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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☒
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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, 2016
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 ☒ 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 ☒
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 ☒
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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).
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Yes ☐ No ☒
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||
The number of shares of the issuer’s common stock, no par value, outstanding as of
October 3, 2016
was
153,697,386
.
GLOBAL PAYMENTS INC.
FORM 10-Q
For the quarterly period ended
August 31, 2016
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 1A.
|
|||
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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
|
|||||||
|
August 31, 2016
|
August 31, 2015
|
||||||
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Revenues
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$
|
939,492
|
|
$
|
748,796
|
|
|
|
Operating expenses:
|
|||||||
|
Cost of service
|
462,626
|
|
272,666
|
|
|||
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Selling, general and administrative
|
355,760
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|
338,358
|
|
|||
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|
818,386
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|
611,024
|
|
|||
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Operating income
|
121,106
|
|
137,772
|
|
|||
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Interest and other income
|
42,473
|
|
1,142
|
|
|||
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Interest and other expense
|
(43,077
|
)
|
(13,243
|
)
|
|||
|
|
(604
|
)
|
(12,101
|
)
|
|||
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Income before income taxes
|
120,502
|
|
125,671
|
|
|||
|
Provision for income taxes
|
(28,044
|
)
|
(32,623
|
)
|
|||
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Net income
|
92,458
|
|
93,048
|
|
|||
|
Less: Net income attributable to noncontrolling interests, net of income tax
|
(7,365
|
)
|
(6,402
|
)
|
|||
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Net income attributable to Global Payments
|
$
|
85,093
|
|
$
|
86,646
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|
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Earnings per share attributable to Global Payments:
|
|||||||
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Basic earnings per share
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$
|
0.55
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$
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0.66
|
|
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Diluted earnings per share
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$
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0.55
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$
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0.66
|
|
|
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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August 31, 2016
|
August 31, 2015
|
||||||
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Net income
|
$
|
92,458
|
|
$
|
93,048
|
|
|
|
Other comprehensive income (loss):
|
|||||||
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Foreign currency translation adjustments
|
(18,781
|
)
|
(37,017
|
)
|
|||
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Income tax benefit related to foreign currency translation adjustments
|
—
|
|
11,100
|
|
|||
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Unrealized losses on hedging activities
|
(3,205
|
)
|
(32
|
)
|
|||
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Reclassification of losses on hedging activities to interest expense
|
1,897
|
|
1,734
|
|
|||
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Income tax benefit (expense) related to hedging activities
|
518
|
|
(622
|
)
|
|||
|
Other
|
108
|
|
—
|
|
|||
|
Other comprehensive loss, net of tax
|
(19,463
|
)
|
(24,837
|
)
|
|||
|
Comprehensive income
|
72,995
|
|
68,211
|
|
|||
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Comprehensive income attributable to noncontrolling interests
|
(7,363
|
)
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(8,300
|
)
|
|||
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Comprehensive income attributable to Global Payments
|
$
|
65,632
|
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$
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59,911
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|
See Notes to Unaudited Consolidated Financial Statements.
4
GLOBAL PAYMENTS INC.
(in thousands, except share data)
|
August 31, 2016
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|
May 31, 2016
|
|||||
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(Unaudited)
|
|||||||
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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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977,776
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$
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1,044,728
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Accounts receivable, net of allowances for doubtful accounts of $326 and $353, respectively
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286,645
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281,612
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|
||
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Claims receivable, net of allowances for doubtful accounts of $5,106 and $4,868, respectively
|
7,974
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6,799
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|
||
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Settlement processing assets
|
1,105,470
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1,336,326
|
|
||
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Prepaid expenses and other current assets
|
206,964
|
|
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181,848
|
|
||
|
Total current assets
|
2,584,829
|
|
|
2,851,313
|
|
||
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Goodwill
|
4,849,015
|
|
|
4,829,405
|
|
||
|
Other intangible assets, net
|
2,211,954
|
|
|
2,264,708
|
|
||
|
Property and equipment, net
|
512,079
|
|
|
493,678
|
|
||
|
Deferred income taxes
|
20,921
|
|
22,719
|
|
|||
|
Other
|
58,982
|
|
|
48,129
|
|
||
|
Total assets
|
$
|
10,237,780
|
|
|
$
|
10,509,952
|
|
|
LIABILITIES AND EQUITY
|
|
||||||
|
Current liabilities:
|
|
||||||
|
Settlement lines of credit
|
$
|
332,078
|
|
$
|
378,436
|
|
|
|
Current portion of long-term debt
|
182,012
|
|
135,542
|
|
|||
|
Accounts payable and accrued liabilities
|
702,277
|
|
|
696,414
|
|
||
|
Settlement processing obligations
|
1,015,805
|
|
1,220,315
|
|
|||
|
Total current liabilities
|
2,232,172
|
|
|
2,430,707
|
|
||
|
Long-term debt
|
4,289,666
|
|
4,379,744
|
|
|||
|
Deferred income taxes
|
724,023
|
|
|
744,862
|
|
||
|
Other noncurrent liabilities
|
86,707
|
|
|
77,235
|
|
||
|
Total liabilities
|
7,332,568
|
|
|
7,632,548
|
|
||
|
Commitments and contingencies
|
|
|
|
|
|
||
|
Equity:
|
|
||||||
|
Preferred stock, no par value; 5,000,000 shares authorized and none issued
|
—
|
|
|
—
|
|
||
|
Common stock, no par value; 200,000,000 shares authorized; 153,684,060 issued and outstanding at August 31, 2016 and 154,421,585 issued and outstanding at May 31, 2016
|
—
|
|
|
—
|
|
||
|
Paid-in capital
|
1,913,164
|
|
|
1,976,715
|
|
||
|
Retained earnings
|
1,099,026
|
|
|
1,015,811
|
|
||
|
Accumulated other comprehensive loss
|
(265,511
|
)
|
|
(246,050
|
)
|
||
|
Total Global Payments shareholders’ equity
|
2,746,679
|
|
|
2,746,476
|
|
||
|
Noncontrolling interests
|
158,533
|
|
130,928
|
|
|||
|
Total equity
|
2,905,212
|
|
2,877,404
|
|
|||
|
Total liabilities and equity
|
$
|
10,237,780
|
|
|
$
|
10,509,952
|
|
See Notes to Unaudited Consolidated Financial Statements.
5
GLOBAL PAYMENTS INC.
(in thousands)
See Notes to Unaudited Consolidated Financial Statements.
|
Three Months Ended
|
|||||||
|
August 31, 2016
|
August 31, 2015
|
||||||
|
Cash flows from operating activities:
|
|||||||
|
Net income
|
$
|
92,458
|
|
$
|
93,048
|
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|||||
|
Depreciation and amortization of property and equipment
|
22,657
|
|
17,909
|
|
|||
|
Amortization of acquired intangibles
|
80,529
|
|
20,848
|
|
|||
|
Share-based compensation expense
|
7,619
|
|
6,467
|
|
|||
|
Provision for operating losses and bad debts
|
9,626
|
|
4,263
|
|
|||
|
Deferred income taxes
|
(20,861
|
)
|
3,584
|
|
|||
|
Gain on sale of investments
|
(41,150
|
)
|
—
|
|
|||
|
Other, net
|
8,855
|
|
1,333
|
|
|||
|
Changes in operating assets and liabilities, net of the effects of acquisitions:
|
|
|
|||||
|
Accounts receivable
|
(7,726
|
)
|
(7,512
|
)
|
|||
|
Claims receivable
|
(7,097
|
)
|
(12,261
|
)
|
|||
|
Settlement processing assets and obligations, net
|
30,409
|
|
402,676
|
|
|||
|
Prepaid expenses and other assets
|
(50,498
|
)
|
(18,114
|
)
|
|||
|
Accounts payable and other liabilities
|
30,846
|
|
1,151
|
|
|||
|
Net cash provided by operating activities
|
155,667
|
|
513,392
|
|
|||
|
Cash flows from investing activities:
|
|||||||
|
Business acquisitions, net of cash acquired
|
(34,563
|
)
|
(241,530
|
)
|
|||
|
Capital expenditures
|
(41,381
|
)
|
(16,858
|
)
|
|||
|
Proceeds from sale of investments
|
37,717
|
|
—
|
|
|||
|
Net cash used in investing activities
|
(38,227
|
)
|
(258,388
|
)
|
|||
|
Cash flows from financing activities:
|
|||||||
|
Net payments on settlement lines of credit
|
(47,336
|
)
|
(236,041
|
)
|
|||
|
Proceeds from issuance of long-term debt
|
215,000
|
|
2,821,425
|
|
|||
|
Principal payments of long-term debt
|
(261,219
|
)
|
(2,626,925
|
)
|
|||
|
Payment of debt issuance costs
|
—
|
|
(4,934
|
)
|
|||
|
Repurchase of common stock
|
(67,633
|
)
|
(34,296
|
)
|
|||
|
Proceeds from stock issued under share-based compensation plans
|
3,037
|
|
2,513
|
|
|||
|
Common stock repurchased - share-based compensation plans
|
(22,204
|
)
|
(8,154
|
)
|
|||
|
Tax benefit from share-based compensation plans
|
12,303
|
|
5,760
|
|
|||
|
Distributions to noncontrolling interests
|
(5,475
|
)
|
(8,158
|
)
|
|||
|
Dividends paid
|
(1,539
|
)
|
(1,305
|
)
|
|||
|
Net cash used in financing activities
|
(175,066
|
)
|
(90,115
|
)
|
|||
|
Effect of exchange rate changes on cash
|
(9,326
|
)
|
(12,319
|
)
|
|||
|
(Decrease) increase in cash and cash equivalents
|
(66,952
|
)
|
152,570
|
|
|||
|
Cash and cash equivalents, beginning of the period
|
1,044,728
|
|
650,739
|
|
|||
|
Cash and cash equivalents, end of the period
|
$
|
977,776
|
|
$
|
803,309
|
|
|
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, 2016
|
154,422
|
|
$
|
1,976,715
|
|
$
|
1,015,811
|
|
$
|
(246,050
|
)
|
$
|
2,746,476
|
|
$
|
130,928
|
|
$
|
2,877,404
|
|
||||||
|
Net income
|
85,093
|
|
85,093
|
|
7,365
|
|
92,458
|
|
||||||||||||||||||
|
Other comprehensive loss, net of tax
|
(19,461
|
)
|
(19,461
|
)
|
(2
|
)
|
(19,463
|
)
|
||||||||||||||||||
|
Stock issued under share-based compensation plans
|
605
|
|
3,037
|
|
3,037
|
|
3,037
|
|
||||||||||||||||||
|
Common stock repurchased - share-based compensation plans
|
(255
|
)
|
(19,216
|
)
|
|
|
(19,216
|
)
|
(19,216
|
)
|
||||||||||||||||
|
Tax benefit from employee share-based compensation
|
12,303
|
|
12,303
|
|
12,303
|
|
||||||||||||||||||||
|
Share-based compensation expense
|
7,619
|
|
7,619
|
|
7,619
|
|
||||||||||||||||||||
|
Contribution of subsidiary shares to noncontrolling interest related to a business combination
|
—
|
|
25,717
|
|
25,717
|
|
||||||||||||||||||||
|
Distributions to noncontrolling interest
|
|
|
—
|
|
(5,475
|
)
|
(5,475
|
)
|
||||||||||||||||||
|
Repurchase of common stock
|
(1,088
|
)
|
(67,294
|
)
|
(339
|
)
|
(67,633
|
)
|
(67,633
|
)
|
||||||||||||||||
|
Dividends paid ($0.01 per share)
|
(1,539
|
)
|
(1,539
|
)
|
(1,539
|
)
|
||||||||||||||||||||
|
Balance at August 31, 2016
|
153,684
|
|
$
|
1,913,164
|
|
$
|
1,099,026
|
|
$
|
(265,511
|
)
|
$
|
2,746,679
|
|
$
|
158,533
|
|
$
|
2,905,212
|
|
||||||
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, 2015
|
130,558
|
|
$
|
148,742
|
|
$
|
795,226
|
|
$
|
(185,992
|
)
|
$
|
757,976
|
|
$
|
105,577
|
|
$
|
863,553
|
|
||||||
|
Net income
|
86,646
|
|
86,646
|
|
6,402
|
|
93,048
|
|
||||||||||||||||||
|
Other comprehensive loss, net of tax
|
(26,735
|
)
|
(26,735
|
)
|
1,898
|
|
(24,837
|
)
|
||||||||||||||||||
|
Stock issued under employee stock plans
|
551
|
|
2,513
|
|
|
|
2,513
|
|
2,513
|
|
||||||||||||||||
|
Common stock repurchased - share-based compensation plans
|
(207
|
)
|
(11,381
|
)
|
|
|
(11,381
|
)
|
|
|
(11,381
|
)
|
||||||||||||||
|
Tax benefit from employee share-based compensation
|
5,760
|
|
5,760
|
|
5,760
|
|
||||||||||||||||||||
|
Share-based compensation expense
|
6,467
|
|
6,467
|
|
6,467
|
|
||||||||||||||||||||
|
Distributions to noncontrolling interest
|
—
|
|
(8,158
|
)
|
(8,158
|
)
|
||||||||||||||||||||
|
Contribution of subsidiary shares to noncontrolling interest related to a business combination
|
4,673
|
|
4,673
|
|
24,727
|
|
29,400
|
|
||||||||||||||||||
|
Repurchase of common stock
|
(1,020
|
)
|
(18,562
|
)
|
(19,355
|
)
|
(37,917
|
)
|
(37,917
|
)
|
||||||||||||||||
|
Dividends paid ($0.01 per share)
|
(1,305
|
)
|
(1,305
|
)
|
(1,305
|
)
|
||||||||||||||||||||
|
Balance at August 31, 2015
|
129,882
|
|
$
|
138,212
|
|
$
|
861,212
|
|
$
|
(212,727
|
)
|
$
|
786,697
|
|
$
|
130,446
|
|
$
|
917,143
|
|
||||||
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 globally. 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 services across a variety of channels to merchants and partners in
30
countries throughout North America, Europe, the Asia-Pacific region and in Brazil and 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 payment technology services 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"). The consolidated balance sheet as of
May 31, 2016
was derived from the audited financial statements for the year ended
May 31, 2016
included in our Annual Report on Form 10-K for the year ended
May 31, 2016
but does not include all disclosures required by GAAP for annual financial statements.
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. These financial statements should 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, 2016
.
On July 27, 2016, the Board of Directors authorized a change in our fiscal year-end from May 31 to December 31. As a result of the change, we will file a Transition Report on Form 10-K for the seven-month transition period ending December 31, 2016 (the "Transition Period"). During the Transition Period, we will continue to file Quarterly Reports on Form 10-Q based on our prior year-end.
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.
Stock split
— Our board of directors declared a
two
-for-one stock split effected in the form of a stock dividend of one additional share of common stock for each outstanding share of common stock (the "Stock Split"), and the stock dividend was paid on
November 2, 2015
to all shareholders of record as of
October 21, 2015
. Common share and per share data for prior periods in the consolidated financial statements and in the notes to our consolidated financial statements have been adjusted to reflect the Stock Split, except for authorized common shares, which were not affected.
Recently Adopted Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 does not change GAAP for a customer’s accounting for service contracts. We adopted this standard as of June 1, 2016 on a prospective basis, and it was not material to our balance sheet and/or our results of operations or cash flows.
9
Recently Issued Accounting Pronouncements Not Yet Adopted
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments
," which makes clarifications to how cash receipts and cash payments in certain transactions are presented and classified in the statement of cash flows. ASU 2016-15 will be effective for years beginning after December 15, 2017, including interim periods, and will require adoption on a retrospective basis unless it is impracticable to apply, in which case we would be required to apply the amendments prospectively as of the earliest date practicable. Early adoption is permitted. We are evaluating the effect of ASU 2016-15 on our consolidated financial statements and disclosures.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326):
Measurement of Credit Losses on Financial instruments
." The amendments in this update change how companies measure and recognize credit impairment for many financial assets. The new expected credit loss model will require companies to immediately recognize an estimate of credit losses expected to occur over the remaining life of the financial assets (including trade receivables) that are in the scope of the update. The update also made amendments to the current impairment model for held-to-maturity and available-for-sale debt securities and certain guarantees. The guidance will be effective for years beginning after December 15, 2019 and interim periods within those years. Early adoption is permitted for annual and interim periods in years beginning after December 15, 2018. We are evaluating the effect of ASU 2016-13 on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting.
" The amendments in this update will change how companies account for certain aspects of share-based payments to employees. Entities will be required to recognize the income tax effects of awards in the statement of income when the awards vest or are settled. This update also changes the guidance on employers’ accounting for an employee’s use of shares to satisfy the employer’s statutory income tax withholding obligation, and permits entities to elect to recognize forfeitures based on actuals or estimates. Finally, the update eliminates the hypothetical additional paid-in capital pool, permits stock option deductions even if not realized in the current year on a return, requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity and potentially has a dilutive effect on earnings per share ("EPS") to the extent that excess tax benefits have historically been included in the calculation of diluted EPS. The amendments in this update will be effective for years beginning after December 15, 2016, including interim periods within those years. Early adoption is permitted. We are evaluating the effect of ASU 2016-09 on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, "
Leases
." The amendments in this update require lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by leases. Accounting by lessors will remain largely unchanged. The guidance will be effective for years, including interim periods, beginning after December 15, 2018, with early adoption permitted. Adoption will require a modified retrospective transition where the lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented. We are evaluating the effect of ASU 2016-02 on our consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities
." The amendments in this update address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The amendments in this update supersede the guidance to classify equity securities with readily determinable fair values into different categories (that is, trading or available-for-sale) and require equity securities (including other ownership interests, such as partnerships, unincorporated joint ventures and limited liability companies) to be measured at fair value with changes in the fair value recognized through earnings. Equity investments that are accounted for under the equity method of accounting or result in consolidation of an investee are not included within the scope of this update. The amendments allow equity investments that do not have readily determinable fair values to be remeasured at fair value either upon the occurrence of an observable price change or upon identification of an impairment. The amendments also require enhanced disclosures about those investments. The guidance will be effective for years beginning after December 15, 2017, including interim periods within those years. Except for specific aspects of this pronouncement, early adoption of the amendments in this update is not permitted. We are evaluating the effect of ASU 2016-01 on our consolidated financial statements.
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.
10
The update 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. ASU 2014-09, as amended by ASU 2015-14, "Revenue from Contracts with Customers (Topic 606):
Deferral of the Effective Date
," is effective for years beginning after December 15, 2017, including interim periods, with early adoption permitted for years beginning after December 15, 2016. We are evaluating the effect of ASU 2014-09, as well as other clarifications and technical guidance issued by the FASB related to this new revenue standard, on our consolidated financial statements.
NOTE
2
—ACQUISITIONS
Heartland
On December 15, 2015, we entered into a merger agreement with Heartland, pursuant to which we merged with Heartland in a cash-and-stock transaction that we completed on April 22, 2016 for total purchase consideration of
$3.9 billion
.
This transaction was accounted for as a business combination, which requires that we record the assets acquired and liabilities assumed at fair value as of the acquisition date. The initial accounting for these acquisitions was not complete as of August 31, 2016. The fair values of the assets acquired and the liabilities assumed have been determined provisionally and are subject to adjustment as we obtain additional information. There were no material measurement-period adjustments during the three months ended
August 31, 2016
. Additional time is needed to refine and review the results of the valuation of assets and liabilities and to evaluate the basis differences for assets and liabilities for financial reporting and tax purposes. Also, we are still in the process of assigning goodwill to our reporting units.
The provisional estimated acquisition-date fair values of major classes of assets acquired and liabilities assumed, including a reconciliation to the total purchase consideration, are as follows (in thousands):
|
Cash and cash equivalents
|
$
|
304,747
|
|
|
Accounts receivable
|
68,585
|
|
|
|
Prepaid expenses and other assets
|
106,450
|
|
|
|
Identified intangible assets
|
1,639,040
|
|
|
|
Property and equipment
|
108,882
|
|
|
|
Debt
|
(437,933
|
)
|
|
|
Accounts payable and accrued liabilities
|
(453,575
|
)
|
|
|
Settlement processing obligations
|
(20,978
|
)
|
|
|
Deferred income taxes
|
(553,454
|
)
|
|
|
Other liabilities
|
(58,542
|
)
|
|
|
Total identifiable net assets
|
703,222
|
|
|
|
Goodwill
|
3,219,598
|
|
|
|
Total purchase consideration
|
$
|
3,922,820
|
|
FIS Gaming Business
On
June 1, 2015
, we acquired certain assets of Certegy Check Services, Inc., a wholly owned subsidiary of
Fidelity National Information Services, Inc. ("FIS"). Under the purchase agreement, we acquired substantially all of the assets of its gaming business related to licensed gaming operators (the "FIS Gaming Business"), including 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. Transaction costs associated with this business combination were not material. The revenue and earnings of the FIS Gaming Business for the year ended
May 31, 2016
were not material nor were the historical revenue and earnings of the acquired business material for the purpose of presenting pro forma information.
11
The estimated acquisition-date fair values of major classes of assets acquired and liabilities assumed including a reconciliation to the total purchase consideration, are as follows (in thousands):
|
Customer-related intangible assets
|
$
|
143,400
|
|
|
Liabilities
|
(150
|
)
|
|
|
Total identifiable net assets
|
143,250
|
|
|
|
Goodwill
|
94,250
|
|
|
|
Total purchase consideration
|
$
|
237,500
|
|
Goodwill arising from the acquisition, included in the North America segment, was attributable to expected growth opportunities, including cross-selling opportunities at existing and acquired gaming client locations, operating 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.
NOTE
3
—SETTLEMENT PROCESSING ASSETS AND OBLIGATIONS
As of
August 31, 2016
and
May 31, 2016
, settlement processing assets and obligations consisted of the following:
|
August 31, 2016
|
May 31, 2016
|
||||||
|
(in thousands)
|
|||||||
|
Settlement processing assets:
|
|||||||
|
Interchange reimbursement
|
$
|
295,277
|
|
$
|
150,644
|
|
|
|
Liability to Members
|
(74,326
|
)
|
(14,997
|
)
|
|||
|
Receivable from networks
|
894,132
|
|
1,203,308
|
|
|||
|
Exception items
|
5,276
|
|
3,003
|
|
|||
|
Merchant Reserves
|
(14,889
|
)
|
(5,632
|
)
|
|||
|
$
|
1,105,470
|
|
$
|
1,336,326
|
|
||
|
Settlement processing obligations:
|
|||||||
|
Interchange reimbursement
|
$
|
69,703
|
|
$
|
193,989
|
|
|
|
Liability to Members
|
(41,248
|
)
|
(261,945
|
)
|
|||
|
Liability to merchants
|
(903,319
|
)
|
(1,005,009
|
)
|
|||
|
Exception items
|
7,915
|
|
5,827
|
|
|||
|
Merchant Reserves
|
(145,278
|
)
|
(149,667
|
)
|
|||
|
Reserves for operating losses and sales allowances
|
(3,578
|
)
|
(3,510
|
)
|
|||
|
$
|
(1,015,805
|
)
|
$
|
(1,220,315
|
)
|
||
12
As of
August 31, 2016
and
May 31, 2016
, goodwill and other intangible assets consisted of the following:
|
|
August 31, 2016
|
May 31, 2016
|
|||||
|
(in thousands)
|
|||||||
|
|
|||||||
|
Goodwill
|
$
|
4,849,015
|
|
$
|
4,829,405
|
|
|
|
Other intangible assets:
|
|||||||
|
Customer-related intangible assets
|
$
|
1,884,155
|
|
$
|
1,864,709
|
|
|
|
Acquired technologies
|
550,366
|
|
549,293
|
|
|||
|
Trademarks and trade names
|
188,938
|
|
188,763
|
|
|||
|
Contract-based intangible assets
|
159,928
|
|
159,890
|
|
|||
|
2,783,387
|
|
2,762,655
|
|
||||
|
Less accumulated amortization:
|
|||||||
|
Customer-related intangible assets
|
443,428
|
|
414,979
|
|
|||
|
Acquired technologies
|
51,776
|
|
26,403
|
|
|||
|
Trademarks and trade names
|
15,193
|
|
7,830
|
|
|||
|
Contract-based intangible assets
|
61,036
|
|
48,735
|
|
|||
|
571,433
|
|
497,947
|
|
||||
|
$
|
2,211,954
|
|
$
|
2,264,708
|
|
||
The following table sets forth the changes in the carrying amount of goodwill for the
three
months ended
August 31, 2016
:
|
North America
|
Europe
|
Asia-Pacific
|
Total
|
||||||||||||
|
(in thousands)
|
|||||||||||||||
|
Balance at May 31, 2016
|
$
|
4,086,430
|
|
$
|
471,773
|
|
$
|
271,202
|
|
$
|
4,829,405
|
|
|||
|
Goodwill acquired
|
—
|
|
26,923
|
|
—
|
|
26,923
|
|
|||||||
|
Effect of foreign currency translation
|
(75
|
)
|
(19,183
|
)
|
8,564
|
|
(10,694
|
)
|
|||||||
|
Measurement-period adjustments
|
3,381
|
|
—
|
|
—
|
|
3,381
|
|
|||||||
|
Balance at August 31, 2016
|
$
|
4,089,736
|
|
$
|
479,513
|
|
$
|
279,766
|
|
$
|
4,849,015
|
|
|||
There was
no
accumulated impairment loss as of
August 31, 2016
or
May 31, 2016
.
NOTE
5
—OTHER ASSETS
Through certain of our subsidiaries in Europe, we were a member and shareholder of Visa Europe Limited ("Visa Europe"). On
June 21, 2016
, Visa Inc. ("Visa") acquired all of the membership interests in Visa Europe, including ours, upon which we recorded a gain of
$41.2 million
included in interest and other income in our consolidated statement of income for the
three
months ended
August 31, 2016
. We received up-front consideration comprised of €
33.5 million
(
$37.7 million
equivalent at
June 21, 2016
) in cash and Series B and C convertible preferred shares whose initial conversion rate equates to Visa common shares valued at
$22.9 million
as of
June 21, 2016
. However, the preferred shares, which we account for using the cost method, have been assigned a value of
zero
as of
June 21, 2016
, based on transfer restrictions, Visa's ability to adjust the conversion rate, and the estimation uncertainty associated with those factors. The fair value was determined using inputs classified as Level 3 within the fair value hierarchy due to the absence of quoted market prices, lack of liquidity and the fact that inputs used to measure fair value are unobservable and require management’s judgment. The preferred shares will convert into Visa common shares at periodic intervals over a
12
-year period. Based on the outcome of potential litigation involving Visa Europe in the United Kingdom and elsewhere
13
in Europe, the conversion rate of the preferred shares could be adjusted down such that the number of Visa common shares ultimately received could be as low as
zero
, and approximately €
25.6 million
(
$28.8 million
equivalent at
June 21, 2016
) of the up-front cash consideration could be refundable. On the third anniversary of the closing of the acquisition by Visa, we will also receive €
3.1 million
(
$3.5 million
at
June 21, 2016
) of deferred consideration (plus compounded interest at a rate of
4.0%
per annum).
NOTE
6
—LONG-TERM DEBT AND CREDIT FACILITIES
As of
August 31, 2016
and
May 31, 2016
, long-term debt consisted of the following:
|
August 31, 2016
|
May 31, 2016
|
||||||
|
(in thousands)
|
|||||||
|
Term loans (face amounts of $3,528,288 and $3,530,000 at August 31, 2016 and May 31, 2016, respectively, less unamortized debt issuance costs of $49,156 and $51,770 at August 31, 2016 and May 31, 2016, respectively)
|
$
|
3,479,132
|
|
$
|
3,478,230
|
|
|
|
Revolving credit facility
|
992,500
|
|
1,037,000
|
|
|||
|
Capital lease obligations
|
46
|
|
56
|
|
|||
|
Total long-term debt
|
4,471,678
|
|
4,515,286
|
|
|||
|
Less current portion of long-term debt (face amounts of $192,300 and $145,938 at August 31, 2016 and May 31, 2016, respectively, less unamortized debt issuance costs of $10,327 and $10,442 at August 31, 2016 and May 31, 2016, respectively) and current portion of capital lease obligations of $39 and $46 at August 31, 2016 and May 31, 2016, respectively
|
182,012
|
|
135,542
|
|
|||
|
Long-term debt, excluding current portion
|
$
|
4,289,666
|
|
$
|
4,379,744
|
|
|
Maturity requirements on long-term debt as of
August 31, 2016
are as follows (in thousands):
|
Fiscal years ending May 31,
|
|||
|
2017
|
$
|
144,264
|
|
|
2018
|
192,307
|
|
|
|
2019
|
219,700
|
|
|
|
2020
|
219,700
|
|
|
|
2021
|
2,749,500
|
|
|
|
2022
|
10,450
|
|
|
|
2023 and thereafter
|
984,913
|
|
|
|
Total
|
$
|
4,520,834
|
|
July 2015 Refinancing
On
July 31, 2015
, we entered into a second amended and restated term loan agreement (the "2015 Term Loan Agreement") and a second amended and restated credit agreement (the "2015 Revolving Credit Facility Agreement" and collectively, the "2015 Credit Facility Agreements") to provide for a
$1.75 billion
term loan (the "Term A Loan") and a
$1.25 billion
revolving credit facility (the "Revolving Credit Facility"), each with a syndicate of financial institutions. We used the proceeds of approximately
$2.0 billion
to repay the then-outstanding balances on our previously existing term loan and revolving credit facility.
February 2016 Refinancing
On
February 26, 2016
, we entered into an amendment to the 2015 Credit Facility Agreements (as amended, the "2016 Credit Facility Agreement") to, among other things, (i) accelerate our repayment schedule for the Term A Loan, effective as of
February 26, 2016
, and (ii) provide security for the Term A Loan and the Revolving Credit Facility and modify the applicable financial covenants and interest rate margins. In addition, the 2016 Credit Facility Agreement provided for a new
$735 million
delayed draw term loan facility (the "Delayed Draw Facility").
We also entered into a new
$1.045 billion
term B loan ("Term B Loan"). The Delayed Draw Facility and Term B Loan were issued on April 22, 2016 in connection with our merger with Heartland, resulting in total financing of approximately
$4.78 billion
. The incremental proceeds from the new loans were used, among other things, to repay certain portions of Heartland's existing
14
indebtedness and to finance, in part, the cash consideration and the merger-related costs. Substantially all of the assets of our domestic subsidiaries are pledged as collateral under the 2016 Credit Facility Agreement.
The 2016 Credit Facility Agreement 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, 2016
, the interest rates on the Term A Loan, the Term B Loan and the Delayed Draw Facility were
3.02%
,
4.02%
and
2.94%
, respectively.
Pursuant to the 2016 Credit Facility Agreement, the Term A Loan must be repaid in equal quarterly installments of
$43.8 million
commencing in November 2016 and ending in May 2020, with the remaining principal balance due upon maturity in July 2020. The Delayed Draw Facility must be repaid in quarterly installments of
$1.7 million
, the first installment of which was made in August 2016, increasing to quarterly installments of
$8.6 million
in August 2018 and ending in May 2020, with the remaining balance due upon maturity in July 2020. The Term B Loan must be repaid in quarterly installments of
$2.6 million
, the first installment of which was made in September 2016, ending in March 2023, with the remaining principal balance due upon maturity in April 2023.
As of
August 31, 2016
, the outstanding balance on the Revolving Credit Facility was
$992.5 million
. The 2016 Credit Facility Agreement allows us to issue standby letters of credit of up to
$100 million
in the aggregate under the Revolving Credit Facility. 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, 2016
and May 31, 2016, we had outstanding standby letters of credit of
$21.3 million
and
$8.5 million
, respectively. The total available commitments under the Revolving Credit Facility at
August 31, 2016
and May 31, 2016 were
$236.2 million
and
$204.5 million
, respectively. As of
August 31, 2016
, the interest rate on the Revolving Credit Facility was
2.94%
. In addition, w
e are required to pay a quarterly commitment fee on the unused portion of the Revolving Credit Facility. The Revolving Credit Facility expires in July 2020.
The 2015 Credit Facility Agreement and the 2016 Credit Facility Agreement were combined in evaluating the accounting treatment for fees and expenses incurred. We incurred fees and expenses associated with the 2015 Credit Facility Agreement and the 2016 Credit Facility Agreement of approximately
$63.4 million
. The portion of the debt issuance costs related to the Revolving Credit Facility is included in other noncurrent assets, and the portion of the debt issuance costs related to the Term A Loan, the Term B Loan and the Delayed Draw Facility is 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 respective facilities.
Settlement Lines of Credit
We have lines of credit with banks in various markets where we do business. The lines of credit, which are restricted for use in funding settlement, generally have variable 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 available credit is increased by the amount of cash we have on deposit in specific accounts with the lender. Accordingly, the amount of the outstanding line of credit may exceed the stated credit limit. As of
August 31, 2016
and
May 31, 2016
, a total of
$46.6 million
and
$42.9 million
, respectively, of cash on deposit was used to determine the available credit.
As of
August 31, 2016
and
May 31, 2016
, respectively, we had
$332.1 million
and
$378.4 million
outstanding under these lines of credit with additional capacity of
$744.3 million
as of
August 31, 2016
to fund settlement. The weighted-average interest rate on these borrowings was
1.98%
and
1.80%
at
August 31, 2016
and
May 31, 2016
, respectively.
During the three months ended
August 31, 2016
, the maximum and average outstanding balances under these lines of credit were
$550.1 million
and
$311.1 million
, respectively.
Compliance with Covenants
The 2016 Credit Facility Agreement contains customary affirmative and restrictive covenants, including, among others, financial covenants based on our leverage and fixed charge coverage ratios. Financial covenants require a leverage ratio no greater than (i)
5.00
to
1.00
as of the end of any fiscal quarter ended during the period from April 22, 2016 through August 31, 2016, (ii)
4.75
to
1.00
as of the end of any fiscal quarter ending during the period from September 1, 2016 through February 28, 2017, (iii)
15
4.50
to
1.00
as of the end of any fiscal quarter ending during the period from March 1, 2017 through August 31, 2017, (iv)
4.25
to
1.00
as of the end of any fiscal quarter ending during the period from September 1, 2017 to February 28, 2018 and (v)
4.00
to
1.00
as of the end of any fiscal quarter ending thereafter. The fixed charge coverage ratio is required to be no less than
2.25
to
1.00
. The 2016 Credit Facility Agreement and settlement lines of credit also include various other covenants that are customary in such borrowings. The 2016 Credit Facility Agreement includes covenants, subject in each case to exceptions and qualifications, that may restrict certain payments, including, in certain circumstances, the payment of cash dividends in excess of our current rate of
$0.01
per share per quarter.
The 2016 Credit Facility Agreement also 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. We were in compliance with all applicable covenants as of and for the
three
months ended
August 31, 2016
.
Interest Rate Swap Agreements
We have interest rate swap agreements with 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 portfolio 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, 2016
, 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 accounts payable and accrued liabilities in the consolidated balance sheets:
|
August 31, 2016
|
May 31, 2016
|
|||||||
|
(in thousands)
|
||||||||
|
Interest rate swaps ($750 million notional)
|
$
|
12,083
|
|
$
|
10,775
|
|
||
16
The table below presents the effects of our interest rate swaps on the consolidated statements of income and other comprehensive loss for the
three
months ended
August 31, 2016
and
2015
:
|
Three Months Ended
|
|||||||
|
August 31, 2016
|
August 31, 2015
|
||||||
|
(in thousands)
|
|||||||
|
Amount of loss recognized in other comprehensive loss
|
$
|
3,205
|
|
$
|
32
|
|
|
|
Amount of loss recognized in interest expense
|
$
|
1,897
|
|
$
|
1,734
|
|
|
At
August 31, 2016
, the amount in accumulated other comprehensive loss related to our interest rate swaps that is expected to be reclassified into interest expense during the next 12 months was approximately
$5.9 million
.
Interest Expense
Interest expense was approximately
$43 million
and
$13 million
for the three months ended
August 31, 2016
and
2015
, respectively.
Our effective income tax rates were
23.3%
and
26.0%
for the three months ended
August 31, 2016
and
August 31, 2015
, 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 and the United Kingdom. We are no longer subject to state income tax examinations for years ended on or before
May 31, 2008
, U.S. federal income tax examinations for fiscal years prior to
2013
and U.K. federal income tax examinations for years ended on or before
May 31, 2013
.
From time-to-time, we make repurchases of our common stock mainly through the use of open market purchases and accelerated share repurchase programs ("ASR's"). As of
August 31, 2016
, we were authorized to repurchase up to
$199.3 million
of our common stock.
During the three months ended
August 31, 2016
,
127,435
shares were delivered to us in connection with the completion of an ASR initiated on April 25, 2016. In addition, through open market repurchase plans, we repurchased and retired
960,716
shares of our common stock at a cost of
$67.6 million
, or an average cost of
$70.39
per share, including commissions.
During the three months ended August 31, 2015,
324,742
shares were delivered to us in connection with the completion of an ASR initiated on
April 10, 2015
. In addition to the ASR, through open market repurchase plans, we repurchased and retired
694,990
shares of our common stock at a cost of
$37.9 million
, or an average cost of $
54.56
per share, including commissions.
17
The following table summarizes share-based compensation expense and the related income tax benefit recognized for our share-based awards and stock options:
|
Three Months Ended
|
|||||||
|
August 31, 2016
|
August 31, 2015
|
||||||
|
(in thousands)
|
|||||||
|
Share-based compensation expense
|
$
|
7,619
|
|
$
|
6,467
|
|
|
|
Income tax benefit
|
$
|
3,572
|
|
$
|
2,358
|
|
|
Share-Based Awards
The following table summarizes the changes in unvested share-based awards for the
three
months ended
August 31, 2016
:
|
Shares
|
Weighted-Average
Grant-Date
Fair Value
|
|||||
|
(in thousands)
|
||||||
|
Unvested at May 31, 2016
|
1,606
|
|
$
|
37.25
|
|
|
|
Granted
|
418
|
|
74.18
|
|
||
|
Vested
|
(687
|
)
|
30.46
|
|
||
|
Forfeited
|
(18
|
)
|
40.85
|
|
||
|
Unvested at August 31, 2016
|
1,319
|
|
$
|
48.95
|
|
|
The total fair value of share-based awards vested during the
three
months ended
August 31, 2016
and
August 31, 2015
was
$20.9 million
and
$15.7 million
, respectively.
For these share-based awards, we recognized compensation expense of
$7.0 million
and
$6.1 million
during the three months ended
August 31, 2016
and
August 31, 2015
, respectively. As of
August 31, 2016
, there was $
56.6 million
of unrecognized compensation expense related to unvested share-based awards that we expect to recognize over a weighted-average period of
2.3
years. Our share-based award plans provide for accelerated vesting under certain conditions.
Stock Options
Stock options are granted with an exercise price equal to
100%
of fair market value of our common stock 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, 2016
and
August 31, 2015
, we granted
72,733
and
72,393
stock options, respectively. Our stock option plans provide for accelerated vesting under certain conditions.
18
The following summarizes changes in unvested stock option activity for the
three
months ended
August 31, 2016
:
|
Options
|
Weighted-Average Exercise Price
|
Weighted-Average Remaining Contractual Term
|
Aggregate Intrinsic Value
|
|||||||||
|
(in thousands)
|
(years)
|
(in millions)
|
||||||||||
|
Outstanding at May 31, 2016
|
811
|
|
$
|
31.81
|
|
5.8
|
$
|
36.8
|
|
|||
|
Granted
|
73
|
|
74.66
|
|
||||||||
|
Forfeited
|
(1
|
)
|
22.93
|
|
||||||||
|
Exercised
|
(111
|
)
|
20.14
|
|
||||||||
|
Outstanding at August 31, 2016
|
772
|
|
$
|
37.56
|
|
6.4
|
$
|
29.9
|
|
|||
|
Options vested and exercisable at August 31, 2016
|
515
|
|
$
|
29.18
|
|
5.1
|
$
|
24.2
|
|
|||
We recognized compensation expense for stock options of
$0.4 million
and
$0.2 million
during the three months ended
August 31, 2016
and
August 31, 2015
, respectively. The aggregate intrinsic value of stock options exercised during the
three
months ended
August 31, 2016
and
August 31, 2015
was
$6.1 million
and
$2.7 million
, respectively. As of
August 31, 2016
, we had
$3.7 million
of unrecognized compensation expense related to unvested stock options that we expect to recognize over a weighted-average period of
2.1
years.
The weighted-average grant-date fair value of each stock option granted during the
three
months ended
August 31, 2016
and
August 31, 2015
was
$21.87
and
$15.60
, 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, 2016
|
August 31, 2015
|
||
|
Risk-free interest rate
|
1.05%
|
1.62%
|
|
|
Expected volatility
|
31.58%
|
28.65%
|
|
|
Dividend yield
|
0.06%
|
0.10%
|
|
|
Expected term (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 term 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. There were
no
stock options that would have an antidilutive effect on the computation of diluted earnings per share for the
three
months ended
August 31, 2016
. The diluted share base for the three months ended
August 31, 2015
excludes less than
0.1 million
shares related to stock options that would have an antidilutive effect on earnings per share.
19
The following table sets forth the computation of diluted weighted-average number of shares outstanding for the
three
months ended
August 31, 2016
and
August 31, 2015
:
|
Three Months Ended
|
|||||
|
August 31, 2016
|
August 31, 2015
|
||||
|
(in thousands)
|
|||||
|
Basic weighted-average number of shares outstanding
|
153,901
|
|
130,328
|
|
|
|
Plus: Dilutive effect of stock options and other share-based awards
|
974
|
|
818
|
|
|
|
Diluted weighted-average number of shares outstanding
|
154,875
|
|
131,146
|
|
|
The changes in the accumulated balances for each component of other comprehensive loss were as follows for the three months ended
August 31, 2016
and
August 31, 2015
:
|
Foreign Currency Translation
|
Unrealized Gains (Losses) on Hedging Activities
|
Other
|
Accumulated Other Comprehensive Loss
|
||||||||||||
|
(in thousands)
|
|||||||||||||||
|
Balance at May 31, 2015
|
$
|
(178,309
|
)
|
$
|
(3,874
|
)
|
$
|
(3,809
|
)
|
$
|
(185,992
|
)
|
|||
|
Other comprehensive income (loss)
|
(27,815
|
)
|
1,080
|
|
—
|
|
(26,735
|
)
|
|||||||
|
Balance at August 31, 2015
|
$
|
(206,124
|
)
|
$
|
(2,794
|
)
|
$
|
(3,809
|
)
|
$
|
(212,727
|
)
|
|||
|
Balance at May 31, 2016
|
$
|
(234,638
|
)
|
$
|
(6,755
|
)
|
$
|
(4,657
|
)
|
$
|
(246,050
|
)
|
|||
|
Other comprehensive income (loss)
|
(18,779
|
)
|
(790
|
)
|
108
|
|
(19,461
|
)
|
|||||||
|
Balance at August 31, 2016
|
$
|
(253,417
|
)
|
$
|
(7,545
|
)
|
$
|
(4,549
|
)
|
$
|
(265,511
|
)
|
|||
Other comprehensive income attributable to noncontrolling interest, which relates only to foreign currency translation, was approximately
zero
and $
1.9 million
for the three months ended
August 31, 2016
and
August 31, 2015
, respectively.
We evaluate performance and allocate resources based on the operating income of each operating segment. The operating income of each operating segment includes the revenues of the segment less 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 and provision for income taxes are not allocated to the individual operating segments. We do not evaluate the performance of or allocate resources to our operating segments using asset data. The accounting policies of the reportable operating segments are the same as those described in our Annual Report on Form 10-K for the year ended
May 31, 2016
and our summary of significant accounting policies in "Note
1
-Basis of Presentation and Summary of Significant Accounting Policies."
20
Information on segments and reconciliations to consolidated revenues and consolidated operating income are as follows for the
three
months ended
August 31, 2016
and
August 31, 2015
:
|
Three Months Ended
|
|||||||
|
August 31, 2016
|
August 31, 2015
|
||||||
|
(in thousands)
|
|||||||
|
Revenues:
|
|||||||
|
North America
|
$
|
711,765
|
|
$
|
530,857
|
|
|
|
Europe
|
169,565
|
|
168,357
|
|
|||
|
Asia-Pacific
|
58,162
|
|
49,582
|
|
|||
|
Consolidated revenues
|
$
|
939,492
|
|
$
|
748,796
|
|
|
|
Operating income (loss):
|
|||||||
|
North America
|
$
|
105,700
|
|
$
|
83,513
|
|
|
|
Europe
|
65,539
|
|
72,733
|
|
|||
|
Asia-Pacific
|
14,022
|
|
12,233
|
|
|||
|
Corporate
(1)
|
(64,155
|
)
|
(30,707
|
)
|
|||
|
Consolidated operating income
|
$
|
121,106
|
|
$
|
137,772
|
|
|
|
Depreciation and amortization:
|
|||||||
|
North America
|
$
|
86,915
|
|
$
|
23,743
|
|
|
|
Europe
|
10,413
|
|
10,344
|
|
|||
|
Asia-Pacific
|
4,426
|
|
3,057
|
|
|||
|
Corporate
|
1,432
|
|
1,613
|
|
|||
|
Consolidated depreciation and amortization
|
$
|
103,186
|
|
$
|
38,757
|
|
|
(1)
During the three months ended
August 31, 2016
, operating loss for Corporate included expenses of
$30.5 million
incurred in connection with the integration of Heartland. These merger-related expenses are included in selling, general and administrative expenses in the consolidated statement of income.
21
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, 2016
. 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 "Forward-Looking Statements" below for additional information.
On September 29, 2015, our board of directors declared a
two
-for-one stock split in the form of a stock dividend of one additional share of common stock for each outstanding share of common stock (the “Stock Split”), which was paid on
November 2, 2015
. As a result, all share and per share information presented herein for prior periods has been adjusted for the Stock Split.
Executive Overview
We are a leading worldwide provider of payment technology services delivering innovative solutions to our customers globally. 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 services across a variety of channels to merchants and partners in
30
countries throughout North America, Europe, the Asia-Pacific region and Brazil and operate in three reportable segments: North America, Europe and Asia-Pacific.
On December 15, 2015, we entered into a merger agreement with Heartland, pursuant to which we merged with Heartland in a cash-and-stock transaction that we completed on April 22, 2016 for total purchase consideration of
$3.9 billion
. See "Note
2
—Acquisitions" in the notes to the accompanying unaudited consolidated financial statements for further discussion of our merger with Heartland.
Highlights related to our financial condition and results of operations for the
three
months ended
August 31, 2016
are provided below:
|
•
|
Consolidated revenues increased by
25.5%
to
$939.5 million
in the three months ended
August 31, 2016
compared to
$748.8 million
for the prior-year period primarily due to the inclusion of Heartland, partially offset by the unfavorable effect of currency fluctuations in foreign markets of
$14.4 million
.
|
|
•
|
Consolidated operating income was
$121.1 million
for the three months ended
August 31, 2016
compared to
$137.8 million
for the prior-year period, and our operating margin was
12.9%
compared to
18.4%
for the prior-year period. The contribution of the revenue growth in local currency was more than offset by an increase in depreciation and amortization expense of
$64.4 million
and Heartland integration expenses of
$30.5 million
for the
three
months ended
August 31, 2016
.
|
|
•
|
On
June 21, 2016
, Visa Inc. ("Visa") acquired all of the membership interests in Visa Europe Limited ("Visa Europe"), including ours, and we recorded a gain on the sale of those investments of
$41.2 million
.
|
|
•
|
Net income attributable to Global Payments was
$85.1 million
for the three months ended
August 31, 2016
compared to
$86.6 million
in the prior-year period. Diluted earnings per share was
$0.55
compared to
$0.66
in the prior-year period.
|
22
Results of Operations
The following table sets forth key selected financial data for the three months ended
August 31, 2016
and
August 31, 2015
, this data as a percentage of total revenues, and the changes between the periods in dollars and as a percentage of the prior year amount.
|
Three Months Ended August 31, 2016
|
% of Revenue
(1)
|
Three Months Ended August 31, 2015
|
% of Revenue
(1)
|
Change
|
% Change
|
|||||||||||||||
|
(dollar amounts in thousands)
|
||||||||||||||||||||
|
Revenues:
|
||||||||||||||||||||
|
North America
|
$
|
711,765
|
|
75.8
|
%
|
$
|
530,857
|
|
70.9
|
%
|
$
|
180,908
|
|
34.1
|
%
|
|||||
|
Europe
|
169,565
|
|
18.0
|
%
|
168,357
|
|
22.5
|
%
|
1,208
|
|
0.7
|
%
|
||||||||
|
Asia-Pacific
|
58,162
|
|
6.2
|
%
|
49,582
|
|
6.6
|
%
|
8,580
|
|
17.3
|
%
|
||||||||
|
Total revenues
|
$
|
939,492
|
|
100.0
|
%
|
$
|
748,796
|
|
100.0
|
%
|
$
|
190,696
|
|
25.5
|
%
|
|||||
|
Consolidated operating expenses:
|
||||||||||||||||||||
|
Cost of service
|
$
|
462,626
|
|
49.2
|
%
|
$
|
272,666
|
|
36.4
|
%
|
$
|
189,960
|
|
69.7
|
%
|
|||||
|
Selling, general and administrative
|
355,760
|
|
37.9
|
%
|
338,358
|
|
45.2
|
%
|
17,402
|
|
5.1
|
%
|
||||||||
|
Operating expenses
|
$
|
818,386
|
|
87.1
|
%
|
$
|
611,024
|
|
81.6
|
%
|
$
|
207,362
|
|
33.9
|
%
|
|||||
|
Operating income (loss):
|
||||||||||||||||||||
|
North America
|
$
|
105,700
|
|
|
|
$
|
83,513
|
|
$
|
22,187
|
|
26.6
|
%
|
|||||||
|
Europe
|
65,539
|
|
72,733
|
|
(7,194
|
)
|
(9.9
|
)%
|
||||||||||||
|
Asia-Pacific
|
14,022
|
|
12,233
|
|
1,789
|
|
14.6
|
%
|
||||||||||||
|
Corporate
|
(64,155
|
)
|
(30,707
|
)
|
(33,448
|
)
|
108.9
|
%
|
||||||||||||
|
Operating income
|
$
|
121,106
|
|
12.9
|
%
|
$
|
137,772
|
|
18.4
|
%
|
$
|
(16,666
|
)
|
(12.1
|
)%
|
|||||
|
Operating margin:
|
||||||||||||||||||||
|
North America
|
14.9
|
%
|
15.7
|
%
|
|
(0.8
|
)%
|
|||||||||||||
|
Europe
|
38.7
|
%
|
43.2
|
%
|
(4.5
|
)%
|
||||||||||||||
|
Asia-Pacific
|
24.1
|
%
|
24.7
|
%
|
|
(0.6
|
)%
|
|||||||||||||
(1)
Percentage amounts may not sum to the total due to rounding.
Revenues
For the three months ended
August 31, 2016
, revenues increased by
25.5%
compared to the prior year to
$939.5 million
, despite the unfavorable effect of currency fluctuations of
$14.4 million
.
North America Segment
. For the three months ended
August 31, 2016
, revenues from our North America segment increased by
$180.9 million
, or
34.1%
, compared to the prior year to
$711.8 million
, primarily due to the merger with Heartland.
Europe Segment.
For the three months ended
August 31, 2016
, Europe revenues increased
$1.2 million
, or
0.7%
, compared to the prior year to
$169.6 million
. The increase was primarily due to revenues associated with a joint venture with Erste Group Bank AG ("Erste Group") in Central and Eastern Europe.
Asia-Pacific Segment.
For the three months ended
August 31, 2016
, Asia-Pacific revenues increased by
$8.6 million
, or
17.3%
, compared to the prior year to
$58.2 million
, primarily due to revenues associated with recent acquisitions.
23
Operating Expenses
Cost of Service.
Cost of service increased by
69.7%
to
$462.6 million
for the three months ended
August 31, 2016
compared to the prior year. As a percentage of revenue, cost of service increased to
49.2%
for the three months ended
August 31, 2016
from
36.4%
for the prior year. The increase in cost of service was driven primarily by an increase in the variable costs associated with our revenue growth, including those related to our merger with Heartland, and by additional intangible asset amortization of
$59.7 million
associated with recently acquired businesses.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses increased by
5.1%
to
$355.8 million
for the three months ended
August 31, 2016
compared to the prior year. As a percentage of revenues, selling, general and administrative expenses decreased to
37.9%
for the three months ended
August 31, 2016
from
45.2%
for the prior year. The increase in selling, general and administrative expenses was primarily due to additional costs to support the growth of our business, including incremental expenses associated with the integration of Heartland.
Operating Income and Operating Margin for Segments
North America Segment
. Operating income in our North America segment increased by
26.6%
to
$105.7 million
for the three months ended
August 31, 2016
compared to the prior year. Operating margin decreased
0.8
percentage points for the
three
months ended
August 31, 2016
. The increase in operating income was primarily due to revenue growth in our U.S. business offset by expenses associated with the merger with Heartland, including intangible asset amortization.
Europe Segment
. Operating income in our Europe segment decreased by
9.9%
to
$65.5 million
for the three months ended
August 31, 2016
compared to the prior year, including the effect of unfavorable currency fluctuations of
$7.1 million
. The operating margin was
38.7%
and
43.2%
for the
three
months ended
August 31, 2016
and 2015, respectively. The decrease in operating income was primarily driven by the effect of unfavorable currency fluctuations. The decrease in operating margin was primarily associated with the integration of our new joint venture with Erste Group.
Asia-Pacific Segment
. Operating income in our Asia-Pacific segment increased by
14.6%
to
$14.0 million
for the three months ended
August 31, 2016
compared to the prior year. The operating margin was
24.1%
and
24.7%
for the
three
months ended
August 31, 2016
and 2015, respectively. The increase in operating income was due to revenue growth.
Corporate.
Corporate expenses increased by
108.9%
to
$64.2 million
for the three months ended
August 31, 2016
compared to the prior year, primarily due to the merger with Heartland and expenses of
$30.5 million
associated with integration.
Other Income/Expense, Net
Interest and other income increased primarily due to a gain of
$41.2 million
recorded
in connection with the sale of our membership interests in Visa Europe
. See "Note
5
—Other Assets" in the notes to the accompanying unaudited consolidated financial statements for further discussion of this transaction.
Interest and other expense increased
$29.8 million
due primarily to an increase in interest expense resulting from an increase in borrowings under our recently expanded credit facilities to fund the merger with Heartland.
Provision for Income Taxes
Our effective income tax rates were
23.3%
and
26.0%
for the three months ended
August 31, 2016
and
August 31, 2015
, respectively. The decrease in our effective income tax rates for the
three
months ended
August 31, 2016
is primarily due to income generated in international jurisdictions with lower tax rates.
Liquidity and Capital Resources
In the ordinary course of our business, 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
24
pay dividends and to pay down debt and repurchase shares of our common stock. Accumulated cash balances are invested in high-quality, marketable short-term instruments.
Our capital plan objectives are to support our operational needs and strategic plan for long-term growth while maintaining a low cost of capital. We use debt financing, such as our revolving credit facility and our term loans, for general corporate purposes and to fund acquisitions. In addition, specialized lines of credit are also used in certain of our markets to pre-fund settlement. 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, 2016
, we had cash and cash equivalents totaling
$977.8 million
. Of this amount, we consider
$355.2 million
to be available cash. Available cash excludes (1) settlement-related cash reserve balances, (2) funds held for collateral for merchant losses ("Merchant Reserves") and (3) funds held for customers. Settlement-related cash reserve balances represent funds that we hold when the incoming amount from the card networks precedes the funding obligation to the merchant. Settlement-related cash reserve balances are not restricted; however, these funds are generally paid out in satisfaction of settlement processing obligations the following day. At
August 31, 2016
, our cash and cash equivalents included
$433.7 million
for settlement-related cash reserve balances. Certain of our funds collected from our merchants serve as collateral to minimize contingent liabilities associated with any losses that may occur under the merchant agreement. At
August 31, 2016
, our cash and cash equivalents included
$160.2 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. Funds held for customers and the corresponding liability that we record in customer deposits include amounts collected prior to remittance on our customers' behalf. At
August 31, 2016
, cash and cash equivalents included funds held for customers of
$201.4 million
.
Our available cash balance includes
$223.3 million
of cash held by foreign subsidiaries whose earnings are considered indefinitely reinvested outside the United States. 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 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
$155.7 million
and
$513.4 million
for the
three
months ended
August 31, 2016
and
August 31, 2015
, respectively. The decrease in cash flows from operating activities of
$357.7 million
was primarily due to a decrease in the change in net settlement processing assets of
$372.3 million
. Fluctuations in settlement processing assets and obligations are largely due to timing of month-end and transaction volume.
Net cash used in investing activities was
$38.2 million
during the
three
months ended
August 31, 2016
and
$258.4 million
in the prior year. During the
three
months ended
August 31, 2016
and
August 31, 2015
, respectively, we invested net cash of
$34.6 million
and
$241.5 million
in the aggregate to complete business acquisitions. We made capital expenditures of
$41.4 million
and
$16.9 million
during the
three
months ended
August 31, 2016
and
August 31, 2015
, respectively. During the twelve-month period ending May 31, 2017, we expect capital expenditures to approximate
$140 million
.
In addition, during the
three
months ended
August 31, 2016
, we received cash of €
33.5 million
(
$37.7 million
equivalent at
June 21, 2016
)
in connection with the sale of our membership interests in Visa Europe to Visa.
Net cash used in financing activities was
$175.1 million
and
$90.1 million
during the
three
months ended
August 31, 2016
and
August 31, 2015
, respectively. During the
three
months ended
August 31, 2016
, net repayments under long-term debt were
$46.2 million
compared to net borrowings of
$194.5 million
in the prior year, reflecting the July 2015 refinancing described above.
Net repayments on settlement lines of credit were
$47.3 million
and
$236.0 million
during the
three
months ended
August 31, 2016
and
August 31, 2015
, respectively. Fluctuations in our settlement lines of credit balances are largely due to timing of month-end and settlement transaction volume.
In addition, we used cash of
$67.6 million
and
$34.3 million
during the
three
months ended
August 31, 2016
and
August 31, 2015
, respectively, to repurchase shares of our common stock.
25
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
July 2015 Refinancing
. On
July 31, 2015
, we entered into a second amended and restated term loan agreement (the "2015 Term Loan Agreement") and a second amended and restated credit agreement (the "2015 Revolving Credit Facility Agreement" and collectively, the "2015 Credit Facility Agreements") to provide for a
$1.75 billion
term loan (the "Term A Loan") and a
$1.25 billion
revolving credit facility (the "Revolving Credit Facility"), each with a syndicate of financial institutions. We used the proceeds of approximately
$2.0 billion
to repay the then-outstanding balances on our previously existing term loan and revolving credit facility.
February 2016 Refinancing
. On
February 26, 2016
, we entered into an amendment to the 2015 Credit Facility Agreement (as amended, the "2016 Credit Facility Agreement") to, among other things, (i) accelerate our repayment schedule for the Term A Loan, effective as of
February 26, 2016
, and (ii) provide security for the Term A Loan and the Revolving Credit Facility and modify the applicable financial covenants and interest rate margins. In addition, the 2016 Credit Facility Agreement provided for a new
$735 million
delayed draw term loan facility (the "Delayed Draw Facility").
We also entered into a new
$1.045 billion
term B loan ("Term B Loan"). The Delayed Draw Facility and Term B Loan were issued on April 22, 2016 in connection with our merger with Heartland, resulting in total financing of approximately
$4.78 billion
. The incremental proceeds from the new loans were used, among other things, to repay certain portions of Heartland's existing indebtedness and to finance, in part, the cash consideration and the merger-related costs.
Pursuant to the 2016 Credit Facility Agreement, the Term A Loan must be repaid in equal quarterly installments of
$43.8 million
commencing in November 2016 and ending in May 2020, with the remaining principal balance due upon maturity in July 2020. The Delayed Draw Facility must be repaid in quarterly installments of $1.7 million, the first installment of which was made in August 2016, increasing to quarterly installments of $8.6 million in August 2018 and ending in May 2020, with the remaining balance due upon maturity in July 2020. The Term B Loan must be repaid in quarterly installments of $2.6 million, the first installment of which was made in September 2016, ending in March 2023, with the remaining principal balance due upon maturity in April 2023.
As of
August 31, 2016
, the outstanding balance on the Revolving Credit Facility was
$992.5 million
. The 2016 Credit Facility Agreement allows us to issue standby letters of credit of up to
$100 million
in the aggregate under the Revolving Credit Facility. 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, 2016
and May 31, 2016, we had outstanding issued standby letters of credit of
$21.3 million
and
$8.5 million
, respectively. The total available commitments under the Revolving Credit Facility at
August 31, 2016
and May 31, 2016 were
$236.2 million
and
$204.5 million
, respectively. The Revolving Credit Facility expires in July 2020.
Settlement Lines of Credit
We have lines of credit with banks in various markets where we do business. The lines of credit, which are restricted for use in funding settlement, generally have variable 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 available credit is increased by the amount of cash we have on deposit in specific accounts with the lender. Accordingly, the amount of the outstanding line of credit may exceed the stated credit limit. As of
August 31, 2016
and
May 31, 2016
, a total of
$46.6 million
and
$42.9 million
, respectively, of cash on deposit was used to determine the available credit.
As of
August 31, 2016
and
May 31, 2016
, respectively, we had
$332.1 million
and
$378.4 million
outstanding under these lines of credit with additional capacity of
$744.3 million
as of
August 31, 2016
to fund settlement. The weighted-average interest rate on these borrowings was
1.98%
and
1.80%
at
August 31, 2016
and
May 31, 2016
, respectively.
26
Compliance with Covenants
The 2016 Credit Facility Agreement contains customary affirmative and restrictive covenants, including, among others, financial covenants based on our leverage and fixed charge coverage ratios. The 2016 Credit Facility Agreement and settlement lines of credit also include various other covenants that are customary in such borrowings. The 2016 Credit Facility Agreement includes covenants, subject in each case to exceptions and qualifications, that may restrict certain payments, including, in certain circumstances, the payment of cash dividends in excess of our current rate of $0.01 per share per quarter.
The 2016 Credit Facility Agreement also 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. We were in compliance with all applicable covenants as of and for the
three
months ended
August 31, 2016
.
See "Note
6
—Long-Term Debt and Credit Facilities" in the notes to the accompanying unaudited consolidated financial statements for further discussion of our borrowing arrangements.
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, 2016
.
Critical Accounting Policies
Our unaudited 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, 2016
. During the
three
months ended
August 31, 2016
, 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, 2016
.
Effect of New Accounting Pronouncements and Recently Issued Accounting 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 a discussion of recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted.
Forward-Looking Statements
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 and depend upon future events or conditions. Actual events or results might differ materially from those expressed or forecasted in these forward-looking statements. Accordingly, we cannot guarantee you that our plans and expectations will be achieved. Such statements may include, but are not limited to, statements about the benefits of our merger with Heartland, including future financial and operating results, the combined company’s plans, objectives, expectations and intentions and other statements that are not historical facts. 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 undertake no obligation to revise any of these statements to reflect future circumstances or the occurrence of unanticipated events.
27
Important factors that may cause actual events or results to differ materially from those anticipated by our forward-looking statements include our ability to safeguard our data; increased competition from larger companies and non-traditional competitors; our ability to update our services in a timely manner; 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; potential systems interruptions or failures; software defects or undetected errors; increased attrition of merchants, referral partners or independent sales organizations; our ability to increase our share of existing markets and expand into new markets; a decline in the use of cards for payment generally; 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, including without limitation difficulties and delays in integrating the Heartland Payment Systems, Inc. business or fully realizing cost savings and other benefits of the acquisition at all or within the expected time period; loss of key personnel; and other risk factors presented in Item 1A - Risk Factors of our Annual Report on Form 10‑K for the year ended May 31, 2016.
Interest Rate Risk
We are exposed to market risk related to changes in interest rates on our long-term debt and cash investments. We invest our excess cash in securities that we believe are highly liquid and marketable in the short term. These investments earn a floating rate of interest and are not held for trading or other speculative purposes.
We have term loans and a corporate credit facility that we use for general corporate purposes, as well as various lines of credit that we use to fund settlement in certain of our markets. Interest rates on these debt instruments and settlement lines of credit are based on market rates and fluctuate accordingly. As of
August 31, 2016
, there was $4.9 billion outstanding under these variable-rate debt arrangements and settlement lines of credit.
The interest earned on our cash investments and the interest paid on our debt are based on variable interest rates; therefore, the exposure of our net income to a change in interest rates is partially mitigated as an increase in rates would increase both interest income and interest expense, and a reduction in rates would decrease both interest income and interest expense. 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
6
- Long-Term Debt and Credit Facilities" in the notes to the accompanying unaudited consolidated financial statements.
Based on balances outstanding under variable-rate debt agreements and cash investment balances at
August 31, 2016
, a hypothetical increase of 100 basis points in applicable interest rates as of
August 31, 2016
would increase our annual interest expense by approximately
$41.0 million
and increase our annual interest income by approximately
$3.3 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.
Disclosure Controls and Procedures
As of
August 31, 2016
, 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, 2016
, 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.
28
Changes in Internal Control Over Financial Reporting
In April
2016
, we completed the merger with Heartland, which is being integrated into our North America segment. As part of our ongoing integration activities, we are continuing to apply our controls and procedures to the Heartland business and to augment our company-wide controls to reflect the risks inherent in an acquisition of this magnitude. Otherwise, there were no changes in our internal control over financial reporting during the quarter ended
August 31, 2016
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are party to a number of claims and lawsuits incidental to our business. In our opinion, the liabilities, if any, which may ultimately result from the outcome of such matters, individually or in the aggregate, are not expected to have a material adverse effect on our financial position, liquidity, results of operations or cash flows.
Heartland, Heartland’s board of directors, Global Payments, Data Merger Sub One, Inc. (a wholly owned subsidiary of Global Payments, which we refer to as "Data Merger Sub One") and Data Merger Sub Two, LLC (a wholly owned subsidiary of Global Payments, which we refer to as "Data Merger Sub Two") were named as defendants in a putative class action lawsuit challenging the proposed merger with Heartland. The suit was filed on January 8, 2016 in the New Jersey Superior Court, Mercer County, Civil Division, and is captioned Kevin Merchant v. Heartland Payment Systems, et al, L-45-16. The complaint alleges, among other things, that the directors of Heartland breached their fiduciary duties to Heartland stockholders by agreeing to sell Heartland for inadequate consideration, agreeing to improper deal protection terms in the merger agreement, failing to properly value Heartland, and filing a materially incomplete registration statement with the Securities and Exchange Commission. In addition, the complaint alleges that Heartland, Global Payments, Merger Sub One, and Merger Sub Two aided and abetted these purported breaches of fiduciary duty. On April 12, 2016, solely to avoid the costs, disruption and distraction of further litigation, and without admitting the validity of any allegations made by the plaintiff, Heartland and Global Payments reached an agreement to settle the suit and entered into a Memorandum of Understanding to document the terms and conditions for settlement of the suit. The proposed settlement is subject to court approval. If the proposed settlement is approved by the court, it will release all claims that were or could have been brought challenging any aspect of the merger with Heartland or the merger agreement related thereto and any disclosure made in connection therewith, under terms that will be disclosed to stockholders before final approval of the proposed settlement. The settlement, if approved, is not expected to have a material adverse effect on our financial position, liquidity, results of operations or cash flows.
There have been no material changes from the risk factors set forth in Part I, Item 1A, "Risk Factors" of our Annual Report on Form 10-K for our fiscal year ended May 31, 2016.
ITEM 2
—
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Information about the shares of our common stock that we repurchased during the quarter ended
August 31, 2016
is set forth below:
|
Period
|
Total Number of
Shares Purchased (1) |
Approximate Average Price Paid per Share
(2)
|
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 (3) |
|||||||||
|
June 2016
(4)
|
709,756
|
|
$
|
70.44
|
|
709,756
|
|
||||||
|
July 2016
|
105,679
|
|
$
|
71.78
|
|
105,679
|
|
||||||
|
August 2016
|
272,716
|
|
$
|
73.51
|
|
272,716
|
|
||||||
|
Total
|
1,088,151
|
|
1,088,151
|
|
$
|
199,300,000
|
|
||||||
29
|
(1)
|
Our board of directors has authorized us to repurchase shares of our common stock through any combination of Rule 10b5-1 open-market repurchase plans, accelerated share repurchase plans, discretionary open-market purchases or privately negotiated transactions.
|
|
(2)
|
Through open market repurchase plans, we repurchased and retired
960,716
shares of our common stock at a cost of
$67.6 million
, or an average cost of
$70.39
per share, including commissions.
|
|
(3)
|
The approximate dollar value of shares that may yet be purchased under our share repurchase program, as of
August 31, 2016
, was comprised of
$199.3 million
remaining available under the board’s authorization announced on July 28, 2015. The authorizations by the board of directors do not expire, but could be revoked at any time. In addition, we are not required by any of the board’s authorizations or otherwise to complete any repurchases by any specific time or at all.
|
|
(4)
|
On April 25, 2016, we entered into an Accelerated Share Repurchase ("ASR") with a financial institution to repurchase an aggregate of $50 million of our common stock. In exchange for an up-front payment of $50 million, the financial institution committed to deliver a number of shares during the ASR's purchase period, which ended on June 23, 2016. On April 26, 2016, 545,777 shares were initially delivered to us. On June 23, 2016, an additional 127,435 shares were delivered to us. The total number of shares delivered under this ASR was 673,212 shares at an average price of $74.27 per share.
|
30
List of Exhibits
|
2.1
|
Agreement and Plan of Merger, dated as of December 15, 2015, by and among Global Payments Inc., Data Merger Sub One, Inc., Data Merger Sub Two, LLC and Heartland Payment Systems, Inc., incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed December 17, 2015.++
|
|
|
10.1
|
Debt Commitment Letter, dated as of December 15, 2015, by and among Global Payments Inc., Bank of America, N.A. and Merrill, Lynch, Pierce, Fenner and Smith Incorporated, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 17, 2015.
|
|
|
10.2
|
Amended and Restated Debt Commitment Letter, dated as of January 8, 2016, by and among Global Payments Inc., Bank of America, N.A., Merrill, Lynch, Pierce, Fenner and Smith Incorporated and certain other lenders named therein, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 14, 2016.
|
|
|
10.3
|
First Amendment to the Second Amended and Restated Credit Agreement, First Amendment to the Second Amended and Restated Term Loan Agreement, First Amendment to the Company Guaranties and First Amendment to the Subsidiary Guaranties, dated as of February 26, 2016, 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 March 1, 2016.
|
|
|
10.4*
|
Form of Performance Unit Award Agreement pursuant to the 2011 Incentive Plan for Executive Officers (Synergy Incentive Program).
|
|
|
10.5*
|
Third Amended and Restated Non-Employee Director Compensation Plan.
|
|
|
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, 2016, 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.
|
|
|
++
|
Certain schedules and exhibits to this agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K and Global Payments Inc. agrees to furnish supplementally to the Securities and Exchange Commission a copy of any omitted schedule and/or exhibit upon request.
|
|
31
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.
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Global Payments Inc.
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(Registrant)
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Date: October 5, 2016
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/s/ Cameron M. Bready
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Cameron M. Bready
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Executive Vice President and Chief Financial Officer
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(Principal Financial Officer)
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TABLE OF CONTENTS
Part 1 - Financial InformationItem 1 Financial StatementsNote 1 Basis Of Presentation and Summary Of Significant Accounting PoliciesNote 2 AcquisitionsNote 3 Settlement Processing Assets and ObligationsNote 4 Goodwill and Other Intangible AssetsNote 5 Other AssetsNote 6 Long-term Debt and Credit FacilitiesNote 7 Income TaxNote 8 Shareholders EquityNote 9 Share-based Awards and OptionsNote 10 Earnings Per ShareNote 11 Accumulated Other Comprehensive LossNote 12 Segment InformationItem 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 1A - Risk FactorsItem 2 Unregistered Sales Of Equity Securities and Use Of ProceedsItem 6 Exhibits