Global Payments Inc. — Form 10-Q Summary
Reporting period: Three months ended August 31, 2016 (unaudited). The company changed its fiscal year-end from May 31 to December 31 and planned a seven-month transition period ending December 31, 2016; during that transition it continued filing quarterly reports using its prior year-end.
Business context and results
Global Payments provides payment technology services in 30 countries through its North America, Europe and Asia-Pacific segments. The quarter includes Heartland, acquired April 22, 2016, so year-over-year comparisons reflect the acquisition as well as organic performance.
| Metric | Quarter ended Aug. 31, 2016 | Prior-year quarter | Change / context |
|---|---|---|---|
| Revenue | $939.5 million | $748.8 million | Up 25.5%; principally reflects Heartland, partly offset by $14.4 million of adverse currency effects |
| Operating income | $121.1 million | $137.8 million | Down 12.1% |
| Operating margin | 12.9% | 18.4% | Down 5.5 percentage points |
| Net income attributable to Global Payments | $85.1 million | $86.6 million | Down approximately 1.8% |
| Diluted EPS | $0.55 | $0.66 | Down approximately 16.7% |
| Operating cash flow | $155.7 million | $513.4 million | Lower mainly because of settlement-processing working-capital timing |
| Cash and cash equivalents | $977.8 million | $1,044.7 million at May 31, 2016 | Company identified $355.2 million as available cash after excluding settlement-related, merchant-reserve and customer funds |
| Long-term debt, including current portion | $4,471.7 million | $4,515.3 million at May 31, 2016 | Settlement lines of credit added $332.1 million outstanding |
Drivers, material changes and unusual items
- North America revenue increased 34.1% to $711.8 million, primarily due to Heartland. Europe revenue rose 0.7% to $169.6 million; Asia-Pacific revenue rose 17.3% to $58.2 million, principally from recent acquisitions.
- Cost of service rose 69.7% to $462.6 million, or 49.2% of revenue versus 36.4%. The company cited higher transaction-related costs and $59.7 million of additional acquired-intangible amortization.
- Corporate operating loss widened to $64.2 million from $30.7 million; it included $30.5 million of Heartland integration expenses. Consolidated depreciation and amortization increased to $103.2 million from $38.8 million.
- A $41.2 million gain from the Visa Europe transaction was included in interest and other income. Interest and other expense increased to $43.1 million from $13.2 million, primarily reflecting acquisition-related borrowing.
- Net cash used in investing was $38.2 million, including $41.4 million of capital expenditures and $34.6 million of net acquisition spending, partly offset by $37.7 million of cash proceeds from the Visa Europe sale. Financing activities used $175.1 million, including $67.6 million of common-stock repurchases.
Liquidity, debt, outlook and risks
- At August 31, 2016, revolving-credit availability was $236.2 million; additional settlement-line capacity was $744.3 million. The company reported compliance with applicable debt covenants. Credit agreements include leverage and fixed-charge-coverage requirements and may restrict certain payments, including dividends above the current $0.01-per-share quarterly rate.
- Management expected capital expenditures of approximately $140 million for the twelve months ending May 31, 2017, and stated that cash, borrowing capacity and expected operating cash flows should meet foreseeable operating and planned requirements. No earnings or revenue guidance is provided in the filing text.
- The Visa Europe transaction included preferred shares assigned a value of zero at closing because of transfer restrictions, potential conversion-rate adjustments and valuation uncertainty. Litigation could reduce the eventual shares received to zero; approximately €25.6 million ($28.8 million at the transaction-date exchange rate) of upfront cash could be refundable. Deferred consideration of €3.1 million plus 4% compounded interest is due on the third anniversary.
- Interest-rate exposure is material: a hypothetical 100-basis-point increase was estimated to raise annual interest expense by approximately $41.0 million and interest income by $3.3 million. The company had $750 million of interest-rate swaps. Other cited risks include foreign-exchange movements, payment-network and data-security requirements, systems interruptions, merchant attrition, and Heartland integration and realization of acquisition benefits.
- A proposed settlement of a lawsuit challenging the Heartland merger remained subject to court approval; the company did not expect it to have a material adverse financial effect. Management said disclosure controls were effective and reported no material change in internal control over financial reporting apart from ongoing Heartland integration work.
Important facts for investors to verify
- How much of revenue growth and future profitability is attributable to Heartland, and whether integration costs and acquired-intangible amortization decline as integration proceeds.
- Debt repayment, refinancing and covenant headroom, including the substantial debt maturities disclosed for fiscal 2021 and the company’s sensitivity to higher interest rates.
- Whether operating cash flow normalizes, given the large year-over-year swing from settlement-processing timing and the restricted practical availability of some reported cash.
- The final value and potential refund exposure associated with Visa Europe consideration, and the status and terms of the proposed Heartland-merger litigation settlement.
- Whether the company meets its stated capital-expenditure expectation and realizes the anticipated benefits of the Heartland acquisition.