Global Payments Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended May 31, 2011; this is an annual report, not a filing for calendar 2010 Q4. The filing also presents quarterly results, including the quarter ended May 31, 2011. Global Payments processes electronic payments through North America and International Merchant Services.
Key financial results
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue | $1,859.8 million | $1,642.5 million |
| Operating income | $331.6 million | $323.3 million |
| Operating margin | 17.8% | 19.7% |
| Net income attributable to Global Payments | $209.2 million | $203.3 million |
| Diluted EPS | $2.60 | $2.48 |
| Cash from operating activities | $709.8 million | $465.8 million |
| Capital expenditures | $98.5 million | $56.1 million |
- Revenue grew 13%; operating income rose 3% and attributable net income rose 3%. Higher operating costs meant margin contracted despite revenue growth.
- North America revenue was $1,362.9 million, up 12%; segment operating income fell 3% to $268.2 million and margin declined to 19.7% from 22.6%.
- International revenue was $496.9 million, up 18%; segment operating income rose 27% to $143.9 million and margin improved to 29.0% from 26.9%.
- Sales, general and administrative expense increased 18% to $863.2 million, including employee termination and relocation benefits, Manila service-center costs, and higher ISO commissions. Cost of service rose 14% to $665.0 million.
- Operating cash flow increased substantially, partly because settlement processing obligations were unusually high at year-end due to cutoff timing. Investing activities used $267.0 million, including $168.0 million for acquisitions; financing activities provided $114.1 million.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $1,354.3 million at year-end, but management estimated only about $240 million was available cash. The balance included $271.4 million of merchant reserves and settlement-related balances; some foreign cash was considered permanently reinvested.
- Total debt was $624.8 million, versus $500.3 million a year earlier. Total available borrowings under credit facilities were $892.7 million. A new unsecured five-year, $600 million revolving facility was entered into in December 2010.
- Reported current debt was $356.5 million, with scheduled 2012 maturities of the same amount; management said these should be considered alongside the higher year-end cash balance. The company reported compliance with debt covenants.
- Management said cash, borrowing capacity and expected operating cash flow should cover operations and planned needs. FY2012 capital expenditures were expected to be $85–$90 million.
- Quarterly dividends were $0.02 per share ($0.08 for the year). The company repurchased $14.9 million of shares in FY2011, including settlement of part of the prior-year repurchase.
Material developments, outlook and risks
- On December 20, 2010, Global Payments acquired a 51% controlling interest in Comercia, a Spanish merchant acquirer, for a total investment of approximately $173.5 million. La Caixa retained 49% and entered a 20-year marketing alliance. Comercia contributed 2% of FY2011 revenue and represented 11% of year-end assets.
- U.S. revenue grew 14%, with transaction growth of 18% partly offset by a 4% decline in average ticket. Management attributed the ticket decline to the merchant mix and more debit transactions. Canada faced pricing pressure; International growth benefited from Spain, the U.K., Russia and Asia-Pacific.
- Foreign-exchange movements increased FY2011 revenue by $19.2 million and diluted EPS by $0.08. Other income/expense improved year over year, including a $2.6 million previously deferred gain on the sale of an interest in Global Payments Credit Services.
- Management continued developing its G2 processing platform, then operating in seven Asia-Pacific markets and beginning U.S. support. Broader migration could bring scale and product benefits, but depreciation and amortization are expected to rise as additional markets move to the platform.
- No specific revenue or EPS guidance is provided in the supplied filing text; the stated FY2012 capital-spending range is $85–$90 million.
- Principal risks include dependence on card-network registration and sponsor banks; cybersecurity, data loss and service outages; fraud, chargebacks and merchant defaults; competitive pricing; regulatory changes, including debit interchange rules; foreign exchange and political risks; acquisition integration; and potential impairment of goodwill or intangibles.
- Potential obligations include a put option held by HSBC Asia Pacific over its minority interest in the Asia-Pacific business. The maximum estimated redemption amount was $133.9 million, with $45.6 million puttable in July 2011; HSBC did not exercise the option by July 24, 2011. Routine litigation was not expected by management to have a material adverse effect.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor excluded Comercia from the FY2011 controls assessment because it was recently acquired; the auditor reported that the company maintained effective controls in all material respects based on the assessment performed.
Investor verification priorities
- Reconcile reported cash with genuinely available liquidity, merchant reserves and settlement balances, and assess the timing-related operating cash-flow benefit.
- Review the $356.5 million of 2012 current debt maturities, credit-facility terms and post-year-end repayment or refinancing activity.
- Track whether North American margin pressure from ISO mix and Canadian pricing is offset by International growth and integration benefits.
- Verify Comercia integration performance and any subsequent exercise or settlement of the Asia-Pacific put option.
- Assess execution, migration costs and future amortization associated with G2, and monitor card-network, cybersecurity, chargeback and regulatory exposures.