Global Payments Reports Second Quarter 2018 Earnings and Announces Agreement to Acquire AdvancedMD

August 2, 2018

ATLANTA--(BUSINESS WIRE)--Aug. 2, 2018-- Global Payments Inc. (NYSE: GPN) today announced results for the second quarter ended June 30, 2018.

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"We delivered double digit organic growth across our markets in the second quarter with results accelerating from the first quarter, highlighting ongoing business momentum globally,” said Jeff Sloan, Chief Executive Officer. “We are also delighted to announce the expansion of our software-driven payments strategy by entering the healthcare vertical market through an agreement to acquire AdvancedMD, a leading provider of cloud-based SaaS solutions to small-to-medium sized physician practices in the United States. This transaction will further shift our business mix toward technology enablement, enhancing future growth opportunities and highlighting our competitive differentiation through to the next decade."

Second Quarter 2018 Summary

  • GAAP revenues were $833.2 million, compared to $962.2 million in the second quarter of 2017; diluted earnings per share were $0.68 compared to $0.44 in the prior year; and operating margin was 22.9% compared to 13.7% in the second quarter of 2017; 2018 results reflect the adoption of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers.
  • Adjusted net revenue plus network fees grew 18% to $982.5 million, compared to $831.7 million in the second quarter of 2017.
  • Adjusted earnings per share grew 37% to $1.29, compared to $0.94 in the second quarter of 2017.
  • Adjusted operating margin expanded 160 basis points to 31.4%.

2018 Outlook

“We are extremely pleased with our performance in the second quarter and year-to-date period, which positions us well to achieve our 2018 expectations, despite facing incremental pressure from foreign currency exchange rates,” stated Cameron Bready, Senior Executive Vice President and Chief Financial Officer. “We continue to expect adjusted net revenue plus network fees to range from $3.90 billion to $3.975 billion, or growth of 13% to 15% over 2017 and adjusted operating margin to expand by as much as 120 basis points. Adjusted earnings per share is now expected to be in a range of $5.05 to $5.20, reflecting growth of 26% to 30% over 2017."

The outlook for 2018 does not include any impact from the AdvancedMD acquisition, which is expected to be immaterial to 2018 adjusted earnings per share.

Capital Allocation

Global Payments’ Board of Directors approved a dividend of $0.01 per share payable September 28, 2018 to shareholders of record as of September 14, 2018.

Conference Call

Global Payments’ management will host a conference call today, August 2, 2018 at 8:00 a.m. ET to discuss financial results and business highlights. Callers may access the conference call via the investor relations page of the company’s website at www.globalpaymentsinc.com; or callers in North America may dial 877-674-6428 and callers outside North America may dial 970-315-0457. A replay of the call will be archived on the company's website within two hours of the live call.

Non-GAAP Financial Measures

Global Payments supplemented revenues, income and earnings per share information determined in accordance with GAAP by providing those measures on an adjusted basis, and other measures, in this earnings release to assist with evaluating performance. In addition to GAAP measures, management uses these non-GAAP measures to focus on the factors the company believes are pertinent to the daily management of our operations.

Reconciliations of the non-GAAP measures to the most directly comparable GAAP measure are included in the schedules to this release.

About Global Payments

Global Payments Inc. (NYSE: GPN) is a leading worldwide provider of payment technology and software solutions delivering innovative services driven by customer needs globally. Our technologies, solutions and employee expertise enable us to provide a broad range of products and services that allow our customers to accept all payment types and operate their businesses more efficiently across a variety of distribution channels in many markets around the world.

Headquartered in Atlanta, Georgia with more than 10,000 employees worldwide, Global Payments is a member of the S&P 500 with customers and partners in 30 countries throughout North America, Europe, the Asia-Pacific region and Brazil. For more information about Global Payments, our Service. Driven. Commerce brand and our technologies, please visit www.globalpaymentsinc.com.

Forward-Looking Statements

This announcement and comments made by Global Payments' management during the conference call may contain certain forward-looking statements within the meaning of the “safe-harbor” provisions of the Private Securities Litigation Reform Act of 1995. Statements that are not historical facts, including revenue, earnings estimates and management’s expectations regarding future events and developments, statements about the benefits of the proposed acquisition of AdvancedMD including future financing and operating results, the combined company’s plans, objectives, expectations and intentions and other statements that are not historical facts, are forward-looking statements and are subject to significant risks and uncertainties.

Important factors that may cause actual events or results to differ materially from those anticipated by such forward-looking statements include our ability to safeguard our data; increased competition from larger companies and non-traditional competitors, our ability to update our services in a timely manner; our ability to maintain Visa and MasterCard registration and financial institution sponsorship; our reliance on financial institutions to provide clearing services in connection with our settlement activities; our potential failure to comply with card network requirements; potential systems interruptions or failures; software defects or undetected errors; increased attrition of merchants, referral partners or independent sales organizations; our ability to increase our share of existing markets and expand into new markets; a decline in the use of cards for payment generally; unanticipated increases in chargeback liability; increases in credit card network fees; change in laws, regulations or network rules or interpretations thereof; foreign currency exchange and interest rate risks; political, economic and regulatory changes in the foreign countries in which we operate; future performance, integration and conversion of acquired operations, including without limitation difficulties and delays in integrating or fully realizing cost savings and other benefits of our acquisitions at all or within the expected time period; fully realizing anticipated annual interest expense savings from refinancing our corporate debt facilities; our loss of key personnel and other risk factors presented in Item 1- Risk Factors of our Report on Form 10-K for the year ended December 31, 2017 and any subsequent SEC filings, which we advise you to review.

Additional important factors that could cause actual events or results to differ from those anticipated by our forward-looking statements or historical performance associated with the proposed acquisition of AdvancedMD include the ability to meet closing conditions at all or on the expected terms and schedule, business disruption during the pendency of the acquisition or thereafter making it more difficult to maintain business and operational relationships, including the possibility that our announcement of the acquisition could disrupt AdvancedMD’s relationships with financial institutions, customers, employees or other partners; and difficulties and delays in fully realizing benefits of the acquisition.

Our forward-looking statements speak only as of the date they are made and should not be relied upon as representing our plans and expectations as of any subsequent date. We undertake no obligation to revise any of these statements to reflect future circumstances or the occurrence of unanticipated events.

 

SCHEDULE 1

UNAUDITED GAAP CONSOLIDATED STATEMENTS OF INCOME

GLOBAL PAYMENTS INC. AND SUBSIDIARIES

(In thousands, except per share data)

                                       
        Three Months Ended     Six Months Ended
        June 30,     June 30,
        2018     2017     % Change     2018     2017     % Change
                                       
Revenues       $ 833,164       $ 962,240       (13.4 )%     $ 1,628,141       $ 1,882,002       (13.5 )%
                                       
Operating expenses:                                      
Cost of service       264,544       469,149       (43.6 )%     516,930       925,085       (44.1 )%
Selling, general and administrative       377,883       361,239       4.6 %     764,304       720,095       6.1 %
        642,427       830,388       (22.6 )%     1,281,234       1,645,180       (22.1 )%
                                       
Operating income       190,737       131,852       44.7 %     346,907       236,822       46.5 %
                                       
Interest and other income       2,568       1,832       40.2 %     14,262       3,439       NM  
Interest and other expense       (47,720 )     (48,361 )     (1.3 )%     (93,325 )     (89,658 )     4.1 %
        (45,152 )     (46,529 )     (3.0 )%     (79,063 )     (86,219 )     (8.3 )%
                                       
Income before income taxes       145,585       85,323       70.6 %     267,844       150,603       77.8 %
Provision for income taxes       (27,856 )     (12,880 )     116.3 %     (52,529 )     (25,201 )     108.4 %
Net income       117,729       72,443       62.5 %     215,315       125,402       71.7 %
Net income attributable to noncontrolling interests, net of income tax       (8,660 )     (5,534 )     56.5 %     (14,847 )     (9,679 )     53.4 %
Net income attributable to Global Payments       $ 109,069       $ 66,909       63.0 %     $ 200,468       $ 115,723       73.2 %
                                       
Earnings per share attributable to Global Payments:                                      
Basic       $ 0.69       $ 0.44       56.8 %     $ 1.26       $ 0.76       65.8 %
Diluted       $ 0.68       $ 0.44       54.5 %     $ 1.25       $ 0.75       66.7 %
                                       
Weighted-average number of shares outstanding:                                      
Basic       159,003       152,525             159,161       152,415        
Diluted       159,677       153,555             159,840       153,405        
                                       

NM - Not Meaningful

                                     
                                       
 

SCHEDULE 2

NON-GAAP FINANCIAL MEASURES (UNAUDITED)

GLOBAL PAYMENTS INC. AND SUBSIDIARIES

(In thousands, except per share data)

                                       
        Three Months Ended     Six Months Ended
        June 30,     June 30,
        2018     2017     % Change     2018     2017     % Change
                                       
Adjusted net revenue plus network fees       $ 982,500     $ 831,658     18.1 %     $ 1,906,780     $ 1,619,374     17.7 %
                                       
Adjusted operating income       $ 308,147     $ 247,738     24.4 %     $ 589,487     $ 476,487     23.7 %
                                       
Adjusted net income attributable to Global Payments       $ 205,998     $ 144,366     42.7 %     $ 386,821     $ 274,402     41.0 %
                                       

Adjusted diluted earnings per share attributable to Global Payments

      $ 1.29     $ 0.94     37.2 %     $ 2.42     $ 1.79     35.2 %

See Schedules 6 and 7 for a reconciliation of each non-GAAP financial measure to the most comparable GAAP measure and Schedule 10 for a discussion of non-GAAP financial measures.

 

SCHEDULE 3

SEGMENT INFORMATION (UNAUDITED)

GLOBAL PAYMENTS INC. AND SUBSIDIARIES

(In thousands)

 
        Three Months Ended                  
        June 30, 2018     June 30, 2017     % Change
        GAAP    

Non-
GAAP(1)

   

Non-GAAP
adjusted net
revenue plus
network
fees(2)

    GAAP    

Non-
GAAP(1)

   

Non-GAAP
adjusted net
revenue plus
network
fees(2)

    GAAP    

Non-
GAAP(3)

   

Non-GAAP
adjusted net
revenue plus
network fees

                                                         
Revenues:                                                        
North America       $ 621,801       $ 549,957       $ 718,574     $ 710,965       $ 624,413       $ 607,332     NM       NM       18.3 %
Europe       155,631       155,631       190,179     186,506       158,759       159,557     NM       NM       19.2 %
Asia-Pacific       55,732       55,732       73,747     64,769       64,769       64,769     NM       NM       13.9 %
        $ 833,164       $ 761,320       $ 982,500     $ 962,240       $ 847,941       $ 831,658     NM       NM       18.1 %
                                                         
Operating income:                                                        
North America       $ 147,184       $ 232,896             $ 112,176       $ 185,144             31.2 %     25.8 %      
Europe       82,682       90,152             65,673       72,268             25.9 %     24.7 %      
Asia-Pacific       19,577       23,255             17,535       19,590             11.6 %     18.7 %      
Corporate       (58,706 )     (38,156 )           (63,532 )     (29,264 )           (7.6 )%     30.4 %      
        $ 190,737       $ 308,147             $ 131,852       $ 247,738             44.7 %     24.4 %      
                                                                 
                                                                 
                                                                 
        Six Months Ended                  
        June 30, 2018     June 30, 2017     % Change
        GAAP    

Non-
GAAP(1)

   

Non-GAAP
adjusted net
revenue plus
network
fees(2)

    GAAP    

Non-
GAAP(1)

   

Non-GAAP
adjusted net
revenue plus
network
fees(2)

    GAAP    

Non-
GAAP(3)

   

Non-GAAP
adjusted net
revenue plus
network fees

                                                         
Revenues:                                                        
North America       $ 1,215,830       $ 1,071,746       $ 1,395,079     $ 1,398,009       $ 1,221,895       $ 1,187,944     NM       NM       17.4 %
Europe       298,908       298,908       361,045     352,054       297,986       299,491     NM       NM       20.6 %
Asia-Pacific       113,403       113,403       150,656     131,939       131,939       131,939     NM       NM       14.2 %
        $ 1,628,141       $ 1,484,057       $ 1,906,780     $ 1,882,002       $ 1,651,820       $ 1,619,374     NM       NM       17.7 %
                                                         
Operating income:                                                        
North America       $ 272,588       $ 446,736             $ 206,259       $ 357,521             32.2 %     25.0 %      
Europe       153,230       167,831             120,180       136,176             27.5 %     23.2 %      
Asia-Pacific       43,351       49,118             37,289       40,559             16.3 %     21.1 %      
Corporate       (122,262 )     (74,198 )           (126,906 )     (57,769 )           (3.7 )%     28.4 %      
        $ 346,907       $ 589,487             $ 236,822       $ 476,487             46.5 %     23.7 %      

NM - Not Meaningful

(1) See Schedules 8 and 9 for a reconciliation of adjusted net revenue, adjusted net revenue plus network fees and adjusted operating income by segment to the most comparable GAAP measures and Schedule 10 for a discussion of non-GAAP financial measures.

(2)Global Payments adopted Accounting Standards Codification Topic 606, Revenue from Contracts with Customers ("ASC 606") on January 1, 2018. The new accounting standard changed the presentation of certain amounts that we pay to third parties, including payment networks. This change in presentation affected our reported GAAP revenues and operating expenses by the same amount and had no effect on operating income. Also, ASC 606 changed the presentation of revenue for our gaming cash advance solutions and had a de minimis impact on revenue for our European business. For our gaming cash advance solutions certain amounts we previously presented as operating expenses are now recognized as a reduction of revenue under GAAP.

(3) As a result of adopting ASC 606, results for 2018 and 2017 revenues and adjusted net revenue are not comparable, thus the change from the prior year is not meaningful.

 

SCHEDULE 4

UNAUDITED CONSOLIDATED BALANCE SHEETS

GLOBAL PAYMENTS INC. AND SUBSIDIARIES

(In thousands, except share data)

               
        June 30, 2018     December 31, 2017
               
ASSETS              
Current assets:              
Cash and cash equivalents       $ 1,099,529       $ 1,335,855  
Accounts receivable, net of allowances for doubtful accounts of $2,795 and $1,827, respectively       317,222       301,887  
Settlement processing assets       2,033,938       2,459,292  
Prepaid expenses and other current assets       208,255       206,545  
Total current assets       3,658,944       4,303,579  
Goodwill       5,671,875       5,703,992  
Other intangible assets, net       1,997,367       2,181,707  
Property and equipment, net       615,803       588,348  
Deferred income taxes       10,049       13,146  
Other noncurrent assets       345,839       207,297  
Total assets       $ 12,299,877       $ 12,998,069  
               
LIABILITIES AND EQUITY              
Current liabilities:              
Settlement lines of credit       $ 547,341       $ 635,166  
Current portion of long-term debt       74,717       100,308  
Accounts payable and accrued liabilities       1,027,934       1,039,607  
Settlement processing obligations       1,714,375       2,040,509  
Total current liabilities       3,364,367       3,815,590  
Long-term debt       4,255,142       4,559,408  
Deferred income taxes       443,874       436,879  
Other noncurrent liabilities       220,493       220,961  
Total liabilities       8,283,876       9,032,838  
Commitments and contingencies              
Equity:              
Preferred stock, no par value; 5,000,000 shares authorized and none issued              
Common stock, no par value; 200,000,000 shares authorized; 158,071,104 issued and outstanding at June 30, 2018 and 159,180,317 issued and outstanding at December 31, 2017              
Paid-in capital       2,254,783       2,379,774  
Retained earnings       1,819,213       1,597,897  
Accumulated other comprehensive loss       (243,629 )     (183,144 )
Total Global Payments shareholders’ equity       3,830,367       3,794,527  
Noncontrolling interests       185,634       170,704  
Total equity       4,016,001       3,965,231  
Total liabilities and equity       $ 12,299,877       $ 12,998,069  
                   
 

SCHEDULE 5

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

GLOBAL PAYMENTS INC. AND SUBSIDIARIES

(In thousands)

               
        Six Months Ended
        June 30, 2018     June 30, 2017
               
Cash flows from operating activities:              
Net income       $ 215,315       $ 125,402  
Adjustments to reconcile net income to net cash provided by operating activities:              

Depreciation and amortization of property and equipment

      69,088       51,197  
Amortization of acquired intangibles       176,303       165,117  
Share-based compensation expense       30,104       21,153  
Provision for operating losses and bad debts       22,942       25,940  
Amortization of capitalized contract costs       23,835       19,681  
Deferred income taxes       (3,061 )     (38,603 )
Other, net       (6,228 )     17,057  
Changes in operating assets and liabilities, net of the effects of acquisitions:              
Accounts receivable       (21,763 )     (4,901 )
Settlement processing assets and obligations, net       95,232       (63,523 )
Prepaid expenses and other assets       (92,154 )     (25,007 )
Accounts payable and other liabilities       (2,857 )     (25,452 )
Net cash provided by operating activities       506,756       268,061  
Cash flows from investing activities:              
Capital expenditures       (102,669 )     (89,958 )
Proceeds from sales of property and equipment       59       37,497  
Other, net       (1,495 )     (34,242 )
Net cash used in investing activities       (104,105 )     (86,703 )
Cash flows from financing activities:              
Net repayments of settlement lines of credit       (88,325 )     (88,490 )
Proceeds from long-term debt       694,214       902,324  
Repayments of long-term debt       (1,024,695 )     (1,082,898 )
Payment of debt issuance costs       (10,884 )     (9,461 )
Repurchase of common stock       (177,261 )     (5,342 )
Proceeds from stock issued under share-based compensation plans       6,340       6,188  
Common stock repurchased - share-based compensation plans       (9,989 )     (418 )
Distributions to noncontrolling interests             (9,301 )
Dividends paid       (3,171 )     (3,551 )
Net cash used in financing activities       (613,771 )     (290,949 )
Effect of exchange rate changes on cash       (25,206 )     27,388  
Decrease in cash and cash equivalents       (236,326 )     (82,203 )
Cash and cash equivalents, beginning of the period       1,335,855       1,162,779  
Cash and cash equivalents, end of the period       $ 1,099,529       $ 1,080,576  
                   
 

SCHEDULE 6

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES TO GAAP MEASURES (UNAUDITED)

GLOBAL PAYMENTS INC. AND SUBSIDIARIES

(In thousands, except per share data)

                                             
        Three Months Ended June 30, 2018
        GAAP    

Net Revenue
Adjustments(1)

   

Earnings
Adjustments(2)

   

Income
Taxes on
Adjustments(3)

   

Non-
GAAP

   

Network
Fees(4)

   

Non-GAAP
Adjusted Net
Revenue Plus
Network Fees

                                             
Revenues       $ 833,164     $ (71,844 )     $     $       $ 761,320     $ 221,180       $ 982,500
                                             
Operating income       $ 190,737     $ 2,276       $ 115,134     $       $ 308,147            
                                             
Net income attributable to Global Payments       $ 109,069     $ 2,276       $ 116,883     $ (22,230 )     $ 205,998            
                                             
Diluted earnings per share attributable to Global Payments       $ 0.68                       $ 1.29            
                                             
Diluted weighted average shares outstanding       159,677                       159,677            
                                             
        Three Months Ended June 30, 2017
        GAAP    

Net Revenue
Adjustments(1)

   

Earnings
Adjustments(2)

   

Income
Taxes on
Adjustments(3)

   

Non-
GAAP

   

Gaming
Cash
Advance /
Other(4)

   

Non-GAAP
Adjusted Net
Revenue Plus
Network Fees

                                             
Revenues       $ 962,240     $ (114,299 )     $     $       $ 847,941     $ (16,283 )     $ 831,658
                                             
Operating income       $ 131,852     $       $ 115,886     $       $ 247,738            
                                             
Net income attributable to Global Payments       $ 66,909     $       $ 120,884     $ (43,427 )     $ 144,366            
                                             
Diluted earnings per share attributable to Global Payments       $ 0.44                       $ 0.94            
                                             
Diluted weighted average shares outstanding       153,555                       153,555            

(1) Represents adjustments to revenues for gross-up related payments (included in operating expenses) associated with certain lines of business to reflect economic benefits to the company. For the three months ended June 30, 2018, includes $2.3 million to eliminate the effect of acquisition accounting fair value adjustments for software-related contract liabilities associated with the acquisition of ACTIVE Network.

(2) For the three months ended June 30, 2018, earnings adjustments to operating income include $92.1 million in cost of service and $23.0 million in selling, general and administrative expenses. Adjustments to cost of service include amortization of acquired intangibles of $89.0 million, acquisition and integration expenses of $0.5 million, employee termination benefits of $0.9 million and other adjustments of $1.7 million. Adjustments to selling, general and administrative expenses include share-based compensation expense of $15.2 million, acquisition and integration expenses of $7.6 million and employee termination benefits of $0.2 million. Net income attributable to Global Payments also reflects an adjustment to remove a charge of $3.3 million associated with the refinancing of our corporate credit facility.

For the three months ended June 30, 2017, earnings adjustments to operating income include $81.6 million of amortization of acquired intangibles in cost of service and $34.2 million in selling, general and administrative expenses, consisting of share-based compensation expense of $12.3 million and acquisition and integration expenses of $21.9 million. Net income attributable to Global Payments also reflects an adjustment to remove a charge of $6.8 million associated with the refinancing of our corporate credit facility.

(3) Income taxes on adjustments reflect the tax effect of earnings adjustments to income before income taxes. The tax rate used in determining the tax impact of earnings adjustments is either the jurisdictional statutory rate in effect at the time of the adjustment or the jurisdictional expected annual effective tax rate for the period, depending on the nature and timing of the adjustment. Also includes the removal of expenses associated with certain discrete tax items related to the impact of changes in state effective income tax rates on deferred liabilities and tax reform true-up impacts on deferred liabilities.

(4)Global Payments adopted ASC 606 on January 1, 2018. The new accounting standard changed the presentation of certain amounts that we pay to third parties, including payment networks. This change in presentation affected our reported GAAP revenues and operating expenses by the same amount and had no effect on operating income.

For 2017, payment network fees were presented within operating expenses and in 2018 payment network fees are presented as a reduction of revenues. As a result, adjusted net revenue plus network fees for the three months ended June 30, 2018 is presented on a basis that is comparable to the prior year. Adjusted net revenue plus network fees for the three months ended June 30, 2017 includes an adjustment for our gaming cash advance solutions and other de minimis amounts for our European business to present it on a basis that is comparable to the current year.

 

SCHEDULE 7

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES TO GAAP MEASURES (UNAUDITED)

GLOBAL PAYMENTS INC. AND SUBSIDIARIES

(In thousands, except per share data)

                                             
        Six Months Ended June 30, 2018
        GAAP    

Net Revenue
Adjustments(1)

   

Earnings
Adjustments(2)

   

Income
Taxes on
Adjustments(3)

   

Non-GAAP

   

Network
Fees(4)

   

Non-GAAP
Adjusted Net
Revenue Plus
Network Fees

                                             
Revenues       $ 1,628,141     $ (144,084 )     $     $       $ 1,484,057     $ 422,723       $ 1,906,780
                                             
Operating income       $ 346,907     $ 5,869       $ 236,711     $       $ 589,487            
                                             
Net income attributable to Global Payments       $ 200,468     $ 5,869       $ 229,025     $ (48,541 )     $ 386,821            
                                             
Diluted earnings per share attributable to Global Payments       $ 1.25                       $ 2.42            
                                             
Diluted weighted average shares outstanding       159,840                       159,840            
                                             
        Six Months Ended June 30, 2017
        GAAP    

Net Revenue
Adjustments(1)

   

Earnings
Adjustments(2)

   

Income
Taxes on
Adjustments(3)

    Non-GAAP    

Gaming
Cash
Advance/
Other(4)

   

Non-GAAP
Adjusted Net
Revenue Plus
Network Fees

                                             
Revenues       $ 1,882,002     $ (230,182 )     $     $       $ 1,651,820     $ (32,446 )     $ 1,619,374
                                             
Operating income       $ 236,822     $       $ 239,665     $       $ 476,487            
                                             
Net income attributable to Global Payments       $ 115,723     $       $ 242,876     $ (84,197 )     $ 274,402            
                                             
Diluted earnings per share attributable to Global Payments       $ 0.75                       $ 1.79            
                                             
Diluted weighted average shares outstanding       153,405                       153,405            

(1) Represents adjustments to revenues for gross-up related payments (included in operating expenses) associated with certain lines of business to reflect economic benefits to the company. For the six months ended June 30, 2018, includes $5.9 million to eliminate the effect of acquisition accounting fair value adjustments for software-related contract liabilities associated with the acquisition of ACTIVE Network.

(2) For the six months ended June 30, 2018 earnings adjustments to operating income include $181.0 million in cost of service and $55.7 million in selling, general and administrative expenses. Adjustments to cost of service include amortization of acquired intangibles of $177.4 million, acquisition and integration expenses of $1.0 million, employee termination benefits of $0.9 million and other adjustments of $1.7 million. Adjustments to selling, general and administrative expenses include share-based compensation expense of $30.1 million, acquisition and integration expenses of $25.4 million and employee termination benefits of $0.2 million. Net income attributable to Global Payments also reflects an adjustment to remove a $9.6 million gain recognized on the reorganization of Interac Association, which we were a member through one of our Canadian subsidiaries, and a charge of $5.2 million associated with the refinancing of our corporate credit facility.

For the six months ended June 30, 2017, earnings adjustments to operating income include $167.9 million and $71.8 million in cost of service and selling, general and administrative expenses, respectively. Adjustments to cost of service include amortization of acquired intangibles of $166.2 million and employee termination benefits of $1.7 million. Adjustments to selling, general and administrative expenses include share-based compensation expense of $21.2 million, acquisition and integration expenses of $48.0 million and employee termination benefits of $2.6 million. Net income attributable to Global Payments also reflects an adjustment to remove a charge of $6.8 million associated with the refinancing of our corporate credit facility.

(3) Income taxes on adjustments reflect the tax effect of earnings adjustments to income before income taxes. The tax rate used in determining the tax impact of earnings adjustments is either the jurisdictional statutory rate in effect at the time of the adjustment or the jurisdictional expected annual effective tax rate for the period, depending on the nature and timing of the adjustment. Also includes the removal of expense associated with certain discrete tax items related to the impact of changes in state effective income tax rates on deferred liabilities and tax reform true-up impacts on deferred liabilities.

(4)Global Payments adopted ASC 606 on January 1, 2018. The new accounting standard changed the presentation of certain amounts that we pay to third parties, including payment networks. This change in presentation affected our reported GAAP revenues and operating expenses by the same amount and had no effect on operating income.

For 2017, payment network fees were presented within operating expenses and in 2018 payment network fees are presented as a reduction of revenues. As a result, adjusted net revenue plus network fees for the six months ended June 30, 2018 is presented on a basis that is comparable to the prior year. Adjusted net revenue plus network fees for the six months ended June 30, 2017 includes an adjustment for our gaming cash advance solutions and other de minimis amounts for our European business to present it on a basis that is comparable to the current year.

 

SCHEDULE 8

RECONCILIATION OF SEGMENT NON-GAAP FINANCIAL MEASURES TO GAAP MEASURES (UNAUDITED)

GLOBAL PAYMENTS INC. AND SUBSIDIARIES

(In thousands)

                                       
                                       
        Three Months Ended June 30, 2018
        GAAP    

Net Revenue
Adjustments (1)

   

Earnings
Adjustments(2)

    Non-GAAP     Network Fees(3)    

Non-GAAP
Adjusted Net
Revenue Plus
Network Fees

                                       
Revenues:                                      
North America       $ 621,801       $ (71,844 )     $     $ 549,957       $ 168,617       $ 718,574
Europe       155,631                 155,631       34,548       190,179
Asia-Pacific       55,732                 55,732       18,015       73,747
        $ 833,164       $ (71,844 )     $     $ 761,320       $ 221,180       $ 982,500
                                       
Operating income:                                      
North America       $ 147,184       $ 2,276       $ 83,436     $ 232,896              
Europe       82,682             7,470     90,152              
Asia-Pacific       19,577             3,678     23,255              
Corporate       (58,706 )           20,550     (38,156 )            
        $ 190,737       $ 2,276       $ 115,134     $ 308,147              
                                       
        Three Months Ended June 30, 2017
        GAAP    

Net Revenue
Adjustments(1)

   

Earnings
Adjustments(2)

    Non-GAAP    

Gaming Cash
Advance/
Other(3)

   

Non-GAAP
Adjusted Net
Revenue Plus
Network Fees

                                       
Revenues:                                      
North America       $ 710,965       $ (86,552 )     $     $ 624,413       $ (17,081 )     $ 607,332
Europe       186,506       (27,747 )         158,759       798       159,557
Asia-Pacific       64,769                 64,769             64,769
        $ 962,240       $ (114,299 )     $     $ 847,941       $ (16,283 )     $ 831,658
                                       
Operating income:                                      
North America       $ 112,176       $       $ 72,968     $ 185,144              
Europe       65,673             6,595     72,268              
Asia-Pacific       17,535             2,055     19,590              
Corporate       (63,532 )           34,268     (29,264 )            
        $ 131,852       $       $ 115,886     $ 247,738              

(1) Represents adjustments to revenues for gross-up related payments (included in operating expenses) associated with certain lines of business to reflect economic benefits to the company. For the three months ended June 30, 2018, includes $2.3 million to eliminate the effect of acquisition accounting fair value adjustments for software-related contract liabilities associated with the acquisition of ACTIVE Network.

(2) For the three months ended June 30, 2018, earnings adjustments to operating income include $92.1 million in cost of service and $23.0 million in selling, general and administrative expenses. Adjustments to cost of service include amortization of acquired intangibles of $89.0 million, acquisition and integration expenses of $0.5 million, employee termination benefits of $0.9 million and other adjustments of $1.7 million. Adjustments to selling, general and administrative expenses include share-based compensation expense of $15.2 million, acquisition and integration expenses of $7.6 million and employee termination benefits of $0.2 million.

For the three months ended June 30, 2017, earnings adjustments to operating income include $81.6 million of amortization of acquired intangibles in cost of service and $34.2 million in selling, general and administrative expenses, consisting of share-based compensation expense of $12.3 million and acquisition and integration expenses of $21.9 million.

(3)Global Payments adopted ASC 606 on January 1, 2018. The new accounting standard changed the presentation of certain amounts that we pay to third parties, including payment networks. This change in presentation affected our reported GAAP revenues and operating expenses by the same amount and had no effect on operating income.

For 2017, payment network fees were presented within operating expenses and in 2018 payment network fees are presented as a reduction of revenues. As a result, adjusted net revenue plus network fees for the three months ended June 30, 2018 is presented on a basis that is comparable to the prior year. Adjusted net revenue plus network fees for the three months ended June 30, 2017 includes an adjustment for our gaming cash advance solutions and other de minimis amounts for our European business to present it on a basis that is comparable to the current year.

 

SCHEDULE 9

RECONCILIATION OF SEGMENT NON-GAAP FINANCIAL MEASURES TO GAAP MEASURES (UNAUDITED)

GLOBAL PAYMENTS INC. AND SUBSIDIARIES

(In thousands)

                                       
        Six Months Ended June 30, 2018
        GAAP    

Net Revenue
Adjustments(1)

   

Earnings
Adjustments(2)

    Non-GAAP     Network Fees(3)    

Non-GAAP
Adjusted Net
Revenue Plus
Network Fees

                                       
Revenues:                                      
North America       $ 1,215,830       $ (144,084 )     $     $ 1,071,746       $ 323,333       $ 1,395,079
Europe       298,908                 298,908       62,137       361,045
Asia-Pacific       113,403                 113,403       37,253       150,656
        $ 1,628,141       $ (144,084 )     $     $ 1,484,057       $ 422,723       $ 1,906,780
                                       
Operating income:                                      
North America       $ 272,588       $ 5,869       $ 168,279     $ 446,736              
Europe       153,230             14,601     167,831              
Asia-Pacific       43,351             5,767     49,118              
Corporate       (122,262 )           48,064     (74,198 )            
        $ 346,907       $ 5,869       $ 236,711     $ 589,487              
                                       
        Six Months Ended June 30, 2017
        GAAP    

Net Revenue
Adjustments(1)

   

Earnings
Adjustments(2)

    Non-GAAP    

Gaming Cash
Advance\
Other(3)

   

Non-GAAP
Adjusted Net
Revenue Plus
Network Fees

                                       
Revenues:                                      
North America       $ 1,398,009       $ (176,114 )     $     $ 1,221,895       $ (33,951 )     $ 1,187,944
Europe       352,054       (54,068 )         297,986       1,505       299,491
Asia-Pacific       131,939                 131,939             131,939
        $ 1,882,002       $ (230,182 )     $     $ 1,651,820       $ (32,446 )     $ 1,619,374
                                       
Operating income:                                      
North America       $ 206,259       $       $ 151,262     $ 357,521              
Europe       120,180             15,996     136,176              
Asia-Pacific       37,289             3,270     40,559              
Corporate       (126,906 )           69,137     (57,769 )            
        $ 236,822       $       $ 239,665     $ 476,487              

(1) Represents adjustments to revenues for gross-up related payments (included in operating expenses) associated with certain lines of business to reflect economic benefits to the company. For the six months ended June 30, 2018, includes $5.9 million to eliminate the effect of acquisition accounting fair value adjustments for software-related contract liabilities associated with the acquisition of ACTIVE Network.

(2) For the six months ended June 30, 2018, earnings adjustments to operating income include $181.0 million in cost of service and $55.7 million in selling, general and administrative expenses. Adjustments to cost of service include amortization of acquired intangibles of $177.4 million, acquisition and integration expenses of $1.0 million, employee termination benefits $0.9 million and other adjustments of $1.7 million. Adjustments to selling, general and administrative expenses include share-based compensation expense of $30.1 million, acquisition and integration expenses of $25.4 million and other adjustments of $0.2 million.

For the six months ended June 30, 2017, earnings adjustments to operating income include $167.9 million and $71.8 million in cost of service and selling, general and administrative expenses, respectively. Adjustments to cost of service include amortization of acquired intangibles of $166.2 million and employee termination benefits of $1.7 million. Adjustments to selling, general and administrative expenses include share-based compensation expense of $21.2 million, acquisition and integration expenses of $48.0 million and employee termination benefits of $2.6 million.

(3)Global Payments adopted ASC 606 on January 1, 2018. The new accounting standard changed the presentation of certain amounts that we pay to third parties, including payment networks. This change in presentation affected our reported GAAP revenues and operating expenses by the same amount and had no effect on operating income.

For 2017, payment network fees were presented within operating expenses and in 2018 payment network fees are presented as a reduction of revenues. As a result, adjusted net revenue plus network fees for the six months ended June 30, 2018 is presented on a basis that is comparable to the prior year. Adjusted net revenue plus network fees for the six months ended June 30, 2017 includes an adjustment for our gaming cash advance solutions and other de minimis amounts for our European business to present it on a basis that is comparable to the current year.

 
SCHEDULE 10
OUTLOOK SUMMARY (UNAUDITED)

GLOBAL PAYMENTS INC. AND SUBSIDIARIES

(In billions, except per share data)

                     
        2017 Actual     2018 Outlook     % Change
                     
Revenues:                    
GAAP revenues       $ 3.98       $3.30 to $3.38     NM
Adjustments(1)         (0.46 )       (0.27 )      
Adjusted net revenue       $ 3.52       $3.03 to $3.10     NM
                     
Gaming cash advance / other(2)         ($0.07 )     $        
Network fees(2)                 0.87        
Adjusted net revenue plus network fees       $ 3.45       $3.90 to $3.975     13% to 15%
                     
Earnings per share ("EPS"):                    
GAAP diluted EPS(3)       $ 3.01       $2.86 to $3.01      
Adjustments(4)         1.00         2.19        
Adjusted diluted EPS       $ 4.01       $5.05 to $5.20     26% to 30%

Our outlook for 2018 does not include any impact from the AdvancedMD acquisition, which we expect to be immaterial to 2018 adjusted earnings per share.

(1) Represents adjustments to revenues for gross-up related payments (included in operating expenses) associated with certain lines of business to reflect economic benefit to the company. As a result of the adoption of ASC 606 effective January 1, 2018, no adjustment is necessary for our European wholesale business as GAAP revenues in 2018 are presented net of these payments. The 2018 Outlook adjustment is $0.16 billion lower as a result of this change. See footnote 2.

Amounts also include adjustments to eliminate the effect of acquisition accounting fair value adjustments for software-related contract liabilities associated with the acquisition of ACTIVE Network.

(2)Global Payments adopted ASC 606 on January 1, 2018. The new accounting standard changed the presentation of certain amounts that we pay to third parties, including payment networks. This change in presentation affected our reported GAAP revenues and operating expenses by the same amount and had no effect on operating income.

For 2017, payment network fees were presented within operating expenses and in 2018 payment network fees are presented as a reduction of revenues. As a result, adjusted net revenue plus network fees for 2018 are presented on a basis that is comparable to the prior year. Adjusted net revenue plus network fees for 2017 includes an adjustment for our gaming cash advance solutions and other de minimis amounts for our European business to present it on a basis that is comparable to the current year.

(3) ASC 606 also changes the amount and timing of revenue and expenses to be recognized under certain of our customer arrangements, the effect of which is reflected in the outlook for GAAP diluted EPS for 2018.

(4) Adjustments to 2017 GAAP diluted EPS include the ACTIVE Network revenue adjustment described above, acquisition related amortization expense of $2.19, share-based compensation expense of $0.25 and net other items of $0.68, including acquisition and integration expense of $0.61. Adjustments to 2017 GAAP diluted EPS also includes the effect of these adjustments on noncontrolling interests and income taxes, as applicable. In addition, these adjustments reflect the removal of income tax benefit of $1.02 representing the effects of U.S. Tax Cuts and Jobs Act of 2017.

NM - Not Meaningful

NON-GAAP FINANCIAL MEASURES

Global Payments supplements revenues, income and EPS information determined in accordance with U.S. GAAP by providing these measures, and other measures, with certain adjustments (such measures being non-GAAP financial measures) in this document to assist with evaluating our performance. In addition to GAAP measures, management uses these non-GAAP financial measures to focus on the factors the company believes are pertinent to the daily management of our operations. Management believes adjusted net revenue and adjusted net revenue plus network fees more closely reflect the economic benefits to the company's core business and, in the case of adjusted net revenue, allows for better comparisons with industry peers. Management uses these non-GAAP financial measures, together with other metrics, to set goals for and measure the performance of the business and to determine incentive compensation. Adjusted net revenue, adjusted net revenue plus network fees, adjusted operating income, adjusted operating margin, adjusted net income and adjusted EPS should be considered in addition to, and not as substitutes for, revenues, operating income, net income and EPS determined in accordance with GAAP. The non-GAAP financial measures reflect management's judgment of particular items, and may not be comparable to similarly titled measures reported by other companies.

Adjusted net revenue excludes gross-up related payments associated with certain lines of business to reflect economic benefits to the company. On a GAAP basis, these payments are presented gross in both revenues and operating expenses. Adjusted operating income, adjusted net income and adjusted EPS exclude acquisition-related amortization expense, share-based compensation and certain other items specific to each reporting period as more fully described in the accompanying reconciliations in Schedules 6, 7, 8 and 9. Beginning in 2018, adjusted operating margin is derived by dividing adjusted operating income by adjusted net revenue plus network fees. The tax rate used in determining the net income impact of earnings adjustments is either the jurisdictional statutory rate in effect at the time of the adjustment or the jurisdictional expected annual effective tax rate for the period, depending on the nature and timing of the adjustment.

Source: Global Payments Inc.

Global Payments Inc.
Investor contact:
Winnie Smith, 770-829-8478
investor.relations@globalpay.com
or
Media contact:
Laura Coerper, 770-829-8755
media.relations@globalpay.com