Global Payments Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended November 30, 2012 (fiscal 2013 second quarter). The company provides electronic payment processing services and reports North America Merchant Services and International Merchant Services segments. Figures below are in U.S. dollars; financial statement amounts are rounded to millions unless noted.
Financial performance
| Metric | Three months ended Nov. 30, 2012 | Year-over-year change | Six months ended Nov. 30, 2012 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $588.5m | +$58.0m (+11%) | $1,178.8m | +$105.5m (+10%) |
| Operating income | $116.6m | +$20.0m (+21%) | $197.1m | −$8.1m (−4%) |
| Operating margin | 19.8% | 18.2% prior year | 16.7% | 19.1% prior year |
| Net income attributable to Global Payments | $70.2m | +$9.0m (+15%) | $116.9m | −$8.3m (−7%) |
| Diluted EPS | $0.89 | $0.78 prior year | $1.48 | $1.57 prior year |
| Net interest and other expense | $12.4m | $2.6m prior year | $14.0m | $4.2m prior year |
Quarterly operating income benefited from a $14.5m credit for intrusion-related costs after the company reduced its estimate of card-network charges. For the six-month period, the company recorded $9.5m of intrusion expense. Revenue growth reflected U.S. and European expansion, transaction growth, and lower debit interchange costs; Canada was affected by pricing compression.
Quarterly segment revenue was $420.8m in North America (+11%) and $167.8m internationally (+11%). For the six months, North America revenue was $847.6m (+12%) and international revenue was $331.3m (+5%). Six-month North America segment operating income fell 6% to $134.3m, with margin declining to 15.8% from 18.8%; international segment operating income rose 11% to $111.1m, with margin increasing to 33.5% from 31.7%.
Cash flow, balance sheet and debt
- Six-month operating cash flow was $124.8m, versus $314.1m used in the prior-year period. The comparison was substantially affected by a $488.2m year-over-year change in net settlement processing assets and obligations.
- Investing cash outflow was $462.6m, mainly reflecting the APT acquisition. Financing cash inflow was $537.3m, including debt issuance. Cash and cash equivalents ended at $998.3m.
- Management identified $419.0m as available cash. Cash included $315.4m related to merchant reserves; $365.9m of available cash was held by foreign subsidiaries whose earnings were considered permanently reinvested for U.S. tax purposes.
- Total debt was $1,092.8m at November 30, 2012, up from $528.4m at May 31, 2012. Current debt was $314.8m and long-term debt $778.0m. The company reported $1,282.3m of incremental borrowing availability and compliance with debt covenants.
- Cash dividends were $0.02 per share for the quarter and $0.04 per share for the six months. The board later authorized total share repurchases of up to $300m; $287.3m remained after purchases reported through the filing.
Transactions, outlook and material risks
- On October 1, 2012, the company acquired Accelerated Payment Technologies (APT) for $413m less working capital, funded with a new term loan. APT expands U.S. direct distribution; because the company already processed most APT merchants, management expected no material revenue change, but expected to eliminate residual payments to APT.
- The company completed the purchase of HSBC’s remaining 44% interest in its Asia-Pacific business on December 1, 2012, for $242m, funded with excess cash and existing credit lines. The purchase was a subsequent event; the amount was recorded as a current liability at November 30.
- Management expected fiscal 2013 capital expenditures of approximately $110m and stated that cash, borrowing capacity and operating cash flow were expected to be sufficient for planned requirements. No earnings or revenue guidance was provided.
- Processing-system intrusion: Unauthorized access identified in March 2012 led certain card networks to remove the company from their lists of PCI DSS-compliant providers. Remediation was substantially complete, but an independent assessor was still evaluating it. The company continued processing through all networks and said confirmed revenue effects were immaterial; failure or delay in regaining compliant status could materially harm the business.
- Life-to-date intrusion expense was reported at $93.9m, including an estimated $35.9m of network fraud losses, fines and other charges; $12.8m of that estimate remained accrued at November 30. Some network matters were unresolved and the company could not estimate additional possible losses. It expected $25m–$35m of fiscal 2013 investigation, remediation and compliance costs, including the $9.5m already recorded, and said additional insurance recoveries of up to $28m might be available, with uncertain timing.
- A class action related to the intrusion remained pending; the company had not accrued a loss and could not estimate a possible loss range. Government inquiries and further claims were also possible. The company’s Canadian Visa participation was temporary through March 31, 2013, subject to extension or an alternative sponsor arrangement.
- Six-month foreign-exchange movements reduced revenue by $15m and diluted EPS by $0.03. The company did not hedge translation exposure. Variable-rate borrowings also expose it to interest-rate changes.
Important facts for investors to verify
- Progress and timing of independent PCI DSS assessment and restoration to card-network compliant-provider lists.
- Final network assessments, remaining intrusion liabilities, litigation or regulatory developments, and actual insurance recoveries.
- Post-acquisition debt, liquidity and covenant headroom after the $242m Asia-Pacific interest purchase.
- Whether revenue growth translates into sustained operating-margin improvement, particularly in North America and Canada.
- Actual fiscal 2013 capital spending and the effect of foreign exchange, settlement-related cash balances and merchant reserves on usable liquidity.