Business Context and Reporting Period
Company: Global Payments Inc.
Filing Type: Form 10-Q (Unaudited Quarterly Report)
Period Ended: November 30, 2001 (Second Quarter of Fiscal Year 2002)
Business Overview: Global Payments is an integrated provider of high-volume electronic transaction processing and value-added end-to-end information services. Following a spin-off from National Data Corporation (NDC) in January 2001, the company operates in one reportable segment: electronic transaction processing, primarily through merchant services (97% of revenue) and funds transfer offerings.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Nov 30, 2001 | Six Months Ended Nov 30, 2001 |
|---|---|---|
| Revenues | $115,617 | $226,572 |
| Operating Income | $20,782 | $43,469 |
| Net Income | $11,643 | $24,516 |
| Basic EPS | $0.32 | $0.67 |
| Diluted EPS | $0.31 | $0.65 |
| Operating Margin | 18.0% | 19.2% |
| Net Cash from Operating Activities | N/A | $82,624 |
| Cash and Cash Equivalents (Nov 30, 2001) | $26,868 | |
| Line of Credit Outstanding | $89,000 (of $125M facility) |
Material Changes vs. Prior Comparable Period
- Revenue Growth: Revenue increased 40% ($33.0 million) for the quarter and 33% ($56.8 million) for the six months compared to the prior year. This growth is primarily attributed to the inclusion of results from the CIBC and Imperial Bank portfolio acquisitions and two months of results from the National Bank of Canada acquisition.
- Profitability: Net income rose 38% for the quarter and 44% for the six months. Operating income increased 30% for the quarter and 34% for the six months.
- Expense Trends: Cost of service increased 40% (quarter) and 37% (six months), rising as a percentage of revenue to 53% and 54% respectively, due to acquired business costs and provisions for losses. SG&A expenses increased 46% (quarter) and 26% (six months) due to sales infrastructure expansion and acquisition integration costs.
- Cash Flow: Net cash provided by operating activities surged 139% to $82.6 million for the six months, driven by net income growth and a one-time $30 million acceleration of Canadian VISA receivables due to a settlement process change.
- Investing Activities: Net cash used in investing activities increased significantly to $73.8 million (six months), primarily due to $61.0 million in business acquisitions (National Bank of Canada and MasterCard minority interest buyout).
Guidance, Outlook, Risks, and Unusual Items
- Guidance: Management expects full-year fiscal 2002 results to be consistent with the outlook disclosed in the previous Form 10-K.
- Impact of September 11 Attacks: The terrorist attacks caused a 25%-30% drop in domestic network processing volumes on September 11, 2001. While domestic volumes rebounded to high-teen growth levels, Canadian volumes have rebounded more slowly due to a slowdown in foreign spending.
- Accounting Changes: The company adopted SFAS No. 142 (Goodwill and Other Intangible Assets) effective June 1, 2001, discontinuing the amortization of goodwill. This reduced amortization expense by approximately $3.4 million for the six-month period.
- Acquisitions: On October 1, 2001, the company acquired National Bank of Canada's merchant acquiring portfolio for $45.9 million (U.S.) and formed a ten-year marketing alliance. In August 2001, it purchased the 7.5% minority interest in Global Payment Systems LLC from MasterCard.
- Restructuring: The company completed plans to consolidate six locations into three, incurring $4.9 million in total charges ($2.7 million cash). As of November 30, 2001, $1.1 million of the cash portion remains accrued.
- Risks: Forward-looking statements are subject to risks including the economic impact of the September 11 attacks, competition, and the success of integration activities. The company notes it is currently unable to fully assess the long-term financial impact of the attacks.
Investor Verification Checklist
- Acquisition Integration: Verify the realization of synergies from the CIBC and National Bank of Canada acquisitions and the timeline for full integration.
- Canadian Volume Recovery: Monitor the recovery rate of Canadian transaction volumes compared to domestic volumes, as noted by management to be slower.
- Goodwill Impairment Testing: Confirm the results of the independent valuation for the trademark (indefinite life intangible asset), with final results expected by February 28, 2002.
- Debt Utilization: Track the utilization of the $125 million revolving line of credit (currently $89 million outstanding) and the new $25 million Canadian facility.
- Cost of Service Margins: Watch for stabilization of the cost of service margin, which has increased to 53-54% of revenue due to the mix of acquired businesses and economic slowdown provisions.