Global Payments Inc. — Form 10-K Summary
Reporting period: Fiscal year ended May 31, 2012. Although the request references 2011 Q4, this filing covers fiscal 2012; it also reports the quarter ended May 31, 2012. Dollar amounts are U.S. dollars.
Business context and period results
Global Payments provides electronic payment processing and related services through North America Merchant Services and International Merchant Services. Fiscal 2012 growth reflected broad market growth and the inclusion of the Spanish Comercia acquisition for a full year. The company also completed acquisitions in Russia, Malta, and U.S. e-commerce for approximately $44 million in total.
Key financial metrics
| Metric | Fiscal 2012 | Fiscal 2011 |
|---|---|---|
| Revenue | $2,203.8 million | $1,859.8 million |
| Operating income | $307.3 million | $331.6 million |
| Operating margin | 13.9% | 17.8% |
| Net income attributable to Global Payments | $188.2 million | $209.2 million |
| Diluted earnings per share | $2.37 | $2.60 |
| Operating cash flow | $(173.5) million | $709.8 million |
| Capital expenditures | $109.9 million | $98.5 million |
| Total debt | $528.4 million | $624.8 million |
Fiscal 2012 revenue grew 18%, while operating income fell 7% and attributable net income fell 10%. The $84.4 million processing-system-intrusion expense was the principal reason for lower consolidated operating income and margin. The effective tax rate was 27.6%, versus 29.3%.
- North America: Revenue rose 15% to $1,567.3 million; segment operating income increased 5% to $281.3 million. Margin declined to 17.9% from 19.7%, reflecting ISO channel mix, Canadian pricing pressure, and investment in Brazil.
- International: Revenue rose 28% to $636.6 million; segment operating income increased 36% to $196.1 million. Margin improved to 30.8% from 29.0%, supported by Spain, U.K. pricing, and Asia-Pacific growth.
- Quarter ended May 31, 2012: Revenue was $597.0 million; operating income was $9.8 million; net income attributable to Global Payments was $5.1 million; diluted EPS was $0.06. The quarter included the $84.4 million intrusion charge.
Cash and cash equivalents were $781.3 million at year-end, but management identified only $278.7 million as available cash. The balance included $328.2 million in merchant reserves; settlement-related balances also fluctuate with processing timing. Management attributed the operating cash outflow largely to a $868.2 million year-over-year swing in settlement processing assets and obligations, including unusually high settlement balances at May 31, 2011. The company reported $938.7 million of incremental borrowing capacity, including $370.5 million under its corporate facility, and stated that liquidity and future operating cash flows were sufficient for foreseeable needs.
Material changes, outlook, and risks
- Processing-system intrusion: Unauthorized access identified in early March 2012 affected a limited portion of the North American card-processing system, according to the company; it did not believe international systems were accessed. Potential access to servers containing personal information was also found, but whether information was exported was unclear. Certain card networks removed the company from their PCI DSS-compliant provider lists. The company continued processing transactions and was pursuing independent review, remediation, and reinstatement.
- The filing reports $84.4 million of fiscal 2012 expense associated with the incident, including $19.0 million of investigation and remediation costs and a $67.4 million accrual for estimated network fraud losses, fines, and other charges; it separately recorded $2.0 million of insurance recoveries. Final assessments could differ materially, and the filing says the company could not estimate additional possible losses. Management anticipated another $55–$65 million of fiscal 2013 costs and up to $28 million of additional insurance recoveries.
- A putative class action related to the incident sought unspecified damages and injunctive relief. The company had not accrued a loss because it had not determined a loss was probable; the outcome and potential amount were not estimable. Government inquiries and further lawsuits were also possible.
- Guidance and investment: The filing did not provide full-year fiscal 2013 revenue or earnings guidance. It expected fiscal 2013 capital expenditures of approximately $110 million. It also described continued investment in technology, international expansion, acquisitions, e-commerce, and mobile payments.
- Acquisition after year-end: On July 26, 2012, the company agreed to buy HSBC’s remaining 44% interest in its Asia-Pacific business for $242.0 million. This was a subsequent event, not a fiscal 2012 cash outlay; the company expected equity accounting treatment.
- Other risks: Visa Canada temporary direct participation was due to expire September 30, 2012; a replacement sponsorship arrangement was available if required, but was not described as a long-term solution. Other principal risks include card-network rules and sponsorship, security and service interruptions, merchant/ISO attrition, competitive pricing, regulation, foreign exchange, acquisitions, and variable-rate debt.
- Durbin debit-interchange caps reduced interchange expense and increased reported revenue, but the company noted that future benefits were uncertain in a competitive market. U.S. direct credit/debit transactions grew 13%, while average ticket declined 3%.
- The company reported effective internal controls over financial reporting, and the auditor issued unqualified opinions on the financial statements and internal controls. The audit report included explanatory paragraphs concerning the intrusion and the accounting change for repurchased shares.
Most important facts for investors to verify
- Final card-network assessments, remediation costs, insurance recoveries, and any additional claims arising from the intrusion; confirm PCI DSS reinstatement and subsequent merchant attrition.
- Whether the large fiscal 2012 cash-flow swing reverses as settlement timing normalizes, and how much cash is operationally available apart from reserves and settlement balances.
- Fiscal 2013 cost and capital-spending outcomes versus the stated $55–$65 million intrusion-cost estimate and approximately $110 million capital expenditure expectation.
- Completion, funding, and financial-statement effects of the $242 million Asia-Pacific minority-interest purchase, along with the status of Canadian Visa sponsorship.
- Underlying segment growth and margins after separating acquisition contributions, Durbin-related revenue effects, and unusual intrusion and corporate costs.