Global Payments Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended February 28, 2011, with year-to-date results for the nine months then ended. The filing is unaudited and compares results with the corresponding 2010 periods. Amounts below are in U.S. dollars.
Business context
Global Payments processes electronic payments for merchants and other organizations through its North America and International Merchant Services segments. The money-transfer business sold in May 2010 is reported as a discontinued operation.
Financial performance
| Metric | Three months ended Feb. 28, 2011 | Three months ended Feb. 28, 2010 | Nine months ended Feb. 28, 2011 | Nine months ended Feb. 28, 2010 |
|---|---|---|---|---|
| Revenue | $456.4 million | $398.5 million | $1,340.0 million | $1,217.4 million |
| Operating income | $78.2 million | $73.8 million | $243.5 million | $251.8 million |
| Operating margin | 17.1% | 18.5% | 18.2% | 20.7% |
| Net income attributable to Global Payments | $47.8 million | $48.5 million | $150.7 million | $169.1 million |
| Diluted EPS | $0.59 | $0.59 | $1.87 | $2.06 |
- Quarterly revenue grew 15%; year-to-date revenue grew 10%. Quarterly operating income increased 6%, but year-to-date operating income declined 3%.
- Quarterly continuing-operations income attributable to Global Payments was $48.2 million, versus $47.7 million. Year-to-date continuing-operations income was $151.6 million, versus $161.3 million.
- Quarterly cost of service was $168.3 million (36.9% of revenue); SG&A was $209.9 million (46.0%). Year-to-date SG&A rose 17% to $623.0 million and increased to 46.5% of revenue.
- North America revenue rose 13% for the quarter and 11% year to date; International revenue rose 20% and 8%, respectively. International operating income increased in both periods, while North America year-to-date operating income fell 6%.
Cash flow, liquidity and debt
- For the nine months, operating cash flow was $733.3 million, investing cash flow was negative $245.3 million, and financing cash flow was positive $50.0 million. Cash and equivalents ended at $1,329.1 million, up from $769.9 million at May 31, 2010.
- Management identified $238.0 million as available cash, generally excluding settlement-related and merchant-reserve balances. Cash included $248.6 million of merchant reserves. Settlement-related balances were unusually high at period end because of cutoff timing and generally were paid out the following day.
- The operating cash-flow increase versus the prior-year period was substantially driven by a $444.2 million cash-flow benefit from changes in settlement processing assets and obligations, compared with $51.9 million in the prior-year period.
- Total debt was $570.1 million, versus $500.3 million at May 31, 2010. The company had $653.8 million of available borrowing capacity under credit facilities and reported compliance with its debt covenants.
- In December 2010, the company entered a five-year, unsecured $600 million revolving credit facility, expandable to $750 million; it borrowed approximately $150 million to repay term debt. It expects fiscal 2011 capital expenditures of approximately $85 million and stated that liquidity and borrowing capacity should meet foreseeable needs.
Material changes, outlook and risks
- On December 20, 2010, Global Payments acquired a 51% interest in Spanish merchant acquirer Comercia for a total contribution of approximately $173.5 million. La Caixa owns the remaining 49% and agreed to a 20-year referral and sponsorship alliance.
- Management attributed growth to U.S. direct-ISO market share gains and performance in the U.K., Russia and Asia-Pacific. U.S. transaction growth was partly offset by lower average ticket sizes. Canadian pricing pressure and the more dilutive mix of ISO business weighed on North American margins.
- Margin pressure also reflected Spain acquisition dilution, higher corporate costs, employee termination and relocation benefits, and Manila service-center expenses. Management reported completing the U.K. back-end processing migration at quarter-end and said it could provide further U.K. margin expansion.
- The prior-year comparison includes discontinued money-transfer operations and disposal-related effects. The nine-month 2011 period includes a $2.6 million previously deferred gain on the sale of a 20% interest in a Russian credit-information business. The filing also records a $0.6 million accrual for final working-capital settlement related to the money-transfer disposition.
- Key exposures include variable-rate borrowings, foreign-currency movements (not hedged for translation exposure), merchant chargeback and check-guarantee losses, and execution of technology and platform integrations. HSBC Asia Pacific may begin exercising a put option in July 2011 requiring annual purchases of up to 15% of its interest in the Asia-Pacific business; the company estimated a maximum redemption amount of $126.6 million.
- Management said pending claims and lawsuits were not expected to have a material adverse effect. It gave no explicit earnings or revenue guidance in the filing. Forward-looking expectations are subject to risks and uncertainties described in the company’s prior Form 10-K.
Important facts for investors to verify
- Whether the substantial operating cash flow is repeatable, given the unusually large settlement-timing contribution.
- Progress in restoring consolidated and North American margins, including the effects of ISO mix, Canadian pricing, Spain, and corporate costs.
- Actual unrestricted liquidity after settlement and merchant-reserve cash are excluded, and planned repayment of revolving-facility borrowings.
- The cost and timing of any Asia-Pacific put-option exercise, and the financial performance and integration of Comercia and the U.K. platform.
- Future merchant-loss provisions, currency and interest-rate effects, and the final cash cost of the money-transfer disposal adjustments.