Global Payments Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; quarterly information includes the quarter ended December 31, 2018. Global Payments provides payment technology and software services across 32 countries, reporting North America, Europe, and Asia-Pacific segments.
Financial performance
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Reported revenue | $3.366 billion | $3.975 billion |
| Revenue on comparable presentation basis | $4.476 billion; up 12.6% | $3.975 billion |
| Operating income | $737.1 million | $558.9 million |
| Operating margin | 21.9% reported; 15.6% excluding the presentation effect | 14.1% |
| Net income attributable to Global Payments | $452.1 million | $468.4 million |
| Diluted EPS | $2.84 | $3.01 |
| Cash from operating activities | $1.106 billion | $512.4 million |
ASC 606 adoption in 2018 reduced reported revenue and operating expenses by the same $1.111 billion, with no effect on operating income or cash flows. Accordingly, the reported revenue decline is not a like-for-like measure of underlying growth. Management attributed comparable revenue growth primarily to organic growth; North America also benefited from ACTIVE Network.
Segment operating income was $570.6 million in North America, $318.4 million in Europe, and $93.4 million in Asia-Pacific. Excluding the accounting-presentation effect, margins were 16.5%, 34.7%, and 29.8%, respectively. Europe’s comparable margin declined from 35.5%, which management attributed to unfavorable currency effects.
Cash, debt, and liquidity
- Cash and cash equivalents were $1.211 billion at year-end; management identified $434.5 million as available for general purposes. Other balances support settlement, merchant reserves, or customer funds.
- Long-term debt was $5.130 billion, and settlement lines of credit were $700.5 million. The company reported $783.6 million of available revolving-credit commitments and $710.3 million of additional settlement-line capacity.
- Operating cash flow of $1.106 billion was offset by $1.476 billion used in investing, including $1.260 billion for acquisitions and $213.3 million in capital expenditures.
- Interest expense was approximately $195.5 million, up from $174.3 million. Management expected 2019 interest expense to increase from 2018 levels, reflecting debt and interest rates.
- The company was in compliance with its debt covenants at December 31, 2018. A 50-basis-point increase in applicable rates was estimated to raise annual interest expense by approximately $17.5 million, partly offset by $3.3 million of additional interest income.
Material developments, outlook, and risks
- Acquired AdvancedMD for approximately $706.9 million and SICOM for approximately $409.2 million in 2018, expanding into healthcare and strengthening restaurant software. Their purchase-price allocations were provisional. Together, the acquisitions contributed less than 2% of 2018 consolidated revenue and no consolidated operating income during the post-acquisition periods.
- Management expects continued growth in electronic payments and software-driven vertical solutions, and plans further technology investment and potential acquisitions. It did not provide specific 2019 revenue, margin, or EPS guidance in the supplied filing text. It did not expect aggregate capital spending to rise materially because of emerging-technology investment.
- The company repatriated $457.7 million from foreign subsidiaries during 2018 and used it to reduce revolving-credit borrowings. The board increased share-repurchase authorization to $750 million in February 2019.
- Net income was affected by tax items: 2017 included a $158.7 million tax benefit related to U.S. tax reform; 2018 included a $23.3 million benefit from related estimate adjustments. These items make reported annual and quarterly earnings comparisons less representative of underlying performance.
- Key disclosed risks include cybersecurity or system outages, competition and pricing pressure, merchant and partner attrition, chargebacks and fraud, reliance on card-network registrations and bank sponsors, regulation and privacy requirements, foreign exchange and interest-rate exposure, acquisition integration, and substantial debt. Goodwill and intangible assets represented approximately 67% of total assets.
- Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting. Management’s internal-control assessment excluded AdvancedMD and SICOM, acquired in 2018; those businesses represented approximately 5% of consolidated assets, excluding goodwill.
Important facts for investors to verify
- Reconcile ASC 606’s $1.111 billion gross-to-net revenue presentation change when comparing growth and margins across periods.
- Assess whether organic growth and operating improvements persist apart from acquired-business contributions and lower acquisition-integration expense.
- Monitor debt reduction, refinancing and interest costs, covenant headroom, and the amount of cash genuinely available for corporate uses.
- Review integration progress and final purchase-price allocations for AdvancedMD and SICOM, including goodwill and intangible-asset assumptions.
- Separate recurring earnings from tax benefits, and examine the quarterly earnings distortion from the 2017 tax benefit.
- Track cyber resilience, sponsor and network relationships, merchant losses, and the effect of evolving privacy and payment regulations.