GLOBAL PAYMENTS INC quarterly report, Q2 FY2017

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

MetricThree months ended Nov. 30, 2016Prior-year quarterSix months ended Nov. 30, 2016Prior-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 margin11.2%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 flowNot provided for the quarterNot 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.