Global Payments Inc. — 2017 Form 10-K
Business context and reporting period. Global Payments provides payment technology, processing and software solutions in 30 countries, across North America, Europe and Asia-Pacific. This filing covers the year ended December 31, 2017. The company changed its fiscal year-end in 2016; the comparable full-year 2016 results are unaudited. The 2017 period includes ACTIVE Network from its September 1 acquisition.
Financial performance and liquidity
| Metric | 2017 | 2016 comparable |
|---|---|---|
| Revenue | $3,975.2 million | $3,371.0 million |
| Operating income | $558.9 million | $356.3 million |
| Operating margin | 14.1% | 10.6% |
| Net income attributable to Global Payments | $468.4 million | $201.8 million |
| Diluted EPS | $3.01 | $1.37 |
| Cash from operating activities | $512.4 million | $515.8 million |
- Revenue rose 17.9%. North America revenue increased 18.3%, Europe 17.1% and Asia-Pacific 15.8%. Growth reflected acquisitions and organic expansion; Heartland contributed for a full year in 2017 versus about eight months in 2016.
- Operating income increased 56.8%. Management cited revenue growth, Heartland synergies and $47.5 million less acquisition and integration expense. Cost of service rose to 48.5% of revenue from 47.6%; selling, general and administrative expense declined to 37.4% from 41.9% of revenue.
- Net income includes a provisional $158.7 million tax benefit from the 2017 U.S. Tax Act, adding $1.02 to diluted EPS. The benefit was not recurring operating performance; the tax accounting remained provisional.
- Operating cash flow was reduced by a $361.7 million outflow from changes in settlement processing assets and obligations. Investing activities used $736.0 million, including $599.5 million of cash for ACTIVE Network; capital expenditures were $181.9 million.
- Year-end cash and cash equivalents were $1,335.9 million, of which $658.4 million was considered available for general purposes. Long-term debt was $4,659.7 million; separate settlement lines of credit had $635.2 million outstanding. Revolver availability was $473.3 million, and additional settlement-line capacity was $689.4 million.
- Interest expense was $174.8 million. Most debt bears variable rates; a hypothetical 50-basis-point rate increase was estimated to raise annual interest expense by $20.2 million, partly offset by higher interest income.
Material changes, outlook and risks
- ACTIVE Network was acquired for $1.17 billion, funded with approximately $599.5 million cash and 6.36 million Global Payments shares. Purchase accounting, including valuation of acquired intangibles and tax balances, was still provisional at year-end.
- The 2017 U.S. Tax Act reduced the federal corporate tax rate to 21% effective January 1, 2018. Management expected the lower rate and territorial tax system to benefit future earnings and cash flows. The estimated $63.7 million transition tax is payable over eight years; related accounting estimates may change.
- Management expects continued growth in electronic payments, software and value-added services, and intends to pursue technology investment and acquisitions. It did not provide numerical earnings or revenue guidance in the supplied filing text. It did not expect aggregate capital spending to increase materially from current levels.
- Beginning in 2018, the new revenue standard will present payment network fees, about 23% of 2017 reported revenue, net against revenue rather than as operating expense; management expected no operating-income effect from this presentation change and estimated the standard’s net operating-income effect at less than 1% for 2018.
- Key risks include cybersecurity incidents and service disruptions, competition and pricing pressure, dependence on card networks and sponsor/clearing banks, merchant and partner attrition, chargebacks and fraud, regulatory and privacy changes (including GDPR effective May 2018), foreign-exchange exposure, acquisition integration, and substantial variable-rate debt. Goodwill and intangible assets represented approximately 61% of total assets.
- The company reported compliance with its debt covenants at year-end. The independent auditor gave unqualified opinions on the financial statements and internal controls; the internal-control assessment excluded ACTIVE Network, which accounted for less than 1.5% of consolidated revenue and 4.3% of assets excluding related goodwill.
Important facts for investors to verify
- Separate underlying operating growth from acquisition contributions, integration costs and the one-time tax benefit; assess 2018 results on a comparable basis.
- Track ACTIVE Network integration, final purchase accounting, synergies and its contribution to revenue and profitability.
- Monitor debt reduction, covenant headroom, variable-rate exposure and the amount of cash actually available for general purposes.
- Review operating cash conversion, particularly settlement-related working-capital swings, and capitalized customer acquisition costs.
- Confirm final tax-act accounting and the effects of the revenue-standard adoption, including changes to reported revenue presentation.