Global Payments Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Global Payments provides payment technology and software solutions in 30 countries, across North America, Europe and Asia-Pacific.
Financial performance
- Revenue: Reported revenue was $795.0 million, down 13.6% year over year. This is not directly comparable with 2017 because adoption of ASC 606 changed presentation, including netting certain network and third-party fees against revenue. Excluding that presentation effect, management reported revenue of $1,045.6 million, up 13.7% year over year, citing organic growth and the ACTIVE Network acquisition.
- Operating results: Operating income rose to $156.2 million from $105.0 million. Reported operating margin was 19.6%, versus 11.4%; the changed revenue presentation substantially affects the comparison. Management cites a 14.0% margin excluding the new standard versus 11.4% a year earlier; verify this figure, since $156.2 million divided by $1,045.6 million implies approximately 14.9%.
- Net income and EPS: Net income attributable to Global Payments was $91.4 million, up from $48.8 million. Diluted EPS was $0.57, compared with $0.32.
- Cash flow: Operating cash flow was $284.5 million versus $294.0 million. Capital expenditures were $43.8 million; investing cash outflow was $45.4 million. Financing activities used $572.0 million, primarily reflecting net debt repayments. Cash declined $330.0 million to $1.006 billion.
- Liquidity and debt: Management identified $332.0 million of cash as available for general purposes. Long-term debt was $4.284 billion, including the current portion; settlement lines of credit had $447.6 million outstanding. Revolver borrowing availability was $827.6 million, and settlement-line capacity was $865.1 million. The company reported covenant compliance.
- Other metrics: Effective tax rate was 20.2%, versus 18.9%. Interest and other expense was $45.6 million, up from $41.3 million, primarily due to higher LIBOR. Depreciation and amortization was $121.7 million, compared with $109.0 million.
Material changes and notable items
- ASC 606 was adopted January 1, 2018 using the modified retrospective method. Adoption increased opening retained earnings by $51.0 million and changed revenue and expense presentation; management says it had no effect on operating income or cash flows. Without the presentation change, reported Q1 revenue and operating expenses would each have been higher.
- The September 2017 ACTIVE Network acquisition had $1.172 billion of purchase consideration. Its purchase accounting remained provisional at quarter-end; goodwill attributable to the acquisition was $785.3 million.
- In March, the company refinanced its Term B-2 loan with a $1.14 billion Term B-3 loan. It also repatriated approximately $341.5 million from foreign subsidiaries and used the cash to reduce revolving borrowings.
- Interest and other income included an approximately $9.6 million gain related to the reorganization of a Canadian debit network association.
- The 2017 U.S. Tax Act accounting remained incomplete and provisional. The company reported a $49.1 million cumulative adoption adjustment to equity for new accounting standards, principally related to revenue and contract-cost accounting.
Outlook, risks and contingencies
- No specific financial guidance for future periods is provided in the supplied filing text. Management expects continued electronic-payment adoption and growth in emerging technologies and vertical markets, and expects to pursue acquisitions and joint ventures. It does not expect aggregate capital spending to increase materially as a result of technology investment.
- Management believes cash, borrowing capacity and future operating cash flow will meet existing and planned needs for the foreseeable future. This outlook depends on cash generation, access to credit and continued compliance with debt covenants.
- Key disclosed risks include data security, system interruptions or software defects, competition, merchant or partner attrition, card-network and regulatory requirements, chargebacks and network fees, interest and foreign-exchange movements, and integration or realization of expected benefits from acquisitions.
- A 50-basis-point increase in applicable interest rates was estimated to raise annual interest expense by approximately $17.1 million and annual interest income by $2.2 million. The company uses interest-rate swaps to hedge part of its variable-rate exposure.
- The company is party to ordinary-course claims and lawsuits, which management does not expect, individually or collectively, to materially affect its financial position, liquidity, results or cash flows. It reported no material changes to the risk factors in its 2017 Form 10-K.
- The company expected to adopt the new lease standard on January 1, 2019 and anticipated recognizing operating-lease right-of-use assets and liabilities; its evaluation was still in progress.
Important facts for investors to verify
- Reconcile the reported revenue decline with the 13.7% growth figure excluding ASC 606’s presentation effect, and confirm the appropriate comparable revenue and margin measures.
- Verify the cited 14.0% comparable operating margin against the stated operating income and revenue figures.
- Assess leverage, refinancing terms, variable-rate exposure, covenant headroom and the distinction between general-purpose cash and settlement-related balances.
- Track completion of ACTIVE Network purchase accounting, integration progress and realization of expected acquisition benefits.
- Follow completion of the company’s provisional accounting for the 2017 U.S. Tax Act and its preparations for lease-standard adoption.