GLOBAL PAYMENTS INC
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
August 31, 2015
OR
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¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
Commission file number: 001-16111
GLOBAL PAYMENTS INC.
(Exact name of registrant as specified in charter)
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Georgia
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58-2567903
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(State or other jurisdiction of
incorporation or organization) |
(I.R.S. Employer
Identification No.) |
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10 Glenlake Parkway, North Tower, Atlanta, Georgia
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30328
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code: (770) 829-8000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
ý
No
¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
ý
No
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
x
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Accelerated filer
¨
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Non-accelerated filer
¨
(Do not check if a smaller reporting company)
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Smaller reporting company
¨
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
|
Yes
¨
No
x
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||
The number of shares of the issuer’s common stock, no par value, outstanding as of
September 22, 2015
was
64,941,999
.
GLOBAL PAYMENTS INC.
FORM 10-Q
For the quarterly period ended
August 31, 2015
TABLE OF CONTENTS
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Page
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PART I - FINANCIAL INFORMATION
|
|||
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ITEM 1.
|
|||
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ITEM 2.
|
|||
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ITEM 3.
|
|||
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ITEM 4.
|
|||
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PART II - OTHER INFORMATION
|
|||
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ITEM 1.
|
|||
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ITEM 2.
|
|||
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ITEM 6.
|
|||
2
GLOBAL PAYMENTS INC.
(in thousands, except per share data)
|
Three Months Ended
|
|||||||
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August 31, 2015
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August 31, 2014
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||||||
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Revenues
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$
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748,796
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$
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704,895
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Operating expenses:
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|||||||
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Cost of service
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272,666
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259,839
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|||
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Selling, general and administrative
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338,358
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320,658
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|||
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611,024
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580,497
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|||
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Operating income
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137,772
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124,398
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|||
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Interest and other income
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1,142
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1,192
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|||
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Interest and other expense
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(13,243
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)
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(11,010
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)
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|||
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(12,101
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)
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(9,818
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)
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|||
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Income before income taxes
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125,671
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114,580
|
|
|||
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Provision for income taxes
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(32,623
|
)
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(30,146
|
)
|
|||
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Net income
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93,048
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|
84,434
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|
|||
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Less: Net income attributable to noncontrolling interests, net of income tax
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(6,402
|
)
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(9,068
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)
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|||
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Net income attributable to Global Payments
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$
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86,646
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$
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75,366
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Earnings per share attributable to Global Payments:
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|||||||
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Basic earnings per share
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$
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1.33
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$
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1.11
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Diluted earnings per share
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$
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1.32
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$
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1.10
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See Notes to Unaudited Consolidated Financial Statements.
3
GLOBAL PAYMENTS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
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Three Months Ended
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|||||||
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August 31, 2015
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August 31, 2014
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||||||
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Net income
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$
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93,048
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$
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84,434
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Other comprehensive income (loss):
|
|||||||
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Foreign currency translation adjustments
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(37,017
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)
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(25,220
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)
|
|||
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Income tax benefit related to foreign currency translation adjustments
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11,100
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2,516
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|||
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Unrealized losses on hedging activities
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(32
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)
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—
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|||
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Reclassification of losses on hedging activities to interest expense
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1,734
|
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—
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|
|||
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Income tax provision related to hedging activities
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(622
|
)
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—
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|||
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Other comprehensive loss, net of tax
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(24,837
|
)
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(22,704
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)
|
|||
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Comprehensive income
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68,211
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61,730
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|||
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Less: comprehensive income attributable to noncontrolling interests
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(8,300
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)
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(3,939
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)
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|||
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Comprehensive income attributable to Global Payments
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$
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59,911
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$
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57,791
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See Notes to Unaudited Consolidated Financial Statements.
4
GLOBAL PAYMENTS INC.
(in thousands, except share data)
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August 31, 2015
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May 31, 2015
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||||
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(Unaudited)
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|||||||
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ASSETS
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|||
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Current assets:
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|||
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Cash and cash equivalents
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$
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803,309
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$
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650,739
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Accounts receivable, net of allowances for doubtful accounts of $398 and $468, respectively
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207,949
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202,390
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||
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Claims receivable, net of allowances for doubtful accounts of $5,933 and $548, respectively
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7,177
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548
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Settlement processing assets
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1,658,193
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2,394,822
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Deferred income taxes
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12,179
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11,664
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||
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Prepaid expenses and other current assets
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58,231
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41,416
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||
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Total current assets
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2,747,038
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3,301,579
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||
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Goodwill
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1,603,593
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1,491,833
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||
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Other intangible assets, net
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686,852
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560,136
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||
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Property and equipment, net
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368,795
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374,143
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||
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Deferred income taxes
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30,375
|
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30,578
|
|
|||
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Other
|
36,265
|
|
|
32,846
|
|
||
|
Total assets
|
$
|
5,472,918
|
|
|
$
|
5,791,115
|
|
|
LIABILITIES AND EQUITY
|
|
||||||
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Current liabilities:
|
|
||||||
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Lines of credit
|
$
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356,675
|
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$
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592,629
|
|
|
|
Current portion of long-term debt
|
—
|
|
61,784
|
|
|||
|
Accounts payable and accrued liabilities
|
303,497
|
|
|
312,647
|
|
||
|
Settlement processing obligations
|
1,699,353
|
|
2,033,900
|
|
|||
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Income taxes payable
|
30,711
|
|
14,228
|
|
|||
|
Total current liabilities
|
2,390,236
|
|
|
3,015,188
|
|
||
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Long-term debt
|
1,932,028
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|
1,678,283
|
|
|||
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Deferred income taxes
|
216,844
|
|
|
214,669
|
|
||
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Other noncurrent liabilities
|
16,667
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|
19,422
|
|
||
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Total liabilities
|
4,555,775
|
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|
4,927,562
|
|
||
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Commitments and contingencies
|
|
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|
||
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Equity:
|
|
||||||
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Preferred stock, no par value; 5,000,000 shares authorized and none issued
|
—
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|
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—
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|
||
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Common stock, no par value; 200,000,000 shares authorized; 64,941,393 issued and outstanding at August 31, 2015 and 65,278,838 issued and outstanding at May 31, 2015
|
—
|
|
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—
|
|
||
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Paid-in capital
|
138,212
|
|
|
148,742
|
|
||
|
Retained earnings
|
861,212
|
|
|
795,226
|
|
||
|
Accumulated other comprehensive loss
|
(212,727
|
)
|
|
(185,992
|
)
|
||
|
Total Global Payments shareholders’ equity
|
786,697
|
|
|
757,976
|
|
||
|
Noncontrolling interests
|
130,446
|
|
105,577
|
|
|||
|
Total equity
|
917,143
|
|
863,553
|
|
|||
|
Total liabilities and equity
|
$
|
5,472,918
|
|
|
$
|
5,791,115
|
|
See Notes to Unaudited Consolidated Financial Statements.
5
GLOBAL PAYMENTS INC.
(in thousands)
|
Three Months Ended
|
|||||||
|
August 31, 2015
|
August 31, 2014
|
||||||
|
Cash flows from operating activities:
|
|||||||
|
Net income
|
$
|
93,048
|
|
$
|
84,434
|
|
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
|
|
|
|||||
|
Depreciation and amortization of property and equipment
|
17,909
|
|
16,712
|
|
|||
|
Amortization of acquired intangibles
|
20,848
|
|
17,854
|
|
|||
|
Share-based compensation expense
|
6,467
|
|
4,066
|
|
|||
|
Provision for operating losses and bad debts
|
4,263
|
|
4,308
|
|
|||
|
Deferred income taxes
|
3,584
|
|
3,705
|
|
|||
|
Other, net
|
1,333
|
|
(755
|
)
|
|||
|
Changes in operating assets and liabilities, net of the effects of acquisitions:
|
|
|
|||||
|
Accounts receivable
|
(7,512
|
)
|
7,933
|
|
|||
|
Claims receivable
|
(12,261
|
)
|
(2,742
|
)
|
|||
|
Settlement processing assets and obligations, net
|
402,676
|
|
(179,462
|
)
|
|||
|
Prepaid expenses and other assets
|
(18,114
|
)
|
1,625
|
|
|||
|
Accounts payable and other liabilities
|
(14,801
|
)
|
(22,151
|
)
|
|||
|
Income taxes payable
|
15,952
|
|
1,000
|
|
|||
|
Net cash provided by (used in) operating activities
|
513,392
|
|
(63,473
|
)
|
|||
|
Cash flows from investing activities:
|
|||||||
|
Business, intangible and other asset acquisitions, net of cash acquired
|
(241,530
|
)
|
(4,773
|
)
|
|||
|
Capital expenditures
|
(16,858
|
)
|
(18,157
|
)
|
|||
|
Principal collections on financing receivables
|
—
|
|
219
|
|
|||
|
Net proceeds from sales of investments and business
|
—
|
|
10,528
|
|
|||
|
Net cash used in investing activities
|
(258,388
|
)
|
(12,183
|
)
|
|||
|
Cash flows from financing activities:
|
|||||||
|
Net (payments) borrowings on short-term lines of credit
|
(236,041
|
)
|
212,029
|
|
|||
|
Proceeds from issuance of long-term debt
|
2,821,425
|
|
390,000
|
|
|||
|
Principal payments of long-term debt
|
(2,626,925
|
)
|
(363,679
|
)
|
|||
|
Payment of debt issuance costs
|
(4,934
|
)
|
—
|
|
|||
|
Repurchase of common stock
|
(34,296
|
)
|
(132,283
|
)
|
|||
|
Proceeds from stock issued under share-based compensation plans
|
2,513
|
|
12,588
|
|
|||
|
Common stock repurchased - share-based compensation plans
|
(8,154
|
)
|
(15,105
|
)
|
|||
|
Tax benefit from share-based compensation plans
|
5,760
|
|
3,154
|
|
|||
|
Distributions to noncontrolling interests
|
(8,158
|
)
|
(11,249
|
)
|
|||
|
Dividends paid
|
(1,305
|
)
|
(1,370
|
)
|
|||
|
Net cash (used in) provided by financing activities
|
(90,115
|
)
|
94,085
|
|
|||
|
Effect of exchange rate changes on cash
|
(12,319
|
)
|
(4,417
|
)
|
|||
|
Increase in cash and cash equivalents
|
152,570
|
|
14,012
|
|
|||
|
Cash and cash equivalents, beginning of the period
|
650,739
|
|
581,872
|
|
|||
|
Cash and cash equivalents, end of the period
|
$
|
803,309
|
|
$
|
595,884
|
|
|
See Notes to Unaudited Consolidated Financial Statements.
6
GLOBAL PAYMENTS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands)
|
|
Number of Shares
|
Paid-in Capital
|
Retained Earnings
|
Accumulated Other Comprehensive Loss
|
Total Global Payments Shareholders’ Equity
|
Noncontrolling Interests
|
Total Equity
|
|||||||||||||||||||
|
Balance at May 31, 2015
|
65,279
|
|
$
|
148,742
|
|
$
|
795,226
|
|
$
|
(185,992
|
)
|
$
|
757,976
|
|
$
|
105,577
|
|
$
|
863,553
|
|
||||||
|
Net income
|
86,646
|
|
86,646
|
|
6,402
|
|
93,048
|
|
||||||||||||||||||
|
Other comprehensive income (loss), net of tax
|
(26,735
|
)
|
(26,735
|
)
|
1,898
|
|
(24,837
|
)
|
||||||||||||||||||
|
Stock issued under share-based compensation plans
|
473
|
|
2,513
|
|
2,513
|
|
2,513
|
|
||||||||||||||||||
|
Common stock repurchased - share-based compensation plans
|
(301
|
)
|
(11,381
|
)
|
|
|
(11,381
|
)
|
(11,381
|
)
|
||||||||||||||||
|
Tax benefit from share-based compensation, net
|
5,760
|
|
5,760
|
|
5,760
|
|
||||||||||||||||||||
|
Share-based compensation expense
|
6,467
|
|
6,467
|
|
6,467
|
|
||||||||||||||||||||
|
Distributions to noncontrolling interests
|
—
|
|
(8,158
|
)
|
(8,158
|
)
|
||||||||||||||||||||
|
Contribution of subsidiary shares to noncontrolling interest as consideration in business combination
|
4,673
|
|
4,673
|
|
24,727
|
|
29,400
|
|
||||||||||||||||||
|
Repurchase of common stock
|
(510
|
)
|
(18,562
|
)
|
(19,355
|
)
|
(37,917
|
)
|
(37,917
|
)
|
||||||||||||||||
|
Dividends paid ($0.02 per share)
|
(1,305
|
)
|
(1,305
|
)
|
(1,305
|
)
|
||||||||||||||||||||
|
Balance at August 31, 2015
|
64,941
|
|
$
|
138,212
|
|
$
|
861,212
|
|
$
|
(212,727
|
)
|
$
|
786,697
|
|
$
|
130,446
|
|
$
|
917,143
|
|
||||||
See Notes to Unaudited Consolidated Financial Statements.
7
GLOBAL PAYMENTS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands)
|
|
Number of Shares
|
Paid-in Capital
|
Retained Earnings
|
Accumulated Other Comprehensive Loss
|
Total Global Payments Shareholders’ Equity
|
Noncontrolling Interests
|
Total Equity
|
|||||||||||||||||||
|
Balance at May 31, 2014
|
68,846
|
|
$
|
183,023
|
|
$
|
815,980
|
|
$
|
(1,776
|
)
|
$
|
997,227
|
|
$
|
135,572
|
|
$
|
1,132,799
|
|
||||||
|
Net income
|
75,366
|
|
75,366
|
|
9,068
|
|
84,434
|
|
||||||||||||||||||
|
Other comprehensive loss, net of tax
|
(17,575
|
)
|
(17,575
|
)
|
(5,129
|
)
|
(22,704
|
)
|
||||||||||||||||||
|
Stock issued under employee stock plans
|
904
|
|
12,588
|
|
|
|
12,588
|
|
12,588
|
|
||||||||||||||||
|
Common stock repurchased - share-based compensation plans
|
(294
|
)
|
(6,713
|
)
|
|
|
(6,713
|
)
|
|
|
(6,713
|
)
|
||||||||||||||
|
Tax benefit from employee share-based compensation, net
|
3,154
|
|
3,154
|
|
3,154
|
|
||||||||||||||||||||
|
Share-based compensation expense
|
4,066
|
|
4,066
|
|
4,066
|
|
||||||||||||||||||||
|
Distributions to noncontrolling interests
|
—
|
|
(11,249
|
)
|
(11,249
|
)
|
||||||||||||||||||||
|
Repurchase of common stock
|
(1,783
|
)
|
(56,977
|
)
|
(67,515
|
)
|
(124,492
|
)
|
(124,492
|
)
|
||||||||||||||||
|
Dividends paid ($0.02 per share)
|
(1,370
|
)
|
(1,370
|
)
|
(1,370
|
)
|
||||||||||||||||||||
|
Balance at August 31, 2014
|
67,673
|
|
$
|
139,141
|
|
$
|
822,461
|
|
$
|
(19,351
|
)
|
$
|
942,251
|
|
$
|
128,262
|
|
$
|
1,070,513
|
|
||||||
See Notes to Unaudited Consolidated Financial Statements.
8
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1
—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business, consolidation and presentation
— We are a leading worldwide provider of payment technology services delivering innovative solutions to our customers. Our technologies, partnerships and employee expertise enable us to provide a broad range of services that allow our customers to accept various payment types. We distribute our payment services and digital commerce services across a variety of channels to merchants and partners in
29
countries throughout North America, Europe, the Asia-Pacific region and Brazil. We operate in
three
reportable segments: North America, Europe, and Asia-Pacific.
We were incorporated in Georgia as Global Payments Inc. in
2000
and spun-off from our former parent company in
2001
. Including our time as part of our former parent company, we have been in the payments business since
1967
. Global Payments Inc. and its consolidated subsidiaries are referred to collectively as "Global Payments," the "Company," "we," "our" or "us," unless the context requires otherwise.
These unaudited consolidated financial statements include our accounts and those of our majority-owned subsidiaries, and all intercompany balances and transactions have been eliminated in consolidation. These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC").
In the opinion of our management, all known adjustments necessary for a fair presentation of the results of the interim periods have been made. These adjustments consist of normal recurring accruals and estimates that affect the carrying amount of assets and liabilities. We suggest that these financial statements be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended
May 31, 2015
.
Use of estimates
—
The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reported period. Actual results could differ materially from those estimates.
Reclassifications
— In the consolidated balance sheet as of
August 31, 2015
, we presented inventory within prepaid expenses and other current assets instead of as a separate line item. Therefore, we reclassified inventory of
$5.2 million
as of
May 31, 2015
to conform to the current presentation. The reclassification also resulted in the combination of changes in inventory of
$1.0 million
with changes in prepaid expenses and other assets in our consolidated statement of cash flows for the
three
months ended
August 31, 2014
.
New accounting pronouncements
— From time-to-time, new accounting pronouncements are issued by the Financial Accounting Standards Board ("FASB") or other standards setting bodies that may affect our current and/or future financial statements when adopted.
Recently Adopted Accounting Pronouncements
In September 2015, the FASB issued Accounting Standards Update ("ASU") 2015-16, "Business Combinations (Topic 805):
Simplifying the Accounting for Measurement-Period Adjustments
." The update requires than an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, including the cumulative effect of the change in provisional amount as if the accounting had been completed at the acquisition date. The adjustments related to previous reporting periods since the acquisition date must be disclosed by income statement line item either on the face of the income statement or in the notes. We adopted this ASU during the three months ended
August 31, 2015
. Accordingly, we applied the amendments in this update to the measurement period adjustments made during the three months ended
August 31, 2015
with no material effect on previous-period or current-period earnings. See "Note
3
—Business Intangible Asset Acquisition and Joint Ventures" for more information regarding adjustments to provisional amounts that occurred during the three months ended
August 31, 2015
.
9
In April 2015, the FASB issued ASU 2015-03, "Interest-Imputation of Interest (Subtopic 835-30):
Simplifying the Presentation of Debt Issuance Costs
." The update requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset. In August 2015, the FASB issued ASU 2015-15, "Interest-Imputation of Interest (Subtopic 835-30):
Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements-Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting
," to clarify that an entity may elect to present debt issuance costs related to a line-of-credit arrangement as an asset, regardless of whether or not there are any outstanding borrowings on the line-of-credit arrangement.
We adopted both ASUs as of June 1, 2015, electing to continue to present debt issuance costs related to our revolving credit facilities as an asset, and reclassified prior-period amounts for debt issuance costs related to our term loans to conform to the current-period presentation. In our consolidated balance sheet as of
May 31, 2015
, we reclassified debt issuance costs of
$0.7 million
from prepaid expenses and other current assets to current portion of long-term debt and
$1.7 million
was reclassified from other noncurrent assets to long-term debt. The adoption of this standard did not affect our results of operations or cash flows in either the current or previous interim or annual periods. See "Note
5
—Long-Term Debt and Credit Facilities" for more information about the presentation of debt issuance costs.
Recently Issued Pronouncements Not Yet Adopted
In April 2015, the FASB issued ASU 2015-05, "Intangibles—Goodwill and Other-Internal-Use Software (Subtopic 350-40):
Customer's Accounting for Fees Paid in a Cloud Computing Arrangement
." The amendments in this update provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change GAAP for a customer’s accounting for service contracts. The amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted for all entities. We are evaluating the effect of ASU 2015-05 on our consolidated financial statements and have not yet adopted the new standard.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)." The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP and permits the use of either the retrospective or cumulative effect transition method. The standard requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. The amendments are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted for annual reporting periods beginning after December 15, 2016. We are evaluating the impact of ASU 2014-09 on our consolidated financial statements.
10
NOTE
2
—SETTLEMENT PROCESSING ASSETS AND OBLIGATIONS
As of
August 31, 2015
and
May 31, 2015
, settlement processing assets and obligations consisted of the following (in thousands):
|
August 31, 2015
|
May 31, 2015
|
||||||
|
Settlement processing assets:
|
|||||||
|
Interchange reimbursement
|
$
|
22,566
|
|
$
|
186,660
|
|
|
|
Receivable from Members
|
66,793
|
|
294,837
|
|
|||
|
Receivable from networks
|
1,566,936
|
|
1,919,148
|
|
|||
|
Exception items
|
2,156
|
|
4,920
|
|
|||
|
Merchant Reserves
|
(258
|
)
|
(10,743
|
)
|
|||
|
$
|
1,658,193
|
|
$
|
2,394,822
|
|
||
|
Settlement processing obligations:
|
|||||||
|
Interchange reimbursement
|
$
|
235,716
|
|
$
|
68,444
|
|
|
|
Liability to Members
|
(209,525
|
)
|
(628
|
)
|
|||
|
Liability to merchants
|
(1,564,142
|
)
|
(1,931,390
|
)
|
|||
|
Exception items
|
10,794
|
|
5,331
|
|
|||
|
Merchant Reserves
|
(167,543
|
)
|
(169,442
|
)
|
|||
|
Reserve for operating losses
|
(1,223
|
)
|
(1,286
|
)
|
|||
|
Reserve for sales allowances
|
(3,430
|
)
|
(4,929
|
)
|
|||
|
$
|
(1,699,353
|
)
|
$
|
(2,033,900
|
)
|
||
NOTE
3
—BUSINESS AND INTANGIBLE ASSET ACQUISITIONS AND JOINT VENTURES
Fiscal 2016
FIS Gaming Business
On
September 30, 2014
, we entered into an asset purchase agreement with Certegy Check Services, Inc., a wholly-owned subsidiary of
Fidelity National Information Services, Inc. ("FIS"), to acquire substantially all of the assets of its gaming business related to licensed gaming operators (the "FIS Gaming Business"), which consisted primarily of customer contracts. On
June 1, 2015
, we completed the acquisition, which included approximately
260
gaming client locations, for
$237.5 million
funded from borrowings on our revolving credit facility and cash on hand. We acquired the FIS Gaming Business to expand our direct distribution and service offerings in the gaming industry. This transaction was accounted for as a business combination. We recorded the assets acquired and liabilities assumed at their estimated fair values as of the acquisition date,
June 1, 2015
. Due to the timing of this transaction, we have not finalized the valuation of intangible assets acquired. Acquisition costs associated with this purchase were not material. The revenue and earnings associated with the acquired business for the year ending
May 31, 2016
are not expected to be material nor were the historical revenue and earnings of the acquired business material for the purpose of presenting pro forma information for the current or prior-year periods.
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed as of the acquisition date (in thousands):
|
Customer-related intangible assets
|
$
|
135,200
|
|
|
Liabilities
|
(150
|
)
|
|
|
Total identifiable net assets
|
135,050
|
|
|
|
Goodwill
|
102,450
|
|
|
|
Total purchase consideration
|
$
|
237,500
|
|
Goodwill of
$102.5 million
arising from the acquisition was included in the North America segment and was attributable to
expected growth opportunities, including cross-selling opportunities at existing and acquired gaming client locations, operating
11
synergies in the gaming business and assembled workforce. Goodwill associated with this acquisition is deductible for income tax purposes. The customer-related intangible assets have an estimated amortization period of
15
years.
We also entered into a gaming bureau license agreement and an outsourcing agreement with FIS on
September 30, 2014
. Under the license agreement, we acquired a perpetual software license for a gaming bureau application that we believe enhances our casino clients’ credit decision process. The software license was recorded in property and equipment in our consolidated balance sheet when acquired. Under the outsourcing agreement, which has a term of
10
years, we engaged FIS to provide a variety of services for our gaming clients, including: check and ACH verification services, collection services, claims management services, billing services and other gaming bureau services. The outsourcing agreement became effective on
June 1, 2015
.
Venture with Bank of the Philippine Islands
We provide merchant acquiring services in the Philippines through our subsidiary Global Payments Asia-Pacific Philippines Incorporated ("GP Philippines"). On
August 3, 2015
, we made a cash payment of
$3.6 million
and contributed a
49%
ownership interest in GP Philippines to Bank of the Philippines ("BPI") in return for its merchant acquiring business, which is now part of GP Philippines, in which we have retained a controlling
51%
interest.
The acquisition of BPI's merchant acquiring business was accounted for as a business combination. We recorded the assets acquired and liabilities assumed at their estimated fair values as of the acquisition date,
August 3, 2015
. The estimated total purchase consideration for BPI's merchant acquiring business was
$33.0 million
, consisting of cash paid of
$3.6 million
and shares issued to BPI representing a
49%
ownership interest in GP Philippines with an estimated acquisition-date fair value of
$29.4 million
. Due to the timing of this transaction, we have not finalized the valuation of shares issued to BPI for the noncontrolling interest or the intangible assets acquired; but, we have recorded provisional estimated amounts.
Central and Eastern European Venture
On
July 27, 2015
, we announced an agreement with CaixaBank, S.A. ("CaixaBank") and Erste Group Bank AG (“Erste Group”) to form a venture to provide merchant acquiring and payment services in
three
Central and Eastern European markets: the Czech Republic, the Slovak Republic and Romania. As part of the agreement, Global Payments and CaixaBank will form an entity, in which Global Payments will have a
51%
controlling interest. This newly formed entity will pay €
30 million
(
$34 million
equivalent as of
August 31, 2015
) in cash to acquire a
51%
controlling ownership in the venture with Erste Group, which will contribute its existing merchant acquiring businesses in each of the
three
countries to the venture and hold a
49%
interest. The transaction is expected to close in the second half of fiscal 2016, subject to receipt of regulatory approvals and satisfaction of customary closing conditions.
Fiscal 2015
Realex Payments
On
March 25, 2015
, we acquired approximately
95%
of the outstanding shares of Pay and Shop Limited for €
110.2 million
in cash (
$118.9 million
equivalent as of the acquisition date) funded from borrowings on our revolving credit facility. On October 5, 2015, we paid €
6.7 million
(
$7.6 million
equivalent) to acquire the remaining shares. Pay and Shop Limited, which does business as Realex Payments ("Realex"), is a leading European online payment gateway technology provider based in Dublin, Ireland. This transaction furthers our strategy to provide omnichannel solutions that combine gateway services, payment service provisioning and merchant acquiring across Europe. This transaction was accounted for as a business combination. We recorded the assets acquired, liabilities assumed and noncontrolling interest at their estimated fair values as of the acquisition date,
March 25, 2015
. Due to the timing of this transaction, we have not finalized the valuation of intangible assets acquired and related deferred income taxes.
12
The following table summarizes the preliminary estimated fair values of the assets acquired, liabilities assumed and the noncontrolling interest as of the acquisition date (in thousands):
|
Cash
|
$
|
4,082
|
|
|
Customer-related intangible assets
|
16,079
|
|
|
|
Acquired technology
|
39,820
|
|
|
|
Trade name
|
3,453
|
|
|
|
Other intangible assets
|
399
|
|
|
|
Other assets
|
6,213
|
|
|
|
Liabilities
|
(3,479
|
)
|
|
|
Deferred income tax liabilities
|
(7,216
|
)
|
|
|
Total identifiable net assets
|
59,351
|
|
|
|
Goodwill
|
66,809
|
|
|
|
Noncontrolling interest
|
(7,280
|
)
|
|
|
Total purchase consideration
|
$
|
118,880
|
|
Goodwill of
$66.8 million
arising from the acquisition was included in the Europe segment and was attributable to expected growth opportunities in Europe, expected synergies from combining our existing business with gateway services and payment service provisioning in new markets and an assembled workforce to support the newly acquired technology. Goodwill associated with this acquisition is not deductible for income tax purposes. The customer-related intangible assets have an estimated amortization period of
16
years. The acquired technology has an estimated amortization period of
10
years. The trade name has an estimated amortization period of
7
years.
Ezidebit
On
October 10, 2014
, we completed the acquisition of
100%
of the outstanding stock of Ezi Holdings Pty Ltd ("Ezidebit") for AUD
302.6 million
(US
$266.0 million
equivalent as of the acquisition date). This acquisition was funded by a combination of cash on hand and borrowings on our revolving credit facility. Ezidebit is a leading integrated payments company focused on recurring payments verticals in Australia and New Zealand. Ezidebit markets its services through a network of integrated software vendors and direct channels to numerous vertical markets. We acquired Ezidebit to establish a direct distribution channel in Australia and New Zealand and to further enhance our existing integrated solutions offerings. This transaction was accounted for as a business combination. We recorded the assets acquired and liabilities assumed at their estimated fair values as of the acquisition date,
October 10, 2014
. Certain adjustments to estimated fair value were recorded during the
three
months ended
August 31, 2015
based on new information obtained that existed as of the acquisition date. During the measurement period, management determined that deferred income taxes should be reflected for certain nondeductible intangible assets. These adjustments are detailed in the table below. FASB Accounting Standards Codification ("ASC") 805, "Business Combinations," as amended by ASU 2015-16, requires than an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. During the
three
months ended
August 31, 2015
, we increased deferred income tax liabilities by
$11.6 million
with a corresponding adjustment to goodwill, and with no material effect on previous-period or current-period earnings or other comprehensive income.
13
The acquisition-date fair values of major classes of assets acquired and liabilities assumed as previously determined and as revised for measurement period adjustments as of
August 31, 2015
, including a reconciliation to the total purchase consideration, is as follows (in thousands):
|
As Previously Determined
|
Measurement Period Adjustments
|
Revised
|
|||||||||
|
Cash
|
$
|
45,826
|
|
$
|
—
|
|
$
|
45,826
|
|
||
|
Customer-related intangible assets
|
42,721
|
|
—
|
|
42,721
|
|
|||||
|
Acquired technology
|
27,954
|
|
—
|
|
27,954
|
|
|||||
|
Trade name
|
2,901
|
|
—
|
|
2,901
|
|
|||||
|
Other assets
|
2,337
|
|
—
|
|
2,337
|
|
|||||
|
Deferred income tax assets (liabilities)
|
1,815
|
|
(11,603
|
)
|
(9,788
|
)
|
|||||
|
Other liabilities
|
(49,797
|
)
|
—
|
|
(49,797
|
)
|
|||||
|
Total identifiable net assets
|
73,757
|
|
(11,603
|
)
|
62,154
|
|
|||||
|
Goodwill
|
192,225
|
|
11,603
|
|
203,828
|
|
|||||
|
Total purchase consideration
|
$
|
265,982
|
|
$
|
—
|
|
$
|
265,982
|
|
||
Goodwill of
$203.8 million
arising from the acquisition was included in the Asia-Pacific segment and was attributable to expected future growth opportunities in Australia and New Zealand, growth and expansion of integrated payments in the Asia-Pacific region, economies of scale in our existing Asia-Pacific business and an assembled workforce. Neither the goodwill nor the customer-related intangible assets associated with this acquisition are deductible for income tax purposes. The customer-related intangible assets have an estimated amortization periods of
15
years. The acquired technology has an estimated amortization period of
15
years. The trade name has an estimated amortization period of
5
years.
As of
August 31, 2015
and
May 31, 2015
, goodwill and intangible assets consisted of the following (in thousands):
|
|
August 31, 2015
|
May 31, 2015
|
|||||
|
|
|||||||
|
Goodwill
|
$
|
1,603,593
|
|
$
|
1,491,833
|
|
|
|
Other intangible assets:
|
|
|
|
|
|||
|
Customer-related intangible assets
|
$
|
863,046
|
|
$
|
718,011
|
|
|
|
Contract-based intangible assets
|
131,591
|
|
130,874
|
|
|||
|
Acquired technologies
|
92,137
|
|
93,194
|
|
|||
|
Trademarks and trade names
|
10,390
|
|
10,777
|
|
|||
|
1,097,164
|
|
952,856
|
|
||||
|
Less accumulated amortization:
|
|||||||
|
Customer-related intangible assets
|
355,471
|
|
342,488
|
|
|||
|
Contract-based intangible assets
|
39,518
|
|
37,286
|
|
|||
|
Acquired technologies
|
10,694
|
|
8,509
|
|
|||
|
Trademarks and trade names
|
4,629
|
|
4,437
|
|
|||
|
410,312
|
|
392,720
|
|
||||
|
$
|
686,852
|
|
$
|
560,136
|
|
||
14
The following table sets forth the changes in the carrying amount of goodwill for the
three
months ended
August 31, 2015
(in thousands):
|
North America
|
Europe
|
Asia-Pacific
|
Total
|
||||||||||||
|
Balance at May 31, 2015
|
$
|
779,734
|
|
$
|
485,921
|
|
$
|
226,178
|
|
$
|
1,491,833
|
|
|||
|
Goodwill acquired
|
102,450
|
|
—
|
|
16,500
|
|
118,950
|
|
|||||||
|
Effect of foreign currency translation
|
(4,146
|
)
|
1,594
|
|
(15,830
|
)
|
(18,382
|
)
|
|||||||
|
Measurement-period adjustments
|
—
|
|
(411
|
)
|
11,603
|
|
11,192
|
|
|||||||
|
Balance at August 31, 2015
|
$
|
878,038
|
|
$
|
487,104
|
|
$
|
238,451
|
|
$
|
1,603,593
|
|
|||
There were
no
accumulated impairment losses as of
August 31, 2015
or
May 31, 2015
.
NOTE
5
—LONG-TERM DEBT AND CREDIT FACILITIES
As of
August 31, 2015
and
May 31, 2015
, long-term debt consisted of the following (in thousands):
|
August 31, 2015
|
May 31, 2015
|
||||||
|
Term loan:
|
|||||||
|
$1,750,000 face amount (less unamortized debt issuance costs of $4,972) at August 31, 2015 and $1,234,375 face amount (less unamortized debt issuance costs of $2,433) at May 31, 2015
|
$
|
1,745,028
|
|
$
|
1,231,942
|
|
|
|
Revolving credit facility
|
187,000
|
|
508,125
|
|
|||
|
Total long-term debt
|
1,932,028
|
|
1,740,067
|
|
|||
|
Less current portion of long-term debt ($62,500 face amount less unamortized debt issuance costs of $716 at May 31, 2015)
|
—
|
|
61,784
|
|
|||
|
Long-term debt, excluding current portion
|
$
|
1,932,028
|
|
$
|
1,678,283
|
|
|
Maturity requirements on long-term debt by fiscal year are as follows (in thousands):
|
2016
|
$
|
—
|
|
|
2017
|
—
|
|
|
|
2018
|
131,250
|
|
|
|
2019
|
175,000
|
|
|
|
2020 and thereafter
|
1,630,750
|
|
|
|
Total
|
$
|
1,937,000
|
|
On
July 31, 2015
, we entered into a second amended and restated term loan agreement (the “Term Loan Agreement”) and a second amended and restated credit agreement (the “Revolving Credit Facility Agreement” and, together with the Term Loan Agreement, the “Agreements”), each with a syndicate of financial institutions. The Term Loan Agreement and the Revolving Credit Facility Agreement amended and restated the our prior term loan agreement and revolving credit facility agreement, each dated
February 28, 2014
.
The Term Loan Agreement provides for a
five
-year senior unsecured
$1.75 billion
term loan facility (the “Term Loan”), and the Revolving Credit Facility Agreement provides for a senior unsecured
$1.25 billion
revolving credit facility (the “Revolving Credit Facility”). The available borrowings under the Revolving Credit Facility may be increased, at our option, by up to an additional
$500 million
, subject to our receipt of increased or new commitments from lenders and the satisfaction of certain conditions.
15
Pursuant to the Term Loan Agreement, the Term Loan must be repaid in equal quarterly installments of
$43.8 million
commencing in November 2017 and ending in May 2020, with the remaining principal balance due upon maturity in July 2020; provided, however, that the Term Loan may be prepaid without penalty. Each of the Agreements provides for an interest rate, at our election, of either London Interbank Offered Rate ("LIBOR") or a base rate, in each case plus a leverage-based margin. As of
August 31, 2015
, the interest rate on the Term Loan was
1.70%
.
As of
August 31, 2015
, the outstanding balance on the Revolving Credit Facility was
$187 million
, and the interest rate was
1.65%
. The Revolving Credit Facility allows us to issue standby letters of credit of up to
$100 million
in the aggregate. Outstanding letters of credit under the Revolving Credit Facility reduce the amount of borrowings available to us. Borrowings available to us under the Revolving Credit Facility are further limited by the covenants described below under "Compliance with Covenants." At
August 31, 2015
, we had standby letters of credit of
$9.5 million
. The total available incremental borrowings under our Revolving Credit Facility at
August 31, 2015
was
$417.3 million
. We are required to pay a quarterly commitment fee on the unused portion of the Revolving Credit Facility. The Revolving Credit Facility Agreement expires in
July 2020
.
Upon the closing of the Term Loan and the Revolving Credit Facility, which occurred on
July 31, 2015
, we used the proceeds of approximately
$2.0 billion
to repay the outstanding balances on our previously existing term loan and revolving credit facility together with accrued interest and fees on each. We intend to use the remaining proceeds to support strategic capital allocation initiatives, including acquisitions and ongoing share repurchases.
We incurred fees and expenses associated with these new arrangements of approximately
$4.9 million
. The portion of the debt issuance costs related to the Revolving Credit Facility are included in prepaid expenses and other current assets and other noncurrent assets in our consolidated balance sheets at
August 31, 2015
. The portion of the debt issuance costs related to the Term Loan are reported as a reduction to the carrying amount of the debt. Debt issuance costs are amortized as an adjustment to interest expense over the terms of the Agreements.
The Agreements contain customary affirmative and restrictive covenants, including, among others, financial covenants based on our leverage and fixed charge coverage ratios. See "Compliance with Covenants" below. Each of the Agreements includes customary events of default, the occurrence of which, following any applicable cure period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations to be immediately due and payable.
Short-term Lines of Credit
We have short-term lines of credit with banks in the United States and Canada as well as several countries in Europe and in the Asia-Pacific region in which we do business. The short-term lines of credit, which are restricted for use in funding settlement, generally have variable short-term interest rates and are subject to annual review. The credit facilities are generally denominated in local currency but may, in some cases, facilitate borrowings in multiple currencies. For certain of our lines of credit, the line of credit balance is reduced by the amount of cash we have on deposit in specific accounts with the lender when determining the available credit. Accordingly, the amount of the outstanding line of credit may exceed the stated credit limit, while the net position is less than the credit limit. As of
August 31, 2015
and
May 31, 2015
, a total of
$108.9 million
and
$193.2 million
, respectively, of cash on deposit was used to determine the available credit.
As of
August 31, 2015
and
May 31, 2015
, respectively, we had
$356.7 million
and
$592.6 million
outstanding under these short-term lines of credit with additional capacity as of
August 31, 2015
of
$859.5 million
to fund settlement. The weighted-average interest rate on these borrowings was
1.83%
and
1.50%
at
August 31, 2015
and
May 31, 2015
, respectively. We are required to pay a commitment fee on unused portions of short-term lines of credit.
16
Compliance with Covenants
There are certain financial and non-financial covenants contained in our various credit facilities and Term Loan. The Agreements include financial covenants requiring (i) a leverage ratio no greater than
3.50
to
1.00
, or up to
3.75
to 1.00 if we were to complete an acquisition, subject to certain conditions, and (ii) a fixed charge coverage ratio no less than
2.50
to
1.00
. We complied with all applicable covenants as of and for the
three
months ended
August 31, 2015
.
Interest Rate Swap Agreements
We have interest rate swap agreements with major financial institutions to hedge changes in cash flows attributable to interest rate risk on a portion of our variable-rate debt instruments. A
$500 million
notional interest rate swap agreement, which became effective on
October 31, 2014
, effectively converted
$500 million
of our variable-rate debt to a fixed rate of
1.52%
plus a leverage-based margin and will mature on
February 28, 2019
. A
$250 million
notional interest rate swap, which became effective on
August 28, 2015
, effectively converted
$250 million
of our variable-rate debt to a fixed rate of
1.34%
plus a leverage-based margin and will mature on
July 31, 2020
.
Net amounts to be received or paid under the swap agreements are reflected as adjustments to interest expense. Since we have designated the interest rate swap agreements as cash flow hedges, unrealized gains or losses resulting from adjusting the swaps to fair value are recorded as components of other comprehensive income, except for any ineffective portion of the change in fair value, which would be immediately recorded in interest expense. During the
three
months ended
August 31, 2015
, there was no ineffectiveness. The fair values of the interest rate swaps were determined based on the present value of the estimated future net cash flows using implied rates in the applicable yield curve as of the valuation date. These derivative instruments were classified within Level 2 of the valuation hierarchy.
The table below presents the fair values of our derivative financial instruments designated as cash flow hedges included within the consolidated balance sheets (in thousands):
|
Consolidated Balance Sheet Location
|
August 31, 2015
|
May 31, 2015
|
||||||||
|
Interest rate swap ($250 million notional)
|
Other assets
|
$
|
1,541
|
|
$
|
—
|
|
|||
|
Interest rate swap ($500 million notional)
|
Accounts payable and accrued liabilities
|
$
|
5,996
|
|
$
|
6,157
|
|
|||
The table below presents the effects of our interest rate swaps on the consolidated statements of income and other comprehensive income for the three months ended
August 31, 2015
(in thousands):
|
Three Months Ended
|
|||||||
|
August 31, 2015
|
August 31, 2014
|
||||||
|
Derivatives in cash flow hedging relationships:
|
|||||||
|
Amount of loss recognized in other comprehensive income
|
$
|
32
|
|
$
|
—
|
|
|
|
Amount of loss recognized in interest expense
|
$
|
1,734
|
|
$
|
—
|
|
|
At
August 31, 2015
, the amount in accumulated other comprehensive income related to our interest rate swaps that is expected to be reclassified into interest expense during the next 12 months was approximately
$7.8 million
.
Interest Expense
Interest expense was
$13.4 million
and
$8.5 million
for the
three
months ended
August 31, 2015
and 2014, respectively. Interest expense is comprised primarily of interest on our long-term debt and short-term lines of credit. Interest expense also includes settlements on our interest rate swaps, amortization of deferred debt issuance costs and commitment fees on the unused portions of our Revolving Credit Facility and short-term lines of credit.
17
Our effective income tax rates were
26.0%
and
26.3%
for the
three
months ended
August 31, 2015
and
August 31, 2014
, respectively. Our effective income tax rates differ from the U.S. statutory rate primarily due to income generated in international jurisdictions with lower tax rates.
We conduct business globally and file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities around the world, including, without limitation, the United States, the United Kingdom and Canada. We are no longer subject to state income tax examinations for years ended on or before May 31, 2008 and are no longer subject to U.S. federal income tax examinations by the U.S. Internal Revenue Service for fiscal years prior to 2012 and U.K. federal income tax examinations for years ended on or before May 31, 2013.
On
April 10, 2015
, we entered into an accelerated share repurchase program (the ''ASR'') with a financial institution to repurchase an aggregate of
$100 million
of our common stock. In exchange for an up-front payment of
$100 million
, the financial institution committed to deliver a number of shares during the ASR's purchase period, which ended on
June 16, 2015
. On
April 14, 2015
,
815,494
shares were initially delivered to us. At
May 31, 2015
, we accounted for the variable component of remaining shares to be delivered under the ASR as a forward contract indexed to our common stock which met all of the applicable criteria for equity classification. On
June 16, 2015
, an additional
162,371
shares were delivered to us. The total number of shares delivered under the ASR was
977,865
shares at an average price of
$102.26
per share.
In addition to the ASR, we repurchased and retired
347,495
shares of our common stock at a cost of
$37.9 million
, or an average cost of
$109.11
per share, including commissions, during the
three
months ended
August 31, 2015
. As of
August 31, 2015
, we had a remaining authorized amount of
$365.0 million
for share repurchases.
During the
three
months ended
August 31, 2014
, we repurchased and retired
1.8 million
shares of our common stock at a cost of
$124.5 million
, or an average cost of
$69.82
per share, including commissions.
The following table summarizes share-based compensation expense and the related income tax benefit recognized for our share-based awards and stock options (in thousands):
|
Three Months Ended
|
|||||||
|
August 31, 2015
|
August 31, 2014
|
||||||
|
Share-based compensation expense
|
$
|
6,467
|
|
$
|
4,066
|
|
|
|
Income tax benefit
|
$
|
2,358
|
|
$
|
3,335
|
|
|
18
Share-Based Awards
The following table summarizes the changes in unvested share-based awards for the
three
months ended
August 31, 2015
(shares in thousands):
|
Shares
|
Weighted-Average
Grant-Date
Fair Value
|
||||||
|
Unvested at May 31, 2015
|
924
|
|
$
|
58
|
|
||
|
Granted
|
223
|
|
112
|
|
|||
|
Vested
|
(301
|
)
|
52
|
|
|||
|
Forfeited
|
(9
|
)
|
57
|
|
|||
|
Unvested at August 31, 2015
|
837
|
|
$
|
73
|
|
||
The total fair value of share-based awards vested during the
three
months ended
August 31, 2015
and
August 31, 2014
was
$15.7 million
and
$13.0 million
, respectively.
For these share-based awards, we recognized compensation expense of
$6.1 million
and
$3.7 million
during the three months ended
August 31, 2015
and
August 31, 2014
, respectively. As of
August 31, 2015
, there was $
58.3 million
of unrecognized compensation expense related to unvested share-based awards that we expect to recognize over a weighted-average period of
2.5
years.
Employee Stock Purchase Plan
We have an employee stock purchase plan under which the sale of
2.4 million
shares of our common stock has been authorized. Employees may designate up to the lesser of
$25,000
or
20%
of their annual compensation for the purchase of our common stock. The price for shares purchased under the plan is
85%
of the market value on the last day of each calendar quarter. As of
August 31, 2015
,
1.1 million
shares had been issued under this plan, with
1.3 million
shares reserved for future issuance. We recognized compensation expense for the plan of
$0.2 million
in each of the
three
-month periods ended
August 31, 2015
and
August 31, 2014
, respectively.
The weighted-average grant-date fair value of each designated share purchased under this plan during the
three
months ended
August 31, 2015
and
August 31, 2014
was approximately
$13
and
$7
, respectively, which represents the fair value of the
15%
discount.
Stock Options
Stock options are granted with an exercise price equal to
100%
of fair market value on the date of grant and have a term of
ten
years. Stock options granted before fiscal 2015 vest in equal installments on each of the first
four
anniversaries of the grant date. Stock options granted during fiscal 2015 and thereafter vest in equal installments on each of the first
three
anniversaries of the grant date. During the
three
months ended
August 31, 2015
and
August 31, 2014
, we granted
0.1 million
and
0.2 million
stock options, respectively. Our stock option plans provide for accelerated vesting under certain conditions.
19
The following is a summary of our stock option activity as of and for the
three
months ended
August 31, 2015
:
|
Options
|
Weighted-Average Exercise Price
|
Weighted-Average Remaining Contractual Term
|
Aggregate Intrinsic Value
|
||||||||||
|
(in thousands)
|
(in years)
|
(in millions)
|
|||||||||||
|
Outstanding at May 31, 2015
|
447
|
|
$
|
51
|
|
5.2
|
$
|
23.9
|
|
||||
|
Granted
|
72
|
|
112
|
|
|||||||||
|
Forfeited
|
(9
|
)
|
37
|
|
|||||||||
|
Exercised
|
(37
|
)
|
47
|
|
|||||||||
|
Outstanding at August 31, 2015
|
473
|
|
$
|
61
|
|
5.9
|
$
|
24.1
|
|
||||
|
Options vested and exercisable at August 31, 2015
|
314
|
|
$
|
47
|
|
4.1
|
$
|
20.5
|
|
||||
We recognized compensation expense for stock options of
$0.2 million
and
$0.1 million
during the
three
months ended
August 31, 2015
and
August 31, 2014
, respectively. The aggregate intrinsic value of stock options exercised during the
three
months ended
August 31, 2015
and
August 31, 2014
was
$2.7 million
and
$8.1 million
, respectively. As of
August 31, 2015
, we had
$3.6 million
of unrecognized compensation expense related to unvested stock options that we expect to recognize over a weighted-average period of
4.1
years.
The weighted-average grant-date fair value of each stock option granted during the
three
months ended
August 31, 2015
and
August 31, 2014
was
$31
and
$17
, respectively. Fair value was estimated on the date of grant using the Black-Scholes valuation model with the following weighted-average assumptions:
|
Three Months Ended
|
|||
|
August 31, 2015
|
August 31, 2014
|
||
|
Risk-free interest rate
|
1.62%
|
1.57%
|
|
|
Expected volatility
|
28.65%
|
23.65%
|
|
|
Dividend yield
|
0.10%
|
0.13%
|
|
|
Expected life (years)
|
5
|
5
|
|
The risk-free interest rate is based on the yield of a zero coupon U.S. Treasury security with a maturity equal to the expected life of the option from the date of the grant. Our assumption on expected volatility is based on our historical volatility. The dividend yield assumption is calculated using our average stock price over the preceding year and the annualized amount of our most current quarterly dividend per share. We based our assumptions on the expected lives of the options on our analysis of the historical exercise patterns of the options and our assumption on the future exercise pattern of options.
Basic earnings per share is computed by dividing reported net income attributable to Global Payments by the weighted-average number of shares outstanding during the period. Earnings available to common shareholders is the same as reported net income attributable to Global Payments for all periods presented.
Diluted earnings per share is computed by dividing net income attributable to Global Payments by the weighted-average number of shares outstanding during the period, including the effect of share-based awards that would have a dilutive effect on earnings per share. All stock options with an exercise price lower than the average market share price of our common stock for the period are assumed to have a dilutive effect on earnings per share. The diluted share base for the
three
months ended
August 31, 2015
and
August 31, 2014
excludes
0.1 million
and
0.2 million
shares, respectively, related to stock options that would have an antidilutive effect on the computation of diluted earnings per share.
20
The following table sets forth the computation of diluted weighted-average shares outstanding for the
three
months ended
August 31, 2015
and
August 31, 2014
(in thousands):
|
Three Months Ended
|
|||||
|
August 31, 2015
|
August 31, 2014
|
||||
|
|
|
||||
|
Basic weighted-average shares outstanding
|
65,164
|
|
68,146
|
|
|
|
Plus: Dilutive effect of stock options and other share-based awards
|
409
|
|
471
|
|
|
|
Diluted weighted-average shares outstanding
|
65,573
|
|
68,617
|
|
|
The changes in the accumulated balances for each component of other comprehensive loss were as follows for the three months ended
August 31, 2015
and
August 31, 2014
(in thousands):
|
Foreign Currency Translation
|
Unrealized Gains (Losses) on Hedging Activities
|
Defined Benefit Pension Plans
|
Accumulated Other Comprehensive Loss
|
||||||||||||
|
Balance at May 31, 2014
|
$
|
1,583
|
|
$
|
—
|
|
$
|
(3,359
|
)
|
$
|
(1,776
|
)
|
|||
|
Other comprehensive loss, net of income tax
|
(17,575
|
)
|
—
|
|
—
|
|
(17,575
|
)
|
|||||||
|
Balance at August 31, 2014
|
$
|
(15,992
|
)
|
$
|
—
|
|
$
|
(3,359
|
)
|
$
|
(19,351
|
)
|
|||
|
Balance at May 31, 2015
|
$
|
(178,309
|
)
|
$
|
(3,874
|
)
|
$
|
(3,809
|
)
|
$
|
(185,992
|
)
|
|||
|
Other comprehensive income (loss), net of income tax
|
(27,815
|
)
|
1,080
|
|
—
|
|
(26,735
|
)
|
|||||||
|
Balance at August 31, 2015
|
$
|
(206,124
|
)
|
$
|
(2,794
|
)
|
$
|
(3,809
|
)
|
$
|
(212,727
|
)
|
|||
Other comprehensive income (loss) attributable to noncontrolling interest, which relates only to foreign currency translation, was
$1.9 million
and
$(5.1) million
for the three months ended
August 31, 2015
and
August 31, 2014
, respectively.
General Information
We are a leading worldwide provider of payment technology services delivering innovative solutions to our customers. Our partnerships, technologies and employee expertise enable us to provide a broad range of services that allow our customers to accept various payment types. We distribute our services across a variety of channels to merchants and partners in
29
countries throughout North America, Europe, the Asia-Pacific region and an equity method investment in Brazil. Early in fiscal 2016, we realigned our businesses into
three
segments: North America, Europe and Asia-Pacific. Recent and anticipated international growth have led to a realigned management structure replacing our International merchant services segment with
two
new operating segments: Europe and Asia-Pacific. We began reporting on the revised basis during fiscal 2016. As a result, we have recast prior year segment data to conform to our current year presentation.
Information About Profit and Assets
We evaluate performance and allocate resources based on the operating income of each segment. The operating income of each segment includes the revenues of the segment less those expenses that are directly related to those revenues. Operating overhead, shared costs and certain compensation costs are included in Corporate in the following table. Interest and other income, interest and other expense, the financial results of equity method investments and provision for income taxes are not allocated to the individual segments. We do not evaluate performance or allocate resources using segment asset data. The accounting policies of the reportable segments are the same as those described in our Annual Report on Form 10-K for the year ended
May 31, 2015
and our summary of significant accounting policies in "Note
1
-Basis of Presentation and Summary of Significant Accounting Policies."
21
Information on segments and reconciliations to consolidated revenues and consolidated operating income are as follows for the
three
months ended
August 31, 2015
and
2014
(in thousands):
|
Three Months Ended
|
|||||||
|
August 31, 2015
|
August 31, 2014
|
||||||
|
Revenues:
|
|||||||
|
North America
|
$
|
530,857
|
|
$
|
504,007
|
|
|
|
Europe
|
168,357
|
|
162,787
|
|
|||
|
Asia-Pacific
(2)
|
49,582
|
|
38,101
|
|
|||
|
Consolidated revenues
|
$
|
748,796
|
|
$
|
704,895
|
|
|
|
Operating income (loss) for segments:
|
|||||||
|
North America
|
$
|
83,513
|
|
$
|
77,937
|
|
|
|
Europe
(1)
|
72,733
|
|
67,045
|
|
|||
|
Asia-Pacific
(2)
|
12,233
|
|
6,557
|
|
|||
|
Corporate
|
(30,707
|
)
|
(27,141
|
)
|
|||
|
Consolidated operating income
|
$
|
137,772
|
|
$
|
124,398
|
|
|
|
Depreciation and amortization:
|
|||||||
|
North America
|
$
|
23,743
|
|
$
|
20,476
|
|
|
|
Europe
|
10,344
|
|
11,037
|
|
|||
|
Asia-Pacific
(2)
|
3,057
|
|
1,453
|
|
|||
|
Corporate
|
1,613
|
|
1,600
|
|
|||
|
Consolidated depreciation and amortization
|
$
|
38,757
|
|
$
|
34,566
|
|
|
(1)
During the three months ended
August 31, 2014
, operating income for the Europe segment includes a
$2.9 million
gain on the sale of a component of our Russia business that leased automated teller machines to our sponsor bank in Russia. The gain is included in selling, general and administrative expenses in the consolidated statement of income for the three months ended
August 31, 2014
.
(2)
The results of Ezidebit are included in the Asia-Pacific segment from the date of acquisition,
October 10, 2014
.
On
September 29, 2015
, our board of directors declared a
two
-for-one stock split of the Company’s common stock to be effected in the form of a stock dividend of one additional share of common stock for each outstanding share of common stock. The stock dividend will be payable on
November 2, 2015
to shareholders of record as of
October 21, 2015
. The financial statements presented in this quarterly report on Form 10-Q do not reflect the effect of the stock split.
22
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes included in Item 1 of Part 1 of this Quarterly Report and the Management’s Discussion and Analysis of Financial Condition and Results of Operations and consolidated financial statements contained in our Annual Report on Form 10-K for the year ended
May 31, 2015
. This discussion and analysis contains forward-looking statements about our plans and expectations of what may happen in the future. Forward-looking statements are based on a number of assumptions and estimates that are inherently subject to significant risks and uncertainties, and our actual results could differ materially from the results anticipated by our forward-looking statements. See "Cautionary Notice Regarding Forward-Looking Statements" below for additional information.
Executive Overview
We are a leading worldwide provider of payment technology services delivering innovative solutions to our customers. Our technologies, partnerships and employee expertise enable us to provide a broad range of services that allow our customers to accept various payment types. We distribute our payment services and digital commerce services across a variety of channels to merchants and partners in
29
countries throughout North America, Europe, the Asia-Pacific region and Brazil. Following is a summary of significant matters related to our financial condition and results of operations for the three months ended August 31, 2015:
|
•
|
Consolidated revenues increased
6.2%
to
$748.8 million
from
$704.9 million
for the prior year period, reflecting growth in most of our markets;
|
|
•
|
Consolidated operating income increased
10.8%
to
$137.8 million
from
$124.4 million
for the prior year period. Our operating margin was
18.4%
for the three months ended
August 31, 2015
and
17.6%
for the prior year period;
|
|
•
|
Net income attributable to Global Payments increased
$11.3 million
, or
15.0%
, to
$86.6 million
from
$75.4 million
in the prior year period, and diluted earnings per share increased
$0.22
to
$1.32
from
$1.10
for in the prior year period;
|
|
•
|
We completed a refinancing of our long-term debt that expanded our debt capacity to
$3 billion
in the aggregate and lowered our borrowing rates; and
|
|
•
|
We completed two acquisitions: one in our North America segment and one in our Asia-Pacific segment.
|
Acquisitions
On
September 30, 2014
, we entered into an asset purchase agreement with Certegy Check Services, Inc., a wholly-owned subsidiary of
Fidelity National Information Services, Inc. ("FIS"), to acquire substantially all of the assets of its gaming business related to licensed gaming operators (the "FIS Gaming Business"). On
June 1, 2015
, we completed the acquisition, which included approximately
260
gaming client locations, for
$237.5 million
, funded from borrowings on our revolving credit facility and cash on hand.
We provide merchant acquiring services in the Philippines through our subsidiary Global Payments Asia-Pacific Philippines Incorporated ("GP Philippines"). On
August 3, 2015
, we made a cash payment of
$3.6 million
and contributed a
49%
ownership interest in GP Philippines to Bank of the Philippines ("BPI") in return for its merchant acquiring business, which is now part of GP Philippines, in which we have retained a controlling
51%
interest.
On
July 27, 2015
, we announced an agreement with CaixaBank, S.A. ("CaixaBank") and Erste Group Bank AG (“Erste Group”) to form a venture to provide merchant acquiring and payment services in three Central and Eastern European markets: the Czech Republic, the Slovak Republic and Romania. As part of the agreement, Global Payments and CaixaBank will form an entity, in which Global Payments will have a
51%
controlling interest. This newly formed entity, to be included in our Europe segment, will pay €
30 million
(
$34 million
equivalent as of
August 31, 2015
) in cash to acquire a
51%
controlling ownership in the venture with Erste Group, which will contribute its existing merchant acquiring businesses in each of the three countries to the venture and
23
hold a
49%
percent interest. The transaction is expected to close in the second half of fiscal 2016, subject to receipt of regulatory approvals and satisfaction of customary closing conditions.
See "Note
3
—Business and Intangible Asset Acquisitions and Joint Ventures" in the notes to the accompanying unaudited consolidated financial statements for further discussion of these acquisitions.
Results of Operations
Early in fiscal 2016, we realigned our businesses into
three
segments: North America, Europe and Asia-Pacific, and we began reporting on the revised basis during fiscal 2016. As a result, we have recast prior year segment data shown in the table below to conform to our current year presentation.
The following table sets forth key selected financial data for the three months ended
August 31, 2015
and
August 31, 2014
, this data as a percentage of total revenues, and the changes between three months ended
August 31, 2015
and
August 31, 2014
in dollars and as a percentage of the prior year amount.
|
Three Months Ended August 31, 2015
|
% of Revenue
(1)
|
Three Months Ended August 31, 2014
|
% of Revenue
(1)
|
Change
|
% Change
|
|||||||||||||||
|
(dollar amounts in thousands)
|
||||||||||||||||||||
|
Revenues:
|
||||||||||||||||||||
|
North America
|
$
|
530,857
|
|
70.9
|
%
|
$
|
504,007
|
|
71.5
|
%
|
$
|
26,850
|
|
5.3
|
%
|
|||||
|
Europe
|
168,357
|
|
22.5
|
%
|
162,787
|
|
23.1
|
%
|
5,570
|
|
3.4
|
%
|
||||||||
|
Asia-Pacific
(2)
|
49,582
|
|
6.6
|
%
|
38,101
|
|
5.4
|
%
|
11,481
|
|
30.1
|
%
|
||||||||
|
Total revenues
|
748,796
|
|
100.0
|
%
|
704,895
|
|
100.0
|
%
|
43,901
|
|
6.2
|
%
|
||||||||
|
Consolidated operating expenses:
|
||||||||||||||||||||
|
Cost of service
|
272,666
|
|
36.4
|
%
|
259,839
|
|
36.9
|
%
|
12,827
|
|
4.9
|
%
|
||||||||
|
Selling, general and administrative
|
338,358
|
|
45.2
|
%
|
320,658
|
|
45.5
|
%
|
17,700
|
|
5.5
|
%
|
||||||||
|
Operating income
|
$
|
137,772
|
|
18.4
|
%
|
$
|
124,398
|
|
17.6
|
%
|
$
|
13,374
|
|
10.8
|
%
|
|||||
|
Operating income (loss) for segments:
|
||||||||||||||||||||
|
North America
|
$
|
83,513
|
|
$
|
77,937
|
|
$
|
5,576
|
|
7.2
|
%
|
|||||||||
|
Europe
|
72,733
|
|
67,045
|
|
5,688
|
|
8.5
|
%
|
||||||||||||
|
Asia-Pacific
(2)
|
12,233
|
|
6,557
|
|
5,676
|
|
86.6
|
%
|
||||||||||||
|
Corporate
|
(30,707
|
)
|
(27,141
|
)
|
(3,566
|
)
|
13.1
|
%
|
||||||||||||
|
Operating income
|
$
|
137,772
|
|
$
|
124,398
|
|
$
|
13,374
|
|
10.8
|
%
|
|||||||||
|
Operating margin for segments:
|
||||||||||||||||||||
|
North America
|
15.7
|
%
|
15.5
|
%
|
|
0.2
|
%
|
|||||||||||||
|
Europe
|
43.2
|
%
|
41.2
|
%
|
2.0
|
%
|
||||||||||||||
|
Asia-Pacific
(2)
|
24.7
|
%
|
17.2
|
%
|
|
7.5
|
%
|
|||||||||||||
(1)
Percentage amounts may not sum to the total due to rounding.
(2)
The results of Ezidebit are included in the Asia-Pacific segment from the date of acquisition.
24
Revenues
For the
three
months ended
August 31, 2015
, revenues increased
6.2%
to
$748.8 million
compared to the prior-year period. The increase in our revenues during the
three
months ended
August 31, 2015
was partially offset by the unfavorable effect of currency fluctuations of
$46.7 million
.
North America Segment
. For the
three
months ended
August 31, 2015
, revenue from our North America segment increased
5.3%
to
$530.9 million
compared to the prior year. The growth in the North America segment was primarily due to growth in our U.S. direct distribution channels, including increases from the acquisition of the FIS Gaming Business, partially offset by the unfavorable effect of currency fluctuations in Canada.
Europe Segment.
For the
three
months ended
August 31, 2015
, Europe revenue increased
3.4%
to
$168.4 million
compared to the prior year. Revenue growth in Europe was driven primarily by card transaction and volume growth across our major markets in Europe, partially offset by the unfavorable effect of currency fluctuations.
Asia-Pacific Segment.
For the
three
months ended
August 31, 2015
, Asia-Pacific revenue increased
30.1%
to
$49.6 million
compared to the prior year. Revenue growth in the Asia-Pacific segment for the
three
months ended
August 31, 2015
was primarily due to growth in card transactions and volume, including increases from the acquisition of Ezidebit, partially offset by the unfavorable effect of currency fluctuations.
Operating Expenses
Cost of Service.
Cost of service increased
4.9%
to
$272.7 million
for the three months ended
August 31, 2015
compared to the prior year. As a percentage of revenue, cost of service decreased to
36.4%
for the
three
months ended
August 31, 2015
from
36.9%
in the prior year. The increase in cost of service was driven primarily by an increase in the variable costs associated with revenue growth and additional intangible asset amortization and other incremental cost of service associated with our acquisitions, partially offset by the favorable effect of currency fluctuations.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses increased
5.5%
to
$338.4 million
for the three months ended
August 31, 2015
compared to the prior year. As a percentage of revenues, selling, general and administrative expenses decreased to
45.2%
for the three months ended
August 31, 2015
from
45.5%
in the prior year. The increase in selling, general and administrative expenses was primarily due to an increase in commission payments to third-party sales partners and incremental costs related to our acquisitions, partially offset by the favorable effect of currency fluctuations.
Operating Income and Operating Margin for Segments
North America Segment
. Operating income in our North America segment increased
7.2%
to
$83.5 million
for the
three
months ended
August 31, 2015
compared to the prior year, despite the unfavorable effect of currency fluctuations in Canada. The increase in operating income was primarily due to the growth in our U.S. direct distribution channels, including increases from the acquisition of the FIS Gaming Business, partially offset by the unfavorable effect of exchange rate fluctuations in Canada. The operating margin was
15.7%
and
15.5%
for the three months ended
August 31, 2015
and
August 31, 2014
, respectively.
Europe Segment
. Operating income in our Europe segment increased
8.5%
to
$72.7 million
for the
three
months ended
August 31, 2015
compared to the prior year, despite the unfavorable effect of currency fluctuations. The increase in operating income was driven primarily by revenue growth in our major markets, partially offset by the unfavorable effect of currency fluctuations in Europe. The operating margin was
43.2%
and
41.2%
for the
three
months ended
August 31, 2015
and
August 31, 2014
, respectively.
Asia-Pacific Segment
. Operating income in our Asia-Pacific segment increased
86.6%
to
$12.2 million
for the
three
months ended
August 31, 2015
compared to the prior year, despite the unfavorable effect of currency fluctuations. The increase in operating income was driven primarily by the incremental revenue and operating margin from our acquisition of Ezidebit, partially offset by the unfavorable effect of exchange rate fluctuations. The operating margin was
24.7%
and
17.2%
for the
three
months ended
August 31, 2015
and
August 31, 2014
, respectively.
25
Corporate.
Corporate expenses increased
13.1%
to
$30.7 million
for the three months ended
August 31, 2015
compared to
$27.1 million
in the prior year, primarily due to an increase in share-based compensation expense.
Operating Income
For the
three
months ended
August 31, 2015
, our consolidated operating income increased
10.8%
to
$137.8 million
from
$124.4 million
in the prior year, despite the unfavorable effect of currency fluctuations. The increase was primarily due to revenue growth in our North America, Europe and Asia-Pacific segments, partially offset by higher variable costs of services associated with revenue growth, higher intangible asset amortization and other incremental operating costs associated with acquisitions, and the unfavorable effect of currency fluctuations.
Other Income/Expense, Net
Interest and other income was relatively unchanged at
$1.1 million
for the three months ended
August 31, 2015
. Interest and other expense increased
$2.2 million
for the three months ended
August 31, 2015
, due to an increase in interest expense on our long-term debt and credit facilities resulting from an increase in average balances outstanding under those debt facilities and payments made to settle our interest rate swaps, partially offset by a decrease in losses from equity method investments. Also, in connection with our debt refinancing completed on
July 31, 2015
, we recorded a loss of
$0.5 million
, representing the write-off of certain remaining unamortized debt issuance costs associated with the previously existing term loan.
Provision for Income Taxes
Our effective income tax rates were
26.0%
and
26.3%
for the
three
months ended
August 31, 2015
and
August 31, 2014
, respectively. Our effective income tax rate differs from the U.S. statutory rate primarily due to income generated in international jurisdictions with lower tax rates.
Liquidity and Capital Resources
A significant portion of our liquidity comes from operating cash flows. Cash flow from operations is used to make planned capital investments in our business, to pursue acquisitions that meet our corporate objectives, to pay dividends, and to pay down debt and repurchase shares of our common stock at the discretion of our Board of Directors. Accumulated cash balances are invested in high-quality, marketable short-term instruments.
Our capital plan objectives are to support the Company's operational needs and strategic plan for long-term growth while maintaining a low cost of capital. Short-term lines of credit are used in certain of our markets to fund settlement. Other bank financing, such as our corporate credit facility and our term loan, are used for general corporate purposes and to fund acquisitions. We regularly evaluate our liquidity and capital position relative to cash requirements, and we may elect to raise additional funds in the future, either through the issuance of debt, equity or otherwise.
At
August 31, 2015
, we had cash and cash equivalents totaling
$803.3 million
. Of this amount, we consider
$200.1 million
to be available cash. Available cash excludes settlement related and merchant reserve cash balances. Settlement related cash balances represent funds that we hold when the incoming amount from the card networks precedes the funding obligation to the merchant. Settlement related cash balances are not restricted; however, these funds are generally paid out in satisfaction of settlement processing obligations the following day. Merchant reserve cash balances represent funds collected from our merchants that serve as collateral to minimize contingent liabilities associated with any losses that may occur under the merchant agreement ("Merchant Reserves"). At
August 31, 2015
, our cash and cash equivalents included
$167.8 million
related to Merchant Reserves. While this cash is not restricted in its use, we believe that designating this cash to collateralize Merchant Reserves strengthens our fiduciary standing with our member sponsors and is in accordance with the guidelines set by the card networks.
Our available cash balance includes
$165.0 million
of cash held by foreign subsidiaries whose earnings are considered permanently reinvested for U.S. tax purposes. These cash balances reflect our capital investments in these subsidiaries and the accumulation of cash flows generated by their operations, net of cash flows used to service debt locally and fund acquisitions outside of the United States. We believe that we are able to maintain a sufficient level of liquidity for our domestic operations and commitments
26
without repatriation of the earnings of these foreign subsidiaries. If we were to repatriate some or all of the cash held by such foreign subsidiaries, we do not believe that the associated income tax liabilities would have a significant effect on our liquidity.
Operating activities provided net cash of
$513.4 million
for the
three
months ended
August 31, 2015
and used net cash of
$63.5 million
for the
three
months ended
August 31, 2014
. The increase in cash flow from operating activities was primarily due to a change in settlement processing assets and obligations of
$582.1 million
. Fluctuations in settlement processing assets and obligations are largely due to timing of month-end.
Net cash used in investing activities was
$258.4 million
during the
three
months ended
August 31, 2015
and
$12.2 million
in the prior year. During the
three
months ended
August 31, 2015
, we invested net cash of
$241.1 million
to acquire the FIS Gaming Business and the merchant acquiring business of BPI. We made capital expenditures of
$16.9 million
and
$18.2 million
during the
three
months ended
August 31, 2015
and
2014
, respectively. During fiscal 2016, we expect capital expenditures to approximate
$105.0 million
. In the prior-year period, we received proceeds of
$10.4 million
from the sale of a component of our Russia business that leased automated teller machines.
During the
three
months ended
August 31, 2015
, we also entered into an agreement to acquire merchant processing businesses in Central and Eastern Europe. We expect the agreement to close in the second half of fiscal 2016, subject to receipt of regulatory approvals and satisfaction of customary closing conditions. See "Note
3
- Business and Intangible Asset Acquisitions and Joint Ventures" in the notes to the accompanying unaudited consolidated financial statements for further discussion, including expected funding requirements.
We used net cash of
$90.1 million
for financing activities during the
three
months ended
August 31, 2015
. During the
three
months ended
August 31, 2014
, financing activities provided cash of
$94.1 million
. On
July 31, 2015
, we refinanced our term loan and revolving credit facility as further discussed below under "Long-term Debt and Credit Facilities - Contractual Obligations." We used proceeds from the refinancing of approximately
$2.0 billion
to repay the outstanding balances on our previously existing term loan and revolving credit facility together with accrued interest and fees on each. During the
three
months ended
August 31, 2015
, net borrowings under long-term debt, including the refinancing, were
$194.5 million
compared to
$26.3 million
in the prior year. A portion of our borrowings during the
three
months ended
August 31, 2015
were made to fund the acquisition of the FIS Gaming Business.
During the
three
months ended
August 31, 2015
, net repayments on short-term lines of credit used to fund settlement were
$236.0 million
compared to net borrowings of
$212.0 million
in the prior year. Fluctuations in short-term lines of credit are largely due to timing of month-end on settlement.
In addition, we used cash of
$34.3 million
and
$132.3 million
during the
three
months ended
August 31, 2015
and 2014, respectively, to repurchase shares of our common stock.
We believe that our current level of cash and borrowing capacity under our debt facilities described below, together with future cash flows from operations, will be sufficient to meet the needs of our existing operations and planned requirements for the foreseeable future.
Long-Term Debt and Credit Facilities
As a result of a debt refinancing we completed on
July 31, 2015
, we have a long-term debt facility comprised of a
five
-year senior unsecured
$1.75 billion
term loan facility (the “Term Loan”) and a senior unsecured
$1.25 billion
revolving credit facility (the “Revolving Credit Facility” and, together with the Term Loan Agreement, the “Agreements”). The available borrowings under the Revolving Credit Facility may be increased, at our option, by up to an additional
$500 million
, subject to our receipt of increased or new commitments from lenders and the satisfaction of certain conditions.
The Term Loan must be repaid in equal quarterly installments of
$43.8 million
commencing in November 2017 and ending in May 2020, with the remaining principal balance due upon maturity in July 2020; provided, however, that the Term Loan may be prepaid without penalty. The Term Loan and the Revolving Credit Facility bear an interest rate, at our election, of either
London Interbank Offered Rate ("LIBOR")
or a base rate, in each case plus a leverage-based margin. As of
August 31, 2015
, the interest rate on the Term Loan was
1.70%
.
27
As of
August 31, 2015
, the outstanding balance on the Revolving Credit Facility was
$187 million
, and the interest rate was
1.65%
. The Revolving Credit Facility allows us to issue standby letters of credit of up to
$100 million
in the aggregate. Outstanding letters of credit under the Revolving Credit Facility reduce the amount of borrowings available to us. Borrowings available to us under the Revolving Credit Facility are further limited by the covenants described below under "Compliance with Covenants." At
August 31, 2015
, we had standby letters of credit of
$9.5 million
. The total available incremental borrowings under our Revolving Credit Facility at
August 31, 2015
was
$417.3 million
. We are required to pay a quarterly commitment fee on the unused portion of the Revolving Credit Facility.
We intend to use the remaining proceeds to support strategic capital allocation initiatives, including acquisitions and ongoing share repurchases. The Agreements expire in
July 2020
.
The loan agreements contain customary affirmative and restrictive covenants, including, among others, financial covenants based on our leverage and fixed charge coverage ratios. See "Compliance with Covenants" below. Each of the Agreements includes customary events of default, the occurrence of which, following any applicable cure period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations to be immediately due and payable.
Short-term Lines of Credit
We have short-term lines of credit with banks in the United States and Canada as well as several countries in Europe and in the Asia-Pacific region in which we do business. The short-term lines of credit, which are restricted for use in funding settlement, generally have variable short-term interest rates and are subject to annual review. The credit facilities are generally denominated in local currency but may, in some cases, facilitate borrowings in multiple currencies. For certain of our lines of credit, the line of credit balance is reduced by the amount of cash we have on deposit in specific accounts with the lender when determining the available credit. Accordingly, the amount of the outstanding line of credit may exceed the stated credit limit, while the net position is less than the credit limit. As of
August 31, 2015
and
May 31, 2015
, a total of
$108.9 million
and
$193.2 million
, respectively, of cash on deposit was used to determine the available credit.
As of
August 31, 2015
and
May 31, 2015
, respectively, we had
$356.7 million
and
$592.6 million
outstanding under these short-term lines of credit with additional capacity as of
August 31, 2015
of
$859.5 million
to fund settlement. The weighted-average interest rate on these borrowings was
1.83%
and
1.50%
at
August 31, 2015
and
May 31, 2015
, respectively. We are required to pay a commitment fee on unused portions of short-term lines of credit.
Compliance with Covenants
There are certain financial and non-financial covenants contained in our various credit facilities and Term Loan. Our Term Loan and Revolving Credit Facility agreements include financial covenants requiring (i) a leverage ratio no greater than
3.50
to
1.00
, or up to
3.75
to 1.00 if we were to complete an acquisition, subject to certain conditions, and (ii) a fixed charge coverage ratio no less than
2.50
to
1.00
. We complied with all applicable covenants as of and for the
three
months ended
August 31, 2015
.
See "Note
5
—Long-Term Debt and Credit Facilities" in the notes to the accompanying unaudited consolidated financial statements for further discussion of our borrowing arrangements.
28
Commitments and Contractual Obligations
The following table summarizes our contractual obligations and commitments as of
August 31, 2015
(in thousands):
|
Payments Due by Future Period
|
|||||||||||||||||||
|
Total
|
Less than 1 Year
|
1-3 Years
|
3-5 Years
|
5+ Years
|
|||||||||||||||
|
Long-term debt
|
$
|
1,937,000
|
|
$
|
—
|
|
$
|
175,000
|
|
$
|
1,762,000
|
|
$
|
—
|
|
||||
|
Interest on long-term debt
(1)
|
167,868
|
|
43,784
|
|
71,981
|
|
52,103
|
|
—
|
|
|||||||||
|
Short-term lines of credit
|
356,675
|
|
356,675
|
|
—
|
|
—
|
|
—
|
|
|||||||||
|
Operating lease obligations
(2)
|
59,934
|
|
13,079
|
|
21,818
|
|
15,941
|
|
9,096
|
|
|||||||||
|
Purchase obligations
(3)
|
276,035
|
|
83,332
|
|
101,454
|
|
36,403
|
|
54,846
|
|
|||||||||
|
$
|
2,797,512
|
|
$
|
496,870
|
|
$
|
370,253
|
|
$
|
1,866,447
|
|
$
|
63,942
|
|
|||||
(1)
Interest on long-term debt is based on rates effective and amounts borrowed as of
August 31, 2015
. The estimated effect of interest rate swaps is included in interest on long-term debt. Since the contractual rates for our long-term debt and settlements on our interest rate swaps are variable, actual cash payments may differ from the estimates provided.
(2)
Includes future minimum lease payments for non-cancelable operating leases at
August 31, 2015
.
(3)
Includes estimate of future payments for contractual obligations related to service arrangements with vendors for fixed or minimum amounts.
The table above excludes other obligations that we may have, such as employee benefit plan obligations, unrecognized tax benefits, and other current and noncurrent liabilities reflected in our consolidated balance sheet. At this time, we are unable to make a reasonably reliable estimate of the timing of these payments; therefore, such amounts are not included in the above contractual obligation table.
Off-Balance Sheet Arrangements
We have not entered into any transactions with unconsolidated entities whereby we have financial guarantees, subordinated retained interest, derivative instruments, or other contingent arrangements that expose us to material continuing risks, contingent liabilities, or other obligations under a variable interest in an unconsolidated entity that provides us with financing, liquidity, market, or credit risk support other than the guarantee services described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" in our Annual Report on Form 10-K for the year ended
May 31, 2015
.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, which often require the judgment of management in the selection and application of certain accounting principles and methods. We discuss our critical accounting policies in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended
May 31, 2015
. During the
three
months ended
August 31, 2015
, we did not adopt any new critical accounting policies, did not change any critical accounting policies and did not change the application of any critical accounting policies from the year ended
May 31, 2015
.
Effect of New Accounting Pronouncements and Recently Issued Pronouncements Not Yet Adopted
From time-to-time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standards setting bodies that may affect our current and/or future financial statements. See "Note
1
—Basis of Presentation and Summary of Significant Accounting Policies" in the notes to the accompanying unaudited consolidated financial statements for new accounting guidance.
29
Cautionary Notice Regarding Forward-Looking Statements
We believe that it is important to communicate our plans and expectations about the future to our shareholders and to the public. Investors are cautioned that some of the statements we use in this report contain forward-looking statements and are made pursuant to the "safe-harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve a number of risks and uncertainties, are predictive in nature, and depend upon or refer to future events or conditions. You can sometimes identify forward-looking statements by our use of the words "believes," "anticipates," "expects," "intends," "plans" and similar expressions. Actual events or results might differ materially from those expressed or forecasted in these forward-looking statements.
Although we believe that the plans and expectations reflected in or suggested by our forward-looking statements are reasonable, those statements are based on a number of assumptions, estimates, projections or plans that are inherently subject to significant risks, uncertainties, and contingencies that are subject to change. Accordingly, we cannot guarantee you that our plans and expectations will be achieved. Our actual revenues, revenue growth and margins, other results of operations and shareholder values could differ materially from those anticipated in our forward-looking statements as a result of many known and unknown factors. Important factors that may cause actual events or results to differ materially from those anticipated by our forward-looking statements include our potential failure to safeguard our data; increased competition from nontraditional competitors; our ability to update our products and services in a timely manner; potential systems interruptions or failures; software defects or undetected errors; our ability to maintain Visa and MasterCard registration and financial institution sponsorship; our reliance on financial institutions to provide clearing services in connection with our settlement activities; our potential failure to comply with card network requirements; increased merchant, referral partner or ISO attrition; our ability to increase our share of existing markets and expand into new markets; unanticipated increases in chargeback liability; increases in credit card network fees; changes in laws, regulations or network rules or interpretations thereof; foreign currency exchange and interest rate risks; political, economic and regulatory changes in the foreign countries in which we operate; future performance, integration and conversion of acquired operations; loss of key personnel; and other risk factors presented in Item 1A—Risk Factors of our Annual Report on Form 10-K for the fiscal year ended
May 31, 2015
, which we advise you to review.
Our forward-looking statements speak only as of the date they are made and should not be relied upon as representing our plans and expectations as of any subsequent date. We specifically disclaim any obligation to release publicly the results of any revisions to our forward-looking statements.
Interest Rate Risk
We are exposed to market risk related to changes in interest rates on our long-term debt and cash investments. Our long-term debt bears interest, at our election, at either LIBOR or a base rate, in each case plus a leverage-based margin. We invest our excess cash in securities that we believe are highly liquid and marketable in the short term and earn a floating rate of interest. These investments are not held for trading or other speculative purposes. Under our current policies, we may selectively use derivative instruments, such as interest rate swaps or forward rate agreements, to manage all or a portion of our exposure to interest rate changes. We have interest rate swaps that reduce a portion of our exposure to market interest rate risk on our LIBOR-based debt as discussed in Note
5
to the accompanying unaudited consolidated financial statements. Using the
August 31, 2015
balances outstanding under variable-rate debt arrangements, with consideration given to the aforementioned interest rate swaps, a hypothetical increase of 100 basis points in applicable interest rates as of
August 31, 2015
would increase our annual interest expense by approximately
$17.1 million
.
Foreign Currency Exchange Rate Risk
A substantial amount of our operations are conducted in foreign currencies. Consequently, a portion of our revenues and expenses may be affected by fluctuations in foreign currency exchange rates. We are also affected by fluctuations in exchange rates on assets and liabilities related to our foreign operations. We have not historically hedged our translation risk on foreign currency exposure, but we may do so in the future.
30
Disclosure Controls and Procedures
As of
August 31, 2015
, management carried out, under the supervision and with the participation of our principal executive officer and principal financial officer, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of
August 31, 2015
, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and are designed to ensure that information required to be disclosed in those reports is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Changes in Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended
August 31, 2015
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
ITEM 2
—
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The shares repurchased in the
first
quarter of fiscal
2016
, the approximate average price paid per share, including commissions, and the approximate dollar value remaining for share purchases are as follows:
|
Plan category
|
Total Number of
Shares Purchased |
Approximate Average Price Paid per Share
|
Total Number of
Shares Purchased as Part of Publicly Announced Plans or Programs |
Maximum
Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs |
|||||||||
|
June 2015
|
162,371
|
|
$
|
102.26
|
|
162,371
|
|
||||||
|
July 2015
|
8,900
|
|
$
|
112.30
|
|
8,900
|
|
||||||
|
August 2015
|
338,595
|
|
$
|
109.03
|
|
338,595
|
|
||||||
|
Total
|
509,866
|
|
509,866
|
|
$
|
365,000,000
|
|
||||||
On
April 10, 2015
, we entered into an Accelerated Share Repurchase program (''ASR'') with a financial institution to repurchase an aggregate of
$100 million
of our common stock. In exchange for an up-front payment of
$100 million
, the financial institution committed to deliver a number of shares during the ASR's purchase period, which ended on
June 16, 2015
. On
April 14, 2015
,
815,494
shares were initially delivered to us. At
May 31, 2015
, we accounted for the variable component of remaining shares to be delivered under the ASR as a forward contract indexed to our common stock which met all of the applicable criteria for equity classification. On
June 16, 2015
, an additional
162,371
shares was delivered to us. The total number of shares delivered under this ASR was
977,865
shares at an average price of
$102.26
per share.
In addition to the ASR, we repurchased and retired
347,495
shares of our common stock at a cost of
$37.9 million
, or an average of
$109.11
per share, respectively, including commissions during the
three
months ended
August 31, 2015
. As of
August 31, 2015
, we had
$365.0 million
of remaining authorized share repurchases.
31
List of Exhibits
|
10.1
|
Second Amended and Restated Term Loan Agreement, dated as of July 31, 2015, by and among the Company and Global Payments Direct, Inc., as borrowers, Bank of America, N.A., as administrative agent, and certain other lenders party thereto, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed August 6, 2015.
|
|
|
10.2
|
Second Amended and Restated Credit Agreement, dated as of July 31, 2015, by and among the Company and certain wholly owned subsidiaries of the Company, as borrowers, Bank of America, N.A., as administrative agent, swing line lender and letter of credit issuer, and certain other lenders party thereto, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed August 6, 2015.
|
|
|
10.3*+
|
Second Amended and Restated Non-Employee Director Compensation Plan.
|
|
|
10.4*+
|
Form of Performance Unit Award Certificate pursuant to the 2011 Incentive Plan for Executive Officers (fiscal 2016).
|
|
|
31.1*
|
Certification of the Principal Executive Officer pursuant to Exchange Act Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
31.2*
|
Certification of the Principal Financial Officer pursuant to Exchange Act Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
32.1*
|
Certification of the Principal Executive Officer and the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
101*
|
The following financial information from the Quarterly Report on Form 10-Q for the quarter ended August 31, 2015, formatted in XBRL (eXtensible Business Reporting Language) and filed electronically herewith: (i) the Unaudited Consolidated Statements of Income; (ii) the Unaudited Consolidated Statements of Comprehensive Income (Loss); (iii) the Consolidated Balance Sheets; (iv) the Unaudited Consolidated Statements of Cash Flows; (v) the Unaudited Consolidated Statements of Changes in Equity; and (vi) the Notes to Unaudited Consolidated Financial Statements.
|
|
______________________
* Filed herewith.
+ Represents a management contract or compensatory plan or arrangement.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
Global Payments Inc.
|
||
|
(Registrant)
|
||
|
Date: October 7, 2015
|
/s/ Cameron M. Bready
|
|
|
Cameron M. Bready
|
||
|
Executive Vice President and Chief Financial Officer
|
||
|
(Principal Financial Officer)
|
||
33
TABLE OF CONTENTS
Part 1 - Financial InformationItem 1 Financial StatementsNote 1 Basis Of Presentation and Summary Of Significant Accounting PoliciesNote 2 Settlement Processing Assets and ObligationsNote 3 Business and Intangible Asset Acquisitions and Joint VenturesNote 4 Goodwill and Intangible AssetsNote 5 Long-term Debt and Credit FacilitiesNote 6 Income TaxNote 7 Shareholders EquityNote 8 Share-based Awards and OptionsNote 9 Earnings Per ShareNote 10 Accumulated Other Comprehensive LossNote 11 Segment InformationNote 12 Subsequent EventItem 2 Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3 Quantitative and Qualitative Disclosures About Market RiskItem 4 Controls and ProceduresPart II Other InformationItem 1 Legal ProceedingsItem 2 Unregistered Sales Of Equity Securities and Use Of ProceedsItem 6 Exhibits