Global Payments Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Global Payments provides payment technology and software solutions across 31 countries, reported in North America, Europe and Asia-Pacific.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue, reported | $857.7 million | $1,038.9 million | $2,485.8 million | $2,920.9 million |
| Operating income | $223.2 million | $172.5 million | $570.1 million | $409.3 million |
| Operating margin, reported | 26.0% | 16.6% | 22.9% | 14.0% |
| Net income attributable to Global Payments | $176.4 million | $110.7 million | $376.8 million | $226.5 million |
| Diluted EPS | $1.11 | $0.71 | $2.36 | $1.47 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $661.0 million | $360.1 million |
Reported revenue fell year over year because adoption of ASC 606 changed presentation to net certain third-party fees; it reduced 2018 revenue and expenses equally and did not affect operating income or cash flow. On a basis excluding this presentation change, revenue was $1,149.2 million in Q3 and $3,309.3 million for the nine months, increases of 10.6% and 13.3%, respectively. On that basis, operating margins were 18.6% and 16.3%, versus 16.6% and 14.0% in the prior-year periods.
For the nine months, investing cash outflow was $927.5 million, including approximately $700 million for AdvancedMD; capital expenditures were $156.1 million. Financing activities used $49.0 million. Cash and cash equivalents were $990.6 million at September 30, down from $1,335.9 million at year-end. The company identified $431.3 million as available for general purposes; this excludes settlement-related, merchant-reserve and customer funds.
Balance sheet, debt and liquidity
- Long-term debt, including current portion, was $4.80 billion at September 30, 2018, compared with $4.66 billion at December 31, 2017. Settlement lines of credit outstanding were $685.9 million; these are used to fund settlement activity.
- Available commitments under the revolving credit facility were $636.4 million, with an additional $759.9 million of capacity on settlement lines. The company said operating cash flow and borrowing capacity should meet foreseeable needs.
- Debt is primarily variable-rate. A 50-basis-point rate change was estimated to affect annual interest expense by approximately $20.5 million and interest income by $2.3 million, after considering swaps.
- The company was in compliance with its debt covenants at quarter-end. Its credit facility requires leverage no greater than 5.00:1 through June 2019, stepping down thereafter, and interest coverage of at least 3.25:1.
Material changes and notable items
- Net income attributable to Global Payments rose 59% in Q3 and 66% for the nine months; diluted EPS increased to $1.11 and $2.36, respectively.
- Operating income increased 29% in Q3 and 39% for the nine months. Management attributed growth across segments to organic growth and, in North America, the contribution from ACTIVE Network.
- AdvancedMD, a cloud-based healthcare software provider, was acquired on September 4 for approximately $700 million, funded with cash and revolver borrowings. Its purchase accounting remained provisional; estimated goodwill was approximately $469 million and expected to be substantially nondeductible.
- After quarter-end, Global Payments acquired SICOM Systems on October 17, funded with approximately $415 million drawn from the revolver. On October 18, it issued a $500 million term loan and used proceeds to repay part of the revolver balance.
- Interest and other expense rose to $46.4 million in Q3 and $139.7 million for the nine months, reflecting higher debt and LIBOR. Nine-month interest and other income included an approximately $9.6 million gain related to a Canadian debit-network association reorganization.
- Q3 income tax benefited from a $23.3 million reduction in the estimated U.S. Tax Act transition-tax liability; the quarter’s effective tax rate was a 3.4% benefit. The company had not completed its accounting for the tax law changes.
- The company repurchased $180.9 million of common stock during the nine months and had $419.1 million of authorization remaining at September 30. It declared a $0.01-per-share dividend payable in December 2018.
Outlook, risks and contingencies
No specific revenue or earnings guidance is provided in the filing. Management expects 2018 capital expenditures for property and equipment to be approximately $210 million and expects electronic payments, new technologies and vertical markets such as healthcare to support future growth. It also expects continued pursuit of acquisitions and joint ventures.
Key risks cited include data security, system interruptions or software defects, competition, merchant and partner attrition, card-network and financial-institution dependencies, chargebacks and network fees, regulatory changes, foreign-exchange and interest-rate exposure, and successful integration and realization of acquisition benefits. The company reported no material change to the risk factors in its prior Form 10-K. It is party to ordinary-course claims and lawsuits that management does not expect to materially affect its financial position or results. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Compare growth and margins on a consistent basis: ASC 606 reduced reported revenue by $291.3 million in Q3 and $825.5 million for the nine months, with corresponding expense reductions.
- Monitor AdvancedMD and SICOM integration, provisional acquisition valuations, and whether anticipated strategic and financial benefits are realized.
- Assess leverage, variable-rate exposure, refinancing needs and covenant headroom, including the subsequent $500 million term loan.
- Review the final accounting for the U.S. Tax Act transition tax and the impact of tax estimates on reported earnings.
- Distinguish general-purpose cash from settlement, merchant-reserve and customer funds when evaluating liquidity.