Global Payments Inc. — fiscal 2015 Form 10-K
Reporting period: Fiscal year ended May 31, 2015, with fourth-quarter results for the three months ended May 31, 2015. The filing is a fiscal 2015 10-K, rather than a 2014 fiscal-year filing.
Business context
Global Payments provides payment processing and digital commerce services in 29 countries. It reports North America and International merchant services; starting in fiscal 2016, it planned to report North America, Europe, and Asia-Pacific separately.
Financial results
| Metric | Fiscal 2015 | Fiscal 2014 |
|---|---|---|
| Revenue | $2,773.7 million | $2,554.2 million |
| Operating income | $456.6 million | $405.5 million |
| Operating margin | 16.5% | 15.9% |
| Net income attributable to Global Payments | $278.0 million | $245.3 million |
| Diluted EPS | $4.12 | $3.37 |
| Cash provided by operating activities | $424.7 million | $194.1 million |
| Capital expenditures | $92.6 million | $81.4 million |
Revenue increased 8.6%; attributable net income rose 13.4%. Cost of service declined to 36.8% of revenue from 37.3%, and selling, general and administrative expense declined to 46.7% from 47.1%.
Fourth quarter: Revenue was $706.5 million versus $674.0 million; operating income was $103.6 million versus $88.9 million; net income attributable to Global Payments was $65.3 million versus $51.6 million; and diluted EPS was $0.99 versus $0.72.
Segments: North America revenue rose 8.8% to $1,968.9 million, with operating income of $293.1 million and a 14.9% margin, compared with 15.0%. International revenue rose 8.0% to $804.8 million; operating income increased to $279.7 million and margin to 34.8% from 32.2%.
Liquidity, debt and capital allocation
At May 31, 2015, cash and cash equivalents were $650.7 million, of which the company identified $195.2 million as available cash. The balance included settlement-related and merchant-reserve cash; $417.2 million was described as settlement-related and merchant-reserve balances, including $180.2 million of merchant-reserve cash.
Long-term debt was $1,742.5 million and short-term settlement lines of credit were $592.6 million. The company also reported $484.3 million of incremental availability under its corporate revolver and $567.5 million of additional settlement-line capacity. It complied with applicable debt covenants. A 100-basis-point rate increase was estimated to raise annual interest expense by approximately $13.8 million, after considering its interest-rate swap.
Operating cash flow increased substantially year over year. Investing activities used $440.9 million, mainly for acquisitions and capital expenditures. Financing activities included $372.4 million of common-stock repurchases and $5.3 million of dividends paid. Fiscal 2016 capital expenditures were expected to be approximately $105 million. Management stated that cash, borrowing capacity, and expected operating cash flows should meet foreseeable needs.
Material changes, outlook and unusual items
- Foreign-exchange movements reduced fiscal 2015 revenue by $78.4 million and diluted EPS by $0.31 versus fiscal 2014. The filing gives no formal revenue or EPS guidance.
- Fiscal 2015 acquisitions included Ezidebit in Australia and New Zealand for approximately $266.0 million and a 95% interest in Realex Payments for approximately $118.9 million. PayPros, acquired in fiscal 2014, was included for a full fiscal year in 2015.
- The FIS gaming-business acquisition closed June 1, 2015, after year-end, for $237.5 million. The BPI Philippines arrangement and a Central and Eastern Europe venture were pending, subject to approvals and other conditions.
- Fourth-quarter results included $6.3 million of employee termination costs and a $1.2 million Realex transaction-tax charge. The quarter also included a $3.6 million reversal of previously accrued tax-related interest expense.
- The company released a $65.6 million uncertain-tax-position liability after concluding the tax positions were more likely than not to be sustained; a subsequent closure notice confirmed no adjustment for the examined tax years. A separate $14.3 million out-of-period deferred-tax correction was recorded in the fourth quarter and offset by a tax benefit related to a change in judgment; management characterized the correction as immaterial.
- Fiscal 2015 corporate expenses included settlement of a European legal claim. The company said its other incidental claims and lawsuits were not expected to materially affect financial position, liquidity, or results.
- Foreign-currency translation contributed to a $212.8 million net other comprehensive loss, principally from a $220.6 million translation adjustment. Goodwill and other intangible assets together represented approximately 35.4% of total assets; no goodwill impairment was recorded.
Risks and contingencies
Key disclosed risks include cybersecurity and system outages, card-network and sponsor-bank relationships, competition and technology change, merchant attrition and chargebacks, regulatory and privacy requirements, foreign-exchange and variable-interest-rate exposure, and integration of acquisitions. The 2012 processing-system intrusion resulted in approximately $114.2 million of cumulative expenses net of insurance recoveries; the company was restored to PCI DSS-compliant service-provider lists in fiscal 2013. The company also noted that higher-than-expected merchant or check-guarantee losses, litigation, tax outcomes, or impairment of acquired goodwill and intangibles could adversely affect results.
Important facts for investors to verify
- Whether organic transaction and volume growth, separate from acquisitions and currency effects, supports continued revenue and margin growth.
- How the fiscal 2016 segment reorganization and acquired businesses affect comparable results, integration costs, and expected synergies.
- Whether available liquidity remains adequate after settlement obligations, merchant reserves, acquisition spending, and share repurchases.
- Debt balances, revolver capacity, covenant headroom, and sensitivity to interest rates and foreign currencies.
- Whether the deferred-tax correction, resolved tax examination, and remaining uncertain tax benefits have any further financial-statement consequences.
- Progress on cybersecurity controls and any new card-network, regulatory, litigation, or merchant-loss developments.