Business Context and Reporting Period
Company: Global Payments Inc.
Filing Type: Form 10-Q (Unaudited Quarterly Report)
Reporting Period: Three and nine months ended February 28, 2002
Business Overview: Global Payments is an integrated provider of high-volume electronic transaction processing and value-added information services. The company operates in one reportable segment: electronic transaction processing, primarily through merchant services (credit/debit card processing, check services) and funds transfer. The company was spun off from National Data Corporation (NDC) in January 2001.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Feb 28, 2002 | 9 Months Ended Feb 28, 2002 |
|---|---|---|
| Revenues | $115,283 | $341,855 |
| Operating Income | $17,995 | $61,464 |
| Net Income | $10,275 | $34,791 |
| Basic EPS | $0.28 | $0.95 |
| Diluted EPS | $0.27 | $0.92 |
| Cash and Cash Equivalents | $17,470 | $17,470 (Balance Sheet) |
| Net Cash from Operating Activities | N/A | $126,961 |
| Line of Credit Outstanding | $48,000 | $48,000 (Balance Sheet) |
Margins (9 Months 2002): Operating margin was 18.0%. Cost of service was 55% of revenue. Sales, general, and administrative (SG&A) expenses were 28% of revenue.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 43% ($34.6 million) for the quarter and 36% ($91.4 million) for the nine-month period compared to the prior year. Growth was driven by acquisitions (National Bank of Canada, CIBC, Imperial Bank) and strength in the direct card business.
- Profitability: Net income increased 76% for the quarter and 52% for the nine-month period. Operating income margins improved to 15.6% (quarter) and 18.0% (nine months) due to cost reduction initiatives and the adoption of SFAS No. 142, which eliminated goodwill amortization.
- Cash Flow: Net cash provided by operating activities surged 131% to $127.0 million for the nine months, attributed to domestic direct card growth and reduced funding requirements for Canadian merchants following the CIBC back-end conversion.
- Investing Activities: Net cash used in investing activities increased significantly to $82.3 million (from $5.2 million prior year) due to $61.2 million in business acquisitions and increased capital expenditures ($16.1 million) for infrastructure and office consolidation.
Guidance, Outlook, and Risks
Management Commentary: Management notes a recovery in domestic network processing volumes following the September 11, 2001 attacks. The company expects capital spending of $20 to $25 million for fiscal 2002, primarily for acquisition integration and infrastructure. The company is transitioning away from bulk terminal equipment sales, which contributed to declines in indirect merchant services revenue.
Accounting Changes: The company adopted SFAS No. 142 (Goodwill and Other Intangible Assets) effective June 1, 2001, discontinuing goodwill amortization. A trademark valued at $24.6 million is classified as an indefinite-life asset; impairment testing is pending and could materially impact net income if fair value is determined to be lower than carrying value.
Risks and Contingencies:
- Integration Risk: Potential failure to achieve synergies or loss of customers during the integration of CIBC and National Bank of Canada portfolios.
- Foreign Currency: Exposure to foreign currency risks due to Canadian operations and a variable-rate credit facility with CIBC.
- Regulatory: Banking regulations limit business types due to CIBC's 26.25% ownership stake.
- Auditor Status: The Audit Committee is monitoring Arthur Andersen LLP's ability to continue as independent auditor and is prepared to transition if necessary.
- Restructuring: $0.9 million in restructuring liabilities remains accrued for facility closures and severance.
Investor Verification Checklist
- Acquisition Integration: Verify the realization of synergies from the National Bank of Canada and CIBC acquisitions and the status of the CIBC back-end conversion.
- Goodwill and Intangibles: Monitor the outcome of the independent valuation for the $24.6 million trademark to assess potential impairment charges.
- Liquidity and Debt: Confirm the utilization of the $125 million revolving line of credit (currently $48 million outstanding) and the status of the CIBC credit facility renewal.
- Auditor Transition: Track any announcements regarding the replacement of Arthur Andersen LLP as the independent auditor.
- Revenue Mix: Assess the continued decline in indirect merchant services and funds transfer revenue versus the growth in direct merchant services.