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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 September 30, 2020
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 | Trading 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 October 26, 2020 was 299,337,266.
GLOBAL PAYMENTS INC.
FORM 10-Q
For the quarterly period ended September 30, 2020
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 |
| September 30, 2020 | | September 30, 2019 |
| | | |
Revenues | $ | 1,917,815 | | | $ | 1,105,941 | |
Operating expenses: | | | |
Cost of service | 900,921 | | | 427,720 | |
Selling, general and administrative | 726,475 | | | 504,184 | |
| 1,627,396 | | | 931,904 | |
Operating income | 290,419 | | | 174,037 | |
| | | |
Interest and other income | 29,983 | | | 11,232 | |
Interest and other expense | (82,976) | | | (96,161) | |
| (52,993) | | | (84,929) | |
Income before income taxes and equity in income of equity method investments | 237,426 | | | 89,108 | |
Income tax (expense) benefit | (42,834) | | | 16,623 | |
Income before equity in income of equity method investments | 194,592 | | | 105,731 | |
Equity in income of equity method investments, net of tax | 35,638 | | | — | |
Net income | 230,230 | | | 105,731 | |
Net income attributable to noncontrolling interests, net of tax | (9,259) | | | (10,687) | |
Net income attributable to Global Payments | $ | 220,971 | | | $ | 95,044 | |
| | | |
Earnings per share attributable to Global Payments: | | | |
Basic earnings per share | $ | 0.74 | | | $ | 0.54 | |
Diluted earnings per share | $ | 0.74 | | | $ | 0.54 | |
See Notes to Unaudited Consolidated Financial Statements.
GLOBAL PAYMENTS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
| | | | | | | | | | | |
| Nine Months Ended |
| September 30, 2020 | | September 30, 2019 |
| | | |
Revenues | $ | 5,493,365 | | | $ | 2,924,131 | |
Operating expenses: | | | |
Cost of service | 2,728,532 | | | 1,035,225 | |
Selling, general and administrative | 2,122,862 | | | 1,293,651 | |
| 4,851,394 | | | 2,328,876 | |
Operating income | 641,971 | | | 595,255 | |
| | | |
Interest and other income | 35,277 | | | 20,342 | |
Interest and other expense | (258,475) | | | (220,858) | |
| (223,198) | | | (200,516) | |
Income before income taxes and equity in income of equity method investments | 418,773 | | | 394,739 | |
Income tax expense | (59,173) | | | (39,765) | |
Income before equity in income of equity method investments | 359,600 | | | 354,974 | |
Equity in income of equity method investments, net of tax | 60,682 | | | — | |
Net income | 420,282 | | | 354,974 | |
Net income attributable to noncontrolling interests, net of tax | (18,406) | | | (27,132) | |
Net income attributable to Global Payments | $ | 401,876 | | | $ | 327,842 | |
| | | |
Earnings per share attributable to Global Payments: | | | |
Basic earnings per share | $ | 1.34 | | | $ | 2.00 | |
Diluted earnings per share | $ | 1.34 | | | $ | 2.00 | |
See Notes to Unaudited Consolidated Financial Statements.
GLOBAL PAYMENTS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
| | | | | | | | | | | |
| Three Months Ended |
| September 30, 2020 | | September 30, 2019 |
| | | |
Net income | $ | 230,230 | | | $ | 105,731 | |
Other comprehensive income (loss): | | | |
Foreign currency translation adjustments | 110,809 | | | (67,279) | |
Income tax benefit related to foreign currency translation adjustments | — | | | 144 | |
Net unrealized gains (losses) on hedging activities | 194 | | | (40,265) | |
Reclassification of net unrealized losses on hedging activities to interest expense | 11,133 | | | 1,193 | |
Income tax (expense) benefit related to hedging activities | (2,612) | | | 9,289 | |
Other, net of tax | (3,531) | | | 37 | |
Other comprehensive income (loss) | 115,993 | | | (96,881) | |
| | | |
Comprehensive income | 346,223 | | | 8,850 | |
Comprehensive income attributable to noncontrolling interests | (18,010) | | | (1,967) | |
Comprehensive income attributable to Global Payments | $ | 328,213 | | | $ | 6,883 | |
| | | | | | | | | | | |
| Nine Months Ended |
| September 30, 2020 | | September 30, 2019 |
| | | |
Net income | $ | 420,282 | | | $ | 354,974 | |
Other comprehensive income (loss): | | | |
Foreign currency translation adjustments | (10,844) | | | (54,377) | |
Income tax benefit related to foreign currency translation adjustments | 1,160 | | | 1,695 | |
Net unrealized losses on hedging activities | (53,332) | | | (96,997) | |
Reclassification of net unrealized losses (gains) on hedging activities to interest expense | 25,786 | | | (1,530) | |
Income tax benefit related to hedging activities | 6,677 | | | 23,800 | |
Other, net of tax | (3,288) | | | 165 | |
Other comprehensive loss | (33,841) | | | (127,244) | |
| | | |
Comprehensive income | 386,441 | | | 227,730 | |
Comprehensive income attributable to noncontrolling interests | (25,898) | | | (17,780) | |
Comprehensive income attributable to Global Payments | $ | 360,543 | | | $ | 209,950 | |
See Notes to Unaudited Consolidated Financial Statements.
GLOBAL PAYMENTS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| (Unaudited) | | |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 2,220,822 | | | $ | 1,678,273 | |
Accounts receivable, net | 822,033 | | | 895,232 | |
Settlement processing assets | 1,385,308 | | | 1,353,778 | |
Prepaid expenses and other current assets | 540,487 | | | 439,165 | |
Total current assets | 4,968,650 | | | 4,366,448 | |
Goodwill | 23,745,340 | | | 23,759,740 | |
Other intangible assets, net | 12,251,680 | | | 13,154,655 | |
Property and equipment, net | 1,526,178 | | | 1,382,802 | |
Deferred income taxes | 6,822 | | | 6,292 | |
Other noncurrent assets | 2,051,112 | | | 1,810,225 | |
Total assets | $ | 44,549,782 | | | $ | 44,480,162 | |
LIABILITIES AND EQUITY | | | |
Current liabilities: | | | |
Settlement lines of credit | $ | 439,371 | | | $ | 463,237 | |
Current portion of long-term debt | 831,500 | | | 35,137 | |
Accounts payable and accrued liabilities | 1,696,048 | | | 1,822,166 | |
Settlement processing obligations | 1,448,335 | | | 1,258,806 | |
Total current liabilities | 4,415,254 | | | 3,579,346 | |
Long-term debt | 8,436,962 | | | 9,090,364 | |
Deferred income taxes | 2,966,020 | | | 3,145,641 | |
Other noncurrent liabilities | 767,704 | | | 609,822 | |
Total liabilities | 16,585,940 | | | 16,425,173 | |
Commitments and contingencies | | | |
Equity: | | | |
Preferred stock, no par value; 5,000,000 shares authorized and none issued | — | | | — | |
Common stock, no par value; 400,000,000 shares authorized at September 30, 2020 and December 31, 2019; 299,286,847 issued and outstanding at September 30, 2020 and 300,225,590 issued and outstanding at December 31, 2019 | — | | | — | |
Paid-in capital | 25,620,599 | | | 25,833,307 | |
Retained earnings | 2,476,962 | | | 2,333,011 | |
Accumulated other comprehensive loss | (351,904) | | | (310,571) | |
Total Global Payments shareholders’ equity | 27,745,657 | | | 27,855,747 | |
Noncontrolling interests | 218,185 | | | 199,242 | |
Total equity | 27,963,842 | | | 28,054,989 | |
Total liabilities and equity | $ | 44,549,782 | | | $ | 44,480,162 | |
See Notes to Unaudited Consolidated Financial Statements.
GLOBAL PAYMENTS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | | | | | | | | | |
| Nine Months Ended |
| September 30, 2020 | | September 30, 2019 |
Cash flows from operating activities: | | | |
Net income | $ | 420,282 | | | $ | 354,974 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization of property and equipment | 265,738 | | | 132,043 | |
Amortization of acquired intangibles | 941,654 | | | 345,455 | |
Amortization of capitalized contract costs | 57,888 | | | 47,778 | |
Share-based compensation expense | 105,081 | | | 55,791 | |
Provision for operating losses and bad debts | 98,967 | | | 34,877 | |
Noncash lease expense | 73,493 | | | 29,135 | |
Deferred income taxes | (118,466) | | | (42,990) | |
Equity in income of equity investments, net of tax | (60,682) | | | — | |
Other, net | (13,584) | | | (22,469) | |
Changes in operating assets and liabilities, net of the effects of business combinations: | | | |
Accounts receivable | 23,352 | | | (80,709) | |
Settlement processing assets and obligations, net | 155,385 | | | 623,985 | |
Prepaid expenses and other assets | (240,804) | | | (148,421) | |
Accounts payable and other liabilities | (163,544) | | | 19,940 | |
Net cash provided by operating activities | 1,544,760 | | | 1,349,389 | |
Cash flows from investing activities: | | | |
Acquisitions, net of cash acquired | (77,180) | | | (334,383) | |
Capital expenditures | (329,413) | | | (201,017) | |
Other, net | 11,575 | | | 29,112 | |
Net cash used in investing activities | (395,018) | | | (506,288) | |
Cash flows from financing activities: | | | |
Net repayments of settlement lines of credit | (31,069) | | | (144,473) | |
Proceeds from long-term debt | 1,868,199 | | | 6,704,838 | |
Repayments of long-term debt | (1,829,637) | | | (6,097,229) | |
Payments of debt issuance costs | (8,075) | | | (32,637) | |
Repurchases of common stock | (421,162) | | | (233,995) | |
Proceeds from stock issued under share-based compensation plans | 51,055 | | | 22,008 | |
Common stock repurchased - share-based compensation plans | (41,966) | | | (49,037) | |
Distributions to noncontrolling interests | (6,955) | | | (31,632) | |
Preacquisition dividends paid to former TSYS shareholders | — | | | (23,240) | |
Dividends paid | (175,025) | | | (4,727) | |
Net cash (used in) provided by financing activities | (594,635) | | | 109,876 | |
Effect of exchange rate changes on cash | (12,558) | | | (36,239) | |
Increase in cash and cash equivalents | 542,549 | | | 916,738 | |
Cash and cash equivalents, beginning of the period | 1,678,273 | | | 1,210,878 | |
Cash and cash equivalents, end of the period | $ | 2,220,822 | | | $ | 2,127,616 | |
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 June 30, 2020 | 299,244 | | | $ | 25,570,582 | | | $ | 2,314,423 | | | $ | (459,146) | | | $ | 27,425,859 | | | $ | 207,130 | | | $ | 27,632,989 | |
Net income | | | | | 220,971 | | | | | 220,971 | | | 9,259 | | | 230,230 | |
Other comprehensive income | | | | | | | 107,242 | | | 107,242 | | | 8,751 | | | 115,993 | |
Stock issued under share-based compensation plans | 50 | | | 8,423 | | | | | | | 8,423 | | | | | 8,423 | |
Common stock repurchased - share-based compensation plans | (7) | | | (682) | | | | | | | (682) | | | | | (682) | |
Share-based compensation expense | | | 42,276 | | | | | | | 42,276 | | | | | 42,276 | |
Distributions to noncontrolling interest | | | | | | | | | — | | | (6,955) | | | (6,955) | |
Cash dividends declared ($0.195 per share) | | | | | (58,432) | | | | | (58,432) | | | | | (58,432) | |
Balance at September 30, 2020 | 299,287 | | | $ | 25,620,599 | | | $ | 2,476,962 | | | $ | (351,904) | | | $ | 27,745,657 | | | $ | 218,185 | | | $ | 27,963,842 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Number of Shares | | Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Global Payments Shareholders’ Equity | | Noncontrolling Interests | | Total Equity |
Balance at June 30, 2019 | 156,675 | | | $ | 2,126,065 | | | $ | 2,204,445 | | | $ | (339,906) | | | $ | 3,990,604 | | | $ | 184,512 | | | $ | 4,175,116 | |
Net income | | | | | 95,044 | | | | | 95,044 | | | 10,687 | | | 105,731 | |
Other comprehensive loss | | | | | | | (88,161) | | | (88,161) | | | (8,720) | | | (96,881) | |
Stock issued under share-based compensation plans | 141 | | | 9,057 | | | | | | | 9,057 | | | | | 9,057 | |
Common stock repurchased - share-based compensation plans | (180) | | | (29,584) | | | | | | | (29,584) | | | | | (29,584) | |
Share-based compensation expense | | | 27,877 | | | | | | | 27,877 | | | | | 27,877 | |
Issuance of common stock in connection with a business combination | 143,909 | | | 23,771,389 | | | | | | | 23,771,389 | | | | | 23,771,389 | |
Distributions to noncontrolling interest | | | | | | | | | — | | | (5,395) | | | (5,395) | |
Cash dividends declared ($0.01 per share) | | | | | (1,592) | | | | | (1,592) | | | | | (1,592) | |
Balance at September 30, 2019 | 300,545 | | | $ | 25,904,804 | | | $ | 2,297,897 | | | $ | (428,067) | | | $ | 27,774,634 | | | $ | 181,084 | | | $ | 27,955,718 | |
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, 2019 | 300,226 | | | $ | 25,833,307 | | | $ | 2,333,011 | | | $ | (310,571) | | | $ | 27,855,747 | | | $ | 199,242 | | | $ | 28,054,989 | |
Cumulative effect of adoption of new accounting standard | | | | | (5,379) | | | | | (5,379) | | | | | (5,379) | |
Net income | | | | | 401,876 | | | | | 401,876 | | | 18,406 | | | 420,282 | |
Other comprehensive (loss) income | | | | | | | (41,333) | | | (41,333) | | | 7,492 | | | (33,841) | |
Stock issued under share-based compensation plans | 1,495 | | | 51,055 | | | | | | | 51,055 | | | | | 51,055 | |
Common stock repurchased - share-based compensation plans | (339) | | | (42,403) | | | | | | | (42,403) | | | | | (42,403) | |
Share-based compensation expense | | | 105,081 | | | | | | | 105,081 | | | | | 105,081 | |
Distributions to noncontrolling interest | | | | | | | | | — | | | (6,955) | | | (6,955) | |
Repurchase of common stock | (2,095) | | | (326,441) | | | (77,521) | | | | | (403,962) | | | | | (403,962) | |
Dividends paid ($0.585 per share) | | | | | (175,025) | | | | | (175,025) | | | | | (175,025) | |
Balance at September 30, 2020 | 299,287 | | | $ | 25,620,599 | | | $ | 2,476,962 | | | $ | (351,904) | | | $ | 27,745,657 | | | $ | 218,185 | | | $ | 27,963,842 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | | | | | 327,842 | | | | | 327,842 | | | 27,132 | | | 354,974 | |
Other comprehensive loss | | | | | | | (117,892) | | | (117,892) | | | (9,352) | | | (127,244) | |
Stock issued under share-based compensation plans | 750 | | | 22,008 | | | | | | | 22,008 | | | | | 22,008 | |
Common stock repurchased - share-based compensation plans | (268) | | | (41,190) | | | | | | | (41,190) | | | | | (41,190) | |
Share-based compensation expense | | | 55,791 | | | | | | | 55,791 | | | | | 55,791 | |
Issuance of common stock in connection with a business combination | 143,909 | | | 23,771,389 | | | | | | | 23,771,389 | | | | | 23,771,389 | |
Distributions to noncontrolling interest | | | | | | | | | — | | | (31,632) | | | (31,632) | |
Repurchase of common stock | (1,808) | | | (138,361) | | | (91,633) | | | | | (229,994) | | | | | (229,994) | |
Dividends paid ($0.03 per share) | | | | | (4,727) | | | | | (4,727) | | | | | (4,727) | |
Balance at September 30, 2019 | 300,545 | | | $ | 25,904,804 | | | $ | 2,297,897 | | | $ | (428,067) | | | $ | 27,774,634 | | | $ | 181,084 | | | $ | 27,955,718 | |
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 pure play payments technology company delivering innovative software and 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 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, which are described in "Note 12—Segment Information." 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, 2019 was derived from the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 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, 2019.
COVID-19 Update
In March 2020, the World Health Organization declared the outbreak of the COVID-19 virus a global pandemic. The pandemic continues to cause major disruptions to businesses and markets worldwide as the virus spreads or has a resurgence in certain jurisdictions. A number of countries as well as many states and cities within the United States have implemented measures in an effort to contain the virus, including physical distancing, travel restrictions, border closures, limitations on public gatherings, work from home and closure of or restrictions on nonessential businesses. The effects of the outbreak are still evolving, and the ultimate severity and duration of the pandemic and the implications on global economic conditions remains uncertain.
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. In particular, the future magnitude, duration and effects of the COVID-19 pandemic are difficult to predict at this time, and the ultimate effect could result in additional charges related to the recoverability of assets, including financial assets, long-lived assets and goodwill and other losses. These unaudited consolidated financial statements reflect the financial statement effects of COVID-19 based upon management’s estimates and assumptions utilizing the most currently available information.
Recently adopted accounting pronouncements
Accounting Standards Update ("ASU") 2018-15— In August 2018, the Financial Accounting Standards Board ("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 following the internal-use software capitalization criteria within Accounting Standards Codification ("ASC") Subtopic 350-40.
We adopted ASU 2018-15 on January 1, 2020, applying the guidance prospectively to all implementation costs incurred on or after the date of adoption. The adoption of this standard did not have a material effect on our consolidated financial statements. We have historically capitalized implementation costs associated with cloud computing arrangements that are service contracts following the guidance in Subtopic 350-40 and will continue to do so pursuant to the clarifications provided in the new guidance. We amortize capitalized implementation costs to expense on a straight-line basis over the term of the applicable hosting arrangement.
ASU 2016-13— We adopted ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" on January 1, 2020 using the modified retrospective transition method. The adoption of this standard resulted in a cumulative-effect adjustment to decrease retained earnings by $5.4 million, net of tax. The amendments in this update changed how we measure and recognize credit impairment for certain financial instruments measured at amortized cost. Under the current expected credit losses model required by ASU 2016-13, we recognize at asset inception and each subsequent reporting date an estimate of credit losses expected to occur over the remaining life of each pool of financial assets with similar risk characteristics.
We have exposure to credit losses for financial assets such as accounts receivable, certain settlement processing assets, check guarantee claims receivable assets and advances to sales representatives. We utilize a combination of aging or loss-rate methods to develop an estimate of current expected credit losses, depending on the nature and risk profile of the underlying asset pool. A broad range of information is considered in the estimation process, including historical loss information adjusted for current conditions and expectations of future trends. The estimation process also includes consideration of qualitative and quantitative risk factors associated with the age of asset balances, expected timing of payment, contract terms and conditions, changes in specific customer risk profiles or mix of customers, geographic risk, industry or economic trends and relevant environmental factors.
As of September 30, 2020, the total allowance for credit losses was approximately $36.9 million. Financial assets are presented net of the allowance for credit losses in the consolidated balance sheets. The measurement of the allowance for credit losses is recognized through credit loss expense. Depending on the nature of the underlying asset, credit loss expense is included as a component of cost of service or selling, general and administrative expense in the consolidated statements of income. Write-offs are recorded in the period in which the asset is deemed to be uncollectible. Recoveries are recorded when received as a direct credit to the credit loss expense in the consolidated statements of income. Prior to the adoption of ASU 2016-13, credit losses on these financial instruments were recognized when an occurrence was deemed to be probable.
Recently issued pronouncements not yet adopted
ASU 2019-12—In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes," which is intended to enhance and simplify various aspects of the accounting for income taxes. The amendments in this update remove certain exceptions to the general principles in ASC Topic 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also clarifies and amends existing guidance to improve consistency in application of the accounting for franchise taxes, enacted changes in tax laws or rates and transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for annual and interim periods beginning after December 15, 2020, with early adoption permitted in any interim period. We are evaluating the effect of ASU 2019-12 on our consolidated financial statements. Based upon the analysis performed to date, we do not believe the adoption of ASU 2019-12 will have a material effect on our consolidated financial statements.
ASU 2020-04—In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848)," which provides optional expedients and exceptions to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference London Inter-bank Offered Rate ("LIBOR") or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022 for which an entity has elected certain optional expedients and which are retained through the end of the hedging relationship. The amendments in this update also include a general principle that permits an entity to consider contract modifications due to reference rate reform to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. If elected, the optional expedients for contract modifications must be applied consistently for all eligible contracts or eligible transactions within the relevant ASC Topic or Industry Subtopic that contains the guidance that otherwise would be required to be applied. The amendments in this update were effective upon issuance and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. We are evaluating the effect of ASU 2020-04 on our consolidated financial statements.
NOTE 2—ACQUISITIONS
Total System Services, Inc.
On September 18, 2019, we merged with Total System Services, Inc. ("TSYS") (the "Merger"). We accounted for this transaction as a business combination, which generally requires that we record the assets acquired and liabilities assumed at fair value as of the acquisition date. The estimated acquisition-date fair values of major classes of assets acquired and liabilities assumed, including a reconciliation to the total purchase consideration, were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Provisional Amounts at December 31, 2019 | | Measurement-Period Adjustments | | Final Amounts at September 30, 2020 |
| | | | | | |
| | (in thousands) |
| | | | | | |
Cash and cash equivalents | | $ | 446,009 | | | $ | — | | | $ | 446,009 | |
Accounts receivable | | 442,848 | | | (2,660) | | | 440,188 | |
Identified intangible assets | | 10,980,000 | | | 978 | | | 10,980,978 | |
Property and equipment | | 644,084 | | | (978) | | | 643,106 | |
Other assets | | 1,474,825 | | | (2,969) | | | 1,471,856 | |
Accounts payable and accrued liabilities | | (614,060) | | | (11,899) | | | (625,959) | |
Debt | | (3,295,342) | | | 4,787 | | | (3,290,555) | |
Deferred income tax liabilities | | (2,687,849) | | | 52,598 | | | (2,635,251) | |
Other liabilities | | (314,415) | | | (173) | | | (314,588) | |
Total identifiable net assets | | 7,076,100 | | | 39,684 | | | 7,115,784 | |
Goodwill | | 17,398,853 | | | (39,684) | | | 17,359,169 | |
Total purchase consideration | | $ | 24,474,953 | | | $ | — | | | $ | 24,474,953 | |
During the nine months ended September 30, 2020, we made measurement-period adjustments, as shown in the table above, that decreased the amount of provisional goodwill by $39.7 million. The decrease in deferred income tax liabilities for the nine months ended September 30, 2020 primarily relates to a refined analysis of the outside bases of partnerships. The effects of the measurement-period adjustments on our consolidated statements of income for the three and nine months ended September 30, 2020 were not material.
As of September 30, 2020, goodwill arising from the acquisition of $17.4 billion was included in our reportable segments as follows: $7.1 billion in the Merchant Solutions segment, $7.9 billion in the Issuer Solutions segment and $2.4 billion in the
Business and Consumer Solutions segment. Goodwill was attributable to expected growth opportunities, an assembled workforce and potential synergies from combining the acquired business into our existing business. Substantially all of the goodwill from this acquisition is not deductible for income tax purposes.
The following unaudited pro forma information shows the results of our operations for the three and nine months ended September 30, 2019 as if the Merger had occurred on January 1, 2018. The unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of what would have occurred if the Merger had occurred as of that date. The unaudited pro forma information is also not intended to be a projection of future results due to the integration of TSYS. The unaudited pro forma information reflects the effects of applying our accounting policies and certain pro forma adjustments to the combined historical financial information of Global Payments and TSYS.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 | | Nine Months Ended September 30, 2019 |
| Actual | | Pro Forma | | Actual | | Pro Forma |
| | | | | | | |
| (in thousands) |
| | | | | | | |
Total revenues | $ | 1,105,941 | | | $ | 1,993,089 | | | $ | 2,924,131 | | | $ | 5,866,522 | |
Net income attributable to Global Payments | $ | 95,044 | | | $ | 219,010 | | | $ | 327,842 | | | $ | 614,317 | |
For the three and nine months ended September 30, 2020, the acquired operations of TSYS contributed $1,067.2 million and $3,119.2 million, respectively, to our consolidated revenues and $165.8 million and $385.1 million, respectively, to our consolidated operating income.
At September 30, 2020, accounts payable and accrued liabilities in the consolidated balance sheet included obligations totaling $26.3 million for employee termination benefits resulting from Merger-related integration activities. During the three months ended September 30, 2020, we recognized charges for employee termination benefits of $8.1 million, which included $1.9 million of share-based compensation expense. During the nine months ended September 30, 2020, we recognized charges for employee termination benefits of $49.8 million, which included $6.1 million of share-based compensation expense. As of September 30, 2020, the cumulative amount of recognized charges for employee termination benefits resulting from Merger-related integration activities was $106.9 million, which included $23.4 million of share-based compensation expense. These charges are recorded within selling, general and administrative expenses in our consolidated statements of income and included within Corporate expenses for segment reporting purposes. New obligations may arise and related expenses may be incurred as Merger-related integration activities continue over the next 12 months.
NOTE 3—REVENUES
The following tables present a disaggregation of our revenues from contracts with customers by geography for each of our reportable segments for the three and nine months ended September 30, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, 2020 |
| Merchant Solutions | | Issuer Solutions | | Business and Consumer Solutions | | Intersegment Eliminations | | Total |
| | | | | | | | | |
| (in thousands) |
| | | | | | | | | |
Americas | $ | 1,039,039 | | | $ | 370,938 | | | $ | 204,106 | | | $ | (15,097) | | | $ | 1,598,986 | |
Europe | 154,262 | | | 113,907 | | | — | | | — | | | 268,169 | |
Asia Pacific | 50,660 | | | 2,564 | | | — | | | (2,564) | | | 50,660 | |
| $ | 1,243,961 | | | $ | 487,409 | | | $ | 204,106 | | | $ | (17,661) | | | $ | 1,917,815 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, 2019 |
| Merchant Solutions | | Issuer Solutions | | Business and Consumer Solutions | | Intersegment Eliminations | | Total |
| | | | | | | | | |
| (in thousands) |
| | | | | | | | | |
Americas | $ | 786,659 | | | $ | 55,091 | | | $ | 27,896 | | | $ | (2,310) | | | $ | 867,336 | |
Europe | 159,592 | | | 20,321 | | | — | | | — | | | 179,913 | |
Asia Pacific | 58,692 | | | 216 | | | — | | | (216) | | | 58,692 | |
| $ | 1,004,943 | | | $ | 75,628 | | | $ | 27,896 | | | $ | (2,526) | | | $ | 1,105,941 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 |
| Merchant Solutions | | Issuer Solutions | | Business and Consumer Solutions | | Intersegment Eliminations | | Total |
| | | | | | | | | |
| (in thousands) |
| | | | | | | | | |
Americas | $ | 2,926,472 | | | $ | 1,127,832 | | | $ | 624,774 | | | $ | (47,558) | | | $ | 4,631,520 | |
Europe | 392,721 | | | 327,532 | | | — | | | — | | | 720,253 | |
Asia Pacific | 141,592 | | | 5,832 | | | — | | | (5,832) | | | 141,592 | |
| $ | 3,460,785 | | | $ | 1,461,196 | | | $ | 624,774 | | | $ | (53,390) | | | $ | 5,493,365 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 |
| Merchant Solutions | | Issuer Solutions | | Business and Consumer Solutions | | Intersegment Eliminations | | Total |
| | | | | | | | | |
| (in thousands) |
| | | | | | | | | |
Americas | $ | 2,181,000 | | | $ | 55,092 | | | $ | 27,896 | | | $ | (2,311) | | | $ | 2,261,677 | |
Europe | 452,317 | | | 30,814 | | | — | | | — | | | 483,131 | |
Asia Pacific | 179,323 | | | 216 | | | — | | | (216) | | | 179,323 | |
| $ | 2,812,640 | | | $ | 86,122 | | | $ | 27,896 | | | $ | (2,527) | | | $ | 2,924,131 | |
The following table presents a disaggregation of our Merchant Solutions segment revenues by distribution channel for the three and nine months ended September 30, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
| | | | | | | |
| (in thousands) |
| | | | | | | |
Relationship-led | $ | 709,749 | | | $ | 538,112 | | | $ | 1,934,265 | | | $ | 1,499,393 | |
Technology-enabled | 534,212 | | | 466,831 | | | 1,526,520 | | | 1,313,247 | |
| $ | 1,243,961 | | | $ | 1,004,943 | | | $ | 3,460,785 | | | $ | 2,812,640 | |
ASC Topic 606, Revenues from Contracts with Customers ("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 nine months ended September 30, 2020 and 2019, substantially all of our revenues were recognized over time.
Supplemental balance sheet information related to contracts from customers as of September 30, 2020 and December 31, 2019 was as follows:
| | | | | | | | | | | | | | | | | |
| Balance Sheet Location | | September 30, 2020 | | December 31, 2019 |
| | | | | |
| | | (in thousands) |
| | | | | |
Assets: | | | | | |
Capitalized costs to obtain customer contracts, net | Other noncurrent assets | | $ | 243,489 | | | $ | 226,945 | |
Capitalized costs to fulfill customer contracts, net | Other noncurrent assets | | $ | 72,114 | | | $ | 38,150 | |
| | | | | |
Liabilities: | | | | | |
Contract liabilities, net (current) | Accounts payable and accrued liabilities | | $ | 206,299 | | | $ | 193,405 | |
Contract liabilities, net (noncurrent) | Other noncurrent liabilities | | $ | 43,714 | | | $ | 35,272 | |
Net contract assets were not material at September 30, 2020 or at December 31, 2019. Revenue recognized for the three months ended September 30, 2020 and 2019 from contract liability balances at the beginning of each period was $69.7 million and $52.0 million. Revenue recognized for the nine months ended September 30, 2020 and 2019 from contract liability balances at the beginning of each period was $195.3 million and $122.7 million.
ASC 606 requires disclosure of the aggregate amount of the transaction price allocated to unsatisfied performance obligations. The purpose of this disclosure is to provide additional information about the amounts and expected timing of revenue to be recognized from the remaining performance obligations in our existing contracts. The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied at September 30, 2020. However, as permitted, we have elected to exclude from this disclosure any contracts with an original duration of one year or less and any variable consideration that meets specified criteria. Accordingly, the total unsatisfied or partially unsatisfied performance obligations related to processing services is significantly higher than the amounts disclosed in the table below (in thousands):
| | | | | |
Year ending December 31, | |
| |
2020 | $ | 251,524 | |
2021 | 879,620 | |
2022 | 688,039 | |
2023 | 479,540 | |
2024 | 308,718 | |
2025 | 225,624 | |
2026 and thereafter | 456,896 | |
Total | $ | 3,289,960 | |
NOTE 4—GOODWILL AND OTHER INTANGIBLE ASSETS
As of September 30, 2020 and December 31, 2019, goodwill and other intangible assets consisted of the following:
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| | | |
| (in thousands) |
| | | |
Goodwill | $ | 23,745,340 | | | $ | 23,759,740 | |
Other intangible assets: | | | |
Customer-related intangible assets | $ | 9,231,143 | | | $ | 9,238,728 | |
Acquired technologies | 2,743,679 | | | 2,732,218 | |
Contract-based intangible assets | |