Global Payments Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with the three months ended March 31, 2018 unless otherwise noted. Global Payments provides payment technology and software in 32 countries and reports North America, Europe, and Asia-Pacific segments.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $883.0 million | $795.0 million | Up 11.1% |
| Operating income | $199.5 million | $156.2 million | Up 27.7% |
| Operating margin | 22.6% | 19.6% | Up 3.0 percentage points |
| Net income attributable to Global Payments | $112.3 million | $91.4 million | Up |
| Diluted EPS | $0.71 | $0.57 | Up |
| Operating cash flow | $229.7 million | $284.5 million | Down |
Cost of service was $305.2 million, or 34.6% of revenue, compared with 31.7% a year earlier. SG&A declined 2.1% to $378.3 million, or 42.8% of revenue versus 48.6%. Interest and other expense was $59.1 million, compared with $33.9 million net expense in the prior period; interest expense alone was approximately $55.4 million versus $45.5 million. The effective tax rate fell to 16.8% from 20.2%, primarily reflecting excess tax benefits from share-based awards.
Segments and material period changes
- North America revenue rose 14.2% to $678.4 million and operating income increased 24.5% to $156.1 million. The company attributed much of the revenue increase to the 2018 AdvancedMD and SICOM acquisitions.
- Europe revenue was nearly flat at $142.9 million; operating income rose 2.0% to $72.0 million. Foreign-exchange movements reduced reported revenue by $14.4 million.
- Asia-Pacific revenue increased 7.1% to $61.7 million, primarily from organic growth; operating income rose 14.7% to $27.3 million. Currency movements reduced revenue by $3.7 million.
- Across the company, currency movements reduced Q1 2019 revenue by $21.8 million. Lower acquisition and integration expense contributed to reduced corporate costs and improved consolidated margin.
- Interest and other income was lower by $8.8 million; the prior-year period included a $9.6 million gain related to a Canadian debit-network association reorganization.
Cash, debt, and liquidity
Cash and cash equivalents were $1.278 billion at March 31, 2019, up from $1.211 billion at December 31, 2018. Of the quarter-end cash, $489.6 million was considered available for general purposes; other balances included settlement-related cash, merchant reserves, and customer funds. Operating activities generated $229.7 million; investing activities used $116.3 million, including $74.8 million for acquisitions and $55.1 million in capital expenditures; financing activities used $49.2 million. The company cited payment and receipt timing as the main reason operating cash flow declined year over year.
Long-term debt was $5.303 billion, including $897.0 million drawn on the revolving facility; $590.5 million of revolving commitments remained available. Settlement lines of credit totaled $641.9 million outstanding, with $725.2 million of additional capacity for settlement funding. The company was in compliance with its credit-facility covenants at quarter-end. Management said cash, borrowing capacity, and anticipated operating cash flows should cover existing operations and planned needs for the foreseeable future.
Outlook, risks, and notable items
- Management expected 2019 capital expenditures for property and equipment to be approximately $230 million. The filing provides no specific revenue or earnings guidance.
- Management described continued electronic-payment adoption, new technologies, and expansion into vertical markets such as healthcare as potential growth drivers, and said it may pursue further acquisitions and joint ventures.
- The company adopted lease accounting guidance on January 1, 2019, recognizing $274.0 million of lease liabilities and $236.0 million of right-of-use assets at adoption. At March 31, operating lease liabilities were $266.7 million. Adoption did not materially affect income or cash flows.
- Credit-facility covenants may restrict certain share repurchases and dividends; substantially all domestic subsidiary assets are pledged as collateral. Variable-rate debt, foreign exchange, acquisition integration, cybersecurity and data protection, payment-network requirements, system interruptions, and competition are among the disclosed risks.
- The company reported routine claims and lawsuits and did not expect their outcomes, individually or collectively, to materially adversely affect its financial position, liquidity, results, or cash flows. No material change in market-risk exposure was reported.
Important facts for investors to verify
- How much of revenue and operating-income growth reflects acquired businesses versus organic growth, particularly in North America.
- Whether the higher interest burden and debt levels remain manageable, including compliance with tightening leverage limits and the 2023 debt maturities.
- Whether operating cash flow recovers from the year-over-year decline and supports planned capital spending, acquisitions, and repurchases.
- How acquisition integration, foreign-exchange movements, payment-industry risks, and the expected adoption of credit-loss accounting affect future results.