EX-13.1 3 tss-20181231ex1315e85db.htm EX-13.1 tss_Current_Folio_Ex_131

 

Exhibit 13.1

Selected Financial Data

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31, 

(in thousands, except per share data)

    

2018

    

2017

    

2016

    

2015

    

2014

Income Statement Data:

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

4,028,211

 

4,927,965

 

4,170,077

 

2,779,541

 

2,446,877

Operating income

 

$

822,738

 

734,044

 

573,382

 

534,107

 

431,640

Income from continuing operations, net of tax

 

$

577,917

 

592,216

 

325,972

 

367,630

 

280,751

Income from discontinued operations, net of tax

 

 

 —

 

 —

 

 —

 

1,411

 

48,655

Net income

 

$

577,917

 

592,216

 

325,972

 

369,041

 

329,406

Net income attributable to noncontrolling interests

 

 

(1,261)

 

(6,031)

 

(6,334)

 

(4,997)

 

(6,534)

Net income attributable to TSYS common shareholders

 

$

576,656

 

586,185

 

319,638

 

364,044

 

322,872

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

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

3.17

 

3.19

 

1.74

 

1.97

 

1.48

Gain from discontinued operations**

 

 

 —

 

 —

 

 —

 

0.01

 

0.26

Net income

 

$

3.17

 

3.19

 

1.74

 

1.98

 

1.73

Diluted EPS* attributable to TSYS common shareholders:

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

3.14

 

3.16

 

1.73

 

1.96

 

1.47

Gain from discontinued operations**

 

 

 —

 

 —

 

 —

 

0.01

 

0.25

Net income

 

$

3.14

 

3.16

 

1.73

 

1.97

 

1.72

Cash dividends declared per share

 

$

0.52

 

0.46

 

0.40

 

0.40

 

0.40

 

 

 

 

 

 

 

 

 

 

 

 

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

** The Company sold all of its stock of GP Network Corporation (representing 54% ownership of the company) and all of its stock of TSYS Japan Godo Kaisha (representing 100% ownership of the company) in April 2014. In 2015, the Company recorded an additional gain of $1.4 million, net of tax, related to the return of cash that was placed in escrow during closing and tax adjustments associated with the transaction.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 

(in thousands)

    

2018

    

2017

    

2016

    

2015

    

2014

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

7,468,709

 

6,331,689

 

6,366,177

 

3,877,895

 

3,725,652

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

 

$

3,889,541

 

2,628,002

 

3,313,276

 

1,377,541

 

1,397,483

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Overview

 

TSYS' revenues are derived from providing payment processing, merchant services and related payment services to financial and nonfinancial institutions, generally under long-term processing contracts. The Company also derives revenues by providing general-purpose reloadable  (“GPR”) prepaid debit 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 to financial and nonfinancial institutions throughout the United States and internationally. The Company’s Merchant Solutions segment provides merchant services to merchant acquirers and merchants primarily in the United States. The Company’s Consumer Solutions segment provides financial service solutions to consumers and businesses in the United States.

 

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

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31, 

 

 

    

20181

 

2017

    

2016

 

Issuer Solutions

 

46

%  

36

%  

40

%

Merchant Solutions

 

34

 

49

 

44

 

Consumer Solutions

 

20

 

15

 

16

 

Total revenues

 

100

%  

100

%  

100

%

 

 

 

 

 

 

 

 

1

The change in the mix for each segment’s revenues as a percentage of the Company’s total revenues in 2018 is primarily the result of the Company’s adoption of ASC 606 as of January 1, 2018.

 

As discussed in Note 1 to the Consolidated Financial Statements, TSYS has updated its revenue recognition policies in conjunction with the adoption of Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (Topic 606) and related ASUs (“ASC 606”) as of January 1, 2018. The most significant impact of adopting ASC 606 in 2018 is primarily the result of gross versus net presentation of interchange and payment network fees. In 2018, these fees collected on behalf of the payment networks and card issuers are presented “net” of the amounts paid to them, as opposed to the “gross” presentation for certain of these fees in 2017 and 2016.

 

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

 

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

 

TSYS acquires other companies as part of its strategy for growth. The Company acquired Cayan Holdings, LLC (“Cayan”) in January 2018 and substantially all of the assets of iMobile3, LLC in June 2018. In April 2016, the Company completed the acquisition of all of the outstanding stock of TransFirst Holdings Corp. (“TransFirst”). These acquisitions are part of the Merchant Solutions segment. Refer to Note 23 in the Notes to Consolidated Financial Statements for more information regarding the Company’s acquisitions.

 

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

 

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

 

Regulation

 

Government regulation affects key areas of TSYS' business, in the United States of America (“U.S.”) as well as internationally. TSYS, along with the rest of the financial services industry, continues to experience increased legislative and regulatory scrutiny, including the enactment of additional legislative and regulatory initiatives such as the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Financial Reform Act”) in 2010. This legislation, which provides for sweeping financial regulatory reform, may have a significant and negative impact on the Company and its clients, which could impact TSYS' earnings through fee reductions, higher costs (both regulatory and implementation) and new restrictions on operations. The Financial Reform Act may also impact the competitive dynamics of the financial services industry in the U.S. by more adversely impacting large financial institutions, some of which are TSYS clients, and by adversely impacting the competitive position of U.S. financial institutions in comparison to foreign competitors in certain businesses.

 

14


 

The Financial Reform Act created the Consumer Financial Protection Bureau (“CFPB”) with responsibility for regulating consumer financial products and services and enforcing most federal consumer protection laws in the area of financial services, including consumer credit and the prepaid card industry. For example, the CFPB has promulgated a new rule regarding prepaid financial products, which, among other things, will establish new disclosure requirements specific to prepaid accounts, eliminate certain fees that may currently be imposed on prepaid accounts, and make it more difficult for a prepaid provider such as the Company’s Consumer Solutions business to offer courtesy overdraft protection on prepaid accounts. The rule is scheduled to become effective on April 1, 2019.  Similarly, other future actions of the CFPB may make payment card or product transactions generally less attractive to card issuers, acquirers, consumers and merchants, and thus negatively impact the Company’s business.

 

On June 23, 2016, the United Kingdom (“U.K.”) held a referendum in which voters approved an exit from the European Union (“E.U.”), commonly referred to as “Brexit.” The U.K. is currently negotiating the terms of its expected exit from the European Union which is scheduled for March 29, 2019. In November 2018, the U.K. and the European Union agreed upon a draft Withdrawal Agreement that sets out the terms of the U.K.’s departure, including a transition period from March 29, 2019 through December 31, 2020 to allow time for the U.K. and the European Union to agree upon a future trade deal. On January 15, 2019, the draft Withdrawal Agreement was rejected by the U.K. Parliament creating significant uncertainty about the terms (and timing) under which the U.K. will leave the European Union and the terms of U.K.’s future relationship with the European Union. TSYS continues to monitor Brexit and its potential impact across key areas including service continuity, contracts, regulatory (including data privacy), the economy and freedom of movement of people.

 

Financial Review

 

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

 

Critical Accounting Policies and Estimates

 

Risk factors that could affect the Company's future operating results and cause actual results to vary materially from expectations are listed in the Company's forward-looking statements. Negative developments in these or other risk factors could have a material adverse effect on the Company's financial position, results of operations and cash flows.

 

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

 

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

 

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

 

Acquisitions — Purchase Price Allocation

 

TSYS' purchase price allocation methodology requires the Company to make assumptions and to apply judgment to estimate the fair value of acquired assets and liabilities. TSYS estimates the fair value of assets and liabilities based upon appraised values, the carrying value of the acquired assets and widely accepted valuation techniques, including the cost approach, discounted cash flows and market multiple analyses. TSYS adjusts the purchase price allocation, as necessary, up to one year after the acquisition closing date as TSYS obtains more information regarding asset valuations and liabilities assumed. Unanticipated events or circumstances may occur which could affect the accuracy of the Company's fair value estimates, including assumptions regarding industry economic factors and business strategies, and may result in an impairment or a new allocation of purchase price. Refer to Note 23 in the Notes to Consolidated Financial Statements for more information about acquisitions.

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Goodwill

 

In accordance with the provisions of U.S. Generally Accepted Accounting Principles (“GAAP”), goodwill is required to be tested for impairment at least annually. The Company tests goodwill for impairment during the second quarter or more frequently whenever events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. Examples of potential triggering events include, but are not limited to, a deterioration in general economic conditions, industry and market considerations such as a deterioration in the environment in which the Company operates, cost factors such as increases in labor or other costs, overall financial performance such as negative or declining cash flows, other relevant entity-specific factors, events affecting a reporting unit or a sustained decrease in share price.

 

In evaluating goodwill for recoverability, the Company has the option to perform a qualitative assessment to determine whether further impairment testing is necessary or to perform a quantitative assessment using discounted net cash flows for future periods estimated by management. The combination of the income approach, utilizing the discounted cash flow (“DCF”) method, and the market approach, utilizing readily available market valuation multiples, is used to estimate the fair value of each reporting unit. Under the DCF method, the fair value of the asset reflects the present value of the projected earnings that will be generated by each asset after taking into account the revenues and expenses associated with the asset, the relative risk that the cash flows will occur, the contribution of other assets, and an appropriate discount rate to reflect the value of invested capital. To the extent the carrying amount of goodwill exceeds its fair value, an impairment charge is measured and recognized. Cash flows are estimated for future periods based on historical data and projections provided by management. If the actual cash flows are not consistent with the Company's estimates, a material impairment charge may result and net income may be materially different than was initially recorded. Note 6 in the Notes to Consolidated Financial Statements contains a discussion of goodwill. The net carrying value of goodwill on the Company's Consolidated Balance Sheet as of December 31, 2018 was $4.1 billion. The Company did not recognize any goodwill impairment charges during the years ended December 31, 2018, 2017 and 2016.

 

Long-lived Assets other than Goodwill

 

The Company reviews long-lived assets, such as property and equipment, intangibles subject to amortization, computer software, contract assets and contract cost assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Examples of potential triggering events include, but are not limited to, a significant decrease in the market price of a long-lived asset or asset group, a significant adverse change in the extent or manner in which a long-lived asset or asset group is being used, a significant adverse change in legal factors or business climate, an accumulation of costs significantly in excess of the originally expected amount, continuing losses associated with the use of a long-lived asset or asset group, or a current expectation that a long-lived asset or asset group will be sold or otherwise disposed of significantly before its previously estimated useful life.

 

In evaluating long-lived assets other than goodwill for recoverability, expected undiscounted future operating cash flows are estimated by management. To the extent the carrying amount of a long-lived asset exceeds its fair value, an impairment charge is measured and recognized. Assumptions and estimates about future cash flows and remaining useful lives are complex and subjective. They can be affected by a variety of factors, including industry and economic trends, changes in the Company’s business strategy and changes in internal forecasts. If the actual cash flows are not consistent with the Company’s estimates, a material impairment charge may result and net income may be materially different than was initially recorded. The Company did not recognize any material impairment charges during the years ended December 31, 2018,  2017 and 2016.

 

Revenue Recognition

 

As discussed in Note 1 in the Notes to Consolidated Financial Statements, TSYS has updated its revenue recognition policies in conjunction with the adoption of ASC 606 as of January 1, 2018. The most significant impact of adopting ASC 606 in 2018 is primarily the result of gross versus net presentation of interchange and payment network fees. In 2018, these fees collected on behalf of the payment networks and card issuers are presented “net” of the amounts paid to them, as opposed to the “gross” presentation for certain of these fees in 2017 and 2016.

 

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

16


 

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.

 

The Company also applies judgment in the determination of performance obligations in accordance with ASC 606. 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.

 

Income Taxes

 

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

 

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

 

On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act of 2017 (“Tax Act”). A key provision of this law that impacted TSYS was the reduction of the Federal corporate income tax rate from 35% to 21%. The Company’s Consolidated Financial Statements reflect the impact of this rate reduction.

 

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

 

Off-Balance Sheet Arrangements

 

Operating Leases

 

As a method of funding its operations, TSYS employs noncancelable operating leases for computer equipment and facilities. These leases allow the Company to use the latest technology while avoiding the risk of ownership. Neither the assets nor obligations related to these leases are included on the Consolidated Balance Sheets. As discussed in Note 1 in the Notes to Consolidated Financial Statements, the Company adopted ASU 2016-02 Leases (Topic 842) (ASU 2016-02) as of January 1, 2019. ASU 2016-02 introduces a lessee model that brings most operating leases on the Consolidated Balance Sheets. Refer to Notes 1 and 15 in the Notes to Consolidated Financial Statements for further information on operating lease commitments.

 

Contractual Obligations   

 

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

 

Recent Accounting Pronouncements

 

For a discussion of recent accounting pronouncements, refer to Note 1 in the Notes to Consolidated Financial Statements.

 

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Results of Operations

 

Revenues

 

The Company generates revenues by providing transaction processing and other payment-related services. The Company's pricing for transactions and services is complex. Each category of revenue has numerous fee components depending on the types of transactions processed or services provided. TSYS reviews its pricing and implements pricing changes on an ongoing basis. In addition, standard pricing varies among its regional businesses, and such pricing can be customized further for customers through tiered pricing of various thresholds for volume activity. The revenue contracts can be highly complex and customized between customers. TSYS' revenues are based upon transactional information accumulated by its systems. The Company's revenues are impacted by currency translation of foreign operations, as well as doing business in the current economic environment.

 

The Company reviews revenue performance on a net revenue basis which is a non-generally accepted accounting principle (“non-GAAP”) measure. Net revenue is defined as total revenues less reimbursable items (such as postage), as well as, merchant acquiring interchange and payment network fees charged by the card associations or payment networks that are recorded by TSYS as expense and are mainly related to the Merchant Solutions segment.  The Company has included reimbursements received for out-of-pocket expenses as revenues and expenses. The largest reimbursable expense items for which TSYS is reimbursed by clients are postage fees. The Company’s reimbursable items are impacted with changes in postal rates and changes in the volumes of mailing activities by its clients. Reimbursable items for the year ended December 31, 2018 were $212.3 million, a decrease of $47.9 million or 18.4%, compared to $260.2 million for the same period last year, primarily due to the Company’s adoption of ASC 606 as of January 1, 2018. See Note 1 in the Notes to Consolidated Financial Statements for further discussion. Reimbursable items for the year ended December 31, 2017 increased $0.7 million, or 0.3%, compared to $259.5 million for the same period in 2016. Interchange and payment network fees related to the TransFirst business were $1.3 billion and $868.7 million for the years ended December 31, 2017 and 2016, respectively. 

 

TSYS' revenues in its Issuer Solutions segment are influenced by several factors, including volumes related to accounts on file (“AOF”) and transactions. TSYS estimates that approximately 49.3% of the segment’s net revenue is AOF and transaction volume driven. The remaining 50.7% of net revenue is not AOF and transaction volume driven, and is derived from production and optional services TSYS considers to be value added products and services, custom programming and licensing arrangements.

 

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

 

TSYS’ revenues in its Consumer Solutions segment primarily consist of a portion of the service fees collected from cardholders and interchange revenues received by Consumer Solutions’ issuing banks in connection with the programs managed by Consumer Solutions.  

 

Total revenues decreased $899.7 million for the year ended December 31, 2018, compared to the year ended December 31, 2017, which increased $757.9 million compared to the year ended December 31, 2016. As discussed in Note 1 in the Notes to Consolidated Financial Statements, the most significant impact of the Company’s adoption of ASC 606 as of January 1, 2018 is primarily the result of gross versus net presentation of interchange and payment network fees. In 2018, these fees collected on behalf of the payment networks and card issuers are presented “net” of the amounts paid to them, as opposed to the “gross” presentation for certain of these fees in 2017 and 2016. The impact of acquisitions on total revenues was a year-over-year increase of $179.0 million in 2018 and $419.7 million in 2017. The decrease in revenues for 2018 was partially offset by an increase of $10.3 million related to the effects of currency translation of the Company's foreign-based subsidiaries and branches. The increase in revenues for 2017 includes a decrease of $15.5 million related to the effects of currency translation of the Company's foreign-based subsidiaries and branches.

 

Net revenue increased 12.2%, or $415.6 million, for the year ended December 31, 2018, compared to the year ended December 31, 2017, which increased 11.8.%, or $358.5 million, compared to the year ended December 31, 2016. The increase in net revenue for the year ended December 31, 2018, as compared to the same period in 2017, is primarily the result of organic growth and $179.0 million of revenues related to acquisitions and an increase associated with currency translation. The increase in net revenue for the year ended December 31, 2017, as compared to the same period in 2016, is primarily the result of the acquisition of TransFirst in April 2016, as well as organic growth, partially offset by decreases associated with currency translation.  

 

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A summary of the consolidated financial highlights is provided below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31, 

 

Percent Change

 

(in thousands, except per share data)

 

2018

    

2017

    

2016

    

2018 vs. 2017

    

2017 vs. 2016

    

Total revenues

 

$

4,028,211

 

4,927,965

 

4,170,077

 

(18.3)

%

18.2

%

Net revenue1

 

$

3,815,900

 

3,400,332

 

3,041,876

 

12.2

 

11.8

 

Operating income

 

$

822,738

 

734,044

 

573,382

 

12.1

 

28.0

 

Net income attributable to TSYS common shareholders

 

$

576,656

 

586,185

 

319,638

 

(1.6)

 

83.4

 

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

 

$

3.17

 

3.19

 

1.74

 

(0.7)

 

83.3

 

Diluted EPS attributable to TSYS common shareholders2

 

$

3.14

 

3.16

 

1.73

 

(0.8)

 

82.4

 

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

 

$

1,370,453

 

1,197,673

 

1,040,551

 

14.4

 

15.1

 

Adjusted earnings4 

 

$

821,292

 

624,183

 

516,419

 

31.6

 

20.9

 

Adjusted diluted EPS5

 

$

4.47

 

3.37

 

2.80

 

32.7

 

20.2

 

Cash flows from operating activities

 

$

1,041,667

 

857,049

 

718,284

 

21.5

 

19.3

 

Free cash flow6

 

$

799,483

 

661,023

 

575,711

 

20.9

 

14.8

 

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

1

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

2

Under GAAP, entities that have participating securities must compute basic EPS using the two-class method and compute diluted EPS using the more dilutive approach of either the two-class method or the treasury stock method. Refer to Note 25 in the Notes to Consolidated Financial Statements for more information on EPS.

3

Adjusted EBITDA is defined as net income excluding equity in income of equity investments,  interest expense (net of interest income), nonoperating income/(expense), income taxes, depreciation, amortization, foreign currency translation gains/(losses), share-based compensation expenses, litigation, claims, judgments or settlements, and TransFirst and Cayan merger and acquisition expenses.

4

Adjusted earnings is net income excluding noncontrolling interests, the after-tax impact of share-based compensation expenses, amortization of acquisition intangibles and other items.

5

Adjusted diluted EPS is defined as adjusted earnings divided by weighted average diluted shares outstanding used for diluted EPS calculations.

6

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

 

Major Customer

 

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

 

Operating Segments

 

TSYS' services are provided through three operating segments: Issuer Solutions, Merchant Solutions and Consumer Solutions.

 

Issuer Solutions

 

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

 

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

 

19


 

Issuer Solutions revenues are generated from charges based on the number of AOF, transactions and authorizations processed, statements mailed, cards embossed and mailed, and other processing services for cardholder AOF. Cardholder AOF includes active and inactive consumer credit, retail, prepaid, stored value, government services and commercial card accounts. TSYS’ clients also have the option to use fraud and portfolio management services. Collectively, these services are considered volume-based revenues.

 

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

 

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

 

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

 

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

 

Below is a summary of AOF for the Company’s Issuer Solutions segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

As of December 31, 

 

Percent Change

 

AOF

    

2018

    

2017

    

2016

    

2018 vs. 2017

    

2017 vs. 2016

 

Consumer

 

514.6

 

481.3

 

442.9

 

6.9

%

8.7

%

Commercial

 

57.8

 

54.2

 

47.9

 

6.5

 

13.2

 

Other

 

41.6

 

36.4

 

31.0

 

14.1

 

17.4

 

Traditional AOF1

 

614.0

 

571.9

 

521.8

 

7.4

 

9.6

 

Prepaid/Stored Value2

 

11.8

 

38.6

 

57.8

 

(69.2)

 

(33.3)

 

Government Services3

 

 —

 

95.0

 

88.7

 

(100.0)

 

7.2

 

Commercial Card Single-Use4

 

113.5

 

92.0

 

83.2

 

23.3

 

10.7

 

Total AOF

 

739.3

 

797.5

 

751.5

 

(7.3)

 

6.1

 

 

 

 

 

 

 

 

 

 

 

 

 

1

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

2

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

3

Government services accounts are disbursements of student loan accounts issued by the Department of Education, which have minimal activity. This portfolio of AOF had  deconverted by December 31, 2018.

4

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

 

Non-volume related revenues include processing fees which are not directly associated with AOF and transactional activity, such as value-added products and services, custom programming and certain other services, which are offered to TSYS’ processing clients.

 

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

 

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

 

The Issuer Solutions segment provides payment processing and related services to clients in North America and internationally. Growth in revenues and operating profit in this segment is derived from retaining and growing the core business and improving the overall cost structure. Growing the core business comes primarily from an increase in account usage, growth from existing clients and sales to new clients and the related account conversions. This segment’s financial results are impacted by foreign currency. Movements in foreign currency exchange rates as compared to the U.S. dollar can result in foreign denominated financial statements being translated into more or fewer U.S. dollars, which impacts the

20


 

comparison to prior periods when the U.S. dollar was stronger or weaker. This segment had two major customers for the year ended December 31, 2018.

 

Below is a summary of the Issuer Solutions segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31, 

 

Percent Change

 

(in thousands, except key indicators)

 

2018

    

2017

    

2016

    

2018 vs. 2017

    

2017 vs. 2016

 

Volume-based revenues

 

$

846,259

 

794,099

 

749,211

 

6.6

%

6.0

%

Non-volume related revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Processing fees

 

$

316,520

 

309,746

 

296,021

 

2.2

 

4.6

 

Value-added, custom programming, licensing and other

 

 

291,241

 

254,847

 

233,424

 

14.3

 

9.2

 

Output and managed services

 

 

264,157

 

236,267

 

236,806

 

11.8

 

(0.2)

 

Total non-volume related revenues

 

$

871,918

 

800,860

 

766,251

 

8.9

 

4.5

 

Net revenue1

 

$

1,718,177

 

1,594,959

 

1,515,462

 

7.7

 

5.2

 

Adjusted segment operating income2

 

$

608,392

 

574,580

 

525,025

 

5.9

 

9.4

 

Adjusted segment operating margin3

 

 

35.4

%  

36.0

%  

34.6

%  

 

 

 

 

Key indicators (in millions):  

 

 

 

 

 

 

 

 

 

 

 

 

AOF

 

 

739.3

 

797.5

 

751.5

 

(7.3)

 

6.1

 

Traditional AOF

 

 

614.0

 

571.9

 

521.8

 

7.4

 

9.6

 

Transactions

 

 

24,350.0

 

21,575.6

 

19,858.1

 

12.9

 

8.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

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

2

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

3

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

 

Net revenues increased $123.2 million for 2018, as compared to 2017.  The increase was driven by organic growth, partially offset by a decrease in net revenue associated with the adoption of ASC 606. Net revenues increased $79.5 million for 2017, as compared to 2016. The increase was attributable to an increase in new business and internal growth, partially offset by client deconversions and price reductions.

 

Movements in foreign currency exchange rates as compared to the U.S. dollar can result in foreign denominated financial statements being translated into more or fewer U.S. dollars, which impacts the comparison to prior periods when the U.S. dollar was stronger or weaker.

 

Net revenue for the years ended December 31, 2018 and 2017, as compared to the same periods in 2017 and 2016, respectively, included an increase of $9.4 million and a decrease of $15.4 million, respectively, associated with currency translation.

 

Merchant Solutions

 

The Merchant Solutions segment provides merchant services and related services to clients based primarily in the United States. Merchant Solutions revenues are derived from providing processing services, acquiring solutions, related systems and integrated support services to merchant acquirers and merchants. Revenues from merchant services include processing all payment forms including credit, debit, prepaid, electronic benefit transfer and electronic check for merchants of all sizes across a wide array of market verticals. Merchant services include authorization and capture of transactions; clearing and settlement of transactions; information reporting services related to transactions; and merchant billing services. This segment had no major customers for the year ended December 31, 2018.

 

The Merchant Solutions segment results are driven by dollar sales volume and the authorization and capture transactions processed at the point-of-sale (“POS”). This segment's authorization and capture transactions are primarily through internet connectivity.

21


 

 

Below is a summary of the Merchant Solutions segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31, 

 

Percent Change

 

(in thousands, except key indicators)

 

2018

    

2017

    

2016

    

2018 vs. 2017

    

2017 vs. 2016

 

Net revenue1

 

$

1,344,718

 

1,103,682

 

898,533

 

21.8

%

22.8

%

Adjusted segment operating income2

 

$

484,197

 

391,466

 

307,595

 

23.7

 

27.3

 

Adjusted segment operating margin3

 

 

36.0

%  

35.5

%  

34.2

%  

 

 

 

 

Key indicators:

 

 

 

 

 

 

 

 

 

 

 

 

Dollar sales volume (in millions)

 

$

159,642.8

 

124,165.1

 

97,735.1

 

28.6

 

27.0

 

POS transactions  (in millions)

 

 

5,874.6

 

4,844.1

 

4,548.1

 

21.3

 

6.5

 

Net revenue per POS transaction

 

$

0.229

 

0.228

 

0.198

 

0.5

 

15.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

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

2

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

3

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

 

With the acquisition of TransFirst in April 2016, TSYS included nine months for 2016 of TransFirst’s results as part of the Merchant Solutions segment. Merchant Solutions net revenue is defined as total revenues less merchant acquiring interchange and payment network fees charged by the card associations or payment networks that are recorded by TSYS as expense.

 

For the year ended December 31, 2018,  approximately 93.6% of TSYS’ Merchant Solutions net revenue was influenced by several factors, including volumes related to transactions and dollar sales volume. The remaining 6.4%  of net revenue was derived from value added services, chargebacks, managed services, investigation, risk and collection services performed.

 

The increase in net revenue and adjusted segment operating income for 2018, as compared to 2017, was driven by $179.0 million of revenues related to acquisitions and higher processing volumes, product fees and processing fees, as well as a gain on the sale of a merchant portfolio in December 2018. The increase in adjusted segment operating income for 2017, as compared to 2016, was driven primarily by the acquisition of TransFirst in April 2016 as well as operating cost reduction in connection with the integration.  

 

Consumer Solutions

 

Consumer Solutions provides GPR prepaid debit and payroll cards, demand deposit accounts and other financial service solutions to the underbanked and other consumers and businesses in the United States. Consumer Solutions’ products provide customers with access to depository accounts insured by the Federal Deposit Insurance Corporation (“FDIC”) with a menu of pricing and features specifically tailored to their needs. Consumer Solutions has an extensive distribution and reload network comprising financial service centers and other retail locations throughout the United States, and is a program manager for FDIC-insured depository institutions that issue the products that Consumer Solutions develops, promotes and distributes. Consumer Solutions currently has active agreements with five issuing banks.

 

The Consumer Solutions segment markets its products through multiple distribution channels, including alternative financial service providers, traditional retailers, direct-to-consumer and online marketing programs and contractual relationships with corporate employers. This segment had no major customers and one major third-party distributor for the year ended December 31, 2018.

 

The Consumer Solutions segment’s revenues primarily consist of a portion of the service fees collected from cardholders and interchange revenues received by Consumer Solutions’ issuing banks and others in connection with the programs managed by this segment. Customers are charged fees for transactions including fees for Personal Identification Number (“PIN”) and signature-based purchase transactions made using their cards, for Automated Teller Machine (“ATM”) withdrawals or other transactions conducted at ATMs, for balance inquiries, and monthly maintenance fees among others. 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, card replacement, foreign exchange 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. Subject to applicable law, interchange fees are fixed by card associations and network organizations.   

22


 

 

Below is a summary of the Consumer Solutions segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31, 

 

Percent Change

 

(in thousands, except key indicators)

    

2018

    

2017

    

2016

    

2018 vs. 2017

 

2017 vs. 2016

 

Net revenue1

 

$

806,430

 

746,870

 

663,579

 

8.0

%

12.6

%

Adjusted segment operating income2

 

$

193,472

 

182,082

 

160,371

 

6.3

 

13.5

 

Adjusted segment operating margin3

 

 

24.0

%  

24.4

%  

24.2

%  

 

 

 

 

Key indicators (in millions):  

 

 

 

 

 

 

 

 

 

 

 

 

Gross dollar volume4

 

$

34,465.5

 

32,034.8

 

28,722.3

 

7.6

 

11.5

 

Number of active cards5

 

 

5.0

 

4.9

 

4.3

 

2.5

 

14.2

 

Number of active cards with direct deposit6

 

 

2.5

 

2.4

 

2.1

 

4.9

 

12.1

 

Percentage of active cards with direct deposit

 

 

50.0

%  

48.9

%  

49.7

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

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

2

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

3

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

4

Gross dollar volume represents the total dollar volume of debit transactions and cash withdrawals made using Consumer Solutions products.

5

Number of active cards represents the total number of cards that have had a PIN or signature-based purchase transaction, a POS load transaction or an ATM withdrawal within three months of the date of determination, adjusted to remove prepaid cards that consumers upgraded to a demand deposit account during the period.

6

Number of active cards with direct deposit represents the number of active cards that have had a direct deposit load within three months of the date of determination, adjusted to remove prepaid cards that consumers upgraded to a demand deposit account during the period.

 

For the year ended December 31, 2018,  71.3%  of revenues were derived from service fees charged to customers and 28.7% of revenues were derived from interchange and other revenues. Service fee revenues are driven by the number of active cards and in particular by the number of cards with direct deposit. Customers with direct deposit generally initiate more transactions and generate more revenues than those that do not take advantage of this feature. Interchange revenues are driven by gross dollar volume. Substantially all of the Consumer Solutions segment revenues were volume driven as they were driven by the active card and gross dollar volume indicators.

 

Consumer Solutions net revenue for 2018 increased $59.6 million compared to 2017.  This increase was comprised of $55.9 million increase in service fee revenues and $3.7 million increase in interchange and other revenues. Consumer Solutions segment net revenue increased $83.3 million for 2017, as compared to 2016. This increase was comprised of $48.6  million increase in service fee revenues and $34.7 million increase in interchange and other revenues.  

 

On January 25, 2018, the CFPB announced that it had finalized updates to its 2016 prepaid rule. The CFPB’s 2016 prepaid rule put in place requirements for treatment of funds on lost or stolen cards, error resolution and investigation, upfront fee disclosures, access to account information, and overdraft features if offered in conjunction with prepaid accounts. The changes announced by the CFPB adjust requirements for resolving errors on unregistered accounts, provide greater flexibility for credit cards linked to digital wallets, and extend the effective date of the rule by one year to April 1, 2019. Assuming no changes to the rule and before taking into consideration the mitigating effects of TSYS’ business expansion and product diversification strategies for the Consumer Solutions segment, the Company currently expects  that the Company’s 2019 net revenue will be negatively impacted by approximately $60 to 65 million, with an estimated negative impact to adjusted diluted EPS of $0.17 to $0.19. TSYS expects to offset one-third to one-half of the expected negative financial impact of the rule, from both a net revenue and an adjusted diluted EPS perspective. TSYS will continue to review and interpret the rule and analyze its expected impact on the Consumer Solutions segment’s business. The estimated net revenue and adjusted diluted EPS impact set forth above is subject to risks and uncertainties such as the success of TSYS’ business expansion and product diversification strategies for the Consumer Solutions segment which success will depend on, among other things, the rate of adoption of the Company’s new products (both by consumers and the Company’s distribution partners), the rate of utilization of the various product features by cardholders, and overall market and regulatory dynamics. The estimated impact of the rule on the Company’s 2019 financial performance could vary based on these and other factors.

 

Operating Expenses

 

The Company’s operating expenses were $3.2 billion, $4.2 billion and $3.6 billion in 2018, 2017 and 2016, respectively. Operating expenses consist of cost of services and selling, general and administrative expenses. Cost of services describes the direct expenses incurred in performing a particular service for customers, including the cost of direct labor expense in putting the service in saleable condition. Selling, general and administrative expenses are incurred in selling or marketing and for the direction of the enterprise as a whole, including accounting, legal fees, sales, investor relations and mergers and acquisitions.

 

23


 

Operating expenses for the year ended December 31, 2018 decreased  $988.4 million,  mainly due to the adoption of ASC 606 and the net presentation of interchange and payment network fees. See Notes 1 and 2 in the Notes to Consolidated Financial Statements for further discussion of the Company’s adoption of ASC 606 as of January 1, 2018. The decrease was partially offset by an increase in operating expenses related to acquisitions as well as increased acquisition expenses and amortization of acquisition intangibles.  Operating expenses for the year ended December 31, 2017 included a decrease of $7.0 million, related to the effects of currency translation of the Company’s foreign-based subsidiaries. TransFirst had an incremental year-over-year impact on operating expenses of $417.3 million in 2017. Operating expenses for the year ended December 31, 2016 were also impacted by the TransFirst acquisition. Operating expenses increased $1.3 billion due to the acquisition of TransFirst in 2016. Operating expenses in 2017 and 2016 were also impacted by $1.9 million and $21.7 million, respectively, of litigation settlement, settlement discussions and related legal expenses. In 2017, TSYS incurred an expense associated with a special one-time cash bonus of $1,000 to certain employees as a result of the Company’s continued success and to share some of the savings that resulted from the Tax Act legislation passed in December 2017.

 

The Company’s cost of services were $2.5 billion, $3.6 billion and $3.0 billion in 2018, 2017 and 2016, respectively. The decrease in cost of services for 2018, as compared to 2017, is due to the adoption of ASC 606 and the presentation of interchange and payment network fees on a  net basis.  The increases in cost of services for 2017, as compared to 2016, are due to increases in employment, severance, technology and facilities and other costs to support revenue growth and the acquisition of TransFirst. The Company’s selling, general and administrative expenses were $713.0 million, $616.6 million and $603.6 million in 2018, 2017 and 2016, respectively. The increase in selling, general and administrative costs in 2018 is the result of an increase in acquisition expenses and amortization for acquisition intangibles. The increase in selling, general and administrative costs in 2017 were due primarily to the acquisition of TransFirst in April 2016.

 

The Company’s merger and acquisition (“M&A”) and integration expenses include transaction-related and integration-related expenses associated with acquisitions. These expenses consist of costs pertaining to the completion of the acquisition such as legal, accounting and professional fees, share-based compensation, as well as, third-party support fees, systems integration costs and personnel costs for severance and retention. M&A and integration expenses were $29.0 million, $13.4 million and $32.3 million for the year ended December 31, 2018, 2017 and 2016, respectively.

 

Operating Income

 

Operating income increased 12.1% for the year ended December 31, 2018, compared to 2017. The Company’s operating profit margin for the year ended December 31, 2018 was 20.4%, compared to 14.9% in 2017. TSYS’ operating margins increased for the year ended December 31, 2018, as compared to 2017,  due primarily to the adoption of ASC 606 and the presentation of interchange and payment network fees on a net basis.  TSYS’ operating margins increased for the year ended December 31, 2017, as compared to 2016, due primarily to a decrease in the amount of acquisition and integration expenses.

 

Nonoperating Income (Expense)

 

Nonoperating income (expense) consists of interest income, interest expense, and gains and losses on currency transactions. Nonoperating expense increased in 2018 as compared to 2017, and increased in 2017 as compared to 2016 primarily due to the increase in interest expense.

 

The following table provides a summary of nonoperating expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31, 

 

Percent Change

 

(in thousands)

    

2018

    

2017

    

2016

    

2018 vs. 2017

 

2017 vs. 2016

 

Interest expense1

 

$

(163,357)

 

 

(118,221)

 

 

(115,363)

 

38.2

%  

2.5

%

Interest income

 

 

4,476

 

 

2,193

 

 

1,840

 

nm

 

19.2

 

Currency translation and transaction gains (losses), net

 

 

109

 

 

(907)

 

 

1,748

 

nm

 

nm

 

Other

 

 

(4,202)

 

 

453

 

 

(575)

 

nm

 

nm

 

Total

 

$

(162,974)

 

 

(116,482)

 

 

(112,350)

 

39.9

 

3.7

 

nm = not meaningful

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

Interest expense includes interest and related costs on Senior Notes of $121.6 million, $102.0 million and $87.7 million, respectively, for the years ended December 31, 2018, 2017 and 2016.

 

Interest expense for the year ended December 31, 2018 increased $45.1 million compared to 2017. The increase in interest expense in 2018 compared to 2017 is primarily due to the debt financing of the acquisition of Cayan. Interest expense for the year ended December 31, 2017 increased $2.9 million compared to 2016. The increase in interest expense in 2017 compared

24


 

to 2016 is due to the debt financing of the acquisition of TransFirst in April 2016. Refer to Notes 12 and 23 in the Notes to Consolidated Financial Statements for more information on long-term borrowings and acquisitions.

 

Income Taxes

 

Below is a summary of income tax expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31, 

 

Percent Change

 

(in thousands)

    

2018

    

2017

    

2016

    

2018 vs. 2017

 

2017 vs. 2016

 

Income tax expense

 

$

127,003

 

65,878

 

161,175

 

92.8

%  

(59.1)

%

Effective income tax rate

 

 

19.3

%  

10.7

%  

35.0

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

During 2018, the Company experienced a net decrease in its valuation allowance for deferred income tax assets of $1.7 million primarily as a result of the utilization of income tax credit carryforwards against the one-time transition tax that was enacted as part of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”).

 

As a result of the Tax Act, the Company realized a net tax benefit of $135.9 million. This was primarily the result of remeasuring deferred tax assets and deferred tax liabilities.

 

In 2018, TSYS reassessed its uncertain tax positions for all jurisdictions. As a result, the Company decreased unrecognized tax benefits by $1.5 million.

 

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

 

Equity in Income of Equity Investments

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31, 

 

Percent Change

 

(in thousands)

    

2018

  

2017

  

2016

  

2018 vs. 2017

 

2017 vs. 2016

 

Equity in income of equity investments, net of tax

 

$

45,156

 

40,532

 

26,115

 

11.4

%  

55.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The increases in equity income in 2018 and 2017 are primarily the result of organic growth in China Union Pay Data Co., Ltd (“CUP Data”). Refer to Note 11 in the Notes to Consolidated Financial Statements for more information on equity investments.

 

Net Income

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31, 

 

Percent Change

 

(in thousands, except per share data)

    

2018

    

2017

    

2016

    

2018 vs. 2017

 

2017 vs. 2016

 

Net income

 

$

577,917

 

592,216

 

325,972

 

(2.4)

%  

81.7

%

Net income attributable to noncontrolling interests

 

 

(1,261)

 

(6,031)

 

(6,334)

 

79.1

 

4.8

 

Net income attributable to TSYS common shareholders

 

$

576,656

 

586,185

 

319,638

 

(1.6)

 

83.4

 

Basic EPS attributable to TSYS common shareholders1

 

$

3.17

 

3.19

 

1.74

 

(0.7)

 

83.3

 

Diluted EPS attributable to TSYS common shareholders1

 

$

3.14

 

3.16

 

1.73

 

(0.8)

 

82.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

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

 

Net income attributable to noncontrolling interests in 2018 decreased by $4.7 million from 2017 and decreased  $0.3 million in 2017 from 2016. The decrease in 2018 compared to 2017 is the result of TSYS acquiring the remaining 15%  equity interest in Central Payment Co., LLC (“CPAY”) in April 2018. The decrease in 2017 compared to 2016 is the result of TSYS acquiring an additional 10% ownership in CPAY in February 2017 partially offset by an increase in operating results of CPAYRefer to Note 23 in the Notes to Consolidated Financial Statements for more information.

 

25


 

Non-GAAP Financial Measures

 

Management evaluates the Company's operating performance based on a constant currency basis, operating margin on a net revenue basis, adjusted EBITDA, adjusted earnings, adjusted diluted EPS and free cash flow which are non-GAAP measures. TSYS also uses these non-GAAP financial measures to evaluate and assess TSYS' financial performance against budget.

 

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

 

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

 

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

 

 

 

 

 

 

 

Constant Currency Comparison

 

 

 

 

 

 

(in thousands)

 

Years Ended December 31, 

Consolidated

 

2018

 

2017

Total revenues (GAAP)

 

$

4,028,211

 

4,927,965

Foreign currency impact1

 

 

(10,325)

 

 —

Constant currency2  (non-GAAP)

 

$

4,017,886

 

4,927,965

 

 

 

 

 

 

Net revenue (non-GAAP)

 

$

3,815,900

 

3,400,332

Foreign currency impact1

 

 

(9,704)

 

 —

Constant currency2  (non-GAAP)

 

$

3,806,196

 

3,400,332

 

 

 

 

 

 

Operating income (GAAP)

 

$

822,738

 

734,044

Foreign currency impact1

 

 

(4,828)

 

 —

Constant currency2  (non-GAAP)

 

$

817,910

 

734,044

 

 

 

 

 

 

Issuer Solutions

 

 

 

 

 

Segment net revenue (GAAP)

 

$

1,718,177

 

1,594,959

Foreign currency impact1

 

 

(9,446)

 

 —

Constant currency2  (non-GAAP)

 

$

1,708,731

 

1,594,959

 

 

 

 

 

 

 

 

 

 

 

 

 

Constant Currency Comparison

 

 

 

 

 

 

(in thousands)

 

Years Ended December 31, 

Consolidated

 

2017

 

2016

Total revenues (GAAP)

 

$

4,927,965

 

4,170,077

Foreign currency impact1

 

 

15,468

 

 —

Constant currency2  (non-GAAP)

 

$

4,943,433

 

4,170,077

 

 

 

 

 

 

Net revenue (non-GAAP)

 

$

3,400,332

 

3,041,876

Foreign currency impact1

 

 

14,417

 

 —

Constant currency2  (non-GAAP)

 

$

3,414,749

 

3,041,876

 

 

 

 

 

 

Operating income (GAAP)

 

$

734,044

 

573,382

Foreign currency impact1

 

 

8,922

 

 —

Constant currency2  (non-GAAP)

 

$

742,966

 

573,382

 

 

 

 

 

 

Issuer Solutions

 

 

 

 

 

Segment net revenue (GAAP)

 

$

1,594,959

 

1,515,462

Foreign currency impact1

 

 

14,326

 

 —

Constant currency2  (non-GAAP)

 

$

1,609,285

 

1,515,462

 

 

 

 

 

 

1

Reflects the impact of calculated changes in foreign currency rates from the comparable period.

2

Reflects current period results on a non-GAAP basis as if foreign currency rates did not change from the comparable prior year period.

26


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Revenue and Operating Margin on a Net Revenue Basis

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31, 

(in thousands)

 

 

2018

 

2017

 

2016

 

Operating income (GAAP) (a)

 

$

822,738

 

734,044

 

573,382

 

Total revenues (GAAP) (b)

 

$

4,028,211

 

4,927,965

 

4,170,077

 

Less: reimbursable items, interchange and payment network fees

 

 

212,311

 

1,527,633

 

1,128,201

 

Net revenue (non-GAAP) (c)

 

$

3,815,900

 

3,400,332

 

3,041,876

 

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

 

 

20.4

%  

14.9

%  

13.8

%

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

 

 

21.6

%  

21.6

%  

18.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31, 

(in thousands)

 

2018

 

2017

 

2016

 

Net income (GAAP) (a)

 

$

577,917

 

592,216

 

325,972

 

Adjust for:

 

 

 

 

 

 

 

 

Less: Equity in income of equity investments

 

 

(45,156)

 

(40,532)

 

(26,115)

 

Add: Income tax expense

 

 

127,003

 

65,878

 

161,175

 

Add: Interest expense, net

 

 

158,881

 

116,028

 

113,523

 

Add: Depreciation and amortization

 

 

408,573

 

405,906

 

373,546

 

Add: Client incentive/contract asset amortization1

 

 

28,105

 

 —

 

 —

 

Add: Contract cost asset amortization1

 

 

35,729

 

 —

 

 —

 

Less/Add: (Gain)/loss on foreign currency translation and transaction (gains) losses

 

 

(109)

 

907

 

(1,748)

 

Add/Less: Other nonoperating expenses (income)

 

 

4,202

 

(453)

 

575

 

Add: Share-based compensation

 

 

48,758

 

42,409

 

43,728

 

Add: Cayan and TransFirst M&A and integration expenses2

 

 

26,550

 

13,367

 

28,176

 

Add: Litigation, claims, judgments or settlements3

 

 

 —

 

1,947

 

21,719

 

Adjusted EBITDA (non-GAAP) (b)

 

$

1,370,453

 

1,197,673

 

1,040,551

 

 

 

 

 

 

 

 

 

 

Total revenues (GAAP) (c)

 

$

4,028,211

 

4,927,965

 

4,170,077

 

Net income margin on total revenues (GAAP) (a)/(c)

 

 

14.3

%

12.0

%

7.8

%

 

 

 

 

 

 

 

 

 

Net revenue (non-GAAP) (d)

 

$

3,815,900

 

3,400,332

 

3,041,876

 

Adjusted EBITDA margin on net revenue (non-GAAP) (b)/(d)

 

 

35.9

%

35.2

%

34.2

%

 

 

 

 

 

 

 

 

 

1

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

2

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

3

Litigation settlement or settlement discussions with counterparties and related legal expenses.

 

 

 

 

 

 

 

 

 

 

Adjusted Earnings and Adjusted Diluted Earnings Per Share

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31, 

 

(in thousands, except per share data)

 

2018

 

2017

 

2016

 

Income attributable to TSYS common shareholders from continuing operations (GAAP)

 

$

576,656

 

586,185

 

319,638

 

Adjust for amounts attributable to TSYS common shareholders:

 

 

 

 

 

 

 

 

Add: Acquisition intangible amortization

 

 

236,707

 

207,172

 

188,887

 

Add: Share-based compensation

 

 

48,757

 

42,399

 

43,691

 

Add: Cayan and TransFirst M&A and integration expenses1