Global Payments Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Amounts below are in U.S. dollars. The company completed its merger with Total System Services (TSYS) on September 18, 2019; reported results include TSYS only from the acquisition date, so year-over-year comparisons are not like-for-like.
Business context and material change
Global Payments describes the combined company as a global payments technology provider serving merchants, issuers and consumers. The TSYS merger had total purchase consideration of approximately $24.5 billion, primarily funded with stock and debt. Global Payments issued about 143.9 million shares to TSYS shareholders; former TSYS holders owned approximately 48% of the combined company’s fully diluted shares after closing. TSYS contributed $147.5 million of revenue and an $11.1 million operating loss from acquisition through quarter-end.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $1,105.9 million | $857.7 million | $2,924.1 million | $2,485.8 million |
| Operating income | $174.0 million | $223.2 million | $595.3 million | $570.1 million |
| Operating margin | 15.7% | 26.0% | 20.4% | 22.9% |
| Net income attributable to Global Payments | $95.0 million | $176.4 million | $327.8 million | $376.8 million |
| Diluted EPS | $0.54 | $1.11 | $2.00 | $2.36 |
| Operating cash flow | Not separately presented for quarter | Not separately presented for quarter | $1,349.4 million | $661.0 million |
Revenue increased 28.9% in Q3 and 17.6% year to date, primarily from TSYS and other acquired businesses, alongside organic growth. Operating income fell 22.0% in Q3, chiefly reflecting merger-related acquisition and integration costs; it rose 4.4% for the nine-month period. Merger-related acquisition and integration expenses were $100.9 million in Q3 and $120.4 million year to date, including costs allocated to TSYS and Corporate. Higher interest expense also contributed to lower net income: interest and other expense was $96.2 million in Q3 versus $46.4 million, and $220.9 million year to date versus $139.7 million. Q3 included an income tax benefit of $16.6 million; the nine-month period recorded tax expense of $39.8 million.
Cash from operations more than doubled year over year, but the filing attributes the increase primarily to a $624.0 million cash benefit from changes in settlement processing assets and obligations, versus a $58.7 million cash use in the prior-year period. Investing activities used $506.3 million, including $201.0 million of capital expenditures. Financing activities provided $109.9 million. Cash and cash equivalents were $2,127.6 million at September 30; management identified $961.9 million as available for general purposes, excluding settlement-related balances, merchant reserves and customer funds.
Debt, liquidity and capital
Long-term debt, including finance lease liabilities, totaled $9,021.1 million at September 30, 2019, compared with $5,130.2 million at December 31, 2018; operating lease liabilities were $501.4 million. The company issued $3.0 billion of senior notes and entered into a $2.0 billion term loan and $3.0 billion revolving facility in connection with the merger and refinancing. The revolving facility had $2,198.8 million of available commitments at quarter-end. Settlement lines of credit had $547.6 million outstanding and $871.9 million of additional settlement capacity. The company was in compliance with its financial covenants. Management said available cash, borrowing capacity and expected operating cash flows should meet foreseeable needs.
Year-to-date share repurchases totaled $234.0 million, with $568.0 million of authorization remaining. The company expected 2019 capital expenditures of approximately $300 million. The board declared a $0.195-per-share dividend payable December 27, 2019.
Outlook, risks and unusual items
- No specific revenue, earnings or EPS guidance is provided in the supplied filing text. Management expects sufficient liquidity for planned needs and forecasts approximately $300 million of 2019 capital expenditures.
- Management cautions that merger integration may be difficult, costly or delayed, and expected synergies and savings may not be fully realized. The filing cites potential disruption, customer or employee losses, higher-than-expected costs and management distraction.
- Other disclosed risks include indebtedness and interest-rate exposure, data security, systems interruptions, competition, merchant attrition, card-network requirements, foreign exchange, regulation, and integration of acquired operations. A 50-basis-point rate increase was estimated to raise annual interest expense by about $6.0 million and annual interest income by $4.6 million, based on quarter-end balances.
- A Georgia jury awarded Frontline Processing $135.2 million plus interest in a contract dispute. Global Payments is appealing; it recorded no liability because management concluded a loss was not probable, while acknowledging a reasonably possible loss range of zero to the judgment amount plus interest.
- Six putative lawsuits challenged the merger. Three were voluntarily dismissed after supplemental disclosures; the filing text does not clearly state the disposition of the other three.
- TSYS acquisition accounting remained provisional at quarter-end. The merger added $17.4 billion of goodwill; substantially all is expected not to be tax deductible. Integration and acquisition costs, acquired-intangible amortization and financing charges weighed on reported results.
Important facts for investors to verify
- Track post-merger organic revenue, segment reporting changes, integration spending and whether anticipated synergies are achieved.
- Assess debt levels, maturities, floating-rate exposure, covenant headroom and the distinction between reported cash and cash available for general purposes.
- Separate settlement-related working-capital movements from recurring operating cash generation.
- Monitor the Frontline appeal and the status and potential exposure of the remaining merger-related lawsuits.
- Review final purchase-price allocations, goodwill and intangible-asset valuations, and the effect of merger-related costs and amortization on future earnings.