Total System Services 10Q 2019 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)


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

	For the quarterly period ended June 30, 2019

OR

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

	For the transition period from To

Commission file number: 1-10254

Total System Services, Inc.

www.tsys.com

(Exact name of registrant as specified in its charter)


Georgia	58-1493818
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

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

(Address of principal executive offices) (Zip Code)

(706) 644-4388

(Registrant’s telephone number, including area code)

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.10 par value	TSS	New York Stock Exchange

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

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

Yes ☑ No ◻

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

Large Accelerated Filer ☑	Accelerated Filer ◻	Non-accelerated Filer ◻
Smaller reporting company ☐	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.◻

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

Yes ☐ No ☑

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

As of June 30, 2019, there were 176,977,106 shares of the registrant’s common stock, $0.10 par value, outstanding.

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TOTAL SYSTEM SERVICES, INC.

Table of Contents

	Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited) — June 30, 2019 and December 31, 2018	3
Consolidated Statements of Income (unaudited) — Three and six months ended June 30, 2019 and 2018	4
Consolidated Statements of Comprehensive Income (unaudited) — Three and six months ended June 30, 2019 and 2018	5
Consolidated Statements of Cash Flows (unaudited) — Six months ended June 30, 2019 and 2018	6
Consolidated Statement of Changes in Equity (unaudited) — Three and six months ended June 30, 2019 and 2018	7
Notes to Unaudited Consolidated Financial Statements	9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3. Quantitative and Qualitative Disclosures About Market Risk	49
Item 4. Controls and Procedures	50
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	50
Item 1A. Risk Factors	50
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 6. Exhibits	54
SIGNATURES	55

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

TOTAL SYSTEM SERVICES, INC.

Consolidated Balance Sheets

(Unaudited)


(in thousands, except per share data)	June 30, 2019		December 31, 2018
Assets
Current assets:
Cash and cash equivalents (Note 2)	$	458,220	471,156
Accounts receivable, net of allowances for doubtful accounts and billing adjustments of $6.1 million and $6.0 million as of 2019 and 2018, respectively		513,712	450,322
Contract assets (Note 3)		43,847	30,950
Prepaid expenses and other current assets (Note 2)		224,048	188,355
Total current assets		1,239,827	1,140,783
Contract assets (Note 3)		56,925	47,839
Goodwill		4,114,851	4,114,838
Other intangible assets, net of accumulated amortization of $891.1 million and $802.0 million as of 2019 and 2018, respectively		703,617	796,702
Intangible assets - computer software, net of accumulated amortization of $955.2 million and $893.4 million as of 2019 and 2018, respectively		520,494	534,536
Property and equipment, net of accumulated depreciation and amortization of $530.4 million and $522.7 million as of 2019 and 2018, respectively (Note 4)		373,868	383,074
Operating lease right-of-use assets, net (Note 4)		198,539	-
Contract cost assets, net of accumulated amortization		148,938	145,598
Equity investments, net		206,504	180,661
Deferred income tax assets		7,516	7,773
Other assets		135,727	116,905
Total assets	$	7,706,806	7,468,709
Liabilities
Current liabilities:
Accounts payable	$	57,911	97,956
Contract liabilities (Note 3)		51,553	47,227
Current portion of operating lease liabilities (Note 4)		43,346	-
Accrued salaries and employee benefits		34,922	73,143
Current portion of long-term borrowings (Note 5)		17,811	20,807
Current portion of obligations under finance leases and license agreements (Note 4)		17,712	8,318
Other current liabilities (Note 2)		278,072	268,150
Total current liabilities		501,327	515,601
Long-term borrowings, excluding current portion (Note 5)		4,003,248	3,843,394
Deferred income tax liabilities		401,486	380,278
Operating lease liabilities, excluding current portion (Note 4)		167,102	-
Obligations under finance leases and license agreements, excluding current portion (Note 4)		39,490	46,147
Contract liabilities (Note 3)		25,281	21,489
Other long-term liabilities		74,278	75,894
Total liabilities		5,212,212	4,882,803
Commitments and contingencies (Note 6)
Shareholders' Equity
Shareholders’ equity:
Common stock- $0.10 par value. Authorized 600,000 shares; 202,765 issued as of 2019 and 2018; 176,977 and 180,586 outstanding as of 2019 and 2018, respectively		20,277	20,277
Additional paid-in capital		203,098	189,889
Accumulated other comprehensive loss, net (Notes 1 and 2)		(64,200)	(60,223)
Treasury stock, at cost (25,788 and 22,179 shares as of 2019 and 2018, respectively)		(1,426,177)	(1,042,687)
Retained earnings		3,761,596	3,478,650
Total shareholders’ equity		2,494,594	2,585,906
Total liabilities and shareholders' equity	$	7,706,806	7,468,709

See accompanying Notes to Unaudited Consolidated Financial Statements

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TOTAL SYSTEM SERVICES, INC.

Consolidated Statements of Income

(Unaudited)


	Three months ended			Six months ended
	June 30,			June 30,
(in thousands, except per share data)	2019		2018	2019		2018
Total revenues (Notes 3 and 11)	$	1,035,485	1,007,580		2,070,016		1,994,750
Cost of services		630,820	617,818		1,263,032		1,231,183
Selling, general and administrative expenses		185,578	181,064		364,627		366,598
Total operating expenses		816,398	798,882		1,627,659		1,597,781
Operating income		219,087	208,698		442,357		396,969
Nonoperating expenses, net		(37,416)	(41,170)		(80,407)		(78,812)
Income before income taxes and equity in income of equity investments		181,671	167,528		361,950		318,157
Income taxes (Note 8)		31,128	37,415		61,027		55,549
Income before equity in income of equity investments		150,543	130,113		300,923		262,608
Equity in income of equity investments, net of tax		12,217	12,322		23,444		22,929
Net income		162,760	142,435		324,367		285,537
Net income attributable to noncontrolling interests		-	-		-		(1,261)
Net income attributable to Total System Services, Inc. (TSYS) common shareholders	$	162,760	142,435		324,367		284,276
Basic earnings per share (EPS) attributable to TSYS common shareholders (Note 9)	$	0.92	0.78		1.83		1.56
Diluted EPS attributable to TSYS common shareholders (Note 9)	$	0.91	0.78		1.81		1.55

See accompanying Notes to Unaudited Consolidated Financial Statements

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TOTAL SYSTEM SERVICES, INC.

Consolidated Statements of Comprehensive Income

(Unaudited)


	Three months ended			Six months ended
	June 30,			June 30,
(in thousands)	2019		2018	2019		2018
Net income	$	162,760	142,435		324,367	285,537
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments		(10,009)	(21,752)		416	(9,257)
Postretirement healthcare plan adjustments		837	(211)		659	(358)
Unrealized (loss) gain on available-for-sale securities (Note 1)		-	(1,840)		-	741
Other comprehensive (loss) income		(9,172)	(23,803)		1,075	(8,874)
Comprehensive income		153,588	118,632		325,442	276,663
Comprehensive income attributable to noncontrolling interests		-	-		-	(1,261)
Comprehensive income attributable to TSYS common shareholders	$	153,588	118,632		325,442	275,402

See accompanying Notes to Unaudited Consolidated Financial Statements

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TOTAL SYSTEM SERVICES, INC.

Consolidated Statements of Cash Flows

(Unaudited)


	Six months ended
	June 30,
(in thousands)	2019		2018
Cash flows from operating activities:
Net income	$	324,367	285,537
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		208,483	208,679
Amortization of operating lease right-of-use assets		25,555	-
Provisions for cardholder losses		25,540	34,433
Share-based compensation		22,214	20,524
Provisions for bad debt expenses and billing adjustments		5,587	5,170
Charges for transaction processing provisions		1,319	3,177
Amortization of debt issuance costs		2,652	2,362
Dividends received from equity investments		-	892
Loss (gain) on foreign currency		287	(107)
Amortization of bond discount		557	482
(Gain) loss on disposal of equipment, net		(801)	32
Deferred income tax expense		21,258	18,657
Changes in value of equity investments		(5,196)	-
Equity in income of equity investments, net of tax		(23,444)	(22,929)
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable		(69,011)	(17,489)
Contract assets and contract liabilities		(13,965)	(8,797)
Contract cost assets		(3,214)	2,989
Prepaid expenses, other current assets and other long-term assets		(52,859)	5,111
Accounts payable		(9,156)	(3,368)
Accrued salaries and employee benefits		(38,282)	(38,784)
Other current liabilities and other long-term liabilities		(26,461)	(25,978)
Net cash provided by operating activities		395,430	470,593

Cash flows from investing activities:
Additions to licensed computer software from vendors		(61,209)	(19,216)
Purchases of property and equipment		(30,844)	(48,608)
Additions to internally developed computer software		(24,817)	(19,934)
Cash used in acquisitions, net of cash acquired		-	(1,051,629)
Other investing activities		(2,700)	(4,119)
Net cash used in investing activities		(119,570)	(1,143,506)

Cash flows from financing activities:
Principal payments on long-term borrowings, finance lease obligations and license agreements		(299,499)	(2,626,534)
Purchase of noncontrolling interest		-	(126,000)
Dividends paid on common stock		(46,534)	(47,190)
Subsidiary dividends paid to noncontrolling shareholders		-	(3,778)
Repurchase of common stock under plans and tax withholding		(400,023)	(82)
Debt issuance costs		-	(15,979)
Proceeds from borrowings of long-term debt		450,000	3,477,000
Proceeds from exercise of stock options		6,911	29,289
Net cash (used in) provided by financing activities		(289,145)	686,726

Cash, cash equivalents and restricted cash:
Effect of exchange rate changes on cash, cash equivalents and restricted cash		(332)	(4,143)
Net (decrease) increase in cash, cash equivalents and restricted cash		(13,617)	9,670
Cash, cash equivalents and restricted cash at beginning of period		474,279	451,370
Cash, cash equivalents and restricted cash at end of period	$	460,662	461,040

Supplemental cash flow information:
Interest paid	$	85,404	71,778
Income taxes paid, net	$	59,411	21,475

See accompanying Notes to Unaudited Consolidated Financial Statements

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TOTAL SYSTEM SERVICES, INC.

Consolidated Statements of Changes in Equity

(Unaudited)


			TSYS Shareholders
							Accumulated
							Other
	Redeemable					Additional	Comprehensive
	Noncontrolling		Common Stock			Paid-In	Income (Loss),	Treasury	Retained
(in thousands, except per share data)	Interests		Shares	Dollars		Capital	Net of Tax	Stock	Earnings	Total Equity

Balance as of December 31, 2018	$	-	202,765	$	20,277	189,889	(60,223)	(1,042,687)	3,478,650	$	2,585,906
Cumulative effect adjustment from adoption of ASU No. 2016-01 (Note 1)		-	-		-	-	(5,052)	-	5,052		-
Cumulative effect adjustment from adoption of ASU No. 2016-02 (Note 1)		-	-		-	-	-	-	(203)		(203)
Net income		-	-		-	-	-	-	161,607		161,607
Other comprehensive income		-	-		-	-	10,247	-	-		10,247
Common stock issued from treasury shares for exercise of stock options		-	-		-	3,485	-	2,981	-		6,466
Common stock unissued due to forfeiture of nonvested awards		-	-		-	77	-	(77)	-		-
Common stock issued from treasury shares for nonvested awards		-	-		-	(12,812)	-	12,812	-		-
Share-based compensation (Note 7)		-	-		-	11,296	-	-	-		11,296
Cash dividends declared ($0.13 per share)		-	-		-	-	-	-	(22,546)		(22,546)
Purchase of treasury shares		-	-		-	-	-	(400,013)	-		(400,013)
Balance as of March 31, 2019		-	202,765		20,277	191,935	(55,028)	(1,426,984)	3,622,560		2,352,760
Net income		-	-		-	-	-	-	162,760		162,760
Other comprehensive loss		-	-		-	-	(9,172)	-	-		(9,172)
Common stock issued from treasury shares for exercise of stock options		-	-		-	30	-	416	-		446
Common stock issued from treasury shares for nonvested awards		-	-		-	(401)	-	401	-		-
Common stock issued from treasury shares for dividend equivalents		-	-		-	602	-	-	-		602
Share-based compensation (Note 7)		-	-		-	10,932	-	-	-		10,932
Cash dividends declared ($0.13 per share)		-	-		-	-	-	-	(23,724)		(23,724)
Purchase of treasury shares		-	-		-	-	-	(10)	-		(10)
Balance as of June 30, 2019	$	-	202,765	$	20,277	203,098	(64,200)	(1,426,177)	3,761,596	$	2,494,594

See accompanying Notes to Unaudited Consolidated Financial Statements

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TOTAL SYSTEM SERVICES, INC.

Consolidated Statements of Changes in Equity

(Unaudited)


			TSYS Shareholders
							Accumulated
							Other
	Redeemable					Additional	Comprehensive
	Noncontrolling		Common Stock			Paid-In	Income (Loss),	Treasury	Retained
(in thousands, except per share data)	Interests		Shares	Dollars		Capital	Net of Tax	Stock	Earnings	Total Equity

Balance as of December 31, 2017	$	115,689	202,765	$	20,277	162,806	(36,148)	(909,960)	3,004,018	$	2,240,993
Cumulative effect adjustment from adoption of ASU No. 2014-09 (Note 3)		-	-		-	-	-	-	(4,445)		(4,445)
Net income		1,261	-		-	-	-	-	141,841		141,841
Other comprehensive income		-	-		-	-	14,929	-	-		14,929
Common stock issued from treasury shares for exercise of stock options		-	-		-	5,199	-	21,258	-		26,457
Common stock unissued due to forfeiture of nonvested awards		-	-		-	551	-	(551)	-		-
Common stock issued from treasury shares for nonvested awards		-	-		-	(12,368)	-	12,368	-		-
Common stock issued from treasury shares for dividend equivalents		-	-		-	925	-	9	-		934
Share-based compensation (Note 7)		-	-		-	6,835	-	-	-		6,835
Cash dividends declared ($0.13 per share)		-	-		-	-	-	-	(23,895)		(23,895)
Purchase of treasury shares		-	-		-	-	-	(24)	-		(24)
Adjustments to redemption value of redeemable noncontrolling interest		9,051	-		-	(9,051)	-	-	-		(9,051)
Subsidiary dividends paid to noncontrolling interests		(1)	-		-	-	-	-	-		-
Balance as of March 31, 2018		126,000	202,765		20,277	154,897	(21,219)	(876,900)	3,117,519		2,394,574
Net income		-	-		-	-	-	-	142,435		142,435
Other comprehensive loss		-	-		-	-	(23,803)	-	-		(23,803)
Common stock issued from treasury shares for exercise of stock options		-	-		-	1,110	-	1,717	-		2,827
Common stock unissued due to forfeiture of nonvested awards		-	-		-	78	-	(78)	-		-
Common stock issued from treasury shares for nonvested awards		-	-		-	(577)	-	577	-		-
Share-based compensation (Note 7)		-	-		-	13,406	-	-	-		13,406
Cash dividends declared ($0.13 per share)		-	-		-	-	-	-	(23,908)		(23,908)
Purchase of treasury shares		-	-		-	-	-	(58)	-		(58)
Adjustments to redemption value of redeemable noncontrolling interest		3,777	-		-	(3,777)	-	-	-		(3,777)
Subsidiary repurchase of noncontrolling interests		(126,000)	-		-	-	-	-	-		-
Subsidiary dividends paid to noncontrolling interests		(3,777)	-		-	-	-	-	-		-
Balance as of June 30, 2018	$	-	202,765	$	20,277	165,137	(45,022)	(874,742)	3,236,046	$	2,501,696

See accompanying Notes to Unaudited Consolidated Financial Statements

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TOTAL SYSTEM SERVICES, INC.

Notes to Unaudited Consolidated Financial Statements

Note 1 —Summary of Significant Accounting Policies

Business

Total System Services, Inc.’s (“TSYS’” or the “Company’s”) revenues are derived from providing payment processing, merchant services and related payment services to financial and nonfinancial institutions, generally under long-term processing contracts. The Company also derives revenues by providing general-purpose reloadable (“GPR”) prepaid debit and payroll cards, demand deposit accounts and other financial service solutions to the underbanked and other consumers and businesses. The Company’s services are provided through three operating segments: Issuer Solutions, Merchant Solutions and Consumer Solutions.

Through the Company's Issuer Solutions segment, TSYS processes information through its cardholder systems for financial and nonfinancial institutions throughout the United States and internationally. The Company's Merchant Solutions segment provides merchant services to merchant acquirers and merchants mainly in the United States. The Company’s Consumer Solutions segment provides financial service solutions to consumers and businesses in the United States.

Pending Merger with Global Payments Inc.

On May 27, 2019, TSYS entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Global Payments Inc., a Georgia corporation (“Global Payments”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, TSYS will merge with and into Global Payments (the “Merger”), with Global Payments as the surviving entity in the Merger.

Upon the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Merger, each share of TSYS common stock outstanding immediately prior to the effective time of the Merger, other than certain shares held by TSYS or Global Payments, will be converted into the right to receive 0.8101 shares of common stock of Global Payments. Holders of common stock of TSYS will receive cash in lieu of fractional shares. Following the completion of the Merger, former holders of TSYS common stock will own approximately forty-eight percent (48%) and former holders of Global Payments common stock will own approximately fifty-two percent (52%) of the fully diluted shares of the combined company.

The transaction, which is expected to close in the fourth quarter of 2019, is subject to the satisfaction or waiver of customary closing conditions for both parties, including receipt of required regulatory approvals, the approval of shareholders of both companies and other customary closing conditions.

Refer to the definitive joint proxy statement/prospectus of TSYS and Global Payments dated July 23, 2019, as filed by TSYS with the U.S. Securities and Exchange Commission (the “SEC”) on July 25, 2019 for additional information on the Merger.

Basis of Presentation

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

These financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and, therefore, do not include all information and footnotes required by U.S. GAAP for complete financial statements. The preparation of the consolidated financial statements requires management of the Company to make estimates and assumptions relating to the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. These estimates and assumptions are developed based upon all information available. Actual results could differ from estimated amounts. All adjustments, consisting of normal recurring

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accruals, which, in the opinion of management, are necessary for a fair presentation of financial position and results of operations for the periods covered by this report, have been included.

The accompanying unaudited consolidated financial statements should be read in conjunction with the Company’s summary of significant accounting policies, consolidated financial statements and related notes appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC. Results of interim periods are not necessarily indicative of results to be expected for the year.

Out-of-period adjustment

As of January 1, 2019, the Company recorded an adjustment to reclassify the cumulative unrealized gain of $5.1 million related to an investment in common stock with a readily determinable fair value from other comprehensive income to opening retained earnings. This adjustment was recorded to comply with the guidance in Accounting Standards Update (“ASU”) No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities.

Fair Value Measurement

Refer to Note 3 of the Company’s audited financial statements for the year ended December 31, 2018, which is included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC, for a discussion regarding fair value measurement.

The Company had no transfers between Level 1, Level 2 or Level 3 assets during the six months ended June 30, 2019 and 2018.

As of June 30, 2019, the Company had recorded goodwill in the amount of $4.1 billion. The Company performs its annual impairment testing of its goodwill balance as of May 31^st of each year. The Company performed its annual impairment testing of its goodwill balance as of May 31, 2019, and this test did not indicate any impairment. The fair value of the reporting units substantially exceeds their carrying value.

Recently Adopted Accounting Pronouncements

The Company adopted the following ASUs on January 1, 2019:

In September 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-13, Revenue Recognition (Topic 605), Revenues from Customers (Topic 606), Leases (Topic 840) and Leases (Topic 842), which made amendments to SEC paragraphs pursuant to the Staff Announcement at the July 20, 2017 Emerging Issues Task Force (“EITF”) Meeting and Rescission of Prior SEC Staff Announcements and Observer comments. This guidance, which is effective immediately, generally relates to the adoption of ASC 606 and 842. The adoption of the amendments in this ASU did not have a material impact on the Company’s financial position, results of operations or cash flows.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which introduced a lessee model that brings most operating leases on the balance sheet and aligns many of the underlying principles of the new lessor model with those in the FASB’s new revenue recognition standard. The FASB has issued several additional ASUs since this time that provide additional clarification to certain issues existing after the original ASU was released. All of the new standards were effective for the Company on January 1, 2019. TSYS adopted the new leases standard as of January 1, 2019 using the cumulative effect method. See Note 4 for further discussion of the Company’s adoption of this new standard.

New Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this update change how companies measure and recognize credit impairment for many financial assets. The new expected credit loss model will require companies to immediately recognize an estimate of credit losses expected to occur over the remaining life of the financial assets (including trade receivables) that are in the scope of the update. The

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update also made amendments to the current impairment model for held-to-maturity and available-for-sale debt securities and certain guarantees. The ASU is effective for the Company on January 1, 2020. Early adoption is permitted for periods beginning on or after January 1, 2019.

The FASB has issued additional ASUs that provide clarification to certain issues identified after ASU 2016-13 was released. In May 2019, the FASB issued ASU 2019-05 Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief. ASU 2019-05 was issued to provide entities with more flexibility in applying the fair value option upon the adoption of the new standard. On adoption, an entity is allowed to irrevocably elect the fair value option on an instrument-by-instrument basis. This alternative is available for all instruments in the scope of Subtopic 326-20 except for existing held-to-maturity debt securities. If an entity elects the fair value option, the difference between the instrument’s fair value and carrying amount is recognized as a cumulative-effect adjustment. In April 2019, the FASB issued ASU 2019-04 Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. ASU 2019-04 makes several changes to how entities will estimate expected credit losses, including two changes that will likely have the most significant effect. The ASU clarifies that the estimate of expected credit losses should include expected recoveries of financial assets, including recoveries of amounts expected to be written off and those previously written off. The ASU also clarifies that contractual extension or renewal options that are not unconditionally cancellable by the lender are considered when determining the contractual term over which expected credit losses are measured. The effective date and transition requirements for the amendments in ASU 2019-05 and ASU 2019-04 are the same as the effective date and transition requirements in ASU 2016-13.

The Company is continuing to evaluate the potential effects of ASU 2016-13 on its consolidated financial statements. Based upon the Company’s evaluation to date, the new guidance will apply to the Company’s accounts receivable and contract assets. The Company does not have any available-for-sale debt securities. The adoption of this guidance will require the implementation of new or updated accounting processes, procedures and internal controls over financial reporting. The new standard will also require expanded qualitative and quantitative disclosures about the Company’s financial assets and allowance for credit losses.

Refer to Note 1 of the Company’s audited financial statements for the year ended December 31, 2018, which is included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC, for a discussion regarding other new accounting pronouncements.

Note 2 — Supplementary Balance Sheet Information

Cash, Cash Equivalents and Restricted Cash

The Company maintains accounts outside the United States denominated in currencies other than the U.S. dollar. All amounts in domestic accounts are denominated in U.S. dollars. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheets that sum to the total of the same such amounts shown in the Consolidated Statements of Cash Flows.

Cash, cash equivalents and restricted cash balances are summarized as follows:



(in thousands)	June 30, 2019		December 31, 2018
Cash and cash equivalents in domestic accounts	$	405,000	405,535
Cash and cash equivalents in foreign accounts		53,220	65,621
Total cash and cash equivalents		458,220	471,156
Restricted cash included in other long-term assets		2,442	3,123
Total cash, cash equivalents and restricted cash shown in the statements of cash flows	$	460,662	474,279

Restricted cash included in other assets in the Consolidated Balance Sheets represents immaterial amounts required across the Company’s segments for operational purposes.

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Prepaid Expenses and Other Current Assets

Significant components of prepaid expenses and other current assets are summarized as follows:



(in thousands)	June 30, 2019		December 31, 2018
Prepaid expenses	$	60,647	48,058
Income taxes receivable		48,509	19,362
R&D state tax credit		21,657	26,541
Supplies inventory		19,710	18,089
Other		73,525	76,305
Total	$	224,048	188,355

Other Current Liabilities

Significant components of other current liabilities are summarized as follows:



(in thousands)	June 30, 2019		December 31, 2018
Accrued card brand fees	$	63,887	55,991
Accrued third-party commissions		53,705	46,977
Accrued expenses		28,431	25,178
Dividends payable		23,780	24,645
Accrued interest		21,818	22,191
Other		86,451	93,168
Total	$	278,072	268,150

Accumulated Other Comprehensive Loss

The income tax effects allocated to and the cumulative balance of accumulated other comprehensive income (loss) are as follows:

(in thousands)

Foreign Currency Translation Adjustments

Gain on Available-For-Sale Securities

Change in Postretirement Healthcare Plans

Total Accumulated Other Comprehensive Loss, Net of Tax

Balance as of December 31, 2018

(63,186)

5,052

(2,089)

(60,223)

Reclassification from adoption of ASU No. 2016-01 (Note 1)

(5,052)

Balance after reclassification (a)

(63,186)

(2,089)

(65,275)

Pretax amount

420

966

1,386

Tax effect

307

311

Net-of-tax amount (b)

416

659

1,075

Balance as of June 30, 2019 (a)+(b)

(62,770)

(1,430)

(64,200)

Note 3 — Revenue from Contracts with Customers

Description of service offerings

Issuer Solutions

The Company's Issuer Solutions revenues are derived from long-term processing contracts with financial and nonfinancial institutions. Payment processing services revenues are generated primarily from charges based on:

●

The number of accounts on file;

●

Transactions and authorizations processed;

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●

Statements generated and/or mailed;

●

Managed services; and

●

Cards embossed and mailed and other processing services for cardholder accounts on file.

Most of these contracts have prescribed annual revenue minimums, penalties for early termination, and service level agreements which may impact contractual fees if certain service levels are not achieved.

Issuer Solutions revenues also include loyalty redemption services and professional services.

Merchant Solutions

The Company’s Merchant Solutions revenues are partially derived from relationships with thousands of individual merchants whose contracts range from thirty days to five years. Additionally, part of the revenues are derived from long-term processing contracts with large financial institutions, other merchant acquirers and merchant organizations which generally range from three to eight years. Merchant services revenue is generated primarily from processing all payment forms including credit, debit and electronic benefits transfer for merchants of all sizes across a wide array of retail market segments.

The products and services offered include:

●

Authorizations and capture of electronic transactions;

●

Clearing and settlement of electronic transactions;

●

Information reporting services related to electronic transactions;

●

Merchant billing services; and

●

Point-of-sale equipment and services.

Most of these contracts have prescribed revenue minimums, penalties for early termination, and service level agreements which may impact contractual fees if certain service levels are not achieved.

Consumer Solutions

The Company’s Consumer Solutions revenues principally consist of a portion of the service fees collected from cardholders and interchange revenues received by the issuing banks in connection with the programs that the Consumer Solutions segment manages.

Customers are charged fees in connection with the Consumer Solutions segment’s products and services as follows:

●

Transactions - Customers are typically charged a fee for each Personal Identification Number (“PIN”) and signature-based purchase transaction made using their cards, unless the customer is on a monthly or annual service plan, in which case the customer is instead charged a monthly or annual subscription fee, as applicable. Customers are also charged fees for Automated Teller Machine (“ATM”) withdrawals and other transactions conducted at ATMs.

●

Customer Service and Maintenance - Customers are typically charged fees for balance inquiries made through call centers. Customers are also charged a monthly maintenance fee after a specified period of inactivity.

●

Additional Products and Services - Customers are charged fees associated with additional products and services offered in connection with certain cards, including the use of overdraft features, a variety of bill payment options, card replacement, foreign exchange and card-to-card transfers of funds initiated through the call centers.

●

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

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Disaggregation of revenue

The following table summarizes volume-based and non-volume related revenue from contracts with external customers for the three and six months ended June 30, 2019 and 2018:

Three months ended June 30, 2019

(in thousands)

Issuer Solutions

Merchant Solutions

Consumer Solutions

Total

Volume-based revenues

231,265

342,651

195,659

769,575

Non-volume related revenues

241,441

23,985

484

265,910

Total revenues

472,706

366,636

196,143

1,035,485

Six months ended June 30, 2019

(in thousands)

Issuer
Solutions

Merchant Solutions

Consumer Solutions

Total

Volume-based revenues

461,476

665,464

414,354

1,541,294

Non-volume related revenues

481,389

46,353

980

528,722

Total revenues

942,865

711,817

415,334

2,070,016


	Three months ended June 30, 2018
(in thousands)	Issuer Solutions		Merchant Solutions		Consumer Solutions		Total
Volume-based revenues	$	223,677		329,295		199,490	$	752,462
Non-volume related revenues		234,924		19,419		775		255,118
Total revenues	$	458,601		348,714		200,265	$	1,007,580


	Six months ended June 30, 2018
(in thousands)	Issuer Solutions		Merchant Solutions		Consumer Solutions		Total
Volume-based revenues	$	442,949		628,242		409,211	$	1,480,402
Non-volume related revenues		473,011		39,895		1,442		514,348
Total revenues	$	915,960		668,137		410,653	$	1,994,750

Issuer Solutions

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

Merchant Solutions

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

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Consumer Solutions

The Consumer Solutions segment’s revenues primarily consist of volume-based revenues generated from a portion of the service fees collected from cardholders and interchange revenues. Non-volume related revenues include value-added products and services which are not directly associated with transactional activity.

The following table summarizes revenue from contracts with customers, by currency, for the three and six months ended June 30, 2019 and 2018:

Three months ended June 30, 2019

(in thousands)

Issuer Solutions

Merchant Solutions

Consumer Solutions

Total

U.S. dollar

372,674

366,313

196,143

935,130

British Pound Sterling

67,142

Euro

25,750

Other

7,140

323

7,463

Total revenues

472,706

366,636

196,143

1,035,485

Six months ended June 30, 2019

(in thousands)

Issuer
Solutions

Merchant Solutions

Consumer Solutions

Total

U.S. dollar

744,674

711,184

415,334

1,871,192

British Pound Sterling

132,294

Euro

51,361

Other

14,536

633

15,169

Total revenues

942,865

711,817

415,334

2,070,016


	Three months ended June 30, 2018
(in thousands)	Issuer Solutions		Merchant Solutions		Consumer Solutions		Total
U.S. dollar	$	367,489		348,524		200,265	$	916,278
British Pound Sterling		59,098		-		-		59,098
Euro		25,419		-		-		25,419
Other		6,595		190		-		6,785
Total revenues	$	458,601		348,714		200,265	$	1,007,580


	Six months ended June 30, 2018
(in thousands)	Issuer Solutions		Merchant Solutions		Consumer Solutions		Total
U.S. dollar	$	727,359		667,743		410,653	$	1,805,755
British Pound Sterling		122,219		-		-		122,219
Euro		52,016		-		-		52,016
Other		14,366		394		-		14,760
Total revenues	$	915,960		668,137		410,653	$	1,994,750

See Note 11 for disclosure of revenues by geography.

Performance obligations

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. The purpose of this disclosure is to provide additional information about the amounts and expected timing of revenue to be recognized from the remaining performance obligations in the Company’s existing contracts.

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For revenue which is recognized using (i) the “as-invoiced” practical expedient and (ii) the “direct allocation” method, the Company is required to disclose the value of unsatisfied performance obligations for contractual minimums only. Accordingly, the total unsatisfied or partially unsatisfied performance obligations related to processing services are materially higher than the amounts disclosed in the below table.


(in thousands)	Remainder of 2019		2020	2021	2022	2023 - 2029		Total
Unsatisfied or partially unsatisfied performance obligations	$	382,746	630,966	528,869	392,712	470,584	$	2,405,877

Contract balances

Contract assets are defined as an entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer when that right is conditioned on something other than the passage of time (for example, the entity’s future performance).

Contract liabilities are defined as an entity’s obligation to transfer goods or services to a customer for which the entity has received consideration (or the amount is due) from the customer.

Net contract assets and liabilities may include amounts related to signing incentives for signing or renewing long-term contracts. Capitalized signing incentives are amortized over the contract term and the amortization is included as a reduction of revenues in the Company’s Consolidated Statements of Income.

ASC 606 requires an entity to present in its Consolidated Balance Sheets the net position in a customer contract on a contract-by-contract basis. The net position in a customer contract is presented as either contract assets or contract liabilities. Significant changes in the contract assets and liabilities balances during the six months ended June 30, 2019 are as follows:


	Six months ended June 30, 2019
(in thousands)	Contract Assets Increase/(Decrease)		Contract Liabilities (Increase)/Decrease
Signing incentive additions	$	32,585	$	-
Signing incentive amortization		(13,336)		(2,631)
Revenue recognized in advance of billings		8,308		867
Billed amounts transferred to receivables		(4,387)		(316)
Cash received from customers		(1,460)		(80,485)
Deferred revenue that was recognized as revenue		3,499		68,548

Other changes in contract assets and contract liabilities primarily relate to movements in net contract position (between contract assets and contract liabilities) each period and foreign currency translation.

Note 4 – Leases

The Company adopted ASU No. 2016-02 and related ASUs (“ASC 842”) as of January 1, 2019 using the cumulative effect method. Upon adoption, the Company recorded right-of-use (“ROU”) assets of $195.2 million and additional operating liabilities of approximately $190.7 million for existing operating leases. Also as part of the initial adoption, the Company wrote off the carrying value of favorable lease intangible assets of $2.1 million and increased the ROU assets by the same amount. The cumulative effect adjustment recorded to opening retained earnings was not material. The adoption of this ASU did not have a material impact on the Company’s results of operations or cash flows.

Description of leases and lease policies - lessee

TSYS enters into leases for datacenters, facilities, computer equipment and certain other equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet. TSYS recognizes lease expense

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or depreciation expense for leases on a straight-line basis over the lease term. Variable lease expense primarily relates to maintenance and other monthly expenses that do not depend on an index or rate.

TSYS determines if an arrangement is a lease at contract inception. Operating leases are included in operating lease ROU assets, other current liabilities, and operating lease liabilities in our Consolidated Balance Sheet. Finance leases are included in property and equipment, net and current and long-term obligations under finance leases in our Consolidated Balance Sheet.

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of the future lease payments. As most of its leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. TSYS uses the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives received. TSYS’ lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

TSYS has lease agreements with lease and non-lease components, which are combined and accounted for as a single lease component for all asset classes excluding computer equipment. For computer equipment leases, the Company accounts for the lease and non-lease components as separate components. The majority of computer equipment lease commitments come with a renewal option or an option to terminate the lease. These lease commitments may be replaced with new leases, which allow the Company to continually update its computer equipment.

Practical expedients and policy elections

The Company has elected to utilize the following practical expedients and accounting policy elections:

●

Electing as a package, the Company did not reassess: (a) whether expired or existing contracts contain leases under the new definition of a lease, (b) lease classification for expired or existing leases, and (c) whether previously capitalized initial direct costs would qualify for capitalization under ASU No. 2016-02.

●

The Company did not evaluate land easements that existed or expired before the Company’s adoption of ASU No. 2016-02 and that were not previously accounted for as leases.

●

From a lessee perspective, the Company has elected to combine lease and non-lease components for all classes of assets except for computer equipment. Accordingly, for all asset classes excluding computer equipment, the Company accounts for the combined lease and non-lease components as a single lease component. For computer equipment, the Company accounts for lease and non-lease components, such as maintenance, separately.

●

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

●

From a lessor perspective, the Company has elected to utilize the practical expedient in ASU No. 2018-11 to not separate non-lease components from the associated lease component for arrangements including point-of-sale (“POS”) terminals. Since the predominant component in these arrangements is service revenue and not the POS terminal, the combined components in these arrangements will be accounted for under ASC 606 and not ASC 842.

●

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

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

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Supplemental Information

Supplemental balance sheet information related to leases is as follows:


(in thousands)	June 30, 2019		December 31, 2018
Lease assets:
Operating lease right-of-use assets, net:
Computer equipment	$	68,179	na
Facilities		130,162	na
Other		198	na
Total operating lease right-of-use assets, net		198,539	na
Finance lease right-of-use assets:
Computer and other equipment		62,896	91,526
Furniture and other equipment		3,894	6,104
Total finance lease assets		66,790	97,630
Less accumulated depreciation:
Computer and other equipment		(24,605)	(47,903)
Furniture and other equipment		(3,000)	(4,859)
Total accumulated depreciation		(27,605)	(52,762)
Total finance lease right-of-use assets, net		39,185	44,868
Total lease assets	$	237,724	44,868
Lease liabilities:
Current portion of operating lease liabilities	$	43,346	na
Operating lease liabilities, excluding current portion		167,102	na
Current portion of obligations under finance leases		5,986	5,934
Obligations under finance leases, excluding current portion		28,247	31,243
Total lease liabilities	$	244,681	37,177
na = not applicable since TSYS adopted ASC 842 as of January 1, 2019

As of June 30, 2019, finance lease assets and finance lease accumulated depreciation decreased by approximately $30.8 million and $25.2 million, respectively, when compared to December 31, 2018. This decrease is related to the execution of purchase options for certain finance leases, the retirement of certain assets no longer in use as well as the expiration of certain leases at the end of their lease term. The balances of any finance leases subject to purchase options exercised during the six months ended June 30, 2019 were subsequently moved to Property and Equipment.

Lease expense

The components of lease expense are as follows:


	Three months ended		Six months ended
(in thousands)	June 30, 2019		June 30, 2019
Operating lease expense:
Fixed lease expense	$	15,050	30,025
Variable lease expense		1,726	3,695
Short-term lease expense		1,715	3,084
Total operating lease expense		18,491	36,804
Finance lease expense:
Amortization of ROU assets		2,836	5,727
Interest on finance lease liabilities		375	763
Total finance lease expense		3,211	6,490
Total lease expense	$	21,702	43,294

Total rental expense under all operating leases for the year ended December 31, 2018 was $128.6 million.

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Other lease information

Supplemental cash flow information related to leases is as follows:


	Six months ended
(in thousands)	June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	41,703
Operating cash flows from finance leases		765
Financing cash flows from finance leases		2,927


	Six months ended June 30,
(in thousands)	2019		2018
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	44,125	na
Finance leases		-	7,382
na = not applicable since TSYS adopted ASC 842 as of January 1, 2019

The weighted-average remaining lease term and weighted-average discount rate are as follows:


	Six months ended
	June 30, 2019
Weighted-average remaining lease term (years):
Operating leases	5.29
Finance leases	5.56
Weighted-average discount rate:
Operating leases	4.21	%
Finance leases	8.49	%

Maturity of lease liabilities

The future minimum lease payments under noncancelable operating and finance leases with remaining terms greater than one year for the next five years and thereafter and in the aggregate as of June 30, 2019 and December 31, 2018, are as follows:


	June 30, 2019			December 31, 2018
(in thousands)	Operating Leases		Finance Leases	Operating Leases	Finance Leases
2019¹	$	23,552	3,714	54,818	7,393
2020		55,056	7,381	54,738	7,319
2021		52,898	7,145	50,794	7,085
2022		44,350	7,111	42,048	7,051
2023		20,990	6,719	19,089	6,658
Thereafter		41,107	6,930	32,894	6,868
Total lease payments		237,953	39,000	254,381	42,374
Less imputed interest		(24,582)	(4,488)	na	(5,197)
Total	$	213,371	34,512	254,381	37,177
na = not applicable since TSYS adopted ASC 842 as of January 1, 2019

1	For the six months ended June 30, 2019, this row represents the remaining payments from July to December 2019.

In 2019, the Company entered into operating and finance leases for certain computer equipment as well as an operating lease for a facility, whose commencement dates range from July 2019 to August 2019. Amounts related to these operating and finance leases totaling $3.5 million are not reflected on the Company’s consolidated balance sheet as of June 30, 2019. However, amounts related to these operating and finance leases are reflected in the above disclosure of future lease commitments as of June 30, 2019.

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Note 5 — Long-Term Borrowings and License Agreements

Refer to Note 12 of the Company’s audited financial statements for the year ended December 31, 2018, which is included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC, for further discussion regarding long-term borrowings and license agreements.

Note 6 — Commitments and Contingencies

Refer to Note 15 of the Company’s audited financial statements for the year ended December 31, 2018, which is included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC, for a discussion regarding commitments and contingencies.

Legal Proceedings – General

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) (Bankr. D. Nev.); (ii) Anthony Cellucci, et al. v. TelexFree, Inc., et. al. (Case No. 4:14-BK-40987) (Bankr. D. Mass.); (iii) Maduako C. Ferguson Sr., et al. v. Telexelectric, LLP, et. al (Case No. 5:14-CV-00316-D) (E.D.N.C.); (iv) Todd Cook v. TelexElectric LLP et al. (Case No. 2:14-CV-00134) (N.D. Ga.); (v) Felicia Guevara v. James M. Merrill et al., CA No. 1:14-cv-22405-DPG) (S.D. Fla.); (vi) Reverend Jeremiah Githere, et al. v. TelexElectric LLP et al. (Case No. 1:14-CV-12825-GAO) (D. Mass.); (vii) Paulo Eduardo Ferrari et al. v. Telexfree, Inc. et al. (Case No. 14-04080) (Bankr. D. Mass); (viii) Magalhaes v. TelexFree, Inc., et al., No. 14-cv-12437 (D. Mass.); (ix) Griffith v. Merrill et al., No. 14-CV-12058 (D. Mass.); (x) Abelgadir v. Telexelectric, LLP, No. 14-09857 (S.D.N.Y.); and (xi) Rita Dos Santos, v. TelexElectric, LLP et al., 2:15-cv-01906-NVW (D. Ariz.) (together, the “Actions”).

On October 21, 2014, the Judicial Panel on Multidistrict Litigation (“JPML”) transferred and consolidated the Actions filed before that date to the United States District Court for the District of Massachusetts (the “Consolidated Action”). The JPML subsequently transferred the remaining Actions to the Consolidated Action. The Consolidated Action is styled In Re: TelexFree Securities Litigation (4:14-md-02566-TSH) (D. Mass.).

The plaintiffs in the Consolidated Action filed a First Consolidated Amended Complaint on March 31, 2015 and filed a Second Consolidated Amended Complaint (the “Second Amended Complaint”) on April 30, 2015. The Second Amended Complaint, which supersedes the complaints filed prior to consolidation of the Actions,

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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. With respect to ProPay, the Second Amended Complaint 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. The court held a hearing on the motions to dismiss on November 2, 2015.

On January 29, 2019, the court granted in part and denied in part ProPay’s motion to dismiss the Second Amended Complaint. The court dismissed plaintiffs’ claim that ProPay was unjustly enriched by the alleged TelexFree fraud, but denied ProPay’s motion to dismiss the plaintiffs’ claim that ProPay allegedly aided and abetted TelexFree’s purported scheme. The court’s ruling does not reflect any determination of the merits of the plaintiffs’ aiding and abetting claim against ProPay, but instead is merely a ruling that the plaintiffs have alleged facts that could potentially entitle them to relief from ProPay if those facts were true. ProPay denies that it had any knowledge of TelexFree’s alleged fraud or that it aided and abetted that fraud in any way.

After deciding the motions to dismiss filed by ProPay and some of the other defendants in the litigation, the court lifted the stay on discovery that had been in place since the outset of the Consolidated Action. Approximately 50 defendants remain in the litigation. The Court held a scheduling conference on March 20, 2019, but has not yet entered an order setting the case schedule.

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.

While the Company and ProPay intend to vigorously defend the Consolidated Action and other matters arising out of the relationship of ProPay with TelexFree and believe ProPay has substantial defenses related to these purported claims, the Company currently cannot reasonably estimate losses attributable to these matters.

TSYS and Global Payments Merger Litigation

As of the date of this report, three putative class action lawsuits challenging the Merger have been filed. Two of these lawsuits, captioned Peters v. Total System Services, Inc. et al. (Case No. 4:19-cv-00114) and Wolf v. Total System Services, Inc., et al. (Case No. 4:19-cv-00115), were filed in the United States District Court for the Middle District of Georgia on July 18, 2019. The third lawsuit, captioned Drulias v. Global Payments Inc., et. al (Case No. 60774/2019) was filed in the Supreme Court of the State of New York, County of Westchester on July 19, 2019.

In addition, a lawsuit challenging the Merger on behalf of an individual plaintiff captioned Hickey v. Total System Services, Inc., et al. (Civil Action No. 1:19-cv-03337-LMM) was filed in the United States District Court for the Northern District of Georgia, Atlanta Division, on July 23, 2019.

The Peters lawsuit names as defendants TSYS, the current members of the TSYS board of directors and certain former members of the TSYS board of directors. The Wolf lawsuit names as defendants TSYS, members of the TSYS board of directors and Global Payments. The Drulias lawsuit names as defendants Global Payments and members of its board. The Hickey lawsuit names as defendants TSYS and the members of the TSYS board of directors. The complaints filed in the lawsuits assert, among other things, claims for filing a materially incomplete registration statement with the SEC. The plaintiffs in the lawsuits seek, among other things, an injunction barring the Merger, rescission of the Merger or rescissory damages, and an award of damages and attorney’s fees. TSYS believes that the claims asserted in the lawsuits are without merit.

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Note 7 — Share-Based Compensation

Refer to Notes 1 and 18 of the Company’s audited financial statements for the year ended December 31, 2018, which are included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC, for a discussion regarding the Company’s share-based compensation plans and policy.

Share-Based Compensation

Share-based compensation costs are classified as selling, general and administrative expenses on the Company’s Consolidated Statements of Income and corporate administration and other expenses for segment reporting purposes. TSYS’ share-based compensation costs are expensed, rather than capitalized, as these awards are typically granted to individuals not involved in capitalizable activities.

Below is a summary of share-based compensation expense for the three and six months ended June 30, 2019 and 2018:


	Three months ended			Six months ended
	June 30,			June 30,
(in thousands)	2019		2018	2019	2018
Share-based compensation	$	11,500	14,230	22,214	20,524

Nonvested Share Awards - Time-Based

The Company granted awards of TSYS common stock to certain key employees. The nonvested stock bonus awards are typically for services to be provided in the future and vest over a period of up to four years. The market value of the TSYS common stock as of the date of issuance is charged as compensation expense over the vesting periods of the awards. As of June 30, 2019, there was approximately $35.2 million of unrecognized compensation cost related to time-based nonvested share awards.



	Six months ended
	June 30,
	2019		2018
Number of shares granted		316,755	320,853
Market value (in millions)	$	29.2	28.6

Performance- and Market-Based Awards

The Company granted performance- and market-based awards to certain key employees. The performance- and market-based goals are established by the Compensation Committee of the Board of Directors and will vest up to a maximum of 200%. During the first six months of 2019 and 2018, the Compensation Committee established performance goals based primarily on various financial and market-based measures. The Company’s market-based awards are based upon the Company’s Total Shareholder Return (“TSR”) as compared to the TSR of the companies in the S&P 500 determined at the end of the performance period for 2018 awards and determined using a twenty day average of the fair market value at the beginning and end of the performance period for 2019 awards.

Compensation expense for performance shares is measured on the grant date based on the quoted market price of TSYS common stock. The Company estimates the probability of achieving the goals through the performance period and expenses the awards on a straight-line basis. The fair value of market-based awards is estimated on the grant date using a Monte Carlo simulation model. The Company expenses market-based awards on a straight-line basis. Compensation costs related to performance- and market-based shares are recognized through the longer of the performance period or the vesting period. As of June 30, 2019, there was approximately $22.3 million of unrecognized compensation cost related to TSYS performance-based awards that is expected to be recognized through December 2021. As of June 30, 2019, there was

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approximately $3.4 million of unrecognized compensation cost related to TSYS market-based awards that is expected to be recognized through December 2021.

During the six months ended June 30, 2019 and 2018, the Company granted performance-based awards based on non-financial metrics and the following performance measures:


Performance Measure	Definition of Measure
Adjusted diluted EPS	Adjusted earnings divided by weighted average diluted shares outstanding used for diluted EPS calculations. Adjusted earnings is net income excluding the after-tax impact of share-based compensation expense, amortization of acquisition intangibles, merger and acquisition expenses for completed acquisitions and litigation claims, judgments or settlement expenses and related legal expenses.
Net revenue	Net revenue is total revenues less reimbursable items that are recorded by TSYS as expense.
Adjusted EBITDA	Adjusted EBITDA is net income excluding equity in income of equity investments, nonoperating income/(expense), income taxes, depreciation, amortization, share-based compensation expenses and other items.

The number of performance-based shares with a one- to two-year performance period granted during the six months ended June 30, 2019 and 2018 totaled 86,779 and 95,904, respectively. The number of performance-based shares with a three-year performance period granted during the six months ended June 30, 2019 and 2018, totaled 79,132 and 79,218, respectively. The grants awarded with a three-year performance period during the first six months of 2019 and 2018 will be expensed through December 31, 2021 and 2020, respectively.

The number of market-based awards granted during the six months ended June 30, 2019 and 2018 were 30,856 and 33,940, respectively. The performance measure for the market-based awards is the Company’s TSR as compared to the TSR of the companies in the S&P 500 determined at the end of the performance period for 2018 awards and determined using a twenty day average of the fair market value at the beginning and end of the performance period for 2019 awards.

Stock Option Awards

The Company granted stock options to certain key executives. The grants will vest over a period of up to three years.

The weighted average fair value of the option grants was estimated on the date of grant using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions:



		Six months ended
		June 30,
	2019			2018
Number of options granted		233,667		360,118
Weighted average exercise price	$	92.37		86.90
Risk-free interest rate		2.47	%	2.55	%
Expected volatility		22.79	%	21.80	%
Expected term (years)		4.8		4.8
Dividend yield		0.56	%	0.60	%
Weighted average fair value	$	21.98		19.23

As of June 30, 2019, there was approximately $5.1 million of unrecognized compensation cost related to TSYS stock options that is expected to be recognized over a remaining weighted average period of 1.7

years.

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Note 8 — Income Taxes

Refer to Notes 1 and 14 of the Company’s audited financial statements for the year ended December 31, 2018, which are included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC, for a discussion regarding income taxes.

TSYS is the parent of an affiliated group that files a consolidated U.S. federal income tax return, consolidated income tax returns for most states and separate entity basis income tax returns for most foreign jurisdictions. In the normal course of business, the Company is subject to examinations by these taxing authorities unless statutory examination periods lapse. TSYS is no longer subject to U.S. federal income tax examinations for years before 2011 and with few exceptions, the Company is no longer subject to income tax examinations from state and local or foreign tax authorities for years before 2014. In March 2019, TSYS reached a closing agreement with the IRS for the federal income tax examinations in progress for the years 2011 through 2013. Additionally, a number of tax examinations are in progress by the relevant state tax authorities. Although TSYS is unable to determine the ultimate outcome of these examinations, TSYS believes that its liability for uncertain tax positions relating to these jurisdictions for such years is adequate.

TSYS’ effective tax rate was 17.1% and 22.3% for the three months ended June 30, 2019 and 2018, respectively, and 16.9% and 17.5% for the six months ended June 30, 2019 and 2018, respectively. The primary reasons for the lower effective income tax rate for the three and six months ended June 30, 2019 as compared to the same periods last year are favorable differences in discrete items related to FIN 48 reserves and equity investment true-ups. During the six-month period ended June 30, 2019, these were mostly offset by unfavorable differences in excess tax benefits of share-based compensation.

GAAP prescribes a recognition threshold and measurement attribute for the financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken in a tax return. The unrecognized tax benefit amounts were $18.8 million and $22.3 million as of June 30, 2019 and December 31, 2018, respectively, which resulted in a decrease of $3.5 million during the period.

TSYS recognizes potential interest and penalties related to the underpayment of income taxes as income tax expense in the Consolidated Statements of Income. Gross accrued interest and penalties on unrecognized tax benefits totaled $1.7 million and $2.5 million as of June 30, 2019 and December 31, 2018, respectively. The total amounts of unrecognized income tax benefits as of June 30, 2019 and December 31, 2018, that, if recognized, would affect the effective tax rates are $19.3 million and $23.5 million (net of the federal benefit on state tax issues), respectively, which include interest and penalties of $1.0 million and $1.7 million, respectively. TSYS does not expect any significant changes to its calculation of uncertain tax positions during the next twelve months.

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Note 9 – Earnings Per Share

The following tables illustrate basic and diluted EPS for the three and six months ended June 30, 2019 and 2018:



	Three months ended				Six months ended
	June 30,				June 30,
	2019		2018		2019		2018
(in thousands, except per share data)	Common Stock		Common Stock		Common Stock		Common Stock
Basic EPS:
Net income attributable to TSYS common shareholders	$	162,760		142,435		324,367		284,276
Less income allocated to nonvested awards		(3)		(59)		(41)		(233)
Net income allocated to common stock for EPS calculation (a)	$	162,757		142,376		324,326		284,043
Weighted average shares outstanding		176,962		182,355		177,697		181,992
Less participating securities		(3)		(76)		(22)		(150)
Average common shares outstanding (b)		176,959		182,279		177,675		181,842
Basic EPS (a)/(b)	$	0.92		0.78		1.83		1.56

Diluted EPS:
Net income attributable to TSYS common shareholders	$	162,760		142,435		324,367		284,276
Less income allocated to nonvested awards		(3)		(59)		(41)		(233)
Add income reallocated to nonvested awards¹		3		59		41		233
Net income allocated to common stock for EPS calculation (c)	$	162,760		142,435		324,367		284,276
Weighted average shares outstanding		176,962		182,355		177,697		181,992
Less participating securities		(3)		(76)		(22)		(150)
Average common shares outstanding		176,959		182,279		177,675		181,842
Increase due to assumed issuance of shares related to common equivalent shares outstanding		986		881		926		1,064
Average nonvested awards¹		569		415		597		551
Average common and common equivalent shares outstanding (d)		178,514		183,575		179,198		183,457
Diluted EPS (c)/(d)	$	0.91		0.78		1.81		1.55

1	In accordance with the diluted EPS guidance under the two-class method, the Company uses the approach- either the treasury stock method or the two-class method assuming a participating security is not exercised- that is more dilutive.

The diluted EPS calculation excludes stock options and nonvested awards that are exercisable into 0.1 million and 0.2 million common shares for the three and six months ended June 30, 2019, respectively, and excludes 0.4 million common shares for the three and six months ended June 30, 2018, because their inclusion would have been anti-dilutive.

Note 10 — Supplementary Cash Flow Information

Software Acquired Under License Agreements

There was approximately $6.9 million and $3.4 million of software acquired under license agreements in the first six months of 2019 and 2018, respectively. Additionally, the Company did not acquire software through vendor financing and other arrangements during the first six months of 2019 compared to $39.6 million of software acquired through vendor financing and other arrangements during the first six months of 2018.

Note 11 — Segment Reporting and Major Customers

Refer to Note 21 of the Company’s audited financial statements for the year ended December 31, 2018, which is included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC, for a discussion regarding segment reporting and major customers.

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At TSYS, the chief operating decision maker (“CODM”) is a group consisting of Senior Executive Management. In the first quarter of 2019, the CODM changed the profitability measure for its operating segments to adjusted segment EBITDA. All periods presented have been adjusted to reflect this new measure.

The following table presents the Company’s total assets by segment:


	As of
(in thousands)	June 30, 2019		December 31, 2018
Issuer Solutions	$	7,049,467	6,843,451
Merchant Solutions		4,204,758	4,248,183
Consumer Solutions		1,383,015	1,374,667
Intersegment assets		(4,930,434)	(4,997,592)
Total assets	$	7,706,806	7,468,709

The Company maintains property and equipment, net of accumulated depreciation and amortization, in the following geographic areas:


	As of
(in thousands)	June 30, 2019		December 31, 2018
United States	$	312,707	321,119
Europe		46,466	45,872
Other		14,695	16,083
Total	$	373,868	383,074

The following table presents the Company’s depreciation and amortization by segment:


	Three months ended			Six months ended
		June 30,			June 30,
(in thousands)	2019		2018	2019		2018
Depreciation and amortization by segment:
Issuer Solutions	$	36,129	29,640		71,296	57,971
Merchant Solutions		8,257	7,523		15,940	15,348
Consumer Solutions		5,202	4,313		9,618	8,573
Segment depreciation and amortization		49,588	41,476		96,854	81,892
Acquisition intangible amortization		53,706	61,865		108,663	124,888
Corporate administration and other		1,479	949		2,966	1,899
Total depreciation and amortization	$	104,773	104,290		208,483	208,679

The following tables reconcile geographic revenues to external revenues by operating segment based on the domicile of the Company’s customers:


	Three months ended June 30, 2019
(in thousands)	Issuer Solutions		Merchant Solutions	Consumer Solutions	Total
United States	$	243,000	365,703	196,143	$	804,846
Europe¹		99,038	128	-		99,166
Canada¹		107,368	422	-		107,790
Other¹		23,300	383	-		23,683
Total	$	472,706	366,636	196,143	$	1,035,485

1Certain of these revenues are impacted by movements in foreign currency exchange rates.

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	Six months ended June 30, 2019
(in thousands)	Issuer Solutions		Merchant Solutions	Consumer Solutions	Total
United States	$	514,130	710,001	415,334	$	1,639,465
Europe¹		193,425	288	-		193,713
Canada¹		187,001	810	-		187,811
Other¹		48,309	718	-		49,027
Total	$	942,865	711,817	415,334	$	2,070,016


	Three months ended June 30, 2018
(in thousands)	Issuer Solutions		Merchant Solutions	Consumer Solutions	Total
United States	$	266,274	348,012	200,265	$	814,551
Europe¹		89,339	127	-		89,466
Canada¹		81,076	279	-		81,355
Other¹		21,912	296	-		22,208
Total	$	458,601	348,714	200,265	$	1,007,580


	Six months ended June 30, 2018
(in thousands)	Issuer Solutions		Merchant Solutions	Consumer Solutions	Total
United States	$	530,306	666,762	410,653	$	1,607,721
Europe¹		184,483	252	-		184,735
Canada¹		158,657	558	-		159,215
Other¹		42,514	565	-		43,079
Total	$	915,960	668,137	410,653	$	1,994,750

2Certain of these revenues are impacted by movements in foreign currency exchange rates.

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The following table presents the Company’s operating results by segment:


(in thousands)	Three months ended			Six months ended
	June 30,			June 30,
Operating Segments		2019	2018		2019	2018
Adjusted segment EBITDA¹:
Issuer Solutions (a)	$	209,845	195,275		414,779	391,040
Merchant Solutions (b)		138,366	133,418		267,201	252,358
Consumer Solutions (c)		53,595	54,545		117,288	108,212
Corporate administration and other		(32,867)	(38,217)		(73,042)	(75,667)
Total		368,939	345,021		726,226	675,943
Less:
Share-based compensation		11,500	14,230		22,214	20,524
Merger & acquisition (M&A) and integration expenses²		17,150	2,581		20,860	16,949
Depreciation and amortization		104,773	104,290		208,483	208,679
Contract asset amortization		8,250	6,711		16,288	13,584
Contract cost asset amortization		8,179	8,511		16,024	19,238
Operating income		219,087	208,698		442,357	396,969
Nonoperating expenses, net		(37,416)	(41,170)		(80,407)	(78,812)
Income before income taxes and equity in income of equity investments	$	181,671	167,528		361,950	318,157

Net revenue by segment:
Issuer Solutions (e)	$	432,445	421,015		865,919	844,589
Merchant Solutions (f)		364,210	346,389		707,166	663,792
Consumer Solutions (g)		196,143	200,293		415,321	410,781
Segment net revenue		992,798	967,697		1,988,406	1,919,162
Less: intersegment revenues		12,878	11,149		28,217	27,117
Net revenue³		979,920	956,548		1,960,189	1,892,045
Add: reimbursable items		55,565	51,032		109,827	102,705
Total revenues	$	1,035,485	1,007,580		2,070,016	1,994,750

Adjusted segment EBITDA margin on net revenue:
Issuer Solutions (a)/(e)		48.5%	46.4%		47.9%	46.3%
Merchant Solutions (b)/(f)		38.0%	38.5%		37.8%	38.0%
Consumer Solutions (c)/(g)		27.3%	27.2%		28.2%	26.3%

Adjusted segment EBITDA is net income excluding equity in income investments, interest expense (net of interest income), income taxes, depreciation, amortization, contract asset amortization, contract cost asset amortization, gains or losses on foreign currency translation, other nonoperating income or expenses, share-based compensation, litigation, claims, judgments or settlements and M&A and integration expenses.

2	Excludes share-based compensation

3	Net revenue is defined as total revenues less reimbursable items (such as postage) that are recorded by TSYS as expense.

Major Customers

For the three and six months ended June 30, 2019 and 2018, the Company did not have any major customers.

Note 12 — Subsequent Events

Management performed an evaluation of the Company’s activity as of the date these consolidated financial statements were issued and has concluded that there are no significant subsequent events requiring disclosure, except for the TSYS and Global Payments merger litigation discussed in Note 6 in the Notes to Unaudited Consolidated Financial Statements.

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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 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 mainly in the United States. The Company’s Consumer Solutions segment provides financial service solutions 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, 2018, as filed with the Securities and Exchange Commission (“SEC”).

Pending Merger with Global Payments Inc.

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.

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A summary of the financial highlights for 2019, as compared to 2018, is provided below:



	Three months ended					Six months ended
	June 30,					June 30,
(in thousands, except per share data)	2019		2018	Percent Change		2019		2018	Percent Change
Total revenues	$	1,035,485	1,007,580	2.8	%	$	2,070,016	1,994,750	3.8	%
Net revenue¹	$	979,920	956,548	2.4		$	1,960,189	1,892,045	3.6
Operating income	$	219,087	208,698	5.0		$	442,357	396,969	11.4
Net income attributable to TSYS common shareholders	$	162,760	142,435	14.3		$	324,367	284,276	14.1
Basic earnings per share (EPS) attributable to TSYS common shareholders²	$	0.92	0.78	17.7		$	1.83	1.56	16.9
Diluted EPS attributable to TSYS common shareholders²	$	0.91	0.78	17.5		$	1.81	1.55	16.8
Adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA)³	$	368,939	345,021	6.9		$	726,226	675,943	7.4
Adjusted earnings⁴	$	226,686	203,796	11.2		$	442,132	411,383	7.5
Adjusted diluted EPS⁵	$	1.27	1.11	14.4		$	2.47	2.24	10.0
Cash flows from operating activities						$	395,430	470,593	(16.0)
Free cash flow⁶						$	278,560	382,835	(27.2)

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 (such as postage) that are recorded by TSYS as expense.

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 9 in the Notes to 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, 2018, 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 on the judgments affecting the application of those estimates and assumptions in 2019. TSYS has updated its lease policies in conjunction with the adoption of Accounting Standards Update No. 2016-02, Leases (Topic 842) (“ASC 842”) as further described in Notes 1 and 4 in the Notes to Unaudited Consolidated Financial Statements. The most significant impact of adopting ASC 842 in 2019 is primarily the addition of operating lease right-of-use assets and corresponding liabilities to the Consolidated Balance Sheet.

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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 Consolidated Balance Sheets as of December 31, 2018. With the adoption of ASC 842, operating lease right-of-use assets and operating lease liabilities were recognized on the Consolidated Balance Sheet as of January 1, 2019.

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.

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. 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 2.8% and 3.8%, for the three and six months ended June 30, 2019, respectively, compared to the same periods in 2018. Revenues for the three and six months ended June 30, 2019 also included decreases of $6.8 million and $15.1 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 that are recorded by TSYS as expense. The Company has included reimbursements received for out-of-pocket expenses as revenues and expenses. The largest reimbursable expense items for which TSYS is reimbursed by clients are postage 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, 2019 were $55.6 million and $109.8 million, increases of 8.9% and 6.9%, respectively, compared to the same periods last year, primarily due to an increase in postal rates.

Net revenue increased $23.4 million and $68.1 million, or 2.4% and 3.6% during the three and six months ended June 30, 2019, respectively, compared to the same periods in 2018. The increase in net revenue for the three and six months ended June 30, 2019, as compared to the same periods in 2018, is primarily the result of organic growth, partially offset by decreases of $6.4 million and $14.1 million, respectively, associated with currency translation.

Major Customers

For a discussion regarding the Company’s major customers, refer to Note 11 in the Notes to Unaudited Consolidated Financial Statements and see “Item 7: Management’s Discussion and Analysis of Financial

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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, 2018, 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, 2019, 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 Consumer Solutions. Refer to Note 11 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 contract assets and contract cost 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 accountholder'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 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 which are based on authorizations processed and AOF, respectively. Collectively, these services are considered volume-based revenues.

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


(in millions)	As of June 30,
AOF	2019	2018	Percent Change
Consumer	532.2	493.8	7.8	%
Commercial	61.6	56.8	8.4
Other	45.1	38.3	18.0
Traditional AOF¹	638.9	588.9	8.5
Prepaid/Stored Value²	8.4	37.0	(77.2)
Commercial Card Single-Use³	121.7	106.0	14.8
Government Services⁴	-	97.4	(100.0)
Total AOF	769.0	829.3	(7.3)

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, single-use accounts and government services.

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

4	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.

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 one major customer for the three and six months ended June 30, 2019.

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Below is a summary of the Issuer Solutions segment:

Three months ended

Six months ended

June 30,

(in thousands, except key indicators)

2019

2018

Percent
Change

2019

2018

Percent
Change

Volume-based revenues

215,945

208,872

3.4

431,369

414,496

4.1

Non-volume related revenues:

Processing fees

76,131

82,349

(7.6)

150,996

162,190

(6.9)

Value-added, custom programming, licensing and other

71,072

67,227

5.7

142,620

143,283

(0.5)

Output and managed services

69,297

62,567

10.8

140,934

124,620

13.1

Total non-volume related revenues

216,500

212,143

2.1

434,550

430,093

1.0

Net revenue¹

432,445

421,015

2.7

865,919

844,589

2.5

Adjusted segment EBITDA²

209,845

195,275

7.5

414,779

391,040

6.1

Adjusted segment EBITDA margin³

48.5

46.4

47.9

46.3

Key indicators (in millions):

AOF

769.0

829.3

(7.3)

Traditional AOF

638.9

588.9

8.5

Transactions

6,645.4

6,050.0

9.8

12,594.2

11,598.0

8.6

1	Net revenue is defined as total revenues less reimbursable items (such as postage) that are recorded by TSYS as expense.

2	Adjusted segment EBITDA excludes acquisition intangible amortization and expenses associated with Corporate Administration and Other.

3	Adjusted segment EBITDA margin is adjusted segment EBITDA divided by net revenue.

For the three and six months ended June 30, 2019, approximately 49.9% and 49.8%, respectively, of net revenue was driven by the volume of AOF and transactions processed and approximately 50.1% and 50.2%, respectively, was derived from non-volume based revenues.

The increase in net revenue for the three and six months ended June 30, 2019, as compared to the same periods in 2018, was 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.

Net revenue for the three and six months ended June 30, 2019, as compared to the same periods in 2018, included decreases of $6.4 million and $14.3 million, respectively, associated with currency translation.

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, 2019.

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.

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Below is a summary of the Merchant Solutions segment:


	Three months ended							Six months ended
	June 30,							June 30,
(in thousands, except key indicators)	2019			2018		Percent Change		2019			2018		Percent Change
Net revenue¹	$	364,210		346,389		5.1	%	$	707,166		663,792		6.5	%
Adjusted segment EBITDA²	$	138,366		133,418		3.7		$	267,201		252,358		5.9
Adjusted segment EBITDA margin³		38.0	%	38.5	%				37.8	%	38.0	%
Key indicators:
Dollar sales volume (in millions)	$	43,890.0		40,362.1		8.7		$	84,131.6		77,628.8		8.4
POS transactions (in millions)		1,700.3		1,498.5		13.5			3,224.7		2,838.0		13.6
Net revenue per POS transaction	$	0.214		0.231		(7.3)		$	0.219		0.234		(6.2)

1	Net revenue is defined as total revenues less reimbursable items (such as postage) that are recorded by TSYS as expense.

2	Adjusted segment EBITDA excludes acquisition intangible amortization and expenses associated with Corporate Administration and Other.

3	Adjusted segment EBITDA margin is adjusted segment EBITDA divided by net revenue.

For the three and six months ended June 30, 2019, approximately 93.4% of 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 and adjusted segment EBITDA for the three and six months ended June 30, 2019, as compared to the same periods in 2018, was driven by higher processing volumes, product fees and processing fees.

Consumer Solutions

The Consumer Solutions segment provides GPR prepaid cards, payroll cards, demand deposit accounts and other financial service solutions to the underbanked and other consumers and businesses in the United States. The segment’s 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. The Consumer Solutions segment has an extensive distribution and reload network including 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 the segment develops, promotes and distributes. The Consumer Solutions segment 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 has no major customers and one major third-party distributor for the three and six months ended June 30, 2019.

The Consumer Solutions segment’s revenues primarily consist of a portion of the service fees and interchange revenues received by the segment’s issuing banks and others in connection with the programs managed by this segment. Customers are charged fees for transactions including fees for PIN and signature-based purchase transactions made using their cards, for 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, custom card designs and card-to-card transfers of funds initiated through call centers. The Consumer Solutions segment also earns revenues from a portion of the interchange fees remitted by merchants when customers make purchase transactions using their products. Subject to applicable law, interchange fees are fixed by card associations and network organizations.

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Below is a summary of the Consumer Solutions segment:


	Three months ended							Six months ended
	June 30,							June 30,
(in thousands, except key indicators)	2019			2018		Percent Change		2019			2018		Percent Change
Net revenue¹	$	196,143		200,293		(2.1)	%	$	415,321		410,781		1.1	%
Adjusted segment EBITDA²	$	53,595		54,545		(1.7)		$	117,288		108,212		8.4
Adjusted segment EBITDA margin³		27.3	%	27.2	%				28.2	%	26.3	%
Key indicators (in millions):
Gross dollar volume⁴	$	8,659.8		8,336.2		3.9		$	18,713.3		18,030.5		3.8
Number of active cards⁵									5.0		5.1		(2.1)
Number of active cards with direct deposit⁶									2.5		2.5		(2.6)
Percentage of active cards with direct deposit									49.3	%	49.6	%

1	Net revenue is defined as total revenues less reimbursable items (such as postage) that are recorded by TSYS as expense.

2	Adjusted segment EBITDA excludes acquisition intangible amortization and expenses associated with Corporate Administration and Other.

3	Adjusted segment EBITDA margin is adjusted segment EBITDA divided by net revenue.

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

Number of active cards represents the total number of 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, 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 three and six months ended June 30, 2019, 68.7% and 69.1%, respectively, of revenues were derived from service fees charged to customers and 31.3% and 30.9%, respectively, 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.

Net revenue for the three and six months ended June 30, 2019, compared to the same periods in 2018, decreased $4.2 million and increased $4.5 million, respectively. Service fee revenue decreased $7.8 million and $2.4 million, or 5.5% and 0.8% for the three months and six months ended June 30, 2019, respectively, compared to the same periods in 2018. The decrease in service fee revenue for the three and six months ended June 30, 2019, was driven by the removal of certain service fees on prepaid products effective April 1, 2019, upon the effective date of the Consumer Financial Protection Bureau’s (“CFPB”) 2016 prepaid rule. Revenues from interchange and other services for the three and six months ended June 30, 2019, increased $3.6 million and $6.9 million, or 6.3% and 5.7%, respectively, compared to the same periods last year. The increase in revenues from interchange and other services for the three and six months ended June 30, 2019, was driven by the increase in gross dollar volume.

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 adjusted requirements for resolving errors on unregistered accounts, provided greater flexibility for credit cards linked to digital wallets, and extended the effective date of the rule by one year to April 1, 2019.

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Operating Expenses

The Company’s operating expenses were $816.4 million and $1.6 billion for the three and six months ended June 30, 2019, respectively, compared to $798.9 million and $1.6 billion for the same periods in 2018. 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 and six months ended June 30, 2019 increased $17.5 million and $29.9 million, respectively, compared to the same periods last year. The increases primarily related to an increase in cost of services.

The Company’s cost of services were $630.8 million and $1.3 billion for the three and six months ended June 30, 2019, respectively, which were increases of 2.1% and 2.6%, respectively, compared to the same periods last year. The increase in cost of services for the three and six months ended June 30, 2019 is due to an increase in merchant referral fees and commissions, reimbursable expenses and salaries. The Company’s selling, general and administrative expenses were $185.6 million and $364.6 million for the three and six months ended June 30, 2019, respectively, an increase of 2.5% and a decrease of 0.5%, respectively, compared to the same periods last year. The increase in selling, general, and administrative costs for the three months ended June 30, 2019 is the result of expenses related to the merger with Global Payments partially offset by a decrease in amortization of acquisition intangibles. The decrease in selling, general, and administrative costs for the six months ended June 30, 2019 is the result of a decrease in amortization of acquisition intangibles.

The Company’s transaction and integration expenses related to mergers and acquisitions were $17.6 million and $21.6 million for the three and six months ended June 30, 2019, respectively. These expenses consist of costs related to mergers and acquisitions such as legal, accounting and professional fees, share-based compensation, as well as, personnel costs for severance and retention.

Operating Income

Operating income increased 5.0% and 11.4% for the three and six months ended June 30, 2019, respectively, compared to the same periods in 2018. The Company’s operating profit margin for the three and six months ended June 30, 2019, was 21.2% and 21.4%, respectively, compared to 20.7% and 19.9%, respectively, for the same periods last year. TSYS’ operating margin increased for the three and six months ended June 30, 2019, as compared to the same periods in 2018, due primarily to a decrease in amortization of acquisition intangibles.

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Nonoperating Expenses, net

Nonoperating income (expense) consists of interest expense, interest income and gains and losses on currency translation and transactions. Net nonoperating expense decreased and increased for the three and six months ended June 30, 2019, respectively, compared to the same periods in 2018.

The following table provides a summary of nonoperating expenses, net:

Three months ended

Six months ended

June 30,

(in thousands)

2019

2018

Percent
Change

2019

2018

Percent
Change

Interest expense¹

(44,244)

(42,643)

(3.8)

(88,241)

(80,042)

(10.2)

Interest income

1,230

1,524

(19.2)

2,458

2,270

0.1

Currency translation and transaction gains (losses), net

850

535

59.0

(287)

107

Other

4,748

(586)

5,663

(1,147)

Total

(37,416)

(41,170)

9.1

(80,407)

(78,812)

(2.0)

nm = not meaningful

1	Interest expense includes interest on Senior Notes of $32.9 million and $65.7 million for the three and six months ended June 30, 2019, respectively, and $30.6 million and $56.1 million, for the same periods in 2018.

Interest expense for the three and six months ended June 30, 2019, increased $1.6 million and $8.2 million, respectively, compared to the same periods in 2018. The increase in interest expense for the three and six months ended June 30, 2019 was primarily the result of the addition of $450 million of bonds in May 2018 as well as the expiration of lower interest rate borrowings in June 2018. Additionally, the increase in interest expense is attributable to higher interest rates associated with the 4.000% and 4.450% Senior Notes issued in May 2018 compared to the 2.375% Senior Notes that were paid off at maturity on June 1, 2018.

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 consolidated financial statements. The upward or downward adjustment is recorded as a gain or loss on foreign currency translation in the Company’s Consolidated Statements of Income.

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 currency translation and transaction gain or loss on foreign currency translation in the Company’s Consolidated 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, 2019, was approximately $28.4 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, 2019 was $63.6 million.

Income Taxes

For a detailed discussion regarding income taxes, refer to Notes 1 and 14 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, 2018, as filed with the SEC. See also Note 8 in the Notes to Unaudited Consolidated Financial Statements for additional information on income taxes for the three and six months ended June 30, 2019.

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Below is a summary of income tax expense:


	Three months ended							Six months ended
	June 30,							June 30,
(in thousands)	2019			2018		Percent Change		2019			2018		Percent Change
Income tax expense	$	31,128		37,415		(16.8)	%	$	61,027		55,549		9.9	%
Effective income tax rate		17.1	%	22.3	%				16.9	%	17.5	%

The primary reason for the lower effective income tax rate for the three months ended June 30, 2019, as compared to the same period last year, is the favorable variance in discrete items related to an equity investment in a foreign entity. During the six months ended June 30, 2019, most of the favorable variances in discrete items related to FIN 48 and equity investment true-ups were offset by unfavorable variances related to excess tax benefits of 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 current year 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 withholding tax upon distribution was approximately $123.8 million as of June 30, 2019. Although TSYS does not intend to repatriate these earnings, a distribution of these non-U.S. earnings in the form of dividends, or otherwise, may subject the Company to withholding taxes payable to some of the various non-U.S. jurisdictions.

Equity in Income of Equity Investments

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

Three months ended

Six months ended

June 30,

(in thousands)

2019

2018

Percent Change

2019

2018

Percent Change

Equity in income of equity investments, net of tax

12,217

12,322

(0.9)

23,444

22,929

2.2

The increase in equity income for the six months ended June 30, 2019, as compared to the same periods in 2018, is primarily the result of increased operating results associated with China UnionPay Data Services Co., LTD.

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Net Income

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


	Three months ended					Six months ended
	June 30,					June 30,
(in thousands, except per share data)	2019		2018	Percent Change		2019		2018	Percent Change
Net income	$	162,760	142,435	14.3	%	$	324,367	285,537	13.6	%
Net income attributable to noncontrolling interests		-	-	na			-	(1,261)	100.0
Net income attributable to TSYS common shareholders	$	162,760	142,435	14.3		$	324,367	284,276	14.1
Basic EPSattributable to TSYS common shareholders¹	$	0.92	0.78	17.7		$	1.83	1.56	16.9
Diluted EPS attributable to TSYS common shareholders¹	$	0.91	0.78	17.5		$	1.81	1.55	16.8
na = not applicable

1	Basic and diluted EPS is computed based on the two-class method in accordance with the guidance under GAAP. Refer to Note 9 in the Notes to Unaudited Consolidated Financial Statements for more information on EPS.

Non-GAAP Measures

Management evaluates the Company's operating performance based upon net revenue, a constant currency 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.

Although the Company excludes the amortization of purchased intangibles from these non-GAAP measures, management believes that it is important for investors to understand that such intangible assets were recorded as part of purchase accounting and contribute to revenue generation.

The following tables provide a reconciliation of GAAP to the Company’s non-GAAP financial measures:



Net Revenue

	Three months ended			Six months ended
	June 30,			June 30,
(in thousands)	2019		2018	2019	2018
Total revenues (GAAP)	$	1,035,485	1,007,580	2,070,016	1,994,750
Less: reimbursable items		55,565	51,032	109,827	102,705
Net revenue (non-GAAP)	$	979,920	956,548	1,960,189	1,892,045

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Constant Currency Comparison

	Three months ended			Six months ended
(in thousands)	June 30,			June 30,
Consolidated	2019		2018	2019	2018
Total revenues (GAAP)	$	1,035,485	1,007,580	2,070,016	1,994,750
Foreign currency impact¹		6,839	—	15,107	—
Constant currency²(non-GAAP)	$	1,042,324	1,007,580	2,085,123	1,994,750

Net revenue (non-GAAP)	$	979,920	956,548	1,960,189	1,892,045
Foreign currency impact¹		6,354	—	14,060	—
Constant currency²(non-GAAP)	$	986,274	956,548	1,974,249	1,892,045

Operating income (GAAP)	$	219,087	208,698	442,357	396,969
Foreign currency impact¹		1,989	—	3,886	—
Constant currency²(non-GAAP)	$	221,076	208,698	446,243	396,969

Issuer Solutions
Segment net revenue (GAAP)	$	432,445	421,015	865,919	844,589
Foreign currency impact¹		6,415	—	14,261	—
Constant currency²(non-GAAP)	$	438,860	421,015	880,180	844,589

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.


Adjusted EBITDA

	Three months ended					Six months ended
	June 30,					June 30,
(in thousands)	2019			2018		2019		2018
Net income (GAAP) (a)	$	162,760		142,435		324,367		285,537
Adjust for:
Less: Equity in income of equity investments		(12,217)		(12,322)		(23,444)		(22,929)
Add: Income tax expense		31,128		37,415		61,027		55,549
Add: Interest expense, net		43,014		41,119		85,783		77,772
Add: Depreciation and amortization		104,773		104,290		208,483		208,679
Add: Contract asset amortization		8,250		6,712		16,288		13,584
Add: Contract cost asset amortization		8,179		8,511		16,024		19,238
Less/Add: (Gain) loss on foreign currency translation and transaction (gains) losses		(850)		(535)		287		(107)
Add/Less: Other nonoperating (income) expenses		(4,748)		586		(5,663)		1,147
Add: Share-based compensation		11,500		14,229		22,214		20,524
Add: M&A and integration expenses¹		17,150		2,581		20,860		16,949
Adjusted EBITDA (non-GAAP) (b)	$	368,939		345,021		726,226		675,943

Total revenues (GAAP) (c)	$	1,035,485		1,007,580		2,070,016		1,994,750
Net income margin on total revenues (GAAP) (a)/(c)		15.7	%	14.1	%	15.7	%	14.3	%

Net revenue (non-GAAP) (d)	$	979,920		956,548		1,960,189		1,892,045
Adjusted EBITDA margin on net revenue (non-GAAP) (b)/(d)		37.6	%	36.1	%	37.0	%	35.7	%

1	Costs associated with mergers & acquisitions and integrations are included in selling, general and administrative expenses and nonoperating expenses.

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Adjusted Earnings and Adjusted Diluted Earnings Per Share

	Three months ended			Six months ended
	June 30,			June 30,
(in thousands, except per share data)	2019		2018	2019	2018
Net income attributable to TSYS common shareholders (GAAP)	$	162,760	142,435	324,367	284,276
Adjust for amounts attributable to TSYS common shareholders:
Add: Acquisition intangible amortization¹		53,707	61,830	108,663	124,818
Add: Share-based compensation		11,500	14,228	22,214	20,522
Add: M&A and integration expenses²		17,150	2,581	20,860	16,949
Less: Tax impact of adjustments³		(18,431)	(17,278)	(33,972)	(35,182)
Adjusted earnings (non-GAAP)	$	226,686	203,796	442,132	411,383

Diluted EPS - Net income attributable to TSYS common shareholders:
As reported (GAAP)	$	0.91	0.78	1.81	1.55
Adjusted diluted EPS (non-GAAP)	$	1.27	1.11	2.47	2.24

Weighted average diluted shares		178,514	183,575	179,198	183,456

The Company’s amortization of acquisition intangible assets is disclosed in its 2018 Form 10-K filing in the applicable footnotes to the consolidated financial statements (Note 7 Other Intangible Assets, Net and the amortization expense associated with acquisition technology intangibles in Note 8 Intangible Assets – Computer Software, Net).

2	Costs associated with mergers & acquisitions and integrations are included in selling, general and administrative expenses and nonoperating expenses.

3	Certain of these merger and acquisition costs are nondeductible for income tax purposes.


Free Cash Flow
	Six months ended
	June 30,
(in thousands)	2019		2018
Net cash provided by operating activities (GAAP)	$	395,430	470,593
Capital expenditures		(116,870)	(87,758)
Free cash flow (non-GAAP)	$	278,560	382,835

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.

As a result of the Merger Agreement with Global Payments discussed in Note 1 in the Notes to Unaudited Consolidated Financial Statements, the Company is precluded from additional share repurchases, new debt or equity financings, increasing its quarterly dividend, or entering into acquisitions or dispositions above certain thresholds, among other activities, without prior written consent from Global Payments.

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Cash Flows From Operating Activities


	Six months ended
	June 30,
(in thousands)	2019		2018
Net income	$	324,367	285,537
Depreciation and amortization		208,483	208,679
Provisions for cardholder losses		25,540	34,433
Amortization of operating lease right-of-use assets		25,555	-
Share-based compensation		22,214	20,524
Deferred income tax expense		21,258	18,657
Provisions for bad debt expenses and billing adjustments		5,587	5,170
Amortization of debt issuance costs		2,652	2,362
Charges for transaction processing provisions		1,319	3,177
Equity in income of equity investments		(23,444)	(22,929)
Other noncash items and charges, net		(5,153)	1,299
Net change in current and other assets and current and other liabilities		(212,948)	(86,316)
Net cash provided by operating activities	$	395,430	470,593

TSYS' main source of funds is derived from operating activities, specifically net income. The amortization of operating lease right-of-use assets relates to the Company’s adoption of ASC 842, Leases, as of January 1, 2019. See further discussion in Notes 1 and 4 in the Notes to Unaudited Consolidated Financial Statements. Net change in current and other assets includes accounts receivable, contract assets and contract liabilities, contract cost assets, prepaid expenses, other current assets and other long-term assets. Net change in current and other liabilities includes accounts payable, accrued salaries and employee benefits, other current liabilities and other long-term liabilities. The change in accounts receivable as of June 30, 2019, as compared to June 30, 2018, is the result of timing of payments by clients. 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, 2019 compared to the same period in 2018.

Cash Flows From Investing Activities


	Six months ended
	June 30,
(in thousands)	2019		2018
Additions to licensed computer software from vendors	$	(61,209)	(19,216)
Purchases of property and equipment		(30,844)	(48,608)
Additions to internally developed computer software		(24,817)	(19,934)
Cash used in acquisitions, net of cash acquired		-	(1,051,629)
Other investing activities		(2,700)	(4,119)
Net cash used in investing activities	$	(119,570)	(1,143,506)

The primary uses of cash for investing activities in 2019 were for the purchase of licensed computer software, purchases of property and equipment and internal development of computer software. The primary uses of cash for investing activities in 2018 were for acquisitions, purchases of property and equipment, internal development of computer software and the purchase of licensed computer software.

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Cash Flows From Financing Activities


	Six months ended
	June 30,
(in thousands)	2019		2018
Proceeds from borrowings of long-term debt	$	450,000	3,477,000
Proceeds from exercise of stock options		6,911	29,289
Repurchase of common stock under plans and tax withholding		(400,023)	(82)
Principal payments on long-term borrowings, finance lease obligations and license agreements		(299,499)	(2,626,534)
Dividends paid on common stock		(46,534)	(47,190)
Purchase of noncontrolling interest		-	(126,000)
Debt issuance costs		-	(15,979)
Subsidiary dividends paid to noncontrolling shareholders		-	(3,778)
Net cash (used in) provided by financing activities	$	(289,145)	686,726

The main uses of cash for financing activities in 2019 were repurchase of common stock, principal payments on long-term borrowings, finance lease obligations and license agreements and the payment of dividends. The main sources of cash provided by financing activities in 2019 were the proceeds from borrowing of long-term debt and exercises of stock options. The main uses of cash for financing activities in 2018 were the purchase of the remaining fifteen percent interest in Central Payment Co., LLC (“CPAY”), principal payments on long-term borrowings, finance lease obligations and license agreements, and the payment of dividends. The main sources of cash provided by financing activities in 2018 were the proceeds from borrowing of long-term debt and exercises of stock options.

Refer to Note 5 in the Notes to Unaudited Consolidated Financial Statements for more information on borrowings.

Dividends

Dividends on common stock of $46.5 million and $47.2 million were paid during the six months ended June 30, 2019 and 2018, respectively. For the six months ended June 30, 2019 and 2018, the Company paid dividends of $0.26 per share.

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, 2018, as filed with the SEC.

In January 2019, the Company entered into an accelerated share repurchase (“ASR”) agreement with a third-party financial institution to repurchase $400 million of the Company’s common stock. Under the ASR agreement, the Company paid a specified amount to the financial institution and received an initial delivery of shares. This initial delivery of shares represents approximately 83% of the estimated shares delivered under the agreement by repurchasing $400 million of the Company’s common stock divided by the Trade Date closing price. Upon settlement of the ASR agreement, the financial institution delivered additional shares, with the final number of shares delivered determined with reference to the volume-weighted average price of the Company’s common stock over the term of the agreement, less an agreed-upon discount. The transactions are accounted for as equity transactions and are included in Treasury Stock when the shares are received, at which time there is an immediate reduction in the weighted-average common shares calculation for basic and diluted earnings per share.

In February 2019, the Company received an initial delivery of 3.7 million shares. The transaction was completed in March 2019, at which time the Company received an additional 638,414 shares.

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Foreign Operations

TSYS operates internationally and is subject to adverse movements in foreign currency exchange rates. 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 considering the terms of its expected exit from the E.U. which is now scheduled to occur no later than October 31, 2019.

This date represents an extension of the original date of March 29, 2019 and was jointly agreed to between the U.K. and the E.U. in April 2019. The extension is expected to only be as long as necessary and in any event no later than October 31, 2019 to allow for the ratification of the withdrawal agreement which was negotiated between the U.K. and the E.U.

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. Uncertainty over the terms of the withdrawal of the U.K. from the E.U. may create global economic uncertainty, and have unknown social and geopolitical impact, which may adversely affect the Company’s business, results of operations and financial condition, as well as potentially affecting TSYS’ relationships with its existing and future customers, vendors and employees.

Additionally, the U.K. may be required to negotiate new terms of trade with various jurisdictions which could be disruptive and adversely affect TSYS’ tax benefits or liabilities in those jurisdictions. 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 2 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, some remaining amounts may not be presently available to fund domestic operations and obligations without paying withholding 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. may be subject to foreign withholding taxes. Pursuant to the Tax Cuts and Jobs Act of 2017 (“Tax Act”), TSYS has not provided for the U.S. federal tax liability on these amounts for financial statement purposes. 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 2.5:1. As of June 30, 2019, TSYS had working capital of $738.5 million compared to working capital of $625.2 million as of December 31, 2018.

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Legal Proceedings

Refer to Note 15 of the Company’s audited financial statements for the year ended December 31, 2018, which are included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, 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 6 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 that it will be able to fund a significant portion of its capital expenditure needs through internally generated cash in the future; (ii) TSYS’ belief with respect to lawsuits, claims and other complaints; (iii) 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 and software;

●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 deconversions 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;

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●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 Cayan and TransFirst acquisitions, 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 rule regarding prepaid financial products;

●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;

●TSYS’ ability to obtain and protect its own patents and intellectual property and also avoid liability for infringement of third party rights;

●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;

●the potential for TSYS’ systems and software to contain undetected errors, viruses or defects;

●other risks detailed in this document under Part II, Item 1A Risk Factors in this Quarterly Report on Form 10-Q, and 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, 2018 and other filings with the Securities and Exchange Commission; and

●TSYS’ ability to manage the foregoing and other risks.

Additional factors related to the Agreement and Plan of Merger between TSYS and Global Payments that could cause actual results to differ materially from our forward-looking statements include, but are not limited to:

●the occurrence of any event, change or other circumstances that could give rise to the right of one or both of TSYS and Global Payments to terminate the Merger Agreement;

●the outcome of any legal proceedings that may be instituted against TSYS, Global Payments or their respective directors;

●the ability to obtain regulatory approvals and meet other closing conditions to the Merger on a timely basis or at all, including the risk that regulatory approvals required for the Merger are not obtained on a timely basis or at all, or are obtained subject to conditions that are not anticipated or that could adversely affect the combined company or the expected benefits of the transaction;

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●the ability to obtain approval by TSYS shareholders and Global Payments shareholders on the expected terms and schedule;

●difficulties and delays in integrating the TSYS and Global Payments businesses, including but not limited to with respect to implementing systems to prevent a material security breach of any internal systems or to successfully manage credit and fraud risks in business units;

●failing to fully realize anticipated cost savings and other anticipated benefits of the Merger when expected or at all;

●business disruptions from the proposed Merger that will harm TSYS’ or Global Payments’ business, including current plans and operation;

●potential adverse reactions or changes to business relationships resulting from the announcement or completion of the Merger, including as it relates to TSYS’ or Global Payments’ ability to successfully renew existing client contracts on favorable terms or at all and obtain new clients;

●failing to comply with the applicable requirements of Visa, Mastercard or other payment networks or card schemes or changes in those requirements;

●the ability of TSYS or Global Payments to retain and hire key personnel;

●the diversion of management’s attention from ongoing business operations;

●uncertainty as to the long-term value of the common stock of Global Payments following the Merger, including the dilution caused by Global Payments’ issuance of additional shares of its common stock in connection with the transaction;

●the continued availability of capital and financing following the Merger;

●the business, economic and political conditions in the markets in which TSYS and Global Payments operate;

●the impact of new or changes in current laws, regulations, credit card association rules or other industry standards, including privacy and cybersecurity laws and regulations; and

●events beyond TSYS’ or Global Payments’ control, such as acts of terrorism.

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

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Foreign Exchange Risk

The Company is exposed to foreign exchange risk because it has assets, liabilities, revenues and expenses denominated in foreign currencies other than the U.S. dollar. These currencies are translated into U.S. dollars at current exchange rates, except for revenues, costs and expenses and net income, which are translated at the average exchange rate for each reporting period. Net exchange gains or losses resulting from the translation of assets and liabilities of foreign operations, net of tax, are accumulated in a separate section of shareholders’ equity entitled “accumulated other comprehensive loss, net.”

Currently, the Company does not use financial instruments to hedge exposure to exchange rate changes.

The following table presents the carrying value of the net assets of TSYS’ foreign operations in U.S. dollars as of June 30, 2019:


(in thousands)	As of June 30, 2019
Europe	$	212,769
China		162,157
Cyprus		47,497
Other		24,485

The Company provides financing to its international operations through intercompany loans that require the operation to repay the financing in amounts denominated in currencies other than the local currency. The functional currency of the operation is the respective local currency. As it translates the foreign currency denominated financial statements into U.S. dollars, the translated balance of the financing (liability) is adjusted upward or downward to match the obligation (receivable) on its consolidated financial statements. The upward or downward adjustment is recorded as a gain or loss on foreign currency translation.

TSYS records foreign currency translation adjustments associated with other balance sheet accounts. The Company maintains several cash accounts denominated in foreign currencies, primarily in U.S. dollars and Euros. As TSYS 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 Consolidated Statements of Income.

TSYS recorded a net translation gain of approximately $0.9 million and a net translation loss of approximately $0.3 million for the three and six months ended June 30, 2019, respectively, relating to the translation of cash and other balance sheet accounts. The balance of the Company’s foreign-denominated cash accounts subject to risk of translation gains or losses as of June 30, 2019, was approximately $28.4 million, the majority of which was 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, 2019, was $63.6 million. The following table presents the potential effect on income before income taxes of hypothetical shifts in the foreign currency exchange rate between the local currencies and the U.S. dollar of plus-or-minus 100 basis points, 500 basis points and 1,000 basis points based on the net asset account balance of $63.6 million as of June 30, 2019.

Effect of basis point change

Increase in basis point of

Decrease in basis point of

(in thousands)

100

500

1,000

100

500

1,000

Effect on income before income taxes and equity in income of equity investments

636

3,179

6,358

(636)

(3,179)

(6,358)

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Interest Rate Risk

TSYS is also exposed to interest rate risk associated with the investing of available cash and the use of debt. TSYS invests available cash in conservative short-term instruments and is subject to changes in interest rates.

The Company’s Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC, contains a discussion of interest rate risk and the Company’s debt obligations that are sensitive to changes in interest rates.

Item 4. Controls and Procedures.

We have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this quarterly report as required by Rule 13a-15 of the Securities Exchange Act of 1934, as amended (“Exchange Act”). This evaluation was carried out under the supervision and with the participation of the Company’s management, including its chief executive officer and chief financial officer. Based on this evaluation, the chief executive officer and chief financial officer concluded that as of June 30, 2019, TSYS’ disclosure controls and procedures were designed and operating effectively to ensure that the information required to be disclosed by TSYS in reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and were also designed and operating effectively to ensure that the information required to be disclosed in the reports that TSYS files or submits under the Exchange Act is accumulated and communicated to management, as appropriate to allow timely decisions regarding required disclosure.

TSYS adopted the leases guidance under Accounting Standards Update No. 2016-02 (ASC 842) as of January 1, 2019. The adoption of this guidance required the implementation of new accounting processes, procedures and internal controls over financial reporting surrounding the adoption of the standard, periodic reporting and expanded disclosures. Additionally, on January 1, 2019, the Company implemented a lease software solution to facilitate compliance with the standard.

No other changes in TSYS’ internal control over financial reporting occurred during the period covered by this report that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II — OTHER INFORMATION

Item 1. Legal Proceedings.

For information regarding TSYS’ legal proceedings, refer to Note 6 of the Notes to Unaudited Consolidated Financial Statements which is incorporated by reference into this item.

Item 1A. Risk Factors.

In addition to the other information set forth in this report (including but not limited to “Forward-Looking Statements,” included in Part I, Item 2 of this Quarterly Report on Form 10-Q), one should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, which could materially affect the Company’s financial position, results of operations or cash flows. The risks described in the Company’s Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s financial position, results of operations or cash flows.

Except as set forth below, there have been no material changes in the Company's risk factors from those disclosed in the Company's 2018 Annual Report on Form 10-K.

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Risks Related to the Merger with Global Payments

Because the market price of Global Payments common stock may fluctuate, holders of TSYS common stock cannot be certain of the market value of the merger consideration they will receive.

In the Merger, each share of TSYS common stock issued and outstanding immediately prior to the effective time of the Merger (other than certain shares held by Global Payments or TSYS) will be converted into 0.8101 shares of Global Payments common stock. This exchange ratio will not be adjusted for changes in the market price of either Global Payments common stock or TSYS common stock. Changes in the price of Global Payments common stock prior to the merger will affect the value that holders of TSYS common stock will receive in the merger. Neither Global Payments nor TSYS is permitted to terminate the merger agreement as a result, in and of itself, of any increase or decrease in the market price of Global Payments common stock or TSYS common stock.

Stock price changes may result from a variety of factors, including general market and economic conditions, changes in TSYS’ and Global Payments’ businesses, operations, results and prospects and regulatory considerations, many of which factors are beyond TSYS’ and Global Payments’ control.

TSYS and Global Payments are expected to incur substantial costs related to the Merger and integration.

TSYS and Global Payments have incurred and expect to incur a number of non-recurring costs associated with the Merger. These costs include financial advisory, legal, accounting, consulting and other advisory fees,

severance/employee benefit-related costs, public company filing fees and other regulatory fees, printing costs and other related costs. Some of these costs are payable by either TSYS or Global Payments regardless of whether or not the Merger is completed.

The combined company is expected to incur substantial costs in connection with the related integration. There are a large number of processes, policies, procedures, operations, technologies and systems that may need to be integrated, including purchasing, accounting and finance, sales, payroll, pricing and benefits. While TSYS and Global Payments have assumed that a certain level of costs will be incurred, there are many factors beyond their control that could affect the total amount or the timing of the integration costs. Moreover, many of the costs that will be incurred are, by their nature, difficult to estimate accurately. These costs could, particularly in the near term, exceed the savings that the combined company expects to achieve from the elimination of duplicative costs and the realization of economies of scale and cost savings. These integration costs may result in the combined company taking significant charges against earnings following the completion of the Merger, and the amount and timing of such charges are uncertain at present.

The market price of Global Payments common stock after the Merger may be affected by factors different from those affecting the shares of TSYS currently.

In the Merger, holders of TSYS common stock will become holders of Global Payments common stock. Aspects of Global Payments’ business differ from those of TSYS. Accordingly, the results of operations of the combined company and the market price of Global Payments common stock after the completion of the merger may be affected by factors different from those currently affecting the independent results of operations of each of Global Payments and TSYS.

Regulatory approvals may not be received, may take longer than expected or may require conditions that are not presently anticipated or that could have an adverse effect on the combined company following the Merger.

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Before the Merger may be completed, various authorizations, consents, clearances, orders and approvals must be obtained from various antitrust and regulatory authorities in the United States and in foreign jurisdictions. The governmental entities from which these approvals are required may refuse to approve the Merger or impose requirements for the completion of the Merger. Any conditions or requirements imposed could have the effect of delaying or preventing completion of the Merger or imposing additional costs on or limiting the revenues of the combined company following the Merger, any of which might have an adverse effect on the combined company following the Merger.

Certain of TSYS’ directors and executive officers may have interests in the Merger that may differ from the interests of holders of TSYS common stock.

Holders of TSYS common stock should be aware that some of the TSYS directors and executive officers may have interests in the Merger and have arrangements that are different from, or in addition to, those of holders of TSYS common stock generally. These interests and arrangements may create potential conflicts of interest. These interests include, among other things, the continued service as a director or an executive officer of the combined company, or, in the alternative, a sizeable severance payment if terminated upon, or following, consummation of the Merger.

Termination of the Merger Agreement could negatively affect TSYS.

If the Merger Agreement is terminated, there may be various consequences. For example, TSYS’ businesses may have been affected adversely by the failure to pursue other beneficial opportunities due to the focus of management on the Merger, without realizing any of the anticipated benefits of completing the Merger. Additionally, if the Merger Agreement is terminated, the market price of TSYS common stock could decline to the extent that the current market prices reflect a market assumption that the

Merger will be completed. If the Merger Agreement is terminated under certain circumstances, TSYS may be required to pay a termination fee of $860 million to Global Payments.

Additionally, TSYS has incurred and will incur substantial costs in connection with the negotiation and completion of the transactions contemplated by the Merger Agreement. If the Merger is not completed, TSYS would have to recognize these as expense without realizing the expected benefits of the Merger.

TSYS will be subject to business uncertainties and contractual restrictions while the Merger is pending.

Uncertainty about the effect of the Merger on employees and customers may have an adverse effect on TSYS. These uncertainties may impair TSYS’ ability to attract, retain and motivate key personnel until the Merger is completed, and could cause customers and others that deal with TSYS to seek to change existing business relationships with TSYS. In addition, subject to certain exceptions, TSYS has agreed to operate its businesses in the ordinary course prior to the effective time of the Merger, which could cause TSYS to be unable to pursue other beneficial opportunities.

Holders of TSYS common stock will have a reduced ownership percentage and voting interest in the combined company after the Merger and may exercise less influence over management.

Holders of TSYS common stock currently have the right to vote in the election of the board of directors and on other matters affecting TSYS, respectively. In the merger, each holder of TSYS common stock who receives shares of Global Payments common stock will become a holder of common stock of the combined company, with a percentage ownership of the combined company that is smaller than the holder’s percentage ownership of TSYS. Following the completion of the Merger, the former holders of TSYS common stock are estimated to own approximately forty-eight percent (48%) of the fully diluted shares of the combined company immediately after the Merger and current holders of Global Payments common stock as a group are estimated to own approximately fifty-two percent (52%) of the fully diluted shares of the combined company immediately after the Merger. Because of this, holders of TSYS common stock may have less influence on the management and policies of the combined company than they now have on the management and policies of TSYS.

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Shareholder litigation could prevent or delay the closing of the Merger or otherwise negatively affect the business and operations of TSYS.

TSYS and Global Payments may incur costs in connection with the defense or settlement of the three putative class action lawsuits related to the proposed Merger which have been filed by purported shareholders of TSYS or Global Payments, or the defense or settlement of any further shareholder lawsuits which may be filed in connection with the Merger. Such litigation could have an adverse effect on the financial condition, results of operations and cash flows of TSYS and Global Payments and could prevent or delay the consummation of the Merger. See Note 6 in the Notes to Unaudited Consolidated Financial Statements and Part II Item 1 Legal Proceedings for a description of the three lawsuits which have been brought against TSYS and/or Global Payments in connection with the proposed Merger.

The merger agreement limits TSYS’ ability to pursue alternatives to the Merger and may discourage other companies from trying to acquire TSYS.

The Merger Agreement contains “no shop” covenants that restrict TSYS’ ability to, directly or indirectly, initiate, solicit, knowingly encourage or knowingly facilitate any inquiries or proposals with respect to any acquisition proposal, engage or participate in any negotiations with any person concerning any acquisition proposal, provide any confidential or nonpublic information or data to, or have or participate in any discussions with, any person relating to any acquisition proposal, subject to certain exceptions, or, unless the merger agreement has been terminated in accordance with its terms, approve or enter into any term sheet, letter of intent, commitment, memorandum of understanding, agreement in principle, acquisition agreement, merger agreement or other agreement in connection with or relating to any acquisition proposal.

The Merger Agreement further provides that, during the 12-month period following the termination of the Merger Agreement under specified circumstances, including the entry into a definitive agreement or consummation of a transaction with respect to an alternative acquisition proposal, TSYS may be required to pay to Global Payments a cash termination fee equal to $860 million.

These provisions could discourage a potential third-party acquirer that might have an interest in acquiring all or a significant portion of TSYS from considering or proposing that acquisition.

The Merger Agreement subjects TSYS to restrictions on its business activities prior to the effective time of the Merger.

The Merger Agreement subjects TSYS to restrictions on its business activities prior to the effective time of the Merger. The Merger Agreement obligates TSYS to, and to cause each of its subsidiaries to, subject to specified exceptions, conduct its business in the ordinary course in all material respects and use reasonable best efforts to maintain and preserve intact its business organization, employees and advantageous business relationships. These restrictions could prevent TSYS from pursuing certain business opportunities that arise prior to the effective time and are outside the ordinary course of business.

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


(in thousands, except per share data)	Total Number of Shares Purchased		Average Price Paid per Share			Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs²	Maximum Number of Shares That May Yet Be Purchased Under the Plans of Programs²
April 2019	-	¹	$	95.01	¹	15,816	4,184
May 2019	-			-		15,816	4,184
June 2019	-	¹		128.27	¹	15,816	4,184
Total	-		$	119.56

1	Includes a total of 20 shares (not rounded) in April and 60 shares (not rounded) in June withheld for payment of taxes.

2	In January 2015, TSYS’ Board of Directors approved a stock repurchase plan to repurchase up to 20 million shares of TSYS stock. The shares may be purchased from time to time at prices considered appropriate. There is no expiration date for the plan.

Item 6. Exhibits.

a) Exhibits


Exhibit Number		Description
2.1		Agreement and Plan of Merger, dated as of May 27, 2019, by and between TSYS and Global Payments, incorporated by reference to Exhibit 2.1 of TSYS’ Current Report on Form 8-K filed with the SEC on May 31, 2019

3.1		Articles of Incorporation of TSYS, as amended, incorporated by reference to Exhibit 3.1 of TSYS’ Current Report on Form 8-K filed with the SEC on May 3, 2019

3.2		Bylaws of TSYS, as amended, incorporated by reference to Exhibit 3.1 of TSYS’ Current Report on Form 8-K filed with the SEC on May 28, 2019

10.1		Summary of Board of Directors Compensation

10.2		Form of Non-Employee Director Fully Vested Stock Option Agreement

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the inline XBRL document.

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

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TOTAL SYSTEM SERVICES, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	TOTAL SYSTEM SERVICES, INC.

Date: July 31, 2019	by:	/s/ M. Troy Woods
		M. Troy Woods
		Chairman, President and Chief Executive Officer

Date: July 31, 2019	by:	/s/ Paul M. Todd
		Paul M. Todd
		Senior Executive Vice President and
		Chief Financial Officer

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	8th grade Bad

Total System Services (TSS) Inactive 10-Q2019 Q2 Quarterly report

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