Global Payments Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter ended November 30, 2013; comparisons are with the quarter and six months ended November 30, 2012. Amounts below are in U.S. dollars.
Business context
Global Payments processes electronic payment transactions for merchants and other customers. It reports North America Merchant Services and International Merchant Services. Revenue is primarily generated through transaction-based fees and service charges.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $634.1 million, up 7.7% | $1,263.8 million, up 7.2% |
| Operating income | $111.9 million, down 4.0% | $219.3 million, up 11.3% |
| Net income attributable to Global Payments | $73.9 million, versus $70.2 million | $138.5 million, up 18.6% |
| Diluted EPS | $1.02, versus $0.89 | $1.88, versus $1.48 |
| Operating cash flow | Not separately reported | $411.7 million, versus $124.8 million |
For the six-month period, North America revenue rose 5.9% to $897.5 million; segment operating margin eased to 15.6% from 15.8%. International revenue increased 10.6% to $366.3 million; segment margin improved to 33.9% from 33.5%. Consolidated operating margin was 17.4% for six months, versus 16.7%; in the quarter it was 17.6%, versus 19.8%.
Quarterly cost of service rose 11.8%, faster than revenue, and increased to 37.1% of revenue from 35.7%. SG&A increased 6.5% but declined to 46.4% of revenue from 46.9%. Six-month effective tax rate was 28.5%, versus 29.2%.
Cash, debt and liquidity
- Cash and equivalents were $1,096.8 million at November 30, 2013, compared with $680.5 million at May 31. Management identified $280.3 million as available cash; that amount excludes settlement-related and merchant-reserve balances.
- Total debt was $1,441.4 million, up from $1,150.9 million at May 31. This included $446.5 million of short-term lines used primarily to fund settlement and a $630.0 million term loan. Available incremental borrowing was $390.0 million under the corporate facility and $1,031.9 million under short-term settlement lines.
- Current assets were $2,058.3 million and current liabilities $1,573.0 million. Settlement processing assets and obligations were unusually elevated at quarter-end because the period ended on a weekend and merchant funding occurred the next business day.
- Operating cash flow benefited substantially from a $204.3 million net change in settlement processing assets and obligations, attributed to quarter-end timing. Investing used $39.1 million; financing provided $47.5 million, including $259.0 million net short-term borrowings and $250.2 million of common-stock repurchases.
Changes, outlook and key risks
- Revenue growth reflected expansion across North America, Europe and Asia-Pacific. U.S. processed credit and debit transactions increased 8.5% for six months; growth in Canada and European markets also contributed.
- Quarterly operating income declined largely because the prior-year quarter included a larger benefit from adjustments to the processing-intrusion accrual. Six-month results included a $7.0 million intrusion-related credit in 2013 versus $9.5 million of expense in 2012. The 2013 credit represented an insurance recovery; recognized recoveries totaled $27.0 million and management expected no further recoveries.
- Management expected fiscal 2014 capital expenditures of approximately $90 million and stated that cash, borrowing capacity and expected operating cash flows should meet foreseeable needs. No revenue or earnings guidance was provided in the filing.
- The 2012 security incident remains a risk: the company reported legal proceedings, governmental inquiries and an FTC investigation. It recorded no loss accrual for these matters because it had not determined losses were probable and could not estimate a range; a future accrual, if required, could be material. The company said it had regained PCI DSS compliance and had not confirmed material revenue loss from the incident.
- Other risks include merchant defaults and check-guarantee losses, foreign-currency exposure (not hedged for translation risk), variable-rate debt, tax examinations including an IRS audit for fiscal 2010 and 2011, and uncertainty in goodwill valuation. The company reported compliance with debt covenants and effective disclosure controls.
Important facts for investors to verify
- Separate underlying operating trends from the unusual intrusion credits and prior-year accrual adjustment.
- Assess cash available for general use separately from merchant reserves and settlement balances; confirm the effect of quarter-end settlement timing on reported cash flow and working capital.
- Review the growth in total debt and short-term settlement borrowing, facility availability, interest-rate exposure and covenant headroom.
- Monitor the intrusion-related litigation, FTC investigation, potential claims and the absence of a recorded loss estimate.
- Consider segment margin trends, particularly North America’s modest margin contraction and International’s improvement, alongside cost-of-service growth and APT-related amortization.