Global Payments Inc. — Form 10-Q Summary
Business context and period. Global Payments processes electronic payments and related services for merchants and other organizations. This unaudited filing covers the fiscal first quarter ended August 31, 2010, compared with the three months ended August 31, 2009. The money transfer business, sold in May 2010, is reported as discontinued operations.
Financial performance
Amounts are in millions of dollars except per-share data. Figures may not sum due to rounding.
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Revenue | $440.1 | $409.9 | +7% |
| Operating income | $82.1 | $89.2 | -8% |
| Operating margin | 18.7% | 21.8% | -3.1 percentage points |
| Income from continuing operations attributable to Global Payments | $49.4 | $55.6 | -11% |
| Net income attributable to Global Payments | $49.4 | $57.8 | -15% |
| Diluted EPS | $0.61 | $0.71 | -14% |
| Operating cash flow | -$104.4 | $696.5 | Down substantially |
| Cash and cash equivalents at period end | $578.2 | $1,072.3 | Down $494.1 year over year |
| Total debt at August 31, 2010 | $460.3 | $500.3 at May 31, 2010 | Down $40.0 |
Cost of service was $151.0 million, or 34.3% of revenue, versus $141.2 million, or 34.4%. Sales, general and administrative expense rose 15% to $207.0 million, or 47.0% of revenue, from 43.8%. The effective tax rate was 33.3%, compared with 31.2%. The filing attributes the increase primarily to a one-time U.K. legislated tax-rate reduction affecting a deferred tax asset.
Segments: North America revenue rose 11% to $336.8 million, while segment operating income fell 10% to $68.4 million and margin declined to 20.3% from 25.0%. International revenue declined 2% to $103.3 million; operating income increased 9% to $31.4 million and margin expanded to 30.4% from 27.1%.
Liquidity, debt and cash flow
- Cash fell by $191.7 million during the quarter. Management identified $237.6 million as available cash, generally excluding settlement-related and merchant-reserve balances; cash included $256.0 million of merchant reserves.
- Operating activities used $104.4 million, principally reflecting a $190.1 million net cash outflow from changes in settlement processing assets and obligations. The prior-year quarter’s operating cash flow was unusually high because of settlement timing and month-end cutoff.
- Investing activities used $26.8 million, including $24.8 million of capital expenditures. Financing activities used $61.8 million, including $49.5 million of debt principal payments and $14.9 million of share repurchases.
- Total debt was $460.3 million, including $222.0 million classified as current and $238.2 million long-term. The company reported compliance with its debt covenants. Debt includes variable-rate term loans; the company did not use interest-rate derivatives.
- Current assets were $805.3 million and current liabilities $508.0 million. Settlement balances are material to these totals and can fluctuate with timing.
Changes, outlook and risks
- Management cited 19% growth in U.S. direct credit and debit transactions and 15% U.S. revenue growth, driven in part by the ISO channel. U.S. average ticket declined about 4%, which management linked to weaker consumer spending, increased debit usage and a shift toward smaller merchants.
- Canada revenue was flat amid competitive pricing pressure. European revenue fell 8%, partly because the company exited certain high-risk, low-margin U.K. acquiring businesses; Asia-Pacific revenue grew 16%, supported in part by dynamic currency conversion.
- Management attributed lower consolidated operating income to North American performance, especially Canada, and higher corporate costs. SG&A and corporate costs included termination and relocation benefits and expenses for a new Manila Global Service Center.
- No specific earnings or revenue guidance is provided. Management expected fiscal 2011 capital expenditures of approximately $85 million, including about $55 million for terminals and infrastructure, $12 million for Manila start-up expenses, and $17 million for a new data center. Management said cash, borrowing capacity and expected operating cash flows should meet foreseeable needs.
- The company expects depreciation and amortization to rise as it migrates additional markets to its G2 processing platform. G2 was operating in seven Asia-Pacific markets; related depreciation was not significant in the quarter.
- Material exposures include merchant chargeback and check-guarantee losses, foreign-exchange movements (not hedged for translation exposure), variable interest rates, competitive pricing and consumer spending. Currency movements increased quarterly revenue by $1.0 million and diluted EPS by $0.01.
- HSBC Asia Pacific may exercise a put option beginning in July 2011, requiring purchases of up to 15% of GPAP shares annually; the estimated maximum total redemption amount was $105.2 million. The company also disclosed reliance on HSBC-provided financial data for the LLP pending integration, with monitoring controls in place.
- After quarter-end, the company entered into revolving overdraft facilities in Malaysia and Singapore for merchant funding. A $2.6 million deferred gain related to the sale of a Russian credit-information business was expected to be recognized in Q2 FY2011 after a contribution requirement expired.
Important facts for investors to verify
- Whether revenue growth can translate into improved operating margins, particularly in North America, given ISO commissions and Canadian pricing pressure.
- How much of operating cash flow and reported cash balances reflects settlement timing, merchant reserves or other funds not ordinarily available for corporate purposes.
- The timing and amount of future debt repayments, variable-rate exposure and any GPAP put-option purchases beginning in July 2011.
- Whether planned capital spending and G2 migrations deliver expected efficiencies, and how higher depreciation may affect reported earnings.
- The continuing effect of consumer spending, average-ticket trends, foreign exchange, merchant losses and reliance on HSBC financial data.