Global Payments Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2019. Global Payments provides payment technology and software solutions across 32 countries, reporting North America, Europe and Asia-Pacific segments. Amounts below are in U.S. dollars; financial amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $935.2 | $833.2 | $1,818.2 | $1,628.1 |
| Operating income | $221.7 | $190.7 | $421.2 | $346.9 |
| Operating margin | 23.7% | 22.9% | 23.2% | 21.3% |
| Net income attributable to Global Payments | $120.5 | $109.1 | $232.8 | $200.5 |
| Diluted earnings per share | $0.77 | $0.68 | $1.48 | $1.25 |
| Operating cash flow | Not separately reported by quarter | $247.4 | $506.8 |
- Q2 revenue rose 12.2% and first-half revenue rose 11.7%. Management attributed the increase primarily to AdvancedMD and SICOM, acquired in the second half of 2018. Foreign exchange reduced revenue by $17.1 million in Q2 and $39.0 million in the first half.
- First-half cost of service increased 17.5%, faster than revenue, partly due to acquired-intangible amortization. SG&A increased 3.3%; as a share of revenue it declined to 43.4% from 46.9%.
- Interest and other expense rose by $17.9 million in Q2 and $31.4 million in the first half, primarily reflecting higher outstanding long-term debt. First-half interest expense was $123.9 million versus $93.5 million.
- First-half operating cash flow fell by $259.4 million year over year. The company cited settlement working-capital movements and timing of supplier payments and customer receipts; settlement assets and obligations reduced operating cash flow by $41.7 million, versus a $95.2 million contribution in the prior-year period.
Financial position and capital resources
- At June 30, cash and cash equivalents were $1,047.7 million, compared with $1,210.9 million at year-end. Management identified $437.2 million as available for general purposes; total cash also includes settlement-related balances, merchant reserves and customer funds.
- Total long-term debt was $5,151.6 million, including $151.1 million current and $5,000.6 million noncurrent; settlement lines of credit added $736.2 million. The company reported $723.2 million available under its revolving credit facility and $628.1 million of additional settlement-line capacity.
- The company was in compliance with its debt covenants at June 30. Its credit facility leverage limit tightened to 4.75:1 beginning July 1, 2019; the minimum interest coverage ratio is 3.25:1.
- First-half investing cash use was $198.4 million, including $133.3 million of capital expenditures and $78.2 million for acquisitions. Management expected 2019 capital expenditures of approximately $230 million.
- First-half financing cash use was $212.5 million, including $234.0 million of common-stock repurchases. Remaining repurchase authorization was $566.0 million.
Material changes, outlook and risks
- Segment revenue increased year over year: North America 15.1% in Q2, Europe 3.0%, and Asia-Pacific 5.7%. North American growth primarily reflected the 2018 acquisitions; Europe and Asia-Pacific growth was partly offset by foreign-exchange impacts. Operating margins improved in all three segments.
- On May 27, 2019, Global Payments agreed to acquire TSYS in a stock-for-stock merger. The preliminary estimated consideration was $23.7 billion; TSYS shareholders were to receive 0.8101 Global Payments shares per TSYS share. The filing expected closing in Q4 2019, subject to shareholder, regulatory and other customary conditions. It anticipated TSYS shareholders would own approximately 48% of the combined company and existing Global Payments shareholders approximately 52%.
- Merger financing plans included a $2.75 billion bridge commitment and, under agreements entered into July 9, a $2.0 billion unsecured term loan and $3.0 billion unsecured revolving facility; the company also expected to issue $2.5 billion of senior notes. These arrangements were intended to support refinancing and the merger.
- Merger-related transaction costs were $12.2 million in the first half. Three lawsuits challenging the merger had been filed; the company stated it believed the claims were without merit. If the merger agreement is terminated in specified circumstances, Global Payments may owe TSYS an $860 million termination fee.
- Key merger risks include failure or delay in obtaining approvals, integration difficulties, costs exceeding expected savings, employee or customer disruption, increased debt and reduced financial flexibility. The filing also identifies risks involving data security, systems availability, competition, card-network requirements, chargebacks, foreign exchange and interest rates.
- No specific earnings or revenue guidance was provided. Management stated that existing cash, borrowing capacity, expected permanent financing and operating cash flows were expected to meet operating and planned requirements for the foreseeable future, while noting this outlook considered completion of the planned financing.
- The company adopted lease accounting on January 1, 2019, recognizing $274.0 million of lease liabilities and $236.0 million of right-of-use assets at adoption. Management said adoption did not materially affect income or cash flows.
Important facts for investors to verify
- Whether the TSYS merger received required shareholder and regulatory approvals, closed on the expected timetable, and achieved anticipated benefits.
- The final merger financing, resulting debt and interest burden, and compliance with applicable covenants.
- Whether revenue growth persists beyond the contribution from recent acquisitions, and how foreign exchange and cost growth affect margins.
- Whether operating cash flow recovers from the first-half decline as settlement balances and payment timing normalize.
- The outcome and potential cost of merger-related litigation, and any merger termination-fee exposure.