GLOBAL PAYMENTS INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Item 6 - Selected Financial Data" and "Item 8 - Financial Statements and Supplementary Data." This discussion and analysis contains forward-looking statements about our plans and expectations of what may happen in the future. Forward-looking statements are based on a number of assumptions and estimates that are inherently subject to significant risks and uncertainties, and our actual results could differ materially from the results anticipated by our forward-looking statements as a result of many known and unknown factors, including but not limited to, those discussed in "Item 1A - Risk Factors." See "Cautionary Notice Regarding Forward-Looking Statements" located above in "Item 1 - Business."
Executive Overview
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. OnSeptember 18, 2019 , we consummated our merger with Total System Services, Inc. ("TSYS") (the "Merger") for total purchase consideration of$24.5 billion , primarily funded with shares of our common stock. Prior to the Merger, TSYS was a leading global payments provider, offering seamless, secure and innovative solutions to issuers, merchants and consumers. See "Note 2-Acquisitions" in the notes to the accompanying consolidated financial statements for further discussion of the Merger. We experienced strong business and financial performance around the world during the year endedDecember 31, 2019 . Highlights related to our financial condition atDecember 31, 2019 and results of operations for the year then ended include the following:
• Consolidated revenues increased to
million for the prior-year period, primarily due to additional revenues
from TSYS.
• Consolidated operating income increased to $791.4 million compared to
$737.1 million for the prior-year period. Operating margin decreased to
16.1% compared to 21.9% for the prior-year period, primarily due to an
increase in acquisition and integration expenses associated with the
Merger.
• Net income attributable to
compared to
in acquisition and integration expenses, amortization of acquired
intangibles and interest expense from the prior-year period.
• Diluted earnings per share decreased to
prior-year period, reflecting the decrease in net income and an increase
in the number of weighted-average shares outstanding as a result of
issuing common shares as purchase consideration in the Merger.
• In connection with the Merger, we achieved an investment grade debt
structure, which now consists of a
and revolving credit facility, unsecured senior notes of
we issued and
in the Merger.
Emerging Trends
For a further discussion of trends, uncertainties and other factors that could
affect our continuing operating results, see the section entitled "Risk Factors"
in Item 1A in this Annual Report on Form 10-K.
The payments technology industry continues to grow worldwide and as a result,
certain large payment technology companies, including us, have expanded
operations globally by pursuing acquisitions and creating alliances and joint
ventures. We expect to
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continue to expand into new markets internationally and increase our scale and improve our competitiveness in existing markets by pursuing additional acquisitions and joint ventures.
We believe that the number of electronic payment transactions will continue to grow and that an increasing percentage of these will be facilitated through emerging technologies. As a result, we expect an increasing portion of our future capital investment will be allocated to support the development of new and emerging technologies; however, we do not expect our aggregate capital spending to support such technologies to increase materially from our current level of spending. We also believe new markets will continue to develop in areas that have been previously dominated by paper-based transactions. We expect industries such as education, government and healthcare, as well as recurring payments and business-to-business payments, to continue to see transactions migrate to electronic-based solutions. We anticipate that the continued development of new services and the emergence of new vertical markets will be a factor in the growth of our business and our revenue in the future. For a further discussion of trends, uncertainties and other factors that could affect our continuing operating results, see the section entitled "Risk Factors" in Item 1A in this Annual Report on Form 10-K.
Results of Operations
Prior to the completion of the Merger, we operated in three reportable segments:North America ,Europe andAsia-Pacific . In the fourth quarter of 2019, as a result of the Merger, we realigned our executive management and organizational structures. Based on an evaluation performed in accordance with the guidance provided in Accounting Standards Codification Topic 280, Segment Reporting, we determined that our new reportable segments as ofDecember 31, 2019 were: Merchant Solutions, Issuer Solutions, and Business and Consumer Solutions. In connection with the organizational realignment, the legacyGlobal Payments businesses are included in the Merchant Solutions segment, with the exception of a small portion of our European business that is included in the Issuer Solutions segment. Certain operating expenses, that prior to the Merger were considered "enterprise-wide" expenses and reported in Corporate, are now reflected in the Merchant Solutions segment. For further information about our reportable segments, see "Item 1. Business-Business Segments" and "Note 15-Segment Information" in the notes to the accompanying consolidated financial statements, incorporated herein by reference. The following discussion of our results recasts our segments for prior periods to conform to our new segment presentation. For a discussion of our results of operations for fiscal 2018 compared to fiscal 2017, refer to "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Form 10-K for the year endedDecember 31, 2018 , which was filed with theSEC onFebruary 21, 2019 .
Revenues
Merchant Solutions. The majority of our Merchant Solutions segment revenues is
generated by services priced as a percentage of transaction value or a specified
fee per transaction, depending on card type or the vertical. We also earn
software subscription and licensing fees, as well as other fees based on
specific value-added services that may be unrelated to the number or value of
transactions. These revenues depend upon a number of factors, such as demand for
and price of our services, the technological competitiveness of our offerings,
our reputation for providing timely and reliable service, competition within our
industry and general economic conditions.
We provide payment technology and software solutions to customers and fund
settlement either directly, in markets where we have direct membership with the
payment networks, or through our relationship with a member financial
institution in markets where we are sponsored. Revenues are recognized in the
amount of customer billing, net of interchange fees and payment network fees. We
market our services through a variety of sales channels, including a direct
sales force, trade associations, agent and enterprise software providers and
referral arrangements with value-added resellers ("VARs"), which we generally
refer to as "direct distribution." We also sell services to ISOs and financial
institutions through our wholesale channel. In certain of these contracts, the
ISO receives a share of the customer profitability in the form of a monthly
residual payment, which is reflected as a component of selling, general and
administrative expenses in the consolidated statements of income.
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Issuer Solutions. Issuer Solutions segment revenues are derived from long-term processing contracts with financial institutions and other financial services providers. Payment processing services revenues are generated primarily from charges based on the number of accounts on file, transactions and authorizations processed, statements generated and/or mailed, managed services, cards embossed and mailed, and other processing services for cardholders accounts on file. Most of these contracts have prescribed annual minimums, penalties for early termination, and service level agreements that may affect contractual fees if specific service levels are not achieved. Issuer Solutions revenues also include loyalty redemption services and professional services. Business and Consumer Solutions. Business and Consumer Solutions segment revenues principally consist of fees collected from cardholders and fees generated by cardholder activity in connection with the programs that we manage. Customers are typically charged a fee for each purchase transaction made using their cards, unless the customer is on a monthly or annual service plan, in which case the customer is instead charged a monthly or annual subscription fee, as applicable. Customers are also charged a monthly maintenance fee after a specified period of inactivity. We also charge fees associated with additional services offered in connection with certain cards, including the use of overdraft features, a variety of bill payment options, card replacement, foreign exchange and card-to-card transfers of funds initiated through our call centers. Revenues are recognized net of fees charged by the payment networks for services they provide in processing transactions routed through them.
Operating Expenses
Cost of Service
Cost of service consists primarily of salaries, wages and related expenses paid to operations and technology-related personnel, including those who monitor our transaction processing systems and settlement functions; the cost of transaction processing systems, including third-party services; the cost of network telecommunications capability; depreciation and occupancy costs associated with the facilities supporting these functions; amortization of intangible assets; amortization of costs to fulfill customer contracts; provisions for operating losses; and, when applicable, integration expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of salaries, wages, commissions and related expenses paid to sales personnel, customer support functions other than those supporting revenue, administrative employees and management; share-based compensation expense; amortization of costs to obtain customer contracts; residuals paid to ISOs; fees paid to VARs, independent contractors and other third parties; other selling expenses; occupancy costs of leased space directly related to these functions; advertising costs; and, when applicable, acquisition and integration expenses.
Operating Income and Operating Margin
For the purpose of discussing segment operations, we refer to "operating
income," which is calculated by subtracting segment direct expenses from segment
revenues. Overhead and shared expenses, including share-based compensation, are
not allocated to segment operations; they are reported in the caption
"Corporate." Similarly, we refer to "operating margin" regarding segment
operations, which is calculated by dividing segment operating income by segment
revenues.
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Year Ended
The following table sets forth key selected financial data for the years endedDecember 31, 2019 and 2018, this data as a percentage of total revenues, and the changes between periods in dollars and as a percentage of the prior-period amount. The income statement data for the years endedDecember 31, 2019 and 2018 are derived from the accompanying consolidated financial statements included in Item 8 - Financial Statements and Supplementary Data. Year Ended December 31, Year Ended December 31, (dollar amounts in thousands) 2019 % of Revenue(1) 2018 % of Revenue(1) Change % Change
Revenues(2):
Merchant Solutions$ 4,098,580 83.4 %$ 3,345,181 99.4 %$ 753,399 22.5 % Issuer Solutions 604,654 12.3 % 21,185 0.6 % 583,469 NM Business and Consumer Solutions 227,440 4.6 % - - % 227,440 NM Segment revenues$ 4,930,674 100.4 %$ 3,366,366 100.0 %$ 1,564,308 46.5 % Less: intersegment revenues (18,782 ) (0.4 )% - - % (18,782 ) NM Consolidated revenues$ 4,911,892 100.0 %$ 3,366,366 100.0 %$ 1,545,526 45.9 % Consolidated operating expenses(2): Cost of service$ 2,073,803 42.2 %$ 1,095,014 32.5 %$ 978,789 89.4 % Selling, general and administrative 2,046,672 41.7 % 1,534,297 45.6 % 512,375 33.4 % Operating expenses$ 4,120,475 83.9 %$ 2,629,311 78.1 %$ 1,491,164 56.7 % Operating income (loss)(2)(3): Merchant Solutions$ 1,148,975 23.4 %$ 940,157 27.9 %$ 208,818 22.2 % Issuer Solutions 82,172 1.7 % 14,084 0.4 % 68,088 NM Business and Consumer Solutions 19,473 0.4 % - - % 19,473 NM Corporate (459,203 ) (9.3 )% (217,186 ) (6.5 )% (242,017 ) 111.4 % Operating income$ 791,417 16.1 %$ 737,055 21.9 %$ 54,362 7.4 % Operating margin(2): Merchant Solutions 28.0 % 28.1 % (0.1 )% Issuer Solutions 13.6 % NM NM Business and Consumer Solutions 8.6 % NM NM
NM = Not meaningful.
(1) Percentage amounts may not sum to the total due to rounding.
(2) Revenues, operating expenses, operating income and operating margin reflect the effects of acquired businesses from the respective dates of acquisition. For further discussion, see "Note 2-Acquisitions" in the notes to the accompanying consolidated financial statements. (3) During the year endedDecember 31, 2019 , operating income for our Merchant Solutions segment reflected the effect of acquisition and integration expenses of$56.1 million . Operating loss for Corporate included acquisition and integration expenses of$199.5 million and$56.1 million , respectively, during the years endedDecember 31, 2019 and 2018. Acquisition and integration expenses for 2019 were primarily related to the Merger.
Revenues
Consolidated revenues for the year endedDecember 31, 2019 increased by 45.9% to$4,911.9 million , compared to$3,366.4 million for the prior-year period, primarily due to additional revenues from the acquired operations of TSYS. For the year ended 33
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December 31, 2019 , currency exchange rate fluctuations reduced our consolidated revenues by approximately$44 million , compared to the prior-year period, calculated by converting revenues for the current year, excluding revenues from current year acquisitions, in local currencies using exchange rates for the prior-year period. The effect of exchange rate fluctuations on our revenues was almost exclusively in our Merchant Solutions segment.
Merchant Solutions Segment. Revenues from our Merchant Solutions segment
increased by 22.5% to
Issuer Solutions and Business and Consumer Solutions Segments. Revenues from our Issuer Solutions and Business and Consumer Solutions segments resulted primarily from the additional revenues from the acquired operations of TSYS.
Operating Expenses
Cost of Service. Cost of service for the year endedDecember 31, 2019 increased by 89.4% to$2,073.8 million , compared to$1,095.0 million for the prior-year period, primarily due to additional costs associated with the acquired operations of TSYS. Cost of service for the year endedDecember 31, 2019 reflects amortization of acquired intangibles of$667.1 million , compared to$377.7 million for the prior-year period, and integration expenses of$41.8 million primarily related to the Merger. Cost of service as a percentage of revenues increased to 42.2% for the year endedDecember 31, 2019 , compared to 32.5% for the prior-year period, primarily due to the increase in amortization of acquired intangibles of$289.5 million . Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year endedDecember 31, 2019 increased by 33.4% to$2,046.7 million , compared to$1,534.3 million for the prior-year period. The increase in selling, general and administrative expenses was primarily due to additional costs associated with the acquired operations of TSYS. In addition, selling, general and administrative expenses for the year endedDecember 31, 2019 reflect acquisition and integration expenses of$213.8 million , primarily related to the Merger, compared to$56.1 million for the prior-year period. Selling, general and administrative expenses as a percentage of revenues was 41.7% for the year endedDecember 31, 2019 , compared to 45.6% for the prior-year period. Corporate. Corporate expenses increased by$242.0 million to$459.2 million for the year endedDecember 31, 2019 , compared to$217.2 million for the prior-year period, primarily due to additional expenses associated with the acquired operations of TSYS and an increase in acquisition and integration expenses primarily due to the Merger. During the years endedDecember 31, 2019 and 2018, operating loss for Corporate included acquisition and integration expenses of$199.5 million and$56.1 million , respectively. Certain of these Merger-related integration activities resulted in the recognition of one-time employee termination benefits. During the year endedDecember 31, 2019 , we recognized charges of$57.1 million for actions taken to date, which included$17.3 million of share-based compensation expense based on accelerated vesting periods for equity awards held by terminated employees. In addition, we wrote-off capitalized software and other assets of$40.2 million for legacyGlobal Payments technology that will no longer be utilized for the combined company. We expect to incur additional charges as Merger-related integration activities continue in 2020.
Operating Income and Operating Margin
Consolidated operating income for the year endedDecember 31, 2019 increased to$791.4 million , compared to$737.1 million for the prior year due to additional income from TSYS of$78.7 million . For the year endedDecember 31, 2019 , currency exchange rate fluctuations reduced our consolidated operating income by approximately$21 million , compared to the prior-year period, calculated by converting operating income for the current year, excluding operating income from current year acquisitions, in local currencies using exchange rates for the prior-year period. The effect of exchange rate fluctuations on our operating income was almost exclusively in our Merchant Solutions segment. Operating margin for the year endedDecember 31, 2019 decreased to 16.1%, compared to 21.9% for the prior-year period. Consolidated operating income for the year endedDecember 31, 2019 reflects an increase in acquisition and integration expenses of$199.5 million , primarily due to the Merger, compared to the prior-year period, which was the primary reason for the decrease in operating margin from the prior-year period. 34
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Other Income/Expense, Net
Interest and other income for the year endedDecember 31, 2019 increased by$10.7 million to$31.4 million , compared to the prior-year period, as a result of interest earned on the net proceeds from the issuance of our unsecured senior notes while they were in escrow. Interest and other income for the year endedDecember 31, 2018 included a gain of$9.6 million recognized on the reorganization of a debit network association of which we were a member through one of our Canadian subsidiaries. Interest and other expense for the year endedDecember 31, 2019 increased by$109.3 million to$304.9 million , compared to the prior-year period, as a result of the increase in our long-term debt, including debt of$3,295.3 million that we assumed in the Merger. Further, we incurred fees and charges of$30.4 million in connection with financing activities related to the Merger, which were included in interest expense for the year endedDecember 31, 2019 . These fees and charges included fees associated with bridge financing and charges for the write-off of unamortized debt issuance costs related to borrowings under the credit facility that was extinguished prior to the completion of the Merger.
Income Tax Expense
Our effective income tax rates for the years endedDecember 31, 2019 and 2018 were 12.0% and 13.8%, respectively. Our effective tax rate for the year endedDecember 31, 2019 reflects the effects of the Merger on our state tax expense, foreign-derived intangible income deduction and tax credits. Our effective tax rate for the year endedDecember 31, 2018 reflects the reduction of our estimated transition tax liability associated with theU.S. Tax Cuts and Jobs Act of 2017.
Equity in Income of Equity Method Investments, Net of Tax
As a result of the Merger, we have a 44.56% investment inChina UnionPay Data Co., Ltd. ("CUP Data"), which we account for using the equity method of accounting. Equity in income of equity method investments, net of tax, primarily reflects our proportional share of earnings from our investment in CUP Data.
Liquidity and Capital Resources
In the ordinary course of our business, a significant portion of our liquidity comes from operating cash flows and borrowings, including the capacity under our credit facilities. Cash flow from operating activities is used to make planned capital investments in our business, to pursue acquisitions that meet our corporate objectives, to pay dividends, to pay principal and interest on our outstanding debt and to repurchase shares of our common stock. Accumulated cash balances are invested in high-quality, marketable short-term instruments. Our capital plan objectives are to support our operational needs and strategic plan for long-term growth while maintaining a low cost of capital. We use a combination of bank financing, such as borrowings under our credit facilities and senior note issuances, for general corporate purposes and to fund acquisitions. In addition, specialized lines of credit are also used in certain of our markets to fund merchant settlement prior to receipt of funds from the card network. We regularly evaluate our liquidity and capital position relative to cash requirements, and we may elect to raise additional funds in the future, through the issuance of debt or equity or by other means. AtDecember 31, 2019 , we had cash and cash equivalents totaling$1,678.3 million . Of this amount, we consider$981.7 million to be available for general purposes, of which$27.0 million is undistributed foreign earnings considered to be indefinitely reinvested outsidethe United States . The available cash of$981.7 million does not include the following: (i) settlement-related cash balances, (ii) funds held as collateral for merchant losses ("Merchant Reserves") and (iii) funds held for customers. Settlement-related cash balances represent funds that we hold when the incoming amount from the card networks precedes the funding obligation to the merchant. Settlement-related cash balances are not restricted; however, these funds are generally paid out in satisfaction of settlement processing obligations the following day. Merchant Reserves serve as collateral to minimize contingent liabilities associated with any losses that may occur under the merchant's agreement. While this cash is not restricted in its use, we believe that designating this cash to collateralize Merchant Reserves strengthens our fiduciary standing with our member sponsors and is in accordance with the guidelines set by the card networks. Funds held for customers and the corresponding liability that we record in customer deposits include amounts collected prior to remittance on our customers' behalf. 35
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Operating activities provided net cash of$1,391.3 million and$1,106.1 million for the years endedDecember 31, 2019 and 2018, respectively, which reflect net income adjusted for noncash items, including depreciation and amortization and changes in operating assets and liabilities. Fluctuations in operating assets and liabilities are affected primarily by timing of month-end and transaction volume, especially changes in settlement processing assets and obligations, and by the effects of businesses we acquire that have different working capital requirements. Changes in settlement processing assets and obligations increased operating cash flows by$213.7 million and$83.5 million during the years endedDecember 31, 2019 and 2018, respectively. The increase in cash flows from operating activities from the prior-year period was primarily due to the increase in earnings before certain noncash items, including amortization of acquired intangibles and depreciation and amortization of property and equipment. We used net cash in investing activities of$917.1 million and$1,476.3 million during the years endedDecember 31, 2019 and 2018, respectively. Cash used for investing activities primarily represents cash used to fund acquisitions, net of cash acquired, and capital expenditures. During the year endedDecember 31, 2019 , we used cash of$1,093.6 million for acquisitions, including$703.6 million for the repayment of TSYS' unsecured revolving credit facility (including accrued interest and fees) and for cash paid to TSYS shareholders in lieu of fractional shares, all of which was partially offset by cash acquired in the Merger and other acquisitions of$448.9 million . During the year endedDecember 31, 2018 , we used cash of$1,274.9 million for acquisitions, which was partially offset by cash acquired of$15.2 million . We made capital expenditures of$307.9 million and$213.3 million to purchase property and equipment during the years endedDecember 31, 2019 and 2018, respectively. These investments include software and hardware to support the development of new technologies, continued consolidation and enhancement of our operating platforms and infrastructure to support our growing business. Financing activities include borrowings and repayments made under our various debt arrangements, as well as borrowings and repayments made under specialized lines of credit to fund daily settlement activities. Our borrowing arrangements are further described in "Note 7-Long-Term Debt and Lines of Credit" in the notes to the accompanying consolidated financial statements and below under "Long-Term Debt and Lines of Credit." Financing activities also include cash flows associated with common stock repurchase programs and share-based compensation programs, as well as cash distributions made to noncontrolling interests and our shareholders. We used net cash in financing activities of$28.7 million during the year endedDecember 31, 2019 , and cash flows from financing activities provided net cash of$286.9 million during the year endedDecember 31, 2018 . In connection with financing activities associated with the Merger, we received proceeds of$2,973.2 million from the issuance of senior unsecured notes and$2,868.0 million from our senior unsecured term loan and revolving credit facilities. We used these proceeds to repay TSYS' unsecured revolving credit facility, to refinance certain of our existing indebtedness, to fund cash payments made in lieu of fractional shares and to pay transaction fees and costs related to the Merger. Repayments of long-term debt were$6,484.7 million and$2,304.3 million for the years endedDecember 31, 2019 and 2018, respectively. Repayments of long-term debt consist of repayments that we make with available cash, from time-to-time, under our revolving credit facility, as well as scheduled principal repayments we make on our term loans. During the year endedDecember 31, 2019 , repayments of long-term debt also included$5,127.5 million for the repayment of all outstanding principal under our secured term loan and revolving credit facility, which we extinguished in connection with the Merger. Activity under our settlement lines of credit is affected primarily by timing of month-end and transaction volume. During the year endedDecember 31, 2019 , we had net repayments of settlement lines of credit of$236.5 million , and during the year endedDecember 31, 2018 , we had net borrowings from settlement lines of credit of$70.8 million . From time to time, we repurchase our common stock, mainly through open market repurchase plans. During the years endedDecember 31, 2019 and 2018, we used cash of$311.4 million and$208.2 million , respectively, to repurchase shares of our common stock. As ofDecember 31, 2019 , we had$473.4 million of share repurchase authority remaining under a share repurchase program authorized by our board of directors. We paid dividends to our common shareholders in the amounts of$63.5 million and$6.3 million during the years endedDecember 31, 2019 and 2018. During the year endedDecember 31, 2019 , we funded assumed dividends payable (declared by TSYS' board of directors prior to consummation of the Merger) to former TSYS shareholders in the amount of$23.2 million . During the 36
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years ended
We believe that our current level of cash and borrowing capacity under our senior unsecured revolving credit facility, together with expected future cash flows from operations, will be sufficient to meet the needs of our existing operations and planned requirements for the foreseeable future.
Long-Term Debt and Lines of Credit
Bridge Facility
OnMay 27, 2019 , in connection with our entry into the merger agreement with TSYS, we obtained commitments for a$2.75 billion , 364-day senior unsecured bridge facility (the "Bridge Facility"). OnJuly 9, 2019 , upon our entry into the senior unsecured term loan and revolving credit facilities described below, the aggregate commitments under the Bridge Facility were reduced to approximately$2.1 billion . Concurrently with the issuance of our senior unsecured notes, the remaining aggregate commitments under the Bridge Facility were reduced to zero and terminated. During the year endedDecember 31, 2019 , we recognized$11.7 million of fees associated with the Bridge Facility in interest expense.
Senior Unsecured Credit Facilities
OnJuly 9, 2019 , we entered into a term loan credit agreement ("Term Loan Credit Agreement") and a revolving credit agreement ("Unsecured Revolving Credit Agreement") in each case withBank of America, N.A ., as administrative agent, and a syndicate of financial institutions, as lenders and other agents. The Term Loan Credit Agreement provides for a senior unsecured$2.0 billion term loan facility, and the Unsecured Revolving Credit Agreement provides for a senior unsecured$3.0 billion revolving credit facility. Borrowings under the term loan facility were made inU.S. dollars and borrowings under the revolving credit facility are available to be made inU.S. dollars, euros, sterling, Canadian dollars and, subject to certain conditions, certain other currencies at our option. Borrowings inU.S. dollars and certain other London Interbank Offered Rate ("LIBOR")-quoted currencies will bear interest, at our option, at a rate equal to either (1) the rate (adjusted for any statutory reserve requirements for eurocurrency liabilities) for eurodollar deposits in theLondon interbank market, (2) a floating rate of interest set forth on the applicable LIBOR screen page designated byBank of America or (3) the highest of (a) the federal funds effective rate plus 0.5%, (b) the rate of interest as publicly announced byBank of America as its "prime rate" or (c) LIBOR plus 1.0%, in each case, plus an applicable margin. As ofDecember 31, 2019 , borrowings outstanding under the term loan facility and the revolving credit facility were$2.0 billion and$903.0 million , respectively. As ofDecember 31, 2019 , the interest rates on the term loan facility and the revolving credit facility were 3.2% and 3.0%, respectively. In addition, we are required to pay a quarterly commitment fee with respect to the unused portion of the revolving credit facility at an applicable rate per annum ranging from 0.125% to 0.300% depending on our credit rating. Beginning onDecember 31, 2022 , and at the end of each quarter thereafter, the term loan facility must be repaid in quarterly installments in the amount of 2.50% of original principal through the maturity date with the remaining principal balance due upon maturity inSeptember 2024 . The revolving credit facility also matures inSeptember 2024 . We may issue standby letters of credit of up to$250 million in the aggregate under the revolving credit facility. Outstanding letters of credit under the revolving credit facility reduce the amount of borrowings available to us. The total available commitments under the revolving credit facility atDecember 31, 2019 were$2,077.5 million . 37
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Senior Unsecured Notes
OnAugust 14, 2019 , we completed the public offering and issuance of$3.0 billion aggregate principal amount of senior unsecured notes, consisting of the following: (i)$1.0 billion aggregate principal amount of 2.650% senior notes due 2025; (ii)$1.25 billion aggregate principal amount of 3.200% senior notes due 2029; and (iii)$750.0 million aggregate principal amount of 4.150% senior notes due 2049. Interest on the senior notes is payable semi-annually in arrears on eachFebruary 15 andAugust 15 , beginning onFebruary 15, 2020 . Each series of the senior notes is redeemable, at our option, in whole or in part, at any time and from time-to-time at the redemption prices set forth in the related indenture. We issued the senior notes at a total discount of$6.1 million and capitalized related debt issuance costs of$29.6 million . FromAugust 14, 2019 until the closing of the Merger onSeptember 18, 2019 , the proceeds from the issuance of the senior notes were held in escrow. Upon closing, the funds were released and used together with borrowings under the term loan facility and the revolving credit facility, as well as cash on hand, to repay TSYS' unsecured revolving credit facility, refinance certain of our existing indebtedness, fund cash payments made in lieu of fractional shares and pay transaction fees and costs related to the Merger. In addition, in connection with the Merger, we assumed$3.0 billion aggregate principal amount of senior unsecured notes of TSYS, consisting of the following: (i)$750 million aggregate principal amount of 3.800% senior notes due 2021; (ii)$550 million aggregate principal amount of 3.750% senior notes due 2023; (iii)$550 million aggregate principal amount of 4.000% senior notes due 2023; (iv)$750 million aggregate principal amount of 4.800% senior notes due 2026; and (v)$450 million aggregate principal amount of 4.450% senior notes due 2028. For the 3.800% senior notes due 2021 and the 4.800% senior notes due 2026, interest is payable semi-annually eachApril 1 andOctober 1 . For the 3.750% senior notes due 2023, the 4.000% senior notes due 2023 and the 4.450% senior notes due 2028, interest is payable semi-annually eachJune 1 andDecember 1 .
Prior Credit Facility
Prior to completion of the Merger, we were party to a credit facility agreement withBank of America, N.A ., as administrative agent, and a syndicate of financial institutions, as lenders and other agents. The credit facility provided for secured financing comprised of (i) a$1.50 billion revolving credit facility; (ii) a$1.5 billion term loan; (iii) a$1.37 billion term loan; (iv) a$1.140 billion term loan; and (v) a$500.0 million term loan. Upon the consummation of the Merger, all borrowings outstanding and other amounts due under the credit facility were repaid and this credit facility was terminated.
Compliance with Covenants
The senior unsecured term loan and revolving credit facilities contain customary conditions to funding, affirmative covenants, negative covenants, financial covenants and events of default. As ofDecember 31, 2019 , financial covenants under the term loan facility required a leverage ratio of 3.50 to 1.00 and an interest coverage ratio of 3.00 to 1.00. We were in compliance with all applicable covenants as ofDecember 31, 2019 .
Settlement Lines of Credit
In various markets where we do business, we have specialized lines of credit, which are restricted for use in funding settlement. The settlement lines of credit generally have variable interest rates, are subject to annual review and are denominated in local currency but may, in some cases, facilitate borrowings in multiple currencies. For certain of our lines of credit, the available credit is increased by the amount of cash we have on deposit in specific accounts with the lender. Accordingly, the amount of the outstanding line of credit may exceed the stated credit limit. As ofDecember 31, 2019 and 2018, a total of$74.5 million and$70.6 million , respectively, of cash on deposit was used to determine the available credit. As ofDecember 31, 2019 , we had$463.2 million outstanding under these lines of credit with additional capacity to fund settlement of$981.8 million . During the year endedDecember 31, 2019 , the maximum and average outstanding balances under these lines of credit were$882.6 million and$423.2 million , respectively. The weighted-average interest rate on these borrowings was 3.16% atDecember 31, 2019 . See "Note 6-Leases" and "Note 7-Long-Term Debt and Lines of Credit" in the notes to the accompanying consolidated financial statements for further information about our borrowing agreements and our lease liabilities. 38
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Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements that have, or are reasonably likely to have, a material effect on our financial condition, revenues, results of operations, liquidity, capital expenditures or capital resources, other than the guarantee services described in "Note 1-Basis of Presentation and Summary of Significant Accounting Policies" in the notes to the accompanying consolidated financial statements.
BIN/ICA Agreements
We have entered into sponsorship or depository and processing agreements with
certain banks. These agreements allow us to use the banks' identification
numbers, referred to as Bank Identification Number ("BIN") for Visa transactions
and Interbank Card Association ("ICA") number for Mastercard transactions, to
clear credit card transactions through Visa and Mastercard. Certain of such
agreements contain financial covenants, and we were in compliance with all such
covenants as of December 31, 2019 .
Commitments and Contractual Obligations
The following table summarizes estimates of our contractual obligations and
commitments as of
Payments Due by Future Period
Less than 1 More Than 5
Total Year 1-3 Years 3-5 Years Years
(in thousands)
Long-term debt $ 8,986,456 $ 28,512 $ 804,944 $ 3,953,000 $ 4,200,000
Interest on long-term debt(1) 2,544,547 337,627 626,346 484,473 1,096,101
Operating lease obligations(2) 576,669 106,787 186,696 106,067 177,119
Settlement lines of credit 463,237 463,237 - - -
Purchase obligations(3) 336,759 125,533 126,033 56,475 28,718
Finance lease liabilities 35,341 7,402 14,279 13,457 203
(1) Interest on long-term debt is based on effective rates and amounts borrowed
as of December 31, 2019 and includes the estimated effect of interest rate
swaps. Since the contractual rates for our long-term debt and settlements on our
interest rate swaps are variable, actual cash payments may differ from the
estimates provided.
(2) Operating lease obligations did not include approximately
(3) Includes an estimate of future payments for noncancelable contractual obligations related to service arrangements with suppliers for fixed or minimum amounts.
The table above excludes other obligations that we may have, such as employee benefit obligations and other noncurrent liabilities reflected in our consolidated balance sheet, because the timing of the related payments is not determinable or because there is no contractual obligation associated with the underlying obligations.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted inthe United States , which often require the judgment of management in the selection and application of certain accounting principles and methods. We consider the following accounting policies to be critical to understanding our consolidated financial statements because the application of these policies requires significant judgment on the part of management, and as a result, actual future developments may be different from those expected at the time that we make these critical judgments. We have discussed these critical accounting policies with the audit committee of the board of directors. 39
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Accounting estimates necessarily require subjective determinations about future events and conditions. Therefore, the following descriptions of our critical accounting policies are forward-looking statements, and actual results could differ materially from the results anticipated by these forward-looking statements. You should read the following in conjunction with "Note 1-Basis of Presentation and Summary of Significant Accounting Policies" of the notes to the accompanying consolidated financial statements and the risk factors contained in "Item 1A - Risk Factors" of this Annual Report on Form 10-K.
Business Combinations
From time to time, we make strategic acquisitions that may have a material effect on our consolidated results of operations or financial position. We record the assets acquired and the liabilities assumed in a business combination at estimated fair value as of the acquisition date. The excess amount of the total consideration paid over the estimated fair value of the net identifiable assets acquired is recorded as goodwill. The estimates we use to determine the fair value of long-lived assets, such as intangible assets, can be complex and require significant judgments. We use information available to us to make fair value determinations and engage independent valuation specialists, when necessary, to assist in the fair value determination of significant acquired long-lived assets. The estimated fair values of customer-related and contract-based intangible assets are generally determined using the income approach, which is 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. These measures of fair value also require considerable judgments about future events, including forecasted revenue growth rates, forecasted customer attrition rates, contract renewal estimates and technology changes. Acquired technologies are generally valued using the replacement cost method, which requires 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 are generally 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 requires us to estimate the future revenues for the related brands, the appropriate royalty rate and the weighted-average cost of capital. This measure of fair value requires considerable judgment about the value a market participant would be willing to pay in order to achieve the benefits associated with the trade name. While we use our best estimates and assumptions to determine the fair values of the assets acquired and the liabilities assumed, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to our consolidated statements of income. We are also required to estimate the useful lives of intangible assets to determine the amount of acquisition-related intangible asset amortization expense to record in future periods. The determination of asset lives affects our results of operations as different types of assets have different useful lives and certain assets may be considered to have indefinite useful lives. We periodically review the estimated useful lives assigned to our intangible assets to determine whether such estimated useful lives continue to be appropriate. Goodwill-We perform our annual goodwill impairment test as ofOctober 1 each year. We test goodwill for impairment at the reporting unit level annually and more often if an event occurs or circumstances change that indicate the fair value of a reporting unit is below its carrying amount. We have the option of performing a qualitative assessment of impairment to determine whether any further quantitative assessment for impairment is necessary. The option of whether or not to perform a qualitative assessment is made annually and may vary by reporting unit. Factors we consider in the qualitative assessment include general macroeconomic conditions, industry and market conditions, cost factors, overall financial performance of our reporting units, events or changes affecting the composition or carrying amount of the net assets of our reporting units, sustained decrease in our share price, and other relevant entity-specific events. If we elect to bypass the qualitative assessment or if we determine, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, a quantitative test would be required. Prior to the Merger, our reporting units consisted of: North America Payments, Integrated Solutions and Vertical Markets,United Kingdom ,Asia-Pacific , Central andEastern Europe ,Russia and Spain. As ofOctober 1, 2019 , we elected to perform a quantitative assessment of impairment for each of these reporting units, and determined on the basis of those assessments that the 40
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fair value of each reporting unit is equal to or greater than its respective carrying amount. As ofOctober 1, 2019 , we had not allocated goodwill associated with the Merger to any of our reporting units; however, no indicators of impairment existed that warranted further evaluation of the provisional goodwill. AfterOctober 1, 2019 , as a result of the Merger, we realigned our reporting units based on new executive management and organizational structures so that they consisted of: North America Payment Solutions, Integrated Solutions, Vertical Market Software Solutions, Europe Merchant Solutions,Spain Merchant Solutions, Asia-Pacific Merchant Solutions, Issuer Solutions and Business and Consumer Solutions. After the reorganization of our reporting units, we performed a quantitative assessment of impairment for each of our new reporting units, and determined on the basis of those assessments that the fair value of each reporting unit is equal to or greater than its respective carrying amount. We believe that the fair value of each of our reporting units is substantially in excess of its carrying amount, except for Issuer Solutions and Business and Consumer Solutions for which the respective carrying amounts approximate fair value since they were recently acquired in the Merger. Intangible and Long-lived Assets-Intangible assets are amortized over their estimated useful lives. The useful lives for customer-related intangible assets are determined based primarily on forecasted cash flows, which include estimates for the revenues, expenses, and customer attrition associated with the assets. The useful lives of contract-based intangible assets are equal to the terms of the agreements. The useful lives of amortizable trademarks and trade names are based on our plans to phase out the trademarks and trade names in the applicable markets. We use the straight-line method of amortization for our amortizable acquired technologies, trademarks and trade names and contract-based intangibles. Amortization for most of our customer-related intangible assets is determined using an accelerated method. The first step in determining the amortization expense for any period is that we calculate the expected cash flows for that period that were used in determining the acquisition-date fair value of the asset divided by the expected total cash flows over the estimated life of the asset. We then multiply that percentage by the initial carrying amount of the asset to arrive at the amortization expense for that period. If the cash flow patterns that we experience differ significantly from our initial estimates, we adjust the amortization schedule prospectively. These cash flow patterns are derived using certain assumptions and cost allocations due to a significant number of asset interdependencies that exist in our business. We believe that our accelerated method reflects the expected pattern of the benefit to be derived from the acquired customer relationships. We did not make any significant adjustments to the amortization schedules of our intangible assets during the year endedDecember 31, 2019 . We regularly evaluate whether events and circumstances have occurred that indicate the carrying amount of property and equipment and finite-life intangible assets may not be recoverable. When factors indicate that these long-lived assets should be evaluated for possible impairment, we assess the potential impairment by determining whether the carrying amount of such long-lived assets will be recovered through the future undiscounted cash flows expected from use of the asset and its eventual disposition. The evaluation is performed at the asset group level, which is the lowest level of identifiable cash flows. If the carrying amount of the asset group is determined not to be recoverable and exceeds its fair value, an impairment loss is recorded, measured as the difference between the fair value and the carrying amount. Fair values are determined based on quoted market prices or discounted cash flow analysis as applicable. We regularly evaluate whether events and circumstances have occurred that indicate the useful lives of property and equipment and finite-life intangible assets may warrant revision.
Capitalization of
We develop software that is used in providing services to customers. Capitalization of internal-use software, primarily associated with operating platforms, occurs when we have completed the preliminary project stage, management authorizes the project, management commits to funding the project, it is probable the project will be completed and the project will be used to perform the function intended. The preliminary project stage consists of the conceptual formulation of alternatives, the evaluation of alternatives, the determination of existence of needed technology and the final selection of alternatives. Costs incurred during the preliminary project stage are expensed as incurred. Currently unforeseen circumstances in software development, such as a significant change in the manner in which the software is intended to be used, obsolescence or a significant reduction in revenues due to merchant attrition, could require us to implement alternative plans with respect to a particular effort, which could result in the impairment of previously capitalized software development costs. The carrying amount of internal-use software, including work-in-progress, atDecember 31, 2019 was$452.7 million . Costs capitalized during the year endedDecember 31, 2019 totaled$95.9 million . Internal-use software is amortized over its estimated useful life, which is typically 2 to 10 years, in a manner that best reflects the pattern of economic use of the assets. 41
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During the fourth quarter of 2019, we preliminarily determined our target
technology architecture for the combined company. As a result, we wrote-off
capitalized software assets of
Revenue Recognition
We adopted Accounting Standards Update 2014-09, "Revenues from Contracts with Customers" as well as other clarifications and technical guidance issued by theFinancial Accounting Standards Board related to this new revenue standard ("ASC 606") and ASC Subtopic 340-40: "Other Assets and Deferred Costs - Contracts with Customers" onJanuary 1, 2018 . We apply judgment in the determination of performance obligations in accordance with ASC 606, in particular related to large customer contracts within the Issuer Solutions segment. Performance obligations in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised services, we must apply judgment to determine whether promised services are capable of being distinct and are distinct in the context of the contract. If these criteria are not met, the promised services are combined and accounted for as a single performance obligation. In addition, a single performance obligation may comprise a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.
Income Taxes
We determine our provision for income taxes using management's judgments, estimates and the interpretation and application of complex tax laws in each of the jurisdictions in which we operate. Judgment is also required in assessing the timing and amounts of deductible and taxable items. These differences result in deferred tax assets and liabilities in our consolidated balance sheet. We believe our tax return positions are fully supportable; however, we recognize the benefit for tax positions only when it is more likely than not that the position will be sustained based on its technical merits. Issues raised by a tax authority may be resolved at an amount different than the related benefit recognized. When facts and circumstances change (including an effective settlement of an issue or statute of limitations expiration), the effect is recognized in the period of change. The unrecognized tax benefits that exist atDecember 31, 2019 would affect our provision for income taxes in the future, if recognized. Judgment is required to determine whether or not some portion or all of our deferred tax assets will not be realized. To the extent we determine that we will not realize the benefit of some or all of our deferred tax assets, then these deferred tax assets are adjusted through our provision for income taxes in the period in which this determination is made.
Effect of New Accounting Pronouncements - Recently Issued Pronouncements Not Yet Adopted
Refer to "Note 1-Basis of Presentation and Summary of Significant Accounting Policies" in the notes to the accompanying consolidated financial statements for information on recently issued accounting pronouncements not yet adopted.
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