Global Payments Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended May 31, 2014. The request refers to 2013 Q4, but the supplied filing is the FY2014 annual report; it also reports fourth-quarter results for the quarter ended May 31, 2014. Amounts below are U.S. dollars.
Business context
Global Payments provides merchant payment processing and digital commerce solutions through North America and International merchant services segments. Revenue is primarily transaction-based. The company completed its $420.0 million cash acquisition of PayPros on March 4, 2014, expanding integrated payment solutions for U.S. small and medium-sized merchants.
Financial performance
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Revenue | $2,554.2 million | $2,375.9 million | +7.5% |
| Operating income | $405.5 million | $357.2 million | +13.5% |
| Consolidated operating margin | 15.9% | 15.0% | +0.9 percentage points |
| Net income attributable to Global Payments | $245.3 million | $216.1 million | +13.5% |
| Diluted EPS | $3.37 | $2.76 | +$0.61 |
| Operating cash flow | $194.1 million | $240.5 million | Down $46.4 million |
FY2014 segment results: North America revenue was $1,809.0 million (+6.1%), operating income $272.3 million, and margin 15.0% versus 15.2%. International revenue was $745.2 million (+11.2%), operating income $240.2 million, and margin 32.2% versus 31.5%. Revenue grew in all reported regions; international growth reflected Europe and Asia-Pacific, while North American growth was led by U.S. direct channels, including PayPros.
For the quarter ended May 31, 2014, revenue was $674.0 million versus $618.4 million a year earlier; operating income was $88.9 million versus $69.4 million; net income attributable to the company was $51.6 million versus $40.8 million; and diluted EPS was $0.72 versus $0.53.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $581.9 million at year-end; management identified $304.3 million as available cash. The cash balance includes funds associated with settlement and merchant reserves, which should not be treated as wholly discretionary liquidity.
- Total debt was $1,833.8 million, up from $1,150.9 million. This included a $1,250.0 million five-year term loan, $140.0 million drawn on a $1,000.0 million revolving facility, and $440.1 million in short-term settlement-related lines. The revolving facility had $851.9 million of incremental availability; settlement lines had $818.5 million of additional capacity.
- Debt carries variable rates; the term loan rate was 1.62% at May 31, 2014. The company reported compliance with its leverage and fixed-charge coverage covenants.
- Investing activities used $501.7 million, including $426.5 million for acquisitions and other assets and $81.4 million in capital expenditures. Financing activities provided $218.9 million. The company repurchased 7.8 million shares for approximately $455.0 million during the year and paid $0.08 per share in dividends.
Changes, outlook and notable items
- Operating cash flow fell primarily because of a $137.4 million adverse year-over-year change in net settlement processing assets and obligations, partly offset by higher operating income and other working-capital movements.
- Foreign exchange reduced FY2014 revenue by $10.8 million and diluted EPS by $0.05 compared with FY2013, on the company’s constant-currency calculation.
- Processing-system intrusion accounting included a $7.0 million insurance recovery credit in FY2014, compared with a $36.8 million charge in FY2013. Cumulative incident expenses net of insurance recoveries were approximately $114.2 million; the company said it did not expect additional recoveries. The incident had prompted temporary removal from certain PCI-compliant provider lists; the company reported reinstatement in the third quarter of FY2013. The matter resulted in governmental inquiries and an FTC investigation.
- Management expected FY2015 capital expenditures of approximately $95 million and stated that cash, borrowing capacity and anticipated operating cash flows should meet existing and planned needs. No specific revenue or EPS guidance is provided in the supplied filing text.
- Management’s strategy emphasizes organic growth, technology investment, expansion of distribution, and acquisitions. Risks highlighted include cybersecurity and service interruptions, competition and merchant attrition, payment-network and sponsor relationships, regulation, variable interest rates, foreign currency and political risks, acquisition integration, chargebacks and merchant defaults.
Important facts for investors to verify
- Underlying growth and earnings contribution from PayPros, including integration costs and the preliminary purchase-price allocation; PayPros’ reported post-acquisition contribution was not material.
- Whether operating cash flow improves as settlement-related balance movements normalize, and how much reported cash is practically available for corporate uses.
- Debt reduction, variable-rate exposure, maturity requirements and continuing compliance with credit-facility covenants.
- Progress on cybersecurity controls and the status or potential financial impact of the FTC investigation and any related claims.
- Whether segment margins, merchant retention and transaction growth remain consistent with FY2014 trends, particularly in North America and foreign markets.