GPN

Business Context and Reporting Period

Company: Global Payments Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: May 31, 2003
Business Overview: Global Payments is a high-volume processor of electronic transactions and money transfers, operating in one segment: electronic transaction processing. The company serves merchants, corporations, and government agencies primarily through merchant services (credit/debit processing, check guarantee) and funds transfer offerings. It operates in the United States, Canada, and Europe.

Key Financial Metrics

Debt and Liquidity: As of May 31, 2003, the company had no outstanding balance on its $125 million revolving line of credit. However, it had $33.9 million outstanding on a Canadian credit facility used for merchant funding. Total obligations under capital leases were $4.7 million.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 12% ($53.3 million) driven by growth in direct merchant services in the U.S. and Canada. Excluding the National Bank portfolio acquisition and foreign exchange impacts, organic growth was approximately 8%.
• Profitability Surge: Net income increased 124% ($29.5 million). This was significantly aided by the absence of the $16.0 million cumulative effect of a change in accounting principle (related to a trademark write-off) that impacted Fiscal 2002.
• Operating Efficiency: Operating margin expanded from 15.4% to 18.1%. Cost of service as a percentage of revenue decreased from 54% to 50% due to acquisition integrations and facility consolidations.
• Cash Flow Volatility: Net cash provided by operating activities decreased significantly ($124.9 million) primarily due to a change in working capital related to Canadian merchant processing. A new "same-day value" funding practice in Canada resulted in a net receivable balance, consuming cash that was previously provided by the bank.
• Restructuring: Fiscal 2003 included a net restructuring charge of $1.3 million, compared to $11.0 million in Fiscal 2002.

Guidance, Outlook, and Risks

Guidance for Fiscal 2004:

• Revenue: Expected to be between $542 million and $562 million (5% to 9% growth).
• Diluted EPS: Expected to be between $1.57 and $1.64 (10% to 15% growth), excluding restructuring charges.
• Operating Margin: Targeted at 19% to 19.5% (excluding restructuring charges).

Management Commentary & Strategy:

• The company is pursuing an acquisition strategy focused on international processing and payment-related businesses to leverage its back-end platform.
• On August 11, 2003, the company announced a definitive agreement to acquire Latin America Money Services, LLC (LAMS), owner of DolEx, for approximately $190 million plus contingent payments.
• Facility consolidation plans initiated in Q4 2003 are expected to cost approximately $8 million total, with $6.5 million to be incurred in Fiscal 2004.

Risks and Contingencies:

• Air Canada Restructuring: Air Canada, representing less than 1% of consolidated revenue, filed for protection under the Companies' Creditors Arrangement Act. Global Payments estimates a maximum potential chargeback liability exposure of $28-$35 million U.S. if Air Canada liquidates and fails to fund deferred ticket revenues. Management believes a material loss is unlikely as long as Air Canada honors tickets.
• Regulatory: As a subsidiary of Canadian Imperial Bank of Commerce (CIBC) for U.S. regulatory purposes, the company is subject to Bank Holding Company Act limitations on expanding into unrelated businesses.
• Market Risk: The company is exposed to foreign currency fluctuations (Canadian dollar and British pound) and variable interest rates on credit facilities.

Investor Verification Checklist

• Air Canada Exposure: Verify the status of Air Canada's restructuring and the potential impact on the estimated $28-$35 million chargeback liability.
• Acquisition Integration: Monitor the closing and integration of the DolEx acquisition (announced post-fiscal year) and its impact on the funds transfer segment.
• Working Capital Trends: Track the stabilization of cash flows from operations, specifically regarding the Canadian "same-day value" funding model which caused a significant cash outflow in 2003.
• Restructuring Costs: Confirm the execution of the $6.5 million in remaining restructuring costs expected in Fiscal 2004.
• Debt Covenants: Review compliance with financial covenants on the $125 million revolving credit facility and the CIBC credit facility.