EX-13.1 2 tss-20161231ex13116affb.htm EX-13.1 tss_Current_Folio_Ex_131

Exhibit 13.1

Selected Financial Data

 

The following financial data should be read in conjunction with the Consolidated Financial Statements and Notes thereto and Financial Review sections of the Annual Report. The historical trends in Total System Services, Inc.'s (TSYS' or the Company’s) results of operations and financial position over the last five years are presented below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31, 

(in thousands, except per share data)

    

2016

    

2015

    

2014

    

2013

    

2012

Income Statement Data:

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

4,170,077

 

2,779,541

 

2,446,877

 

2,064,305

 

1,793,557

Operating income

 

$

573,382

 

534,107

 

431,640

 

382,500

 

354,969

Income from continuing operations, net of tax

 

$

325,972

 

367,630

 

280,751

 

254,542

 

248,928

Income from discontinued operations, net of tax

 

 

 -

 

1,411

 

48,655

 

2,055

 

995

Net income

 

$

325,972

 

369,041

 

329,406

 

256,597

 

249,923

Net income attributable to noncontrolling interests

 

 

(6,334)

 

(4,997)

 

(6,534)

 

(11,847)

 

(5,643)

Net income attributable to TSYS common shareholders

 

$

319,638

 

364,044

 

322,872

 

244,750

 

244,280

Basic earnings per share (EPS)* attributable to TSYS common shareholders:

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

1.74

 

1.97

 

1.48

 

1.31

 

1.31

Gain (loss) from discontinued operations

 

 

 -

 

0.01

 

0.26

 

(0.01)

 

(0.02)

Net income

 

$

1.74

 

1.98

 

1.73

 

1.30

 

1.30

Diluted EPS* attributable to TSYS common shareholders:

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

1.73

 

1.96

 

1.47

 

1.30

 

1.31

Gain (loss) from discontinued operations

 

 

 -

 

0.01

 

0.25

 

(0.01)

 

(0.02)

Net income

 

$

1.73

 

1.97

 

1.72

 

1.29

 

1.29

Cash dividends declared per share

 

$

0.40

 

0.40

 

0.40

 

0.40

 

0.40

 

 

 

 

 

 

 

 

 

 

 

 

*Basic and diluted EPS amounts for continuing operations and net income may not total due to rounding.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 

(in thousands)

    

2016

    

2015

    

2014

    

2013

    

2012

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

6,366,177

 

3,877,895

 

3,725,652

 

3,677,077

 

2,023,129

Obligations under long-term borrowings and capital leases, excluding current portion

 

 

3,313,276

 

1,377,541

 

1,397,483

 

1,426,260

 

190,854

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Overview

 

TSYS' 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 cards and payroll cards and alternative financial services to underbanked and other consumers. The Company’s services are provided through four operating segments: North America Services, International Services, Merchant Services and Netspend.

 

Through the Company’s North America Services and International Services segments, TSYS processes information through its cardholder systems to financial and nonfinancial institutions throughout the United States and internationally. The Company’s North America Services segment provides these services to clients in the United States, Canada, Mexico and the Caribbean. The Company’s International Services segment provides services to clients in Europe, India, Middle East, Africa, Asia Pacific and Latin America. The Company’s Merchant Services segment provides merchant services to merchant acquirers and merchants mainly in the United States. The Company’s Netspend segment provides services to consumers in the United States.

 

TSYS acquires other companies as part of its strategy for growth. In April 2016, the Company completed the acquisition of all the outstanding stock of TransFirst Holdings Corp. (TransFirst). TransFirst is part of the Merchant Services segment. Refer to Note 23 in the Notes to Consolidated Financial Statements for more information about the acquisition of TransFirst.

 

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The following table sets forth each segment’s revenues as a percentage of the Company’s total revenues:

 

 

 

 

 

 

 

 

 

 

Years Ended December 31, 

 

 

    

2016

    

2015

    

2014

 

Merchant Services

 

44

%  

20

%  

21

%

North America Services

 

32

 

47

 

45

 

Netspend

 

16

 

21

 

19

 

International Services

 

8

 

12

 

15

 

Total revenues

 

100

%  

100

%  

100

%

 

 

 

 

 

 

 

 

 

Due to the somewhat seasonal nature of the payments industry, TSYS' revenues and results of operations have generally increased in the fourth quarter of each year because of increased transaction and authorization volumes during the traditional holiday shopping season. Furthermore, growth or declines in card and merchant portfolios of existing clients, the conversion of cardholder and merchant accounts of new clients to the Company's processing platforms, the receipt of fees for early contract termination and the loss of cardholder and merchant accounts either through purges or deconversions impact the results of operations from period to period.

 

Another factor which may affect TSYS' revenues and results of operations from time to time is consolidation in the financial services or retail industries either through the sale, by a client, of its business, its card portfolio or a segment of its accounts to a party which processes cardholder or merchant accounts internally or uses another third-party processor. A change in the economic environment in the retail sector, or a change in the mix of payments between cash and cards could favorably or unfavorably impact TSYS' financial position, results of operations and cash flows in the future.

 

TSYS' reported financial results will also be impacted by significant shifts in currency conversion rates. TSYS does not view foreign currency as an economic event for the Company but as a financial reporting issue. Because changes in foreign currency exchange rates distort the operating growth rates, TSYS discloses the impact of foreign currency translation on its financial performance.

 

A significant amount of the Company's revenues are derived from long-term contracts with large clients. Processing contracts with large clients, representing a significant portion of the Company's total revenues, generally provide for discounts on certain services based on the size and activity of clients' portfolios. Therefore, revenues and the related margins are influenced by the client mix relative to the size of client portfolios, as well as the number and activity of individual cardholder or merchant accounts processed for each client.

 

Also impacting revenues is the impact of TransFirst. TransFirst’s results are part of the Merchant Services segment and are reported gross, which includes amounts paid for interchange and assessments, due to TransFirst’s relationship with its customers.

 

Regulation

 

Government regulation affects key areas of TSYS' business, in the U.S. as well as internationally. TSYS, along with the rest of the financial services industry, continues to experience increased legislative and regulatory scrutiny, including the enactment of additional legislative and regulatory initiatives such as the Dodd-Frank Wall Street Reform and Consumer Protection Act (Financial Reform Act). This legislation, which provides for sweeping financial regulatory reform, may have a significant and negative impact on the Company and its clients, which could impact TSYS' earnings through fee reductions, higher costs (both regulatory and implementation) and new restrictions on operations. The Financial Reform Act may also impact the competitive dynamics of the financial services industry in the U.S. by more adversely impacting large financial institutions, some of which are TSYS clients, and by adversely impacting the competitive position of U.S. financial institutions in comparison to foreign competitors in certain businesses.

 

The Financial Reform Act created a new Consumer Financial Protection Bureau (“CFPB”) with responsibility for regulating consumer financial products and services and enforcing most federal consumer protection laws in the area of financial services, including consumer credit and the prepaid card industry.  For example, the CFPB has promulgated a new rule regarding prepaid financial products, which, among other things, establishes new disclosure requirements specific to prepaid accounts, eliminates certain fees that may currently be imposed on prepaid accounts, and effectively eliminates the ability of a prepaid card provider such as the Company’s Netspend business to offer courtesy overdraft protection on prepaid accounts.  The new rule is scheduled to become effective on October 1, 2017.  Similarly, other future actions of the CFPB may make payment card or product transactions generally less attractive to card issuers, acquirers, consumers and merchants by further regulatory disclosures, payment card practices, fees, routing and other matters with respect to credit, debit and prepaid cards, and thus negatively impact the Company’s business.

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Financial Review

 

This Financial Review provides a discussion of critical accounting policies and estimates, related party transactions and off-balance sheet arrangements. This Financial Review also discusses the results of operations, financial position, liquidity and capital resources of TSYS and outlines the factors that have affected its recent earnings, as well as those factors that may affect its future earnings. The accompanying Consolidated Financial Statements and related Notes are an integral part of this Financial Review and should be read in conjunction with it.

 

Critical Accounting Policies and Estimates

 

Risk factors that could affect the Company's future operating results and cause actual results to vary materially from expectations are listed in the Company's forward-looking statements. 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.

 

TSYS' financial position, results of operations and cash flows are impacted by the accounting policies the Company has adopted. Refer to Note 1 in the Consolidated Financial Statements for more information on the Company's basis of presentation and a summary of significant accounting policies.

 

Management believes that the following accounting policies are the most critical to fully understand and evaluate the Company's results. Within each critical policy, the Company makes estimates that require management's subjective or complex judgments about the effects of matters that are inherently uncertain.

 

A summary of the Company's critical accounting estimates applicable to the reportable operating segments follows:

 

Allowance for Doubtful Accounts and Billing Adjustments

 

The Company estimates the allowance for doubtful accounts. When estimating the allowance, the Company takes into consideration such factors as its knowledge of the financial position of specific clients, the industry and size of its clients, the overall composition of its accounts receivable aging, prior experience with specific customers of accounts receivable write-offs and prior history 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. If the actual collectability of clients' accounts is not consistent with the Company's estimates, bad debt expense, which is recorded in selling, general and administrative expenses, may be materially different than was initially recorded. The Company's experience and extensive data accumulated historically indicates that these estimates have proven reliable over time.

 

The Company estimates allowances for billing adjustments for 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. If the actual adjustments to clients' billing are not consistent with the Company's estimates, billing adjustments, which are recorded as a reduction of revenues in the Company's Consolidated Statements of Income, may be materially different than was initially recorded. The Company's experience and extensive data accumulated historically indicates that these estimates have proven reliable over time. The allowance for doubtful accounts and billing adjustments on the Company’s Consolidated Balance Sheet as of December 31, 2016 was $4.8 million.

 

Contract Acquisition Costs

 

In evaluating contract acquisition 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 acquisition costs associated with each customer for impairment on the basis of whether these costs are fully recoverable from either contractual minimum fees (conversion costs) or from expected undiscounted net operating cash flows of the related contract (cash incentives paid). 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, or diminished prospects for current clients. Note 10 in the Consolidated Financial Statements contains a discussion of contract acquisition costs. The net carrying value of contract acquisition costs on the Company's Consolidated Balance Sheet as of December 31, 2016 was $235.7 million.

 

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Software Development Costs

 

In evaluating software development costs for recoverability, expected cash flows are estimated by management should events indicate a loss may have been triggered. The Company evaluates the unamortized capitalized costs of software development, the impairment of which is determined by expected undiscounted future operating cash flows of the software as compared to the carrying amount of the software product. The amount by which the unamortized software development costs exceed the lower of the carrying amount or fair value is written off in the period that such determination is made. If the actual cash flows are not consistent with the Company's estimates, a material write-off may result and net income may be materially different than was initially recorded. Assumptions and estimates about future cash flows and remaining useful lives of software are complex and subjective. They can be affected by a variety of factors, including industry and economic trends, changes in the Company’s business strategy and changes in the internal forecasts. Note 8 in the Consolidated Financial Statements contains a discussion of internally developed software costs. The net carrying value of internally developed software on the Company's Consolidated Balance Sheet as of December 31, 2016 was $121.4 million.

 

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 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, up to 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.

 

TSYS may allocate part of the purchase price of future acquisitions to contingent consideration as required by generally accepted accounting principles (GAAP) for business combinations. The fair value calculation of contingent consideration will involve a number of assumptions that are subjective in nature and which may differ significantly from actual results. TSYS may experience volatility in its earnings to some degree in future reporting periods as a result of these fair value measurements.

 

Goodwill

 

In evaluating for impairment, discounted net cash flows for future periods are estimated by management. In accordance with the provisions of GAAP, goodwill is required to be tested for impairment at least annually. The combination of the income approach, utilizing the discounted cash flow (DCF) method, and the market approach, utilizing readily available market valuation multiples, is used to estimate the fair value. Under the DCF method, the fair value of the asset reflects the present value of the projected earnings that will be generated by each asset 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 invested capital. Cash flows are estimated for future periods based on historical data and projections provided by management. 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. Note 6 in the Consolidated Financial Statements contains a discussion of goodwill. The net carrying value of goodwill on the Company's Consolidated Balance Sheet as of December 31, 2016 was $3.3 billion.

 

Long-lived Assets and Intangibles

 

In evaluating long-lived assets and intangibles for recoverability, expected undiscounted net operating cash flows are estimated by management. The Company reviews long-lived assets, such as property and equipment and intangibles subject to amortization, including contract acquisition costs 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 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. The Company did not recognize any impairment charges during the years ended December 31, 2016, 2015 and 2014.

 

Revenue Recognition

 

The Company recognizes revenues in accordance with the provisions of GAAP, which sets forth guidance as to when revenue is realized or realizable and earned when all of the following criteria are met: (1) persuasive evidence of an

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arrangement exists; (2) delivery has occurred or services have been performed; (3) the seller's price to the buyer is fixed or determinable; and (4) collectability is reasonably assured.

 

The Company evaluates its contractual arrangements that provide services to clients through a bundled sales arrangement in accordance with the provisions of GAAP to address the determination of whether an arrangement involving more than one deliverable contains more than one unit of accounting and how the arrangement consideration should be measured and allocated to the separate units of accounting.

 

A deliverable in multiple element arrangements indicates any performance obligation on the part of the seller and includes any combination of obligations to perform different services, grant licenses or other rights. Revenue is allocated to the separate units of accounting in a multiple element arrangement based on relative fair values, provided the delivered element has standalone value to the customer and delivery of any undelivered items is probable and substantially within the Company's control. Evidence of fair value must be objective and reliable. An item has value to the customer on a standalone basis if it is sold separately by any vendor or the customer could resell the deliverable on a standalone basis.

 

As TSYS’ business and service offerings change in the future, the determination of the number of deliverables in an arrangement and related units of accounting and future pricing practices may result in changes in the estimates of vendor-specific objective evidence of selling price (VSOE) and estimates of the standalone selling price (ESP), which may change the ratio of fees allocated to each service or unit of accounting in a given customer arrangement. There were no material changes or impact to revenue in revenue recognition during the years ended December 31, 2016, 2015 and 2014 due to any changes in the determination of the number of deliverables in an arrangement, units of accounting, or estimates of VSOE or ESP for existing contractual arrangements.

 

Cardholders’ Reserve

 

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 or services. These reserves are established based upon historical loss and recovery rates and cardholder activity for which specific losses can be identified. The cardholders’ reserve was $10.5 million as of December 31, 2016. The provision for cardholder losses is included in cost of services in the Consolidated Statements of Income and in other current liabilities in the Consolidated Balance Sheets. The Company regularly updates its estimate as new facts become known and events occur that may impact the settlement or recovery of losses.

 

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 due to the indemnities it has with the sponsoring bank. 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 is established using historical loss rates, applied to recent bankcard processing volume. As of December 31, 2016, the Company had a merchant loss provision in the amount of $2.0 million.

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Transaction Processing Provisions

 

The Company records estimates to provide 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 estimating these accruals, the Company takes into consideration such factors as the prior history of performance penalties and processing errors incurred, actual contractual penalties inherent in the Company's contracts, progress towards milestones, and known processing errors not covered by insurance. If the actual performance penalties incurred are not consistent with the Company's estimates, performance penalties and processing errors, which are recorded in cost of services, may be materially different than were initially recorded. The Company's experience and extensive data accumulated historically indicate that these estimates have proven reliable over time. Transaction processing provisions are included in other current liabilities in the Consolidated Balance Sheets. As of December 31, 2016, the Company had a transaction processing provision in the amount of $2.9 million.

 

Income Taxes

 

 In calculating its effective tax rate, the Company makes decisions regarding certain tax positions, including the timing and amount of deductions and allocations of income among various tax jurisdictions. The Company has various tax filing positions, including the timing and amount of deductions and credits, the establishment of reserves for audit matters and the allocation of income among various tax jurisdictions.

 

The Company makes estimates as to the amount of deferred tax assets and liabilities and records valuation allowances to reduce its deferred tax assets to reflect the amount that is more likely than not to be realized. The Company considers projected future taxable income and ongoing tax planning strategies in assessing the need for the valuation allowance. Actual results may differ from the Company's estimates. If the Company realizes a deferred tax asset or the Company was unable to realize a net deferred tax asset, an adjustment to the deferred tax asset would increase or decrease earnings, respectively, in the period the difference is recognized.

 

Off-Balance Sheet Arrangements

 

Operating Leases

 

As a method of funding its operations, TSYS employs noncancelable operating leases for computer equipment, software and facilities. These leases allow the Company to use the latest technology while avoiding the risk of ownership. Neither the assets nor obligations related to these leases are included on the balance sheet. Refer to Notes 1 and 15 in the Consolidated Financial Statements for further information on operating lease commitments.

 

Contractual Obligations   

 

The Company has long-term obligations which consist of required minimum future payments under contracts with the Company’s distributors and other service providers.

 

Recent Accounting Pronouncements

 

In December 2016, the FASB issued ASU 2016-19 “Technical Corrections,” which represent changes to clarify, correct errors or make minor improvements to the Accounting Standards Codification. Most of the amendments in this Update do not require transition guidance and are effective upon issuance of this Update. Six amendments in this Update clarify guidance or correct references in the Accounting Standards Codification that could potentially result in changes in current practice because of either misapplication or misunderstanding of current guidance. Early adoption is permitted for the amendments that require transition guidance. The Company will be impacted by the amendment to Subtopic 350-40, “Intangibles—Goodwill and Other— Internal-Use Software,” which adds a reference to guidance to use when accounting for internal-use software licensed from third parties that is within the scope of Subtopic 350-40. The transition guidance for that amendment is the same as the transition guidance in ASU 2015-05, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement,” to which the amendment relates. The Company does not expect the adoption of this ASU to 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 ASU is effective for the Company on January 1,

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2018. The Company does not expect the adoption of this ASU to have a material impact on the Company’s financial position, results of operations or cash flows.

 

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 is effective for the Company on January 1, 2018. The Company does not expect the adoption of this ASU to have a material impact on the Company’s financial position, results of operations or cash flows.

 

In August 2016, the FASB issued ASU 2016-15 “Statement of Cash Flow (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 is effective for the Company on January 1, 2018. Early adoption is permitted by all entities. The Company does not expect the adoption of this ASU to have a material impact on the Company’s financial position, results of operations or cash flows.

 

In March 2016, the FASB issued ASU 2016-09 “Improvements to Employee ShareBased Payment Accounting,” which simplifies several aspects of the accounting for employee sharebased payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2016. The adoption of this ASU will result in excess tax benefits and deficiencies associated with share-based payments being recorded on the income statement at the time they are deducted on the income tax return instead of being recorded in additional paid-in capital. The excess tax benefits are recorded along with other income tax cash flows as an operating activity in the statement of cash flows. The Company will adopt this ASU on January 1, 2017. The Company has reviewed this standard, noting adoption of the standard will result in a benefit to the income tax provision and an immaterial dilutive effect on diluted EPS.

 

In March 2016, the FASB issued ASU 2016-07 “Simplifying the Transition to the Equity Method of Accounting,” which simplifies the equity method of accounting by eliminating the requirement to retrospectively apply the equity method to an investment that subsequently qualifies for such accounting as a result of an increase in the level of ownership interest or degree of influence. The ASU further requires that unrealized holding gains or losses in accumulated other comprehensive income related to an available-for-sale security that becomes eligible for the equity method be recognized in earnings as of the date on which the investment qualifies for the equity method. The guidance in the ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2016. Early adoption is permitted for all entities. Entities are required to apply the guidance prospectively to increases in the level of ownership interest or degree of influence occurring after the ASU’s effective date. The Company does not expect the adoption of this ASU to have a material impact on the Company’s financial position, results of operations or cash flows.

 

In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842).” ASU 2016-02 introduces a lessee model that brings most 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 standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than twelve months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

 

The new guidance will be effective for the Company on January 1, 2019 with early adoption permitted. The Company expects to adopt the new standard on its effective date. The Company expects the standard will have a material effect on its financial statements.  At December 31, 2016, the Company had approximately $472.8 million of operating leases that would be recorded on the balance sheet if the standard was already effective. The Company has not determined the remaining effect on its ongoing financial reporting for adoption of this ASU. The Company expects to elect all of the available practical expedients on adoption.

 

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 new standard is effective for fiscal years and interim periods within those years beginning after December 15, 2017. The Company does not expect the adoption of this ASU to have a material impact on the Company’s financial position, results of operations or cash flows.

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Recent Revenue Recognition Accounting Pronouncements

 

In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers,” 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 will replace 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 are effective for the Company on January 1, 2018, with early adoption permitted no sooner than January 1, 2017. The standards permit the use of either the retrospective or cumulative effect transition method. The Company has not determined the effect on its ongoing financial reporting for adoption of these ASUs.

 

The Company is reviewing the requirements of the new revenue standard, and amendments described below, while following activities of the FASB and the American Institute of Certified Public Accountants (AICPA) for certain interpretive guidance applicable to IT outsourcers and payment processors. The Company is evaluating customer contracts under the new standard for each type of significant revenue stream (and related costs) identified to evaluate differences from current accounting. TSYS plans to adopt ASU 2014-09, as well as all other clarifications and technical guidance issued by the FASB and AICPA related to this new revenue standard, on January 1, 2018 using the modified retrospective transition method. Such adoption method may result in an adjustment to the opening balance of retained earnings (or other appropriate components of net assets in the statement of financial position) for the cumulative effect, if any, of applying the standard to contracts that are not completed on January 1, 2018. Under the modified retrospective transition method, the Company is required to disclose the impact of changes to financial statement line items due to the application of the new revenue standard, including an explanation of the reasons for any significant changes.

 

The new standard could change the amount and timing of revenue and costs for certain significant revenue streams, increase areas of judgment and related internal controls requirements, change the presentation of revenue for certain contract arrangements and possibly require changes to the Company’s software systems to assist in both internally capturing accounting differences and externally reporting such differences through enhanced disclosure requirements.

 

In March 2016, the FASB issued ASU 2016-08 “Revenue from Contracts with Customers (Topic  606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net),"  which improves the operability and understandability of the implementation guidance on principal versus agent considerations by providing indicators as to which party controls the good or service provided to a customer (the principal).

 

In April 2016, the FASB issued ASU 2016-10 “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,” which clarifies two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas.

 

In May 2016, the FASB issued ASU 2016-12 “Revenue from Contracts with Customers (Topic 606): Narrow Scope Improvements and Practical Expedients,” which affects only the following narrow aspects of Topic 606: Assessing the Collectability Criterion; Presentation of Sales and Other Taxes Collected from Customers; Noncash Consideration; Contract Modification at Transition; Completed Contracts at Transition; and Technical Correction.

 

In December 2016, the FASB issued ASU 2016-20 “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” which affects only the following narrow aspects of Topic 606: Disclosure of Remaining Performance Obligations as it relates to entities such as processors which may not be required to estimate revenue under ASU 2014-09 due to direct allocation of variable consideration; Disclosure of Prior-Period Performance Obligations; Loan Guarantee Fees; Contract Costs—Impairment Testing; Contract Costs— Interaction of Impairment Testing with Guidance in Other Topics; Provisions for Losses on Construction-Type and Production Type Contracts; Contracts within the scope of Topic 944 (insurance)are excluded from the scope of Topic 606; Contract Modifications; Contract Asset versus Receivable; Refund Liability; Advertising Costs; Fixed-Odds Wagering Contracts in the Casino Industry.

 

Results of Operations

 

Revenues

 

The Company generates revenues by providing transaction processing and other payment-related services. The Company's pricing for transactions and services is complex. Each category of revenue has numerous fee components depending on the types of transactions processed or services provided. TSYS reviews its pricing and implements pricing changes on an ongoing basis. In addition, standard pricing varies among its regional businesses, and such pricing can be customized further for customers through tiered pricing of various thresholds for volume activity. TSYS' revenues are based upon transactional

18

 


 

information accumulated by its systems or reported by its customers. The Company's revenues are impacted by currency translation of foreign operations, as well as doing business in the current economic environment.

 

The Company reviews revenue performance on a net revenue basis which is a non-GAAP measure. Net revenue is defined as total revenues less reimbursable items, as well as, merchant acquiring interchange and assessment fees charged by the card associations or payment networks that are recorded by TSYS as expense. The Company has included reimbursements received for out-of-pocket expenses as revenues and expenses. The largest reimbursable expense items for which TSYS is reimbursed by clients are postage and network association fees. The Company’s reimbursable items are impacted with changes in postal rates and changes in the volumes of mailing activities by its clients. Reimbursable items for the year ended December 31, 2016 were $259.5 million, a decrease of $20.6 million or 7.4%, compared to $280.2 million for the same period last year. Reimbursable items for the year ended December 31, 2015 increased $26.3 million, or 10.4%, compared to $253.9 million for the same period in 2014. Interchange and assessment expenses related to the TransFirst business were $868.7 million for the year ended December 31, 2016.

 

TSYS' revenues in its North America Services and International Services segments are influenced by several factors, including volumes related to accounts on file (AOF) and transactions. TSYS estimates that approximately 49.4% of these segments’ net revenue is AOF and transaction volume driven. The remaining 50.6% of net revenue is not AOF and transaction volume driven, and is derived from production and optional services TSYS considers to be value added products and services, custom programming and licensing arrangements.

 

TSYS’ revenues in its Merchant Services segment are influenced by several factors, including volumes related to transactions, dollar sales volume, value added services, monthly statement fees, compliance fees and miscellaneous services.

 

TSYS’ revenues in its Netspend segment primarily consist of a portion of the service fees and interchange revenues received by Netspend’s prepaid card Issuing Banks in connection with the programs managed by Netspend.

 

A summary of the consolidated financial highlights is provided below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31, 

 

Percent Change

 

(in thousands, except per share data)

 

    

2016

    

2015

    

2014

    

2016 vs. 2015

    

2015 vs. 2014

    

Total revenues

 

 

$

4,170,077

 

2,779,541

 

2,446,877

 

50.0

%

13.6

%

Net revenue1

 

 

$

3,041,876

 

2,499,349

 

2,192,978

 

21.7

 

14.0

 

Operating income

 

 

$

573,382

 

534,107

 

431,640

 

7.4

 

23.7

 

Net income attributable to TSYS common shareholders

 

 

$

319,638

 

364,044

 

322,872

 

(12.2)

 

12.8

 

Basic earnings per share (EPS) attributable to TSYS common shareholders2

 

 

$

1.74

 

1.98

 

1.73

 

(12.0)

 

14.1

 

Diluted EPS attributable to TSYS common shareholders2

 

 

$

1.73

 

1.97

 

1.72

 

(11.8)

 

14.2

 

Adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA)3

 

 

$

1,040,551

 

833,920

 

712,267

 

24.8

 

17.1

 

Adjusted EPS4 from continuing operations

 

 

$

2.81

 

2.46

 

1.96

 

14.5

 

25.5

 

Cash flows from operating activities

 

 

$

717,909

 

600,194

 

560,201

 

19.6

 

7.1

 

Free cash flow5

 

 

$

575,336

 

396,879

 

324,278

 

45.0

 

22.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refer to the reconciliation of GAAP to non-GAAP measures later in this section.

1

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

2

Basic and diluted EPS is computed based on the two-class method in accordance with the guidance under GAAP. Refer to Note 25 in the Consolidated Financial Statements for more information on EPS.

3

Adjusted EBITDA is net income excluding equity in income of equity investments, nonoperating income/(expense), income taxes, depreciation, amortization and share-based compensation expenses and other items.

4

Adjusted EPS is adjusted earnings divided by weighted average shares outstanding used for basic EPS calculations. Adjusted earnings is net income excluding the after-tax impact of share-based compensation expenses, amortization of acquisition intangibles and other items.

5

Free cash flow is net cash provided by operating activities less capital expenditures.

Total revenues increased $1.4 billion for the year ended December 31, 2016, compared to the year ended December 31, 2015, which increased $332.7 million compared to the year ended December 31, 2014. The increase in total revenues for the year ended December 31, 2016, as compared to 2015 is primarily the result of the acquisition of TransFirst in April 2016.  The impact of the acquisition on total revenues was $1.2 billion. The increases in revenues for 2016 and 2015 include decreases of $42.5 million and $31.5 million, respectively, related to the effects of currency translation of the Company's foreign-based subsidiaries and branches.

 

Net revenue increased 21.7%, or $542.5 million, for the year ended December 31, 2016, compared to the year ended December 31, 2015, which increased 14.0%, or $306.4 million, compared to the year ended December 31, 2014. The

19


 

increase in net revenue for the year ended December 31, 2016, as compared to the same period in 2015, is primarily the result of the acquisition of TransFirst in April 2016, partially offset by decreases associated with currency translation. The impact of the TransFirst acquisition on net revenue was $380.7 million for the year ended December 31, 2016. The increase in net revenue for the year ended December 31, 2015, as compared to the same period in 2014 is primarily the result of increases in new business and organic growth, partially offset by decreases associated with currency translation.

 

Major Customer

 

The Company works to maintain a large and diverse customer base across various industries. Although the Company does not have a major customer on a consolidated basis, a significant amount of the Company's revenues are derived from long-term contracts with large clients. TSYS derives revenues from providing various processing and other services to these clients, including processing of consumer and commercial accounts, as well as revenues for reimbursable items. The loss of one of the Company's large clients could have a material adverse effect on the Company's financial position, results of operations and cash flows.

 

Operating Segments

 

TSYS' services are provided through four operating segments: North America Services, International Services, Merchant Services and Netspend.

 

Issuing Services - North America Services and International Services

 

The Company’s North America Services and International Services segments have many long-term customer contracts with card issuers pursuant to which both segments provide account processing and output services for printing and embossing items. These contracts generally require advance notice prior to the end of the contract if a client chooses not to renew. Additionally, some contracts may permit early termination upon the occurrence of certain events such as a change in control. The termination fees paid upon the occurrence of such events are designed primarily to cover balance sheet exposure related to items such as capitalized conversion costs or client incentives associated with the contract and, in some cases, may cover a portion of lost future revenue and profit. Although these contracts may be terminated upon certain occurrences, the contracts provide each segment with a steady revenue stream since a vast majority of the contracts are honored through the contracted expiration date.

 

These services are provided throughout the period of each account's use, starting from a card-issuing client processing an application for a card. Services may include processing the card application, initiating service for the cardholder, processing each card transaction for the issuing retailer or financial institution and accumulating the account's transactions. Fraud management services monitor the unauthorized use of accounts which have been reported to be lost, stolen, or which exceed credit limits. Fraud detection systems help identify fraudulent transactions by monitoring each account holder's purchasing patterns and flagging unusual purchases. Other services provided include customized communications to cardholders, information verification associated with granting credit, debt collection and customer service

 

Issuing Services revenues are generated from charges based on the number of accounts on file (AOF), transactions and authorizations processed, statements mailed, cards embossed and mailed, 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. Collectively, these services are considered volume-based revenues.

 

Whether or not an account on file is active can impact TSYS' revenues differently. Active accounts are accounts that have had monetary activity either during the current month or in the past 90 days based on contractual definition. Inactive accounts are accounts that have not had a monetary transaction (such as a purchase or payment) in the past 90 days. The more active an account is, the more revenue is generated for TSYS (items such as transactions and authorizations processed and statements billed).

 

Occasionally, a client will purge inactive accounts from its portfolio. An inactive account typically will only generate an AOF charge. A processing client will periodically review its cardholder portfolio based upon activity and usage. Each client, based upon criteria individually set by the client, will flag an account to be "purged" from TSYS' system and deactivated.

 

A deconversion involves a client migrating all of its accounts to an in-house solution or another processor. Account deconversions include active and inactive accounts and can impact the Company's revenues significantly more than an account purge.

 

20

 


 

A sale of a portfolio typically involves a client selling a portion of its accounts to another party. A sale of a portfolio and a deconversion impact the Company's financial statements in a similar fashion, although a sale usually has a smaller financial impact due to the number of accounts typically involved.

 

Below is a summary of AOF for the Company’s Issuing Services segments combined:

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

 

As of December 31, 

 

Percent Change

 

AOF

 

    

2016

    

2015

    

2014

    

2016 vs. 2015

    

2015 vs. 2014

 

Consumer

 

 

442.9

 

408.2

 

298.4

 

8.5

%

36.8

%

Commercial

 

 

47.9

 

45.4

 

41.6

 

5.4

 

9.2

 

Other

 

 

31.0

 

26.6

 

22.4

 

16.8

 

18.8

 

Traditional AOF1

 

 

521.8

 

480.2

 

362.4

 

8.7

 

32.5

 

Prepaid/Stored Value2

 

 

57.8

 

97.2

 

127.3

 

(40.5)

 

(23.7)

 

Government Services3

 

 

88.7

 

79.3

 

67.4

 

11.7

 

17.8

 

Commercial Card Single-Use4

 

 

83.2

 

75.8

 

59.6

 

9.8

 

27.1

 

Total AOF

 

 

751.5

 

732.5

 

616.7

 

2.6

 

18.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

Traditional accounts include consumer, retail, commercial, debit and other accounts. These accounts are grouped together due to the tendency to have more transactional activity than prepaid, government services and single-use accounts.

2

Prepaid does not include Netspend accounts. These accounts tend to have less transactional activity than the traditional accounts. Prepaid and stored value cards are issued by firms through retail establishments to be purchased by consumers to be used at a later date. These accounts tend to be the least active of all accounts on file.

3

Government services accounts are disbursements of student loan accounts issued by the Department of Education, which have minimal activity.

4

Commercial card single-use accounts are one-time use accounts issued by firms to book lodging and other travel related expenses.

 

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, certain clients license the Company’s processing systems and process in-house. Since these accounts are processed outside of TSYS, for licensing arrangements the AOF and other volumes are not available to TSYS. Thus, volumes reported by TSYS do not include volumes associated with licensing.

 

Output and managed services include offerings such as card production, statement production, correspondence and call center support services.    

 

A summary of each segment's results follows:

 

North America Services

 

The North America Services segment provides payment processing and related services to clients based primarily in North America. Growth in revenues and operating profit in this segment is derived from retaining and growing the core business and improving the overall cost structure. Growing the core business comes primarily from an increase in account usage, growth from existing clients and sales to new clients and the related account conversions. This segment had three major customers for the year ended December 31, 2016.

 

21


 

Below is a summary of the North America Services segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31, 

 

Percent Change

 

(in thousands)

 

    

2016

    

2015

    

2014

    

2016 vs. 2015

    

2015 vs. 2014

 

Volume-based revenues

 

 

$

630,900

 

595,314

 

480,386

 

6.0

%

23.9

%

Non-volume related revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Processing fees

 

 

$

236,641

 

235,313

 

216,685

 

0.6

 

8.6

 

Value-added, custom programming, licensing and other

 

 

 

159,084

 

151,671

 

115,741

 

4.9

 

31.0

 

Output and managed services

 

 

 

179,388

 

164,956

 

141,270

 

8.7

 

16.8

 

Total non-volume related revenues

 

 

$

575,113

 

551,940

 

473,696

 

4.2

 

16.5

 

Net revenue

 

 

$

1,206,013

 

1,147,254

 

954,082

 

5.1

 

20.2

 

Total revenues

 

 

$

1,387,416

 

1,334,258

 

1,117,764

 

4.0

 

19.4

 

Adjusted segment operating income1

 

 

$

468,251

 

429,064

 

351,512

 

9.1

 

22.1

 

Adjusted segment operating margin2

 

 

 

38.8

%  

37.4

%  

36.8

%  

 

 

 

 

Key indicators (in millions):  

 

 

 

 

 

 

 

 

 

 

 

 

 

AOF

 

 

 

662.8

 

654.1

 

550.0

 

1.3

 

18.9

 

Transactions

 

 

 

17,140.3

 

15,774.5

 

10,838.0

 

8.7

 

45.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

Adjusted segment operating income excludes acquisition intangible amortization and expenses associated with Corporate Administration and Other.

2

Adjusted segment operating margin equals adjusted segment operating income divided by net revenue.

 

For the year ended December 31, 2016, approximately 52.3% of TSYS’ North America Services segment net revenue was driven by the volume of accounts on file and transactions processed and approximately 47.7% was derived from non-volume based revenues.

 

Total segment revenues increased $53.2 million for 2016, as compared to 2015. The increase was attributable to an increase in new business and internal growth, partially offset by decreases related to client deconversions and price reductions. Total segment revenues increased $216.5 million for 2015, as compared to 2014. The increase was attributable to an increase in new business, internal growth and reimbursable items, partially offset by decreases related to client deconversions, price reductions and other adjustments.

 

During the first quarter of 2015, two of the Company’s largest prepaid processing clients in the North America Services segment informed TSYS that they did not intend to renew their prepaid processing agreements. One of the deconversions was completed in early October 2015. The other is expected to be completed during the first half of 2017. The revenues associated with these clients, in the aggregate, are immaterial to the Company’s total consolidated revenues in 2016, 2015, and 2014.

 

The increases in adjusted segment operating income for 2016 and 2015 were driven primarily by increases in revenues partially offset by increases in total operating expenses including severance costs, technology and other expenses.

 

International Services

 

The International Services segment provides issuer card solutions to financial institutions and other organizations primarily based outside the North American region. Growth in revenues and operating profit in this segment is derived from retaining and growing the core business and improving the overall cost structure. Growing the core business comes primarily from an increase in account usage, growth from existing clients and sales to new clients and the related account conversions. This segment’s financial results are impacted by foreign currency. Movements in foreign currency exchange rates as compared to the U.S. dollar can result in foreign denominated financial statements being translated into more or fewer U.S. dollars, which impacts the comparison to prior periods when the U.S. dollar was stronger or weaker. This segment had two major customers for the year ended December 31, 2016.

22

 


 

Below is a summary of the International Services segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31, 

 

Percent Change

 

(in thousands)

 

    

2016

    

2015

    

2014

    

2016 vs. 2015

    

2015 vs. 2014

 

Volume-based revenues

 

 

$

118,311

 

119,974

 

131,322

 

(1.4)

%  

(8.6)

%

Non-volume related revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Processing fees

 

 

$

59,379

 

62,998

 

69,346

 

(5.7)

 

(9.2)

 

Value-added, custom programming, licensing and other

 

 

 

78,408

 

86,318

 

95,040

 

(9.2)

 

(9.2)

 

Output and managed services

 

 

 

57,533

 

61,869

 

46,077

 

(7.0)

 

34.3

 

Total non-volume related revenues

 

 

$

195,320

 

211,185

 

210,463

 

(7.5)

 

0.3

 

Net revenue

 

 

$

313,631

 

331,159

 

341,785

 

(5.3)

 

(3.1)

 

Total revenues

 

 

$

335,977

 

354,725

 

363,359

 

(5.3)

 

(2.4)

 

Adjusted segment operating income1

 

 

$

56,774

 

60,087

 

55,123

 

(5.5)

 

9.0

 

Adjusted segment operating margin2

 

 

 

18.1

%  

18.1

%  

16.1

%  

 

 

 

 

Key indicators (in millions):  

 

 

 

 

 

 

 

 

 

 

 

 

 

AOF

 

 

 

88.7

 

78.5

 

66.6

 

13.0

 

17.8

 

Transactions

 

 

 

2,717.8

 

2,473.6

 

2,268.4

 

9.9

 

9.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

Adjusted segment operating income excludes acquisition intangible amortization and expenses associated with Corporate Administration and Other.

2

Adjusted segment operating margin equals adjusted segment operating income divided by net revenue.

 

For the year ended December 31, 2016, approximately 37.7% of TSYS’ International Services segment net revenue was driven by the volume of accounts on file and transactions processed and approximately 62.3% was derived from non-volume based revenues.

 

The decreases in total segment revenues for 2016 and 2015 were driven primarily by the negative impacts of $42.5 million and $31.0 million in currency translation. Excluding the impact of currency translation, segment revenues increased $23.8 million, or 6.7% in 2016, as compared to 2015 and $22.3 million, or 6.1% in 2015, as compared to 2014.

 

The decrease in adjusted segment operating income for 2016, as compared to 2015, was driven primarily by currency translation, severance costs and decreases in both volume and non-volume related revenues. The increase in adjusted segment operating income for 2015, as compared to 2014, was driven primarily by an increase in non-volume related revenues due to increased business.

 

Merchant Services

 

The Merchant Services segment provides merchant services and related services to clients based primarily in the United States. Merchant Services revenues are derived from providing processing services, acquiring solutions, related systems and integrated support services to merchant acquirers and merchants. Revenues from merchant services include processing all payment forms including credit, debit, prepaid, electronic benefit transfer and electronic check for merchants of all sizes across a wide array of market verticals. Merchant services include authorization and capture of transactions; clearing and settlement of transactions; information reporting services related to transactions; merchant billing services; and point-of-sale (POS) equipment sales and service. This segment had no major customers for the year ended December 31, 2016.

 

Below is a summary of the Merchant Services segment: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31, 

 

Percent Change

 

(in thousands)

 

    

2016

    

2015

    

2014

    

2016 vs. 2015

    

2015 vs. 2014

 

Net revenue

 

 

$

898,533

 

474,040

 

435,649

 

89.5

%  

8.8

%

Total revenues

 

 

$

1,828,828

 

549,369

 

510,120

 

nm

 

7.7

 

Adjusted segment operating income1

 

 

$

307,595

 

150,225

 

134,872

 

nm

 

11.4

 

Adjusted segment operating margin2

 

 

 

34.2

%  

31.7

%  

31.0

%  

 

 

 

 

Key indicators (in millions):  

 

 

 

 

 

 

 

 

 

 

 

 

 

POS transactions

 

 

 

4,548.1

 

4,266.5

 

4,052.7

 

6.6

 

5.3

 

Dollar sales volume

 

 

$

97,735.1

 

48,072.7

 

46,846.4

 

nm

 

2.6

 

Includes TransFirst's results for nine months in 2016. TransFirst's results are not included in 2015 and 2014.
nm = not meaningful

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

Adjusted segment operating income excludes acquisition intangible amortization and expenses associated with Corporate Administration and Other.

2

Adjusted segment operating margin equals adjusted segment operating income divided by net revenue.

 

23


 

With the acquisition of TransFirst in April 2016, TSYS included nine months of TransFirst’s results as part of the Merchant Services segment.  TransFirst’s revenues are 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 assessment fees are included in TransFirst’s cost of services and are directly attributable to processing fee revenues.  Merchant Segment net revenue is defined as total revenues less merchant acquiring interchange and assessment fees charged by the card associations or payment networks that are recorded by TSYS as an expense.

 

The Merchant Services segment results are driven by dollar sales volume and the authorization and capture transactions processed at the point-of-sale and clearing and settlement transactions. This segment's authorization and capture transactions are primarily through dial-up or Internet connectivity.

 

For the year ended December 31, 2016, approximately 94.0% of TSYS’ Merchant Services segment net revenue was influenced by several factors, including volumes related to transactions and dollar sales volume. The remaining 6.0% of this segment’s net revenue was derived from value added services, chargebacks, managed services, investigation, risk and collection services performed.

 

Total segment revenues increased $1.3 billion for 2016, as compared to 2015. This increase was primarily due to the inclusion of TransFirst revenues, which were $1.2 billion, as well as increases associated with new business, internal growth and reimbursable items offset by decreases associated with lost business, deconversions and price reductions. Total segment revenues increased $39.2 million for 2015, as compared to 2014. This increase includes increases associated with new business, internal growth and reimbursable items offset by decreases associated with lost business, deconversions and price reductions.

 

The increase in adjusted segment operating income for 2016, as compared to 2015, was driven primarily by the acquisition of TransFirst in April 2016, partially offset by severance costs. The increase in adjusted segment operating income for 2015, as compared to 2014, was driven by an increase in revenues partially offset by increases in associated costs.

 

Netspend

 

Netspend provides GPR prepaid debit cards, payroll cards, and alternative financial service solutions to underbanked and other consumers and businesses in the United States.  Netspend’s products provide customers with access to depository accounts insured by the FDIC with a menu of pricing and features specifically tailored to their needs.  This segment has an extensive distribution and reload network comprising financial service centers and other retail locations throughout the United States, and is a program manager for FDIC-insured depository institutions that issue the card products that Netspend develops, promotes and distributes. Netspend currently has active agreements with six Issuing Banks.

 

The Netspend segment markets prepaid cards through multiple distribution channels, including alternative financial service providers, traditional retailers, direct-to-consumer and online marketing programs and contractual relationships with corporate employers. This segment had no major customers and one major third-party distributor for the year ended December 31, 2016.

 

The Netspend segment’s revenues primarily consist of a portion of the service fees and interchange revenues received by Netspend’s prepaid card Issuing Banks in connection with the programs managed by this segment. Cardholders are charged fees for transactions including fees for PIN and signature-based purchase transactions made using their prepaid cards, for ATM withdrawals or other transactions conducted at ATMs, for balance inquiries, and monthly maintenance fees among others. Cardholders are also charged fees associated with additional products and services offered in connection with certain cards including the use of overdraft features, bill payment options, custom card designs and card-to-card transfers of funds initiated through call centers. The Netspend segment also earns revenues from a portion of the interchange fees remitted by merchants when cardholders make purchase transactions using their cards. Subject to applicable law, interchange fees are fixed by card associations and network organizations.   

 

24

 


 

Below is a summary of the Netspend segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31, 

 

Percent Change

 

(in thousands)

 

    

2016

    

2015

    

2014

    

2016 vs. 2015

    

2015 vs. 2014

 

Total revenues (and net revenue)

 

 

$

663,579

 

580,377

 

482,686

 

14.3

%  

20.2

%

Adjusted segment operating income1

 

 

$

160,371

 

137,837

 

128,285

 

16.3

 

7.4

 

Adjusted segment operating margin2

 

 

 

24.2

%  

23.8

%  

26.6

%  

 

 

 

 

Key indicators (in millions):  

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of active cards3

 

 

 

4.3

 

3.9

 

3.2

 

10.3

 

29.1

 

Number of active cards with direct deposit4

 

 

 

2.1

 

1.9

 

1.6

 

12.7

 

17.7

 

Percentage of active cards with direct deposit

 

 

 

49.7

%  

48.7

%  

50.1

%  

 

 

 

 

Gross dollar volume5

 

 

$

28,722.3

 

24,274.9

 

20,296.0

 

18.3

%  

19.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

Adjusted segment operating income excludes acquisition intangible amortization and expenses associated with Corporate Administration and Other.

2

Adjusted segment operating margin equals adjusted segment operating income divided by net revenue

3

Number of active cards represents the total number of prepaid cards that have had a PIN or signature-based purchase transaction, a point-of-sale load transaction or an ATM withdrawal within three months of the date of determination.

4

Number of active cards with direct deposit represents the number of active cards that have had a direct deposit load within three months of the date of determination.

5

Gross dollar volume represents the total dollar volume of debit transactions and cash withdrawals made using prepaid cards.

 

Netspend segment revenues increased $83.2 million for 2016 from 2015. This increase was comprised of a $66.6 million increase in service fee revenues and a $16.6 million increase in interchange and other revenues. Netspend segment revenues increased $97.7 million for 2015, as compared to 2014. This increase was comprised of a $64.3 million increase in service fee revenues and a $33.4 million increase in interchange and other revenues.

 

For the year ended December 31, 2016, 70.9% of revenues were derived from service fees charged to cardholders and 29.1% of revenues were derived from interchange and other revenues. Service fee revenues are driven by the number of active cards and in particular by the number of cards with direct deposit. Cardholders with direct deposit generally initiate more transactions and generate more revenues than those that do not take advantage of this feature. Interchange revenues are driven by gross dollar volume. Substantially all of the Netspend segment revenues were volume driven as they were driven by the active card and gross dollar volume indicators.

 

If the CFPB’s new rule pertaining to prepaid financial products, which is scheduled to become effective October 1, 2017, had been effective for 2016, the Company currently estimates that 2016 total revenues would have been negatively impacted by approximately $80.0 million to $85.0 million, with an estimated negative impact to EPS of $0.19 to $0.21, including compliance costs. The impacted revenue consists of overdraft revenue which was approximately 10% to 12% of Netspend’s revenue and certain other fees that are prohibited by the rule. The Company currently expects 2017 total revenues to be negatively impacted by approximately $20.0 million to $25.0 million, with an estimated negative impact to EPS of $0.06 to $0.08, which has been factored in to the Company’s guidance for 2017, and currently expects 2018 total revenues to be negatively impacted by an additional $20.0 million to $25.0 million, with an estimated negative impact to EPS of $0.05 to $0.07.

 

The estimated earnings and revenue impact of the new rule set forth above for 2017 and 2018 is based in part on the Company’s current, but not yet complete, analysis of the rule and analysis of the CFPB’s underlying intent. By 2018, the Company expects to offset approximately one-half of the total negative revenue impact of the rule and approximately one-third of the total negative EPS impact of the rule through its business expansion strategies.

 

The Company will continue to review and interpret the new rule and analyze its expected impact on Netspend’s business. The estimated revenue and earnings impact set forth above only includes the projected impact of the rule on the Company’s financial performance and does not include the impact of other matters that may impact the performance of Netspend’s business in 2017 and 2018 and is subject to risks and uncertainties such as the costs of compliance associated with the rule and the success of Netspend’s business expansion strategies which success will depend on, among other things, the rate of adoption of Netspend’s new products both by consumers and its distribution partners, the rate of utilization of the various product features by cardholders and market and regulatory dynamics. The estimated impact of the rule on both the Company’s 2017 and 2018 financial performance could vary either positively or negatively based on these and other factors. Furthermore, the estimated impact of the rule on both the Company’s 2017 and 2018 financial performance may be adjusted either upward or downward after the Company completes its analysis of the rule and as Netspend’s business expansion planning progresses.

 

25


 

Operating Expenses

 

The Company’s operating expenses were $3.6 billion, $2.2 billion and $2.0 billion in 2016, 2015 and 2014, respectively. Operating expenses consist of cost of services and selling, general and administrative expenses. Cost of services describes the direct expenses incurred in performing a particular service for customers, including the cost of direct labor expense in putting the service in saleable condition. Selling, general and administrative expenses are incurred in selling or marketing and for the direction of the enterprise as a whole, including accounting, legal fees, sales, investor relations and mergers and acquisitions.

 

The changes in operating expenses for the years ended December 31, 2016 and 2015 include decreases of $26.0 million and $30.4 million, respectively, related to the effects of currency translation of the Company's foreign-based subsidiaries. Operating expenses for the year ended December 31, 2016 were also impacted by the TransFirst acquisition. Operating expenses increased $1.3 billion due to the acquisition of TransFirst in 2016. Operating expenses in 2016 were also impacted by $21.7 million of litigation settlement, settlement discussions and related legal expenses.

 

The Company’s cost of services were $3.0 billion, $1.9 billion and $1.7 billion in 2016, 2015 and 2014, respectively. The increases in cost of services are due to increases in employment, severance, technology and facilities and other costs to support revenue growth and the acquisition of TransFirst. The Company’s selling, general and administrative expenses were $603.6 million, $390.3 million and $346.3 million in 2016, 2015 and 2014, respectively. The increases in selling, general and administrative costs were due primarily to the acquisition of TransFirst in April 2016 and litigation settlement and settlement discussions. Expenses in 2015 were also impacted by certain one-time state tax benefits of $15.6 million that resulted from prior years but were recognized in 2015. Expenses in 2014 were also impacted by a significant nonrecurring charitable contribution.

 

The Company’s transaction and integration expenses related to the acquisition of TransFirst in 2016 were $32.3 million for the year ended December 31, 2016. These expenses consist of costs related to the completion of the acquisition such as legal, accounting and professional fees, as well as, personnel costs for severance and retention.

 

Operating Income

 

Operating income increased 7.4% for the year ended December 31, 2016, compared to 2015. The Company’s operating profit margin for year ended December 31, 2016 was 13.6%, compared to 19.2% last year. TSYS’ operating margins decreased for the year ended December 31, 2016, as compared 2015, due primarily to the increase in acquisition and integration expenses, severance and the operating results and lower operating margin of TransFirst.

 

Nonoperating Income (Expense)

 

Nonoperating income (expense) consists of interest income, interest expense, gains and losses on currency transactions and gains and losses on investments in private equity. Nonoperating expense increased in 2016 as compared to 2015, and decreased in 2015 as compared to 2014.

 

The following table provides a summary of nonoperating expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31, 

 

Percent Change

 

(in thousands)

 

    

2016

    

2015

    

2014

    

2016 vs. 2015

 

2015 vs. 2014

 

Interest expense1

 

 

$

(115,363)

 

 

(40,701)

 

 

(40,975)

 

nm

%  

(0.7)

%

Interest income

 

 

 

1,840

 

 

1,450

 

 

1,109

 

26.9

 

30.8

 

Currency transaction gains (losses),net

 

 

 

1,748

 

 

(388)

 

 

142

 

nm

 

nm

 

Net gains (losses) on investments in private equity

 

 

 

182

 

 

3,324

 

 

308

 

nm

 

nm

 

Other

 

 

 

(575)

 

 

(904)

 

 

705

 

(36.4)

 

nm

 

Total

 

 

$

(112,168)

 

 

(37,219)

 

 

(38,711)

 

nm

 

(3.9)

 

nm = not meaningful

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

Interest expense includes interest on bonds of $84.6 million, $33.7 million, and $33.7 million, respectively, for the years ended December 31, 2016, 2015 and 2014.

 

Interest expense for the year ended December 31, 2016 increased $74.6 million compared to 2015. The increase in interest expense in 2016 compared to 2015 is due to the debt financing of the acquisition of TransFirst in April 2016. Refer to Notes 12 and 23 in the Consolidated Financial Statements for more information on long-term borrowings and acquisitions.

 

26

 


 

Income Taxes

 

Below is a summary of income tax expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31, 

 

Percent Change

 

(in thousands)

 

    

2016

    

2015

    

2014

    

2016 vs. 2015

 

2015 vs. 2014

 

Income tax expense

 

 

$

161,175

 

151,364

 

129,761

 

6.5

%  

16.6

%

Effective income tax rate

 

 

 

34.9

%  

30.5

%  

33.0

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

During 2016, the Company generated income tax credits in excess of its utilization capacity based on both the Company's current operations and with consideration of future tax planning strategies. Based upon these same considerations, the Company reassessed its need for valuation allowances in all jurisdictions. Accordingly, the Company experienced a net increase in its valuation allowance for deferred income tax assets of $2.9 million.

 

In 2016, TSYS reassessed its uncertain tax positions for all jurisdictions.  As a result, the Company increased unrecognized tax benefits by $3.4 million.

 

Refer to Note 14 in the Consolidated Financial Statements for more information on income taxes.

 

Equity in Income of Equity Investments

 

Below is a summary of TSYS' share of income from its interest in equity investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31, 

 

Percent Change

 

(in thousands)

    

2016

    

2015

    

2014

    

2016 vs. 2015

 

2015 vs. 2014

 

Equity in income of equity investments

 

$

25,933

 

22,106

 

17,583

 

17.3

%  

25.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The increases in equity income in 2016 and 2015 is the result of organic growth in China Union Pay Data Co., Ltd (CUP Data). Refer to Note 11 in the Consolidated Financial Statements for more information on equity investments.

 

Discontinued Operations

 

TSYS sold its Japan-based operations during 2014 and recorded income from discontinued operations, net of tax, of $1.4 million and $48.7 million for 2015 and 2014, respectively. Refer to Note 2 in the Consolidated Financial Statements for more information on discontinued operations.

 

Net Income

 

The following table provides a summary of net income and EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31, 

 

Percent Change

 

(in thousands, except per share data)

 

    

2016

    

2015

    

2014

    

2016 vs. 2015

 

2015 vs. 2014

 

Net income

 

 

$

325,972

 

369,041

 

329,406

 

(11.7)

%  

12.0

%

Net income attributable to noncontrolling interests

 

 

 

(6,334)

 

(4,997)

 

(6,534)

 

26.8

 

(23.5)

 

Net income attributable to TSYS common shareholders

 

 

$

319,638

 

364,044

 

322,872

 

(12.2)

 

12.8

 

Basic EPS attributable to TSYS common shareholders1

 

 

$

1.74

 

1.98

 

1.73

 

(12.0)

 

14.1

 

Diluted EPS attributable to TSYS common shareholders1

 

 

$

1.73

 

1.97

 

1.72

 

(11.8)

 

14.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

Basic and diluted EPS is computed based on the two-class method in accordance with the guidance under GAAP. Refer to Note 25 in the Consolidated Financial Statements for more information on EPS.

 

Net income attributable to noncontrolling interests in 2016 increased by $1.3 million from 2015 and decreased $1.5 million in 2015 from 2014. The increase in 2016 compared to 2015 is driven by the increased operating results of Central Payment Co., LLC (CPAY). The decrease in 2015 compared to 2014 is driven by the sale of GP Network Corporation (GP Net) in 2014 and the decline in operating results of the Company’s European cost center business in 2015.

 

27


 

Non-GAAP Financial Measures

 

Management evaluates the Company's operating performance based upon operating margin on a net revenue basis, adjusted EBITDA, segment operating margin and consolidated adjusted operating margin, adjusted EPS and free cash flow which are all non-generally accepted accounting principles (non-GAAP) measures. TSYS also uses these non-GAAP financial measures to evaluate and assess TSYS' financial performance against budget.

 

Although non-GAAP financial measures are often used to measure TSYS’ operating results and assess its financial performance, they are not necessarily comparable to similarly titled measures of other companies due to potential inconsistencies in the method of calculation.

 

TSYS believes that its provision of non-GAAP financial measures provides investors with important key financial performance indicators that are utilized by management to assess TSYS’ operating results, evaluate the business and make operational decisions on a prospective, going-forward basis. Hence, management provides disclosure of non-GAAP financial measures to give shareholders and potential investors an opportunity to see TSYS as viewed by management, to assess TSYS with some of the same tools that management utilizes internally and to be able to compare such information with prior periods. TSYS believes that inclusion of non-GAAP financial measures provides investors with additional information to help them better understand its financial statements just as management utilizes these non-GAAP financial measures to understand the business, manage budgets and allocate resources.

 

The following tables provide a reconciliation of GAAP to non-GAAP financial measures:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue before Reimbursable Items, Net Revenue and Operating Margin on a Net Revenue Basis

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31, 

 

(in thousands)

 

2016

 

2015

 

2014

 

Operating income (a) (GAAP)

 

$

573,382

 

534,107

 

431,640

 

Total revenues (b)

 

$

4,170,077

 

2,779,541

 

2,446,877

 

Less: Reimbursable items

 

 

259,543

 

280,192

 

253,899

 

Revenue before reimbursable items

 

 

3,910,534

 

2,499,349

 

2,192,978

 

Less: Interchange and assessment expenses

 

 

868,658

 

 -

 

 -

 

Net revenue (c) (non-GAAP)

 

$

3,041,876

 

2,499,349

 

2,192,978

 

Operating margin (as reported) (a)/(b)

 

 

13.75

%  

19.22

%  

17.64

%

Operating margin on a net revenue basis (a)/(c) (non-GAAP)

 

 

18.85

%  

21.37

%  

19.68

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31, 

 

(in thousands)

 

2016

 

2015

 

2014

 

Net income (GAAP)

 

$

325,972

 

 

369,041

 

 

329,406

 

Adjust for:

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

 

 -

 

 

(1,411)

 

 

(48,655)

 

Deduct: Equity in income of equity investments

 

 

(25,933)

 

 

(22,106)

 

 

(17,583)

 

Add: Income taxes

 

 

161,175

 

 

151,364

 

 

129,761

 

Add: Nonoperating expense

 

 

112,168

 

 

37,219

 

 

38,711

 

Add: Depreciation and amortization

 

 

373,546

 

 

258,264

 

 

246,620

 

EBITDA

 

 

946,928

 

 

792,371

 

 

678,260

 

Adjust for:

 

 

 

 

 

 

 

 

 

 

Add: Share-based compensation

 

 

43,728

 

 

41,549

 

 

30,790

 

Add: TransFirst and Netspend M&A and integration expenses1

 

 

28,176

 

 

 -

 

 

3,217

 

Add: Litigation, claims, judgments or settlements2

 

 

21,719

 

 

 -

 

 

 -

 

Adjusted EBITDA (non-GAAP)

 

$

1,040,551

 

 

833,920

 

 

712,267

 

 

 

 

 

 

 

 

 

 

 

 

1

Costs associated with the TransFirst and Netspend acquisitions which are included in selling, general and administrative expenses.

2

Litigation settlement or settlement discussions and related legal expenses

 

28

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Operating Margin and Adjusted Segment Operating Income

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31, 

 

(in thousands)

 

 

2016

 

2015

 

2014

 

Operating income (GAAP) (a)

 

$

573,382

 

534,107

 

431,640

 

Share-based compensation

 

 

43,728

 

41,549

 

30,790

 

TransFirst and Netspend M&A and integration expenses1

 

 

28,176

 

 -

 

3,217

 

Litigation, claims, judgments or settlements

 

 

21,719

 

 -

 

 -

 

Acquisition intangible amortization

 

 

189,990

 

92,521

 

96,970

 

Adjusted operating income (non-GAAP)(b)

 

$

856,995

 

668,177

 

562,617

 

 

 

 

 

 

 

 

 

 

Adjusted operating income by segment (non-GAAP):

 

 

 

 

 

 

 

 

North America Services (c)

 

$