GPN

Global Payments Inc. 10-K Summary (Fiscal Year Ended May 31, 2010)

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended May 31, 2010. Global Payments Inc. is a leading provider of electronic payment transaction processing services, operating primarily in two segments: North America Merchant Services and International Merchant Services. The company serves merchants, financial institutions, and ISOs across the United States, Canada, the United Kingdom, the Asia-Pacific region, the Czech Republic, and the Russian Federation. During the period, the company completed the disposition of its money transfer business (DolEx and Europhil), which is now reported as a discontinued operation.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 12% year-over-year, driven by growth in direct merchant acquiring markets globally. North America revenue grew 10% to $1,220.1 million, while International revenue grew 19% to $422.4 million.
• Profitability Surge: Net income attributable to Global Payments increased 446% to $203.3 million. This significant increase is largely due to the absence of a $147.7 million impairment charge recorded in fiscal 2009 related to the money transfer business.
• Segment Performance:
  • North America: Operating income increased slightly to $275.4 million, though margins declined from 24.7% to 22.6% due to the dilutive effect of the ISO channel growth.
  • International: Operating income increased 37% to $113.7 million, with margins expanding from 23.3% to 26.9%, driven by the HSBC Merchant Services LLP acquisition and strong performance in the UK and Asia-Pacific.
• Debt Levels: Total debt increased significantly to $500.3 million from $207.2 million, primarily due to a new $300 million term loan entered into in July 2009 to fund the acquisition of the remaining 49% interest in HSBC Merchant Services LLP.

Guidance, Outlook, and Risks

• Capital Allocation: The company repurchased 2.38 million shares of common stock for $100 million in fiscal 2010. Capital expenditures for fiscal 2011 are expected to approximate $85 million, focusing on terminal replacement, a new Global Service Center in Manila, and a new data center.
• Strategic Acquisitions: The company acquired Auctionpay, Inc. (Greater Giving) for $22 million to expand into the fundraising vertical market. It also acquired the remaining 49% of HSBC Merchant Services LLP for $307.7 million.
• Key Risks:
  • Sponsorship Risk: Canadian Imperial Bank of Commerce (CIBC) notified the company it will not renew its Visa sponsorship in Canada after March 2011. Failure to secure a replacement sponsor or establish a wholly-owned loan company could materially reduce revenues.
  • Regulatory & Tax: A reduction in the UK corporate tax rate from 28% to 24% is expected to result in a $9 million reduction of deferred tax assets and an increase in tax provision in fiscal 2011.
  • Technology & Security: Risks include system failures, security breaches, and the costs associated with migrating to new technology platforms (G2) and chip card technology in Canada.

Investor Verification Checklist

• Verify the status of the Canadian Visa sponsorship renewal with CIBC and the progress of establishing a wholly-owned loan company.
• Confirm the impact of the UK corporate tax rate reduction on fiscal 2011 earnings and deferred tax assets.
• Monitor the integration progress and cost synergies of the HSBC Merchant Services LLP acquisition.
• Review the company's ability to maintain operating margins in the North America segment as the ISO channel continues to grow.
• Assess the timeline and costs associated with the migration to the G2 technology platform and chip card compliance in Canada.