Global Payments Inc. — Form 10-Q Summary
Business context and reporting period
Global Payments provides electronic payment processing and related services through North America and International merchant services segments. This filing covers the third quarter and nine months of fiscal 2014, ended February 28, 2014; comparisons are with the periods ended February 28, 2013.
Key financial metrics
| Metric | Three months | Nine months |
|---|---|---|
| Revenue | $616.5 million, up 6.5% | $1,880.3 million, up 7.0% |
| Operating income | $97.3 million, up 7.2%; 15.8% margin versus 15.7% | $316.6 million, up 10.0%; 16.8% margin versus 16.4% |
| Net income attributable to Global Payments | $55.1 million versus $58.5 million | $193.7 million, up 10.5% |
| Diluted EPS | $0.76 versus $0.75 | $2.65 versus $2.23 |
| Operating cash flow | $314.4 million for nine months, versus $204.8 million | |
| Capital expenditures | $61.3 million for nine months, versus $75.0 million |
Quarterly net income attributable to the company declined despite revenue and operating-income growth, primarily alongside higher interest and other expense. Diluted EPS increased as weighted-average diluted shares fell to 72.4 million from 78.3 million. Nine-month cash flow from operations improved, principally because the prior-year period included substantial payments of previously accrued intrusion-related expenses.
At February 28, cash and cash equivalents were $1,013.6 million, including $177.7 million of merchant-reserve cash. Management identified $660.4 million as available cash; that unusually high balance included $341.0 million of net refinancing proceeds. The company used $420.0 million of available cash to acquire PayPros on March 4, 2014. Total debt was $1,516.5 million, including a $1,250.0 million term loan and $262.1 million of short-term lines of credit. The new $1,000.0 million revolving facility had no balance outstanding at quarter end. Additional short-term settlement borrowing capacity was $860.8 million.
Changes versus the prior comparable period
- Revenue growth came from all reported geographies. Nine-month North America revenue rose 5.6%; International revenue rose 10.4%, including 11.1% growth in Europe and 7.6% in Asia-Pacific.
- Nine-month segment operating margins edged up to 15.2% in North America from 15.1%, and to 32.9% internationally from 32.5%. Higher variable service costs and APT-related amortization contributed to cost-of-service growth outpacing revenue for the nine-month period.
- Nine-month results included a $7.0 million insurance-recovery credit related to the 2012 processing-system intrusion, versus an $8.3 million net charge in the prior-year period. These items aided the year-over-year operating-income comparison.
- The company refinanced debt on February 28, recording a $4.8 million loss on extinguishment. Debt increased from $1,150.9 million at May 31, 2013, while share repurchases totaled $258.6 million during the nine months.
Outlook, commentary and risks
Management expected fiscal 2014 capital expenditures of approximately $90 million and said cash, borrowing capacity and operating cash flows were sufficient for existing operations and planned requirements for the foreseeable future. The filing provides no specific revenue or earnings guidance.
On March 4, 2014, after quarter end, Global Payments acquired PayPros for $420.0 million in cash, subject to a working-capital adjustment. PayPros serves 58,000 small-to-medium-sized U.S. merchants through more than 1,000 software partners; purchase-price allocation was not finalized in the filing.
The 2012 intrusion led to legal proceedings and governmental inquiries. No related loss accrual had been recorded because loss was not deemed probable and the possible amount could not be estimated; an eventual material accrual could adversely affect results. The company stated it had returned to PCI DSS-compliant service-provider status and did not expect further insurance recoveries beyond the $27.0 million recognized to date.
Other principal risks include data security and service interruptions, maintaining card-network registration and bank sponsorship, merchant and partner attrition, acquisition integration, foreign-exchange exposure, and political, economic or regulatory developments abroad, including potential sanctions affecting Russia. Debt bears variable-rate exposure; the company reported covenant compliance at quarter end. Management’s January 2014 qualitative goodwill assessment found no reporting unit more likely than not impaired, but forecasts and valuation assumptions remain judgment-sensitive.
Important facts for investors to verify
- How the PayPros acquisition affects post-quarter cash, debt, integration costs and future results.
- Underlying operating growth excluding intrusion-related credits and charges, and the impact of higher service costs and corporate data-security spending.
- The status and potential financial exposure of intrusion-related legal proceedings and governmental inquiries.
- Post-acquisition liquidity, variable-rate debt exposure, covenant headroom and use of the revolving facility.
- Performance and cash generation by geography, including foreign-exchange and Russia-related exposure.