Business context and reporting period
Global Payments Inc. provides electronic payment processing and related services through North America Merchant Services and International Merchant Services. The filing is for the fiscal third quarter ended February 29, 2012, and compares the quarter and first nine months with the periods ended February 28, 2011. This differs from the request metadata’s “2011 Q3.”
Key financial metrics
| Metric | Three months ended Feb. 29, 2012 | Three months ended Feb. 28, 2011 | Nine months ended Feb. 29, 2012 | Nine months ended Feb. 28, 2011 |
|---|---|---|---|---|
| Revenue | $533.5 million | $456.4 million | $1,606.8 million | $1,340.0 million |
| Operating income | $92.3 million | $78.2 million | $297.5 million | $243.5 million |
| Operating margin | 17.3% | 17.1% | 18.5% | 18.2% |
| Net income attributable to Global Payments | $57.9 million | $47.8 million | $183.1 million | $150.7 million |
| Diluted EPS | $0.73 | $0.59 | $2.30 | $1.87 |
At February 29, 2012, cash and cash equivalents were $735.7 million, including $330.9 million of merchant reserves; management identified $240.6 million as available cash, including $211.5 million held by foreign subsidiaries. Total debt was $476.1 million, down from $624.8 million at May 31, 2011. The company reported $990.4 million of incremental borrowing capacity, including $445.5 million under its corporate facility, and was in compliance with debt covenants.
For the nine-month period, operating activities used $226.8 million of cash, versus generating $733.3 million in the prior-year period. Investing activities used $113.5 million; financing activities used $268.0 million. The filing attributes the operating cash-flow swing primarily to a $968.0 million change in net settlement processing assets and obligations, reflecting unusually high settlement balances at the prior fiscal year-end and settlement timing.
Material changes versus the prior comparable period
- Quarterly revenue increased 17%; nine-month revenue rose 20%. Nine-month growth reflected regional performance and the Spanish Comercia acquisition; exchange-rate movements added $11.5 million to nine-month revenue and $0.04 to diluted EPS.
- International Merchant Services was a key growth and margin driver: nine-month revenue increased 36% and segment operating income 45%. North America revenue grew 14%, but segment operating margin declined to 18.0% from 20.0%.
- Quarterly North America operating margin fell to 16.5% from 19.1%, with management citing ISO channel dilution, Durbin-related effects, spread compression and Canadian currency trends. The Durbin amendment reduced interchange expense, but higher ISO commissions limited margin benefits.
- Quarterly net income attributable to Global Payments increased to $57.9 million from $47.8 million. Nine-month net income rose to $183.1 million from $150.7 million.
- Cash fell from $1,354.3 million at May 31, 2011 to $735.7 million at February 29, 2012. Total debt declined over the same dates. The company repurchased $99.6 million of stock during the nine months; the $100 million authorization was completed.
Outlook, commentary, risks and unusual items
- Management said cash, available borrowing capacity and expected operating cash flows should meet operating and planned requirements for the foreseeable future. Fiscal 2012 capital expenditures were expected to be $95 million to $105 million. No specific revenue or earnings guidance was provided in the filing text.
- Three acquisitions completed in the quarter—Alfa-Bank’s Russian merchant acquiring business, a Malta merchant acquiring business and a U.S. CyberSource merchant portfolio—had an aggregate purchase price of approximately $44 million.
- After quarter-end, the company disclosed unauthorized access to part of its North American processing system. Fewer than 1.5 million card numbers may have been exported; Track 2 card data may have been taken, while names, addresses and Social Security numbers were not identified as obtained. Visa removed the company from its published PCI-DSS compliant provider list pending investigation and revalidation. Potential losses could be material, but were not reasonably estimable and no loss accrual had been recorded; insurance coverage was not confirmed.
- The company has a put arrangement relating to its 44%-owned Asia-Pacific partner’s interest. The estimated maximum redemption amount was $141.9 million, of which $45.6 million was puttable on July 24, 2011; the partner did not exercise on that date.
- Merchant processing and check-guarantee services expose the company to losses from chargebacks, merchant defaults and dishonored checks. Management stated that the maximum potential exposure under these guarantees was not practicably estimable.
- The company corrected a prior-period equity presentation error and retrospectively changed its accounting method for retiring repurchased shares. The filing says the correction affected paid-in capital and treasury stock presentation; the accounting-method change reallocated $29.6 million between beginning paid-in capital and retained earnings.
- Management reported effective disclosure controls. It also disclosed reliance on la Caixa for certain Comercia financial data pending integration, with monitoring controls implemented.
Important facts for investors to verify
- Track the security-incident investigation, PCI-DSS revalidation, card-network or regulatory actions, litigation exposure, remediation costs and confirmed insurance coverage.
- Assess the quality and sustainability of operating cash flow, separating settlement timing movements from underlying cash generation.
- Monitor North America margins, ISO channel economics and the continuing effect of Durbin-related interchange changes, alongside International segment growth.
- Confirm debt maturities, liquidity availability and any exercise or valuation changes under the Asia-Pacific put option.
- Review acquisition integration and performance, including Comercia reporting controls and the newer Russian, Malta and CyberSource businesses.