Global Payments Inc. — Form 10-Q Summary
Business context and reporting period. Global Payments provides merchant payment and digital-commerce services through North America and International merchant services segments. This fiscal 2015 second-quarter report covers the three and six months ended November 30, 2014, compared with the corresponding 2013 periods. Amounts below are in U.S. dollars.
Financial performance and position
- Quarter revenue: $697.3 million, up 10.0% year over year. Operating income was $124.0 million, up 10.8%; operating margin was 17.8%, versus 17.6%. Net income attributable to Global Payments was $74.8 million, versus $73.9 million; diluted EPS was $1.10, versus $1.02.
- Six-month revenue: $1.402 billion, up 10.9%. Operating income was $248.4 million, up 13.3%, with a 17.7% operating margin versus 17.4%. Net income attributable to Global Payments was $150.1 million, up 8.4%; diluted EPS was $2.20, versus $1.88.
- Segment results, six months: North America revenue rose 10.6% to $992.8 million and operating income rose 8.6% to $152.2 million; margin eased to 15.3% from 15.6%. International revenue rose 11.8% to $409.4 million and operating income rose 21.0% to $150.0 million; margin improved to 36.6% from 33.9%.
- Cash flow, six months: Operating activities provided $226.9 million, down from $411.7 million, mainly reflecting cash used to fund settlement. Investing activities used $246.2 million, including the Ezidebit acquisition. Financing activities provided $105.0 million. Cash increased $62.6 million to $644.5 million.
- Liquidity and debt: Management identified $223.5 million of available cash, excluding settlement-related and merchant-reserve balances. Total debt was $2.132 billion, up from $1.834 billion at May 31, 2014. The company reported $641.0 million of additional availability under its corporate revolver and $852.4 million under short-term settlement lines. It was in compliance with debt covenants.
- Other metrics: Six-month effective tax rate was 26.1%, compared with 28.5%. Comprehensive income attributable to Global Payments was $49.2 million, down from $155.8 million, chiefly reflecting foreign-currency translation losses.
Material changes and developments
- Growth reflected higher transaction volumes across most markets, PayPros’ contribution to U.S. direct channels, and Ezidebit’s contribution in Australia and New Zealand. International growth also benefited from Europe, e-commerce, and lower interchange rates in Spain.
- Ezidebit was acquired on October 10, 2014, for approximately AU$305.0 million, subject to working-capital adjustment; the purchase was funded with cash and revolving-credit borrowings. Its purchase-price allocation remains preliminary.
- The company agreed to acquire FIS’s gaming business for $236.5 million, subject to adjustments and closing conditions; closing was expected in fiscal 2015’s fourth quarter and funding from operating cash flow.
- A December 2014 agreement with Bank of the Philippine Islands would combine its merchant-acquiring business with Global Payments’ Philippines subsidiary. Global Payments would retain 51%; closing was subject to approvals and conditions. Management expected no material fiscal 2015 revenue or EPS effect.
- During the six months, the company repurchased $171.9 million of shares and had $197.7 million of repurchase authorization remaining. Shares outstanding fell to about 67.0 million from 68.8 million at May 31, 2014.
Outlook, risks, and unusual items
- Management expected fiscal 2015 capital expenditures of approximately $95 million and said cash, borrowing capacity, and operating cash flows should fund existing operations and planned improvements for the foreseeable future. No specific revenue or EPS guidance was provided in the filing text.
- A swap entered in October 2014 effectively fixed the rate on $500 million of variable-rate debt at 1.52% plus a leverage-based margin through February 2019. Management estimated a hypothetical 100-basis-point interest-rate increase would not materially affect pretax income, cash flows, or financial position.
- The prior-year periods included a $7.0 million insurance-recovery credit related to a 2012 processing-system intrusion; there was no comparable credit in 2014. Corporate expense also reflected a legal-claim settlement in the current six-month period; the filing text does not provide a clear amount.
- Key risks cited include data security and system outages, card-network and sponsor-bank relationships, chargebacks and merchant attrition, competition, regulatory changes, foreign-exchange and interest-rate exposure, and integration or performance of acquisitions. The company noted deteriorating Russian economic conditions and ruble devaluation but did not consider an interim goodwill impairment test necessary at November 30, 2014.
- Controls and procedures were judged effective, and no material change in internal control over financial reporting was reported. Legal proceedings were listed as none.
Important facts for investors to verify
- How much reported growth reflects organic transaction and volume growth versus PayPros and Ezidebit, and how acquisition-related costs affect margins.
- Whether operating cash flow recovers from the year-over-year decline as settlement balances fluctuate, and how much cash is freely available after settlement and merchant-reserve needs.
- Debt levels, short-term settlement borrowing, covenant headroom, and exposure to variable rates and foreign currencies.
- Final purchase accounting and integration results for Ezidebit, and closing, funding, and expected economics of the FIS gaming and BPI transactions.
- Potential effects of foreign-exchange weakness, including the large translation loss in comprehensive income and the company’s Russia goodwill exposure.