Global Payments Inc. — Form 10-Q Summary
Period: Fiscal third quarter and nine months ended February 28, 2013, compared with the periods ended February 29, 2012. The request metadata says “2012 Q3,” but the filing covers fiscal 2013 Q3.
Business context
Global Payments processes electronic payment transactions through North America Merchant Services and International Merchant Services. The company completed its acquisition of Accelerated Payment Technologies (APT) in October 2012 and purchased HSBC’s remaining 44% interest in its Asia-Pacific business in December 2012.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Revenue | $578.7 million, up 8% | $1.758 billion, up 9% |
| Operating income | $90.8 million, down 2%; margin 15.7% vs. 17.3% | $287.8 million, down 3%; margin 16.4% vs. 18.5% |
| Net income attributable to Global Payments | $58.5 million vs. $57.9 million | $175.3 million vs. $183.1 million |
| Diluted EPS | $0.75 vs. $0.73 | $2.23 vs. $2.30 |
| Operating cash flow | Not provided for the quarter | $204.8 million provided, vs. $226.8 million used |
Revenue growth reflected U.S. and European growth, gaming and ISO-channel activity, and lower debit interchange costs; Canadian pricing compression and foreign exchange were offsets. Nine-month segment revenue rose 11% in North America and 7% internationally. North America segment operating income fell 7% for the nine months, while International segment operating income rose 10%.
Nine-month investing cash outflow was $506.3 million, including acquisition spending; financing activities provided $196.1 million. Cash and cash equivalents were $683.0 million at February 28, including $291.4 million in merchant reserves. Management identified $223.4 million as available cash.
Total debt was $1.123 billion, up from $528.4 million at May 31, 2012. Long-term debt was $883.5 million. The new $700 million five-year term loan carried a 2.20% rate at quarter-end; the company reported compliance with its financial covenants. The filing reported $1.215 billion of additional borrowing capacity under its lines of credit.
Material changes and unusual items
- The 2012 processing-system intrusion resulted in $8.3 million of expense in the nine-month period and $92.7 million of cumulative net expense as described by the company. The quarter included $18.0 million of insurance recoveries, producing a $1.2 million net credit for intrusion costs.
- The company reduced its estimated card-network fraud-loss, fine and charge accrual by $31.8 million after reaching resolutions; $1.8 million remained accrued at February 28. It expected final network payments and additional remediation costs in fiscal Q4.
- APT was acquired for $413.0 million less working capital; its incremental revenue and earnings since acquisition were not material, while the company expected to stop paying APT monthly residuals. The $242.0 million purchase of the remaining Asia-Pacific interest eliminated the redeemable noncontrolling interest.
- Higher acquisition-related borrowing increased interest expense. The nine-month period also included an $8.4 million payment to HSBC classified as interest expense.
- The company repurchased $137.7 million of stock during the nine months and initiated a $125 million accelerated share repurchase; final shares and average purchase price were not yet determined.
Outlook, commentary and risks
- Management expected fiscal 2013 capital expenditures of approximately $110 million and believed cash, borrowing capacity and operating cash flows would meet foreseeable needs.
- Management expected Asia-Pacific transaction weakness to continue through fiscal Q4. It also anticipated higher corporate security and data-protection costs in fiscal 2014 and beyond.
- The company estimated total net processing-intrusion expense of $20 million for fiscal 2013 and said it might receive up to $10 million of additional insurance recoveries, with uncertain timing and amount.
- Potential future intrusion-related claims and governmental investigations remained possible; no accrual was recorded for those matters because loss was not considered probable or reasonably estimable. The related class action was dismissed with prejudice on March 6, 2013.
- Foreign exchange reduced nine-month revenue by $14.2 million and diluted EPS by $0.03. The company did not hedge foreign-currency translation risk. Variable-rate debt exposes it to interest-rate changes.
Important facts for investors to verify
- How much of reported growth and margin movement reflects underlying transaction activity, interchange accounting, APT, and acquisition-related costs.
- Final fiscal 2013 intrusion costs, insurance recoveries, and any subsequent claims or regulatory inquiries.
- Debt repayment pace, variable-rate exposure, covenant headroom, and the effect of acquisitions on leverage and interest expense.
- Progress in Canada, including pricing pressure and the planned Visa BIN transfer, and whether Asia-Pacific weakness persists.
- Final share count and average price under the accelerated repurchase, alongside ongoing capital spending and available liquidity.