Business context and reporting period
Global Payments Inc. filed this Form 10-K for the fiscal year ended May 31, 2013, not a calendar-year 2012 fourth quarter. The company processes card, electronic-payment and check transactions for merchants and other institutions across North America, Europe and Asia-Pacific. It reports North America Merchant Services and International Merchant Services segments. The filing also provides results for the quarter ended May 31, 2013.
Financial performance
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $2,375.9 million | $2,203.8 million |
| Operating income | $357.2 million | $307.3 million |
| Operating margin | 15.0% | 13.9% |
| Net income attributable to Global Payments | $216.1 million | $188.2 million |
| Diluted EPS | $2.76 | $2.37 |
| Operating cash flow | $240.5 million provided | $173.5 million used |
| Capital expenditures | $98.6 million | $109.9 million |
| Total debt at year-end | $1,150.9 million | $528.4 million |
Revenue grew 7.8%; net income attributable to the company rose 14.8%. Cost of service was 36.3% of revenue versus 35.6%, while sales, general and administrative expense was 47.1% versus 46.6%. Consolidated operating margin improved largely because intrusion-related costs declined to $36.8 million from $84.4 million.
North America revenue rose 8.8% to $1,705.7 million, but segment operating income fell 8.0% to $258.9 million and margin declined to 15.2% from 17.9%. International revenue rose 5.3% to $670.2 million; operating income increased 7.7% to $211.2 million and margin improved to 31.5% from 30.8%.
For the quarter ended May 31, 2013, revenue was $618.4 million, operating income $69.4 million, net income attributable to Global Payments $40.8 million and diluted EPS $0.53. In the comparable quarter ended May 31, 2012, the figures were $597.0 million, $9.8 million, $5.1 million and $0.06, respectively; FY2012 fourth-quarter operating income included a significant intrusion-related charge.
Liquidity, debt and capital allocation
Year-end cash and cash equivalents were $680.5 million, but management identified only $255.0 million as available cash. The cash balance included $280.7 million of merchant reserves; $214.1 million of available cash was held by foreign subsidiaries whose earnings were considered permanently reinvested. Operating cash flow improved sharply, principally due to a $464.3 million year-over-year change in net settlement processing assets and obligations driven by month-end timing, so the reported increase should not be assumed to represent a comparable improvement in underlying cash generation.
Debt rose by $622.6 million year over year, mainly reflecting acquisition financing. The company entered a $700 million term loan, with $647.5 million outstanding at year-end, and reported $440 million of incremental corporate-facility borrowing capacity plus $796.1 million available for settlement funding under short-term lines. It reported compliance with its debt covenants. Fiscal 2013 share repurchases totaled $175.3 million; dividends were $0.08 per share for the year. Management expected fiscal 2014 capital expenditures of approximately $90 million and said cash, borrowing capacity and anticipated operating cash flows should cover foreseeable needs.
Material changes, outlook and risks
- Fiscal 2013 acquisitions included APT for $413.0 million less working capital, the remaining 44% of GPAP for $242.0 million, and the Civica merchant-acquiring business for approximately $22.9 million. APT expanded U.S. integrated-payment distribution; the GPAP purchase gave the company full ownership.
- Growth came from U.S. ISO and direct channels, gaming and Europe. Canadian revenue declined 6.4% amid pricing compression despite transaction growth. Asia-Pacific revenue was nearly flat.
- Foreign exchange reduced fiscal 2013 revenue and earnings. The filing gives differing revenue impacts in separate sections: $20.3 million in one discussion and $19.1 million in the market-risk discussion; it also reports diluted EPS impacts of $0.05 and $0.04, respectively.
- The March 2012 processing-system intrusion generated $36.8 million of fiscal 2013 expense and $121.2 million of life-to-date expense. Remediation was reported complete, and the primary operating entity regained PCI DSS compliance. The company had received $20.0 million of insurance recoveries and resolved card-network assessments, but stated that the FTC investigation and possible additional claims remained unresolved; no accrual was recorded for those matters because a probable, estimable loss had not been established.
- Key risks include data security and potential liability, card-network registration and bank sponsorship, merchant and ISO attrition, pricing and competitive pressure, transaction and settlement exposure, technology execution, acquisition integration, foreign-currency and country risk, regulatory change, and debt covenant restrictions. A Canadian Visa participation arrangement was temporary while a direct-membership process was pending.
- The filing describes strategic priorities—growing existing markets and channels, investing in technology, and pursuing acquisitions—but provides no specific fiscal 2014 revenue or earnings guidance in the supplied text.
Important facts for investors to verify
- Clarify the conflicting foreign-exchange impact figures and distinguish reported growth from currency-adjusted growth.
- Track any further costs, recoveries, regulatory findings or claims related to the 2012 intrusion and FTC investigation.
- Assess whether North America margin pressure, especially in Canada and the ISO channel, persists and whether international growth continues.
- Review acquisition integration and returns, debt repayment and refinancing needs, and the effects of floating-rate borrowings.
- Confirm the status of Canadian Visa sponsorship and the expected fiscal 2014 capital spending and operating outlook.
- Interpret cash-flow trends in light of settlement timing and distinguish unrestricted operating liquidity from merchant reserves and foreign cash.