Global Payments Inc. — Form 10-Q Summary
Reporting period: Three months ended August 31, 2013, the company’s fiscal first quarter of fiscal 2014 (filed October 1, 2013). The filing compares results with the three months ended August 31, 2012. The request metadata’s “2013 Q1” refers to this fiscal quarter, not a calendar-year quarter.
Business context and performance
Global Payments processes electronic payment transactions for merchants, financial institutions and other customers. It reports North America Merchant Services and International Merchant Services. Management attributed growth to North American sales channels and Canada, and strong transaction growth in European markets.
Key financial metrics
| Metric | Quarter ended Aug. 31, 2013 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $629.7 million | $590.3 million | +6.7% |
| Operating income | $107.4 million | $80.5 million | +33.4% |
| Operating margin | 17.1% | 13.6% | +3.5 percentage points |
| Net income attributable to Global Payments | $64.6 million | $46.7 million | +38.5% |
| Diluted EPS | $0.87 | $0.59 | +$0.28 |
| Operating cash flow | $(23.2) million | $68.6 million | Down $91.8 million |
| Capital expenditures | $20.3 million | $29.2 million | Down $9.0 million |
North America revenue was $450.5 million, up 5.6%; segment operating income was $69.7 million, with a 15.5% margin versus 15.7%. International revenue was $179.2 million, up 9.6%; segment operating income was $61.5 million, with a 34.3% margin versus 34.9%. Cost of service rose 12.9% and increased to 36.6% of revenue from 34.6%; SG&A rose 3.6% but declined to 46.3% of revenue from 47.7%.
At August 31, cash and cash equivalents were $725.9 million, of which the company considered $276.3 million available. Cash included $272.4 million related to merchant reserves; settlement and reserve balances are not equivalent to freely available operating cash. Total debt was $1.401 billion, including $400.7 million classified as current and $1.000 billion as long-term. Debt increased from $1.151 billion at May 31. The company reported $330.3 million of incremental corporate borrowing capacity and $660.8 million available under short-term settlement lines. It was in compliance with debt covenants.
Material changes and unusual items
- Prior-year operating results included $24.0 million of processing-system intrusion costs; no such expense was recorded in this quarter. Management identified this comparison as a key reason operating income and earnings increased.
- Operating cash flow turned negative, primarily due to a $115.4 million net cash outflow from settlement processing assets and obligations, which management attributed to month-end timing.
- Financing activities provided $92.5 million, including increased short-term and corporate borrowings, partly offset by $143.7 million of common-stock repurchases. The company repurchased 3.05 million shares at an average $47.33 and had $230.3 million remaining under its repurchase authority.
- Other expense, net increased to $4.5 million from $1.6 million, primarily due to higher interest expense on increased debt.
- Revenue growth included U.S. direct credit and debit transaction growth of 9%, Canadian transaction growth of 3%, and European revenue growth of 11.5%. Asia-Pacific revenue increased 2.8%.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management expected fiscal 2014 capital expenditures to be approximately $90 million and stated that cash, borrowing capacity and expected operating cash flows should meet foreseeable operating and planned requirements.
- CaixaBank agreed to purchase 50% of the company’s Brazil operation and assume joint control; closing was expected in the second quarter of fiscal 2014.
- The 2012 security intrusion had been remediated sufficiently for the company to regain PCI-compliant service-provider status. The company received $20 million of insurance recoveries in fiscal 2013 and anticipated possible additional recoveries in fiscal 2014. Related lawsuits and a Federal Trade Commission investigation remained potential exposures; no loss accrual was recorded because a probable, estimable loss had not been established.
- Merchant processing and check-guarantee services expose the company to merchant default, chargeback and check-return losses. Management noted that maximum exposure under these guarantees was not practicable to estimate.
- The company has variable-rate debt and foreign-currency exposure and had not hedged translation risk. It also reported an ongoing IRS audit for fiscal 2010 and 2011 and $57.1 million of liabilities for unrecognized tax benefits.
Important facts for investors to verify
- Whether the settlement-related working-capital outflow reversed in subsequent periods and how much of reported cash is operationally available.
- Debt levels, borrowing use for settlement, interest costs, and continued compliance with credit-facility covenants.
- Whether cost-of-service growth and segment margin declines persist as revenue expands.
- Developments, insurance recoveries and any potential losses related to the security intrusion and associated investigations or claims.
- Completion and financial effects of the planned Brazil transaction, and progress toward the stated capital expenditure plan.