There were no changes in reporting units or significant changes in the methodology used to assess goodwill impairment during the year ended
Intangible and Long-lived Assets- Intangible assets are amortized over their estimated useful lives. The useful lives for customer-related intangible assets are determined based primarily on forecasted cash flows, which include estimates for the revenues, expenses, and customer attrition associated with the assets. The useful lives of contract-based intangible assets are equal to the terms of the agreements. The useful lives of acquired technologies are based on an estimate of the period over which we expect to receive economic benefit. The useful lives of amortizable trademarks and trade names are based on an estimate of the period over which we will earn revenues for the related brands, including contemplation of any future plans to phase out the trademarks and trade names in the applicable markets. We use the straight-line method of amortization for our amortizable acquired technologies, trademarks and trade names and certain contract-based intangibles. Amortization for most of our customer-related intangible assets and certain contract-based intangibles is determined using an accelerated method. Under this accelerated method, the first step in determining the amortization expense for any period is that we divide the expected cash flows for that period that were used in determining the acquisition-date fair value of the asset divided by the expected total cash flows over the estimated life of the asset. We then multiply that ratio by the initial carrying amount of the asset to arrive at the amortization expense for that period. If the cash flow patterns that we experience differ significantly from our initial estimates, we adjust the amortization schedule prospectively. We believe that our accelerated method reflects the expected pattern of the benefit to be derived. We did not make any significant adjustments to the amortization schedules of our intangible assets during the year endedDecember 31, 2021 . We regularly evaluate whether events and circumstances have occurred that indicate the carrying amount of property and equipment, lease right-of-use assets and finite-life intangible assets may not be recoverable. When factors indicate that these long-lived assets should be evaluated for possible impairment, we assess the potential impairment by determining whether the carrying amount of such long-lived assets will be recovered through the future undiscounted cash flows expected from use of the asset and its eventual disposition. The evaluation is performed at the asset group level, which is the lowest level of identifiable cash flows. If the carrying amount of the asset group is determined not to be recoverable and exceeds its fair value, an impairment loss is recorded, measured as the difference between the fair value and the carrying amount. Fair values are determined based on quoted market prices or discounted cash flow analysis as applicable. We regularly evaluate whether events and circumstances have occurred that indicate the useful lives of property and equipment and finite-life intangible assets may warrant revision. As a result of actions taken in the fourth quarter of 2021 to reduce our facilities footprint in certain markets around the world given the success of remote work and flexible arrangements implemented during the COVID-19 pandemic, we recognized charges of$51.3 million , primarily related to certain lease right-of-use assets, leasehold improvements, furniture and fixtures and equipment to reduce the carrying amount of each asset group to estimated fair value. We continue to evaluate our physical footprint and additional charges may be incurred as these facilities exit activities continue in 2022. 46 -------------------------------------------------------------------------------- Table of Contents Capitalization ofInternal-Use Software We develop software that is used in providing services to customers. Capitalization of internal-use software, primarily associated with operating platforms, occurs when we have completed the preliminary project stage, management authorizes the project, management commits to funding the project, it is probable the project will be completed and the project will be used to perform the function intended. The preliminary project stage consists of the conceptual formulation of alternatives, the evaluation of alternatives, the determination of existence of needed technology and the final selection of alternatives. Costs incurred during the preliminary project stage are recognized as expense as incurred. Currently unforeseen circumstances in software development, such as a significant change in the manner in which the software is intended to be used, obsolescence or a significant reduction in revenues due to merchant attrition, could require us to implement alternative plans with respect to a particular effort, which could result in the impairment of previously capitalized software development costs. The carrying amount of internal-use software, including work-in-progress, atDecember 31, 2021 was$742.0 million . Costs capitalized during the year endedDecember 31, 2021 totaled$255.9 million . Internal-use software is amortized over its estimated useful life, which is typically 5 to 10 years, in a manner that best reflects the pattern of economic use of the assets. There were no significant changes in the accounting methodology used for capitalization of internal-use software during the year endedDecember 31, 2021 . During the year endedDecember 31, 2019 , we preliminarily determined our target technology architecture for the combined company. As a result, we wrote-off capitalized software assets of$31.1 million related to legacyGlobal Payments technology that will no longer be utilized.
Revenue recognition
In accordance with Accounting Standards Codification Topic 606, Revenue from
Contracts with Customers ("ASC 606"), we apply judgment in the determination of
performance obligations, in particular related to large customer contracts
within the Issuer Solutions segment. Performance obligations in a contract are
identified based on the goods or services that will be transferred to the
customer that are both capable of being distinct, whereby the customer can
benefit from the service either on its own or together with other resources that
are readily available from third parties or from us, and are distinct in the
context of the contract, whereby the transfer of the services is separately
identifiable from other promises in the contract. To the extent a contract
includes multiple promised services, we must apply judgment to determine whether
promised services are capable of being distinct and are distinct in the context
of the contract. If these criteria are not met, the promised services are
combined and accounted for as a single performance obligation. In addition, a
single performance obligation may comprise a series of distinct goods or
services that are substantially the same and that have the same pattern of
transfer to the customer.
Income taxes
We determine our provision for income taxes using management's judgments, estimates and the interpretation and application of complex tax laws in each of the jurisdictions in which we operate. Judgment is also required in assessing the timing and amounts of deductible and taxable items. These differences result in deferred tax assets and liabilities in our consolidated balance sheet. We believe our tax return positions are fully supportable; however, we recognize the benefit for tax positions only when it is more likely than not that the position will be sustained based on its technical merits. Issues raised by a tax authority may be resolved at an amount different than the related benefit recognized. When facts and circumstances change (including an effective settlement of an issue or statute of limitations expiration), the effect is recognized in the period of change. The unrecognized tax benefits that exist atDecember 31, 2021 would affect our provision for income taxes in the future, if recognized. Judgment is required to determine whether or not some portion or all of our deferred tax assets will not be realized. To the extent we determine that we will not realize the benefit of some or all of our deferred tax assets, then these deferred tax assets are adjusted through our provision for income taxes in the period in which this determination is made. See "Note 10-Income Tax" in the notes to the accompanying consolidated financial statements for further information regarding the changes in the amount of unrecognized tax benefits and deferred tax valuation allowances during the year endedDecember 31, 2021 . 47
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Effect of New Accounting Pronouncements and Recently Issued Accounting Pronouncements Not Yet Adopted
From time-to-time, new accounting pronouncements are issued by theFinancial Accounting Standards Board or other standards setting bodies that may affect our current and/or future financial statements. See "Note 1-Basis of Presentation and Summary of Significant Accounting Policies" in the notes to the accompanying consolidated financial statements for a discussion of recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted.
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