10-Q 1 tss-20180630x10q.htm 10-Q tss_Current_Folio_10Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended June 30, 2018

 

 

OR

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the transition period from                     To                    

 

Commission file number: 1-10254

 

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Total System Services, Inc.

www.tsys.com

(Exact name of registrant as specified in its charter)

 

Georgia

58-1493818

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

One TSYS Way, Post Office Box 1755, Columbus, Georgia 31902

(Address of principal executive offices) (Zip Code)

 

(706) 644-6081

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☑ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

Large accelerated filer

Accelerated filer

Non-accelerated filer ☐ (Do not check if a smaller reporting company)

 

Smaller reporting company

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.☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☑

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

CLASS

OUTSTANDING AS OF: July 31, 2018

Common Stock, $0.10 par value

182,418,038 shares

 

 

 

 


 

Picture 1

 

TOTAL SYSTEM SERVICES, INC.

Table of Contents

 

 

Page
Number

PART I. FINANCIAL INFORMATION 

 

Item 1. Financial Statements 

 

Consolidated Balance Sheets (unaudited) — June 30, 2018 and December 31, 2017 

3

Consolidated Statements of Income (unaudited) — Three and six months ended June 30, 2018 and 2017 

4

Consolidated Statements of Comprehensive Income (unaudited) — Three and six months ended June 30, 2018 and 2017 

5

Consolidated Statements of Cash Flows (unaudited) — Six months ended June 30, 2018 and 2017 

6

Consolidated Statements of Changes in Equity (unaudited) — Six months ended June 30, 2018          

7

Notes to Unaudited Consolidated Financial Statements 

8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 

36

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

55

Item 4. Controls and Procedures 

56

PART II. OTHER INFORMATION 

 

Item 1. Legal Proceedings 

56

Item 1A. Risk Factors 

56

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

57

Item 6. Exhibits 

57

SIGNATURES 

58

 

 

 


 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

TOTAL SYSTEM SERVICES, INC.

Consolidated Balance Sheets

(Unaudited)

 

 

 

 

 

 

(in thousands, except per share data)

    

June 30, 2018

    

December 31, 2017

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents (Note 4)

 

$

460,019

 

450,357

Accounts receivable, net of allowances for doubtful accounts and billing adjustments of $5.4 million and $5.9 million as of 2018 and 2017, respectively

 

 

440,875

 

412,322

Contract assets (Note 2)

 

 

34,083

 

 -

Prepaid expenses and other current assets (Note 4)

 

 

202,045

 

216,565

Total current assets

 

 

1,137,022

 

1,079,244

Contract assets (Note 2)

 

 

54,018

 

 -

Goodwill (Note 3)

 

 

4,088,579

 

3,264,071

Other intangible assets, net of accumulated amortization of $708.5 million and $600.9 million as of 2018 and 2017, respectively

 

 

904,281

 

727,146

Intangible assets - computer software, net of accumulated amortization of $881.9 million and  $849.3 million as of 2018 and 2017, respectively

 

 

452,818

 

383,715

Property and equipment, net of accumulated depreciation and amortization of $521.7 million and  $521.1 million as of 2018 and 2017, respectively

 

 

363,336

 

325,218

Contract cost assets, net of accumulated amortization (Notes 2 and 4)

 

 

147,512

 

258,665

Equity investments, net

 

 

187,818

 

163,518

Deferred income tax assets

 

 

7,177

 

6,091

Other assets

 

 

123,929

 

124,021

Total assets

 

$

7,466,490

 

6,331,689

Liabilities

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term borrowings (Note 5)

 

$

12,854

 

559,050

Accounts payable

 

 

63,282

 

62,310

Contract liabilities (Note 2)

 

 

54,701

 

52,913

Accrued salaries and employee benefits

 

 

47,404

 

82,135

Current portion of obligations under capital leases and license agreements (Note 5)

 

 

8,495

 

6,762

Other current liabilities (Note 4)

 

 

258,837

 

225,922

Total current liabilities

 

 

445,573

 

989,092

Long-term borrowings, excluding current portion (Note 5)

 

 

4,014,919

 

2,591,949

Deferred income tax liabilities

 

 

371,343

 

238,317

Contract liabilities (Note 2)

 

 

19,111

 

48,526

Obligations under capital leases and license agreements, excluding current portion (Note 5)

 

 

38,268

 

36,053

Other long-term liabilities

 

 

75,580

 

71,070

Total liabilities

 

 

4,964,794

 

3,975,007

Redeemable noncontrolling interest in consolidated subsidiary

 

 

 -

 

115,689

Commitments and contingencies (Note 10)

 

 

 

 

 

Shareholders' Equity

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common stock- $0.10 par value. Authorized 600,000 shares; 202,765 issued as of 2018 and 2017; 182,396 and 180,903 outstanding as of 2018 and 2017, respectively

 

 

20,277

 

20,277

Additional paid-in capital

 

 

165,137

 

162,806

Accumulated other comprehensive loss, net (Note 4)

 

 

(45,022)

 

(36,148)

Treasury stock, at cost (20,369 and 21,862 shares as of 2018 and 2017, respectively)

 

 

(874,742)

 

(909,960)

Retained earnings

 

 

3,236,046

 

3,004,018

Total shareholders’ equity

 

 

2,501,696

 

2,240,993

Total liabilities and shareholders' equity

 

$

7,466,490

 

6,331,689

 

See accompanying Notes to Unaudited Consolidated Financial Statements

3


 

TOTAL SYSTEM SERVICES, INC.

Consolidated Statements of Income

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three months ended

 

Six months ended

 

 

 

June 30, 

 

June 30, 

 

(in thousands, except per share data)

    

2018

    

2017

    

2018

    

2017

 

Total revenues (Notes 2 and 8)

 

$

1,007,580

 

1,222,375

 

 

1,994,750

 

 

2,407,100

 

Cost of services (Note 2)

 

 

617,818

 

877,887

 

 

1,231,183

 

 

1,739,744

 

Selling, general and administrative expenses

 

 

181,064

 

151,240

 

 

366,598

 

 

306,925

 

Total operating expenses

 

 

798,882

 

1,029,127

 

 

1,597,781

 

 

2,046,669

 

Operating income

 

 

208,698

 

193,248

 

 

396,969

 

 

360,431

 

Nonoperating expenses, net

 

 

(41,170)

 

(30,042)

 

 

(78,812)

 

 

(59,945)

 

Income before income taxes and equity in income of equity investments

 

 

167,528

 

163,206

 

 

318,157

 

 

300,486

 

Income taxes (Note 7)

 

 

37,415

 

56,207

 

 

55,549

 

 

99,289

 

Income before equity in income of equity investments

 

 

130,113

 

106,999

 

 

262,608

 

 

201,197

 

Equity in income of equity investments, net of tax

 

 

12,322

 

9,513

 

 

22,929

 

 

22,422

 

Net income

 

 

142,435

 

116,512

 

 

285,537

 

 

223,619

 

Net income attributable to noncontrolling interests

 

 

 -

 

(1,498)

 

 

(1,261)

 

 

(2,737)

 

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

 

$

142,435

 

115,014

 

 

284,276

 

 

220,882

 

Basic earnings per share (EPS) attributable to TSYS common shareholders (Note 11)

 

$

0.78

 

0.62

 

 

1.56

 

 

1.20

 

Diluted EPS attributable to TSYS common shareholders (Note 11)

 

$

0.78

 

0.62

 

 

1.55

 

 

1.19

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements

4


 

TOTAL SYSTEM SERVICES, INC.

Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30, 

 

June 30, 

 

(in thousands)

 

2018

    

2017

   

2018

    

2017

 

Net income

 

$

142,435

 

116,512

 

 

285,537

 

223,619

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(21,752)

 

7,054

 

 

(9,257)

 

12,566

 

Postretirement healthcare plan adjustments

 

 

(211)

 

123

 

 

(358)

 

247

 

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

 

 

(1,840)

 

66

 

 

741

 

(1,793)

 

Other comprehensive (loss) income

 

 

(23,803)

 

7,243

 

 

(8,874)

 

11,020

 

Comprehensive income

 

 

118,632

 

123,755

 

 

276,663

 

234,639

 

Comprehensive income attributable to noncontrolling interests

 

 

 -

 

(1,499)

 

 

(1,261)

 

(2,738)

 

Comprehensive income attributable to TSYS common shareholders

 

$

118,632

 

122,256

 

 

275,402

 

231,901

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements

5


 

TOTAL SYSTEM SERVICES, INC.

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

Six months ended

 

 

 

June 30, 

 

(in thousands)

    

2018

    

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

285,537

 

223,619

 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

208,679

 

203,537

 

Provisions for cardholder losses

 

 

34,433

 

27,587

 

Share-based compensation

 

 

20,524

 

20,055

 

Provisions for bad debt expenses and billing adjustments

 

 

5,170

 

4,906

 

Charges for transaction processing provisions

 

 

3,177

 

4,053

 

Amortization of debt issuance costs

 

 

2,362

 

2,163

 

Dividends received from equity investments

 

 

892

 

943

 

(Gain) loss on foreign currency

 

 

(107)

 

824

 

Amortization of bond discount

 

 

482

 

449

 

Loss on disposal of equipment, net

 

 

32

 

428

 

Deferred income tax expense (benefit)

 

 

18,657

 

(18,191)

 

Equity in income of equity investments, net of tax

 

 

(22,929)

 

(22,422)

 

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

 

 

 

 

 

 

Accounts receivable

 

 

(17,489)

 

(12,090)

 

Contract assets and contract liabilities

 

 

(8,797)

 

5,224

 

Contract cost assets

 

 

2,989

 

 -

 

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

 

 

5,111

 

845

 

Accounts payable

 

 

(3,368)

 

13,177

 

Accrued salaries and employee benefits

 

 

(38,784)

 

(27,160)

 

Other current liabilities and other long-term liabilities

 

 

(25,978)

 

(26,969)

 

Net cash provided by operating activities

 

 

470,593

 

400,978

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

(48,608)

 

(26,739)

 

Additions to contract acquisition costs

 

 

 -

 

(14,655)

 

Additions to internally developed computer software

 

 

(19,934)

 

(13,581)

 

Additions to licensed computer software from vendors

 

 

(19,216)

 

(10,568)

 

Cash used in acquisitions, net of cash acquired

 

 

(1,051,629)

 

 -

 

Other investing activities

 

 

(4,119)

 

(759)

 

Net cash used in investing activities

 

 

(1,143,506)

 

(66,302)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

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

 

 

(2,626,534)

 

(234,093)

 

Purchase of noncontrolling interest

 

 

(126,000)

 

(70,000)

 

Dividends paid on common stock

 

 

(47,190)

 

(36,734)

 

Subsidiary dividends paid to noncontrolling shareholders

 

 

(3,778)

 

(3,885)

 

Repurchase of common stock under plans and tax withholding

 

 

(82)

 

(24)

 

Debt issuance costs

 

 

(15,979)

 

 -

 

Proceeds from borrowings of long-term debt

 

 

3,477,000

 

 -

 

Proceeds from exercise of stock options

 

 

29,289

 

8,987

 

Net cash provided by (used in) financing activities

 

 

686,726

 

(335,749)

 

 

 

 

 

 

 

 

Cash, cash equivalents and restricted cash:

 

 

 

 

 

 

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

 

 

(4,143)

 

3,494

 

Net increase in cash, cash equivalents and restricted cash

 

 

9,670

 

2,421

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

451,370

 

425,810

 

Cash, cash equivalents and restricted cash at end of period

 

$

461,040

 

428,231

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

Interest paid

 

$

71,778

 

57,405

 

Income taxes paid, net

 

$

21,475

 

121,620

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements

6


 

 

TOTAL SYSTEM SERVICES, INC.

Consolidated Statements of Changes in Equity

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TSYS Shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

Redeemable

 

 

 

 

 

 

Additional

 

Comprehensive

 

 

 

 

 

 

 

 

 

 

Noncontrolling

 

Common Stock

 

Paid-In

 

Income (Loss),

 

Treasury

 

Retained

 

 

 

 

(in thousands, except per share data)

 

Interests

    

Shares

    

Dollars

    

Capital

    

Net of Tax

    

Stock

    

Earnings

    

Total Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2017

 

$

115,689

 

202,765

 

$

20,277

 

162,806

 

(36,148)

 

(909,960)

 

3,004,018

 

$

2,240,993

 

Balance as of January 1, 2018, as previously reported

 

$

115,689

 

202,765

 

$

20,277

 

162,806

 

(36,148)

 

(909,960)

 

3,004,018

 

$

2,240,993

 

Impact of change in accounting policy (Note 2)

 

 

 -

 

 -

 

 

 -

 

 -

 

 -

 

 -

 

(4,445)

 

 

(4,445)

 

Adjusted balance as of January 1, 2018

 

 

115,689

 

202,765

 

 

20,277

 

162,806

 

(36,148)

 

(909,960)

 

2,999,573

 

 

2,236,548

 

Net income

 

 

1,261

 

 -

 

 

 -

 

 -

 

 -

 

 -

 

284,276

 

 

284,276

 

Other comprehensive loss

 

 

 -

 

 -

 

 

 -

 

 -

 

(8,874)

 

 -

 

 -

 

 

(8,874)

 

Common stock issued from treasury shares for exercise of stock options

 

 

 -

 

 -

 

 

 -

 

6,309

 

 -

 

22,975

 

 -

 

 

29,284

 

Common stock unissued due to forfeiture of nonvested awards

 

 

 -

 

 -

 

 

 -

 

629

 

 -

 

(629)

 

 -

 

 

 -

 

Common stock issued from treasury shares for nonvested awards

 

 

 -

 

 -

 

 

 -

 

(12,945)

 

 -

 

12,945

 

 -

 

 

 -

 

Common stock issued from treasury shares for dividend equivalents

 

 

 -

 

 -

 

 

 -

 

925

 

 -

 

 9

 

 -

 

 

934

 

Share-based compensation

 

 

 -

 

 -

 

 

 -

 

20,241

 

 -

 

 -

 

 -

 

 

20,241

 

Cash dividends declared ($0.26 per share)

 

 

 -

 

 -

 

 

 -

 

 -

 

 -

 

 -

 

(47,803)

 

 

(47,803)

 

Purchase of treasury shares

 

 

 -

 

 -

 

 

 -

 

 -

 

 -

 

(82)

 

 -

 

 

(82)

 

Adjustments to redemption value of redeemable noncontrolling interest

 

 

12,828

 

 -

 

 

 -

 

(12,828)

 

 -

 

 -

 

 -

 

 

(12,828)

 

Subsidiary repurchase of noncontrolling interest

 

 

(126,000)

 

 -

 

 

 -

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

Subsidiary dividends paid to noncontrolling interest

 

 

(3,778)

 

 -

 

 

 -

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

Balance as of June 30, 2018

 

$

 -

 

202,765

 

$

20,277

 

165,137

 

(45,022)

 

(874,742)

 

3,236,046

 

$

2,501,696

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements

7


 

 

 

TOTAL SYSTEM SERVICES, INC.

Notes to Unaudited Consolidated Financial Statements

 

Note 1  —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 service solutions to the 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 for 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.

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements of TSYS include the accounts of TSYS and its wholly- and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

These financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and, therefore, do not include all information and footnotes required by U.S. GAAP for complete financial statements. The preparation of the consolidated financial statements requires management of the Company to make estimates and assumptions relating to the reported amounts of assets and liabilities as of 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. All adjustments, consisting of normal recurring accruals, which, in the opinion of management, are necessary for a fair presentation of financial position and results of operations for the periods covered by this report, have been included.

 

The accompanying unaudited consolidated financial statements should be read in conjunction with the Company’s summary of significant accounting policies, consolidated financial statements and related notes appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the Securities and Exchange Commission (“SEC”). Results of interim periods are not necessarily indicative of results to be expected for the year.

 

Recently Adopted Accounting Pronouncements

 

The Company adopted the following Accounting Standards Updates (“ASUs”) on January 1, 2018:

 

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

8


 

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 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.

   

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

9


 

January 1, 2018 using the modified retrospective transition method. See Note 2 for further discussion of the Company’s adoption of this new standard.

 

New Accounting Pronouncements

 

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 7 for further discussion regarding income taxes.

 

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. Upon adoption of this ASU, the Company expects to record a balance sheet reclassification of approximately $2.3 million between accumulated other comprehensive loss and retained earnings.

   

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 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 ASU also addresses other concerns related to the current leases model. The new guidance will be effective for fiscal years and interim periods within those years beginning after December 15, 2018. Early adoption will be permitted for all entities. The Company will adopt ASU 2016-02 on January 1, 2019.

 

The FASB has issued several additional ASUs that provide additional clarification to certain issues existing after the original ASU was released. 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

10


 

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 2018-11 and ASU 2018-10 will be the same as the effective date and transition requirements in ASU 2016-02. The Company is evaluating the effect of ASU 2018-11 and ASU 2018-10 on its consolidated financial statements.

 

The Company has 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. From a lessee standpoint, the Company’s leases primarily involve computer and other equipment, and facilities. From a lessor perspective, the Company’s leases primarily involve point-of-sale (POS) terminals. The Company is reviewing its lease contracts under the new standard to identify and evaluate differences from current guidance. Additionally, the Company plans to implement a new lease software solution to facilitate compliance with the requirements of the new standard.

 

While the Company is continuing to evaluate the effects of this ASU, the Company expects to record material right of use assets and lease liabilities on its consolidated balance sheet upon adoption. The new standard will also require expanded qualitative and quantitative disclosures regarding the Company’s leases.

 

Note 2 — Revenue from Contracts with Customers

 

The Company adopted 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.

11


 

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.

 

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 service offerings and revenue recognition policies

 

Issuer Solutions

 

Description of service offerings

 

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;

·

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 conversion and development services.

 

Description of revenue recognition policies

 

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

12


 

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 Company determines standalone selling price 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.

 

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. For separate performance obligations relating to professional services, revenue is recognized using an input method based on labor hours expended. 

Merchant Solutions

 

Description of service offerings

 

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.

13


 

 

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.

 

Description of revenue recognition policies

 

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 obligations to provide merchant processing 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, 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. These fees collected on behalf of the payment networks and card issuers are presented net of the amounts paid to them. 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

 

Description of service offerings

 

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.

·

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, custom card designs and card-to-card transfers of funds initiated through the call centers.

14


 

·

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

 

Description of revenue recognition policies

 

Consumer Solutions revenues include one performance obligation to provide account access and facilitate purchase transactions and 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.

 

Disaggregation of revenue

 

The following table summarizes volume-based and non-volume related revenue from contracts with external customers for the three and six months ended June 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2018

(in thousands)

    

Issuer Solutions

 

Merchant Solutions

    

Consumer Solutions

 

Total

Volume-based revenues

 

$

223,677

 

 

329,295

 

 

199,490

 

$

752,462

Non-volume related revenues

 

 

234,924

 

 

19,419

 

 

775

 

 

255,118

Total revenues

 

$

458,601

 

 

348,714

 

 

200,265

 

$

1,007,580

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2018

(in thousands)

    

Issuer Solutions

 

Merchant Solutions

    

Consumer Solutions

 

Total

Volume-based revenues

 

$

442,949

 

 

628,242

 

 

409,211

 

$

1,480,402

Non-volume related revenues

 

 

473,011

 

 

39,895

 

 

1,442

 

 

514,348

Total revenues

 

$

915,960

 

 

668,137

 

 

410,653

 

$

1,994,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

 

15


 

Consumer Solutions

 

The Consumer Solutions segment’s revenues primarily consist of a portion of the service fees collected from cardholders and interchange revenues. Customers are charged fees for transactions including fees for purchase transactions, ATM withdrawals, balance inquiries, monthly maintenance services and other transaction fees. Customers are also charged fees associated with additional features and services offered in connection with certain products including the use of courtesy overdraft protection, bill payment options, custom card designs and card-to-card transfers of funds initiated through call centers. The Consumer Solutions segment also earns revenues from a portion of the interchange fees remitted by merchants when customers make purchase transactions using their products. Substantially all of the Consumer Solutions segment revenues are volume driven by the active card and gross dollar volume (spend) indicators.

 

The following table summarizes revenue from contracts with customers, by currency, for the three and six months ended June 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2018

(in thousands)

    

Issuer Solutions

 

Merchant Solutions

    

Consumer Solutions

 

Total

U.S. Dollar

 

$

367,489

 

 

348,524

 

 

200,265

 

$

916,278

British Pound Sterling

 

 

59,098

 

 

 -

 

 

 -

 

 

59,098

Euro

 

 

25,419

 

 

 -

 

 

 -

 

 

25,419

Other

 

 

6,595

 

 

190

 

 

 -

 

 

6,785

Total revenues

 

$

458,601

 

 

348,714

 

 

200,265

 

$

1,007,580

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2018

(in thousands)

    

Issuer Solutions

 

Merchant Solutions

    

Consumer Solutions

 

Total

U.S. Dollar

 

$

727,359

 

 

667,743

 

 

410,653

 

$

1,805,755

British Pound Sterling

 

 

122,219

 

 

 -

 

 

 -

 

 

122,219

Euro

 

 

52,016

 

 

 -

 

 

 -

 

 

52,016

Other

 

 

14,366

 

 

394

 

 

 -

 

 

14,760

Total revenues

 

$

915,960

 

 

668,137

 

 

410,653

 

$

1,994,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Note 8 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)

    

Remainder of 2018

    

2019

    

2020

    

2021

    

2022 - 2029

    

    

Total

Unsatisfied or partially unsatisfied performance obligations

 

$

403,691

 

643,413

 

564,662

 

472,777

 

648,137

 

$

2,732,680

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Contract balances

 

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

 

 

 

 

 

 

 

 

 

 

As of

(in thousands)

 

June 30, 2018

 

January 1, 2018

Accounts receivable

    

$

440,875

 

$

412,322

Contract assets

 

 

88,101

 

 

87,812

Contract liabilities

 

 

73,812

 

 

76,541

 

 

 

 

 

 

 

 

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.

 

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.

 

Significant changes in the contract assets and liabilities balances during the six months ended June 30, 2018 are as follows:

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2018

(in thousands)

 

Contract Assets Increase/(Decrease)

 

Contract Liabilities (Increase)/Decrease

Increase in net contract assets related to signing incentives

 

$

13,960

 

$

 -

Decrease in net contract assets and increase in net contract liabilities related to signing incentive amortization

 

 

(13,713)

 

 

(4,797)

Increase in net contract assets related to revenue recognized in advance of billings

 

 

3,481

 

 

 -

Change in net contract assets due to billed amounts transferred to receivables

 

 

(2,287)

 

 

 -

Increase in net contract liabilities primarily relating to cash received from customers

 

 

 -

 

 

(72,625)

Decrease in net contract assets primarily relating to cash received from customers

 

 

(538)

 

 

 -

Deferred revenue that was released from net contract liabilities

 

 

 -

 

 

71,789

Deferred revenue that was released from net contract assets

 

 

4,380

 

 

 -

 

 

 

 

 

 

 

 

Other changes in contract assets and contract liabilities primarily relate to foreign currency translation.

 

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).

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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 4.

 

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.

 

In certain arrangements with customers, the Company has determined that certain promised goods or services are immaterial in the context of the contract, from both a quantitative and qualitative perspective.

 

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 June 30, 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.

 

18


 

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. For contracts that were modified before the effective date, the Company utilized the practical expedient to consider the aggregate effect of all modifications when identifying performance obligations and allocating transaction price.

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

(in thousands)

 

As Reported

 

Balances without adoption of ASC 606

 

Effect of Change Higher/(Lower)

Assets:

 

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

$

202,045

 

$

204,105

 

$

(2,060)

Contract assets (short-term and long-term)

 

 

88,101

 

 

 -

 

 

88,101

Contract cost assets (short-term and long-term)

 

 

147,512

 

 

253,992

 

 

(106,480)

Deferred income tax assets

 

 

7,177

 

 

6,300

 

 

877

Other assets

 

 

123,929

 

 

129,347

 

 

(5,418)

Liabilities:

 

 

 

 

 

 

 

 

 

Contract liabilities

 

 

73,812

 

 

90,059

 

 

(16,247)

Other liabilities (short-term and long-term)

 

 

334,417

 

 

335,295

 

 

(878)

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive loss, net

 

 

(45,022)

 

 

(44,640)

 

 

(382)

Retained earnings

 

 

3,236,046

 

 

3,243,519

 

 

(7,473)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three months ended June 30, 2018

    

Six months ended June 30, 2018

(in thousands, except per share data)