Global Payments Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended November 30, 2011, compared with the corresponding 2010 periods. The company processes electronic payments and operates North America Merchant Services and International Merchant Services.
Financial performance
| Metric | Three months ended Nov. 30, 2011 | Prior-year quarter | Six months ended Nov. 30, 2011 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $530.5 million | $443.5 million | $1,073.3 million | $883.7 million |
| Operating income | $96.6 million | $83.1 million | $205.2 million | $165.3 million |
| Operating margin | 18.2% | 18.7% | 19.1% | 18.7% |
| Net income attributable to Global Payments | $61.2 million | $53.5 million | $125.2 million | $102.9 million |
| Diluted earnings per share | $0.78 | $0.67 | $1.57 | $1.28 |
| Operating cash flow | Not separately provided | Not separately provided | $(314.1) million | $(60.9) million |
Quarterly revenue increased 20%, while operating income rose 16% and attributable net income rose approximately 14%. For the six-month period, revenue grew 21%, operating income 24%, and attributable net income 22%. Quarterly operating margin declined year over year; the six-month margin improved.
- Segment trends: Six-month North America revenue increased 14% to $757.6 million; International revenue increased 44% to $315.7 million, including the contribution from the Spain acquisition. Six-month segment operating margins were 18.8% for North America (down from 20.4%) and 31.7% for International (up from 30.4%).
- Cash flow and investment: The six-month operating cash outflow chiefly reflected a $259.9 million larger year-over-year cash use from net settlement processing assets and obligations. Investing cash outflow was $40.9 million, including $35.1 million of capital expenditures. Financing cash outflow was $211.8 million, including $99.6 million of share repurchases and debt repayments. Cash declined $583.4 million to $770.9 million.
- Liquidity and debt: Cash and cash equivalents were $770.9 million, but management identified $238.3 million as available cash; cash included $360.1 million of merchant reserves. Total debt was $516.9 million, down from $624.8 million at May 31, 2011. The company reported $925.9 million of available incremental borrowing capacity and compliance with debt covenants.
Management commentary, outlook and risks
- Management attributed growth to performance across regions, the Spain acquisition, favorable foreign exchange, U.S. transaction growth, and U.K. pricing. Six-month foreign exchange effects added $16.9 million to revenue and $0.06 to diluted EPS.
- The debit interchange cap effective October 1, 2011 increased reported revenue by approximately $15 million and EPS by approximately $0.02 for the six-month reporting period, but management said future benefits are uncertain and potentially transitory. Because much of the effect flowed through the U.S. ISO channel, it diluted operating margin.
- Management expected fiscal 2012 capital expenditures of $95 million to $105 million and said cash, borrowing capacity, and expected operating cash flows were sufficient for foreseeable operating and planned needs. No earnings or revenue guidance was provided in the filing.
- Acquisitions announced or completed after period-end included merchant acquiring businesses in Russia and Malta and an agreement to acquire a U.S. e-commerce portfolio; aggregate purchase price was expected to be approximately $45 million.
- HSBC Asia Pacific holds a put option relating to its 44% interest in the Asia-Pacific business. The estimated maximum redemption amount was $139.9 million, with $45.6 million puttable on July 24, 2011; the option was not exercised on that first exercisable date.
- Merchant processing and check-guarantee activities expose the company to merchant defaults, fraud, chargebacks, and check losses. The filing says maximum guarantee exposure is not practicable to estimate. The chargeback guarantee fair-value expense rose to $5.3 million for the six months from $2.1 million a year earlier.
- Other risks include foreign-exchange fluctuations, consumer spending, competitive pricing, variable-rate debt, and potential goodwill impairment. Management reported effective disclosure controls, while noting reliance on la Caixa-provided financial data for Comercia until integration is complete.
Material changes and unusual items
- The company corrected a prior-period equity presentation error concerning repurchased shares and retrospectively changed its accounting method for retired shares. The adjustments reclassified amounts within paid-in capital and retained earnings and did not affect total equity or reported earnings.
- Foreign-currency translation reduced equity during the six-month period; the filing reported a $77.1 million total translation adjustment, including noncontrolling interests.
- The $100 million share repurchase authorization approved in August was completed: 2.29 million shares were repurchased at an average $43.49 per share during the first half.
Important facts for investors to verify
- How much of revenue and earnings growth is organic versus attributable to the Spain acquisition, currency movements, and debit interchange changes.
- Whether settlement-related cash-flow swings normalize, and how much of reported cash is practically available after merchant reserves and settlement needs.
- North America margin trends, including the effect of the ISO channel and interchange legislation, and sustainability of International margins.
- Integration, retention, purchase-price allocation, and returns for the Russia, Malta, and e-commerce transactions.
- Potential cash requirements from the Asia-Pacific put option, merchant-loss guarantees, and tax exposures.