Attached files
file | filename |
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EX-32 - EX-32 - TOTAL SYSTEM SERVICES INC | g22052exv32.htm |
10-K - FORM 10-K - TOTAL SYSTEM SERVICES INC | g22052e10vk.htm |
EX-10.4 - EX-10.4 - TOTAL SYSTEM SERVICES INC | g22052exv10w4.htm |
EX-21.1 - EX-21.1 - TOTAL SYSTEM SERVICES INC | g22052exv21w1.htm |
EX-23.1 - EX-23.1 - TOTAL SYSTEM SERVICES INC | g22052exv23w1.htm |
EX-31.1 - EX-31.1 - TOTAL SYSTEM SERVICES INC | g22052exv31w1.htm |
EX-31.2 - EX-31.2 - TOTAL SYSTEM SERVICES INC | g22052exv31w2.htm |
Exhibit
13.1
Financial Overview
Total System Services, Inc.s (TSYS or the
Companys) revenues are derived from providing electronic
payment processing, merchant services and related services to
financial and nonfinancial institutions, generally under
long-term processing contracts. The Companys services are
provided through the Companys three 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 Company previously
provided debt collection services through March 2009. In 2009,
the Company sold the subsidiary providing these services and has
reported the financial results associated with this subsidiary
as discontinued operations.
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.
Due to the somewhat seasonal nature of the credit card industry,
TSYS revenues and results of operations have generally
increased in the fourth quarter of each year because of
increased transaction and authorization volumes during the
traditional holiday shopping season. Furthermore, growth or
declines in card and merchant portfolios of existing clients,
the conversion of cardholder and merchant accounts of new
clients to the Companys processing platforms and the loss
of cardholder and merchant accounts either through purges or
deconversions impact the results of operations from period to
period.
Another factor which may affect TSYS revenues and results
of operations from time to time is consolidation in the
financial services or retail industries either through the sale
by a client of its business, its card portfolio or a segment of
its accounts to a party which processes cardholder accounts
internally or uses another third-party processor. A change in
the economic environment in the retail sector, or a change in
the mix of payments between cash and cards could favorably or
unfavorably impact TSYS financial position, results of
operations and cash flows in the future.
TSYS reported financial results will also be impacted by
significant shifts in currency conversion rates. TSYS does not
view foreign currency as an economic event for the Company but
as a financial reporting issue. Because changes in foreign
currency exchange rates distort the operating growth rates, TSYS
discloses the impact of foreign currency translation on its
financial performance.
A significant amount of the Companys revenues is derived
from long-term contracts with large clients, including a certain
major customer. Processing contracts with large clients,
representing a significant portion of the Companys total
revenues, generally provide for discounts on certain services
based on the size and activity of clients portfolios.
Therefore, electronic payment processing revenues and the
related margins are influenced by the client mix relative to the
size of client card portfolios, as well as the number and
activity of individual cardholder accounts processed for each
client. Consolidation among financial institutions has resulted
in an increasingly concentrated client base, which results in a
change in client mix toward larger clients.
Based upon available market data that includes cards processed
in-house, the Company believes that in 2009, it provided issuer
processing services for 19% of the U.S. consumer credit
card market, 44% of the Canadian credit card market and 16% of
the Western European credit card market. The Company also
believes it held a 75% share of the Visa and MasterCard
U.S. commercial card processing market in 2009. In
addition, the Company believes it is the second-largest
processor of merchant accounts and processes transactions for
approximately 20% of all bankcard accepting merchant locations
in the U.S.
The Company provides issuer processing services for consumer,
retail, commercial, government services, stored value and debit
cards. Below is a general description of each type of account:
Account type
|
Description | |
Consumer
|
Visa, MasterCard and American Express credit cards | |
Retail
|
Private label cards | |
Commercial
|
Purchasing cards, corporate cards and fleet cards for employees; US General Services Administration purchasing and travel cards for government employees; American Express cards | |
Government services
|
Student loan processing accounts | |
Stored value
|
Prepaid cards, including loyalty incentive cards, health care cards, flexible spending cards and gift cards | |
Debit
|
On-line (PIN-based) and off-line (signature-based) accounts | |
5
The tables on pages 15 and 16 summarize TSYS accounts on
file (AOF) information as of December 31, 2009, 2008 and
2007.
A summary of the financial highlights for the years ended
December 31, 2009, 2008 and 2007 is provided below:
Years Ended December 31, | Percent Change | |||||||||||||||||||
(in millions, except per share data and employees) | 2009 | 2008 | 2007 | 2009 vs. 2008 | 2008 vs. 2007 | |||||||||||||||
Revenues before reimbursable items
|
$ | 1,417.9 | 1,456.8 | 1,388.9 | (2.7 | )% | 4.9 | % | ||||||||||||
Total revenues
|
1,688.1 | 1,721.6 | 1,662.5 | (2.0 | ) | 3.6 | ||||||||||||||
Operating income
|
342.0 | 368.7 | 349.1 | (7.2 | ) | 5.6 | ||||||||||||||
Net income attributable to TSYS
|
215.2 | 250.1 | 237.4 | (13.9 | ) | 5.3 | ||||||||||||||
Basic
EPS(1) :
|
||||||||||||||||||||
Income from continuing operations
|
1.12 | 1.26 | 1.19 | (11.2 | ) | 6.4 | ||||||||||||||
Net income
|
1.09 | 1.26 | 1.20 | (13.7 | ) | 5.2 | ||||||||||||||
Diluted
EPS(1):
|
||||||||||||||||||||
Income from continuing operations
|
1.12 | 1.26 | 1.19 | (11.3 | ) | 6.1 | ||||||||||||||
Net income
|
1.09 | 1.26 | 1.20 | (13.7 | ) | 5.3 | ||||||||||||||
Cash flows from operating activities
|
423.1 | 352.8 | 334.9 | 19.9 | 5.4 | |||||||||||||||
Other:
|
||||||||||||||||||||
AOF
|
344.8 | 352.5 | 375.5 | (2.2 | ) | (6.1 | ) | |||||||||||||
Cardholder transactions processed
|
7,272.9 | 7,694.1 | 9,508.5 | (5.5 | ) | (19.1 | ) | |||||||||||||
Average full-time equivalent employees (FTE)
|
7,898 | 7,691 | 6,799 | 2.7 | 13.1 |
(1) | Basic and diluted EPS is computed based on the two-class method in accordance with the guidance under Accounting Standards Codification (ASC) 260. Refer to Note 27 in the consolidated financial statements for more information on earnings per share. |
Significant items for 2009 include:
Corporate
| Sold TSYS Total Debt Management, Inc. (TDM), a wholly owned subsidiary involved in the late stage collection and bankruptcy management business. |
North
America
| Renewed a longstanding issuer processing relationship with Navy Federal Credit Union. |
| Signed an agreement with Unicard México, a wholly owned subsidiary of Unibanco Brasil, and TSYS first TS2 card issuing client in Mexico. |
International
| Signed a multi-year contract with Banco Carrefour S.A., to process its hybrid and private label card business in Brazil on the TS Prime multi-client payments processing platform. |
| Reached an agreement with Travel Bank, Inc., a financial services company that is a part of the JTB Group, to process Japans first Visa branded Prepaid card. |
| Began offering merchant payment services to PaySquare in the Benelux, which is TSYS first acquirer-processing client to go live in Europe. |
| Announced China UnionPay Data Services Co., Ltd. (CUP Data) (TSYS joint venture with China UnionPay) signed processing agreements with China Postal Savings Bank, Chinas fifth largest bank, and Bank of East Asia, Hong Kongs largest local independent bank and the first foreign bank to launch a card program in China. |
| Introduced its market-leading CentreSuite product to Europe. |
Merchant
| Signed an agreement with Global Cash Access to use TSYS processing services to provide cash access services in over 1,100 casinos to millions of gaming patrons. |
| Acknowledged that Bank of America and other parties 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 will expire in April 2010. Bank of America has indicated to TSYS that it is in the process of formulating its plans with respect to changes in its merchant processing relationship with TSYS but has not yet communicated to TSYS the timing or extent of the deconversion from TSYS systems. |
| Announced an agreement to partner with mPay Gatewaytm and Nova Libra to provide point-of-sale payment solutions to healthcare providers and pharmacies. |
6
Economic
Conditions
General economic conditions in the U.S. and other areas of
the world weakened in the second half of 2008 with a dramatic
acceleration of the decline in the fourth quarter which
generally continued during 2009. Many of TSYS businesses
rely in part on the number of consumer credit transactions which
have been reduced by a weakened U.S. and world economy and
difficult credit markets.
General reduction in consumer credit card spending negatively
impacted the Companys revenues during 2009. In addition,
the Companys revenues and operating profit during 2009 as
compared to 2008 were adversely impacted by shifts from credit
card transactions to PIN-based debit card transactions. Also as
a result of the current economic conditions in the U.S., credit
card issuers have been reducing credit limits and closing
accounts and are more selective with respect to whom they issue
credit cards. This reduction in the number of accounts and
account activity adversely impacted the results for the North
America Services segment for the year ended December 31,
2009 as compared to 2008. A continuation of the economic
recession could adversely impact future revenues and profits of
the Company.
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. The accompanying
Consolidated Financial Statements and related Notes are an
integral part of this Financial Review and should be read in
conjunction with it.
Critical
Accounting Policies and Estimates
TSYS financial position, results of operations and cash
flows are impacted by the accounting policies the Company has
adopted. In order to gain a full understanding of the
Companys financial statements, one must have a clear
understanding of the accounting policies employed.
Refer to Note 1 in the consolidated financial statements
for more information on the Companys basis of presentation
and a summary of significant accounting policies.
Factors that could affect the Companys future operating
results and cause actual results to vary materially from
expectations are listed in the Companys forward-looking
statements on pages 25 and 26. Negative developments in these or
other risk factors could have a material adverse effect on the
Companys financial position, results of operations and
cash flows.
Management believes that the following accounting policies are
the most critical to fully understand and evaluate the
Companys results. Within each critical policy, the Company
makes estimates that require managements subjective or
complex judgments about the effects of matters that are
inherently uncertain.
7
A summary of the Companys critical accounting estimates
applicable to all three reportable operating segments follows:
Impact if Actual Results |
||||
Critical Estimates
|
Assumptions and Judgment | Differ from Assumptions | ||
ACCOUNTS RECEIVABLE | ||||
The Company estimates the allowances for doubtful accounts. | When estimating the allowances for doubtful accounts, the Company takes into consideration such factors as its day-to-day knowledge of the financial position of specific clients, the industry and size of its clients, the overall composition of its accounts receivable aging, prior experience with specific customers of accounts receivable write-offs and prior history of allowances in proportion to the overall receivable balance. This analysis includes an ongoing and continuous communication with its largest clients and those clients with past due balances. A financial decline of any one of the Companys large clients could have a material adverse effect on collectibility of receivables and thus the adequacy of the allowance for doubtful accounts. |
If the actual collectibility of clients accounts is not consistent with the Companys estimates, bad debt expense, which is recorded in other operating expenses, may be materially different than was initially recorded.
The Companys experience and extensive data accumulated historically indicates that these estimates have proven reliable over time. |
||
The Company estimates allowances for billing adjustments for potential billing discrepancies. | When estimating the allowance for billing adjustments, the Company considers its overall history of billing adjustments, as well as its history with specific clients and known disputes. | If the actual adjustments to clients billing is not consistent with the Companys estimates, billing adjustments, which is recorded as a reduction of revenues in the Companys consolidated statements of income, may be materially different than was initially recorded. | ||
The Companys experience and extensive data accumulated historically indicates that these estimates have proven reliable over time. | ||||
REVENUE RECOGNITION | ||||
The Company estimates revenue for service billings not yet invoiced. | Since TSYS invoices clients for processing services monthly in arrears, the Company estimates revenues for one month of service billings not yet invoiced. | If actual client revenue billing is not consistent with the Companys estimates, processing revenues may be materially different than was initially recorded. | ||
The Companys experience and extensive data accumulated historically indicates that these estimates have proven reliable over time. |
8
Impact if Actual Results |
||||
Critical Estimates
|
Assumptions and Judgment | Differ from Assumptions | ||
ASSET IMPAIRMENT | ||||
Analysis of potential asset impairment involves various estimates and assumptions: | ||||
Contract Acquisition Costs | ||||
In evaluating for recoverability, expected undiscounted net operating cash flows are estimated by management. |
The Company evaluates the carrying value of contract acquisition costs associated with each customer for impairment on the basis of whether these costs are fully recoverable from either contractual minimum fees (conversion costs) or from expected undiscounted net operating cash flows of the related contract (cash incentives paid). The determination of expected undiscounted net operating cash flows requires management to make estimates.
These costs may become impaired with the loss of a contract, the financial decline of a client, termination of conversion efforts after a contract is signed or diminished prospects for current clients. |
If the actual cash flows are not consistent with the Companys estimates, a material impairment charge may result and net income may be materially different than was initially recorded.
Note 9 in the consolidated financial statements contains a discussion of contract acquisition costs. The net carrying value of contract acquisition costs on the Companys Consolidated Balance Sheet as of December 31, 2009 was $128.0 million. |
||
Software Development Costs | ||||
In evaluating for recoverability, expected undiscounted net operating cash flows are estimated by management. | The Company evaluates the unamortized capitalized costs of software development as compared to the net realizable value of the software product, which is determined by expected undiscounted net operating cash flows. The amount by which the unamortized software development costs exceed the net realizable value is written off in the period that such determination is made. |
If the actual cash flows are not consistent with the Companys estimates, a material write-off may result and net income may be materially different than was initially recorded.
Note 8 in the consolidated financial statements contains a discussion of internally developed software costs. The net carrying value of internally developed software on the Companys Consolidated Balance Sheet as of December 31, 2009 was $79.3 million. |
9
Impact if Actual Results |
||||
Critical Estimates
|
Assumptions and Judgment | Differ from Assumptions | ||
Goodwill | ||||
In evaluating for impairment, discounted net cash flows for future periods are estimated by management. |
In accordance with the provisions of ASC 350, Intangibles Goodwill and Other, (previously referred to as Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangibles Assets), goodwill is required to be tested for impairment at least annually. The combination of the income approach utilizing the discounted cash flow (DCF) method and the market approach, utilizing readily available market valuation multiples, is used to estimate the fair value.
Under the DCF method, the fair value of the asset reflects the present value of the projected earnings that will be generated by each asset after taking into account the revenues and expenses associated with the asset, the relative risk that the cash flows will occur, the contribution of other assets, and an appropriate discount rate to reflect the value of invested capital. Cash flows are estimated for future periods based on historical data and projections provided by management. |
If the actual cash flows are not consistent with the Companys estimates, a material impairment charge may result and net income may be materially different than was initially recorded.
Note 10 in the consolidated financial statements contains a discussion of goodwill. The net carrying value of goodwill on the Companys Consolidated Balance Sheet as of December 31, 2009 was $168.1 million. |
||
Long-lived Assets and Intangibles | ||||
In evaluating for recoverability, expected undiscounted net operating cash flows are estimated by management. | The Company reviews long-lived assets, such as property and equipment and intangibles subject to amortization, including contract acquisition costs and certain computer software, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. | If the actual cash flows are not consistent with the Companys estimates, a material impairment charge may result and net income may be materially different than was initially recorded. |
10
Impact if Actual Results |
||||
Critical Estimates
|
Assumptions and Judgment | Differ from Assumptions | ||
TRANSACTION PROCESSING PROVISIONS | ||||
The Company records estimates to accrue for contract contingencies (performance penalties) and processing errors. | A significant number of the Companys contracts with large clients contain service level agreements which can result in TSYS incurring performance penalties if contractually required service levels are not met. When estimating these accruals, the Company takes into consideration such factors as the prior history of performance penalties and processing errors incurred, actual contractual penalties inherent in the Companys contracts, progress towards milestones and known processing errors not covered by insurance. |
If the actual performance penalties incurred are not consistent with the Companys estimates, performance penalties and processing errors, which is recorded in other operating expenses, may be materially different than was initially recorded.
The Companys experience and extensive data accumulated historically indicates that these estimates have proven reliable over time. |
||
INCOME TAXES | ||||
In calculating its effective tax rate, the Company makes decisions regarding certain tax positions, including the timing and amount of deductions and allocations of income among various tax jurisdictions.
The Company makes estimates as to the amount of deferred tax assets and liabilities and records valuation allowances to reduce its deferred tax assets to reflect the amount that is more likely than not to be realized. |
The Company has various tax filing positions, including the timing and amount of deductions and credits, the establishment of reserves for audit matters and the allocation of income among various tax jurisdictions.
The Company considers projected future taxable income and ongoing tax planning strategies in assessing the need for the valuation allowance. |
Actual results may differ from the Companys estimates. If the Company realizes a deferred tax asset or the Company was unable to realize a net deferred tax asset, an adjustment to the deferred tax asset would increase or decrease earnings, respectively, in the period the difference is recognized. |
Related Party
Transactions
The Company provides electronic payment processing and other
services to the Companys equity investments, Total System
Services de México, S.A. de C.V. (TSYS de México) and
CUP Data. Prior to the spin-off by Synovus Financial Corp.
(Synovus) of the shares of TSYS held by Synovus to Synovus
shareholders, the Company provided electronic payment processing
and other services to Synovus and its affiliates.
On October 25, 2007, the Company announced that it had
entered into an agreement and plan of distribution with Synovus,
under which Synovus planned to distribute all of its shares of
TSYS common stock in a spin-off to Synovus shareholders. On
December 31, 2007, Synovus completed the spin-off to its
shareholders of the shares of TSYS, and TSYS became a fully
independent company, creating broader diversification of the
Companys shareholder base, more liquidity of the
Companys shares, and providing for the opportunity for
additional investment in strategic growth opportunities and
potential acquisitions.
Refer to Notes 13, 16 and 25 in the consolidated financial
statements for further information on spin-related items.
The related party services are performed under contracts that
are similar to its contracts with unrelated third party
customers. The Company believes the terms and conditions of
transactions between the Company and these related parties 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. The amounts related to these transactions are
disclosed on the face of TSYS consolidated financial
statements. No significant changes have been made to the method
of establishing terms with the affiliated companies during the
periods presented.
Refer to Note 4 in the consolidated financial statements
for more information on transactions with affiliated companies.
The Company continues to provide electronic payment processing
and other services to Synovus subsequent to the spin-off.
Beginning January 1, 2008, the Companys transactions
with Synovus and its affiliates are no longer considered related
party transactions.
11
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. Refer to Notes 1
and 19 in the consolidated financial statements for further
information on operating lease commitments.
Recent Accounting
Pronouncements
Accounting
Standards Update
2010-08,
Technical Corrections to Various
Topics
In February 2010, the FASB issued Accounting Standards Update
(ASU)
2010-08,
Technical Corrections to Various Topics,
which eliminates inconsistencies and outdated provisions and
provides clarifications within current Accounting Standards
Codification. ASU
2010-08 is
effective for the first reporting period (including interim
periods) beginning after issuance. The Company does not expect
the impact of adopting ASU
2010-08 on
its financial position, results of operations and cash flows to
be material.
Accounting
Standards Update
2010-06,
Fair Value Measurements and Disclosures (Topic 820):
Improving Disclosures about Fair Value
Measurements
In January 2010, the FASB issued ASU
2010-06,
Fair Value Measurements and Disclosures (Topic 820):
Improving Disclosures about Fair Value Measurements,
which adds new requirements for disclosures about transfers into
and out of Levels 1 and 2 and separate disclosures about
purchases, sales, issuances and settlements relating to
Level 3 measurements. ASU
2010-06 is
effective for the first reporting period (including interim
periods) beginning after December 15, 2010. The Company
does not expect the impact of adopting ASU
2010-06 on
its financial position, results of operations and cash flows to
be material.
Accounting
Standards Update
2010-05,
Compensation Stock Compensation (Topic 718):
Escrowed Share Arrangements and the Presumption of
Compensation
In January 2010, the FASB issued ASU
2010-05,
Compensation - Stock Compensation (Topic 718): Escrowed
Share Arrangements and the Presumption of
Compensation, which reflects the Securities and
Exchange Commissions views on overcoming the presumption
that escrowed share arrangement represent compensation for
certain shareholders. ASU
2010-05 did
not contain an effective date. The Company does not expect the
impact of adopting ASU
2010-05 on
its financial position, results of operations and cash flows to
be material.
Accounting
Standards Update
2010-04,
Accounting for Various Topics Technical
Corrections to SEC Paragraphs
In January 2010, the FASB issued ASU
2010-04,
Accounting for Various Topics Technical
Corrections to SEC Paragraphs, which provide technical
corrections to SEC paragraphs. ASU
2010-04 did
not contain an effective date. The Company does not expect the
impact of adopting ASU
2010-04 on
its financial position, results of operations and cash flows to
be material.
Accounting
Standards Update
2010-02,
Consolidation (Topic 810): Accounting and Reporting for
Decreases in Ownership of a Subsidiary a Scope
Clarification
In January 2010, the FASB issued ASU
2010-02,
Consolidation (Topic 810): Accounting and Reporting for
Decreases in Ownership of a Subsidiary a Scope
Clarification, which clarifies that the
decrease-in-ownership
provisions of ASC
810-10 and
related guidance apply to: a subsidiary or group of assets that
is a business or nonprofit activity, a subsidiary or group of
assets that is a business or nonprofit activity that is
transferred to an equity method investee or joint venture, or an
exchange of a group of assets that constitutes a business or
nonprofit activity for a noncontrolling interest in an entity
(including an equity method investee or joint venture). ASU
2010-02 is
effective in the beginning in the first interim or annual
reporting period ending on or after December 15, 2009. The
Company does not expect the impact of adopting the update to ASC
810-10 on
its financial position, results of operations and cash flows to
be material.
Accounting
Standards Update
2010-01,
Equity (Topic 505): Accounting for Distributions to
Shareholders with Components of Stock and Cash (A Consensus of
the FASB Emerging Issues Task Force)
In January 2010, the FASB issued ASU
2010-01,
Equity (Topic 505): Accounting for Distributions to
Shareholders with Components of Stock and Cash (A Consensus of
the FASB Emerging Issues Task Force), which provides
guidance on accounting for distributions to shareholders with
components of stock and cash, clarifying that in calculating
EPS, an entity should account for the share portion of the
distribution as a stock issuance and not as a stock dividend.
ASU 2010-01
is effective for interim and annual periods ending on or after
December 15, 2009, with retrospective application to all
prior periods. The Company does not expect the impact of
adopting ASU
2010-01 on
its financial position, results of operations and cash flows to
be material.
Accounting
Standards Update
2009-17,
Improvements to Financial Reporting by Enterprises
Involved With Variable Interest Entities
In December 2009, the FASB issued ASU
2009-17,
Improvements to Financial Reporting by Enterprises
Involved With Variable Interest Entities, which
replaces the quantitative-based
risks-and-rewards
calculation for determining which reporting entity, if any, has
a controlling financial interest in a variable interest entity,
with an approach focused on identifying which reporting entity
has (1) the power to direct the activities of a variable
interest entity that most significantly affect the entitys
economic performance and (2) the obligation to absorb
losses of,
12
or the right to receive benefits from, the entity. The update to
ASC 810 is effective at the start of a reporting entitys
first fiscal year beginning after November 15, 2009. The
Company does not expect the impact of adopting the update to ASC
810 on its financial position, results of operations and cash
flows to be material.
Accounting
Standards Update
2009-14,
Certain Revenue Arrangements that Include Software
Elements
In October 2009, the FASB issued ASU
2009-14,
Certain Revenue Arrangements that Include Software
Elements, an update to ASC
985-605,
Software-Revenue Recognition, and formerly
known as
EITF 09-3,
Revenue Arrangements that Include Software
Elements. ASU
2009-14
amends ASC Subtopic
985-605 to
exclude from its scope tangible products that contain both
software and non-software components that function together to
deliver a products essential functionality. ASU
2009-14 will
be effective prospectively for revenue arrangements entered into
or materially modified in fiscal years beginning on or after
June 15, 2010. Early adoption is permitted. The Company is
currently evaluating the impact of adopting ASU
2009-14 on
its financial position, results of operations and cash flows,
but has yet to complete its assessment.
Accounting
Standards Update
2009-13,
Multiple Deliverable Revenue
Arrangements
In October 2009, the FASB issued ASU
2009-13,
Multiple Deliverable Revenue Arrangements, an
update to ASC Topic 605, Revenue Recognition,
and formerly known as
EITF 08-1,
Revenue Arrangements with Multiple Deliverables.
ASU
2009-13
amends ASC
650-25 to
eliminate the requirement that all undelivered elements have
vendor-specific objective evidence (VSOE) or third-party
evidence (TPE) before an entity can recognize the portion of an
overall arrangement fee that is attributable to items that
already have been delivered. The overall arrangement fee will be
allocated to each element (both delivered and undelivered items)
based on their relative selling prices, regardless of whether
those selling prices are evidenced by VSOE or TPE or are based
on the entitys estimated selling price. ASU
2009-13 will
be effective prospectively for revenue arrangements entered into
or materially modified in fiscal years beginning on or after
June 15, 2010. Early adoption is permitted. The Company is
currently evaluating the impact of adopting ASU
2009-13 on
its financial position, results of operations and cash flows,
but has yet to complete its assessment.
Accounting
Standards Codification 810,
Consolidation
In June 2009, the FASB issued an update to ASC 810, previously
referred to as SFAS No. 167, Amendments to
FASB Interpretation No. 46(R), which requires an
enterprise to perform an analysis to determine whether the
enterprises variable interest or interests give it a
controlling financial interest in a variable interest entity.
The update to ASC 810 is effective as of the beginning of each
reporting entitys first annual reporting period that
begins after November 15, 2009, for interim periods within
that first annual reporting period, and for interim and annual
reporting periods thereafter. The Company does not expect the
impact of adopting the update to ASC 810 on its financial
position, results of operations and cash flows to be material.
13
The following table sets forth certain revenue and expense items
as a percentage of total revenues and the percentage increase or
decrease in those items:
Percent of |
||||||||||||||||||||
Total Revenues | ||||||||||||||||||||
Years Ended |
Percent Change in |
|||||||||||||||||||
December 31, | Dollar Amounts | |||||||||||||||||||
2009 | 2008 | 2007 | 2009 vs. 2008 | 2008 vs. 2007 | ||||||||||||||||
Revenues:
|
||||||||||||||||||||
Electronic payment processing services
|
56.1 | % | 57.8 | 57.7 | (4.9 | )% | 3.7 | % | ||||||||||||
Merchant services
|
16.4 | 15.2 | 16.1 | 6.1 | (2.4 | ) | ||||||||||||||
Other services
|
11.5 | 11.6 | 9.7 | (2.8 | ) | 24.0 | ||||||||||||||
Reimbursable items
|
16.0 | 15.4 | 16.5 | 2.0 | (3.2 | ) | ||||||||||||||
Total revenues
|
100.0 | 100.0 | 100.0 | (2.0 | ) | 3.6 | ||||||||||||||
Expenses:
|
||||||||||||||||||||
Salaries and other personnel expenses
|
34.4 | 34.1 | 33.6 | (0.8 | ) | 4.8 | ||||||||||||||
Net technology and facilities expenses
|
17.9 | 17.3 | 16.3 | 1.5 | 9.9 | |||||||||||||||
Spin-related expenses
|
| 0.6 | 0.8 | (100.0 | ) | (17.6 | ) | |||||||||||||
Other operating expenses
|
11.4 | 11.2 | 11.8 | (0.5 | ) | (1.5 | ) | |||||||||||||
Reimbursable items
|
16.0 | 15.4 | 16.5 | 2.0 | (3.2 | ) | ||||||||||||||
Total expenses
|
79.7 | 78.6 | 79.0 | (0.5 | ) | 3.0 | ||||||||||||||
Operating income
|
20.3 | 21.4 | 21.0 | (7.2 | ) | 5.6 | ||||||||||||||
Nonoperating (expenses) income
|
(0.2 | ) | 0.3 | 1.4 | nm | (76.0 | ) | |||||||||||||
Income from continuing operations before income taxes and equity
in income of equity investments
|
20.1 | 21.7 | 22.4 | (9.6 | ) | 0.3 | ||||||||||||||
Income taxes
|
7.2 | 7.6 | 8.5 | (7.6 | ) | (7.6 | ) | |||||||||||||
Income from continuing operations before equity in income of
equity investments
|
12.9 | 14.1 | 13.9 | (10.6 | ) | 5.3 | ||||||||||||||
Equity in income of equity investments
|
0.4 | 0.4 | 0.3 | (5.6 | ) | 34.1 | ||||||||||||||
Income from continuing operations, net of tax
|
13.3 | 14.5 | 14.2 | (10.5 | ) | 5.9 | ||||||||||||||
(Loss) income from discontinued operations, net of tax
|
(0.3 | ) | 0.1 | 0.2 | nm | (63.3 | ) | |||||||||||||
Net income
|
13.0 | 14.6 | 14.4 | (12.9 | ) | 5.1 | ||||||||||||||
Net income attributable to noncontrolling interests
|
(0.2 | ) | (0.1 | ) | (0.1 | ) | nm | (20.2 | ) | |||||||||||
Net income attributable to TSYS
|
12.8 | 14.5 | 14.3 | (13.9 | ) | 5.3 | ||||||||||||||
nm = not meaningful
|
||||||||||||||||||||
Results of
Operations
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 were negatively
impacted by currency translation of foreign operations, as well
as doing business in the current economic environment. Of the
total revenue decline of 2.0% for the year ended
December 31, 2009, the Company estimates revenues decreased
by a net 4.2% due to foreign currency exposure and pricing, and
increased 2.2% for volume changes.
Total revenues decreased 2.0%, or $33.6 million, for the
year ended December 31, 2009, compared to the year ended
December 31, 2008, which increased 3.6%, or
$59.2 million, compared to the year ended December 31,
2007. The decrease in revenues for 2009 and the increase in
revenues for 2008 include a decrease of $46.8 million and
$21.1 million, respectively, related to the effects of
currency translation of the Companys foreign-based
subsidiaries and branches. Excluding reimbursable items,
revenues decreased 2.7%, or $38.9 million, for the year
ended December 31, 2009, compared to the year ended
December 31, 2008, which increased 4.9%, or
$67.9 million, compared to the year ended December 31,
2007. The Company expanded its product and service offerings
through an acquisition in 2008. The impact of that acquisition
on consolidated total revenues was $6.8 million in 2009 and
$2.0 million in 2008.
14
Major
Customer
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 will expire in April
2010, which services accounted for approximately 5.2%, 4.0% and
4.4% of TSYS total revenues for 2009, 2008 and 2007,
respectively.
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 40%, 29% and 30% of the total revenues derived
from providing merchant services to Bank of America are
attributable to reimbursable items for 2009, 2008 and 2007,
respectively, which are provided at no margin.
TSYS will operate under the current contract until its
expiration in April 2010. 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.
Refer to Note 22 in the consolidated financial statements
for more information on the major customer.
The Company works to maintain a large and diverse customer base
across various industries. However, in addition to its major
customer, the Company has other large clients representing a
significant portion of its total revenues. The loss of any one
of the Companys large clients could have a material
adverse effect on the Companys financial position, results
of operations and cash flows.
AOF Information
(in
millions)
Percent Change | ||||||||||||||||||||
2009 | 2008 | 2007 | 2009 vs. 2008 | 2008 vs. 2007 | ||||||||||||||||
At December 31,
|
344.8 | 352.5 | 375.5 | (2.2 | )% | (6.1 | )% | |||||||||||||
YTD Average
|
347.9 | 365.7 | 401.2 | (4.9 | ) | (8.8 | ) |
AOF by Portfolio
Type
(in
millions)
Percent Change | ||||||||||||||||||||||||||||||||
At December 31, | 2009 | % | 2008 | % | 2007 | % | 2009 vs. 2008 | 2008 vs. 2007 | ||||||||||||||||||||||||
Consumer
|
187.8 | 54.5 | % | 205.8 | 58.4 | % | 201.5 | 53.7 | % | (8.8 | )% | 2.2 | % | |||||||||||||||||||
Retail
|
42.9 | 12.4 | 52.9 | 15.0 | 56.8 | 15.1 | (18.9 | ) | (7.0 | ) | ||||||||||||||||||||||
Stored value
|
42.3 | 12.3 | 24.9 | 7.1 | 49.2 | 13.1 | 69.9 | (49.4 | ) | |||||||||||||||||||||||
Commercial
|
41.1 | 11.9 | 42.8 | 12.1 | 39.0 | 10.4 | (4.0 | ) | 9.8 | |||||||||||||||||||||||
Government services
|
25.5 | 7.4 | 21.2 | 6.0 | 23.7 | 6.3 | 20.7 | (10.7 | ) | |||||||||||||||||||||||
Debit
|
5.2 | 1.5 | 4.9 | 1.4 | 5.3 | 1.4 | 4.5 | (6.2 | ) | |||||||||||||||||||||||
Total
|
344.8 | 100.0 | % | 352.5 | 100.0 | % | 375.5 | 100.0 | % | (2.2 | ) | (6.1 | ) | |||||||||||||||||||
AOF by Geographic
Area
(in millions)
Percent Change | ||||||||||||||||||||||||||||||||
At December 31, | 2009 | % | 2008 | % | 2007 | % | 2009 vs. 2008 | 2008 vs. 2007 | ||||||||||||||||||||||||
U.S.
|
255.5 | 74.1 | % | 268.1 | 76.1 | % | 301.3 | 80.2 | % | (4.7 | )% | (11.0 | )% | |||||||||||||||||||
Outside U.S.
|
89.3 | 25.9 | 84.4 | 23.9 | 74.2 | 19.8 | 5.9 | 13.7 | ||||||||||||||||||||||||
Total
|
344.8 | 100.0 | % | 352.5 | 100.0 | % | 375.5 | 100.0 | % | (2.2 | ) | (6.1 | ) | |||||||||||||||||||
Note: The accounts on file distinction between U.S and
outside U.S. is based on the geographic domicile of the
Companys processing clients.
15
Activity in AOF
(in
millions)
2008 to 2009 | 2007 to 2008 | 2006 to 2007 | ||||||||||
Beginning balance
|
352.5 | 375.5 | 416.4 | |||||||||
Internal growth of existing clients
|
25.2 | 36.5 | 40.3 | |||||||||
New clients
|
28.1 | 22.7 | 24.2 | |||||||||
Purges/Sales
|
(34.1 | ) | (46.3 | ) | (11.8 | ) | ||||||
Deconversions
|
(26.9 | ) | (35.9 | ) | (93.6 | ) | ||||||
Ending balance
|
344.8 | 352.5 | 375.5 | |||||||||
Electronic
Payment Processing Services
Electronic payment processing services revenues are generated
primarily from charges based on the number of accounts on file,
transactions and authorizations processed, statements mailed,
cards embossed and mailed, and other processing services for
cardholder accounts on file. Cardholder accounts on file include
active and inactive consumer credit, retail, debit, stored
value, government services and commercial card accounts.
TSYS electronic payment processing revenues are influenced
by several factors, including volumes related to AOF and
transactions. TSYS estimates that approximately 49% of total
electronic payment processing revenues is AOF and transaction
volume driven, and are driven primarily from processing
services. The remaining 51% of electronic payment processing
revenues are not AOF and transaction volume driven, and are
derived from production and optional services TSYS considers to
be value added products and services, custom programming and
licensing arrangements.
Active accounts are accounts that have had monetary activity
either during the current month or in the past 90 days
based on contractual definition. Inactive accounts are accounts
that have not had a monetary transaction (such as a purchase or
payment) in the past 90 days. The more active an account
is, the more revenue is generated for TSYS (items such as
transaction and authorizations processed and statements billed).
Occasionally, a client will purge inactive accounts from its
portfolio. An inactive account typically will only generate an
AOF charge. A processing client will periodically review its
cardholder portfolio based upon activity and usage. Each client,
based upon criteria individually set by the client, will flag an
account to be purged from TSYS system and
deactivated.
A deconversion involves a client migrating all of its accounts
to an in-house solution or another processor. Account
deconversions include active and inactive accounts and can
impact the Companys revenues significantly more than an
account purge.
A sale of a portfolio typically involves a client selling a
portion of its accounts to another party. A sale of a portfolio
and a deconversion impact the Companys financial
statements in a similar fashion, although a sale usually has a
smaller financial impact due to the number of accounts typically
involved.
Merchant
Services
Merchant services revenues are derived from providing processing
services, acquiring solutions, related systems and integrated
support services to financial institutions and other merchant
acquirers. Revenues from merchant services include processing
all payment forms including credit, debit, prepaid, electronic
benefit transfer and electronic check for merchants of all sizes
across a wide array of retail market segments. Merchant services
include authorization and capture of transactions; clearing and
settlement of transactions; information reporting services
related to transactions; merchant billing services; and
point-of-sale
equipment sales and service.
Other
Services
Revenues from other services consist primarily of revenues
generated not included in electronic payment processing services
or merchant services, as well as TSYS business process
management services. These services include mail and
correspondence processing services, teleservicing, data
documentation capabilities, offset printing, client services,
collections and account solicitation services.
Reimbursable
Items
As a result of ASC 605, Revenue Recognition,
previously referred to as the FASBs EITF
No. 01-14,
Income Statement Characterization of Reimbursements
Received for Out-of-Pocket Expenses Incurred,
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.
Operating
Segments
TSYS services are provided through three 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 electronic payment
processing and related services to clients based primarily in
North America. This segment has two major customers.
16
Below is a summary of the North America Services segment:
Years Ended December 31, | Percent Change | |||||||||||||||||||
(in millions) | 2009 | 2008 | 2007 | 2009 vs. 2008 | 2008 vs. 2007 | |||||||||||||||
Total revenues
|
$ | 1,016.3 | 1,107.2 | 1,118.8 | (8.2 | )% | (1.0 | )% | ||||||||||||
Reimbursable items
|
160.3 | 189.4 | 203.2 | (15.3 | ) | (6.8 | ) | |||||||||||||
Operating income
|
234.5 | 265.9 | 253.9 | (11.8 | ) | 4.7 | ||||||||||||||
Operating margin
|
23.1 | % | 24.0 | % | 22.7 | % | ||||||||||||||
Key indicators:
|
||||||||||||||||||||
AOF
|
305.2 | 319.0 | 352.1 | (4.3 | ) | (9.4 | ) | |||||||||||||
Transactions
|
6,136.9 | 6,658.2 | 8,664.2 | (7.8 | ) | (23.2 | ) | |||||||||||||
The $90.9 million decrease in segment total revenues for
2009 as compared to 2008 is the result of client deconverions
and portfolio sales. The $11.6 million decrease in segment
total revenues in 2008 as compared to 2007 is attributable to
the $13.8 million decrease in reimbursable items.
International
Services
The International Services segment provides electronic payment
processing and related services to clients based primarily
outside the North America region. This segment has one major
customer.
Below is a summary of the International Services segment:
Years Ended December 31, | Percent Change | |||||||||||||||||||
(in millions) | 2009 | 2008 | 2007 | 2009 vs. 2008 | 2008 vs. 2007 | |||||||||||||||
Total revenues
|
$ | 335.5 | 316.9 | 252.3 | 5.9 | % | 25.6 | % | ||||||||||||
Reimbursable items
|
15.1 | 11.2 | 10.3 | 34.8 | 8.8 | |||||||||||||||
Operating income
|
43.2 | 48.4 | 44.1 | (10.6 | ) | 9.7 | ||||||||||||||
Operating margin
|
12.9 | % | 15.3 | % | 17.5 | % | ||||||||||||||
Key indicators:
|
||||||||||||||||||||
AOF
|
39.5 | 33.5 | 23.4 | 18.0 | 43.4 | |||||||||||||||
Transactions
|
1,136.0 | 1,035.8 | 844.2 | 9.7 | 22.7 | |||||||||||||||
The $18.6 million increase in total segment revenues for
2009, as compared to 2008, is the result of an increase from
internal growth of existing clients, deconversion fee of
approximately $10.8 million received from a client for the
discontinuance of an account portfolio, approximately
$26.3 million in new business, and a decrease of
$46.8 million impact related to foreign currency
translation. The increase in total segment revenues for 2008, as
compared to 2007, is driven by growth in accounts and
transactions processed.
During the fourth quarter of 2008, the U.S. dollar
strengthened against the British Pound. As a result, foreign
denominated financial statements were translated into fewer
U.S. dollars, which impact the comparison to prior periods
when the U.S. dollar was weaker. For 2010, TSYS does not
expect any significant movements from the rates that existed at
December 31, 2009.
Merchant
Services
The Merchant Services segment provides merchant services 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:
Years Ended December 31, | Percent Change | |||||||||||||||||||
(in millions) | 2009 | 2008 | 2007 | 2009 vs. 2008 | 2008 vs. 2007 | |||||||||||||||
Total revenues
|
$ | 336.2 | 297.6 | 291.3 | 13.0 | % | 2.2 | % | ||||||||||||
Reimbursable items
|
94.8 | 64.3 | 60.2 | 47.4 | 6.9 | |||||||||||||||
Operating income
|
64.3 | 65.6 | 64.7 | (2.0 | ) | 1.4 | ||||||||||||||
Operating margin
|
19.1 | % | 22.0 | % | 22.2 | % | ||||||||||||||
Key indicator:
|
||||||||||||||||||||
Point-of-sale
transactions
|
5,194.4 | 5,057.9 | 4,944.5 | 2.7 | 2.3 | |||||||||||||||
The $38.6 million increase in total segment revenues for
2009, as compared to 2008, is the result of $30.5 million
increase in reimbursable items related to the increase in Visa
access fees, $5.4 million from acquisitions, and internal
growth. The increase in total segment revenues for 2008, as
compared to 2007, is the result of new business and
acquisitions, and was partially offset by price compression and
deconversions.
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.
In 2009, the Merchant Services segment further expanded its
offering with the Infonox technology into new markets such as
mobile and self-service. These offerings further compliment the
authorization and capture and clearing and settlement services
already offered within these markets.
Operating
Expenses
As a percentage of revenues, operating expenses increased in
2009 to 79.7%, compared to 78.6% and 79.0% for 2008 and 2007,
respectively. The changes for the years ended December 31,
2009 and 2008 include a decrease of $39.6 million and
$15.6 million, respectively, related to the effects of
currency translation of the Companys foreign based
subsidiaries, branches and divisions. The impact
17
of acquisitions on consolidated total expenses was
$14.7 million in 2009 and $3.0 million in 2008.
Operating expenses were $1,346.0 million in 2009, compared
to $1,353.0 million in 2008 and $1,313.3 million in
2007.
Salaries and
Other Personnel Expense
The impact of acquisitions on consolidated salaries and other
personnel expenses was $8.3 million in 2009 and
$1.5 million in 2008. In addition, the change in salaries
and other personnel expense is associated with the normal salary
increases and related benefits, offset by the level of
employment costs capitalized as software development and
contract acquisition costs. Salaries and other personnel expense
include the accrual for performance-based incentive benefits,
which includes bonuses, profit sharing and employer 401(k)
expenses. For the years ended December 31, 2009, 2008 and
2007, the Company accrued $3.1 million, $11.0 million
and $38.0 million, respectively, of performance-based
incentives.
The Company maintains share-based employee compensation plans
for purposes of incenting and retaining employees. In December
2004, the FASB issued authoritative guidance under ASC 718,
Compensation Stock Compensation,
previously referred to as Statement of Financial Accounting
Standards No. 123 (revised) Share-Based Payment
(Revised), which the Company adopted on
January 1, 2006. ASC 718 requires the Company to recognize
compensation expense for the nonvested portion of outstanding
share-based compensation granted in the form of stock options
based on the grant-date fair value of those awards. Refer to
Note 16 in the consolidated financial statements for more
information on share-based compensation.
Share-based compensation expenses include the impact of
expensing the fair value of stock options, as well as expenses
associated with nonvested shares. For the year ended
December 31, 2009, share-based compensation was
$16.1 million, compared to $17.8 million (excluding
$6.8 million included in spin related expenses) and
$13.1 million (excluding $5.4 million included in spin
related expenses) for the same period in 2008 and 2007,
respectively.
The Companys salaries and other personnel expense is
greatly influenced by the number of employees. Below is a
summary of the Companys employee data:
Employee Data: |
Percent Change |
|||||||||||||||||||
(FTE)
|
2009 | 2008 | 2007 | 2009 vs. 2008 | 2008 vs. 2007 | |||||||||||||||
At December 31,
|
7,620 | 8,110 | 6,921 | (6.0 | )% | 17.2 | % | |||||||||||||
YTD Average
|
7,898 | 7,691 | 6,799 | 2.7 | 13.1 | |||||||||||||||
The majority of the decrease in the number of employees in 2009,
as compared to 2008, is the result of eliminating positions due
to lost or deconverted processing and call center business, and
approximately 170 people associated with the sale of TDM.
The majority of the increase in the number of employees in 2008,
as compared to 2007, is a result of the acquisition of Infonox
(104) and the expansion of TSYS international
business (782) mainly associated with its Managed Services
business.
Prior to the spin-off date of December 31, 2007, Synovus
provided certain administrative services, such as human
resources, legal, security and tax preparation and compliance,
to TSYS in exchange for a management fee, which is included in
other operating expenses, to cover TSYS pro rata share of
services. With the spin-off, TSYS began recruiting employees and
assumed these functions during 2008. During the 2008 transition
period, TSYS continued to utilize Synovus administrative
services until these functions were operational within TSYS in
exchange for an adjusted management fee based on utilization. As
it assumed these functions, the Companys salaries and
other personnel expenses increased, while other operating
expenses decreased. TSYS headcount has increased by
approximately 60 people as these administrative services
transitioned to TSYS.
In January 2010, the Company announced that it would reduce its
overall workforce by approximately 5%, primarily from the U.S,
through a targeted workforce reduction and attrition. Some
positions will be eliminated and some employees will be
terminated with severance. The targeted workforce reduction is
expected to be completed by the end of February 2010.
Net Technology
and Facilities Expense
The impact of acquisitions on consolidated net technology and
facilities expense was $3.3 million in 2009 and $854,000 in
2008.
Amortization expense of licensed computer software, developed
software and acquisition technology intangibles decreased 9.4%,
or $6.1 million, for the year ended December 31, 2009,
as compared to the year ended December 31, 2008, which
increased 0.4%, or $279,000, as compared to the year ended
December 31, 2007. Refer to Note 8 in the consolidated
financial statements for further information on computer
software.
TSYS equipment and software needs are fulfilled primarily
through operating leases and software licensing arrangements.
Equipment and software rental expense was $87.7 million for
the year ended December 31, 2009, an increase of
$1.9 million, or 2.2%, compared to $85.8 million for
the year ended December 31, 2008, an increase of
$5.8 million, or 7.3%, compared to
18
$80.0 million for the year ended December 31, 2007.
The Companys equipment and software rentals increased for
2009, as compared to 2008, as a result of technology upgrades in
the North America Services segment. The Companys equipment
and software rentals increased for 2008, as compared to 2007, as
a result of increased processing capacity associated with the
growth in international business.
Spin Related
Expenses
Spin related expenses consist of expenses associated with the
separation from Synovus. In July 2007, Synovus Board of
Directors appointed a special committee of independent directors
to make a recommendation with respect to whether to distribute
Synovus ownership interest in TSYS to Synovus
shareholders. As a result, the TSYS Board of Directors formed a
special committee of independent TSYS directors to consider the
terms of any proposed spin-off by Synovus of its ownership
interest in TSYS, including the size of the pre-spin cash
dividend. TSYS incurred expenses associated with advisory and
legal services in connection with the spin assessment. As the
spin-off was finalized and completed, TSYS also incurred
expenses for the incremental fair value associated with
converting Synovus stock options held by TSYS employees to TSYS
options. During the years ended December 31, 2008 and 2007,
the Company incurred approximately $11.1 million and
$13.5 million of spin related expenses, respectively. Refer
to Note 25 in the consolidated financial statements for
more information on the spin-off.
Other Operating
Expenses
The impact of acquisitions on consolidated other operating
expenses was $3.1 million in 2009 and $674,000 in 2008.
Other operating expenses were also impacted by amortization of
contract acquisition costs and the provision for transaction
processing accruals. Amortization of contract acquisition costs
associated with conversions was $17.8 million,
$14.4 million and $15.9 million in 2009, 2008 and
2007, respectively.
Other operating expenses also include, among other things, costs
associated with delivering merchant services, professional
advisory fees, charges for processing errors, contractual
commitments and bad debt expense. Managements evaluation
of the adequacy of its transaction processing reserves and
allowance for doubtful accounts is based on a formal analysis
which assesses the probability of losses related to contractual
contingencies, processing errors and uncollectible accounts.
Increases and decreases in service level quality expenses and
charges for bad debt expense are reflected in other operating
expenses. For 2009, 2008 and 2007, service level quality
expenses were $4.1 million, $3.2 million and $29,000,
respectively. For 2009, 2008 and 2007, the Company had
provisions for bad debt expense of $6.4 million, $618,000
and $1.2 million, respectively.
TSYS management fees decreased as it transitioned away
from administrative services supplied by Synovus, and began
recruiting employees and assumed these functions in 2008. The
majority of these types of expenses are salaries and other
personnel expense.
Operating
Income
Operating income decreased 7.2% to $342.0 million in 2009,
compared to $368.7 million in 2008, which was an increase
of 5.6% over 2007 operating income of $349.1 million.
Nonoperating
Income (Expense)
Nonoperating income consists of interest income, interest
expense and gains and losses on currency translations.
Nonoperating income decreased in 2009 as compared to 2008, and
decreased in 2008 as compared to 2007. Interest income for 2009
was $1.9 million, a 78.5% decrease compared to
$8.6 million in 2008, which was a 67.7% decrease compared
to $26.8 million in 2007. The variation in interest income
is primarily attributable to changes in short-term interest
rates in 2009 and 2008. In 2008, the Companys decrease in
interest income as compared to 2007 was also impacted by the
fluctuations in the cash available for investment.
Prior to the spin-off transaction and in accordance with the
agreement and plan of distribution, TSYS agreed to pay a
one-time aggregate cash dividend of $600 million to all
TSYS shareholders, including Synovus. TSYS funded the dividend
through a combination of cash on hand and the use of a revolving
credit facility. Refer to Notes 13 and 25 in the
consolidated financial statements for further information on the
financing and the spin-off.
Interest expense for 2009 was $4.1 million, a decrease of
$7.2 million compared to $11.3 million in 2008, which
was an increase of $8.2 million compared to
$3.1 million in 2007. The decrease in interest expense in
2009 compared to 2008 is attributable to the changes in interest
rates. The increase in interest expense in 2008 compared to 2007
relates to the increased borrowings undertaken by the Company in
2007, primarily associated with paying the one-time special
dividend.
For the years ended December 31, 2009, 2008 and 2007, the
Company recorded a translation loss of approximately
$2.6 million and a translation gain of approximately
$10.5 million and $41,000, 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 in the
Companys statements of
19
income. As a result of these financing arrangements, the Company
recorded a foreign currency transactional gain on the
Companys financing for the years ended December 31,
2008 and 2007 of $2.2 million and $3.4 million,
respectively.
On October 31, 2008, the Company repaid its loan associated
with its International Services segment of
£33.0 million, or approximately $54.1 million,
which it obtained in August 2007. Refer to Note 13 in the
consolidated financial statements for more information on the
long-term financing arrangement.
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
(BPS). 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 loss of
approximately $2.6 million, a net translation gain of
approximately $8.3 million, and a net translation loss of
approximately $3.3 million for the years ended
December 31, 2009, 2008 and 2007, respectively, related to
the translation of foreign denominated balance sheet accounts,
most of which were cash.
The balance of the Companys foreign-denominated cash
accounts subject to risk of translation gains or losses at
December 31, 2009 was approximately $7.6 million, the
majority of which is denominated in Euros.
Income
Taxes
Income tax expense was $121.2 million, $131.8 million
and $143.7 million in 2009, 2008 and 2007, respectively,
representing effective income tax rates of 35.5%, 34.6% and
37.8%, respectively. The calculation of the effective tax rate
includes noncontrolling interest in consolidated
subsidiaries net income and equity in income of equity
investments in pretax income.
During 2009, the Company generated foreign net operating loss
benefits in excess of its utilization capacity based on both the
Companys current operations and with consideration of
future tax planning strategies. Additionally, the Company
reassessed its need for federal and state valuation allowances
based upon these same considerations. Accordingly, the Company
experienced a net decrease in its valuation allowance for
deferred income tax assets of $6.2 million.
TSYS has 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. As a result, TSYS now considers
foreign earnings related to these foreign operations to be
permanently reinvested.
In 2009, TSYS reassessed its contingencies for foreign, federal
and state exposures, which resulted in a net increase in tax
contingency amounts of approximately $0.6 million.
Equity in Income
of Equity Investments
TSYS share of income from its equity in equity investments
was $7.0 million, $7.4 million and $5.5 million
for 2009, 2008 and 2007, respectively. Refer to Note 11 in
the consolidated financial statements for more information on
equity investments.
(Loss) Income
from Discontinued Operations, net of tax
(Loss) Income from discontinued operations, net of tax contains
the operating results of TDM and the loss on the sale in 2009 of
TDM. Final adjustments related to the sale, if any, are expected
to be included in the financial results of 2010. Refer to
Note 2 in the consolidated financial statements for more
information on discontinued operations.
Net
Income
Net income decreased 13.9% to $215.2 million (basic and
diluted EPS of $1.09) in 2009, compared to 2008. In 2008, net
income increased 5.3% to $250.1 million (basic and diluted
EPS of $1.26), compared to $237.4 million (basic and
diluted EPS of $1.20) in 2007.
Non-GAAP Financial
Measures
Management evaluates the Companys operating performance
based upon operating and net profit margins excluding
reimbursable items, a non-generally accepted accounting
principles (GAAP) measure. TSYS also uses these non-GAAP
financial measures to evaluate and assess TSYS financial
performance against budget. TSYS believes that these non-GAAP
financial measures are important to enable investors to
understand and evaluate its ongoing operating results.
TSYS believes that these non-GAAP financial measures are
representative measures of comparative financial performance
that reflect the economic substance of TSYS current and
ongoing business operations. Although non-GAAP financial
measures are often used to measure TSYS operating results
and assess its financial performance, they are not necessarily
comparable to similarly titled captions of other companies due
to potential inconsistencies in the method of calculation.
20
TSYS believes that its use of these non-GAAP financial measures
provides investors with the same key financial performance
indicators that are utilized by management to assess TSYS
operating results, evaluate the business and make operational
decisions on a prospective, going-forward basis. Hence,
management provides disclosure of non-GAAP financial measures in
order to allow shareholders and potential investors an
opportunity to see TSYS as viewed by management, assess TSYS
with some of the same tools that management utilizes internally
and compare such information with prior periods.
Profit Margins
and Reimbursable Items
Management believes that operating and net profit margins
excluding reimbursable items are more useful because
reimbursable items do not impact profitability as the Company
receives reimbursement for expenses incurred on behalf of its
clients. TSYS believes that the presentation of GAAP financial
measures alone would not provide its shareholders and potential
investors with the ability to appropriately analyze its ongoing
operational results, and therefore expected future results. TSYS
therefore believes that inclusion of these non-GAAP financial
measures provides investors with more information to help them
better understand its financial statements just as management
utilizes these non-GAAP financial measures to better understand
the business, manage its budget and allocate its resources.
Below is the reconciliation between reported margins and
adjusted margins excluding reimbursable items for the years
ended December 31, 2009, 2008 and 2007:
|
||||||||||||
(in thousands) | 2009 | 2008 | 2007 | |||||||||
Operating income
|
$ | 342,033 | 368,675 | 349,135 | ||||||||
Net income attributable to TSYS
|
$ | 215,213 | 250,100 | 237,443 | ||||||||
Total revenues
|
$ | 1,688,062 | 1,721,646 | 1,662,450 | ||||||||
Less reimbursable items
|
270,178 | 264,892 | 273,594 | |||||||||
Revenues before reimbursable items
|
$ | 1,417,884 | 1,456,754 | 1,388,856 | ||||||||
Operating margin (as reported)
|
20.3 | % | 21.4 | % | 21.0 | % | ||||||
Net profit margin (as reported)
|
12.8 | % | 14.5 | % | 14.3 | % | ||||||
Adjusted operating margin
|
24.1 | % | 25.3 | % | 25.1 | % | ||||||
Adjusted net profit margin
|
15.2 | % | 17.2 | % | 17.1 | % | ||||||
Projected Outlook
for 2010
As compared to 2009, TSYS expects its 2010 net income to decline
by 15%-13% and expects 2010 total revenues to decline by 4%-2%,
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 Consolidated Statements of Cash Flows detail the
Companys cash flows from operating, investing and
financing activities. TSYS primary methods for funding its
operations and growth have been cash generated from current
operations, the use of leases and the occasional use of borrowed
funds to supplement financing of capital expenditures.
Cash Flows from
Operating Activities
Years Ended December 31, | ||||||||||||
(in thousands) | 2009 | 2008 | 2007 | |||||||||
Net income
|
$ | 219,176 | 251,676 | 239,419 | ||||||||
Depreciation and amortization
|
156,471 | 164,643 | 156,465 | |||||||||
Loss on disposal of subsidiary
|
5,713 | | | |||||||||
Other noncash items and charges, net
|
21,346 | 6,452 | (2,572 | ) | ||||||||
Dividends from equity investments
|
4,942 | 6,421 | 2,994 | |||||||||
Net change in current and other assets and current and other
liabilities
|
15,489 | (76,357 | ) | (61,444 | ) | |||||||
Net cash provided by operating activities
|
$ | 423,137 | 352,835 | 334,862 | ||||||||
TSYS main source of funds is derived from operating
activities, specifically net income. The increase in 2009, as
compared to 2008, 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. The increase in 2008,
as compared to 2007, in
21
net cash provided by operating activities was primarily the
result of increased earnings and other noncash items and charges.
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 and other liabilities. The change
in accounts receivable between the years is the result of timing
of collections compared to billings. The change in accounts
payable and other liabilities between years is the result of the
timing of payments, funding of performance-based incentives and
payments of vendor invoices.
During 2007, the Company recognized impairment charges on
property of $538,000 and contract acquisition costs of $620,000.
Refer to Notes 7, 8 and 9 in the consolidated financial
statements for more information on the impairment of developed
software, property and contract acquisition costs.
Dividends
Received from Equity Investments
Total cash dividends received from equity investments was
$4.9 million in 2009, compared to $6.4 million and
$3.0 million in 2008 and 2007, respectively.
Cash Flows from
Investing Activities
Years Ended December 31, | ||||||||||||
(in thousands) | 2009 | 2008 | 2007 | |||||||||
Purchases of property and equipment, net
|
$ | (34,017 | ) | (47,969 | ) | (55,274 | ) | |||||
Additions to licensed computer software from vendors
|
(20,059 | ) | (31,499 | ) | (33,382 | ) | ||||||
Additions to internally developed computer software
|
(31,445 | ) | (21,777 | ) | (17,785 | ) | ||||||
Proceeds from disposition, net of expenses paid and cash disposed
|
1,979 | | | |||||||||
Cash used in acquisitions and equity investments, net of cash
acquired
|
(294 | ) | (50,017 | ) | (12,552 | ) | ||||||
Subsidiary repurchase of noncontrolling interest
|
| (343 | ) | | ||||||||
Additions to contract acquisition costs
|
(35,596 | ) | (41,456 | ) | (22,740 | ) | ||||||
Net cash used in investing activities
|
$ | (119,432 | ) | (193,061 | ) | (141,733 | ) | |||||
The major uses of cash for investing activities in 2009 was for
additions to contract acquisition costs, equipment, licensed
computer software from vendors and internally developed
software. The major uses of cash for investing activities in
2008 was for the purchase of Infonox, the purchase of property
and equipment and additions to licensed computer software from
vendors. The major uses of cash for investing activities in 2007
was for the purchase of property and equipment and additions to
licensed computer software from vendors.
Property and
Equipment
Capital expenditures for property and equipment were
$34.0 million in 2009, compared to $48.0 million in
2008 and $55.3 million in 2007. The majority of capital
expenditures in 2009, 2008 and 2007 related to investments in
new computer processing hardware.
Licensed Computer
Software from Vendors
Expenditures for licensed computer software from vendors were
$20.1 million in 2009, compared to $31.5 million in
2008 and $33.4 million in 2007.
Internally
Developed Computer Software Costs
Additions to capitalized software development costs, including
enhancements to and development of processing systems, were
$31.4 million in 2009, $21.8 million in 2008 and
$17.8 million in 2007.
The Company remains committed to developing and enhancing its
processing solutions to expand its service offerings. In
addition to developing solutions, the Company has expanded its
service offerings through strategic acquisitions, such as
Infonox.
Cash Used in
Acquisitions
In 2008, TSYS acquired Infonox for an aggregate consideration of
approximately $50.6 million, with contingent payments over
the next three years of up to $25.0 million based on
performance. The Company has allocated approximately $29.1
million to goodwill. Refer to Note 24 in the consolidated
financial statements for more information on Infonox.
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 $35.6 million in 2009,
$41.5 million in 2008 and $22.8 million in 2007. The
Company made cash payments for processing rights of
$9.3 million, $20.1 million and $13.5 million in
2009, 2008 and 2007, respectively. Conversion cost additions
were $26.3 million, $21.4 million and
$9.3 million in 2009, 2008 and 2007, respectively. The
increase in the amount of conversion cost additions for 2008, as
compared to 2007, is the
22
result of capitalized costs related to conversions that occurred
during the year.
Cash Flows from
Financing Activities
(in thousands) | 2009 | 2008 | 2007 | |||||||||
Proceeds from borrowings of long-term debt
|
$ | 5,334 | 18,575 | 263,946 | ||||||||
Principal payments on long-term debt borrowings and capital
lease obligations
|
(18,869 | ) | (67,631 | ) | (4,816 | ) | ||||||
Dividends paid on common stock
|
(55,207 | ) | (55,449 | ) | (655,246 | ) | ||||||
Repurchase of common stock
|
(329 | ) | (35,698 | ) | | |||||||
Other
|
(227 | ) | 117 | 19,412 | ||||||||
Net cash used in financing activities
|
$ | (69,298 | ) | (140,086 | ) | (376,704 | ) | |||||
The major uses of cash for financing activities have been the
payment of dividends, principal payment on capital lease and
software obligations and the purchase of stock under the stock
repurchase plan as described below. The main source of cash from
financing activities has been the use of borrowed funds. Net
cash used in financing activities for the year ended
December 31, 2009 was $69.3 million primarily as a
result of payments of cash dividends. The Company used
$140.1 million in cash for financing activities for the
year ended December 31, 2008 primarily for payments on
long-term debt and capital lease obligations and the purchase of
common stock. Net cash used in financing activities for the year
ended December 31, 2007 was $376.7 million primarily
as a result of payments of cash dividends. Refer to Note 13
in the consolidated financial statements for more information on
the long-term debt financing. Refer to Note 25 in the
consolidated financial statements for more information on the
spin-off.
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 represented slightly more than five
percent of the shares of TSYS stock held by shareholders other
than Synovus. The shares may be purchased from time to time over
a two year period and will depend on various factors including
price, market conditions, acquisitions and the general financial
position of TSYS. Repurchased shares will 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.
During 2008, TSYS purchased 2.0 million shares of TSYS
common stock through open market transactions for an aggregate
purchase price of $35.7 million, or an average per share
price of $18.13. As of December 31, 2009, the Company has
approximately 6.9 million shares remaining that could be
repurchased under the stock repurchase plan.
Financing
In April 2009, the Company repaid its International
Services loan of £1.3 million, or approximately
$1.8 million, which it obtained in May 2008. Refer to
Note 13 in the consolidated financial statements for more
information on the note.
On October 31, 2008, the Company repaid its International
Services loan of £33.0 million, or approximately
$54.1 million, which it obtained in August 2007. Refer to
Note 13 in the consolidated financial statements for more
information on the long-term financing arrangement.
On October 30, 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 the London Interbank
Offered Rate (LIBOR) plus 80 basis points. The Company
initially made a draw 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. Refer to Note 13 in the
consolidated financial statements for more information on the
note.
In January 2008, the Company repaid its International
Services loan of $2.1 million that it acquired in
January 2007. Refer to Note 13 in the consolidated
financial statements for more information on the note.
In December 2007, TSYS entered into a credit agreement with Bank
of America N.A., Royal Bank of Scotland plc, and other lenders
which provides for a $252.0 million five year unsecured
revolving credit facility and a $168.0 million unsecured
term loan. The proceeds from the credit facility will be used
for working capital and other corporate purposes, including to
finance the repurchase by TSYS of its capital stock. Refer to
Note 13 in the consolidated financial statements for more
information on the long-term debt financing. As of
December 31, 2009, the Company has not drawn on the
$252.0 million credit facility.
In December 2007, the Company financed the purchase of
$22.0 million of mainframe and distributed system software
licenses with a note payable with the vendor. The term of the
note is 39 months and the interest rate is 3.95%. Refer to
Note 13 in the consolidated financial statements for
further information on long-term debt.
23
In connection with the formation of TSYS Managed Services, TSYS
and Merchants agreed to provide long-term financing to TSYS
Managed Services. Refer to Note 13 of the consolidated
financial statements for more information regarding the
long-term financing arrangement between TSYS Managed Services
and Merchants. At the end of December 2009, the balance of the
financing arrangement was approximately £504,000, or
approximately $804,000.
Dividends
Dividends on common stock of $55.2 million were paid in
2009, compared to $55.4 million and $655.2 million in
2008 and 2007, respectively.
In connection with the spin-off in December 2007, TSYS
shareholders received a special cash dividend of approximately
$3.03 per share.
Significant
Noncash Transactions
During 2009, 2008 and 2007, the Company issued 513,920, 697,911
and 241,260 shares of common stock, respectively, to
certain key employees and non-management members of its Board of
Directors under nonvested shares for services to be provided in
the future by such individuals. The market value of the common
stock at the date of issuance is amortized as compensation
expense over the vesting period of the awards.
Refer to Notes 16 and 23 in the consolidated financial
statements for more information on share-based compensation and
significant noncash transactions.
Additional Cash
Flow Information
Off-Balance Sheet
Financing
TSYS uses various operating leases in its normal course of
business. These off-balance sheet arrangements
obligate TSYS to make payments for computer equipment, software
and facilities. These computer and software lease commitments
may be replaced with new lease commitments due to new
technology. Management expects that, as these leases expire,
they will be evaluated and renewed or replaced by similar leases
based on need.
The following table summarizes future contractual cash
obligations, including lease payments and software arrangements,
as of December 31, 2009, for the next five years and
thereafter:
Contractual Cash Obligations |
||||||||||||||||||||
Payments Due By Period | ||||||||||||||||||||
1 Year |
2 - 3 |
4 - 5 |
After |
|||||||||||||||||
(in millions) | Total | or Less | Years | Years | 5 Years | |||||||||||||||
Operating leases
|
$ | 196.6 | 103.6 | 64.3 | 14.1 | 14.6 | ||||||||||||||
Debt obligations
|
199.4 | 7.0 | 192.4 | | | |||||||||||||||
Capital lease obligations
|
19.0 | 6.2 | 10.6 | 2.2 | | |||||||||||||||
Total contractual cash obligations
|
$ | 415.0 | 116.8 | 267.3 | 16.3 | 14.6 | ||||||||||||||
Income
Taxes
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), Accounting for Uncertainty
in Income Taxes, an Interpretation of FASB Statement
No. 109, at December 31, 2009 is
$5.0 million. Refer to Note 20 in the 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.
Foreign
Exchange
TSYS operates internationally and is subject to potentially
adverse movements in foreign currency exchange rates. TSYS has
not entered into foreign exchange forward contracts to reduce
its exposure to foreign currency rate changes. The Company
continues to analyze potential hedging instruments to safeguard
it from significant 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
24
bonds. However, there can be no assurance that funds will be
available on terms acceptable to TSYS. Management expects that
TSYS will continue to be able to fund a significant portion of
its capital expenditure needs through internally generated cash
in the future, as evidenced by TSYS current ratio of
3.7:1. At December 31, 2009, TSYS had working capital of
$590.1 million, compared to $389.4 million in 2008 and
$43.9 million in 2007.
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 these matters present loss
contingencies that TSYS determines to be both probable and
reasonably estimable.
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 belief
with respect to its percentage of market share of specified
markets; (ii) TSYS expectation that the loss of Bank
of America as a merchant services client will not have a
material adverse effect on TSYS; (iii) TSYS
expectation that it will be able to fund a significant portion
of its capital expenditure needs through internally generated
cash in the future; (iv) the Boards intention to
continue to pay cash dividends on TSYS stock;
(v) TSYS expected decline in revenues and net income
for 2010; (vi) TSYS belief with respect to
contractual commitments, lawsuits, claims and other complaints;
(vii) the expected financial impact of recent accounting
pronouncements; (viii) TSYS expectation with respect
to certain tax matters; (ix) TSYS expected
acquisition of 51% ownership of First National Merchants
Solutions, LLC; and the assumptions underlying such statements,
including, with respect to TSYS expected decline in net
income for 2010: (a) 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;
(b) anticipated levels in employment, technology and other
expenses, which are included in 2010 estimates, will be
accomplished; (c) there will be no significant movement in
foreign currency exchange rates related to TSYS business
during 2010; (d) 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; (e) there will be no deconversions of large
clients during the year other than as previously announced; and
(f) the economy will not worsen during 2010. In addition,
certain statements in future filings by TSYS with the Securities
and Exchange Commission, in press releases, and in oral and
written statements made by or with the approval of TSYS which
are not statements of historical fact constitute forward-looking
statements within the meaning of the Act. Examples of
forward-looking statements include, but are not limited to:
(i) projections of revenue, income or loss, earnings or
loss per share, the payment or nonpayment of dividends, capital
structure and other financial items; (ii) statements of
plans and objectives of TSYS or its management or Board of
Directors, including those relating to products or services;
(iii) statements of future economic performance; and
(iv) statements of assumptions underlying such statements.
Words such as believes, anticipates,
expects, intends, targeted,
estimates, projects, plans,
may, could, should,
would, and similar expressions are intended to
identify forward-looking statements but are not the exclusive
means of identifying these statements.
These statements are based upon the current beliefs and
expectations of TSYS management and are subject to
significant risks and uncertainties. Actual results may differ
materially from those contemplated by the forward-looking
statements. A number of important factors could cause actual
results to differ materially from those contemplated by 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 industry throughout 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 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; |
25
| adverse developments with respect to the credit card industry in general, including a decline in the use of credit 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 its 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.
Subsequent
Events
On March 1, 2010, TSYS signed an Investment Agreement with
First National Bank of Omaha of Omaha, Nebraska pursuant to
which the parties intend to enter into a joint venture
arrangement in connection with the expected 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 is the
name under which First National Bank of Omaha currently conducts
its merchant activities.
First National Merchant Solutions offers transaction processing,
merchant support and underwriting, as well as business and
value-added services, and has a 57-year history in the acquiring
industry. First National Merchant Solutions has more than
300,000 merchant outlets in its diverse portfolio.
26
Consolidated Balance
Sheets
December 31, | ||||||||
(in thousands, except per share data) | 2009 | 2008 | ||||||
Assets
|
||||||||
Current assets:
|
||||||||
Cash and cash equivalents (Note 5)
|
$ | 449,955 | 211,365 | |||||
Restricted cash
|
46,190 | 31,128 | ||||||
Accounts receivable, net of allowance for doubtful accounts and
billing adjustments of $6.8 million and $8.0 million
at 2009 and 2008, respectively
|
231,325 | 246,767 | ||||||
Deferred income tax assets (Note 20)
|
11,302 | 22,793 | ||||||
Prepaid expenses and other current assets (Note 6)
|
72,124 | 88,612 | ||||||
Current assets of discontinued operations
|
| 24,569 | ||||||
Total current assets
|
810,896 | 625,234 | ||||||
Property and equipment, net of accumulated depreciation and
amortization (Notes 7 and 22)
|
289,198 | 291,341 | ||||||
Computer software, net of accumulated amortization (Note 8)
|
197,134 | 202,038 | ||||||
Contract acquisition costs, net of accumulated amortization
(Note 9)
|
128,038 | 131,568 | ||||||
Goodwill (Note 10)
|
168,121 | 165,995 | ||||||
Equity investments (Note 11)
|
75,495 | 74,012 | ||||||
Other intangible assets, net of accumulated amortization
(Note 12)
|
14,132 | 17,452 | ||||||
Other assets
|
27,940 | 35,139 | ||||||
Long-term assets of discontinued operations
|
| 7,245 | ||||||
Total assets
|
$ | 1,710,954 | 1,550,024 | |||||
Liabilities
|
||||||||
Current liabilities:
|
||||||||
Accrued salaries and employee benefits
|
$ | 32,457 | 46,701 | |||||
Accounts payable
|
21,729 | 32,440 | ||||||
Current portion of long-term debt (Note 13)
|
6,988 | 8,575 | ||||||
Current portion of obligations under capital leases
(Note 13)
|
6,289 | 6,344 | ||||||
Other current liabilities (Note 14)
|
153,316 | 130,751 | ||||||
Current liabilities of discontinued operations
|
| 10,993 | ||||||
Total current liabilities
|
220,779 | 235,804 | ||||||
Long-term debt, excluding current portion (Note 13)
|
192,367 | 196,295 | ||||||
Deferred income tax liabilities (Note 20)
|
47,162 | 60,573 | ||||||
Obligations under capital leases, excluding current portion
(Note 13)
|
12,756 | 13,576 | ||||||
Other long-term liabilities
|
48,443 | 40,709 | ||||||
Long-term liabilities of discontinued operations
|
| 2,217 | ||||||
Total liabilities
|
521,507 | 549,174 | ||||||
Equity
|
||||||||
Shareholders equity (Notes 15, 16, 17 and 18):
|
||||||||
Common stock $0.10 par value. Authorized
600,000 shares; 200,860 and 200,354 issued at 2009 and
2008, respectively; 197,180 and 196,702 outstanding at 2009 and
2008, respectively
|
20,086 | 20,036 | ||||||
Additional paid-in capital
|
139,742 | 126,889 | ||||||
Accumulated other comprehensive income (loss), net
|
5,673 | (6,627 | ) | |||||
Treasury stock (shares of 3,680 and 3,652 at 2009 and 2008,
respectively)
|
(69,950 | ) | (69,641 | ) | ||||
Retained earnings
|
1,080,250 | 920,292 | ||||||
Total shareholders equity
|
1,175,801 | 990,949 | ||||||
Noncontrolling interests in consolidated subsidiaries
|
13,646 | 9,901 | ||||||
Total equity
|
1,189,447 | 1,000,850 | ||||||
Commitments and contingencies (Note 19)
|
||||||||
Total liabilities and equity
|
$ | 1,710,954 | 1,550,024 | |||||
See accompanying Notes to Consolidated Financial Statements
27
Consolidated
Statements of Income
Years Ended December 31, | ||||||||||||
(in thousands, except per share data) | 2009 | 2008 | 2007 | |||||||||
Revenues:
|
||||||||||||
Electronic payment processing services (includes
$5.6 million from related parties for 2007)
|
$ | 946,298 | 995,430 | 959,836 | ||||||||
Merchant services
|
277,434 | 261,537 | 267,844 | |||||||||
Other services (includes $9.0 million from related parties
for 2007)
|
194,152 | 199,787 | 161,176 | |||||||||
Reimbursable items (includes $2.5 million from related
parties for 2007)
|
270,178 | 264,892 | 273,594 | |||||||||
Total revenues (Notes 4 and 22)
|
1,688,062 | 1,721,646 | 1,662,450 | |||||||||
Expenses:
|
||||||||||||
Salaries and other personnel expenses (Notes 16 and 21)
|
581,650 | 586,295 | 559,336 | |||||||||
Net technology and facilities expenses
|
301,820 | 297,265 | 270,553 | |||||||||
Spin-related expenses (Note 25)
|
| 11,140 | 13,526 | |||||||||
Other operating expenses (includes $9.5 million to related
parties for 2007)
|
192,381 | 193,379 | 196,306 | |||||||||
Reimbursable items
|
270,178 | 264,892 | 273,594 | |||||||||
Total expenses (Note 4)
|
1,346,029 | 1,352,971 | 1,313,315 | |||||||||
Operating income
|
342,033 | 368,675 | 349,135 | |||||||||
Nonoperating (expenses) income (includes $16.5 million from
related parties for 2007) (Note 4)
|
(3,441 | ) | 5,772 | 24,009 | ||||||||
Income from continuing operations before income taxes and equity
in income of equity investments
|
338,592 | 374,447 | 373,144 | |||||||||
Income taxes (Note 20)
|
121,238 | 131,206 | 142,070 | |||||||||
Income from continuing operations before equity in income of
equity investments
|
217,354 | 243,241 | 231,074 | |||||||||
Equity in income of equity investments (Note 11)
|
6,985 | 7,397 | 5,516 | |||||||||
Income from continuing operations, net of tax
|
224,339 | 250,638 | 236,590 | |||||||||
(Loss) income from discontinued operations, net of tax
|
(5,163 | ) | 1,038 | 2,829 | ||||||||
Net income
|
219,176 | 251,676 | 239,419 | |||||||||
Net income attributable to noncontrolling interests
|
(3,963 | ) | (1,576 | ) | (1,976 | ) | ||||||
Net income attributable to TSYS
|
$ | 215,213 | 250,100 | 237,443 | ||||||||
Basic earnings per share (EPS)* (Note 27):
|
||||||||||||
Income from continuing operations
|
$ | 1.12 | 1.26 | 1.19 | ||||||||
(Loss) income from discontinued operations
|
(0.03 | ) | 0.01 | 0.01 | ||||||||
Net income
|
$ | 1.09 | 1.26 | 1.20 | ||||||||
Diluted EPS*:
|
||||||||||||
Income from continuing operations
|
$ | 1.12 | 1.26 | 1.19 | ||||||||
(Loss) income from discontinued operations
|
(0.03 | ) | 0.01 | 0.01 | ||||||||
Net income
|
$ | 1.09 | 1.26 | 1.20 | ||||||||
Amounts attributable to TSYS common shareholders:
|
||||||||||||
Income from continuing operations, net of tax
|
$ | 220,376 | 249,062 | 234,614 | ||||||||
(Loss) income from discontinued operations, net of tax
|
(5,163 | ) | 1,038 | 2,829 | ||||||||
Net income
|
$ | 215,213 | 250,100 | 237,443 | ||||||||
* | Note: Basic and diluted EPS amounts for continuing operations and net income may not total due to rounding. |
See accompanying Notes to Consolidated Financial Statements
28
Consolidated
Statements of Cash Flows
Years Ended December 31, | ||||||||||||
(in thousands) | 2009 | 2008 | 2007 | |||||||||
Cash flows from operating activities:
|
||||||||||||
Net income
|
$ | 219,176 | 251,676 | 239,419 | ||||||||
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||||||
Net loss (gain) on foreign currency translation
|
2,607 | (10,481 | ) | (41 | ) | |||||||
Equity in income of equity investments, net of tax
|
(6,985 | ) | (7,397 | ) | (5,516 | ) | ||||||
Dividends received from equity investments (Note 4)
|
4,942 | 6,421 | 2,994 | |||||||||
Share-based compensation
|
16,128 | 24,733 | 18,620 | |||||||||
Excess tax benefit from share-based payment arrangements
|
(6 | ) | (90 | ) | (8,507 | ) | ||||||
Depreciation and amortization
|
156,471 | 164,643 | 156,465 | |||||||||
Amortization of debt issuance costs
|
154 | 154 | | |||||||||
Asset impairments
|
| | 1,158 | |||||||||
Provisions for bad debt expenses and billing adjustments
|
6,381 | 618 | 1,231 | |||||||||
Charges for transaction processing provisions
|
6,556 | 3,172 | 35 | |||||||||
Deferred income tax (benefit) expense
|
(3,864 | ) | (4,439 | ) | (10,052 | ) | ||||||
Loss on disposal of equipment, net
|
375 | 182 | 500 | |||||||||
Loss on disposal of subsidiary
|
5,713 | | | |||||||||
Changes in operating assets and liabilities:
|
||||||||||||
Accounts receivable
|
10,807 | (15,490 | ) | (10,796 | ) | |||||||
Prepaid expenses, other current assets and other assets
|
27,893 | (48,024 | ) | (14,870 | ) | |||||||
Accounts payable
|
(11,883 | ) | 4,550 | 10,080 | ||||||||
Accrued salaries and employee benefits
|
(11,697 | ) | (25,267 | ) | 4,445 | |||||||
Other current liabilities and other liabilities
|
369 | 7,874 | (50,303 | ) | ||||||||
Net cash provided by operating activities
|
423,137 | 352,835 | 334,862 | |||||||||
Cash flows from investing activities:
|
||||||||||||
Purchases of property and equipment, net
|
(34,017 | ) | (47,969 | ) | (55,274 | ) | ||||||
Additions to licensed computer software from vendors
|
(20,059 | ) | (31,499 | ) | (33,382 | ) | ||||||
Additions to internally developed computer software
|
(31,445 | ) | (21,777 | ) | (17,785 | ) | ||||||
Proceeds from disposition, net of expenses paid and cash disposed
|
1,979 | | | |||||||||
Cash used in acquisitions and equity investments, net of cash
acquired
|
(294 | ) | (50,017 | ) | (12,552 | ) | ||||||
Subsidiary repurchase of minority interest
|
| (343 | ) | | ||||||||
Additions to contract acquisition costs
|
(35,596 | ) | (41,456 | ) | (22,740 | ) | ||||||
Net cash used in investing activities
|
(119,432 | ) | (193,061 | ) | (141,733 | ) | ||||||
Cash flows from financing activities:
|
||||||||||||
Proceeds from borrowings
|
5,334 | 18,575 | 263,946 | |||||||||
Excess tax benefit from share-based payment arrangements
|
6 | 90 | 8,507 | |||||||||
Principal payments on long-term debt borrowings and capital
lease obligations
|
(18,869 | ) | (67,631 | ) | (4,816 | ) | ||||||
Dividends paid on common stock (includes $528.4 million to
a related party for 2007) (Note 4)
|
(55,208 | ) | (55,449 | ) | (655,246 | ) | ||||||
Subsidiary dividends paid to noncontrolling shareholders
|
(235 | ) | (241 | ) | | |||||||
Proceeds from exercise of stock options
|
2 | 268 | 11,672 | |||||||||
Debt issuance costs
|
| | (767 | ) | ||||||||
Repurchases of common stock
|
(328 | ) | (35,698 | ) | | |||||||
Net cash used in financing activities
|
(69,298 | ) | (140,086 | ) | (376,704 | ) | ||||||
Cash and cash equivalents:
|
||||||||||||
Effect of exchange rate changes on cash and cash equivalents
|
(4,470 | ) | (10,188 | ) | 4,970 | |||||||
Net increase (decrease) in cash and cash equivalents
|
229,937 | 9,500 | (178,605 | ) | ||||||||
Cash and cash equivalents at beginning of year
|
220,018 | 210,518 | 389,123 | |||||||||
Cash and cash equivalents at end of year
|
$ | 449,955 | 220,018 | 210,518 | ||||||||
Supplemental cash flow information:
|
||||||||||||
Cash paid for interest
|
$ | 3,368 | 11,299 | 2,670 | ||||||||
Cash paid for income taxes, net of refunds
|
$ | 104,004 | 151,165 | 176,141 | ||||||||
Significant noncash transactions (Note 23)
|
See accompanying Notes to Consolidated Financial Statements
29
Consolidated
Statements of Equity and
Comprehensive Income
Comprehensive Income
TSYS Shareholders | ||||||||||||||||||||||||||||||||
Accumulated |
||||||||||||||||||||||||||||||||
Additional |
Other |
|||||||||||||||||||||||||||||||
Common Stock |
Paid-In |
Comprehensive |
Treasury |
Retained |
Noncontrolling |
Total |
||||||||||||||||||||||||||
(in thousands, except per share data) | Shares | Dollars | Capital | Income (Loss) | Stock | Earnings | Interests | Equity | ||||||||||||||||||||||||
Balance as of December 31, 2006
|
198,676 | $ | 19,868 | $ | 66,677 | $ | 20,641 | $ | (35,233 | ) | $ | 1,145,407 | $ | 6,229 | $ | 1,223,589 | ||||||||||||||||
Cumulative effect of adoption of FIN 48 (Note 20)
|
| | | | | (1,969 | ) | (1,969 | ) | |||||||||||||||||||||||
Comprehensive income:
|
||||||||||||||||||||||||||||||||
Net income
|
| | | | | 237,443 | 1,976 | 239,419 | ||||||||||||||||||||||||
Other comprehensive income, net of tax (Note 18):
|
||||||||||||||||||||||||||||||||
Foreign currency translation
|
| | | 7,632 | | | 375 | 8,007 | ||||||||||||||||||||||||
Change in accumulated OCI related to postretirement healthcare
plans
|
| | | 49 | | | | 49 | ||||||||||||||||||||||||
Other comprehensive income
|
8,056 | |||||||||||||||||||||||||||||||
Comprehensive income
|
247,475 | |||||||||||||||||||||||||||||||
Common stock issued from treasury shares for exercise of stock
options (Note 17)
|
| | 314 | | 1,095 | | | 1,409 | ||||||||||||||||||||||||
Common stock issued for exercise of stock options (Note 16)
|
752 | 75 | 10,188 | | | | | 10,263 | ||||||||||||||||||||||||
Common stock issued for nonvested awards (Note 16)
|
225 | 22 | (22 | ) | | | | | | |||||||||||||||||||||||
Common stock issued under commitment to charitable foundation
|
7 | 1 | 99 | | | | | 100 | ||||||||||||||||||||||||
Difference in carrying value of asset transferred from related
party
|
| | 371 | | | | | 371 | ||||||||||||||||||||||||
Share-based compensation (Note 16)
|
| | 18,430 | | | | | 18,430 | ||||||||||||||||||||||||
Cash dividends declared ($3.31 per share)
|
| | | | | (655,320 | ) | | (655,320 | ) | ||||||||||||||||||||||
Tax benefits associated with share based payment arrangements
|
| | 8,705 | | | | | 8,705 | ||||||||||||||||||||||||
Balance as of December 31, 2007
|
199,660 | 19,966 | 104,762 | 28,322 | (34,138 | ) | 725,561 | 8,580 | 853,053 | |||||||||||||||||||||||
Comprehensive income:
|
||||||||||||||||||||||||||||||||
Net income
|
| | | | | 250,100 | 1,576 | 251,676 | ||||||||||||||||||||||||
Other comprehensive (loss) income, net of tax (Note 18):
|
||||||||||||||||||||||||||||||||
Foreign currency translation
|
| | | (35,060 | ) | | | (255 | ) | (35,315 | ) | |||||||||||||||||||||
Change in accumulated OCI related to postretirement healthcare
plans
|
| | | 111 | | | | 111 | ||||||||||||||||||||||||
Other comprehensive (loss) income
|
(35,204 | ) | ||||||||||||||||||||||||||||||
Comprehensive income
|
216,472 | |||||||||||||||||||||||||||||||
Common stock issued from treasury shares for exercise of stock
options (Note 17)
|
| | 30 | | 195 | | | 225 | ||||||||||||||||||||||||
Common stock issued for exercise of stock options (Note 16)
|
2 | 1 | 42 | | | | | 43 | ||||||||||||||||||||||||
Common stock issued for nonvested awards (Note 16)
|
692 | 69 | (69 | ) | | | | | | |||||||||||||||||||||||
Share-based compensation (Note 16)
|
| | 24,584 | | | | | 24,584 | ||||||||||||||||||||||||
Cash dividends declared ($0.28 per share)
|
| | | | | (55,369 | ) | | (55,369 | ) | ||||||||||||||||||||||
Purchase of treasury shares (Note 17)
|
| | | | (35,698 | ) | | | (35,698 | ) | ||||||||||||||||||||||
Pre-spin tax benefits adjustment
|
| | (1,820 | ) | | | | | (1,820 | ) | ||||||||||||||||||||||
Tax shortfalls associated with share based payment arrangements
|
| | (640 | ) | | | | | (640 | ) | ||||||||||||||||||||||
Balance as of December 31, 2008
|
200,354 | 20,036 | 126,889 | (6,627 | ) | (69,641 | ) | 920,292 | 9,901 | 1,000,850 | ||||||||||||||||||||||
Comprehensive income:
|
||||||||||||||||||||||||||||||||
Net income
|
| | | | | 215,213 | 3,963 | 219,176 | ||||||||||||||||||||||||
Other comprehensive (loss) income, net of tax
(Note 18):
|
||||||||||||||||||||||||||||||||
Foreign currency translation
|
| | | 12,145 | | | (218 | ) | 11,927 | |||||||||||||||||||||||
Change in accumulated OCI related to postretirement
healthcare plans
|
| | | 155 | | | | 155 | ||||||||||||||||||||||||
Other comprehensive income
|
12,082 | |||||||||||||||||||||||||||||||
Comprehensive income
|
231,258 | |||||||||||||||||||||||||||||||
Common stock issued from treasury shares for exercise of
stock options (Note 17)
|
| | (17 | ) | | 19 | | | 2 | |||||||||||||||||||||||
Common stock issued for nonvested awards (Note 16)
|
506 | 50 | (50 | ) | | | | | | |||||||||||||||||||||||
Share-based compensation (Note 16)
|
| | 16,225 | | | | | 16,225 | ||||||||||||||||||||||||
Cash dividends declared ($0.28 per share)
|
| | | | | (55,255 | ) | | (55,255 | ) | ||||||||||||||||||||||
Purchase of treasury shares (Note 17)
|
| | | | (328 | ) | | | (328 | ) | ||||||||||||||||||||||
Tax shortfalls associated with share based payment
arrangements
|
| | (3,305 | ) | | | | | (3,305 | ) | ||||||||||||||||||||||
Balance as of December 31, 2009
|
200,860 | $ | 20,086 | $ | 139,742 | $ | 5,673 | $ | (69,950 | ) | $ | 1,080,250 | $ | 13,646 | $ | 1,189,447 | ||||||||||||||||
See accompanying Notes to Consolidated Financial Statements
30
Notes to
Consolidated Financial Statements
NOTE 1 | Basis of Presentation and Summary of Significant Accounting Policies |
BUSINESS: Total System Services, Inc. (TSYS or
the Company) provides electronic payment processing, merchant
services and related services to financial and nonfinancial
institutions. The Companys services are provided through
the Companys three 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.
As a result of the sale of TSYS Total Debt Management, Inc.
(TDM), as discussed in Note 2, the Companys financial
statements reflect TDM as discontinued operations. The Company
segregated the net assets, net liabilities and operating results
from continuing operations in the Consolidated Balance Sheets
and Consolidated Statements of Income for all periods presented.
PRINCIPLES OF CONSOLIDATION AND BASIS OF
PRESENTATION: The accompanying consolidated
financial statements of Total System Services, Inc. include the
accounts of TSYS and its majority owned subsidiaries. All
significant intercompany accounts and transactions have been
eliminated in consolidation. In addition, the Company evaluates
its relationships with other entities to identify whether they
are variable interest entities as defined in accordance with the
provisions of Accounting Standards Codification (ASC) 810,
Consolidation, previously referred to as the
Financial Accounting Standards Boards (FASBs)
Interpretation No. 46(R), Consolidation of
Variable Interest Entities, and to assess whether it
is the primary beneficiary of such entities. If the
determination is made that the Company is the primary
beneficiary, then that entity is included in the consolidated
financial statements in accordance with ASC 810.
RISKS AND UNCERTAINTIES AND USE OF
ESTIMATES: Factors that could affect the
Companys future operating results and cause actual results
to vary materially from expectations include, but are not
limited to, lower than anticipated growth from existing clients,
an inability to attract new clients and grow internationally,
loss of a major customer or other significant client, loss of a
major supplier, an inability to grow through acquisitions or
successfully integrate acquisitions, an inability to control
expenses, technology changes, the impact of the application of
and/or
changes in accounting principles, financial services
consolidation, changes in regulatory requirements, a decline in
the use of cards as a payment mechanism, disruption of the
Companys international operations, breach of the
Companys security systems, a decline in the financial
stability of the Companys clients and uncertain economic
conditions. Negative developments in these or other risk factors
could have a material adverse effect on the Companys
financial position, results of operations and cash flows.
The Company has prepared the accompanying consolidated financial
statements 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.
CASH EQUIVALENTS: Investments with a maturity
of three months or less when purchased are considered to be cash
equivalents.
RESTRICTED CASH: Restricted cash balances
relate to cash balances collected on behalf of customers and
held in escrow. TSYS records a corresponding liability for the
obligation to the customer which is reflected in other current
liabilities in the accompanying consolidated balance sheets.
ACCOUNTS RECEIVABLE: Accounts receivable
balances are stated net of allowances for doubtful accounts and
billing adjustments of $6.8 million and $8.0 million
at December 31, 2009 and December 31, 2008,
respectively.
TSYS records an allowance for doubtful accounts when it is
probable that the accounts receivable balance will not be
collected. When estimating the allowance for doubtful accounts,
the Company takes into consideration such factors as its
day-to-day
knowledge of the financial position of specific clients, the
industry and size of its clients, the overall composition of its
accounts receivable aging, prior history with specific customers
of accounts receivable write-offs and prior experience of
allowances in proportion to the overall receivable balance. This
analysis includes an ongoing and continuous communication with
its largest clients and those clients with past due balances. A
financial decline of any one of the Companys large clients
could have a material adverse effect on collectibility of
31
receivables and thus the adequacy of the allowance for doubtful
accounts.
Increases in the allowance for doubtful accounts are recorded as
charges to bad debt expense and are reflected in other operating
expenses in the Companys consolidated statements of
income. Write-offs of uncollectible accounts are charged against
the allowance for doubtful accounts.
TSYS records an allowance for billing adjustments for actual and
potential billing discrepancies. When estimating the allowance
for billing adjustments, the Company considers its overall
history of billing adjustments, as well as its history with
specific clients and known disputes. Increases in the allowance
for billing adjustments are recorded as a reduction of revenues
in the Companys consolidated statements of income and
actual adjustments to invoices are charged against the allowance
for billing adjustments.
PROPERTY AND EQUIPMENT: Property and equipment
are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed using
the straight-line method over the estimated useful lives of the
assets. Buildings and improvements are depreciated over
estimated useful lives of 5-40 years, computer and other
equipment over estimated useful lives of 2-5 years, and
furniture and other equipment over estimated useful lives of
3-15 years. The Company evaluates impairment losses on
long-lived assets used in operations in accordance with the
provisions of ASC 205, Presentation of Financial
Statements, previously referred to as Statement of
Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets.
All ordinary repairs and maintenance costs are expensed as
incurred. Maintenance costs that extend the asset life are
capitalized and amortized over the remaining estimated life of
the asset.
LICENSED COMPUTER SOFTWARE: The Company
licenses software that is used in providing electronic payment
processing, merchant services and other services to clients.
Licensed software is obtained through perpetual licenses and
site licenses and through agreements based on processing
capacity (called MIPS agreements). Perpetual and
site licenses are amortized using the straight-line method over
their estimated useful lives which range from three to five
years. Software licensed under MIPS agreements is amortized
using a
units-of-production
basis over the estimated useful life of the software, generally
not to exceed ten years. At each balance sheet date, the Company
evaluates impairment losses on long-lived assets used in
operations in accordance with ASC 205.
ACQUISITION TECHNOLOGY INTANGIBLES: These
identifiable intangible assets are software technology assets
resulting from acquisitions. These assets are amortized using
the straight-line method over periods not exceeding their
estimated useful lives, which range from five to nine years. The
provisions of ASC 350, Intangibles Goodwill
and Other, previously referred as
SFAS No. 142, Goodwill and Other Intangible
Assets, require that intangible assets with estimated
useful lives be amortized over their respective estimated useful
lives to their residual values, and reviewed for impairment in
accordance with ASC 205. Acquisition technology intangibles net
book values are included in computer software, net in the
accompanying balance sheets. Amortization expenses are charged
to net technology and facilities expenses in the Companys
consolidated statements of income.
SOFTWARE DEVELOPMENT COSTS: In accordance with
the provisions of ASC 985, Software,
previously referred to as SFAS No. 86,
Computer Software to be Sold, Leased or Otherwise
Marketed, software development costs are capitalized
once technological feasibility of the software product has been
established. Costs incurred prior to establishing technological
feasibility are expensed as incurred. Technological feasibility
is established when the Company has completed a detailed program
design and has determined that a product can be produced to meet
its design specifications, including functions, features and
technical performance requirements. Capitalization of costs
ceases when the product is generally available to clients. At
each balance sheet date, the Company evaluates the unamortized
capitalized costs of software development as compared to the net
realizable value of the software product which is determined by
future undiscounted net cash flows. The amount by which the
unamortized software development costs exceed the net realizable
value is written off in the period that such determination is
made. Software development costs are amortized using the greater
of (1) the straight-line method over its estimated useful
life, which ranges from three to ten years or (2) the ratio
of current revenues to total anticipated revenue over its useful
life.
The Company also develops software that is used internally.
These software development costs are capitalized based upon the
provisions of ASC 350, previously referred to as
Statement of Position (SOP) No.
98-1,
Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use. Internal-use software
development costs are capitalized once (1) the preliminary
project stage is completed, (2) management authorizes and
commits to funding a computer software project, and (3) it
is probable that the project will be completed and the software
will be used to perform the function intended. Costs incurred
prior to meeting the qualifications are expensed as incurred.
Capitalization of costs ceases when the project is substantially
complete and ready for its intended use. Internal-use software
development costs are amortized using an estimated useful life
of three to five years. Software development costs may become
impaired in situations where development efforts are abandoned
due to the viability of the planned project becoming doubtful or
due to technological obsolescence of the planned software
product.
CONTRACT ACQUISITION COSTS: The Company
capitalizes contract acquisition costs related to signing or
renewing long-term contracts. The Company capitalizes internal
conversion costs in accordance with the provisions of Staff
Accounting Bulletin (SAB) No. 104, Revenue
Recognition and ASC 605, Revenue
Recognition, previously referred to as FASB Technical
Bulletin No. 90-1,
Accounting for Separately Priced Extended Warranty and
Product Maintenance Contracts. The capitalization of
costs related to cash payments for rights to provide processing
services is capitalized in accordance with the provisions of ASC
605, previously referred to as the FASBs Emerging Issues
Task Force (EITF)
No. 01-9,
Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendors Products).
All costs incurred prior to a signed agreement are expensed
as incurred.
Contract acquisition costs are amortized using the straight-line
method over the expected customer relationship (contract term)
32
beginning when the clients cardholder accounts are
converted and producing revenues. The amortization of contract
acquisition costs associated with cash payments is included as a
reduction of revenues in the Companys consolidated
statements of income. The amortization of contract acquisition
costs associated with conversion activity is recorded as other
operating expenses in the Companys consolidated statements
of income.
The Company evaluates the carrying value of contract acquisition
costs associated with each customer for impairment on the basis
of whether these costs are fully recoverable from either
contractual minimum fees (contractual costs) or from expected
undiscounted net operating cash flows of the related contract
(cash incentives paid). The determination of expected
undiscounted net operating cash flows requires management to
make estimates. These costs may become impaired with the loss of
a contract, the financial decline of a client, termination of
conversion efforts after a contract is signed, diminished
prospects for current clients or if the Companys actual
results differ from its estimates of future cash flows. The
amount of the impairment is written off in the period that such
a determination is made.
EQUITY INVESTMENTS: TSYS 49% investment
in Total System Services de México, S.A. de C.V. (TSYS de
México), an electronic payment processing support operation
located in Mexico, is accounted for using the equity method of
accounting, as is TSYS 44.56% investment in China UnionPay
Data Co., Ltd. (CUP Data) headquartered in Shanghai, China.
TSYS equity investments are recorded initially at cost and
subsequently adjusted for equity in earnings, cash contributions
and distributions, and foreign currency translation adjustments.
GOODWILL: Goodwill results from the excess of
cost over the fair value of net assets of businesses acquired.
Goodwill and intangible assets with indefinite useful lives are
tested for impairment at least annually in accordance with the
provisions of ASC 350. ASC 350 also requires that intangible
assets with estimable useful lives be amortized over their
respective estimated useful lives to their estimated residual
values, and reviewed for impairment in accordance with ASC 205.
The portion of the difference between the cost of an investment
and the amount of underlying equity in net assets of an equity
method investee that is recognized as goodwill in accordance
with the provisions of ASC 323, Investments
Equity Method and Joint Ventures, previously referred
to as Accounting Principles Board (APB) Opinion No. 18,
The Equity Method of Accounting for Investments in
Common Stock, shall not be amortized. However, equity
method goodwill shall not be reviewed for impairment in
accordance with ASC 350, but instead should continue to be
reviewed for impairment in accordance with paragraph 19(h)
of ASC 323. Equity method goodwill, which is not reported as
goodwill in the Companys consolidated balance sheet, but
is reported as a component of the equity investment, was
$47.0 million at December 31, 2009.
At December 31, 2009, the Company had unamortized goodwill
in the amount of $168.1 million. The Company performed its
annual impairment analyses of its unamortized goodwill balance,
and this test did not indicate any impairment for the periods
ended December 31, 2009, 2008 and 2007, respectively.
OTHER INTANGIBLE ASSETS: Identifiable
intangible assets relate primarily to customer relationships,
covenants-not-to-compete and trade names resulting from
acquisitions. These identifiable intangible assets are amortized
using the straight-line method over periods not exceeding the
estimated useful lives, which range from three to ten years. ASC
350 requires that intangible assets with estimable useful lives
be amortized over their respective estimated useful lives to
their estimated residual values, and reviewed for impairment in
accordance with ASC 205. Amortization expenses are charged to
other operating expenses in the Companys consolidated
statements of income.
FAIR VALUES OF FINANCIAL INSTRUMENTS: The
Company uses financial instruments in the normal course of its
business. The carrying values of cash equivalents, accounts
receivable, accounts payable, accrued salaries and employee
benefits, and other current liabilities approximate their fair
value due to the short-term maturities of these assets and
liabilities. The fair value of the Companys long-term debt
and obligations under capital leases is not significantly
different from its carrying value.
Investments in equity investments are accounted for using the
equity method of accounting and pertain to privately held
companies for which fair value is not readily available. The
Company believes the fair values of its investments in equity
investments exceed their respective carrying values.
IMPAIRMENT OF LONG-LIVED ASSETS: In accordance
with ASC 205, the Company reviews long-lived assets, such as
property and equipment and intangibles subject to amortization,
including contract acquisition costs and certain computer
software, for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset
to estimated undiscounted future cash flows expected to be
generated by the asset. If the carrying amount of an asset
exceeds its estimated undiscounted future cash flows, an
impairment charge is recognized by the amount by which the
carrying amount of the asset exceeds the fair value of the
asset. Assets to be disposed of would be separately presented in
the balance sheet and reported at the lower of the carrying
amount or fair value less costs to sell, and would no longer be
depreciated. The assets and liabilities of a disposed group
classified as held for sale would be presented separately in the
appropriate asset and liability sections of the balance sheet.
TRANSACTION PROCESSING PROVISIONS: The Company
has recorded an accrual for contract contingencies (performance
penalties) and processing errors. A significant number of the
Companys contracts with large clients contain service
level agreements which can result in TSYS incurring performance
penalties if contractually required service levels are not met.
When providing for these accruals, the Company takes into
consideration such
33
factors as the prior history of performance penalties and
processing errors incurred, actual contractual penalties
inherent in the Companys contracts, progress towards
milestones and known processing errors not covered by insurance.
These accruals are included in other current liabilities in the
accompanying consolidated balance sheets. Increases and
decreases in transaction processing provisions are charged to
other operating expenses in the Companys consolidated
statements of income, and payments or credits for performance
penalties and processing errors are charged against the accrual.
NONCONTROLLING INTEREST: In December 2007, the
FASB issued authoritative guidance under ASC 810,
Consolidation, previously referred to as
SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - an amendment of
ARB No. 51. ASC 810 changes the accounting for
noncontrolling (minority) interests in consolidated financial
statements, including the requirements to classify
noncontrolling interests as a component of consolidated
shareholders equity, the elimination of minority
interest accounting in results of operations and changes
in the accounting for both increases and decreases in a
parents controlling ownership interest.
Noncontrolling interest in earnings of subsidiaries represents
the minority shareholders share of the net income or loss
of GP Net and TSYS Managed Services EMEA Ltd. (TSYS Managed
Services). The noncontrolling interest in the consolidated
balance sheet reflects the original investment by these
shareholders in GP Net and TSYS Managed Services, their
proportional share of the earnings or losses and their
proportional share of net gains or losses resulting from the
currency translation of assets and liabilities of GP Net and
TSYS Managed Services. TSYS has adopted the accounting policy to
recognize gains or losses on equity transactions of a subsidiary
as a capital transaction.
FOREIGN CURRENCY TRANSLATION: The Company
maintains several different foreign operations whose functional
currency is their local currency. Foreign currency financial
statements of the Companys Mexican and Chinese equity
investments, the Companys wholly owned subsidiaries and
the Companys majority owned subsidiaries, as well as the
Companys division and branches in the United Kingdom and
China, 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 rates for each
reporting period. Net gains or losses resulting from the
currency translation of assets and liabilities of the
Companys foreign operations, net of tax when applicable,
are accumulated in a separate section of shareholders
equity titled accumulated other comprehensive income (loss).
Gains and losses on transactions denominated in currencies other
than the functional currencies are included in determining net
income for the period in which exchange rates change.
COMPREHENSIVE INCOME: The provisions of ASC
220, Comprehensive Income, previously
referred to as SFAS No. 130, Reporting
Comprehensive Income, require companies to display,
with the same prominence as other financial statements, the
components of comprehensive income (loss). TSYS displays the
items of other comprehensive income (loss) in its consolidated
statements of equity and comprehensive income.
TREASURY STOCK: The Company uses the cost
method when it purchases its own common stock as treasury shares
or issues treasury stock upon option exercises and displays
treasury stock as a reduction of shareholders equity.
DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES: In June 1998, the FASB issued
authoritative guidance under ASC 815, Derivatives and
Hedging, previously referred to as
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. In June 2000, the
FASB issued authoritative guidance under ASC 815, previously
referred to as SFAS No. 138, Accounting for
Certain Derivative Instruments and Hedging Activities, an
amendment of SFAS No. 133. ASC 815 requires
that all derivative instruments be recorded on the balance sheet
at their respective fair values. The Company did not have any
outstanding derivative instruments or hedging transactions at
December 31, 2009.
REVENUE RECOGNITION: The Companys
electronic payment processing services revenues are derived from
long-term processing contracts with financial and nonfinancial
institutions and are generally recognized as the services are
performed. Electronic payment processing services revenues are
generated primarily from charges based on the number of accounts
on file, transactions and authorizations processed, statements
mailed, cards embossed and mailed and other processing services
for cardholder accounts on file. Most of these contracts have
prescribed annual revenue minimums. Processing contracts
generally range from three to ten years in length and provide
for penalties for early termination.
The Companys merchant services revenues are derived from
long-term processing contracts with large financial institutions
and other merchant acquirers which generally range from three to
eight years and provide for penalties for early termination.
Merchant services revenues are generated primarily from
processing all payment forms including credit, debit, electronic
benefits transfer and check truncation for merchants of all
sizes across a wide array of retail market segments. The
products and services offered include authorization and capture
of electronic transactions, clearing and settlement of
electronic transactions, information reporting services related
to electronic transactions, merchant billing services, and
point-of-sale
terminal sales and services. Revenue is recognized for merchant
services as those services are performed, primarily on a per
unit basis. Revenues on
point-of-sale
terminal equipment are recognized upon the transfer of ownership
and shipment of product.
The Company recognizes revenues in accordance with the
provisions of SAB No. 104. SAB No. 104 sets
forth guidance as to when revenue is realized or realizable and
earned when all of the following criteria are met:
(1) persuasive evidence of an arrangement exists;
(2) delivery has occurred or services have been performed;
(3) the sellers price to the buyer is fixed or
determinable; and (4) collectibility is reasonably assured.
The Company evaluates its contractual arrangements that provide
services to clients through a bundled sales arrangement in
34
accordance with the provisions of ASC 605, previously referred
to as FASBs
EITF 00-21,
Revenue Arrangements with Multiple Deliverables.
ASC 605 addresses the determination of whether an
arrangement involving more than one deliverable contains more
than one unit of accounting and how the arrangement
consideration should be measured and allocated to the separate
units of accounting.
A deliverable in multiple element arrangements indicates any
performance obligation on the part of the seller and includes
any combination of obligations to perform different services,
grant licenses or other rights. Revenue is allocated to the
separate units of accounting in a multiple element arrangement
based on relative fair values, provided the delivered element
has standalone value to the customer, the fair value of any
undelivered items can be readily determined, and delivery of any
undelivered items is probable and substantially within the
Companys control. Evidence of fair value must be objective
and reliable. An item has value to the customer on a standalone
basis if it is sold separately by any vendor or the customer
could resell the deliverable on a standalone basis.
The Companys other service revenues are derived from
commercial printing activities, targeted loyalty programs, and
customer relationship management services, such as call center
activities for card activation, balance transfer requests,
customer service and collection. The contract terms for these
services are generally shorter in nature as compared with the
Companys long-term processing contracts. Revenue is
recognized on these other services as the services are
performed, either on a per unit or a fixed price basis.
In regards to taxes assessed by a governmental authority imposed
directly on a revenue producing transaction, the Company reports
its revenues on a net basis.
REIMBURSABLE ITEMS: Reimbursable items consist
of
out-of-pocket
expenses which are reimbursed by the Companys clients.
These expenses consist primarily of postage, access fees and
third party software. The Company accounts for reimbursable
items in accordance with the provisions of ASC 605, previously
referred to as FASBs EITF
No. 01-14,
Income Statement Characterization of Reimbursements
Received for Out-of-Pocket Expenses
Incurred.
COST OF SERVICES AND SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES: The Companys operating expenses
consists of cost of services and selling, general and
administrative expenses. The Company presents these expenses as
employment, technology and facilities and other expenses.
Overall, the Company believes its expenses consist predominately
of cost of sales type expenses, while selling, general and
administrative expenses are insignificant.
In 2010, the Company will begin presenting its statement of
income in the cost of services and selling, general and
administrative expense format.
SHARE-BASED COMPENSATION: In December 2004,
the FASB issued authoritative guidance under ASC 718,
Compensation Stock Compensation,
previously referred to as SFAS No. 123 (Revised),
Share-Based Payment (Revised). ASC 718
establishes standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods or
services. It also addresses transactions in which an entity
incurs liabilities in exchange for goods or services that are
based on the fair value of the entitys equity instruments
or that may be settled by the issuance of those equity
instruments. This Statement requires a public entity to measure
the cost of employee services received in exchange for an award
of equity instruments based on the grant-date fair value of the
award (with limited exceptions). That cost will be recognized
over the period during which an employee is required to provide
service in exchange for the award.
ASC 718 is effective for all awards granted on or after
January 1, 2006, and to awards modified, repurchased or
cancelled after that date. ASC 718 requires the Company to
recognize compensation costs for the nonvested portion of
outstanding share-based compensation granted in the form of
stock options based on the grant-date fair value of those awards
calculated under the provisions of ASC 718, previously referred
to as SFAS No. 123, Accounting for
Stock-Based Compensation, for pro forma disclosures.
Share-based compensation expenses include the impact of
expensing the fair value of stock options (including both TSYS
options and Synovus options to TSYS employees), as well as
expenses associated with nonvested shares. In the future, the
Company expects nonvested share awards to replace stock options
as TSYS primary method of share-based compensation. TSYS
adopted the provisions of ASC 718 effective January 1, 2006
using the modified-prospective-transition method.
ASC 718 requires companies to estimate forfeitures when
recognizing compensation cost. The estimate of forfeitures will
be adjusted by a company as actual forfeitures differ from its
estimates, resulting in compensation cost only for those awards
that actually vest. The effect of the change in estimated
forfeitures is recognized as compensation costs in the period
the change in estimate occured. In estimating its forfeiture
rate, the Company stratified its data based upon historical
experience to determine separate forfeiture rates for the
different award grants. The Company currently estimates a
forfeiture rate for existing stock option grants to TSYS
non-executive employees, and a forfeiture rate for all other
TSYS share-based awards (including Synovus options to TSYS
employees). Currently, TSYS estimates a forfeiture rate in the
range of 0% to 10.0%.
The Company has issued its common stock to directors and to
certain employees under nonvested awards. The market value of
the common stock at the date of issuance is recorded as a
reduction of shareholders equity in the Companys
consolidated balance sheet and is amortized as compensation
expense over the vesting period of the awards. For nonvested
award grants that have pro rata vesting, the Company recognizes
compensation expense using the straight-line method over the
vesting period of the award.
LEASES: The Company is obligated under
noncancelable leases for computer equipment and facilities. As
these leases expire, they will be evaluated and renewed or
replaced by similar leases based on need. A lease is an
agreement conveying the right to use property, plant, or
equipment (land
and/or
depreciable assets) usually for a stated period of time. For
purposes of
35
applying the accounting and reporting standards, leases are
classified from the standpoint of the lessee as capital or
operating leases. The provisions of ASC 840,
Leases, previously referred to as
SFAS No. 13, Accounting for Leases,
establish standards of financial accounting and reporting
for leases by lessees and lessors. If at inception a lease meets
one or more of the following four criteria, the lease shall be
classified as a capital lease by the lessee: (a) the lease
transfers ownership of the property to the lessee by the end of
the lease term; (b) the lease contains a bargain purchase
option; (c) the lease term is equal to 75 percent or
more of the estimated economic life of the leased property; and
(d) the present value at the beginning of the lease term of
the minimum lease payments equals or exceeds 90 percent of
the fair value of the leased property. If the lease does not
meet one or more of the criteria, it shall be classified as an
operating lease.
Rental payments on operating leases are charged to expense over
the lease term. If rental payments are not made on a
straight-line basis, rental expense nevertheless shall be
recognized on a straight-line basis unless another systematic
and rational basis is more representative of the time pattern in
which use benefit is derived from the leased property, in which
case that basis shall be used.
Certain of the Companys operating leases are for office
space. The Company will make various alterations (leasehold
improvements) to the office space and capitalize these costs as
part of property and equipment. Leasehold improvements are
amortized on a straight-line basis over the useful life of the
improvement or the term of the lease, whichever is shorter.
ADVERTISING: Advertising costs, consisting
mainly of advertising in trade publications, are expensed as
incurred or the first time the advertising takes place.
Advertising expense for 2009, 2008 and 2007 was $327,000,
$1.2 million and $1.1 million, respectively.
INCOME TAXES: Income taxes reflected in
TSYS consolidated financial statements are computed based
on the taxable income of TSYS and its affiliated subsidiaries. A
consolidated U.S. federal income tax return is filed for
TSYS and its majority owned U.S. subsidiaries through the
year ended December 31, 2009. A consolidated
U.S. federal income tax return was filed for Synovus
Financial Corp. (Synovus) and its majority owned subsidiaries,
including TSYS, through the year ended December 31, 2007.
Income tax returns are also filed in foreign jurisdictions where
TSYS has a foreign affiliate.
The Company accounts for income taxes in accordance with the
asset and liability method. Deferred income tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to
be recovered or settled. Reserves against the carrying value of
a deferred tax asset are established when necessary to reflect
the decreased likelihood of realization of a deferred asset in
the future. The effect on deferred income tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
Income tax provisions require the use of management judgments,
which are subject to challenge by various taxing authorities.
Contingency reserves are periodically established where the
amount of the contingency can be reasonably determined and is
likely to occur. Reductions in contingency reserves are
recognized when tax disputes are settled or examination periods
lapse.
Significant estimates used in accounting for income taxes relate
to the determination of taxable income, the determination of
temporary differences between book and tax bases, as well as
estimates on the realizability of tax credits.
TSYS recognizes potential interest and penalties related to the
underpayment of income taxes as income tax expense in the
consolidated statements of income.
TSYS adopted the authoritative guidance under ASC 740,
Income Taxes, previously referred to as FASB
Interpretation No. 48, Accounting for Income
Taxes an Interpretation of FASB Statement 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.
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 earnings per share (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. The guidance under ASC 260 was effective
for reporting periods beginning after December 15, 2008,
and it requires restatement of prior periods. The impact on 2008
EPS (as recast to show retroactive adoption of ASC
260) caused basic and diluted EPS to be lower by $0.01. The
impact on 2007 caused basic EPS to be lower by $0.01.
Basic EPS is calculated by dividing net income by the weighted
average number of common shares outstanding during the period.
Diluted EPS is calculated to reflect the potential dilution that
would occur if stock options or other contracts to issue common
stock were exercised. Diluted EPS is calculated by dividing net
income by weighted average common and common
36
equivalent shares outstanding. Common equivalent shares are
calculated using the treasury stock method.
RECENT ACCOUNTING
PRONOUNCEMENTS:
Accounting
Standards Update
2010-01,
Equity (Topic 505): Accounting for Distributions to
Shareholders with Components of Stock and Cash (A Consensus of
the FASB Emerging Issues Task Force)
In January 2010, the FASB issued Accounting Standards Update
2010-01 (ASU
2010-01),
Equity (Topic 505): Accounting for Distributions to
Shareholders with Components of Stock and Cash (A Consensus of
the FASB Emerging Issues Task Force), which provides
guidance on accounting for distributions to shareholders with
components of stock and cash, clarifying that in calculating
EPS, an entity should account for the share portion of the
distribution as a stock issuance and not as a stock dividend.
ASU 2010-01
is effective for interim and annual periods ending on or after
December 15, 2009, with retrospective application to all
prior periods. The Company does not expect the impact of
adopting ASU
2010-01 on
its financial position, results of operations and cash flows to
be material.
NOTE 2 | Discontinued Operations |
The Company sold TDM on August 31, 2009. Final adjustments
related to the sale, if any, are expected to be included in 2010
results. The decision to sell the TDM business was the result of
managements decision to divest non-strategic businesses
and focus resources on core products and services. TDM was part
of the North America Services segment.
In accordance with the provisions of ASC 205,
Presentation of Financial Statements
(previously referred to as SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets), the Company determined that the TDM business
became a discontinued operation in the first quarter of 2009.
The following table presents the summarized results of
discontinued operations for the years ended December 31,
2009, 2008 and 2007:
(in millions) | 2009 | 2008 | 2007 | |||||||||
Other services revenues
|
$ | 20.2 | 35.3 | 39.3 | ||||||||
Reimbursable items
|
150.3 | 181.7 | 104.1 | |||||||||
Total revenues
|
$ | 170.5 | 217.0 | 143.4 | ||||||||
Operating (loss) income
|
$ | (2.9 | ) | 1.5 | 5.2 | |||||||
Income taxes
|
$ | (1.0 | ) | 0.6 | 1.9 | |||||||
(Loss) income from discontinued operations, net of tax
|
$ | (1.8 | ) | 1.0 | 2.8 | |||||||
Loss on disposition, net of tax
|
(3.4 | ) | | | ||||||||
Subtotal
|
$ | (5.2 | ) | 1.0 | 2.8 | |||||||
The Consolidated Statements of Cash Flows include TDM through
the date of disposition.
NOTE 3 | 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.
37
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 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 December 31, 2009, the Company had unamortized goodwill
in the amount of $168.1 million. The Company performed its
annual impairment analyses of its unamortized goodwill balance
as of May 31, 2009, and this test did not indicate any
impairment.
The fair value of the Companys long-term debt and
obligations under capital leases is not significantly different
from its carrying value.
NOTE 4 | Relationships with Affiliated Companies |
On October 25, 2007, the Company announced that it had
entered into an agreement and plan of distribution with Synovus,
under which Synovus planned to distribute all of its shares of
TSYS common stock in a spin-off to Synovus shareholders. Under
the terms and conditions of the agreement, on December 31,
2007 TSYS became a fully independent company, allowing for
broader diversification of the Companys shareholder base,
more liquidity of the Companys shares and additional
investment in strategic growth opportunities and potential
acquisitions.
Prior to the spin-off transaction and in accordance with the
agreement and plan of distribution, TSYS agreed to pay a
one-time aggregate cash dividend of $600 million to all
TSYS shareholders, including Synovus. TSYS funded the dividend
through a combination of cash on hand and the use of a revolving
credit facility. Refer to Note 25 in the consolidated
financial statements for further information on the spin.
The Company continues to provide electronic payment processing
and other services to Synovus subsequent to the spin-off.
Beginning January 1, 2008, the Companys transactions
with Synovus and its affiliates are no longer considered related
party transactions. As such, information with respect to 2009
and 2008 transactions is not reported as related party
transactions.
The Company provides electronic payment processing and other
services to the Companys equity investments, TSYS de
México and CUP Data. The amounts associated with these
affiliated parties were not material.
The foregoing related party services are performed under
contracts that are similar to its contracts with unrelated third
party customers. The Company believes the terms and conditions
of transactions between the Company and these related parties
are comparable to those which could have been obtained in
transactions with unaffiliated parties. The amounts related to
these transactions are disclosed on the face of TSYS
consolidated financial statements.
Through its related party transactions, TSYS generates accounts
receivable and liability accounts with TSYS de México and
CUP Data. At December 31, 2009, the Company had accounts
payable balances of $12,000 associated with related parties.
Statements of
Income
The Company provides electronic payment processing services and
other services for Synovus, CB&T and other Synovus
affiliates, as well as the Companys equity method
investments, TSYS de México and CUP Data.
The table below details revenues derived from affiliated
companies for the years ended December 31, 2009, 2008 and
2007:
(in thousands) | 2009 | 2008 | 2007 | |||||||||
Electronic payment processing services:
|
||||||||||||
TSYS de México
|
$ | 2 | 2 | 3 | ||||||||
CB&T
|
| | 5,431 | |||||||||
Synovus and affiliates
|
| | 124 | |||||||||
Total electronic payment processing services
|
$ | 2 | 2 | 5,558 | ||||||||
Other services:
|
||||||||||||
CB&T
|
$ | | | 7,158 | ||||||||
Synovus and affiliates
|
| | 1,412 | |||||||||
Total other services
|
$ | | | 8,570 | ||||||||
Reimbursable items:
|
||||||||||||
TSYS de México
|
$ | 51 | 54 | 2 | ||||||||
CUP Data
|
75 | 44 | 88 | |||||||||
CB&T
|
| | 2,067 | |||||||||
Synovus and affiliates
|
| | 298 | |||||||||
Total reimbursable items
|
$ | 126 | 98 | 2,455 | ||||||||
38
The Company and Synovus and its affiliates are parties to
various agreements to provide certain services between one
another. The table below details expenses associated with
affiliated companies for the years ended December 31, 2009,
2008 and 2007 by expense category:
(in thousands) | 2009 | 2008 | 2007 | |||||||||
Salaries and other personnel expense:
|
||||||||||||
Trustee fees paid to Synovus
|
$ | | | 1,138 | ||||||||
Total salaries and other personnel expense
|
$ | | | 1,138 | ||||||||
Net technology and facilities expense:
|
||||||||||||
Rent paid to CB&T by TSYS
|
$ | | | 119 | ||||||||
Rent paid to TSYS by CB&T
|
| | (39 | ) | ||||||||
Rent paid to TSYS by Synovus
|
| | (1,165 | ) | ||||||||
Total net technology and facilities expense
|
$ | | | (1,085 | ) | |||||||
Other operating expenses:
|
||||||||||||
Processing support fees paid to TSYS de México
|
$ | 147 | 141 | 141 | ||||||||
Management fees paid to Synovus
|
| | 8,890 | |||||||||
Misc. fees paid to Synovus
|
| | 163 | |||||||||
Misc. fees paid to CB&T
|
| | 259 | |||||||||
Banking service fees paid by TSYS to Synovus affiliate banks
|
| | 12 | |||||||||
Data processing service fees paid to TSYS de México
|
| | 1 | |||||||||
Total other operating expenses
|
$ | 147 | 141 | 9,466 | ||||||||
Nonoperating
Income
The Company earned interest income from Synovus affiliate banks
for the year ended December 31, 2007 of approximately
$16.5 million.
Cash
Flow
TSYS paid cash dividends to CB&T in the amount of
approximately $528.4 million in 2007. TSYS received cash
dividends from its equity method equity investments of
approximately $4.9 million, $6.4 million and
$3.0 million in 2009, 2008 and 2007, respectively.
Stock
Options
Prior to the spin-off, certain officers of TSYS and other TSYS
employees participated in the Synovus Incentive Plans.
Nonqualified options to acquire approximately 103,000 at a
weighted average exercise price of $31.93 shares of Synovus
common stock were granted in 2007.
These stock options were granted with an exercise price equal to
the fair market value of Synovus common stock at the date of
grant. The options vest over two to three years and expire eight
to ten years from date of grant. Refer to Note 16 for more
information on stock options.
Prior to the spin-off, Synovus had granted stock options to key
TSYS employees through its various stock option plans under
which the Compensation Committee of the Synovus Board of
Directors had the authority to grant stock options, stock
appreciation rights, restricted stock and performance awards. As
a result of the spin-off, these outstanding Synovus stock
options granted to TSYS employees were converted to TSYS options
on December 31, 2007. Refer to Note 16 in the
consolidated financial statements for more information on stock
options.
The Company believes the terms and conditions of the
transactions described above between TSYS, CB&T, Synovus
and other affiliated companies are comparable to those which
could have been obtained in transactions with unaffiliated
parties. No significant changes have been made to the method of
establishing terms with the affiliated companies during the
periods presented.
NOTE 5 | Cash and Cash Equivalents |
Cash and cash equivalent balances at December 31 are summarized
as follows:
(in thousands) | 2009 | 2008 | ||||||
Cash and cash equivalents in domestic accounts
|
$ | 403,421 | 149,047 | |||||
Cash and cash equivalents in foreign accounts
|
46,534 | 62,318 | ||||||
Total
|
$ | 449,955 | 211,365 | |||||
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.
At December 31, 2009 and 2008, the Company had
$32.2 million and $13.7 million, respectively, of cash
and cash equivalents 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.
39
NOTE 6 | Prepaid Expenses and Other Current Assets |
Significant components of prepaid expenses and other current
assets at December 31 are summarized as follows:
(in thousands) | 2009 | 2008 | ||||||
Prepaid expenses
|
$ | 14,071 | 14,079 | |||||
Supplies inventory
|
10,285 | 9,586 | ||||||
Income taxes receivable
|
72 | 23,752 | ||||||
Other
|
47,696 | 41,195 | ||||||
Total
|
$ | 72,124 | 88,612 | |||||
NOTE 7 | Property and Equipment, net |
Property and equipment balances at December 31 are as follows:
(in thousands) | 2009 | 2008 | ||||||
Computer and other equipment
|
$ | 230,633 | 223,540 | |||||
Buildings and improvements
|
225,232 | 220,696 | ||||||
Furniture and other equipment
|
112,636 | 116,430 | ||||||
Land
|
16,882 | 16,556 | ||||||
Other
|
12,926 | 774 | ||||||
Total property and equipment
|
598,309 | 577,996 | ||||||
Less accumulated depreciation and amortization
|
309,111 | 286,655 | ||||||
Property and equipment, net
|
$ | 289,198 | 291,341 | |||||
Depreciation and amortization expense related to property and
equipment was $50.7 million, $47.9 million and
$43.3 million for the years ended December 31, 2009,
2008 and 2007, respectively. Depreciation expense includes
amounts for equipment acquired under capital lease. The increase
in other for 2009 as compared to 2008 is primarily due to the
Companys infrastructure requirements in order to support
the Companys South America client base. This includes
equipment not yet placed in service as well as building
improvements.
In September 2007, the Company recognized an impairment loss of
$538,000 in net technology and facilities expense related to one
of the Companys facilities. The impairment charge of
$538,000 is reflected in the North America Services segment.
NOTE 8 | Computer Software, net |
Computer software at December 31 is summarized as follows:
(in thousands) | 2009 | 2008 | ||||||
Licensed computer software
|
$ | 383,045 | 361,626 | |||||
Software development costs
|
240,992 | 208,968 | ||||||
Acquisition technology intangibles
|
55,975 | 55,156 | ||||||
Total computer software
|
680,012 | 625,750 | ||||||
Less accumulated amortization:
|
||||||||
Licensed computer software
|
292,238 | 259,781 | ||||||
Software development costs
|
161,682 | 142,202 | ||||||
Acquisition technology intangibles
|
28,958 | 21,729 | ||||||
Total accumulated amortization
|
482,878 | 423,712 | ||||||
Computer software, net
|
$ | 197,134 | 202,038 | |||||
TSYS acquired Infonox on the Web (Infonox) in November 2008. The
Company has allocated approximately $21.5 million to
acquisition technology intangibles. Refer to Note 24 for
more information on Infonox.
Amortization expense related to licensed computer software costs
was $31.5 million, $38.7 million and
$38.2 million for the years ended December 31, 2009,
2008 and 2007, respectively. Amortization expense includes
amounts for computer software acquired under capital lease.
Amortization of software development costs was
$20.0 million, $19.8 million and $20.0 million
for the years ended December 31, 2009, 2008 and 2007,
respectively. Amortization expense related to acquisition
technology intangibles was $6.9 million for 2009,
$5.9 million for 2008 and $6.0 million for 2007.
The weighted average useful life for each component of computer
software, and in total, at December 31, 2009, is as follows:
Weighted |
||||
Average |
||||
Amortization |
||||
At December 31, 2009 | Period (Yrs) | |||
Licensed computer software
|
7.0 | |||
Software development costs
|
6.2 | |||
Acquisition technology intangibles
|
7.8 | |||
Total
|
6.8 | |||
40
Estimated future amortization expense of licensed computer
software, software development costs and acquisition technology
intangibles as of December 31, 2009 for the next five years
is:
Licensed |
Software |
Acquisition |
||||||||||
Computer |
Development |
Technology |
||||||||||
(in thousands) | Software | Costs | Intangibles | |||||||||
2010
|
$ | 30,432 | 24,804 | 6,447 | ||||||||
2011
|
23,450 | 20,475 | 5,941 | |||||||||
2012
|
20,660 | 15,748 | 5,232 | |||||||||
2013
|
12,988 | 11,209 | 3,305 | |||||||||
2014
|
3,061 | 7,034 | 2,920 | |||||||||
NOTE 9 | Contract Acquisition Costs, net |
Significant components of contract acquisition costs at December
31 are summarized as follows:
(in thousands) | 2009 | 2008 | ||||||
Payments for processing rights, net
|
$ | 59,085 | 73,201 | |||||
Conversion costs, net
|
68,953 | 58,367 | ||||||
Total
|
$ | 128,038 | 131,568 | |||||
Amortization related to payments for processing rights, which is
recorded as a reduction of revenues, was $25.5 million,
$28.5 million and $24.7 million for 2009, 2008 and
2007, respectively.
Amortization expense related to conversion costs was
$17.8 million, $14.4 million and $15.9 million
for 2009, 2008 and 2007, respectively.
In March 2007, the Company recognized an impairment loss related
to conversion costs of $620,000, which is reflected in the North
America Services segment.
The weighted average useful life for each component of contract
acquisition costs, and in total, at December 31, 2009 is as
follows:
Weighted |
||||
Average |
||||
Amortization |
||||
At December 31, 2009 | Period (Yrs) | |||
Payments for processing rights
|
9.4 | |||
Conversion costs
|
6.6 | |||
Total
|
8.2 | |||
Estimated future amortization expense on payments for processing
rights and conversion costs as of December 31, 2009 for the
next five years is:
Payments for |
Conversion |
|||||||
(in thousands) | Processing Rights | Costs | ||||||
2010
|
$ | 16,548 | 17,065 | |||||
2011
|
12,923 | 17,068 | ||||||
2012
|
10,134 | 11,684 | ||||||
2013
|
8,018 | 8,748 | ||||||
2014
|
6,123 | 6,699 | ||||||
NOTE 10 | Goodwill |
In November 2008, TSYS acquired Infonox for an aggregate
consideration of approximately $50.5 million, with
contingent payments over the next three years of up to
$25.0 million based on performance. The Company did not
make any contingent payments in 2009. The Company has allocated
approximately $29.1 million to goodwill. Refer to
Note 24 for more information on Infonox.
Effective February 1, 2008, Golden Retriever Systems L.L.C.
(Golden Retriever) became a wholly owned subsidiary of TSYS
Acquiring. Golden Retriever was previously reported under the
North America Services segment. Effective February 1, 2008,
the financial results of Golden Retriever were included in the
Merchant Services segment. As a result, the Company reallocated
approximately $2.1 million of goodwill between the North
America Services segment and the Merchant Services segment.
41
The changes in the carrying amount of goodwill at
December 31, 2009 and 2008 are as follows:
North America |
International |
Merchant |
||||||||||||||
(in thousands) | Services | Services | Services | Consolidated | ||||||||||||
Balance as of December 31, 2007
|
$ | 72,698 | 37,747 | 32,100 | $ | 142,545 | ||||||||||
Acquisition of Infonox
|
| | 28,395 | 28,395 | ||||||||||||
Transfer goodwill between segments
|
(2,084 | ) | | 2,084 | | |||||||||||
Currency translation adjustments
|
| (4,945 | ) | | (4,945 | ) | ||||||||||
Balance as of December 31, 2008
|
70,614 | 32,802 | 62,579 | 165,995 | ||||||||||||
Infonox purchase price allocation adjustment
|
| | 747 | 747 | ||||||||||||
Currency translation adjustments
|
| 1,379 | | 1,379 | ||||||||||||
Balance as of December 31, 2009
|
$ | 70,614 | 34,181 | 63,326 | $ | 168,121 | ||||||||||
NOTE 11 Equity
Investments
The Company has an equity investment with Promocíón y
Operación, S.A. de C.V. and records its 49% ownership using
the equity method of accounting. The operation, TSYS de
México, prints statements and provides card-issuing support
services to the equity investment clients and others.
The Company has an equity investment with China UnionPay Co.,
Ltd. and records its 44.56% ownership using the equity method of
accounting. CUP is sanctioned by the Peoples Bank of
China, Chinas central bank, and has become one of the
worlds largest and fastest-growing payments networks. CUP
Data currently provides transaction processing, disaster
recovery and other services for banks and bankcard issuers in
China.
TSYS equity investments are recorded initially at cost and
subsequently adjusted for equity in earnings, cash contributions
and distributions, and foreign currency translation adjustments.
TSYS equity in income of equity investments (net of tax)
for the years ended December 31, 2009, 2008 and 2007 was
$7.0 million, $7.4 million and $5.5 million,
respectively.
A summary of TSYS equity investments at December 31 is as
follows:
(in millions) | 2009 | 2008 | ||||||
CUP Data
|
$ | 68.0 | 65.9 | |||||
TSYS de México
|
7.5 | 8.1 | ||||||
Total
|
$ | 75.5 | 74.0 | |||||
NOTE 12 | Other Intangible Assets, net |
In November 2008, TSYS acquired Infonox. The Company has
allocated approximately $7.0 million to other intangible
assets as part of the purchase price allocation to customer
relationships, convenants-not-to-compete and trade name. Refer
to Note 24 for more information on Infonox.
Significant components of other intangible assets at December 31
are summarized as follows:
2009 | ||||||||||||
Accumulated |
||||||||||||
(in thousands) | Gross | Amortization | Net | |||||||||
Customer relationships
|
$ | 27,796 | (14,151 | ) | $ | 13,645 | ||||||
Covenants-not-to-compete
|
1,000 | (775 | ) | 225 | ||||||||
Trade name
|
2,084 | (1,822 | ) | 262 | ||||||||
Total
|
$ | 30,880 | (16,748 | ) | $ | 14,132 | ||||||
2008 | ||||||||||||
Accumulated |
||||||||||||
(in thousands) | Gross | Amortization | Net | |||||||||
Customer relationships
|
$ | 29,451 | (13,113 | ) | $ | 16,338 | ||||||
Covenants-not-to-compete
|
1,600 | (1,075 | ) | 525 | ||||||||
Trade name
|
2,046 | (1,457 | ) | 589 | ||||||||
Total
|
$ | 33,097 | (15,645 | ) | $ | 17,452 | ||||||
Amortization related to other intangible assets, which is
recorded in other operating expenses, was $3.4 million,
$2.9 million and $3.1 million for 2009, 2008 and 2007,
respectively.
The weighted average useful life for each component of other
intangible assets, and in total, at December 31, 2009 is as
follows:
Weighted |
||||
Average |
||||
Amortization |
||||
At December 31, 2009 | Period (Yrs) | |||
Customer relationships
|
8.7 | |||
Covenant-not-to-compete
|
2.8 | |||
Trade name
|
2.8 | |||
Total
|
8.1 | |||
42
Estimated future amortization expense on other intangible assets
as of December 31, 2009 for the next five years is:
(in thousands) | ||||
2010
|
$ | 3,098 | ||
2011
|
2,606 | |||
2012
|
2,606 | |||
2013
|
1,356 | |||
2014
|
1,106 | |||
NOTE 13 | Long-term Debt and Capital Lease Obligations |
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 the
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 the London Interbank
Offered Rate (LIBOR) plus an applicable margin of 0.60%. The
applicable margin could vary within a range from 0.27% to 0.725%
depending on changes in the Companys corporate credit
rating which is currently a BBB investment grade
rating from Standard and Poors. 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. In addition, the Company is
to pay each lender a fee in respect of the amount of such
lenders commitment under the revolving credit facility
(regardless of usage), ranging from 0.08% to 0.15% (currently
0.10%) depending on the Companys corporate credit rating.
The Company is not required to make any scheduled principal
payments other than payment of the entire outstanding balance on
December 21, 2012. The Company may prepay the revolving
credit facility and the term loan in whole or in part at any
time without premium or penalty, subject to reimbursement of the
lenders customary breakage and redeployment costs in the
case of prepayment of LIBOR borrowings. The Credit Agreement
includes covenants requiring the Company to maintain certain
minimum financial ratios. The Company did not use the revolving
credit facility in 2009, 2008 or 2007.
The proceeds will be used for working capital and other
corporate purposes, including financing the repurchase by TSYS
of its capital stock.
In April 2009, the Company repaid its International
Services loan of £1.3 million, or approximately
$1.8 million, which it obtained in May 2008.
On October 31, 2008, the Company repaid its International
Services loan that it acquired in August 2007. The loan
was scheduled to mature in January 2009. The Company paid
£33 million, or approximately $54.1 million.
On October 30, 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 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.
In January 2008, the Company repaid its International
Services loan of approximately $2.1 million that it
acquired in January 2007.
In December 2007, the Company financed the purchase of
$22.0 million of mainframe and distributed system software
licenses with a note payable with the vendor. The term of the
note is 39 months and the interest rate is 3.95%.
In connection with the formation of TSYS Managed Services, TSYS
and Merchants agreed to provide long-term financing to TSYS
Managed Services. At the end of December 2009, the balance of
the financing arrangement with Merchants was approximately
£504,000, or approximately $804,000.
In addition, TSYS maintains an unsecured credit agreement with
CB&T. The credit agreement has a maximum available
principal balance of $5.0 million, with interest at prime.
TSYS did not use the credit facility during 2009, 2008 or 2007.
43
Long-term debt at December 31 consists of:
(in thousands) | 2009 | 2008 | ||||||
LIBOR + 0.60%, unsecured term loan, due December 21, 2012,
with principal to be paid at maturity
|
$ | 168,000 | 168,000 | |||||
LIBOR + 0.80%, unsecured term loan, due November 2, 2011,
with principal paid at maturity
|
21,773 | 16,602 | ||||||
3.95% note payable, due March 1, 2011, with monthly
interest and principal payments
|
8,778 | 15,496 | ||||||
LIBOR + 2.00%, unsecured term loan, due November 16, 2011,
with quarterly interest payments and principal to be paid at
maturity
|
804 | 2,914 | ||||||
LIBOR + 2.00%, unsecured term loan, due April 30, 2009,
with quarterly interest payments and principal to be paid at
maturity
|
| 1,858 | ||||||
Total debt
|
199,355 | 204,870 | ||||||
Less current portion
|
6,988 | 8,575 | ||||||
Noncurrent portion of long-term debt
|
$ | 192,367 | 196,295 | |||||
Required annual principal payments on long-term debt for the
five years subsequent to December 31, 2009 are summarized
as follows:
(in thousands) | ||||
2010
|
$ | 6,988 | ||
2011
|
24,367 | |||
2012
|
168,000 | |||
2013
|
| |||
2014
|
| |||
Capital lease obligations at December 31 consists of:
(in thousands) | 2009 | 2008 | ||||||
Capital lease obligations
|
$ | 19,045 | 19,920 | |||||
Less current portion
|
6,289 | 6,344 | ||||||
Noncurrent portion of capital leases
|
$ | 12,756 | 13,576 | |||||
The future minimum lease payments under capital leases at
December 31, 2009 are summarized as follows:
(in thousands) | ||||
2010
|
$ | 6,990 | ||
2011
|
7,215 | |||
2012
|
4,194 | |||
2013
|
2,190 | |||
2014
|
83 | |||
Total minimum lease payments
|
20,672 | |||
Less amount representing interest
|
1,627 | |||
$ | 19,045 | |||
NOTE 14 | Other Current Liabilities |
Significant components of other current liabilities at December
31 are summarized as follows:
(in thousands) | 2009 | 2008 | ||||||
Client liabilities
|
$ | 45,824 | 30,723 | |||||
Accrued expenses
|
33,274 | 26,747 | ||||||
Deferred revenues
|
31,243 | 22,619 | ||||||
Dividends payable
|
13,828 | 13,779 | ||||||
Transaction processing provisions
|
5,483 | 5,417 | ||||||
Client postage deposits
|
3,736 | 3,772 | ||||||
Accrued income taxes
|
252 | 2,808 | ||||||
Other
|
19,676 | 24,886 | ||||||
Total
|
$ | 153,316 | 130,751 | |||||
NOTE 15 | Equity |
DIVIDENDS: Dividends on common stock of
$55.2 million were paid in 2009, compared to
$55.4 million and $655.2 million in 2008 and 2007,
respectively. Prior to the spin-off transaction and in
accordance with the agreement and plan of distribution, TSYS
paid a one-time aggregate cash dividend of $600 million to
all TSYS shareholders.
44
EQUITY COMPENSATION PLANS: The following table
summarizes TSYS equity compensation plans by category:
(a) | (b) | (c) | ||||||||||
Weighted-average |
Number of securities remaining |
|||||||||||
Number of securities to be |
exercise price of |
available for future issuance |
||||||||||
(in thousands, except |
issued upon exercise of |
outstanding |
under equity compensation plans |
|||||||||
per share data) |
outstanding options, warrants |
options, warrants |
(excluding securities reflected |
|||||||||
Plan Category | and rights | and rights | in column (a)) | |||||||||
Equity compensation plans approved by security holders
|
6,955 | (1) | $ | 25.54 | 22,490 | (2) | ||||||
Equity compensation plans not approved by security holders
|
| | | |||||||||
Total
|
6,955 | $ | 25.54 | 22,490 | ||||||||
(1) | Does not include an aggregate of 171,467 shares of nonvested awards which will vest over the remaining years through 2012. | |
(2) | Includes 22,490,211 shares available for future grants under the Total System Services, Inc. 2000 Long-Term Incentive Plan, 2002 Long-Term Incentive Plan, 2007 Omnibus Plan and 2008 Omnibus Plan. |
In 2008, TSYS trued up certain pre-spin tax benefits previously
recorded in connection with various stock options and nonvested
awards. The adjustment resulted in a debit to additional paid-in
capital of $1.8 million and a corresponding adjustment to
taxes payable.
NOTE 16 | Share-Based Compensation |
General
Description of Share-Based Compensation Plans
TSYS has various long-term incentive plans under which the
Compensation Committee of the Board of Directors has the
authority to grant share-based compensation to TSYS employees.
Vesting for stock options granted during 2006 accelerates upon
retirement for plan participants who have reached age 62
and who also have no less than fifteen years of service at the
date of their election to retire. For stock options granted in
2006, share-based compensation expense is fully recognized for
plan participants upon meeting the retirement eligibility
requirements of age and service.
Stock options granted prior to 2006 generally become exercisable
at the end of a two to three-year period and expire ten years
from the date of grant. Vesting for stock options granted prior
to 2006 accelerates upon retirement for plan participants who
have reached age 50 and who also have no less than fifteen
years of service at the date of their election to retire.
Following adoption of ASC 718, share-based compensation expense
is recognized in income over the remaining nominal vesting
period with consideration for retirement eligibility.
The Company historically issues new shares or uses treasury
shares to satisfy share option exercises.
Long-Term
Incentive Plans Synovus
Prior to the spin-off, Synovus had various stock option plans
under which the Compensation Committee of the Synovus Board of
Directors had authority to grant stock options, stock
appreciation rights, restricted stock and performance awards to
key Synovus employees, including key TSYS employees. The general
terms of the existing stock option plans included vesting
periods ranging from two to three years and exercise periods
ranging from five to ten years. Such stock options were granted
at exercise prices which equaled the fair market value of a
share of common stock on the grant date.
During 2007, Synovus granted 102,653 stock options to key TSYS
officers and employees. The fair value of the option grant was
$7.22 per option and was estimated on the date of grant using
the Black-Scholes-Merton option-pricing model with the following
weighted average assumptions: risk-free interest rate of 4.78%;
expected volatility of 21.76%; expected term of 6.0 years;
and dividend yield of 2.60%. The expected term of 6.0 years
was determined using the simplified method, as
prescribed by SECs SAB No. 107.
As a result of the spin-off, all Synovus stock options
outstanding granted to TSYS employees were converted to TSYS
options on December 31, 2007.
45
A summary of the option activity related to option grants on
Synovus common stock to TSYS employees as of December 31,
2007 and changes during the year ended on that date is presented
below:
2007 | ||||||||
Weighted |
||||||||
Average |
||||||||
(in thousands, except per share data) | Options | Exercise Price | ||||||
Options:
|
||||||||
Outstanding at beginning of year
|
6,045 | $ | 26.48 | |||||
Granted
|
103 | 31.93 | ||||||
Exercised
|
(690 | ) | 20.77 | |||||
Net Synovus/TSYS employee transfers in and out
|
15 | 23.57 | ||||||
Forfeited/canceled/converted to TSYS options
|
(5,473 | ) | 27.29 | |||||
Outstanding at end of year
|
| $ | | |||||
Options exercisable at year-end
|
| $ | | |||||
Weighted average fair value of options granted during the year
|
$ | 7.22 | ||||||
Long-Term
Incentive Plans TSYS
TSYS maintains the Total System Services, Inc. 2008 Omnibus
Plan, Total System Services, Inc. 2007 Omnibus Plan, Total
System Services, Inc. 2002 Long-Term Incentive Plan and the 2000
Long-Term Incentive Plan to advance the interests of TSYS and
its shareholders through awards that give employees and
directors a personal stake in TSYS growth, development and
financial success. Awards under these plans are designed to
motivate employees and directors to devote their best interests
to the business of TSYS. Awards will also help TSYS attract and
retain the services of employees and directors who are in a
position to make significant contributions to TSYS success
after the spin-off.
The plans are administered by the Compensation Committee of the
Companys Board of Directors and enable the Company to
grant nonqualified and incentive stock options, stock
appreciation rights,restricted stock and restricted stock units,
performance units or performance shares, cash-based awards, and
other stock-based awards.
All stock options must have a maximum life of no more than ten
years from the date of grant. The exercise price will not be
less than 100% of the fair market value of TSYS common
stock at the time of grant. Any shares related to awards which
terminate by expiration, forfeiture, cancellation, or otherwise
without the issuance of such shares, are settled in cash in lieu
of shares, or are exchanged with the Committees
permission, prior to the issuance of shares, for awards not
involving shares, shall be available again for grant under the
various plans. The aggregate number of shares of TSYS stock
which may be granted to participants pursuant to awards granted
under the various plans may not exceed the following: Total
System Services, Inc. 2008 Omnibus Plan −17 million
shares; Total System Services, Inc. 2007 Omnibus Plan
−5 million shares; Total System Services, Inc. 2002
Long-Term Incentive Plan −9.4 million shares; and the
2000 Long-Term Incentive Plan −2.4 million shares.
Share-Based
Compensation
TSYS share-based compensation costs are included as
expenses and classified as salaries and other personnel
expenses. 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 year ended December 31, 2009,
share-based compensation was $16.1 million compared to
$17.8 million (excluding $6.8 million included in
spin-related expenses) and $13.1 million (excluding
$5.4 million included in spin-related expenses) for the
same periods in 2008 and 2007, respectively.
Prior to the spin-off, Synovus had granted stock options to key
TSYS employees through its various stock option plans under
which the Compensation Committee of the Synovus Board of
Directors had the authority to grant stock options, stock
appreciation rights, restricted stock and performance awards. As
a result of the spin-off, these Synovus stock options
outstanding granted to TSYS employees were converted to TSYS
options on December 31, 2007. In connection with the
conversion, TSYS recorded $5.4 million of expense related
to the revaluation of the vested converted options. TSYS will
recognize additional expense related to the nonvested converted
options through the remaining vesting period, the vast majority
of which occurred in 2008.
Nonvested Awards: The Company granted
shares of TSYS 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 in the future by
such officers, directors and employees. The following table
summarizes the number of shares granted each year:
2009 | 2008 | 2007 | ||||||||||
Number of shares
|
513,920 | 697,911 | 241,260 | |||||||||
Market value
|
$ | 6.8 million | $ | 15.3 million | $ | 7.6 million | ||||||
46
A summary of the status of TSYS nonvested shares as of
December 31, 2009, 2008 and 2007, respectively, and the
changes during the periods are presented below:
2009 | 2008 | 2007 | ||||||||||||||||||||||
Weighted |
Weighted |
Weighted |
||||||||||||||||||||||
Average |
Average |
Average |
||||||||||||||||||||||
Nonvested shares |
Grant-Date |
Grant-Date |
Grant-Date |
|||||||||||||||||||||
(in thousands, except per share data) | Shares | Fair Value | Shares | Fair Value | Shares | Fair Value | ||||||||||||||||||
Outstanding at beginning of year
|
1,014 | $ | 23.46 | 591 | $ | 26.15 | 514 | $ | 22.69 | |||||||||||||||
Issued
|
514 | 13.28 | 698 | 21.89 | 241 | 31.37 | ||||||||||||||||||
Vested
|
(414 | ) | 23.77 | (258 | ) | 25.24 | (148 | ) | 22.63 | |||||||||||||||
Forfeited/canceled
|
(30 | ) | 20.34 | (17 | ) | 25.19 | (16 | ) | 26.37 | |||||||||||||||
Outstanding at end of year
|
1,084 | $ | 18.60 | 1,014 | $ | 23.46 | 591 | $ | 26.15 | |||||||||||||||
As of December 31, 2009, there was approximately
$12.2 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 2.2 years.
During 2008 and 2005, respectively, TSYS authorized a grant of
non-vested awards to two key executives with separate
performance vesting schedules. These grants have separate
one-year performance periods that vest over five to seven years
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 vesting 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.
A summary of the awards authorized in each year is below:
Number of |
||||||||||||
Total Number of |
Performance Shares |
|||||||||||
Year of Initial Award | Shares Awarded | to be Vested | ||||||||||
2008
|
182,816 | 146,252 | (2010-2014 | ) | ||||||||
2005
|
126,087 | 25,215 | (2010-2011 | ) | ||||||||
A summary of the status of TSYS performance-based
nonvested shares as of December 31, 2009, 2008 and 2007,
respectively, and changes during those periods are presented
below:
2009 | 2008 | 2007 | ||||||||||||||||||||||
Weighted |
Weighted |
Weighted |
||||||||||||||||||||||
Performance-based |
Average |
Average |
Average |
|||||||||||||||||||||
Nonvested shares |
Grant Date |
Grant-Date |
Grant-Date |
|||||||||||||||||||||
(in thousands, except per share data) | Shares | Fair Value | Shares | Fair Value | Shares | Fair Value | ||||||||||||||||||
Outstanding at beginning of year
|
62 | $ | 23.32 | 25 | $ | 32.27 | 25 | $ | 20.00 | |||||||||||||||
Issued
|
62 | 13.69 | 62 | 23.32 | 25 | 32.27 | ||||||||||||||||||
Vested
|
(62 | ) | 23.32 | (25 | ) | 32.27 | (25 | ) | 20.00 | |||||||||||||||
Forfeited/canceled
|
| | | | | | ||||||||||||||||||
Outstanding at end of year
|
62 | $ | 13.69 | 62 | $ | 23.32 | 25 | $ | 32.27 | |||||||||||||||
Synovus maintains various plans that are administered by its
Compensation Committee of the Board of Directors designed to
motivate employees and directors to devote their best interests
to the business of Synovus. Through these plans, Synovus has
granted nonvested awards to its employees. As a result of the
spin-off and the distribution by Synovus of 0.483921 of a share
of TSYS common stock on December 31, 2007 for each share of
Synovus common stock outstanding on December 18, 2007,
approximately 515,362 shares of TSYS stock were distributed
to holders of Synovus nonvested awards. As a result, these
shares are deemed nonvested TSYS shares and are not included in
the calculation of basic EPS.
Performance-Based Awards: During 2009
and 2008, respectively, TSYS authorized performance-based awards
that have a market condition calculated on a combination of
earnings per share growth and TSYS performance compared to
a three-year Total Shareholder Return versus peers. Vesting of
the awards will occur on the last day of the three-year market
condition valuation period if the participant is still employed
on that date. The fair value of these awards is based on a Monte
Carlo simulation as prescribed by ASC 718,
Compensation Stock Compensation,
previously referred to as SFAS No. 123 (Revised),
Share-Based Payment (Revised). Although
authorized by the TSYS Board, the final amount of the awards is
not known until the Compensation Committee has determined the
final terms of the awards, at which
47
time the award is deemed granted. The March 2008 award was
authorized in 2008; however, it was not deemed granted until the
Compensation Committee determined the final terms of the award
in January 2009. Likewise, the January 2009 award was authorized
in 2009; however, the award will not be deemed granted until the
Compensation Committee determines the final terms of the award,
which occurred in January 2010. The awards will be amortized
through the end of the respective three-year periods.
A summary of the awards authorized in each year is below:
Fair Value | ||||||||||||||
Month |
Primary |
Secondary |
Estimated |
Retirement |
Grant Date Terms |
|||||||||
Authorized
|
Measure | Measure | Method | Valuation | Amortized through | Provision | Determined | |||||||
January 2009
|
2009 EPS Growth | Three-year Total Shareholder Return | Monte Carlo simulation | $4.0 million | December 2011 | Age 62 with 15 years of service, or age 65 | January 2010 | |||||||
(2009-2011) | regardless of service | |||||||||||||
March 2008
|
2008 EPS Growth |
Three-year Total Shareholder Return (2008-2010) |
Monte Carlo simulation | $1.0 million | December 2010 | Age 62 with 15 years of service, or age 65 regardless of service | January 2009 | |||||||
Until the awards were deemed granted, TSYS excluded the issuance
of these awards in reporting shares outstanding from the
calculation of basic and diluted EPS (although related
compensation expense on these awards are included properly in
net income and related EPS calculation).
In March 2009, the Company determined that it was no longer
probable that the specified performance measures associated with
performance-based awards issued in 2009 would be achieved. As a
result, the performance-based awards issued during 2009 were not
expected to vest, and the Company did not recognize any
share-based compensation expense related to these awards. In
January 2010, the Compensation Committee determined the criteria
for the 2009 performance-based awards were not met and therefore
did not grant the awards.
Stock Option
Awards
During 2009 and 2008, the Company granted stock options to key
TSYS executive officers. The average fair value of the options
granted for both years was estimated on the date of grant using
the Black-Scholes-Merton option-pricing model. The following
table summarizes the weighted average assumptions, and the fair
value of the options:
2009 | 2008 | |||||||
Number of options granted
|
1,047,949 | 771,892 | ||||||
Weighted average exercise price
|
$ | 13.11 | $ | 23.15 | ||||
Risk-free interest rate
|
3.19 | % | 3.42 | % | ||||
Expected volatility
|
42.00 | % | 36.57 | % | ||||
Expected term (years)
|
8.6 | 8.7 | ||||||
Dividend yield
|
2.14 | % | 1.21 | % | ||||
Weighted average fair value
|
$ | 5.31 | $ | 9.73 | ||||
The expected term of years for the 2008 grant was determined
under the simplified method as prescribed by the
SECs Staff Accounting Bulletin No. 107.
As part of the spin-off, all Synovus stock options outstanding
granted to TSYS employees were converted to TSYS options on
December 31, 2007. The conversion resulted in
5.2 million TSYS options being granted to TSYS employees.
The weighted average fair value of the option grant was $4.31
per option and it was estimated on the date of conversion using
the Black-Scholes-Merton option pricing model with the following
weighted average assumptions: risk-free interest rate of 3.28%;
expected volatility of 26.41%; expected term of 2.4 years;
and dividend yield of 1.04%. The expected term of 2.4 years
was determined under the simplified method, as
prescribed by the SECs Staff Accounting
Bulletin No. 107.
48
A summary of TSYS stock option activity as of
December 31, 2009, 2008 and 2007, and changes during the
years ended on those dates is presented below:
2009 | 2008 | 2007 | ||||||||||||||||||||||
Weighted |
Weighted |
Weighted |
||||||||||||||||||||||
(in thousands, |
Average |
Average |
Average |
|||||||||||||||||||||
except per share data) | Options | Exercise Price | Options | Exercise Price | Options | Exercise Price | ||||||||||||||||||
Options:
|
||||||||||||||||||||||||
Outstanding at beginning of year
|
6,185 | $ | 27.59 | 5,439 | $ | 28.20 | 1,066 | $ | 15.53 | |||||||||||||||
Granted
|
1,048 | 13.11 | 771 | 23.15 | 5,195 | 28.55 | ||||||||||||||||||
Exercised
|
(1 | ) | 1.83 | (14 | ) | 18.62 | (822 | ) | 13.99 | |||||||||||||||
Forfeited/canceled
|
(277 | ) | 24.36 | (11 | ) | 28.40 | | | ||||||||||||||||
Outstanding at end of year
|
6,955 | $ | 25.54 | 6,185 | $ | 27.59 | 5,439 | $ | 28.20 | |||||||||||||||
Options exercisable at year-end
|
5,357 | $ | 28.15 | 5,250 | $ | 28.14 | 2,015 | $ | 24.72 | |||||||||||||||
Weighted average fair value of options granted during the year
|
$ | 5.31 | $ | 9.73 | $ | 4.31 | ||||||||||||||||||
The following table summarizes information about TSYS
stock options outstanding and exercisable at December 31,
2009:
(in thousands, |
||||||||||||||
except per share data) |
||||||||||||||
Outstanding | Exercisable | |||||||||||||
Number Outstanding |
Range of |
Number Exercisable |
Range of |
|||||||||||
at December 31, 2009 | Exercise Prices | at December 31, 2009 | Exercise Prices | |||||||||||
1,418 | $13.11 - 19.64 | 370 | $13.11 - 19.64 | |||||||||||
974 | 20.10 - 25.81 | 457 | 20.10 - 25.81 | |||||||||||
1,051 | 26.85 - 27.69 | 1,051 | 26.85 - 27.69 | |||||||||||
502 | 28.02 - 29.18 | 502 | 28.02 - 29.18 | |||||||||||
3,010 | 30.29 - 33.36 | 2,977 | 30.29 - 33.36 | |||||||||||
Total
6,955
|
Weighted
Average $ 25.54
|
Total
5,357
|
Weighted Average
$ 28.15
|
|||||||||||
Outstanding | Exercisable | |||||||
Average remaining contractual life (in years)
|
4.2 | 2.9 | ||||||
Aggregate intrinsic value (in thousands)
|
$ | (57,514 | ) | $ | (58,281 | ) | ||
Options Exercised | Intrinsic Value | |||||||
2009
|
1,205 | $14,300 | ||||||
2008
|
14,399 | $64,000 | ||||||
2007
|
821,525 | $13.3 million | ||||||
For awards granted before January 1, 2006 that were not
fully vested on January 1, 2006, the Company will record
the tax benefits from the exercise of stock options as increases
to the Additional paid-in capital line item of the
Consolidated Balance Sheets. If the Company does recognize tax
benefits, the Company will record these tax benefits from
share-based compensation costs as cash inflows in the financing
section and cash outflows in the operating section in the
Statement of Cash Flows. The Company has elected to use the
short-cut method to calculate its historical pool of windfall
tax benefits.
As of December 31, 2009, there was approximately
$5.1 million of total unrecognized compensation cost
related to TSYS stock options that is expected to be recognized
over a remaining weighted average period of 1.6 years.
49
NOTE 17 | Treasury Stock |
The following table summarizes shares held as treasury stock and
their related carrying value:
Number of |
||||||||
Treasury |
Treasury |
|||||||
(in thousands) | Shares | Shares Cost | ||||||
December 31, 2009
|
3,680 | $ | 69,950 | |||||
December 31, 2008
|
3,652 | 69,641 | ||||||
December 31, 2007
|
1,695 | 34,138 | ||||||
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 represented slightly more than five
percent of the shares of TSYS stock held by shareholders other
than Synovus. The shares may be purchased from time to time over
a two year period and will depend on various factors including
price, market conditions, acquisitions and the general financial
position of TSYS. Repurchased shares will 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.
During 2008, TSYS purchased approximately 2.0 million
shares of TSYS common stock through privately negotiated and
open market transactions for an aggregate purchase price of
$35.7 million, or an average per share price of $18.13. The
Company has approximately 6,928,000 shares remaining that
could be repurchased under the stock repurchase plan.
The following table sets forth information regarding the
Companys purchases of its common stock on a monthly basis
during the three months ended December 31, 2009:
Maximum |
||||||||||||||||
Number of |
||||||||||||||||
Total Number of |
Shares That |
|||||||||||||||
Cumulative Shares Purchased |
May Yet Be |
|||||||||||||||
Total Number |
as Part of Publicly |
Purchased |
||||||||||||||
of Shares |
Average Price |
Announced Plans |
Under the Plans |
|||||||||||||
(in thousands, except per share data) | Purchased | Paid per Share | or Programs | or Programs | ||||||||||||
October 2009
|
| $ | | 3,072 | 6,928 | |||||||||||
November 2009
|
| | 3,072 | 6,928 | ||||||||||||
December 2009
|
| | 3,072 | 6,928 | ||||||||||||
Total
|
| $ | | |||||||||||||
Shares Issued for
Options Exercised
During 2009, 2008 and 2007, employees of the Company exercised
options for shares of TSYS common stock that were issued from
treasury or newly issued shares. The table below summarizes
these stock option exercises by year:
2009 | 2008 | 2007 | ||||||||||
Issued from treasury
|
1,205 | 12,198 | 69,325 | |||||||||
Newly issued
|
| 2,201 | 752,200 | |||||||||
Treasury
Shares
In 2008, the Compensation Committee approved share
withholding for taxes for all employee nonvested awards,
and also for employee stock options during the six month period
before the options expire for those employees who have
inside information during that six month period
(including broad-based group employees). The dollar amount of
the income tax liability from each exercise is converted into
TSYS shares. The shares are added to the treasury account and
TSYS remits funds to the Internal Revenue Service to settle the
tax liability. During 2009, the Company acquired
29,221 shares as a result of share withholding for taxes.
50
NOTE 18 | Other Comprehensive Income (Loss) |
In June 1997, the FASB issued authoritative guidance under ASC
220. ASC 220 established certain standards for reporting and
presenting comprehensive income in the general-purpose financial
statements. The purpose of ASC 220 was to report all items that
met the definition of comprehensive income in a
prominent financial statement for the same period in which they
were recognized. Comprehensive income includes all changes in
owners equity that resulted from transactions of the
business entity with nonowners.
Comprehensive income is the sum of net income and other items
that must bypass the income statement because they have not been
realized, including items such as an unrealized holding gain or
loss from available for sale securities and foreign currency
translation gains or losses. These items are not part of net
income, yet are important enough to be included in comprehensive
income, giving the user a more comprehensive picture of the
organization as a whole. Items included in comprehensive income,
but not net income, are reported under the accumulated other
comprehensive income section of shareholders equity.
In September 2006, the FASB issued authoritative guidance under
ASC 715, Compensation Retirement
Benefits, previously referred to as
SFAS No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans.
ASC 715 requires an employer to recognize the overfunded or
underfunded status of a defined benefit postretirement plan as
an asset or liability in its statement of financial position and
to recognize changes in the funded status in the year in which
the changes occur through comprehensive income.
Comprehensive income (loss) for TSYS consists of net income,
cumulative foreign currency translation adjustments and the
recognition of an overfunded or underfunded status of a defined
benefit postretirement plan recorded as a component of
shareholders equity. The income tax effects allocated to
and the cumulative balance of each component of accumulated
other comprehensive income (loss) are as follows:
Beginning |
Pretax |
Net-of-Tax |
Ending |
|||||||||||||||||
(in thousands) | Balance | amount | Tax effect | Amount | Balance | |||||||||||||||
December 31, 2006
|
$ | 5,685 | 19,121 | 4,165 | 14,956 | $ | 20,641 | |||||||||||||
Foreign currency translation adjustments
|
$ | 21,570 | 9,456 | 1,824 | 7,632 | $ | 29,202 | |||||||||||||
Change in accumulated OCI related to postretirement healthcare
plans
|
(929 | ) | 76 | 27 | 49 | (880 | ) | |||||||||||||
December 31, 2007
|
$ | 20,641 | 9,532 | 1,851 | 7,681 | $ | 28,322 | |||||||||||||
Foreign currency translation adjustments
|
$ | 29,202 | (43,315 | ) | (8,255 | ) | (35,060 | ) | $ | (5,858 | ) | |||||||||
Change in accumulated OCI related to postretirement healthcare
plans
|
(880 | ) | 194 | 83 | 111 | (769 | ) | |||||||||||||
December 31, 2008
|
$ | 28,322 | (43,121 | ) | (8,172 | ) | (34,949 | ) | $ | (6,627 | ) | |||||||||
Foreign currency translation adjustments
|
$ | (5,858 | ) | 14,140 | 1,995 | 12,145 | $ | 6,287 | ||||||||||||
Change in accumulated OCI related to postretirement
healthcare plans
|
(769 | ) | 235 | 80 | 155 | (614 | ) | |||||||||||||
December 31, 2009
|
$ | (6,627 | ) | 14,375 | 2,075 | 12,300 | $ | 5,673 | ||||||||||||
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 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 19 | Commitments and Contingencies |
LEASE COMMITMENTS: TSYS is obligated under
noncancelable operating leases for computer equipment and
facilities.
The future minimum lease payments under noncancelable operating
leases with remaining terms greater than one year for the
51
next five years and thereafter and in the aggregate as of
December 31, 2009, are as follows:
(in thousands) | ||||
2010
|
$ | 87,809 | ||
2011
|
48,004 | |||
2012
|
16,300 | |||
2013
|
8,833 | |||
2014
|
5,272 | |||
Thereafter
|
14,641 | |||
Total future minimum lease payments
|
$ | 180,859 | ||
The majority of computer equipment lease commitments come with a
renewal option or an option to terminate the lease. These lease
commitments may be replaced with new leases which allow the
Company to continually update its computer equipment. Total
rental expense under all operating leases in 2009, 2008 and 2007
was $106.0 million, $102.4 million and
$92.8 million, respectively. Total rental expense under
sublease arrangements in 2009, 2008 and 2007 was $720,000,
$702,000 and $171,000, respectively. The rental income under
sublease arrangements in 2009, 2008 and 2007 was $863,000,
$842,000 and $209,000, respectively.
The total of minimum rental receipts under noncancelable
subleases as of the date of the latest balance sheet presented
is $809,000.
CONTRACTUAL COMMITMENTS: In the normal course
of its business, the Company maintains long-term processing
contracts with its clients. These processing contracts contain
commitments, including, but not limited to, minimum standards
and time frames against which the Companys performance is
measured. In the event the Company does not meet its contractual
commitments with its clients, the Company may incur penalties
and certain clients may have the right to terminate their
contracts with the Company. The Company does not believe that it
will fail to meet its contractual commitments to an extent that
will result in a material adverse effect on its financial
position, results of operations or cash flows.
CONTINGENCIES: 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, Contingencies,
previously referred to as SFAS No. 5,
Accounting for Contingencies.
GUARANTEES AND INDEMNIFICATIONS: The Company
has entered into processing and licensing agreements with its
clients that include intellectual property indemnification
clauses. Under these 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.
The Company has not recorded a liability for guarantees or
indemnities in the accompanying consolidated balance sheet since
the maximum amount of potential future payments under such
guarantees and indemnities is not determinable.
NOTE 20 | Income Taxes |
The provision for income taxes includes income taxes currently
payable and those deferred because of temporary differences
between the financial statement carrying amounts and tax bases
of assets and liabilities.
The components of income tax expense included in the
consolidated statements of income were as follows:
Years Ended December 31, | ||||||||||||
(in thousands) | 2009 | 2008 | 2007 | |||||||||
Current income tax expense (benefit):
|
||||||||||||
Federal
|
$114,716 | 125,743 | 151,552 | |||||||||
State
|
4,311 | 4,678 | (3,010 | ) | ||||||||
Foreign
|
6,185 | 5,075 | 3,326 | |||||||||
Total current income tax expense
|
125,212 | 135,496 | 151,868 | |||||||||
Deferred income tax expense (benefit):
|
||||||||||||
Federal
|
(4,237 | ) | (3,469 | ) | (11,683 | ) | ||||||
State
|
947 | (390 | ) | 1,607 | ||||||||
Foreign
|
(684 | ) | (431 | ) | 278 | |||||||
Total deferred income tax benefit
|
(3,974 | ) | (4,290 | ) | (9,798 | ) | ||||||
Total income tax expense
|
$121,238 | 131,206 | 142,070 | |||||||||
Income tax expense differed from the amounts computed by
applying the statutory U.S. federal income tax rate of 35%
to
52
income before income taxes, noncontrolling interest and equity
in income of equity investments as a result of the following:
Years Ended December 31, | ||||||||||||
(in thousands) | 2009 | 2008 | 2007 | |||||||||
Computed expected income tax expense
|
$118,507 | 131,057 | 130,302 | |||||||||
Increase (decrease) in income tax expense resulting from:
|
||||||||||||
Noncontrolling interests in income of consolidated subsidiaries
and equity in income of equity investments
|
1,695 | 1,806 | 1,421 | |||||||||
State income tax expense (benefit), net of federal income tax
effect
|
3,418 | 2,787 | (918 | ) | ||||||||
Increase (decrease) in valuation allowance
|
(6,159 | ) | 5,006 | 2,003 | ||||||||
Tax credits
|
(4,299 | ) | (4,131 | ) | (5,290 | ) | ||||||
Federal income tax expense resulting from ASC 740 Election
|
9,844 | | | |||||||||
Federal income tax expense resulting from deconsolidation
|
| | 10,369 | |||||||||
Permanent differences and other, net
|
(1,768 | ) | (5,319 | ) | 4,183 | |||||||
Total income tax expense
|
$121,238 | 131,206 | 142,070 | |||||||||
Temporary differences between the financial statement carrying
amounts and tax bases of assets and liabilities that give rise
to significant portions of the net deferred tax liability at
December 31, 2009 and 2008 relate to the following:
At December 31, | ||||||||
(in thousands) | 2009 | 2008 | ||||||
Deferred income tax assets:
|
||||||||
Net operating loss and income tax credit carryforwards
|
$ | 18,653 | 8,207 | |||||
Allowances for doubtful accounts and billing adjustments
|
2,114 | 2,686 | ||||||
Deferred revenue
|
14,857 | 3,434 | ||||||
Other, net
|
29,610 | 48,104 | ||||||
Total deferred income tax assets
|
65,234 | 62,431 | ||||||
Less valuation allowance for deferred income tax assets
|
(12,870 | ) | (19,029 | ) | ||||
Net deferred income tax assets
|
52,364 | 43,402 | ||||||
Deferred income tax liabilities:
|
||||||||
Excess tax over financial statement depreciation
|
(36,223 | ) | (26,655 | ) | ||||
Computer software development costs
|
(39,150 | ) | (39,655 | ) | ||||
Purchase accounting adjustments
|
(1,672 | ) | (1,953 | ) | ||||
Foreign currency translation
|
(4,851 | ) | (2,856 | ) | ||||
Other, net
|
(6,328 | ) | (10,068 | ) | ||||
Total deferred income tax liabilities
|
(88,224 | ) | (81,187 | ) | ||||
Net deferred income tax liabilities
|
$ | (35,860 | ) | (37,785 | ) | |||
Total net deferred tax assets (liabilities):
|
||||||||
Current
|
$ | 11,302 | 22,793 | |||||
Noncurrent
|
(47,162 | ) | (60,573 | ) | ||||
Net deferred income tax liability
|
$ | (35,860 | ) | (37,780 | ) | |||
As of December 31, 2009, TSYS had recognized deferred tax
assets from net operating losses, capital losses and federal and
state income tax credit carryforwards of $13.2 million,
$2.4 million and $3.1 million, respectively. As of
December 31, 2008, TSYS had recognized deferred tax assets
from net operating losses and federal and state income tax
credit carryforwards of $14.1 million and
$4.0 million, respectively. The credits will begin to
expire in the year 2010. The net operating losses will expire in
the years 2011 through 2020. In assessing the realizability of
deferred income tax assets, management considers whether it is
more likely than not that some portion or all of the deferred
income tax assets will not be realized. The ultimate realization
of deferred income tax assets is dependent upon the generation
of future taxable income during the periods in which those
temporary differences become deductible. Management considers
the scheduled reversal of deferred tax liabilities, projected
future taxable income and tax planning strategies in making this
assessment.
53
At December 31, 2009 and 2008, based upon the level of
historical taxable income and projections for future taxable
income over the periods in which the deferred income tax assets
are deductible, management believes it is more likely than not
that TSYS will realize the benefits of these deductible
differences, net of existing valuation allowances. The valuation
allowance for deferred tax assets was $12.9 million and
$19.0 million at December 31, 2009 and 2008,
respectively. The decrease in the valuation allowance for
deferred income tax assets was $6.2 million for 2009. The
increase in the valuation allowance for deferred income tax
assets was $5.0 million for 2008. The decrease relates to
federal losses which are no longer recognized due to an ASC
Subtopic 740-30 election net of foreign losses recognized in
2009, which, more likely than not, will not be realized in later
years.
No provision for U.S. federal and state incomes taxes has
been made in our consolidated financial statements for those
non-U.S. subsidiaries
whose earnings are considered to be reinvested. A distribution
of these
non-U.S. earnings
in the form of dividends, or otherwise, would subject the
Company to both U.S. federal and state income taxes, as
adjusted for
non-U.S. tax
credits, and withholding taxes payable to the various
non-U.S. countries.
Determination of the amount of any unrecognized deferred income
tax liability on these undistributed earnings is not practicable.
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 few exceptions, the Company is no longer subject to
income tax examinations from state and local or foreign tax
authorities for years before 2002. There are currently no
federal or foreign tax examinations in progress. However, a
number of tax examinations are in progress by the relevant state
tax authorities. Although TSYS is unable to determine the
ultimate outcome of these examinations, TSYS believes that its
liability for uncertain tax positions relating to these
jurisdictions for such years is adequate.
TSYS 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. As a result of the implementation
of ASC 740, the Company recognized approximately a
$2.0 million increase in the liability for unrecognized
income tax benefits, which was accounted for as a reduction to
the January 1, 2007, balance of retained earnings. This
adjustment was the cumulative effect of applying a different
measurement standard in accounting for uncertainty in income
taxes. During the year ended December 31, 2009, TSYS
decreased its liability for prior year uncertain income tax
positions as a discrete item by a net amount of approximately
$0.1 million (net of the federal tax effect). This decrease
resulted from recalculating state liabilities and expiring
federal and state audit period statutes and other new
information impacting the potential resolution of material
uncertain tax positions.
A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as
follows(1):
Year Ended |
||||
December 31, |
||||
(in millions) | 2009 | |||
Beginning balance
|
$ | 4.4 | ||
Current activity:
|
||||
Additions based on tax positions related to current year
|
0.1 | |||
Additions for tax positions of prior years
|
2.5 | |||
Reductions for tax positions of prior years
|
(2.0 | ) | ||
Settlements
|
| |||
Net, current activity
|
0.6 | |||
Ending balance
|
$ | 5.0 | ||
(1) | Unrecognized state tax benefits are not adjusted for the federal tax impact. |
TSYS recognizes potential interest and penalties related to the
underpayment of income taxes as income tax expense in the
consolidated statements of income. Gross accrued interest and
penalties on unrecognized tax benefits totaled $0.7 million
and $1.3 million as of December 31, 2009 and
December 31, 2008, respectively. The total amounts of
unrecognized income tax benefits as of December 31, 2009
and December 31, 2008 that, if recognized, would affect the
effective tax rates are $4.2 million and $4.3 million
(net of the federal benefit on state tax issues), respectively,
which includes interest and penalties of $0.6 million and
$1.0 million, respectively.
NOTE 21 | Employee Benefit Plans |
The Company provides benefits to its employees by offering
employees participation in certain defined contribution plans.
On December 31, 2007, Synovus completed the spin-off to its
shareholders of the shares of TSYS stock formerly owned by
Synovus. As a result of the spin-off, TSYS created TSYS specific
benefit plans. The descriptions provided below for the TSYS
specific plans are also applicable to the prior Synovus plans.
54
The employee benefit plans through which TSYS provided benefits
to its employees during 2009 are described as follows:
MONEY PURCHASE PLAN: During 2009, the
Companys employees were eligible to participate in the
Total System Services, Inc. (TSYS) Money Purchase Pension Plan,
a defined contribution pension plan. The terms of the plan
provide for the Company to make annual contributions to the plan
equal to 7% of participant compensation, as defined.
In 2010, the Company created a new plan named the TSYS
Retirement Savings Plan designed to reward all team members of
TSYS
U.S.-based
companies with a uniform employer contribution. The terms of the
plan provide for the Company to match 100% of the employee
contribution up to 4% of eligible compensation. The Company can
make discretionary contributions up to another 4% based upon
business conditions.
PROFIT SHARING PLAN: During 2009, the
Companys employees were eligible to participate in the
TSYS Profit Sharing Plan. The Companys contributions to
the plan are contingent upon achievement of certain financial
goals. The terms of the plan limit the Companys
contribution to 7% of participant compensation, as defined, not
to exceed the maximum allowable deduction under Internal Revenue
Service guidelines.
401(K) PLAN: During 2009, the Companys employees
were eligible to participate in the TSYS 401(k) Plan. The terms
of the plan allow employees to contribute eligible pretax
compensation with a discretionary company contribution up to a
maximum of 7% of participant compensation, as defined, based
upon the Companys attainment of certain financial goals.
The Companys contributions to the plans charged to expense
for the years ended December 31 are as follows:
(in thousands) | 2009 | 2008 | 2007 | |||||||||
Money Purchase Plan
|
$ | 21,985 | 21,613 | 18,699 | ||||||||
Profit Sharing Plan
|
| 4,473 | 17,546 | |||||||||
401(k) Plan
|
318 | 656 | 1,007 | |||||||||
STOCK PURCHASE PLAN: The Company maintains
stock purchase plans for employees and directors. Prior to July
2009, the Company made contributions equal to one-half of
employee and director voluntary contributions. Beginning in July
2009, the Company changed its contribution to 15% of employee
and director voluntary contributions. The funds are used to
purchase presently issued and outstanding shares of TSYS common
stock for the benefit of participants. The Companys
contributions to these plans charged to expense for the years
ended December 31 are as follows:
(in thousands) | ||||
2009
|
$ | 3,778 | ||
2008
|
5,891 | |||
2007
|
5,451 | |||
POSTRETIREMENT MEDICAL BENEFITS PLAN: TSYS
provides certain medical benefits to qualified retirees through
a postretirement medical benefits plan, which is immaterial to
the Companys consolidated financial statements. The
measurement of the benefit expense and accrual of benefit costs
associated with the plan do not reflect the effects of the 2003
Medicare Act. Additionally, the benefit expense and accrued
benefit cost associated with the plan, as well as any potential
impact of the effects of the 2003 Medicare Act, are not
significant to the Companys consolidated financial
statements.
NOTE 22 | Segment Reporting, including Geographic Area Data and Major Customers |
In June 1997, the FASB issued guidance in accordance with ASC
280, Segment Reporting, previously referred
to as SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. ASC
280 establishes standards for the way public business
enterprises are to report information about operating segments
in annual financial statements and requires those enterprises to
report selected financial information about operating segments
in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and
services, geographic area data and major customers.
As a result of the spin-off and the associated spin-related
costs, the Company revised its segment information to reflect
the information that the chief operating decision maker (CODM)
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 senior executive vice
presidents. During 2008, TSYS reorganized and renamed its
operating segments in a manner that reflects the way the CODM
views the business. The new operating segments are North America
Services segment, International Services segment and Merchant
Services segment. As part of the reorganization, TSYS
reclassified the segment results for TSYS de México from
International Services to North America Services to reflect the
change.
During the first quarter of 2009, the Company decided to sell
TDM. As a result, TDM was classified as discontinued operations
for all periods. TDM was included in the North America Services
segment. Refer to Note 2 for more information on TDM.
In November 2008, TSYS acquired Infonox, to provide valuable new
acceptance capabilities utilizing PCs, kiosks, ATMs, mobile
devices and Web interfaces to process checks, conduct debit and
credit transactions, process instant loans, facilitate bill
payments, execute money transfers, issue and dispense prepaid
cards and more. Refer to Note 24 for more information on
Infonox. Since the acquisition, TSYS has included the financial
results of Infonox in the Merchant Services segment.
TSYS provides electronic payment processing services, merchant
services and related services to card-issuing institutions in
the
55
United States and internationally through online accounting and
electronic payment processing systems. The North America
Services segment includes electronic payment processing services
and other services provided from within the United States.
The International Services segment includes electronic payment
processing services and other services from outside the United
States.
The Company believes the terms and conditions of transactions
between the segments are comparable to those which could have
been obtained in transactions with unaffiliated parties.
2009 vs. 2008 |
2008 vs. 2007 |
|||||||||||||||||||||||||||
(in thousands) |
Change | Change | ||||||||||||||||||||||||||
Operating Segments
|
2009 | 2008 | 2007 | $ | % | $ | % | |||||||||||||||||||||
Revenues before reimbursable items
|
||||||||||||||||||||||||||||
North America Services
|
$ | 880,668 | 938,442 | 939,148 | (57,774 | ) | (6.2 | )% | $ | (706 | ) | (0.1 | )% | |||||||||||||||
International Services
|
322,697 | 307,361 | 243,226 | 15,336 | 5.0 | % | 64,135 | 26.4 | % | |||||||||||||||||||
Merchant Services
|
242,841 | 234,467 | 231,947 | 8,374 | 3.6 | % | 2,520 | 1.1 | % | |||||||||||||||||||
Intersegment revenues
|
(28,322 | ) | (23,516 | ) | (25,465 | ) | (4,806 | ) | 20.4 | % | 1,949 | (7.7 | )% | |||||||||||||||
Revenues before reimbursable items from external customers
|
$ | 1,417,884 | 1,456,754 | 1,388,856 | (38,870 | ) | (2.7 | )% | $ | 67,898 | 4.9 | % | ||||||||||||||||
Total revenues
|
||||||||||||||||||||||||||||
North America Services
|
$ | 1,048,932 | 1,136,901 | 1,150,711 | (87,969 | ) | (7.7 | )% | $ | (13,810 | ) | (1.2 | )% | |||||||||||||||
International Services
|
337,757 | 318,534 | 253,497 | 19,223 | 6.0 | % | 65,037 | 25.7 | % | |||||||||||||||||||
Merchant Services
|
337,635 | 298,792 | 292,118 | 38,843 | 13.0 | % | 6,674 | 2.3 | % | |||||||||||||||||||
Intersegment revenues
|
(36,262 | ) | (32,581 | ) | (33,876 | ) | (3,681 | ) | 11.3 | % | 1,295 | (3.8 | )% | |||||||||||||||
Revenues from external customers
|
$ | 1,688,062 | 1,721,646 | 1,662,450 | (33,584 | ) | (2.0 | )% | $ | 59,196 | 3.6 | % | ||||||||||||||||
Depreciation and amortization
|
||||||||||||||||||||||||||||
North America Services
|
$ | 86,730 | 97,006 | 101,130 | (10,276 | ) | (10.6 | )% | $ | (4,124 | ) | (4.1 | )% | |||||||||||||||
International Services
|
36,328 | 33,490 | 24,213 | 2,838 | 8.5 | % | 9,277 | 38.3 | % | |||||||||||||||||||
Merchant Services
|
32,864 | 27,797 | 26,680 | 5,067 | 18.2 | % | 1,117 | 4.2 | % | |||||||||||||||||||
Total depreciation and amortization
|
$ | 155,922 | 158,293 | 152,023 | (2,371 | ) | (1.5 | )% | $ | 6,270 | 4.1 | % | ||||||||||||||||
Segment operating income
|
||||||||||||||||||||||||||||
North America Services
|
$ | 234,512 | 265,858 | 253,880 | (31,346 | ) | (11.8 | )% | $ | 11,978 | 4.7 | % | ||||||||||||||||
International Services
|
43,238 | 48,362 | 44,083 | (5,124 | ) | (10.6 | )% | 4,279 | 9.7 | % | ||||||||||||||||||
Merchant Services
|
64,283 | 65,595 | 64,698 | (1,312 | ) | (2.0 | )% | 897 | 1.4 | % | ||||||||||||||||||
Spin-related costs
|
| (11,140 | ) | (13,526 | ) | 11,140 | (100.0 | )% | 2,386 | (17.6 | )% | |||||||||||||||||
Operating income
|
$ | 342,033 | 368,675 | 349,135 | (26,642 | ) | (7.2 | )% | $ | 19,540 | 5.6 | % | ||||||||||||||||
Total assets
|
||||||||||||||||||||||||||||
North America Services
|
$ | 1,535,129 | 1,415,960 | 1,271,177 | 119,169 | 8.4 | % | $ | 144,783 | 11.4 | % | |||||||||||||||||
International Services
|
379,606 | 324,313 | 319,279 | 55,293 | 17.0 | % | 5,034 | 1.6 | % | |||||||||||||||||||
Merchant Services
|
215,855 | 212,779 | 197,230 | 3,076 | 1.4 | % | 15,549 | 7.9 | % | |||||||||||||||||||
Intersegment assets
|
(419,636 | ) | (403,028 | ) | (308,605 | ) | (16,608 | ) | 4.1 | % | (94,423 | ) | 30.6 | % | ||||||||||||||
Total assets
|
$ | 1,710,954 | 1,550,024 | 1,479,081 | 160,930 | 10.4 | % | $ | 70,943 | 4.8 | % | |||||||||||||||||
Revenues for North America Services and Merchant Services
include electronic payment processing services 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 services and
other services provided from facilities outside the United
States to clients based predominantly outside the United States.
As a result of the conversion to a new reporting system in
January 2010, TSYS began implementing changes to its
operating segment structure by creating a new segment named
Corporate Admin that will house expenses associated with
finance, human resources, investor relations, legal and
executive management.
56
GEOGRAPHIC AREA DATA: The Company maintains
property and equipment, net of accumulated depreciation and
amortization, in the following geographic areas:
At |
||||||||
December 31, | ||||||||
(in millions) | 2009 | 2008 | ||||||
United States
|
$ | 203.6 | 227.1 | |||||
Europe
|
60.7 | 54.1 | ||||||
Japan
|
6.4 | 3.5 | ||||||
Other
|
18.5 | 6.6 | ||||||
Totals
|
$ | 289.2 | 291.3 | |||||
The following geographic area data represents revenues for the
years ended December 31 based on the domicile of the
Companys customers:
(in millions) | 2009 | % | 2008 | % | 2007 | % | ||||||||||||||||||
United States
|
$ | 1,194.4 | 70.7 | $ | 1,253.0 | 72.8 | $ | 1,256.9 | 75.6 | |||||||||||||||
Europe
|
269.4 | 16.0 | 269.1 | 15.6 | 211.8 | 12.7 | ||||||||||||||||||
Canada
|
139.7 | 8.3 | 127.1 | 7.4 | 126.8 | 7.6 | ||||||||||||||||||
Japan
|
48.9 | 2.9 | 33.9 | 2.0 | 24.5 | 1.5 | ||||||||||||||||||
Mexico
|
8.2 | 0.5 | 13.4 | 0.8 | 14.0 | 0.9 | ||||||||||||||||||
Other
|
27.5 | 1.6 | 25.1 | 1.4 | 28.5 | 1.7 | ||||||||||||||||||
Totals
|
$ | 1,688.1 | 100.0 | $ | 1,721.6 | 100.0 | $ | 1,662.5 | 100.0 | |||||||||||||||
GEOGRAPHIC AREA REVENUE BY OPERATING
SEGMENT: The following table reconciles segment
revenue to revenues by geography for the years ended December 31:
North America Services | International Services | Merchant Services | ||||||||||||||||||||||||||||||||||
(in millions) | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||||||||||||||
United States
|
$ | 859.5 | 956.6 | 969.8 | $ | 0.1 | 0.2 | 0.5 | $ | 334.8 | 296.2 | 286.6 | ||||||||||||||||||||||||
Europe
|
0.9 | 0.9 | 1.7 | 268.5 | 268.2 | 210.1 | | | | |||||||||||||||||||||||||||
Canada
|
139.1 | 126.5 | 126.2 | | | | 0.6 | 0.6 | 0.6 | |||||||||||||||||||||||||||
Japan
|
| | | 48.9 | 33.9 | 24.5 | | | | |||||||||||||||||||||||||||
Mexico
|
8.2 | 13.4 | 14.0 | | | | | | | |||||||||||||||||||||||||||
Other
|
9.6 | 9.7 | 10.5 | 17.1 | 14.6 | 17.2 | 0.8 | 0.8 | 0.8 | |||||||||||||||||||||||||||
Totals
|
$ | 1,017.3 | 1,107.1 | 1,122.2 | $ | 334.6 | 316.9 | 252.3 | $ | 336.2 | 297.6 | 288.0 | ||||||||||||||||||||||||
MAJOR CUSTOMER: For the years ended
December 31, 2009, 2008 and 2007, the Company had one major
customer which accounted for approximately $217.7 million,
or 12.9%, $220.3 million, or 12.8%, and
$213.3 million, or 12.8%, respectively, of total revenues.
Revenues from the major customer for the years ended
December 31, 2009, 2008 and 2007, respectively, are
primarily attributable to the North America Services segment and
the Merchant Services segment.
NOTE 23 | Supplemental Cash Flow Information |
Nonvested Share
Awards
The Company issued shares of TSYS 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
in the future by such officers, directors and employees. The
following table summarizes the number of shares issued each year:
2009 | 2008 | 2007 | ||||
Number of shares
|
513,920 | 697,911 | 241,260 | |||
Market value
|
$6.8 million | $15.3 million | $7.6 million | |||
57
Equipment and Software Acquired Under Capital Lease
Obligations
The Company acquired computer equipment and software under
capital lease in the amount of $6.7 million,
$18.1 million and $4.8 million in 2009, 2008 and 2007,
respectively.
NOTE 24 | Acquisitions |
Infonox on the
Web
The Company acquired Infonox on November 4, 2008 for
approximately $50.5 million, with contingent payments over
the next three years of up to $25 million based on
performance. Infonox provides payment products on self-service
and full-service transaction touch points in the gaming, banking
and retail markets. The company delivers, manages, operates and
supports services for several large publicly traded companies.
The acquisition added new payment technology and acceptance
capabilities. Infonox is based in Sunnyvale, California, with an
office in Pune, India.
The final purchase price allocation is presented below:
(in thousands) | ||||
Cash and cash equivalents
|
$ | 899 | ||
Intangible assets
|
21,500 | |||
Goodwill
|
29,142 | |||
Other assets
|
3,222 | |||
Total assets acquired
|
54,763 | |||
Other liabilities
|
4,190 | |||
Total liabilities assumed
|
4,190 | |||
Net assets acquired
|
$ | 50,573 | ||
Revenues associated with Infonox are included in merchant
services and are included in Merchant Services for segment
reporting purposes.
NOTE 25 | Synovus Spin-off of TSYS |
In July 2007, Synovus Board of Directors appointed a
special committee of independent directors to make a
recommendation with respect to whether to distribute
Synovus ownership interest in TSYS to Synovus
shareholders. As a result, the TSYS Board of Directors formed a
special committee of independent TSYS directors to consider the
terms of any proposed spin-off by Synovus of its ownership
interest in TSYS, including the size of the pre-spin cash
dividend.
On October 25, 2007, the Company entered into an agreement
and plan of distribution with Synovus, under which Synovus
planned to distribute all of its shares of TSYS common stock in
a spin-off to Synovus shareholders. Under the terms and
conditions of the agreement, TSYS would become a fully
independent company, allowing for broader diversification of the
Companys shareholder base, more liquidity of the
Companys shares and additional investment in strategic
growth opportunities and potential acquisitions.
In accordance with the agreement and plan of distribution by and
among TSYS, Synovus and CB&T, on November 30, 2007,
TSYS entered into a Transition Services Agreement, an Employee
Matters Agreement, an Indemnification and Insurance Matters
Agreement, a Master Confidential Disclosure Agreement and an
Assignment and Assumption Agreement with Synovus. On
November 30, 2007, TSYS also entered into a Tax Sharing
Agreement with CB&T and Synovus. On November 30, 2007,
TSYS, Synovus and CB&T also entered into an amendment to
the Distribution Agreement which clarified that the effective
time of the spin-off transaction would be prior to the close of
business on December 31, 2007.
Prior to the spin-off transaction and in accordance with the
agreement and plan of distribution, TSYS agreed to pay a
one-time aggregate cash dividend of $600 million to all
TSYS shareholders, including Synovus. The per share amount of
the $600 million special cash dividend was determined to be
$3.0309 per share, based on the number of TSYS shares
outstanding as of the close of business on December 17,
2007, the record date. TSYS funded the dividend with a
combination of cash on hand and the use of a revolving credit
facility. Refer to Note 13 for more information on the
revolving credit facility.
Synovus distributed 0.483921 of a share of TSYS common stock on
December 31, 2007 for each share of Synovus common stock
outstanding on December 18, 2007, the record date.
The spin-off was completed on December 31, 2007. TSYS
incurred expenses associated with advisory and legal services in
connection with the spin-off assessment. TSYS also incurred
expenses for the incremental fair value associated with
converting Synovus stock options held by TSYS employees to TSYS
options. Expenses associated with the spin-off for the years
ended December 31, 2008 and 2007 are as follows:
(in millions) | 2008 | 2007 | ||||||
Incremental value of converting Synovus stock options to TSYS
stock options
|
$ | 7 | 6 | |||||
Other operating expenses
|
4 | 8 | ||||||
Total operating expenses
|
11 | 14 | ||||||
Tax impact*
|
(3 | ) | (2 | ) | ||||
Total operating expenses, net of tax impact
|
8 | 12 | ||||||
Income taxes related to deconsolidation
|
| 11 | ||||||
Total
|
$ | 8 | 23 | |||||
* | Certain expenses in a re-organization, such as the spin-off, are not deductible for tax purposes. A majority of the expenses in 2007 are not deductible. |
With the completion of the spin-off, the TSYS Board of Directors
extended to April 2010 TSYS current share repurchase
program
58
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.
NOTE 26 | Collaborative Arrangement |
In January 2009, TSYS adopted the authoritative guidance under
ASC 808, Collaborative Arrangements,
previously referred to as the FASB Emerging Issue Task Force
(EITF)
No. 07-1,
Accounting for Collaborative Arrangements.
The guidance under ASC 808 is effective for reporting
periods beginning after December 15, 2008, and it requires
restatement of prior periods for all collaborative arrangements
existing as of the effective date. Prior to the adoption of ASC
808, TSYS used the equity method of accounting for the joint
ownership of an aircraft enterprise.
In December 2007, TSYS acquired for approximately
$12.1 million a 45% ownership interest in an enterprise
jointly owned with two other entities which operates aircraft
for the owners internal use. The arrangement allows each
entity access to the aircraft and each entity pays for its usage
of the aircraft. Each quarter, the net operating results of the
enterprise are shared among the owners based on their respective
ownership percentage.
TSYS records its usage of the aircraft and its share of net
operating results of the enterprise in Net Technology and
Facilities Expenses and Other Operating Expenses. The amounts of
expense the Company recorded that is attributable to the
collaborative arrangement for the year ended December 31,
2008 was approximately $2.0 million.
The following table illustrates the effect of the retrospective
application on TSYS Expenses and Equity income for its
collaborative arrangements existing as of the effective date:
December 31, 2008 | December 31, 2007 | |||||||||||||||||||||||
As |
Effect of |
As |
Effect of |
|||||||||||||||||||||
Previously |
Adoption of |
Currently |
Previously |
Adoption of |
Currently |
|||||||||||||||||||
(in thousands) | Reported | ASC 808 | Reported | Reported | ASC 808 | Reported | ||||||||||||||||||
Technology and facilities expense
|
$ | | 705 | $ | 705 | $ | | 59 | $ | 59 | ||||||||||||||
Other operating expenses
|
| 1,326 | 1,326 | | 120 | 120 | ||||||||||||||||||
Total operating expenses
|
$ | | 2,031 | $ | 2,031 | $ | | 179 | $ | 179 | ||||||||||||||
Operating profit
|
$ | | (2,031 | ) | $ | (2,031 | ) | $ | | (179 | ) | $ | (179 | ) | ||||||||||
Equity in income of equity investments, net of tax
|
$ | (2,031 | ) | 2,031 | | $ | (179 | ) | 179 | | ||||||||||||||
Net income
|
$ | (2,031 | ) | | $ | (2,031 | ) | $ | (179 | ) | | $ | (179 | ) | ||||||||||
NOTE 27 | Earnings Per Share |
The following table illustrates basic and diluted EPS under the
guidance of ASC 260:
December 31, 2009 | December 31, 2008 | December 31, 2007 | ||||||||||||||||||||||
Common |
Participating |
Common |
Participating |
Common |
Participating |
|||||||||||||||||||
(in thousands, except per share data) | Stock | Securities | Stock | Securities | Stock | Securities | ||||||||||||||||||
Basic EPS:
|
||||||||||||||||||||||||
Net income
|
$ | 215,213 | 250,100 | 237,443 | ||||||||||||||||||||
Less income allocated to nonvested awards
|
(1,644 | ) | 1,644 | (2,069 | ) | 2,069 | (873 | ) | 873 | |||||||||||||||
Net income allocated to common stock for EPS calculation(a)
|
$ | 213,569 | 1,644 | 248,031 | 2,069 | 236,570 | 873 | |||||||||||||||||
Average common shares outstanding(b)
|
195,623 | 1,511 | 196,106 | 1,640 | 196,759 | 729 | ||||||||||||||||||
Basic EPS(a)/(b)
|
$ | 1.09 | 1.09 | 1.26 | 1.26 | 1.20 | 1.20 | |||||||||||||||||
Diluted EPS:
|
||||||||||||||||||||||||
Net income
|
$ | 215,213 | 250,100 | 237,443 | ||||||||||||||||||||
Less income allocated to nonvested awards
|
(1,644 | ) | 1,644 | (2,069 | ) | 2,069 | (873 | ) | 873 | |||||||||||||||
Net income allocated to common stock for EPS calculation(c)
|
$ | 213,569 | 1,644 | 248,031 | 2,069 | 236,570 | 873 | |||||||||||||||||
Average common shares outstanding
|
195,623 | 1,511 | 196,106 | 1,640 | 196,759 | 729 | ||||||||||||||||||
Increase due to assumed issuance of shares related to common
equivalent shares outstanding
|
63 | 20 | 192 | |||||||||||||||||||||
Average common and common equivalent shares outstanding(d)
|
195,686 | 1,511 | 196,126 | 1,640 | 196,951 | 729 | ||||||||||||||||||
Diluted EPS(c)/(d)
|
$ | 1.09 | 1.09 | 1.26 | 1.26 | 1.20 | 1.20 | |||||||||||||||||
59
The diluted EPS calculation excludes stock options and nonvested
awards that are convertible into 6,954,579 common shares for the
year ended December 31, 2009, and excludes 5,600,520 and
5,213,298 common shares for the years ended December 31,
2008 and 2007, respectively, because their inclusion would have
been anti-dilutive.
NOTE 28 | Subsequent Events |
On March 1, 2010, TSYS signed an Investment Agreement with
First National Bank of Omaha of Omaha, Nebraska pursuant to
which the parties intend to enter into a joint venture
arrangement in connection with the expected 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 is the
name under which First National Bank of Omaha currently conducts
its merchant activities.
First National Merchant Solutions offers transaction processing,
merchant support and underwriting, as well as business and
value-added services, and has a 57-year history in the acquiring
industry. First National Merchant Solutions has more than
300,000 merchant outlets in its diverse portfolio.
Management performed an evaluation of the Companys
activity through March 1, 2010, the issuance date of these
financial statements, and has concluded that other than as set
forth above there are no significant subsequent events requiring
disclosure.
60
Report of
Independent Registered Public Accounting Firm
The Board of Directors
Total System Services, Inc.:
We have audited the accompanying consolidated balance sheets of
Total System Services, Inc. and subsidiaries as of
December 31, 2009 and 2008, and the related consolidated
statements of income, cash flows, and equity and comprehensive
income for each of the years in the three-year period ended
December 31, 2009. These consolidated financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Total System Services, Inc. and subsidiaries as of
December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2009, in conformity
with U.S. generally accepted accounting principles.
As discussed in the notes to the consolidated financial
statements, the Company changed the manner in which it accounts
for noncontrolling interests as of January 1, 2009 (note
1), earnings per share as of January 1, 2009 (notes 1 and
27) and uncertain tax positions as of January 1, 2007
(notes 1 and 20).
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2009, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated March 1, 2010 expressed an unqualified opinion on the
effectiveness of the Companys internal control over
financial reporting.
Atlanta, Georgia
March 1, 2010
61
Managements
Report on Internal Control Over Financial Reporting
The management of Total System Services, Inc. (the Company) is
responsible for establishing and maintaining adequate internal
control over financial reporting as defined in
Rule 13a-15(f)
under the Securities Exchange Act of 1934. The Company maintains
accounting and internal control systems which are intended to
provide reasonable assurance that assets are safeguarded against
loss from unauthorized use or disposition, transactions are
executed in accordance with managements authorization and
accounting records are reliable for preparing financial
statements in accordance with accounting principles generally
accepted in the United States.
Internal control over financial reporting cannot provide
absolute assurance of achieving financial reporting objectives
because of its inherent limitations. Internal control over
financial reporting is a process that involves human diligence
and compliance and is subject to lapses in judgment and
breakdowns resulting from human failures. Internal control over
financial reporting also can be circumvented by collusion or
improper management override. Because of such limitations, there
is a risk that material misstatements may not be prevented or
detected on a timely basis by internal control over financial
reporting. However, these inherent limitations are known
features of the financial reporting process. Therefore, it is
possible to design into the process safeguards to reduce, though
not eliminate, risk.
The Companys management assessed the effectiveness of the
Companys internal control over financial reporting as of
December 31, 2009. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring
Organizations (COSO) of the Treadway Commission in Internal
Control Integrated Framework.
Based on our assessment management believes that, as of
December 31, 2009, the Companys internal control over
financial reporting is effective based on those criteria.
KPMG LLP, the independent registered public accounting firm who
audited the Companys consolidated financial statements,
has issued an attestation report on the effectiveness of
internal control over financial reporting as of
December 31, 2009 that appears on page 63 hereof.
Philip W. Tomlinson Chairman of the Board & Chief Executive Officer |
James B. Lipham Senior Executive Vice President & Chief Financial Officer |
62
Report of
Independent Registered Public Accounting Firm
The Board of Directors
Total System Services, Inc.:
We have audited Total System Services, Inc.s internal
control over financial reporting as of December 31, 2009,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Total System
Services, Inc.s management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in the accompanying
Managements Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the
Companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Total System Services, Inc. maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2009, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Total System Services, Inc. and
subsidiaries as of December 31, 2009 and 2008, and the
related consolidated statements of income, cash flows, and
equity and comprehensive income, for each of the years in the
three-year period ended December 31, 2009, and our report
dated March 1, 2010 expressed an unqualified opinion on
those consolidated financial statements.
Atlanta, Georgia
March 1, 2010
63
Quarterly Financial
Data (Unaudited), Stock Price, Dividend Information
TSYS common stock trades on the New York Stock Exchange
(NYSE) under the symbol TSS. Price and volume
information appears under the abbreviation
TotlSysSvc in NYSE daily stock quotation listings.
As of February 11, 2010, there were 30,794 holders of
record of TSYS common stock, some of whom are holders in nominee
name for the benefit of different shareholders.
The fourth quarter dividend of $0.07 per share was declared on
December 8, 2009, and was paid January 4, 2010, to
shareholders of record on December 23, 2009. Total
dividends declared in 2009 and in 2008 amounted to
$55.3 million and $55.4 million, respectively. It is
the present intention of the Board of Directors of TSYS to
continue to pay cash dividends on its common stock.
Presented here is a summary of the unaudited quarterly financial
data for the years ended December 31, 2009 and 2008.
First |
Second |
Third |
Fourth |
|||||||||||||||
(in thousands, except per share data) | Quarter | Quarter | Quarter | Quarter | ||||||||||||||
2009
|
Revenues | $ | 408,933 | 411,993 | 432,296 | 434,840 | ||||||||||||
Operating income | 78,115 | 82,779 | 87,855 | 93,284 | ||||||||||||||
Net income attributable to TSYS | 46,526 | 53,447 | 55,026 | 60,214 | ||||||||||||||
Basic earnings per share | 0.24 | 0.27 | 0.28 | 0.31 | ||||||||||||||
Diluted earnings per share | 0.24 | 0.27 | 0.28 | 0.31 | ||||||||||||||
Cash dividends declared | 0.07 | 0.07 | 0.07 | 0.07 | ||||||||||||||
Stock prices: | ||||||||||||||||||
High | 15.07 | 14.79 | 16.43 | 17.71 | ||||||||||||||
Low | 11.33 | 12.20 | 12.61 | 14.76 | ||||||||||||||
Close | 13.81 | 13.39 | 16.11 | 17.27 | ||||||||||||||
2008
|
Revenues | $ | 419,826 | 429,630 | 439,446 | 432,744 | ||||||||||||
Operating income | 86,096 | 96,848 | 95,290 | 90,441 | ||||||||||||||
Net income attributable to TSYS | 56,614 | 63,084 | 64,074 | 66,328 | ||||||||||||||
Basic earnings per share | 0.29 | 0.32 | 0.32 | 0.34 | ||||||||||||||
Diluted earnings per share | 0.29 | 0.32 | 0.32 | 0.34 | ||||||||||||||
Cash dividends declared | 0.07 | 0.07 | 0.07 | 0.07 | ||||||||||||||
Stock prices: | ||||||||||||||||||
High | 29.50 | 26.62 | 23.15 | 16.47 | ||||||||||||||
Low | 18.76 | 22.14 | 14.30 | 10.36 | ||||||||||||||
Close | 23.66 | 22.22 | 16.40 | 14.00 | ||||||||||||||
64
STOCK PERFORMANCE
GRAPH
The following graph compares the yearly percentage change in
cumulative shareholder return on TSYS stock with the cumulative
total return of the Standard & Poors 500 Index
and the Standard & Poors Systems Software Index
for the last five fiscal years (assuming a $100 investment on
December 31, 2004 and reinvestment of all dividends).
COMPARISON OF
FIVE YEAR CUMULATIVE TOTAL RETURN
AMONG TSYS, THE S&P 500 INDEX
AND THE S&P SYSTEMS SOFTWARE INDEX
AMONG TSYS, THE S&P 500 INDEX
AND THE S&P SYSTEMS SOFTWARE INDEX
2004 | 2005 | 2006 | 2007 | 2008 | 2009 | |||||||||||||||||||||||||
TSYS
|
$ | 100 | $ | 82 | $ | 111 | $ | 133 | $ | 68 | $ | 85 | ||||||||||||||||||
S&P 500
|
$ | 100 | $ | 105 | $ | 121 | $ | 128 | $ | 81 | $ | 102 | ||||||||||||||||||
S&P SS
|
$ | 100 | $ | 96 | $ | 113 | $ | 135 | $ | 84 | $ | 128 | ||||||||||||||||||
65