Global Payments Inc. — FY2016 Form 10-K Summary
Period clarification: The filing is the annual report for the fiscal year ended May 31, 2016, not a standalone “2015 Q4” filing. It includes unaudited fourth-quarter results for the three months ended May 31, 2016. Amounts below are U.S. dollars unless noted.
Business context
Global Payments provides payment technology and processing services to merchants and partners in 30 countries, across North America, Europe and Asia-Pacific. It completed its $3.9 billion cash-and-stock acquisition of Heartland Payment Systems on April 22, 2016; the transaction was described as valued at $4.4 billion including assumed debt. Heartland’s results were consolidated only from the acquisition date through year-end.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $2,898.2 million | $2,773.7 million |
| Operating income | $424.9 million | $456.6 million |
| Operating margin | 14.7% | 16.5% |
| Net income attributable to Global Payments | $271.7 million | $278.0 million |
| Diluted EPS | $2.04 | $2.06 |
| Operating cash flow | $585.0 million | $424.7 million |
| Capital expenditures | $91.6 million | $92.6 million |
Revenue grew 4.5%, while operating income fell 6.9%. Management attributed the pressure on earnings principally to $51.3 million of Heartland merger-related expenses and $43.6 million of adverse foreign-exchange impact on operating income. Currency movements reduced reported revenue by $117.0 million. Cost of service rose to 39.6% of revenue from 36.8%, including $41.1 million of additional acquired-intangible amortization; SG&A declined to 45.7% of revenue from 46.7%.
By segment, North America revenue was $2,052.6 million and operating income $307.6 million; Europe revenue was $631.9 million and operating income $244.8 million; Asia-Pacific revenue was $213.6 million and operating income $50.7 million. Asia-Pacific revenue grew 13.1% and segment operating income grew 27.8%, supported by acquisitions and organic growth.
Fourth quarter: Revenue was $747.1 million versus $706.5 million in Q4 FY2015. Operating income was $56.2 million versus $103.6 million; net income attributable to Global Payments was $37.2 million versus $65.3 million; diluted EPS was $0.26 versus $0.49. The quarter included Heartland results after April 22; the filing does not provide a standalone quantified bridge explaining the full year-over-year quarterly decline.
At May 31, 2016, cash and cash equivalents were $1,044.7 million, of which management classified $369.3 million as available cash after excluding settlement balances, merchant reserves and customer funds. Long-term debt was $4,515.3 million, plus $378.4 million outstanding on settlement lines of credit. Revolving-credit availability was $204.5 million; additional settlement-line capacity was $733.2 million. Total equity was $2,877.4 million. The company reported compliance with its debt covenants at year-end.
Investing activities used $2,127.2 million, including $2,035.7 million for acquisitions. Financing activities provided $1,965.5 million, principally reflecting acquisition-related borrowings. Management expected FY2017 capital expenditures of approximately $140 million and said cash, borrowing capacity and operating cash flows should cover foreseeable needs.
Material changes, outlook and risks
- Heartland materially increased scale and U.S. merchant reach, adding more than 300,000 merchants, a 1,400-person direct sales force and approximately $130 billion in annual payment volume. Integration, realization of synergies and customer retention remain execution risks.
- Debt increased substantially to finance the acquisition. The credit agreement includes leverage and fixed-charge covenants, limits certain dividends and repurchases, and exposes the company to variable-rate interest costs. A 100-basis-point rate increase was estimated to raise annual interest expense by approximately $42 million, partly offset by higher interest income.
- Management’s outlook emphasized continued expansion through technology, distribution and acquisitions; no specific revenue, earnings or EPS guidance is stated in the provided filing text.
- Other important risks include cybersecurity incidents and service outages; competition and technology change; dependence on card-network registrations, sponsor banks and clearing institutions; merchant attrition, fraud and chargebacks; foreign exchange and political/regulatory exposure; and acquisition integration.
- Goodwill and other intangible assets were approximately 67.5% of total assets. Goodwill increased to $4,829.4 million, including provisional Heartland goodwill of about $3.2 billion; management reported no impairment in its FY2016 annual assessment.
- Check-guarantee loss provision increased to $22.8 million from $9.6 million, against $20.6 million of actual losses. The Heartland merger shareholder lawsuit was subject to a proposed settlement and court approval; the company did not expect a material financial effect. Potential Visa Europe-related litigation could reduce preferred-share conversion value to zero and make approximately €25.6 million of cash consideration refundable.
- The company changed its fiscal year-end after year-end from May 31 to December 31, with a seven-month transition period ending December 31, 2016.
Most important facts for investors to verify
- How much of reported revenue and earnings growth is organic versus acquired, and whether Heartland integration delivers the anticipated revenue and cost synergies.
- Post-acquisition leverage, interest expense, covenant headroom, and the pace of debt repayment.
- Whether cash-flow strength persists after acquisition-related outflows and settlement-balance timing effects.
- Trends in operating margins, acquired-intangible amortization, FX exposure and merchant/check-guarantee losses.
- Final Heartland purchase accounting and goodwill allocation, plus the outcome and financial implications of the Visa Europe consideration and related litigation.
The independent auditor issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management’s internal-control assessment excluded Heartland operations acquired on April 22, 2016; the auditor’s opinion likewise excluded that portion of Heartland’s controls.