10-Q 1 tss-20180930x10q.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 September 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

 

Picture 1

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 every Interactive Data File required to be submitted 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 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

 

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: October 31, 2018

Common Stock, $0.10 par value

182,441,467 shares

 

 

 

 


 

Picture 1

 

TOTAL SYSTEM SERVICES, INC.

Table of Contents

 

 

Page
Number

PART I. FINANCIAL INFORMATION 

 

Item 1. Financial Statements 

 

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

3

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

4

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

5

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

6

Consolidated Statement of Changes in Equity (unaudited) — Nine months ended September 30, 2018          

7

Notes to Unaudited Consolidated Financial Statements 

8

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

37

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

56

Item 4. Controls and Procedures 

57

PART II. OTHER INFORMATION 

 

Item 1. Legal Proceedings 

57

Item 1A. Risk Factors 

57

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

58

Item 6. Exhibits 

58

SIGNATURES 

59

 

 

 


 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

TOTAL SYSTEM SERVICES, INC.

Consolidated Balance Sheets

(Unaudited)

 

 

 

 

 

 

(in thousands, except per share data)

    

September 30, 2018

    

December 31, 2017

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents (Note 4)

 

$

484,581

 

450,357

Accounts receivable, net of allowances for doubtful accounts and billing adjustments of $5.7 million and $5.9 million as of 2018 and 2017, respectively

 

 

485,722

 

412,322

Contract assets (Note 2)

 

 

32,604

 

 -

Prepaid expenses and other current assets (Note 4)

 

 

197,010

 

216,565

Total current assets

 

 

1,199,917

 

1,079,244

Contract assets (Note 2)

 

 

49,956

 

 -

Goodwill (Note 3)

 

 

4,113,669

 

3,264,071

Other intangible assets, net of accumulated amortization of $757.4 million and $600.9 million as of 2018 and 2017, respectively

 

 

855,527

 

727,146

Intangible assets - computer software, net of accumulated amortization of $913.9 million and $849.3 million as of 2018 and 2017, respectively

 

 

440,904

 

383,715

Property and equipment, net of accumulated depreciation and amortization of $538.5 million and  $521.1 million as of 2018 and 2017, respectively

 

 

372,900

 

325,218

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

 

 

147,732

 

258,665

Equity investments, net

 

 

170,177

 

163,518

Deferred income tax assets

 

 

6,928

 

6,091

Other assets

 

 

115,334

 

124,021

Total assets

 

$

7,473,044

 

6,331,689

Liabilities

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term borrowings (Note 5)

 

$

12,975

 

559,050

Accounts payable

 

 

59,770

 

62,310

Contract liabilities (Note 2)

 

 

50,673

 

52,913

Accrued salaries and employee benefits

 

 

59,951

 

82,135

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

 

 

8,196

 

6,762

Other current liabilities (Note 4)

 

 

275,606

 

225,922

Total current liabilities

 

 

467,171

 

989,092

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

 

 

3,837,659

 

2,591,949

Deferred income tax liabilities

 

 

394,119

 

238,317

Contract liabilities (Note 2)

 

 

21,730

 

48,526

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

 

 

37,156

 

36,053

Other long-term liabilities

 

 

75,027

 

71,070

Total liabilities

 

 

4,832,862

 

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; 182,441 and 180,903 outstanding as of 2018 and 2017, respectively

 

 

20,277

 

20,277

Additional paid-in capital

 

 

178,155

 

162,806

Accumulated other comprehensive loss, net (Note 4)

 

 

(50,086)

 

(36,148)

Treasury stock, at cost (20,324 and 21,862 shares as of 2018 and 2017, respectively)

 

 

(873,946)

 

(909,960)

Retained earnings

 

 

3,365,782

 

3,004,018

Total shareholders’ equity

 

 

2,640,182

 

2,240,993

Total liabilities and shareholders' equity

 

$

7,473,044

 

6,331,689

 

See accompanying Notes to Unaudited Consolidated Financial Statements

3


 

TOTAL SYSTEM SERVICES, INC.

Consolidated Statements of Income

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three months ended

 

Nine months ended

 

 

 

September 30, 

 

September 30, 

 

(in thousands, except per share data)

    

2018

    

2017

    

2018

    

2017

 

Total revenues (Notes 2 and 8)

 

$

1,015,371

 

1,247,576

 

 

3,010,121

 

 

3,654,676

 

Cost of services (Note 2)

 

 

624,363

 

898,471

 

 

1,855,546

 

 

2,638,214

 

Selling, general and administrative expenses

 

 

175,025

 

149,413

 

 

541,623

 

 

456,339

 

Total operating expenses

 

 

799,388

 

1,047,884

 

 

2,397,169

 

 

3,094,553

 

Operating income

 

 

215,983

 

199,692

 

 

612,952

 

 

560,123

 

Nonoperating expenses, net

 

 

(41,294)

 

(28,835)

 

 

(120,106)

 

 

(88,780)

 

Income before income taxes and equity in income of equity investments

 

 

174,689

 

170,857

 

 

492,846

 

 

471,343

 

Income taxes (Note 7)

 

 

31,112

 

54,628

 

 

86,662

 

 

153,917

 

Income before equity in income of equity investments

 

 

143,577

 

116,229

 

 

406,184

 

 

317,426

 

Equity in income of equity investments, net of tax

 

 

12,383

 

8,497

 

 

35,313

 

 

30,919

 

Net income

 

 

155,960

 

124,726

 

 

441,497

 

 

348,345

 

Net income attributable to noncontrolling interests

 

 

 -

 

(1,631)

 

 

(1,261)

 

 

(4,368)

 

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

 

$

155,960

 

123,095

 

 

440,236

 

 

343,977

 

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

 

$

0.85

 

0.67

 

 

2.42

 

 

1.87

 

Diluted EPS attributable to TSYS common shareholders (Note 11)

 

$

0.85

 

0.66

 

 

2.40

 

 

1.85

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements

4


 

TOTAL SYSTEM SERVICES, INC.

Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30, 

 

September 30, 

 

(in thousands)

 

2018

    

2017

   

2018

    

2017

 

Net income

 

$

155,960

 

124,726

 

 

441,497

 

348,345

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(4,912)

 

7,946

 

 

(14,169)

 

20,511

 

Postretirement healthcare plan adjustments

 

 

(179)

 

(693)

 

 

(537)

 

(445)

 

Unrealized loss on available-for-sale securities

 

 

(2,302)

 

(1,373)

 

 

(1,561)

 

(3,166)

 

Other comprehensive (loss) income

 

 

(7,393)

 

5,880

 

 

(16,267)

 

16,900

 

Comprehensive income

 

 

148,567

 

130,606

 

 

425,230

 

365,245

 

Comprehensive income attributable to noncontrolling interests

 

 

 -

 

(1,631)

 

 

(1,261)

 

(4,368)

 

Comprehensive income attributable to TSYS common shareholders

 

$

148,567

 

128,975

 

 

423,969

 

360,877

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements

5


 

TOTAL SYSTEM SERVICES, INC.

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

September 30, 

 

(in thousands)

    

2018

    

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

441,497

 

348,345

 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

310,010

 

303,821

 

Provisions for cardholder losses

 

 

50,911

 

39,036

 

Share-based compensation

 

 

32,916

 

28,462

 

Provisions for bad debt expenses and billing adjustments

 

 

7,451

 

7,835

 

Charges for transaction processing provisions

 

 

4,694

 

5,719

 

Amortization of debt issuance costs

 

 

3,668

 

3,247

 

Dividends received from equity investments

 

 

24,921

 

20,589

 

(Gain) loss on foreign currency

 

 

(295)

 

1,250

 

Amortization of bond discount

 

 

753

 

677

 

Loss on disposal of equipment, net

 

 

27

 

1,247

 

Deferred income tax expense (benefit)

 

 

21,173

 

(46,435)

 

Equity in income of equity investments, net of tax

 

 

(35,313)

 

(30,919)

 

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

 

 

 

 

 

 

Accounts receivable

 

 

(62,751)

 

(24,582)

 

Contract assets and contract liabilities

 

 

(4,824)

 

8,282

 

Contract cost assets

 

 

2,906

 

 -

 

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

 

 

15,684

 

12,118

 

Accounts payable

 

 

(3,760)

 

14,419

 

Accrued salaries and employee benefits

 

 

(26,199)

 

(10,315)

 

Other current liabilities and other long-term liabilities

 

 

(30,961)

 

(23,368)

 

Net cash provided by operating activities

 

 

752,508

 

659,428

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

(77,841)

 

(42,572)

 

Additions to contract acquisition costs

 

 

 -

 

(21,662)

 

Additions to internally developed computer software

 

 

(29,692)

 

(22,011)

 

Additions to licensed computer software from vendors

 

 

(32,496)

 

(23,114)

 

Cash used in acquisitions, net of cash acquired

 

 

(1,051,629)

 

 -

 

Other investing activities

 

 

(5,670)

 

(1,436)

 

Net cash used in investing activities

 

 

(1,197,328)

 

(110,795)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

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

 

 

(2,807,187)

 

(415,788)

 

Purchase of noncontrolling interest

 

 

(126,000)

 

(70,000)

 

Dividends paid on common stock

 

 

(70,897)

 

(55,151)

 

Subsidiary dividends paid to noncontrolling shareholders

 

 

(3,778)

 

(5,216)

 

Repurchase of common stock under plans and tax withholding

 

 

(443)

 

(27,895)

 

Debt issuance costs

 

 

(16,004)

 

 -

 

Proceeds from borrowings of long-term debt

 

 

3,477,000

 

 -

 

Proceeds from exercise of stock options

 

 

31,024

 

15,499

 

Net cash provided by (used in) financing activities

 

 

483,715

 

(558,551)

 

 

 

 

 

 

 

 

Cash, cash equivalents and restricted cash:

 

 

 

 

 

 

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

 

 

(3,639)

 

5,589

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

35,256

 

(4,329)

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

451,370

 

425,810

 

Cash, cash equivalents and restricted cash at end of period

 

$

486,626

 

421,481

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

Interest paid

 

$

113,099

 

93,151

 

Income taxes paid, net

 

$

59,099

 

194,435

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements

6


 

Consolidated Financial Statements

 

TOTAL SYSTEM SERVICES, INC.

Consolidated Statement 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

 

Cumulative effect adjustment from adoption of ASU 2014-09 (Note 2)

 

 

 -

 

 -

 

 

 -

 

 -

 

 -

 

 -

 

(4,445)

 

 

(4,445)

 

Reclassification from adoption of ASU 2018-02 (Notes 1 and 4)

 

 

 -

 

 -

 

 

 -

 

 -

 

2,329

 

 -

 

(2,329)

 

 

 -

 

Net income

 

 

1,261

 

 -

 

 

 -

 

 -

 

 -

 

 -

 

440,236

 

 

440,236

 

Other comprehensive loss

 

 

 -

 

 -

 

 

 -

 

 -

 

(16,267)

 

 -

 

 -

 

 

(16,267)

 

Common stock issued from treasury shares for exercise of stock options

 

 

 -

 

 -

 

 

 -

 

7,075

 

 -

 

23,943

 

 -

 

 

31,018

 

Common stock unissued due to forfeiture of nonvested awards

 

 

 -

 

 -

 

 

 -

 

658

 

 -

 

(658)

 

 -

 

 

 -

 

Common stock issued from treasury shares for nonvested awards

 

 

 -

 

 -

 

 

 -

 

(13,163)

 

 -

 

13,163

 

 -

 

 

 -

 

Common stock issued from treasury shares for dividend equivalents

 

 

 -

 

 -

 

 

 -

 

925

 

 -

 

 9

 

 -

 

 

934

 

Share-based compensation

 

 

 -

 

 -

 

 

 -

 

32,682

 

 -

 

 -

 

 -

 

 

32,682

 

Cash dividends declared ($0.39 per share)

 

 

 -

 

 -

 

 

 -

 

 -

 

 -

 

 -

 

(71,698)

 

 

(71,698)

 

Purchase of treasury shares

 

 

 -

 

 -

 

 

 -

 

 -

 

 -

 

(443)

 

 -

 

 

(443)

 

Adjustments to redemption value of redeemable noncontrolling interest

 

 

12,828

 

 -

 

 

 -

 

(12,828)

 

 -

 

 -

 

 -

 

 

(12,828)

 

Repurchase of noncontrolling interest

 

 

(126,000)

 

 -

 

 

 -

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

Subsidiary dividends paid to noncontrolling interest

 

 

(3,778)

 

 -

 

 

 -

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

Balance as of September 30, 2018

 

$

 -

 

202,765

 

$

20,277

 

178,155

 

(50,086)

 

(873,946)

 

3,365,782

 

$

2,640,182

 

 

 

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 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

8


 

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

 

1.

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

2.

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

3.

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

 

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

 

In January 2017, the FASB issued ASU 2017-01 Business Combinations (Topic 805), Clarifying the Definition of a Business, which provides a more robust framework to use in determining when a set of assets and activities is a business. The framework assists entities in evaluating whether both an input and a substantive process are present. The framework includes two sets of criteria to consider that depend on whether a set 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

9


 

adoption of this ASU did not have a material impact on the Company’s financial position, results of operations or cash flows.

 

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

 

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

 

New Accounting Pronouncements

 

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

 

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

   

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

 

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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 is permitted for all entities.

 

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

 

·

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

·

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

·

From a lessee perspective, the Company has elected, as an accounting policy election by class of underlying asset, not to separate non-lease components from lease components. By electing to utilize this practical expedient, the Company will account for the combined lease and non-lease components as a single lease component.

·

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

·

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

 

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

 

The Company 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. The Company is reviewing its lease contracts under the new standard to identify and evaluate differences from current guidance. From a lessee standpoint, the Company’s leases primarily involve

11


 

computer and other equipment, and facilities. Also, from a lessor perspective, the Company continues to evaluate the accounting treatment for point-of-sale (“POS”) terminals.

 

While the Company is continuing to evaluate the effects of this ASU, the Company expects to record material ROU assets and lease liabilities on its consolidated balance sheet upon adoption as of January 1, 2019. The Company does not expect the adoption of this ASU to have a material impact on its results of operations or cash flows. The adoption of this guidance will require the implementation of new or updated accounting processes, procedures and internal controls over financial reporting. The Company plans to implement a new lease accounting software solution to facilitate compliance with the requirements of the new standard. 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. 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

12


 

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 professional 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 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

13


 

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. Revenues related to this combined performance obligation are immaterial. For separate performance obligations relating to professional services, revenue is recognized using an input method based on labor hours expended. 

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.

 

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

14


 

Solutions arrangements also include other promised goods or services (such as point-of-sale terminals and merchant statement services) that are immaterial in the context of the contract. As a result, the Company has determined that Merchant Solutions arrangements represent one performance obligation.

 

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

Interchange and payment network fees

 

Interchange and payment network fees are charged by the card associations or payment networks and relate primarily to the Company’s Merchant Solutions segment. With respect to interchange and payment network fees, the Company evaluated whether it is the principal or the agent in the arrangement. With the adoption of ASC 606, the Company determined that interchange and payment network fees are not provided in return or exchange for services that the Company controls or acts as the principal, and, therefore, are not part of the consideration paid for its services. 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.

·

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

15


 

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 nine months ended September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2018

(in thousands)

    

Issuer Solutions

 

Merchant Solutions

    

Consumer Solutions

 

Total

Volume-based revenues

 

$

227,423

 

 

325,831

 

 

195,722

 

$

748,976

Non-volume related revenues

 

 

243,555

 

 

22,760

 

 

80

 

 

266,395

Total revenues

 

$

470,978

 

 

348,591

 

 

195,802

 

$

1,015,371

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2018

(in thousands)

    

Issuer Solutions

 

Merchant Solutions

    

Consumer Solutions

 

Total

Volume-based revenues

 

$

670,374

 

 

954,073

 

 

604,933

 

$

2,229,380

Non-volume related revenues

 

 

716,565

 

 

62,654

 

 

1,522

 

 

780,741

Total revenues

 

$

1,386,939

 

 

1,016,727

 

 

606,455

 

$

3,010,121

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuer Solutions

 

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

 

Merchant Solutions

 

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

 

Consumer Solutions

 

The Consumer Solutions segment’s revenues primarily consist of 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.

 

16


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2018

(in thousands)

    

Issuer Solutions

 

Merchant Solutions

    

Consumer Solutions

 

Total

U.S. Dollar

 

$

373,821

 

 

348,419

 

 

195,802

 

$

918,042

British Pound Sterling

 

 

65,259

 

 

 -

 

 

 -

 

 

65,259

Euro

 

 

25,135

 

 

 -

 

 

 -

 

 

25,135

Other

 

 

6,763

 

 

172

 

 

 -

 

 

6,935

Total revenues

 

$

470,978

 

 

348,591

 

 

195,802

 

$

1,015,371

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2018

(in thousands)

    

Issuer Solutions

 

Merchant Solutions

    

Consumer Solutions

 

Total

U.S. Dollar

 

$

1,101,180

 

 

1,016,161

 

 

606,455

 

$

2,723,796

British Pound Sterling

 

 

187,478

 

 

 -

 

 

 -

 

 

187,478

Euro

 

 

77,152

 

 

 -

 

 

 -

 

 

77,152

Other

 

 

21,129

 

 

566

 

 

 -

 

 

21,695

Total revenues

 

$

1,386,939

 

 

1,016,727

 

 

606,455

 

$

3,010,121

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

200,261

 

698,863

 

605,797

 

508,478

 

808,194

 

$

2,821,593

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract balances

 

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

 

 

 

 

 

 

 

 

 

 

As of

(in thousands)

 

September 30, 2018

 

January 1, 2018

Accounts receivable

    

$

485,722

 

$

412,322

Contract assets

 

 

82,560

 

 

87,812

Contract liabilities

 

 

72,403

 

 

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.

 

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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 nine months ended September 30, 2018 are as follows:

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2018

(in thousands)

 

Contract Assets Increase/(Decrease)

 

Contract Liabilities (Increase)/Decrease

Changes in net contract assets and net contract liabilities related to signing incentives

   

$

18,366

 

$

57

Changes in net contract assets and net contract liabilities related to signing incentive amortization

 

 

(19,980)

 

 

(5,986)

Changes in net contract assets and net contract liabilities related to revenue recognized in advance of billings

 

 

3,900

 

 

1,584

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

 

 

(3,694)

 

 

(2,612)

Changes in net contract assets and net contract liabilities primarily relating to cash received from customers

 

 

(3,925)

 

 

(111,778)

Deferred revenue that was released from net contract assets and net contract liabilities

 

 

6,308

 

 

113,520

 

 

 

 

 

 

 

 

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). The Company also makes commission payments to third parties such as agents and partners. To date, costs to obtain a contract that qualify for capitalization are immaterial.

 

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

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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 September 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.

 

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.

 

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Impact of New Revenue Guidance on Financial Statement Line Items

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2018

(in thousands)

 

As Reported

 

Balances without adoption of ASC 606

 

Effect of Change Higher/(Lower)

Assets:

 

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

$

197,010

 

$

199,071

 

$

(2,061)

Contract assets (short-term and long-term)

 

 

82,560

 

 

 -

 

 

82,560

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

 

 

147,732

 

 

255,567

 

 

(107,835)

Deferred income tax assets

 

 

6,928

 

 

6,051

 

 

877

Other assets

 

 

115,334

 

 

120,752

 

 

(5,418)

Liabilities:

 

 

 

 

 

 

 

 

 

Contract liabilities (short-term and long-term)

 

 

72,403

 

 

91,576

 

 

(19,173)

Other liabilities (short-term and long-term)

 

 

350,633

 

 

352,435

 

 

(1,802)

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive loss, net

 

 

(50,086)

 

 

(49,707)

 

 

(379)

Retained earnings

 

 

3,365,782

 

 

3,376,305

 

 

(10,523)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2018

 

Nine months ended September 30, 2018

(in thousands, except per share data)

 

As Reported

 

Balances without adoption of ASC 606

 

Effect of Change Higher/(Lower)

 

As Reported