Global Payments Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Global Payments provides payment technology and software services in 30 countries through North America, Europe and Asia-Pacific. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Reported revenue | $833.2 | $962.2 | $1,628.1 | $1,882.0 |
| Revenue growth, excluding ASC 606 presentation change | 15.8% | — | 14.8% | — |
| Operating income | $190.7 | $131.9 | $346.9 | $236.8 |
| Operating margin, reported | 22.9% | 13.7% | 21.3% | 12.6% |
| Operating margin, excluding ASC 606 presentation change | 16.3% | 13.7% | 15.2% | 12.6% |
| Net income attributable to Global Payments | $109.1 | $66.9 | $200.5 | $115.7 |
| Diluted EPS | $0.68 | $0.44 | $1.25 | $0.75 |
| Operating cash flow | — | — | $506.8 | $268.1 |
Balance sheet and liquidity
- At June 30, 2018, cash and cash equivalents were $1,099.5 million, compared with $1,335.9 million at year-end. Management identified $462.1 million as available for general purposes; this excludes settlement-related balances, merchant reserves and customer funds.
- Long-term debt under the Credit Facility was $4,329.9 million, including $74.7 million current and $4,255.1 million long-term. Settlement lines of credit outstanding were $547.3 million, with a further $764.2 million of settlement capacity.
- Available commitments under the $1.5 billion revolving facility were $1,125.4 million. The company reported compliance with its debt covenants.
- Operating cash flow of $506.8 million was offset by $104.1 million used in investing and $613.8 million used in financing. Cash declined by $236.3 million during the half-year.
Material changes and drivers
- Revenue presentation: Effective January 1, 2018, ASC 606 changed revenue presentation to net certain payments to third parties, including payment-network fees. This reduced reported revenue and operating expenses by the same amounts—$281.9 million and $281.9 million, respectively, in Q2, and $534.3 million and $534.2 million in the first half—without affecting operating income or cash flows. Accordingly, reported revenue fell 13.4% in Q2 and 13.5% in the first half, while management’s revenue measure excluding the presentation change grew 15.8% and 14.8%.
- Management attributed growth to organic expansion and the ACTIVE Network acquisition, completed in September 2017. Excluding the ASC 606 presentation change, North America revenue grew 13.5% in Q2 and 12.3% in the first half; Europe grew 25.5% and 24.8%; Asia-Pacific grew 13.9% and 14.2%.
- Operating income increased 44.7% in Q2 and 46.5% in the first half. Management cited business growth, improved operating margins and lower acquisition and integration expenses. First-half corporate acquisition and integration expenses were $26.4 million, versus $48.0 million a year earlier.
- First-half interest and other income included an approximately $9.6 million gain related to the reorganization of a Canadian debit-network association. The effective tax rate rose to 19.1% in Q2 and 19.6% in the first half, versus 15.1% and 16.7%, primarily reflecting the mix of income by jurisdiction.
- The company repurchased approximately 1.61 million shares for $180.9 million in the first half. At June 30, $419.1 million remained authorized for repurchases.
Outlook, commentary and risks
- No specific revenue or earnings guidance was provided. Management expects continued growth in electronic payments and technology-enabled services, and sees opportunities in areas including education, government, healthcare, recurring payments and business-to-business payments. It did not expect aggregate capital spending to increase materially due to investment in emerging technologies.
- Management expected 2018 capital expenditures of approximately $210 million and stated that cash, borrowing capacity and operating cash flows should be sufficient for foreseeable needs.
- On August 2, 2018, the company announced a planned $700 million cash acquisition of AdvancedMD, a cloud-software provider to ambulatory physician practices. It expected to fund the purchase with cash and the Credit Facility and anticipated closing in Q4 2018, subject to regulatory approval and customary conditions.
- Credit Facility amendments in March and June reduced certain interest-rate margins; the June amendment also increased total facility capacity to approximately $5.5 billion and extended maturities. Debt remains substantially variable-rate. Management estimated that a 50-basis-point rate change would affect annual interest expense by approximately $17.3 million and interest income by approximately $2.3 million.
- Risks highlighted include data security, service interruptions or software defects, competition, merchant attrition, card-network and regulatory requirements, chargebacks and network fees, foreign-exchange and interest-rate movements, and acquisition integration and realization of expected benefits. The company reported no material change to previously disclosed risk factors; routine claims and lawsuits were not expected to have a material adverse effect.
Important facts for investors to verify
- Compare reported revenue with the company’s revenue-growth figures excluding ASC 606’s net presentation change; the reported and adjusted bases are not directly comparable.
- Assess the durability and organic composition of growth, including the contribution and integration of ACTIVE Network and performance across the three segments.
- Review debt repayment, variable-rate exposure, covenant headroom and the effect of the planned AdvancedMD acquisition on leverage and liquidity.
- Distinguish total cash from the $462.1 million management considered available for general purposes, given settlement and customer-related balances.
- Consider the sustainability of earnings growth in light of the one-time $9.6 million gain, higher effective tax rates, share repurchases and continued acquisition and integration activity.