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EXCEL - IDEA: XBRL DOCUMENT - TOTAL SYSTEM SERVICES INC | Financial_Report.xls |
EX-32 - EX-32 - TOTAL SYSTEM SERVICES INC | g27058exv32.htm |
EX-31.1 - EX-31.1 - TOTAL SYSTEM SERVICES INC | g27058exv31w1.htm |
EX-10.2 - EX-10.2 - TOTAL SYSTEM SERVICES INC | g27058exv10w2.htm |
EX-31.2 - EX-31.2 - TOTAL SYSTEM SERVICES INC | g27058exv31w2.htm |
EX-10.1 - EX-10.1 - TOTAL SYSTEM SERVICES INC | g27058exv10w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: March 31, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from To
Commission file number 1-10254
Total System Services, Inc.
www.tsys.com
(Exact name of registrant as specified in its charter)
Georgia | 58-1493818 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
One TSYS Way, Post Office Box 1755, Columbus, Georgia 31902
(Address of principal executive offices) (Zip Code)
(Address of principal executive offices) (Zip Code)
(706) 649-2310
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer þ
|
Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
CLASS | OUTSTANDING AS OF: May 6, 2011 | |
Common Stock, $0.10 par value | 192,652,326 shares |
TOTAL SYSTEM SERVICES, INC.
INDEX
INDEX
Page | ||||||||
Number | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
17 | ||||||||
29 | ||||||||
31 | ||||||||
32 | ||||||||
32 | ||||||||
32 | ||||||||
33 | ||||||||
34 | ||||||||
EX-10.1 | ||||||||
EX-10.2 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT |
Table of Contents
TOTAL SYSTEM SERVICES, INC.
Part I Financial Information
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except per share data) | March 31, 2011 | December 31, 2010 | ||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 252,488 | 394,795 | |||||
Restricted cash |
92 | 434 | ||||||
Accounts receivable, net of allowance for doubtful accounts and billing
adjustments of $4.5 million and $4.5 million at 2011 and 2010, respectively |
236,952 | 238,283 | ||||||
Deferred income tax assets |
9,552 | 11,090 | ||||||
Prepaid expenses and other current assets |
72,927 | 77,211 | ||||||
Total current assets |
572,011 | 721,813 | ||||||
Property and equipment, net of accumulated depreciation and amortization of $331.4
million and $317.4 million at 2011 and 2010, respectively |
297,463 | 300,102 | ||||||
Computer software, net of accumulated amortization of $517.7 million and $497.6
million at 2011 and 2010, respectively |
236,587 | 246,424 | ||||||
Contract acquisition costs, net of accumulated amortization of $272.3 million and
$260.7 million at 2011 and 2010, respectively |
167,534 | 166,251 | ||||||
Goodwill |
321,990 | 320,399 | ||||||
Equity investments |
80,379 | 77,127 | ||||||
Other intangible assets, net of accumulated amortization of $28.9 million and $26.9
million at 2011 and 2010, respectively |
77,316 | 83,118 | ||||||
Other assets |
31,745 | 37,027 | ||||||
Total assets |
$ | 1,785,025 | 1,952,261 | |||||
Liabilities |
||||||||
Current liabilities: |
||||||||
Current portion of long-term debt |
$ | 38,478 | 39,557 | |||||
Current portion of obligations under capital leases |
12,898 | 13,191 | ||||||
Accrued salaries and employee benefits |
14,091 | 27,414 | ||||||
Accounts payable |
32,069 | 36,068 | ||||||
Other current liabilities |
120,880 | 111,040 | ||||||
Total current liabilities |
218,416 | 227,270 | ||||||
Long-term debt, excluding current portion |
191,409 | 194,703 | ||||||
Deferred income tax liabilities |
44,773 | 42,547 | ||||||
Obligations under capital leases, excluding current portion |
27,705 | 30,573 | ||||||
Other long-term liabilities |
57,305 | 53,363 | ||||||
Total liabilities |
539,608 | 548,456 | ||||||
Redeemable noncontrolling interest in consolidated subsidiary |
| 146,000 | ||||||
Equity |
||||||||
Shareholders equity: |
||||||||
Common stock $0.10 par value. Authorized 600,000 shares; 201,609 and 201,326
issued at 2011 and 2010, respectively; 192,905 and 194,528 outstanding at 2011
and 2010, respectively |
20,140 | 20,133 | ||||||
Additional paid-in capital |
95,346 | 119,722 | ||||||
Accumulated other comprehensive income (loss), net |
7,405 | (2,585 | ) | |||||
Treasury stock, at cost (shares of 8,704 and 6,798 at 2011 and 2010, respectively) |
(149,430 | ) | (115,449 | ) | ||||
Retained earnings |
1,254,554 | 1,219,303 | ||||||
Total shareholders equity |
1,228,015 | 1,241,124 | ||||||
Noncontrolling interests in consolidated subsidiaries |
17,402 | 16,681 | ||||||
Total equity |
1,245,417 | 1,257,805 | ||||||
Total liabilities and equity |
$ | 1,785,025 | 1,952,261 | |||||
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
3
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TOTAL SYSTEM SERVICES, INC.
Condensed Consolidated Statements of Income
(Unaudited)
Three months ended March 31, | ||||||||
(in thousands, except per share data) | 2011 | 2010 | ||||||
Total revenues |
$ | 429,430 | 413,464 | |||||
Cost of services |
301,492 | 290,538 | ||||||
Selling, general and administrative expenses |
54,910 | 43,214 | ||||||
Total operating expenses |
356,402 | 333,752 | ||||||
Operating income |
73,028 | 79,712 | ||||||
Nonoperating expenses |
(728 | ) | (261 | ) | ||||
Income from continuing operations before income taxes and equity in income of
equity investments |
72,300 | 79,451 | ||||||
Income taxes |
25,158 | 28,097 | ||||||
Income from continuing operations before equity in income of equity investments |
47,142 | 51,354 | ||||||
Equity in income of equity investments, net of tax |
2,270 | 893 | ||||||
Income from continuing operations, net of tax |
49,412 | 52,247 | ||||||
Loss from discontinued operations, net of tax |
| (428 | ) | |||||
Net income |
49,412 | 51,819 | ||||||
Net income attributable to noncontrolling interests |
(622 | ) | (492 | ) | ||||
Net income attributable to TSYS common shareholders |
$ | 48,790 | 51,327 | |||||
Basic earnings per share (EPS) (Note 13): |
||||||||
Income from continuing operations to TSYS common shareholders |
$ | 0.25 | 0.26 | |||||
Loss from discontinued operations to TSYS common shareholders |
| 0.00 | ||||||
Net income attributable to TSYS common shareholders |
$ | 0.25 | 0.26 | |||||
Diluted EPS: |
||||||||
Income from continuing operations to TSYS common shareholders |
$ | 0.25 | 0.26 | |||||
Loss from discontinued operations to TSYS common shareholders |
| 0.00 | ||||||
Net income attributable to TSYS common shareholders |
$ | 0.25 | 0.26 | |||||
Amounts attributable to TSYS common shareholders: |
||||||||
Income from continuing operations |
$ | 48,790 | 51,755 | |||||
Loss from discontinued operations |
| (428 | ) | |||||
Net income |
$ | 48,790 | 51,327 | |||||
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
4
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TOTAL SYSTEM SERVICES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three months ended March 31, | ||||||||
(in thousands) | 2011 | 2010 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 49,412 | 51,819 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Net
loss (gain) on foreign currency |
352 | (247 | ) | |||||
Equity in income of equity investments, net of tax |
(2,270 | ) | (893 | ) | ||||
Dividends received from equity investments |
13 | | ||||||
Depreciation and amortization |
41,068 | 38,564 | ||||||
Amortization of debt issuance costs |
26 | 38 | ||||||
Share-based compensation |
4,332 | 2,913 | ||||||
Excess tax benefit from share-based payment arrangements |
(103 | ) | (111 | ) | ||||
Asset impairments |
773 | | ||||||
Provisions for (recoveries of) bad debt expenses and billing adjustments |
204 | (658 | ) | |||||
Charges for transaction processing provisions |
1,296 | 849 | ||||||
Deferred income tax expense |
3,874 | 3,665 | ||||||
Loss (gain) on disposal of equipment, net |
(1,497 | ) | 30 | |||||
Changes in operating assets & liabilities: |
||||||||
Accounts receivable |
2,971 | 9,874 | ||||||
Prepaid expenses, other current assets and other long-term assets |
14,046 | 2,892 | ||||||
Accounts payable |
(4,635 | ) | 8,319 | |||||
Accrued salaries and employee benefits |
(13,800 | ) | (32,707 | ) | ||||
Other current liabilities and other long-term liabilities |
6,109 | 49,188 | ||||||
Net cash provided by operating activities |
102,171 | 133,535 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Purchases of property and equipment, net |
(5,960 | ) | (9,170 | ) | ||||
Additions to licensed computer software from vendors |
(1,280 | ) | (3,769 | ) | ||||
Additions to internally developed computer software |
(4,478 | ) | (5,760 | ) | ||||
Proceeds from sale of tradenames |
4,500 | | ||||||
Additions to contract acquisition costs |
(7,202 | ) | (9,914 | ) | ||||
Net cash used in investing activities |
(14,420 | ) | (28,613 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Purchase of noncontrolling interest |
(174,050 | ) | | |||||
Repurchase of common stock |
(35,700 | ) | (1,075 | ) | ||||
Dividends paid on common stock |
(13,556 | ) | (13,797 | ) | ||||
Excess tax benefit from share-based payment arrangements |
103 | 111 | ||||||
Principal payments on long-term debt borrowings and capital lease obligations |
(8,551 | ) | (3,731 | ) | ||||
Proceeds from exercise of stock options |
1,119 | 109 | ||||||
Net cash used in financing activities |
(230,635 | ) | (18,383 | ) | ||||
CASH AND CASH EQUIVALENTS: |
||||||||
Effect of exchange rate changes on cash and cash equivalents |
577 | (2,007 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
(142,307 | ) | 84,532 | |||||
Cash and cash equivalents at beginning of period |
394,795 | 449,955 | ||||||
Cash and cash equivalents at end of period |
$ | 252,488 | 534,487 | |||||
Supplemental cash flow information: |
||||||||
Interest paid |
$ | 709 | 304 | |||||
Income taxes paid, net |
$ | 3,447 | 3,682 | |||||
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
5
Table of Contents
TOTAL SYSTEM SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Total System
Services, Inc.® (TSYS® or the Company) include the accounts of TSYS and its wholly and majority
owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in
consolidation.
These financial statements have been prepared in accordance with the instructions to Form 10-Q
and do not include all information and footnotes necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with accounting principles generally
accepted in the United States of America. The preparation of the consolidated financial statements
requires management of the Company to make a number of estimates and assumptions relating to the
reported amounts of assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the period. These estimates and assumptions
are developed based upon all information available. Actual results could differ from estimated
amounts. All adjustments, consisting of normal recurring accruals, which, in the opinion of
management, are necessary for a fair presentation of financial position and results of operations
for the periods covered by this report, have been included.
The accompanying unaudited condensed consolidated financial statements should be read in
conjunction with the Companys summary of significant accounting policies, consolidated financial
statements and related notes appearing in the Companys Annual Report on Form 10-K for the year
ended December 31, 2010. Results of interim periods are not necessarily indicative of results to be
expected for the year.
Note 2 Fair Value Measurement
ASC 820, Fair Value Measurements and Disclosure, 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 Financial Accounting Standards Board (FASB) issued authoritative
guidance under ASC 825, Financial Instruments. ASC 825 permits the Company to choose to measure
many financial instruments and certain other items at fair value. Upon adoption of the guidance on
January 1, 2008, TSYS did not elect the fair value option for any financial instrument it did not
currently report at fair value.
Goodwill and certain intangible assets not subject to amortization are assessed annually for
impairment in the second quarter of each year using fair value measurement techniques.
Specifically, goodwill impairment is determined using a two-step test. The first step of the
goodwill impairment test is used to identify potential impairment by comparing the fair value of a
reporting unit with its book value, including goodwill. If the fair value of the reporting unit
exceeds its book value, goodwill is considered not impaired and the second step of the impairment
test is unnecessary. If the book value of the reporting unit exceeds its fair value, the second
step of the goodwill impairment test is performed to measure the amount of impairment loss, if any.
The second step of the goodwill impairment test compares the implied fair value of the reporting
units goodwill with the book value of that goodwill. If the book value of the reporting units
goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an
amount equal to that excess. The fair value of the reporting unit is allocated to all of the assets
and liabilities of that unit as if the reporting unit had been acquired in a business combination
and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit.
The estimate of fair value of the Companys reporting units is determined using various
valuation techniques, including using the combination of the market approach and the income
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
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asset, the relative risk that the cash flows will occur, the contribution of other assets, and
an appropriate discount rate to reflect the value of the invested capital. Cash flows are estimated
for future periods based upon historical data and projections by management.
At March 31, 2011, the Company had recorded goodwill in the amount of $322.0 million.
The fair value of the Companys long-term debt and obligations under capital leases is not
significantly different from its carrying value.
Note 3 Supplementary Balance Sheet Information
Cash and Cash Equivalents
The Company maintains accounts outside the United States denominated in currencies other than
the U.S. dollar. All amounts in domestic accounts are denominated in U.S. dollars.
Cash and cash equivalent balances are summarized as follows:
(in thousands) | March 31, 2011 | December 31, 2010 | ||||||
Cash and cash equivalents in domestic accounts |
$ | 195,577 | 347,734 | |||||
Cash and cash equivalents in foreign accounts |
56,911 | 47,061 | ||||||
Total |
$ | 252,488 | 394,795 | |||||
At March 31, 2011 and December 31, 2010, the Company had approximately $31.4 million and $29.9
million 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 at the time of purchase
that they present insignificant risk of changes in value because of change in interest rates.
Prepaid Expenses and Other Current Assets
Significant components of prepaid expenses and other current assets are summarized as follows:
(in thousands) | March 31, 2011 | December 31, 2010 | ||||||
Prepaid expenses |
$ | 20,396 | 15,421 | |||||
Supplies inventory |
5,045 | 7,138 | ||||||
Income taxes receivable |
| 12,977 | ||||||
Other |
47,486 | 41,675 | ||||||
Total |
$ | 72,927 | 77,211 | |||||
Contract Acquisition Costs, net
Significant components of contract acquisition costs, net of accumulated amortization, are
summarized as follows:
(in thousands) | March 31, 2011 | December 31, 2010 | ||||||
Conversion costs, net of
accumulated amortization of $96.7
million and $90.9 million at 2011
and 2010, respectively |
$ | 85,788 | 80,521 | |||||
Payments for processing rights, net
of accumulated amortization of
$175.6 million and $169.8 million at
2011 and 2010, respectively |
81,746 | 85,730 | ||||||
Total |
$ | 167,534 | 166,251 | |||||
Amortization expense related to conversion costs, which is recorded in cost of services, was
$4.5 million and $4.1 million for the three months ended March 31, 2011 and 2010, respectively.
Amortization related to payments for processing rights, which is recorded as a reduction of
revenues, was $3.9 million and $5.8 million for the three months ended March 31, 2011 and 2010,
respectively.
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Other Current Liabilities
Significant components of other current liabilities are summarized as follows:
(in thousands) | March 31, 2011 | December 31, 2010 | ||||||
Deferred revenues |
$ | 35,936 | 34,184 | |||||
Accrued expenses |
28,822 | 29,999 | ||||||
Dividends payable |
13,529 | 13,634 | ||||||
Accrued income taxes |
10,982 | 2,920 | ||||||
Other |
31,611 | 30,303 | ||||||
Total |
$ | 120,880 | 111,040 | |||||
Note 4 Long-Term Debt
Refer to Note 13 of the Companys audited financial statements for the year ended December 31,
2010, which are included as Exhibit 13.1 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2010, as filed with the SEC, for a discussion regarding long-term debt.
Note 5 Comprehensive Income
For the three months ended March 31, comprehensive income is summarized below:
Three months ended March 31, 2011 | Three months ended March 31, 2010 | |||||||||||||||||||||||
TSYS | Noncontrolling | TSYS | Noncontrolling | |||||||||||||||||||||
(in thousands) | Shareholders | Interests | Total | Shareholders | Interests | Total | ||||||||||||||||||
Net income |
$ | 48,790 | 622 | $ | 49,412 | $ | 51,327 | 492 | $ | 51,819 | ||||||||||||||
Other comprehensive
income (OCI), net
of tax: |
||||||||||||||||||||||||
Foreign currency
translation
adjustments |
10,172 | 99 | 10,271 | (12,855 | ) | (721 | ) | (13,576 | ) | |||||||||||||||
Change in
accumulated OCI
related to
postretirement
healthcare plans |
(182 | ) | | (182 | ) | 37 | | 37 | ||||||||||||||||
Total |
$ | 58,780 | 721 | $ | 59,501 | $ | 38,509 | (229 | ) | $ | 38,280 | |||||||||||||
The income tax effects allocated to and the cumulative balance of accumulated other
comprehensive income (loss) are as follows:
Beginning Balance | Pretax | Ending Balance | ||||||||||||||||||
(in thousands) | December 31, 2010 | Amount | Tax Effect | Net-of-Tax Amount | March 31, 2011 | |||||||||||||||
Foreign currency translation adjustments |
$ | (1,242 | ) | 12,281 | (2,109 | ) | 10,172 | $ | 8,930 | |||||||||||
Change in accumulated OCI related to
postretirement healthcare plans |
(1,343 | ) | (285 | ) | 103 | (182 | ) | (1,525 | ) | |||||||||||
Total |
$ | (2,585 | ) | 11,996 | (2,006 | ) | 9,990 | $ | 7,405 | |||||||||||
Consistent with its overall strategy of pursuing international investment opportunities,
TSYS adopted the permanent reinvestment exception under ASC 740, Income Taxes, with respect to
future earnings of certain foreign subsidiaries. Its decision to permanently reinvest foreign
earnings offshore means TSYS will no longer allocate taxes to foreign currency translation
adjustments associated with these foreign subsidiaries accumulated in other comprehensive income.
Note 6 Share-Based Compensation
The Companys Annual Report on Form 10-K for the year ended December 31, 2010, as filed with
the SEC, contains a discussion of the Companys share-based compensation plans and policy.
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Share-Based Compensation
TSYS share-based compensation costs are included as expenses and classified as cost of
services and selling, general, and administrative 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 three months ended March 31, 2011, share-based compensation was
$4.3 million, compared to $2.9 million for the same period in 2010. Included in the $4.3 million
amount for 2011 and $2.9 million amount for 2010 is approximately $1.9 million and $1.0 million,
respectively, related to expensing the fair value of stock options.
Nonvested and Performance Share Awards
During the first three months of 2011, the Company issued 193,971 shares of TSYS common stock
with a market value of $3.4 million to certain key employees and non-management members of its
Board of Directors under nonvested stock bonus awards for services to be provided in the future by
such officers, directors and employees. The market value of the TSYS common stock at the date of
issuance is amortized as compensation expense over the vesting period of the awards.
During the first three months of 2010, the Company issued 189,934 shares of TSYS common stock
with a market value of $3.0 million to certain key employees and non-management members of its
Board of Directors under nonvested stock bonus awards for services to be provided in the future by
such officers, directors and employees. The market value of the TSYS common stock at the date of
issuance is amortized as compensation expense over the vesting period of the awards.
As of March 31, 2011, there was approximately $9.9 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 2.1 years.
During the first three months of 2008, TSYS authorized a total grant of 182,816 shares of
nonvested stock to two key executives with a performance schedule (2008 performance shares). These
2008 performance shares have seven one-year performance periods (2008-2014) during each of which
the Compensation Committee establishes an earnings per share goal and, if such goal is attained
during any performance period, 20% of the performance shares will vest, up to a maximum of 100% of
the total grant. Compensation expense for each years award is measured on the grant date based on
the quoted market price of TSYS common stock and is expensed on a straight-line basis for the year.
As of March 31, 2011, there was approximately $661,000 of total unrecognized compensation cost
related to the 2008 grant of nonvested performance share-based compensation arrangements. That cost
is expected to be recognized over the remainder of 2011.
On March 15, 2011, TSYS authorized a total grant of 263,292 performance shares to certain key
executives with a performance based vesting schedule (2011 performance shares). These 2011
performance shares have a 2011-2013 performance period for which the Compensation Committee
established two performance goals: revenues before reimbursables and income from continuing
operations and, if such goals are attained in 2012, the performance shares will vest, up to a
maximum of 200% of the total grant. Compensation expense for the award is measured on the grant
date based on the quoted market price of TSYS common stock. The Company will estimate the
probability of achieving the goals through the performance period and will expense the award on a
straight-line basis.
On March 31, 2010, TSYS authorized a total grant of 279,831 performance shares to certain key
executives with a performance based vesting schedule (2010 performance shares). These 2010
performance shares have a 2010-2012 performance period for which the Compensation Committee
established two performance goals: revenues before reimbursables and income from continuing
operations and, if such goals are attained in 2012, the performance shares will vest, up to a
maximum of 200% of the total grant. Compensation expense for the award is measured on the grant
date based on the quoted market price of TSYS common stock. The Company will estimate the
probability of achieving the goals through the performance period and will expense the award on a
straight-line basis.
As of March 31, 2011, there was approximately $7.3 million of total unrecognized compensation
cost related to the 2010 and 2011 performance shares compensation arrangement. That cost is
expected to be recognized until the end of 2013.
Stock Option Awards
During the first three months of 2011, the Company granted 699,426 stock options to key TSYS
executive officers. The average fair value of the option grant was $5.77 per option and was
estimated on the date of grant using the Black-Scholes-Merton option-pricing model with the
following weighted average assumptions: exercise price of $17.57; risk-free interest rate of 2.96%;
expected volatility of 30.0%; expected term of 8.5 years; and dividend yield of 1.59%. The grant
will vest over a period of 3 years.
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During the first three months of 2010, the Company granted 736,389 stock options to key TSYS
executive officers. The average fair value of the option grant was $5.33 per option and was
estimated on the date of grant using the Black-Scholes-Merton option-pricing model with the
following weighted average assumptions: exercise price of $15.66; risk-free interest rate of 3.77%;
expected volatility of 30.0%; expected term of 8.6 years; and dividend yield of 1.79%. The grant
will vest over a period of 3 years.
As of March 31, 2011, there was approximately $9.5 million of total unrecognized compensation
cost related to TSYS stock options that is expected to be recognized over a remaining weighted
average period of 2.2 years.
Note 7 Income Taxes
TSYS is the parent of an affiliated group that files a consolidated U.S. Federal income tax
return and most state and foreign income tax returns on a separate entity basis. In the normal
course of business, the Company is subject to examinations by these taxing authorities unless
statutory examination periods lapse. TSYS is no longer subject to U.S. Federal income tax
examinations for years before 2007 and with a few exceptions, the Company is no longer subject to
income tax examinations from state, local or foreign authorities for years before 2003. There are
currently no Federal tax examinations in progress. However, a number of tax examinations are in
progress by the relevant foreign and state tax authorities. Although TSYS is unable to determine
the ultimate outcome of these examinations, TSYS believes that its liability for uncertain tax
positions relating to these jurisdictions for such years is adequate.
TSYS effective tax rate attributable to continuing operations was 34.0% and 35.2% for the
three months ended March 31, 2011 and March 31, 2010, respectively. The decreased rate during the
March 31, 2011 period was mostly due to differences in discrete charges and changes in the
jurisdictional sources of income.
TSYS adopted the provisions of ASC 740, Income Taxes, on January 1, 2007. This
interpretation prescribed a recognition threshold and measurement attribute for the financial
statement recognition, measurement and disclosure of a tax position taken or expected to be taken
in a tax return. The amount of unrecognized tax benefits did not change significantly during the
three months ended March 31, 2011.
TSYS recognizes potential interest and penalties related to the underpayment of income taxes
as income tax expense in the condensed consolidated statements of income. Gross accrued interest
and penalties on unrecognized tax benefits totaled $0.6 million and $1.1 million as of and March
31, 2011 and December 31, 2010, respectively. The total amounts of unrecognized income tax benefits
as of March 31, 2011 and December 31, 2010 that, if recognized, would affect the effective tax
rates are $3.7 million and $4.2 million (net of the Federal benefit on state tax issues),
respectively, which include interest and penalties of $0.5 million and $1.0 million. TSYS does not
expect any material changes to its calculation of uncertain tax positions during the next twelve
months.
Note 8 Segment Reporting and Major Customers
The Company reports selected information about operating segments in accordance with ASC 280,
Segment Reporting. The Companys segment information reflects 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
four senior executive vice presidents.
TSYS provides electronic payment processing and other services to card-issuing and merchant
acquiring institutions in the United States and internationally through online accounting and
electronic payment processing systems.
North America Services includes electronic payment processing services and other services
provided from within the North America region. International Services includes electronic payment
processing and other services provided from outside the North America region. Merchant Services
includes electronic processing and other services provided to merchant acquiring institutions.
Corporate administration expenses, such as finance, legal, human resources, mergers and
acquisitions and investor relations, that exist in all operating segments are accumulated and
categorized as Corporate Administration.
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Operating Segments
Three months ended March 31, | ||||||||||||||||
Change | ||||||||||||||||
(in thousands) | 2011 | 2010 | $ | % | ||||||||||||
Revenues before reimbursable items |
||||||||||||||||
North America Services |
$ | 194,590 | 215,309 | (20,719 | ) | (9.6 | ) | |||||||||
International Services |
87,419 | 76,281 | 11,138 | 14.6 | ||||||||||||
Merchant Services |
86,519 | 56,773 | 29,746 | 52.4 | ||||||||||||
Intersegment revenues |
(5,885 | ) | (5,702 | ) | (183 | ) | (3.2 | ) | ||||||||
Revenues before reimbursable items
from external customers |
$ | 362,643 | 342,661 | 19,982 | 5.8 | |||||||||||
Total revenues |
||||||||||||||||
North America Services |
$ | 230,559 | 254,228 | (23,670 | ) | (9.3 | ) | |||||||||
International Services |
90,710 | 79,392 | 11,318 | 14.3 | ||||||||||||
Merchant Services |
115,756 | 87,318 | 28,438 | 32.6 | ||||||||||||
Intersegment revenues |
(7,595 | ) | (7,474 | ) | (121 | ) | (1.6 | ) | ||||||||
Revenues from external customers |
$ | 429,430 | 413,464 | 15,965 | 3.9 | |||||||||||
Depreciation and amortization |
||||||||||||||||
North America Services |
$ | 19,467 | 20,403 | (936 | ) | (4.6 | ) | |||||||||
International Services |
11,708 | 8,595 | 3,113 | 36.2 | ||||||||||||
Merchant Services |
9,146 | 8,537 | 609 | 7.1 | ||||||||||||
Corporate Administration |
747 | 981 | (234 | ) | (23.9 | ) | ||||||||||
Total depreciation and amortization |
$ | 41,068 | 38,516 | 2,552 | 6.6 | |||||||||||
Segment operating income |
||||||||||||||||
North America Services |
$ | 55,200 | 69,788 | (14,588 | ) | (20.9 | ) | |||||||||
International Services |
11,024 | 11,283 | (259 | ) | (2.3 | ) | ||||||||||
Merchant Services |
26,923 | 17,856 | 9,067 | 50.8 | ||||||||||||
Corporate Administration |
(20,119 | ) | (19,215 | ) | (904 | ) | (4.7 | ) | ||||||||
Operating income |
$ | 73,028 | 79,712 | (6,684 | ) | (8.4 | ) | |||||||||
Change | ||||||||||||||||
At March 31, 2011 | At December 31, 2010 | $ | % | |||||||||||||
Total Assets |
||||||||||||||||
North America Services |
$ | 1,580,240 | 1,632,882 | (52,642 | ) | (3.2 | ) | |||||||||
International Services |
427,518 | 408,880 | 18,638 | 4.6 | ||||||||||||
Merchant Services |
444,219 | 460,750 | (16,531 | ) | (3.6 | ) | ||||||||||
Corporate Administration |
(666,952 | ) | (550,251 | ) | (116,701 | ) | 21.2 | |||||||||
Total Assets |
$ | 1,785,025 | 1,952,261 | (167,236 | ) | (8.6 | ) | |||||||||
Revenues by Geographic Area
Revenues for North America Services and Merchant Services include electronic payment
processing and other services provided from the United States to clients domiciled in the United
States or other countries. Revenues for International Services include electronic payment
processing and other services provided from facilities outside the United States to clients based
predominantly outside the United States.
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The following geographic data presents revenues based on the domicile of the Companys
customers.
Three months ended March 31, | ||||||||
(in millions) | 2011 | 2010 | ||||||
United States |
$ | 292.7 | 293.5 | |||||
Europe* |
65.8 | 62.5 | ||||||
Canada |
44.1 | 36.7 | ||||||
Japan* |
17.4 | 12.2 | ||||||
Mexico |
1.9 | 1.7 | ||||||
Other |
7.5 | 6.9 | ||||||
Total |
$ | 429.4 | 413.5 | |||||
* | Revenues are impacted by movements in foreign currency exchange rates. Refer to the discussion under Revenues in the Results of Operations. |
The following table reconciles geographic revenues to revenues by operating segment based on
the domicile of the Companys customers.
Three months ended March 31, | ||||||||||||||||||||||||
North America Services | International Services | Merchant Services | ||||||||||||||||||||||
(in millions) | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||
United States |
$ | 178.9 | 206.8 | | | 113.8 | 86.7 | |||||||||||||||||
Europe |
0.2 | 0.2 | 65.6 | 62.2 | | 0.1 | ||||||||||||||||||
Canada |
44.0 | 36.5 | | | 0.1 | 0.2 | ||||||||||||||||||
Japan |
| | 17.4 | 12.2 | | | ||||||||||||||||||
Mexico |
1.9 | 1.7 | | | | | ||||||||||||||||||
Other |
2.5 | 2.2 | 4.8 | 4.5 | 0.2 | 0.2 | ||||||||||||||||||
Total |
$ | 227.5 | 247.4 | 87.8 | 78.9 | 114.1 | 87.2 | |||||||||||||||||
The Company maintains property and equipment, net of accumulated depreciation and
amortization, in the following geographic areas:
(in millions) | At March 31, 2011 | At December 31, 2010 | ||||||
United States |
$ | 199.2 | 203.8 | |||||
Europe |
58.6 | 58.3 | ||||||
Japan |
11.2 | 11.3 | ||||||
Other |
28.5 | 26.7 | ||||||
Total |
$ | 297.5 | 300.1 | |||||
Major Customers
For the three months ended March 31, 2011, the Company had one major customer which accounted
for approximately 12.5%, or $53.6 million, of total revenues. For the three months ended March 31,
2010, this major customer accounted for approximately 13.1%, or $54.5 million, of total revenues.
Revenues from major customers for the periods reported are primarily attributable to the North
America Services and Merchant Services segments.
Note 9 Supplementary Cash Flow Information
Nonvested Awards
During the first three months of 2011 and 2010, the Company issued shares of common stock to
certain key employees and non-management members of its Board of Directors under nonvested stock
bonus awards for services to be provided by such key employees and directors in the future. Refer
to Note 6 for more information.
Equipment and Software Acquired Under Capital Lease Obligations
The Company acquired equipment and software under capital lease obligations in the amount of
$14.9 million during the first three months of 2010 related to storage and other peripheral
hardware.
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Note 10 Legal Proceedings
General
The Company is subject to various legal proceedings and claims and is also subject to
information requests, inquiries and investigations arising out of the ordinary conduct of its
business. The Company establishes 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. In the opinion of management, based on current knowledge
and in part upon the advice of legal counsel, all matters not specifically discussed below are
believed to be adequately covered by insurance, or if not covered, 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.
Infonox Matter
On April 29, 2011, TSYS entered into an agreement with Safwan Shah, both individually and in
his capacity as a representative of certain remaining shareholders (the Agreement) to resolve all
claims against Total System Services, Inc., TSYS Acquiring Solutions, L.L.C. and Infonox, a TSYS
company, alleged in the previously disclosed litigation initiated by Mr. Shah in the Superior Court
of California, Santa Clara County (Case No. 1-10-CV-183173). Such claims arose out of TSYS
purchase of Infonox on the Web (Infonox) in November 2008. The Agreement provides for the
payment by TSYS of $6 million of contingent merger consideration to Mr. Shah and the other remaining shareholders
pursuant to the Agreement and Plan of Merger entered into in connection with the transaction and
also provides for the dismissal of the litigation with prejudice and the mutual release of all
parties to the litigation. The payment of the contingent merger consideration by TSYS will be
recorded as goodwill and will have no impact on TSYS results of operations.
Electronic Payment Systems Matter
In February 2007, TSYS Acquiring Solutions, L.L.C., a wholly owned subsidiary of TSYS (TSYS
Acquiring), filed a demand for arbitration for payment of past due processing fees pursuant to a
contract with Electronic Payment Systems LLC (EPS), an acquiring independent sales organization.
EPS counterclaimed and alleged certain monetary damages. In April 2008, EPS amended its
counterclaims, adding a claim for a declaration that the arbitrator award EPS ownership, control
and access to the 1-800 number that connects EPS merchants to TSYS Acquiring as EPS processor. On
January 20, 2009, the arbitrator denied all TSYS Acquirings claims, awarded EPS approximately $3.3
million in damages and fees and awarded EPS immediate ownership, control and access over the 1-800
number.
On January 26, 2009, TSYS Acquiring filed an action (the First Action) in the United States
District Court for the District of Arizona (Civil Action No. CV09-00155-PHX-JAT) seeking to vacate
the arbitration award. However, on October 22, 2009, the court granted summary judgment in favor of
EPS. On May 4, 2010, after the court denied post-judgment motions filed by TSYS Acquiring, the
court confirmed the monetary judgment and TSYS Acquiring paid the monetary judgment to EPS. TSYS
Acquiring had been using seven 1-800 numbers to connect EPS merchants and the court interpreted
the arbitrators award to include all seven numbers.
On May 14, 2010, TSYS Acquiring filed a second action (the Second Action) in the United
States District Court for the District of Arizona (Civil Action No. CV10-01060-PHX-DGC) seeking a
declaratory judgment that TSYS did not need to give EPS ownership and control of the seven 1-800
numbers. EPS filed a motion for summary judgment on the request for declaratory relief. EPS also
filed a counterclaim arguing that TSYS Acquiring should be required to pay EPS for its continued
use of the 1-800 number and seeking punitive damages based on various consumer protection statutes.
On November 9, 2010, the court granted EPS motion for summary judgment. The EPS counterclaims that
were not previously dismissed in the Second Action remain pending.
On December 3, 2010, EPS filed a motion to compel in the First Action seeking to require TSYS
Acquiring to provide EPS with immediate ownership, control and access over the seven 1-800 numbers
used by EPS merchants.
On January 24, 2011, TSYS Acquiring filed a petition with the Federal Communications
Commission (FCC) seeking a ruling that the enforcement of the arbitration award regarding the
1-800 numbers would violate the FCCs rules regarding the allocation and transfer of 1-800 numbers.
On February 15, 2011, the court in the First Action issued an order (the Order) requiring
TSYS Acquiring to comply with the arbitration award by moving all non-EPS merchants off of 1-800
numbers used by EPS merchants, and to then transfer to EPS the seven toll free numbers at issue.
The Order requires compliance within 90 days. In addition, the court rejected TSYS Acquirings
arguments that the award cannot be enforced because it violates FCC regulations.
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On February 24, 2011, the FCC released a Declaratory Ruling granting TSYS Acquirings petition
by affirming that the FCC has exclusive jurisdiction over the transfer of toll free numbers, and
noting that several aspects of the arbitrators ruling and the affirmation of that ruling by the
United States District Court for the District of Arizona conflicted with the FCCs rules and
related tariffs governing the transfer of toll free numbers. Because of this, the Declaratory
Ruling proceeded to direct those third parties charged with the administration of the seven toll
free numbers for TSYS Acquiring, as well as the Toll Free Number Administrator charged with
administering the database of toll free numbers, to reject any requests seeking a transfer of those
numbers from TSYS Acquiring to another party, absent a specific directive from the FCC.
Following the FCCs Declaratory Ruling that the toll free numbers may not be transferred by an
order of the court or the arbitrator, TSYS Acquiring filed a motion for reconsideration with the
United States District Court of the District of Arizona with respect to the Order. On April 8,
2011, the United States District Court for the District of Arizona denied TSYS Acquirings motion
but granted a stay of enforcement of the Order pending EPS appeal of the FCCs Declaratory Ruling.
Therefore, TSYS Acquiring is not required to comply with the Order within the 90-day time frame
initially imposed by the court and does not intend to comply with the Order unless and until such
time as is required by the court.
In light of the FCCs Declaratory Ruling that the toll free numbers may not be transferred by
an order of the court or the arbitrator, TSYS Acquiring intends to continue to vigorously defend
itself against any future enforcement of the Order in the United States District Court for the
District of Arizona, and if necessary, the Ninth Circuit Court of Appeals.
If the Order is not ultimately vacated or modified in response to the FCCs Declaratory
Ruling, or if EPS is successful in its appeal of the FCCs Declaratory Ruling, it would require
TSYS Acquiring to move over 750,000 merchants that use one of the seven numbers that EPS seeks to
possess to other toll free numbers. TSYS Acquiring cannot estimate the cost of such compliance, but
TSYS Acquiring believes the cost of such compliance would be substantial. However, we are unable to
estimate the potential loss or range of losses at this time. Based upon current knowledge, TSYS
management does not believe that the eventual outcome of this case will have a material adverse
effect on TSYS financial position, results of operations or cash flows. However, it is possible
that the ultimate outcome of this case may be material to TSYS results of operations for any
particular period.
Note 11 Guarantees and Indemnifications
The Company has entered into processing and licensing agreements with its clients that include
intellectual property indemnification clauses. The Company generally agrees to indemnify its
clients, subject to certain exceptions, against legal claims that TSYS services or systems
infringe on certain third party patents, copyrights or other proprietary rights. In the event of
such a claim, the Company is generally obligated to hold the client harmless and pay for related
losses, liabilities, costs and expenses, including, without limitation, court costs and reasonable
attorneys fees. The Company has not made any indemnification payments pursuant to these
indemnification clauses. In addition, the Company has indemnification obligations to Synovus
Financial Corp. pursuant to the disaffiliation and related agreements entered into by the parties
in connection with the corporate spin-off of TSYS from Synovus Financial Corp.
The Company has not recorded a liability for guarantees or indemnities in the accompanying
condensed consolidated balance sheets, since neither a range nor a maximum amount of potential
future payments under such guarantees and indemnities is determinable.
Note 12 Business Combinations
TSYS Merchant Solutions
On March 1, 2010, TSYS announced the signing of an Investment Agreement with First National
Bank of Omaha (FNBO) to form a new joint venture company, First National Merchant Solutions(FNMS).
Refer to Note 24 of the Companys audited financial statements for the year ended December 31,
2010, which are included as Exhibit 13.1 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2010, as filed with the SEC, for more information on the acquisition of TMS.
On January 4, 2011, TSYS announced it had acquired the remaining 49-percent interest in FNMS,
effective January 1, 2011, from FNBO. The entity was rebranded as TSYS Merchant Solutions (TMS).
14
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The amounts of TMS revenue and earnings included in TSYS consolidated income statement for
the three months ended March 31, 2011, and the pro forma revenue and 100-percent of the earnings of
the combined entity had the acquisition date been January 1, 2010 are:
Net Income | Basic EPS | Diluted EPS | ||||||||||||||
Attributable to | Attributable to | Attributable to | ||||||||||||||
TSYS Common | TSYS Common | TSYS Common | ||||||||||||||
(in thousands) | Revenue | Shareholders | Shareholders | Shareholders | ||||||||||||
Actual from 1/1/2011-3/31/2011 |
$ | 429,430 | $ | 48,790 | $ | 0.25 | $ | 0.25 | ||||||||
Actual from 1/1/2010-3/31/2010 |
413,464 | 51,327 | 0.26 | 0.26 | ||||||||||||
Supplemental pro forma for 1/1/2010-3/31/2010 |
442,504 | 56,008 | 0.29 | 0.28 |
Note 13 Earnings Per Share
In June 2008, the FASB issued authoritative guidance under ASC 260, Earnings Per Share. 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,
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 following table illustrates basic and diluted EPS under the guidance of ASC 260 for the
three months ended March 31, 2011 and 2010:
Three months ended | Three months ended | |||||||||||||||
March 31, 2011 | March 31, 2010 | |||||||||||||||
(in thousands, except | Common | Participating | Common | Participating | ||||||||||||
per share data) | Stock | Securities | Stock | Securities | ||||||||||||
Basic EPS: |
||||||||||||||||
Net income |
$ | 48,790 | 51,327 | |||||||||||||
Less income allocated to nonvested awards |
(191 | ) | 191 | (264 | ) | 264 | ||||||||||
Net income allocated to common stock for EPS calculation (a) |
$ | 48,599 | 191 | 51,063 | 264 | |||||||||||
Average common shares outstanding (b) |
192,851 | 765 | 196,160 | 1,016 | ||||||||||||
Basic EPS (a)/(b) |
$ | 0.25 | 0.25 | 0.26 | 0.26 | |||||||||||
Diluted EPS: |
||||||||||||||||
Net income |
$ | 48,790 | 51,327 | |||||||||||||
Less income allocated to nonvested awards |
(191 | ) | 191 | (263 | ) | 263 | ||||||||||
Net income allocated to common stock for EPS calculation (c) |
$ | 48,599 | 191 | 51,064 | 263 | |||||||||||
Average common shares outstanding |
192,851 | 765 | 196,160 | 1,016 | ||||||||||||
Increase due to assumed issuance of shares related to common
equivalent shares outstanding |
305 | 86 | ||||||||||||||
Average common and common equivalent shares and participating
securities (d) |
193,156 | 765 | 196,246 | 1,016 | ||||||||||||
Diluted EPS (c)/(d) |
$ | 0.25 | 0.25 | 0.26 | 0.26 | |||||||||||
The diluted EPS calculation excludes stock options and nonvested awards that are
convertible into 8.7 million common shares for the three months ended March 31, 2011 and excludes
7.1 million common shares for the three months ended March 31, 2010 because their inclusion would
have been anti-dilutive.
Note 14 Redeemable Noncontrolling Interests
In connection with the purchase of the remaining 49-percent interest in FNMS, the Company sold
the rights to the FNMS tradename valued at $4.5 million, and recorded a gain on the sale of the
tradename of $1.5 million. The Company bought the remaining 49-percent interest for $174.1
million, and paid net cash of $169.6 million ($174.1 million less $4.5 million). With the
15
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purchase, the Company eliminated the redeemable noncontrolling interest of $146.0 million and
recorded a reduction of approximately $28.1 million to additional paid-in capital.
Note 15 Discontinued Operations
The Company sold certain assets and liabilities of TPOS on September 30, 2010. The sale of
certain assets and liabilities of TPOS was the result of managements decision during the third
quarter of 2010 to divest non-strategic businesses and focus resources on core products and
services. The Company had a pre-tax goodwill impairment of $2.2 million (approximately $1.5
million after-tax) related to TPOS, which was included in discontinued operations as part of the
sale. TPOS was part of the Merchant Services segment and was not considered a significant component
of the segment. This transaction resulted in the assumed lease of its Sacramento, California,
facility and the closure of its Columbus, Georgia-based distribution center.
TPOS was not a significant component of the Merchant Services segment, nor TSYS consolidated
results.
In accordance with the provisions of ASC 205, Presentation of Financial Statements, the
Company determined the TPOS business became a discontinued operation in the third quarter of 2010.
The following table presents the summarized results of discontinued operations for the three
months ended March 31, 2010:
Three months ended | ||||
March 31, 2010 | ||||
(in thousands) | ||||
Revenues before reimbursable items |
$ | 1,891 | ||
Total revenues |
1,891 | |||
Operating (loss) income |
(641 | ) | ||
Income taxes |
(213 | ) | ||
(Loss) income from discontinued operations, net of tax |
(428 | ) |
The Unaudited Condensed Consolidated Statements of Cash Flows include TPOS through the date of
disposition and are not considered material.
Note 16 Subsequent Events
On April 29, 2011, TSYS entered into an agreement with Safwan Shah, both individually and in
his capacity as a representative of certain remaining shareholders (the Agreement) to resolve all
claims against Total System Services, Inc., TSYS Acquiring Solutions, L.L.C. and Infonox, a TSYS
company, alleged in the previously disclosed litigation initiated by Mr. Shah in the Superior Court
of California, Santa Clara County (Case No. 1-10-CV-183173). Such claims arose out of TSYS
purchase of Infonox on the Web (Infonox) in November 2008. The Agreement provides for the
payment by TSYS of $6 million of contingent merger consideration to Mr. Shah and the other remaining shareholders
pursuant to the Agreement and Plan of Merger entered into in connection with the transaction and
also provides for the dismissal of the litigation with prejudice and the mutual release of all
parties to the litigation. The payment of the contingent merger consideration by TSYS will be
recorded as goodwill and will have no impact on TSYS results of operations.
On May 2, 2011, TSYS acquired TermNet Merchant Services, an Atlanta-based merchant acquirer.
The company will be re-branded as TSYS and fully integrated into TSYS Merchant Solutions, another
recent TSYS acquisition based in Omaha, Nebraska.
On May 3, 2011, TSYS announced that its Board had approved an increase in the number of shares
that may be repurchased under its current share repurchase plan from up to 10 million shares to up
to 15 million shares of TSYS stock. The expiration date of the plan was also extended to April 30,
2013.
Management performed an evaluation of the Companys activity the date these unaudited
financial statements were issued, and has concluded that, other than as set forth above, there are
no significant subsequent events requiring disclosure.
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TOTAL SYSTEM SERVICES, INC.
Item 2 Managements Discussion and Analysis of Financial
Condition and Results of Operations
Financial Overview
Total System Services, Inc.s (TSYS or the Companys) revenues are derived from providing
payment processing, merchant services and related services to financial and nonfinancial
institutions, generally under long-term processing contracts. The Companys services are provided
through three of the Companys operating segments: North America Services, International Services
and Merchant Services.
Through the Companys North America Services and International Services segments, TSYS
processes information through its cardholder systems to financial and nonfinancial 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.
On January 1, 2011, TSYS acquired the remaining 49-percent interest in First National Merchant
Solutions (FNMS), from First National Bank of Omaha (FNBO). FNMS was rebranded as TSYS Merchant
Solutions (TMS).
For a detailed discussion regarding the Companys Operations, see Item 7: Managements
Discussion and Analysis of Financial Condition and Results of Operations in the Companys Annual
Report on Form 10-K for the year ended December 31, 2010.
A summary of the financial highlights for 2011, as compared to 2010, is provided below:
Three months ended March 31, | ||||||||||||
(in millions) | 2011 | 2010 | Percent Change | |||||||||
Total revenues |
$ | 429.4 | 413.5 | 3.9 | % | |||||||
Operating income |
73.0 | 79.7 | (8.4 | ) | ||||||||
Net income attributable to TSYS common shareholders |
48.8 | 51.3 | (4.9 | ) |
Financial Review
This Financial Review provides a discussion of critical accounting policies and estimates,
related party transactions and off-balance sheet arrangements. This Financial Review also discusses
the results of operations, financial position, liquidity and capital resources of TSYS and outlines
the factors that have affected its recent earnings, as well as those factors that may affect its
future earnings.
Critical Accounting Policies and Estimates
There have been no material changes other than what is noted below to the Companys critical
accounting policies, estimates and assumptions or the judgments affecting the application of those
estimates and assumptions in 2011. For a detailed discussion regarding the Companys critical
accounting policies and estimates, see Item 7: Managements Discussion and Analysis of Financial
Condition and Results of Operations, and for a detailed discussion regarding the Companys risk
factors, see Item 1A: Risk Factors in the Companys Annual Report on Form 10-K for the year ended
December 31, 2010.
In October 2009, the Financial Accounting Standards Board (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 revise the guidance for determining whether multiple deliverables in an arrangement
can be separated for revenue recognition and how the consideration should be allocated. It
eliminates the use of the residual method of revenue recognition and the requirement that all
undelivered elements have vendor-specific objective evidence (VSOE) or third-party evidence (TPE)
of fair value before an entity can separate its deliverables for revenue recognition. The revised
guidance requires the allocation of vendor consideration to each deliverable using the relative
selling price method. The selling price for each deliverable is based on VSOE if available, TPE if
VSOE is not available, or estimated selling price (ESP) if neither VSOE nor TPE is available.
Effective January 1, 2011, the Company adopted the provisions of ASU 2009-13 on a prospective basis
for all new and materially modified arrangements.
Related Party Transactions
The Company believes the terms and conditions of transactions between the Company and its
equity investments, Total System Services de México, S.A. de. C.V. (TSYS de México) and China
UnionPay Data Co., Ltd. (CUP Data), are comparable to those which
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could have been obtained in transactions with unaffiliated parties. The Companys margins with
respect to related party transactions are comparable to margins recognized in transactions with
unrelated third parties.
Off-Balance Sheet Arrangements
Operating Leases: As a method of funding its operations, TSYS employs noncancelable operating
leases for computer equipment, software and facilities. These leases allow the Company to provide
the latest technology while avoiding the risk of ownership. Neither the assets nor obligations
related to these leases are included on the balance sheet.
Contractual Obligations: The total liability (with state amounts tax effected) for uncertain tax
positions under ASC 740, Income Taxes, at March 31, 2011 is $3.5 million. Refer to Note 7 in the
Notes to Unaudited Condensed Consolidated Financial Statements for more information on income
taxes. The Company is not able to reasonably estimate the amount by which the liability will
increase or decrease over time; however, at this time, the Company does not expect a significant
payment related to these obligations within the next year.
As indicated in the Companys Annual Report on Form 10-K for the year ended December 31, 2010,
total contractual cash obligations at December 31, 2010 were estimated at $757.5 million. These
contractual cash obligations include lease payments and software arrangements.
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 are impacted by currency translation of foreign operations, as well as doing
business in the current economic environment.
Total revenues increased $16.0 million, or 3.9%, during the three months ended March 31, 2011,
compared to the same period in 2010. The increase in revenues for the three months ended March 31,
2011 includes an increase of $3.4 million related to the effects of currency translation of
foreign-based subsidiaries and branches. The Company has included reimbursements received for
out-of-pocket expenses as revenues and expenses. The largest reimbursable expense item for which
TSYS is reimbursed by clients is postage. The Companys reimbursable items are impacted with
changes in postal rates and changes in the volumes of all mailing activities by its clients.
Reimbursable items for the first three months of 2011 were $66.8 million, a decrease of $4.0
million or 5.7%, compared to $70.8 million for the same period last year. The increase in
reimbursable items was the result of increases in Visa access fees. Excluding reimbursable items,
revenues increased $20.0 million, or 5.8%, during the three months ended March 31, 2011 compared to
the same period in 2010.
Major Customers
A significant amount of the Companys revenues is derived from long-term contracts with large
clients, including a major customer. TSYS derives revenues from providing various processing and
other services to these clients, including processing of consumer and commercial accounts, as well
as revenues for reimbursable items. The loss of the Companys major customer could have a material
adverse effect on the Companys financial position, results of operations and cash flows.
In June 2009, Bank of America announced that it formed a new joint venture to provide merchant
services. TSYS provides accounting, settlement, authorization and other services to Bank of
America. TSYS provides a number of additional services to Bank of America, including commercial
card processing, small business card processing and card production services. Approximately 12.5%
and 13.2% of TSYS total revenues for the three months ended March 31, 2011 and 2010, respectively
were attributed to Bank of America. Revenues from the major customer for the periods reported are
primarily attributable to the North America Services segment and Merchant Services segment.
In November 2010, TSYS and Bank of America agreed to a new merchant services agreement, during
which TSYS expects merchant services revenues from Bank of America to decline as Bank of America
transitions its services to its new joint venture. 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. Approximately 44% and 48% of the total revenues derived from
providing merchant services to Bank of America are attributable to reimbursable items for the three
months ended March 31, 2011 and 2010, respectively, which are provided at no margin.
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TSYS services are provided through three of its operating segments: North America Services,
International Services and Merchant Services.
Operating Segments
A summary of each segments results follows:
North America Services
The North America Services segment provides payment processing and related services to clients
based primarily in North America. This segment has two major customers.
Below is a summary of the North America Services segment:
Three months ended March 31, | ||||||||||||
(in millions) | 2011 | 2010 | Percent Change | |||||||||
Total revenues |
$ | 230.6 | 254.2 | (9.3 | )% | |||||||
External revenues |
224.1 | 247.4 | (9.4 | ) | ||||||||
Operating income |
55.2 | 69.8 | (20.9 | ) | ||||||||
Operating margin |
23.9 | % | 27.5 | % | ||||||||
Key indicators: |
||||||||||||
Accounts on file (AOF) |
309.6 | 283.1 | 9.3 | % | ||||||||
Transactions |
1,626.8 | 1,458.2 | 11.6 |
* | Note: Segment operating margins do not include expenses associated with Corporate Administration. Refer to Note 8 for more information on operating segments. |
The decline in total segment external revenues for the three months ended March 31, 2011, as
compared to the same periods in 2010, is the result of a decrease in revenues associated with
client portfolio deconversions, as well as a decrease in termination fees of $23.1 million,
partially offset by new business and organic growth.
International Services
The International Services segment provides issuer and merchant card solutions to financial
institutions and other organizations primarily based outside the North America region. Growth in
revenues and operating profit in this segment is derived from retaining and growing the core
business and improving the overall cost structure. Growing the core business comes primarily from
an increase in account usage, growth from existing clients and sales to new clients and the related
account conversions.
This segment has many long-term customer contracts with card issuers providing account
processing and output services for printing and embossing items. These contracts generally require
advance notice prior to the end of the contract if a client chooses not to renew. Additionally,
some contracts may allow for early termination upon the occurrence of certain events such as a
change in control. The termination fees paid upon the occurrence of such events are designed
primarily to cover balance sheet exposure related to items such as capitalized conversion costs or
client incentives associated with the contract and, in some cases, may cover a portion of lost
future revenue and profit. Although these contracts may be terminated upon certain occurrences, the
contracts provide the segment with a steady revenue stream since a vast majority of the contracts
are honored through the contracted expiration date.
This segment has one major customer.
Below is a summary of the International Services segment:
Three months ended March 31, | ||||||||||||
(in millions) | 2011 | 2010 | Percent Change | |||||||||
Total revenues |
$ | 90.7 | 79.4 | 14.3 | % | |||||||
External revenues |
89.9 | 79.0 | 13.8 | |||||||||
Operating income |
11.0 | 11.3 | (2.3 | ) | ||||||||
Operating margin |
12.2 | % | 14.2 | % | ||||||||
Key indicators: |
||||||||||||
AOF |
47.2 | 40.2 | 17.3 | % | ||||||||
Transactions |
326.0 | 281.3 | 15.9 |
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* | Note: Segment operating margins do not include expenses associated with Corporate Administration. Refer to Note 8 for more information on operating segments. |
The increase in total segment external total revenues for the three months ended March 31,
2011, as compared to 2010, is driven by $7.3 million of new business and organic growth and $3.4
million increase related to the impact of foreign currency translation.
On March 11, 2011, an earthquake struck off the northeast coast of Japan, triggering a
tsunami. TSYS operations in Japan were not directly impacted by the natural disaster.
Merchant Services
The Merchant Services segment provides merchant processing and related services to clients
based primarily in the United States. Merchant services revenues are derived from providing
processing services, acquiring solutions, related systems and integrated support services to
merchant acquirers and merchants. Revenues from merchant services include processing all payment
forms including credit, debit, prepaid, electronic benefit transfer and electronic check for
merchants of all sizes across a wide array of market verticals. Merchant services include
authorization and capture of transactions; clearing and settlement of transactions; information
reporting services related to transactions; merchant billing services; and point-of-sale equipment
sales and service.
With the acquisition of TMS, the Company has expanded its service offerings to include
merchant support and underwriting, and business and value-added services, as well as Visa- and
Mastercard-branded prepaid cards for businesses of any size. Ranked as the 10th-largest
merchant acquirer in North America by dollar volume (The Nilson Report, March 2010), TMS has a
57-year history in the acquiring industry with more than 300,000 merchant outlets in its diverse
portfolio.
This segment has one major customer.
Below is a summary of the Merchant Services segment:
Three months ended March 31, | ||||||||||||
(in millions) | 2011 | 2010 | Percent Change | |||||||||
Total revenues |
$ | 115.8 | 87.3 | 32.6 | % | |||||||
External revenues |
115.5 | 87.0 | 32.7 | |||||||||
Operating income |
26.9 | 17.9 | 50.8 | |||||||||
Operating margin |
23.3 | % | 20.5 | % | ||||||||
Key indicator: |
||||||||||||
Point-of-sale transactions |
1,205.7 | 1,314.3 | (8.3 | ) |
* | Note: Segment operating margins do not include expenses associated with Corporate Administration. Refer to Note 8 for more information on operating segments. |
The $28.5 million increase in total segment external revenues for the three months ended March
31, 2011, as compared to the same period in 2010, is the result of $31.0 million net increase for
acquisitions, 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.
Refer to the discussion of Bank of America under Major Customers.
Operating Expenses
The Companys operating expenses consist of cost of services and selling, general and
administrative expenses. Cost of services describes the direct expenses incurred in performing a
particular service for our customers, including the cost of direct labor expense in putting the
service in saleable condition. Selling, general and administrative expenses are incurred in selling
or marketing and for the direction of the enterprise as a whole, including accounting, legal fees,
officers salaries, investor relations and mergers and acquisitions.
The Companys cost of services were $301.5 million during the three months ended March 31,
2011, an increase of 3.8%, compared to $290.5 million for the same period last year.
The Companys selling, general and administrative expenses were $54.9 million during the three
months ended March 31, 2011, an increase of 27.1%, compared to $43.2 million for the same period
last year. The increase is the result of the impact of the acquisition of TMS.
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As a result of the acquisition of TMS, TSYS incurred $1.1 million during the three months
ended March 31, 2010 of acquisition related costs.
Federal legislation was recently enacted which makes extensive changes to the current system
of health care insurance and benefits. The Company has reviewed the legislation and, based upon
information available, expects the impact of the legislation on 2011 to be approximately $2.2
million.
Operating Income
Operating income decreased 8.4% for the three months ended March 31, 2011 over the same period
in 2010. The Companys operating profit margin for the three months ended March 31, 2011 was 17.0%,
and was also 19.3% for the same period last year. TSYS operating margin decreased for the three
March 31, 2011, as compared to the same periods in 2010, as the result of the loss of revenues
associated with deconverted clients, an increase in reimbursable items and non-recurring expenses
associated with the acquisition of FNMS.
Nonoperating Income (Expense)
Interest income for the three months ended March 31, 2011 was $133,000, a decrease of $58,000,
compared to $191,000 for the same period in 2010. The decrease in interest income is primarily
attributable to the decline in interest rates and cash available for investing.
Interest expense for the three months ended March 31, 2011 was $829,000, a decrease of
$100,000 compared to $929,000 for the same period in 2010. The decrease in interest expense in
2011 compared to 2010 relates to the decline in interest rates.
For the three months ended March 31, 2011 and 2010, the Company recorded a translation loss of
approximately $352,000 and a translation gain of $247,000, respectively, related to intercompany
loans and foreign-denominated balance sheet accounts.
Occasionally, the Company will provide financing to its subsidiaries in the form of an
intercompany loan, which is required to be repaid in U.S. dollars. For its subsidiaries whose
functional currency is something other than the U.S. dollar, the translated balance of the
financing (liability) is adjusted upward or downward to match the U.S. dollar obligation
(receivable) on the Companys financial statements. The upward or downward adjustment is recorded
as a gain or loss on foreign currency translation.
The Company records foreign currency translation adjustments on foreign-denominated balance
sheet accounts. The Company maintains several cash accounts denominated in foreign currencies,
primarily in Euros and British Pounds Sterling. As the Company translates the foreign-denominated
cash balances into U.S. dollars, the translated cash balance is adjusted upward or downward
depending upon the foreign currency exchange movements. The upward or downward adjustment is
recorded as a gain or loss on foreign currency translation in the Companys statements of income.
As those cash accounts have increased, the upward or downward adjustments have increased.
The balance of the Companys foreign-denominated cash accounts subject to risk of translation
gains or losses at March 31, 2011 was approximately $8.7 million, the majority of which is
denominated in Euros and British Pounds Sterling.
Income Taxes
TSYS effective income tax rate attributable to continuing operations for the three months
ended March 31, 2011 was 34.0%, compared to 35.2% for the same period in 2010. The calculation of
the effective tax rate is income taxes adjusted for income taxes associated with noncontrolling
interest and equity income divided by TSYS pretax income adjusted for minority interests in
consolidated subsidiaries net income and equity pre-tax earnings of its equity investments. Refer
to Note 7 in the Notes to Unaudited Condensed Consolidated Financial Statements for more
information on income taxes.
In the normal course of business, TSYS is subject to examinations from various tax
authorities. These examinations may alter the timing or amount of taxable income or deductions or
the allocation of income among tax jurisdictions.
TSYS continually monitors and evaluates the potential impact of current events and
circumstances on the estimates and assumptions used in the analysis of its income tax positions,
and, accordingly, TSYS effective tax rate may fluctuate in the future.
Equity in Income of Equity Investments
The Company has two equity investments located in Mexico and China that are accounted for
under the equity method of accounting. TSYS share of income from its equity in equity investments
was $2.3 million and $893,000 for the three months ended March 31, 2011 and 2010, respectively.
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Net Income
Net income for the three months ended March 31, 2011 decreased 4.6%, or $2.4 million, to $49.4
million, compared to $51.8 million for the same period in 2010.
Net income attributable to TSYS common shareholders for the three months ended March 31, 2011
decreased 4.9%, or $2.5 million, to $48.8 million, or basic and diluted earnings per share of
$0.25, compared to $51.3 million, or basic and diluted earnings per share of $0.26, for the same
period in 2010.
Projected Outlook for 2011
As compared to 2010, TSYS expects its 2011 income from continuing operations available to TSYS
common shareholders to increase by 7%-9%, its EPS from continuing operations to increase by 9%-11%,
its revenues before reimbursable items to increase by 3%-5% and its total revenues to increase by
2%-4%, 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) there will be no significant movement in foreign currency exchange rates related to TSYS
business during 2011; (3) 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; (4) there will be no deconversions of large clients during the year; and (5) the
economy will not worsen during 2011.
Financial Position, Liquidity and Capital Resources
The Condensed Consolidated Statements of Cash Flows detail the Companys cash flows from
operating, investing and financing activities. TSYS primary method of funding its operations and
growth has been cash generated from current operations and the use of leases. TSYS has occasionally
used borrowed funds to supplement financing of capital expenditures and acquisitions.
Cash Flows From Operating Activities
Three months ended March 31, | ||||||||
(in thousands) | 2011 | 2010 | ||||||
Net income |
$ | 49,412 | 51,819 | |||||
Depreciation and amortization |
41,068 | 38,564 | ||||||
Other noncash items and charges, net |
7,000 | 5,586 | ||||||
Net change in current and other assets and current and other liabilities |
4,691 | 37,566 | ||||||
Net cash provided by operating activities |
$ | 102,171 | 133,535 | |||||
TSYS main source of funds is derived from operating activities, specifically net income. The
decrease in 2011 in net cash provided by operating activities was primarily the result of the net
change in current and other assets and current and other liabilities.
Net change in current and other assets and current and other liabilities include accounts
receivable, prepaid expenses, other current assets and other assets, accounts payable, accrued
salaries and employee benefits, other current liabilities and other liabilities. The change in
accounts receivable at March 31, 2011, as compared to December 31, 2010, is the result of timing of
collections compared to billings. The change in accounts payable and other liabilities for the same
period is the result of the timing of payments, funding of performance-based incentives and
payments of vendor invoices.
Cash Flows From Investing Activities
Three months ended March 31, | ||||||||
(in thousands) | 2011 | 2010 | ||||||
Additions to contract acquisition costs |
$ | (7,202 | ) | (9,914 | ) | |||
Purchases of property and equipment, net |
(5,960 | ) | (9,170 | ) | ||||
Additions to internally developed computer software |
(4,478 | ) | (5,760 | ) | ||||
Additions to licensed computer software from vendors |
(1,280 | ) | (3,769 | ) | ||||
Proceeds from sale of tradename |
4,500 | | ||||||
Net cash used in investing activities |
$ | (14,420 | ) | (28,613 | ) | |||
The major uses of cash for investing activities have been the addition of property and
equipment, primarily computer equipment, the purchase of licensed computer software and internal
development of computer software, and investments in contract acquisition costs associated with
obtaining and servicing new or existing clients. The major uses of cash for investing activities in
2011 was for additions to contract acquisition costs, equipment, licensed computer software from
vendors and internally developed computer software, which was partially offset by the sale of a
tradename. The major uses of cash for investing activities in 2010 was for additions to contract
acquisition costs, equipment, licensed computer software from vendors and internally developed
computer software.
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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 $7.2 million for the three
months ended March 31, 2011 compared to $9.9 million for the three months ended March 31, 2010.
Cash Flows From Financing Activities
Three months ended March 31, | ||||||||
(in thousands) | 2011 | 2010 | ||||||
Purchase of noncontrolling interests |
$ | (174,050 | ) | | ||||
Repurchase of common stock |
(35,700 | ) | (1,075 | ) | ||||
Dividends paid on common stock |
(13,556 | ) | (13,797 | ) | ||||
Principal payments on long-term debt
borrowings and capital lease obligations |
(8,551 | ) | (3,731 | ) | ||||
Other |
1,222 | 220 | ||||||
Net cash used in financing activities |
$ | (230,635 | ) | (18,383 | ) | |||
The major use of cash from financing activities has been the purchase of noncontrolling
interests, payment of dividends and repurchase of common stock. The main source of cash from
financing activities has been the exercise of stock options. The major uses of cash from financing
activities in 2011 was for the purchase of noncontrolling interests , payment of dividends and the
repurchase of common stock. The major use of cash from financing activities in 2010 was for the
payment of dividends and the repurchase of common stock.
Borrowings
For a detailed discussion regarding the Companys borrowings, see Item 7: Managements
Discussion and Analysis of Financial Condition and Results of Operations, and for a detailed
discussion regarding the Companys long-term debt, see Note 13 Long-term Debt and Capital Lease
Obligations in the Companys Annual Report on Form 10-K for the year ended December 31, 2010.
Stock Repurchase Plan
On April 20, 2010, TSYS announced a stock repurchase plan to purchase up to 10 million shares
of TSYS stock. The shares may be purchased from time to time over the next two years at prices
considered attractive to the Company. Through March 31, 2011, the Company purchased 2.0 million
shares for approximately $35.7 million, at an average price of $17.85.
Dividends
Dividends on common stock of $13.6 million were paid during the three months ended March 31,
2011 compared to $13.8 million paid during the three months ended March 31, 2010.
Significant Noncash Transactions
Refer to Note 9 of the Notes to Unaudited Condensed Consolidated Financial Statements for more
information about supplementary cash flow information.
Foreign Operations
TSYS operates internationally and is subject to adverse movements in foreign currency exchange
rates. Since December 2000, TSYS has not entered into foreign exchange forward contracts to reduce
its exposure to foreign currency rate changes. TSYS continues to analyze potential hedging
instruments to safeguard it from significant foreign currency translation risks.
TSYS maintains operating cash accounts outside the United States. Refer to Note 3 in the
Notes to Unaudited Condensed Consolidated Financial Statements for more information on cash and
cash equivalents. TSYS has adopted the permanent reinvestment exception under ASC 740 with respect
to future earnings of certain foreign subsidiaries. While some of the foreign cash is available to
repay intercompany financing arrangements, remaining amounts are not presently available to fund
domestic operations and obligations without paying a significant amount of taxes upon its
repatriation. Demand on our cash has increased as a result of our strategic initiatives. We fund
these initiatives through a balance of internally generated cash, external sources of capital, and,
when advantageous, access to foreign cash in a tax efficient manner. Where local regulations limit
an efficient intercompany transfer of amounts held outside of the U.S., we will continue to utilize
these funds for local liquidity needs. Under current law, balances available to be repatriated to
the U.S. would be subject to U.S. federal income taxes, less applicable foreign tax credits. We
have provided for the U.S. federal tax liability on these amounts for financial statement purposes,
except for foreign earnings that are considered permanently reinvested outside of the U.S. We
utilize a variety of tax planning and financing strategies with the objective of having our
worldwide cash available in the locations where it is needed.
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Impact of Inflation
Although the impact of inflation on its operations cannot be precisely determined, the Company
believes that by controlling its operating expenses, and by taking advantage of more efficient
computer hardware and software, it can minimize the impact of inflation.
Working Capital
TSYS may seek additional external sources of capital in the future. The form of any such
financing will vary depending upon prevailing market and other conditions and may include
short-term or long-term borrowings from financial institutions or the issuance of additional equity
and/or debt securities such as industrial revenue bonds. However, there can be no assurance that
funds will be available on terms acceptable to TSYS. Management expects that TSYS will continue to
be able to fund a significant portion of its capital expenditure needs through internally generated
cash in the future, as evidenced by TSYS current ratio of 2.6:1. At March 31, 2011, TSYS had
working capital of $353.6 million compared to $494.5 million at December 31, 2010.
Legal Proceedings
General
The Company is subject to various legal proceedings and claims and is also subject to
information requests, inquiries and investigations arising out of the ordinary conduct of its
business. The Company establishes 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. In the opinion of management, based on current knowledge
and in part upon the advice of legal counsel, all matters not specifically discussed below are
believed to be adequately covered by insurance, or if not covered, 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.
Infonox Matter
On April 29, 2011, TSYS entered into an agreement with Safwan Shah, both individually and in
his capacity as a representative of certain remaining shareholders (the Agreement) to resolve all
claims against Total System Services, Inc., TSYS Acquiring Solutions, L.L.C. and Infonox, a TSYS
company, alleged in the previously disclosed litigation initiated by Mr. Shah in the Superior Court
of California, Santa Clara County (Case No. 1-10-CV-183173). Such claims arose out of TSYS
purchase of Infonox on the Web (Infonox) in November 2008. The Agreement provides for the
payment by TSYS of $6 million of contingent merger consideration to Mr. Shah and the other remaining shareholders
pursuant to the Agreement and Plan of Merger entered into in connection with the transaction and
also provides for the dismissal of the litigation with prejudice and the mutual release of all
parties to the litigation. The payment of the contingent merger consideration by TSYS will be
recorded as goodwill and will have no impact on TSYS results of operations.
Electronic Payment Systems Matter
In February 2007, TSYS Acquiring Solutions, L.L.C., a wholly owned subsidiary of TSYS (TSYS
Acquiring), filed a demand for arbitration for payment of past due processing fees pursuant to a
contract with Electronic Payment Systems LLC (EPS), an acquiring independent sales organization.
EPS counterclaimed and alleged certain monetary damages. In April 2008, EPS amended its
counterclaims, adding a claim for a declaration that the arbitrator award EPS ownership, control
and access to the 1-800 number that connects EPS merchants to TSYS Acquiring as EPS processor. On
January 20, 2009, the arbitrator denied all TSYS Acquirings claims, awarded EPS approximately $3.3
million in damages and fees and awarded EPS immediate ownership, control and access over the 1-800
number.
On January 26, 2009, TSYS Acquiring filed an action (the First Action) in the United States
District Court for the District of Arizona (Civil Action No. CV09-00155-PHX-JAT) seeking to vacate
the arbitration award. However, on October 22, 2009, the court granted summary judgment in favor of
EPS. On May 4, 2010, after the court denied post-judgment motions filed by TSYS Acquiring, the
court confirmed the monetary judgment and TSYS Acquiring paid the monetary judgment to EPS. TSYS
Acquiring had been using seven 1-800 numbers to connect EPS merchants and the court interpreted
the arbitrators award to include all seven numbers.
On May 14, 2010, TSYS Acquiring filed a second action (the Second Action) in the United
States District Court for the District of Arizona (Civil Action No. CV10-01060-PHX-DGC) seeking a
declaratory judgment that TSYS did not need to give EPS ownership and control of the seven 1-800
numbers. EPS filed a motion for summary judgment on the request for declaratory relief. EPS also
filed a counterclaim arguing that TSYS Acquiring should be required to pay EPS for its continued
use of the 1-800 number and seeking
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punitive damages based on various consumer protection statutes. On November 9, 2010, the court
granted EPS motion for summary judgment. The EPS counterclaims that were not previously dismissed
in the Second Action remain pending.
On December 3, 2010, EPS filed a motion to compel in the First Action seeking to require TSYS
Acquiring to provide EPS with immediate ownership, control and access over the seven 1-800 numbers
used by EPS merchants.
On January 24, 2011, TSYS Acquiring filed a petition with the Federal Communications
Commission (FCC) seeking a ruling that the enforcement of the arbitration award regarding the
1-800 numbers would violate the FCCs rules regarding the allocation and transfer of 1-800 numbers.
On February 15, 2011, the court in the First Action issued an order (the Order) requiring
TSYS Acquiring to comply with the arbitration award by moving all non-EPS merchants off of 1-800
numbers used by EPS merchants, and to then transfer to EPS the seven toll free numbers at issue.
The Order requires compliance within 90 days. In addition, the court rejected TSYS Acquirings
arguments that the award cannot be enforced because it violates FCC regulations.
On February 24, 2011, the FCC released a Declaratory Ruling granting TSYS Acquirings petition
by affirming that the FCC has exclusive jurisdiction over the transfer of toll free numbers, and
noting that several aspects of the arbitrators ruling and the affirmation of that ruling by the
United States District Court for the District of Arizona conflicted with the FCCs rules and
related tariffs governing the transfer of toll free numbers. Because of this, the Declaratory
Ruling proceeded to direct those third parties charged with the administration of the seven toll
free numbers for TSYS Acquiring, as well as the Toll Free Number Administrator charged with
administering the database of toll free numbers, to reject any requests seeking a transfer of those
numbers from TSYS Acquiring to another party, absent a specific directive from the FCC.
Following the FCCs Declaratory Ruling that the toll free numbers may not be transferred by an
order of the court or the arbitrator, TSYS Acquiring filed a motion for reconsideration with the
United States District Court of the District of Arizona with respect to the Order. On April 8,
2011, the United States District Court for the District of Arizona denied TSYS Acquirings motion
but granted a stay of enforcement of the Order pending EPS appeal of the FCCs Declaratory Ruling.
Therefore, TSYS Acquiring is not required to comply with the Order within the 90-day time frame
initially imposed by the court and does not intend to comply with the Order unless and until such
time as is required by the court.
In light of the FCCs Declaratory Ruling that the toll free numbers may not be transferred by
an order of the court or the arbitrator, TSYS Acquiring intends to continue to vigorously defend
itself against any future enforcement of the Order in the United States District Court for the
District of Arizona, and if necessary, the Ninth Circuit Court of Appeals.
If the Order is not ultimately vacated or modified in response to the FCCs Declaratory
Ruling, or if EPS is successful in its appeal of the FCCs Declaratory Ruling, it would require
TSYS Acquiring to move over 750,000 merchants that use one of the seven numbers that EPS seeks to
possess to other toll free numbers. TSYS Acquiring cannot estimate the cost of such compliance, but
TSYS Acquiring believes the cost of such compliance would be substantial. However, we are unable to
estimate the potential loss or range of losses at this time. Based upon current knowledge, TSYS
management does not believe that the eventual outcome of this case will have a material adverse
effect on TSYS financial position, results of operations or cash flows. However, it is possible
that the ultimate outcome of this case may be material to TSYS results of operations for any
particular period.
Recent Accounting Pronouncements
The Companys Annual Report on Form 10-K for the year ended December 31, 2010, as filed with
the SEC, contains a discussion of recent accounting pronouncements and the expected impact on the
Companys financial statements.
In October 2009, the Financial Accounting Standards Board (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 revise the guidance for determining whether multiple deliverables in an arrangement
can be separated for revenue recognition and how the consideration should be allocated. It
eliminates the use of the residual method of revenue recognition and the requirement that all
undelivered elements have vendor-specific objective evidence (VSOE) or third-party evidence (TPE)
of fair value before an entity can separate its deliverables for revenue recognition. The revised
guidance requires the allocation of vendor consideration to each deliverable using the relative
selling price method. The selling price for each deliverable is based on VSOE if available, TPE if
VSOE is not available, or best estimated selling price (ESP) if neither VSOE nor TPE is available.
Effective January 1, 2011, the Company adopted the provisions of ASU 2009-13 on a prospective basis
for all new and materially modified arrangements.
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The Companys North America and International Services revenues are derived from long-term
payment processing contracts with financial and nonfinancial institutions and are generally
recognized as the services are performed. 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,
penalties for early termination, and service level agreements. Revenue is recognized as the
services are performed, primarily on a per unit basis. Processing contracts generally range from
three to ten years in length and provide for penalties for early termination. When providing
payment processing services, the Company frequently enters into customer arrangements to provide
multiple services that may also include conversion or implementation services, business process
outsourcing services such as call center services, web-based services, and other payment
processing-related services. Revenue for these services is generally recognized as they are
performed on a per unit basis each month or ratably over the term of the contract.
The Companys Merchant Services revenues are derived from long-term processing contracts with
large financial institutions, other merchant acquirers and merchant organizations which generally
range from three to eight years and provide for penalties for early termination. Merchant services
revenue is 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
services. Revenue is recognized for merchant services as those services are performed, primarily on
a per unit basis. When providing merchant processing services, the Company frequently enters into
customer arrangements to provide multiple services that may also include conversion or
implementation services, business process outsourcing services such as call center services,
terminal services, and other merchant processing-related services. Revenue for these services is
generally recognized as they are performed on a per unit basis each month or ratably over the term
of the contract.
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) collectability is reasonably assured. In many situations, the Company enters
into arrangements with customers to provide conversion or implementation services in addition to
processing services where the conversion or implementation services do not have standalone value.
In these situations, the deliverables do not meet the criteria of ASC 605-25 for separation and the
deliverables are combined as a single unit of accounting for revenue recognition. For these
arrangements, conversion or implementation services revenue is recognized as the related processing
services are performed, and revenue continues to be recognized in a single unit of accounting upon
adoption of ASU 2009-13 in 2011.
The Companys other services generally have standalone value and constitute separate units of
accounting for revenue recognition purposes. However, customer arrangements entered into prior to
January 1, 2011 often included services for which sufficient objective and reliable evidence of
fair value did not exist. In certain situations, sufficient objective and reliable evidence of
fair value did not exist for multiple undelivered services, and the deliverables were combined and
recognized as a single unit of accounting based on the proportional performance for the combined
unit. Beginning on January 1, 2011, services in new or materially modified arrangements of this
nature are now divided into separate units of accounting and revenue is allocated to each unit
based on the relative selling price method. As the services in these arrangements are generally
delivered over the same term with consistent patterns of performance, there is no change in the
timing or pattern of revenue recognition upon adoption of ASU 2009-13.
In certain situations, VSOE existed for all but one of the shorter services (for which
standalone value existed), and the Company allocated revenue to each of the deliverables under the
residual method of accounting whereby the difference between the total arrangement consideration
and VSOE for the undelivered services was allocated to the other service. While there is no change
in the units of accounting for these arrangements, beginning on January 1, 2011, revenue for
services in new or materially modified arrangements of this nature will be allocated based on the
relative selling price method. The residual amount of revenue historically allocated to the
shorter services in these arrangements is generally consistent with our best estimate of selling
price for those services. In situations where this may not have been the case, services in these
arrangements were delivered over the same term with consistent patterns of performance.
Accordingly, there is no change in the pattern of revenue recognition and adoption of ASU 2009-13
is not expected to have a material effect on revenue recognition for these arrangements in future
periods.
In many situations, VSOE exists for the Companys payment processing services and certain
other processing-related services. The Company establishes VSOE of selling price using the priced
charged when the same service is sold separately. In certain situations, the Company does not have
sufficient VSOE based on its related accounting policy due to limited standalone sales of certain
services for a particular group of customers, limited sales history for certain services, and/or
disparity in pricing for a given service. In these situations, we considered whether sufficient
TPE of selling price existed for the Companys services. TPE is established by evaluating similar
or interchangeable competitor products or services in standalone sale to similarly situated
customers.
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The Company typically is not able to determine TPE and has not used this measure of selling
price due to the unique and proprietary nature of some of its services and the inability to
reliably verify relevant standalone competitor prices. ESP has been established in these
situations using limited standalone sales that do not meet the Companys criteria to establish
VSOE, management pricing strategies, residual selling price data when VSOE exists for a group of
elements, and margin objectives. Consideration is also given to market conditions including
competitor pricing strategies and benchmarking studies.
The Companys multiple element arrangements may include one or more elements that are subject
to other Topics including software revenue recognition and leasing guidance. The consideration for
these multiple element arrangements is allocated to each group of deliverables those subject to
ASC 605-25 and those subject to other Topics based on the revised guidance in ASC 2009-13.
Arrangement revenue for each group of deliverables is then further separated, allocated, and
recognized based on applicable guidance.
The Company regularly reviews the evidence of selling price for its services and maintains
internal controls over the establishment and updates of these estimates. There were no material
changes in estimated selling price for its services during the quarter and the Company does not
expect a material impact from changes in selling price in the foreseeable future.
If the Company were to apply the new revenue recognition guidance as if it had early adopted
the guidance for the three months ended March 31, 2010 and the year ended December 31, 2010, there
would have been no material impact to revenue in the earlier periods. As previously disclosed,
there were changes to the units of accounting and changes in the way arrangement consideration is
allocated for certain types of the Companys arrangements; however, the adoption of ASU 2009-13 did
not have a material impact on revenue for the three months ended March 31, 2011 when compared to
the revenue that would have been recognized under the guidance in effect prior to adoption of ASU
2009-13. The impact of adopting this guidance in future periods will depend on the nature of the
Companys customer arrangements in those periods, including the nature of products and services
included in those arrangements, the magnitude of revenue associated with certain deliverables in
those arrangements, and the timing of delivery of the related products or services in those
arrangements, among other considerations. While the impact in future periods is dependent on these
factors and future go-to-market strategies, the Company does not currently expect the adoption of
this guidance to have a material impact on the timing and pattern of revenue recognition in future
periods. The Company does not expect this new guidance to impact future pricing practices or
go-to-market strategies.
Forward-Looking Statements
Certain statements contained in this filing which are not statements of historical fact
constitute forward-looking statements within the meaning of the Private Securities Litigation
Reform Act (the Act). These forward-looking statements include, among others: (i) TSYS expectation
that the loss of Bank of America as a merchant services client will not have a material adverse
affect on TSYS; (ii) TSYS expectation that it will be able to fund a significant portion of its
capital expenditure needs through internally generated cash in the future; (iii) TSYS earnings
guidance for 2011 total revenues, revenues before reimbursable items, income from continuing
operations and EPS from continuing operations; (iv)TSYS belief with respect to lawsuits, claims
and other complaints; (v) the expected financial impact of recent accounting pronouncements; (vi)
TSYS expectation with respect to certain tax matters, and the assumptions underlying such
statements, including, with respect to TSYS earnings guidance for 2011: (a) the economy will not
worsen during 2011; (b) there will be no deconversions of large clients during the year; (c) there
will be no significant movement in foreign currency exchange rates related to TSYS business during
2011; (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; and (e)
there will be no significant movements in LIBOR, and no significant draws on the remaining balance
of TSYS revolving credit facility. In addition, certain statements in future filings by TSYS with
the Securities and Exchange Commission, in press releases, and in oral and written statements made
by or with the approval of TSYS which are not statements of historical fact constitute
forward-looking statements within the meaning of the Act. Examples of forward-looking statements
include, but are not limited to: (i) projections of revenue, income or loss, earnings or loss per
share, the payment or nonpayment of dividends, capital structure and other financial items; (ii)
statements of plans and objectives of TSYS or its management or Board of Directors, including those
relating to products or services; (iii) statements of future economic performance; and (iv)
statements of assumptions underlying such statements. Words such as believes, anticipates,
expects, intends, targeted, estimates, projects, plans, may, could, should,
would, and similar expressions are intended to identify forward-looking statements but are not
the exclusive means of identifying these statements.
These statements are based upon the current beliefs and expectations of TSYS management and
are subject to significant risks and uncertainties. Actual results may differ materially from those
contemplated by the forward-looking statements. A number of 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; |
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| internal growth rates for TSYS existing clients are lower than anticipated whether as a result of unemployment rates, card delinquencies and charge off rates or otherwise; | ||
| TSYS does not convert and deconvert clients portfolios as scheduled; | ||
| adverse developments with respect to foreign currency exchange rates; | ||
| adverse developments with respect to entering into contracts with new clients and retaining current clients; | ||
| continued consolidation and turmoil in the financial services and other industries during 2011, including the merger of TSYS clients with entities that are not TSYS processing clients, the sale of portfolios by TSYS clients to entities that are not TSYS processing clients and the nationalization or seizure by banking regulators of TSYS clients; | ||
| the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act on TSYS and our clients; | ||
| adverse developments with respect to the credit card industry in general, including a decline in the use of cards as a payment mechanism; | ||
| TSYS is unable to successfully manage any impact from slowing economic conditions or consumer spending; | ||
| the impact of potential and completed acquisitions, including the costs associated therewith and their being more difficult to integrate than anticipated; | ||
| the costs and effects of litigation, investigations or similar matters or adverse facts and developments relating thereto, including the pending litigation discussed in this filing; | ||
| 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, rules, regulations, credit card association rules or other industry standards affecting TSYS and our clients that may result in costly new compliance burdens on TSYS and our clients and lead to a decrease in the volume and/or number of transactions processed; | ||
| 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, 2010 and other filings with the Securities and Exchange Commission; and | ||
| TSYS ability to manage the foregoing and other risks. |
These forward-looking statements speak only as of the date on which they are made and TSYS
does not intend to update any forward-looking statement as a result of new information, future
developments or otherwise.
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TOTAL SYSTEM SERVICES, INC.
Item 3 Quantitative and Qualitative Disclosures About Market Risk
Foreign Exchange Risk
The Company is exposed to foreign exchange risk because it has assets, liabilities, revenues
and expenses denominated in foreign currencies other than the U.S. dollar. These currencies are
translated into U.S. dollars at current exchange rates, except for revenues, costs and expenses and
net income, which are translated at the average exchange rate for each reporting period. Net
exchange gains or losses resulting from the translation of assets and liabilities of foreign
operations, net of tax, are accumulated in a separate section of shareholders equity entitled
accumulated other comprehensive income, net. The following represents the amount of other
comprehensive gain (loss):
Three months ended March 31, | ||||||||
(in millions) | 2011 | 2010 | ||||||
Other comprehensive gain (loss) |
$ | 10.2 | (12.9 | ) |
Currently, the Company does not use financial instruments to hedge exposure to exchange rate
changes.
The following table presents the carrying value of the net assets of TSYS foreign operations
in U.S. dollars at March 31, 2011:
(in millions) | March 31, 2011 | |||
Europe |
$ | 196.8 | ||
China |
73.6 | |||
Japan |
15.1 | |||
Mexico |
7.0 | |||
Canada |
1.2 | |||
Other |
39.0 |
TSYS records foreign currency translation adjustments associated with other balance sheet
accounts. The Company maintains several cash accounts denominated in foreign currencies, primarily
in Euros and British Pounds Sterling. As TSYS translates the foreign-denominated cash balances into
U.S. dollars, the translated cash balance is adjusted upward or downward depending upon the foreign
currency exchange movements. The upward or downward adjustment is recorded as a gain or loss on
foreign currency translation in the statements of income. As those cash accounts have increased,
the upward or downward adjustments have increased. TSYS recorded a net translation loss of
approximately $352,000 for the three months ended March 31, 2011, relating to the translation of
cash and other balance sheet accounts. The balance of the Companys foreign-denominated cash
accounts subject to risk of translation gains or losses at March 31, 2011 was approximately $8.7
million, the majority of which was denominated in Euros and British Pounds Sterling.
The Company provides financing to its international operation in Europe through an
intercompany loan that requires the operation to repay the financing in U.S. dollars. The
functional currency of the operation is the respective local currency. As it translates the foreign
currency denominated financial statements into U.S. dollars, the translated balance of the
financing (liability) is adjusted upward or downward to match the U.S. dollar obligation
(receivable) on its financial statements. The upward or downward adjustment is recorded as a gain
or loss on foreign currency translation.
The net asset account balance subject to foreign currency exchange rates between the local
currencies and the U.S. dollar at March 31, 2011 was $8.7 million.
The following table presents the potential effect on income before income taxes of
hypothetical shifts in the foreign currency exchange rate between the local currencies and the U.S.
dollar of plus-or-minus 100 basis points, 500 basis points and 1,000 basis points based on the net
asset account balance of $8.7 million at March 31, 2011.
Effect of Basis Point Change | ||||||||||||||||||||||||
Increase in basis point of | Decrease in basis point of | |||||||||||||||||||||||
(in thousands) | 100 | 500 | 1,000 | 100 | 500 | 1,000 | ||||||||||||||||||
Effect on income before income taxes |
$ | 87 | 434 | 869 | (87 | ) | (434 | ) | (869 | ) |
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TOTAL SYSTEM SERVICES, INC.
Item 3 Quantitative and Qualitative Disclosures About Market Risk (continued)
Item 3 Quantitative and Qualitative Disclosures About Market Risk (continued)
Interest Rate Risk
TSYS is also exposed to interest rate risk associated with the investing of available cash and
the use of debt. TSYS invests available cash in conservative short-term instruments and is
primarily subject to changes in the short-term interest rates.
The Companys Annual Report on Form 10-K for the year ended December 31, 2010, as filed with
the SEC, contains a discussion of interest rate risk and the Companys debt obligations that are
sensitive to changes in interest rates.
On December 21, 2007, the Company entered into a Credit Agreement with Bank of America N.A.,
as Administrative Agent, The Royal Bank of Scotland plc, as Syndication Agent, and other lenders.
The Credit Agreement provides for a $168 million unsecured five-year term loan to the Company and a
$252 million five-year unsecured revolving credit facility. The principal balance of loans
outstanding under the credit facility bears interest at a rate of London Interbank Offered Rate
(LIBOR) plus an applicable margin of 0.60%. Interest is paid on the last date of each interest
period; however, if the period exceeds three months, interest is paid every three months after the
beginning of such interest period.
On October 31, 2008, the Companys International Services segment obtained a credit agreement
from a third party to borrow up to approximately ¥2.0 billion, or $21 million, in a Yen-denominated
three year loan to finance activities in Japan. The rate is LIBOR plus 80 basis points. The
Company initially made a draw down of ¥1.5 billion, or approximately $15.1 million. In January
2009, the Company made an additional draw down of ¥250 million, or approximately $2.8 million. In
April 2009, the Company made an additional draw down of ¥250 million, or approximately $2.5
million.
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TOTAL SYSTEM SERVICES, INC.
Item 4 Controls and Procedures
We have evaluated the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this quarterly report as required by Rule 13a-15
of the Securities Exchange Act of 1934, as amended (Exchange Act). This evaluation was carried
out under the supervision and with the participation of our management, including our chief
executive officer and chief financial officer. Based on this evaluation, the chief executive
officer and chief financial officer concluded that as of March 31, 2011, TSYS disclosure controls
and procedures were designed and effective to ensure that the information required to be disclosed
by TSYS in reports that it files under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms and were also designed and
effective to ensure that the information required to be disclosed in the reports that TSYS files or
submits under the Exchange Act is accumulated and communicated to management, as appropriate to
allow timely decisions regarding required disclosure.
No change in TSYS internal control over financial reporting occurred during the period
covered by this report that materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
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TOTAL SYSTEM SERVICES, INC.
Part II Other Information
Item 1 Legal Proceedings
For information regarding TSYS Legal Proceedings, refer to Note 10 of the Notes to Unaudited
Condensed Consolidated Financial Statements.
Factors Item 1A Risk Factors
In addition to the other information set forth in this report, one should carefully consider
the factors discussed in Part I, Item 1A. Risk Factors in the Companys Annual Report on Form
10-K for the year ended December 31, 2010, which could materially affect the Companys financial
position, results of operations or cash flows. The risks described in the Companys Annual Report
on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not
currently known to the Company or that the Company currently deems to be immaterial also may
materially adversely affect the Companys financial position, results of operations or cash flows.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth information regarding the Companys purchases of its common
stock on a monthly basis during the three months ended March 31, 2011:
Total Number of | Maximum Number of | |||||||||||||||
Shares Purchased as | Shares That May Yet | |||||||||||||||
Part of Publicly | Be Purchased | |||||||||||||||
(in thousands, except per share data) | Total Number of | Average Price | Announced Plans | Under the Plans | ||||||||||||
Period | Shares Purchased | Paid per Share | or Programs | or Programs | ||||||||||||
January 2011 |
34 | (1) | $ | 17.07 | 3,093 | 6,907 | ||||||||||
February 2011 |
1,000 | $ | 17.69 | 4,093 | 5,907 | |||||||||||
March 2011 |
1,000 | $ | 17.99 | 5,093 | 4,907 | |||||||||||
Total |
2,034 | (1) | $ | 17.84 | ||||||||||||
(1) | Consists of delivery of shares to TSYS on vesting of restricted shares to pay taxes. |
Item 6 Exhibits
a) Exhibits
Exhibit | ||
Number | Description | |
10.1
|
Form of Stock Option Agreement for 2011 stock option awards under the Total System Services, Inc. 2008 Omnibus Plan | |
10.2
|
Form of Performance Share Agreement for 2011 performance share awards under the Total System Services, Inc. 2008 Omnibus Plan | |
31.1
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101
|
The following materials from TSYS Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Income (Unaudited), (ii) the Condensed Consolidated Balance Sheets (Unaudited), (iii) the Condensed Consolidated Statements of Cash Flows (Unaudited), and (iv) Notes to Unaudited Condensed Consolidated Financial Statements, tagged as blocks of text. |
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TOTAL SYSTEM SERVICES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TOTAL SYSTEM SERVICES, INC. |
||||
Date: May 6, 2011 | by: | /s/ Philip W. Tomlinson | ||
Philip W. Tomlinson | ||||
Chairman of the Board and Chief Executive Officer |
||||
Date: May 6, 2011 | by: | /s/ James B. Lipham | ||
James B. Lipham | ||||
Senior Executive Vice President and Chief Financial Officer |
||||
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TOTAL SYSTEM SERVICES, INC.
Exhibit Index
Exhibit | ||
Number | Description | |
10.1
|
Form of Stock Option Agreement for 2011 stock option awards under the Total System Services, Inc. 2008 Omnibus Plan | |
10.2
|
Form of Performance Share Agreement for 2011 performance share awards under the Total System Services, Inc. 2008 Omnibus Plan | |
31.1
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101
|
The following materials from TSYS Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Income (Unaudited), (ii) the Condensed Consolidated Balance Sheets (Unaudited), (iii) the Condensed Consolidated Statements of Cash Flows (Unaudited), and (iv) Notes to Unaudited Condensed Consolidated Financial Statements, tagged as blocks of text. |
34