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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
| | |
☒ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2019
OR
|
| | |
☐ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-16111
GLOBAL PAYMENTS INC.
(Exact name of registrant as specified in charter)
|
| | |
Georgia | | 58-2567903 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
|
| | | | | | |
3550 Lenox Road | , | Atlanta | , | Georgia | | 30326 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (770) 829-8000 |
| | |
Securities registered pursuant to Section 12(b) of the Act |
Title of each class | Ticker symbol | Name of exchange on which registered |
Common stock, no par value | GPN | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
|
| | | | |
Large accelerated filer | ☒ | | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
The number of shares of the issuer’s common stock, no par value, outstanding as of July 25, 2019 was 156,678,101.
GLOBAL PAYMENTS INC.
FORM 10-Q
For the quarterly period ended June 30, 2019
TABLE OF CONTENTS
|
| | | |
| | | Page |
PART I - FINANCIAL INFORMATION |
ITEM 1. | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
ITEM 2. | | | |
ITEM 3. | | | |
ITEM 4. | | | |
PART II - OTHER INFORMATION |
ITEM 1. | | | |
ITEM 1A. | | | |
ITEM 2. | | | |
ITEM 6. | | | |
| | | |
PART 1 - FINANCIAL INFORMATION
ITEM 1—FINANCIAL STATEMENTS
GLOBAL PAYMENTS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
|
| | | | | | | |
| Three Months Ended |
| June 30, 2019 | | June 30, 2018 |
| | | |
Revenues | $ | 935,152 |
| | $ | 833,164 |
|
Operating expenses: | | | |
Cost of service | 302,276 |
| | 264,544 |
|
Selling, general and administrative | 411,150 |
| | 377,883 |
|
| 713,426 |
| | 642,427 |
|
Operating income | 221,726 |
| | 190,737 |
|
| | | |
Interest and other income | 6,176 |
| | 2,568 |
|
Interest and other expense | (65,616 | ) | | (47,720 | ) |
| (59,440 | ) | | (45,152 | ) |
Income before income taxes | 162,286 |
| | 145,585 |
|
Provision for income taxes | (32,247 | ) | | (27,856 | ) |
Net income | 130,039 |
| | 117,729 |
|
Net income attributable to noncontrolling interests, net of income tax | (9,581 | ) | | (8,660 | ) |
Net income attributable to Global Payments | $ | 120,458 |
| | $ | 109,069 |
|
| | | |
Earnings per share attributable to Global Payments: | | | |
Basic earnings per share | $ | 0.77 |
| | $ | 0.69 |
|
Diluted earnings per share | $ | 0.77 |
| | $ | 0.68 |
|
See Notes to Unaudited Consolidated Financial Statements.
GLOBAL PAYMENTS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
|
| | | | | | | |
| Six Months Ended |
| June 30, 2019 | | June 30, 2018 |
| | | |
Revenues | $ | 1,818,190 |
| | $ | 1,628,141 |
|
Operating expenses: | | | |
Cost of service | 607,505 |
| | 516,930 |
|
Selling, general and administrative | 789,467 |
| | 764,304 |
|
| 1,396,972 |
| | 1,281,234 |
|
Operating income | 421,218 |
| | 346,907 |
|
| | | |
Interest and other income | 9,112 |
| | 14,262 |
|
Interest and other expense | (124,697 | ) | | (93,325 | ) |
| (115,585 | ) | | (79,063 | ) |
Income before income taxes | 305,633 |
| | 267,844 |
|
Provision for income taxes | (56,388 | ) | | (52,529 | ) |
Net income | 249,245 |
| | 215,315 |
|
Net income attributable to noncontrolling interests, net of income tax | (16,445 | ) | | (14,847 | ) |
Net income attributable to Global Payments | $ | 232,800 |
| | $ | 200,468 |
|
| | | |
Earnings per share attributable to Global Payments: | | | |
Basic earnings per share | $ | 1.48 |
| | $ | 1.26 |
|
Diluted earnings per share | $ | 1.48 |
| | $ | 1.25 |
|
See Notes to Unaudited Consolidated Financial Statements.
GLOBAL PAYMENTS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
|
| | | | | | | |
| Three Months Ended |
| June 30, 2019 | | June 30, 2018 |
| | | |
Net income | $ | 130,039 |
| | $ | 117,729 |
|
Other comprehensive income (loss): | | | |
Foreign currency translation adjustments | 7,704 |
| | (78,550 | ) |
Income tax benefit (provision) related to foreign currency translation adjustments | 1,517 |
| | (763 | ) |
Net unrealized gains (losses) on hedging activities | (42,222 | ) | | 2,932 |
|
Reclassification of net unrealized gains on hedging activities to interest expense | (893 | ) | | (1,104 | ) |
Income tax benefit (provision) related to hedging activities | 10,527 |
| | (445 | ) |
Other, net of tax | 17 |
| | 52 |
|
Other comprehensive loss | (23,350 | ) | | (77,878 | ) |
| | | |
Comprehensive income | 106,689 |
| | 39,851 |
|
Comprehensive (income) loss attributable to noncontrolling interests | (13,529 | ) | | 2,551 |
|
Comprehensive income attributable to Global Payments | $ | 93,160 |
| | $ | 42,402 |
|
|
| | | | | | | |
| Six Months Ended |
| June 30, 2019 | | June 30, 2018 |
| | | |
Net income | $ | 249,245 |
| | $ | 215,315 |
|
Other comprehensive income (loss): | | | |
Foreign currency translation adjustments | 12,902 |
| | (65,225 | ) |
Income tax benefit (provision) related to foreign currency translation adjustments | 1,551 |
| | (365 | ) |
Net unrealized gains (losses) on hedging activities | (56,731 | ) | | 10,508 |
|
Reclassification of net unrealized gains on hedging activities to interest expense | (2,723 | ) | | (1,167 | ) |
Income tax benefit (provision) related to hedging activities | 14,512 |
| | (2,310 | ) |
Other, net of tax | 128 |
| | — |
|
Other comprehensive loss | (30,361 | ) | | (58,559 | ) |
| | | |
Comprehensive income | 218,884 |
| | 156,756 |
|
Comprehensive income attributable to noncontrolling interests | (15,815 | ) | | (14,930 | ) |
Comprehensive income attributable to Global Payments | $ | 203,069 |
| | $ | 141,826 |
|
See Notes to Unaudited Consolidated Financial Statements.
GLOBAL PAYMENTS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
| (Unaudited) | | |
ASSETS | | | |
|
Current assets: | | | |
|
Cash and cash equivalents | $ | 1,047,727 |
| | $ | 1,210,878 |
|
Accounts receivable, net | 394,603 |
| | 348,400 |
|
Settlement processing assets | 2,844,267 |
| | 1,600,222 |
|
Prepaid expenses and other current assets | 261,082 |
| | 216,708 |
|
Total current assets | 4,547,679 |
| | 3,376,208 |
|
Goodwill | 6,345,563 |
| | 6,341,355 |
|
Other intangible assets, net | 2,308,333 |
| | 2,488,618 |
|
Property and equipment, net | 712,396 |
| | 653,542 |
|
Deferred income taxes | 6,950 |
| | 8,128 |
|
Other noncurrent assets | 663,151 |
| | 362,923 |
|
Total assets | $ | 14,584,072 |
| | $ | 13,230,774 |
|
LIABILITIES AND EQUITY | | | |
Current liabilities: | | | |
Settlement lines of credit | $ | 736,209 |
| | $ | 700,486 |
|
Current portion of long-term debt | 151,062 |
| | 115,075 |
|
Accounts payable and accrued liabilities | 1,117,938 |
| | 1,176,703 |
|
Settlement processing obligations | 2,478,373 |
| | 1,276,356 |
|
Total current liabilities | 4,483,582 |
| | 3,268,620 |
|
Long-term debt | 5,000,585 |
| | 5,015,168 |
|
Deferred income taxes | 556,130 |
| | 585,025 |
|
Other noncurrent liabilities | 368,659 |
| | 175,618 |
|
Total liabilities | 10,408,956 |
| | 9,044,431 |
|
Commitments and contingencies |
|
| |
|
|
Equity: | | | |
Preferred stock, no par value; 5,000,000 shares authorized and none issued | — |
| | — |
|
Common stock, no par value; 200,000,000 shares authorized; 156,674,688 issued and outstanding at June 30, 2019 and 157,961,982 issued and outstanding at December 31, 2018 | — |
| | — |
|
Paid-in capital | 2,126,065 |
| | 2,235,167 |
|
Retained earnings | 2,204,445 |
| | 2,066,415 |
|
Accumulated other comprehensive loss | (339,906 | ) | | (310,175 | ) |
Total Global Payments shareholders’ equity | 3,990,604 |
| | 3,991,407 |
|
Noncontrolling interests | 184,512 |
| | 194,936 |
|
Total equity | 4,175,116 |
| | 4,186,343 |
|
Total liabilities and equity | $ | 14,584,072 |
| | $ | 13,230,774 |
|
See Notes to Unaudited Consolidated Financial Statements.
GLOBAL PAYMENTS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) |
| | | | | | | |
| Six Months Ended |
| June 30, 2019 | | June 30, 2018 |
Cash flows from operating activities: | | | |
Net income | $ | 249,245 |
| | $ | 215,315 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization of property and equipment | 82,760 |
| | 69,088 |
|
Amortization of acquired intangibles | 210,993 |
| | 176,303 |
|
Amortization of capitalized contract costs | 31,965 |
| | 23,835 |
|
Share-based compensation expense | 27,914 |
| | 30,104 |
|
Provision for operating losses and bad debts | 18,637 |
| | 22,942 |
|
Deferred income taxes | (6,483 | ) | | (3,061 | ) |
Other, net | 22,469 |
| | (6,228 | ) |
Changes in operating assets and liabilities, net of the effects of business combinations: | | | |
Accounts receivable | (49,774 | ) | | (21,763 | ) |
Settlement processing assets and obligations, net | (41,715 | ) | | 95,232 |
|
Prepaid expenses and other assets | (148,435 | ) | | (92,154 | ) |
Accounts payable and other liabilities | (150,223 | ) | | (2,857 | ) |
Net cash provided by operating activities | 247,353 |
| | 506,756 |
|
Cash flows from investing activities: | | | |
Acquisitions, net of cash acquired | (78,245 | ) | | — |
|
Capital expenditures | (133,312 | ) | | (102,669 | ) |
Other, net | 13,182 |
| | (1,436 | ) |
Net cash used in investing activities | (198,375 | ) | | (104,105 | ) |
Cash flows from financing activities: | | | |
Net borrowings (repayments) of settlement lines of credit | 32,163 |
| | (88,325 | ) |
Proceeds from long-term debt | 586,000 |
| | 694,214 |
|
Repayments of long-term debt | (569,119 | ) | | (1,024,695 | ) |
Payment of debt issuance costs | — |
| | (10,884 | ) |
Repurchase of common stock | (233,996 | ) | | (177,261 | ) |
Proceeds from stock issued under share-based compensation plans | 12,952 |
| | 6,340 |
|
Common stock repurchased - share-based compensation plans | (11,167 | ) | | (9,989 | ) |
Distributions to noncontrolling interests | (26,239 | ) | | — |
|
Dividends paid | (3,137 | ) | | (3,171 | ) |
Net cash used in financing activities | (212,543 | ) | | (613,771 | ) |
Effect of exchange rate changes on cash | 414 |
| | (25,206 | ) |
Decrease in cash and cash equivalents | (163,151 | ) | | (236,326 | ) |
Cash and cash equivalents, beginning of the period | 1,210,878 |
| | 1,335,855 |
|
Cash and cash equivalents, end of the period | $ | 1,047,727 |
| | $ | 1,099,529 |
|
See Notes to Unaudited Consolidated Financial Statements.
GLOBAL PAYMENTS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Number of Shares | | Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Global Payments Shareholders’ Equity | | Noncontrolling Interests | | Total Equity |
Balance at March 31, 2019 | 157,130 |
| | $ | 2,151,623 |
| | $ | 2,111,798 |
| | $ | (312,608 | ) | | $ | 3,950,813 |
| | $ | 191,648 |
| | $ | 4,142,461 |
|
Net income | | | | | 120,458 |
| | | | 120,458 |
| | 9,581 |
| | 130,039 |
|
Other comprehensive income (loss) | | | | | | | (27,298 | ) | | (27,298 | ) | | 3,948 |
| | (23,350 | ) |
Stock issued under share-based compensation plans | 67 |
| | 5,104 |
| | | | | | 5,104 |
| | | | 5,104 |
|
Common stock repurchased - share-based compensation plans | (9 | ) | | (1,406 | ) | | | | | | (1,406 | ) | | | | (1,406 | ) |
Share-based compensation expense | | | 16,497 |
| | | | | | 16,497 |
| | | | 16,497 |
|
Distributions to noncontrolling interest | | | | | | | | | — |
| | (20,665 | ) | | (20,665 | ) |
Repurchase of common stock | (513 | ) | | (45,753 | ) | | (26,246 | ) | | | | (71,999 | ) | | | | (71,999 | ) |
Dividends paid ($0.01 per share) | | | | | (1,565 | ) | | | | (1,565 | ) | | | | (1,565 | ) |
Balance at June 30, 2019 | 156,675 |
| | $ | 2,126,065 |
| | $ | 2,204,445 |
| | $ | (339,906 | ) | | $ | 3,990,604 |
| | $ | 184,512 |
| | $ | 4,175,116 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Number of Shares | | Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Global Payments Shareholders’ Equity | | Noncontrolling Interests | | Total Equity |
Balance at March 31, 2018 | 159,533 |
| | $ | 2,390,022 |
| | $ | 1,738,545 |
| | $ | (176,961 | ) | | $ | 3,951,606 |
| | $ | 188,184 |
| | $ | 4,139,790 |
|
Net income | | | | | 109,069 |
| | | | 109,069 |
| | 8,660 |
| | 117,729 |
|
Other comprehensive loss | | | | | | | (66,668 | ) | | (66,668 | ) | | (11,210 | ) | | (77,878 | ) |
Stock issued under share-based compensation plans | 151 |
| | 3,727 |
| | | | | | 3,727 |
| | | | 3,727 |
|
Common stock repurchased - share-based compensation plans | (10 | ) | | (1,078 | ) | | | | | | (1,078 | ) | | | | (1,078 | ) |
Share-based compensation expense | | | 15,206 |
| | | | | | 15,206 |
| | | | 15,206 |
|
Repurchase of common stock | (1,603 | ) | | (153,094 | ) | | (26,823 | ) | | | | (179,917 | ) | | | | (179,917 | ) |
Dividends paid ($0.01 per share) | | | | | (1,578 | ) | | | | (1,578 | ) | | | | (1,578 | ) |
Balance at June 30, 2018 | 158,071 |
| | $ | 2,254,783 |
| | $ | 1,819,213 |
| | $ | (243,629 | ) | | $ | 3,830,367 |
| | $ | 185,634 |
| | $ | 4,016,001 |
|
See Notes to Unaudited Consolidated Financial Statements.
GLOBAL PAYMENTS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Number of Shares | | Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Global Payments Shareholders’ Equity | | Noncontrolling Interests | | Total Equity |
Balance at December 31, 2018 | 157,962 |
| | $ | 2,235,167 |
| | $ | 2,066,415 |
| | $ | (310,175 | ) | | $ | 3,991,407 |
| | $ | 194,936 |
| | $ | 4,186,343 |
|
Net income | | | | | 232,800 |
| | | | 232,800 |
| | 16,445 |
| | 249,245 |
|
Other comprehensive loss | | | | | | | (29,731 | ) | | (29,731 | ) | | (630 | ) | | (30,361 | ) |
Stock issued under share-based compensation plans | 609 |
| | 12,952 |
| | | | | | 12,952 |
| | | | 12,952 |
|
Common stock repurchased - share-based compensation plans | (88 | ) | | (11,606 | ) | |
|
| | | | (11,606 | ) | | | | (11,606 | ) |
Share-based compensation expense | | | 27,914 |
| | | | | | 27,914 |
| | | | 27,914 |
|
Distributions to noncontrolling interest | | | | | | | | | — |
| | (26,239 | ) | | (26,239 | ) |
Repurchase of common stock | (1,808 | ) | | (138,362 | ) | | (91,633 | ) | | | | (229,995 | ) | | | | (229,995 | ) |
Dividends paid ($0.02 per share) | | | | | (3,137 | ) | | | | (3,137 | ) | | | | (3,137 | ) |
Balance at June 30, 2019 | 156,675 |
| | $ | 2,126,065 |
| | $ | 2,204,445 |
| | $ | (339,906 | ) | | $ | 3,990,604 |
| | $ | 184,512 |
| | $ | 4,175,116 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Number of Shares | | Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Global Payments Shareholders’ Equity | | Noncontrolling Interests | | Total Equity |
Balance at December 31, 2017 | 159,180 |
| | $ | 2,379,774 |
| | $ | 1,597,897 |
| | $ | (183,144 | ) | | $ | 3,794,527 |
| | $ | 170,704 |
| | $ | 3,965,231 |
|
Cumulative effect of adoption of new accounting standard | | | | | 50,970 |
| | (1,843 | ) | | 49,127 |
| | | | 49,127 |
|
Net income | | | | | 200,468 |
| | | | 200,468 |
| | 14,847 |
| | 215,315 |
|
Other comprehensive income (loss) | | | | | | | (58,642 | ) | | (58,642 | ) | | 83 |
| | (58,559 | ) |
Stock issued under share-based compensation plans | 570 |
| | 6,340 |
| | | |
|
| | 6,340 |
| | | | 6,340 |
|
Common stock repurchased - share-based compensation plans | (67 | ) | | (7,489 | ) | | | | | | (7,489 | ) | | | | (7,489 | ) |
Share-based compensation expense | | | 30,104 |
| | | | | | 30,104 |
| | | | 30,104 |
|
Repurchase of common stock | (1,612 | ) | | (153,946 | ) | | (26,951 | ) | | | | (180,897 | ) | | | | (180,897 | ) |
Dividends paid ($0.02 per share) | | | | | (3,171 | ) | | | | (3,171 | ) | | | | (3,171 | ) |
Balance at June 30, 2018 | 158,071 |
| | $ | 2,254,783 |
| | $ | 1,819,213 |
| | $ | (243,629 | ) | | $ | 3,830,367 |
| | $ | 185,634 |
| | $ | 4,016,001 |
|
See Notes to Unaudited Consolidated Financial Statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business, consolidation and presentation— We are a leading worldwide provider of payment technology and software solutions delivering innovative services to our customers globally. Our technologies, services and employee expertise enable us to provide a broad range of solutions that allow our customers to accept various payment types and operate their businesses more efficiently. We distribute our services across a variety of channels in 32 countries throughout North America, Europe, the Asia-Pacific region and Brazil and operate in three reportable segments: North America, Europe and Asia-Pacific.
We were incorporated in Georgia as Global Payments Inc. in 2000 and spun-off from our former parent company in 2001. Including our time as part of our former parent company, we have been in the payment technology services business since 1967. Global Payments Inc. and its consolidated subsidiaries are referred to herein collectively as "Global Payments," the "Company," "we," "our" or "us," unless the context requires otherwise.
These unaudited consolidated financial statements include our accounts and those of our majority-owned subsidiaries, and all intercompany balances and transactions have been eliminated in consolidation. These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The consolidated balance sheet as of December 31, 2018 was derived from the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018 but does not include all disclosures required by GAAP for annual financial statements.
In the opinion of our management, all known adjustments necessary for a fair presentation of the results of the interim periods have been made. These adjustments consist of normal recurring accruals and estimates that affect the carrying amount of assets and liabilities. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018.
On May 27, 2019, Global Payments and Total System Services, Inc. ("TSYS") entered into an Agreement and Plan of Merger ("Merger Agreement") providing for the merger of TSYS with and into Global Payments, with Global Payments as the surviving entity (the "Merger"). TSYS is a leading global payments provider, offering seamless, secure and innovative solutions across the payments spectrum - for issuers, merchants and consumers. The Merger is subject to the satisfaction or waiver of the closing conditions set forth in the Merger Agreement, including shareholder approval for both companies. Upon completion of the Merger, TSYS will no longer be a separate publicly traded corporation. Global Payments will continue to trade on the New York Stock Exchange. See "Note 2—Acquisitions" and "Note 7—Long-Term Debt and Lines of Credit" for further information about the proposed Merger and related debt financing.
Use of estimates— The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reported period. Actual results could differ materially from those estimates.
Recently Adopted Accounting Pronouncements— In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, "Leases." ASU 2016-02 requires recognition of assets and liabilities for the rights and obligations created by leases and new disclosures about leases. We adopted ASU 2016-02, as well as other related clarifications and interpretive guidance issued by the FASB, on January 1, 2019 using the optional modified retrospective transition method. Under this transition method, we did not recast the prior period financial statements presented. We elected the transition package of three practical expedients, which among other things, allowed for the carryforward of historical lease classifications. We made accounting policy elections to not recognize assets or liabilities for leases with a term of less than twelve months and to account for all components in a lease arrangement as a single combined lease component.
The adoption of ASU 2016-02 resulted in the measurement and recognition of lease liabilities in the amount of $274.0 million and right-of-use assets in the amount of $236.0 million as of January 1, 2019. Lease liabilities were measured as the present value of remaining lease payments, and the corresponding right-of-use assets were measured at an amount equal to the lease liabilities
adjusted by the amounts of certain assets and liabilities, such as deferred lease obligations and prepaid rent, that we previously recognized on the balance sheet prior to the initial application of ASU 2016-02. To calculate the present value of remaining lease payments, we elected to use an incremental borrowing rate based on the remaining lease term at transition.
Recently Issued Pronouncements Not Yet Adopted— In August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (A Consensus of the FASB Emerging Issues Task Force)." ASU 2018-15 provides additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement (i.e., hosting arrangement) that is a service contract. The new guidance amends the definition of a hosting arrangement and requires a customer in a hosting arrangement that is a service contract to capitalize certain implementation costs as if the arrangement was an internal-use software project. We have historically capitalized implementation costs for internal-use software projects and will continue to do so pursuant to the clarifications provided in the new guidance. We expect to amortize deferred implementation costs to expense on a straight-line basis over the term of the hosting arrangement. The amendments in this update also provide additional presentation and disclosure requirements, including requirements to disclose the nature of an entity’s hosting arrangements that are service contracts, as well as quantitative information about capitalized implementation costs and related amortization expense. The guidance will become effective for us on January 1, 2020. Entities have the option to apply the guidance prospectively to all implementation costs incurred after the date of adoption or retrospectively. We are comparing the guidance in ASU 2018-15 to our current accounting practices for costs of implementation activities performed in cloud computing arrangements. We have not yet quantified the effect, if any, of ASU 2018-15 on our consolidated balance sheet or our statements of income and cash flows.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." The amendments in this update change how companies measure and recognize credit impairment for many financial instruments measured at amortized cost. The new model for current expected credit losses ("CECL") will require us to immediately recognize an estimate of credit losses expected to occur over the remaining life of the financial instruments that are within the scope of the update, including accounts receivable and settlement processing assets, each of which is short-term in nature. Under current GAAP, credit losses on these financial instruments are not recognized until their occurrence is deemed to be probable. The guidance will become effective for us on January 1, 2020. In general, the new guidance will require modified retrospective application to all outstanding financial assets that are in the scope of the update, with a cumulative-effect adjustment, if any, recorded to retained earnings as of the date of adoption. We are evaluating the effect of ASU 2016-13 on our consolidated financial statements, including comparing how we currently measure and recognize our allowance for doubtful accounts on accounts receivable and our reserve for operating losses and sales allowances to how we would make such measurements applying the new CECL model. We have not yet quantified the effect, if any, of ASU 2016-13 on our consolidated financial statements.
NOTE 2—ACQUISITIONS
Pending Merger with TSYS
In connection with the proposed Merger, we have determined that Global Payments would be the acquirer of TSYS for accounting purposes. In the proposed Merger, holders of TSYS common stock would receive 0.8101 shares of Global Payments common stock for each share of TSYS common stock they own at the effective time of the Merger ("Exchange Ratio").
The preliminary estimated Merger consideration to be transfered to TSYS shareholders is $23.7 billion based on the number of TSYS common shares outstanding and the closing price of our common stock on July 25, 2019. Merger consideration will include the amount of TSYS' unsecured revolving credit facility that we are required to repay upon consummation of the Merger. During the three and six months ended June 30, 2019, we incurred transaction costs related to the Merger of $12.2 million. We expect the Merger to close in the fourth quarter of 2019, subject to customary closing conditions, regulatory approvals and shareholder approval for both companies. See "Note 7—Long-Term Debt and Lines of Credit" for a description of related debt financing activities.
Business Combinations
The transactions described below were accounted for as business combinations, which requires that we record the assets acquired and liabilities assumed at fair value as of the acquisition date.
SICOM
On October 17, 2018, we acquired SICOM Systems, Inc. ("SICOM") for total purchase consideration of $410.2 million, which we funded with cash on hand and by drawing on our Revolving Credit Facility (described in "Note 7—Long-Term Debt and Lines of Credit"). SICOM is a provider of end-to-end enterprise, cloud-based software solutions and other technologies to quick service restaurants and food service management companies.
The provisional estimated acquisition-date fair values of major classes of assets acquired and liabilities assumed as of June 30, 2019, including a reconciliation to the total purchase consideration, were as follows (in thousands):
|
| | | | |
Cash and cash equivalents | | $ | 7,540 |
|
Property and equipment | | 5,838 |
|
Identified intangible assets | | 188,294 |
|
Other assets | | 22,275 |
|
Deferred income taxes | | (48,560 | ) |
Other liabilities | | (31,350 | ) |
Total identifiable net assets | | 144,037 |
|
Goodwill | | 266,164 |
|
Total purchase consideration | | $ | 410,201 |
|
During the six months ended June 30, 2019, we made an adjustment of $1.0 million to reflect an increase in the total purchase consideration. As of June 30, 2019, we considered these balances to be provisional because we were still in the process of gathering and reviewing information to support the valuations of the assets acquired and liabilities assumed.
Goodwill arising from the acquisition of $266.2 million, included in the North America segment, was attributable to expected growth opportunities, an assembled workforce and potential synergies from combining our existing businesses. We expect that approximately $40 million of the goodwill from this acquisition will be deductible for income tax purposes.
The following table reflects the estimated fair values of the identified intangible assets of SICOM and the respective aggregated weighted-average estimated amortization periods:
|
| | | | | |
| Estimated Fair Values | | Weighted-Average Estimated Amortization Periods |
| | | |
| (in thousands) | | (years) |
Customer-related intangible assets | $ | 104,900 |
| | 14 |
Acquired technologies | 65,312 |
| | 6 |
Trademarks and trade names | 11,202 |
| | 3 |
Contract-based intangible assets | 6,880 |
| | 5 |
Total estimated identified intangible assets | $ | 188,294 |
| | 10 |
AdvancedMD
On September 4, 2018, we acquired AdvancedMD, Inc. ("AdvancedMD") for total purchase consideration of $706.9 million, which we funded with cash on hand and by drawing on our Revolving Credit Facility. AdvancedMD is a provider of cloud-based enterprise software solutions to small-to-medium sized ambulatory care physician practices.
The provisional estimated acquisition-date fair values of major classes of assets acquired and liabilities assumed as of June 30, 2019, including a reconciliation to the total purchase consideration, were as follows (in thousands):
|
| | | | |
Cash and cash equivalents | | $ | 7,657 |
|
Property and equipment | | 5,672 |
|
Identified intangible assets | | 419,500 |
|
Other assets | | 11,785 |
|
Deferred income taxes | | (93,372 | ) |
Other liabilities | | (15,647 | ) |
Total identifiable net assets | | 335,595 |
|
Goodwill | | 371,290 |
|
Total purchase consideration | | $ | 706,885 |
|
During the six months ended June 30, 2019, we made measurement period adjustments, including a $5.6 million reduction to deferred income tax liabilities, which resulted in a corresponding reduction to goodwill. As of June 30, 2019, we considered these balances to be provisional because we were still in the process of gathering and reviewing information to support the valuation of the assets acquired and liabilities assumed.
Goodwill arising from the acquisition of $371.3 million, included in the North America segment, was attributable to expected growth opportunities, an assembled workforce and potential synergies from combining our existing businesses. We expect that substantially all of the goodwill from this acquisition will not be deductible for income tax purposes.
The following table reflects the estimated fair values of the identified intangible assets of AdvancedMD and the respective aggregated weighted-average estimated amortization periods:
|
| | | | | |
| Estimated Fair Values | | Weighted-Average Estimated Amortization Periods |
| | | |
| (in thousands) | | (years) |
Customer-related intangible assets | $ | 303,100 |
| | 11 |
Acquired technologies | 83,700 |
| | 5 |
Trademarks and trade names | 32,700 |
| | 15 |
Total estimated identified intangible assets | $ | 419,500 |
| | 10 |
Valuation of Identified Intangible Assets
For the acquisitions discussed above, the estimated fair values of customer-related intangible assets were determined using the income approach, which was 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 the average estimated value of a market participant’s cost of capital and debt, derived using customary market metrics. Acquired technologies were valued using the replacement cost method, which required 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 were 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 required us to estimate the future revenues for the related brands, the appropriate royalty rate and the weighted-average cost of capital.
NOTE 3—REVENUES
The following tables present a disaggregation of our revenue from contracts with customers by distribution channel for the three and six months ended June 30, 2019 and 2018:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2019 |
| North America | | Europe | | Asia-Pacific | | Total |
| | | | | | | |
| (in thousands) |
| | | | | | | |
Direct: | | | | | | | |
Relationship-led | $ | 301,094 |
| | $ | 110,655 |
| | $ | 30,742 |
| | $ | 442,491 |
|
Technology-enabled | 349,839 |
| | 49,694 |
| | 28,142 |
| | 427,675 |
|
| 650,933 |
| | 160,349 |
| | 58,884 |
| | 870,166 |
|
Wholesale | 64,986 |
| | — |
| | — |
| | 64,986 |
|
| $ | 715,919 |
| | $ | 160,349 |
| | $ | 58,884 |
| | $ | 935,152 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2018 |
| North America | | Europe | | Asia-Pacific | | Total |
| | | | | | | |
| (in thousands) |
| | | | | | | |
Direct: | | | | | | | |
Relationship-led | $ | 244,861 |
| | $ | 102,960 |
| | $ | 32,371 |
| | $ | 380,192 |
|
Technology-enabled | 296,419 |
| | 52,671 |
| | 23,361 |
| | 372,451 |
|
| 541,280 |
| | 155,631 |
| | 55,732 |
| | 752,643 |
|
Wholesale | 80,521 |
| | — |
| | — |
| | 80,521 |
|
| $ | 621,801 |
| | $ | 155,631 |
| | $ | 55,732 |
| | $ | 833,164 |
|
|
| | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2019 |
| North America | | Europe | | Asia-Pacific | | Total |
| | | | | | | |
| (in thousands) |
| | | | | | | |
Direct: | | | | | | | |
Relationship-led | $ | 571,637 |
| | $ | 205,220 |
| | $ | 64,161 |
| | $ | 841,018 |
|
Technology-enabled | 691,947 |
| | 97,998 |
| | 56,470 |
| | 846,415 |
|
| 1,263,584 |
| | 303,218 |
| | 120,631 |
| | 1,687,433 |
|
Wholesale | 130,757 |
| | — |
| | — |
| | 130,757 |
|
| $ | 1,394,341 |
| | $ | 303,218 |
| | $ | 120,631 |
| | $ | 1,818,190 |
|
|
| | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2018 |
| North America | | Europe | | Asia-Pacific | | Total |
| | | | | | | |
| (in thousands) |
| | | | | | | |
Direct: | | | | | | | |
Relationship-led | $ | 471,281 |
| | $ | 195,174 |
| | $ | 67,613 |
| | $ | 734,068 |
|
Technology-enabled | 579,776 |
| | 103,734 |
| | 45,790 |
| | 729,300 |
|
| 1,051,057 |
| | 298,908 |
| | 113,403 |
| | 1,463,368 |
|
Wholesale | 164,773 |
| | — |
| | — |
| | 164,773 |
|
| $ | 1,215,830 |
| | $ | 298,908 |
| | $ | 113,403 |
| | $ | 1,628,141 |
|
ASC 606 requires that we determine for each customer arrangement whether revenue should be recognized at a point in time or over time. For the three and six months ended June 30, 2019 and 2018, substantially all of our revenues were recognized over time.
Supplemental balance sheet information related to contracts from customers as of June 30, 2019 and December 31, 2018 was as follows:
|
| | | | | | | | | |
| Balance Sheet Location | | June 30, 2019 | | December 31, 2018 |
| | | | | |
| | | (in thousands) |
| | | | | |
Assets: | | | | | |
Capitalized costs to obtain customer contracts, net | Other noncurrent assets | | $ | 210,609 |
| | $ | 194,616 |
|
Capitalized costs to fulfill customer contracts, net | Other noncurrent assets | | $ | 19,319 |
| | $ | 12,954 |
|
| | | | | |
Liabilities: | | | | | |
Contract liabilities, net (current) | Accounts payable and accrued liabilities | | $ | 156,930 |
| | $ | 146,947 |
|
Contract liabilities, net (noncurrent) | Other noncurrent liabilities | | $ | 9,532 |
| |