Note 8 — Supplementary Cash Flow Information
Nonvested Awards
The Company issued shares of common stock to certain key employees during the first six months of 2017 and 2016, respectively. The grants were issued under nonvested stock bonus awards for services to be provided in the future. Refer to Note 5 for more information.
Equipment Acquired Under Capital Lease Obligations and Software Acquired Under License Agreements
There was approximately $2.1 million of equipment acquired under capital lease obligations and $5.9 million of software acquired under license agreements in the first six months of 2017. During the first six months of 2016, the Company acquired approximately $720,000 of equipment under capital lease obligations.
Note 9 — Commitments and Contingencies
Refer to Note 15 of the Company’s audited financial statements for the year ended December 31, 2016, which is included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the SEC, for a discussion regarding commitments and contingencies.
Legal Proceedings
The Company is subject to various legal proceedings and claims and is also subject to information requests, inquiries and investigations arising out of the ordinary conduct of its business. The Company establishes accruals for litigation and similar matters when those matters present loss contingencies that TSYS determines to be both probable and reasonably estimable in accordance with GAAP. Legal costs are expensed as incurred. In the opinion of management, based on current knowledge and in part upon the advice of legal counsel, all matters not specifically discussed below are believed to be adequately covered by insurance, or, if not covered, the possibility of losses from such matters are believed to be remote or such matters are of such kind or involve such amounts that would not have a material adverse effect on the financial position, results of operations or cash flows of the Company if disposed of unfavorably.
TelexFree Matter
ProPay, Inc. (ProPay), a subsidiary of the Company, has been named as one of a number of defendants (including other merchant processors) in several purported class action lawsuits relating to the activities of TelexFree, Inc. and its affiliates and principals. TelexFree is a former merchant customer of ProPay. With regard to TelexFree, each purported class action lawsuit generally alleges that TelexFree engaged in an improper multi-tier marketing scheme involving voice-over Internet protocol telephone services. The plaintiffs in each of the purported class action complaints generally allege that the various merchant processor defendants, including ProPay, aided and abetted the improper activities of TelexFree. TelexFree filed for bankruptcy protection in Nevada. The bankruptcy proceeding was subsequently transferred to the Massachusetts Bankruptcy Court.
Specifically, ProPay has been named as one of a number of defendants (including other merchant processors) in each of the following purported class action complaints relating to TelexFree: (i) Waldermara Martin, et al. v. TelexFree, Inc., et al. (Case No. BK-S-14-12524-ABL) filed on May 3, 2014 in the United States Bankruptcy Court District of Nevada, (ii) Anthony Cellucci, et al. v. TelexFree, Inc., et. al. (Case No. 4:14-BK-40987) filed on May 15, 2014 in the United States Bankruptcy Court District of Massachusetts, (iii) Maduako C. Ferguson Sr., et al. v. Telexelectric, LLP, et. al (Case No. 5:14-CV-00316-D) filed on June 5, 2014 in the United States District Court of North Carolina, (iv) Todd Cook v. TelexElectric LLP et al. (Case No. 2:14-CV-00134), filed on June 24, 2014 in the United States District Court for the Northern District of Georgia, (v) Felicia Guevara v. James M. Merrill et al., CA No. 1:14-cv-22405-DPG), filed on June 27, 2014 in the United State District Court for the Southern District of Florida, and (vi) Reverend Jeremiah Githere, et al. v. TelexElectric LLP et al. (Case No. 1:14-CV-12825-GAO), filed on June 30, 2014 in the United States District Court for the District of Massachusetts (together, the “Actions”). On October 21, 2014, the Judicial Panel on Multidistrict Litigation
transferred and consolidated the Actions before the United States District Court for the District of Massachusetts (the “Consolidated Action”).
Following the Judicial Panel on Multidistrict Litigation’s October 21, 2014 order, four additional cases arising from the alleged TelexFree scheme were transferred to the United States District Court for the District of Massachusetts for coordinated or consolidated proceedings, including (i) Paulo Eduardo Ferrari et al. v. Telexfree, Inc. et al. (Case No. 14-04080); (ii) Magalhaes v. TelexFree, Inc., et al., No. 14-cv-12437 (D. Mass.); (iii) Griffith v. Merrill et al., No. 14-CV-12058 (D. Mass.); Abelgadir v. Telexelectric, LLP, No. 14-09857 (S.D.N.Y.) In addition, on September 23, 2015, a putative class action relating to TelexFree was filed in the United States District Court for the District of Arizona, styled
Rita Dos Santos, Putative Class Representatives and those Similarly Situated v. TelexElectric, LLP et al
., 2:15-cv-01906-NVW (the “Arizona Action”). The Arizona Action makes claims similar to those alleged in the consolidated action pending before the United States District Court for the District of Massachusetts. On September 29, 2015, a group of certain defendants to the Consolidated Action, including ProPay, filed a “tag along” notice with the Judicial Panel on Multidistrict Litigation, asking that the Arizona Action be transferred to the District of Massachusetts where it can be consolidated or coordinated with the Consolidated Action. On October 20, 2015, the Judicial Panel on Multidistrict Litigation transferred the Arizona Action to the District of Massachusetts.
The United States District Court for the District of Massachusetts appointed lead plaintiffs’ counsel on behalf of the putative class of plaintiffs in the Consolidated Action. On March 31, 2015, the plaintiffs filed a First Consolidated Amended Complaint (the “Consolidated Complaint”). The Consolidated Complaint purports to bring claims on behalf of all persons who purchased certain TelexFree “memberships” and suffered a “net loss” between January 1, 2012 and April 16, 2014. The Consolidated Complaint supersedes the complaints filed prior to consolidation of the Actions, and alleges that ProPay aided and abetted tortious acts committed by TelexFree, and that ProPay was unjustly enriched in the course of providing payment processing services to TelexFree. On April 30, 2015, the plaintiffs filed a Second Consolidated Amended Complaint (the “Second Amended Complaint”), which amends and supersedes the Consolidated Complaint. Like the Consolidated Complaint, the Second Amended Complaint generally alleges that ProPay aided and abetted tortious acts committed by TelexFree, and that ProPay was unjustly enriched in the course of providing payment processing services to TelexFree
Several defendants, including ProPay, moved to dismiss the Second Amended Complaint on June 2, 2015.Briefing on those motions closed on October 16, 2015. The court held a hearing on the motions to dismiss on November 2, 2015. At present, pursuant to a court order, all discovery in the action is stayed pending the resolution of parallel criminal proceedings against certain former principals of TelexFree, Inc. Despite that stay of discovery, the lead plaintiffs have subpoenaed documents previously produced by ProPay pursuant to the Federal Rules of Bankruptcy Procedure to the court-appointed trustee in the TelexFree bankruptcy proceeding. ProPay has filed a motion to quash that subpoena. ProPay’s motion remains pending before the Court. ProPay’s motion to dismiss also remains pending.
On April 4, 2017, lead plaintiffs moved the court for leave to further amend the Second Amended Complaint, and submitted a proposed amendment with their motion. The proposed amendment seeks to add new defendants to the case but does not make any new or additional allegations against ProPay. ProPay, along with certain other defendants in the litigation, have not opposed the lead plaintiffs’ motion to further amend the Second Amended Complaint so long as the amendment, if allowed by the court, would not delay the court’s decision on the pending motions to dismiss. Lead plaintiffs’ motion for leave to amend is pending before the court.
ProPay has also received various subpoenas, a seizure warrant and other inquiries requesting information regarding TelexFree from (i) the Commonwealth of Massachusetts, Securities Division, (ii) United States Securities and Exchange Commission, (iii) US Immigration and Customs Enforcement, and (iv) the bankruptcy Trustee of the Chapter 11 entities of TelexFree, Inc., TelexFree, LLC and TelexFree Financial, Inc. Pursuant to the seizure warrant served by the United States Attorney’s Office for the District of Massachusetts, ProPay delivered all funds associated with TelexFree held for chargeback and other purposes by ProPay to US Immigration and Customs Enforcement. In addition, ProPay received a notice of potential claim from the bankruptcy Trustee as a result of the relationship of ProPay with TelexFree and its affiliates.
Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
Financial Overview
Total System Services, Inc.’s (TSYS' or the Company’s) revenues are derived from providing payment processing services, merchant services and related payment services to financial and nonfinancial institutions, generally under long-term processing contracts. The Company also derives revenues by providing general-purpose reloadable (GPR) prepaid debit cards, payroll cards and alternative financial services to underbanked and other consumers. The Company's services are provided through three operating segments: Issuer Solutions, Merchant Solutions and Netspend.
Through the Company’s Issuer Solutions segment, TSYS processes information through its cardholder systems to financial and nonfinancial institutions throughout the United States and internationally. The Company's Merchant Solutions segment provides merchant services to merchant acquirers and merchants mainly in the United States. The Company’s Netspend segment provides prepaid program management services to consumers and businesses in the United States.
For a detailed discussion regarding the Company’s operations, see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the Securities and Exchange Commission (SEC).
Management’s discussion and analysis contains items prepared in conformity with GAAP, as well as non-GAAP measures. For detailed information and reconciliations to GAAP, refer to the discussion under the caption Non-GAAP Measures.
A summary of the financial highlights for 2017, as compared to 2016, is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
Six months ended June 30,
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
(in thousands, except per share data)
|
|
2017
|
|
2016
|
|
Change
|
|
2017
|
|
2016
|
|
Change
|
|
|
Total revenues
|
|
$
|
1,222,375
|
|
1,151,587
|
|
6.1
|
%
|
$
|
2,407,100
|
|
1,890,965
|
|
27.3
|
%
|
|
Net revenue
1
|
|
$
|
844,068
|
|
794,937
|
|
6.2
|
|
$
|
1,676,960
|
|
1,466,581
|
|
14.3
|
|
|
Operating income
|
|
$
|
193,248
|
|
135,821
|
|
42.3
|
|
$
|
360,431
|
|
287,508
|
|
25.4
|
|
|
Net income attributable to TSYS common shareholders
|
|
$
|
115,014
|
|
69,708
|
|
65.0
|
|
$
|
220,882
|
|
160,336
|
|
37.8
|
|
|
Basic earnings per share (EPS) attributable to TSYS common shareholders
2
|
|
$
|
0.62
|
|
0.38
|
|
64.6
|
|
$
|
1.20
|
|
0.87
|
|
37.3
|
|
|
Diluted EPS attributable to TSYS common shareholders
2
|
|
$
|
0.62
|
|
0.38
|
|
64.3
|
|
$
|
1.19
|
|
0.87
|
|
37.2
|
|
|
Adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA)
3
|
|
$
|
307,698
|
|
274,032
|
|
12.3
|
|
$
|
594,935
|
|
504,862
|
|
17.8
|
|
|
Adjusted earnings
4
|
|
$
|
158,215
|
|
135,416
|
|
16.8
|
|
$
|
310,480
|
|
256,126
|
|
21.2
|
|
|
Adjusted diluted EPS
5
|
|
$
|
0.85
|
|
0.73
|
|
16.4
|
|
$
|
1.68
|
|
1.39
|
|
20.7
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
$
|
400,792
|
|
339,081
|
|
18.2
|
|
|
Free cash flow
6
|
|
|
|
|
|
|
|
|
$
|
335,249
|
|
257,273
|
|
30.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refer to the reconciliation of GAAP to non-GAAP measures later in Item 2.
|
1
|
|
Net revenue is defined as total revenues less reimbursable items, as well as, merchant acquiring interchange and assessment fees charged by card associations or payment networks that are recorded by TSYS as expense.
|
|
2
|
|
Basic and diluted EPS is computed based on the two-class method in accordance with the guidance under GAAP. Refer to Note 10 in the Unaudited Consolidated Financial Statements for more information on EPS.
|
|
3
|
|
Adjusted EBITDA is defined as net income excluding equity in income of equity investments, nonoperating income/(expense), income taxes, depreciation, amortization, share-based compensation expenses and other items.
|
|
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 shares outstanding used for diluted EPS calculations.
|
|
6
|
|
Free cash flow is defined as net cash provided by operating activities less capital expenditures.
|
Financial Review
This Financial Review provides a discussion of critical accounting policies and estimates, related party transactions and off-balance sheet arrangements. This Financial Review also discusses the results of operations, financial position, liquidity and capital resources of TSYS and outlines the factors that have affected its recent earnings, as well as those factors that may affect its future earnings. For a detailed discussion regarding these topics, refer to our Notes to Consolidated Financial Statements and “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” which are included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the SEC.
Critical Accounting Policies and Estimates
Refer to Note 1 in the Notes to Unaudited Consolidated Financial Statements for more information on changes to the Company’s critical accounting policies, estimates and assumptions or the judgments affecting the application of those estimates and assumptions in 2017.
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 provide the latest technology while avoiding the risk of ownership. Neither the assets nor obligations related to these leases are included on the balance sheet.
Contractual Obligations
The Company has long-term obligations which consist of required minimum future payments under contracts with certain of our distributors and other service providers.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, refer to Note 1 in the Notes to Unaudited Consolidated Financial Statements and see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the SEC.
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 its clients through tiered pricing of various thresholds for volume activity. TSYS’ revenues are based upon transactional information accumulated by its systems or reported by its customers. The Company’s revenues are impacted by currency translation of foreign operations, as well as doing business in the current economic environment.
Total revenues increased 6.1% and 27.3%, respectively, for the three and six months ended June 30, 2017, compared to the same periods in 2016. The impact of the acquisition of TransFirst on total revenues for the six months ended June 30, 2017 was $872.1 million. Revenues for the three and six months ended June 30, 2017 also included decreases of $10.0 million and $21.1 million, respectively, related to the effects of currency translation of the Company’s foreign-based subsidiaries and branches.
The Company reviews revenue performance on a net revenue basis which is a non-GAAP measure. Net revenue is defined as total revenues less reimbursable items, as well as, merchant acquiring interchange and assessment fees charged by the card associations or payment networks that are recorded by TSYS as expense and are mainly related to the TransFirst business. The Company has included reimbursements received for out-of-pocket expenses as revenues and expenses. The largest reimbursable expense items for which TSYS is reimbursed by clients are postage and network association fees. The Company’s reimbursable items are primarily impacted by changes in postal rates and changes in the volumes of mailing activities by its clients. Reimbursable items for the three and six months ended June 30, 2017 were $64.1 million and $126.1 million, respectively, decreases of 3.1% and 5.8% compared to the same periods last year.
Net revenue increased $49.1 million and $210.3 million, or 6.2% and 14.3%, respectively, during the three and six months ended June 30, 2017, compared to the same periods in 2016. The increase in net revenue for the three months ended June 30, 2017, as compared to the same period in 2016, is primarily the result of organic growth, partially offset by a decrease of $9.3 million associated with currency translation. The increase in net revenue for the six months ended June 30, 2017, as compared to the same period in 2016, is primarily the result of the acquisition of TransFirst, as well as organic growth, partially offset by a decrease of $19.6 million associated with currency translation.
Major Customers
For discussion regarding the Company’s major customers, refer to Note 7 in the Notes to Unaudited Consolidated Financial Statements and see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the SEC.
The Company works to maintain a large and diverse customer base across various industries. For the three and six months ended June 30, 2017, the Company did not have a major customer on a consolidated basis. However, 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 Netspend. Refer to Note 7 in the Notes to Unaudited Consolidated Financial Statements for more information on the Company’s operating segments.
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 capitalized conversion costs or client incentives associated with the contract and, in some cases, may cover a portion of lost future revenue and profit. Although these contracts may be terminated upon certain occurrences, the contracts provide 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.
TSYS’ revenues in its Issuer Solutions segment are primarily derived from electronic payment processing. There are certain basic core services directly tied to accounts on file (AOF) and transactions. These are provided to all of TSYS’ processing clients. The core services begin with AOF.
The core services include housing an AOF, authorizing transactions (authorizations), accumulating monthly transactional activity (transactions) and providing a monthly statement (statement generation). From these core services, TSYS’ clients also have the option to use fraud and portfolio management services. Collectively, these services are considered volume-based revenues.
Below is a summary of AOF for the Company’s Issuer Solutions segment:
|
|
|
|
|
|
|
|
|
(in millions)
|
|
As of June 30,
|
|
|
AOF
|
|
2017
|
|
2016
|
|
Percent
Change
|
|
|
Consumer
|
|
457.0
|
|
425.3
|
|
7.4
|
%
|
|
Commercial
|
|
51.5
|
|
47.0
|
|
9.6
|
|
|
Other
|
|
33.5
|
|
28.8
|
|
16.2
|
|
|
Traditional AOF
1
|
|
542.0
|
|
501.1
|
|
8.2
|
|
|
Prepaid/Stored Value
2
|
|
50.6
|
|
79.5
|
|
(36.3)
|
|
|
Government Services
3
|
|
91.3
|
|
84.6
|
|
7.9
|
|
|
Commercial Card Single-Use
4
|
|
89.7
|
|
76.9
|
|
16.6
|
|
|
Total AOF
|
|
773.6
|
|
742.1
|
|
4.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Traditional accounts include consumer, retail, commercial, debit and other accounts. These accounts are grouped together due to the tendency to have more transactional activity than prepaid, government services and single-use accounts.
|
|
2
|
|
Prepaid does not include Netspend accounts. These accounts tend to have less transactional activity than the traditional accounts. Prepaid and stored value cards are issued by firms through retail establishments to be purchased by consumers to be used at a later date. These accounts tend to be the least active of all accounts on file.
|
|
3
|
|
Government services accounts are disbursements of student loan accounts issued by the Department of Education, which have minimal activity.
|
|
4
|
|
Commercial card single-use accounts are one-time use accounts issued by firms to book lodging and other travel related expenses.
|
Non-volume related revenues include processing fees which are not directly associated with AOF and transactional activity, such as certain value added products and services, custom programming and certain other services, which are only offered to TSYS’ processing clients.
Additionally, certain clients license the Company’s processing systems and process in-house. Since 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 based in the United States 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 has two major customers for the three and six months ended June 30, 2017.
Below is a summary of the Issuer Solutions segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
Percent
Change
|
|
|
2017
|
|
2016
|
|
Percent
Change
|
|
|
|
Volume-based revenues
|
|
$
|
198,348
|
|
186,554
|
|
6.3
|
%
|
|
$
|
388,653
|
|
368,237
|
|
5.5
|
%
|
|
|
Non-volume related revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Processing fees
|
|
|
76,382
|
|
75,218
|
|
1.5
|
|
|
|
150,560
|
|
149,078
|
|
1.0
|
|
|
|
Value-added, custom programming, licensing and other
|
|
|
60,591
|
|
57,336
|
|
5.7
|
|
|
|
125,684
|
|
119,295
|
|
5.4
|
|
|
|
Output and managed services
|
|
|
57,439
|
|
58,754
|
|
(2.2)
|
|
|
|
115,118
|
|
119,261
|
|
(3.5)
|
|
|
|
Total non-volume related revenues
|
|
|
194,412
|
|
191,308
|
|
1.6
|
|
|
|
391,362
|
|
387,634
|
|
1.0
|
|
|
|
Net revenue
1
|
|
$
|
392,760
|
|
377,862
|
|
3.9
|
|
|
$
|
780,015
|
|
755,871
|
|
3.2
|
|
|
|
Adjusted segment operating income
2
|
|
$
|
147,277
|
|
128,493
|
|
14.6
|
|
|
$
|
281,150
|
|
263,570
|
|
6.7
|
|
|
|
Adjusted segment operating margin
3
|
|
|
37.5
|
%
|
34.0
|
%
|
|
|
|
|
36.0
|
%
|
34.9
|
%
|
|
|
|
|
Key indicators
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transactions
|
|
|
5,340.6
|
|
4,985.1
|
|
7.1
|
|
|
|
10,217.2
|
|
9,573.1
|
|
6.7
|
|
|
|
Total Accounts on File (AOF)
|
|
|
|
|
|
|
|
|
|
|
773.6
|
|
742.1
|
|
4.2
|
|
|
|
Total Traditional AOF
|
|
|
|
|
|
|
|
|
|
|
542.0
|
|
501.1
|
|
8.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
.
|
For the three and six months ended June 30, 2017, approximately 50.5% and 49.8% of net revenue was driven by the volume of AOF and transactions processed and approximately 49.5% and 50.2% was derived from non-volume based revenues.
Segment revenues for the three and six months ended June 30, 2017, as compared to the same periods in 2016, included decreases of $9.3 million and $19.6 million, respectively, associated with currency translation.
The increases in net revenue for the three and six months ended June 30, 2017, as compared to the same periods in 2016, were driven by organic growth.
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.
Merchant Solutions
The Merchant Solutions segment provides merchant processing 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 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 Solutions include authorization and capture of transactions; clearing and settlement of transactions; information reporting services related to transactions; and merchant billing services. This segment has no major customers for the three and six months ended June 30, 2017.
The Merchant Solutions segment's 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.
Below is a summary of the Merchant Solutions segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
(in thousands, except key indicators)
|
|
2017
|
|
2016
|
|
Percent
Change
|
|
|
2017
|
|
2016
|
|
Percent
Change
|
|
|
Net revenue
1
|
|
$
|
278,588
|
|
261,467
|
|
6.5
|
%
|
|
$
|
539,149
|
|
382,079
|
|
41.1
|
%
|
|
Adjusted segment operating income
2
|
|
$
|
101,996
|
|
89,915
|
|
13.4
|
|
|
$
|
193,275
|
|
128,272
|
|
50.7
|
|
|
Adjusted segment operating margin
3
|
|
|
36.6
|
%
|
34.4
|
%
|
|
|
|
|
35.9
|
%
|
33.6
|
%
|
|
|
|
Key indicators:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
POS transactions
(
in millions
)
|
|
|
1,233.5
|
|
1,159.5
|
|
6.4
|
|
|
|
2,361.3
|
|
2,250.4
|
|
4.9
|
|
|
Dollar sales volume
(
in millions
)
|
|
$
|
31,127.5
|
|
28,560.8
|
|
9.0
|
|
|
$
|
60,247.9
|
|
40,344.2
|
|
49.3
|
|
|
Net revenue per POS transaction
|
|
$
|
0.226
|
|
0.225
|
|
0.2
|
|
|
$
|
0.228
|
|
0.170
|
|
34.5
|
|
|
Includes TransFirst's results for three months in 2016 and six months in 2017.
|
|
|
|
|
|
|
|
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.
|
With the acquisition of TransFirst in April 2016, TSYS included six months of TransFirst’s results as part of the Merchant Solutions segment in 2017, whereas three months of TransFirst’s results are included in the results for the six months ended June 30, 2016. TransFirst’s revenues are reported gross, which includes amounts paid for interchange and assessments. Expenses covering interchange and assessment fees are included in TransFirst’s cost of services and are directly attributable to processing fee revenues. Merchant Segment net revenue is defined as total revenues less merchant acquiring interchange and assessment fees charged by the card associations or payment networks that are recorded by TSYS as an expense.
For the three and six months ended June 30, 2017,
approximately 93.4% of TSYS’ Merchant Solutions segment net revenue was influenced by several factors, including volumes related to transactions and dollar sales volume. The remaining 6.6% of this segment’s net revenue was derived from value added services, chargebacks, managed services, investigation and risk and collection services performed.
The increase in net revenue, total segment revenues and adjusted segment operating income for the three months ended June 30, 2017, as compared to the same period in 2016, was driven by higher processing volumes, product fees and processing fees.
The increase in net revenue and adjusted segment operating income for the six months ended June 30, 2017, as compared to the same period in 2016, was driven by higher processing volumes, product fees and processing fees primarily due to the acquisition of TransFirst and including six months of Transfirst’s results in 2017 compared to three months of results in 2016.
Netspend
Netspend provides GPR prepaid debit cards, payroll cards, and alternative financial service solutions to underbanked and other consumers and businesses in the United States. Netspend’s products provide customers with access to depository accounts insured by the FDIC with a menu of pricing and features specifically tailored to their needs. Netspend has an extensive distribution and reload network comprising financial service centers and other retail locations throughout the United States, and is a program manager for FDIC-insured depository institutions that issue the card products that Netspend develops, promotes and distributes.
Netspend currently has active agreements with six Issuing Banks.
The Netspend segment markets prepaid cards through multiple distribution channels, including alternative financial service providers, traditional retailers, direct-to-consumer and online marketing programs, and
contractual relationships with corporate employers. This segment
has no major customers and one major third-party distributor for the three and six months ended June 30, 2017.
The Netspend segment’s revenues primarily consist of a portion of the service fees and interchange revenues received by Netspend’s prepaid card Issuing Banks and others in connection with the programs managed by this segment. Cardholders are charged fees for transactions including fees for PIN and signature-based purchase transactions made using their prepaid cards, for ATM withdrawals or other transactions conducted at ATMs, for balance inquiries, and monthly maintenance fees among others. Cardholders are also charged fees associated with additional products and services offered in connection with certain cards including the use of overdraft features, bill payment options, custom card designs and card-to-card transfers of funds initiated through call centers. The Netspend segment also earns revenues from a portion of the interchange fees remitted by merchants when cardholders make purchase transactions using their cards. Subject to applicable law, interchange fees are fixed by card associations and network organizations.
Below is a summary of the Netspend segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
Percent
Change
|
|
|
2017
|
|
2016
|
|
Percent
Change
|
|
|
Net revenue
1
|
|
$
|
183,065
|
|
162,620
|
|
12.6
|
%
|
|
$
|
380,530
|
|
347,613
|
|
9.5
|
%
|
|
Adjusted segment operating income
2
|
|
$
|
46,044
|
|
42,481
|
|
8.4
|
|
|
$
|
94,692
|
|
84,682
|
|
11.8
|
|
|
Adjusted segment operating margin
3
|
|
|
25.2
|
%
|
26.1
|
%
|
|
|
|
|
24.9
|
%
|
24.4
|
%
|
|
|
|
Key indicators
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of active cards
4
|
|
|
|
|
|
|
|
|
|
|
4,964.9
|
|
4,448.8
|
|
11.6
|
|
|
Number of active cards with direct deposit
5
|
|
|
|
|
|
|
|
|
|
|
2,416.7
|
|
2,192.5
|
|
10.2
|
|
|
Percentage of active cards with direct deposit
|
|
|
|
|
|
|
|
|
|
|
48.7
|
%
|
49.3
|
%
|
|
|
|
Gross dollar volume
6
|
|
$
|
7,605.5
|
|
6,614.7
|
|
15.0
|
|
|
$
|
17,212.8
|
|
15,776.2
|
|
9.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
4
|
|
Number of active cards represents the total number of prepaid cards that have had a PIN or signature-based purchase transaction, a point-of-sale load transaction or an ATM withdrawal within three months of the date of determination.
|
|
5
|
|
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.
|
|
6
|
|
Gross dollar volume represents the total dollar volume of debit transactions and cash withdrawals made using Netspend products.
|
For the three and six months ended June 30, 2017, respectively, 70.3%
and
68.6%
of revenues were derived from service fees charged to cardholders and
29.7% and 31.4%
of revenues were derived from interchange and other revenues.
Service fee revenues are driven by the number of active cards and in particular by the number of cards with direct deposit. Cardholders with direct deposit generally initiate more transactions and generate more revenues than those that do not take advantage of this feature. Interchange revenues are driven by gross dollar volume. Substantially all of the Netspend segment revenues were volume driven as they were driven by the active card and gross dollar volume indicators.
Segment net revenue for the three and six months ended June 30, 2017, as compared to the same periods in 2016, increased $20.4 million and $32.9 million, respectively. Service fee revenue increased $12.0 million and $18.7 million, or 10.3% and 7.7%, respectively. Revenues from interchange and other services increased $8.4 million and $14.2 million, or 18.2% and 13.5%, respectively. These increases were substantially driven by increases in the number of active cards and gross dollar volume during the three and six months ended June 30, 2017.
The Consumer Financial Protection Bureau (CFPB) has promulgated a new rule regarding prepaid financial products, which, among other things, establishes new disclosure requirements specific to prepaid accounts, eliminates certain fees that may currently be imposed on prepaid accounts, and effectively eliminates the ability of a prepaid card provider, such as the Company’s Netspend business, to offer courtesy overdraft protection on prepaid accounts. The new rule was originally scheduled to become effective on October 1, 2017. In April 2017, the CFPB released a final rule delaying the effective date by six months. The rule will now take effect on April 1, 2018. Given this delay, the Company does not expect its 2017 financials to be significantly impacted by the rule.
Operating Expenses
The Company’s operating expenses were $1.0 billion and $2.0 billion for the three and six months ended June 30, 2017, respectively, compared to $1.0 billion and $1.6 billion for the same periods in 2016. The Company’s 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 the Company’s customers, including the cost of reimbursable items and 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.
Operating expenses for the three months ended June 30, 2017 increased $13.4 million mainly due to an increase in reimbursable items, interchange and assessments partially offset by decreases in TransFirst acquisition expenses and decreases in amortization of acquisition intangibles.
Operating expenses for the six months ended June 30, 2017 were impacted by the TransFirst acquisition. Operating expenses increased $862.5 million for the six months ended June 30, 2017 due to the acquisition of TransFirst.
The Company’s cost of services were $877.9 million and $1.7 billion for the three and six months ended June 30, 2017, which were increases of 4.3% and 31.2%, respectively, compared to the same periods last year. The increase in cost of services for the three months ended June 30, 2017 is due to increases in employment, severance, technology and facilities, interchange and assessments and other costs to support revenue growth. The increase in cost of services for the six months ended June 30, 2017 is primarily the result of the acquisition of TransFirst. The Company’s selling, general and administrative expenses were $151.2 million and $306.9 million for the three and six months ended June 30, 2017, respectively, a decrease of 13.0% and an increase of 10.8%, respectively, compared to the same periods last year. The decrease in selling, general, and administrative costs for the three months ended June 30, 2017 is the result of decreases in acquisition expenses and amortization of acquisition intangibles. The increase in selling, general, and administrative costs for the six months ended June 30, 2017, was due primarily to the acquisition of TransFirst.
The Company’s transaction and integration expenses related to the acquisition of TransFirst in April 2016 were $4.1 million and $9.0 million, respectively, for the three and six months ended June 30, 2017. These expenses consist of costs related to the completion of the acquisition such as legal, accounting and professional fees, share-based compensation, as well as, personnel costs for severance and retention.
Operating Income
Operating income increased 42.3% and 25.4%, respectively, for the three and six months ended June 30, 2017, compared to the same periods in 2016. The Company’s operating profit margins for the three and six months ended June 30, 2017, respectively, were 15.8% and 15.0% compared to 11.8% and 15.2% for the same periods last year. TSYS’ operating margin increased for the three and six months ended June 30, 2017, as compared to the same periods in 2016, due primarily to decreases in acquisition related expenses and amortization of acquisition intangibles.
Nonoperating Income (Expense)
Nonoperating income (expense) consists of interest income, interest expense and gains and losses on currency transactions. Net nonoperating expense increased for the three
and six months ended June 30, 2017
, as
compared to the same periods in 2016. The increase in net nonoperating expense for the three months ended June 30, 2017 was due primarily to losses from currency translation adjustments. The increase in net nonoperating expense for the six months ended June 30, 2017 was mainly due to increased interest expense associated with the financing of the acquisition of TransFirst.
The following table provides a summary of nonoperating expenses, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
Percent
Change
|
|
|
2017
|
|
2016
|
|
Percent
Change
|
|
|
Interest expense
1
|
|
$
|
(30,012)
|
|
(31,189)
|
|
3.8
|
%
|
|
$
|
(60,231)
|
|
(53,975)
|
|
(11.6)
|
%
|
|
Interest income
|
|
|
475
|
|
419
|
|
13.4
|
|
|
|
921
|
|
910
|
|
1.2
|
|
|
Currency translation gains (losses),net
|
|
|
(513)
|
|
960
|
|
nm
|
|
|
|
(824)
|
|
1,469
|
|
nm
|
|
|
Other
|
|
|
8
|
|
50
|
|
(86.7)
|
|
|
|
189
|
|
(261)
|
|
nm
|
|
|
Total
|
|
$
|
(30,042)
|
|
(29,760)
|
|
(0.9)
|
|
|
$
|
(59,945)
|
|
(51,857)
|
|
(15.6)
|
|
|
nm = not meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Interest expense includes interest on Senior Notes of $25.5 million and $51.0 million for the three and six months ended June 30, 2017 and $25.4 million and $36.6 million for the same periods in 2016.
|
Interest expense for the three and six months ended June 30, 2017, respectively, decreased $1.2 million and increased $6.3 million compared the same periods in 2016. The decrease in interest expense for the three months ended June 30, 2017 was primarily the result of decreasing amounts of outstanding debt due to debt repayments. The increase in interest expense for the six months ended June 30, 2017 compared to 2016 was due primarily to the debt financing of the acquisition of TransFirst in April 2016.
Occasionally, the Company will provide financing to its subsidiaries in the form of an intercompany loan, which is required to be repaid in U.S. dollars. For its subsidiaries whose functional currency is other than the U.S. dollar, the translated balance of the financing (liability) is adjusted upward or downward to match the U.S. dollar obligation (receivable) on the Company’s financial statements. The upward or downward adjustment is recorded as a gain or loss on foreign currency translation.
The Company records foreign currency translation adjustments on foreign-denominated balance sheet accounts. The Company maintains several cash accounts denominated in foreign currencies. As the Company translates the foreign-denominated cash balances into U.S. dollars, the translated cash balance is adjusted upward or downward depending upon the foreign currency exchange movements. The upward or downward adjustment is recorded as a gain or loss on foreign currency translation in the Company’s statements of income.
The balance of the Company’s foreign-denominated cash accounts subject to risk of translation gains or losses as of June 30, 2017, was approximately $4.9 million, the majority of which is denominated in U.S. Dollars and Euros. The net asset account balance subject to foreign currency exchange rates between the local currencies and the U.S. Dollar as of June 30, 2017 was $17.9 million.
Income Taxes
For a detailed discussion regarding income taxes, refer to Notes 1 and 6 in the Notes to Consolidated Financial Statements and “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” which are included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the SEC. See also Note 6 in the Notes to Unaudited Consolidated Financial Statements for additional information on income taxes.
Below is a summary of income tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
Percent
Change
|
|
|
2017
|
|
2016
|
|
Percent
Change
|
|
|
|
Income tax expense
|
|
$
|
56,207
|
|
40,290
|
|
39.5
|
%
|
|
$
|
99,289
|
|
83,719
|
|
18.6
|
%
|
|
|
Effective income tax rate
|
|
|
34.4
|
%
|
38.0
|
%
|
|
|
|
|
33.0
|
%
|
35.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The primary differences in the 2017 effective income tax rates compared to the 2016 effective income tax rates reflect changes from the favorable discrete items related to the adoption of new accounting guidance regarding the treatment of excess tax benefits from share-based compensation.
In the normal course of business, TSYS is subject to examinations from various tax authorities. These examinations may alter the timing or amount of taxable income or deductions or the allocation of income among tax jurisdictions.
TSYS continually monitors and evaluates the potential impact of current events and circumstances on the estimates and assumptions used in the analysis of its income tax positions, and accordingly, TSYS’ effective tax rate may fluctuate in the future.
No provision for U.S. federal and state income taxes has been made in the Company’s consolidated financial statements for those non-U.S. subsidiaries whose earnings are considered to be permanently reinvested. The amount of undistributed earnings considered to be “reinvested” which may be subject to tax upon distribution was approximately $90.1 million as of June 30, 2017. A distribution of these non-U.S. earnings in the form of dividends, or otherwise, would subject the Company to both U.S. federal and state income taxes, as adjusted for non-U.S. tax credits, and withholding taxes payable to the various non-U.S. countries. Determination of the amount of any unrecognized deferred income tax liability on these undistributed earnings is not practicable.
Equity in Income of Equity Investments
Below is a summary of TSYS' share of income from its interest in equity investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
Percent Change
|
|
|
2017
|
|
2016
|
|
Percent Change
|
|
|
Equity in income of equity investments, net of tax
|
|
$
|
9,513
|
|
5,977
|
|
59.2
|
%
|
|
$
|
22,422
|
|
12,224
|
|
83.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increases in equity income for the three
and six months ended June 30, 2017
, compared to the same periods in 2016, are primarily the result of organic growth associated with the operations of China UnionPay Data Co., LTD (CUP Data) from core processing and value-added products and services in 2017, as well as an under-accrual of 2016 results.
Net Income
The following table provides a summary of net income and EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
(in thousands, except per share data)
|
|
2017
|
|
2016
|
|
Percent change
|
|
|
2017
|
|
2016
|
|
Percent Change
|
|
|
Net income
|
|
$
|
116,512
|
|
71,748
|
|
62.4
|
%
|
|
$
|
223,619
|
|
164,156
|
|
36.2
|
%
|
|
Net income attributable to noncontrolling interests
|
|
|
(1,498)
|
|
(2,040)
|
|
(26.6)
|
|
|
|
(2,737)
|
|
(3,820)
|
|
(28.4)
|
|
|
Net income attributable to TSYS common shareholders
|
|
$
|
115,014
|
|
69,708
|
|
65.0
|
|
|
$
|
220,882
|
|
160,336
|
|
37.8
|
|
|
Basic EPS
attributable to TSYS common shareholders
1
|
|
$
|
0.62
|
|
0.38
|
|
64.6
|
|
|
$
|
1.20
|
|
0.87
|
|
37.3
|
|
|
Diluted EPS attributable to TSYS common shareholders
1
|
|
$
|
0.62
|
|
0.38
|
|
64.3
|
|
|
$
|
1.19
|
|
0.87
|
|
37.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Basic and diluted EPS is computed based on the two-class method in accordance with the guidance under GAAP. Refer to Note 10 for more information.
|
Non-GAAP Measures
Management evaluates the Company's operating performance based upon operating margin on a net revenue basis, adjusted EBITDA, adjusted earnings, adjusted diluted EPS and free cash flow which are all non-generally accepted accounting principles (non-GAAP) measures. TSYS also uses these non-GAAP financial measures to evaluate and assess TSYS' financial performance against budget.
Although non-GAAP financial measures are often used to measure TSYS’ operating results and assess its financial performance, they are not necessarily comparable to similarly titled measures of other companies due to potential inconsistencies in the method of calculation.
TSYS believes that its provision of non-GAAP financial measures provides investors with important key financial performance indicators that are utilized by management to assess TSYS’ operating results, evaluate the business and make operational decisions on a prospective, going-forward basis. Hence, management provides disclosure of non-GAAP financial measures to give shareholders and potential investors an opportunity to see TSYS as viewed by management, to assess TSYS with some of the same tools that management utilizes internally and to be able to compare such information with prior periods. TSYS believes that inclusion of non-GAAP financial measures provides investors with additional information to help them better understand its financial statements just as management utilizes these non-GAAP financial measures to understand the business, manage budgets and allocate resources.
The following tables provide a reconciliation of GAAP to the Company’s non-GAAP financial measures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenue and Operating Margin on a Net Revenue Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
|
2017
|
|
2016
|
|
|
Operating income (a) (GAAP)
|
|
$
|
193,248
|
|
135,821
|
|
|
360,431
|
|
287,508
|
|
|
Total revenues (b) (GAAP)
|
|
$
|
1,222,375
|
|
1,151,587
|
|
|
2,407,100
|
|
1,890,965
|
|
|
Less: reimbursable items, interchange and assessments expenses
|
|
|
378,307
|
|
356,650
|
|
|
730,140
|
|
424,384
|
|
|
Net revenue (c) (non-GAAP)
|
|
$
|
844,068
|
|
794,937
|
|
|
1,676,960
|
|
1,466,581
|
|
|
Operating margin (as reported) (a)/(b) (GAAP)
|
|
|
15.8
|
%
|
11.8
|
%
|
|
15.0
|
%
|
15.2
|
%
|
|
Operating margin on a net revenue basis (a)/(c) (non-GAAP)
|
|
|
22.9
|
%
|
17.1
|
%
|
|
21.5
|
%
|
19.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Net income (GAAP)
|
|
$
|
116,512
|
|
71,748
|
|
223,619
|
|
164,156
|
|
Adjust for:
|
|
|
|
|
|
|
|
|
|
|
Less: Equity in income of equity investments, net of tax
|
|
|
(9,513)
|
|
(5,977)
|
|
(22,422)
|
|
(12,224)
|
|
Add: Income taxes
|
|
|
56,207
|
|
40,290
|
|
99,289
|
|
83,719
|
|
Add: Interest expense, net
|
|
|
29,537
|
|
30,770
|
|
59,310
|
|
53,065
|
|
Add: Depreciation and amortization
|
|
|
99,359
|
|
104,969
|
|
203,537
|
|
172,552
|
|
Less: (Gain)/loss on foreign currency translations
|
|
|
513
|
|
(960)
|
|
824
|
|
(1,469)
|
|
Less: Other nonoperating (income) expense
|
|
|
(8)
|
|
(50)
|
|
(189)
|
|
261
|
|
Add: Share-based compensation
|
|
|
11,008
|
|
12,566
|
|
20,055
|
|
20,724
|
|
Add: TransFirst M&A and integration expenses
1
|
|
|
4,166
|
|
20,676
|
|
9,034
|
|
24,078
|
|
Add: Litigation claims, judgments or settlements
2
|
|
|
(83)
|
|
-
|
|
1,878
|
|
-
|
|
Adjusted EBITDA (non-GAAP)
|
|
$
|
307,698
|
|
274,032
|
|
594,935
|
|
504,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Costs associated with the TransFirst acquisition and integration which are included in selling, general and administrative expenses.
|
|
2
|
|
Litigation settlement or settlement discussions and related expenses.
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Earnings and Adjusted Diluted Earnings Per Share
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
(in thousands, except per share data)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Net income attributable to TSYS common shareholders (GAAP)
|
|
$
|
115,014
|
|
69,708
|
|
220,882
|
|
160,336
|
|
Adjust for amounts attributable to TSYS common shareholders:
|
|
|
|
|
|
|
|
|
|
|
Add: Acquisition intangible amortization
|
|
|
50,783
|
|
58,210
|
|
105,785
|
|
80,855
|
|
Add: Share-based compensation
|
|
|
11,009
|
|
12,557
|
|
20,051
|
|
20,707
|
|
Add: TransFirst M&A and integration expenses
1
|
|
|
4,149
|
|
20,676
|
|
8,973
|
|
33,859
|
|
Add: Litigation claims, judgments or settlements
2
|
|
|
(83)
|
|
-
|
|
1,878
|
|
-
|
|
Less: Tax impact of adjustments
3
|
|
|
(22,657)
|
|
(25,735)
|
|
(47,089)
|
|
(39,631)
|
|
Adjusted earnings (non-GAAP)
|
|
$
|
158,215
|
|
135,416
|
|
310,480
|
|
256,126
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS - Net income attributable to TSYS common shareholders:
|
|
|
|
|
|
|
|
|
|
|
As reported (GAAP)
|
|
$
|
0.62
|
|
0.38
|
|
1.19
|
|
0.87
|
|
Adjusted diluted EPS (non-GAAP)
|
|
$
|
0.85
|
|
0.73
|
|
1.68
|
|
1.39
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares
|
|
|
185,286
|
|
184,598
|
|
185,286
|
|
184,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Costs associated with the TransFirst acquisition and integration which are included in selling, general and administative expenses and nonoperating expenses.
|
|
2
|
|
Litigation claims, judgments, settlements or settlement discussions and related legal expenses.
|
|
3
|
|
Certain of these merger and acquisition costs are nondeductible for income tax purposes. Income tax impact includes a discrete item as a result of the acquisition.
|
|
|
|
|
|
|
Free Cash Flow
|
|
|
Six months ended June 30,
|
(in thousands)
|
|
2017
|
|
2016
|
Net cash provided by operating activities (GAAP)
|
|
$
|
400,792
|
|
339,081
|
Capital expenditures
|
|
|
(65,543)
|
|
(81,808)
|
Free cash flow (non-GAAP)
|
|
$
|
335,249
|
|
257,273
|
|
|
|
|
|
|
Financial Position, Liquidity and Capital Resources
Cash Flows
The Consolidated Statements of Cash Flows detail the Company’s cash flows from operating, investing and financing activities. TSYS’ primary method of funding its operations and growth has been cash generated from current operations. TSYS has occasionally used borrowed funds to supplement financing of capital expenditures and acquisitions.
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
Net income
|
|
$
|
223,619
|
|
164,156
|
|
Depreciation and amortization
|
|
|
203,537
|
|
172,552
|
|
Provisions for cardholder losses
|
|
|
27,587
|
|
25,216
|
|
Share-based compensation
|
|
|
20,055
|
|
20,724
|
|
Provisions for bad debt expenses and billing adjustments
|
|
|
4,906
|
|
2,938
|
|
Charges for transaction processing provisions
|
|
|
4,053
|
|
2,191
|
|
Amortization of debt issuance costs
|
|
|
2,163
|
|
11,451
|
|
Deferred income tax (benefit) expense
|
|
|
(18,191)
|
|
18,519
|
|
Equity in income of equity investments
|
|
|
(22,422)
|
|
(12,224)
|
|
Other noncash items and charges, net
|
|
|
2,644
|
|
(8,088)
|
|
Net change in current and other assets and current and other liabilities
|
|
|
(47,159)
|
|
(58,354)
|
|
Net cash provided by operating activities
|
|
$
|
400,792
|
|
339,081
|
|
|
|
|
|
|
|
|
TSYS’ main source of funds is derived from operating activities, specifically net income. The change in depreciation and amortization is mainly the result of the acquisition of TransFirst. The change in Other noncash items and charges, net is primarily due to the adoption of new guidance related to excess tax benefits from share-based payment arrangements. Net change in current and other assets and current and other liabilities includes accounts receivable, prepaid expenses, other current assets and other assets, accounts payable, accrued salaries and employee benefits, other current liabilities and other liabilities. The change in accounts receivable as of June 30, 2017, as compared to June 30, 2016, is the result of timing of collections. The change in accounts payable and other liabilities for the same period is the result of the timing of payments of vendor invoices. The change in accrued salaries and employee benefits is due primarily to changes in incentive bonuses and benefits paid in the first six months ended June 30, 2017 compared to the same period in 2016.
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
Six months ended June 30,
|
(in thousands)
|
|
2017
|
|
2016
|
Purchases of property and equipment, net
|
|
$
|
(26,739)
|
|
(20,669)
|
Additions to contract acquisition costs
|
|
|
(14,655)
|
|
(31,276)
|
Additions to internally developed computer software
|
|
|
(13,581)
|
|
(18,484)
|
Additions to licensed computer software from vendors
|
|
|
(10,568)
|
|
(11,379)
|
Cash used in acquisitions, net of cash acquired
|
|
|
-
|
|
(2,345,438)
|
Other investing activities
|
|
|
(759)
|
|
(1,730)
|
Net cash used in investing activities
|
|
$
|
(66,302)
|
|
(2,428,976)
|
|
|
|
|
|
|
The primary uses of cash for investing activities in 2017 were for purchases of property and equipment, additions to contract acquisition costs, internal development of computer software and the purchase of licensed computer software. The primary uses of cash for investing activities in 2016 were the acquisition of TransFirst, purchases of property and equipment, additions to contract acquisition costs, internal development of computer software and the purchase of licensed computer software.
Contract Acquisition Costs
TSYS makes cash payments for processing rights, third-party development costs and other direct salary-related costs in connection with converting new clients to the Company’s processing systems. The Company’s investments in contract acquisition costs were $14.7 million, including $5.5 million of client incentives, for the six months ended June 30, 2017, compared to $31.3 million for the six months ended June 30, 2016.
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
Principal payments on long-term borrowings, capital lease obligations and license agreements
|
|
$
|
(234,093)
|
|
(435,953)
|
|
Purchase of noncontrolling interest
|
|
|
(70,000)
|
|
(5,878)
|
|
Dividends paid on common stock
|
|
|
(36,734)
|
|
(36,622)
|
|
Subsidiary dividends paid to noncontrolling shareholders
|
|
|
(3,885)
|
|
(3,829)
|
|
Repurchase of common stock under plans and tax withholding
|
|
|
(24)
|
|
(5,034)
|
|
Debt issuance costs
|
|
|
-
|
|
(26,554)
|
|
Excess tax benefit from share-based payment arrangements
|
|
|
-
|
|
8,034
|
|
Proceeds from borrowings of long-term debt
|
|
|
-
|
|
2,666,295
|
|
Proceeds from exercise of stock options
|
|
|
8,987
|
|
9,737
|
|
Net cash (used in) provided by financing activities
|
|
$
|
(335,749)
|
|
2,170,196
|
|
|
|
|
|
|
|
|
The main uses of cash for financing activities in 2017 were principal payments on long-term borrowings, capital lease obligations and license agreements, the purchase of an additional ten percent interest in Central Payment Co., LLC (CPAY) and the payment of dividends. The main source of cash provided by financing activities in 2017 is the proceeds from exercises of stock options. The main source of cash provided by financing activities in 2016 were proceeds from borrowings of long term debt. The main uses of cash for financing activities in 2016 were principal payments on long-term borrowings, capital lease obligations, debt issuance costs and the payment of dividends.
Borrowings
In 2016, the Company entered into a Credit Agreement (the “2016 Credit Agreement”) which provides the Company with a $700 million five-year term loan facility (the “Term Loan Facility”) consisting of (i) a $300 million term loan (the “Refinancing Term Loan”) funded upon entry into the 2016 Credit Agreement and (ii) a $400 million term loan (the “Delayed Draw Term Loan”). The 2016 Credit Agreement also provides the Company with a $800 million unsecured revolving credit facility (the “Revolving Loan Facility”). During the six months ended June 30, 2017, the Company repaid $155.0 million on the Term Loan Facility. The balance as of June 30, 2017 was $543.0, million net of discount and debt issuance costs on the Term Loan Facility. As of June 30, 2017, there was no outstanding balance on the Revolving Loan Facility.
Refer to Note 4 in the Notes to Unaudited Consolidated Financial Statements for more information on borrowings.
Dividends
Dividends on common stock of $36.7 million and $36.6 million were paid during the six months ended June 30, 2017 and 2016, respectively.
Stock Repurchase
For a detailed discussion regarding the Company’s stock repurchase plan, see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the SEC.
The Company did not purchase any shares under the plan during the six months ended June 30, 2017 or 2016.
Foreign Operations
TSYS operates internationally and is subject to adverse movements in foreign currency exchange rates. In June 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.” As a result, global markets were adversely impacted, including currencies, and resulted in a decline in the value of the British pound, as compared to the U.S. dollar and other currencies. The announcement of Brexit and the withdrawal of the U.K. from the E.U. may also create global economic uncertainty, and have unknown social and geopolitical impact, which may adversely affect our business, results of operations and financial condition. TSYS has not entered into foreign exchange forward contracts to reduce its exposure to foreign currency rate changes. TSYS continues to analyze potential hedging instruments to safeguard it from significant foreign currency translation risks.
TSYS maintains operating cash accounts outside the United States. Refer to Note 3 in the Notes to Unaudited Consolidated Financial Statements for more information on cash and cash equivalents. TSYS has adopted the permanent reinvestment exception under GAAP with respect to future earnings of certain foreign subsidiaries. While some of the foreign cash is available to repay intercompany financing arrangements, remaining amounts are not presently available to fund domestic operations and obligations without paying a significant amount of taxes upon its repatriation. Demand on the Company’s cash has increased as a result of its strategic initiatives. TSYS funds these initiatives through a balance of internally generated cash, external sources of capital, and, when advantageous, access to foreign cash in a tax efficient manner. Where local regulations limit an efficient intercompany transfer of amounts held outside of the U.S., TSYS will continue to utilize these funds for local liquidity needs. Under current law, balances available to be repatriated to the U.S. would be subject to U.S. federal income taxes, less applicable foreign tax credits. TSYS has provided for the U.S. federal tax liability on these amounts for financial statement purposes, except for foreign earnings that are considered permanently reinvested outside of the U.S. TSYS utilizes a variety of tax planning and financing strategies with the objective of having its worldwide cash available in the locations where it is needed.
Impact of Inflation
Although the impact of inflation on its operations cannot be precisely determined, the Company believes that by controlling its operating expenses, and by taking advantage of more efficient computer hardware and software, it can minimize the impact of inflation.
Working Capital
TSYS may seek additional external sources of capital in the future. The form of any such financing will vary depending upon prevailing market and other conditions and may include short-term or long-term borrowings from financial institutions or the issuance of additional equity and/or debt securities such as industrial revenue bonds. However, there can be no assurance that funds will be available on terms acceptable to TSYS. Management expects that TSYS will continue to be able to fund a significant portion of its capital expenditure needs through internally generated cash in the future, as evidenced by TSYS’ current ratio of 1.1:1. As of June 30, 2017, TSYS had working capital of $85.8 million compared to $602.3 million as of December 31, 2016. The change in working capital was the result of $550 million of Senior Notes due June 1, 2018 being classified as short term on June 30, 2017.
Legal Proceedings
Refer to Note 15 of the Company’s audited financial statements for the year ended December 31, 2016, which are included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31,
2016, as filed with the SEC, for a discussion regarding commitments and contingencies including legal proceedings. Also, for more information regarding the Company’s legal proceedings, refer to Note 9 in the Notes to Unaudited Consolidated Financial Statements.
Forward-Looking Statements
Certain statements contained in this filing which are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act (the Act). These forward-looking statements include, among others: (i) TSYS’ expectation with respect to the effect of recent accounting pronouncements; (ii) TSYS’ expectation with respect to the impact of the CFPB’s new rule pertaining to prepaid financial products on its financial results for 2017; (iii) TSYS’ expectation that it will be able to fund a significant portion of its capital expenditure needs through internally generated cash in the future; (iv) TSYS’ belief with respect to lawsuits, claims and other complaints; (v) TSYS’ expectation with respect to certain tax matters, and the assumptions underlying such statements. In addition, certain statements in future filings by TSYS with the Securities and Exchange Commission, in press releases, and in oral and written statements made by or with the approval of TSYS which are not statements of historical fact constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenue, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans and objectives of TSYS or its management or Board of Directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” “estimates,” “projects,” “plans,” “may,” “could,” “should,” “would,” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying these statements.
These statements are based upon the current beliefs and expectations of TSYS’ management and are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements. A number of important factors could cause actual results to differ materially from those contemplated by the Company’s forward-looking statements. Many of these factors are beyond TSYS’ ability to control or predict. These factors include, but are not limited to:
|
·
|
|
the material breach of security of any of TSYS’ systems;
|
|
·
|
|
TSYS incurs expenses associated with the signing of a significant client;
|
|
·
|
|
organic growth rates for TSYS’ existing clients are lower than anticipated whether as a result of unemployment rates, card delinquencies and charge off rates or otherwise or attrition rates of existing clients are higher than anticipated;
|
|
·
|
|
conversions and deconverions of client portfolios may not occur as scheduled;
|
|
·
|
|
risks associated with foreign operations, including adverse developments with respect to foreign currency exchange rates, and in particular with respect to the current environment, adverse developments with respect to foreign currency exchange rates as a result of the United Kingdom’s decision to leave the European Union (Brexit);
|
|
·
|
|
adverse developments with respect to entering into contracts with new clients and retaining current clients;
|
|
·
|
|
consolidation in the financial services and other industries, including the merger of TSYS clients with entities that are not TSYS processing clients, the sale of portfolios by TSYS clients to entities that are not TSYS processing clients and financial institutions which are TSYS clients otherwise ceasing to exist;
|
|
·
|
|
the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act on TSYS and its clients;
|
|
·
|
|
adverse developments with respect to the payment card industry in general, including a decline in the use of cards as a payment mechanism;
|
|
·
|
|
the impact of potential and completed acquisitions, particularly the completed TransFirst acquisition, including the costs associated therewith, their being more difficult to integrate than anticipated, and the inability to achieve the anticipated growth opportunities and other benefits of the acquisitions;
|
|
·
|
|
the costs and effects of litigation, investigations or similar matters or adverse facts and developments relating thereto;
|
|
·
|
|
the impact of the application of and/or changes in accounting principles;
|
|
·
|
|
TSYS’ inability to timely, successfully and cost-effectively improve and implement processing systems to provide new products, increased functionality and increased efficiencies;
|
|
·
|
|
TSYS’ reliance on financial institution sponsors;
|
|
·
|
|
changes occur in laws, rules, regulations, credit card association rules, prepaid industry rules, or other industry standards affecting TSYS and its clients that may result in costly new compliance burdens on TSYS and its clients and lead to a decrease in the volume and/or number of transactions processed or limit the types and amounts of fees that can be charged to customers, and in particular the CFPB’s new rule regarding prepaid financial products;
|
|
·
|
|
the success of Netspend’s business expansion strategies to offset the loss of revenue from the CFPB’s new rule regarding prepaid financial products which will depend on, among other things, the rate of adoption of Netspend’s new products both by consumers and its distribution partners, the rate of utilization of the various product features by cardholders and market and regulatory dynamics, and, in addition, the costs of compliance associated with the new rule;
|
|
·
|
|
successfully managing the potential both for patent protection and patent liability in the context of rapidly developing legal framework for expansive patent protection;
|
|
·
|
|
the effect of current domestic and worldwide economic and geopolitical conditions;
|
|
·
|
|
the impact on TSYS’ business, as well as on the risks set forth above, of various domestic or international military or terrorist activities or conflicts;
|
|
·
|
|
other risk factors described in the “Risk Factors” and other sections of TSYS’ Annual Report on Form
10-K for the fiscal year ended December 31, 2016 and other filings with the Securities and Exchange Commission; and
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TSYS’ ability to manage the foregoing and other risks.
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These forward-looking statements speak only as of the date on which they are made and TSYS disclaims any obligation to update any forward-looking statement as a result of new information, future developments or otherwise except as required by law
Subsequent Events
On July 24, 2017, TSYS’ Board of Directors approved a 30% increase in the regular quarterly dividend payable on TSYS common stock from $0.10 per share to $0.13 per share, payable on October 2, 2017 to shareholders of record as of the close of business on September 21, 2017.
Management performed an evaluation of the Company’s activity as of the date these financial statements were issued and has concluded that, other than as set forth above, there are no significant subsequent events requiring disclosure.