Global Payments Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Global Payments is a global payments technology company with Merchant Solutions, Issuer Solutions, and Business and Consumer Solutions segments. Comparisons are materially affected by the September 2019 TSYS merger; TSYS contributed $1.067 billion of Q3 2020 revenue and $3.119 billion for the first nine months of 2020.
Financial highlights
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $1.918 billion | $1.106 billion | $5.493 billion | $2.924 billion |
| Operating income | $290.4 million | $174.0 million | $642.0 million | $595.3 million |
| Operating margin | 15.1% | 15.7% | 11.7% | 20.4% |
| Net income attributable to Global Payments | $221.0 million | $95.0 million | $401.9 million | $327.8 million |
| Diluted EPS | $0.74 | $0.54 | $1.34 | $2.00 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $1.545 billion | $1.349 billion |
Q3 revenue increased 73.4% and operating income increased 66.9%; nine-month revenue rose 87.9% and operating income 7.8%. These reported increases largely reflect TSYS consolidation and should not be read as organic growth. Nine-month diluted EPS declined despite higher net income, reflecting the higher weighted-average share count following merger-related share issuance.
Cost of service was 47.0% of Q3 revenue and 49.7% for the first nine months, versus 38.7% and 35.4% in the respective 2019 periods. Management attributed much of the increase to acquired-intangible amortization, which totaled $313.4 million in Q3 and $941.7 million year to date. Acquisition and integration expenses were $213.6 million for the first nine months, compared with $108.0 million a year earlier.
Liquidity, debt, and capital
- At September 30, 2020, cash and cash equivalents were $2.221 billion; management identified $1.426 billion as available for general purposes, excluding settlement-related cash, merchant reserves, and customer funds.
- Total debt was $9.268 billion, including $831.5 million classified as current. Settlement lines of credit had $439.4 million outstanding. The company reported $2.1 billion available under its $3 billion revolving facility and was in compliance with applicable debt covenants.
- Operating cash flow of $1.545 billion less investing cash outflow of $395.0 million and financing cash outflow of $594.6 million resulted in a $542.5 million increase in cash during the nine-month period.
- Capital expenditures were $329.4 million year to date. The company issued $1.0 billion of 2.9% senior notes due 2030 in May 2020, using net proceeds partly to repay revolving debt.
- Year-to-date cash used for common-stock repurchases was $421.2 million, although repurchases were temporarily suspended in Q2 and Q3. The board increased total repurchase authorization to $1.25 billion on October 28, 2020.
Material developments, outlook, and risks
- COVID-19: Management reported revenue declines beginning in mid-March as consumer spending fell and some merchant businesses closed. Results and trends improved from May through Q3 as restrictions eased, but the company expected the pandemic to continue adversely affecting revenue and earnings for the remainder of 2020. No quantified earnings or revenue guidance was provided.
- Merger integration: TSYS-related integration continued. Cumulative employee termination-benefit charges were $106.9 million at September 30, including $49.8 million recognized in the first nine months; $26.3 million remained in accrued liabilities. Management expected additional integration charges over the next 12 months.
- Unusual income item: A partial conversion of Visa Europe-related preferred shares generated a $27.3 million gain in Q3; the received shares were sold in October. Remaining preferred shares continued to be carried at zero value.
- Contingency: A jury award to Frontline Processing was $135.2 million plus interest. The company appealed, said the claim lacked merit, and considered a loss reasonably possible within a range from zero to the judgment plus interest, but not probable; no liability was accrued.
- Other risks: Management cited uncertainty around the pandemic and possible renewed restrictions, customer and transaction volumes, cyber and payment fraud, third-party service disruptions, merger integration and expected synergies, indebtedness and interest-rate exposure. The filing also notes LIBOR transition considerations.
Key facts for investors to verify
- Separate TSYS-related reported growth from comparable or organic performance, and assess the ongoing recovery in payment volumes and merchant activity.
- Track operating margins, acquired-intangible amortization, integration charges, and progress toward merger cost savings.
- Monitor COVID-19 effects, capital spending, cash generation, debt maturities, and available borrowing capacity.
- Follow the Frontline appeal and any changes to the probability, range, or accounting treatment of a potential loss.
- Confirm the realized proceeds from the Visa share sale and the value or conversion terms of the remaining preferred shares.