Global Payments Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results. Unless stated otherwise, amounts below are U.S. dollars.
Business context
Global Payments provides payment processing, software and related financial services to approximately 3.5 million merchant locations and more than 1,300 financial institutions in over 100 countries. Following its September 18, 2019 merger with Total System Services (TSYS), the company reported three segments: Merchant Solutions, Issuer Solutions, and Business and Consumer Solutions. The $24.5 billion merger was funded primarily with Global Payments shares.
Key financial results
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $4.912 billion | $3.366 billion |
| Operating income | $791.4 million | $737.1 million |
| Operating margin | 16.1% | 21.9% |
| Net income attributable to Global Payments | $430.6 million | $452.1 million |
| Diluted EPS | $2.16 | $2.84 |
| Cash from operating activities | $1.391 billion | $1.106 billion |
| Capital expenditures | $307.9 million | $213.3 million |
Revenue increased 45.9%, primarily because TSYS contributed results from the merger closing date. TSYS contributed $1.215 billion of revenue and $78.7 million of operating income after acquisition. The company’s unaudited pro forma revenue, assuming the merger had occurred January 1, 2018, was $7.854 billion in 2019 versus $7.360 billion in 2018; pro forma net income attributable to Global Payments was $711.7 million versus $510.8 million. These pro forma figures are not presented as actual results or forecasts.
Operating income rose 7.4%, but operating margin declined 5.8 percentage points. Acquisition and integration expenses were $255.6 million in 2019, versus $56.1 million in 2018; acquired-intangible amortization increased to $667.1 million from $377.7 million. Higher integration costs, amortization and interest expense contributed to lower attributable net income and EPS. EPS was also affected by the additional shares issued for the merger.
For the fourth quarter, revenue was $1.988 billion, operating income $196.2 million, net income attributable to Global Payments $102.8 million and diluted EPS $0.34. Fourth-quarter 2018 figures were $880.6 million, $167.0 million, $75.2 million and $0.47, respectively. The sharp revenue comparison reflects the inclusion of TSYS following the merger. Fourth-quarter 2019 acquisition and integration expenses were $135.3 million.
Cash, debt and liquidity
At December 31, 2019, cash and cash equivalents were $1.678 billion, of which $981.7 million was considered available for general purposes; the remainder included settlement-related balances, merchant reserves and customer funds. Operating cash flow less capital expenditures was approximately $1.083 billion. The company used $917.1 million in investing activities and $28.7 million in financing activities during the year.
Total debt reported on the balance sheet was $9.126 billion, including the current portion; settlement lines of credit were an additional $463.2 million. The company had $2.078 billion of available capacity under its $3.0 billion revolving facility and $981.8 million of additional settlement-line capacity. It reported compliance with its debt covenants at year-end and stated that cash, borrowing capacity and expected operating cash flows should meet foreseeable needs. The filing reports $2.545 billion of estimated future interest payments on long-term debt, subject to variable-rate assumptions.
Outlook, risks and unusual items
- Management expects continued growth in electronic payments and investment in emerging technologies, and intends to pursue acquisitions and joint ventures. The filing text does not provide clear numerical revenue, earnings or margin guidance.
- Merger integration was ongoing; management expected additional integration charges in 2020. In 2019, it recorded $57.1 million of one-time employee termination charges and wrote off $40.2 million of legacy technology and other assets, including $31.1 million of capitalized software.
- Key risks include successful integration and realization of merger synergies, cybersecurity and service interruptions, competition and pricing pressure, dependence on card networks and sponsor banks, merchant attrition and chargebacks, regulatory and privacy requirements, foreign exchange and interest-rate exposure, and substantial indebtedness. Goodwill and other intangible assets represented about 83% of total assets.
- A jury awarded Frontline Processing $135.2 million plus interest in a contract dispute. Global Payments is appealing; it recorded no liability because it concluded a loss was not probable, while acknowledging a reasonably possible loss ranging from zero to the judgment amount plus interest.
- The independent auditor gave an unqualified opinion on the financial statements and concluded internal controls were effective. Management’s internal-control assessment excluded acquired TSYS operations, which represented approximately 32% of consolidated assets excluding goodwill, 25% of revenue and 10% of operating income for 2019.
Most important facts for investors to verify
- Underlying and pro forma growth apart from the partial-year inclusion of TSYS, including segment trends and integration synergies.
- The pace and total cost of integration, expected savings, customer retention and any further technology or restructuring write-offs.
- Debt repayment, refinancing and interest-rate exposure, including the availability of revolving credit and settlement funding.
- The Frontline appeal and any changes in the company’s assessment or reserve for that contingency.
- Whether TSYS operations are incorporated into company-wide internal controls within the applicable SEC timeframe.
- Comparability of reported revenue across periods: since 2018, revenue is presented net of certain payment-network and other third-party fees, reducing both revenue and expenses without changing operating income.