Global Payments Inc. — Form 10-Q summary
Reporting period: Quarter and six months ended November 30, 2010 (fiscal 2011 second quarter), compared with the corresponding 2009 periods. The company processes electronic payments for merchants and other organizations. Continuing operations comprise North America and International Merchant Services; the money transfer business was sold in May 2010 and is reported as discontinued operations. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Key financial results
| Metric | Three months ended Nov. 30, 2010 | Prior year | Six months ended Nov. 30, 2010 | Prior year |
|---|---|---|---|---|
| Revenue | $443.5 | $409.0 | $883.7 | $818.9 |
| Operating income | $83.1 | $88.7 | $165.3 | $177.9 |
| Operating margin | 18.7% | 21.7% | 18.7% | 21.7% |
| Income from continuing operations attributable to Global Payments | $54.0 | $58.0 | $103.4 | $113.6 |
| Net income attributable to Global Payments | $53.5 | $62.8 | $102.9 | $120.7 |
| Diluted EPS | $0.67 | $0.76 | $1.28 | $1.48 |
- Quarter revenue increased 8%; operating income decreased 6%. Six-month revenue increased 8%, while operating income fell 7%.
- Six-month cost of service was $305.2 million (34.5% of revenue, versus 34.9%); SG&A was $413.2 million (46.8%, versus 43.3%). SG&A rose 16%, reflecting termination and relocation benefits, Manila service-center startup costs, and higher ISO commissions.
- North America drove growth, with six-month revenue up 10%; U.S. transaction volume grew 18%, partly offset by lower average tickets. North America six-month operating income fell 9%, with margin down to 20.4% from 24.8%, amid ISO mix and Canadian pricing pressure. International revenue rose 2%; segment operating income rose 12% and margin increased to 30.4% from 27.6%.
- Operating cash flow was an outflow of $60.9 million for the six months, versus an inflow of $785.2 million in the prior-year period. Management attributed the swing mainly to settlement-processing timing: the year-ago period had unusually high settlement balances at month-end. Investing cash outflow was $56.1 million, including $51.7 million of capital expenditures; financing provided $2.4 million.
- Cash and equivalents were $663.7 million at November 30, including $252.9 million of merchant reserves. Management identified $285.5 million as available cash, generally excluding settlement-related and merchant-reserve balances.
- Total debt was $526.6 million, including $324.0 million current and $202.6 million long-term, compared with $500.3 million at May 31. The balance included $180.9 million of credit-facility borrowings. The company reported compliance with debt covenants.
Changes, outlook and risks
- The prior-year comparison included discontinued money-transfer operations and an estimated disposal loss; 2010 discontinued operations recorded a $0.5 million loss, versus $4.9 million income in the prior-year quarter. The sale was completed for $85 million, with $60.2 million net proceeds before final working-capital adjustments.
- Other expense improved partly because the company recognized a previously deferred $2.6 million gain on the sale of a 20% interest in a Russian credit-information business.
- On December 7, 2010, after quarter-end, the company entered a new unsecured five-year $600 million revolving facility, expandable to $750 million, and used about $150 million to repay existing term-loan debt. For fiscal 2011, management expected capital expenditures of approximately $85 million and said available cash, borrowing capacity and expected operating cash flows should meet foreseeable needs. No earnings or revenue guidance was provided.
- On December 20, 2010, the company paid €125 million ($164.1 million at closing) for a 51% stake in a Spanish merchant-acquiring partnership with la Caixa, which retained 49% and agreed to a 20-year marketing alliance. Purchase-price allocation was not final at filing.
- Management expected to complete U.K. merchant migration to its back-end processing platform by the end of February 2011, with potential for further margin expansion. The G2 platform migration may increase depreciation and amortization as additional markets are brought onto it.
- Risks and contingencies include competition and pricing pressure, merchant chargebacks and check-guarantee losses, foreign-exchange movements (not hedged for translation exposure), and variable-rate debt. A partner in the Asia-Pacific business could begin exercising a put option in July 2011; the maximum redemption amount was estimated at $115.3 million.
- Management said disclosure controls were effective, but the company continued to rely on HSBC for some financial data related to the U.K. business; it had implemented monitoring controls over that information.
Most important facts for investors to verify
- Whether revenue growth, particularly U.S. transaction growth, can translate into operating-income and margin recovery despite ISO mix and Canadian pricing pressure.
- Whether the negative operating cash flow is primarily settlement timing, and how settlement balances and cash available for corporate use evolve.
- The effect of the new credit facility and subsequent Spanish acquisition on debt, liquidity, integration costs and future results.
- The timing, cost and realized benefits of U.K. and G2 platform migrations, including higher future depreciation and amortization.
- Potential cash requirements from the Asia-Pacific put option, merchant-loss guarantees, and tax examinations or unrecognized tax benefits.