GPN

Business Context and Reporting Period

Company: Global Payments Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: February 28, 2009 (Nine months ended February 28, 2009)
Business Overview: Global Payments is a high-volume processor of electronic transactions and consumer money transfer services. Operations are divided into three segments: North America Merchant Services, International Merchant Services, and Money Transfer. The company recently acquired a 51% interest in HSBC Merchant Services LLP in the UK.

Key Financial Metrics

Note: Operating expenses included a significant non-cash impairment charge of $147,664 thousand in both the three and nine-month periods.

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 26% for the quarter and 29% for the nine-month period compared to the prior year. Growth was driven by the acquisition of HSBC Merchant Services LLP and expansion in North America and Asia-Pacific.
• Profitability Decline: Operating income swung from a profit of $59.9 million in the prior year quarter to a loss of $81.9 million. This was primarily due to a $147.7 million impairment charge related to the Money Transfer segment.
• Net Income: Net income dropped from $40.1 million (quarter) and $121.9 million (nine months) in the prior year to a net loss of $106.8 million (quarter) and a near-break-even loss of $0.3 million (nine months).
• Debt Increase: Total debt increased significantly from $1.5 million to $194.1 million, driven by a new $200 million term loan used to fund the HSBC acquisition.
• Currency Impact: Foreign currency fluctuations reduced revenues by $35.4 million for the quarter and $50.2 million for the nine-month period.

Guidance, Outlook, and Risks

• Guidance: Management expects fiscal 2009 consolidated revenues to range from $1,550 million to $1,580 million (22% to 24% growth). Diluted earnings per share are expected to range from $0.35 to $0.42.
• Money Transfer Segment: The outlook for this segment has significantly declined due to difficult macroeconomic conditions, specifically the downturn in the construction market and immigrant labor trends in the US and Spain. This led to the goodwill impairment charge.
• Consumer Spending: The average ticket size for US direct credit card transactions decreased in the high single-digit range, attributed to lower consumer spending and a shift toward smaller merchants. This trend is expected to continue.
• Acquisition Integration: The company is integrating the HSBC UK merchant acquiring business. Internal controls over financial reporting are currently reliant on HSBC UK's procedures until integration is complete.
• Redeemable Minority Interests: The company has significant potential redemption obligations related to minority interests in its Asia-Pacific and UK partnerships, estimated at $93.3 million and $379.1 million respectively, though not redeemable until 2011 and 2013.

Investor Verification Checklist

• Impairment Details: Verify the assumptions used in the discounted cash flow analysis that led to the $147.7 million impairment charge in the Money Transfer segment.
• HSBC Integration: Monitor the timeline and costs associated with integrating the HSBC UK operations and the impact on future operating margins.
• Debt Covenants: Confirm continued compliance with financial covenants on the new $200 million term loan and existing credit facilities.
• Minority Interest Accounting: Review the impact of the upcoming adoption of EITF Topic D-98 (effective June 1, 2009) on the balance sheet, which may require a $449.5 million adjustment to minority interest and retained earnings.
• Consumer Trends: Track the average transaction ticket size and volume growth in the US and Canada to assess the severity of the macroeconomic slowdown on core merchant services revenue.