Form 8-K
GLOBAL PAYMENTS INC false 0001123360 0001123360 2019-08-01 2019-08-01

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 8-K

 

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): August 1, 2019

Commission file number 001-16111

 

 

IMAGE

GLOBAL PAYMENTS INC.

(Exact name of registrant as specified in charter)

 

Georgia

 

58-2567903

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

     

3550 Lenox RoadAtlantaGeorgia

 

30326

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (770) 829-8000

NONE

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act

Title of each class

 

Ticker 

symbol

 

Name of exchange 

on which registered

Common stock, no par value

 

GPN

 

New York Stock Exchange

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

 

 


Item 8.01. Other Events.

As previously announced, on May 27, 2019, Global Payments Inc. (“Global Payments”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Total System Services, Inc. (“TSYS”), pursuant to which TSYS will merge with and into Global Payments (the “Merger”), with Global Payments as the surviving entity in the Merger. The Merger is currently expected to close in the fourth quarter of 2019, subject to the satisfaction or waiver of the closing conditions specified in the Merger Agreement.

Global Payments is filing: (i) as Exhibit 99.1 to this Current Report on Form 8-K, TSYS’ audited consolidated financial statements as of December 31, 2018 and 2017 and for each of the fiscal years ended December 31, 2018, 2017 and 2016; (ii) as Exhibit 99.2, TSYS’ interim unaudited consolidated financial statements as of June 30, 2019 and for the three and six months ended June 30, 2019 and 2018; (iii) as Exhibit 99.3, Management’s Discussion and Analysis of Financial Condition and Results of Operations of TSYS for the year ended December 31, 2018; (iv) as Exhibit 99.4, Management’s Discussion and Analysis of Financial Condition and Results of Operations of TSYS for the three and six months ended June 30, 2019; (v) as Exhibit 99.5, information related to TSYS’ business and operations and information related to certain material regulatory matters related to TSYS’ business; (vi) as Exhibit 99.6, information related to certain material risks related to TSYS’ business, operations and financial condition; (vii) as Exhibit 99.7, the unaudited pro forma condensed combined financial statements of Global Payments and TSYS, including (a) the unaudited pro forma condensed combined consolidated statement of income of Global Payments and TSYS for the six months ended June 30, 2019, giving effect to the Merger as if it had occurred on January 1, 2018, and the unaudited pro forma condensed combined consolidated balance sheet of Global Payments and TSYS as of June 30, 2019, giving effect to the Merger as if it had occurred on June 30, 2019, and (b) for the year ended December 31, 2018, the unaudited pro forma condensed combined consolidated statement of income of Global Payments and TSYS for the year ended December 31, 2018, giving effect to the Merger as if it had occurred on January 1, 2018; and (viii) as Exhibit 23.1, the consent of KPMG LLP, independent registered public accounting firm of TSYS.

This Current Report on Form 8-K does not modify or update the consolidated financial statements of Global Payments included in Global Payments’ Annual Report on Form 10-K for the year ended December 31, 2018, nor does it reflect any subsequent information or events. The information referenced in items (i)–(vi) above was previously disclosed by TSYS in its reports filed with the U.S. Securities and Exchange Commission (the “SEC”), including its Annual Report on Form 10-K for the fiscal year ended December 31, 2018 and its Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2019.

Forward-Looking Statements

Certain of the matters discussed in this communication which are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements, which are based on current expectations, estimates and projections about the industry and markets in which TSYS and Global Payments operate and beliefs of and assumptions made by TSYS management and Global Payments management, involve uncertainties that could significantly affect the financial condition, results of operations, business plans and the future performance of TSYS, Global Payments or the combined company. Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” “estimates,” “forecasts,” “projects,” “plans,” “may,” “could,” “should,” “would” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying these statements. Such forward-looking statements include, but are not limited to, statements about the strategic rationale and financial benefits of the transaction, including expected future financial and operating results and the combined company’s plans, objectives, expectations and intentions. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future — including statements relating to projections of revenue, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; statements of plans and objectives of TSYS or Global Payments or their management or board of directors, including those relating to products or services; and statements of future economic performance — are forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be attained, and therefore actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. In addition to factors previously disclosed in Global Payments’ reports filed with the SEC and those identified elsewhere in this communication, the following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance: the occurrence of any event, change or other circumstances that could give rise to the right of one or both of TSYS and Global Payments to terminate the Merger Agreement; the outcome of any legal proceedings that may be instituted against TSYS, Global Payments or their respective directors in respect of the Merger or the Merger Agreement; the ability to obtain regulatory approvals and meet other closing conditions to the Merger on a timely basis or at all, including the risk that regulatory approvals required for the Merger are not obtained on a timely basis or at all, or are obtained subject to conditions that are not anticipated or that could adversely affect the combined company or the expected benefits of the transaction; the ability to obtain approval by TSYS shareholders and Global Payments shareholders on the expected terms and schedule; difficulties and delays in integrating the TSYS and Global Payments businesses, including with


respect to implementing systems to prevent a material security breach of any internal systems or to successfully manage credit and fraud risks in business units; failing to fully realize anticipated cost savings and other anticipated benefits of the Merger when expected or at all; business disruptions from the proposed Merger that will harm TSYS’ or Global Payments’ business, including current plans and operations; potential adverse reactions or changes to business relationships resulting from the announcement or completion of the Merger, including as it relates to TSYS’ or Global Payments’ ability to successfully renew existing client contracts on favorable terms or at all and obtain new clients; failing to comply with the applicable requirements of Visa, Mastercard or other payment networks or card schemes or changes in those requirements; the ability of TSYS or Global Payments to retain and hire key personnel; the diversion of management’s attention from ongoing business operations; uncertainty as to the long-term value of the common stock of Global Payments following the Merger, including the dilution caused by Global Payments’ issuance of additional shares of its common stock in connection with the transaction; the continued availability of capital and financing following the Merger; the business, economic and political conditions in the markets in which TSYS and Global Payments operate; the impact of new or changes in current laws, regulations, credit card association rules or other industry standards, including privacy and cybersecurity laws and regulations; and events beyond TSYS’ or Global Payments’ control, such as acts of terrorism.

Any forward-looking statements speak only as of the date of this communication or as of the date they were made, and neither TSYS nor Global Payments undertakes any obligation to update forward-looking statements. For a more detailed discussion of these factors, also see the information under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Global Payments’ most recent annual reports on Form 10-K for the year ended December 31, 2018, quarterly reports on Form 10-Q for the period ended June 30, 2019, and any material updates to these factors contained in any of Global Payments’ future filings and in Exhibits 99.3, 99.4 and 99.6 to this Current Report on Form 8-K.

As for the forward-looking statements that relate to future financial results and other projections, actual results will be different due to the inherent uncertainties of estimates, forecasts and projections and may be better or worse than projected and such differences could be material. Given these uncertainties, you should not place any reliance on these forward-looking statements. Annualized, pro forma, projected and estimated numbers are used for illustrative purpose only, are not forecasts and may not reflect actual results.

Additional Information and Where to Find It

In connection with the Merger, Global Payments filed with the SEC a registration statement on Form S-4 to register the shares of Global Payments’ common stock to be issued in connection with the Merger on July 23, 2019. The registration statement includes a joint proxy statement/prospectus. Global Payments and TSYS commenced mailing the joint proxy statement/prospectus to shareholders on or about July 25, 2019. SHAREHOLDERS OF GLOBAL PAYMENTS AND TSYS ARE URGED TO READ THE REGISTRATION STATEMENT ON FORM S-4 AND THE RELATED JOINT PROXY STATEMENT/PROSPECTUS INCLUDED WITHIN THE REGISTRATION STATEMENT ON FORM S-4, AS WELL AS ANY AMENDMENTS OR SUPPLEMENTS TO THOSE DOCUMENTS AND ANY OTHER RELEVANT DOCUMENTS FILED OR TO BE FILED WITH THE SEC IN CONNECTION WITH THE MERGER BECAUSE THEY CONTAIN IMPORTANT INFORMATION ABOUT TSYS, GLOBAL PAYMENTS AND THE PROPOSED MERGER.

Investors and security holders may obtain copies of these documents free of charge through the website maintained by the SEC at www.sec.gov or from TSYS at its website, www.tsys.com, or from Global Payments at its website, www.globalpaymentsinc.com. Documents filed with the SEC by TSYS will be available free of charge by accessing TSYS’ website at www.tsys.com under the heading Investor Relations or, alternatively, by directing a request by telephone or mail to TSYS at One TSYS Way, Columbus, Georgia 31901, and documents filed with the SEC by Global Payments will be available free of charge by accessing Global Payments’ website at www.globalpaymentsinc.com under the heading Investor Relations or, alternatively, by directing a request by telephone or mail to Global Payments at 3550 Lenox Road, Suite 3000 Atlanta, Georgia 30326, Attention: Investor Relations.

Participants in the Solicitation

TSYS and Global Payments and certain of their respective directors and executive officers may be deemed to be participants in the solicitation of proxies from the shareholders of Global Payments and TSYS in respect of the Merger under the rules of the SEC. Information about Global Payments’ directors and executive officers is available in Global Payments’ proxy statement dated March 13, 2019 for its 2019 Annual Meeting of Shareholders. Information about TSYS’ directors and executive officers is available in TSYS’ proxy statement dated March 20, 2019 for its 2019 Annual Meeting of Shareholders. Other information regarding the participants in the proxy solicitation and a description of their direct and indirect interests, by security holdings or otherwise, are contained in the joint proxy statement/prospectus and other relevant materials to be filed with the SEC regarding the merger when they become available. Investors should read the joint proxy statement/prospectus carefully before making any voting or investment decisions. You may obtain free copies of these documents from Global Payments or TSYS using the sources indicated above.


No Offer or Solicitation

This communication shall not constitute an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities, in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offering of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act.

Item 9.01. Financial Statements and Exhibits.

(d)    Exhibits

Exhibit
    No.    

   

Description

         
 

23.1

   

Consent of KPMG LLP (with respect to Total System Services, Inc.).

         
 

99.1

   

Audited consolidated financial statements of Total System Services, Inc. as of December 31, 2018 and 2017 and for each of the fiscal years ended December 31, 2018, 2017 and 2016.

         
 

99.2

   

Interim unaudited consolidated financial statements of Total System Services, Inc. as of June 30, 2019 and for the three and six months ended June 30, 2019 and 2018.

         
 

99.3

   

Management’s Discussion and Analysis of Financial Condition and Results of Operations of Total System Services, Inc. for the year ended December 31, 2018.

         
 

99.4

   

Management’s Discussion and Analysis of Financial Condition and Results of Operations of Total System Services, Inc. for the three and six months ended June 30, 2019 and 2018.

         
 

99.5

   

Information related to Total System Services, Inc.’s business and operations and information related to certain material regulatory matters related to Total System Services, Inc.’s business.

         
 

99.6

   

Information related to certain material risks related to Total System Services, Inc.’s business, operations and financial condition.

         
 

99.7

   

Unaudited pro forma condensed combined financial statements (a) as of and for the six months ended June 30, 2019 and (b) for the year ended December 31, 2018.


Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

GLOBAL PAYMENTS INC.

             

Date: August 1, 2019

 

 

By:

 

/s/ Cameron M. Bready

 

 

 

Cameron M. Bready

 

 

 

Senior Executive Vice President and Chief Financial Officer

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

The Board of Directors

Total System Services, Inc.:

We consent to the incorporation by reference in the registration statements (No. 333-169436 and No. 333-177026) on Form S-8, the registration statement (No. 333-220380) on Form S-3 and the registration statement (No. 333-232545) on Form S-4 of Global Payments Inc. and subsidiaries of our report dated February 21, 2019, with respect to the consolidated balance sheets of Total System Services, Inc. (the Company) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, cash flows, and changes in equity for each of the years in the three-year period ended December 31, 2018, and the related notes and financial statement schedule (collectively, the “consolidated financial statements”), and the effectiveness of internal control over financial reporting as of December 31, 2018, which report appears in the Form 8-K of Global Payments Inc. dated August 1, 2019.

Our report dated February 21 2019, on the effectiveness of internal control over financial reporting as of December 31, 2018, contains an explanatory paragraph that states that the Company acquired Cayan Holdings LLC (Cayan) and iMobile3, LLC (iMobile3) during 2018, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018 Cayan and iMobile3’s internal controls over financial reporting associated with total assets of $1.2 billion and total revenues of $179 million included in the consolidated financial statements of the Company as of and for the year ended December 31, 2018. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Cayan and iMobile3.

Our report dated February 21, 2019 contains an explanatory paragraph that states that as discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for revenue recognition in 2018 due to the adoption of Accounting Standards Codification 606 (ASC 606), Revenue from Contracts with Customers.

/s/ KPMG LLP

Atlanta, Georgia

August 1, 2019

EX-99.1

EXHIBIT 99.1

Audited consolidated financial statements of Total System Services, Inc.

as of December 31, 2018 and 2017 and for each of the fiscal years ended December 31, 2018, 2017 and 2016.

Index to Consolidated Financial Statements

 

Total System Services, Inc. and Subsidiaries

  

Consolidated Financial Statements:

  

Report of KPMG LLP, Independent Registered Public Accounting Firm

     2  

Consolidated Balance Sheets as of December 31, 2018 and 2017

     4  

Consolidated Statements of Income for the years ended December 31, 2018, 2017, and 2016

     5  

Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017, and 2016

     6  

Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017, and 2016

     7  

Consolidated Statements of Equity for the years ended December 31, 2018, 2017, and 2016

     8  

Notes to the Consolidated Financial Statements

     9  

Schedules:

  

Schedule II-Valuation and Qualifying Accounts

     60  


Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors Total System Services, Inc.:

Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting

We have audited the accompanying consolidated balance sheets of Total System Services, Inc. and subsidiaries (the Company) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, cash flows, and changes in equity for each of the years in the three-year period ended December 31, 2018, and the related notes and financial statement schedule (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

The Company acquired Cayan Holdings LLC (Cayan) and iMobile3, LLC (iMobile3) during 2018, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018 Cayan’s and iMobile3’s internal control over financial reporting associated with total assets of $1.2 billion and total revenues of $179 million included in the consolidated financial statements of the Company as of and for the year ended December 31, 2018. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Cayan and iMobile3.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for revenue recognition in 2018 due to the adoption of Accounting Standards Codification 606 (ASC 606), Revenue from Contracts with Customers.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and

 

-2-


disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ KPMG LLP
We have served as the Company’s auditor since 1983.
Atlanta, Georgia
February 21, 2019

 

-3-


TOTAL SYSTEM SERVICES, INC.

CONSOLIDATED BALANCE SHEETS

 

(in thousands, except per share data)

   December 31, 2018     December 31, 2017  

Assets

    

Current assets:

    

Cash and cash equivalents (Note 4)

   $ 471,156       450,357  

Accounts receivable, net of allowances for doubtful accounts and billing adjustments of $6.0 million and $5.9 million as of 2018 and 2017, respectively

     450,322       412,322  

Contract assets (Note 2)

     30,950       —    

Prepaid expenses and other current assets (Note 5)

     188,355       216,565  
  

 

 

   

 

 

 

Total current assets

     1,140,783       1,079,244  

Contract assets (Note 2)

     47,839       —    

Goodwill (Note 6)

     4,114,838       3,264,071  

Other intangible assets, net of accumulated amortization of $802.0 million and $600.9 million as of 2018 and 2017, respectively (Note 7)

     796,702       727,146  

Intangible assets - computer software, net of accumulated amortization of $893.4 million and $849.3 million as of 2018 and 2017, respectively (Note 8)

     534,536       383,715  

Property and equipment, net of accumulated depreciation and amortization of $522.7 million and $521.1 million as of 2018 and 2017, respectively (Note 9)

     383,074       325,218  

Contract cost assets, net of accumulated amortization (Notes 1 and 10)

     145,598       258,665  

Equity investments, net (Note 11)

     180,661       163,518  

Deferred income tax assets (Note 14)

     7,773       6,091  

Other assets

     116,905       124,021  
  

 

 

   

 

 

 

Total assets

   $ 7,468,709       6,331,689  
  

 

 

   

 

 

 

Liabilities

    

Current liabilities:

    

Current portion of long-term borrowings (Note 12)

   $ 20,807       559,050  

Accounts payable

     97,956       62,310  

Contract liabilities (Note 2)

     47,227       52,913  

Accrued salaries and employee benefits

     73,143       82,135  

Current portion of obligations under capital leases and license agreements (Note 12)

     8,318       6,762  

Other current liabilities (Note 13)

     268,150       225,922  
  

 

 

   

 

 

 

Total current liabilities

     515,601       989,092  

Long-term borrowings, excluding current portion (Note 12)

     3,843,394       2,591,949  

Deferred income tax liabilities (Note 14)

     380,278       238,317  

Contract liabilities (Note 2)

     21,489       48,526  

Obligations under capital leases and license agreements, excluding current portion (Note 12)

     46,147       36,053  

Other long-term liabilities

     75,894       71,070  
  

 

 

   

 

 

 

Total liabilities

     4,882,803       3,975,007  
  

 

 

   

 

 

 

Redeemable noncontrolling interest in consolidated subsidiary (Note 23)

     —         115,689  
  

 

 

   

 

 

 

Commitments and contingencies (Note 15)

    

Shareholders’ Equity

    

Shareholders’ equity:

    

Common stock- $0.10 par value. Authorized 600,000 shares; 202,765 issued as of 2018 and 2017; 180,586 and 180,903 outstanding as of 2018 and 2017, respectively

     20,277       20,277  

Additional paid-in capital

     189,889       162,806  

Accumulated other comprehensive loss, net (Note 20)

     (60,223     (36,148

Treasury stock, at cost (22,179 and 21,862 shares as of 2018 and 2017, respectively) (Note 19)

     (1,042,687     (909,960

Retained earnings

     3,478,650       3,004,018  
  

 

 

   

 

 

 

Total shareholders’ equity

     2,585,906       2,240,993  
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 7,468,709       6,331,689  
  

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

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TOTAL SYSTEM SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME

 

(in thousands, except per share data)

   Years Ended December 31,  
     2018     2017     2016  

Total revenues (Notes 1, 2 and 21)

   $ 4,028,211       4,927,965       4,170,077  
  

 

 

   

 

 

   

 

 

 

Cost of services (Note 1)

     2,492,482       3,577,320       2,993,062  

Selling, general and administrative expenses

     712,991       616,601       603,633  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     3,205,473       4,193,921       3,596,695  
  

 

 

   

 

 

   

 

 

 

Operating income

     822,738       734,044       573,382  

Nonoperating expenses, net

     (162,974     (116,482     (112,350
  

 

 

   

 

 

   

 

 

 

Income before income taxes and equity in income of equity investments

     659,764       617,562       461,032  

Income taxes (Note 14)

     127,003       65,878       161,175  
  

 

 

   

 

 

   

 

 

 

Income before equity in income of equity investments

     532,761       551,684       299,857  

Equity in income of equity investments, net of tax

     45,156       40,532       26,115  
  

 

 

   

 

 

   

 

 

 

Net income

   $ 577,917       592,216       325,972  

Net income attributable to noncontrolling interests

     (1,261     (6,031     (6,334
  

 

 

   

 

 

   

 

 

 

Net income attributable to Total System Services, Inc. (TSYS) common shareholders

   $ 576,656       586,185       319,638  
  

 

 

   

 

 

   

 

 

 

Basic earnings per share (EPS) attributable to TSYS common shareholders (Note 25)

   $ 3.17       3.19       1.74  
  

 

 

   

 

 

   

 

 

 

Diluted EPS attributable to TSYS common shareholders (Note 25)

   $ 3.14       3.16       1.73  
  

 

 

   

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

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TOTAL SYSTEM SERVICES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

     Years Ended December 31,  

(in thousands)

   2018     2017     2016  

Net income

   $ 577,917       592,216       325,972  
  

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income, net of tax:

      

Foreign currency translation adjustments

     (20,326     22,018       (30,801

Postretirement healthcare plan adjustments

     (716     (592     496  

Unrealized (loss) gain on available-for-sale securities

     (5,362     (1,416     7,359  
  

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (26,404     20,010       (22,946
  

 

 

   

 

 

   

 

 

 

Comprehensive income

     551,513       612,226       303,026  

Comprehensive income attributable to noncontrolling interests

     (1,261     (6,031     (6,002
  

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to TSYS common shareholders

   $ 550,252       606,195       297,024  
  

 

 

   

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

-6-


TOTAL SYSTEM SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Years Ended December 31,  

(in thousands)

   2018     2017     2016  

Cash flows from operating activities:

      

Net income

   $ 577,917       592,216       325,972  

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization

     408,573       405,906       373,546  

Provisions for cardholder losses

     65,108       51,194       49,363  

Share-based compensation

     48,758       42,409       43,728  

Provisions for bad debt expenses and billing adjustments

     10,313       10,169       7,584  

Charges for transaction processing provisions

     7,163       11,716       5,351  

Amortization of debt issuance costs

     4,982       4,307       13,570  

Dividends received from equity investments

     24,921       20,589       15,246  

(Gain) loss on foreign currency

     (109     907       (1,748

Amortization of bond discount

     1,027       907       750  

Loss on disposal of equipment, net

     84       3,605       774  

Excess tax benefit from share-based payment arrangements

     —         —         (9,905

Deferred income tax expense (benefit)

     21,400       (172,488     7,435  

Equity in income of equity investments, net of tax

     (45,156     (40,532     (26,115

Changes in operating assets and liabilities, net of effects of acquisitions:

      

Accounts receivable

     (34,834     (29,729     (73,235

Contract assets and contract liabilities

     (2,771     6,184       (2,262

Contract cost assets

     3,316       —         —    

Prepaid expenses, other current assets and other long-term assets

     16,402       3,089       (58,345

Accounts payable

     2,718       17,653       (12,562

Accrued salaries and employee benefits

     (12,543     13,538       (2,597

Other current liabilities and other long-term liabilities

     (55,602     (84,591     61,734  
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     1,041,667       857,049       718,284  
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Purchases of property and equipment

     (113,266     (70,039     (51,132

Additions to contract acquisition costs

     —         (69,806     (45,847

Additions to internally developed computer software

     (39,162     (30,265     (34,043

Additions to licensed computer software from vendors

     (89,756     (25,916     (11,551

Cash used in acquisitions, net of cash acquired

     (1,051,629     —         (2,345,493

Proceeds from sale of acquisition intangibles

     3,847       —         —    

Other investing activities

     (4,183     (2,718     (4,930
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (1,294,149     (198,744     (2,492,996
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Principal payments on long-term borrowings, capital lease obligations and license agreements

     (2,812,366     (421,306     (724,084

Purchase of noncontrolling interest

     (126,000     (70,000     (5,878

Dividends paid on common stock

     (94,557     (79,017     (73,378

Subsidiary dividends paid to noncontrolling shareholders

     (3,777     (5,997     (5,548

Repurchase of common stock under plans and tax withholding

     (172,966     (284,237     (30,275

Debt issuance costs

     (16,004     —         (26,555

Excess tax benefit from share-based payment arrangements

     —         —         9,905  

Proceeds from borrowings of long-term debt

     3,477,000       200,000       2,666,295  

Proceeds from exercise of stock options

     31,177       21,832       11,708  
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     282,507       (638,725     1,822,190  
  

 

 

   

 

 

   

 

 

 

Cash, cash equivalents and restricted cash:

      

Effect of exchange rate changes on cash, cash equivalents and restricted cash

     (7,116     5,980       (11,197
  

 

 

   

 

 

   

 

 

 

Net increase in cash, cash equivalents and restricted cash

     22,909       25,560       36,281  

Cash, cash equivalents and restricted cash at beginning of period

     451,370       425,810       389,529  
  

 

 

   

 

 

   

 

 

 

Cash, cash equivalents and restricted cash at end of period

   $ 474,279       451,370       425,810  
  

 

 

   

 

 

   

 

 

 

Supplemental cash flow information:

      

Interest paid

   $ 154,487       112,705       84,420  
  

 

 

   

 

 

   

 

 

 

Income taxes paid, net

   $ 78,546       269,113       87,428  
  

 

 

   

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

-7-


TOTAL SYSTEM SERVICES, INC.

CONSOLIDATED STATEMENTS OF EQUITY

 

           TSYS Shareholders  
                             Accumulated                          
                             Other                          
     Redeemable     Common Stock           Comprehensive                          
     Noncontrolling                 Additional     Income (Loss),           Retained     Noncontrolling        

(in thousands, except per share data)

   Interests     Shares     Dollars     Paid-In Capital     Net of Tax     Treasury Stock     Earnings     Interests     Total Equity  

Balance as of December 31, 2015

   $ 23,410       202,769     $ 20,277       241,891       (33,544     (641,664     2,256,058       5,664     $ 1,848,682  

Net income

     6,231       —         —         —         —         —         319,638       103       319,741  

Other comprehensive loss (Note 20)

     —         —         —         —         (22,614     —         —         (332     (22,946

Common stock issued from treasury shares for exercise of stock options (Note 18)

     —         —         —         1,824       —         9,884       —         —         11,708  

Common stock unissued due to forfeiture of nonvested awards

     —         (4     (1     1,197       —         (1,196     —         —         —    

Common stock issued from treasury shares for nonvested awards (Note 18)

     —         —         —         (17,204     —         17,204       —         —         —    

Share-based compensation (Note 18)

     —         —         —         42,457       —         —         —         —         42,457  

Cash dividends declared ($0.40 per share)

     —         —         —         —         —         —         (73,474     —         (73,474

Purchase of treasury shares (Note 19)

     —         —         —         —         —         (30,275     —         —         (30,275

Subsidiary repurchase of noncontrolling interests

     —         —         —         (443     —         —         —         (5,435     (5,878

Subsidiary dividends paid to noncontrolling interests

     (5,548     —         —         —         —         —         —         —         —    

Tax benefits associated with share-based compensation

     —         —         —         9,905       —         —         —         —         9,905  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2016

     24,093       202,765       20,276       279,627       (56,158     (646,047     2,502,222       —         2,099,920  

Net income

     6,031                 586,185         586,185  

Other comprehensive income (Note 20)

     —         —         —         —         20,010       —         —         —         20,010  

Common stock issued from treasury shares for exercise of stock options (Note 18)

     —         —         —         10,474       —         11,358       —         —         21,832  

Common stock unissued due to forfeiture of nonvested awards

     —         —         1       1,230       —         (1,231     —         —         —    

Common stock issued from treasury shares for nonvested awards (Note 18)

     —         —         —         (10,197     —         —         —         —         —    

Share-based compensation (Note 18)

     —         —         —         43,234       —         —             43,234  

Cash dividends declared ($0.46 per share)

     —         —         —         —         —           (84,389     —         (84,389

Purchase of treasury shares (Note 19)

     —         —         —         —         —         (284,237     —         —         (284,237

Adjustments to redemption value of redeemable noncontrolling interest

     101,405       —         —         (101,405     —         —         —         —         (101,405

Subsidiary repurchase of noncontrolling interests

     (9,843     —         —         (60,157     —         —         —         —         (60,157

Subsidiary dividends paid to noncontrolling interests

     (5,997     —         —         —         —         —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2017

     115,689       202,765       20,277       162,806       (36,148     (909,960     3,004,018       —         2,240,993  

Cumulative effect adjustment from adoption of ASU 2014-09 (Note 1)

     —         —         —         —         —         —         (4,445     —         (4,445

Reclassification from adoption of ASU 2018-02 (Notes 1 and 20)

       —         —         —         2,329       —         (2,329     —         —    

Net income

     1,261       —         —         —         —         —         576,656       —         576,656  

Other comprehensive loss (Note 20)

     —         —         —         —         (26,404     —         —         —         (26,404

Common stock issued from treasury shares for exercise of stock options (Note 18)

     —         —         —         7,089       —         24,083       —         —         31,172  

Common stock unissued due to forfeiture of nonvested awards

     —         —         —         692       —         (692     —         —         —    

Common stock issued from treasury shares for nonvested awards (Note 18)

     —         —         —         (16,839     —         16,839       —         —         —    

Common stock issued from treasury shares for dividend equivalents

     —         —         —         925       —         9       —         —         934  

Share-based compensation (Note 18)

     —         —         —         48,044       —         —           —         48,044  

Cash dividends declared ($0.52 per share)

     —         —         —         —         —         —         (95,250     —         (95,250

Purchase of treasury shares (Note 19)

     —         —         —         —         —         (172,966     —         —         (172,966

Adjustments to redemption value of redeemable noncontrolling interest

     12,828       —         —         (12,828     —         —         —         —         (12,828

Subsidiary dividends paid to noncontrolling interest

     (3,778     —         —         —         —         —         —         —         —    

Repurchase of noncontrolling interest

     (126,000     —         —         —         —         —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2018

   $ —         202,765     $ 20,277       189,889       (60,223     (1,042,687     3,478,650       —       $ 2,585,906  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to the Consolidated Financial Statements.

 

-8-


TOTAL SYSTEM SERVICES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Basis of Presentation and Summary of Significant Accounting Policies

BUSINESS: Total System Services, Inc.’s (“TSYS’” or “the Company’s”) revenues are derived from providing payment processing, merchant services and related payment services to financial and nonfinancial institutions, generally under long-term processing contracts. The Company also derives revenues by providing general-purpose reloadable (“GPR”) prepaid debit and payroll cards, demand deposit accounts and other financial services to underbanked and other consumers and businesses. The Company’s services are provided through three operating segments: Issuer Solutions, Merchant Solutions and Consumer Solutions.

Through the Company’s Issuer Solutions segment, TSYS processes information through its cardholder systems to financial and nonfinancial institutions throughout the United States and internationally. The Company’s Merchant Solutions segment provides merchant services to merchant acquirers and merchants mainly in the United States. The Company’s Consumer Solutions segment provides financial service solutions to consumers and businesses in the United States.

PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION: The accompanying Consolidated Financial Statements, which are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) include the accounts of TSYS and its wholly- and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. In addition, the Company evaluates its relationships with other entities to identify whether they are variable interest entities and to assess whether it is the primary beneficiary of such entities. If the determination is made that the Company is the primary beneficiary, then that entity is included in the consolidated financial statements.

RISKS AND UNCERTAINTIES AND USE OF ESTIMATES: Factors that could affect the Company’s future operating results and cause actual results to vary materially from expectations include, but are not limited to, lower than anticipated growth from existing clients, an inability to attract new clients and grow internationally, loss of a major customer or other significant client, loss of a major supplier, an inability to grow through acquisitions or successfully integrate acquisitions, an inability to control expenses, technology changes, the impact of the application of and/or changes in accounting principles, financial services consolidation, changes in regulatory requirements, a decline in the use of cards as a payment mechanism, disruption of the Company’s international operations, breach of the Company’s security systems, a decline in the financial stability of the Company’s clients and uncertain economic conditions. Negative developments in these or other risk factors could have a material adverse effect on the Company’s financial position, results of operations and cash flows.

The Company has prepared the accompanying consolidated financial statements in conformity with U.S. GAAP. The preparation of the consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. These estimates and assumptions are developed based upon all information available. Actual results could differ from estimated amounts.

ACQUISITIONS — PURCHASE PRICE ALLOCATION: TSYS’ purchase price allocation methodology requires the Company to make assumptions and to apply judgment to estimate the fair value of acquired assets and liabilities. TSYS estimates the fair value of assets and liabilities based upon appraised market values, the carrying value of the acquired assets and widely accepted valuation techniques, including the cost approach, discounted cash flows and market multiple analyses. Management determines the fair value of fixed assets and identifiable intangible assets such as developed technology or customer relationships, and any other significant assets or liabilities. TSYS adjusts the purchase price allocation, as necessary, until the end of the measurement period, which is no longer than one year after the acquisition closing date as TSYS obtains more information regarding asset valuations and liabilities assumed. Unanticipated events or circumstances may occur which could affect the accuracy of the Company’s fair value estimates, including assumptions regarding industry economic factors and business strategies, and may result in an impairment or a new allocation of purchase price.

 

-9-


CASH AND CASH EQUIVALENTS: Cash on hand and investments with a maturity of three months or less when purchased are considered to be cash equivalents.

ACCOUNTS RECEIVABLE: Accounts receivable balances are stated net of allowances for doubtful accounts and billing adjustments.

TSYS records an allowance for doubtful accounts when it is probable that the accounts receivable balance will not be collected. When estimating the allowance for doubtful accounts, the Company takes into consideration such factors as its day-to-day knowledge of the financial position of specific clients, the industry and size of its clients, the overall composition of its accounts receivable aging, prior history with specific customers of accounts receivable write-offs and prior experience of allowances in proportion to the overall receivable balance. This analysis includes an ongoing and continuous communication with its largest clients and those clients with past due balances. A financial decline of any one of the Company’s large clients could have a material adverse effect on collectability of receivables and thus the adequacy of the allowance for doubtful accounts.

Increases in the allowance for doubtful accounts are recorded as charges to bad debt expense and are reflected in selling, general and administrative expenses in the Company’s Consolidated Statements of Income. Write-offs of uncollectible accounts are charged against the allowance for doubtful accounts.

TSYS records an allowance for billing adjustments for actual and potential billing discrepancies. When estimating the allowance for billing adjustments, the Company considers its overall history of billing adjustments, as well as its history with specific clients and known disputes. Increases in the allowance for billing adjustments are recorded as a reduction of revenues in the Company’s Consolidated Statements of Income and actual adjustments to invoices are charged against the allowance for billing adjustments.

GOODWILL: Goodwill results from the excess of cost over the fair value of net assets of businesses acquired. Goodwill is tested for impairment at least annually. Equity investment goodwill, which is not reported as goodwill in the Company’s Consolidated Balance Sheet, but is reported as a component of the equity investment, was $46.6 million and $48.8 million as of December 31, 2018 and 2017, respectively.

OTHER INTANGIBLE ASSETS: Identifiable intangible assets relate primarily to merchant relationships, customer relationships, databases, channel relationships, covenants-not-to-compete, trade names and trade associations resulting from acquisitions. These identifiable intangible assets are amortized using the straight-line method over periods not exceeding the estimated useful lives, which range from one to twelve years. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with GAAP. Amortization expenses are charged to selling, general and administrative expenses in the Company’s Consolidated Statements of Income.

INTANGIBLE ASSETS – COMPUTER SOFTWARE, NET: Licensed computer software includes software the Company licenses from third parties that is for internal use and providing services to clients. Licensed software is obtained through perpetual licenses, term licenses, site licenses and through agreements based on processing capacity. Perpetual and site licenses are amortized using the straight-line method over their estimated useful lives which range from one to ten years. Term licenses are amortized over the term of the agreement. Mainframe software that is licensed based on processing capacity is amortized using either a straight-line or a units-of-production basis over the estimated useful life of the software, generally not to exceed ten years. At each balance sheet date, the Company evaluates impairment losses on long-lived assets used in operations in accordance with GAAP.

Acquisition technology intangibles are software technology assets resulting from acquisitions. These assets are amortized using the straight-line method over periods not exceeding their estimated useful lives, which range from three to eight years. GAAP requires that intangible assets with estimated useful lives be amortized over their respective estimated useful lives to their residual values, and reviewed for impairment. Acquisition technology intangibles’ net book values are included in computer software, net in the accompanying Consolidated Balance Sheets. Amortization expenses are charged to cost of services in the Company’s Consolidated Statements of Income.

 

-10-


Software development costs are costs of computer software to be sold, leased or otherwise marketed are capitalized once technological feasibility of the software product has been established. Costs incurred prior to establishing technological feasibility are expensed as incurred. Technological feasibility is established when the Company has completed a detailed program design and has determined that a product can be produced to meet its design specifications, including functions, features and technical performance requirements. Capitalization of costs ceases when the product is generally available to clients. In evaluating software development costs for recoverability, expected cash flows are estimated by management should events indicate a loss may have been triggered. Software development costs are amortized using the straight-line method over its estimated useful life, which ranges from one to ten years.

The Company also develops software that is used internally. Internal-use software development costs are capitalized once: (1) the preliminary project stage is completed, (2) management authorizes and commits to funding a computer software project, and (3) it is probable that the project will be completed and the software will be used to perform the function intended. Costs incurred prior to meeting the qualifications are expensed as incurred. Capitalization of costs ceases when the project is substantially complete and ready for its intended use. Internal-use software development costs are amortized using the straight-line method over its estimated useful life which ranges from three to ten years. Software development costs may become impaired in situations where development efforts are abandoned due to the viability of the planned project becoming doubtful or due to technological obsolescence of the planned software product.

Based upon management’s review for potential impairment, no material impairment losses related to intangible assets – computer software were recorded in 2018, 2017 or 2016.

PROPERTY AND EQUIPMENT: Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. Buildings and improvements are depreciated over estimated useful lives of 5-40 years, computer and other equipment over estimated useful lives of 2-5 years, and furniture and other equipment over estimated useful lives of 3-15 years. The Company evaluates impairment losses on long-lived assets used in operations in accordance with the provisions of GAAP. All ordinary repairs and maintenance costs are expensed as incurred. Maintenance costs that extend the asset life are capitalized and amortized over the remaining estimated life of the asset.

EQUITY METHOD INVESTMENTS: TSYS’ 49% investment in Total System Services de Mexico, S.A. de C.V. (“TSYS de Mexico”), an electronic payment processing support operation located in Toluca, Mexico, is accounted for using the equity method of accounting, as is TSYS’ 44.56% investment in China UnionPay Data Co., Ltd. (“CUP Data”) headquartered in Shanghai, China. The Company has entered into limited partnership agreements in connection with investing in two Atlanta-based venture capital funds focused exclusively on investing in technology-enabled financial services companies. TSYS’ equity investments are recorded initially at cost and subsequently adjusted for equity in earnings, cash contributions and distributions, and foreign currency translation adjustments.

INCOME TAXES: Income taxes reflected in TSYS’ consolidated financial statements are computed based on the taxable income of TSYS and its affiliated subsidiaries. A consolidated U.S. federal income tax return is filed for TSYS and its majority-owned U.S. subsidiaries. Additionally, income tax returns are also filed in states where TSYS and its subsidiaries have filing obligations and in foreign jurisdictions where TSYS has a foreign affiliate.

The Company accounts for income taxes in accordance with the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Reserves against the carrying value of a deferred tax asset are established when necessary to reflect the decreased likelihood of realization of a deferred asset in the future. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

-11-


Income tax provisions require the use of management judgments, which are subject to challenge by various taxing authorities. Contingency reserves are periodically established where the amount of the contingency can be reasonably determined and is likely to occur. Reductions in contingency reserves are recognized when tax disputes are settled or examination periods lapse.

Significant estimates used in accounting for income taxes relate to the determination of taxable income, the determination of temporary differences between book and tax basis, as well as estimates on the realizability of tax credits and net operating losses.

TSYS recognizes potential interest and penalties related to the underpayment of income taxes as income tax expense in the Consolidated Statements of Income.

UP-FRONT DISTRIBUTOR AND PARTNER PAYMENTS: The Company makes up-front contractual payments to third-party distributors and partners. The Company assesses each up-front payment to determine whether it meets the criteria of an asset as defined by U.S. GAAP. If these criteria are met, the Company capitalizes the up-front payment and recognizes the capitalized amount as expense ratably over the benefit period, which is generally the contract period. If the contract requires the distributor or partner to perform specific acts (i.e., achieve a sales goal) and no other conditions exist for the distributor or partner to earn or retain the up-front payment, then the Company capitalizes the payment and recognizes it as an expense when the performance conditions have been met. Up-front distributor and partner payments are classified on the Consolidated Balance Sheets as other current and non-current assets and recorded as a cost of services in the Consolidated Statements of Income.

IMPAIRMENT OF LONG-LIVED ASSETS: The Company reviews long-lived assets, such as property and equipment and intangibles subject to amortization, including contract assets, contract cost assets and certain computer software, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If upon a triggering event the Company determines that the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the Consolidated Balance Sheets and reported at the lower of the carrying amount or fair value less costs to sell, and would no longer be depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheet.

TRANSACTION PROCESSING PROVISIONS: The Company has recorded an accrual for contract contingencies (performance penalties) and processing errors. A significant number of the Company’s contracts with large clients contain service level agreements which can result in TSYS incurring performance penalties if contractually required service levels are not met. When providing for these accruals, the Company takes into consideration such factors as the prior history of performance penalties and processing errors incurred, actual contractual penalty charge rates in the Company’s contracts, progress towards milestones and known processing errors. As of December 31, 2018 and 2017, the Company had transaction processing provisions of $3.6 million and $2.2 million, respectively. These accruals are included in other current liabilities in the accompanying Consolidated Balance Sheets. Increases and decreases in transaction processing provisions are charged to cost of services in the Company’s Consolidated Statements of Income, and payments or credits for performance penalties and processing errors are charged against the accrual.

PROVISION FOR CARDHOLDER LOSSES: The Company is exposed to losses due to cardholder fraud, payment defaults and other forms of cardholder activity as well as losses due to non-performance of third parties who receive cardholder funds for transmittal to the issuing banks (banks that issue Mastercard International or Visa USA, Inc. branded cards to customers). The Company establishes a reserve for the losses it estimates will arise from processing customer transactions, debit card overdrafts, chargebacks for unauthorized card use and merchant-related chargebacks due to non-delivery of goods and services. These reserves are established based upon historical loss and recovery rates and cardholder activity for which specific losses can be identified. The provision for cardholder losses was approximately $13.1 million and $9.5 million as of December 31, 2018 and 2017, respectively. The charges to provisions for cardholder losses are included in cost of services in the Consolidated Statements of Income and other current liabilities in the Consolidated Balance Sheets. The Company regularly updates its reserve estimate as new facts become known and events occur that may impact the settlement or recovery of losses.

 

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PROVISION FOR MERCHANT LOSSES: The Company has potential liability for losses resulting from disputes between a cardholder and a merchant that arise as a result of, among other things, the cardholder’s dissatisfaction with merchandise quality or merchant services. Such disputes may not be resolved in the merchant’s favor. In these cases, the transaction is “charged back” to the merchant, which means the purchase price is refunded to the customer by the card-issuing bank and charged to the merchant. If the merchant is unable to fund the refund, TSYS must do so. TSYS also bears the risk of reject losses arising from the fact that TSYS collects fees from its merchants after the monthly billing period. If the merchant has gone out of business during such period, TSYS may be unable to collect such fees. TSYS maintains cash deposits or requires the pledge of a letter of credit from certain merchants, generally those with higher average transaction size where the card is not present when the charge is made or the product or service is delivered after the charge is made, in order to offset potential contingent liabilities such as chargebacks and reject losses that would arise if the merchant went out of business. Most chargeback and reject losses are charged to cost of services as they are incurred. However, the Company also maintains a provision against losses, including major fraud losses, which are both less predictable and involve larger amounts. The loss provision was established using historical loss rates, applied to recent bankcard processing volume. The Company had a merchant loss provision in the amount $4.3 million for the years ended December 31, 2018 and 2017.

LEASES: The Company is obligated under noncancelable leases for computer equipment and facilities. As these leases expire, they will be evaluated and renewed or replaced by similar leases based on need. For purposes of applying the accounting and reporting standards, leases are classified from the standpoint of the lessee as capital or operating leases.

Rental payments on operating leases are charged to expense over the lease term. If rental payments are not made on a straight-line basis, rental expense nevertheless shall be recognized on a straight-line basis unless another systematic and rational basis is more representative of the time pattern in which use benefit is derived from the leased property, in which case that basis shall be used.

Certain of the Company’s operating leases are for office space. The Company will make various alterations (leasehold improvements) to the office space and capitalize these costs as part of property and equipment. Leasehold improvements are amortized on a straight-line basis over the useful life of the improvement or the term of the lease, whichever is shorter.

TREASURY STOCK: The Company uses the cost method when it purchases its own common stock as treasury shares or issues treasury stock upon option exercises and displays treasury stock as a reduction of shareholders’ equity.

FAIR VALUES OF FINANCIAL INSTRUMENTS: The Company uses financial instruments in the normal course of its business. The carrying values of cash equivalents, accounts receivable, accounts payable and employee benefits, and other current liabilities approximate their fair value due to the short-term maturities of these assets and liabilities. The fair values of the Company’s unsecured revolving loan and notes payable are considered to be level 2 measurements which are based on inputs other than quoted prices included within Level 1 that are observable for the liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar liabilities in active or inactive markets, or other inputs that can be corroborated by observable market data. The carrying value of the Company’s unsecured revolving loan approximates fair value since the interest rate resets monthly and the balances are pre-payable at any time. With respect to the Company’s notes payable due March and December 2020, the carrying values approximate fair value due to their relatively short maturities. Refer to Note 12 for the estimated fair values of the Company’s Senior Notes.

Investments in equity method investments are accounted for using the equity method of accounting and pertain to privately held companies. The Company believes the fair values of its investments in equity method investments exceed their respective carrying values.

FOREIGN CURRENCY TRANSLATION: The Company maintains several different foreign operations whose functional currency is their local currency. Foreign currency financial statements of the Company’s Mexican and Chinese equity investments, the Company’s wholly-owned subsidiaries and the Company’s majority-owned subsidiaries, as well as the Company’s division and branches in the United Kingdom and China, are translated into

 

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U.S. dollars at current exchange rates, except for revenues, costs and expenses, and net income which are translated at the average exchange rates for each reporting period. Net gains or losses resulting from the currency translation of assets and liabilities of the Company’s foreign operations, net of tax when applicable, are accumulated in a separate section of shareholders’ equity titled accumulated other comprehensive income (loss). Gains and losses on transactions denominated in currencies other than the functional currencies are included in determining non-operating income (expense).

REVENUE RECOGNITION:

Revenue recognition for periods after the Company’s adoption of ASC 606 as of January 1, 2018

The Company adopted Accounting Standards Update (“ASU”) 2014-09 and related ASUs (“ASC 606”) as of January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. For contracts that were modified before the effective date, the Company considered the effect of all modifications when identifying performance obligations and allocating transaction price, which did not have a material effect on the adjustment to retained earnings. The reported results for 2018 reflect the application of ASC 606 guidance while the reported results for 2017 were prepared under the guidance of ASC 605, Revenue Recognition (“ASC 605”), which is also referred to herein as “legacy GAAP” or the “previous guidance.” In accordance with ASC 606, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services. To achieve this core principle, the Company applies the following five steps:

 

  1.

Identify the contract with a customer. A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the services to be transferred and identifies the payment terms related to these services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.

 

  2.

Identify the performance obligations in the contract. Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised services, the Company must apply judgment to determine whether promised services are capable of being distinct and are distinct in the context of the contract. If these criteria are not met, the promised services are accounted for as a combined performance obligation.

 

  3.

Determine the transaction price. The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods and services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur.

 

  4.

Allocate the transaction price to performance obligations in the contract. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. However, if a series of distinct services that are substantially the same qualifies as a single performance obligation in a contract with variable consideration, the Company must determine if the variable consideration is attributable to the entire contract or to a specific part of the contract. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct service that forms part of a single performance obligation. The Company determines standalone selling prices based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.

 

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  5.

Recognize revenue when or as the Company satisfies a performance obligation. The Company satisfies performance obligations either over time or at a point in time as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised good or service to a customer.

Description of revenue recognition policies

Issuer Solutions

Issuer Solutions revenues typically include a performance obligation to provide processing services to financial and non-financial institutions. The Company has determined that these processing services represent a stand-ready series of distinct daily services that are substantially the same, with the same pattern of transfer to the customer. In many cases, Issuer Solutions arrangements may include additional performance obligations relating to loyalty redemption services and other professional services. Similar to processing services, the Company has determined that loyalty redemption services represent a stand-ready series of distinct daily services that are substantially the same, with the same pattern of transfer to the customer. Professional services represent performance obligations that are satisfied over time.

The Company has determined that the vast majority of performance obligations to provide processing services and loyalty redemption services meet the allocation of variable consideration exception criteria (“direct allocation”) in that (a) the terms of a variable payment relate specifically to the entity’s efforts to satisfy the performance obligation or transfer the distinct service and (b) allocating the variable amount of consideration entirely to the performance obligation or the distinct good or service is consistent with the allocation objective when considering all of the performance obligations and payment terms in the contract. As a result, for those performance obligations qualifying for direct allocation, the Company allocates and recognizes variable consideration in the period in which it has the contractual right to invoice the customer. In certain instances when a performance obligation does not meet the criteria for direct allocation, the Company recognizes revenue on either a straight-line basis or a blended rate method (i.e., an output method using the estimated per transaction fee based on estimated total contract consideration and volumes, multiplied by the actual monthly transaction volumes) over the term of the contract. A blended rate method is utilized for contracts that have estimates of significant growth over the contract term. The Company determined that straight-line or blended rate are the most appropriate methods of measuring progress toward completion for performance obligations that do not meet the criteria for direct allocation.

For professional services, the Company recognizes revenue based on the labor hours incurred for time and materials projects or on a straight-line basis for fixed fee projects.

For Issuer Solutions contracts that contain multiple performance obligations, the transaction price is allocated to each performance obligation based on a relative standalone selling price basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct service that forms part of a single performance obligation.

The Issuer Solutions segment also enters into licensing arrangements with customers. Under these arrangements, the Company provides the customer with a term license (“functional IP”), implementation services and annual support, which includes unspecified upgrades and enhancements. The Company has determined that these promised goods and services represent one combined performance obligation since the individual promised goods or services are not distinct in the context of the contract. The Company recognizes revenue over the remaining contract period beginning at go-live, on a straight-line basis, for this performance obligation. Revenues related to this combined performance obligation are immaterial. For separate performance obligations relating to professional services, revenue is recognized using an input method based on labor hours expended.

 

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Merchant Solutions

Merchant Solutions revenues typically include one performance obligation to provide processing services to individual merchants, large financial institutions, other merchant acquirers or merchant organizations. The Company has determined that merchant processing services represent a stand-ready series of distinct daily services that are substantially the same, with the same pattern of transfer to the customer. Merchant Solutions arrangements also include other promised goods or services (such as point-of-sale terminals and merchant statement services) that are immaterial in the context of the contract. As a result, the Company has determined that Merchant Solutions arrangements represent one performance obligation.

The Company has determined that the performance obligation to provide merchant processing services meets the allocation of variable consideration exception criteria (“direct allocation”) in that (a) the terms of a variable payment relate specifically to the entity’s efforts to satisfy the performance obligation or transfer the distinct service and (b) allocating the variable amount of consideration entirely to the performance obligation or the distinct good or service is consistent with the allocation objective when considering all of the performance obligations and payment terms in the contract. As a result, the Company allocates and recognizes variable consideration in the period it has the contractual right to invoice the customer.

Interchange and payment network fees

Interchange and payment network fees are charged by the card associations or payment networks and relate primarily to the Company’s Merchant Solutions segment. With respect to interchange and payment network fees, the Company evaluated whether it is the principal or the agent in the arrangement. With the adoption of ASC 606, the Company determined that interchange and payment network fees are not provided in return or exchange for services that the Company controls or acts as the principal, and, therefore, are not part of the consideration paid for its services. Accordingly, the Company is acting as an agent and presents the fees collected from merchants on behalf of the payment networks and card issuers net of the amounts paid to them. In reaching this determination, the Company considered a number of factors including indicators of control such as the party primarily responsible and the party who has discretion in establishing prices.

Consumer Solutions

Consumer Solutions revenues include one performance obligation to provide account access and facilitate purchase transactions, as well as interchange fees. The Company has determined that Consumer Solutions services represent a stand-ready series of distinct daily services that are substantially the same, with the same pattern of transfer to the customer. Further, the Company has determined that the performance obligation to provide account access and facilitate purchase transactions meets the criteria for the “as invoiced” practical expedient in that the Company has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the Company’s performance completed to date. As a result, the Company recognizes revenue in the amount to which the Company has a right to invoice.

Reimbursable Items

Reimbursable items consist of out-of-pocket expenses which are reimbursed by the Company’s clients. These expenses consist primarily of postage, gift cards and third-party software. Reimbursable items are recorded on a gross basis in total revenues and cost of services.

Costs to obtain or fulfill a contract

The Company capitalizes the incremental costs of obtaining a contract with a customer if the Company expects to recover those costs. The incremental costs of obtaining a contract are those that the Company incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, a sales commission). The Company also makes commission payments to third parties such as agents and partners. To date, costs to obtain a contract that qualify for capitalization are immaterial.

 

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The Company capitalizes the costs incurred to fulfill a contract only if those costs meet all of the following criteria:

 

  a.

The costs relate directly to a contract or to an anticipated contract that the Company can specifically identify.

 

  b.

The costs generate or enhance resources of the Company that will be used in satisfying (or in continuing to satisfy) performance obligations in the future.

 

  c.

The costs are expected to be recovered.

See related discussion of contract cost assets in Note 10.

Contract acquisition and fulfillment costs are amortized using the straight-line method over the expected period of benefit (ranging from 20 months to seven years or the longer of the contract term) beginning when the client’s cardholder accounts are converted or activated and producing revenues. The amortization of contract fulfillment costs associated with conversion activity is recorded as cost of services in the Company’s Consolidated Statements of Income. The amortization of contract acquisition costs associated with sales commissions that qualify for capitalization is recorded as selling, general and administrative expense in the Company’s Consolidated Statements of Income. Costs to obtain or fulfill a contract are classified as contract cost assets in the Company’s Consolidated Balance Sheets.

In evaluating contract acquisition and fulfillment costs for recoverability, expected cash flows are estimated by management should events indicate a loss may have been triggered. The Company evaluates the carrying value of contract cost assets associated with each customer for impairment on the basis of whether these costs are fully recoverable from either contractual minimum fees or from expected undiscounted net operating cash flows of the related contract. The determination of expected undiscounted net operating cash flows requires management to make estimates. If the actual cash flows are not consistent with the Company’s estimates, a material impairment charge may result and net income may be materially different than was initially recorded. These costs may become impaired with the loss of a contract, the financial decline of a client, termination of conversion efforts after a contract is signed, diminished prospects for current clients or if the Company’s actual results differ from its estimates of future cash flows. The amount of the impairment is written off in the period that such a determination is made.

Optional exemptions, practical expedients and policy elections

The Company has elected to treat shipping and handling activities as a cost of fulfillment rather than a separate performance obligation.

The Company has elected to exclude all sales and other similar taxes from the transaction price. Accordingly, the Company presents all collections from customers for these taxes on a net basis, rather than having to assess whether the Company is acting as an agent or a principal in each taxing jurisdiction.

The Company utilizes a portfolio approach in order to estimate amounts for service level agreement penalties and similar items for portfolios of contracts with similar characteristics, using estimates and assumptions that reflect the size and composition of the portfolio.

As a practical expedient, the Company is not required to adjust the promised amount of consideration for the effects of a significant financing component if the Company expects, at contract inception, that the period between when the Company transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less. None of the Company’s contracts as of December 31, 2018 contained a significant financing component.

The Company has elected to use the “as-invoiced” practical expedient for its performance obligations to provide account access and facilitate purchase transactions related to the Consumer Solutions segment.

 

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The Company does not disclose the value of unsatisfied performance obligations (except for contractual minimums) for which revenue is recognized using (i) the “as-invoiced” practical expedient and (ii) the “direct allocation” method.

The Company adopted ASC 606 as of January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption.

Revenue recognition for periods prior to the Company’s adoption of ASC 606 as of January 1, 2018

Revenue was recognized when it was realized or realizable and earned, which was deemed to occur when all of the following criteria were met: (1) persuasive evidence of an arrangement existed; (2) delivery had occurred or services had been performed; (3) the seller’s price to the buyer was fixed or determinable; and (4) collectability was reasonably assured. The Company accrued for rights of refund, processing errors or penalties, or other related allowances based on historical experience.

Issuer Solutions

Revenue was recognized as the services were performed, primarily on a per unit basis. Processing contracts generally ranged from three to ten years in length. When providing payment processing services, the Company frequently entered into customer arrangements to provide multiple services that may have also included conversion or implementation services, business process outsourcing services such as call center services, web-based services, and other payment processing-related services. The revenue contracts can be highly complex and customized between customers. Revenue for these services was generally recognized as they were performed on a per unit basis each month or ratably over the term of the contract.

Merchant Solutions

Revenue was recognized for merchant services as those services were performed, primarily measured on a per unit basis. When providing merchant processing services, the Company frequently entered into customer arrangements to provide multiple services that may have also included conversion or implementation services, business process outsourcing services such as call center services, terminal services, and other merchant processing-related services. Revenue for these services was generally recognized as they were performed on a per unit basis each month or ratably over the term of the contract. Revenues on point-of-sale (“POS”) terminal equipment were recognized upon the transfer of ownership and shipment of product.

With the acquisition of TransFirst Holdings Corp. (“TransFirst”) on April 1, 2016, TSYS included TransFirst’s results as part of the Merchant Solutions segment. TransFirst’s revenues were reported gross, which includes amounts paid for interchange and assessments, as TransFirst is the principal in the contractual relationship with its customers. Expenses covering interchange and payment network fees were included in TransFirst’s cost of services and were directly attributable to processing fee revenues and were recognized in the same period as the related revenue.

Consumer Solutions

Revenue resulting from the service fees charged to the cardholders was recognized when the fees were charged because the earnings process was substantially complete, except for revenue resulting from the initial activation of cards and annual subscription fees. Revenue resulting from the initial activation of cards was recognized ratably, net of commissions paid to distributors, over the average account life. Revenue resulting from annual subscription fees was recognized ratably over the annual period to which the fees related.

Revenues also included fees charged in connection with program management and processing services the Company provided for private-label programs. Revenue resulting from these fees was recognized when the Company had fulfilled its obligations under the underlying service agreements.

The Company derives revenue from a portion of the interchange fees remitted by merchants when cardholders make purchases using their cards. Subject to applicable law, interchange fees are fixed by the card associations and network organizations (“Networks”). Interchange revenue was recognized net of sponsorship, licensing and processing fees charged by the Networks for services they provided in processing purchase transactions routed through them. Interchange revenue was recognized during the period that the purchase transactions occurred. Revenues also included fees earned from branding agreements with the Networks.

 

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Multiple Element Arrangements

When a sale involved multiple deliverables, revenue recognition was affected by the determination of the number of deliverables in an arrangement, whether those deliverables may be separated into multiple units of accounting, and the standalone selling price of each unit of accounting which affected the amount of revenue allocated to each unit. Pursuant to ASC 605, the Company used vendor-specific objective evidence (“VSOE”) of the standalone selling price of its services when it existed to determine the amount of revenue to allocate to each unit of accounting. The Company established VSOE using the price charged when the same service was sold separately (on a standalone basis). In most situations, the Company did not have sufficient VSOE. In these situations, TSYS considered whether sufficient third party evidence (“TPE”) of standalone selling price existed for the Company’s services. However, the Company typically was not able to determine TPE and had not used this measure of selling price due to the unique and proprietary nature of some of its services and the inability to reliably verify relevant standalone third party prices. When there was insufficient evidence of VSOE and TPE, the Company made its best estimate of the standalone selling price (“ESSP”) of that service for purposes of allocating revenue to each unit of accounting. When determining ESSP, TSYS used limited standalone sales data that met the Company’s criteria to establish VSOE, management pricing strategies, residual selling price data when VSOE exists for a group of elements, the cost of providing the services and the related margin objectives. Consideration was also given to geographies in which the services were sold or delivered, customer classifications, and market conditions including competitor pricing strategies and benchmarking studies. Revenue was recognized when the revenue recognition criteria for each unit of accounting had been met.

There were no material changes or impact to revenue for current contractual arrangements during the years ended December 31, 2017 and 2016 due to any changes in the determination of the number of deliverables in an arrangement, units of accounting, or estimates of VSOE or ESSP.

In many situations, the Company entered into arrangements with customers to provide conversion or implementation services in addition to processing services where the conversion or implementation services did not have standalone value. For these arrangements, conversion or implementation services that did not have standalone value, were recognized over the expected customer relationship (contract term) as the related processing services were performed.

The Company’s multiple element arrangements may have included one or more elements that were subject to other topics including software revenue recognition and leasing guidance. The consideration for these multiple element arrangements was allocated to each group of deliverables – those subject to ASC 605-25 Revenue Recognition – Multiple-Element Arrangements and those subject to other topics based on the revised guidance in ASU 2009-13 Revenue Recognition (Topic 605). Arrangement revenue for each group of deliverables was then further separated, allocated, and recognized based on applicable guidance.

In regards to taxes assessed by a governmental authority imposed directly on a revenue producing transaction, the Company reports its revenues on a net basis.

Reimbursable Items

Reimbursable items consisted of out-of-pocket expenses which were reimbursed by the Company’s clients. These expenses consisted primarily of postage, access fees and third-party software. Reimbursable items were recorded on a gross basis in total revenues and cost of services.

SHARE-BASED COMPENSATION: GAAP establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. A public entity must measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award.

 

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The Company estimates forfeitures when recognizing compensation cost. The estimate of forfeitures will be adjusted by the Company as actual forfeitures differ from its estimates, resulting in compensation cost only for those awards that actually vest. The effect of the change in estimated forfeitures is recognized as compensation costs in the period the change in estimate occurred. In estimating its forfeiture rate, the Company stratified its data based upon historical experience to determine separate forfeiture rates for the different award grants.

The Company currently estimates a forfeiture rate for existing stock option grants to TSYS non-executive employees, and other TSYS share-based awards. Currently, TSYS estimates a forfeiture rate in the range of 0% to 3% for executive level employees and up to 8% for other employees. The Company has issued its vested awards to directors and nonvested awards to certain employees. The market value of the common stock at the date of issuance is recognized as compensation expense immediately for vested awards and over the vesting period of the nonvested awards. For nonvested award grants that have pro rata vesting, the Company recognizes compensation expense using the straight-line method over the vesting period of the award.

ADVERTISING: Advertising costs are expensed as incurred or the first time the advertising takes place except for direct-response advertising and television advertising production costs. Direct-response advertising consists of commissions paid to affiliate marketers for the new funded customer accounts generated by them. Direct-response advertising costs are capitalized and amortized over the average life of the new accounts, which is approximately one year. Television advertising production costs consist of the costs of developing and filming television ads. Television advertising production costs are capitalized when the production services are received and expensed in the period when the advertising first takes place. Advertising expense for 2018, 2017 and 2016 was $12.4 million, $13.2 million and $11.5 million, respectively.

NONCONTROLLING INTEREST: Noncontrolling interest in earnings of subsidiaries represents the minority shareholders’ share of the net income of Central Payment Co., LLC (“CPAY”). Refer to Note 23 for more information on acquisitions.

EARNINGS PER SHARE: Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS is calculated to reflect the potential dilution that would occur if stock options or other contracts to issue common stock were exercised. Diluted EPS is calculated by dividing net income by weighted average common and common equivalent shares outstanding. Common equivalent shares are calculated using the treasury stock method.

Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are “participating securities” as defined by GAAP, and therefore should be included in EPS using the two-class method. The two-class method is an earnings allocation method for computing EPS when an entity’s capital structure includes two or more classes of common stock or common stock and participating securities. It determines EPS based on dividends declared on common stock and participating securities and participation rights of participating securities in any undistributed earnings.

RECLASSIFICATIONS: The Company had restricted cash of $1.0 million and $0.5 million as of December 31, 2017 and 2016. Upon the Company’s adoption of ASU 2016-18 on January 1, 2018, the Company reclassified the change in its restricted cash to cash, cash equivalents and restricted cash on the Consolidated Statements of Cash Flows for all periods presented.

Recently Adopted Accounting Pronouncements

The Company adopted the following ASUs:

In March 2018, the FASB issued ASU 2018-05 Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. This ASU adds SEC paragraphs pursuant to the SEC Staff Accounting Bulletin No. 118, which expresses the view of the staff regarding application of Topic 740, Income Taxes, in the reporting period that includes December 22, 2017 - the date on which the Tax Cuts and Jobs Act was signed into law. The Company adopted the provisions of SEC Staff Accounting Bulletin No. 118 as of December 22, 2017. See Note 14 for further discussion regarding income taxes.

 

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In February 2018, the FASB issued ASU 2018-02 Income Statement – Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments in this ASU eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this ASU is permitted. The amendments in this ASU should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The ASU was early adopted by the Company as of July 1, 2018 and the Company recorded a balance sheet reclassification of $2.3 million between accumulated other comprehensive loss and retained earnings.

In May 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-09 Compensation – Stock Compensation (Topic 718), Scope of Modification Accounting, to provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless all the following are met:

 

  1.

The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification.

 

  2.

The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified.

 

  3.

The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified.

The ASU was adopted by the Company on January 1, 2018. The adoption of this ASU did not have a material impact on the Company’s financial position, results of operations or cash flows.

In January 2017, the FASB issued ASU 2017-01 Business Combinations (Topic 805), Clarifying the Definition of a Business, which provides a more robust framework to use in determining when a set of assets and activities is a business. The framework assists entities in evaluating whether both an input and a substantive process are present. The framework includes two sets of criteria to consider that depend on whether a set of assets and activities has outputs. Although outputs are not required for a set to be a business, outputs generally are a key element of a business; therefore, the FASB has developed more stringent criteria for sets without outputs. The ASU was adopted by the Company on January 1, 2018. The adoption of this ASU did not have a material impact on the Company’s financial position, results of operations or cash flows.

In November 2016, the FASB issued ASU 2016-18 Statement of Cash Flows (Topic 230): Restricted Cash, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The Company adopted this guidance on January 1, 2018 and has applied the guidance using a retrospective transition method for all periods presented.

In October 2016, the FASB issued ASU 2016-16 Income Taxes (Topic 740): Intra-Equity Transfers of Assets Other Than Inventory, which requires that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs and eliminates the exception for an intra-entity transfer of an asset other than inventory. The ASU was adopted by the Company on January 1, 2018. The adoption of this ASU did not have a material impact on the Company’s financial position, results of operations or cash flows.

 

-21-


In August 2016, the FASB issued ASU 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain Receipts and Cash Payments, which clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flow. The ASU was adopted by the Company on January 1, 2018. The adoption of this ASU did not have a material impact on the Company’s financial position, results of operations or cash flows.

In January 2016, the FASB issued ASU 2016-01 Recognition and Measurement of Financial Assets and Financial Liabilities, which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. The ASU significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments. The ASU was adopted by the Company on January 1, 2018. The adoption of this ASU did not have a material impact on the Company’s financial position, results of operations or cash flows.

In May 2014, the FASB issued ASU 2014-09 Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU replaces most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The FASB has issued several additional ASUs since this time that add additional clarification to certain issues existing after the original ASU was released. All of the new standards were effective for the Company on January 1, 2018. The standards permit the use of either the full retrospective or modified retrospective transition method. TSYS adopted the new revenue standard as of January 1, 2018 using the modified retrospective transition method. See Notes 1 and 2 for further discussion of the Company’s adoption of this new standard.

New Accounting Pronouncements

In November 2018, the FASB issued ASU 2018-18 Collaborative Arrangements (Topic 808), Clarifying the Interaction between Topic 808 and Topic 606. The amendments in this update make targeted improvements to GAAP for collaborative arrangements as follows:

 

  1.

Clarify that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account. In those situations, all the guidance in Topic 606 should be applied, including recognition, measurement, presentation, and disclosure requirements.

 

  2.

Add unit of account guidance in Topic 808 to align with the guidance in Topic 606 (that is, a distinct good or service) when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of Topic 606.

 

  3.

Require that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, presenting the transaction together with revenue recognized under Topic 606 is precluded if the collaborative arrangement participant is not a customer.

The ASU is effective for the Company on January 1, 2020. Early adoption of the ASU is permitted. The Company is evaluating the effects of ASU 2018-18 on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15 Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40), Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The ASU is effective for the Company on January 1, 2020. Early adoption of the ASU is permitted. The Company is evaluating the effects of ASU 2018-15 on its consolidated financial statements.

 

-22-


In August 2018, the FASB issued ASU 2018-13 Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The FASB is issuing the amendments in this update in connection with the FASB Statement of Financial Accounting Concepts No. 8, Conceptual Framework for Financial Reporting-Chapter 8: Notes to Financial Statements, which was finalized in August 2018. The amendments in this update modify the disclosure requirements on fair value measurement in Topic 820, Fair Value Measurement, by removing, modifying or adding disclosures. The ASU is effective for the Company on January 1, 2020. Early adoption of the ASU is permitted. The Company is evaluating the effects of ASU 2018-13 on its consolidated financial statements.

In September 2017, the FASB issued ASU 2017-13 Revenue Recognition (Topic 605), Revenues from Customers (Topic 606), Leases (Topic 840) and Leases (Topic 842), which made amendments to SEC paragraphs pursuant to the Staff Announcement at the July 20, 2017 Emerging Issues Task Force (“EITF”) Meeting and rescission of prior SEC Staff Announcements and Observer comments. This guidance, which is effective immediately, generally relates to the adoption of ASC 606 and 842. The adoption of the amendments in this ASU relating to ASC 606 did not have a material impact on the Company’s financial position, results of operations or cash flows. The Company does not expect the adoption of the amendments in this ASU relating to ASC 842 to have a material impact on the Company’s financial position, results of operations or cash flows.

In June 2016, the FASB issued ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this update change how companies measure and recognize credit impairment for many financial assets. The new expected credit loss model will require companies to immediately recognize an estimate of credit losses expected to occur over the remaining life of the financial assets (including trade receivables) that are in the scope of the update. The update also made amendments to the current impairment model for held-to-maturity and available-for-sale debt securities and certain guarantees. The ASU is effective for the Company on January 1, 2020. Early adoption is permitted for periods beginning on or after January 1, 2019. The Company is evaluating the effect of ASU 2016-13 on its consolidated financial statements.

Recent Accounting Pronouncements Related to Leases

In February 2016, the FASB issued ASU 2016-02 Leases (Topic 842), which introduces a lessee model that brings most operating leases on the balance sheet and aligns many of the underlying principles of the new lessor model with those in the FASB’s new revenue recognition standard. The new guidance will be effective for fiscal years and interim periods within those years beginning after December 15, 2018. Early adoption is permitted for all entities.

The FASB has issued several additional ASUs that provide additional clarification to certain issues existing after ASU 2016-02 was released. In December 2018, the FASB issued ASU 2018-20 Leases (Topic 842), Narrow-Scope Improvements for Lessors. The amendments in this update create a lessor practical expedient applicable to sales and other similar taxes incurred in connection with a lease, and simplify lessor accounting for lessor costs paid by the lessee. In July 2018, the FASB issued ASU 2018-11 Leases (Topic 842): Targeted Improvements to provide entities with an additional (and optional) transition method to adopt the new leases standard and provide lessors with a practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease component and, instead, to account for those components as a single component if certain criteria are met. Also in July 2018, the FASB issued ASU 2018-10 Codification Improvements to Topic 842 to make amendments addressing sixteen issues related to various aspects of ASU 2016-02. The effective date and transition requirements for the amendments in ASU 2018-20, ASU 2018-11 and ASU 2018-10 are the same as the effective date and transition requirements in ASU 2016-02.

The Company adopted ASU 2016-02 on January 1, 2019 using the additional transition method (cumulative effect method) provided by ASU 2018-11. The Company has elected to utilize the following practical expedients and accounting policy elections:

 

 

The Company, electing as a package, will not reassess: (a) whether expired or existing contracts contain leases under the new definition of a lease, (b) lease classification for expired or existing leases, and (c) whether previously capitalized initial direct costs would qualify for capitalization under ASU 2016-02.

 

-23-


 

The Company will not evaluate land easements that exist or expired before the Company’s adoption of ASU 2016¬02 and that were not previously accounted for as leases.

 

 

From a lessee perspective, the Company has elected to combine lease and non-lease components for all classes of assets except for computer equipment. Accordingly, for all asset classes excluding computer equipment, the Company will account for the combined lease and non-lease components as a single lease component. For computer equipment, the Company will account for lease and non-lease components, such as maintenance, separately.

 

 

From a lessee perspective, the Company has elected, as an accounting policy election by class of underlying asset, not to recognize Right-of-Use (“ROU”) assets and lease liabilities for short-term leases.

 

 

From a lessor perspective, the Company has elected to utilize the practical expedient in ASU 2018-11 to not separate non-lease components from the associated lease component for arrangements including point-of-sale (“POS”) terminals. Since the predominant component in these arrangements is service revenue and not the POS terminal, the combined components in these arrangements will be accounted for under ASC 606 and not ASC 842.

 

 

The Company will utilize incremental borrowing rates in transition (as of January 1, 2019) based on the remaining lease payments and remaining lease term.

The Company decided not to elect the use of hindsight in determining the lease term and in assessing impairment of the Company’s ROU assets.

The Company formed a cross-functional project team to evaluate the requirements of the new leases standard from both a lessee and lessor perspective, and to monitor ongoing standard setting activities of the FASB. The Company is reviewing its lease contracts under the new standard to identify and evaluate differences from current guidance. From a lessee standpoint, the Company’s leases primarily involve computer equipment and facilities. From a lessor perspective, the Company’s leases primarily involve POS terminals.

While the Company is continuing to evaluate the effects of this ASU, the Company expects to record material ROU assets and lease liabilities on its consolidated balance sheet upon adoption as of January 1, 2019. Upon adoption, the Company expects to record ROU assets of approximately $195 million and additional operating liabilities of approximately $190 million for existing operating leases. Also as part of the initial adoption, the Company wrote off the carrying value of favorable lease intangible assets of $2.1 million and increased the ROU assets by the same amount. The cumulative effect adjustment expected to be recorded to opening retained earnings is not material. The Company does not expect the adoption of this ASU to have a material impact on its results of operations or cash flows. The adoption of this guidance will require the implementation of new or updated accounting processes, procedures and internal controls over financial reporting. The Company implemented a new lease accounting software solution in 2019 to facilitate compliance with the requirements of the new standard. The new standard also requires expanded qualitative and quantitative disclosures regarding the Company’s leases.

Note 2: Revenue from Contracts with Customers

Description of service offerings

Issuer Solutions

The Company’s Issuer Solutions revenues are derived from long-term processing contracts with financial and nonfinancial institutions. Payment processing services revenues are generated primarily from charges based on:

 

 

The number of accounts on file;

 

 

Transactions and authorizations processed;

 

-24-


 

Statements generated and/or mailed;

 

 

Managed services; and

 

 

Cards embossed and mailed and other processing services for cardholder accounts on file.

Most of these contracts have prescribed annual revenue minimums, penalties for early termination, and service level agreements which may impact contractual fees if certain service levels are not achieved.

Issuer Solutions revenues also include loyalty redemption services and professional services.

Merchant Solutions

The Company’s Merchant Solutions revenues are partially derived from relationships with thousands of individual merchants whose contracts range from thirty days to five years. Additionally, part of the revenues are derived from long-term processing contracts with large financial institutions, other merchant acquirers and merchant organizations which generally range from three to eight years. Merchant services revenue is generated primarily from processing all payment forms including credit, debit and electronic benefits transfer for merchants of all sizes across a wide array of retail market segments.

The products and services offered include:

 

 

Authorizations and capture of electronic transactions;

 

 

Clearing and settlement of electronic transactions;

 

 

Information reporting services related to electronic transactions;

 

 

Merchant billing services; and

 

 

Point-of-sale equipment and services.

Most of these contracts have prescribed revenue minimums, penalties for early termination, and service level agreements which may impact contractual fees if certain service levels are not achieved.

Consumer Solutions

The Company’s Consumer Solutions revenues principally consist of a portion of the service fees collected from cardholders and interchange revenues received by the issuing banks in connection with the programs that the Consumer Solutions segment manages.

Customers are charged fees in connection with the Consumer Solutions segment’s products and services as follows:

 

 

Transactions – Customers are typically charged a fee for each Personal Identification Number (“PIN”) and signature-based purchase transaction made using their cards, unless the customer is on a monthly or annual service plan, in which case the customer is instead charged a monthly or annual subscription fee, as applicable. Customers are also charged fees for Automated Teller Machine (“ATM”) withdrawals and other transactions conducted at ATMs.

 

 

Customer Service and Maintenance – Customers are typically charged fees for balance inquiries made through Consumer Solutions call centers. Customers are also charged a monthly maintenance fee after a specified period of inactivity.

 

-25-


   

Additional Products and Services – Customers are charged fees associated with additional products and services offered in connection with certain cards, including the use of overdraft features, a variety of bill payment options, card replacement, foreign exchange and card-to-card transfers of funds initiated through the call centers.

 

   

Other – Customers are charged fees in connection with the acquisition and reloading of the cards at retailers and the Company receives a portion of these amounts in some cases.

Disaggregation of revenue

The following table summarizes volume-based and non-volume related revenue from contracts with external customers for the year ended December 31, 2018:

 

     Year Ended December 31, 2018  

(in thousands)

   Issuer
Solutions
     Merchant
Solutions
     Consumer
Solutions
     Total  

Volume-based revenues

   $ 903,831        1,268,151        804,231      $ 2,976,213  

Non-volume related revenues

     964,474        85,468        2,056        1,051,998  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 1,868,305        1,353,619        806,287      $ 4,028,211  
  

 

 

    

 

 

    

 

 

    

 

 

 

Issuer Solutions

Volume-based revenues are generated from charges based on the number of Accounts on File (“AOF”), transactions and authorizations processed, statements generated, and other processing services for cardholder AOF. Cardholder AOF includes active and inactive consumer credit, retail, prepaid, stored value, government services and commercial card accounts. TSYS’ clients also have the option to use fraud and portfolio management services which are based on authorizations processed and AOF, respectively. Collectively, these services are considered volume-based revenues. Non-volume related revenues include processing fees which are not directly associated with AOF and transactional activity, such as value-added products and services, custom programming and certain other services, which are only offered to TSYS’ processing clients. Additionally, non-volume based revenues include licensing, managed services and output services such as card and document production.

Merchant Solutions

The Merchant Solutions segment’s revenues primarily consist of volume-based revenues generated from charges based on sales volume processed, and authorized transactions and settled transactions processed. Non-volume related revenues include chargeback and retrieval services, data transmissions, value-added products and managed services which are not directly associated with transactional activity.

Consumer Solutions

The Consumer Solutions segment’s revenues primarily consist of volume-based revenues generated from a portion of the service fees collected from cardholders and interchange revenues. Non-volume related revenues include value-added products and services which are not directly associated with transactional activity.

The following table summarizes revenue from contracts with customers, by currency, for the year ended December 31, 2018:

 

     Year Ended December 31, 2018  

(in thousands)

   Issuer
Solutions
     Merchant
Solutions
     Consumer
Solutions
     Total  

U.S. Dollar

   $ 1,482,772        1,352,852        806,287      $ 3,641,911  

British Pound Sterling

     253,185        —          —          253,185  

Euro

     103,785        —          —          103,785  

Other

     28,563        767        —          29,330  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 1,868,305        1,353,619        806,287      $ 4,028,211  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

-26-


See Note 21 for disclosure of revenues by geography.

Performance obligations

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. The purpose of this disclosure is to provide additional information about the amounts and expected timing of revenue to be recognized from the remaining performance obligations in the Company’s existing contracts. For revenue which is recognized using (i) the “as-invoiced” practical expedient and (ii) the “direct allocation” method, the Company is required to disclose the value of unsatisfied performance obligations for contractual minimums only. Accordingly, the total unsatisfied or partially unsatisfied performance obligations related to processing services are materially higher than the amounts disclosed in the below table.

 

(in thousands)

   2019      2020      2021      2022 -
2029
     Total  

Unsatisfied or partially unsatisfied performance obligations

   $ 693,978        602,463        505,287        799,026      $ 2,600,754  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Contract balances

The following table provides information about accounts receivable, contract assets and contract liabilities from contracts with customers:

 

     As of  

(in thousands)

   December 31, 2018      January 1, 2018  

Accounts receivable

   $ 450,322      $ 412,322  

Contract assets (short-term and long-term)

     78,789        87,812  

Contract liabilities (short-term and long-term)

     68,716        76,541  

Contract assets are defined as an entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer when that right is conditioned on something other than the passage of time (for example, the entity’s future performance).

Contract liabilities are defined as an entity’s obligation to transfer goods or services to a customer for which the entity has received consideration (or the amount is due) from the customer. Contract liabilities as of December 31, 2017 were previously described as deferred revenues.

Net contract assets and liabilities may include amounts related to signing incentives for signing or renewing long-term contracts. Capitalized signing incentives are amortized over the contract term and the amortization is included as a reduction of revenues in the Company’s Consolidated Statements of Income.

ASC 606 requires an entity to present in its consolidated balance sheets the net position in a customer contract on a contract-by-contract basis. The net position in a customer contract is presented as either contract assets or contract liabilities. Excluding the impact of the initial adoption of ASC 606 as of January 1, 2018, significant changes in the contract assets and liabilities balances during the year ended December 31, 2018 are as follows:

 

     Year Ended December 31, 2018  

(in thousands)

   Contract Assets
Increase/(Decrease)
     Contract Liabilities
(Increase)/Decrease
 

Signing incentive additions

   $ 24,837      $ 55  

Signing incentive amortization

     (29,244      (7,330

Revenue recognized in advance of billings

     4,956        2,099  

Billed amounts transferred to receivables

     (4,772      (2,668

Cash received from customers

     (7,531      (136,295

Deferred revenue that was recognized as revenue

     9,110        140,558  

 

-27-


Other changes in contract assets and contract liabilities primarily relate to movements in net contract position (between contract assets and contract liabilities) each period and foreign currency translation.

Impact of New Revenue Guidance on Financial Statement Line Items

The disclosure of the impact of adoption of ASC 606 on the Company’s consolidated balance sheets, statements of income, and statements of cash flows was as follows:

 

     As of December 31, 2018  

(in thousands)

   As Reported      Balances without
Adoption of
ASC 606
     Effect of Change
Higher/(Lower)
 

Assets

        

Prepaid expenses and other current assets

   $ 188,355      $ 190,417      $ (2,062

Contract assets (short-term and long-term)

     78,789        —          78,789  

Contract cost assets

     145,598        252,550        (106,952

Deferred income tax assets

     7,773        6,896        877  

Other assets

     116,905        122,323        (5,418

Liabilities:

        

Contract liabilities (short-term and long-term)

     68,716        91,678        (22,962

Other liabilities (short-term and long-term)

     344,044        345,625        (1,581

Shareholders’ equity:

        

Accumulated other comprehensive loss, net

     (60,223      (59,842      (381

Retained earnings

     3,478,650        3,488,492        (9,842
     Year Ended December 31, 2018  

(in thousands, except per share data)

   As Reported      Balances without
Adoption of
ASC 606
     Effect of Change
Higher/(Lower)
 

Total revenues

   $ 4,028,211      $ 5,716,741      $ (1,688,530

Total operating expenses

     3,205,473        4,887,026        (1,681,553

Operating income

     822,738        829,715        (6,977

Income taxes

     127,003        128,585        (1,582

Net income

     577,917        583,314        (5,397

Net income attributable to TSYS common shareholders

     576,656        582,053        (5,397

Basic earnings per share (EPS) attributable to TSYS common shareholders1

     3.17        3.20        (0.03

Diluted EPS attributable to TSYS common shareholders1

     3.14        3.16        (0.03

 

1 

EPS Amounts may not total due to rounding.

 

     Year Ended December 31, 2018  

(in thousands)

   As Reported      Balances without
Adoption of
ASC 606
     Effect of Change
Higher/(Lower)
 

Cash flows from operating activities:

        

Net income

   $ 577,917      $ 583,314      $ (5,397

Adjustments to reconcile net income to net cash provided by operating activities:

        

Depreciation and amortization

     408,573        470,804        (62,231

Changes in contract assets and contract liabilities

     (2,771      (35,754      32,983  

Changes in contract cost assets

     3,316        —          3,316  

Changes in other current and other long-term liabilities

     (55,602      (54,524      (1,078

Cash flows from investing activities:

        

Additions to contract cost assets

     —          (32,407      32,407  

 

-28-


Note 3: Fair Value Measurements

GAAP requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy for which these assets and liabilities must be grouped, based on significant level of inputs. The three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies, is as follows:

Level 1 — Quoted prices for identical assets and liabilities in active markets.

Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3 — Unobservable inputs for the asset or liability.

The Company had no transfers between Level 1, Level 2, or Level 3 during the years ended December 31, 2018, 2017 or 2016. Goodwill is assessed annually for impairment in the second quarter of each year using fair value measurement techniques. Specifically, goodwill impairment is determined using a two-step test. Step 0 is a qualitative analysis of relevant events or circumstances to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit (“RU”) with its book value, including goodwill. If the fair value of the RU exceeds its book value, goodwill is considered not impaired. If the book value of the RU exceeds its fair value, an impairment charge is recognized for the amount by which the carrying amount exceeds the fair value of identifiable assets and liabilities of the RU.

The estimate of fair value of the Company’s RUs is determined using various valuation techniques, including using an equally weighted combination of the market approach and the income approach. The market approach, which contains Level 2 inputs, utilizes readily available market valuation multiples to estimate fair value. The income approach is a valuation technique that utilizes the discounted cash flow (“DCF”) method, which includes Level 3 inputs. Under the DCF method, the fair value of the RU reflects the present value of the projected earnings that will be generated by each RU after taking into account the revenues and expenses associated with the asset, the relative risk that the cash flows will occur, the contribution of other assets, and an appropriate discount rate to reflect the value of the invested capital. Cash flows are estimated for future periods based upon historical data and projections by management.

As of December 31, 2018, the Company had recorded goodwill in the amount of $4.1 billion. The Company performed its annual impairment test of its goodwill balances as of May 31, 2018, and this test did not indicate any impairment. The fair value of the RUs substantially exceeds the carrying value. Refer to Note 6 for more information regarding goodwill.

The fair values of the Company’s unsecured revolving loan and notes payable are considered to be level 2 measurements which are based on inputs other than quoted prices included within Level 1 that are observable for the liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar liabilities in active or inactive markets, or other inputs that can be corroborated by observable market data. The carrying value of the Company’s unsecured revolving loan approximates fair value since the interest rate resets monthly and the balances are pre-payable at any time. With respect to the Company’s notes payable due March and December 2020, the carrying values approximate fair value due to their relatively short maturities. Refer to Note 12 for the estimated fair values of the Company’s Senior Notes.

Note 4: Cash, Cash Equivalents and Restricted Cash

Cash, cash equivalents and restricted cash balances as of December 31, 2018 and 2017 are summarized as follows:

 

(in thousands)

   December 31, 2018      December 31, 2017  

Cash and cash equivalents in domestic accounts

   $ 405,535        396,577  

Cash and cash equivalents in foreign accounts

     65,621        53,780  
  

 

 

    

 

 

 

Total cash and cash equivalents

     471,156        450,357  

Restricted cash included in other assets

     3,123        1,013  
  

 

 

    

 

 

 

Total cash, cash equivalents and restricted cash shown in the statement of cash flows

   $ 474,279        451,370  
  

 

 

    

 

 

 

 

-29-


The Company maintains operating accounts outside the United States denominated in currencies other than the U.S. dollar. All amounts in domestic accounts are denominated in U.S. dollars. Restricted cash included in other assets in the consolidated balance sheets represents immaterial amounts required across the Company’s segments for operational purposes.

Note 5: Prepaid Expenses and Other Current Assets

Significant components of prepaid expenses and other current assets as of December 31, 2018 and 2017 are summarized as follows:

 

(in thousands)

   December 31, 2018      December 31, 2017  

Prepaid expenses

   $ 48,058        65,159  

R&D state tax credit

     26,541        22,642  

Income taxes receivable

     19,362        41,400  

Supplies inventory

     18,089        17,072  

Other

     76,305        70,292  
  

 

 

    

 

 

 

Total

   $ 188,355        216,565  
  

 

 

    

 

 

 

Note 6: Goodwill

In 2018, the Company completed the acquisition of Cayan Holdings LLC (“Cayan”) resulting in an additional $0.8 billion of goodwill being recorded. Also in 2018, the Company acquired substantially all of the assets of iMobile3 resulting in an additional $5.3 million of goodwill being recorded.

The gross amount and accumulated impairment losses of goodwill as of December 31, 2018 and 2017 are as follows:

 

     2018  

(in thousands)

   Issuer
Solutions
     Merchant
Solutions
     Consumer
Solutions
     Consolidated  

Gross amount

   $ 98,276        2,984,609        1,035,965      $ 4,118,850  

Accumulated impairment losses

     (1,787      (2,225      —          (4,012
  

 

 

    

 

 

    

 

 

    

 

 

 

Goodwill, net

   $ 96,489        2,982,384        1,035,965      $ 4,114,838  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     2017  
     Issuer
Solutions
     Merchant
Solutions
     Consumer
Solutions
     Consolidated  

Gross amount

   $ 99,465        2,132,653        1,035,965      $ 3,268,083  

Accumulated impairment losses

     (1,787      (2,225      —          (4,012

Goodwill, net

   $ 97,678        2,130,428        1,035,965      $ 3,264,071  

Below are the balances of goodwill as of December 31, 2018 and 2017 along with the related changes in carrying value.

 

(in thousands)

   Issuer
Solutions
     Merchant
Solutions
     Consumer
Solutions
     Consolidated  

Balance as of December 31, 2016

   $ 94,946        2,141,836        1,034,170      $ 3,270,952  

Tax adjustment

     —          —          1,795        1,795  

Acquisition

     —          (11,408      —          (11,408

Currency translation adjustments

     2,732        —          —          2,732  
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance as of December 31, 2017

     97,678        2,130,428        1,035,965        3,264,071  

Acquisition

     —          851,956        —          851,956  

Currency translation adjustments

     (1,189      —          —          (1,189
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance as of December 31, 2018

   $ 96,489        2,982,384        1,035,965      $ 4,114,838  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

-30-


In 2017, the Company adjusted the Netspend goodwill due to a tax adjustment of $1.8 million relating to uncertain tax positions. In 2017, the Company decreased the Merchant Solutions goodwill due to deferred tax adjustments of $12.1 million and the write-off of a note receivable of $727,000 on the opening balance sheet of TransFirst. Refer to Note 23 for more information on acquisitions.

Note 7: Other Intangible Assets, Net

Significant components of other intangible assets as of December 31, 2018 and 2017 are summarized as follows:

 

     2018  

(in thousands)

   Gross      Accumulated
Amortization
     Net  

Merchant relationships

   $ 756,400        (252,050    $ 504,350  

Channel relationships

     520,000        (260,461      259,539  

Customer relationships

     166,811        (150,509      16,302  

Trade name

     79,546        (70,906      8,640  

Covenants-not-to-compete

     34,040        (29,507      4,533  

Database

     28,000        (28,000      —    

Trade association

     10,000        (8,750      1,250  

Favorable lease

     3,929        (1,841      2,088  
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,598,726        (802,024    $ 796,702  
  

 

 

    

 

 

    

 

 

 
     2017  

(in thousands)

   Gross      Accumulated
Amortization
     Net  

Merchant relationships

   $ 588,000        (147,000    $ 441,000  

Channel relationships

     439,398        (200,540      238,858  

Customer relationships

     167,222        (139,969      27,253  

Trade name

     62,468        (58,068      4,400  

Covenants-not-to-compete

     29,940        (20,815      9,125  

Database

     28,000        (25,200      2,800  

Trade association

     10,000        (7,750      2,250  

Favorable lease

     3,006        (1,546      1,460  
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,328,034        (600,888    $ 727,146  
  

 

 

    

 

 

    

 

 

 

Other intangible assets increased in 2018 due to the acquisition of Cayan in January 2018 and acquiring substantially all of the assets of iMobile3 in June 2018. Refer to Note 23 for more information regarding the Company’s acquisitions. In connection with the sale of a merchant portfolio in December 2018, the Company wrote off $2.8 million of merchant relationship intangible assets. In connection with the early termination of a facilities lease in December 2018, the Company wrote off a favorable lease intangible asset of $0.3 million. Upon the Company’s adoption of ASC 842, Leases, as of January 1, 2019, the Company wrote-off the carrying value of favorable lease intangible assets of $2.1 million and increased right-of-use assets by the same amount.

Amortization related to other intangible assets, which is recorded in selling, general and administrative expenses, was $202.1 million, $179.5 million and $163.8 million for 2018, 2017 and 2016, respectively.

 

-31-


The weighted average useful life for each component of other intangible assets, and in total, as of December 31, 2018 is as follows:

 

     Weighted Average
Amortization Period
(Years)
 

Merchant relationships

     7.2  

Channel relationships

     8.8  

Customer relationships

     6.9  

Trade name

     3.8  

Covenants-not-to-compete

     4.0  

Database

     5.0  

Trade association

     10.0  

Favorable lease

     5.6  
  

 

 

 

Total

     7.4  
  

 

 

 

Estimated future amortization expense of other intangible assets as of December 31, 2018 for the next five years is:

 

(in thousands)

      

2019

   $ 178,740  

2020

     171,876  

2021

     151,180  

2022

     130,930  

2023

     62,326  

Note 8: Intangible Assets – Computer Software, Net

Computer software as of December 31, 2018 and 2017 is summarized as follows:

 

(in thousands)

   2018      2017  

Licensed computer software

   $ 656,704        543,198  

Software development costs

     485,047        450,789  

Acquisition technology intangibles

     286,206        239,011  
  

 

 

    

 

 

 

Total computer software

     1,427,957        1,232,998  
  

 

 

    

 

 

 

Less accumulated amortization:

     

Licensed computer software

     347,641        360,160  

Software development costs

     347,847        325,443  

Acquisition technology intangibles

     197,933        163,680  
  

 

 

    

 

 

 

Total accumulated amortization

     893,421        849,283  
  

 

 

    

 

 

 

Computer software, net

   $ 534,536        383,715  
  

 

 

    

 

 

 

Licensed computer software includes the following computer software acquired under license agreements as of December 31, 2018 and 2017:

 

(in thousands)

   2018      2017  

Licensed computer software (acquired under license agreements)

   $ 20,524        24,421  

Accumulated amortization

     (3,228      (15,918
  

 

 

    

 

 

 

Licensed computer software, net

   $ 17,296        8,503  
  

 

 

    

 

 

 

Amortization expense includes amounts for computer software acquired under license agreements. The Company had the following amortization expense related to computer software for the years ended December 31, 2018, 2017 and 2016:

 

(in thousands)

   2018      2017      2016  

Amortization expense related to:

        

Licensed computer software

   $ 63,370        51,247        45,655  

Software development costs

     26,701        27,461        26,478  

Acquisition technology intangibles

     34,758        28,267        26,217  

 

-32-


The weighted average useful life for each component of computer software, and in total, as of December 31, 2018, is as follows:

 

    

Weighted Average

Amortization Period (Years)

 

Licensed computer software

     6.2  

Software development costs

     6.0  

Acquisition technology intangibles

     5.8  
  

 

 

 

Total

     6.0  
  

 

 

 

Estimated future amortization expense of licensed computer software, software development costs and acquisition technology intangibles as of December 31, 2018 for the next five years is:

 

(in thousands)

   Licensed Computer
Software
     Software
Development Costs
     Acquisition
Technology
Intangibles
 

2019

   $ 71,418        23,345        35,333  

2020

     61,558        19,125        29,674  

2021

     50,675        14,078        13,140  

2022

     40,318        8,959        9,540  

2023

     32,819        6,292        575  

Note 9: Property and Equipment, Net

Property and equipment balances as of December 31, 2018 and 2017 are as follows:

 

(in thousands)

   2018      2017  

Computer and other equipment

   $ 446,000        424,957  

Buildings and improvements

     275,396        262,499  

Furniture and other equipment

     167,578        141,927  

Land

     15,677        16,195  

Other

     1,171        724  
  

 

 

    

 

 

 

Total property and equipment

     905,822        846,302  

Less accumulated depreciation and amortization

     (522,748      (521,084
  

 

 

    

 

 

 

Property and equipment, net

   $ 383,074        325,218  
  

 

 

    

 

 

 

Property and equipment includes various types of equipment under capital lease arrangements. The Company has the following amounts of equipment under capital lease obligations as of December 31, 2018 and 2017:

 

(in thousands)

   2018      2017  

Computer and other equipment (acquired under capital lease arrangements)

   $ 91,526        92,553  

Furniture and other equipment (acquired under capital lease arrangements)

     6,104        5,451  
  

 

 

    

 

 

 

Total equipment

     97,630        98,004  
  

 

 

    

 

 

 

Less accumulated depreciation:

     

Computer and other equipment

     (47,903      (44,327

Furniture and other equipment

     (4,859      (4,520
  

 

 

    

 

 

 

Total accumulated depreciation

     (52,762      (48,847
  

 

 

    

 

 

 

Total equipment, net

   $ 44,868        49,157  
  

 

 

    

 

 

 

Depreciation and amortization expense includes amounts for computer equipment, furniture and other equipment acquired under capital lease. Depreciation and amortization expense related to property and equipment was $81.1 million, $68.0 million and $62.5 million for the years ended December 31, 2018, 2017 and 2016, respectively.

 

-33-


Note 10: Contract Cost Assets, Net

Upon the Company’s adoption of ASC 606, costs to obtain or fulfill a contract are classified as contract cost assets. As of December 31, 2018, contract cost assets primarily relate to conversion costs. Also, with the adoption of ASC 606, payments for processing rights (signing incentives) are classified as contract assets in the Company’s consolidated balance sheets. See further discussion in Notes 1 and 2.

Prior to the Company’s adoption of ASC 606, contract cost assets were referred to as contract acquisition costs and included both conversion costs and payments for processing rights (signing incentives).

Significant components of contract cost assets as of December 31, 2018 and 2017 are summarized as follows:

 

(in thousands)

   December 31, 2018      December 31, 2017  

Contract cost assets, net

   $ 145,598        139,249  

Payments for processing rights, net

     —          119,416  
  

 

 

    

 

 

 

Total

   $ 145,598        258,665  
  

 

 

    

 

 

 

Amortization expense related to contract cost assets for the years ended December 31, 2018, 2017 and 2016 is as follows:

 

(in thousands)

   2018      2017      2016  

Amortization expense related to:

        

Contract cost assets

   $ 35,729        29,625        28,811  

Payments for processing rights

     —          21,357        19,804  

The weighted average useful life for contract cost assets as of December 31, 2018 is 7.7 years.

Estimated future amortization expense of contract cost assets as of December 31, 2018 for the next five years is:

 

(in thousands)

   Contract Cost Assets  

2019

   $ 31,565  

2020

     29,231  

2021

     27,426  

2022

     22,404  

2023

     13,576  

Note 11: Equity Investments

The Company has an equity investment in CUP Data and records its 44.56% ownership using the equity method of accounting. CUP Data is sanctioned by the People’s Bank of China, China’s central bank. CUP Data currently provides transaction processing, disaster recovery and other services for banks and bankcard issuers in China.

The Company also has an equity investment in TSYS de Mexico and records its 49% ownership using the equity method of accounting. The electronic payment processing support operation prints statements and provides card-issuing support services to its clients.

The Company invests in limited partnership agreements with two Atlanta-based venture capital funds focused exclusively on investing in technology-enabled financial services companies. Pursuant to each limited partnership agreement, the Company has committed to invest up to $20.0 million in each fund so long as its ownership interest in each fund does not exceed 50%. As of December 31, 2018 and 2017, the Company had made contributions to the funds of $29.5 million and $22.8 million, respectively.

TSYS believes the carrying value approximates the underlying net assets of the equity investments.

 

-34-


TSYS’ equity in income of equity investments (net of tax) for the years ended December 31, 2018, 2017 and 2016 was $45.2 million, $40.5 million and $26.1 million, respectively.

A summary of TSYS’ equity investments as of December 31, 2018 and 2017 is as follows:

 

(in thousands)

   2018      2017  

CUP Data

   $ 138,791        127,367  

Other

     41,870        36,151  
  

 

 

    

 

 

 

Total

   $ 180,661        163,518  
  

 

 

    

 

 

 

Note 12: Long-term Borrowings, Capital Lease Obligations and License Agreements

Long-term debt as of December 31, 2018 and 2017 consists of:

 

(in thousands)

   December 31,
2018
     December 31,
2017
 

3.800% Senior Notes due April 1, 2021 (5 year tranche), net of discount and debt issuance costs

   $ 746,430        745,000  

4.800% Senior Notes due April 1, 2026 (10 year tranche), net of discount and debt issuance costs

     743,734        743,042  

3.750% Senior Notes due June 1, 2023 (10 year tranche), net of discount and debt issuance costs

     545,647        544,780  

4.000% Senior Notes due June 1, 2023 (5 year tranche), net of discount and debt issuance costs

     545,801        —    

4.450% Senior Notes due June 1, 2028 (10 year tranche), net of discount and debt issuance costs

     445,439        —    

LIBOR + 1.300%, unsecured revolving loan, due April 23, 2023, with monthly interest payments on outstanding balances

     805,000        —    

3.760% note payable due March 20, 2020, with monthly interest and principal payments

     16,450        —    

3.600% note payable due December 20, 2020, with monthly interest and principal payments

     15,700        —    

2.375% Senior Notes due June 1, 2018 (5 year tranche), net of discount and debt issuance costs

     —          549,532  

LIBOR + 1.500%, unsecured term facility, due February 23, 2021, with quarterly principal and interest payments, net of debt issuance costs

     —          368,645  

LIBOR + 1.300%, unsecured revolving loan, due February 23, 2021, with monthly interest payments on outstanding balances

     —          200,000  
  

 

 

    

 

 

 

Total debt

     3,864,201        3,150,999  

Less current portion

     (20,807      (559,050
  

 

 

    

 

 

 

Noncurrent portion of long-term debt

   $ 3,843,394        2,591,949  
  

 

 

    

 

 

 

 

1 

As of December 31, 2018 and 2017, the estimated fair values of the Company’s Senior Notes totaled $3.0 billion and $2.7 billion, respectively. The estimated fair values of the Company’s Senior Notes were based on quoted prices in an active market and are considered to be Level 1 measurements.

Interest expense for the years ended December 31, 2018, 2017 and 2016 was $163.4 million, $118.2 million and $115.4 million, respectively.

Senior Notes

On May 11, 2018, TSYS closed its sale (the “Transaction”) of $550 million aggregate principal amount of 4.000% Senior Notes due 2023 and $450 million aggregate principal amount of 4.450% Senior Notes due 2028 (collectively, the “Notes”) pursuant to an underwriting agreement, dated May 9, 2018 (the “Underwriting Agreement”), with Merrill Lynch, Pierce, Fenner & Smith Incorporated and J.P. Morgan Securities LLC (the “Underwriters”). The Company used the net proceeds of the Transaction to repay (i) all of its outstanding 2.375% Senior Notes due June 1, 2018 at maturity, (ii) all of its remaining outstanding indebtedness under that certain credit agreement dated January 10, 2018, (iii) with any remaining amounts, a portion of the $1.34 billion outstanding under that certain Credit Agreement dated April 23, 2018, among the Company and Bank of America, N.A. The Notes were issued pursuant to a Senior Indenture, dated as of March 17, 2016, between the Company and Regions Bank, as trustee. The balance as of December 31, 2018 was $545.8 million net of discount and debt issuance costs for the Senior Notes due June 1, 2023 and $445.4 million net of discount and debt issuance costs for the Senior Notes due June 1, 2028.

 

-35-


On March 17, 2016, the Company closed its sale of $750 million aggregate principal amount of 3.800% Senior Notes due 2021 and $750 million aggregate principal amount of 4.800% Senior Notes due 2026 (collectively, the “2016 Notes”). The Company used the net proceeds of the transaction to pay a portion of the approximately $2.35 billion purchase price of the Company’s acquisition of TransFirst and related fees and expenses. The 2016 Notes were issued pursuant to a Senior Indenture, dated as of March 17, 2016, between the Company and Regions Bank, as trustee. The balance as of December 31, 2018 was $746.4 million net of discount and debt issuance costs for the Senior Notes due April 1, 2021 and $743.7 million net of discount and debt issuance costs for the Senior Notes due April 1, 2026.

In May 2013, the Company closed its issuance of $550.0 million aggregate principal amount of 2.375% Senior Notes due 2018 and $550.0 million aggregate principal amount of 3.750% Senior Notes due 2023 (collectively, the “2013 Notes”) pursuant to an Underwriting Agreement with J.P. Morgan Securities LLC. The Company used the net proceeds of the transaction to pay a portion of the $1.4 billion purchase price of the Company’s acquisition of Netspend and related fees and expenses. The 2013 Notes were issued pursuant to an Indenture dated as of May 22, 2013 between the Company and Wells Fargo Bank, National Association, as trustee. As of December 31, 2018 there was no outstanding balance for the Senior Notes due June 1, 2018 and a balance of $545.6 million net of discount and debt issuance costs for the Senior Notes due June 1, 2023.

Senior Credit Facility and Other Borrowings

On April 23, 2018, TSYS entered into a Credit Agreement with Bank of America, N.A. The Credit Agreement provides the Company with a $1.75 billion five-year revolving senior credit facility, which includes a $50 million sub-facility for the issuance of standby letters of credit.

The Credit Agreement was used to repay (i) in full, borrowings under that certain Credit Agreement dated February 23, 2016, among the Company, JPMorgan Chase Bank, N.A. and (ii) in part, borrowings under that certain Credit Agreement dated January 10, 2018, among the Company and Bank of America as administrative agent and the lenders party thereto, as amended.

Borrowings under the Credit Agreement will accrue interest at either the base rate (as defined in the Credit Agreement) or the London Interbank Offered Rate (“LIBOR”), in each case plus a margin based on the Company’s corporate credit ratings. Additionally, a facility fee of 0.2% is assessed on the entire revolver.

The Credit Agreement contains customary covenants regarding, among other matters, the maintenance of insurance, the preservation and maintenance of the Company’s corporate existence, material compliance with laws and the payment of taxes and other material obligations. The Credit Agreement also contains financial covenants including (i) a minimum consolidated fixed charge coverage ratio (the “Minimum Fixed Charge Coverage Ratio”) of 2.5 to 1.0 and (ii) a maximum consolidated leverage ratio (“Maximum Leverage Ratio”) (x) of 4.00 to 1.0, for the fiscal quarter ending June 30, 2018, (y) of 3.75 to 1.0, for each of the fiscal quarters ending September 30, 2018, December 31, 2018 and March 31, 2019, and (z) of 3.50 to 1.0, for any fiscal quarter ending thereafter. The Company was in compliance with all applicable financial covenants as of December 31, 2018. As of December 31, 2018, the outstanding balance on the Company’s revolving credit facility was $805.0 million.

On January 10, 2018, TSYS entered into a credit agreement with Bank of America, N.A. The credit agreement provides the Company with a $450 million two-year term loan facility (“Term Loan Facility”). The Term Loan Facility was used to finance, in part, the Company’s acquisition of Cayan.

 

-36-


Borrowings under the credit agreement will accrue interest at the base rate (as defined in the Credit Agreement) or LIBOR, in each case plus a margin based on the Company’s corporate credit ratings. The applicable margin for loans bearing interest based on LIBOR ranges from 1.000% to 1.750%. The applicable margin for loans bearing interest based on the base rate ranges from 0.000% to 0.750%.

The credit agreement contains customary covenants regarding, among other matters, the maintenance of insurance, the preservation and maintenance of the Company’s corporate existence, material compliance with laws and the payment of taxes and other material obligations. The credit agreement also contains financial covenants requiring the maintenance as of the end of each fiscal quarter of (i) a minimum fixed charge coverage ratio of 2.5 to 1.0 and (ii) a maximum consolidated leverage ratio of 3.5 to 1.0, which may be increased upon the occurrence of certain events. As discussed above, the remaining balance of the Term Loan Facility was paid off in May 2018.

On February 23, 2016, the Company entered into the 2016 Credit Agreement with JPMorgan Chase Bank, N.A. The 2016 Credit Agreement provided the Company with a $700 million five-year term loan facility (the “Term Loan Facility”) consisting of (i) a $300 million term loan (the “Refinancing Term Loan”) funded upon entry into the 2016 Credit Agreement and (ii) the Delayed Draw Term Loan. The 2016 Credit Agreement also provided the Company with the Revolving Loan Facility, which includes a $50 million sub-facility for the issuance of standby letters of credit. As of December 31, 2018, there was no remaining balance on the Term Loan Facility.

Borrowings under the 2016 Credit Agreement will accrue interest at the base rate (as defined in the 2016 Credit Agreement) or LIBOR, in each case plus a margin that is set based on the Company’s corporate credit ratings. The applicable margin for loans bearing interest based on LIBOR ranges from 0.900% to 1.500% for revolving loans and 1.000% to 1.750% for term loans. The applicable margin for loans bearing interest based on the base rate ranges from 0.000% to 0.500% for revolving loans and 0.000% to 0.750% for term loans. In addition, the Company will pay the lenders a facility fee ranging from 0.100% to 0.250% per annum, depending on the Company’s corporate credit ratings, on the commitments under the Revolving Loan Facility (regardless of usages) and the undrawn commitment amount in respect of the Delayed Draw Term Loan. Based on the Company’s current corporate credit ratings, (i) the applicable margin for loans accruing interest at the base rate is 0.500% for term loans and 0.300% for revolving loans and (ii) the applicable margin for loans accruing interest at LIBOR is 1.500% for term loans and 1.300% for revolving loans. The 2016 Credit Agreement contains customary covenants regarding, among other matters, the maintenance of insurance, the preservation and maintenance of the Company’s corporate existence, material compliance with laws and the payment of taxes and other material obligations. As of December 31, 2018, the 2016 Credit Agreement no longer exists as it was replaced by the April 23, 2018 Credit Agreement.

The Refinancing Term Loan was used to repay in full the Company’s outstanding loans and other obligations under that certain credit agreement, dated as of September 10, 2012. The Delayed Draw Term Loan was used to finance, in part, the TransFirst acquisition and related transactions. The Revolving Loan Facility is available for draws for purposes of working capital and other general corporate purposes, including to finance, in part, the acquisition and related transactions. The creditor group of the modified debt remained consistent before and after the debt was amended.

Debt Covenants

The 2018 Credit Agreement also contains various affirmative and negative covenants, including those that create limitations on the Company’s:

 

 

creation of liens;

 

 

merging or selling assets unless certain conditions are met; and

 

 

entering into sale/leaseback transactions.

The 2013, 2016 and 2018 Notes also contain a provision that requires the Company to repurchase all or any portion of a holder’s notes, at the holder’s option, if a Change in Control Repurchase Event occurs, as defined in the Prospectus Supplements for the 2013, 2016, and 2018 Notes offerings.

 

-37-


Annual Principal Payments on Long-term Debt

Required annual principal payments on long-term debt for the five years subsequent to December 31, 2018 are summarized as follows:

 

(in thousands)

      

2019

   $ 20,807  

2020

     11,342  

2021

     750,000  

2022

     —    

2023

     1,905,000  

Capital Lease Obligations and License Agreements

Capital lease obligations and license agreements as of December 31, 2018 and 2017 consist of:

 

(in thousands)

   2018      2017  

Capital lease obligations

   $ 37,177        37,950  

License agreements

     17,288        4,865  
  

 

 

    

 

 

 

Total capital lease obligations and license agreements

     54,465        42,815  

Less current portion

     (8,318      (6,762
  

 

 

    

 

 

 

Noncurrent portion of capital leases and license agreements

   $ 46,147        36,053  
  

 

 

    

 

 

 

The Company acquires various computer equipment, software, machinery and equipment and furniture and fixtures under capital lease obligations and license agreements. Refer to Notes 7, 8 and 22 for more information. The capital lease and license agreements obligations have various payment terms for each capital lease obligation, including single payment leases, monthly, quarterly and annually. The lease terms for the equipment and software range from one to six years. The future minimum lease payments under capital leases and license agreements as of December 31, 2018 are summarized as follows:

 

(in thousands)

   Capital
Leases
     License
Agreements
 

2019

   $ 7,393        2,939  

2020

     7,319        13,778  

2021

     7,085        1,390  

2022

     7,051        39  

2023

     6,658        —    

Thereafter

     6,868        —    
  

 

 

    

 

 

 

Total minimum lease payments

     42,374        18,146  

Less amount representing interest

     (5,197      (858
  

 

 

    

 

 

 

Principal minimum lease payments

   $ 37,177        17,288  
  

 

 

    

 

 

 

Note 13: Other Current Liabilities

Significant components of other current liabilities as of December 31, 2018 and 2017 are summarized as follows:

 

(in thousands)

   December 31,
2018
     December 31,
2017
 

Accrued card brand fees

   $ 55,991        43,814  

Accrued third-party commissions

     46,977        34,276  

Accrued expenses

     25,178        34,260  

Dividends payable

     24,645        24,886  

Accrued interest

     22,191        19,330  

Other

     93,168        69,356  
  

 

 

    

 

 

 

Total

   $ 268,150        225,922  
  

 

 

    

 

 

 

 

-38-


Note 14: Income Taxes

The provision for income taxes includes income taxes currently payable and those deferred because of temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities.

The components of income tax expense included in the Consolidated Statements of Income are as follows:

 

     Years Ended December 31,  

(in thousands)

   2018      2017      2016  

Current income tax expense:

        

Federal

   $ 75,273        210,550        140,079  

State

     18,000        20,316        9,218  

Foreign

     12,330        7,500        4,443  
  

 

 

    

 

 

    

 

 

 

Total current income tax expense

     105,603        238,366        153,740  
  

 

 

    

 

 

    

 

 

 

Deferred income tax (benefit) expense:

        

Federal

     18,200        (178,879      8,393  

State

     3,891        5,093        (65

Foreign

     (691      1,298        (893
  

 

 

    

 

 

    

 

 

 

Total deferred income tax (benefit) expense

     21,400        (172,488      7,435  
  

 

 

    

 

 

    

 

 

 

Total income tax expense

   $ 127,003        65,878        161,175  
  

 

 

    

 

 

    

 

 

 
     Years Ended December 31,  

(in thousands)

   2018      2017      2016  

Components of income before income taxes and equity in income of equity investments:

        

Domestic

   $ 634,433        603,260        454,628  

Foreign

     25,331        14,302        6,404  
  

 

 

    

 

 

    

 

 

 

Total income before income tax expense

   $ 659,764        617,562        461,032  
  

 

 

    

 

 

    

 

 

 

Income tax expense differs from the amounts computed by applying the statutory U.S. federal income tax rate of 21% to income before income taxes, noncontrolling interest and equity in income of equity investments as a result of the following:

 

     Years Ended December 31,  

(in thousands)

   2018      2017      2016  

Computed “expected” income tax expense

   $ 138,551        216,147        161,425  

Increase (decrease) in income tax expense resulting from:

        

International tax rate differential and equity income

     14,683        11,953        8,715  

State income tax expense, net of federal income tax effect

     19,220        12,470        9,127  

(Decrease) increase in valuation allowance

     (1,714      8,230        2,855  

Tax credits

     (22,963      (20,998      (15,695

Share-based compensation

     (20,309        (14,310      —    

Foreign-derived intangible income deduction

     (7,283      —          —    

Deduction for domestic production activities

     —          (17,150      (12,950

Re-measurement of deferred tax asset / deferred tax liability

     —          (146,093      —    

Permanent differences and other, net

     6,818        15,629        7,698  
  

 

 

    

 

 

    

 

 

 

Total income tax expense

   $ 127,003        65,878        161,175  
  

 

 

    

 

 

    

 

 

 

 

-39-


Temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities that give rise to significant portions of the net deferred tax liability as of December 31, 2018 and 2017 relate to the following:

 

     As of December 31,  

(in thousands)

   2018      2017  

Deferred income tax assets:

     

Net operating loss and income tax credit carryforwards

   $ 32,767        35,089  

Allowances for doubtful accounts and billing adjustments

     1,132        852  

Contract liabilities

     8,611        17,813  

Share-based compensation

     11,735        15,170  

Foreign currency translation

     1,938        —    

Postretirement benefits

     5,349        4,679  

Employee compensation and benefits

     7,126        2,790  

Foreign timing differences

     5,737        2,924  

Other, net

     8,767        4,522  
  

 

 

    

 

 

 

Total deferred income tax assets

     83,162        83,839  

Less valuation allowance for deferred income tax assets

     (27,817      (29,531
  

 

 

    

 

 

 

Net deferred income tax assets

     55,345        54,308  
  

 

 

    

 

 

 

Deferred income tax liabilities:

     

Excess tax over financial statement depreciation

     (75,222      (43,056

Computer software development costs

     (56,250      (48,244

Purchased intangibles

     (32,363      (42,467

Foreign currency translation

     —          (942

Partnership interests

     (258,007      (143,908

Other, net

     (6,008      (7,917
  

 

 

    

 

 

 

Total deferred income tax liabilities

     (427,850      (286,534
  

 

 

    

 

 

 

Net deferred income tax liabilities

   $ (372,505      (232,226
  

 

 

    

 

 

 

Total net deferred tax assets (liabilities):

     

Noncurrent deferred tax asset

   $ 7,773        6,091  

Noncurrent deferred tax liability

     (380,278      (238,317
  

 

 

    

 

 

 

Net deferred tax liability

   $ (372,505      (232,226
  

 

 

    

 

 

 

As of December 31, 2018, TSYS had recognized deferred tax assets from net operating losses, capital losses and federal and state income tax credit carryforwards of $5.9 million, $0.3 million and $26.5 million, respectively. As of December 31, 2017, TSYS had recognized deferred tax assets from net operating losses, capital losses, and federal and state income tax credit carryforwards of $6.6 million, $0.3 million, and $28.2 million, respectively. Additionally, net deferred income tax liabilities were increased by $124.2 million as a result of the acquisition of Cayan.

In assessing the realizability of deferred income tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.

Management believes it is more likely than not that TSYS will realize the benefits of these deductible differences, net of existing valuation allowances. The valuation allowance for deferred tax assets was $27.8 million and $29.5 million at December 31, 2018 and 2017, respectively. The decrease in the valuation allowance for deferred income tax assets was $1.7 million primarily as a result of utilization of income tax credit carryforwards against the one-time transition tax that was enacted as part of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”).

TSYS’ effective tax rate was 19.3% and 10.7% for the years ended December 31, 2018 and 2017, respectively. The primary reasons for the higher effective income tax rate for the year ended December 31, 2018 as compared to the same period last year is that the prior year reflected a significant one-time benefit, the elimination of the domestic production activities deduction for 2018 and limitations on executive compensation for 2018 as provided by the Tax Act. This was somewhat offset by favorable variances in discrete items related to excess tax benefits from share-based compensation and the lower 2018 statutory Federal income tax rate and a deduction for foreign-derived intangible income as enacted by the Tax Act. On December 22, 2017, the President signed into law the Tax Act. Some key provisions of this law impacted the Company during this reporting period. One such provision was the reduction of the Federal corporate income tax rate from 35.0% to 21.0%. The Company’s consolidated financial statements reflect the impact of this rate reduction.

 

-40-


Additionally, the Tax Act provides for two U.S. tax base erosion provisions which began in 2018. They are the base-erosion and anti-abuse tax (“BEAT”) and the global intangible low-taxed income (“GILTI”). While TSYS’ calculations indicate no impact related to BEAT in 2018, the Company’s GILTI calculations did indicate an insignificant impact, which has been reflected in the Company’s consolidated financial statements. TSYS will continue to perform all necessary calculations, make any needed elections and report any future impacts of GILTI and BEAT as appropriate. The Company has made the policy election to record any liabilities associated with GILTI in the period in which it is incurred.

The Tax Act provides the Company with a new deduction for Foreign-Derived Intangible Income (FDII). The deduction effectively results in a preferential tax rate on eligible income generated from TSYS’ non US-based clients located primarily in Europe and Canada. TSYS recorded a FDII tax benefit of $7.3 million in 2018.

Although the Tax Act allows repatriation of foreign earnings without incurring U.S. income taxes, TSYS has maintained the previously adopted permanent reinvestment exception under GAAP, with respect to earnings of certain foreign subsidiaries. As a result, TSYS considers foreign earnings related to these foreign operations to be permanently reinvested. Pursuant to U.S. tax requirements, no provision for U.S. federal and state incomes taxes has been made in the consolidated financial statements for those non-U.S. subsidiaries whose earnings were deemed to be permanently reinvested. The amount of undistributed earnings considered to be “reinvested” which may be subject to tax upon distribution was approximately $115.3 million as of December 31, 2018. Although TSYS does not intend to repatriate these earnings, a distribution of these non-U.S. earnings in the form of dividends, or otherwise, may subject the Company to withholding taxes payable to the various non-U.S. countries.

Pursuant to the Tax Act, some amounts related to repatriation of foreign accumulated earnings and related to executive compensation may be considered provisional amounts pursuant to Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 118. As such, these amounts were subject to adjustment during the measurement period ended December 22, 2018.

TSYS is the parent of an affiliated group that files a consolidated U.S. federal income tax return and most state and foreign income tax returns on a separate entity basis. In the normal course of business, the Company is subject to examinations by these taxing authorities unless statutory examination periods lapse. TSYS is no longer subject to U.S. federal income tax examinations for years before 2011 and with few exceptions, the Company is no longer subject to income tax examinations from state and local or foreign tax authorities for years before 2011. There are currently federal income tax examinations in progress for the years 2011 through 2013. Additionally, a number of tax examinations are in progress by the relevant state tax authorities. Although TSYS is unable to determine the ultimate outcome of these examinations, TSYS believes that its liability for uncertain tax positions relating to these jurisdictions for such years is adequate.

GAAP prescribes a recognition threshold and measurement attribute for the financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken in a tax return. During the year ended December 31, 2018, TSYS decreased its liability for uncertain income tax positions by a net amount of approximately $1.5 million.

 

-41-


The Company is not able to reasonably estimate the amount by which the liability will increase or decrease over time; however, at this time, the Company does not expect any significant changes related to these obligations within the next twelve months. A reconciliation of the beginning and ending amount of unrecognized tax liabilities is as follows:

 

     Years Ended December 31  

(in millions)

   2018      2017      2016  

Beginning balance

   $ 23.8        16.5        13.1  

Current activity:

        

Additions based on tax positions related to current year

     2.4        4.9        3.4  

Additions for tax positions of prior years

     3.2        4.6        3.0  

Reductions for tax positions of prior years

     (6.5      —          —    

Decreases resulting from settlements with tax authorities

     (0.6      (2.2      (3.0
  

 

 

    

 

 

    

 

 

 

Net current activity

     (1.5      7.3        3.4  
  

 

 

    

 

 

    

 

 

 

Ending balance

   $ 22.3        23.8        16.5  
  

 

 

    

 

 

    

 

 

 

 

1 

Unrecognized state tax liabilities are not adjusted for the federal tax impact.

TSYS recognizes potential interest and penalties related to the underpayment of income taxes as income tax expense in the Consolidated Statements of Income. Gross accrued interest and penalties on unrecognized tax benefits totaled $2.5 million and $2.0 million as of December 31, 2018 and 2017, respectively. The total amounts of unrecognized income tax benefits as of December 31, 2018 and 2017 that, if recognized, would affect the effective tax rates are $23.5 million and $24.5 million (net of the federal benefit on state tax issues), respectively, which includes interest and penalties of $1.7 million and $1.3 million, respectively. TSYS does not expect any significant changes to its calculation of uncertain tax positions during the next twelve months.

Note 15: Commitments and Contingencies

LEASE AND PURCHASE COMMITMENTS: TSYS is obligated under noncancelable operating leases for computer equipment and facilities. Additionally, the Company has long-term obligations which consist of required minimum future payments under contracts with the Company’s distributors and other service providers.

The future minimum lease payments under noncancelable operating leases and purchase commitments with remaining terms greater than one year for the next five years and thereafter and in the aggregate as of December 31, 2018, are as follows:

 

(in thousands)

   Operating
Leases
     Other Purchase
Commitments
 

2019

   $ 54,818        59,182  

2020

     54,738        29,036  

2021

     50,794        10,427  

2022

     42,048        6,892  

2023

     19,089        5,438  

Thereafter

     32,894        20,813  
  

 

 

    

 

 

 

Total future minimum commitment payments

   $ 254,381        131,788  
  

 

 

    

 

 

 

The majority of computer equipment lease commitments come with a renewal option or an option to terminate the lease. These lease commitments may be replaced with new leases which allow the Company to continually update its computer equipment. The operating lease commitments for 2019, 2020, 2021 and 2022 include amounts relating to a hardware lease that commenced on January 1, 2019.

Total rental expense under all operating leases in 2018, 2017 and 2016 was $128.6 million, $134.0 million and $122.9 million, respectively.

CONTRACTUAL COMMITMENTS: In the normal course of its business, the Company maintains long-term processing contracts with its clients. These processing contracts contain commitments, including, but not limited to, minimum standards and time frames against which the Company’s performance is measured. In the event the Company does not meet its contractual commitments with its clients, the Company may incur penalties and certain clients may have the right to terminate their contracts with the Company. The Company does not believe that it will fail to meet its contractual commitments to an extent that will result in a material adverse effect on its financial position, results of operations or cash flows.

 

-42-


CONTINGENCIES:

Legal Proceedings – General

The Company is subject to various legal proceedings and claims and is also subject to information requests, inquiries and investigations arising out of the ordinary conduct of its business. The Company establishes accruals for litigation and similar matters when those matters present loss contingencies that TSYS determines to be both probable and reasonably estimable in accordance with GAAP. Legal costs are expensed as incurred. In the opinion of management, based on current knowledge and in part upon the advice of legal counsel, all matters not specifically discussed below are believed to be adequately covered by insurance, or, if not covered, the possibility of losses from such matters are believed to be remote or such matters are of such kind or involve such amounts that would not have a material adverse effect on the financial position, results of operations or cash flows of the Company if disposed of unfavorably.

TelexFree Matter

ProPay, Inc. (ProPay), a subsidiary of the Company, has been named as one of a number of defendants (including other merchant processors) in several purported class action lawsuits relating to the activities of TelexFree, Inc. and its affiliates and principals. TelexFree is a former merchant customer of ProPay. With regard to TelexFree, each purported class action lawsuit generally alleges that TelexFree engaged in an improper multi-tier marketing scheme involving voice-over Internet protocol telephone services. The plaintiffs in each of the purported class action complaints generally allege that the various merchant processor defendants, including ProPay, aided and abetted the improper activities of TelexFree. TelexFree filed for bankruptcy protection in Nevada. The bankruptcy proceeding was subsequently transferred to the Massachusetts Bankruptcy Court.

Specifically, ProPay has been named as one of a number of defendants (including other merchant processors) in each of the following purported class action complaints relating to TelexFree: (i) Waldermara Martin, et al. v. TelexFree, Inc., et al. (Case No. BK-S-14-12524-ABL) (Bankr. D. Nev.); (ii) Anthony Cellucci, et al. v. TelexFree, Inc., et. al. (Case No. 4:14-BK-40987) (Bankr. D. Mass.); (iii) Maduako C. Ferguson Sr., et al. v. Telexelectric, LLP, et. al (Case No. 5:14-CV-00316-D) (E.D.N.C.); (iv) Todd Cook v. TelexElectric LLP et al. (Case No. 2:14-CV-00134) (N.D. Ga.); (v) Felicia Guevara v. James M. Merrill et al., CA No. 1:14-cv-22405-DPG) (S.D. Fla.); (vi) Reverend Jeremiah Githere, et al. v. TelexElectric LLP et al. (Case No. 1:14-CV-12825-GAO) (D. Mass.); (vii) Paulo Eduardo Ferrari et al. v. TelexFree, Inc. et al. (Case No. 14-04080) (Bankr. D. Mass); (viii) Magalhaes v. TelexFree, Inc., et al., No. 14-cv-12437 (D. Mass.); (ix) Griffith v. Merrill et al., No. 14-CV-12058 (D. Mass.); (x) Abelgadir v. Telexelectric, LLP, No. 14-09857 (S.D.N.Y.); and (xi) Rita Dos Santos, v. TelexElectric, LLP et al., 2:15-cv-01906-NVW (D. Ariz.) (together, the “Actions”).

On October 21, 2014, the Judicial Panel on Multidistrict Litigation (“JPML”) transferred and consolidated the Actions filed before that date to the United States District Court for the District of Massachusetts (the “Consolidated Action”). The JPML subsequently transferred the remaining Actions to the Consolidated Action. The Consolidated Action is styled In Re: TelexFree Securities Litigation (4:14-md-02566-TSH) (D. Mass.).

The plaintiffs in the Consolidated Action filed a First Consolidated Amended Complaint on March 31, 2015 and filed a Second Consolidated Amended Complaint (the “Second Amended Complaint”) on April 30, 2015. The Second Amended Complaint, which supersedes the complaints filed prior to consolidation of the Actions, purports to bring claims on behalf of all persons who purchased certain TelexFree “memberships” and suffered a “net loss” between January 1, 2012 and April 16, 2014. With respect to ProPay, the Second Amended Complaint alleges that ProPay aided and abetted tortious acts committed by TelexFree, and that ProPay was unjustly enriched in the course of providing payment processing services to TelexFree. Several defendants, including ProPay, moved to dismiss the Second Amended Complaint on June 2, 2015. The court held a hearing on the motions to dismiss on November 2, 2015.

On January 29, 2019, the court granted in part and denied in part ProPay’s motion to dismiss the Second Amended Complaint. The court dismissed plaintiffs’ claim that ProPay was unjustly enriched by the alleged TelexFree fraud, but denied ProPay’s motion to dismiss the plaintiffs’ claim that ProPay allegedly aided and abetted TelexFree’s purported scheme. The court’s ruling does not reflect any determination of the merits of the plaintiffs’ aiding and abetting claim against ProPay, but instead is merely a ruling that the plaintiffs have alleged facts that could potentially entitle them to relief from ProPay if those facts were true. ProPay denies that it had any knowledge of TelexFree’s alleged fraud or that it aided and abetted that fraud in any way.

 

-43-


After deciding the motions to dismiss filed by ProPay and some of the other defendants in the litigation, the court lifted the stay on discovery that had been in place since the outset of the Consolidated Action proceeding. Approximately 50 defendants remain in the litigation, and the Court will hold a scheduling conference on March 20, 2019 to set a case schedule.

ProPay has also received various subpoenas, a seizure warrant and other inquiries requesting information regarding TelexFree from (i) the Commonwealth of Massachusetts, Securities Division, (ii) United States Securities and Exchange Commission, (iii) US Immigration and Customs Enforcement, and (iv) the bankruptcy Trustee of the Chapter 11 entities of TelexFree, Inc., TelexFree, LLC and TelexFree Financial, Inc. Pursuant to the seizure warrant served by the United States Attorney’s Office for the District of Massachusetts, ProPay delivered all funds associated with TelexFree held for chargeback and other purposes by ProPay to US Immigration and Customs Enforcement. In addition, ProPay received a notice of potential claim from the bankruptcy Trustee as a result of the relationship of ProPay with TelexFree and its affiliates.

While the Company and ProPay intend to vigorously defend the Consolidated Action proceeding and other matters arising out of the relationship of ProPay with TelexFree and believe ProPay has substantial defenses related to these purported claims, the Company currently cannot reasonably estimate losses attributable to these matters.

GUARANTEES AND INDEMNIFICATIONS: The Company has entered into processing and licensing agreements with its clients that include intellectual property indemnification clauses. Under these clauses, the Company generally agrees to indemnify its clients, subject to certain exceptions, against legal claims that TSYS’ services or systems infringe on certain third party patents, copyrights or other proprietary rights. In the event of such a claim, the Company is generally obligated to hold the client harmless and pay for related losses, liabilities, costs and expenses, including, without limitation, court costs and reasonable attorney’s fees. The Company has not made any indemnification payments pursuant to these indemnification clauses.

A portion of the Company’s business is conducted through distributors that provide load and reload services to cardholders at their locations. Members of the Company’s distribution and reload network collect cardholder funds and remit them by electronic transfer to the issuing banks for deposit in the cardholder accounts. The Company’s issuing banks typically receive cardholders’ funds no earlier than two business days after they are collected by the distributor. If any distributor fails to remit cardholders’ funds to the Company’s issuing banks, the Company typically reimburses the issuing banks for the shortfall created thereby. The Company manages the risk associated with this process through a formalized set of credit standards, volume limits and deposit requirements for certain distributors and by typically maintaining the right to offset any settlement shortfall against the commissions payable to the relevant distributor. To date, the Company has not experienced any significant losses associated with settlement failures and the Company had not recorded a settlement guarantee liability as of December 31, 2018. As of December 31, 2018 and 2017, the Company’s estimated gross settlement exposure was $17.2 million and $16.7 million, respectively.

Cardholders of the products managed by the Company’s Consumer Solutions segment can incur charges in excess of the funds available in their accounts and are liable for the resulting overdrawn account balance. Although the Company generally declines authorization attempts for amounts that exceed the available balance in a cardholder’s account, the application of the Networks’ rules and regulations, the timing of the settlement of transactions and the assessment of subscription, maintenance or other fees can, among other things, result in overdrawn card accounts. The Company also provides, as a courtesy and in its discretion, certain cardholders with a “cushion” that allows them to overdraw their card accounts by a nominal amount. In addition, eligible cardholders may enroll in the issuing banks’ overdraft protection programs and fund transactions that exceed the available balance in their accounts. The Company generally provides the funds used as part of these overdraft programs (one of the Company’s issuing banks will advance the first $1.0 million on behalf of its cardholders) and is responsible to the issuing banks for any losses associated with any overdrawn account balances. As of December 31, 2018 and 2017, cardholders’ overdrawn account balances totaled $29.1 million and $25.5 million, respectively. As of December 31, 2018 and 2017, the Company’s reserves for the losses it estimates will arise from processing customer transactions, debit card overdrafts, chargebacks for unauthorized card use and merchant-related chargebacks due to non-delivery of goods or services was $13.1 million and $9.5 million, respectively.

 

-44-


The Company has not recorded a liability for guarantees or indemnities in the accompanying consolidated balance sheet since the maximum amount of potential future payments under such guarantees and indemnities is not determinable.

PRIVATE EQUITY INVESTMENTS: The Company has limited partnership agreements with two Atlanta-based venture capital funds focused exclusively on investing in technology-enabled financial services companies. Pursuant to each limited partnership agreement, the Company has committed to invest up to $20.0 million in each fund so long as its ownership interest in each fund does not exceed 50%. As of December 31, 2018 and 2017, the Company had made contributions to the funds of $29.5 million and $22.8 million, respectively. The Company had investments, including equity in income, totaling $34.3 million and $26.1 million, respectively, as of December 31, 2018 and 2017.

Note 16: Employee Benefit Plans

The Company provides benefits to its employees by offering employees participation in certain defined contribution plans. The employee benefit plans through which TSYS provided benefits to its employees during 2018 are described as follows:

RETIREMENT SAVINGS AND STOCK PURCHASE PLANS: TSYS maintains a single plan, the TSYS Retirement Savings Plan, which is designed to reward all team members of TSYS U.S.-based companies with a uniform employer contribution. Until June 30, 2018, the terms of the plan provided for the Company to match 100% of the employee contribution up to 4% of eligible compensation. Beginning July 1, 2018, the terms of the plan were amended to provide for the Company to match 100% of the employee contributions up to 5% of eligible compensation. The Company can make discretionary contributions up to another 4% based upon business conditions.

The Company also maintains a stock purchase plan for employees. The Company contributes 15% of employee contributions up to certain limits. The funds are used to purchase presently issued and outstanding shares of TSYS common stock on the open market at fair market value for the benefit of participants. The Company’s contributions to the plans charged to expense for the years ended December 31, 2018, 2017 and 2016 are as follows:

 

(in thousands)

   2018      2017      2016  

TSYS Retirement Savings Plan

   $ 28,196        23,113        21,077  

TSYS Stock Purchase Plan

     1,793        1,600        1,514  

POSTRETIREMENT MEDICAL BENEFITS PLAN: TSYS provides certain medical benefits to qualified retirees through a postretirement medical benefits plan, which is immaterial to the Company’s consolidated financial statements. The measurement of the benefit expense and accrual of benefit costs associated with the plan do not reflect the effects of the 2003 Medicare Act. Additionally, the benefit expense and accrued benefit cost associated with the plan, as well as any potential impact of the effects of the 2003 Medicare Act, are not significant to the Company’s consolidated financial statements.

Note 17: Equity

DIVIDENDS: Dividends on common stock of $94.6 million were paid in 2018, compared to $79.0 million and $73.4 million in 2017 and 2016, respectively.

 

-45-


EQUITY COMPENSATION PLANS: The following table summarizes TSYS’ equity compensation plans by category as of December 31, 2018:

 

     (a)      (b)      (c)  

(in thousands, except per share data)

Plan Category                                      

   Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options,
Warrants and
Rights
     Weighted
Average
Exercise Price of
Outstanding
Options,
Warrants and
Rights
     Number of
Securities
Remaining
Available for
Future Issuance
Under Equity
Compensation
Plans
(Excluding
Securities
Reflected in
Column (a)
 

Equity compensation plans approved by security holders

     3,585      $ 49.27 1       13,964 2 
  

 

 

    

 

 

    

 

 

 

The Company does not have any equity compensation plans that were not approved by security holders.

 

1 

Weighted-average exercise price represents 2.0 million options only and does not include restricted share units that have no exercise price.

2 

Shares available for future grants under the Total System Services, Inc. 2017 Omnibus Plan, which could be in the form of options, nonvested awards and performance shares.

Note 18: Share-Based Compensation

TSYS has various long-term incentive plans under which the Compensation Committee of the Board of Directors has the authority to grant share-based compensation to TSYS employees.

Share-Based Compensation and Long-Term Incentive Plans

TSYS maintains the Total System Services, Inc. 2017 Omnibus Plan, Total System Services, Inc. 2012 Omnibus Plan, Total System Services, Inc. 2007 Omnibus Plan, Total System Services, Inc. 2002 Long-Term Incentive Plan, Total System Services, Inc. 2000 Long-Term Incentive Plan and the Amended and Restated Netspend Holdings, Inc. 2004 Equity Incentive Plan for Options and Restricted Shares Assumed by Total System Services, Inc. to advance the interests of TSYS and its shareholders through awards that give employees and directors a personal stake in TSYS’ growth, development and financial success. Awards under these plans are designed to motivate employees and directors to devote their best efforts to the business of TSYS. Awards will also help TSYS attract and retain the services of employees and directors who are in a position to make significant contributions to TSYS’ success.

The plans are administered by the Compensation Committee of the Company’s Board of Directors and enable the Company to grant nonqualified and incentive stock options, stock appreciation rights, restricted stock and restricted stock units, performance units or performance shares, cash-based awards and other stock-based awards.

All stock options must have a maximum life of no more than ten years from the date of grant. The exercise price will not be less than 100% of the fair market value of TSYS’ common stock at the time of grant. Any shares related to awards which terminate by expiration, forfeiture, cancellation or otherwise without the issuance of shares, are settled in shares, or are exchanged with the Committee’s permission, prior to the issuance of shares, for awards not involving shares, shall be available again for grant under the Total System Services, Inc. 2017 Omnibus Plan. Effective as of, or prior to, April 27, 2017, no additional awards may be made from any of the other plans.

 

-46-


The aggregate number of shares of TSYS stock which may be granted, or could have been granted, to participants pursuant to awards granted under the various plans may not exceed the following:

 

(in thousands)

      
Plan    Shares  

Total System Services, Inc. 2017 Omnibus Plan

     15,000  

Total System Services, Inc. 2012 Omnibus Plan

     17,000  

Total System Services, Inc. 2007 Omnibus Plan

     5,000  

Total System Services, Inc. 2002 Long-term Incentive Plan

     9,400  

Total System Services, Inc. 2000 Long-term Incentive Plan

     2,400  

Share-based compensation costs are classified as selling, general and administrative expenses on the Company’s consolidated statements of income and corporate administration and other expenses for segment reporting purposes. TSYS’ share-based compensation costs are expensed, rather than capitalized, as these awards are typically granted to individuals not involved in capitalizable activities. For the year ended December 31, 2018, share-based compensation was $48.8 million compared to $42.4 million and $43.7 million for the same periods in 2017 and 2016, respectively.

Nonvested Awards

The Company granted shares of TSYS common stock to certain key employees and non-management members of its Board of Directors. The grants to certain key employees were issued under nonvested stock bonus awards and are typically for services to be provided in the future and vest over a period of up to four years. The grants to non-management members of the Board of Directors were fully vested on the date of grant. The market value of the TSYS common stock at the date of issuance is charged as compensation expense over the vesting periods or derived service periods.

The following table summarizes the number of shares granted each year:

 

     2018      2017      2016  

Number of shares granted

     326,968        329,051        362,804  

Market value (in millions)

   $ 29.1        18.1        16.8  

A summary of the status of TSYS’ nonvested shares as of December 31, 2018, 2017 and 2016 and the changes during the periods are presented below:

 

     2018      2017      2016  

(in thousands, except per share data)

   Shares     Weighted
Average
Grant date
Fair Value
     Shares     Weighted
Average
Grant date
Fair Value
     Shares     Weighted
Average
Grant date
Fair Value
 

Outstanding at beginning of year

     634     $ 47.19        863     $ 37.78        1,146     $ 31.11  

Granted

     327       89.13        329       55.06        363       46.23  

Vested

     (336     46.10        (458     36.01        (563     29.95  

Forfeited/canceled/adjusted

     (85     54.30        (100     43.82        (84     36.79  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Outstanding at end of year

     540     $ 72.08        634     $ 47.19        863     $ 37.78  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

As of December 31, 2018, there was approximately $21.6 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements. That cost is expected to be recognized over a remaining weighted average period of 1.8 years.

Performance- and Market-Based Awards

The Company granted performance- and market-based shares to certain key executives and granted performance-based shares to certain key employees. The performance- and market-based goals are established by the Compensation Committee of the Board of Directors and will vest up to a maximum of 200% of target. During 2018, 2017 and 2016, the Compensation Committee established performance goals based on various financial and market-based measures. Compensation expense for performance-based shares is measured on the grant date based on the quoted market price of TSYS common stock.

 

-47-


The Company estimates the probability of achieving the goals through the performance period and expenses the awards on a straight-line basis over the derived service period. The fair value of market-based awards is estimated on the grant date using a Monte Carlo simulation model. The Company expenses market-based awards on a straight-line basis. Compensation costs related to performance- and market-based shares are recognized through the longer of the performance period, the vesting period, or the derived service period. As of December 31, 2018, there was approximately $19.7 million of unrecognized compensation cost related to TSYS performance-based awards that is expected to be recognized through December 2020. As of December 31, 2018, there was approximately $2.0 million of unrecognized compensation cost related to TSYS market-based awards that is expected to be recognized through December 2020.

The number of market-based awards granted during 2018, 2017 and 2016 were 33,940, 44,275, and 58,807, respectively. The performance measure for the market-based awards is the Company’s Total Shareholder Return (“TSR”) as compared to the TSR of the companies in the S&P 500 at the end of the performance period.

During the years ended December 31, 2018, 2017 and 2016, the Company granted performance-based awards based on non-financial operational metrics and the following financial performance measures:

 

Performance Measure

  

Definition of Measure

Adjusted diluted EPS    Adjusted earnings divided by weighted average diluted shares outstanding used for diluted EPS calculations. Adjusted earnings is net income excluding the after-tax impact of share-based compensation expense, amortization of acquisition intangibles, merger and acquisition expenses for completed acquisitions and litigation claims, judgments or settlement expenses and related legal expenses.
Net revenue    Net revenue is total revenue less reimbursable items, as well as merchant acquiring interchange and payment network fees charged by card associations or payment networks that are recorded by TSYS as expense.
Adjusted EPS    Adjusted EPS is adjusted earnings divided by weighted average shares outstanding used for basic EPS.
Revenues before reimbursable items    Revenues before reimbursable items is total revenue less reimbursable items which consist of out-of-pocket expenses which are reimbursed by the Company’s clients. These expenses consist primarily of postage, access fees and third-party software.

The number of performance-based shares with a one-year performance period granted during the years ended December 31, 2018, 2017 and 2016 totaled 84,600, 146,094, and 160,600, respectively. The number of performance-based shares with a three-year performance period granted during the years ended December 31, 2018, 2017 and 2016 totaled 130,840, 129,442, and 312,293, respectively. The grants awarded with a three-year performance period during 2018, 2017 and 2016 will be expensed through December 31, 2020, 2019 and 2018, respectively.

A summary of the awards authorized in each year is below:

 

     Total Number of
Shares Awarded1
     Potential Number of
Performance- and
Market-Based Shares
to be Vested2
     Year Potential
Performance-and
Market-Based Shares
Will Fully Vest3
 

2018

     249,380        426,963        2021  

2017

     319,811        903,364        2020  

2016

     531,700        687,015        2019  

 

1 

Shares awarded does not include dividend equivalents.

2 

Includes dividend equivalents.

3 

Represents year in which authorized performance and market-based shares will fully vest if they had been granted during 2018, 2017, and 2016, respectively.

 

-48-


A summary of the status of TSYS’ performance- and market-based nonvested shares as of December 31, 2018, 2017 and 2016 and changes during those periods are presented below:

 

     2018      2017      2016  

(in thousands, except per share data)

   Shares1     Weighted
Average
Grant
Date Fair
Value
     Shares1     Weighted
Average
Grant
Date Fair
Value
     Shares1     Weighted
Average
Grant
Date Fair
Value
 

Outstanding at beginning of year

     805     $ 45.41        982     $ 33.43        918     $ 31.19  

Granted

     521       93.28        618       52.48        540       45.91  

Vested

     (569     40.69        (621     14.85        (140     37.91  

Forfeited/canceled/adjusted

     (112     59.50        (174     46.98        (336     37.70  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Outstanding at end of year

     645     $ 67.44        805     $ 45.41        982     $ 33.43  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

1 

Includes dividend equivalents.

Stock Option Awards

Stock options generally become exercisable in three equal annual installments on the anniversaries of the date of grant and expire ten years from the date of grant. The required service period for retirement eligible employees is typically 12 or 18 months. For retirement eligible employees who retire prior to completing this required service period, the options vest on a pro-rata basis based upon the number of months employed during the full service period. For retirement eligible employees who retire after the required 18-month service period, the options become fully vested upon retirement. For retirement eligible employees who retire after the required 12-month service period, the option holder is deemed to have continued employment through the end of the vesting period and the options continue to vest in accordance with their terms. During 2018, 2017 and 2016, the Company granted stock options to key TSYS executive officers and non-management members of its Board of Directors. The grants to key TSYS executive officers were issued for services to be provided in the future and vest over a period of three years. The grants to the Board of Directors were fully vested on the date of grant. The weighted average fair value of the options granted was estimated on the date of grant using the Black-Scholes-Merton option-pricing model.

In December 2018, the Company modified the exercise provisions for stock option awards granted to non-management members of its Board of Directors. The modification permits non-management directors to exercise the option for the remainder of the option’s term if the director’s service ceases for any reason. Previously, the non-management members of the Board of Directors had one year from the time they retire from the Board of Directors to exercise their options. The total incremental compensation cost resulting from the modification is immaterial.

The following table summarizes the weighted average assumptions, and the weighted average fair value of the options:

 

     2018     2017      2016  

Number of options granted

     362,525       550,527        687,685  

Weighted average exercise price

   $ 86.91       54.97        47.01  

Risk-free interest rate

     2.55     1.78        1.24

Expected volatility

     21.80     21.72        21.53

Expected term (years)

     4.9       4.6        4.5  

Dividend yield

     0.63     0.73        0.86

Weighted average fair value

   $ 19.44       10.85        8.50  

 

-49-


A summary of TSYS’ stock option activity as of December 31, 2018, 2017 and 2016, and changes during the years ended on those dates is presented below:

 

     2018      2017      2016  

(in thousands, except per share data)

   Options     Weighted
Average
Exercise
Price
     Options     Weighted
Average
Exercise
Price
     Options     Weighted
Average
Exercise
Price
 

Outstanding at beginning of year

     2,695     $ 37.15        2,996     $ 32.78        2,887     $ 28.07  

Granted

     362       86.91        551       54.97        688       47.01  

Exercised

     (1,020     30.55        (730     30.05        (500     23.43  

Forfeited/canceled

     (45     51.72        (122     52.76        (79     43.49  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Outstanding at end of year

     1,992     $ 49.27        2,695     $ 37.15        2,996     $ 32.78  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Options exercisable at year-end

     1,234     $ 38.08        1,758     $ 31.00        1,877     $ 28.45  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Weighted average fair value of options granted during the year

     $ 19.44        $ 10.85        $ 8.50  
    

 

 

      

 

 

      

 

 

 

As of December 31, 2018, the average remaining contractual life and intrinsic value of TSYS’ outstanding and exercisable stock options were as follows:

 

     Outstanding      Exercisable  

Average remaining contractual life (in years)

     8.4        6.0  

Aggregate intrinsic value (in thousands)

   $ 12,437        53,366  

Shares Issued for Options Exercised

During 2018, 2017 and 2016, employees of the Company exercised options for shares of TSYS common stock that were issued from treasury. The table below summarizes these stock option exercises by year:

 

(in thousands)

   Options Exercised
and
Issued from
Treasury
     Intrinsic Value  

2018

     1,020      $ 57,868  

2017

     730        23,629  

2016

     500        12,984  

For awards granted before January 1, 2006, that were not fully vested on January 1, 2006, the Company recorded the tax benefits from the exercise of stock options as increases to the “Additional paid-in capital” line item of the Consolidated Balance Sheets. Through December 31, 2016, if the Company recognized tax benefits, the Company recorded these tax benefits from share-based compensation costs as cash inflows in the financing section and cash outflows in the operating section in the Consolidated Statement of Cash Flows. The Company elected to use the short-cut method to calculate its historical pool of windfall tax benefits. As previously disclosed, the Company adopted ASU 2016-09 Compensation- Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting effective January 1, 2017 on a prospective basis.

As of December 31, 2018, there was approximately $3.6 million of total unrecognized compensation cost related to TSYS stock options that is expected to be recognized over a remaining weighted average period of 1.7 years.

Note 19: Treasury Stock

The following table summarizes shares held as treasury stock and their related carrying value as of December 31:

 

(in thousands)

   Number of
Treasury Shares
     Treasury Shares
Cost
 

2018

     22,179      $ 1,042,687  

2017

     21,862        909,960  

2016

     19,314        646,047  

 

-50-


Stock Repurchase Plan

In January 2015, TSYS announced that its Board had approved a stock repurchase plan to purchase up to 20 million shares of TSYS stock. The shares may be purchased from time to time at prices considered appropriate. There is no expiration date for the plan.

The table below summarizes these repurchases under the plan by year:

 

(in thousands, except per share data)

   Total Number of
Shares
Purchased
     Average Price
Paid per Share
     Repurchased
Shares Cost
 

2018

     2,000      $ 85.95      $ 171,898  

2017

     3,850        73.41        282,645  

2016

     500        48.57        24,287  

The following table sets forth information regarding the Company’s purchases of its common stock on a monthly basis during the three months ended December 31, 2018:

 

(in thousands, except per share data)

   Total Number
of Shares
Purchased
     Average Price
Paid per Share1
     Total Number
of Cumulative
shares
Purchased as
Part of Publicly
Announced
Plans or
Programs2
     Maximum
Number of
Shares That
May yet be
Purchased
Under the Plans
or Programs2
 

October 2018

     —        $ —          9,500        10,500  

November 2018

     740        85.77        10,240        9,760  

December 2018

     1,268        86.00        11,500        8,500  
  

 

 

    

 

 

       

Total

     2,008 3     $ 85.92        
  

 

 

    

 

 

       

 

1 

Includes a total of 7,681 shares (not rounded) in December withheld for payment of taxes.

2 

In January 2015, TSYS’ Board of Directors approved a stock repurchase plan to repurchase up to 20 million shares of TSYS stock. The shares may be purchased from time to time at prices considered appropriate. There is no expiration date for the plan.

3 

Total number of shares purchased amounts may not total due to rounding.

Treasury Shares

In 2008, the Compensation Committee approved “share withholding for taxes” for all employee nonvested awards, and also for employee stock options under specified circumstances. The dollar amount of the income tax liability from each exercise is converted into TSYS shares and withheld at the statutory minimum. The shares are added to the treasury account and TSYS remits funds to the Internal Revenue Service to settle the tax liability. During 2018 and 2017, the Company acquired 12,518 shares for approximately $1.1 million, and acquired 20,875 shares for approximately $1.6 million, respectively, as a result of share withholding for taxes.

Note 20: Accumulated Other Comprehensive Loss (AOCL)

Comprehensive income (loss) for TSYS consists of net income, cumulative foreign currency translation adjustments, unrealized gains on available for sale securities and the recognition of an overfunded or underfunded status of a defined benefit postretirement plan recorded as a component of shareholders’ equity.

 

-51-


The income tax effects allocated to and the cumulative balance of each component of accumulated other comprehensive income (“AOCI”) (loss) are as follows:

 

(in thousands)

   Foreign
Currency
Translation
Adjustments
     Gain on
Available-For-

Sale Securities
     Change in
Postretirement
Healthcare
Plans
    Total
Accumulated
Other
Comprehensive
Loss, Net of Tax
 

Balance as of December 31, 2015

   $ (35,013      2,503        (1,034   $ (33,544

Pretax amount

     (36,341      11,394        775       (24,172

Tax effect

     (5,872      4,035        279       (1,558
  

 

 

    

 

 

    

 

 

   

 

 

 

Net-of-tax amount

     (30,469      7,359        496       (22,614
  

 

 

    

 

 

    

 

 

   

 

 

 

Balance as of December 31, 2016

     (65,482      9,862        (538     (56,158

Pretax amount

     24,794        (2,050      (682     22,062  

Tax effect

     2,776        (634      (90     2,052  
  

 

 

    

 

 

    

 

 

   

 

 

 

Net-of-tax amount

     22,018        (1,416      (592     20,010  
  

 

 

    

 

 

    

 

 

   

 

 

 

Balance as of December 31, 2017

     (43,464      8,446        (1,130     (36,148

Pretax amount

     (21,495      (6,896      (682     (29,073

Tax effect

     (1,169      (1,534      34       (2,669
  

 

 

    

 

 

    

 

 

   

 

 

 

Net-of-tax amount

     (20,326      (5,362      (716     (26,404
  

 

 

    

 

 

    

 

 

   

 

 

 

Reclassification for adoption of ASU 2018-02 (Note 1)

     604        1,968        (243     2,329  
  

 

 

    

 

 

    

 

 

   

 

 

 

Balance as of December 31, 2018

   $ (63,186      5,052        (2,089   $ (60,223
  

 

 

    

 

 

    

 

 

   

 

 

 

As discussed in Note 1, the Company early adopted ASU 2018-02 as of July 1, 2018 and recorded a balance sheet reclassification of $2.3 million between accumulated other comprehensive loss and retained earnings.

Consistent with its overall strategy of pursuing international investment opportunities, TSYS adopted the permanent reinvestment exception under GAAP, with respect to future earnings of certain foreign subsidiaries. Its decision to permanently reinvest foreign earnings offshore means TSYS will no longer allocate taxes to foreign currency translation adjustments associated with these foreign subsidiaries accumulated in other comprehensive income.

Note 21: Segment Reporting, including Geographic Area Data and Major Customers

TSYS provides global payment processing and other services to card-issuing and merchant acquiring institutions in the United States and internationally through online accounting and electronic payment processing systems. The Company also provides financial service solutions to consumers and businesses in the United States. Corporate expenses, such as finance, legal, human resources, mergers and acquisitions and investor relations are categorized as Corporate Administration and Other.

At TSYS, the chief operating decision maker (“CODM”) is a group consisting of Senior Executive Management. The information utilized by the CODM consists of the financial statements and the main metrics monitored are revenue growth and growth in profitability. During the second quarter of 2018, the CODM renamed the Netspend segment to the Consumer Solutions segment as a part of the rebranding of the segment. There has been no change to the composition of the Consumer Solutions segment. Therefore, no prior periods were restated.

The Company acquired Cayan in January 2018 and substantially all of the assets of iMobile3, LLC in June 2018. In April 2016, the Company completed the acquisition of all of the outstanding stock of TransFirst. These acquisitions are part of the Merchant Solutions segment. Refer to Note 23 for more information regarding the Company’s acquisitions.

Issuer Solutions includes electronic payment processing services and other services provided from within the North America region and internationally. Merchant Solutions includes electronic processing and other services provided to merchants and merchant acquirers. The Consumer Solutions segment provides GPR prepaid debit and payroll cards, demand deposit accounts and other financial service solutions to the underbanked and other consumers and businesses in the United States.

TSYS’ operating segments share certain resources, such as information technology support, that TSYS allocates based on various metrics depending on the nature of the service.

 

-52-


Operating Segments    Years Ended December 31,  

(in thousands)

   2018     2017     2016  

Adjusted operating income by segment:

      

Issuer Solutions (a)

   $ 608,392       574,580       525,025  

Merchant Solutions (b)

     484,197       391,466       307,595  

Consumer Solutions (c)

     193,472       182,082       160,371  

Corporate Administration and Other

     (151,167     (148,564     (135,996
  

 

 

   

 

 

   

 

 

 

Adjusted segment operating income1 (d)

     1,134,894       999,564       856,995  
  

 

 

   

 

 

   

 

 

 

Less:

      

Share-based compensation

     48,758       42,409       43,728  

Cayan and TransFirst merger & acquisition (M&A) and integration expenses2

     26,550       13,367       28,176  

Litigation, claims, judgments or settlements

     —         1,947       21,719  

Acquisition intangible amortization

     236,848       207,797       189,990  
  

 

 

   

 

 

   

 

 

 

Operating income

     822,738       734,044       573,382  

Nonoperating expenses, net

     (162,974     (116,482     (112,350
  

 

 

   

 

 

   

 

 

 

Income before income taxes and equity in income of equity investments

   $ 659,764       617,562       461,032  
  

 

 

   

 

 

   

 

 

 

Net revenue by segment:

      

Issuer Solutions (e)

   $ 1,718,177       1,594,959       1,515,462  

Merchant Solutions (f)

     1,344,718       1,103,682       898,533  

Consumer Solutions (g)

     806,430       746,870       663,579  
  

 

 

   

 

 

   

 

 

 

Segment net revenue

     3,869,325       3,445,511       3,077,574  

Less: intersegment revenues

     53,425       45,179       35,698  
  

 

 

   

 

 

   

 

 

 

Net revenue3 (h)

     3,815,900       3,400,332       3,041,876  

Add: reimbursable items, interchange and payment network fees4

     212,311       1,527,633       1,128,201  
  

 

 

   

 

 

   

 

 

 

Total revenues

   $ 4,028,211       4,927,965       4,170,077  
  

 

 

   

 

 

   

 

 

 

Adjusted segment operating margin on net revenue:

      

Issuer Solutions (a)/(e)

     35.4     36.0     34.6
  

 

 

   

 

 

   

 

 

 

Merchant Solutions (b)/(f)

     36.0     35.5     34.2
  

 

 

   

 

 

   

 

 

 

Consumer Solutions (c)/(g)

     24.0     24.4     24.2
  

 

 

   

 

 

   

 

 

 

Adjusted segment operating margin on net revenue (d)/(h)

     29.7     29.4     28.2
  

 

 

   

 

 

   

 

 

 

 

1 

Adjusted segment operating income excludes acquisition intangible amortization, TransFirst and Cayan M&A and integration expenses, share-based compensation and expenses associated with Corporate Administration and Other.

2 

Excludes share-based compensation.

3 

Net revenue is total revenues less reimbursable items (such as postage), as well as, merchant acquiring interchange and payment network fees charged by the card associations or payment networks that are recorded by TSYS as expense.

4 

As discussed in Note 1, the most significant impact of the Company’s adoption of ASC 606 as of January 1, 2018 is the result of gross versus net presentation of interchange and payment network fees. In 2018, these fees collected on behalf of the payment networks and card issuers are presented “net” of the amounts paid to them, as opposed to the “gross” presentation for certain of these fees in 2017 and 2016.

 

-53-


The following table presents the Company’s depreciation and amortization expense by segment:

 

     Years Ended December 31,  

(in thousands)

   2018      2017      2016  

Depreciation and amortization by segment:

        

Issuer Solutions

   $ 119,402        147,914        141,309  

Merchant Solutions

     30,713        29,477        25,553  

Consumer Solutions

     17,424        15,838        13,133  
  

 

 

    

 

 

    

 

 

 

Segment depreciation and amortization

     167,539        193,229        179,995  

Acquisition intangible amortization

     236,848        207,797        189,990  

Corporate administration and other

     4,186        4,880        3,561  
  

 

 

    

 

 

    

 

 

 

Total depreciation and amortization1

   $ 408,573        405,906        373,546  
  

 

 

    

 

 

    

 

 

 

 

1 

Client incentive/contract asset amortization is no longer included in depreciation and amortization due to the adoption of ASC 606 on January 1, 2018.

The following table presents the Company’s total assets by segment:

 

     As of December 31,  

(in thousands)

   2018      2017  

Issuer Solutions

   $ 6,843,451        5,735,195  

Merchant Solutions

     4,248,183        3,136,395  

Consumer Solutions

     1,374,667        1,418,644  

Intersegment assets

     (4,997,592      (3,958,545
  

 

 

    

 

 

 

Total assets

   $ 7,468,709        6,331,689  
  

 

 

    

 

 

 

The Company maintains property and equipment, net of accumulated depreciation and amortization, in the following geographic areas:

 

     As of December 31,  

(in thousands)

   2018      2017  

United States

   $ 321,119        273,690  

Europe

     45,872        43,586  

Other

     16,083        7,942  
  

 

 

    

 

 

 

Total

   $ 383,074        325,218  
  

 

 

    

 

 

 

The following tables reconcile geographic revenues to external revenues by operating segment based on the domicile of the Company’s customers for the years ended December 31:

 

     20182  

(in thousands)

   Issuer
Solutions
     Merchant
Solutions
     Consumer
Solutions
     Total      Percentage
of Revenues
 

United States

   $ 1,079,461        1,350,671        806,287      $ 3,236,419        80.4

Europe1

     375,793        625        —          376,418        9.3  

Canada1

     324,937        1,148        —          326,085        8.1  

Other1

     88,114        1,175        —          89,289        2.2  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,868,305        1,353,619        806,287      $ 4,028,211        100.0
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

-54-


     2017  

(in thousands)

   Issuer
Solutions
     Merchant
Solutions
     Consumer
Solutions
     Total      Percentage of
Revenues
 

United States

   $ 1,051,292        2,428,327        745,235      $ 4,224,854        85.7

Europe1

     320,400        284        —          320,684        6.5  

Canada1

     313,674        1,496        —          315,170        6.4  

Other1

     66,102        1,155        —          67,257        1.4  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,751,468        2,431,262        745,235      $ 4,927,965        100.0
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     2016  

(in thousands)

   Issuer
Solutions
     Merchant
Solutions
     Consumer
Solutions
     Total
Consumer
     Percentage of
Revenues
 

United States

   $ 1,032,381        1,826,775        660,845      $ 3,520,001        84.4

Europe1

     306,894        227        —          307,121        7.4  

Canada1

     284,028        705        —          284,733        6.8  

Other1

     57,460        762        —          58,222        1.4  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,680,763        1,828,469        660,845      $ 4,170,077        100.0
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

1 

Certain of these revenues are impacted by movements in foreign currency exchange rates.

2 

Includes the impact of adopting ASC 606.

MAJOR CUSTOMER: For the years ended December 31, 2018, 2017 and 2016, the Company had no major customers.

Note 22: Supplemental Cash Flow Information

Equipment Acquired Under Capital Lease Obligations and Software Acquired Under License Agreements

The Company acquired approximately $8.4 million, $40.8 million and $1.8 million of equipment under capital lease obligations in 2018, 2017 and 2016, respectively. The Company acquired approximately $14.8 million and $8.5 million of software under license agreements in 2018 and 2017, respectively. The amount of software acquired under license agreements in 2016 was insignificant. Additionally, the Company acquired $52.2 million of software through vendor financing and other arrangements in 2018.

Note 23: Acquisitions

The revenue and operating loss of the Company’s 2018 acquisitions included in the Company’s Consolidated Statements of Income since the acquisitions are $179.0 million and ($5.4) million, respectively, for the year ended December 31, 2018.

iMobile3

On June 1, 2018, TSYS acquired substantially all of the assets of iMobile3, LLC, a leading provider of private-labeled small business solutions within the payments industry, for $13.4 million in cash. The newly acquired business is part of the Company’s Merchant Solutions segment. The goodwill amount of $5.3 million arising from the acquisition is primarily attributable to the economies of scale from combining the assets of TSYS and iMobile3. All of the goodwill was assigned to TSYS’ Merchant Solutions segment. The goodwill recognized is expected to be deductible for income tax purposes. Identifiable intangible assets acquired in the iMobile3 acquisition include technology of $6.9 million and non-compete agreements of $900,000. The measurement period, during which changes in assets or other items of consideration are subject to adjustment, ends one year following the acquisition date. The intangible assets are being amortized over their estimated useful lives of three to five years based on the pattern of expected future economic benefit, which approximates a straight-line basis over the useful lives of the assets.

Additional disclosures relating to the iMobile3 acquisition, including pro forma financial information, have not been included since the transaction is insignificant.

 

-55-


Redeemable Noncontrolling Interest – CPAY

2018

In April 2018, the Company acquired the remaining 15% equity interest in Central Payment Co., LLC from a privately-owned company for $126.0 million.

2017

On February 3, 2017, the Company acquired an additional 10% equity interest in CPAY from a privately-owned company for $70.0 million. This purchase reduced the remaining redeemable noncontrolling interest in CPAY to 15% of its total outstanding equity and extended the put call arrangement until April 2018. The transaction resulted in a decrease to noncontrolling interest of $9.8 million and a decrease to additional paid-in-capital of $60.2 million.

Cayan

On January 11, 2018, TSYS completed the acquisition of 100 percent ownership of Cayan, a payment technology company focused on integrated payment solutions and merchant acquiring, in an all cash transaction valued at approximately $1.05 billion. In connection with the acquisition, the Company entered into a Loan Facility with Bank of America, N.A. as administrative agent and the other lenders a party thereto from time to time to provide a $450 million two-year bilateral loan (see Note 12). The results of the newly acquired business are being reported by TSYS as part of the Merchant Solutions segment.

The goodwill amount of $0.8 billion arising from the acquisition is primarily attributable to the expansion of the Merchant Solutions segment’s customer base, differentiation in market opportunity and economies of scale expected from combining the operations of TSYS and Cayan. All of the goodwill was assigned to TSYS’ Merchant Solutions segment. Approximately $0.4 billion of the goodwill recognized is expected to be deductible for income tax purposes.

The following table summarizes the consideration paid for Cayan and the recognized amounts of the identifiable assets acquired and liabilities assumed on January 11, 2018 (the acquisition date).

 

(in thousands)       

Consideration

  

Cash

   $ 1,054,931  
  

 

 

 

Fair value of total consideration transferred