Global Payments Inc. — Form 10-Q Summary
Reporting period: Three months ended August 31, 2011, the company’s first quarter of fiscal 2012. The filing compares results with the three months ended August 31, 2010. Global Payments provides electronic transaction processing through North America Merchant Services and International Merchant Services.
Financial performance
| Metric | Quarter ended Aug. 31, 2011 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $542.8 million | $440.1 million | +23% |
| Operating income | $108.6 million | $82.1 million | +32% |
| Operating margin | 20.0% | 18.7% | +1.3 percentage points |
| Net income attributable to Global Payments | $64.0 million | $49.4 million | +30% |
| Diluted EPS | $0.79 | $0.61 | +30% |
| Net cash used in operating activities | $605.9 million | $104.4 million | Greater use of cash, chiefly from settlement balances |
North America revenue rose 12% to $378.6 million; segment operating income increased 5% to $71.8 million, while margin fell to 19.0% from 20.3%, partly due to growth in the lower-margin ISO channel. International revenue grew 59% to $164.1 million and segment operating income rose 77% to $55.7 million; margin increased to 33.9% from 30.4%. Spain acquisition effects, UK pricing, a Spain marketing-fee true-up and favorable currency movements contributed to international growth.
Cost of service increased 27% to $191.5 million and rose to 35.3% of revenue from 34.3%. Sales, general and administrative expense increased 17% to $242.6 million but declined to 44.7% of revenue from 47.0%. The effective tax rate was 32.7%, versus 31.7%. Foreign-exchange movements added approximately $15 million to revenue and $0.05 to diluted EPS, according to management.
Financial position and liquidity
- Cash and cash equivalents were $724.0 million at August 31, down from $1.354 billion at May 31, 2011. Management identified $234.1 million as available cash; this includes $174.6 million held by foreign subsidiaries considered permanently reinvested. Cash also included $284.7 million of merchant reserves.
- Total debt was $690.7 million, up from $624.8 million at May 31. Current debt was $405.0 million and long-term debt $285.8 million. Available incremental borrowing capacity under credit facilities was $803.5 million, including $369.5 million under the Corporate Credit Facility.
- Net cash used in investing activities was $11.6 million. Financing activities used $11.7 million, including $80.5 million of first-quarter share repurchases. The company completed the $100 million repurchase authorization in the second quarter, with an additional $19.1 million of purchases disclosed.
- Management expected fiscal 2012 capital expenditures of $85 million to $90 million and stated that cash, borrowing capacity and anticipated operating cash flows should meet foreseeable operating and planned requirements.
Changes, outlook and notable matters
- Operating cash use was driven mainly by a $687.2 million cash outflow from the net change in settlement processing assets and obligations, compared with $190.1 million in the prior-year quarter. Management attributed the year-over-year deterioration in operating cash flow principally to this settlement-balance movement. These balances arise from payment-settlement timing and are not equivalent to ordinary operating working capital.
- Revenue growth reflected broad regional performance, favorable exchange rates and the December 2010 acquisition of a 51% interest in Spain’s Comercia. Comercia results were included in the current quarter but not the comparative quarter.
- The company disclosed a correction of an equity-presentation error relating to repurchased shares: prior treasury-stock and paid-in-capital balances were reclassified. It also retrospectively changed its accounting method for retired repurchased shares, allocating cost between paid-in capital and retained earnings. The filing says the error’s effect was limited to treasury stock and paid-in capital.
- Merchant processing and check-guarantee activities expose the company to merchant defaults, fraud and chargebacks. The filing says maximum guarantee exposure cannot practicably be calculated; the card-processing guarantee liability was $3.6 million, and the check-guarantee loss reserve was $4.8 million.
- HSBC Asia Pacific holds a put option over additional shares in the Asia-Pacific business. It did not exercise on the first eligible date in July 2011; the disclosed maximum redemption amount was $138.4 million, of which $45.6 million was puttable on that date.
- Foreign-currency exposure is unhedged, and variable-rate borrowings expose the company to interest-rate changes. The company reported compliance with debt covenants. It also relied on la Caixa to provide some Comercia financial data pending integration, with monitoring controls described as mitigation.
- No specific revenue or earnings guidance was provided. Management cautioned that exchange-rate changes and lower consumer spending could affect results. The filing states disclosure controls were effective as of August 31, 2011.
Important facts for investors to verify
- Whether the unusually large operating cash outflow is principally settlement timing and how settlement assets and obligations evolve in subsequent quarters.
- How much of reported cash is practically available, given merchant reserves and foreign cash designated as permanently reinvested.
- Debt maturities, borrowing capacity and sensitivity to interest rates, including the term loan due in July 2012.
- Whether international growth and margins are sustainable without the Spain acquisition, one-time marketing-fee true-up and currency benefits, and whether North American ISO growth continues to dilute margins.
- The potential timing and cost of any future exercise of the Asia-Pacific put option, and the progress of Comercia integration and related financial reporting controls.
- The filing gives inconsistent interest-rate information for the remaining sterling term loan: Note 4 reports 2.17%, while the MD&A reports 0.02%. Verify the correct rate in the underlying credit disclosures.