Business context and reporting period
Global Payments Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2017. The company provides payment technology services in 30 countries through North America, Europe and Asia-Pacific. The prior-year comparison is the three months ended March 31, 2016; results are significantly affected by the April 2016 Heartland acquisition, which contributed for the full quarter in 2017 but not in the comparison period.
Key financial results
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $919.8 million | $626.3 million | Up 46.9% |
| Operating income | $105.0 million | $94.6 million | Up 11.0% |
| Operating margin | 11.4% | 15.1% | Down 3.7 percentage points |
| Net income attributable to Global Payments | $48.8 million | $59.9 million | Down 18.5% |
| Diluted EPS | $0.32 | $0.46 | Down 30.4% |
| Net cash provided by operating activities | $294.0 million | $208.2 million | Up $85.8 million |
Revenue growth reflected Heartland and growth in all segments, partly offset by $8.2 million of unfavorable currency effects. Operating expenses rose 53.2% to $814.8 million: cost of service increased 83.7% and SG&A increased 26.6%. Cost of service included $63.5 million of additional acquired-intangible amortization. Interest and other expense was $39.7 million versus $11.8 million; reported interest expense was $41.1 million versus $13.5 million, mainly reflecting acquisition-related borrowing. The effective tax rate declined to 18.9% from 23.4%.
By segment, North America revenue was $687.0 million, up 60.6%, and operating income was $94.1 million, up 44.3%; Europe revenue was $165.5 million, up 14.9%, while operating income fell 2.3% to $54.5 million; Asia-Pacific revenue was $67.2 million, up 23.7%, and operating income increased 35.7% to $19.8 million. Growth in North America primarily reflected Heartland. European results were adversely affected by currency fluctuations.
Balance sheet, debt and liquidity
At March 31, 2017, cash and cash equivalents were $1.262 billion, total assets $9.960 billion, and total liabilities $7.083 billion. Long-term debt, including current maturities, was $4.400 billion; settlement lines of credit outstanding were $276.4 million. The company reported $228.8 million available under its revolving facility and $856.5 million of additional settlement-line capacity. Management identified $423.3 million of cash as available for general purposes; the total cash balance also included settlement-related funds, merchant reserves and customer funds. Cash held by foreign subsidiaries whose earnings were considered indefinitely reinvested was $342.9 million.
Operating cash flow of $294.0 million was supported in part by changes in settlement processing assets and obligations, which management noted fluctuate with timing and transaction volumes. Capital expenditures were $46.2 million; the company expected approximately $160 million for full-year 2017. Investing activities used $46.6 million and financing activities used $160.0 million. The company was in compliance with applicable debt covenants at quarter-end.
Material changes, outlook and risks
- Heartland integration expenses were $26.1 million in the quarter and were included in SG&A. Corporate expenses increased 54.7%. Management cited integration costs and acquired-intangible amortization as contributors to the lower consolidated operating margin.
- On May 2, 2017, after quarter-end, the company amended its credit facility, increasing total financing capacity to $5.2 billion and replacing the Term B Loan with a Term B-2 Loan. Outstanding aggregate debt did not change in connection with the amendment. The amendment also revised leverage covenant thresholds and debt terms.
- Management expected operating cash flows, cash and borrowing capacity to meet existing operating and planned needs for the foreseeable future. It did not provide revenue or earnings guidance. Full-year 2017 capital expenditures were expected to approximate $160 million.
- Management expects electronic payments and emerging technologies to support industry growth, and anticipates continued investment in technology without a material increase in aggregate capital spending. It also expects to pursue acquisitions, joint ventures and expansion in existing or new markets.
- Key risks include data security, service interruptions or software defects, competition, merchant and partner attrition, card-network and regulatory compliance, chargebacks and network fees, foreign-exchange and interest-rate exposure, and the ability to integrate Heartland and realize anticipated benefits. A hypothetical 50-basis-point increase in applicable rates was estimated to increase annual interest expense by approximately $17.1 million and annual interest income by $2.7 million.
- The company reported no material change in its previously disclosed risk factors. It said ordinary-course claims and lawsuits were not expected to have a material adverse effect. The Heartland merger-related class action was settled, with amended disclosures and $325,000 in attorneys’ fees; the company did not admit the allegations.
- The company had not completed its assessment of the forthcoming revenue-recognition standard, expected to adopt it January 1, 2018, likely using the modified retrospective method. Its preliminary view was that recognition for its largest contract category, core payment services, would be similar, but it expected additional contract-cost capitalization and more extensive disclosures.
Important facts for investors to verify
- How much reported growth and operating performance is attributable to Heartland versus organic growth, particularly in North America.
- Whether Heartland integration costs, expected synergies and acquired-intangible amortization evolve as anticipated, and their effect on margins and earnings.
- Debt repayment, refinancing terms, variable-rate exposure, covenant headroom and the availability of general-purpose liquidity distinct from settlement and customer funds.
- Whether operating cash flow remains strong when settlement-related balances and timing effects differ from this quarter, and whether capital expenditures track the approximately $160 million outlook.
- The eventual financial-statement and control effects of adopting the new revenue standard.