Global Payments Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods. Global Payments provides payment technology services in 30 countries across North America, Europe and Asia-Pacific.
Financial performance
- Q3 revenue: $1.039 billion, up 9.1%. Growth reflected organic growth across segments and a $9.1 million favorable currency impact.
- Q3 operating income: $172.5 million, up 43.3%; operating margin was 16.6%, versus 12.6% a year earlier.
- Q3 net income attributable to Global Payments: $110.7 million, versus $55.5 million; diluted EPS was $0.71, versus $0.36. The effective tax rate declined to 11.7% from 18.4%, partly reflecting tax benefits on share-based awards.
- Nine-month revenue: $2.921 billion, up 20.7%, primarily reflecting the Heartland merger. Operating income rose 48.2% to $409.3 million and operating margin increased to 14.0% from 11.4%.
- Nine-month net income attributable to Global Payments: $226.5 million, versus $177.7 million; diluted EPS was $1.47, versus $1.23. The 2016 comparison included a $41.2 million Visa Europe sale gain.
- Cash flow: Operating activities generated $360.1 million for the nine months, versus $367.4 million. Investing used $710.2 million, including the ACTIVE Network acquisition; financing provided $333.1 million. Cash increased $23.3 million to $1.186 billion.
- Liquidity and debt: Management identified $560.7 million of cash as available for general purposes. Long-term debt was $4.771 billion, and settlement lines of credit had $487.5 million outstanding. The company reported $383.1 million of available revolving-credit commitments and $669.9 million of additional settlement-line capacity. It was in compliance with its debt covenants.
- Other balance-sheet items: Total assets were $12.282 billion; goodwill was $5.616 billion and other intangible assets, net, were $2.329 billion.
Material changes and unusual items
- On September 1, 2017, Global Payments acquired ACTIVE Network’s communities and sports divisions for $600 million cash and 6,357,509 shares valued at approximately $572 million. Purchase accounting remained provisional; acquired goodwill was estimated at $704 million.
- Nine-month revenue growth was led by North America, up 22.1%, primarily due to Heartland; Europe rose 16.2% and Asia-Pacific 17.9%. Q3 growth was primarily organic across all three segments.
- Nine-month cost of service increased 26.1%, faster than revenue, reflecting acquired businesses and additional intangible amortization. SG&A grew 7.2%; SG&A as a share of revenue fell, with management citing Heartland synergies and lower acquisition and integration costs.
- Acquisition and integration expenses were $21.5 million in Q3 and $69.5 million for the nine months. Q3 was below the respective 2016 amount of $34.0 million; nine-month 2017 was below $93.0 million.
- The company completed a $37.5 million sale-leaseback of an Indiana facility, accounting for it as an operating lease with an initial 20-year term.
Outlook, risks and contingencies
- Management expects 2017 capital expenditures of approximately $180 million and believes cash, borrowing capacity and operating cash flows will meet foreseeable needs. No specific revenue, earnings or EPS guidance is provided in this filing.
- Management expects continued growth in electronic payments and plans to pursue technology investment, new vertical markets and international expansion, including potential acquisitions and joint ventures.
- Key risks include data security, system interruptions or software defects, competition, merchant attrition, card-network and regulatory requirements, chargebacks and network fees, foreign-exchange and interest-rate exposure, and successful integration of Heartland and ACTIVE Network.
- A hypothetical 50-basis-point increase in applicable rates was estimated to increase annual interest expense by approximately $20.0 million and interest income by $3.5 million. The company had $5.3 billion outstanding under variable-rate debt and settlement arrangements.
- The filing reports ordinary-course legal claims that management does not expect, individually or collectively, to materially adversely affect financial position, liquidity, results or cash flows. No material risk-factor changes were reported beyond those in the prior-quarter filing.
- Revenue-standard adoption was planned for January 1, 2018; the company had not quantified the effect. It expected core payment-services revenue timing and amount to be broadly similar, but certain third-party payments could be presented as a reduction of revenue, with no operating-income effect.
Important facts for investors to verify
- Whether ACTIVE Network’s provisional purchase accounting, integration and expected synergies develop as anticipated.
- Whether organic growth and segment margins persist after separating acquisition, foreign-exchange and amortization effects.
- Debt reduction, interest-rate sensitivity, covenant headroom and the amount of cash practically available for general use.
- The eventual accounting and presentation effects of the 2018 revenue-standard adoption.
- Potential exposure related to payment security, card-network obligations, merchant losses, foreign currency and pending legal or tax matters.