Attached files
file | filename |
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EX-32 - EX-32 - TOTAL SYSTEM SERVICES INC | g23272exv32.htm |
EX-31.2 - EX-31.2 - TOTAL SYSTEM SERVICES INC | g23272exv31w2.htm |
EX-10.2 - EX-10.2 - TOTAL SYSTEM SERVICES INC | g23272exv10w2.htm |
EX-10.4 - EX-10.4 - TOTAL SYSTEM SERVICES INC | g23272exv10w4.htm |
EX-10.6 - EX-10.6 - TOTAL SYSTEM SERVICES INC | g23272exv10w6.htm |
EX-10.5 - EX-10.5 - TOTAL SYSTEM SERVICES INC | g23272exv10w5.htm |
EX-10.1 - EX-10.1 - TOTAL SYSTEM SERVICES INC | g23272exv10w1.htm |
EX-31.1 - EX-31.1 - TOTAL SYSTEM SERVICES INC | g23272exv31w1.htm |
EX-10.3 - EX-10.3 - TOTAL SYSTEM SERVICES INC | g23272exv10w3.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One) |
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: March 31, 2010
OR
o | 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)
(Exact name of registrant as specified in its charter)
Georgia (State or other jurisdiction of incorporation or organization) |
58-1493818 (I.R.S. Employer Identification No.) |
One TSYS Way, Post Office Box 1755, Columbus, Georgia 31902
(Address of principal executive offices) (Zip Code)
(Address of principal executive offices) (Zip Code)
(706) 649-2310
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
CLASS Common Stock, $0.10 par value |
OUTSTANDING AS OF: May 7, 2010 197,400,167 shares |
TOTAL SYSTEM SERVICES, INC.
INDEX
INDEX
Page | ||||||||
Number | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
15 | ||||||||
26 | ||||||||
28 | ||||||||
29 | ||||||||
29 | ||||||||
29 | ||||||||
30 | ||||||||
31 | ||||||||
EX-10.1 | ||||||||
EX-10.2 | ||||||||
EX-10.3 | ||||||||
EX-10.4 | ||||||||
EX-10.5 | ||||||||
EX-10.6 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32 |
Table of Contents
TOTAL SYSTEM SERVICES, INC.
Part I Financial Information
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except per share data) | March 31, 2010 | December 31, 2009 | ||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 534,487 | 449,955 | |||||
Restricted cash |
30,348 | 46,190 | ||||||
Accounts receivable, net of allowance for doubtful accounts and billing
adjustments of $5.0 million and $6.8 million at 2010 and 2009, respectively |
218,815 | 231,325 | ||||||
Deferred income tax assets |
9,980 | 11,302 | ||||||
Prepaid expenses and other current assets |
78,015 | 72,124 | ||||||
Total current assets |
871,645 | 810,896 | ||||||
Property and equipment, net of accumulated depreciation and amortization of $303.0
million and $309.1 million at 2010 and 2009, respectively |
291,400 | 289,198 | ||||||
Computer software, net of accumulated amortization of $450.7 million and $482.9
million at 2010 and 2009, respectively |
192,400 | 197,134 | ||||||
Contract acquisition costs, net |
123,482 | 128,038 | ||||||
Goodwill |
166,370 | 168,121 | ||||||
Equity investments |
76,021 | 75,495 | ||||||
Other intangible assets, net of accumulated amortization of $17.3 million and $16.7
million at 2010 and 2009, respectively |
13,009 | 14,132 | ||||||
Other assets |
29,716 | 27,940 | ||||||
Total assets |
$ | 1,764,043 | 1,710,954 | |||||
Liabilities |
||||||||
Current liabilities: |
||||||||
Current portion of long-term debt |
$ | 7,057 | 6,988 | |||||
Current portion of obligations under capital leases |
9,817 | 6,289 | ||||||
Accrued salaries and employee benefits |
15,336 | 32,457 | ||||||
Accounts payable |
29,249 | 21,729 | ||||||
Other current liabilities |
167,191 | 153,316 | ||||||
Total current liabilities |
228,650 | 220,779 | ||||||
Long-term debt, excluding current portion |
190,308 | 192,367 | ||||||
Deferred income tax liabilities |
49,324 | 47,162 | ||||||
Obligations under capital leases, excluding current portion |
36,327 | 12,756 | ||||||
Other long-term liabilities |
44,507 | 48,443 | ||||||
Total liabilities |
549,116 | 521,507 | ||||||
Equity |
||||||||
Shareholders equity: |
||||||||
Common stock $0.10 par value. Authorized 600,000 shares; 201,336 and 200,860
issued at 2010 and 2009, respectively; 197,598 and 197,180 outstanding at 2010
and 2009, respectively |
20,130 | 20,086 | ||||||
Additional paid-in capital |
141,617 | 139,742 | ||||||
Accumulated other comprehensive income (loss), net |
(7,145 | ) | 5,673 | |||||
Treasury stock, at cost (shares of 3,738 and 3,680 at 2010 and 2009, respectively) |
(70,881 | ) | (69,950 | ) | ||||
Retained earnings |
1,117,789 | 1,080,250 | ||||||
Total shareholders equity |
1,201,510 | 1,175,801 | ||||||
Noncontrolling interests in consolidated subsidiaries |
13,417 | 13,646 | ||||||
Total equity |
1,214,927 | 1,189,447 | ||||||
Total liabilities and equity |
$ | 1,764,043 | 1,710,954 | |||||
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
3
Table of Contents
TOTAL SYSTEM SERVICES, INC.
Condensed Consolidated Statements of Income
(Unaudited)
(Unaudited)
Three months ended March 31, | ||||||||
(in thousands, except per share data) | 2010 | 2009 | ||||||
Total revenues |
$ | 415,354 | 408,933 | |||||
Cost of services |
292,191 | 284,675 | ||||||
Selling, general and administrative expenses |
44,092 | 46,143 | ||||||
Total operating expenses |
336,283 | 330,818 | ||||||
Operating income |
79,071 | 78,115 | ||||||
Nonoperating expenses |
(262 | ) | (1,459 | ) | ||||
Income from continuing operations before income taxes and equity in income of
equity investments |
78,809 | 76,656 | ||||||
Income taxes |
27,883 | 27,415 | ||||||
Income from continuing operations before equity in income of equity investments |
50,926 | 49,241 | ||||||
Equity in income of equity investments, net of tax |
893 | 1,043 | ||||||
Income from continuing operations, net of tax |
51,819 | 50,284 | ||||||
Loss from discontinued operations, net of tax |
| (3,343 | ) | |||||
Net income |
51,819 | 46,941 | ||||||
Net income attributable to noncontrolling interests |
(492 | ) | (415 | ) | ||||
Net income attributable to TSYS |
$ | 51,327 | 46,526 | |||||
Basic earnings per share (EPS) (Note 13): |
||||||||
Income from continuing operations to TSYS common shareholders |
$ | 0.26 | 0.26 | |||||
Loss from discontinued operations to TSYS common shareholders |
0.00 | (0.02 | ) | |||||
Net income attributable to TSYS common shareholders |
$ | 0.26 | 0.24 | |||||
Diluted EPS: |
||||||||
Income from continuing operations to TSYS common shareholders |
$ | 0.26 | 0.26 | |||||
Loss from discontinued operations to TSYS common shareholders |
0.00 | (0.02 | ) | |||||
Net income attributable to TSYS common shareholders |
$ | 0.26 | 0.24 | |||||
Amounts attributable to TSYS common shareholders: |
||||||||
Income from continuing operations |
$ | 51,327 | 49,869 | |||||
(Loss) income from discontinued operations |
| (3,343 | ) | |||||
Net income |
$ | 51,327 | 46,526 | |||||
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
4
Table of Contents
TOTAL SYSTEM SERVICES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Unaudited)
Three months ended March 31, | ||||||||
(in thousands) | 2010 | 2009 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 51,819 | 46,941 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Net gain (loss) on foreign currency |
(247 | ) | 883 | |||||
Equity in income of equity investments, net of tax |
(893 | ) | (1,043 | ) | ||||
Depreciation and amortization |
38,564 | 39,850 | ||||||
Amortization of debt issuance costs |
38 | 38 | ||||||
Share-based compensation |
2,913 | 5,297 | ||||||
Excess tax benefit from share-based payment arrangements |
(111 | ) | | |||||
Provisions for bad debt expenses and billing adjustments |
(658 | ) | (394 | ) | ||||
Charges for transaction processing provisions |
849 | 1,537 | ||||||
Deferred income tax benefit |
3,665 | (2,329 | ) | |||||
Loss on disposal of equipment, net |
30 | 7 | ||||||
Changes in operating assets & liabilities: |
||||||||
Accounts receivable |
9,874 | 1,166 | ||||||
Prepaid expenses, other current assets and other long-term assets |
2,892 | (1,743 | ) | |||||
Accounts payable |
8,319 | (3,779 | ) | |||||
Accrued salaries and employee benefits |
(32,707 | ) | (25,567 | ) | ||||
Other current liabilities and other long-term liabilities |
49,188 | 37,806 | ||||||
Net cash provided by operating activities |
133,535 | 98,670 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Purchases of property and equipment, net |
(9,170 | ) | (2,181 | ) | ||||
Additions to licensed computer software from vendors |
(3,769 | ) | (5,932 | ) | ||||
Additions to internally developed computer software |
(5,760 | ) | (5,828 | ) | ||||
Cash used in acquisitions, net of cash acquired |
| (205 | ) | |||||
Additions to contract acquisition costs |
(9,914 | ) | (10,992 | ) | ||||
Net cash used in investing activities |
(28,613 | ) | (25,138 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Proceeds from borrowings of long-term debt |
| 2,809 | ||||||
Dividends paid on common stock |
(13,797 | ) | (13,779 | ) | ||||
Repurchase of common stock |
(1,075 | ) | (329 | ) | ||||
Excess tax benefit from share-based payment arrangements |
111 | | ||||||
Principal payments on long-term debt borrowings and capital lease obligations |
(3,731 | ) | (3,622 | ) | ||||
Proceeds from exercise of stock options |
109 | | ||||||
Net cash used in financing activities |
(18,383 | ) | (14,921 | ) | ||||
CASH AND CASH EQUIVALENTS: |
||||||||
Effect of exchange rate changes on cash and cash equivalents |
(2,007 | ) | (1,084 | ) | ||||
Net increase in cash and cash equivalents |
84,532 | 57,527 | ||||||
Cash and cash equivalents at beginning of period |
449,955 | 220,018 | ||||||
Cash and cash equivalents at end of period |
$ | 534,487 | 277,545 | |||||
Supplemental cash flow information: |
||||||||
Interest paid |
$ | 304 | 998 | |||||
Income taxes paid, net |
$ | 3,682 | (467 | ) | ||||
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
5
Table of Contents
TOTAL SYSTEM SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Total System
Services, Inc.® (TSYS® or the Company) include the accounts of TSYS and its wholly owned
subsidiaries as well as TSYS majority-owned foreign subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
These financial statements have been prepared in accordance with the instructions to Form 10-Q
and do not include all information and footnotes necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with accounting principles generally
accepted in the United States of America. The preparation of the consolidated financial statements
requires management of the Company to make a number of estimates and assumptions relating to the
reported amounts of assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the period. These estimates and assumptions
are developed based upon all information available. Actual results could differ from estimated
amounts. All adjustments, consisting of normal recurring accruals, which, in the opinion of
management, are necessary for a fair presentation of financial position and results of operations
for the periods covered by this report, have been included.
The accompanying unaudited condensed consolidated financial statements should be read in
conjunction with the Companys summary of significant accounting policies, consolidated financial
statements and related notes appearing in the Companys Annual Report on Form 10-K for the year
ended December 31, 2009. Results of interim periods are not necessarily indicative of results to be
expected for the year.
Certain reclassifications have been made to the 2009 financial statements to conform to the
presentation adopted in 2010.
Note 2 Fair Value Measurement
ASC 820, Fair Value Measurements and Disclosure, previously referred to as SFAS No. 157,
Fair Value Measurements, requires disclosure about how fair value is determined for assets and
liabilities and establishes a hierarchy for which these assets and liabilities must be grouped,
based on significant level of inputs. The three-tier fair value hierarchy, which prioritizes the
inputs used in the valuation methodologies, is as follows:
Level 1 Quoted prices for identical assets and liabilities in active markets.
Level 2 Observable inputs other than quoted prices included in Level 1, such as quoted prices
for similar assets and liabilities in active markets, quoted prices for identical or similar
assets and liabilities in markets that are not active, or other inputs that are observable or can
be corroborated by observable market data.
Level 3 Unobservable inputs for the asset or liability.
In February 2007, the FASB issued authoritative guidance under ASC 825, Financial
Instruments, previously referred to as SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities. ASC 825 permits the Company to choose to measure many financial
instruments and certain other items at fair value. Upon adoption of the guidance on January 1,
2008, TSYS did not elect the fair value option for any financial instrument it did not currently
report at fair value.
Goodwill and certain intangible assets not subject to amortization are assessed annually for
impairment in the second quarter of each year using fair value measurement techniques.
Specifically, goodwill impairment is determined using a two-step test. The first step of the
goodwill impairment test is used to identify potential impairment by comparing the fair value of a
reporting unit with its book value, including goodwill. If the fair value of the reporting unit
exceeds its book value, goodwill is considered not impaired and the second step of the impairment
test is unnecessary. If the book value of the reporting unit exceeds its fair value, the second
step of the goodwill impairment test is performed to measure the amount of impairment loss, if any.
The second step of the goodwill impairment test compares the implied fair value of the reporting
units goodwill with the book value of that goodwill. If the book value of the reporting units
goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an
amount equal to that excess. The fair value of the reporting unit is allocated to all of the assets
and liabilities of that unit as if the reporting unit had been acquired in a business combination
and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit.
The estimate of fair value of the Companys reporting units is determined using various
valuation techniques, including using the combination of the income approach and the market
approach. The market approach, which contains Level 2 inputs, utilizes readily
6
Table of Contents
available market valuation multiples to estimate fair value. The income approach is a
valuation technique that utilizes the discounted cash flow (DCF) method, which includes Level 3
inputs. Under the DCF method, the fair value of the asset reflects the present value of the
projected earnings that will be generated by each asset after taking into account the revenues and
expenses associated with the asset, the relative risk that the cash flows will occur, the
contribution of other assets, and an appropriate discount rate to reflect the value of the invested
capital. Cash flows are estimated for future periods based upon historical data and projections by
management.
At March 31, 2010, the Company had recorded goodwill in the amount of $166.4 million.
The fair value of the Companys long-term debt and obligations under capital leases is not
significantly different from its carrying value.
Note 3 Supplementary Balance Sheet Information
Cash and Cash Equivalents
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.
Cash and cash equivalent balances are summarized as follows:
(in thousands) | March 31, 2010 | December 31, 2009 | ||||||
Cash and cash equivalents in domestic accounts |
$ | 473,930 | 403,421 | |||||
Cash and cash equivalents in foreign accounts |
60,557 | 46,534 | ||||||
Total |
$ | 534,487 | 449,955 | |||||
At March 31, 2010 and December 31, 2009, the Company had approximately $534.5 million and
$450.0 million, respectively, of cash and cash equivalents of which $36.7 million and $32.2 million
was in Money Market accounts that had an original maturity date of 90 days or less. The Company
considers cash equivalents to be short-term, highly liquid investments that are both readily
convertible to known amounts of cash and so near their maturity that they present insignificant
risk of changes in value because of change in interest rates.
Prepaid Expenses and Other Current Assets
Significant components of prepaid expenses and other current assets are summarized as follows:
(in thousands) | March 31, 2010 | December 31, 2009 | ||||||
Prepaid expenses |
$ | 26,896 | $ | 14,071 | ||||
Supplies inventory |
8,246 | 10,285 | ||||||
Other |
42,873 | 47,768 | ||||||
Total |
$ | 78,015 | $ | 72,124 | ||||
Contract Acquisition Costs, net
Significant components of contract acquisition costs, net of accumulated amortization, are
summarized as follows:
(in thousands) | March 31, 2010 | December 31, 2009 | ||||||
Payments for processing rights,
net of accumulated amortization of
$157.5 million and $154.7 million at
2010 and 2009, respectively |
$ | 54,407 | 59,085 | |||||
Conversion costs, net of accumulated
amortization of $77.4 million and
$75.0 million at 2010 and 2009,
respectively |
69,075 | 68,953 | ||||||
Total |
$ | 123,482 | 128,038 | |||||
Amortization related to payments for processing rights, which is recorded as a reduction of
revenues, was $5.8 million and $8.0 million for the three months ended March 31, 2010 and 2009,
respectively.
Amortization expense related to conversion costs, which is recorded in other operating
expenses, was $4.1 million and $4.0 million for the three months ended March 31, 2010 and 2009,
respectively.
7
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Other Current Liabilities
Significant components of other current liabilities are summarized as follows:
(in thousands) | March 31, 2010 | December 31, 2009 | ||||||
Deferred revenues |
$ | 42,496 | 31,243 | |||||
Accrued expenses |
32,698 | 33,274 | ||||||
Client liabilities |
30,017 | 45,824 | ||||||
Accrued income taxes |
17,875 | 252 | ||||||
Dividends payable |
13,818 | 13,828 | ||||||
Transaction processing provisions |
4,244 | 5,483 | ||||||
Client postage deposits |
4,231 | 3,736 | ||||||
Other |
21,812 | 19,676 | ||||||
Total |
$ | 167,191 | 153,316 | |||||
Note 4 Long-Term Debt
Refer to Note 13 of the Companys audited financial statements for the year ended December 31,
2009, which are included as Exhibit 13.1 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2009, as filed with the SEC, for a discussion regarding long-term debt.
Note 5 Comprehensive Income
For the three months ended March 31, comprehensive income is summarized below:
Three months ended March 31, 2010 | Three months ended March 31, 2009 | |||||||||||||||||||||||
TSYS | Noncontrolling | Noncontrolling | ||||||||||||||||||||||
(in thousands) | Shareholders | Interests | Total | TSYS Shareholders | Interests | Total | ||||||||||||||||||
Net income |
$ | 51,327 | 492 | $ | 51,819 | $ | 46,526 | 415 | $ | 46,941 | ||||||||||||||
Other comprehensive
income (OCI), net
of tax: |
||||||||||||||||||||||||
Foreign currency
translation
adjustments |
(12,855 | ) | (721 | ) | (13,576 | ) | (3,777 | ) | (587 | ) | (4,364 | ) | ||||||||||||
Change in
accumulated OCI
related to
postretirement
healthcare plans |
37 | | 37 | 21 | | 21 | ||||||||||||||||||
Total |
$ | 38,509 | (229 | ) | $ | 38,280 | $ | 42,770 | (172 | ) | $ | 42,598 | ||||||||||||
The income tax effects allocated to and the cumulative balance of accumulated other
comprehensive income are as follows:
Beginning Balance | Pretax | Ending Balance | ||||||||||||||||||
(in thousands) | December 31, 2009 | Amount | Tax Effect | Net-of-Tax Amount | March 31, 2010 | |||||||||||||||
Foreign currency translation adjustments |
$ | 6,287 | ($16,762 | ) | 3,907 | ($12,855 | ) | ($6,568 | ) | |||||||||||
Change in accumulated OCI related to
postretirement healthcare plans |
(614 | ) | 58 | (21 | ) | 37 | (577 | ) | ||||||||||||
Total |
$ | 5,673 | ($16,704 | ) | 3,886 | ($12,818 | ) | ($7,145 | ) | |||||||||||
Consistent with its overall strategy of pursuing international investment opportunities,
TSYS adopted the permanent reinvestment exception under ASC 740, Income Taxes, previously
referred to as Accounting Principles Board Opinion No. 23 (APB 23) Accounting for Income Taxes
Special Areas, with respect to future earnings of certain foreign subsidiaries. Its decision to
permanently reinvest foreign earnings offshore means TSYS will no longer allocate taxes to foreign
currency translation adjustments associated with these foreign subsidiaries accumulated in other
comprehensive income.
Note 6 Share-Based Compensation
The Companys Annual Report on Form 10-K for the year ended December 31, 2009, as filed with
the SEC, contains a discussion of the Companys share-based compensation plans and policy.
8
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Share-Based Compensation
TSYS share-based compensation costs are included as expenses and classified as cost of
services and selling, general, and administrative. TSYS does not include amounts associated with
share-based compensation as costs capitalized as software development and contract acquisition
costs, as these awards are typically granted to individuals not involved in capitalizable
activities. For the three months ended March 31, 2010, share-based compensation was $2.9 million,
compared to $5.3 million for the same period in 2009. Included in the $2.9 million amount for 2010
and $5.3 million amount for 2009 is approximately $964,000 and $2.4 million, respectively, related
to expensing the fair value of stock options.
Nonvested and Performance Share Awards
During the first three months of 2010, the Company issued 189,934 shares of TSYS common stock
with a market value of $3.0 million to certain key employees and non-management members of its
Board of Directors under nonvested stock bonus awards for services to be provided in the future by
such officers, directors and employees. The market value of the TSYS common stock at the date of
issuance is amortized as compensation expense over the vesting period of the awards.
During the first three months of 2009, the Company issued 457,220 shares of TSYS common stock
with a market value of $6.0 million to certain key employees and non-management members of its
Board of Directors under nonvested stock bonus awards for services to be provided in the future by
such officers, directors and employees. The market value of the TSYS common stock at the date of
issuance is amortized as compensation expense over the vesting period of the awards.
As of March 31, 2010, there was approximately $13.4 million of total unrecognized compensation
cost related to nonvested share-based compensation arrangements. That cost is expected to be
recognized over a remaining weighted average period of 2.3 years.
During the first three months of 2008, TSYS authorized a total grant of 182,816 shares of
nonvested stock to two key executives with a performance schedule (2008 performance shares). These
2008 performance shares have seven one-year performance periods (2008-2014) during each of which
the Compensation Committee establishes an earnings per share goal and, if such goal is attained
during any performance period, 20% of the performance shares will vest, up to a maximum of 100% of
the total grant. Compensation expense for each years award is measured on the grant date based on
the quoted market price of TSYS common stock and is expensed on a straight-line basis for the year.
As of March 31, 2010, there was approximately $514,000 of total unrecognized compensation cost
related to the 2008 grant of nonvested performance share-based compensation arrangements. That cost
is expected to be recognized over the remainder of 2010.
On March 31, 2010, TSYS authorized a total grant of 279,831 performance shares to certain key
executives with a performance based vesting schedule (2010 performance shares). These 2010
performance shares have a 2010-2012 performance period for which the Compensation Committee
established two performance goals: revenues before reimbursables and income from continuing
operations and, if such goals are attained in 2012, the performance shares will vest, up to a
maximum of 200% of the total grant. Compensation expense for the award is measured on the grant
date based on the quoted market price of TSYS common stock. The Company will estimate the
probability of achieving the goals through the performance period and will expense the award on a
straight-line basis.
As of March 31, 2010, there was approximately $4.5 million of total unrecognized compensation
cost related to the 2010 performance shares compensation arrangement. That cost is expected to be
recognized until the end of 2012.
Stock Option Awards
During the first three months of 2010, the Company granted 736,389 stock options to key TSYS
executive officers. The average fair value of the option grant was $5.33 per option and was
estimated on the date of grant using the Black-Scholes-Merton option-pricing model with the
following weighted average assumptions: exercise price of $15.66; risk-free interest rate of 3.77%;
expected volatility of 30.0%; expected term of 8.6 years; and dividend yield of 1.79%.
During the first three months of 2009, the Company granted 1,047,949 stock options to key
TSYS executive officers. The average fair value of the option grant was $5.31 per option and was
estimated on the date of grant using the Black-Scholes-Merton option-pricing model with the
following weighted average assumptions: exercise price of $13.11; risk-free interest rate of 3.19%;
expected volatility of 42.00%; expected term of 8.6 years; and dividend yield of 2.14%.
As of March 31, 2010, there was approximately $8.0 million of total unrecognized compensation
cost related to TSYS stock options that is expected to be recognized over a remaining weighted
average period of 2.2 years.
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Note 7 Income Taxes
TSYS is the parent of an affiliated group that files a consolidated U.S. federal income tax
return and most state and foreign income tax returns on a separate entity basis. 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 2006 and with a few exceptions, the Company is no longer subject to
income tax examinations from state, local or foreign authorities for years before 2001. There are
currently no federal tax examinations in progress. However, a number of tax examinations are in
progress by the relevant foreign and 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 attributable to continuing operations was 35.3% and 35.6% for the
three months ended March 31, 2010 and March 31, 2009, respectively. The decreased rate during the
March 31, 2010 period was mostly due to changes in the mix of income.
TSYS adopted the provisions of ASC 740, Income Taxes, previously referred to as FASB
Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an Interpretation of
FASB Statement No. 109, on January 1, 2007. This interpretation prescribed 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 amount of
unrecognized tax benefits did not change significantly during the three months ended March 31,
2010.
TSYS recognizes potential interest and penalties related to the underpayment of income taxes
as income tax expense in the condensed consolidated statements of income. Gross accrued interest
and penalties on unrecognized tax benefits totaled $0.9 million and $0.7 million as of March 31,
2010 and December 31, 2009, respectively. The total amounts of unrecognized income tax benefits as
of March 31, 2010 and December 31, 2009 that, if recognized, would affect the effective tax rates
are $4.3 million and $4.2 million (net of the federal benefit on state tax issues), respectively,
which include interest and penalties of $0.8 million and $0.6 million. TSYS does not expect any
material changes to its calculation of uncertain tax positions during the next twelve months.
Note 8 Segment Reporting and Major Customers
The Company reports selected information about operating segments in accordance with ASC 280,
Segment Reporting, previously referred to as SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. The Companys segment information reflects the information
that the chief operating decision maker (CODM) now uses to make resource allocations and strategic
decisions. The CODM at TSYS consists of the chairman of the board and chief executive officer, the
president and the four senior executive vice presidents.
TSYS provides electronic payment processing and other services to card-issuing and merchant
acquiring institutions in the United States and internationally through online accounting and
electronic payment processing systems. During the first quarter of 2010, TSYS reorganized its
operating segments in a manner that reflects the way the CODM now views the business. The change
involved accumulating corporate administration expenses, such as finance, legal, human resources,
mergers and acquisitions and investor relations, that existed in all operating segments and
categorizing them as Corporate Administration.
North America Services includes electronic payment processing services and other services
provided from within the North America region. International Services includes electronic payment
processing and other services provided from outside the North America region. Merchant Services
includes electronic processing and other services provided to merchant acquiring institutions.
Operating Segments | Three months ended March 31, | Change | ||||||||||||||
(in thousands) | 2010 | 2009 | $ | % | ||||||||||||
Revenues before reimbursable items |
||||||||||||||||
North America Services |
$ | 215,309 | 223,782 | (8,473 | ) | (3.8) | % | |||||||||
International Services |
76,281 | 70,584 | 5,697 | 8.1 | % | |||||||||||
Merchant Services |
58,663 | 58,206 | 457 | 0.8 | % | |||||||||||
Intersegment revenues |
(5,702 | ) | (7,126 | ) | 1,424 | 20.0 | % | |||||||||
Revenues before reimbursable items
from external customers |
$ | 344,551 | 345,446 | (895 | ) | (0.3) | % | |||||||||
Total revenues |
||||||||||||||||
North America Services |
$ | 254,228 | 268,789 | (14,561 | ) | (5.4) | % | |||||||||
International Services |
79,392 | 73,802 | 5,590 | 7.6 | % |
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Operating Segments | Three months ended March 31, | Change | ||||||||||||||
(in thousands) | 2010 | 2009 | $ | % | ||||||||||||
Merchant Services |
89,209 | 75,499 | 13,710 | 18.2 | % | |||||||||||
Intersegment revenues |
(7,475 | ) | (9,157 | ) | 1,682 | 18.4 | % | |||||||||
Revenues from external customers |
$ | 415,354 | 408,933 | 6,421 | 1.6 | % | ||||||||||
Depreciation and amortization |
||||||||||||||||
North America Services |
$ | 20,403 | 23,230 | (2,827 | ) | (12.2) | % | |||||||||
International Services |
8,783 | 7,584 | 1,199 | 15.8 | % | |||||||||||
Merchant Services |
8,585 | 8,087 | 498 | 6.2 | % | |||||||||||
Corporate Administration |
793 | 577 | 216 | 37.4 | % | |||||||||||
Total depreciation and amortization |
$ | 38,564 | 39,478 | (914 | ) | (2.3) | % | |||||||||
Segment operating income |
||||||||||||||||
North America Services |
$ | 69,788 | 71,494 | (1,706 | ) | (2.4) | % | |||||||||
International Services |
11,283 | 9,532 | 1,751 | 18.4 | % | |||||||||||
Merchant Services |
17,325 | 15,519 | 1,806 | 11.6 | % | |||||||||||
Corporate Administration |
(19,325 | ) | (18,430 | ) | (895 | ) | (4.9) | % | ||||||||
Operating income |
$ | 79,071 | 78,115 | 956 | 1.2 | % | ||||||||||
Change | ||||||||||||||||
At March 31, 2010 | At December 31, 2009 | $ | % | |||||||||||||
Total assets |
||||||||||||||||
North America Services |
$ | 1,582,743 | 1,535,129 | 47,614 | 3.1 | % | ||||||||||
International Services |
374,072 | 379,606 | (5,534 | ) | (1.5) | % | ||||||||||
Merchant Services |
217,625 | 215,855 | 1,770 | 0.8 | % | |||||||||||
Intersegment assets |
(410,397 | ) | (419,636 | ) | 9,239 | 2.2 | % | |||||||||
Total assets |
$ | 1,764,043 | 1,710,954 | 53,089 | 3.1 | % | ||||||||||
Revenues by Geographic Area
Revenues for North America Services and Merchant Services include electronic payment
processing and other services provided from the United States to clients domiciled in the United
States or other countries. Revenues for International Services include electronic payment
processing and other services provided from facilities outside the United States to clients based
predominantly outside the United States.
The following geographic data presents revenues based on the domicile of the Companys
customers.
Three months ended March 31, | ||||||||
(in millions) | 2010 | 2009 | ||||||
United States |
$ | 295.4 | 300.4 | |||||
Europe* |
62.5 | 57.8 | ||||||
Canada |
36.7 | 30.6 | ||||||
Japan* |
12.2 | 11.1 | ||||||
Mexico |
1.7 | 2.2 | ||||||
Other |
6.9 | 6.8 | ||||||
Total |
$ | 415.4 | 408.9 | |||||
* | Revenues are impacted by movements in foreign currency exchange rates. Refer to the discussion under Revenues in the Results of Operations. |
The following table reconciles geographic revenues to revenues by reportable segment based on
the domicile of the Companys customers.
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Three months ended March 31, | ||||||||||||||||||||||||
North America Services | International Services | Merchant Services | ||||||||||||||||||||||
(in millions) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||
United States |
$ | 206.8 | 225.6 | | | 88.6 | 74.8 | |||||||||||||||||
Europe |
0.2 | 0.2 | 62.2 | 57.6 | 0.1 | | ||||||||||||||||||
Canada |
36.5 | 30.5 | | | 0.2 | 0.1 | ||||||||||||||||||
Japan |
| | 12.2 | 11.1 | | | ||||||||||||||||||
Mexico |
1.7 | 2.2 | | | | | ||||||||||||||||||
Other |
2.2 | 2.4 | 4.5 | 4.2 | 0.2 | 0.2 | ||||||||||||||||||
Total |
$ | 247.4 | 260.9 | 78.9 | 72.9 | 89.1 | 75.1 | |||||||||||||||||
The Company maintains property and equipment, net of accumulated depreciation and
amortization, in the following geographic areas:
(in millions) | At March 31, 2010 | At December 31, 2009 | ||||||
United States |
$ | 202.8 | 203.6 | |||||
Europe |
60.6 | 60.7 | ||||||
Japan |
6.8 | 6.4 | ||||||
Other |
21.2 | 18.5 | ||||||
Total |
$ | 291.4 | 289.2 | |||||
Major Customers
For the three months ended March 31, 2010, the Company had one major customer which accounted
for approximately 13.1%, or $54.5 million, of total revenues. For the three months ended March 31,
2009, this major customer accounted for approximately 12.5%, or $51.3 million, of total revenues.
Revenues from major customers for the periods reported are primarily attributable to the North
America Services and Merchant Services segments.
Note 9 Supplementary Cash Flow Information
Contract Acquisition Costs
Cash used for contract acquisition costs are summarized as follows:
Three months ended March 31, | ||||||||
(in thousands) | 2010 | 2009 | ||||||
Conversion costs |
$ | 6,846 | 8,223 | |||||
Payments for processing rights |
3,068 | 2,769 | ||||||
Total |
$ | 9,914 | 10,992 | |||||
Nonvested Awards
During the first three months of 2010 and 2009, the Company issued shares of common stock to
certain key employees and non-management members of its Board of Directors under nonvested stock
bonus awards for services to be provided by such key employees and directors in the future. Refer
to Note 6 for more information.
Equipment and Software Acquired Under Capital Lease Obligations
The Company acquired equipment and software under capital lease obligations in the amount of
$14.9 million during 2010 related to storage and other peripheral hardware. The Company acquired
equipment and software under capital lease obligations in the amount of $4.3 million during 2009
related to storage and other peripheral hardware.
Note 10 Legal Proceedings
The Company is subject to various legal proceedings and claims and is also subject to
information requests, inquiries and investigations arising out of the ordinary conduct of its
business. In the opinion of management, based in part upon the advice of legal counsel, all matters
are believed to be adequately covered by insurance, or if not covered, are believed to be without
merit or 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
12
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flows of the Company if disposed of unfavorably. The Company establishes reserves for
litigation and similar matters when those matters present loss contingencies that TSYS determines
to be both probable and reasonably estimable in accordance with ASC 450, Contingencies,
previously referred to as SFAS No. 5, Accounting for Contingencies.
Note 11 Guarantees and Indemnifications
The Company has entered into processing and licensing agreements with its clients that include
intellectual property indemnification clauses. The Company generally agrees to indemnify its
clients, subject to certain exceptions, against legal claims that TSYS services or systems
infringe on certain third party patents, copyrights or other proprietary rights. In the event of
such a claim, the Company is generally obligated to hold the client harmless and pay for related
losses, liabilities, costs and expenses, including, without limitation, court costs and reasonable
attorneys fees. The Company has not made any indemnification payments pursuant to these
indemnification clauses. In addition, the Company has indemnification obligations to Synovus
Financial Corp. pursuant to the disaffiliation and related agreements entered into by the parties
in connection with the spin-off.
The Company has not recorded a liability for guarantees or indemnities in the accompanying
condensed consolidated balance sheets, since neither a range nor a maximum amount of potential
future payments under such guarantees and indemnities is determinable.
Note 12 Business Combinations
First National Merchant Solutions
On March 1, 2010, TSYS signed an Investment Agreement with First National Bank of Omaha of
Omaha, Nebraska pursuant to which the parties intended to enter into a joint venture arrangement in
connection with the acquisition by TSYS of 51-percent ownership of a newly formed company named
First National Merchant Solutions, LLC for approximately $150.5 million. First National Merchant
Solutions (FNMS) is the name under which First National Bank of Omaha conducts its merchant
activities. The sale transaction was consummated on April 1, 2010.
FNMS had approximately $74 billion in sales volume in 2009, serving 302,000 merchant outlets.
This represents about 56,000 merchants and 246,000 processed and settled merchants. With a 57-year
history, FNMS provides complete payment processing and fully customizable Visa- and
MasterCard-branded prepaid products for businesses of any size. In 2009, its net revenue was $93
million. The company has 475 employees and will remain headquartered in Omaha, Nebraska.
FNMS will be included in Merchant Services for segment reporting purposes.
Note 13 Earnings Per Share
In June 2008, the FASB issued authoritative guidance under ASC 260, Earnings Per Share,
previously referred to as FASB Staff Position EITF 03-6-1, Determining Whether Instruments Granted
in Share-Based Payment Transactions are Participating Securities. The guidance under ASC 260 holds
that unvested share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents are participating securities as defined in ASC 260, previously referred to
as EITF 03-6, Participating Securities and the Two-Class Method under FASB Statement No. 128,
Earnings per Share, and therefore should be included in computing EPS using the two-class
method.
The two-class method is an earnings allocation method for computing EPS when an entitys
capital structure includes two or more classes of common stock or common stock and participating
securities. It determines EPS based on dividends declared on common stock and participating
securities and participation rights of participating securities in any undistributed earnings.
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The following table illustrates basic and diluted EPS under the guidance of ASC 260:
Three months ended | Three months ended | |||||||||||||||
March 31, 2010 | March 31, 2009 | |||||||||||||||
(in thousands, except | Common | Participating | Common | Participating | ||||||||||||
per share data) | Stock | Securities | Stock | Securities | ||||||||||||
Basic earnings per share: |
||||||||||||||||
Net income |
$ | 51,327 | 46,526 | |||||||||||||
Less income allocated to nonvested awards |
(264 | ) | 264 | (361 | ) | 361 | ||||||||||
Net income allocated to common stock for EPS calculation (a) |
$ | 51,063 | 264 | 46,165 | 361 | |||||||||||
Average common shares outstanding (b) |
196,160 | 1,016 | 195,461 | 1,534 | ||||||||||||
Basic earnings per share (a)/(b) |
$ | 0.26 | 0.26 | 0.24 | 0.24 | |||||||||||
Diluted earnings per share: |
||||||||||||||||
Net income |
$ | 51,327 | 46,526 | |||||||||||||
Less income allocated to nonvested awards |
(263 | ) | 263 | (360 | ) | 360 | ||||||||||
Net income allocated to common stock for EPS calculation (c) |
$ | 51,064 | 263 | 46,166 | 360 | |||||||||||
Average common shares outstanding |
196,160 | 1,016 | 195,461 | 1,534 | ||||||||||||
Increase due to assumed issuance of shares related to common
equivalent shares outstanding (d) |
86 | 67 | ||||||||||||||
Diluted earnings per share (c)/(d) |
$ | 0.26 | 0.26 | 0.24 | 0.24 | |||||||||||
The diluted earnings per share calculation excludes stock options and nonvested awards
that are convertible into 7.1 million common shares for the three months ended March 31, 2010 and
excludes 6.8 million common shares for the three months ended March 31, 2009 because their
inclusion would have been anti-dilutive.
Note 14 Recent Accounting Pronouncements
The Companys Annual Report on Form 10-K for the year ended December 31, 2009, as filed with
the SEC, contains a discussion of recent accounting pronouncements and the expected impact on the
Companys financial statements.
Accounting Standards Update No. 2010-13, CompensationStock Compensation (Topic 718): Effect of
Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in
Which the Underlying Equity Security Trades (A consensus of the FASB Emerging Issues Task Force)
In April 2010, the Task Force issued Accounting Standards Update No. 2010-13 (ASU 2010-13),
"CompensationStock Compensation (Topic 718): Effect of Denominating the Exercise Price of a
Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security
Trades (A consensus of the FASB Emerging Issues Task Force). The Task Force reached a consensus
that an employee share-based payment with an exercise price denominated in the currency of a market
in which a substantial portion of the entitys equity securities trade should be considered an
equity classified award assuming all other criteria for equity classification are met. ASU 2010-13
will be effective for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2010, with early adoption permitted. The Company is currently evaluating the
impact of adopting ASU 2010-13 on its financial position, results of operations and cash flows, but
has yet to complete its assessment.
Note 15 Subsequent Events
On April 1, 2010, TSYS consummated its acquisition of 51% of FNMS. Refer to Note 12 for more
information regarding the joint venture.
On April 20, 2010, TSYS announced a new stock repurchase plan to purchase up to 10 million
shares of TSYS stock.
Management performed an evaluation of the Companys activity through the date these unaudited
financial statements were issued, and has concluded that other than as set forth above there are no
significant subsequent events requiring disclosure.
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TOTAL SYSTEM SERVICES, INC.
Item 2 Managements Discussion and Analysis of Financial
Condition and Results of Operations
Financial Overview
Total System Services, Inc.s (TSYS or the Companys) revenues are derived from providing
payment processing, merchant services and related services to financial and nonfinancial
institutions, generally under long-term processing contracts. The Companys services are provided
through three of the Companys operating segments: North America Services, International Services
and Merchant Services. Through the Companys North America Services and International Services
segments, TSYS processes information through its cardholder systems to financial institutions
throughout the United States and internationally. The Companys North America Services segment
provides these services in the United States to clients in the United States, Canada, Mexico and
the Caribbean.
The Companys International Services segment provides services in England, Japan and Brazil to
clients in the United States, Europe, Asia Pacific and Brazil.
The Companys Merchant Services segment provides merchant services to financial institutions
and other organizations, predominately in the United States.
For a detailed discussion regarding the Companys Operations, see Item 7: Managements
Discussion and Analysis of Financial Condition and Results of Operations in the Companys Annual
Report on Form 10-K for the year ended December 31, 2009.
A summary of the financial highlights for 2010, as compared to 2009, is provided below:
Three months ended March 31, | ||||||||||||
(in millions, except per share data and employees) | 2010 | 2009 | Percent Change | |||||||||
Total revenues
|
$ | 415.4 | 408.9 | 1.6 | % | |||||||
Operating income
|
79.1 | 78.1 | 1.2 | |||||||||
Net income attributable to TSYS common shareholders
|
51.3 | 46.5 | 10.3 | |||||||||
Cash flows from operating activities
|
133.5 | 98.7 | 35.3 | |||||||||
Other: |
||||||||||||
Accounts on file
|
323.3 | 340.4 | (5.0 | ) | ||||||||
Total Cardholder transactions
|
1,739.5 | 1,728.9 | 0.6 | |||||||||
Full-time equivalent employees (FTE)
|
7,433 | 8,068 | (7.9 | ) |
Significant highlights for 2010 include:
Corporate
| Announced a partnership agreement with Serverside Group to launch TSYS Card Shop, a digital card fulfillment and marketing solution that combines on-demand manufacturing processes with industry-leading card management and customization capabilities. |
North America
| Signed an agreement with Caterpillar Financial Services Corporation, the financial arm of Caterpillar Inc. Under terms of the agreement, TSYS industry leading TS2® platform will be used to process commercial credit accounts. |
| Announced the signing of a new long-term agreement with U.S. Bank to continue to support the banks commercial card payment services, as well as become its exclusive partner in providing card processing services for the banks Consumer Directed Healthcare benefit cards, issued by its Healthcare Payment Solutions business line. |
| Introduced an innovative payment card that allows consumers to choose how they want to pay through the patent-pending TSYS HybridSM product which combines credit and checking payment functionality on a single card, creating an easy-to-manage payment solution that gives consumers greater financial control. |
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International
| Announced the signing of a multi-year payment services agreement with Degussa Bank of Germany to provide a broad range of products and services for its corporate and business clients. |
| Signed an agreement to provide B+S Card Service with back-office merchant acceptance services across Europe. |
| Announced it will provide card and payments services to Cedacri through its fully outsourced processing solution. |
| Announced that SBI Sumishin Net Bank, one of the leading internet-based banks in Japan, selected TSYS to process its payment card portfolio. |
Merchant
| Announced the signing of a joint venture agreement with First National Bank of Omaha (FNBO) to form a new company, First National Merchant Solutions, LLC (FNMS). |
| Announced the signing of an agreement to provide authorization and capture services to Central Payment Co. (CPC), one of the fastest-growing, transaction processing providers in the country. |
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.
Critical Accounting Policies and Estimates
There have been no material changes to the Companys critical accounting policies, estimates
and assumptions or the judgments affecting the application of those estimates and assumptions in
2010. For a detailed discussion regarding the Companys critical accounting policies and estimates,
see Item 7: Managements Discussion and Analysis of Financial Condition and Results of
Operations, and for a detailed discussion regarding the Companys risk factors, see Item 1A: Risk
Factors in the Companys Annual Report on Form 10-K for the year ended December 31, 2009.
Related Party Transactions
The Company believes the terms and conditions of transactions between the Company and its
equity investments, Total System Services de México, S.A. de. C.V. (TSYS de México) and China
UnionPay Data Co., Ltd. (CUP Data), are comparable to those which could have been obtained in
transactions with unaffiliated parties. The Companys margins with respect to related party
transactions are comparable to margins recognized in transactions with unrelated third parties.
Off-Balance Sheet Arrangements
Operating Leases: As a method of funding its operations, TSYS employs noncancelable operating
leases for computer equipment, software and facilities. These leases allow the Company to provide
the latest technology while avoiding the risk of ownership. Neither the assets nor obligations
related to these leases are included on the balance sheet.
Contractual Obligations: The total liability (with state amounts tax effected) for uncertain tax
positions under ASC 740, Income Taxes, previously referred to as FASB Interpretation No. 48 (FIN
48), at March 31, 2010 is $3.6 million. Refer to Note 7 in the Notes to Unaudited Condensed
Consolidated Financial Statements for more information on income taxes. The Company is not able to
reasonably estimate the amount by which the liability will increase or decrease over time; however,
at this time, the Company does not expect a significant payment related to these obligations within
the next year.
As indicated in the Companys Annual Report on Form 10-K for the year ended December 31, 2009,
total contractual cash obligations at December 31, 2009 were estimated at $415.0 million. These
contractual cash obligations include lease payments and software arrangements.
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Results of Operations
The following table sets forth certain income statement captions as a percentage of total
revenues and the percentage increases or decreases in those items:
Three months ended March 31, | ||||||||||||
Percent Change | ||||||||||||
% of Total Revenues | in Dollar Amounts | |||||||||||
2010 | 2009 | 2010 vs. 2009 | ||||||||||
Total revenues |
100.0 | % | 100.0 | % | 1.6 | % | ||||||
Cost of services |
70.3 | 69.6 | 2.6 | |||||||||
Selling, general and administrative expenses |
10.6 | 11.3 | (4.4 | ) | ||||||||
Total operating expenses |
80.9 | 80.9 | 1.7 | |||||||||
Operating income |
19.1 | 19.1 | 1.2 | |||||||||
Nonoperating expenses |
(0.1 | ) | (0.4 | ) | nm | |||||||
Income from continuing operations before income taxes and equity in income of
equity investments |
19.0 | 18.7 | 2.8 | |||||||||
Income taxes |
6.7 | 6.7 | 1.7 | |||||||||
Income from continuing operations before equity in income of equity investments |
12.3 | 12.0 | 3.4 | |||||||||
Equity in income of equity investments |
0.2 | 0.3 | (14.4 | ) | ||||||||
Income from continuing operations, net of tax |
12.5 | 12.3 | 3.1 | |||||||||
(Loss) income from discontinued operations, net of tax |
0.0 | (0.8 | ) | nm | ||||||||
Net income |
12.5 | 11.5 | 10.4 | |||||||||
Net income attributable to the noncontrolling interests |
(0.1 | ) | (0.1 | ) | nm | |||||||
Net income attributable to TSYS |
12.4 | % | 11.4 | % | 10.3 | % | ||||||
nm = not meaningful
Revenues
The Company generates revenues by providing transaction processing and other payment-related
services. The Companys pricing for transactions and services is complex. Each category of revenue
has numerous fee components depending on the types of transactions or services provided. TSYS
reviews its pricing and implements pricing changes on an ongoing basis. In addition, standard
pricing varies among its regional businesses, and such pricing can be customized further for
customers through tiered pricing of various thresholds for volume activity. TSYS revenues are
based upon transactional information accumulated by its systems or reported by its customers. The
Companys revenues are impacted by currency translation of foreign operations, as well as doing
business in the current economic environment.
Total revenues increased $6.4 million, or 1.6%, during the three months ended March 31, 2010
compared to the same period in 2009. The increase in revenues for the three months ended March 31,
2010 includes an increase of $5.8 million related to the effects of currency translation of
foreign-based subsidiaries and branches. The Company has included reimbursements received for
out-of-pocket expenses as revenues and expenses. The largest reimbursable expense item for which
TSYS is reimbursed by clients is postage. The Companys reimbursable items are impacted with
changes in postal rates and changes in the volumes of all mailing activities by its clients.
Reimbursable items for the first three months of 2010 were $70.8 million, an increase of $7.3
million or 11.5%, compared to $63.5 million for the same period last year. The increase in
reimbursable items was the result of increased in Visa access fees. Excluding reimbursable items,
revenues decreased $895,000, or 0.3%, during the three months ended March 31, 2010 compared to the
same period in 2009.
Major Customers
A significant amount of the Companys revenues is derived from long-term contracts with large
clients, including a major customer. 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 the Companys major customer could have a material
adverse effect on the Companys financial position, results of operations and cash flows.
In June 2009, Bank of America announced that it formed a new joint venture to provide merchant
services. TSYS provides accounting, settlement, authorization and other services to Bank of America
pursuant to a contract that expired in April 2010, which services accounted for approximately 6.0%
and 4.2% of TSYS total revenues for 2010 and 2009, respectively.
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Bank of America has indicated to TSYS that it is in the process of formulating its plans
with respect to changes in its merchant relationship with TSYS, but has not yet communicated to
TSYS the timing or extent of the deconversion from TSYS systems. TSYS provides a number of
additional services to Bank of America, including commercial card processing, small business card
processing and card production services.
Approximately 48% and 31% of the total revenues derived from providing merchant services to
Bank of America are attributable to reimbursable items for 2010 and 2009, respectively, which are
provided at no margin.
The loss of Bank of America as a merchant services client is not expected to have a material
adverse effect on TSYS financial position, results of operations or cash flows.
Revenues from the major customer for the periods reported are primarily attributable to the
North America Services segment and Merchant Services segment.
Accounts on File (AOF) by Portfolio Type
At March 31, | ||||||||||||||||||||
2010 | 2009 | |||||||||||||||||||
(in millions) | AOF | % | AOF | % | Percent Change | |||||||||||||||
Consumer |
182.2 | 56.3 | 186.5 | 54.8 | (2.3 | ) | ||||||||||||||
Commercial |
44.1 | 13.6 | 44.4 | 13.0 | (0.8 | ) | ||||||||||||||
Stored value |
40.9 | 12.7 | 26.0 | 7.6 | 57.2 | |||||||||||||||
Government services |
26.3 | 8.1 | 21.7 | 6.4 | 21.2 | |||||||||||||||
Retail |
24.4 | 7.6 | 56.5 | 16.6 | (56.7 | ) | ||||||||||||||
Debit |
5.1 | 1.6 | 5.2 | 1.5 | (2.9 | ) | ||||||||||||||
Healthcare |
0.3 | 0.1 | 0.1 | 0.1 | nm | |||||||||||||||
Total |
323.3 | 100.0 | 340.4 | 100.0 | (5.0 | ) | ||||||||||||||
nm = not meaningful
Activity in AOF
March 2009 to | March 2008 to | |||||||
(in millions) | March 2010 | March 2009 | ||||||
Beginning balance |
340.4 | 364.9 | ||||||
Internal growth of existing clients |
24.4 | 32.0 | ||||||
New clients |
29.1 | 20.0 | ||||||
Purges/Sales |
(43.4 | ) | (35.9 | ) | ||||
Deconversions |
(27.2 | ) | (40.6 | ) | ||||
Ending balance |
323.3 | 340.4 | ||||||
TSYS services are provided through three of its operating segments: North America Services,
International Services and Merchant Services.
A summary of each segments results follows:
North America Services
The North America Services segment provides payment processing and related services to
clients based primarily in North America. This segment has three major customers.
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Below is a summary of the North America Services segment:
Three months ended March 31, | ||||||||||||
(in millions) | 2010 | 2009 | Percent Change | |||||||||
Total revenues
|
$ | 254.2 | 268.8 | (5.4 | )% | |||||||
Operating income
|
69.8 | 71.5 | (2.4 | ) | ||||||||
Operating margin
|
27.5 | % | 26.6 | % | ||||||||
Key indicators: |
||||||||||||
AOF
|
283.1 | 303.2 | (6.6 | ) | ||||||||
Transactions
|
1,458.2 | 1,481.0 | (1.5 | ) |
The decline in total segment revenues for the three months ended March 31, 2010, as compared
to the same period in 2009, is the result of a decrease in revenues associated with client
portfolio deconversions, as well as overall economic conditions causing existing clients to be
selective in the services being utilized.
International Services
The International Services segment provides payment processing and related services to clients
based primarily outside the North America region. This segment has three major customers.
Below is a summary of the International Services segment:
Three months ended March 31, | ||||||||||||
(in millions) | 2010 | 2009 | Percent Change | |||||||||
Total revenues |
$ | 79.4 | 73.8 | 7.6 | % | |||||||
Operating income |
11.3 | 9.5 | 18.4 | |||||||||
Operating margin |
14.2 | % | 12.9 | % | ||||||||
Key indicators: |
||||||||||||
AOF |
40.2 | 37.2 | 8.1 | |||||||||
Transactions |
281.3 | 247.9 | 13.5 |
The increase in total segment revenues for the three months ended March 31, 2010, as compared
to the same period in 2009, is the result of $5.9 million positive impact of foreign currency
translation.
Merchant Services
The Merchant Services segment provides merchant processing and related services to clients
based primarily in the United States. This segment has one major customer.
Below is a summary of the Merchant Services segment:
Three months ended March 31, | ||||||||||||
(in millions) | 2010 | 2009 | Percent Change | |||||||||
Total revenues |
$ | 89.2 | 75.5 | 18.2 | % | |||||||
Operating income |
17.3 | 15.5 | 11.6 | |||||||||
Operating margin |
19.4 | % | 20.6 | % | ||||||||
Key indicator: |
||||||||||||
Point-of-sale transactions |
1,320.3 | 1,226.1 | 7.7 |
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The increase in total segment revenues for 2010, as compared to 2009, is the result of $13.3
million increase in reimbursable items related to the increase in Visa access fees and internal
growth.
Merchant Services segments results are driven by the authorization and capture transactions
processed at the point-of-sale and clearing and settlement transactions. This segments
authorization and capture transactions are primarily through dial-up or Internet connectivity.
Refer to the discussion of Bank of America under Major Customers.
Operating Expenses
The Companys operating expenses consist of cost of services and selling, general and
administrative expenses. Cost of services describes the direct expenses incurred in producing a
particular service for sale, including the cost of direct labor expense in putting the service in
saleable condition. Selling, general and administrative expenses are incurred in selling or
marketing and for the direction of the enterprise as a whole, including accounting, legal fees,
officers salaries, investor relations and mergers and acquisitions.
For the first three months of 2010, the Companys cost of services were $292.2 million, an
increase of 2.6%, compared to $284.7 million for the same period last year. During the first three
months of 2010, TSYS announced plans to reduce its workforce through attrition and job elimination.
As part of the workforce reduction, the Company incurred approximately $2.6 million in severance
payments.
For the first three months of 2010, the Companys selling, general and administrative expenses
were $44.1 million, a decrease of $2.1 million, compared to $46.1 million for the same period last
year. The decrease was the result of lower expenses associated with share-based compensation.
As a result of the acquisition of FNMS, TSYS incurred $1.1 million of acquisition related
costs.
Federal legislation was recently enacted which makes extensive changes to the current system
of health care insurance and benefits. The Company has reviewed the legislation and determined
that it will not have a material impact upon the Companys financial position, results of
operations or cash flows for 2010. The Company is still in the process of reviewing the impact of
the legislation on future periods.
Operating Income
Operating income increased 1.2% for the three months ended March 31, 2010 over the same period
in 2009. The Companys operating profit margin for the three months ended March 31, 2010 was 19.1%,
and was also 19.1% for the same period last year.
Nonoperating Income (Expense)
Interest income for the three months ended March 31, 2010 was $191,000, a decrease of
$578,000, compared to $769,000 for the same period in 2009. The decrease in interest income is
primarily attributable to the decline in interest rates.
Interest expense for the three months ended March 31, 2010 was $929,000, a decrease of
$181,000 compared to $1.1 million for the same period in 2009. The decrease in interest expense in
2009 compared to 2008 relates to the decline in interest rates.
For the three months ended March 31, 2010 and 2009, the Company recorded a translation gain of
approximately $247,000 and a translation loss of $884,000, respectively, related to intercompany
loans and foreign-denominated balance sheet accounts.
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 something 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 Companys financial statements. The upward or downward adjustment is recorded
as a gain or loss on foreign currency translation.
The Company records foreign currency translation adjustments on foreign-denominated balance
sheet accounts. The Company maintains several cash accounts denominated in foreign currencies,
primarily in Euros and British Pounds Sterling. As the Company translates the foreign-denominated
cash balances into U.S. dollars, the translated cash balance is adjusted upward or downward
depending upon the foreign currency exchange movements. The upward or downward adjustment is
recorded as a gain or loss on foreign currency translation in the Companys statements of income.
As those cash accounts have increased, the upward or downward adjustments have increased. The
Company recorded a net translation gain of approximately $247,000 for the three months ended March
31, 2010, related to the translation of foreign-denominated balance sheet accounts, most of which
were cash.
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The balance of the Companys foreign-denominated cash accounts subject to risk of translation
gains or losses at March 31, 2010 was approximately $4.2 million, the majority of which is
denominated in Euros.
Income Taxes
TSYS effective income tax rate attributable to continuing operations for the three months
ended March 31, 2010 was 35.3%, compared to 35.6% for the same period in 2009. The calculation of
the effective tax rate is income taxes plus income taxes associated with equity income divided by
TSYS pretax income adjusted for minority interests in consolidated subsidiaries net income and
equity pre-tax earnings of its equity investments. Refer to Note 7 in the Notes to Unaudited
Condensed Consolidated Financial Statements for more information on income taxes.
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.
Equity in Income of Equity Investments
The Company has two equity investments located in Mexico and China that are accounted for
under the equity method of accounting. TSYS share of income from its equity in equity investments
was $893,000 and $1.0 million for the three months ended March 31, 2010 and 2009, respectively.
Loss from Discontinued Operations, net of tax
Loss from discontinued operations, net of tax, for the three months ended March 31, 2009 was
$3.3 million. Final adjustments related to the sale are expected to be included in the financial
results for the second quarter of 2010.
Net Income
Net income for the three months ended March 31, 2010 increased 10.4%, or $4.9 million, to
$51.8 million, compared to $46.9 million for the same period in 2009.
Net income attributable to TSYS common shareholders for the three months ended March 31, 2010
increased 10.3%, or $4.8 million, to $51.3 million, or basic and diluted earnings per share of
$0.26, compared to $46.5 million, or basic and diluted earnings per share of $0.24, for the same
period in 2009.
Projected Outlook for 2010
As compared to 2009, TSYS expects its 2010 total revenues to increase by 1% to 3%, revenues
before reimbursable items to increase by 1% to 3%, income from continuing operations to decline by
14%-12%, and EPS from continuing operations to decline by 14% 12% based on the following
assumptions: (1) there will be no significant movements in LIBOR and TSYS will not make any
significant draws on the remaining balance of its revolving credit facility; (2) anticipated levels
in employment, technology and other expenses, which are included in 2010 estimates, will be
accomplished; (3) there will be no significant movement in foreign currency exchange rates related
to TSYS business during 2010; (4) TSYS will not incur significant expenses associated with the
conversion of new large clients or acquisitions, or any significant impairment of goodwill or other
intangibles; (5) there will be no deconversions of large clients during the year other than as
previously announced; and (6) the economy will not worsen during 2010.
Financial Position, Liquidity and Capital Resources
The Condensed Consolidated Statements of Cash Flows detail the Companys cash flows from
operating, investing and financing activities. TSYS primary method of funding its operations and
growth has been cash generated from current operations and the use of leases. TSYS has occasionally
used borrowed funds to supplement financing of capital expenditures, acquisitions and, most
recently, the spin-off.
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Cash Flows From Operating Activities
Three months ended March 31, | ||||||||
(in thousands) | 2010 | 2009 | ||||||
Net income |
$ | 51,819 | 46,941 | |||||
Depreciation and amortization |
38,564 | 39,850 | ||||||
Other noncash items and charges, net |
5,586 | 3,996 | ||||||
Net change in current and other assets and current and other liabilities |
37,566 | 7,883 | ||||||
Net cash provided by operating activities |
$ | 133,535 | 98,670 | |||||
TSYS main source of funds is derived from operating activities, specifically net income. The
increase in 2010 in net cash provided by operating activities was primarily the result of the net
change in current and other assets and current and other liabilities.
Net change in current and other assets and current and other liabilities include accounts
receivable, prepaid expenses, other current assets and other assets, accounts payable, accrued
salaries and employee benefits, other current liabilities and other liabilities. The change in
accounts receivable at March 31, 2010, as compared to December 31, 2009, is the result of timing of
collections compared to billings. The change in accounts payable and other liabilities for the same
period is the result of the timing of payments, funding of performance-based incentives and
payments of vendor invoices.
Cash Flows From Investing Activities
Three months ended March 31, | ||||||||
(in thousands) | 2010 | 2009 | ||||||
Purchases of property and equipment, net |
$ | (9,170 | ) | (2,181 | ) | |||
Additions to licensed computer software from vendors |
(3,769 | ) | (5,932 | ) | ||||
Additions to internally developed computer software |
(5,760 | ) | (5,828 | ) | ||||
Cash used in acquisitions, net of cash acquired |
| (205 | ) | |||||
Additions to contract acquisition costs |
(9,914 | ) | (10,992 | ) | ||||
Net cash used in investing activities |
$ | (28,613 | ) | (25,138 | ) | |||
The major uses of cash for investing activities have been the addition of property and
equipment, primarily computer equipment, the purchase of licensed computer software and internal
development of computer software, investments in contract acquisition costs associated with
obtaining and servicing new or existing clients, and business acquisitions. The major uses of cash
for investing activities in 2010 was for additions to contract acquisition costs, equipment,
licensed computer software from vendors and internally developed computer software. The major uses
of cash for investing activities in 2009 was for additions of equipment and contract acquisition
costs.
Contract Acquisition Costs
TSYS makes cash payments for processing rights, third-party development costs and other direct
salary-related costs in connection with converting new customers to the Companys processing
systems. The Companys investments in contract acquisition costs were $9.9 million for the three
months ended March 31, 2010 compared to $11.0 million for the three months ended March 31, 2009.
The Company had cash payments for processing rights of approximately $3.1 million during the
three months ended March 31, 2010 compared to $2.8 million for the same three months last year.
Conversion cost additions were $6.8 million and $8.2 million for the three months ended March
31, 2010 and 2009, respectively. The increase in the amount of conversion cost additions for 2010,
as compared to 2009, is the result of the timing of conversion activity in 2010 versus 2009.
Cash Flows From Financing Activities
Three months ended March 31, | ||||||||
(in thousands) | 2010 | 2009 | ||||||
Dividends paid on common stock |
$ | (13,797 | ) | (13,779 | ) | |||
Proceeds from borrowings of long-term debt |
| 2,809 | ||||||
Repurchase of common stock |
(1,075 | ) | (329 | ) | ||||
Principal payments on long-term debt
borrowings and capital lease obligations |
(3,731 | ) | (3,622 | ) | ||||
Other |
220 | -- | ||||||
Net cash used in financing activities |
$ | (18,383 | ) | (14,921 | ) | |||
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The major use of cash from financing activities has been the payment of dividends and
repurchase of common stock. The main source of cash from financing activities has been the
occasional use of borrowed funds and the exercise of stock options. The major use of cash from
financing activities in 2010 was for the payment of dividends. The major uses of cash from
financing activities in 2009 was for the payment of dividends and the repurchase of common stock.
Borrowings
For a detailed discussion regarding the Companys borrowings, see Item 7: Managements
Discussion and Analysis of Financial Condition and Results of Operations, and for a detailed
discussion regarding the Companys long-term debt, see Note 13 Long-term Debt and Capital Lease
Obligations in the Companys Annual Report on Form 10-K for the year ended December 31, 2009.
Stock Repurchase Plan
On April 20, 2006, TSYS announced that its Board had approved a stock repurchase plan to
purchase up to 2 million shares, which at the time represented slightly more than five percent of
the shares of TSYS stock held by shareholders other than Synovus. The shares were to be purchased
from time to time over a two-year period and would depend on various factors, including price,
market conditions, acquisitions and the general financial position of TSYS. Repurchased shares are
to be used for general corporate purposes.
With the completion of the spin-off, the TSYS Board of Directors extended to April 2010 TSYS
current share repurchase program that was set to expire in April 2008 and increased the number of
shares that may be repurchased under the plan from 2 million to 10 million. The plan expired on
April 19, 2010.
On April 20, 2010, TSYS announced a new stock repurchase plan to purchase up to 10 million
shares of TSYS stock. This equates to approximately $162 million of TSYS stock based on current
market prices. The shares may be purchased from time to time over the next two years at prices
considered attractive to the Company.
Dividends
Dividends on common stock of $13.8 million were paid during the three months ended March 31,
2010 compared to $13.8 million paid during the three months ended March 31, 2009.
Significant Noncash Transactions
Refer
to Note 9 of the Notes to Unaudited Condensed Consolidated Financial Statements for
more information about supplementary cash flow information.
Foreign Exchange
TSYS operates internationally and is subject to adverse movements in foreign currency exchange
rates. Since December 2000, 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.
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
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capital expenditure needs through internally generated cash in the future, as evidenced by
TSYS current ratio of 3.8:1. At March 31, 2010, TSYS had working capital of $643.0 million
compared to $590.1 million at December 31, 2009.
Legal Proceedings
The Company is subject to various legal proceedings and claims and is also subject to
information requests, inquiries and investigations arising out of the ordinary conduct of its
business. In the opinion of management, based in part upon the advice of legal counsel, all matters
are believed to be adequately covered by insurance, or if not covered, are believed to be without
merit or 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. The Company establishes reserves for litigation and similar matters when those matters
present loss contingencies that TSYS determines to be both probable and reasonably estimable in
accordance with ASC 450.
Recent Accounting Pronouncements
The Companys Annual Report on Form 10-K for the year ended December 31, 2009, as filed with
the SEC, contains a discussion of recent accounting pronouncements and the expected impact on the
Companys financial statements.
Accounting Standards Update No. 2010-13, CompensationStock Compensation (Topic 718): Effect
of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in
Which the Underlying Equity Security Trades (A consensus of the FASB Emerging Issues Task Force)
In April 2010, the Task Force issued Accounting Standards Update No. 2010-13 (ASU 2010-13),
"CompensationStock Compensation (Topic 718): Effect of Denominating the Exercise Price of a
Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security
Trades (A consensus of the FASB Emerging Issues Task Force). The Task Force reached a consensus
that an employee share-based payment with an exercise price denominated in the currency of a market
in which a substantial portion of the entitys equity securities trade should be considered an
equity classified award assuming all other criteria for equity classification are met. ASU 2010-13
will be effective for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2010, with early adoption permitted. The Company is currently evaluating the
impact of adopting ASU 2010-13 on its financial position, results of operations and cash flows, but
has yet to complete its assessment.
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 the loss of Bank of America as a merchant services client will not have a material adverse
affect on TSYS; (ii) TSYS expectation that it will be able to fund a significant portion of its
capital expenditure needs through internally generated cash in the future; (iii) TSYS earnings
guidance for 2010 total revenues, revenues before reimbursable items, income from continuing
operations and EPS from continuing operations; (iv)TSYS belief with respect to lawsuits, claims
and other complaints; (v) the expected financial impact of recent accounting pronouncements; and
(vi) TSYS expectation with respect to certain tax matters; and the assumptions underlying such
statements, including, with respect to TSYS earnings guidance for 2010: (a) the economy will not
worsen during 2010; (b) there will be no deconversions of large clients during the year other than
as previously announced; (c) there will be no significant movement in foreign currency exchange
rates related to TSYS business during 2010; (d) the anticipated levels in employment, technology
and other expenses, which are included in 2010 estimates, will be accomplished; (e) TSYS will not
incur significant expenses associated with the conversion of new large clients or acquisitions, or
any significant impairment of goodwill or other intangibles; and (f) there will be no significant
movements in LIBOR, and no significant draws on the remaining balance of TSYS revolving credit
facility. 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
24
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important factors could cause actual results to differ materially from those contemplated by
our forward-looking statements. Many of these factors are beyond TSYS ability to control or
predict. These factors include, but are not limited to:
| movements in LIBOR are greater than expected and draws on the revolving credit facility are greater than expected; | ||
| TSYS incurs expenses associated with the signing of a significant client; | ||
| internal 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; | ||
| TSYS does not convert and deconvert clients portfolios as scheduled; | ||
| adverse developments with respect to foreign currency exchange rates; | ||
| adverse developments with respect to entering into contracts with new clients and retaining current clients; | ||
| continued consolidation and turmoil in the financial services and other industries during 2010, 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 the nationalization or seizure by banking regulators of TSYS clients; | ||
| TSYS is unable to control expenses and increase market share, both domestically and internationally; | ||
| adverse developments with respect to the credit card industry in general, including a decline in the use of cards as a payment mechanism; | ||
| TSYS is unable to successfully manage any impact from slowing economic conditions or consumer spending; | ||
| the impact of potential and completed acquisitions, including the costs associated therewith and their being more difficult to integrate than anticipated; | ||
| 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 inability to anticipate and respond to technological changes, particularly with respect to e-commerce; | ||
| changes occur in laws, regulations, credit card associations rules or other industry standards affecting TSYS business which require significant product redevelopment efforts or reduce the market for or value of our products; | ||
| successfully managing the potential both for patent protection and patent liability in the context of rapidly developing legal framework for expansive patent protection; | ||
| the material breach of security of any of our systems; | ||
| overall market conditions; | ||
| the loss of a major supplier; | ||
| the impact on TSYS business, as well as on the risks set forth above, of various domestic or international military or terrorist activities or conflicts; | ||
| other risk factors described in the Risk Factors and other sections of TSYS Annual Report on Form 10-K for the fiscal year ended December 31, 2009 and other filings with the Securities and Exchange Commission; and | ||
| TSYS ability to manage the foregoing and other risks. |
These forward-looking statements speak only as of the date on which they are made and TSYS
does not intend to update any forward-looking statement as a result of new information, future
developments or otherwise.
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TOTAL SYSTEM SERVICES, INC.
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 income, net. The following represents the amount of other
comprehensive loss:
Three months ended March 31, | ||||||||
(in millions) | 2010 | 2009 | ||||||
Other comprehensive loss |
$ | (12.9 | ) | (3.8 | ) |
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 at March 31, 2010:
(in millions) | March 31, 2010 | |||
Europe |
$ | 170.1 | ||
China |
68.5 | |||
Japan |
10.1 | |||
Mexico |
7.7 | |||
Canada |
1.3 | |||
Other |
29.2 |
TSYS records foreign currency translation adjustments associated with other balance sheet
accounts. The Company maintains several cash accounts denominated in foreign currencies, primarily
in Euros and British Pounds Sterling. 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 statements of income. As those cash accounts have increased,
the upward or downward adjustments have increased. TSYS recorded a translation gain of
approximately $247,000 for the three months ended March 31, 2010 relating to the translation of
cash and other balance sheet accounts. The balance of the Companys foreign-denominated cash
accounts subject to risk of translation gains or losses at March 31, 2010 was approximately $4.2
million, the majority of which was denominated in Euros.
The Company provides financing to its international operation in Europe through an
intercompany loan that requires the operation to repay the financing in U.S. dollars. 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 U.S. dollar obligation
(receivable) on its financial statements. The upward or downward adjustment is recorded as a gain
or loss on foreign currency translation.
The net asset account balance subject to foreign currency exchange rates between the local
currencies and the U.S. dollar at March 31, 2010 was $4.2 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 $4.2 million at March 31, 2010.
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 |
$ | 42 | 210 | 419 | (42 | ) | (210 | ) | (419 | ) |
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TOTAL SYSTEM SERVICES, INC.
Item 3 Quantitative and Qualitative Disclosures About Market Risk (continued)
Item 3 Quantitative and Qualitative Disclosures About Market Risk (continued)
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
primarily subject to changes in the short-term interest rates.
On December 21, 2007, the Company entered into a Credit Agreement with Bank of America N.A.,
as Administrative Agent, The Royal Bank of Scotland plc, as Syndication Agent, and other lenders.
The Credit Agreement provides for a $168 million unsecured five-year term loan to the Company and a
$252 million five-year unsecured revolving credit facility. The principal balance of loans
outstanding under the credit facility bears interest at a rate of London Interbank Offered Rate
(LIBOR) plus an applicable margin of 0.60%. Interest is paid on the last date of each interest
period; however, if the period exceeds three months, interest is paid every three months after the
beginning of such interest period.
On October 31, 2008, the Companys International Services segment obtained a credit agreement
from a third party to borrow up to approximately ¥2.0 billion, or $21 million, in a Yen-denominated
three year loan to finance activities in Japan. The rate is LIBOR plus 80 basis points. The
Company initially made a draw down of ¥1.5 billion, or approximately $15.1 million. In January
2009, the Company made an additional draw down of ¥250 million, or approximately $2.8 million. In
April 2009, the Company made an additional draw down of ¥250 million, or approximately $2.5
million.
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TOTAL SYSTEM SERVICES, INC.
Item 4 Controls and Procedures
We have evaluated the effectiveness of the design and operation of our 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 our management, including our chief
executive officer and chief financial officer. Based on this evaluation, the chief executive
officer and chief financial officer concluded that as of March 31, 2010, TSYS disclosure controls
and procedures were designed and effective 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 SECs rules and forms and were also designed and
effective 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.
Other than as set forth below, no change in TSYS internal control over financial reporting
occurred during the period covered by this report that materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
During the first quarter of 2010, TSYS implemented a new corporate-wide financial
consolidation and reporting system. The new system is expected to materially impact internal
controls over financial reporting by providing more timely financial reporting and consolidation
information, reducing manual processes and providing a flexible architecture to reduce data entry.
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TOTAL
SYSTEM SERVICES, INC.
Part II Other Information
Item 1A Risk Factors
In addition to the other information set forth in this report, one should carefully consider
the factors discussed in Part I, Item 1A. Risk Factors in the Companys Annual Report on Form
10-K for the year ended December 31, 2009, which could materially affect the Companys financial
position, results of operations or cash flows. The risks described in the Companys 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 Companys financial position, results of operations or cash flows.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth information regarding the Companys purchases of its common
stock on a monthly basis during the three months ended March 31, 2010:
Total Number of | Maximum Number of | |||||||||||||||
Shares Purchased as | Shares That May Yet | |||||||||||||||
Part of Publicly | Be Purchased | |||||||||||||||
(in thousands, except per share data) | Total Number of | Average Price | Announced Plans | Under the Plans | ||||||||||||
Period | Shares Purchased | Paid per Share | or Programs | or Programs | ||||||||||||
January 2010 |
25 | (1) | $ | 16.59 | 3,072 | 6,928 | ||||||||||
February 2010 |
39 | (1) | 14.55 | 3,072 | 6,928 | |||||||||||
March 2010 |
| | 3,072 | 6,928 | ||||||||||||
Total |
64 | (1) | $ | 15.35 | ||||||||||||
(1) | Consists of delivery of shares to TSYS on vesting of restricted shares to pay taxes. |
Item 6 Exhibits
a) Exhibits
Exhibit | ||
Number | Description | |
10.1
|
Investment Agreement (excluding exhibits and schedules) dated March 1, 2010 by and between First National Bank of Omaha and Total System Services, Inc. | |
10.2
|
Assignment of Investment Agreement dated April 1, 2010 between Total System Services, Inc. and Columbus Depot Equipment Company, a wholly owned subsidiary of Total System Services, Inc. | |
10.3
|
Amended and Restated Limited Liability Company Agreement of FNMS Holding, LLC (excluding exhibits and schedules) dated April 1, 2010 by and between Columbus Depot Equipment Company, First National Bank of Omaha, FN Merchant Partners, Inc. and FNMS Holding, LLC. | |
10.4
|
Form of Stock Option Agreement for 2010 stock option awards under the Total System Services, Inc. 2008 Omnibus Plan. | |
10.5
|
Form of Performance Share Agreement for 2010 performance share awards under the Total System Services, Inc. 2008 Omnibus Plan. | |
10.6
|
Form of Performance-Based Special Stock Option Agreement for performance-based stock option awards under the Total System Services, Inc. 2008 Omnibus Plan. | |
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 | |
TSYS will furnish supplementally a copy of any omitted schedule to the Commission upon request. |
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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: May 7, 2010 | by: | /s/ Philip W. Tomlinson | ||
Philip W. Tomlinson | ||||
Chairman of the Board and Chief Executive Officer |
||||
Date: May 7, 2010 | by: | /s/ James B. Lipham | ||
James B. Lipham | ||||
Senior Executive Vice President and Chief Financial Officer |
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TOTAL SYSTEM SERVICES, INC.
Exhibit Index
Exhibit | ||
Number | Description | |
10.1
|
Investment Agreement (excluding exhibits and schedules) dated March 1, 2010 by and between First National Bank of Omaha and Total System Services, Inc. | |
10.2
|
Assignment of Investment Agreement dated April 1, 2010 between Total System Services, Inc. and Columbus Depot Equipment Company, a wholly owned subsidiary of Total System Services, Inc. | |
10.3
|
Amended and Restated Limited Liability Company Agreement of FNMS Holding, LLC (excluding exhibits and schedules) dated April 1, 2010 by and between Columbus Depot Equipment Company, First National Bank of Omaha, FN Merchant Partners, Inc. and FNMS Holding, LLC. | |
10.4
|
Form of Stock Option Agreement for 2010 stock option awards under the Total System Services, Inc. 2008 Omnibus Plan. | |
10.5
|
Form of Performance Share Agreement for 2010 performance share awards under the Total System Services, Inc. 2008 Omnibus Plan. | |
10.6
|
Form of Performance-Based Special Stock Option Agreement for performance-based stock option awards under the Total System Services, Inc. 2008 Omnibus Plan. | |
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 |
31