Global Payments Inc. — Form 10-Q Summary
Business and period. Global Payments provides payment technology services in 30 countries and reports North America, Europe, and Asia-Pacific segments. This report covers the three and six months ended November 30, 2016, compared with the same 2015 periods. The company changed its fiscal year-end to December 31 and planned a seven-month transition report for the period ending December 31, 2016. Heartland, acquired April 22, 2016, is included in current-period results from its acquisition date.
Key financial results
| Metric | Three months ended Nov. 30, 2016 | Prior-year quarter | Six months ended Nov. 30, 2016 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $941.8 million | $722.4 million | $1,881.3 million | $1,471.1 million |
| Operating income | $105.3 million | $123.2 million | $226.4 million | $260.9 million |
| Operating margin | 11.2% | 17.1% | 12.0% | 17.7% |
| Net income attributable to Global Payments | $49.5 million | $78.8 million | $134.5 million | $165.4 million |
| Diluted EPS | $0.32 | $0.60 | $0.87 | $1.27 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $193.5 million | $454.1 million |
Balance sheet and liquidity at November 30, 2016: Cash and cash equivalents were $995.8 million, of which management identified $387.4 million as available cash after excluding settlement-related balances, merchant reserves, and customer funds. Current assets were $2.575 billion and current liabilities were $2.210 billion. Long-term debt was $4.494 billion in total, including its current portion; settlement lines of credit had $467.3 million outstanding. Revolving-credit availability was $418.5 million, and additional settlement-line capacity was $776.6 million. The company reported covenant compliance.
Changes and drivers
- Revenue rose 30.4% in the quarter and 27.9% for the six-month period, primarily because of Heartland; unfavorable currency movements reduced revenue by $16.0 million and $30.4 million, respectively.
- Operating income and margins declined despite revenue growth. Higher acquired-intangible amortization, variable service costs, and Heartland integration expenses were key factors. Integration expenses were $36.6 million for the quarter and $67.2 million for six months; acquired-intangible amortization increased by $64.7 million and $124.4 million, respectively.
- North America revenue grew 37.2% for the quarter, largely reflecting Heartland. Europe revenue increased 10.7%, partly due to a new Central and Eastern Europe joint venture, while currency movements weighed on results. Asia-Pacific revenue grew 23.8%, primarily from organic growth.
- Six-month operating cash flow fell by $260.5 million year over year, principally reflecting a less favorable change in net settlement processing assets and payment of Heartland integration costs. Investing cash outflow was $80.8 million; capital expenditures were $83.3 million.
- Net income for six months included a $41.2 million gain on the sale of the company’s Visa Europe interests. The quarter’s effective tax rate was 2.9%, versus 24.7% a year earlier; the filing attributes the rate change chiefly to international earnings mix and revised estimates.
Outlook, risks, and contingencies
- Management expected approximately $160 million of capital expenditures in calendar 2017 and said cash, borrowing capacity, and anticipated operating cash flows should meet foreseeable operating and planned needs.
- The October 2016 debt amendment reduced borrowing spreads; management expected $10 million–$12 million in annual interest savings, net of anticipated future hedging costs. Actual savings were subject to execution and conditions.
- Management cited continued electronic-payment adoption, international expansion, acquisitions, and investment in emerging technologies as growth themes. It did not provide numerical revenue or earnings guidance.
- Risks include successful Heartland integration and realization of synergies, substantial debt and variable interest-rate exposure, foreign currency movements, payment-system and data-security risks, competition, merchant attrition, and regulatory or card-network changes. A 50-basis-point rate increase was estimated to raise annual interest expense by about $21.3 million and interest income by $1.5 million.
- Visa Europe consideration included preferred shares valued at zero because of restrictions and valuation uncertainty. Litigation could reduce their conversion value to zero and potentially require repayment of approximately €25.6 million of upfront cash. A separate proposed settlement of litigation challenging the Heartland merger awaited court approval; the company did not expect it to have a material adverse effect. Management reported no material change to the prior annual report’s risk factors.
- The company reported no material off-balance-sheet arrangements beyond previously disclosed guarantee services. Disclosure controls were considered effective; controls were being extended and adapted as Heartland integration continued.
Investor verification points
- Separate Heartland’s acquired revenue and costs from organic growth, and assess integration progress and whether projected synergies are being realized.
- Track operating-margin recovery, acquired-intangible amortization, integration spending, and Europe’s currency-adjusted performance.
- Reconcile operating cash flow and settlement-related working-capital movements; confirm the composition and accessibility of the stated $387.4 million available cash.
- Review debt maturities, covenant headroom, variable-rate exposure, refinancing savings, and the effect of further share repurchases on leverage and liquidity.
- Monitor the Visa Europe preferred-share valuation and refund exposure, as well as court approval and terms of the Heartland merger litigation settlement.