GPN 2.28.2013 10Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 2013

OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             

Commission file number: 001-16111
GLOBAL PAYMENTS INC.
(Exact name of registrant as specified in charter)

Georgia
 
58-2567903
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
10 Glenlake Parkway, North Tower, Atlanta, Georgia
 
30328
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code: (770) 829-8000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý   No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ý   No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý                        Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)    Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨   No ý
The number of shares of the issuer’s common stock, no par value outstanding as of April 1, 2013 was 76,230,946.


Table of Contents

GLOBAL PAYMENTS INC.
FORM 10-Q
For the quarterly period ended February 28, 2013


TABLE OF CONTENTS
 
 
  
 
Page
PART I - FINANCIAL INFORMATION
ITEM 1.
  
FINANCIAL STATEMENTS
 
 
  
 
 
 
 
 
  
 
  
 
  
 
 
ITEM 2.
 
ITEM 3.
  
ITEM 4.
  
PART II - OTHER INFORMATION
ITEM 1.
 
ITEM 2.
 
ITEM 6.
  
SIGNATURES    



2

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

GLOBAL PAYMENTS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
 
 
Three Months Ended
 
February 28, 2013
 
February 29, 2012
Revenues    
$
578,746

 
$
533,539

Operating expenses:


 


Cost of service
217,465

 
194,218

Sales, general and administrative
271,696

 
246,973

Processing system intrusion
(1,189
)
 

 
487,972

 
441,191

Operating income    
90,774

 
92,348

Other income (expense):
 
 
 
Interest and other income    
2,536

 
2,368

Interest and other expense    
(7,063
)
 
(3,698
)
 
(4,527
)
 
(1,330
)
Income before income taxes
86,247

 
91,018

Provision for income taxes    
(23,433
)
 
(25,328
)
Net income
62,814

 
65,690

Less: Net income attributable to noncontrolling interests, net of income tax provision of $707 and $771, respectively
(4,352
)
 
(7,770
)
Net income attributable to Global Payments
$
58,462

 
$
57,920

 
 
 
 
Earnings per share attributable to Global Payments:
 
 
 
Basic
$
0.75

 
$
0.74

Diluted
$
0.75

 
$
0.73

Dividends per share
$
0.02

 
$
0.02

See Notes to Unaudited Consolidated Financial Statements.



3

Table of Contents

GLOBAL PAYMENTS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
 
 
Nine Months Ended
 
February 28, 2013
 
February 29, 2012
Revenues    
$
1,757,571

 
$
1,606,815

Operating expenses:
 
 
 
Cost of service    
632,124

 
571,685

Sales, general and administrative
829,292

 
737,593

Processing system intrusion
8,311

 

 
1,469,727

 
1,309,278

Operating income    
287,844

 
297,537

Other income (expense):
 
 
 
Interest and other income    
6,706

 
7,128

Interest and other expense    
(25,217
)
 
(12,663
)
 
(18,511
)
 
(5,535
)
Income before income taxes
269,333

 
292,002

Provision for income taxes    
(76,986
)
 
(86,082
)
Net income
192,347

 
205,920

Less: Net income attributable to noncontrolling interests, net of income tax provision of $3,276 and $3,709, respectively
(17,027
)
 
(22,845
)
Net income attributable to Global Payments
$
175,320

 
$
183,075

 
 
 
 
Earnings per share attributable to Global Payments:
 
 
 
Basic
$
2.24

 
$
2.32

Diluted
$
2.23

 
$
2.30

Dividends per share
$
0.06

 
$
0.06

See Notes to Unaudited Consolidated Financial Statements.



4

Table of Contents


GLOBAL PAYMENTS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except per share data)

 
Three Months Ended
 
February 28, 2013
 
February 29, 2012
 
 
 
 
Net income
$
62,814

 
$
65,690

Other comprehensive income (loss):
 
 
 
   Foreign currency translation adjustments
(28,288
)
 
21,351

   Income tax benefit (provision) related to foreign currency translation adjustments
3,960

 
(3,898
)
Other comprehensive (loss) income, net of tax
(24,328
)
 
17,453

 
 
 
 
Comprehensive income
38,486

 
83,143

   Less: comprehensive income attributable to noncontrolling interests
(5,230
)
 
(4,833
)
Comprehensive income attributable to Global Payments
$
33,256

 
$
78,310


 
Nine Months Ended
 
February 28, 2013
 
February 29, 2012
 
 
 
 
Net income
$
192,347

 
$
205,920

Other comprehensive income (loss):
 
 
 
   Foreign currency translation adjustments
30,842

 
(58,481
)
   Income tax benefit related to foreign currency translation adjustments
814

 
783

Other comprehensive income (loss), net of tax
31,656

 
(57,698
)
 
 
 
 
Comprehensive income
224,003

 
148,222

   Less: comprehensive income attributable to noncontrolling interests
(25,457
)
 
(11,168
)
Comprehensive income attributable to Global Payments
$
198,546

 
$
137,054

See Notes to Unaudited Consolidated Financial Statements.


5

Table of Contents

GLOBAL PAYMENTS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
February 28, 2013
 
May 31, 2012
 
(Unaudited)
 
 
ASSETS
 
  
 

Current assets:
 
  
 

Cash and cash equivalents    
$
682,960

  
$
781,275

Accounts receivable, net of allowances for doubtful accounts of $478 and $532, respectively
166,271

  
182,962

Claims receivable, net of allowances for losses of $3,438 and $3,435, respectively
897

  
1,029

Settlement processing assets    
208,471

  
217,994

Inventory
11,349

  
9,864

Deferred income taxes    
6,350

  
21,969

Prepaid expenses and other current assets    
70,564

  
33,646

Total current assets    
1,146,862

  
1,248,739

Goodwill    
1,051,614

  
724,687

Other intangible assets, net
412,995

  
290,188

Property and equipment, net of accumulated depreciation of $185,722 and $161,911, respectively
341,573

  
305,848

Deferred income taxes    
93,626

 
97,235

Other    
29,554

  
21,446

Total assets    
$
3,076,224

  
$
2,688,143

LIABILITIES AND EQUITY
 
  
 
Current liabilities:
 
  
 
Lines of credit    
$
167,152

 
$
215,391

Current portion of long-term debt
72,332

 
76,420

Accounts payable and accrued liabilities    
227,367

  
316,313

Settlement processing obligations    
201,190

 
216,878

Income taxes payable    
5,787

 
12,283

Total current liabilities    
673,828

  
837,285

Long-term debt
883,462

 
236,565

Deferred income taxes    
162,389

  
106,644

Other long-term liabilities    
71,307

  
62,306

Total liabilities    
1,790,986

  
1,242,800

Commitments and contingencies (See Note 12)


  


Redeemable noncontrolling interest (See Note 3)

  
144,422

Equity:
 
  
 
Preferred stock, no par value; 5,000,000 shares authorized and none issued    

  

Common stock, no par value; 200,000,000 shares authorized; 76,749,164 and 78,551,297 issued and outstanding at February 28, 2013 and May 31, 2012, respectively

  

Paid-in capital
207,666

  
358,728

Retained earnings
946,195

  
843,456

Accumulated other comprehensive loss
(6,774
)
  
(30,000
)
Total Global Payments shareholders’ equity    
1,147,087

  
1,172,184

Noncontrolling interest    
138,151

 
128,737

Total equity    
1,285,238

 
1,300,921

Total liabilities and equity    
$
3,076,224

  
$
2,688,143

See Notes to Unaudited Consolidated Financial Statements.

6

Table of Contents

GLOBAL PAYMENTS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Nine Months Ended
 
February 28, 2013
 
February 29, 2012
Cash flows from operating activities:
 
 
 
Net income
$
192,347

 
$
205,920

Adjustments to reconcile net income to net cash provided by (used in) operating activities:


 


Depreciation and amortization of property and equipment    
40,856

 
35,821

Amortization of acquired intangibles    
42,091

 
37,676

Share-based compensation expense
14,063

 
12,796

Provision for operating losses and bad debts    
16,681

 
18,833

Deferred income taxes    
27,282

 
5,858

Other, net    
(3,692
)
 
(949
)
Changes in operating assets and liabilities, net of the effects of acquisitions:


 


Accounts receivable    
17,706

 
10,502

Claims receivable    
(9,235
)
 
(11,744
)
Settlement processing assets and obligations, net    
(12,028
)
 
(523,802
)
Inventory    
(1,535
)
 
(4,773
)
Prepaid expenses and other assets    
(34,898
)
 
(2,388
)
Accounts payable and other accrued liabilities    
(78,375
)
 
(22,211
)
Income taxes payable    
(6,496
)
 
11,615

Net cash provided by (used in) operating activities
204,767

 
(226,846
)
Cash flows from investing activities:
 
 
 
Business, intangible and other asset acquisitions, net of cash acquired
(433,427
)
 
(44,245
)
Capital expenditures    
(75,016
)
 
(71,084
)
Net decrease in financing receivables    
2,158

 
1,862

Net cash used in investing activities    
(506,285
)
 
(113,467
)
Cash flows from financing activities:
 
 
 
Net payments on short-term lines of credit
(48,239
)
 
(55,029
)
Proceeds from issuance of long-term debt
1,085,327

 
71,374

Principal payments under long-term debt
(439,789
)
 
(162,482
)
Payment of debt issuance cost
(3,987
)
 

Acquisition of redeemable noncontrolling interests
(242,000
)
 

Proceeds from stock issued under share-based compensation plans
9,257

 
9,630

Common stock repurchased - share-based compensation plans
(10,215
)
 
(4,847
)
Repurchase of common stock    
(137,653
)
 
(99,604
)
Tax benefit from employee share-based compensation    
1,791

 
2,036

Distributions to noncontrolling interest    
(13,656
)
 
(24,334
)
Dividends paid    
(4,688
)
 
(4,740
)
Net cash provided by (used in) financing activities
196,148

 
(267,996
)
Effect of exchange rate changes on cash    
7,055

 
(10,243
)
Decrease in cash and cash equivalents
(98,315
)
 
(618,552
)
Cash and cash equivalents, beginning of the period    
781,275

 
1,354,285

Cash and cash equivalents, end of the period    
$
682,960

 
$
735,733

See Notes to Unaudited Consolidated Financial Statements.

7

Table of Contents

GLOBAL PAYMENTS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

 
(in thousands, except per share data)


 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of Shares 
 
Paid-in Capital 
Retained Earnings 
 
Accumulated Other Comprehensive Income (Loss)
 
Total Global Payments
Shareholders’ Equity
 
 
Noncontrolling Interest
 
Total
Equity
Balance at May 31, 2012
78,551

 
$
358,728

$
843,456

 
$
(30,000
)
 
$
1,172,184

 
$
128,737

 
$
1,300,921

Net income
 
 
 
175,320

 
 
 
175,320

 
15,213

 
190,533

Other comprehensive income
 
 
 
 
 
23,226

 
23,226

 
7,857

 
31,083

Stock issued under employee stock plans
856

 
9,257

 
 
 
 
9,257

 
 
 
9,257

Common stock repurchased - share based compensation plans
(335
)
 
(10,215
)
 
 
 
 
(10,215
)
 
 
 
(10,215
)
Tax benefit from employee share-based compensation, net
 
 
784

 
 
 
 
784

 
 
 
784

Share-based compensation expense
 
 
14,063

 
 
 
 
14,063

 
 
 
14,063

Distributions to noncontrolling interest
 
 
 
 
 
 
 

 
(13,656
)
 
(13,656
)
Redeemable noncontrolling interest valuation adjustment
 
 
 
817

 
 
 
817

 
 
 
817

Repurchase of common stock
(2,323
)
 
(68,943
)
(68,710
)
 
 
 
(137,653
)
 
 
 
(137,653
)
Purchase of redeemable noncontrolling interest
 
 
(96,008
)
 
 
 
 
(96,008
)
 
 
 
(96,008
)
Dividends paid ($0.06 per share)
 
 
 
(4,688
)
 
 
 
(4,688
)
 
 
 
(4,688
)
Balance at February 28, 2013
76,749

 
$
207,666

$
946,195

 
$
(6,774
)
 
$
1,147,087

 
$
138,151

 
$
1,285,238


See Notes to Unaudited Consolidated Financial Statements.


8

Table of Contents

GLOBAL PAYMENTS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

 
(in thousands, except per share data)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number  of Shares 
 
Paid-in Capital 
Retained Earnings 
 
Accumulated Other Comprehensive Income (Loss)
 
Total Global Payments
Shareholders’ Equity
 
 
Noncontrolling Interest
 
Total
Equity
Balance at May 31, 2011
80,335

 
$
419,591

$
685,624

 
$
79,320

 
$
1,184,535

 
$
153,282

 
$
1,337,817

Net income
 
 
 
183,075

 
 
 
183,075

 
13,150

 
196,225

Other comprehensive loss
 
 
 
 
 
(46,021
)
 
(46,021
)
 
(12,492
)
 
(58,513
)
Stock issued under employee stock plans, net
500

 
4,783

 
 
 
 
4,783

 
 
 
4,783

Tax benefit from employee share-based compensation, net
 
 
2,036

 
 
 
 
2,036

 
 
 
2,036

Share-based compensation expense
 
 
12,796

 
 
 
 
12,796

 
 
 
12,796

Distributions to noncontrolling interest
 
 
 
 
 
 
 


 
(16,610
)
 
(16,610
)
Redeemable noncontrolling interests valuation adjustment
 
 
 
(6,883
)
 
 
 
(6,883
)
 
 
 
(6,883
)
Repurchase of common stock
(2,290
)
 
(85,015
)
(14,589
)
 
 
 
(99,604
)
 
 
 
(99,604
)
Dividends paid ($0.06 per share)
 
 
 
(4,740
)
 
 
 
(4,740
)
 
 
 
(4,740
)
Balance at February 29, 2012
78,545

 
$
354,191

$
842,487

 
$
33,299

 
$
1,229,977

 
$
137,330

 
$
1,367,307



See Notes to Unaudited Consolidated Financial Statements.


9

Table of Contents

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Business, consolidation and presentation— Global Payments Inc. is a high-volume processor of electronic transactions for merchants, multinational corporations, financial institutions, consumers, government agencies and other business and non-profit business enterprises to facilitate payments to purchase goods and services or further other economic goals. Our role is to serve as an intermediary in the exchange of information and funds that must occur between parties so that a transaction can be completed. We were incorporated in Georgia as Global Payments Inc. in September 2000 and we spun-off from our former parent company on January 31, 2001. Including our time as part of our former parent company, we have been in business since 1967.
 
These unaudited consolidated financial statements include our accounts and those of our majority-owned subsidiaries and all intercompany balances and transactions have been eliminated. These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and with Rule 10-01 of Regulation S-X.

In the opinion of our management, all known adjustments necessary for a fair presentation of the results of the interim periods have been made.  These adjustments consist of normal recurring accruals and estimates that impact the carrying value of assets and liabilities.  We suggest that these financial statements be read in conjunction with the consolidated financial statements and notes thereto included in our Form 10-K for the fiscal year ended May 31, 2012.

Use of estimatesThe preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.

Revenue recognition Our two merchant services segments primarily include processing solutions for credit cards, debit cards, and check-related services. Revenue is recognized as such services are performed. Revenue for processing services provided directly to merchants is recorded net of interchange fees charged by card issuing banks. The majority of our business model provides payment products and services directly to merchants as our end customers. We also provide similar products and services to financial institutions and a limited number of Independent Sales Organizations ("ISOs") that, in turn, resell our products and services, in which case, the financial institutions and select ISOs are our end customers. The majority of merchant services revenue is generated on services priced as a percentage of transaction value or a specified fee per transaction, depending on card type. We also charge other fees based on specific services that are unrelated to the number of transactions or the transaction value. Revenue from credit cards and signature debit cards, which are only a U.S. based card type, is generally based on a percentage of transaction value along with other related fees, while revenue from PIN debit cards is typically based on a fee per transaction.

Cash and cash equivalents Cash and cash equivalents include cash on hand and all liquid investments with an initial maturity of three months or less when purchased. Cash and cash equivalents include reserve funds collected from our merchants that serve as collateral (“Merchant Reserves”) to minimize contingent liabilities associated with any losses that may occur under the merchant agreement. We record a corresponding liability in settlement processing assets and settlement processing obligations in our consolidated balance sheet. While this cash is not restricted in its use, we believe that designating this cash to collateralize Merchant Reserves strengthens our fiduciary standing with our member sponsors and is in accordance with guidelines set by the card networks. As of February 28, 2013 and May 31, 2012, our cash and cash equivalents included $291.4 million and $328.2 million, respectively, related to Merchant Reserves.

Our cash and cash equivalents include settlement related cash balances. Settlement related cash balances represent surplus funds that we hold on behalf of our member sponsors when the incoming amount from the card networks precedes the member sponsors’ funding obligation to the merchant. Settlement related cash balances are not restricted; however, these funds are generally paid out in satisfaction of settlement processing obligations the following day. Please see Settlement processing assets and obligations below for further information.

InventoryInventory, which includes electronic point of sale terminals, automated teller machines, and related peripheral equipment, is stated at the lower of cost or fair value. Cost is determined by using the average cost method.

10

Table of Contents

 
Settlement processing assets and obligationsWe are designated as a Member Service Provider by MasterCard and an Independent Sales Organization by Visa. These designations are dependent upon member clearing banks (“Member”) sponsoring us and our adherence to the standards of the networks. We have primary financial institution sponsors in the various markets where we facilitate payment transactions with whom we have sponsorship or depository and clearing agreements. These agreements allow us to route transactions under the member banks' control and identification numbers to clear credit card transactions through Visa and MasterCard. Visa and MasterCard set the standards with which we must comply. Certain of the member financial institutions of Visa and MasterCard are our competitors. In certain markets, we are members in various payment networks, allowing us to process and fund transactions without third-party sponsorship.

We also provide credit card transaction processing for Discover Financial Services or Discover Card (“Discover”) and are designated as an acquirer by Discover. Our agreement with Discover allows us to acquire, process and fund transactions directly through Discover's network without the need of a financial institution sponsor. Otherwise, we process Discover transactions similarly to how we process MasterCard and Visa transactions. Discover publishes acquirer operating regulations, with which we must comply. We use our Members to assist in funding merchants for Discover transactions.

Funds settlement refers to the process of transferring funds for sales and credits between card issuers and merchants. Depending on the type of transaction, either the credit card interchange system or the debit network is used to transfer the information and funds between the Member and card issuer to complete the link between merchants and card issuers.

For transactions processed on our systems, we use our internal network telecommunication infrastructure to provide funding instructions to the Members who in turn fund the merchants. In certain of our markets, merchant funding primarily occurs after the Member receives the funds from the card issuer through the card networks creating a net settlement obligation on our balance sheet. In our other markets, the Member funds the merchants before the Member receives the net settlement funds from the card networks, creating a net settlement asset on our balance sheet. In certain markets, the Member provides the payment processing operations and related support services on our behalf under a transition services agreement. In such instances, we do not reflect the related settlement processing assets and obligations in our consolidated balance sheet. The Member will continue to provide these operations and services until the integration to our platform is completed. After our integration, the Member will continue to provide funds settlement services similar to the functions performed by our Members in other markets at which point the related settlement assets and obligations will be reflected in our consolidated balance sheet.

Timing differences, interchange expense, Merchant Reserves and exception items cause differences between the amount the Member receives from the card networks and the amount funded to the merchants. The standards of the card networks restrict us from performing funds settlement or accessing merchant settlement funds, and, instead, require that these funds be in the possession of the Member until the merchant is funded. However, in practice and in accordance with the terms of our sponsorship agreements with our Members, we generally follow a net settlement process whereby, if the incoming amount from the card networks precedes the Member's funding obligation to the merchant, we temporarily hold the surplus on behalf of the Member in our account at the Member bank and record a corresponding liability. Conversely, if the Member's funding obligation to the merchant precedes the incoming amount from the card networks, the amount of the Member's net receivable position is either subsequently advanced to the Member by us or the Member satisfies this obligation with its own funds. If the Member uses its own funds, the Member assesses a funding cost, which is included in interest and other expense on the accompanying consolidated statements of income. Each participant in the transaction process receives compensation for its services.

Settlement processing assets and obligations represent intermediary balances arising in our settlement process for direct merchants. Settlement processing assets consist primarily of (i) our receivable from merchants for the portion of the discount fee related to reimbursement of the interchange expense (“Interchange reimbursement”), (ii) our receivable from the Members for transactions we have funded merchants on behalf of the Members in advance of receipt of card association funding (“Receivable from Members”), (iii) our receivable from the card networks for transactions processed on behalf of merchants where we are a Member of that particular network (“Receivable from networks”), and (iv) exception items, such as customer chargeback amounts receivable from merchants (“Exception items”), all of which are reported net of (v) Merchant Reserves. Settlement processing obligations consist primarily of (i) Interchange reimbursement, (ii) Receivable from Members (iii) our liability to the Members for transactions for which we have received funding from the Members but have not funded merchants on behalf of the Members (“Liability to Members”), (iv) our liability to merchants for transactions that have been processed but not yet funded where we are a Member of that particular network (“Liability to merchants”), (v) Exception items, (vi) Merchant Reserves, (vii) the reserve for operating losses (see Reserve for operating losses below), and (viii) the reserve for sales allowances. In cases in which the Member

11

Table of Contents

uses its own funds to satisfy a funding obligation to merchants that precedes the incoming amount from the card network, we reflect the amount of this funding as a component of "Liability to Members."

A summary of these amounts as of February 28, 2013 and May 31, 2012 is as follows:

 
February 28, 2013
 
May 31,
2012
Settlement processing assets:
(in thousands)
Interchange reimbursement
$
56,810

 
$
28,699

Receivable from Members
103,116

 
77,073

Receivable from networks
101,724

 
118,942

Exception items
3,706

 
1,345

Merchant Reserves
(56,885
)
 
(8,065
)
   Total
$
208,471

 
$
217,994

 
.

 
 
Settlement processing obligations:
 
 
 
Interchange reimbursement
$
165,188

 
$
223,008

(Liability to) Receivable from Members
(30,017
)
 
589

Liability to merchants
(113,522
)
 
(128,663
)
Exception items
14,910

 
11,554

Merchant Reserves
(234,476
)
 
(320,168
)
Reserve for operating losses
(2,304
)
 
(2,325
)
Reserves for sales allowances
(969
)
 
(873
)
   Total
$
(201,190
)
 
$
(216,878
)

Reserve for operating losses As a part of our merchant credit and debit card processing and check guarantee services, we experience merchant losses and check guarantee losses, which are collectively referred to as “operating losses.”

Our credit card processing merchant customers are liable for any charges or losses that occur under the merchant agreement. In the event, however, that we are not able to collect such amount from the merchants, due to merchant fraud, insolvency, bankruptcy or any other merchant-related reason, we may be liable for any such losses based on our merchant agreement. We require cash deposits (Merchant Reserves), guarantees, letters of credit, and other types of collateral by certain merchants to minimize any such contingent liability. We also utilize a number of systems and procedures to manage merchant risk. We have, however, historically experienced losses due to merchant defaults.
  
We account for our potential liability for the full amount of the operating losses discussed above as guarantees. We estimate the fair value of these guarantees by adding a fair value margin to our estimate of losses. This estimate of losses is comprised of estimated known losses and estimated incurred but not reported losses. Estimated known losses arise from specific instances of merchant bankruptcies, closures or fraud of which we are aware at the balance sheet date but for which the ultimate amount of associated loss will not be determined until after the balance sheet date. Estimated known loss accruals are recorded when it is probable that we have incurred a loss and the loss is reasonably estimable. Estimated known losses are calculated at the merchant level based on chargebacks received to date, processed volume, and historical chargeback ratios. The estimate is reduced for any collateral that we hold. Accruals for estimated known losses are evaluated periodically and adjusted as appropriate based on actual loss experience. Incurred but not reported losses result from transactions that we process before the balance sheet date for which we have not yet received chargeback notification. We estimate incurred but not reported losses by applying historical loss ratios to our direct merchant credit card and signature debit card sales volumes processed, or processed volume. Historically, this estimation process has been materially accurate.

As of both February 28, 2013 and May 31, 2012, $2.3 million has been recorded to reflect the fair value of guarantees associated with merchant card processing. These amounts are included in settlement processing obligations in the accompanying consolidated balance sheets. The expense associated with the fair value of the guarantees of customer chargebacks is included in cost of service

12

Table of Contents

in the accompanying consolidated statements of income. For the three months ended February 28, 2013 and February 29, 2012, we recorded such expenses in the amounts of $2.0 million and $2.1 million, respectively. For both the nine months ended February 28, 2013 and February 29, 2012, we recorded such expenses in the amount of $7.3 million.
 
In our check guarantee service offering, we charge our merchants a percentage of the gross amount of the check and guarantee payment of the check to the merchant in the event the check is not honored by the checkwriter’s bank in accordance with the merchant’s agreement with us. The fair value of the check guarantee approximates cost and is equal to the fee charged for the guarantee service, and we defer this fee revenue until the guarantee is satisfied. We have the right to collect the full amount of the check from the checkwriter but have not historically recovered 100% of the guaranteed checks. Our check guarantee loss reserve is based on historical and projected loss experiences. As of both February 28, 2013 and May 31, 2012, we have a check guarantee loss reserve of $3.4 million which is included in net claims receivable in the accompanying consolidated balance sheets. For the three months ended February 28, 2013 and February 29, 2012, we recorded expenses of $2.7 million and $3.7 million, respectively. For the nine months ended February 28, 2013 and February 29, 2012, we recorded expenses of $9.4 million and $11.5 million, respectively. The estimated check returns and recovery amounts are subject to the risk that actual amounts returned and recovered in the future may differ significantly from estimates used in calculating the receivable valuation allowance.

As the potential for merchants’ failure to settle individual reversed charges from consumers in our merchant credit card processing offering and the timing of individual checks clearing the checkwriters’ banks in our check guarantee offering are not predictable, it is not practicable to calculate the maximum amounts for which we could be liable under the guarantees issued under the merchant card processing and check guarantee service offerings. It is not practicable to estimate the extent to which merchant collateral or subsequent collections of dishonored checks, respectively, would offset these exposures due to these same uncertainties.

Property and equipment— Property and equipment are stated at amortized cost. Depreciation and amortization are calculated using the straight-line method, except for certain technology assets discussed below. Leasehold improvements are amortized over the lesser of the remaining term of the lease or the useful life of the asset. Maintenance and repairs are charged to operations as incurred.

We develop software that is used in providing processing services to customers. Capitalization of internally developed software, primarily associated with operating platforms, occurs when we have completed the preliminary project stage, management authorizes the project, management commits to funding the project, it is probable the project will be completed and the project will be used to perform the function intended. The preliminary project stage consists of the conceptual formulation of alternatives, the evaluation of alternatives, the determination of existence of needed technology and the final selection of alternatives. Costs incurred prior to the completion of the preliminary project stage are expensed as incurred.

As of February 28, 2013, we have placed into service $86.5 million of hardware and software associated with our authorization processing platform, referred to as G2. The platform is designed to serve as a front-end operating environment for merchant processing and is intended to replace a number of legacy platforms that have higher cost structures. Depreciation and amortization associated with these costs is calculated based on transactions expected to be processed over the life of the platform. We believe that this method is more representative of the platform's use than the straight-line method. We are currently processing transactions on our G2 platform in seven markets in our Asia-Pacific region and for a limited number of U.S. merchants. As these markets represent a small percentage of our overall transactions, depreciation and amortization related to our G2 platform for the three and nine months ended February 28, 2013 was not significant. Depreciation and amortization expense will increase as we complete migrations of other merchants to the G2 platform.

Goodwill and other intangible assets We completed our most recent annual goodwill impairment test as of January 1, 2013 and determined that the fair value of each of our reporting units was substantially in excess of the carrying value. No events or changes in circumstances have occurred since the date of our most recent annual impairment test that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

In September 2011, the Financial Accounting Standards Board (“FASB”) issued amendments intended to simplify how entities test goodwill for impairment. The amendments permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step quantitative goodwill impairment test. Under the guidance, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying value.


13

Table of Contents

Goodwill is tested for impairment at the reporting unit level, and we have elected to perform the two-step goodwill impairment test. In the first step the reporting unit’s carrying amount, including goodwill, is compared to its fair value. If the carrying amount of the reporting unit is greater than its fair value, goodwill is considered potentially impaired and step two must be performed. Step two measures the impairment loss by comparing the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to all the assets and liabilities of that unit (including unrecognized intangibles) as if the reporting unit had been acquired in a business combination. The excess of fair value over the amounts allocated to the assets and liabilities of the reporting unit is the implied fair value of goodwill. The excess of the carrying amount over the implied fair value is the impairment loss.

We have six reporting units: North America Merchant Services, UK Merchant Services, Asia Pacific Merchant Services, Central and Eastern Europe Merchant Services, Russia Merchant Services and Spain Merchant Services. We estimate the fair value of our reporting units using a combination of the income approach and the market approach. The income approach utilizes a discounted cash flow model incorporating management’s expectations for future revenue, operating expenses, EBITDA, capital expenditures and an anticipated tax rate. We discount the related cash flow forecasts using our estimated weighted-average cost of capital for each reporting unit at the date of valuation. The market approach utilizes comparative market multiples in the valuation estimate. Multiples are derived by relating the value of guideline companies, based on either the market price of publicly traded shares or the prices of companies being acquired in the marketplace, to various measures of their earnings and cash flow. Such multiples are then applied to the historical and projected earnings and cash flow of the reporting unit in developing the valuation estimate.

Preparation of forecasts and the selection of the discount rates involve significant judgments about expected future business performance and general market conditions. Significant changes in our forecasts, the discount rates selected or the weighting of the income and market approach could affect the estimated fair value of one or more of our reporting units and could result in a goodwill impairment charge in a future period.

Other intangible assets primarily represent customer-related intangible assets (such as customer lists and merchant contracts), contract-based intangible assets (such as non-compete agreements, referral agreements and processing rights), and trademarks associated with acquisitions. Customer-related intangible assets, contract-based intangible assets and certain trademarks are amortized over their estimated useful lives of from 5 to 30 years. The useful lives for customer-related intangible assets are determined based primarily on forecasted cash flows, which include estimates for the revenues, expenses, and customer attrition associated with the assets. The useful lives of contract-based intangible assets are equal to the terms of the agreements. The useful lives of amortizable trademarks are based on our plans to phase out the trademarks in the applicable markets.

Amortization for most of our customer-related intangible assets is calculated using an accelerated method. In determining amortization expense under our accelerated method for any given period, we calculate the expected cash flows for that period that were used in determining the acquired value of the asset and divide that amount by the expected total cash flows over the estimated life of the asset. We multiply that percentage by the initial carrying value of the asset to arrive at the amortization expense for that period. If the cash flow patterns that we experience are less favorable than our initial estimates, we will adjust the amortization schedule accordingly. These cash flow patterns are derived using certain assumptions and cost allocations due to a significant amount of asset interdependencies that exist in our business.

Impairment of long-lived assetsWe regularly evaluate whether events and circumstances have occurred that indicate the carrying amount of property and equipment and finite-lived intangible assets may not be recoverable. When factors indicate that these long-lived assets should be evaluated for possible impairment, we assess the potential impairment by determining whether the carrying value of such long-lived assets will be recovered through the future undiscounted cash flows expected from use of the asset and its eventual disposition. If the carrying amount of the asset is determined not to be recoverable, a write-down to fair value is recorded. Fair values are determined based on quoted market values or discounted cash flow analyses as applicable. We regularly evaluate whether events and circumstances have occurred that indicate the useful lives of property and equipment and finite-life intangible assets may warrant revision. In our opinion, the carrying values of our long-lived assets, including property and equipment and finite-lived intangible assets, were not impaired at February 28, 2013 and May 31, 2012.

Income taxesDeferred income taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax laws and rates. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized.


14

Table of Contents

Our effective tax rates were 27.2% and 27.8% for the three months ended February 28, 2013 and February 29, 2012, respectively. Our effective tax rates were 28.6% and 29.5% for the nine months ended February 28, 2013 and February 29, 2012, respectively. The effective tax rates for the three and nine months ended February 28, 2013 and February 29, 2012 reflect reductions to our UK deferred tax asset due to legislated enacted corporate tax rate reductions in the United Kingdom of 2% in each year. Please see Note 6 – Income Tax for further information.

Fair value of financial instrumentsWe consider that the carrying amounts of our financial instruments, including cash and cash equivalents, receivables, settlement processing assets and obligations, lines of credit, accounts payable and accrued liabilities, approximate their fair value given the short-term and highly liquid nature of these items. Our subsidiary in the Russian Federation has notes payable with interest rates of 8.5% and maturity dates ranging from March 2013 through November 2016. At February 28, 2013, we believe the carrying amount of these notes approximates fair value. Our term loans include variable interest rates based on the prime rate or London Interbank Offered Rate ("LIBOR") plus a margin based on our leverage position. At February 28, 2013, the carrying amount of our term loans approximates fair value. The estimated fair value of our term loan was calculated using a discounted cash flow method using market yields for issuances of similar size and credit quality and is considered to be a level 3 measurement. Please see Note 5 – Long-Term Debt and Credit Facilities for further information regarding the carrying value of our term loans and notes.

Financing receivablesOur subsidiary in the Russian Federation purchases Automated Teller Machines ("ATMs") and leases those ATMs to our sponsor bank. We have determined these arrangements to be direct financing leases. Accordingly, we have $9.6 million ($6.9 million, net of the related deferred income) and $13.5 million ($9.1 million, net of the related deferred income) of financing receivables included in our February 28, 2013 and May 31, 2012 consolidated balance sheets, respectively.

There is an inherent risk that our customer may not pay the contractual balances due. We periodically review the financing receivables for credit losses and past due balances to determine whether an allowance should be recorded. Historically we have not had any credit losses or past due balances associated with these receivables, and therefore we do not have an allowance recorded. We have had no financing receivables modified as troubled debt restructurings nor have we had any purchases or sales of financing receivables.

Foreign currenciesWe have significant operations in a number of foreign subsidiaries whose functional currency is their local currency.  Gains and losses on transactions denominated in currencies other than the functional currencies are included in determining net income for the period.  For the three and nine months ended February 28, 2013 and February 29, 2012, our transaction gains and losses were insignificant.

The assets and liabilities of subsidiaries whose functional currency is a foreign currency are translated at the period-end rate of exchange. Income statement items are translated at the weighted average rates prevailing during the period. The resulting translation adjustment is recorded as a component of other comprehensive income and is included in equity. Translation gains and losses on intercompany balances of a long-term investment nature are also recorded as a component of other comprehensive income.

Earnings per shareBasic earnings per share is computed by dividing reported earnings available to common shareholders by the weighted average shares outstanding during the period. Earnings available to common shareholders are the same as reported net income attributable to Global Payments for all periods presented.
 
Diluted earnings per share is computed by dividing reported earnings available to common shareholders by the weighted average shares outstanding during the period and the impact of securities that would have a dilutive effect on earnings per share. All options with an exercise price less than the average market share price for the period are assumed to have a dilutive effect on earnings per share. The diluted share base for both the three months ended February 28, 2013 and February 29, 2012 excludes shares of 0.1 million related to stock options. The diluted share base for the nine months ended February 28, 2013 and February 29, 2012 excludes shares of 0.4 million and 0.3 million, respectively, related to stock options. These shares were not considered in computing diluted earnings per share because including them would have had an antidilutive effect. Additionally, the forward contract to repurchase our shares associated with our Accelerated Share Repurchase program has been excluded due to its antidilutive effect. Please see Note 7 - Shareholders' Equity for further information regarding the Accelerated Share Repurchase Program. No additional securities were outstanding that could potentially dilute basic earnings per share.

The following table sets forth the computation of diluted weighted average shares outstanding for the three and nine months ended February 28, 2013 and February 29, 2012 (in thousands):

15

Table of Contents


 
Three Months Ended
 
Nine Months Ended
 
February 28, 2013
 
February 29, 2012
 
February 28, 2013
 
February 29, 2012
 
 
 
 
 
 
 
 
Basic weighted average shares outstanding    
77,756

 
78,421

 
78,364

 
78,937

Plus: dilutive effect of stock options and other share-based awards
568

 
644

 
383

 
574

Diluted weighted average shares outstanding    
78,324

 
79,065

 
78,747

 
79,511


Repurchased shares - We account for the retirement of repurchased shares using the par value method. The cost of repurchased and retired shares is allocated between paid-in-capital and retained earnings by comparing the price of shares repurchased to the original issue proceeds of those shares. When the repurchase price of the shares repurchased is greater than the original issue proceeds, the excess is charged to retained earnings. We use a last-in, first-out cost flow assumption to identify the original issue proceeds to the costs of the shares repurchased. We believe that this allocation method is preferable because it more accurately reflects our paid-in capital balances by allocating the cost of the shares repurchased and retired to paid-in capital in proportion to paid-in capital associated with the original issuance of said shares.

New accounting pronouncements— From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that are adopted by us as of the specified effective date. Unless otherwise discussed, our management believes that the impact of recently issued standards that are not yet effective will not have a material impact on our consolidated financial statements upon adoption.

In March 2013, the FASB issued ASU 2013-5, "Foreign Currency Matters" ("ASU 2013-5"). The amendments in ASU 2013-5 resolve the diversity in practice about whether current literature applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. In addition, the amendments in ASU 2013-5 resolve the diversity in practice for the treatment of business combinations achieved in stages (sometimes also referred to as step acquisitions) involving a foreign entity. ASU 2013-5 is effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2013. This standard is effective for us beginning June 1, 2014. We are currently evaluating the impact of ASU 2013-5 on our consolidated financial statements.

In December 2011, the FASB issued ASU 2011-11, "Disclosures About Offsetting Assets and Liabilities" ("ASU 2011-11"). The amendments in ASU 2011-11 require entities to disclose information about offsetting and related arrangements to enable users of financial statements to understand the effect of those arrangements on an entity's financial position. The amendments require enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either (i) offset in accordance with current literature or (ii) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with current literature. ASU 2011-11 is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. This standard will become effective for us beginning June 2013. The disclosures required by ASU 2011-11 will be applied retrospectively for all comparative periods presented. We are currently evaluating the impact of ASU 2011-11 on our settlement processing assets and obligations disclosures.

NOTE 2-PROCESSING SYSTEM INTRUSION

In early March of 2012, we identified and self-reported unauthorized access into a limited portion of our North America card processing system. Our investigation also revealed potential unauthorized access to servers containing personal information collected from merchants who applied for processing services. The merchants who could potentially be affected are limited to those based in the U.S. We cannot verify those potentially affected as it is unclear whether any information was exported; however, we notified potentially-affected individuals and made available credit monitoring and identity protection insurance at no cost to the individuals.


16

Table of Contents

As a result of this event, certain card networks removed us from their list of PCI DSS compliant service providers. Our work to remediate our systems and processes is complete. We hired a Qualified Security Assessor, or QSA, to conduct an independent review of the PCI DSS compliance of our systems. Our QSA completed the evaluation of our remediation work. Global Payments Direct, Inc, our primary operating entity, has been returned to the list of PCI DSS compliant service providers and we have received reports on compliance covering all of our systems that process, store, transmit or otherwise utilize card data. To date, we have not experienced a material loss of revenue that we can confirm has been related to this event. However, this event and our related remediation efforts could potentially have a negative impact on future revenues.

During the nine months ended February 28, 2013, we recorded $8.3 million of expense associated with this incident, bringing the life-to-date total expense to $92.7 million. Of this life-to-date expense, $77.1 million represents costs incurred through February 28, 2013 for professional fees and other costs associated with the investigation and remediation, incentive payments to certain business partners and costs associated with credit monitoring and identity protection insurance. An additional $35.6 million represents total fraud losses, fines and other charges that have been imposed upon us by the card networks. We have also recorded $20.0 million of insurance recoveries based on claims submitted to date as discussed below. The $18.0 million of insurance recoveries we recorded during the three months ended February 28, 2013 resulted in a net credit of $1.2 million for total processing system intrusion costs for the quarter. During the nine months ended February 28, 2013, we reduced our accrual for fraud losses, fines and other charges by $31.8 million. We based our initial estimate of fraud losses, fines and other charges on our understanding of the rules and operating regulations published by the networks and preliminary communications with the networks. We have now reached resolution with the networks and made payments to certain networks, resulting in charges that were less than our initial estimates. The primary difference between our initial estimates and the final charges relates to lower fraud related costs attributed to this event than previously expected. The following table reflects the activity in our accrual for fraud losses, fines and other charges for the nine months ended February 28, 2013 (in thousands):

Balance at May 31, 2012
$
67,436

Adjustments
(31,781
)
Subtotal
35,655

Payments
(33,840
)
Balance at February 28, 2013
$
1,815


We expect to make final payments to networks for fraud losses, fines and other charges during the fourth quarter of fiscal year 2013. We anticipate that we will continue to incur professional fees and other costs associated with remediation during the fourth quarter of fiscal 2013.

We are insured under policies that will provide coverage of certain costs associated with this event. The policies provide a total of $30.0 million in policy limits and contain various sub-limits of liability and other terms, conditions and limitations, including a $1.0 million deductible per claim. Our insurers have been advised of the circumstances surrounding our recent event. During fiscal year 2012, we recorded $2.0 million in insurance recoveries based on claims submitted to date. During the nine months ended February 28, 2013, we received assessments from certain networks and submitted additional claims to the insurers and recorded $18.0 million in additional insurance recoveries based on our negotiations with our insurers. We will record receivables for any additional recoveries in the periods in which we determine such recovery is probable and the amount can be reasonably estimated.

A class action arising out of the processing system intrusion was filed against us on April 4, 2012 by Natalie Willingham (individually and on behalf of a putative nationwide class) (the "Plaintiff").  Specifically, Ms. Willingham alleged that we failed to maintain reasonable and adequate procedures to protect her personally identifiable information (“PII”) which she claims resulted in two fraudulent charges on her credit card in March 2012.  Further, Ms. Willingham asserted that we failed to timely notify the public of the data breach.  Based on these allegations, Ms. Willingham asserted claims for negligence, violation of the Federal Stored Communications Act, willful violation of the Fair Credit Reporting Act, negligent violation of the Fair Credit Reporting Act, violation of Georgia's Unfair and Deceptive Trade Practices Act, negligence per se, breach of third-party beneficiary contract, and breach of implied contract.  Ms. Willingham sought an unspecified amount of damages and injunctive relief. The lawsuit was filed in the United States District Court for the Northern District of Georgia.  On May 14, 2012, we filed a motion to dismiss.  On July 11, 2012, Plaintiff filed a motion for leave to amend her complaint, and on July 16, 2012, the Court granted that motion.  She then filed an amended complaint on July 16, 2012. The amended complaint did not add any new causes of action.  Instead, it added two new named Plaintiffs (Nadine and Robert Hielscher) (together with Plaintiff, the "Plaintiffs") and dropped Plaintiff's claim for negligence per se.  On August 16, 2012, we filed a motion to dismiss the Plaintiffs' amended complaint.  The Plaintiffs' filed their response in opposition to our motion to dismiss on October 5, 2012, and we subsequently filed our reply brief on October 22, 2012.  The magistrate judge issued a report and recommendation recommending dismissal of all of Plaintiffs' claims with

17

Table of Contents

prejudice.  The Plaintiffs subsequently agreed to voluntarily dismiss the lawsuit with prejudice, with each party bearing its own fees and costs. This was the only consideration exchanged by the parties in connection with Plaintiffs' voluntary dismissal with prejudice of the lawsuit.  The lawsuit was dismissed with prejudice on March 6, 2013.

NOTE 3—BUSINESS AND INTANGIBLE ASSET ACQUISITIONS

Fiscal 2013

Accelerated Payment Technologies

On October 1, 2012, we completed the acquisition of 100% of the common stock of Accelerated Payment Technologies ("APT") for $413.0 million less working capital. We funded the acquisition using proceeds from a term loan. We acquired APT, a provider of fully-integrated payment technology solutions for small and medium sized merchants, to expand our direct distribution capabilities in the United States. This acquisition has been recorded as a business combination, and the purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values. The purchase price of APT was determined by analyzing the historical and prospective financial statements. Acquisition costs associated with this purchase were not material.

The following table summarizes the preliminary purchase price allocation, which is subject to the final deferred income tax computations (in thousands):
Goodwill
$
308,518

Customer-related intangible assets
97,200

Contract-based intangible assets
30,600

Acquired technology
15,000

Fixed assets
1,309

Other
3,708

Total assets acquired
456,335

Deferred income taxes
(46,167
)
     Net assets acquired       
$
410,168


The goodwill associated with the acquisition is not deductible for tax purposes. The customer-related intangible assets have estimated amortization periods of 12 years. The contract-based intangible assets have amortization periods of 1.5 to 10 years. The acquired technology has an amortization period of 8 years.

Prior to the acquisition, we processed transactions for the majority of APT's merchants via an ISO relationship. As a result, our revenue will not materially change with this acquisition and the amount of incremental revenue and earnings of APT since the acquisition date included in the consolidated statement of income for the three and nine months ended February 28, 2013 is not material. With the acquisition, we will no longer pay a monthly residual to APT. The following pro forma information shows the results of our operations for the three and nine months ended February 28, 2013 and February 29, 2012 as if the APT acquisition had occurred June 1, 2011. The pro forma information is presented for information purposes only and is not necessarily indicative of what would have occurred if the acquisition had been made as of that date. The pro forma information is also not intended to be a projection of future results due to the integration of the acquired business.

 
Three Months Ended
 
Nine Months Ended
 
February 28, 2013
 
February 29, 2012
 
February 28, 2013
 
February 29, 2012
 
(Actual)
 
(Pro forma)
 
(Pro forma)
 
(Pro forma)
 
(in thousands, except per share data)
Total revenues
$
578,746

 
$
535,743

 
$
1,761,746

 
$
1,612,768

Net income
$
46,497

 
$
56,524

 
$
164,124

 
$
178,270




 


 


 


Net income per share, basic
$
0.60

 
$
0.72

 
$
2.09

 
$
2.26

Net income per share, diluted
$
0.59

 
$
0.71

 
$
2.08

 
$
2.24



18

Table of Contents

Redeemable Noncontrolling Interest Acquisition

On July 26, 2012, we entered into an agreement to purchase HSBC Asia's ("HSBC") 44% interest in Global Payments Asia-Pacific Limited ("GPAP") for fair value of $242.0 million. Effective December 1, 2012, we completed the purchase. We used a combination of excess cash and existing borrowings to complete the transaction.

The purchase was treated as an equity transaction and reflected as a financing cash outflow in our statement of cash flows. Accordingly, no additional value was ascribed to the assets of GPAP. The difference between the maximum redemption amount of the redeemable noncontrolling interest at July 26, 2012 and our purchase price was recorded as a reduction of paid-in capital of $96.0 million. In accordance with Accounting Standards Codification 480, Distinguishing Liabilities from Equity ("ASC 480"), from the agreement date through the close of the transaction, we accounted for our commitment to purchase the remaining 44% of GPAP as a freestanding forward contract. Accordingly as of July 26, 2012, we stopped attributing income to redeemable noncontrolling interest and any subsequent distributions to holders of the redeemable noncontrolling interest are characterized as interest expense. HSBC is entitled to dividends through the closing of the transaction pursuant to the GPAP shareholders agreement and the purchase agreement. During the nine months ended February 28, 2013, we declared a dividend for fiscal year 2012 of which $8.4 million was paid to HSBC. Such dividend is reflected as interest expense in our consolidated statements of income in the accordance with the provisions of ASC 480. During fiscal year 2014, we expect to declare an additional dividend related to GPAP operations through the closing date. We expect HSBC's share of such dividend to be reflected in interest expense in our fiscal year 2014 consolidated statements of income.

Banca Civica Acquisition

On December 12, 2012, Comercia Global Payments Entidad de Pago, S.L. ("Comercia") completed the acquisition of the merchant acquiring business of Banca Civica, S.A. from Caixabank, S.A. ("Caixabank") for €17.5 million ($22.9 million equivalent as of the acquisition date). This transaction has been recorded as a business combination, and the purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values. The purchase price of Banca Civica was determined by analyzing the historical and prospective financial statements. The results of operations of this business were not significant to our consolidated results of operations and accordingly, we have not provided pro forma information relating to this acquisition. Acquisition costs associated with this purchase were not material.

The following table summarizes the preliminary purchase price allocation, which is subject to the final valuation of intangible assets (in thousands):
Goodwill
$
8,459

Customer-related intangible assets
4,851

Contract-based intangible assets
9,570

     Net assets acquired
$
22,880


The goodwill associated with the acquisition is not deductible for tax purposes. The customer-related and contract-based intangible assets have estimated amortization periods of 10 years.

Fiscal 2012

Alfa-Bank

On December 5, 2011, we acquired the merchant acquiring business of Alfa-Bank ("Alfa"), the largest privately owned bank in Russia, for $14.1 million in cash. This acquisition has been recorded as a business combination, and the purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values. The purchase price of Alfa was determined by analyzing the historical and prospective financial statements. The results of operations of this business were not significant to our consolidated results of operations and accordingly, we have not provided pro forma information relating to this acquisition.


19

Table of Contents

The following table summarizes the purchase price allocation (in thousands):
Goodwill
$
3,021

Customer-related intangible assets
7,004

Fixed assets
1,137

Other assets
2,888

     Net assets acquired       
$
14,050


The customer-related intangible assets have estimated amortization periods of 10 years.

Malta

On December 30, 2011, we acquired a merchant acquiring business in the Republic of Malta from HSBC Malta for $14.5 million in cash. This acquisition has been recorded as a business combination, and the purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values. In conjunction with the acquisition, HSBC Malta agreed to a 10 year marketing alliance agreement in which HSBC Malta will refer customers to us for payment processing services in Malta and provide sponsorship into the card networks. The purchase price of our merchant acquiring business in Malta was determined by analyzing the historical and prospective financial statements. The results of operations of this business were not significant to our consolidated results of operations and accordingly, we have not provided pro forma information relating to this acquisition.

The following table summarizes the purchase price allocation (in thousands):
Goodwill
$
6,341

Customer-related intangible assets
4,543

Contract-based intangible assets
2,796

Fixed assets
798

     Net assets acquired       
$
14,478


The goodwill associated with the acquisition is not deductible for tax purposes. The customer-related intangible assets have estimated amortization periods of 16 years. The contract-based intangible assets have estimated amortization periods of 10 years.

CyberSource

On January 31, 2012, we acquired the U.S. merchant portfolio of CyberSource from Visa for $14.9 million. The merchant portfolio has been classified as customer-related intangible assets with estimated amortization periods of 10 years.



20

Table of Contents


NOTE 4—GOODWILL AND INTANGIBLE ASSETS

As of February 28, 2013 and May 31, 2012, goodwill and intangible assets consisted of the following:
 
 
February 28, 2013
 
May 31,
2012
 
(in thousands)
Goodwill
$
1,051,614

 
$
724,687

Other intangible assets:


 


Customer-related intangible assets
$
559,436

 
$
451,095

Trademarks, finite life
8,186

 
7,996

Contract-based intangible assets
109,382

 
66,393

Acquired technology
15,000

 

 
692,004

 
525,484

Less accumulated amortization of:
 
 
 
Customer-related intangible assets
251,585

 
214,285

Trademarks
5,805

 
4,868

Contract-based intangible assets
20,839

 
16,143

Acquired technology
780

 

 
279,009

 
235,296

Total other intangible assets, net
$
412,995

 
$
290,188


The following table discloses the changes in the carrying amount of goodwill for the nine months ended February 28, 2013:

 
North America merchant services
 
International merchant services
 



Total
 
(in thousands)
Balance at May 31, 2012
$
211,102

 
$
513,585

 
$
724,687

Accumulated impairment losses

 

 

 
211,102

 
513,585

 
724,687

 
 
 
 
 
 
Goodwill acquired
308,518

 
8,459

 
316,977

Effect of foreign currency translation
200

 
9,750

 
9,950

Balance at February 28, 2013
$
519,820

 
$
531,794

 
$
1,051,614



21

Table of Contents

NOTE 5—LONG-TERM DEBT AND CREDIT FACILITIES

Outstanding debt consisted of the following:
 
February 28,
2013
 
May 31,
2012
Lines of credit:
(in thousands)
Corporate Credit Facility - long-term
$
284,055

 
$
229,500

Short-term lines of credit:
 
 
 
United Kingdom Credit Facility
63,201

 
85,102

Hong Kong Credit Facility
36,182

 
54,564

Canada Credit Facility

 
20,033

Malaysia Credit Facility
13,841

 
12,844

Spain Credit Facility
22,480

 
17,241

Singapore Credit Facility
8,993

 
10,318

Philippines Credit Facility
7,426

 
6,336

Maldives Credit Facility
1,610

 
4,219

Macau Credit Facility
1,826

 
2,443

Sri Lanka Credit Facility
2,343

 
2,291

Taiwan Credit Facility
9,250

 

Total short-term lines of credit
167,152

 
215,391

Total lines of credit
451,207

 
444,891

Notes Payable
6,739

 
10,089

Term loans
665,000

 
73,396

Total debt
$
1,122,946

 
$
528,376

 
 
 
 
Current portion
$
239,484

 
$
291,811

Long-term debt
883,462

 
236,565

Total debt
$
1,122,946

 
$
528,376


Lines of Credit

The Corporate Credit Facility is available for general corporate purposes and to fund future strategic acquisitions. As of February 28, 2013, the interest rate on the Corporate Credit Facility was 2.26% and the facility expires on December 7, 2015. In September 2012, in conjunction with entering into a new $700.0 million term loan, we executed the accordion feature of our Corporate Credit Facility and increased the size of the facility from $600.0 million to $750.0 million. Our short-term line of credit facilities are used to fund settlement and provide a source of working capital. With certain of our credit facilities, the facility nets the amounts pre-funded to merchants against specific cash balances in local Global Payments accounts, which we characterize as cash and cash equivalents.  Therefore, the amounts reported in lines of credit, which represents the amounts pre-funded to merchants, may exceed the stated credit limit, when in fact the combined position is less than the credit limit. The total available incremental borrowings under our lines of credit at February 28, 2013 were $1,215.3 million, of which $465.9 million is available under our Corporate Credit Facility.

During the nine months ended February 28, 2013, the United Kingdom Credit Facility has been increased from £80 million to £140 million and amended to facilitate borrowings in multiple currencies. During the nine months ended February 28, 2013, the Spain Credit Facility has been increased from €210 million to €230 million.


22

Table of Contents

Term Loans

In September 2012, we entered into a five-year unsecured $700.0 million term loan agreement, with a syndicate of banks, which we used to fund our APT acquisition, to partially fund the December 2012 acquisition of the noncontrolling interest associated with our Asia-Pacific merchant services business (see Note 3 - Business and Intangible Asset Acquisitions) and to repay the outstanding balance on our Corporate Credit Facility. The term loan expires in September 2017 and bears interest, at our election, at the prime rate or LIBOR, plus a leverage based margin. As of February 28, 2013, the interest rate on the term loan was 2.20%. The term loan has scheduled quarterly principal payments of $17.5 million at the end of each fiscal quarter through maturity. As of February 28, 2013, the outstanding balance of the term loan was $665.0 million.
During the quarter ended February 28, 2013, we paid off our five-year unsecured $200.0 million term loan agreement with a syndicate of banks. The term loan had a variable interest rate, at our election, based on the prime rate or LIBOR, plus a leverage based margin.

On July 10, 2012, we paid off the remaining $13.5 million outstanding of our $300.0 million term loan agreement ($230.0 million and £43.5 million) with a syndicate of financial institutions. The term loan had a variable interest rate based on LIBOR plus a leverage based margin. 

Notes Payable

UCS, our subsidiary in the Russian Federation, has notes payable with a total outstanding balance of approximately $6.7 million at February 28, 2013. These notes have fixed interest rates of 8.5% with maturity dates ranging from March 2013 through November 2016.

Compliance with Covenants

There are certain financial and non-financial covenants contained in our various credit facilities and term loans. Our Corporate Credit Facility and $700.0 million term loan agreements include financial covenants requiring a leverage ratio no greater than 3.25 to 1.00; and a fixed charge coverage ratio no less than 2.50 to 1.00. We complied with these covenants as of and for the nine months ended February 28, 2013.

NOTE 6—INCOME TAX

We have a deferred tax asset of $89.1 million at February 28, 2013 primarily associated with the purchase of the remaining 49% interest in HSBC Merchant Services LLP in fiscal 2010 ("UK deferred tax asset").

Our effective tax rates were 27.2% and 27.8% for the three months ended February 28, 2013 and February 29, 2012, respectively. Our effective tax rates were 28.6% and 29.5% for the nine months ended February 28, 2013 and February 29, 2012, respectively. The effective tax rates for the three and nine months ended February 28, 2013 and February 29, 2012 reflect reductions to our UK deferred tax asset due to legislated enacted corporate tax rate reductions in the United Kingdom of 2% in each year.

As of February 28, 2013 and May 31, 2012, other long-term liabilities included liabilities for unrecognized income tax benefits of $51.4 million and $45.6 million, respectively. During the three months ended February 28, 2013, we recognized reduction in liabilities of $0.5 million for unrecognized income tax benefits. During the nine months ended February 28, 2013, we recognized additional liabilities of $5.8 million for unrecognized income tax benefits. During the three and nine months ended February 28, 2013 and February 29, 2012, amounts recorded for accrued interest and penalty expense related to the unrecognized income tax benefits were insignificant. We expect the amounts of unrecognized tax benefits to increase by approximately $8.3 million within the next twelve months.

We conduct business globally and file income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as the United States, United Kingdom and Canada. We are currently under audit with the United States Internal Revenue Service for fiscal years 2011 and 2010. We are no longer subject to income tax examinations for years ended May 31, 2005 and prior.

23

Table of Contents


NOTE 7—SHAREHOLDERS’ EQUITY

On July 26, 2012, our Board of Directors approved a share repurchase program that authorized the purchase of up to $150.0 million of Global Payments' stock in the open market at the current market price, subject to market conditions, business opportunities, and other factors. On January 8, 2013 our Board of Directors approved an additional share repurchase authorization of up to $150.0 million, bringing the total share repurchase authorization to $300.0 million.

On January 14, 2013, pursuant to the authorization described above, we entered into an Accelerated Share Repurchase program (''ASR'') with a financial institution to repurchase an aggregate of $125.0 million of the company's common stock. In exchange for an up-front payment of $125.0 million, the financial institution committed to deliver a number of shares during the ASR's purchase period, which ends no later than May 30, 2013. The total number of shares ultimately delivered, and therefore the average price paid per share, will be determined at the end of the purchase period based on the volume weighted average price of our stock during that period. In the third quarter of fiscal 2013, 2,023,472 shares were initially delivered to us. This does not represent the final number of shares to be delivered under the ASR. These shares were retired and accounted for as a reduction to shareholders' equity in the consolidated balance sheet. We accounted for the initial delivery of shares component of the ASR as a repurchase of common stock for purposes of calculating earnings per share. We accounted for the variable component of shares to be delivered under the ASR as a forward contract indexed to our stock which met all of the applicable criteria for equity classification, and, therefore, was not accounted for as a derivative instrument, but instead was also accounted for as a component of equity.

In addition to the ASR, we repurchased 300,000 shares of our common stock at a cost of $12.7 million, or an average of $42.18 per share, including commissions during the nine months ended February 28, 2013.

On August 8, 2011, our Board of Directors approved a share repurchase program that authorized the purchase of up to $100.0 million of Global Payments’ stock in the open market at the current market price, subject to market conditions, business opportunities, and other factors. Under this authorization, we repurchased 2,290,059 shares of our common stock at a cost of $99.6 million, or an average of $43.49 per share, including commissions during fiscal 2012. This share repurchase program has concluded.


NOTE 8—SHARE-BASED AWARDS AND OPTIONS

As of February 28, 2013, we have awards outstanding under four share-based employee compensation plans. The fair value of share-based awards is amortized as compensation expense on a straight-line basis over the vesting period.

Non-qualified stock options and restricted stock have been granted to officers, key employees and directors under the Global Payments Inc. 2000 Long-Term Incentive Plan, as amended and restated (the “2000 Plan”), the Global Payments Inc. Amended and Restated 2005 Incentive Plan (the “2005 Plan”), an Amended and Restated 2000 Non-Employee Director Stock Option Plan (the “Director Plan”), and the Global Payments Inc. 2011 Incentive Plan (the “2011 Plan”) (collectively, the “Plans”). There were no further grants made under the 2000 Plan after the 2005 Plan was effective and the Director Plan expired by its terms on February 1, 2011 so no further grants will be granted thereunder.

A total of 7.0 million shares of our common stock were reserved and made available for issuance pursuant to awards granted under the 2011 Plan. Effective with the adoption of the 2011 Plan in September of 2011, there will be no future grants under the 2005 Plan.

The following table summarizes the share-based compensation cost charged to income for (i) all stock options granted, (ii) our restricted stock program (including PRSUs and TSRs), and (iii) our employee stock purchase plan. The total income tax benefit recognized for share-based compensation in the accompanying unaudited statements of income is also presented.

24

Table of Contents

 
Three Months Ended
 
Nine Months Ended
 
February 28, 2013
 
February 29, 2012
 
February 28, 2013
 
February 29, 2012
 
(in millions)
Share-based compensation cost       
$
5.0

 
$
4.4

 
$
14.1

 
$
12.8

Income tax benefit    
$
1.5

 
$
1.5

 
$
4.1

 
$
4.2


Stock Options

Stock options are granted at 100% of fair market value on the date of grant and have 10-year terms. Stock options granted vest one year after the date of grant in 25% increments over a four year period. The Plans provide for accelerated vesting under certain conditions. We have historically issued new shares to satisfy the exercise of options. There were no options granted under the 2005 or 2011 Plans during the nine months ended February 28, 2013 and February 29, 2012.

The following is a summary of our stock option plans as of and for the nine months ended February 28, 2013:
 
 
 
Options
(in thousands)
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term
(years)
 
Aggregate Intrinsic Value
(in millions)
Outstanding at May 31, 2012
 
2,148

 
$
34

 
4.1
 
$
20.7

Granted    
 

 
$

 
 
 
 
Forfeited    
 
(71
)
 
$
42

 
 
 
 
Exercised    
 
(285
)
 
$
23

 
 
 
 
Outstanding at February 28, 2013
 
1,792

 
$
35

 
3.7
 
$
25.2

 
 
 
 
 
 
 
 
 
Options vested and exercisable at February 28, 2013
 
1,609

 
$
34

 
3.3
 
$
23.4


The aggregate intrinsic value of stock options exercised during the nine months ended February 28, 2013 and February 29, 2012 was $5.8 million and $4.0 million, respectively. As of February 28, 2013, we had $1.6 million of total unrecognized compensation cost related to unvested options which we expect to recognize over a weighted average period of 2.4 years. We recognized compensation expense for stock options of $0.4 million and $0.6 million in the three months ended February 28, 2013 and February 29, 2012, respectively. We recognized compensation expense for stock options of $1.3 million and $1.8 million in the nine months ended February 28, 2013 and February 29, 2012, respectively.

Restricted Stock

Shares and performance units awarded under the restricted stock program of the 2005 Plan and the 2011 Plan are held in escrow and released to the grantee upon the grantee’s satisfaction of conditions of the grantee’s restricted stock agreement. The grant date fair value of restricted stock awards is based on the quoted market price of our common stock at the award date.

Certain executives are granted two different types of performance units under our restricted stock program. A portion of those performance units represent the right to earn 0% to 200% of a target number of shares of Global Payments stock depending upon the achievement level of certain performance measures during the grant year (“PRSUs”). The target number of PRSUs and the performance measures (at threshold, target, and maximum) are set by the Compensation Committee of our Board of Directors. PRSUs are converted to a time-based restricted stock grant only if the Company's performance during the fiscal year exceeds pre-established goals. The other portion of these performance units represent the right to earn 0% to 200% of target shares of Global Payments stock based on Global Payments' relative total shareholder return compared to peer companies over a three year performance period

25

Table of Contents

("TSRs"). The target number of TSRs for each executive is set by the Compensation Committee of our Board of Directors and a monte carlo simulation is used to calculate the estimated share payout.

Grants of restricted awards are generally subject to forfeiture if a grantee, among other conditions, leaves our employment prior to expiration of the restricted period. New grants of restricted awards generally vest one year after the date of grant in 25% increments over a four year period, with the exception of TSRs which vest after a three year period.

The following table summarizes the changes in non-vested restricted stock awards for the nine months ended February 28, 2013.

 
Share
Awards
 
Weighted Average
Grant-Date Fair Value
 
(in thousands)
 
 
 
 
 
 
Non-vested at May 31, 2012
941

 
$
44

Granted    
555

 
44

Vested    
(312
)
 
43

Forfeited    
(68
)
 
42

Non-vested at February 28, 2013
1,116

 
44


The total fair value of shares vested during the nine months ended February 28, 2013 was $13.5 million. During the nine months ended February 29, 2012, the weighted average grant-date fair value of shares vested was $40 and the total fair value of shares vested was $12.7 million.

We recognized compensation expense for restricted stock of $4.4 million and $3.0 million in the three months ended February 28, 2013 and February 29, 2012, respectively. We recognized compensation expense for restricted stock of $12.4 million and $9.9 million in the nine months ended February 28, 2013 and February 29, 2012, respectively. As of February 28, 2013, there was $38.5 million of total unrecognized compensation cost related to unvested restricted stock awards that is expected to be recognized over a weighted average period of 1.9 years.

Employee Stock Purchase Plan

We have an Employee Stock Purchase Plan under which the sale of 2.4 million shares of our common stock has been authorized. Employees may designate up to the lesser of $25,000 or 20% of their annual compensation for the purchase of stock. The price for shares purchased under the plan is 85% of the market value on the last day of the quarterly purchase period. As of February 28, 2013, 1.0 million shares had been issued under this plan, with 1.4 million shares reserved for future issuance. We recognized compensation expense for the plan of $0.2 million and $0.1 million in the three months ended February 28, 2013 and February 29, 2012, respectively. We recognized compensation expense for the plan of $0.4 million in both the nine months ended February 28, 2013 and February 29, 2012.
 
The weighted average grant-date fair value of each designated share purchased under this plan during the nine months ended February 28, 2013 and February 29, 2012 was $6 and $7, respectively, which represents the fair value of the 15% discount.


26

Table of Contents


NOTE 9—SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow disclosures are as follows:
 
Nine Months Ended
 
February 28, 2013

February 29, 2012
 
(in thousands)
Income taxes paid, net of refunds    
$
48,966

 
$
46,112

Interest paid    
22,892

 
10,431

Financing receivables:


 


Investment in equipment for financing leases
$

 
$

Principal collections from customers – financing leases    
2,158

 
1,862

Net decrease in financing receivables    
$
2,158

 
$
1,862


NOTE 10—NONCONTROLLING INTERESTS

Effective December 1, 2012, we completed the purchase of the remaining 44% of GPAP from HSBC. Please see Note 3 - Business and Intangible Asset Acquisitions for further information. The following table details the components of redeemable noncontrolling interests for the nine months ended February 28, 2013 and February 29, 2012:

 
Nine Months Ended
 
February 28, 2013
 
February 29, 2012
 
(in thousands)
Beginning balance
$
144,422

 
$
133,858

Net income attributable to redeemable noncontrolling interest
1,814

 
9,695

Distributions to redeemable noncontrolling interest

 
(7,724
)
Foreign currency translation adjustment
573

 
(815
)
Change in the maximum redemption amount of redeemable noncontrolling interest
(817
)
 
6,883

Purchase of redeemable noncontrolling interest (See Note 3)
(145,992
)
 

Ending balance
$

 
$
141,897


For the nine months ended February 28, 2013 and February 29, 2012, net income included in the consolidated statements of changes in shareholders’ equity is reconciled to net income presented in the consolidated statements of income as follows:

 
Nine Months Ended
 
February 28, 2013
 
February 29, 2012
 
(in thousands)
Net income attributable to Global Payments
$
175,320

 
$
183,075

Net income attributable to nonredeemable noncontrolling interest
15,213

 
13,150

Net income attributable to redeemable noncontrolling interest
1,814

 
9,695

   Net income including noncontrolling interest
$
192,347

 
$
205,920


The following table is the reconciliation of net income attributable to noncontrolling interest to comprehensive income attributable to noncontrolling interest for the three and nine months ended February 28, 2013 and February 29, 2012:


27

Table of Contents

 
Three Months Ended
 
February 28, 2013
 
February 29, 2012
 
(in thousands)
Net income attributable to noncontrolling interest, net of tax
$
4,352

 
$
7,770

Foreign currency translation attributable to nonredeemable noncontrolling interests
878

 
(1,796
)
Foreign currency translation attributable to redeemable noncontrolling interests

 
(1,141
)
Comprehensive income attributable to noncontrolling interests, net of tax
$
5,230

 
$
4,833



 
Nine Months Ended
 
February 28, 2013
 
February 29, 2012
 
(in thousands)
Net income attributable to noncontrolling interest, net of tax
$
17,027

 
$
22,845

Foreign currency translation attributable to nonredeemable noncontrolling interests
7,857

 
(12,492
)
Foreign currency translation attributable to redeemable noncontrolling interests
573

 
815

Comprehensive income attributable to noncontrolling interests, net of tax
$
25,457

 
$
11,168



NOTE 11—SEGMENT INFORMATION

General information

We operate in two reportable segments, North America Merchant Services and International Merchant Services. The merchant services segments primarily offer processing solutions for credit cards, debit cards, and check-related services.

Information about profit and assets

We evaluate performance and allocate resources based on the operating income of each segment. The operating income of each segment includes the revenues of the segment less those expenses that are directly related to those revenues. Operating overhead, shared costs and certain compensation costs are included in Corporate in the following table. Interest expense or income and income tax expense are not allocated to the individual segments. Lastly, we do not evaluate performance or allocate resources using segment asset data. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in Note 1.


28

Table of Contents

Information on segments, including revenues by geographic distribution within segments, and reconciliations to consolidated revenues and consolidated operating income are as follows for the three and nine months ended February 28, 2013 and February 29, 2012:

 
Three Months Ended
 
Nine Months Ended
 
February 28,
2013
 
February 29,
2012
 
February 28,
2013
 
February 29,
2012
 
(in thousands)
Revenues:
 
 
 
 
 
 
 
   United States
$
336,354

 
$
302,105

 
$
1,022,250

 
$
882,946

   Canada
72,218

 
76,677

 
233,885

 
253,419

   North America merchant services    
408,572

 
378,782

 
1,256,135

 
1,136,365

 
 
 
 
 
 
 
 
   Europe
130,750

 
116,196

 
390,376

 
360,779

   Asia-Pacific
39,424

 
38,561

 
111,060

 
109,671

   International merchant services
170,174

 
154,757

 
501,436

 
470,450

 
 
 
 
 
 
 
 
Consolidated revenues    
$
578,746

 
$
533,539

 
$
1,757,571

 
$
1,606,815

 
 
 
 
 
 
 
 
Operating income for segments:
 
 
 
 
 
 
 
North America merchant services    
$
55,478

 
$
62,462

 
$
189,809

 
$
204,893

International merchant services    
51,820

 
47,911

 
162,947

 
148,063

Corporate    
(16,524
)
 
(18,025
)
 
(64,912
)
 
(55,419
)
Consolidated operating income    
$
90,774

 
$
92,348

 
$
287,844

 
$
297,537

 
 
 
 
 
 
 
 
Depreciation and amortization:
 
 
 
 
 
 
 
North America merchant services    
$
14,267

 
$
9,124

 
$
36,092

 
$
26,191

International merchant services    
15,147

 
15,212

 
43,004

 
45,091

Corporate    
1,478

 
922

 
3,851

 
2,215

Consolidated depreciation and amortization    
$
30,892

 
$
25,258

 
$
82,947

 
$
73,497


Our results of operations and our financial condition are not significantly reliant upon any single customer.


NOTE 12—COMMITMENTS AND CONTINGENCIES

BIN/ICA Agreements
 
In connection with our acquisition of merchant credit card operations of banks, we have entered into sponsorship or depository and processing agreements with certain of the banks. These agreements allow us to use the banks' identification numbers, referred to as Bank Identification Number ("BIN") for Visa transactions and Interbank Card Association ("ICA") number for MasterCard transactions, to clear credit card transactions through Visa and MasterCard. Certain of such agreements contain financial covenants, and we were in compliance with all such covenants as of February 28, 2013.

Our Canadian Visa sponsorship which was originally obtained through a Canadian financial institution, expired in March 2011. We have filed an application with the Office of the Superintendent of Financial Institutions Canada ("OSFI") for the formation of a wholly owned loan company in Canada which would serve as our financial institution sponsor. On December 12, 2012, the loan

29

Table of Contents

company received a restricted Order to Commence and Carry on Business from OSFI which will enable the loan company to become a direct VISA member at such time that Global Payments concludes the appropriate BIN transfer process with VISA.

While the loan company application was pending, in March 2011, we obtained temporary direct participation in the Visa Canada system.  We anticipate that the BIN transfer process with VISA will be completed by September 30, 2013.



30

Table of Contents


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

For an understanding of the significant factors that influenced our results, the following discussion should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this report. This management’s discussion and analysis should also be read in conjunction with the management’s discussion and analysis and consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2012.

General
 
We are a provider of electronic payments transaction processing services for consumers, merchants, Independent Sales Organizations ("ISOs"), financial institutions, government agencies and multi-national corporations located throughout the United States, Canada, the United Kingdom, Spain, the Republic of Malta, the Asia-Pacific region, the Czech Republic and the Russian Federation. We serve as an intermediary to facilitate payments transactions and operate in two business segments, North America Merchant Services and International Merchant Services. We were incorporated in Georgia as Global Payments Inc. in September 2000 and spun-off from our former parent company on January 31, 2001. Including our time as part of our former parent company, we have been in business since 1967.

Our North America Merchant Services and International Merchant Services segments target customers in many vertical industries including financial institutions, gaming, government, health care, professional services, restaurants, retail, universities, nonprofit organizations and utilities.

Our offerings provide merchants, ISOs and financial institutions with credit and debit card transaction processing and check-related services. The majority of our business model provides payment products and services directly to merchants as our end customers. We also provide similar products and services to financial institutions and a limited number of ISOs that, in turn, resell our products and services, in which case, the financial institutions and select ISOs are our end customers. These particular services are marketed in the United States, Canada, and parts of Eastern Europe.

The majority of merchant services revenue is generated on services priced as a percentage of transaction value or a specified fee per transaction, depending on card type. We also charge other fees based on specific services that are unrelated to the number of transactions or the transaction value. Revenue from credit cards and signature debit cards, which are only a U.S. based card type, is generally based on a percentage of transaction value along with other related fees, while revenue from PIN debit cards is typically based on a fee per transaction.

Our products and services are marketed through a variety of sales channels that include a dedicated direct sales force, ISOs, an internal telesales group, retail outlets, trade associations, alliance bank relationships and financial institutions. We seek to leverage the continued shift to electronic payments by expanding market share in our existing markets through our distribution channels or through acquisitions in North America, the Asia-Pacific region and Europe, and investing in and leveraging technology and people, thereby maximizing shareholder value. We also seek to enter new markets through acquisitions in the Asia-Pacific region, Europe, and Latin America.

Our business does not have pronounced seasonality in which more than 30% of our revenues occur in one quarter. However, each geographic channel has somewhat higher and lower quarters given the nature of the portfolio. While there is some variation in seasonality across markets, the first and fourth quarters are generally the strongest, and the third quarter tends to be the slowest due to lower volumes in the months of January and February.

Executive Overview

In early March of 2012, we identified and self-reported unauthorized access into a limited portion of our North America card processing system. Our investigation also revealed potential unauthorized access to servers containing personal information collected from merchants who applied for processing services. The merchants who could potentially be affected are limited to those based in the U.S. We cannot verify those potentially affected as it is unclear whether any information was exported; however, we notified potentially-affected individuals and made available credit monitoring and identity protection insurance at no cost to the individuals.


31

Table of Contents

As a result of this event, certain card networks removed us from their list of PCI DSS compliant service providers. Our work to remediate our systems and processes is complete. We hired a Qualified Security Assessor, or QSA, to conduct an independent review of the PCI DSS compliance of our systems. Our QSA completed the evaluation of our remediation work. Global Payments Direct, Inc, our primary operating entity, has been returned to the list of PCI DSS compliant service providers and we have received reports on compliance covering all of our systems that process, store, transmit or otherwise utilize card data. To date, we have not experienced a material loss of revenue that we can confirm has been related to this event. However, this event and our related remediation efforts could potentially have a negative impact on future revenues.

During the nine months ended February 28, 2013, we recorded $8.3 million of expense associated with this incident, bringing the life-to-date total expense to $92.7 million. Of this life-to-date expense, $77.1 million represents costs incurred through February 28, 2013 for professional fees and other costs associated with the investigation and remediation, incentive payments to certain business partners and costs associated with credit monitoring and identity protection insurance. An additional $35.6 million represents total fraud losses, fines and other charges that have been imposed upon us by the card networks. We have also recorded $20.0 million of insurance recoveries based on claims submitted to date. The $18.0 million of insurance recoveries we recorded during the three months ended February 28, 2013 resulted in a net credit of $1.2 million for total processing system intrusion costs for the quarter.

Revenues increased $150.8 million, or 9%, during the nine months ended February 28, 2013 compared to the prior year’s comparable period. This increase is primarily due to growth in our U.S. and European markets, partially offset by our results in Canada.

Operating income decreased $9.7 million during the nine months ended February 28, 2013 compared to the prior year’s comparable period. Operating margins for the nine months ended February 28, 2013 decreased to 15.1% compared to 18.0% during the nine months ended February 28, 2013. The decline in operating income and margins is primarily due to costs associated with the processing system intrusion.

For the nine months ended February 28, 2013, currency exchange rate fluctuations decreased our revenues by $14.2 million and our earnings by $0.03 per diluted share. To calculate this impact, we converted our fiscal 2013 actual revenues and expenses from continuing operations at fiscal 2012 currency exchange rates. Further fluctuations in currency exchange rates or decreases in consumer spending could cause our results to differ from our current expectations.

On July 26, 2012, we agreed to purchase the remaining 44% of GPAP from HSBC for $242.0 million. This purchase was completed effective December 1, 2012.

On September 28, 2012, we closed a new five-year senior unsecured term loan of $700.0 million and a $150.0 million increase to our existing $600.0 million senior unsecured revolving credit facility arranged by a syndicate of lenders. We used the proceeds to fund the APT acquisition described below and to repay a portion of our existing debt.

On October 1, 2012, we completed the acquisition of Accelerated Payment Technologies ("APT") for $413.0 million less working capital. We acquired APT, a provider of fully-integrated payment technology solutions for small and medium sized merchants, to expand our direct distribution capabilities in the United States. Prior to the acquisition, we processed transactions for the majority of APT's merchants via an ISO relationship. As a result, our revenue will not materially change with this acquisition. Additionally, with the acquisition, we will no longer pay a monthly residual to APT. We funded the acquisition with the new financing described above.

On December 12, 2012, Comercia Global Payments Entidad de Pago, S.L. ("Comercia") completed the acquisition of the merchant acquiring business of Banca Civica, S.A. from Caixabank, S.A. ("Caixabank") for €17.5 million ($22.9 million equivalent as of the acquisition date).


32

Table of Contents

Results of Operations

The following table shows key selected financial data for the three months ended February 28, 2013 and February 29, 2012, this data as a percentage of total revenue, and the changes between three months ended February 28, 2013 and February 29, 2012, in dollars and as a percentage of the prior year’s comparable period. APT's results of operations are included in our consolidated results of operations and results of operations of our North America merchant services segment from October 1, 2012, the date we acquired APT. Accordingly, results of operations for the three months ended February 28, 2013 reflect the results of APT's operations, while results of operations for the three months ended February 29, 2012 do not reflect any results of APT operations.
 
Three Months Ended February 28, 2013
 
% of Revenue(1)
 
Three Months Ended February 29, 2012
 
% of Revenue(1)
 
Change
 
% Change
 
(dollar amounts in thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
United States
$
336,354

 
58

 
$
302,105

 
57

 
$
34,249

 
11

Canada
72,218

 
12

 
76,677

 
14

 
(4,459
)
 
(6
)
    North America merchant services
408,572

 
71

 
378,782

 
71

 
29,790

 
8

 
 
 
 
 
 
 
 
 
 
 
 
Europe
130,750

 
23

 
116,196

 
22

 
14,554

 
13

Asia Pacific
39,424

 
7

 
38,561

 
7

 
863

 
2

    International merchant services
170,174

 
29

 
154,757

 
29

 
15,417

 
10

 
 
 
 
 
 
 
 
 
 
 
 
          Total revenues
$
578,746

 
100

 
$
533,539

 
100

 
$
45,207

 
8

 
 
 
 
 
 
 
 
 
 
 
 
Consolidated operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of service
$
217,465

 
37.6

 
$
194,218

 
36.4

 
$
23,247

 
12

Sales, general and administrative
271,696

 
46.9

 
246,973

 
46.3

 
24,723

 
10

Processing system intrusion
(1,189
)
 
(0.2
)
 

 

 
(1,189
)
 
NM

     Operating income
$
90,774

 
15.7

 
$
92,348

 
17.3

 
$
(1,574
)
 
(2
)
 
 
 
 
 
 
 
 
 
 
 
 
Operating income for segments:
 
 
 
 
 
 
 
 
 
 
 
North America merchant services
$
55,478

 
 
 
$
62,462

 
 
 
$
(6,984
)
 
(11
)
International merchant services
51,820

 
 
 
47,911

 
 
 
3,909

 
8

Corporate
(16,524
)
 
 
 
(18,025
)
 
 
 
1,501

 
8

     Operating income
$
90,774

 
 
 
$
92,348

 
 
 
$
(1,574
)
 
(2
)
 
 
 
 
 
 
 
 
 
 
 
 
Operating margin for segments:
 
 
 
 
 
 
 
 
 
 
 
North America merchant services
13.6
%
 
 
 
16.5
%
 
 
 
(2.9
)%
 
 
International merchant services
30.5
%
 
 
 
31.0
%
 
 
 
(0.5
)%
 
 
(1) Percentage amounts may not sum to the total due to rounding.


33

Table of Contents

The following table shows key selected financial data for the nine months ended February 28, 2013 and February 29, 2012, this data as a percentage of total revenue, and the changes between nine months ended February 28, 2013 and February 29, 2012, in dollars and as a percentage of the prior year’s comparable period. APT's results of operations are included in our consolidated results of operations and results of operations of our North America merchant services segment from October 1, 2012, the date we acquired APT. Accordingly, results of operations for the nine months ended February 28, 2013 reflect the results of APT's operations for five months, while results of operations for the nine months ended February 29, 2012 do not reflect any results of APT's operations.
 
Nine Months Ended February 28, 2013
 
% of Revenue(1)
 
Nine Months Ended February 29, 2012
 
% of Revenue(1)
 
Change
 
% Change
 
(dollar amounts in thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
United States
$
1,022,250

 
58

 
$
882,946

 
55

 
$
139,304

 
16

Canada
233,885

 
13

 
253,419

 
16

 
(19,534
)
 
(8
)
    North America merchant services
1,256,135

 
71

 
1,136,365

 
71

 
119,770

 
11

 
 
 
 
 
 
 
 
 
 
 
 
Europe
390,376

 
22

 
360,779

 
22

 
29,597

 
8

Asia Pacific
111,060