Market Overview

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

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Global Payments Inc. (NYSE:GPN) today announced results for the
second quarter ended June 30, 2018.

This press release features multimedia. View the full release here:
https://www.businesswire.com/news/home/20180802005225/en/

"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.

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