Global Payments Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Global Payments is a global payments technology and services company operating through Merchant Solutions, Issuer Solutions, and Business and Consumer Solutions. Results include TSYS, acquired on September 18, 2019, so year-over-year comparisons are materially affected by the acquisition.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Revenue | $1,903.6 million | $883.0 million | Up 115.6%, primarily reflecting TSYS; TSYS contributed $1,055.0 million of revenue. |
| Operating income | $244.0 million | $199.5 million | Up 22.3%; TSYS contributed $115.5 million. |
| Operating margin | 12.8% | 22.6% | Down 9.8 percentage points, mainly due to acquired-intangible amortization and merger integration costs. |
| Net income attributable to Global Payments | $143.6 million | $112.3 million | Up 27.8%. |
| Diluted EPS | $0.48 | $0.71 | Down; the share count increased following stock issued as merger consideration. |
| Operating cash flow | $436.6 million | $229.7 million | Higher mainly due to earnings and noncash depreciation and amortization. |
| Cash and cash equivalents | $1,800.1 million | $1,678.3 million at Dec. 31, 2019 | $1,297.8 million was identified as available for general purposes, subject to stated exclusions. |
| Long-term debt, including current portion | $9,706.6 million | $9,125.5 million at Dec. 31, 2019 | Debt increased; $1,416.0 million was drawn on the revolving facility. |
Cost of service was $933.9 million, including $314.2 million of acquired-intangible amortization. SG&A was $725.7 million and included $71.6 million in acquisition and integration expenses. Interest and other expense was $92.6 million; interest expense alone was $81.1 million. The effective tax rate was 10.1%, versus 16.8% a year earlier. Other comprehensive loss was $235.9 million, substantially reflecting foreign-currency translation and hedging losses.
Cash used in investing activities was $169.7 million, including $104.8 million of capital expenditures. Cash used in financing activities was $77.5 million; it included $421.2 million of cash outflow for share repurchases, partly offset by $607.0 million of long-term debt proceeds. Settlement lines of credit outstanding were $375.2 million. The company reported $1,576.5 million available under its revolving facility and stated it was in compliance with debt covenants at quarter-end.
Material changes and business developments
- Revenue and operating income rose substantially with the TSYS combination, but acquisition-related amortization, higher interest expense, integration costs, and the larger share count affected margins and per-share results.
- COVID-19 began significantly affecting results in mid-March, particularly in North America and Europe. Merchant revenues were pressured by reduced spending and business closures; Issuer Solutions was affected by lower transaction volumes, especially commercial-card travel and entertainment; Business and Consumer Solutions faced lower spending, load activity, and new funded accounts.
- Merger-related integration costs increased: Q1 acquisition and integration expenses were $71.6 million, and $17.6 million of employee termination charges were recognized. The company expected further integration charges during 2020.
- The company repurchased 2.1 million shares for $404.0 million during the quarter and had $880.0 million of repurchase authorization remaining at March 31. The board declared a $0.195-per-share dividend payable in June 2020.
Outlook, risks, and contingencies
Management expected COVID-19 to adversely affect revenue and financial results for the remainder of 2020, but said the magnitude and duration could not be predicted. No specific numerical earnings or revenue guidance is provided in the filing. The company was operating normally and did not then anticipate significant operational effects, while implementing cost-saving measures, including reductions in employee compensation costs, travel, and marketing. It also planned to reduce capital expenditures from its initial expectations and manage liquidity, including reducing planned buybacks.
Key risks include the duration and severity of the pandemic, merchant closures or failures, weaker consumer and business spending, potential service-provider disruptions, increased cyber and payment-fraud risks, and the ability to maintain service reliability. Merger integration, realization of expected synergies, customer retention, indebtedness, and financing availability are also identified risks. Management’s quarter-end assessment concluded that no reporting unit was more likely than not impaired; it cautioned that pandemic effects could lead to future asset recoverability charges or other losses.
In the Frontline Processing contract dispute, a jury had awarded $135.2 million plus interest. Global Payments was appealing and stated that a loss was reasonably possible, ranging from zero to the judgment amount plus interest, but not probable; accordingly, no liability was recorded at March 31, 2020. The company also disclosed $293.8 million of software and related-services purchase obligations, including $97.6 million financed through a two-year vendor arrangement.
Important facts for investors to verify
- Assess underlying organic performance separately from TSYS’s contribution and acquisition-related accounting effects.
- Track the duration and financial impact of COVID-19, including transaction volumes, cost actions, liquidity, and any changes to capital spending or buybacks.
- Monitor integration expenses, anticipated merger savings, acquired-intangible amortization, and goodwill or other asset impairment indicators.
- Review debt maturities and available borrowing capacity; the filing lists $801.8 million of debt maturities in 2021 and reports covenant compliance at quarter-end.
- Follow the Frontline appeal and any change in the company’s loss assessment or recorded contingency.