10-Q 1 gpn1130201210q1.htm 10-Q GPN 11.30.2012 10Q (1)
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 November 30, 2012

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 January 2, 2013 was 78,724,744.



GLOBAL PAYMENTS INC.
FORM 10-Q
For the quarterly period ended November 30, 2012


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



2


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
 
November 30, 2012
 
November 30, 2011
Revenues    
$
588,538

 
$
530,505

Operating expenses:


 


Cost of service
210,268

 
185,931

Sales, general and administrative
276,177

 
247,994

Processing system intrusion
(14,489
)
 

 
471,956

 
433,925

Operating income    
116,582

 
96,580

Other income (expense):
 
 
 
Interest and other income    
2,187

 
2,259

Interest and other expense    
(14,609
)
 
(4,878
)
 
(12,422
)
 
(2,619
)
Income before income taxes
104,160

 
93,961

Provision for income taxes    
(28,789
)
 
(25,812
)
Net income
75,371

 
68,149

Less: Net income attributable to noncontrolling interests, net of income tax provision of $948 and $1,077, respectively
(5,188
)
 
(6,968
)
Net income attributable to Global Payments
$
70,183

 
$
61,181

 
 
 
 
Earnings per share attributable to Global Payments:
 
 
 
Basic
$
0.89

 
$
0.78

Diluted
$
0.89

 
$
0.78

Dividends per share
$
0.02

 
$
0.02

See Notes to Unaudited Consolidated Financial Statements.



3


GLOBAL PAYMENTS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
 
 
Six Months Ended
 
November 30, 2012
 
November 30, 2011
Revenues    
$
1,178,825

 
$
1,073,276

Operating expenses:
 
 
 
Cost of service    
414,659

 
377,467

Sales, general and administrative
557,596

 
490,619

Processing system intrusion
9,500

 

 
981,755

 
868,086

Operating income    
197,070

 
205,190

Other income (expense):
 
 
 
Interest and other income    
4,170

 
4,760

Interest and other expense    
(18,154
)
 
(8,965
)
 
(13,984
)
 
(4,205
)
Income before income taxes
183,086

 
200,985

Provision for income taxes    
(53,553
)
 
(60,755
)
Net income
129,533

 
140,230

Less: Net income attributable to noncontrolling interests, net of income tax provision of $2,568 and $2,935, respectively
(12,675
)
 
(15,075
)
Net income attributable to Global Payments
$
116,858

 
$
125,155

 
 
 
 
Earnings per share attributable to Global Payments:
 
 
 
Basic
$
1.49

 
$
1.58

Diluted
$
1.48

 
$
1.57

Dividends per share
$
0.04

 
$
0.04

See Notes to Unaudited Consolidated Financial Statements.



4



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

 
Three Months Ended
 
November 30, 2012
 
November 30, 2011
 
 
 
 
Net income
$
75,371

 
$
68,149

Other comprehensive income (loss):
 
 
 
   Foreign currency translation adjustments
18,089

 
(69,522
)
   Income tax benefit related to foreign currency translation adjustments
3,433

 
3,499

Other comprehensive income (loss), net of tax
21,522

 
(66,023
)
 
 
 
 
Comprehensive income
96,893

 
2,126

   Less: comprehensive (income) loss attributable to noncontrolling interests
(9,776
)
 
1,614

Comprehensive income attributable to Global Payments
$
87,117

 
$
3,740


 
Six Months Ended
 
November 30, 2012
 
November 30, 2011
 
 
 
 
Net income
129,533

 
140,230

Other comprehensive income (loss):
 
 
 
   Foreign currency translation adjustments
59,130

 
(79,832
)
   Income tax (expense) benefit related to foreign currency translation adjustments
(3,146
)
 
4,681

Other comprehensive income (loss), net of tax
55,984

 
(75,151
)
 
 
 
 
Comprehensive income
185,517

 
65,079

   Less: comprehensive income attributable to noncontrolling interests
(20,227
)
 
(6,335
)
Comprehensive income attributable to Global Payments
165,290

 
58,744



5


GLOBAL PAYMENTS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
November 30, 2012
 
May 31, 2012
 
(Unaudited)
 
 
ASSETS
 
  
 

Current assets:
 
  
 

Cash and cash equivalents    
$
998,261

  
$
781,275

Accounts receivable, net of allowances for doubtful accounts of $833 and $532, respectively
183,256

  
182,962

Claims receivable, net of allowances for losses of $3,876 and $3,435, respectively
968

  
1,029

Settlement processing assets    
237,640

  
217,994

Inventory
14,147

  
9,864

Deferred income taxes    
6,464

  
21,969

Prepaid expenses and other current assets    
49,184

  
33,646

Total current assets    
1,489,920

  
1,248,739

Goodwill    
1,059,520

  
724,687

Other intangible assets, net
416,170

  
290,188

Property and equipment, net of accumulated depreciation of $179,846 and $161,911, respectively
338,195

  
305,848

Deferred income taxes    
97,966

 
97,235

Other    
26,950

  
21,446

Total assets    
$
3,428,721

  
$
2,688,143

LIABILITIES AND EQUITY
 
  
 
Current liabilities:
 
  
 
Lines of credit    
$
212,399

 
$
215,391

Current portion of long-term debt
102,425

 
76,420

Commitment to purchase redeemable noncontrolling interest (See Note 13)
242,000

 

Accounts payable and accrued liabilities    
244,499

  
316,313

Settlement processing obligations    
228,711

 
216,878

Income taxes payable    
7,436

 
12,283

Total current liabilities    
1,037,470

  
837,285

Long-term debt
777,988

 
236,565

Deferred income taxes    
167,365

  
106,644

Other long-term liabilities    
71,097

  
62,306

Total liabilities    
2,053,920

  
1,242,800

Commitments and contingencies (See Note 12)


  


Redeemable noncontrolling interest (See Note 13)

  
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; 78,724,622 and 78,551,297 issued and outstanding at November 30, 2012 and May 31, 2012, respectively

  

Paid-in capital
257,554

  
358,728

Retained earnings
957,978

  
843,456

Accumulated other comprehensive income (loss)
18,432

  
(30,000
)
Total Global Payments shareholders’ equity    
1,233,964

  
1,172,184

Noncontrolling interest    
140,837

 
128,737

Total equity    
1,374,801

 
1,300,921

Total liabilities and equity    
$
3,428,721

  
$
2,688,143

See Notes to Unaudited Consolidated Financial Statements

6


GLOBAL PAYMENTS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Six Months Ended
 
November 30, 2012
 
November 30, 2011
Cash flows from operating activities:
 
 
 
Net income
$
129,533

 
$
140,230

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


 


Depreciation and amortization of property and equipment    
26,494

 
23,444

Amortization of acquired intangibles    
25,561

 
24,796

Share-based compensation expense
9,178

 
8,425

Provision for operating losses and bad debts    
11,970

 
13,061

Deferred income taxes    
30,055

 
5,915

Other, net    
(2,231
)
 
(100
)
Changes in operating assets and liabilities, net of the effects of acquisitions:


 


Accounts receivable    
721

 
3,897

Claims receivable    
(6,600
)
 
(7,880
)
Settlement processing assets and obligations, net    
(11,671
)
 
(499,849
)
Inventory    
(4,297
)
 
(4,212
)
Prepaid expenses and other assets    
(11,204
)
 
62

Accounts payable and other accrued liabilities    
(67,869
)
 
(31,257
)
Income taxes payable    
(4,847
)
 
9,402

Net cash provided by (used in) operating activities
124,793

 
(314,066
)
Cash flows from investing activities:
 
 
 
Business, intangible and other asset acquisitions, net of cash acquired
(409,731
)
 
(7,000
)
Capital expenditures    
(54,393
)
 
(35,146
)
Net decrease in financing receivables    
1,485

 
1,203

Net cash used in investing activities    
(462,639
)
 
(40,943
)
Cash flows from financing activities:
 
 
 
Net payments on short-term lines of credit
(2,992
)
 
(45,069
)
Proceeds from issuance of long-term debt
910,327

 
71,374

Principal payments under long-term debt
(343,133
)
 
(131,345
)
Payment of debt issuance cost
(3,987
)
 

Proceeds from stock issued under share-based compensation plans
7,080

 
(768
)
Common stock repurchased - share-based compensation plans
(10,224
)
 

Repurchase of common stock    
(12,653
)
 
(99,604
)
Tax benefit from employee share-based compensation    
1,791

 
1,436

Distributions to noncontrolling interest    
(5,740
)
 
(4,660
)
Dividends paid    
(3,153
)
 
(3,169
)
Net cash provided by (used in) financing activities
537,316

 
(211,805
)
Effect of exchange rate changes on cash    
17,516

 
(16,611
)
Increase (decrease) in cash and cash equivalents
216,986

 
(583,425
)
Cash and cash equivalents, beginning of the period    
781,275

 
1,354,285

Cash and cash equivalents, end of the period    
$
998,261

 
$
770,860

See Notes to Unaudited Consolidated Financial Statements

7


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
 
 
 
116,858

 
 
 
116,858

 
10,861

 
127,719

Other comprehensive income
 
 
 
 
 
48,432

 
48,432

 
6,979

 
55,411

Stock issued under employee stock plans
807

 
7,080

 
 
 
 
7,080

 
 
 
7,080

Common stock repurchased - share based compensation plans
(333
)
 
(10,224
)
 
 
 
 
(10,224
)
 
 
 
(10,224
)
Tax benefit from employee share-based compensation, net
 
 
1,453

 
 
 
 
1,453

 
 
 
1,453

Share-based compensation expense
 
 
9,178

 
 
 
 
9,178

 
 
 
9,178

Distributions to noncontrolling interest
 
 
 
 
 
 
 

 
(5,740
)
 
(5,740
)
Redeemable noncontrolling interest valuation adjustment
 
 
 
817

 
 
 
817

 
 
 
817

Repurchase of common stock
(300
)
 
(12,653
)

 
 
 
(12,653
)
 
 
 
(12,653
)
Commitment to purchase redeemable noncontrolling interest
 
 
(96,008
)
 
 
 
 
(96,008
)
 
 
 
(96,008
)
Dividends paid ($0.04 per share)
 
 
 
(3,153
)
 
 
 
(3,153
)
 
 
 
(3,153
)
Balance at November 30, 2012
78,725

 
$
257,554

$
957,978

 
$
18,432

 
$
1,233,964

 
$
140,837

 
$
1,374,801


See Notes to Unaudited Consolidated Financial Statements.


8


GLOBAL PAYMENTS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

 
(in thousands, except per share data)

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

 
$
502,993

(112,980
)
$
715,202

 
$
79,320

 
$
1,184,535

 
$
153,282

 
$
1,337,817

Retrospective adjustment for the correction of an error (see Note 1)
 
 
(112,980
)
112,980


 

 

 

 

Retrospective adjustment for the change in accounting method for the retirement of repurchased shares (see Note 1)
 
 
29,578


(29,578
)
 

 

 

 

Balance at May 31, 2011, as adjusted
 
 
419,591


685,624

 
79,320

 
1,184,535

 
153,282

 
1,337,817

Net income
 
 
 
 
125,155

 
 
 
125,155

 
9,533

 
134,688

Other comprehensive loss
 
 
 
 
 
 
(66,411
)
 
(66,411
)
 
(10,696
)
 
(77,107
)
Stock issued under employee stock plans, net
310

 
(768
)
 
 
 
 
 
(768
)
 
 
 
(768
)
Tax benefit from employee share-based compensation, net
 
 
681

 
 
 
 
 
681

 
 
 
681

Share-based compensation expense
 
 
8,425

 
 
 
 
 
8,425

 
 
 
8,425

Distributions to noncontrolling interest
 
 
 
 
 
 
 
 


 
(4,660
)
 
(4,660
)
Redeemable noncontrolling interests valuation adjustment
 
 
 
 
(2,489
)
 
 
 
(2,489
)
 
 
 
(2,489
)
Repurchase of common stock (see Note 1)
(2,290
)
 
(85,015
)
 
(14,589
)
 
 
 
(99,604
)
 
 
 
(99,604
)
Dividends paid ($0.04 per share)
 
 
 
 
(3,169
)
 
 
 
(3,169
)
 
 
 
(3,169
)
Balance at November 30, 2011
78,355

 
$
342,914


$
790,532

 
$
12,909

 
$
1,146,355

 
$
147,459

 
$
1,293,814



See Notes to Unaudited Consolidated Financial Statements.


9


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. Our most significant estimate that is subject to change is discussed in Note 2 - Processing System Intrusion.

Correction of an error and change in accounting principle During the three months ended August 31, 2011 we determined that our presentation of repurchased shares as a separate component of shareholders' equity ("treasury stock") in previously issued financial statements was at variance with Georgia incorporation law. As such, our shares repurchased during fiscal year 2010 and the first quarter of fiscal 2011 should have been accounted for as constructively retired, and the cost of repurchased shares should have been charged to paid-in capital in accordance with our accounting policy at that time. As a result of this error, our previously reported balances of treasury stock and paid-in capital as of May 31, 2011 were misstated. To correct this error we have restated our May 31, 2011 treasury stock and paid-in capital balances. This adjustment is reflected in our consolidated statements of changes in equity by eliminating treasury stock and reclassifying this balance to paid-in capital. The May 31, 2011 treasury stock balance of $113.0 million has been reclassified to reduce paid-in capital by $113.0 million. The effect of these misstatements was limited to treasury stock and paid-in capital.

We account for the retirement of repurchased shares using the par value method. Effective June 1, 2011, we elected to change our method of accounting under the par value method. We previously accounted for the retirement of repurchased shares by charging the entire cost to paid-in capital. Our new method of accounting allocates the cost of repurchased and retired shares 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 cost 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. We reflected the application of this new accounting method retrospectively by adjusting prior periods. This change is limited to an increase to the beginning balance of paid-in capital and a decrease to beginning balance of retained earnings of $29.6 million at May 31, 2011 and is reflected in our consolidated balance sheets and statements of changes in equity.

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

10


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 November 30, 2012 and May 31, 2012, our cash and cash equivalents included $315.4 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.
 
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.


11


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 held to minimize contingent liabilities associated with charges properly reversed by a cardholder (“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 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 November 30, 2012 and May 31, 2012 is as follows:

 
November 30, 2012
 
May 31,
2012
Settlement processing assets:
(in thousands)
Interchange reimbursement
$
70,821

 
$
28,699

Receivable from Members
112,665

 
77,073

Receivable from networks
118,935

 
118,942

Exception items
3,645

 
1,345

Merchant Reserves
(68,426
)
 
(8,065
)
   Total
$
237,640

 
$
217,994

 
.

 
 
Settlement processing obligations:
 
 
 
Interchange reimbursement
$
176,581

 
$
223,008

(Liability to) Receivable from Members
(8,880
)
 
589

Liability to merchants
(158,421
)
 
(128,663
)
Exception items
12,792

 
11,554

Merchant Reserves
(246,966
)
 
(320,168
)
Reserve for operating losses
(2,725
)
 
(2,325
)
Reserves for sales allowances
(1,092
)
 
(873
)
   Total
$
(228,711
)
 
$
(216,878
)


12


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 November 30, 2012 and May 31, 2012, $2.7 million and $2.3 million, respectively, have 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 in the accompanying consolidated statements of income. For the three months ended November 30, 2012 and 2011, we recorded such expenses in the amounts of $2.5 million and $2.9 million, respectively. For both the six months ended November 30, 2012 and 2011, we recorded such expenses in the amount of $5.3 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 November 30, 2012 and May 31, 2012, we have a check guarantee loss reserve of $3.9 million and $3.4 million, respectively, which is included in net claims receivable in the accompanying consolidated balance sheets. For both the three months ended November 30, 2012 and 2011, we recorded expenses of $3.4 million. For the six months ended November 30, 2012 and 2011, we recorded expenses of $6.7 million and $7.8 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

13


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 November 30, 2012, we have placed into service $86.5 million of hardware and software associated with our technology processing platform, referred to as G2. The vision for this platform is 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 six months ended November 30, 2012 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, 2012 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 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.

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

14


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 November 30, 2012 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.

Our effective tax rates were 27.6% and 27.5% for the three months ended November 30, 2012 and 2011, respectively. Our effective tax rates were 29.2% and 30.2% for the six months ended November 30, 2012 and 2011, respectively. The effective tax rates for the three and six months ended November 30, 2012 and 2011 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, commitment to purchase redeemable noncontrolling interest, 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 December 2012 through November 2016. At November 30, 2012, 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 November 30, 2012, 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 $10.8 million ($7.6 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 November 30, 2012 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

15


determining net income for the period.  For the three and six months ended November 30, 2012 and 2011, 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 the three months ended November 30, 2012 and 2011 excludes shares of 0.4 million and 0.6 million, respectively, related to stock options. The diluted share base for the six months ended November 30, 2012 and 2011 excludes shares of 0.5 million and 0.4 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. 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 six months ended November 30, 2012 and 2011 (in thousands):

 
Three Months Ended
 
Six Months Ended
 
November 30, 2012
 
November 30, 2011
 
November 30, 2012
 
November 30, 2011
 
 
 
 
 
 
 
 
Basic weighted average shares outstanding    
78,751

 
78,348

 
78,669

 
79,207

Plus: dilutive effect of stock options and other share-based awards
393

 
528

 
393

 
624

Diluted weighted average shares outstanding    
79,144

 
78,876

 
79,062

 
79,831


New accounting pronouncements— From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“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 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.

16



As a result of this event, certain card networks removed us from their list of PCI DSS compliant service providers. Our removal from certain networks' lists of PCI DSS compliant service providers could mean that certain existing customers and other third parties may cease using, referring or selling our products and services. Also, prospective customers and other third parties may choose to delay or choose not to consider us for their processing needs. In addition, the card networks could refuse to allow us to process through their networks. To date, the impact on revenue that we can confirm related to our removal from the lists has been immaterial. Also the impact on revenue of customers or other third parties who have failed to renew, terminated negotiations, or informed us they are not considering us at all, where we can confirm it is related to our removal from the lists, has been immaterial. We continue to process transactions worldwide through all of the card networks. We hired a Qualified Security Assessor, or QSA, to conduct an independent review of the PCI DSS compliance of our systems. Our work to remediate our systems and processes is substantially complete. Our QSA is currently evaluating our remediation work. Once the QSA's evaluation is complete we will work closely with the networks to return to the list of PCI DSS compliant service providers as quickly as possible. Our failure or a delay in returning to the list could have a material adverse effect on our business, financial condition, results of operations and cash flows.

The 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.

During the six months ended November 30, 2012, we recorded $9.5 million of expense associated with this incident, bringing the life-to-date total expense to $93.9 million. Of this life-to-date expense, $60.0 million represents costs incurred through November 30, 2012 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 $35.9 million represents our estimate of total fraud losses, fines and other charges that will be imposed upon us by the card networks. We have also recorded $2.0 million of insurance recoveries based on claims submitted to date as discussed below. During the three months ended November 30, 2012, we reduced our estimate of fraud losses, fines and other charges by $31.5 million resulting in a credit of $14.5 million for total processing system intrusion costs for the quarter ended November 30, 2012. 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 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 six months ended November 30, 2012 (in thousands):

Balance at May 31, 2012
$
67,436

Adjustments
(31,472
)
Subtotal
35,964

Payments
(23,211
)
Balance at November 30, 2012
$
12,753



We have not reached final resolution with certain other networks. As such, the amount of fraud losses, fines and other charges that will be imposed by those networks could differ from the amount we have accrued as of November 30, 2012. Currently we do not have sufficient information to estimate the amount or range of additional possible loss for fraud losses, fines and other charges that will be imposed upon us by those card networks.

We are insured under policies that we believe may 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 three months ended November 30, 2012, we received assessments from certain networks and submitted additional claims to the insurers. We will record receivables for such recoveries in the periods in which we determine such recovery is probable and the amount can be reasonably estimated.

We expect to incur additional costs associated with investigation, remediation and demonstrating PCI DSS compliance. We will expense such costs as they are incurred in accordance with our accounting policies for such costs. We currently anticipate that such additional costs may be material to our fiscal 2013 financial position, results of operations and cash flows.

17



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).  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.  Plaintiff seeks an unspecified amount of damages and injunctive relief. The suit 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.  Plaintiff filed an amended complaint on July 16, 2012. The amended complaint does not add any new causes of action.  Instead, it adds two new named Plaintiffs (Nadine and Robert Hielscher) and drops Plaintiffs' 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.  At this stage of the proceedings we cannot predict the outcome of the matter, but we intend to defend the matter vigorously. We have not recorded a loss accrual related to this matter because we have not determined that a loss is probable.  Currently we do not have sufficient information to estimate the amount or range of possible loss associated with this matter.



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.

The following table summarizes the preliminary purchase price allocation, which is subject to the final valuation of intangible assets and deferred income tax computations (in thousands):
Goodwill
$
309,536

Customer-related intangible assets
97,100

Contract-based intangible assets
29,100

Acquired technology
15,000

Fixed assets
1,309

Other
3,708

Total assets acquired
455,753

Deferred income taxes
(45,585
)
     Net assets acquired       
$
410,168


None of the goodwill associated with the acquisition is 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 2 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 revenue and earnings of APT since the acquisition date included in the consolidated statement of income for the three and six months ended November 30, 2012 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 six months ended November 30, 2012 and 2011 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

18


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
 
Six Months Ended
 
November 30, 2012
 
November 30, 2011
 
November 30, 2012
 
November 30, 2011
 
(in thousands, except per share data)
Total revenues
$
589,327

 
$
535,107

 
$
1,183,000

 
$
1,080,819

Net income
$
69,871

 
$
60,360

 
$
117,754

 
$
121,893




 


 


 


Net income per share, basic
$
0.89

 
$
0.77

 
$
1.50

 
$
1.54

Net income per share, diluted
$
0.88

 
$
0.77

 
$
1.49

 
$
1.53



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.

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


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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



NOTE 4—GOODWILL AND INTANGIBLE ASSETS

As of November 30, 2012 and May 31, 2012, goodwill and intangible assets consisted of the following:
 
 
November 30, 2012
 
May 31,
2012
 
(in thousands)
Goodwill
$
1,059,520

 
$
724,687

Other intangible assets:


 


Customer-related intangible assets
$
562,247

 
$
451,095

Trademarks, finite life
8,248

 
7,996

Contract-based intangible assets
98,631

 
66,393

Acquired technology
15,000

 

 
684,126

 
525,484

Less accumulated amortization of:
 
 
 
Customer-related intangible assets
242,665

 
214,285

Trademarks
5,569

 
4,868

Contract-based intangible assets
19,410

 
16,143

Acquired technology
312

 

 
267,956

 
235,296

Total other intangible assets, net
$
416,170

 
$
290,188


The following table discloses the changes in the carrying amount of goodwill for the six months ended November 30, 2012:

 
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
309,536

 

 
309,536

Effect of foreign currency translation
3,687

 
21,610

 
25,297

Balance at November 30, 2012
$
524,325

 
$
535,195

 
$
1,059,520



21


NOTE 5—LONG-TERM DEBT AND CREDIT FACILITIES

Outstanding debt consisted of the following:
 
November 30,
2012
 
May 31,
2012
Lines of credit:
(in thousands)
Corporate Credit Facility - long-term
$
160,461

 
$
229,500

Short-term lines of credit:
 
 
 
United Kingdom Credit Facility
93,705

 
85,102

Hong Kong Credit Facility
52,577

 
54,564

Canada Credit Facility

 
20,033

Malaysia Credit Facility
11,952

 
12,844

Spain Credit Facility
20,982

 
17,241

Singapore Credit Facility
15,956

 
10,318

Philippines Credit Facility
5,337

 
6,336

Maldives Credit Facility
1,493

 
4,219

Macau Credit Facility
2,780

 
2,443

Sri Lanka Credit Facility
2,425

 
2,291

Taiwan Credit Facility
5,192

 

Total short-term lines of credit
212,399

 
215,391

Total lines of credit
372,860

 
444,891

Notes Payable
7,452

 
10,089

Term loans
712,500

 
73,396

Total debt
$
1,092,812

 
$
528,376

 
 
 
 
Current portion
$
314,824

 
$
291,811

Long-term debt
777,988

 
236,565

Total debt
$
1,092,812

 
$
528,376


Lines of Credit

The Corporate Credit Facility is available for general corporate purposes and to fund future strategic acquisitions. As of November 30, 2012, the interest rate on the Corporate Credit Facility was 1.85% 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 credit facilities at November 30, 2012 were $1,282.3 million, of which $589.5 million is available under our Corporate Credit Facility.

During the quarter ended November 30, 2012, the United Kingdom Credit Facility has been increased from £80 million to £140 million and amended to facilitate borrowings in multiple currencies.

22


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 13 - Subsequent Events) 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 November 30, 2012, the interest rate on the term loan was 2.21%. The term loan has scheduled quarterly principal payments of $17.5 million at the end of each fiscal quarter through maturity. As of November 30, 2012, the outstanding balance of the term loan was $682.5 million.
We have a five-year unsecured $200.0 million term loan agreement with a syndicate of banks in the United States. The term loan expires in May 2013 and bears interest, at our election, at the prime rate or LIBOR, plus a leverage based margin. As of November 30, 2012 the interest rate on the term loan was 1.20%. The term loan has scheduled quarterly principal payments of $15.0 million for the next two fiscal quarter ends. As of November 30, 2012, the outstanding balance of the term loan was $30.0 million.

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 $7.5 million at November 30, 2012. These notes have fixed interest rates of 8.5% with maturity dates ranging from December 2012 through November 2016.

Compliance with Covenants

There are certain financial and non-financial covenants contained in our various credit facilities and term loans.  Our $200.0 million term loan agreement includes 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.  Our Corporate Credit Facility and $700.0 million term loan agreements include financial covenants requiring a leverage ratio no greater than 2.50 to 1.00, which shall increase to 3.25 to 1.00 on and after the earlier to occur of (i) the date we are listed on the publicly available list of PCI compliant processors or (ii) receipt by the Administrative Agent of documentation demonstrating the approval of the Report on Compliance by card networks; and a fixed charge coverage ratio no less than 2.50 to 1.00. We complied with these covenants as of and for the six months ended November 30, 2012.

NOTE 6—INCOME TAX

We have a deferred tax asset of $93.5 million at November 30, 2012 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 27.6% and 27.5% for the three months ended November 30, 2012 and 2011, respectively. Our effective tax rates were 29.2% and 30.2% for the six months ended November 30, 2012 and 2011, respectively. The effective tax rates for the three and six months ended November 30, 2012 and 2011 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 November 30, 2012 and May 31, 2012, other long-term liabilities included liabilities for unrecognized income tax benefits of $51.9 million and $45.6 million, respectively. During the three months ended November 30, 2012, we recognized additional liabilities of $2.8 million for unrecognized income tax benefits. During the six months ended November 30, 2012, we recognized additional liabilities of $6.3 million for unrecognized income tax benefits. During the three and six months ended November 30, 2012 and 2011, 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 $8.9 million within the next twelve months.


23


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. With few exceptions, we are no longer subject to income tax examinations for years ended May 31, 2005 and prior.

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. Under this authorization, 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 first half of fiscal 2013. On January 8, 2013 our Board of Directors approved an additional share repurchase authorization of $150.0 million, bringing the total share repurchase authorization to $300.0 million, with $287.3 million remaining.

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.

During the first quarter of fiscal 2011, we used the $13.0 million remaining under the authorization from our original share repurchase program initiated during fiscal 2007 to repurchase 344,847 shares of our common stock a cost of $13.0 million, or an average of $37.64 per share, including commissions.

NOTE 8—SHARE-BASED AWARDS AND OPTIONS

As of November 30, 2012, 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.
 
Three Months Ended
 
Six Months Ended
 
November 30, 2012
 
November 30, 2011
 
November 30, 2012
 
November 30, 2011
 
(in millions)
Share-based compensation cost       
$
5.0

 
$
4.4

 
$
9.2

 
$
8.4

Income tax benefit    
$
1.3

 
$
1.5

 
$
2.7

 
$
2.8



24


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 six months ended November 30, 2012 and 2011.

The following is a summary of our stock option plans as of and for the six months ended November 30, 2012:
 
 
 
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    
 
(69
)
 
$
39

 
 
 
 
Exercised    
 
(241
)
 
$
20

 
 
 
 
Outstanding at November 30, 2012
 
1,838

 
$
35

 
3.6

 
$
17.0

 
 
 
 
 
 
 
 
 
Options vested and exercisable at November 30, 2012
 
1,652

 
$
34

 
3.6

 
$
16.2


The aggregate intrinsic value of stock options exercised during the six months ended November 30, 2012 and 2011 was $5.4 million and $0.6 million, respectively. As of November 30, 2012, we had $1.8 million of total unrecognized compensation cost related to unvested options which we expect to recognize over a weighted average period of 2.3 years. We recognized compensation expense for stock options of $0.4 million and $0.6 million in the three months ended November 30, 2012 and 2011, respectively. We recognized compensation expense for stock options of $0.9 million and $1.2 million in the six months ended November 30, 2012 and 2011, 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 ("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.


25


The following table summarizes the changes in non-vested restricted stock awards for the six months ended November 30, 2012.

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

 
$
44

Granted    
555

 
44

Vested    
(311
)
 
43

Forfeited    
(57
)
 
42

Non-vested at November 30, 2012
1,128

 
44


The total fair value of shares vested during the six months ended November 30, 2012 was $13.2 million. During the six months ended November 30, 2011, the weighted average grant-date fair value of shares vested was $40 and the total fair value of shares vested was $12.6 million.

We recognized compensation expense for restricted stock of $4.4 million and $3.9 million in the three months ended November 30, 2012 and 2011, respectively. We recognized compensation expense for restricted stock of $8.0 million and $6.9 million in the six months ended November 30, 2012 and 2011, respectively. As of November 30, 2012, there was $43.3 million of total unrecognized compensation cost related to unvested restricted stock awards that is expected to be recognized over a weighted average period of 2 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 November 30, 2012, 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 November 30, 2012 and 2011, respectively. We recognized compensation expense for the plan of $0.3 million and $0.3 million in the six months ended November 30, 2012 and 2011.
 
The weighted average grant-date fair value of each designated share purchased under this plan during the six months ended November 30, 2012 and 2011 was $6 and $7, respectively, which represents the fair value of the 15% discount.


26



NOTE 9—SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow disclosures are as follows:
 
Six Months Ended
 
November 30, 2012

November 30, 2011
 
(in thousands)
Income taxes paid, net of refunds    
$
23,236

 
$
26,325

Interest paid    
7,772

 
6,739

Financing receivables:


 


Investment in equipment for financing leases
$

 
$

Principal collections from customers – financing leases    
1,485

 
1,203

Net decrease in financing receivables    
$
1,485

 
$
1,203


NOTE 10—NONCONTROLLING INTERESTS

Pursuant to our July 26, 2012 agreement to acquire our redeemable noncontrolling interest, we derecognized the redeemable noncontrolling interest at November 30, 2012 and recorded a liability for the purchase price. Please see Note 13 - Subsequent Events for further information. The following table details the components of redeemable noncontrolling interests for the six months ended November 30, 2012 and 2011:

 
Six Months Ended
 
November 30, 2012
 
November 30, 2011
 
(in thousands)
Beginning balance    
$
144,422

 
$
133,858

Net income attributable to redeemable noncontrolling interest    
1,814

 
5,542

Foreign currency translation adjustment
573

 
(1,955
)
Change in the maximum redemption amount of redeemable noncontrolling interest
(817
)
 
2,489

Derecognition of redeemable noncontrolling interest (See Note 13)
(145,992
)
 

Ending balance    
$

 
$
139,934


For the six months ended November 30, 2012 and 2011, 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:

 
Six Months Ended
 
November 30, 2012
 
November 30, 2011
 
(in thousands)
Net income attributable to Global Payments    
$
116,858

 
$
125,155

Net income attributable to nonredeemable noncontrolling interest    
10,861

 
9,533

Net income attributable to redeemable noncontrolling interest    
1,814

 
5,542

   Net income including noncontrolling interest    
$
129,533

 
$
140,230


The following table is the reconciliation of net income attributable to noncontrolling interest to comprehensive income attributable to noncontrolling interest for the three and six months ended November 30, 2012 and 2011:


27


 
Three Months Ended
 
November 30, 2012
 
November 30, 2011
 
(in thousands)
Net income attributable to noncontrolling interest, net of tax
$
5,188

 
$
6,968

Foreign currency translation attributable to nonredeemable noncontrolling interests
4,588

 
(10,406
)
Foreign currency translation attributable to redeemable noncontrolling interests

 
1,824

Comprehensive income attributable to noncontrolling interests, net of tax
$
9,776

 
$
(1,614
)


 
Six Months Ended
 
November 30, 2012
 
November 30, 2011
 
(in thousands)
Net income attributable to noncontrolling interest, net of tax
$
12,675

 
$
15,075

Foreign currency translation attributable to nonredeemable noncontrolling interests
6,979

 
(10,696
)
Foreign currency translation attributable to redeemable noncontrolling interests
573

 
1,956

Comprehensive income attributable to noncontrolling interests, net of tax
$
20,227

 
$
6,335



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.

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 six months ended November 30, 2012 and 2011:


28


 
Three Months Ended
 
Six Months Ended
 
November 30,
2012
 
November 30,
2011
 
November 30,
2012
 
November 30,
2011
 
(in thousands)
Revenues:
 
 
 
 
 
 
 
   United States
$
339,998

 
$
293,416

 
$
685,896

 
$
580,841

   Canada
80,770

 
85,521

 
161,667

 
176,742

   North America merchant services    
420,768

 
378,937

 
847,563

 
757,583

 
 
 
 
 
 
 
 
   Europe
131,161

 
115,169

 
259,626

 
244,583

   Asia-Pacific
36,609

 
36,399

 
71,636

 
71,110

International merchant services    
167,770

 
151,568

 
331,262

 
315,693

 
 
 
 
 
 
 
 
Consolidated revenues    
$
588,538

 
$
530,505

 
$
1,178,825

 
$
1,073,276

 
 
 
 
 
 
 
 
Operating income for segments:
 
 
 
 
 
 
 
North America merchant services    
$
67,114

 
$
70,673

 
$
134,331

 
$
142,431

International merchant services    
53,987

 
44,494

 
111,127

 
100,152

Corporate    
(4,519
)
 
(18,587
)
 
(48,388
)
 
(37,393
)
Consolidated operating income    
$
116,582

 
$
96,580

 
$
197,070

 
$
205,190

 
 
 
 
 
 
 
 
Depreciation and amortization:
 
 
 
 
 
 
 
North America merchant services    
$
12,569

 
$
8,535

 
$
21,825

 
$
17,067

International merchant services    
14,234

 
14,720

 
27,857

 
29,880

Corporate    
1,358

 
769

 
2,373

 
1,293

Consolidated depreciation and amortization    
$
28,161

 
$
24,024

 
$
52,055

 
$
48,240


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 November 30, 2012.

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 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 obtains its PCI certification status with the payment networks and concludes the appropriate BIN transfer process with VISA.


29


While the loan company application was pending, in March 2011, we obtained temporary direct participation in the Visa Canada system.  This temporary status will expire on March 31, 2013.  In the event that Visa is unwilling to extend our temporary status, we have entered into an agreement with a financial institution who is willing to serve as our sponsor.


NOTE 13—SUBSEQUENT EVENTS

Redeemable Noncontrolling Interest Acquisition

On July 26, 2012, we entered into an agreement to purchase all of HSBC Asia's ("HSBC") interest in Global Payments Asia-Pacific Limited ("GPAP") for fair value of $242.0 million. Effective December 1, 2012, we completed the purchase of the remaining 44% of GPAP from HSBC. We used a combination of excess cash and existing lines of credit to complete the transaction. In accordance with Accounting Standards Codification 480, Distinguishing Liabilities from Equity ("ASC 480"), the agreement to purchase HSBC's interest in GPAP has been accounted for as a freestanding forward contract and therefore, the noncontrolling interest in GPAP has been classified as a liability as of the agreement date. The liability is measured at fair value. As such, we have derecognized our previous redeemable noncontrolling interest in GPAP as of July 26, 2012 and recorded a corresponding current liability in the accompanying consolidated balance sheet as of November 30, 2012. The difference between the maximum redemption amount of the redeemable noncontrolling interest at July 26, 2012 and the fair value of the liability was recorded as a reduction of paid-in capital of $96.0 million. Upon completion of the purchase, we derecognized the liability and there was no additional value ascribed to the assets of GPAP.

In accordance with ASC 480, from the agreement date, we no longer attribute 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 six months ended November 30, 2012, we declared a dividend for fiscal year 2012 of which $8.4 million will be 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.

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 ($22.7 million, equivalent as of the acquisition date). This transaction will be recorded as a business combination, and the purchase price will be allocated to the assets acquired and liabilities assumed based on their estimated fair values. Due to the timing of this transaction, the allocation of the purchase price has not been finalized pending valuation of intangible assets.



30



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.

As a result of this event, certain card networks removed us from their list of PCI DSS compliant service providers. Our removal from certain networks' lists of PCI DSS compliant service providers could mean that certain existing customers and other third parties may cease using, referring or selling our products and services. Also, prospective customers and other third parties may choose to

31


delay or choose not to consider us for their processing needs. In addition, the card networks could refuse to allow us to process through their networks. To date, the impact on revenue that we can confirm related to our removal from the lists has been immaterial. Also the impact on revenue of customers or other third parties who have failed to renew, terminated negotiations, or informed us they are not considering us at all, where we can confirm it is related to our removal from the lists, has been immaterial. We continue to process transactions worldwide through all of the card networks.

During the six months ended November 30, 2012, we recorded $9.5 million of expense associated with this incident, bringing the life-to-date total expense to $93.9 million. Of this life-to-date expense, $60.0 million represents costs incurred through November 30, 2012 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 $35.9 million represents our estimate of total fraud losses, fines and other charges that will be imposed upon us by the card networks. We have also recorded $2.0 million of insurance recoveries based on claims submitted to date. During the three months ended November 30, 2012, we reduced our estimate of fraud losses, fines and other charges by $31.5 million resulting in a credit of $14.5 million for total processing system intrusion costs for the quarter ended November 30, 2012. 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 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.

Revenues increased $105.5 million, or 10%, during the six months ended November 30, 2012 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 $8.1 million during the six months ended November 30, 2012 compared to the prior year’s comparable period. Operating margins for the six months ended November 30, 2012 decreased to 16.7% compared to 19.1% during the six months ended November 30, 2012. The decline in operating margins is primarily due to costs associated with the processing system intrusion.

For the six months ended November 30, 2012, currency exchange rate fluctuations decreased our revenues by $15.0 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. On December 1, 2012, we completed the purchase of the remaining 44% of GPAP from HSBC.

On September 28, 2012, we closed a new five-year senior unsecured term loan of $700.0 million and a $150 million increase to our existing $600 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 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 channel 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. 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.



32


Results of Operations

The following table shows key selected financial data for the three months ended November 30, 2012 and 2011, this data as a percentage of total revenue, and the changes between three months ended November 30, 2012 and 2011, 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 November 30, 2012 reflect the results of APT's operations for two months, while results of operations for the three months ended November 30, 2011 do not reflect any results of APT operations.
 
Three Months Ended November 30, 2012
 
% of Revenue(1)
 
Three Months Ended November 30, 2011
 
% of Revenue(1)
 
Change
 
% Change
 
(dollar amounts in thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
United States
$
339,998

 
58

 
$
293,416

 
55

 
$
46,582

 
16

Canada
80,770

 
14

 
85,521

 
16

 
(4,751
)
 
(6
)
    North America merchant services
420,768

 
71

 
378,937

 
71

 
41,831

 
11

 
 
 
 
 
 
 
 
 
 
 
 
Europe
131,161

 
22

 
115,169

 
22

 
15,992

 
14

Asia-Pacific
36,609

 
6

 
36,399

 
7

 
210

 
1

    International merchant services
167,770

 
29

 
151,568

 
29

 
16,202

 
11

 
 
 
 
 
 
 
 
 
 
 
 
          Total revenues
$
588,538

 
100

 
$
530,505

 
100

 
$
58,033

 
11

 
 
 
 
 
 
 
 
 
 
 
 
Consolidated operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of service
$
210,268

 
35.7

 
$
185,931

 
35.0

 
$
24,337

 
13

Sales, general and administrative
276,177

 
46.9

 
247,994

 
46.7

 
28,183

 
11

Processing system intrusion
(14,489
)
 
(2.5
)
 

 

 
(14,489
)
 
NM

     Operating income
$
116,582

 
19.8

 
$
96,580

 
18.2

 
$
20,002

 
21

 
 
 
 
 
 
 
 
 
 
 
 
Operating income for segments:
 
 
 
 
 
 
 
 
 
 
 
North America merchant services
$
67,114

 
 
 
$
70,673

 
 
 
$
(3,559
)
 
(5
)
International merchant services
53,987

 
 
 
44,494

 
 
 
9,493

 
21

Corporate
(4,519
)
 
 
 
(18,587
)
 
 
 
14,068

 
76

     Operating income
$
116,582

 
 
 
$
96,580

 
 
 
$
20,002

 
21

 
 
 
 
 
 
 
 
 
 
 
 
Operating margin for segments:
 
 
 
 
 
 
 
 
 
 
 
North America merchant services
16.0
%
 
 
 
18.7
%
 
 
 
(2.7
)%
 
 
International merchant services
32.2
%
 
 
 
29.4
%
 
 
 
2.8
 %
 
 
(1) Percentage amounts may not sum to the total due to rounding.


33


The following table shows key selected financial data for the six months ended November 30, 2012 and 2011, this data as a percentage of total revenue, and the changes between six months ended November 30, 2012 and 2011, 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 six months ended November 30, 2012 reflect the results of APT's operations for two months, while results of operations for the six months ended November 30, 2011 do not reflect any results of APT's operations.
 
Six Months Ended November 30, 2012
 
% of Revenue(1)
 
Six Months Ended November 30, 2011
 
% of Revenue(1)
 
Change
 
% Change
 
(dollar amounts in thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
United States
$
685,896

 
58

 
$
580,841

 
54

 
$
105,055

 
18

Canada
161,667

 
14

 
176,742

 
16

 
(15,075
)
 
(9
)
    North America merchant services
847,563

 
72

 
757,583

 
71

 
89,980

 
12

 
 
 
 
 
 
 
 
 
 
 
 
Europe
259,626

 
22

 
244,583

 
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