Business context and reporting period
Global Payments Inc. provides payment technology services in 30 countries and reports North America, Europe, and Asia-Pacific segments. This Form 10-Q covers the quarter and six months ended June 30, 2017, compared with the corresponding 2016 periods. Comparisons are affected by the Heartland merger, completed April 22, 2016; 2017 includes Heartland for the full periods, while 2016 includes it only from the merger date.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $962.2 million, up 14.2% | $1.882 billion, up 28.1% |
| Operating income | $131.9 million, versus $61.2 million | $236.8 million, versus $155.7 million |
| Operating margin | 13.7%, versus 7.3% | 12.6%, versus 10.6% |
| Net income attributable to Global Payments | $66.9 million, versus $62.2 million | $115.7 million, versus $122.1 million |
| Diluted EPS | $0.44, versus $0.42 | $0.75, versus $0.87 |
Six-month revenue growth was led by North America, primarily reflecting Heartland; Europe and Asia-Pacific also grew. Foreign-exchange movements reduced revenue by $13.4 million for the quarter and $21.5 million for the six-month period. Six-month cost of service rose 41.2%, outpacing revenue growth, including higher variable costs and acquired-intangible amortization.
For the six months, operating cash flow was $268.1 million, compared with $249.3 million; capital expenditures were $90.0 million, versus $62.9 million. Cash and cash equivalents were $1.081 billion at June 30, of which $500.9 million was identified as available for general purposes. Total debt was approximately $4.262 billion, excluding $318.3 million outstanding on settlement lines of credit. The company reported $915.3 million of available revolving-credit commitments and $817.9 million of additional settlement-line capacity. It was in compliance with its debt covenants.
Total assets were $10.037 billion and total liabilities were $7.032 billion at June 30, 2017. These included $4.890 billion of goodwill and $1.927 billion of net intangible assets.
Material changes versus the prior comparable period
- Operating income and margins improved in both the quarter and six-month period. Management cited revenue growth, Heartland synergies, and lower merger-related expenses in the quarter; acquired-intangible amortization and increased interest expense partly offset gains.
- Six-month net income attributable to the company and diluted EPS declined year over year despite higher operating income. The 2016 comparison included a $41.2 million gain on the Visa Europe sale; 2016 also included a $12.7 million tax benefit related to Canadian earnings.
- Interest expense was $47.4 million for the quarter and $88.5 million for the six months, up from $37.5 million and $51.0 million, respectively, primarily reflecting borrowings used to fund the Heartland merger.
- Cash declined by $82.2 million during the six months. Financing used $290.9 million, including net long-term debt repayments of $180.6 million; 2016 financing and investing cash flows were unusually affected by Heartland acquisition funding.
Outlook, risks, contingencies, and unusual items
- Management expects 2017 capital expenditures of approximately $170 million and says existing cash, borrowing capacity, and operating cash flows should cover expected needs, including the planned ACTIVE Network transaction. No specific revenue or earnings guidance is provided.
- On August 2, 2017, after quarter-end, the company agreed to acquire ACTIVE Network’s communities and sports divisions for $1.2 billion: $600 million cash, expected to be funded primarily through the revolving facility, and $600 million in stock. Closing was expected in the fourth quarter of 2017, subject to regulatory approval and customary conditions. Risks include closing delays or failure, integration costs and disruption, additional debt, and dilution.
- The May 2017 credit-facility amendment raised total facility capacity to $5.2 billion and set maximum leverage ratios that tighten over time; substantially all domestic subsidiary assets are pledged. A hypothetical 50-basis-point rate increase was estimated to raise annual interest expense by $16.6 million and interest income by $2.4 million.
- A sale-leaseback of the Jeffersonville, Indiana facility generated $37.5 million in May 2017, with a 20-year initial operating-lease term and future minimum payments totaling $56.1 million.
- Visa Europe consideration remains subject to potential litigation-related adjustments; the filing says preferred shares could ultimately be worth zero and approximately €25.6 million of upfront cash could be refundable. The company also expects €3.1 million of deferred consideration plus interest on the third anniversary of the sale.
- Management identifies risks including data security, system failures, competition, merchant attrition, card-network requirements and fees, chargebacks, foreign exchange and interest rates, and acquisition integration. The Heartland merger-related class action settlement was approved in April 2017; Heartland agreed to pay plaintiffs’ counsel $325,000. Other ordinary-course claims were not expected to have a material adverse effect.
- The company expects to adopt the new revenue standard on January 1, 2018, likely using the modified retrospective method. Its assessment was incomplete; management preliminarily expected core payment-services revenue timing and amounts to be similar, but anticipated capitalization of additional contract-acquisition costs and expanded disclosures.
Important facts for investors to verify
- How much reported growth reflects Heartland’s inclusion for a full 2017 period versus acquisition-driven and organic growth; review segment results and currency impacts.
- Whether operating-margin gains and Heartland synergies persist as integration expenses continue and acquired-intangible amortization remains elevated.
- Debt levels, covenant headroom, interest-rate exposure, and the financing and dilution effects if the ACTIVE Network acquisition closes.
- The amount of cash genuinely available for corporate purposes, given settlement balances, merchant reserves, customer funds, and foreign-held cash.
- The eventual financial effects of the new revenue standard and the unresolved Visa Europe consideration exposure.