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Table of Contents

 

 

UNITED STATES

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, 2014

OR

 

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

For the transition period from                      To                     

Commission file number: 1-10254

 

 

 

LOGO

Total System Services, Inc.

www.tsys.com

(Exact name of registrant as specified in its charter)

 

 

 

Georgia   58-1493818

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

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

(Address of principal executive offices) (Zip Code)

(706) 649-2310

(Registrant’s 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  ¨

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨

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.

 

Large accelerated filer   þ    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    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  ¨    No  þ

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

 

CLASS   OUTSTANDING AS OF: April 22, 2014
Common Stock, $0.10 par value   188,738,707 shares

 

 

 


Table of Contents

 

LOGO

TOTAL SYSTEM SERVICES, INC.

Table of Contents

 

     Page
Number
 

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements

  

Consolidated Balance Sheets (unaudited) — March 31, 2014 and December 31, 2013

     3   

Consolidated Statements of Income (unaudited) — Three months ended March 31, 2014 and 2013

     4   

Consolidated Statements of Comprehensive Income (unaudited) — Three months ended March 31, 2014 and 2013

     5   

Consolidated Statements of Cash Flows (unaudited) — Three months ended March 31, 2014 and 2013

     6   

Notes to Unaudited Consolidated Financial Statements

     7   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     18   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     36   

Item 4. Controls and Procedures

     37   

Part II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     38   

Item 1A. Risk Factors

     38   

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

     38   

Item 6. Exhibits

     39   

Signatures

     40   

Exhibit Index

     41   


Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

TOTAL SYSTEM SERVICES, INC.

Consolidated Balance Sheets

(Unaudited)

 

(in thousands, except per share data)    March 31, 2014     December 31, 2013  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 274,161        247,700   

Accounts receivable, net of allowance for doubtful accounts and billing adjustments of $4.6 million and $3.4 million as of 2014 and 2013, respectively

     268,794        255,773   

Deferred income tax assets

     12,477        14,158   

Prepaid expenses and other current assets

     89,810        95,109   

Current assets of discontinued operations

     43,614        41,193   
  

 

 

   

 

 

 

Total current assets

     688,856        653,933   

Goodwill

     1,539,758        1,541,574   

Other intangible assets, net of accumulated amortization of $124.8 million and $105.4 million as of 2014 and 2013, respectively

     462,027        481,419   

Computer software, net of accumulated amortization of $557.4 million and $536.4 million as of 2014 and 2013, respectively

     359,806        363,880   

Property and equipment, net of accumulated depreciation and amortization of $401.1 million and $391.5 million as of 2014 and 2013, respectively

     262,754        259,968   

Contract acquisition costs, net of accumulated amortization of $260.6 million and $251.8 million as of 2014 and 2013, respectively

     195,706        184,828   

Equity investments, net

     96,533        94,133   

Deferred income tax assets, net

     3,903        3,972   

Other assets

     97,409        87,146   

Long-term assets of discontinued operations

     14,467        15,715   
  

 

 

   

 

 

 

Total assets

   $ 3,721,219        3,686,568   
  

 

 

   

 

 

 

Liabilities

    

Current liabilities:

    

Accounts payable

   $ 51,488        33,651   

Current portion of long-term borrowings

     34,320        34,257   

Accrued salaries and employee benefits

     28,879        38,339   

Current portion of obligations under capital leases

     10,625        22,662   

Other current liabilities

     195,708        159,170   

Current liabilities of discontinued operations

     6,675        9,136   
  

 

 

   

 

 

 

Total current liabilities

     327,695        297,215   

Long-term borrowings, excluding current portion

     1,419,742        1,428,251   

Deferred income tax liabilities

     229,649        228,727   

Obligations under capital leases, excluding current portion

     6,096        7,500   

Other long-term liabilities

     83,194        81,600   

Long-term liabilities of discontinued operations

     1,244        1,197   
  

 

 

   

 

 

 

Total liabilities

     2,067,620        2,044,490   
  

 

 

   

 

 

 

Redeemable noncontrolling interest in consolidated subsidiary

     23,918        39,652   
  

 

 

   

 

 

 

Commitments and contingencies (Note 10)

    

Equity

    

Shareholders’ equity:

    

Common stock — $0.10 par value. Authorized 600,000 shares; 202,788 and 202,790 issued as of 2014 and 2013, respectively; 188,801 and 187,717 outstanding as of 2014 and 2013, respectively

     20,279        20,279   

Additional paid-in capital

     144,682        165,841   

Accumulated other comprehensive income, net

     5,320        3,749   

Treasury stock, at cost (13,987 and 15,073 shares as of 2014 and 2013, respectively)

     (311,779     (326,996

Retained earnings

     1,748,660        1,718,204   
  

 

 

   

 

 

 

Total shareholders’ equity

     1,607,162        1,581,077   
  

 

 

   

 

 

 

Noncontrolling interests in consolidated subsidiaries

     22,519        21,349   
  

 

 

   

 

 

 

Total equity

     1,629,681        1,602,426   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 3,721,219        3,686,568   
  

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements

 

3


Table of Contents

TOTAL SYSTEM SERVICES, INC.

Consolidated Statements of Income

(Unaudited)

 

     Three months ended March 31,  
(in thousands, except per share data)    2014     2013  

Total revenues

   $ 592,848        448,791   
  

 

 

   

 

 

 

Cost of services

     422,883        304,369   

Selling, general and administrative expenses

     87,963        66,421   

Merger and acquisition expenses

     1,305        3,481   
  

 

 

   

 

 

 

Total operating expenses

     512,151        374,271   
  

 

 

   

 

 

 

Operating income

     80,697        74,520   

Nonoperating (expenses) income, net

     (324     1,003   

Merger and acquisition expenses — bridge loan facility and other financing

     (9,489     (2,743
  

 

 

   

 

 

 

Income before income taxes and equity in income of equity investments

     70,884        72,780   

Income taxes

     24,335        17,463   
  

 

 

   

 

 

 

Income before equity in income of equity investments

     46,549        55,317   

Equity in income of equity investments, net of tax

     4,096        3,817   
  

 

 

   

 

 

 

Income from continuing operations, net of tax

     50,645        59,134   

Income from discontinued operations, net of tax

     980        15   
  

 

 

   

 

 

 

Net income

     51,625        59,149   

Net income attributable to noncontrolling interests

     (2,322     (2,121
  

 

 

   

 

 

 

Net income attributable to Total System Services, Inc.

    

(TSYS) common shareholders

   $ 49,303        57,028   
  

 

 

   

 

 

 

Basic earnings per share (EPS) (Note 12):

    

Income from continuing operations to TSYS common shareholders

   $ 0.26        0.31   

Loss from discontinued operations to TSYS common shareholders

     (0.00     (0.00
  

 

 

   

 

 

 

Net Income attributable to TSYS common shareholders

   $ 0.26        0.31   
  

 

 

   

 

 

 

Diluted EPS attributable to TSYS common shareholders (Note 12)

    

Income from continuing operations to TSYS common shareholders

   $ 0.26        0.31   

Loss from discontinued operations to TSYS common shareholders

     (0.00     (0.00
  

 

 

   

 

 

 

Net Income attributable to TSYS common shareholders*

   $ 0.26        0.30   
  

 

 

   

 

 

 

Amounts attributable to TSYS common shareholders

    

Income from continuing operations

   $ 49,321        57,905   

Loss from discontinued operations

     (18     (877
  

 

 

   

 

 

 

Net Income

   $ 49,303        57,028   
  

 

 

   

 

 

 

 

* Diluted EPS amounts do not total due to rounding

See accompanying Notes to Unaudited Consolidated Financial Statements

 

4


Table of Contents

TOTAL SYSTEM SERVICES, INC.

Consolidated Statements of Comprehensive Income

(Unaudited)

 

     Three months ended March 31,  
(in thousands)    2014     2013  

Net income

   $ 51,625        59,149   

Other comprehensive income (loss), net of tax:

    

Foreign currency translation adjustments

     1,581        (12,646

Postretirement healthcare plan adjustments

     (75     155   

Unrealized gain on available-for-sale securities

     570        —     
  

 

 

   

 

 

 

Other comprehensive income (loss)

     2,076        (12,491
  

 

 

   

 

 

 

Comprehensive income

     53,701        46,658   

Comprehensive income attributable to noncontrolling interests

     2,827        467   
  

 

 

   

 

 

 

Comprehensive income attributable to TSYS common shareholders

   $ 50,874        46,191   
  

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements

 

5


Table of Contents

TOTAL SYSTEM SERVICES, INC.

Consolidated Statements of Cash Flows

(Unaudited)

 

     Three months ended March 31,  
(in thousands)    2014      2013  

Cash flows from operating activities:

     

Net income

   $ 51,625         59,149   

Adjustments to reconcile net income to net cash provided by operating activities:

     

Depreciation and amortization

     61,432         42,498   

Provisions for fraud and other losses

     9,639         —     

Share-based compensation

     7,611         4,593   

Deferred income tax expense

     4,751         9,442   

Charges for transaction processing provisions

     1,826         4,160   

Provisions for bad debt expenses and billing adjustments

     749         376   

Amortization of debt issuance costs

     452         2,860   

Amortization of bond discount

     94         —     

Loss on disposal of equipment, net

     2         55   

Changes in value of private equity investments

     (312      (1,227

Net gain on foreign currency

     (425      (45

Excess tax benefit from share-based payment arrangements

     (4,037      (536

Equity in income of equity investments

     (4,096      (3,817

Changes in operating assets and liabilities:

     

Accounts payable

     15,738         (30,182

Prepaid expenses, other current assets and other long-term assets

     (3,170      (32,247

Accrued salaries and employee benefits

     (9,986      (9,266

Accounts receivable

     (11,418      5,745   

Other current liabilities and other long-term liabilities

     28,231         879   
  

 

 

    

 

 

 

Net cash provided by operating activities

     148,706         52,437   
  

 

 

    

 

 

 

Cash flows from investing activities:

     

Additions to contract acquisition costs

     (17,903      (13,666

Purchases of property and equipment

     (13,641      (6,481

Additions to internally developed computer software

     (9,735      (5,297

Additions to licensed computer software from vendors

     (5,963      (29,904

Purchase of private equity investments

     (822      (411
  

 

 

    

 

 

 

Net cash used in investing activities

     (48,064      (55,759
  

 

 

    

 

 

 

Cash flows from financing activities:

     

Purchase of noncontrolling interests

     (37,500      —     

Principal payments on long-term borrowings and capital lease obligations

     (22,277      (9,784

Dividends paid on common stock

     (18,788      —     

Repurchase of common stock under plans and tax withholding

     (5,173      (5,501

Subsidiary dividends paid to noncontrolling shareholders

     (2,312      (953

Debt issuance costs

     —           (3,534

Excess tax benefit from share-based payment arrangements

     4,037         536   

Proceeds from exercise of stock options

     9,539         2,551   
  

 

 

    

 

 

 

Net cash used in financing activities

     (72,474      (16,685
  

 

 

    

 

 

 

Cash and cash equivalents:

     

Effect of exchange rate changes on cash and cash equivalents

     1,015         (4,508
  

 

 

    

 

 

 

Net increase (decrease) in cash and cash equivalents

     29,183         (24,515

Cash and cash equivalents at beginning of period

     278,230         247,612   
  

 

 

    

 

 

 

Cash and cash equivalents at end of period

     307,413         223,097   

Less cash and cash equivalents of discontinued operations at end of period

     33,252         22,324   
  

 

 

    

 

 

 

Cash and cash equivalents of continued operations at end of period

   $ 274,161         200,773   
  

 

 

    

 

 

 

Supplemental cash flow information:

     

Interest paid

   $ 10,323         776   
  

 

 

    

 

 

 

Income taxes paid, net

   $ 3,146         15,600   
  

 

 

    

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements

 

6


Table of Contents

TOTAL SYSTEM SERVICES, INC.

Notes to Unaudited Consolidated Financial Statements

Note 1 — Summary of Significant Accounting Policies

Business

Total System Services, Inc.’s (TSYS’ or the Company’s) revenues are derived from providing payment processing, merchant services and related payment services to financial and nonfinancial institutions, generally under long-term processing contracts. The Company also derives revenues by providing general-purpose reloadable (GPR) prepaid debit cards and payroll cards and alternative financial services to underbanked consumers. The Company’s services are provided through four operating segments: North America Services, International Services, Merchant Services and NetSpend.

Through the Company’s North America Services and International Services segments, TSYS processes information through its cardholder systems to financial institutions throughout the United States and internationally. The Company’s North America Services segment provides these services to clients in the United States, Canada, Mexico and the Caribbean. The Company’s International Services segment provides services to clients in Europe, India, Middle East, Africa, Asia Pacific and Brazil. The Company’s Merchant Services segment provides merchant services to merchant acquirers and merchants mainly in the United States. The Company’s NetSpend segment provides services to consumers in the United States.

Basis of Presentation

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

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

Certain prior period amounts have been reclassified to conform to the current period’s presentation.

As discussed in Note 2, the Company’s financial statements reflect TSYS Japan and GP Network Corporation (GP Net) as discontinued operations. The Company has segregated the net assets, net liabilities and operating results from continuing operations on the Unaudited Condensed Consolidated Balance Sheets and Unaudited Condensed Consolidated Statements of Income for all periods presented.

The accompanying unaudited consolidated financial statements should be read in conjunction with the Company’s summary of significant accounting policies, consolidated financial statements and related notes appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission (SEC). Results of interim periods are not necessarily indicative of results to be expected for the year.

Recently Adopted Accounting Pronouncements

On January 1, 2014, the Company adopted Accounting Standards Update (ASU) 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss or a Tax Credit Carryforward Exists” and ASU 2013-05, “Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.” The adoption of these ASUs did not have a material impact on the Company’s financial position, results of operations or cash flows.

 

7


Table of Contents

Note 2 — Discontinued Operations

The Company is in the process of selling TSYS Japan and GP Net. The decision to sell the businesses in Japan was the result of management’s decision to divest non-strategic businesses and focus resources on core products and services. Both entities were part of the International Services segment.

In accordance with U.S. GAAP, the Company determined that the Japan businesses became discontinued operations in the first quarter of 2014.

The following table presents the main classes of assets and liabilities held for sale as of March 31, 2014 and December 31, 2013:

 

(in thousands)    March 31, 2014      December 31, 2013  

Cash and cash equivalents

   $ 33,252         30,530   

Other Assets

     24,829         26,378   

Total Liabilities

     7,919         10,333   

The following table presents the summarized results of discontinued operations for the three months ended March 31, 2014, as compared to 2013:

 

     Three months ended March 31,  
(in thousands)    2014     2013  

Revenues before reimbursable items

   $ 16,248        16,205   

Total revenues

     16,248        16,205   

Operating income

     367        383   

Income tax (benefit) expense

     (44     383   

Income from discontinued operations, net of tax

     980        15   

Income from discontinued operations, net of tax, attributable to noncontrolling interest

     998        892   

Loss from discontinued operations, net of tax, attributable to TSYS common shareholders

     (18     (877

The Unaudited Consolidated Statements of Cash Flows include TSYS Japan and GPNet and are not considered material.

Note 3 — Fair Value Measurement

Refer to Note 2 of the Company’s audited financial statements for the year ended December 31, 2013, which are included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC, for a discussion regarding fair value measurement.

Accounting Standards Codification (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.

The Company had no transfers between Level 1, Level 2 or Level 3 assets during the three months ended March 31, 2014.

 

8


Table of Contents

As of March 31, 2014, the Company had recorded goodwill in the amount of $1.5 billion.

The Company had nonrecurring fair value measurements related to discontinued operations. The Company determined that the carrying value of its assets and liabilities held for sale approximate their fair values less costs to sell.

Note 4 — 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, 2014      December 31, 2013  

Cash and cash equivalents in domestic accounts

   $ 213,608         191,460   

Cash and cash equivalents in foreign accounts

     60,553         56,240   
  

 

 

    

 

 

 

Total

   $ 274,161         247,700   
  

 

 

    

 

 

 

As of March 31, 2014 and December 31, 2013, the Company had approximately $5 million in money market accounts which the Company considered cash equivalents. 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 as of the time of purchase that they present insignificant risk of changes in value because of changes 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, 2014      December 31, 2013  

Prepaid expenses

   $ 38,379         41,905   

Supplies inventory

     11,675         12,142   

Other

     39,756         41,062   
  

 

 

    

 

 

 

Total

   $ 89,810         95,109   
  

 

 

    

 

 

 

Contract Acquisition Costs, net

Significant components of contract acquisition costs, net of accumulated amortization, are summarized as follows:

 

(in thousands)    March 31, 2014      December 31, 2013  

Conversion costs, net of accumulated amortization of $131.4 million and $126.5 million as of 2014 and 2013, respectively

   $ 125,288         112,177   

Payments for processing rights, net of accumulated amortization of $129.2 million and $125.3 million as of 2014 and 2013, respectively

     70,418         72,651   
  

 

 

    

 

 

 

Total

   $ 195,706         184,828   
  

 

 

    

 

 

 

Amortization expense related to conversion costs, which is recorded in cost of services, was $4.3 million and $5.4 million for the three months ended March 31, 2014 and 2013, respectively.

Amortization related to payments for processing rights, which is recorded as a reduction of revenues, was $3.3 million for the three months ended March 31, 2014 and 2013, respectively.

 

9


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Other Current Liabilities

Significant components of other current liabilities are summarized as follows:

 

(in thousands)    March 31, 2014      December 31, 2013  

Deferred revenues

   $ 39,084         36,408   

Dissenting shareholder liability *

     25,723         25,723   

Accrued expenses

     25,181         23,265   

Dividends payable

     19,155         19,508   

Other

     86,565         54,266   
  

 

 

    

 

 

 

Total

   $ 195,708         159,170   
  

 

 

    

 

 

 

 

* Represents 1.6 million NetSpend shares held by dissenting shareholders

Accumulated Other Comprehensive Income (AOCI)

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

 

(in thousands)    Beginning
Balance
December 31,
2013
    Pretax
Amount
    Tax
Effect
    Net-of-Tax
Amount
    Ending
Balance
March 31,
2014
 

Foreign currency translation adjustments and transfers from noncontrolling interests

   $ 2,032        1,181        105        1,076      $ 3,108   

Unrealized gain on available-for-sale securities

     1,773        904        334        570        2,343   

Change in AOCI related to postretirement healthcare plans

     (56     (118     (43     (75     (131
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 3,749        1,967        396        1,571      $ 5,320   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

There were no reclassifications of AOCI to net income or to other accounts for the three month period ended March 31, 2014.

Note 5 — Long-Term Borrowings

Refer to Note 12 of the Company’s audited financial statements for the year ended December 31, 2013, which are included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC, for a discussion regarding long-term borrowings.

Note 6 — Share-Based Compensation

Refer to Notes 1 and 18 of the Company’s audited financial statements for the year ended December 31, 2013, which are included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC, for a discussion regarding the Company’s share-based compensation plans and policy.

Share-Based Compensation

TSYS’ share-based compensation costs are expensed, rather than capitalized, as these awards are typically granted to individuals not involved in capitalizable activities. Share-based compensation costs are classified as selling, general and administrative expenses on the Company’s statements of income and corporate administration and other expenses for segment reporting purposes. For the three months ended March 31, 2014, share-based compensation was $7.6 million, compared to $4.6 million for the same period in 2013.

Nonvested Share Awards

During the first three months of 2014, the Company issued 596,113 shares of TSYS common stock with a market value of $18.2 million to certain key employees. The nonvested stock bonus awards to certain key employees are for services to be provided in the future and vest over a period of up to four years. The market value of the TSYS common stock as of the date of issuance is charged as compensation expense over the vesting periods of the awards.

 

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During the first three months of 2013, the Company issued 338,485 shares of TSYS common stock with a market value of $8.0 million to certain key employees. The nonvested stock bonus awards to certain key employees are for services to be provided in the future and vest over a period of three years. The market value of the TSYS common stock as of the date of issuance is charged as compensation expense over the vesting period of the awards.

As of March 31, 2014, there was approximately $44.4 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements. That cost is expected to be recognized over a remaining weighted average period of 2.5 years.

Performance-Based Awards

During the first three months of 2014, TSYS authorized a total grant of 201,189 performance shares to certain key executives with a performance-based vesting schedule (2014 performance shares). These 2014 performance shares have a 2014-2016 performance period for which the Compensation Committee of the Board of Directors established two performance goals: revenues before reimbursable items and adjusted cash EPS and, if such goals are attained in 2016, 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 estimates the probability of achieving the goals through the performance period and expenses the award on a straight-line basis. Compensation costs related to these performance shares are expected to be recognized through the end of 2016.

Stock Option Awards

During the first three months of 2014, the Company granted 914,470 stock options to key TSYS executive officers. The weighted average fair value of the option grants was $7.60 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 $30.83; risk-free interest rate of 2.00%; expected volatility of 25.00%; expected term of 6.5 years; and dividend yield of 1.30%. The grants to key TSYS executive officers will vest over a period of three years.

As of March 31, 2014, there was approximately $11.3 million of total unrecognized compensation cost related to TSYS stock options that is expected to be recognized over a remaining weighted average period of 1.7 years.

Note 7 — Income Taxes

Refer to Notes 1 and 14 of the Company’s audited financial statements for the year ended December 31, 2013, which are included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC, for a discussion regarding income taxes.

TSYS is the parent of an affiliated group that files a consolidated U.S. federal income tax return 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 2009 and with few exceptions, the Company is no longer subject to income tax examinations from state and local or foreign tax authorities for years before 2005. There are currently Federal income tax examinations in progress for the years 2009 and 2010 for a subsidiary which TSYS purchased in the prior year. Additionally, a number of tax examinations are in progress by the relevant state tax authorities. Although TSYS is unable to determine the ultimate outcome of these examinations, TSYS believes that its liability for uncertain tax positions relating to these jurisdictions for such years is adequate.

TSYS’ effective tax rate was 32.1% and 23.8% for the three months ended March 31, 2014 and 2013, respectively. The increased rate during the period ended March 31, 2014 is primarily due to changes in discrete items and tax credits.

TSYS has adopted the provisions of ASC 740, “Income Taxes,” which prescribes a recognition threshold and measurement attribute for the financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken in a tax return. The amount of unrecognized tax benefits increased by $0.2 million during the three months ended March 31, 2014.

TSYS recognizes potential interest and penalties related to the underpayment of income taxes as income tax expense in the consolidated statements of income. Gross accrued interest and penalties on unrecognized tax benefits totaled $0.3

 

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million as of both March 31, 2014 and December 31, 2013. The total amounts of unrecognized income tax benefits as of March 31, 2014 and December 31, 2013 that, if recognized, would affect the effective tax rates are $3.0 million and $2.8 million (net of the federal benefit on state tax issues), respectively, which include interest and penalties of $0.2 million for each respective period. 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

Refer to Note 21 of the Company’s audited financial statements for the year ended December 31, 2013, which are included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC, for a discussion regarding segment reporting and major customers.

At TSYS, the chief operating decision maker (CODM) is a group consisting of Senior Executive Management and above. The CODM has decided that all share-based compensation costs should be included in the category “Corporate Administration and Other.” This change is used to evaluate performance and assess resources starting in the first quarter of 2014. Additionally, the Company’s Japan-based entities qualified for discontinued operations treatment during the quarter ended March 31, 2014. The following operating results by segment comparison reflects these changes, including the financial results for 2013. For more information regarding discontinued operations, refer to Notes 2 and 13.

 

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

 

Operating Segments    Three months ended March 31,  
(in thousands)    2014     2013  

Revenues before reimbursable items

    

North America Services

   $ 224,368        205,596   

International Services

     76,773        76,387   

Merchant Services

     104,625        109,301   

NetSpend

     132,640        —     

Intersegment revenues

     (5,656     (3,252
  

 

 

   

 

 

 

Revenues before reimbursable items from external customers

   $ 532,750        388,032   
  

 

 

   

 

 

 

Total revenues

    

North America Services

   $ 262,178        239,789   

International Services

     82,378        80,891   

Merchant Services

     122,690        132,901   

NetSpend

     132,640        —     

Intersegment revenues

     (7,038     (4,790
  

 

 

   

 

 

 

Revenues from external customers

   $ 592,848        448,791   
  

 

 

   

 

 

 

Depreciation and amortization

    

North America Services

   $ 20,276        18,083   

International Services

     9,805        10,699   

Merchant Services

     3,400        3,142   

NetSpend

     1,735        —     
  

 

 

   

 

 

 

Segment depreciation and amortization

     35,216        31,924   

Acquisition intangible amortization

     24,313        8,532   

Corporate Administration and Other

     506        396   
  

 

 

   

 

 

 

Total depreciation and amortization

   $ 60,035        40,852   
  

 

 

   

 

 

 

Adjusted segment operating income

    

North America Services

   $ 74,578        68,748   

International Services

     4,555        6,861   

Merchant Services

     30,168        37,636   

NetSpend

     28,717        —     
  

 

 

   

 

 

 

Total adjusted segment operating income

     138,018        113,245   

Acquisition intangible amortization

     (24,313     (8,532

NetSpend merger and acquisition operating expenses (non-recurring)

     (1,253     (3,481

Corporate Administration and Other

     (31,755     (26,712
  

 

 

   

 

 

 

Operating income

   $ 80,697        74,520   
  

 

 

   

 

 

 
     As of  
     March 31, 2014     December 31,2013  

Total assets

    

North America Services

   $ 3,248,265        3,215,333   

International Services

     411,420        417,379   

Merchant Services

     693,130        676,592   

NetSpend

     1,588,092        1,596,150   

Intersegment eliminations

     (2,219,688     (2,218,886
  

 

 

   

 

 

 

Total assets

   $ 3,721,219        3,686,568   
  

 

 

   

 

 

 

 

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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. Revenues for NetSpend include a portion of transaction fees and interchange fees received by Issuing Banks along with other products and services provided to customers domiciled in the United States.

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

 

     Three months ended March 31, 2014  
(in millions)    North America
Services
     International
Services
     Merchant
Services
     NetSpend      Total  

United States

   $ 185.3         —           122.5         132.6       $ 440.4   

Europe*

     0.2         69.8         —           —           70.0   

Canada

     62.9         —           0.1         —           63.0   

Mexico

     3.9         —           —           —           3.9   

Other*

     3.8         11.5         0.2         —           15.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 256.1         81.3         122.8         132.6       $ 592.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Three months ended March 31, 2013  
(in millions)    North America
Services
     International
Services
     Merchant
Services
     NetSpend      Total  

United States

   $ 171.7         —           133.3         —         $ 305.0   

Europe*

     0.2         70.7         —           —           70.9   

Canada

     56.7         —           0.1         —           56.8   

Mexico

     4.1         —           —           —           4.1   

Other*

     2.8         9.0         0.2         —           12.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 235.5         79.7         133.6         —         $ 448.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

* Revenues are impacted by movements in foreign currency exchange rates.

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

 

     As of  
(in millions)    March 31, 2014      December 31, 2013  

United States

   $ 210.9         207.4   

Europe*

     44.8         46.4   

Other*

     7.1         6.2   
  

 

 

    

 

 

 

Total

   $ 262.8         260.0   
  

 

 

    

 

 

 

 

 

* Total assets are impacted by movements in foreign currency exchange rates.

Major Customers

For the three months ended March 31, 2014 and 2013, the Company did not have any major customers.

Note 9 — Supplementary Cash Flow Information

Nonvested Awards

The Company issued shares of common stock to certain key employees. The grants to certain key employees were issued under nonvested stock bonus awards for services to be provided in the future by such officers and employees. Refer to Note 6 for more information.

 

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Table of Contents

Equipment and Software Acquired Under Capital Lease Obligations

The Company acquired equipment and software under capital lease obligations in the amount of $12.7 million during the first three months of 2013 related to software and other peripheral hardware. The company did not acquire any equipment and software under capital lease obligations during the first three months of 2014.

Note 10 — Commitments and Contingencies

Refer to Note 15 of the Company’s audited financial statements for the year ended December 31, 2013, which are included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC, for a discussion regarding commitments and contingencies.

Income Taxes

The total liability for uncertain tax positions under ASC 740 as of March 31, 2014 was $2.8 million. Refer to Note 7 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 change related to these obligations within the next year.

Legal Proceedings

The Company is subject to various legal proceedings and claims and is also subject to information requests, inquiries and investigations arising out of the ordinary conduct of its business. The Company establishes 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 are believed to be adequately covered by insurance, or, if not covered, the possibility of losses from such matters are believed to be remote or such matters are of such kind or involve such amounts that would not have a material adverse effect on the financial position, results of operations or cash flows of the Company if disposed of unfavorably.

Note 11 — Acquisitions

Refer to Note 23 of the Company’s audited financial statements for the year ended December 31, 2013, which are included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC, for a discussion regarding acquisitions.

NetSpend

The Company recognized amounts of the identifiable assets acquired and liabilities assumed on July 1, 2013 (the acquisition date). These amounts will remain preliminary until the valuation analysis has been finalized. The measurement period during which changes in assets, liabilities, equity interests, or items of consideration are subject to adjustment ends one year following the acquisition date. The Company continues to evaluate consideration paid, deferred taxes, goodwill and financial liabilities. During the quarter ended March 31, 2014, the Company decreased its goodwill by $1.8 million mainly due to adjustments in deferred taxes resulting from changes in state apportionment.

 

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Table of Contents

Pro Forma Result of Operations

The amounts of NetSpend revenue and earnings included in TSYS’ consolidated income statement for the year ended December 31, 2013 and the pro forma revenue and earnings of the combined entity had the acquisition date been January 1, 2013 are:

 

 

     Actual      Supplemental pro forma  
     Three months ended
March 31, 2013
     Three months ended
March 31, 2013
 
(in thousands, except per share data)              

Revenue

   $ 448,791       $ 566,052   
  

 

 

    

 

 

 

Net income attributable to TSYS common shareholders

   $ 57,028       $ 57,684   
  

 

 

    

 

 

 

Basic EPS attributable to TSYS common shareholders

   $ 0.31       $ 0.31   
  

 

 

    

 

 

 

Diluted EPS attributable to TSYS common shareholders

   $ 0.30       $ 0.30   
  

 

 

    

 

 

 

 

The unaudited pro forma financial information presented above does not purport to represent what the actual results of our operations would have been if the acquisition of NetSpend’s operations had occurred prior to January 1, 2013, nor is it indicative of the future operating results of TSYS. The unaudited pro forma financial information does not reflect the impact of future events that may occur after the acquisition, including, but not limited to, anticipated cost savings from operating synergies.

The unaudited pro forma financial information presented in the table above has been adjusted to give effect to adjustments that are (1) directly related to the business combination; (2) factually supportable; and (3) expected to have a continuing impact. These adjustments include, but are not limited to, the application of accounting policies; and depreciation and amortization related to fair value adjustments to property, plant and equipment and intangible assets.

The pro forma adjustments do not reflect the following material items that result directly from the acquisition and which impacted our statement of operations following the acquisition:

 

    Acquisition and related financing transactions costs relating to fees to investment bankers, attorneys, accountants, and other professional advisors, and other transaction-related costs that were not capitalized as deferred financing costs; and

 

    The effect of anticipated cost savings or operating efficiencies expected to be realized and related restructuring charges such as technology and infrastructure integration expenses, and other costs related to the integration of NetSpend into TSYS.

Redeemable Noncontrolling Interest

On February 11, 2014, the Company acquired an additional 15% equity interest in Central Payment Co., LLC (CPAY) from its privately held owner for $37.5 million, which increased its equity interest in CPAY from 60% to 75%. This purchase reduced the remaining redeemable noncontrolling interest in CPAY to 25% of its total outstanding equity. The pro forma revenue and earnings of this acquisition are not material to the consolidated financial statements.

 

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Note 12 — Earnings Per Share

The following table illustrates basic and diluted EPS for the three months ended March 31, 2014 and 2013:

 

     Three months ended March 31,  
     2014      2013  
(in thousands, except per share data)    Common
Stock
    Participating
Securities
     Common
Stock
    Participating
Securities
 

Basic EPS:

         

Net income attributable to TSYS common shareholders

   $ 49,303           57,028     

Less income allocated to nonvested awards

     (516     516         (209     209   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income allocated to common stock for EPS calculation (a)

   $ 48,787        516         56,819        209   
  

 

 

   

 

 

    

 

 

   

 

 

 

Average common shares outstanding (b)

     185,763        1,989         186,108        699   
  

 

 

   

 

 

    

 

 

   

 

 

 

Basic EPS (a)/(b)

   $ 0.26        0.26         0.31        0.30   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted EPS:

         

Net income attributable to TSYS common shareholders

   $ 49,303           57,028     

Less income allocated to nonvested awards

     (512     512         (208     208   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income allocated to common stock for EPS calculation (c)

   $ 48,791        512         56,820        208   
  

 

 

   

 

 

    

 

 

   

 

 

 

Average common shares outstanding

     185,763        1,989         186,108        699   

Increase due to assumed issuance of shares related to common equivalent shares outstanding

     2,632           1,274     
  

 

 

   

 

 

    

 

 

   

 

 

 

Average common and common equivalent shares outstanding (d)

     188,395        1,989         187,382        699   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted EPS (c)/(d)

   $ 0.26        0.26         0.30        0.30   
  

 

 

   

 

 

    

 

 

   

 

 

 

The diluted EPS calculation excludes stock options and nonvested awards that are convertible into 4.5 million common shares for the three months ended March 31, 2014 and excludes 3.2 million common shares for the three months ended March 31, 2013, because their inclusion would have been anti-dilutive.

Note 13 — Subsequent Events

The Company completed the sale of all of its ownership in GPNet and TSYS Japan in April 2014. The decision to sell the businesses in Japan was the result of management’s decision to divest non-strategic businesses and focus resources on core products and services. Both entities were part of the International Services segment.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Financial Overview

Total System Services, Inc.’s (TSYS’ or the Company’s) revenues are derived from providing payment processing, merchant services and related services to financial and nonfinancial institutions, generally under long-term processing contracts. The Company also derives revenues by providing general-purpose reloadable (GPR) prepaid debit cards and payroll cards and alternative financial services to underbanked consumers. The Company’s services are provided through four operating segments: North America Services, International Services, Merchant Services and NetSpend.

Through the Company’s 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 Company’s North America Services segment provides these services to clients in the United States, Canada, Mexico and the Caribbean. The Company’s International Services segment provides services to clients in Europe, India, Middle East, Africa, Asia Pacific and Brazil. The Company’s Merchant Services segment provides merchant services to merchant acquirers and merchants mainly in the United States. The Company’s NetSpend segment provides GPR prepaid debit and payroll cards and alternative financial service solutions to the underbanked and other consumers in the United States.

For a detailed discussion regarding the Company’s operations, see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission (SEC).

A summary of the financial highlights for 2014, as compared to 2013, is provided below:

 

     Three months ended March 31,  
(in millions)    2014      2013      Percent
Change
 

Total revenues

   $ 592.8         448.8         32.1

Operating income

     80.7         74.5         8.3   

Net income attributable to TSYS common shareholders

     49.3         57.0         (13.5

Basic earnings per share (EPS)

     0.26         0.31         (14.0

Diluted EPS

     0.26         0.30         (14.6

Adjusted earnings before interest, taxes, depreciation, and amortization (Adjusted EBITDA)1

     149.6         123.4         21.2   

Adjusted cash EPS2

     0.38         0.38         (1.1

Cash flows from operating activities

     148.7         52.4         nm

 

* not meaningful
1  Adjusted EBITDA is net income excluding equity in income of equity investments, nonoperating income/(expense), income taxes, depreciation, amortization and stock-based compensation expenses and other non-recurring items.
2  Adjusted cash EPS is adjusted cash earnings divided by weighted average shares outstanding used for basic EPS calculations. Adjusted cash earnings is net income excluding the after-tax impact of stock-based compensation expenses, amortization of acquisition intangibles and other non-recurring items.

 

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Below is a summary of accounts on file (AOF) for the Company’s North America Services and International Services segments:

 

(in millions)    As of March 31,  

AOF

   2014      2013      Percent
Change
 

Consumer Credit

     234.8         203.7         15.3

Retail

     27.5         25.2         9.3   
  

 

 

    

 

 

    

Total Consumer

     262.3         228.9         14.6   

Commercial

     40.4         37.9         6.7   

Other

     19.7         13.4         46.5   
  

 

 

    

 

 

    

Subtotal1

     322.4         280.2         15.1   

Prepaid/Stored Value2

     120.0         107.3         11.8   

Government Services3

     63.0         59.4         6.1   

Commercial Card Single Use4

     50.8         31.6         60.8   
  

 

 

    

 

 

    

Total AOF

     556.2         478.5         16.2
  

 

 

    

 

 

    

 

1  Traditional accounts include consumer, retail, commercial, debit and other accounts. These accounts are grouped together due to the tendency to have more transactional activity than prepaid, government services and single use accounts.
2  These accounts tend to have less transactional activity than the traditional accounts. Prepaid and stored value cards are issued by firms through retail establishments to be purchased by consumers to be used as of a later date. These accounts tend to be the least active of all accounts on file.
3  Government services accounts are disbursements of student loan accounts issued by the Department of Education, which have minimal activity.
4  Commercial card single use accounts are one-time use accounts issued by firms to book lodging and other travel related expenses.

Financial Review

This Financial Review provides a discussion of critical accounting policies and estimates, related party transactions and off-balance sheet arrangements. This Financial Review also discusses the results of operations, financial position, liquidity and capital resources of TSYS and outlines the factors that have affected its recent earnings, as well as those factors that may affect its future earnings. For a detailed discussion regarding these topics, refer to our Notes to Consolidated Financial Statements and “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” which are included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC.

Critical Accounting Policies and Estimates

Refer to Note 1 in the Notes to Unaudited Consolidated Financial Statements for more information on changes to the Company’s critical accounting policies, estimates and assumptions or the judgments affecting the application of those estimates and assumptions in 2014.

Related Party Transactions

The Company believes the terms and conditions of transactions between the Company and its equity investments, Total System Services de México, S.A. de. C.V. (TSYS de México) and China UnionPay Data Co., Ltd. (CUP Data), are comparable to those which could have been obtained in transactions with unaffiliated parties. The Company’s margins with respect to related party transactions are comparable to margins recognized in transactions with unrelated third parties.

 

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Table of Contents

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 for uncertain tax positions under Accounting Standards Codification (ASC) 740, “Income Taxes,” as of March 31, 2014 is $2.8 million. Refer to Note 7 in the Notes to Unaudited 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, as of this time, the Company does not expect a significant change related to these obligations within the next year.

Additionally, the Company has long-term obligations which consist of required minimum future payments under contracts with our distributors and other services providers for the NetSpend segment.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, refer to Note 1 in the Notes to Unaudited Consolidated Financial Statements and see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC.

In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) ASU 2014-08 “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” ASU 2014-08 addresses the accounting for the disposal of a component of an entity or a group of components of an entity. The amendments in this Update address those issues by changing the criteria for reporting discontinued operations and enhancing convergence of the FASB’s and the International Accounting Standard Board’s (IASB) reporting requirements for discontinued operations. For public entities, the ASU is effective prospectively for fiscal years, and interim periods, within those years, beginning after December 15, 2014. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The Company has elected not to early adopt ASU 2014-08. The Company does not expect the adoption of this ASU to have a material impact on the its financial position, results of operations or cash flows.

Results of Operations

Revenues

The Company generates revenues from transaction processing, debit and other payment-related services. The Company’s pricing for transactions and services is complex. Each category of revenue has numerous fee components depending on the types of transactions or services provided. TSYS reviews its pricing and implements pricing changes on an ongoing basis. In addition, standard pricing varies among its regional businesses, and such pricing can be customized further for its clients through tiered pricing of various thresholds for volume activity. TSYS’ revenues are based upon transactional information accumulated by its systems or reported by its customers. The Company’s revenues are impacted by currency translation of foreign operations, as well as doing business in the current economic environment.

Total revenues increased $144.0 million, or 32.1%, respectively, for the three months ended March 31, 2014, compared to the same period in 2013. The increases in revenues for the three months ended March 31, 2014 include an increase of $4.4 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 Company’s reimbursable items are

 

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impacted with changes in postal rates and changes in the volumes of mailing activities by its clients. Reimbursable items for the three months ended March 31, 2014 were $60.1 million which decreased $661,000, or 1.1%, compared to $60.8 million for the same period last year.

Excluding reimbursable items, revenues increased $144.7 million, or 37.3%, during the three months ended March 31, 2014, compared to 2013. The 37.3% increase in revenues excluding reimbursable items for the three months ended March 31, 2014, as compared to the same period in 2013, is the result of increases of 34.2% in revenues associated with acquisitions, and 3.1% in organic growth.

Major Customers

For discussion regarding the Company’s major customers, refer to Note 8 in the Notes to Unaudited Consolidated Financial Statements and see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC.

A significant amount of the Company’s revenues is derived from long-term contracts with large clients by providing various processing and other services to these clients, including processing of consumer and commercial accounts, as well as revenues for reimbursable items. In the first three months of 2014 and 2013, the Company had no major customers. The loss of one of the Company’s large clients could have a material adverse effect on the Company’s financial position, results of operations and cash flows.

On July 19, 2012, TSYS announced that it finalized a master services agreement, with a minimum six year term, with Bank of America to provide processing services for its consumer credit card portfolios in the U.S. In addition, TSYS will continue to process Bank of America’s commercial credit card portfolios in the U.S. and internationally. TSYS plans to complete the conversion of Bank of America’s consumer card portfolio from its in-house processing system in the third quarter of 2014. Following the processing term, the agreement provides Bank of America the option to use the TS2 software pursuant to a license under a long-term payment structure for purposes of processing its consumer card portfolio.

The master services agreement with Bank of America provides for a tiered-pricing arrangement for both the consumer card portfolio, which is expected to be converted in 2014, and the existing commercial card portfolios.

In June 2009, Bank of America announced that it formed a new joint venture to provide merchant services. In November 2010, TSYS and Bank of America agreed to a new agreement, during the term of which TSYS expects merchant services revenues from Bank of America to decline as Bank of America transitions its services to its new joint venture. Effective June 2013, the Company renewed its processing agreement, which includes revenue minimums, with Bank of America for an additional two years.

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. However, the loss will have a significant adverse effect on the Merchant Services segment’s financial position, results of operations and cash flows.

Operating Segments

TSYS’ services are provided through four operating segments: North America Services, International Services, Merchant Services and NetSpend. Refer to Note 8 in the Notes to Unaudited Consolidated Financial Statements for more information on the Company’s operating segments.

The Company’s North America and International segments have 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.

 

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These services are provided throughout the period of each account’s use, starting from a card-issuing client processing an application for a card. Services may include processing the card application, initiating service for the cardholder, processing each card transaction for the issuing retailer or financial institution and accumulating the account’s transactions. Fraud management services monitor the unauthorized use of accounts which have been reported to be lost, stolen, or which exceed credit limits. Fraud detection systems help identify fraudulent transactions by monitoring each accountholder’s purchasing patterns and flagging unusual purchases. Other services provided include customized communications to cardholders, information verification associated with granting credit, debt collection and customer service.

TSYS’ revenues in its North America Services and International Services segments are derived from electronic payment processing. There are certain basic core services directly tied to accounts on file and transactions. These are provided to all of TSYS’ processing clients. The core services begin with an account on file.

The core services include housing an account on TSYS’ system (AOF), authorizing transactions (authorizations), accumulating monthly transactional activity (transactions) and providing a monthly statement (statement generation). From these core services, TSYS’ clients also have the option to use fraud and portfolio management services. Collectively, these services are considered volume-based revenues.

Non-volume related revenues include processing fees which are not directly associated with AOF and transactional activity, such as value added products and services, custom programming and certain other services, which are only offered to TSYS’ processing clients.

Additionally, certain clients license the Company’s processing systems and process in-house. Since the accounts are processed outside of TSYS for licensing arrangements, the AOF and other volumes are not available to TSYS. Thus, volumes reported by TSYS do not include volumes associated with licensing.

Output and managed services include offerings such as card production, statement production, correspondence and call center support services.

A summary of each segment’s results follows:

North America Services

The North America Services segment provides payment processing and related services to clients based primarily in North America. 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 (also referred to as internal growth) and sales to new clients and the related account conversions. This segment has one major customer for the three month period ended March 31, 2014.

Below is a summary of the North America Services segment:

 

     Three months ended March 31,  
(in millions)    2014     2013     Percent
Change
 

Total revenues

   $ 262.2        239.8        9.3 % 

Revenues before reimbursable items

     224.4        205.6        9.1   

Adjusted segment operating income1

     74.6        68.7        8.5   

Adjusted segment operating margin2

     28.4 %      28.7  

Key indicators:

      

AOF

     495.5        422.8        17.2   

Transactions

     2,327.6        2,013.4        15.6   

 

1  Adjusted segment operating income excludes acquisition intangible amortization and expenses associated with Corporate Administration and Other.
2  Adjusted segment operating margin equals adjusted segment operating income divided by total revenues.

The 9.3% increase in total segment revenues for the three months ended March 31, 2014, as compared to the same period in 2013, is driven by increases in revenues associated with new business and internal growth, partially offset by client portfolio deconversions and pricing concessions. Reimbursable items for the three months ended March 31, 2014 were $37.8 million, an increase of $3.6 million, or 10.6%, compared to $34.2 million for the same period last year.

 

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Excluding reimbursable items, revenues increased $18.8 million or 9.1%, for the three months ended March 31, 2014, as compared to the same period in 2013.

The increase in adjusted segment operating income for the three months ended March 31, 2014, as compared to 2013, is driven by an increase in revenues while the operating margin remained relatively flat.

For the three months ended March 31, 2014, approximately 50.0% of revenues before reimbursable items of TSYS’ North America Services segment are driven by the volume of accounts on file and transactions processed and approximately 50.0% are derived from non-volume based revenues, such as processing fees, value-added products and services, custom programming and licensing arrangements.

 

     Three months ended March 31,  
(in millions)    2014      2013      Percent
Change
 

Volume-based revenues

   $ 112.2         102.0         10.0
  

 

 

    

 

 

    

Non-volume related revenues:

        

Processing fees

     50.5         47.0         7.4   

Value-added, custom programming, licensing and other

     27.5         27.2         1.0   

Output and managed services

     34.2         29.4         16.4   
  

 

 

    

 

 

    

Total non-volume related revenues

     112.2         103.6         8.3   
  

 

 

    

 

 

    

Total revenues before reimbursable items

     224.4         205.6         9.1   

Reimbursable items

     37.8         34.2         10.6   
  

 

 

    

 

 

    

Total Revenues

   $ 262.2         239.8         9.3
  

 

 

    

 

 

    

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. Changes in revenues in this segment are derived from retaining and growing the core business. Growing the core business comes primarily from an increase in account usage, growth from existing clients and sales to new clients and the related account conversions. This segment has two major customers for the three months ended March 31, 2014.

Below is a summary of the International Services segment:

 

     Three months ended March 31,  
(in millions)    2014     2013     Percent
Change
 

Total revenues

   $ 82.4        80.9        1.8

Revenues before reimbursable items

     76.8        76.4        0.5   

Adjusted segment operating income1

     4.6        6.9        (33.6

Adjusted segment operating margin2

     5.5     8.5  

Key indicators:

      

AOF

     60.7        55.7        9.0   

Transactions

     517.9        434.0        19.3   

 

1  Adjusted segment operating income excludes acquisition intangible amortization and expenses associated with Corporate Administration and Other.
2  Adjusted segment operating margin equals adjusted segment operating income divided by total revenues.

 

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The 1.8% increase in total segment revenues for the three months ended March 31, 2014, as compared to the same period in 2013, is driven by an increase of $4.2 million associated with currency translation, offset by decreases associated with client deconversions. Reimbursable items for the three months ended March 31, 2014 were $5.6 million, an increase of $1.1 million, or 24.5%, compared to $4.5 million for the same period last year. Excluding reimbursable items, revenues increased approximately $386,000, or 0.5%, respectively, for the three months ended March 31, 2014, as compared to the same period in 2013. The 0.5% increase in revenues excluding reimbursable items for the three months ended March 31, 2014, as compared to the same period in 2013, is the result of an increase from internal growth, partially offset by decreases in client deconversions and pricing concessions.

The increases in adjusted segment operating income for the three months ended March 31, 2014, as compared to the same periods in 2013, are driven primarily from changes in foreign currency exchange rates and decreases in depreciation and amortization.

Movements in foreign currency exchange rates as compared to the U.S. Dollar can result in foreign denominated financial statements being translated into more or fewer U.S. Dollars, which impacts the comparison to prior periods when the U.S. Dollar was stronger or weaker.

For the three months ended March 31, 2014, approximately 41.8% of the revenues before reimbursable items of TSYS’ International Services segment, are driven by the volume of accounts on file and transactions processed and approximately 58.2% are derived from non-volume based revenues, such as processing fees, value-added products and services, custom programming and licensing arrangements.

 

     Three months ended March 31,  
(in millions)    2014      2013      Percent
Change
 

Volume-based revenues

   $ 32.1         30.8         4.2
  

 

 

    

 

 

    

Non-volume related revenues:

        

Processing fees

     14.5         16.2         (10.6

Value-added, custom programming, licensing and other

     19.8         18.8         5.5   

Output and managed services

     10.4         10.6         (2.1
  

 

 

    

 

 

    

Total non-volume related revenues

     44.7         45.6         (2.0
  

 

 

    

 

 

    

Total revenues before reimbursable items

     76.8         76.4         0.5   

Reimbursable items

     5.6         4.5         24.4   
  

 

 

    

 

 

    

Total Revenues

   $ 82.4         80.9         1.8
  

 

 

    

 

 

    

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 (POS) equipment sales and service. This segment has no major customers.

 

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Below is a summary of the Merchant Services segment:

 

     Three months ended March 31,  
(in millions)    2014     2013     Percent
Change
 

Total revenues

   $ 122.7        132.9        (7.7 )% 

Revenues before reimbursable items

     104.6        109.3        (4.3

Adjusted segment operating income1

     30.2        37.6        (19.8

Adjusted segment operating margin2

     24.6     28.3  

Key indicators:

      

POS transactions

     982.2        1,099.1        (10.6

Dollar sales volume

   $ 10,779.7        10,132.3        6.4   

 

1  Adjusted segment operating income excludes acquisition intangible amortization and expenses associated with Corporate Administration and Other.
2  Adjusted segment operating margin equals adjusted segment operating income divided by total revenues.

Total segment revenues for the three months ended March 31, 2014, as compared to the same period in 2013, include a decrease in reimbursable items of $5.5 million. Reimbursable items for the three months ended March 31, 2014 were $18.1 million, a decrease of $5.5 million, or 23.5%, compared to $23.6 million for the same period last year. Excluding reimbursable items, revenues decreased $4.7 million, or 4.3%, as the result of declines in our indirect line of business due to market factors such as industry consolidation and in-sourcing, partially offset by growth in our direct line of business.

The Merchant Services segment’s results are driven by dollar sales volume and the authorization and capture transactions processed at the point-of-sale. This segment’s authorization and capture transactions are primarily through Internet connectivity or dial-up.

The decrease in adjusted segment operating income for the three months ended March 31, 2014, as compared to the same period in 2013, is the result of lower revenues and increased employee related expenses.

For the three months ended March 31, 2014, approximately 92.7% of the revenues of TSYS’ Merchant Services segment, are influenced by several factors, including volumes related to transactions and dollar sales volume. The remaining 7.3% of this segment’s revenues are derived from value added services, chargebacks, managed services, investigation, risk and collection services performed.

NetSpend

The NetSpend segment is a program manager for FDIC-insured depository institutions that issue GPR cards and payroll cards and provide alternative financial services to underbanked consumers in the United States. The products within this segment provide underbanked consumers with access to FDIC-insured depository accounts with a menu of pricing and features specifically tailored to their needs. This segment has an extensive distribution and reload network comprised of financial service centers, employers, and retail locations throughout the United States. The NetSpend segment markets prepaid cards through multiple distribution channels, including alternative financial service providers, traditional retailers, direct-to-consumer and online marketing programs and contractual relationships with corporate employers.

The NetSpend segment’s revenues primarily consist of a portion of the service fees and interchange revenues received by NetSpend’s prepaid card Issuing Banks in connection with the programs managed by this segment. Cardholders are charged fees for transactions including fees for PIN and signature-based purchase transactions made using their prepaid cards, for ATM withdrawals or other transactions conducted at ATMs, for balance inquiries, and monthly maintenance fees among others. Cardholders are also charged fees associated with additional products and services offered in connection with certain cards including the use of overdraft features, bill payment options, custom card designs and card-to-card transfers of funds initiated through call centers. The NetSpend segment also earns revenues from a portion of the interchange fees remitted by merchants when cardholders make purchase transactions using their cards. Subject to applicable law, interchange fees are fixed by the networks.

 

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Below is a summary of the NetSpend segment:

 

     Three months ended
March 31,
 
(in millions)    2014  

Total revenues

   $ 132.6   

Revenues before reimbursable items

     132.6   

Adjusted segment operating income1

     28.7   

Adjusted segment operating margin2

     21.7

Key indicators:

  

Number of active cards

     3.7   

Number of active cards with direct deposit

     2.1   

Percentage of active cards with direct deposit

     57.0

Gross dollar volume

   $ 6,567.2  

1 Adjusted segment operating income excludes acquisition intangible amortization and expenses associated with Corporate Administration and Other.

2 Adjusted segment operating margin equals adjusted segment operating income divided by total revenues.

Number of active cards represents the total number of prepaid cards that have had a PIN or signature-based purchase transaction, a point-of-sale load transaction or an ATM withdrawal within three months of the date of determination. Number of active cards with direct deposit represents the number of active cards that have had a direct deposit load within three months of the date of determination. Gross dollar volume represents the total dollar volume of debit transactions and cash withdrawals made using the prepaid cards the NetSpend segment manages.

NetSpend segment revenues totaled $132.6 million with 68.7% of revenues derived from fees charged to cardholders and 31.3% of revenues derived from interchange. Service fee revenues are driven by the number of active cards which totaled approximately 3.7 million as of March 31, 2014, and in particular by the number of cards with direct deposit. Cardholders with direct deposit generally initiate more transactions and generate more revenues than those that do not take advantage of this feature. Interchange revenues are driven by gross dollar volume, which totaled approximately $6.6 billion for the three months ended March 31, 2014. Substantially all of the NetSpend segment revenues are volume driven as they are driven by the active card and gross dollar volume indicators.

Cardholder funds and deposits related to NetSpend’s prepaid products are held at FDIC-insured Issuing Banks for the benefit of the cardholders. NetSpend currently has active agreements with seven Issuing Banks.

NetSpend’s prepaid card business derived approximately one-third of its revenues from cardholders acquired through one of its third-party distributors.

Operating Expenses

The Company’s operating expenses consist of cost of services and selling, general and administrative expenses. Cost of services describes the direct expenses incurred in performing a particular service for 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 Company’s cost of services increased 38.9% for the three months ended March 31, 2014 compared to $304.4 million for the same period last year. The Company’s selling, general and administrative expenses increased 27.7% for the three months ended March 31, 2014 compared to $69.9 million for the same period last year. The increase in expenses is associated with the acquisition of NetSpend.

The Company’s merger and acquisition expenses were $1.3 million for the three months ended March 31, 2014 compared to $3.5 million for the same period last year.

 

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Operating Income

Operating income increased 8.3% for the three months ended March 31, 2014 over the same period in 2013. The Company’s operating profit margin for the three months ended March 31, 2014 was 13.6%, compared to 16.6% for the same period last year. TSYS’ operating margin decreased for the three months ended March 31, 2014, as compared to the same period in 2013, as a result of the addition of operating expenses for NetSpend.

Nonoperating Income (Expense)

Interest income for the three months ended March 31, 2014 was $242,000, a decrease of $17,000, compared to $259,000 for the same period in 2013. Changes in interest income are primarily attributable to changes in the amount of cash available for investing.

Interest expense for the three months ended March 31, 2014 was $10.3 million, an increase of $6.8 million, compared to $3.5 million for the same period in 2013. The Company’s interest expense on bonds was $8.8 million for the three months ended March 31, 2014.

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 Company’s financial statements. The upward or downward adjustment is recorded as a gain or loss on foreign currency translation.

The Company records foreign currency translation adjustments on foreign-denominated balance sheet accounts. The Company’s International Services segment maintains several cash accounts denominated in foreign currencies, primarily in U.S. Dollars and Euros. As the Company translates the foreign-denominated cash balances into U.S. Dollars, the translated cash balance is adjusted upward or downward depending upon the foreign currency exchange movements. The upward or downward adjustment is recorded as a gain or loss on foreign currency translation in the Company’s statements of income. As those cash accounts have increased, the upward or downward adjustments have increased.

For the three months ended March 31, 2014 and 2013, the Company recorded net translation losses of approximately $143,000 and $46,000, respectively, related to intercompany loans and foreign-denominated balance sheet accounts.

The balance of the International Services segment’s foreign-denominated cash accounts subject to risk of translation gains or losses as of March 31, 2014 was approximately $14.8 million, the majority of which is denominated in U.S. Dollars and Euros. The net asset account balance subject to foreign currency exchange rates between the local currencies and the U.S. Dollar as of March 31, 2014 was $25.2 million.

The Company recorded a gain on its investments in private equity of $312,000 for the three months ended March 31, 2014 as a result of a change in value.

Income Taxes

For a detailed discussion regarding these topics, refer to Notes 1 and 14 in the Notes to Consolidated Financial Statements and “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” which are included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC.

TSYS’ effective income tax rate for the three months ended March 31, 2014 was 32.1%, compared to 23.8% for the same period in 2013. The differences in the 2014 rates compared to 2013 rates reflect changes in discrete items, tax credits and in the jurisdictional sources of income. 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.

 

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TSYS continually monitors and evaluates the potential impact of current events and circumstances on the estimates and assumptions used in the analysis of its income tax positions, and, accordingly, TSYS’ effective tax rate may fluctuate in the future.

No provision for U.S. federal and state income taxes has been made in our consolidated financial statements for those non-U.S. subsidiaries whose earnings are considered to be permanently reinvested. The amount of undistributed earnings considered to be “reinvested” which may be subject to tax upon distribution was approximately $79.9 million as of March 31, 2014. A distribution of these non-U.S. earnings in the form of dividends, or otherwise, would subject the Company to both U.S. federal and state income taxes, as adjusted for non-U.S. tax credits, and withholding taxes payable to the various non-U.S. countries. Determination of the amount of any unrecognized deferred income tax liability on these undistributed earnings is not practicable.

Equity in Income of Equity Investments

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 $4.1 million and $3.8 million for the three months ended March 31, 2014 and 2013, respectively.

Discontinued Operations

The Company’s Japan-based entities qualified for discontinued operations treatment during the quarter ended March 31, 2014. The assets and liabilities along with the income from operations, net of tax, were removed from continuing operations and disclosed as discontinued operations in the current period and all prior periods presented. There were $980,000 and $15,000 of income from discontinued operations, net of tax, reported in the periods ended March 31, 2014 and 2013, respectively. For more information regarding the Company’s discontinued operations, refer to Notes 2 and 13 in the Notes to Unaudited Consolidated Financial Statements.

Net Income

Net income for the three months ended March 31, 2014 decreased $7.5 million compared to the same period in 2013.

Net income attributable to non-controlling interest increased $201,000 for the three months ended March 31, 2014, compared to the same period in 2013. The increase is driven by the increase in earnings of CPAY.

Net income attributable to TSYS common shareholders for the three months ended March 31, 2014 decreased $7.7 million, to $49.3 million, or basic and diluted EPS of $0.26, compared to $57.0 million, or basic EPS of $0.31 and diluted EPS of $0.30, for the same period in 2013.

Non-GAAP Measures

Management evaluates the Company’s operating performance based upon operating margin excluding reimbursables, adjusted cash EPS, and adjusted EBITDA, which are all non-generally accepted accounting principle (non-GAAP) measures. TSYS also uses these non-GAAP financial measures to evaluate and assess TSYS’ financial performance against budget.

Although not a substitute for GAAP, TSYS believes that non-GAAP financial measures are important to enable investors to understand and evaluate its ongoing operating results. Accordingly, TSYS includes non-GAAP financial measures when reporting its financial results to shareholders and investors in order to provide them with an additional tool to evaluate TSYS’ ongoing business operations. TSYS believes that the non-GAAP financial measures are representative of comparative financial performance that reflects the economic substance of TSYS’ current and ongoing business operations.

Although non-GAAP financial measures are often used to measure TSYS’ operating results and assess its financial performance, they are not necessarily comparable to similarly titled captions of other companies due to potential inconsistencies in the method of calculation.

 

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TSYS believes that its use of non-GAAP financial measures provides investors with the same key financial performance indicators that are utilized by management to assess TSYS’ operating results, evaluate the business and make operational decisions on a prospective, going-forward basis. Hence, management provides disclosure of non-GAAP financial measures to give shareholders and potential investors an opportunity to see TSYS as viewed by management, to assess TSYS with some of the same tools that management utilizes internally and to be able to compare such information with prior periods. TSYS believes that the presentation of GAAP financial measures alone would not provide its shareholders and potential investors with the ability to appropriately analyze its ongoing operational results, and therefore expected future results. TSYS therefore believes that inclusion of non-GAAP financial measures provides investors with additional information to help them better understand its financial statements just as management utilizes these non-GAAP financial measures to better understand the business, manage budgets and allocate resources.

Revenues Before Reimbursable Items and Operating Margin Excluding Reimbursable Items

 

     Three months ended
March 31,
 
(in thousands except per share data)    2014     2013  

Operating income (a)

   $ 80,697        74,520   
  

 

 

   

 

 

 

Total revenues (b)

   $ 592,848        448,791   

Less reimbursable items

     60,098        60,759   
  

 

 

   

 

 

 

Revenues before reimbursable items (c)

   $ 532,750        388,032   
  

 

 

   

 

 

 

Operating margin (as reported) (a)/(b)

     13.61     16.60
  

 

 

   

 

 

 

Operating margin excluding reimbursables (a)/(c)

     15.15     19.20
  

 

 

   

 

 

 

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

Adjusted EBITDA

 

     Three months ended
March 31,
 
(in thousands)    2014     2013  

Net income

   $ 51,625        59,149   

Adjusted for:

    

Deduct: Income from discontinued operations

     (980     (15

Deduct: Equity in income of equity investments, net of taxes

     (4,096     (3,817

Add: Income taxes

     24,335        17,463   

Add: Nonoperating expenses

     9,813        1,740   

Add: Depreciation and amortization

     60,035        40,852   
  

 

 

   

 

 

 

EBITDA

     140,732        115,372   

Adjust for:

    

Add: Share-based compensation

     7,611        4,593   

Add: NetSpend merger and acquisition expenses* (non-recurring)

     1,253        3,481   
  

 

 

   

 

 

 

Adjusted EBITDA

   $ 149,596        123,446   
  

 

 

   

 

 

 

 

* Excludes share-based compensation

 

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Adjusted Cash Earnings Per Share

 

     Three months ended March 31,  
(in thousands except per share data)    2014      2013  

Income from continuing operations attributable to

     

TSYS common shareholders

   $ 49,321         57,905   
  

 

 

    

 

 

 

Adjust for amounts attributable to TSYS common shareholders (net of taxes):

     

Acquisition intangible amortization, net of taxes

     15,813         5,492   

Share-based compensation, net of taxes

     5,017         3,148   
  

 

 

    

 

 

 

Cash earnings

     70,151         66,545   

NetSpend merger and acquisition expenses, net of taxes* (non-recurring)

     1,204         5,222   
  

 

 

    

 

 

 

Adjusted cash earnings

   $ 71,355         71,767   
  

 

 

    

 

 

 

Basic EPS - Net income attributable to TSYS common shareholders

     

As reported (GAAP)

   $ 0.26         0.31   
  

 

 

    

 

 

 

Adjust for amounts attributable to TSYS common shareholders (net of taxes):

     

Acquisition intangible amortization, net of taxes

     0.08         0.03   

Share-based compensation, net of taxes

     0.03         0.02   
  

 

 

    

 

 

 

Cash earnings per share

     0.37         0.36   

NetSpend merger and acquisition expenses, net of taxes1 (non-recurring)

     0.01         0.03   
  

 

 

    

 

 

 

Adjusted cash earnings per share2

   $ 0.38         0.38   
  

 

 

    

 

 

 

Average common shares and participating securities

     187,752         186,807   
  

 

 

    

 

 

 

 

1  Certain merger and acquisition costs are nondecductible for income tax purposes
2  Adjusted cash EPS amounts do not total due to rounding.

Projected Outlook for 2014

As compared to 2013, TSYS expects its 2014 total revenues to increase by 17-20%, its revenues before reimbursable items to increase by 20%-22%, its adjusted EBITDA to increase by 17%-20%, and its adjusted cash EPS to increase by 10%-12%. The guidance is based on the following assumptions with respect to 2014: (1) there will be no significant movements in the London Interbank Offered Rate (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; (3) TSYS will not incur significant expenses associated with the conversion of new large clients other than included in the 2014 estimate, additional acquisitions, or any significant impairment of goodwill or other intangibles; (4) there will be no deconversions of large clients during the year; (5) there will be minimal synergies from the NetSpend acquisition for 2014; and (6) the economy will not worsen.

 

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Financial Position, Liquidity and Capital Resources

Cash Flows

The Consolidated Statements of Cash Flows detail the Company’s cash flows from operating, investing and financing activities. TSYS’ primary method of funding its operations and growth has been cash generated from current operations. TSYS has occasionally used borrowed funds to supplement financing of capital expenditures and acquisitions. For more information regarding borrowings, refer to Note 5 in the Notes to Unaudited Consolidated Financial Statements.

Cash Flows From Operating Activities

 

     Three months ended March 31,  
(in thousands)    2014      2013  

Net income

   $ 51,625         59,149   

Depreciation and amortization

     61,432         42,498   

Other noncash items and charges, net

     16,254         15,861   

Net change in current and other assets and current and other liabilities

     19,395         (65,071
  

 

 

    

 

 

 

Net cash provided by operating activities

   $ 148,706         52,437   
  

 

 

    

 

 

 

TSYS’ main source of funds is derived from operating activities, specifically net income. The increase in 2014 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 increase in other noncash items and charges is due primarily to increases in deferred income tax expense, share based compensation, dividends received from equity investments, charges for transaction processing provisions, amortization of debt issuance costs, and provisions for fraud and other losses, partially offset by an increase in income of equity investments. The change in accounts receivable as of March 31, 2014, as compared to March 31, 2013, 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 payments of vendor invoices and the timing of payments.

Cash Flows From Investing Activities

 

     Three months ended March 31,  
(in thousands)    2014     2013  

Additions to contract acquisition costs

   $ (17,903     (13,666

Purchases of property and equipment, net

     (13,641     (6,481

Additions to internally developed computer software

     (9,735     (5,297

Additions to licensed computer software from vendors

     (5,963     (29,904

Purchase of private equity investments

     (822     (411
  

 

 

   

 

 

 

Net cash used in investing activities

   $ (48,064     (55,759
  

 

 

   

 

 

 

The major use of cash for investing activities in 2014 was for investments in contract acquisition costs associated with obtaining and servicing new or existing clients. Other major uses of cash for investing activities in 2014 and 2013 were for the addition of property and equipment, internal development of computer software and the purchase of licensed computer software. In 2013, several software arrangements were licensed to extend processing capacity in advance of anticipated conversions.

 

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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 clients to the Company’s processing systems. The Company’s investments in contract acquisition costs were $17.9 million for the three months ended March 31, 2014, compared to $13.7 million for the three months ended March 31, 2013. The increase in contract acquisition costs is the result of increased capitalized conversion costs and client signing incentive additions in the first three months of 2014.

Purchase of Private Equity Investments

On May 31, 2011, the Company entered into a limited partnership agreement in connection with its agreement to invest in an Atlanta-based venture capital fund focused exclusively on investing in technology-enabled financial services companies. Pursuant to the limited partnership agreement, the Company has committed to invest up to $20 million in the fund so long as its ownership interest in the fund does not exceed 50%. During the first three months of 2014, the Company made an additional investment of $822,000 compared to $411,000 for the same period in 2013.

Cash Flows From Financing Activities

 

     Three months ended March 31,  
(in thousands)    2014     2013  

Purchase of noncontrolling interest

   $ (37,500     —     

Principal payments on long-term borrowings and capital lease obligations

     (22,277     (9,784

Dividends paid on common stock

     (18,788     —     

Repurchase of common stock under plans and tax withholding

     (5,173     (5,501

Subsidiary dividends paid to noncontrolling shareholders

     (2,312     (953

Debt issuance costs

     —          (3,534

Excess tax benefit from share-based payment arrangements

     4,037        536   

Proceeds from exercise of stock options

     9,539        2,551   
  

 

 

   

 

 

 

Net cash used in financing activities

   $ (72,474     (16,685
  

 

 

   

 

 

 

The main uses of cash for financing activities in 2014 were the purchase of noncontrolling interest in CPAY, principal payments on long-term borrowings and capital lease obligations, and the payment of dividends. The main uses of cash in 2013 were principal payments on long-term borrowings and capital lease obligations, the repurchase of stock, and debt issuance costs. The main sources of cash provided by financing activities in 2014 and 2013, respectively, were the proceeds from exercise of stock options.

Borrowings

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

Stock Repurchase

For a detailed discussion regarding the Company’s stock repurchase plan, see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC.

During the first three months of 2014, shares with a value of $5.2 million were withheld upon the vesting of certain equity awards. TSYS added these shares to treasury and paid taxes on behalf of the equity award recipients. The Company did not purchase any shares under its Share Repurchase Plan during the first three months of 2014.

Dividends

Dividends on common stock of $18.8 million were paid during the three months ended March 31, 2014, compared to no payments during the three months ended March 31, 2013. The 2012 fourth quarter dividend was accelerated and paid in December 2012 rather than January 2013 to allow shareholders to benefit from the lower dividend tax rate that expired on December 31, 2012.

 

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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 4 in the Notes to Unaudited 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 the Company’s cash has increased as a result of its strategic initiatives. TSYS funds these initiatives through a balance of internally generated cash, external sources of capital, and, when advantageous, access to foreign cash in a tax efficient manner. Where local regulations limit an efficient intercompany transfer of amounts held outside of the U.S., TSYS will continue to utilize these funds for local liquidity needs. Under current law, balances available to be repatriated to the U.S. would be subject to U.S. federal income taxes, less applicable foreign tax credits. TSYS has provided for the U.S. federal tax liability on these amounts for financial statement purposes, except for foreign earnings that are considered permanently reinvested outside of the U.S. TSYS utilizes a variety of tax planning and financing strategies with the objective of having its worldwide cash available in the locations where it is needed.

Impact of Inflation

Although the impact of inflation on its operations cannot be precisely determined, the Company believes that by controlling its operating expenses, and by taking advantage of more efficient computer hardware and software, it can minimize the impact of inflation.

Working Capital

TSYS may seek additional external sources of capital in the future. The form of any such financing will vary depending upon prevailing market and other conditions and may include short-term or long-term borrowings from financial institutions or the issuance of additional equity and/or debt securities such as industrial revenue bonds. However, there can be no assurance that funds will be available on terms acceptable to TSYS. Management expects that TSYS will continue to be able to fund a significant portion of its capital expenditure needs through internally generated cash in the future, as evidenced by TSYS’ current ratio of 2.1:1. As of March 31, 2014, TSYS had working capital of $361.2 million compared to $356.7 million as of December 31, 2013.

Legal Proceedings

The Company is subject to various legal proceedings and claims and is also subject to information requests, inquiries and investigations arising out of the ordinary conduct of its business. The Company establishes 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 are believed to be adequately covered by insurance, or, if not covered, the possibility of losses from such matters are believed to be remote or such matters are of such kind or involve such amounts that would not have a material adverse effect on the financial position, results of operations or cash flows of the Company if disposed of unfavorably.

 

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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 effect on TSYS’ business; (ii) TSYS’ expectation with respect to the timing of the conversion of Bank of America’s consumer card portfolios; (iii) TSYS’ expectation that it will be able to fund a significant portion of its capital expenditure needs through internally generated cash in the future; (iv) TSYS’ belief with respect to lawsuits, claims and other complaints; (v) TSYS’ expectation with respect to certain tax matters; (vi) the economies of scale expected from combining the operations of TSYS and NetSpend; (vii) TSYS’ earnings guidance for 2014 total revenues, revenues before reimbursable items, adjusted EBITDA, and adjusted cash EPS, and the assumptions underlying such statements. In addition, certain statements in future filings by TSYS with the Securities and Exchange Commission, in press releases, and in oral and written statements made by or with the approval of TSYS which are not statements of historical fact constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenue, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans and objectives of TSYS or its management or Board of Directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” “estimates,” “projects,” “plans,” “may,” “could,” “will,” “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:

 

    the material breach of security of any of TSYS’ systems;

 

    TSYS incurs expenses associated with the signing of a significant client;

 

    internal growth rates for TSYS’ existing clients are lower than anticipated whether as a result of unemployment rates, card delinquencies and charge off rates or otherwise;

 

    TSYS does not convert and deconvert clients’ portfolios as scheduled;

 

    risks associated with foreign operations, including adverse developments with respect to foreign currency exchange rates;

 

    adverse developments with respect to entering into contracts with new clients and retaining current clients;

 

    consolidation in the financial services and other industries, including the merger of TSYS clients with entities that are not TSYS processing clients, the sale of portfolios by TSYS clients to entities that are not TSYS processing clients and financial institutions which are TSYS clients otherwise ceasing to exist;

 

    the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act on TSYS and its clients;

 

    adverse developments with respect to the payment card industry in general, including a decline in the use of cards as a payment mechanism;

 

    the impact of potential and completed acquisitions, particularly the NetSpend acquisition, including the costs associated therewith, their being more difficult to integrate than anticipated, and the inability to achieve the anticipated growth opportunities and other benefits of the acquisitions;

 

    the costs and effects of litigation, investigations or similar matters or adverse facts and developments relating thereto;

 

    the impact of the application of and/or changes in accounting principles;

 

    TSYS’ inability to timely, successfully and cost-effectively improve and implement processing systems to provide new products, increased functionality and increased efficiencies;

 

    TSYS’ reliance on financial institution sponsors;

 

    changes occur in laws, rules, regulations, credit card association rules, prepaid industry rules, or other industry standards affecting TSYS and its clients that may result in costly new compliance burdens on TSYS and its clients and lead to a decrease in the volume and/or number of transactions processed or limit the types and amounts of fees that can be charged to customers;

 

    successfully managing the potential both for patent protection and patent liability in the context of rapidly developing legal framework for expansive patent protection;

 

    one or more of the assumptions upon which TSYS’ earnings guidance for 2014 is based is inaccurate;

 

    the effect of current domestic and worldwide economic conditions;

 

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    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, 2013 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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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 (loss), net.”

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

The following table presents the carrying value of the net assets of TSYS’ foreign operations in U.S. Dollars as of March 31, 2014:

 

(in millions)    March 31, 2014  

Europe

   $ 173.8   

China

     88.7   

Japan

     42.3   

Mexico

     8.2   

Canada

     1.3   

Other

     49.4   

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

TSYS records foreign currency translation adjustments associated with other balance sheet accounts. The International Services segment maintains several cash accounts denominated in foreign currencies, primarily in U.S. Dollars and Euros. As TSYS translates the foreign-denominated cash balances into U.S. Dollars, the translated cash balance is adjusted upward or downward depending upon the foreign currency exchange movements. The upward or downward adjustment is recorded as a gain or loss on foreign currency translation in the statements of income. As those cash accounts have increased, the upward or downward adjustments have increased.

TSYS recorded a net translation loss of approximately $597,000 for the three months ended March 31, 2014 relating to the translation of cash and other balance sheet accounts. The balance of the Company’s foreign-denominated cash accounts subject to risk of translation gains or losses as of March 31, 2014 was approximately $14.8 million, the majority of which was denominated in U.S. Dollars and Euros.

The net asset account balance subject to foreign currency exchange rates between the local currencies and the U.S. Dollar as of March 31, 2014 was $25.2 million.

The following table presents the potential effect on income before income taxes of hypothetical shifts in the foreign currency exchange rate between the local currencies and the U.S. Dollar of plus-or-minus 100 basis points, 500 basis points and 1,000 basis points based on the net asset account balance of $25.2 million as of March 31, 2014.

 

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     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

   $ 252         1,259         2,517         (252     (1,259     (2,517

Interest Rate Risk

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

The Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC, contains a discussion of interest rate risk and the Company’s debt obligations that are sensitive to changes in interest rates. Also, refer to Note 5 in the Notes to Unaudited Consolidated Financial Statements for more information on our long-term debt.

On April 8, 2013, the Company entered into a Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as Administrative Agent, The Bank of Tokyo-Mitsubishi UFJ, Ltd., as Syndication Agent, Regions Bank and U.S. Bank National Association, as Documentation Agents, and other lenders party thereto, with J.P. Morgan Securities LLC, The Bank of Tokyo Mitsubishi UFJ, Ltd., Regions Capital Markets, and U.S. Bank National Association as joint lead arrangers and joint bookrunners. The Credit Agreement provides for a five-year term loan to the Company in the amount of $200 million (the “Term Loan”). For more information regarding the Term Loan, refer to Note 5 in the Notes to Unaudited Consolidated Financial Statements.

On September 10, 2012, the Company entered into a credit agreement with JPMorgan Chase Bank, N.A., as Administrative Agent, The Bank of Tokyo-Mitsubishi UFJ, Ltd., Regions Bank and U.S. Bank National Association, as Syndication Agents, and the other lenders named therein, with J.P. Morgan Securities LLC, The Bank of Tokyo-Mitsubishi UFJ, Ltd., Regions Capital Markets and U.S. Bank National Association, as joint lead arrangers and joint bookrunners (the “Existing Credit Agreement”). The Existing Credit Agreement provides for a $350 million five-year unsecured revolving credit facility (which may be increased by up to an additional $350 million under certain circumstances) and includes a $50 million subfacility for the issuance of standby letters of credit and a $50 million subfacility for swingline loans. The Existing Credit Agreement also provides for a $150 million five-year unsecured term loan, which was fully funded on the closing of the Existing Credit Agreement. The principal balance of loans outstanding under the credit facility bears interest at a rate of LIBOR plus an applicable margin of 1.125%. 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 April 8, 2013, the Company entered into the First Amendment to the Existing Credit Agreement in order to conform certain provisions of the Existing Credit Agreement to the Credit Agreement for the Term Loan.

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, 2014, TSYS’ disclosure controls and procedures were designed and operating effectively to ensure that the information required to be disclosed by TSYS in reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and were also designed and operating effectively to ensure that the information required to be disclosed in the reports that TSYS files or submits under the Exchange Act is accumulated and communicated to management, as appropriate to allow timely decisions regarding required disclosure.

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 which is incorporated by reference into this item.

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 Company’s Annual Report on Form 10-K for the year ended December 31, 2013, which could materially affect the Company’s financial position, results of operations or cash flows. The risks described in the Company’s Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s financial position, results of operations or cash flows.

There have been no material changes in the Company’s risk factors from those disclosed in the Company’s 2013 Annual Report on Form 10-K.

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

The following table sets forth information regarding the Company’s purchases of its common stock on a monthly basis during the three months ended March 31, 2014:

 

(in thousands, except per share data)    Total Number of
Shares
Purchased
    Average Price
Paid per Share
     Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
     Maximum
Number of
Shares That
May Yet Be
Purchased
Under the Plans
of  Programs
 

January 2014

     161 1    $ 32.15         15,993         12,007   

February 2014

     —          —           15,993         12,007   

March 2014

     —          —           15,993         12,007   
  

 

 

   

 

 

       

Total

     161      $ 32.15         
  

 

 

   

 

 

       

 

1  Consists of delivery of shares to TSYS on vesting of shares to pay taxes.

 

 

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Item 6. Exhibits.

a) Exhibits

 

Exhibit
Number

  

Description

10.1    Form of Senior Executive Stock Option Agreement for 2014 stock option awards under the Total System Services, Inc. 2012 Omnibus Plan
10.2    Form of Senior Executive Performance Share Agreement for 2014 performance share awards under the Total System Services, Inc. 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.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

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TOTAL SYSTEM SERVICES, INC.

SIGNATURES

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

 

    TOTAL SYSTEM SERVICES, INC.
Date: May 8, 2014     by:  

/s/ Philip W. Tomlinson

      Philip W. Tomlinson
      Chairman of the Board and
Chief Executive Officer
Date: May 8, 2014     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 Senior Executive Stock Option Agreement for 2014 stock option awards under the Total System Services, Inc. 2012 Omnibus Plan
10.2    Form of Senior Executive Performance Share Agreement for 2014 performance share awards under the Total System Services, Inc. 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.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

41