Global Payments Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter and nine months ended February 29, 2016, compared with the periods ended February 28, 2015. Although the request metadata says “2015 Q3,” the filing itself is for fiscal 2016 third quarter. The company provides payment technology and digital commerce services in 29 countries through North America, Europe and Asia-Pacific.
Financial performance
| Metric | Three months ended Feb. 29, 2016 | Year-over-year | Nine months ended Feb. 29, 2016 | Year-over-year |
|---|---|---|---|---|
| Revenue | $679.9 million | +2.2% | $2,151.1 million | +4.1% |
| Operating income | $107.8 million | +3.0% | $368.7 million | +4.5% |
| Operating margin | 15.9% | 15.7% prior year | 17.1% | Unchanged |
| Net income attributable to Global Payments | $69.1 million | +10.4% | $234.5 million | +10.2% |
| Diluted EPS | $0.53 | +15.2% | $1.80 | +14.6% |
| Operating cash flow | Not presented for quarter | — | $878.0 million | $347.1 million prior year |
Revenue growth was reported despite unfavorable foreign-exchange effects of $23.2 million for the quarter and $105.9 million for the nine-month period. For nine months, Asia-Pacific revenue grew 12.3%, Europe 2.7%, and North America 3.7%. Segment operating income improved in all three regions; Asia-Pacific benefited substantially from the Ezidebit acquisition. Cost of service rose faster than revenue, reaching 38.1% of quarterly revenue versus 37.6% a year earlier. Quarterly SG&A was 46.1% of revenue, down from 46.6%.
Nine-month operating cash flow increased by $530.9 million, primarily because settlement processing assets and obligations provided a $523.8 million cash-flow contribution, compared with a use of $27.9 million in the prior period. Management said settlement cash-flow movements are largely timing- and transaction-volume-related. Investing activities used $299.5 million, including $242.0 million for acquisitions and $57.5 million in capital expenditures. Financing activities used $367.8 million. Cash increased to $825.5 million from $650.7 million at May 31, 2015.
Balance sheet, debt and liquidity
- At February 29, 2016, total debt was approximately $1.87 billion, including $1.75 billion outstanding on the term loan and $128.5 million on the revolving facility. Separately, settlement-funding lines of credit had $189.9 million outstanding.
- Cash and cash equivalents were $825.5 million, but management identified only $240.0 million as available cash after excluding settlement-related and merchant-reserve balances. This available cash included $208.7 million held by foreign subsidiaries whose earnings were considered permanently reinvested for U.S. tax purposes.
- The revolving facility had $488.2 million of available commitments; settlement lines had an additional $1.12 billion of capacity. The company reported covenant compliance at period end.
- Current assets were $2.07 billion and current liabilities $1.75 billion. These balances include substantial settlement-processing assets and obligations, which fluctuate with payment timing and should not be treated as ordinary working capital.
- Interest expense for the nine months was $40.3 million, up from $31.1 million. A hypothetical 100-basis-point rate increase, based on period-end positions, was estimated to raise annual interest expense by $13.2 million and annual interest income by $6.0 million.
Material developments, outlook and risks
- Proposed Heartland acquisition: The cash-and-stock transaction was valued at approximately $3.6 billion, or $93.15 per Heartland share as of March 22, 2016. The company expected closing in fiscal 2016 fourth quarter, subject to customary conditions and Heartland stockholder approval. Expected cash consideration was approximately $2.0 billion; estimated acquisition-related costs for both companies were approximately $52 million. A financing package of up to $4.78 billion was arranged, and the company warned that acquisition borrowing would significantly increase debt and interest expense. A shareholder lawsuit sought to block the transaction; Global Payments said it believed the suit was without merit.
- Other acquisition: Global Payments completed its $237.5 million acquisition of the FIS Gaming Business on June 1, 2015, adding approximately 260 client locations. Management said its fiscal 2016 revenue and earnings contribution was not expected to be material.
- Visa Europe consideration: Following Visa’s proposed acquisition of Visa Europe, Global Payments preliminarily expected €31.0 million in cash and Visa preferred stock valued at approximately $21.2 million at announcement, with possible contingent earn-out consideration. Amount and composition were not final; litigation could result in repayment of approximately €23.6 million of cash consideration and could reduce the preferred-stock conversion to as few as zero shares.
- Outlook: No consolidated revenue or earnings guidance is provided in the supplied filing text. Fiscal 2016 capital expenditures were expected to be approximately $95 million, excluding any Heartland spending after the anticipated acquisition date. Management believed existing cash, borrowing capacity, operating cash flows and committed Heartland financing would meet foreseeable needs.
- Operating and market risks: The filing highlights foreign-exchange exposure, variable-rate debt, data-security and systems risks, dependence on financial institution sponsors and card networks, competition, merchant attrition, chargebacks, regulatory changes, and acquisition closing and integration risks. Foreign-currency translation reduced reported revenue, and accumulated other comprehensive loss increased to $277.3 million, largely reflecting currency translation and hedging losses.
- Other items: The company repurchased $82.8 million of common stock during the nine months and had approximately $319.5 million remaining under repurchase authorizations. Disclosure controls were assessed as effective, with no material changes in internal control reported for the quarter.
Most important facts for investors to verify
- Whether the Heartland transaction closed on the expected terms and schedule, and the resulting purchase accounting, integration costs, synergies and leverage.
- How much of reported operating cash flow reflects sustainable earnings versus settlement-processing timing; the nine-month increase was heavily affected by settlement balances.
- Debt, interest expense, available liquidity and covenant headroom after any Heartland financing and closing-related payments.
- Whether revenue and margin growth persist after accounting for foreign exchange, acquisition contributions and rising service costs.
- Final Visa Europe consideration and any effects from related litigation, including potential repayment or reduction of share consideration.