Business Context and Reporting Period
Company: Global Payments Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: February 28, 2010
Business Overview: Global Payments is a high-volume processor of electronic transactions for merchants, financial institutions, and consumers. The company operates primarily through two segments: North America Merchant Services and International Merchant Services. The Money Transfer segment has been classified as discontinued operations following an agreement to sell the business.
Key Financial Metrics
| Metric | Three Months Ended Feb 28, 2010 | Nine Months Ended Feb 28, 2010 |
|---|---|---|
| Revenues | $398.5 million | $1,217.4 million |
| Operating Income | $73.8 million | $251.8 million |
| Operating Margin | 18.5% | 20.7% |
| Net Income (Attributable to Global Payments) | $48.5 million | $169.1 million |
| Diluted EPS (Attributable to Global Payments) | $0.59 | $2.06 |
| Cash and Cash Equivalents | $589.6 million | $589.6 million (Balance Sheet) |
| Net Cash Provided by Operating Activities | N/A | $318.2 million |
| Total Debt | $457.8 million | $457.8 million (Balance Sheet) |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 11% for both the three and nine-month periods compared to the prior year. International Merchant Services revenue grew 24% (three months) and 22% (nine months), driven by the acquisition of ZAO United Card Service (UCS) in Russia and favorable currency trends in the UK. North America revenue grew 7% (three months) and 8% (nine months).
- Profitability: Operating income increased 18% for the three months and 10% for the nine months. The significant improvement in net income compared to the prior year is largely due to the absence of a $147.7 million goodwill impairment charge recorded in the prior year's Money Transfer segment.
- Discontinued Operations: The Money Transfer segment, previously a major loss driver due to impairment, is now reported as discontinued. It generated a net income of $0.7 million for the three months ended Feb 28, 2010, compared to a loss of $141.4 million in the prior year.
- Debt Levels: Total debt increased significantly from $207.2 million to $457.8 million. This increase was primarily due to a new $300 million term loan entered into in July 2009 to refinance credit facilities used for the acquisition of the remaining 49% interest in HSBC Merchant Services LLP.
- Currency Impact: Foreign currency fluctuations increased revenues by $18.2 million for the three months and $2.4 million for the nine months ended Feb 28, 2010.
Guidance, Outlook, and Risks
- Strategic Transactions: The company expects to close the sale of its Money Transfer business before the end of fiscal year 2010, with proceeds estimated between $85 million and $110 million. The company also completed the acquisition of Auctionpay, Inc. for $22.0 million to expand into fundraising payment processing.
- Capital Allocation: The company maintains a share repurchase program with $13.0 million remaining under authorization. Dividends of $0.02 per share were paid for the quarter.
- Technology Investment: The company is migrating to a new processing platform (G2), with $53.8 million of hardware and software costs placed into service during the nine-month period. Depreciation and amortization expenses are expected to increase as migrations complete.
- Risks and Contingencies:
- Redeemable Noncontrolling Interest: The company has a put option obligation related to its Asia-Pacific business (GPAP), with a maximum estimated redemption amount of $99.0 million as of Feb 28, 2010.
- Market Risk: The company is exposed to foreign currency exchange rate fluctuations and variable interest rates on its debt. It does not currently hedge translation risk.
- Internal Controls: Integration of financial reporting for recently acquired entities (HSBC Merchant Services LLP and UCS) relies on data provided by partners, which could materially affect internal controls.
Investor Verification Checklist
- Discontinued Operations Closure: Verify the timing and final proceeds of the Money Transfer business sale to Palladium Equity Partners.
- Debt Servicing: Review the impact of the increased debt load ($457.8 million) on future interest expenses and cash flow, noting the variable rates tied to LIBOR.
- Acquisition Integration: Assess the financial performance and integration progress of the UCS (Russia) and HSBC Merchant Services (UK) acquisitions.
- Redeemable Interest Obligation: Monitor the status of the $99.0 million put option liability associated with the Asia-Pacific joint venture.
- Technology Migration Costs: Track the capital expenditure and depreciation impact of the G2 platform rollout on future operating margins.