Global Payments Inc. — Form 10-Q Summary
Reporting period: Three months ended August 31, 2014 (fiscal first quarter 2015), compared with the three months ended August 31, 2013. The filing is unaudited.
Business context
Global Payments provides payment and digital commerce services across North America, Europe, and Asia-Pacific. It reports North America merchant services and International merchant services as its two segments. Its revenues primarily come from transaction-based processing fees and related services.
Financial performance
| Metric | Quarter ended Aug. 31, 2014 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $704.9 million | $629.7 million | Up 11.9% |
| Operating income | $124.4 million | $107.4 million | Up 15.8% |
| Operating margin | 17.6% | 17.1% | Up 0.5 percentage points |
| Net income attributable to Global Payments | $75.4 million | $64.6 million | Up 16.7% |
| Diluted EPS | $1.10 | $0.87 | Up $0.23 |
| Net cash used in operating activities | $63.5 million | $23.2 million | Cash use increased |
North America revenue grew 11.9% to $504.0 million; segment operating margin was 15.5%, unchanged. International revenue grew 12.1% to $200.9 million; segment operating margin increased to 36.6% from 34.3%. International segment operating income included a $2.9 million gain on the sale of a Russia business component.
Cost of service was 36.9% of revenue, versus 36.6% a year earlier; selling, general and administrative expense was 45.5%, versus 46.3%. The effective tax rate was 26.3%, compared with 30.3%.
Financial position, cash flow, and capital
- Cash and cash equivalents were $595.9 million at August 31, 2014; management identified $265.6 million as available cash, excluding settlement-related and merchant-reserve balances. $224.4 million of available cash was held by foreign subsidiaries whose earnings were treated as permanently reinvested for U.S. tax purposes.
- Total debt was $2.072 billion, up from $1.834 billion at May 31, 2014. Debt included a $1.25 billion term loan, $170 million drawn on the corporate revolver, and $652.2 million of short-term lines, primarily used to fund settlement. The filing reports $821.8 million of remaining capacity on the corporate facility and $639.0 million of additional short-term line capacity.
- Operating cash use reflected a $179.5 million net cash outflow from settlement processing assets and obligations, which management said was largely driven by month-end timing. Investing activities used $12.2 million; financing activities provided $94.1 million. Cash increased by $14.0 million during the quarter.
- Share repurchases totaled $124.5 million for 1.8 million shares; $245.1 million remained authorized. The company paid $1.4 million in dividends, or $0.02 per share.
- The company reported compliance with applicable debt covenants. Its term loan and revolver mature in February 2019; both had a 1.62% interest rate at quarter-end.
Material changes and management commentary
Management attributed North America growth mainly to U.S. direct channels, including PayPros, acquired in March 2014, and Canadian growth partly from selective pricing. International growth was driven by European transaction growth, dynamic currency conversion in Spain, e-commerce, and favorable exchange rates in the U.K. and Spain. Asia-Pacific revenue growth reflected pricing and assessment changes and e-commerce volume.
PayPros-related amortization and operating costs increased expenses. Corporate expenses rose 13.8%, partly due to settlement of a legal claim. Other expense, net increased to $9.8 million, including $3.5 million of losses from the equity-method investment in Comercia Global Payments Brazil, associated with contract renegotiation costs.
Outlook, acquisitions, risks, and unusual items
- No revenue, earnings, or EPS forecast was provided. Management expected fiscal 2015 capital expenditures of approximately $95 million and said existing cash, borrowing capacity, and operating cash flows were sufficient for operations and planned improvements for the foreseeable future.
- After quarter-end, the company announced an agreement to acquire Ezidebit for AU$305 million in cash, subject to adjustments, with closing expected in fiscal Q2 2015. It also agreed to acquire FIS’s gaming business for $236.5 million before expected tax benefits, subject to adjustments and closing conditions; closing was expected in fiscal Q4 2015. Planned funding was a mix of cash and revolver borrowings for Ezidebit, and operating cash flows for the gaming business.
- Foreign-currency translation reduced comprehensive income by $22.7 million, net of tax, compared with $0.2 million of other comprehensive income in the prior-year quarter.
- Management identified risks including data security, system interruptions, competition, product development, card-network and sponsor-bank relationships, merchant and partner attrition, chargebacks, network fees, regulation, foreign exchange and interest rates, and acquisition integration and performance. The company noted exposure to variable interest rates and foreign currencies and said it had not historically hedged translation exposure.
- The company stated that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter. It reported no legal proceedings in Part II; MD&A separately cites settlement of a legal claim as a driver of higher corporate expense.
Key facts investors should verify
- How much of revenue and operating-income growth reflects organic processing growth versus PayPros, pricing, foreign exchange, and the Russia sale gain.
- Whether operating cash flow improves as settlement balances normalize, and how cash conversion compares with reported earnings.
- Debt levels, settlement-related short-term borrowing needs, interest-rate exposure, and liquidity after the announced acquisitions.
- Acquisition closing, funding, integration, and expected returns for Ezidebit and the FIS gaming business.
- The sustainability of International segment margin improvement and the effects of currency movements and Brazil investment losses.