TOTAL SYSTEM SERVICES, INC.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended: March 31, 2009
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from To
Commission file number 1-10254
Total System Services, Inc.
www.tsys.com
(Exact name of registrant as specified in its charter)
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Georgia
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58-1493818 |
(State or other jurisdiction of incorporation or organization)
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(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
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
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CLASS
Common Stock, $0.10 par value
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OUTSTANDING AS OF: May 7, 2009
197,160,976 shares |
TOTAL SYSTEM SERVICES, INC.
INDEX
TOTAL SYSTEM SERVICES, INC.
Part I Financial Information
Condensed Consolidated Balance Sheets
(Unaudited)
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(in thousands, except per share data) |
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March 31, 2009 |
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December 31, 2008 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
271,043 |
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211,365 |
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Restricted cash |
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32,892 |
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31,128 |
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Accounts receivable, net of allowance for doubtful accounts and billing
adjustments of $6.6 million and $8.0 million at 2009 and 2008, respectively |
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240,421 |
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246,767 |
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Deferred income tax assets |
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14,777 |
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29,615 |
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Prepaid expenses and other current assets |
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90,826 |
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88,612 |
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Current assets of discontinued operations |
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28,985 |
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24,570 |
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Total current assets |
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678,944 |
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632,057 |
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Property and equipment, net of accumulated depreciation and amortization of $286.2
million and $285.9 million at 2009 and 2008, respectively |
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273,028 |
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279,653 |
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Computer software, net of accumulated amortization of $436.4 million and $423.7
million at 2009 and 2008, respectively |
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198,504 |
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202,038 |
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Contract acquisition costs, net |
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129,912 |
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131,568 |
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Goodwill |
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165,413 |
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165,995 |
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Equity investments |
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75,027 |
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74,012 |
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Other intangible assets, net of accumulated amortization of $16.4 million and $15.6
million at 2009 and 2008, respectively |
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16,491 |
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17,452 |
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Other assets |
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45,136 |
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40,768 |
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Long-term assets of discontinued operations |
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6,697 |
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7,245 |
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Total assets |
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$ |
1,589,152 |
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1,550,788 |
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Liabilities |
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Current liabilities: |
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Current portion of long-term debt |
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$ |
8,619 |
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8,575 |
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Current portion of obligations under capital leases |
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6,954 |
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6,344 |
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Accrued salaries and employee benefits |
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20,861 |
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46,696 |
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Accounts payable (includes $12 payable to related parties at 2008) |
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29,177 |
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32,440 |
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Other current liabilities |
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170,711 |
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131,515 |
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Current liabilities of discontinued operations |
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18,911 |
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10,998 |
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Total current liabilities |
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255,233 |
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236,568 |
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Long-term debt, excluding current portion |
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195,920 |
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196,295 |
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Deferred income tax liabilities |
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49,674 |
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60,578 |
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Obligations under capital leases, excluding current portion |
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15,186 |
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13,576 |
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Other long-term liabilities |
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40,004 |
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40,709 |
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Long-term liabilities of discontinued operations |
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1,600 |
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2,212 |
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Total liabilities |
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557,617 |
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549,938 |
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Equity |
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Shareholders equity: |
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Common stock $0.10 par value. Authorized 600,000 shares; 200,813 and 200,356
issued at 2009 and 2008, respectively; 197,161 and 196,704 outstanding at 2009
and 2008, respectively |
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20,080 |
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20,036 |
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Additional paid-in capital |
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129,074 |
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126,889 |
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Accumulated other comprehensive income, net |
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(10,383 |
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(6,627 |
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Treasury stock, at cost (shares of 3,678 and 3,652 at 2009 and 2008, respectively) |
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(69,970 |
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(69,641 |
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Retained earnings |
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953,005 |
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920,292 |
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Total shareholders equity |
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1,021,806 |
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990,949 |
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Noncontrolling interests in consolidated subsidiaries |
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9,729 |
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9,901 |
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Total equity |
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1,031,535 |
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1,000,850 |
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Total liabilities and equity |
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$ |
1,589,152 |
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1,550,788 |
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See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
3
TOTAL SYSTEM SERVICES, INC.
Condensed Consolidated Statements of Income
(Unaudited)
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Three months ended March 31, |
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(in thousands, except per share data) |
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2009 |
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2008 |
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Revenues: |
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Electronic payment processing services |
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$ |
232,119 |
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245,669 |
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Merchant acquiring services |
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65,477 |
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61,714 |
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Other services |
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47,850 |
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45,747 |
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Revenues before reimbursable items |
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345,446 |
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353,130 |
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Reimbursable items |
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63,487 |
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66,696 |
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Total revenues |
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408,933 |
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419,826 |
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Expenses: |
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Salaries and other personnel expense |
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144,342 |
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145,225 |
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Net technology and facilities expense |
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73,986 |
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72,255 |
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Spin related expenses |
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¾ |
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6,895 |
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Other operating expenses |
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49,004 |
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42,659 |
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Expenses before reimbursable items |
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267,332 |
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267,034 |
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Reimbursable items |
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63,487 |
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66,696 |
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Total expenses |
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330,819 |
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333,730 |
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Operating income |
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78,114 |
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86,096 |
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Nonoperating (expense) income |
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(1,458 |
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1,280 |
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Income from continuing operations before income taxes and equity in income of
equity investments |
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76,656 |
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87,376 |
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Income taxes |
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27,415 |
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32,907 |
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Income from continuing operations before equity in income of equity investments |
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49,241 |
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54,469 |
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Equity in income of equity investments, net of tax |
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1,043 |
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2,162 |
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Income from continuing operations, net of tax |
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50,284 |
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56,631 |
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(Loss) income from discontinued operations, net of tax |
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(3,343 |
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233 |
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Net income |
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46,941 |
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56,864 |
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Net income attributable to noncontrolling interests |
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(415 |
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(250 |
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Net income attributable to TSYS |
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$ |
46,526 |
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56,614 |
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Basic earnings per share: |
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Income from continuing operations |
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$ |
0.26 |
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0.29 |
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(Loss) income from discontinued operations |
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(0.02 |
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0.00 |
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Net income |
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$ |
0.24 |
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0.29 |
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Diluted earnings per share: |
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Income from continuing operations |
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$ |
0.26 |
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0.29 |
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(Loss) income from discontinued operations |
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(0.02 |
) |
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0.00 |
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Net income |
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$ |
0.24 |
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0.29 |
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Weighted average common shares outstanding |
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195,461 |
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196,745 |
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Increase due to assumed issuance of shares related to common equivalent shares |
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355 |
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561 |
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Weighted average common and common equivalent shares outstanding |
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195,816 |
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197,306 |
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Amounts attributable to TSYS common shareholders: |
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Income from continuing operations |
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$ |
49,869 |
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56,381 |
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(Loss) income from discontinued operations |
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(3,343 |
) |
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233 |
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Net income |
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$ |
46,526 |
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56,614 |
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See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
4
TOTAL SYSTEM SERVICES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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Three months ended March 31, |
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(in thousands) |
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2009 |
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2008 |
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Cash flows from operating activities: |
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Net income attributable to TSYS |
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$ |
46,526 |
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56,614 |
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Adjustments to reconcile net income attributable to TSYS to net cash provided
by operating activities: |
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Net income attributable to the noncontrolling interests in consolidated
subsidiaries net income, net of tax |
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415 |
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250 |
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Net loss (gain) on foreign currency |
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883 |
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(1,943 |
) |
Equity in income of equity investments, net of tax |
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(1,043 |
) |
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(2,162 |
) |
Depreciation and amortization |
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39,850 |
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39,229 |
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Amortization of debt issuance costs |
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38 |
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38 |
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Share-based compensation |
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5,297 |
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7,895 |
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Excess tax benefit from share-based payment arrangements |
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(67 |
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(Recoveries of) provisions for bad debt expenses and billing adjustments |
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(394 |
) |
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2,101 |
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Charges for transaction processing provisions |
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1,537 |
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265 |
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Deferred income tax benefit |
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(2,329 |
) |
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(6,875 |
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Loss on disposal of equipment, net |
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7 |
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161 |
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(Increase) decrease in: |
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Accounts receivable |
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1,166 |
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(6,140 |
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Prepaid expenses, other current assets and other long-term assets |
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(1,743 |
) |
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2,492 |
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Increase (decrease) in: |
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Accounts payable |
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(3,779 |
) |
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3,426 |
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Accrued salaries and employee benefits |
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(25,567 |
) |
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(34,401 |
) |
Other current liabilities and other long-term liabilities |
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37,806 |
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39,116 |
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Net cash provided by operating activities |
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98,670 |
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99,999 |
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Cash flows from investing activities: |
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Purchases of property and equipment, net |
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(2,181 |
) |
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(14,350 |
) |
Additions to licensed computer software from vendors |
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(5,932 |
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(2,351 |
) |
Additions to internally developed computer software |
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(5,828 |
) |
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(2,413 |
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Cash used in acquisitions |
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(205 |
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Additions to contract acquisition costs |
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(10,992 |
) |
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(17,168 |
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Net cash used in investing activities |
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(25,138 |
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(36,282 |
) |
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Cash flows from financing activities: |
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Dividends paid on common stock |
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(13,779 |
) |
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(13,858 |
) |
Repurchase of common stock |
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(329 |
) |
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(11,369 |
) |
Excess tax benefit from share-based payment arrangements |
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|
67 |
|
Principal payments on long-term debt borrowings and capital lease obligations |
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(3,622 |
) |
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(4,976 |
) |
Proceeds from borrowings |
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2,809 |
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Proceeds from exercise of stock options |
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¾ |
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59 |
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Net cash used in financing activities |
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(14,921 |
) |
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(30,077 |
) |
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Effect of exchange rate changes on cash and cash equivalents |
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(1,084 |
) |
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(1,509 |
) |
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Net increase in cash and cash equivalents |
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|
57,527 |
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|
32,131 |
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Cash and cash equivalents at beginning of period |
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220,018 |
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|
210,518 |
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Cash and cash equivalents at end of period |
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$ |
277,545 |
|
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|
242,649 |
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Supplemental cash flow information: |
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Interest paid |
|
$ |
998 |
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|
3,340 |
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Income taxes (refunds received) paid, net |
|
$ |
(467 |
) |
|
|
1,095 |
|
|
|
|
|
|
|
|
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
5
TOTAL SYSTEM SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Total System
Services, Inc.® (TSYS® or the Company) include the accounts of TSYS and its wholly-owned
subsidiaries as well as TSYS majority owned foreign subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
These financial statements have been prepared in accordance with the instructions to Form 10-Q
and do not include all information and footnotes necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with accounting principles generally
accepted in the United States of America. The preparation of the consolidated financial statements
requires management of the Company to make a number of estimates and assumptions relating to the
reported amounts of assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the period. These estimates and assumptions
are developed based upon all information available. Actual results could differ from estimated
amounts. All adjustments, consisting of normal recurring accruals, which, in the opinion of
management, are necessary for a fair presentation of financial position and results of operations
for the periods covered by this report have been included.
The accompanying unaudited condensed consolidated financial statements should be read in
conjunction with the Companys summary of significant accounting policies, consolidated financial
statements and related notes appearing in the Companys 2008 Annual Report previously filed on Form
10-K. Results of interim periods are not necessarily indicative of results to be expected for the
year.
As a result of the pending sale of TSYS Total Debt Management, Inc. (TDM) as discussed in Note
2, the Companys financial statements reflect TDM 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.
Certain reclassifications have been made to the 2008 financial statements to conform to the
presentation adopted in 2009.
Note 2 Discontinued Operations
The Company is in the process of selling TDM. The decision to sell the TDM business was the
result of managements decision to divest non-strategic businesses and focus resources on core
products and services. TDM was part of the North America Services segment.
In accordance with the provisions of Statement of Financial Accounting Standards No. 144 (SFAS
No. 144), Accounting for the Impairment or Disposal of Long-Lived Assets, the Company determined
that the TDM business became a discontinued operation in the first quarter of 2009.
The following table presents the summarized results of discontinued operations for the three
months ended March 31, 2009, as compared to 2008:
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Three months ended March 31, |
(in millions) |
|
2009 |
|
2008 |
|
Percent Change |
Revenues before reimbursable items |
|
$ |
7.4 |
|
|
|
6.9 |
|
|
|
6.4 |
% |
Total revenues |
|
|
66.8 |
|
|
|
41.9 |
|
|
|
59.4 |
|
Operating (loss) income |
|
|
(5.3 |
) |
|
|
0.3 |
|
|
nm |
Income taxes |
|
|
(1.9 |
) |
|
|
0.1 |
|
|
nm |
(Loss) income from discontinued operations, net of tax |
|
|
(3.3 |
) |
|
|
0.2 |
|
|
nm |
The
Unaudited Condensed Consolidated Statements of Cash Flows will include TDM through the date of disposition.
The following table presents the quarterly and year-to-date summary of 2008 consolidated
financial results for TSYS with TDM classified as discontinued operations:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Twelve Months Ended |
|
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
December 31, |
|
(in thousands) |
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
|
|
|
|
|
Revenues before reimbursable items |
|
$ |
353,130 |
|
|
|
363,055 |
|
|
|
372,703 |
|
|
|
367,866 |
|
|
$ |
1,456,754 |
|
Reimbursable items |
|
|
66,696 |
|
|
|
66,575 |
|
|
|
66,742 |
|
|
|
64,879 |
|
|
|
264,892 |
|
|
|
|
|
|
|
Total revenues |
|
|
419,826 |
|
|
|
429,630 |
|
|
|
439,445 |
|
|
|
432,745 |
|
|
|
1,721,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
333,730 |
|
|
|
332,782 |
|
|
|
344,155 |
|
|
|
342,304 |
|
|
|
1,352,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
86,096 |
|
|
|
96,848 |
|
|
|
95,290 |
|
|
|
90,441 |
|
|
|
368,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonoperating income |
|
|
1,280 |
|
|
|
(429 |
) |
|
|
(82 |
) |
|
|
5,003 |
|
|
|
5,772 |
|
|
|
|
|
|
|
Income before income taxes |
|
|
87,376 |
|
|
|
96,419 |
|
|
|
95,208 |
|
|
|
95,444 |
|
|
|
374,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
32,907 |
|
|
|
33,981 |
|
|
|
34,091 |
|
|
|
30,227 |
|
|
|
131,206 |
|
|
|
|
|
|
|
Income before equity income |
|
|
54,469 |
|
|
|
62,438 |
|
|
|
61,117 |
|
|
|
65,217 |
|
|
|
243,241 |
|
Equity income |
|
|
2,162 |
|
|
|
1,109 |
|
|
|
3,062 |
|
|
|
1,064 |
|
|
|
7,397 |
|
|
|
|
|
|
|
Income from continuing
operations, net of tax |
|
|
56,631 |
|
|
|
63,547 |
|
|
|
64,179 |
|
|
|
66,281 |
|
|
|
250,638 |
|
(Loss) income from discontinued
operations, net of tax |
|
|
233 |
|
|
|
234 |
|
|
|
269 |
|
|
|
302 |
|
|
|
1,038 |
|
|
|
|
|
|
|
Net income |
|
|
56,864 |
|
|
|
63,781 |
|
|
|
64,448 |
|
|
|
66,583 |
|
|
|
251,676 |
|
Noncontrolling interests |
|
|
(250 |
) |
|
|
(697 |
) |
|
|
(374 |
) |
|
|
(255 |
) |
|
|
(1,576 |
) |
|
|
|
|
|
|
Net income attributable to TSYS
common shareholders |
|
$ |
56,614 |
|
|
|
63,084 |
|
|
|
64,074 |
|
|
|
66,328 |
|
|
$ |
250,100 |
|
|
|
|
|
|
|
Note 3 Fair Value Measurement
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 157 (SFAS No. 157), Fair Value Measurements. Although this
statement does not require any new fair value measurements, in certain cases its application has
changed previous practice in determining fair value. SFAS No. 157 became effective for the Company
beginning January 1, 2008 as it relates to fair value measurements of financial assets and
liabilities and certain non-financial assets and liabilities that are recognized at fair value in
its financial statements on a recurring basis (at least annually). It became effective beginning
January 1, 2009 for certain other non-financial assets and non-financial liabilities.
SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at the measurement
date. It establishes a hierarchy for fair value measurements based upon the inputs to the valuation
and the degree to which they are observable or not observable in the market. The three levels in
the hierarchy are as follows:
|
|
|
Level 1 Inputs to the valuation based upon quoted prices (unadjusted) for identical
assets or liabilities in active markets that are accessible as of the measurement date. |
|
|
|
|
Level 2 Inputs to the valuation include quoted prices in either markets that are not
active, or in active markets for similar assets or liabilities, inputs other than quoted
prices that are observable, and inputs that are derived principally from or corroborated by
observable market data. |
|
|
|
|
Level 3 Inputs to the valuation that are unobservable inputs for the asset or
liability. |
SFAS No. 157 assigns the highest priority to Level 1 inputs and the lowest priority to Level 3
inputs.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (SFAS
No. 159), The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159
permits the Company to choose to measure many financial instruments and certain other items at fair
value. Upon adoption of SFAS No. 159 on January 1, 2008, TSYS did not elect the fair value option
for any financial instrument it did not currently report at fair value.
7
Goodwill and certain intangible assets not subject to amortization are assessed annually for
impairment in the second quarter of each year using fair value measurement techniques.
Specifically, goodwill impairment is determined using a two-step test. The first step of the
goodwill impairment test is used to identify potential impairment by comparing the fair value of a
reporting unit with its book value, including goodwill. If the fair value of the reporting unit
exceeds its book value, goodwill is considered not impaired and the second step of the impairment
test is unnecessary. If the book value of the reporting unit exceeds its fair value, the second
step of the goodwill impairment test is performed to measure the amount of impairment loss, if any.
The second step of the goodwill impairment test compares the implied fair value of the reporting
units goodwill with the book value of that goodwill. If the book value of the reporting units
goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an
amount equal to that excess. The fair value of the reporting unit is allocated to all of the assets
and liabilities of that unit as if the reporting unit had been acquired in a business combination
and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit.
The estimate of fair value of the Companys goodwill reporting units is determined using
various valuation techniques including using the combination of the income approach and the market
approach. The market approach, which contains Level 2 inputs, utilizes readily available market
valuation multiples to estimate fair value. The income approach is a valuation technique that
utilizes the discounted cash flow (DCF) method which includes Level 3 inputs. Under the DCF
method, the fair value of the asset reflects the present value of the projected earnings that will
be generated by each asset after taking into account the revenues and expenses associated with the
asset, the relative risk that the cash flows will occur, the contribution of other assets, and an
appropriate discount rate to reflect the value of the invested capital. Cash flows are estimated
for future periods based upon historical data and projections by
management.
Note 4 Supplementary Balance Sheet Information
Cash and Cash Equivalents
Cash and cash equivalent balances are summarized as follows:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
March 31, 2009 |
|
|
December 31, 2008 |
|
Cash and cash equivalents in domestic accounts |
|
$ |
233,429 |
|
|
|
149,047 |
|
Cash and cash equivalents in foreign accounts |
|
|
37,614 |
|
|
|
62,318 |
|
|
|
|
|
|
|
|
Total |
|
$ |
271,043 |
|
|
|
211,365 |
|
|
|
|
|
|
|
|
The Company maintains accounts outside the United States denominated in currencies other than
the U.S. dollar. All amounts in domestic accounts are denominated in U.S. dollars.
Prepaid Expenses and Other Current Assets
Significant components of prepaid expenses and other current assets are summarized as follows:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
March 31, 2009 |
|
|
December 31, 2008 |
|
Income taxes receivable |
|
$ |
21,774 |
|
|
|
23,752 |
|
Prepaid expenses |
|
|
15,260 |
|
|
|
14,079 |
|
Supplies inventory |
|
|
10,079 |
|
|
|
9,586 |
|
Other |
|
|
43,713 |
|
|
|
41,195 |
|
|
|
|
|
|
|
|
Total |
|
$ |
90,826 |
|
|
|
88,612 |
|
|
|
|
|
|
|
|
Contract Acquisition Costs, net
Significant components of contract acquisition costs, net of accumulated amortization, are
summarized as follows:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
March 31, 2009 |
|
|
December 31, 2008 |
|
Payments for processing rights, net
of accumulated amortization of
$134.1 million and $126.5 million at
2009 and 2008, respectively |
|
$ |
67,631 |
|
|
|
73,201 |
|
Conversion costs, net of accumulated
amortization of $60.0 million and
$56.1 million at 2009 and 2008,
respectively |
|
|
62,281 |
|
|
|
58,367 |
|
|
|
|
|
|
|
|
Total |
|
$ |
129,912 |
|
|
|
131,568 |
|
|
|
|
|
|
|
|
8
Amortization related to payments for processing rights, which is recorded as a reduction of
revenues, was $134.1 million and $114.5 million for the three months ended March 31, 2009 and 2008,
respectively.
Amortization expense related to conversion costs, which is recorded in other operating
expenses, was $60.0 million and $48.7 million for the three months ended March 31, 2009 and 2008,
respectively.
Other Current Liabilities
Significant components of other current liabilities are summarized as follows:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
March 31, 2009 |
|
|
December 31, 2008 |
|
Client liabilities |
|
$ |
37,294 |
|
|
|
35,423 |
|
Accrued income taxes |
|
|
34,236 |
|
|
|
2,808 |
|
Deferred revenues |
|
|
27,793 |
|
|
|
22,619 |
|
Accrued expenses |
|
|
26,904 |
|
|
|
27,510 |
|
Dividends payable |
|
|
13,813 |
|
|
|
13,780 |
|
Transaction processing provisions |
|
|
6,134 |
|
|
|
5,417 |
|
Client postage deposits |
|
|
3,819 |
|
|
|
3,772 |
|
Other |
|
|
20,718 |
|
|
|
20,186 |
|
|
|
|
|
|
|
|
Total |
|
$ |
170,711 |
|
|
|
131,515 |
|
|
|
|
|
|
|
|
Note 5 Long-Term Debt
Refer to Note 11 of the Companys audited financial statements for the year ended December 31,
2008 which are included as Exhibit 13.1 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2008, as filed with the SEC, for a discussion regarding long-term debt.
On October 31, 2008, the Companys International Services segment obtained a credit agreement
from a third-party to borrow up to approximately ¥2.0 billion, or $21 million, in a Yen-denominated
three year loan to finance activities in Japan. The rate is London Interbank Offered Rate (LIBOR)
plus 80 basis points. In 2008, the Company initially made a draw down of ¥1.5 billion, or
approximately $15.1 million. In January 2009, the Company made another draw down of ¥250 million,
or approximately $2.8 million.
Note 6 Equity and Noncontrolling Interests
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160 (SFAS
No. 160), Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB
No. 51. SFAS No. 160 changes the accounting for noncontrolling (minority) interests in consolidated
financial statements including the requirements to classify noncontrolling interests as a component
of consolidated shareholders equity, the elimination of minority interest accounting in results
of operations and changes in the accounting for both increases and decreases in a parents
controlling ownership interest.
Below is a summary of the changes in the statement of equity as a result of the adoption of
SFAS No. 160 through three months ended March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TSYS Shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Comprehensive |
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
(in thousands, except |
|
Common Stock |
|
|
paid-in |
|
|
Income (Loss) |
|
|
Treasury |
|
|
Retained |
|
|
controlling |
|
|
Total |
|
per share data) |
|
Shares |
|
|
Dollars |
|
|
Capital |
|
|
(OCI) |
|
|
Stock |
|
|
Earnings |
|
|
Interests |
|
|
Equity |
|
Balance,
December 31, 2008 |
|
|
200,356 |
|
|
$ |
20,036 |
|
|
|
126,889 |
|
|
|
(6,627 |
) |
|
|
(69,641 |
) |
|
|
920,292 |
|
|
|
9,901 |
|
|
$ |
1,000,850 |
|
Comprehensive
income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,526 |
|
|
|
415 |
|
|
|
46,941 |
|
Other
comprehensive
income, net of
tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TSYS Shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Comprehensive |
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
(in thousands, except |
|
Common Stock |
|
|
paid-in |
|
|
Income (Loss) |
|
|
Treasury |
|
|
Retained |
|
|
controlling |
|
|
Total |
|
per share data) |
|
Shares |
|
|
Dollars |
|
|
Capital |
|
|
(OCI) |
|
|
Stock |
|
|
Earnings |
|
|
Interests |
|
|
Equity |
|
Foreign currency
translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,777 |
) |
|
|
|
|
|
|
|
|
|
|
(587 |
) |
|
|
(4,364 |
) |
Change in
accumulated OCI
related to
postretirement
healthcare plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
¾ |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,756 |
) |
|
|
|
|
|
|
|
|
|
|
(587 |
) |
|
|
(4,343 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued
for nonvested
awards |
|
|
457 |
|
|
|
44 |
|
|
|
(44 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
5,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,281 |
|
Cash
dividends and dividend
equivalents
declared ($0.07 per
share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,813 |
) |
|
|
|
|
|
|
(13,813 |
) |
Purchase of
treasury shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(329 |
) |
|
|
|
|
|
|
|
|
|
|
(329 |
) |
Tax shortfalls
associated with
share-based payment
arrangements |
|
|
|
|
|
|
|
|
|
|
(3,052 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,052 |
) |
|
|
|
Balance,
March 31, 2009 |
|
|
200,813 |
|
|
$ |
20,080 |
|
|
|
129,074 |
|
|
|
(10,383 |
) |
|
|
(69,970 |
) |
|
|
953,005 |
|
|
|
9,729 |
|
|
$ |
1,031,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7 Comprehensive Income
Comprehensive income is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2009 |
|
|
For the three months ended March 31, 2008 |
|
|
|
TSYS |
|
|
Noncontrolling |
|
|
|
|
|
|
TSYS |
|
|
Noncontrolling |
|
|
|
|
(in thousands) |
|
Shareholders |
|
|
Interests |
|
|
Total |
|
|
Shareholders |
|
|
Interests |
|
|
Total |
|
|
Net income |
|
$ |
46,526 |
|
|
|
415 |
|
|
$ |
46,941 |
|
|
$ |
56,614 |
|
|
|
250 |
|
|
$ |
56,864 |
|
Other comprehensive
income (OCI), net
of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
translation
adjustments |
|
|
(3,777 |
) |
|
|
(587 |
) |
|
|
(4,364 |
) |
|
|
4,353 |
|
|
|
962 |
|
|
|
5,315 |
|
Change in
accumulated OCI
related to
postretirement
healthcare plans |
|
|
21 |
|
|
|
¾ |
|
|
|
21 |
|
|
|
12 |
|
|
|
¾ |
|
|
|
12 |
|
|
|
|
Total |
|
$ |
42,770 |
|
|
|
(172 |
) |
|
$ |
42,598 |
|
|
$ |
60,979 |
|
|
|
1,212 |
|
|
$ |
62,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The income tax effects allocated to and the cumulative balance of accumulated other
comprehensive income are as follows:
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance |
|
|
Pretax |
|
|
|
|
|
|
|
|
|
|
Ending Balance |
|
(in thousands) |
|
December 31, 2008 |
|
|
Amount |
|
|
Tax Effect |
|
|
Net-of-Tax Amount |
|
|
March 31, 2009 |
|
Foreign currency translation adjustments |
|
$ |
(5,858 |
) |
|
$ |
(4,308 |
) |
|
|
531 |
|
|
$ |
(3,777 |
) |
|
$ |
(9,635 |
) |
Change in accumulated OCI related to
postretirement healthcare plans |
|
|
(769 |
) |
|
|
38 |
|
|
|
(17 |
) |
|
|
21 |
|
|
|
(748 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(6,627 |
) |
|
$ |
(4,270 |
) |
|
|
514 |
|
|
$ |
(3,756 |
) |
|
$ |
(10,383 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consistent with its overall strategy of pursuing international investment opportunities, TSYS
adopted the permanent reinvestment exception under Accounting Principles Board Opinion No. 23 (APB
23) Accounting for Income Taxes Special Areas, with respect to future earnings of certain
foreign subsidiaries. Its decision to permanently reinvest foreign earnings offshore means TSYS
will no longer allocate taxes to foreign currency translation adjustments associated with these
foreign subsidiaries accumulated in other comprehensive income.
Note 8 Share-Based Compensation
The Companys Annual Report on Form 10-K for the year ended December 31, 2008, as filed with
the SEC, contains a discussion of the Companys share-based compensation plans and policy.
Share-Based Compensation
TSYS share-based compensation costs are included as expenses and classified as salaries,
other personnel expenses and spin-related expenses. TSYS does not include amounts associated with
share-based compensation as costs capitalized as software development and contract acquisition
costs as these awards are typically granted to individuals not involved in capitalizable
activities. For the three months ended March 31, 2009, share-based compensation was $5.3 million,
compared to $7.9 million for the same period in 2008. Included in the $5.3 million amount for 2009
and $7.9 million amount for 2008 is approximately $2.4 million and $5.7 million, respectively,
related to expensing the fair value of stock options.
Nonvested Share Awards
During the first three months of 2009, the Company issued 457,220 shares of TSYS common stock
with a market value of $6.0 million to certain key employees and non-management members of its
Board of Directors under nonvested stock bonus awards for services to be provided in the future by
such officers, directors and employees. The market value of the TSYS common stock at the date of
issuance is amortized as compensation expense over the vesting period of the awards.
During the first three months of 2008, the Company issued 695,411 shares of TSYS common stock
with a market value of $15.2 million to certain key employees and non-management members of its
Board of Directors under nonvested stock bonus awards for services to be provided in the future by
such officers, directors and employees. The market value of the TSYS common stock at the date of
issuance is amortized as compensation expense over the vesting period of the awards.
As of March 31, 2009, there was approximately $19.4 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 2.4 years.
During the first three months of 2008, TSYS authorized a total grant of 182,816 shares of
nonvested stock to two key executives with a performance-vesting schedule (2008 performance-vesting
shares). These 2008 performance-vesting shares have seven one-year performance periods (2008-2014)
during each of which the Compensation Committee establishes an earnings per share goal and, if such
goal is attained during any performance period, 20% of the performance-vesting shares will vest, up
to a maximum of 100% of the total grant. Compensation expense for each years award is measured on
the grant date based on the quoted market price of TSYS common stock and is expensed on a
straight-line basis for the year.
During 2005, TSYS authorized a total grant of 126,087 shares of nonvested stock to two key
executives with a performance-vesting schedule (2005 performance-vesting shares). These
performance-vesting shares have seven one-year performance periods (2005-2011) during each of which
the Compensation Committee establishes an earnings per share goal and, if such goal is attained
during any performance period, 20% of the performance-vesting shares will vest, up to a maximum of
100% of the total grant. Compensation expense for each years award is measured on the grant date
based on the quoted market price of TSYS common stock and is expensed on a straight-line basis for
the year.
As of March 31, 2009, there was approximately $846,000 of total unrecognized compensation cost
related to both the 2008 grant and 2005 grant of nonvested performance-vesting share-based
compensation arrangements. That cost is expected to be recognized over the remainder of 2009.
11
Performance Based Awards
During the first quarters of 2009 and 2008, respectively, TSYS authorized performance based
awards that have a market condition calculated on a combination of earnings per share growth and
TSYS performance compared to a three-year Total Shareholder Return versus peers. Vesting of the
awards will occur on the last day of the three-year market condition valuation period if the
participant is still employed on that date. The fair value of these awards is based on a Monte
Carlo simulation as prescribed by Statement of Financial Accounting Standards No. 123 (Revised)
(SFAS No. 123R) Share-Based Payment (Revised). Although authorized by the TSYS Board, the final
amount of the awards is not known until the Compensation Committee has determined the final terms
of the awards, at which time the award is deemed granted. The March 2008 award was authorized in
2008, however it was not deemed granted until the Compensation Committee determined the final terms
of the award in January 2009. Likewise, the January 2009 award was authorized in 2009, however the
award will not be deemed granted until the Compensation Committee determines the final terms of the
award, which is expected to be in January 2010. The Company engaged a third-party valuation
specialist to ascertain the fair value of these awards. The awards will be amortized through the
end of the respective three-year periods.
A summary of the awards authorized in each year is below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date |
Month |
|
Primary |
|
Secondary |
|
|
|
Estimated |
|
Amortized |
|
Retirement |
|
Terms |
Authorized |
|
Measure |
|
Measure |
|
Method |
|
Valuation |
|
through |
|
Provision |
|
Determined |
|
February 2009
|
|
2009 EPS Growth
|
|
Three-year Total
Shareholder Return
(2009-2012)
|
|
Monte Carlo
simulation
|
|
$4.0 million
|
|
December 2011
|
|
Age 62 with 15
years of service,
or age 65
regardless of
service
|
|
To be determined
(January 2010) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 2008
|
|
2008 EPS Growth
|
|
Three-year Total
Shareholder Return
(2008-2011)
|
|
Monte Carlo
simulation
|
|
$1.0 million
|
|
December 2010
|
|
Age 62 with 15
years of service,
or age 65
regardless of
service
|
|
January 2009 |
Until the awards were deemed granted, TSYS excluded the issuance of these awards in reporting
shares outstanding from the calculation of basic and diluted EPS (although related compensation
expense on these awards are included properly in net income and related EPS calculation).
Stock Option Awards
During the first three months of March 2009, the Company granted 1,047,949 stock options to
key TSYS executive officers. The average fair value of the option grant was $5.31 per option and
was estimated on the date of grant using the Black-Scholes-Merton option-pricing model with the
following weighted average assumptions: exercise price of $13.11; risk-free interest rate of 3.19%;
expected volatility of 42.00%; expected term of 8.6 years; and dividend yield of 2.14%.
During the first three months of March 2008, the Company granted 768,855 stock options to key
TSYS executive officers. The average fair value of the option grant was $9.73 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 $23.15; risk-free interest rate of 3.42%;
expected volatility of 36.57%; expected term of 8.7 years; and dividend yield of 1.21%.
As of March 31, 2009, there was approximately $7.9 million of total unrecognized compensation
expense cost related to TSYS stock options that is expected to be recognized over a remaining
weighted average period of 2.3 years.
12
Note 9 Cost of Services and Selling, General and Administrative Expenses
The Companys operating expenses consists of cost of services and selling, general and
administrative expenses. The Company presents these expenses as employment, technology and
facilities and other expenses. Overall, the Company believes its expenses consist predominately of
cost of sales type expenses, while selling, general and administrative expenses are insignificant.
Note 10 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 2005 and with a few exceptions, the Company is no longer subject to
income tax examinations from state and local authorities for years before 2001 and from foreign
authorities before 2003. There are currently no Federal tax examinations in progress. However, a
number of tax examinations are in progress by the relevant foreign and state tax authorities.
Although TSYS is unable to determine the ultimate outcome of these examinations, TSYS believes that
its liability for uncertain tax positions relating to these jurisdictions for such years is
adequate.
TSYS effective tax rate was 35.6% and 36.9% for the three months ended March 31, 2009 and
March 31, 2008, respectively. The increased rate during the March 31, 2008 period was mostly due to
discrete items charged during the 2008 period.
TSYS adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes an Interpretation of FASB Statement 109 (FIN 48) on January 1, 2007. This
interpretation prescribed a recognition threshold and measurement attribute for the financial
statement recognition, measurement and disclosure of a tax position taken or expected to be taken
in a tax return. The amount of unrecognized tax benefits did not change significantly during the
three months ended March 31, 2009.
TSYS recognizes potential interest and penalties related to the underpayment of income taxes
as income tax expense in the condensed consolidated statements of income. Gross accrued interest
and penalties on unrecognized tax benefits totaled $1.4 million and $1.3 million as of and March
31, 2009 and December 31, 2008, respectively. The total amounts of unrecognized income tax benefits
as of March 31, 2009 and December 31, 2008 that, if recognized, would affect the effective tax
rates are $4.4 million and $4.3 million (net of the Federal benefit on state tax issues),
respectively, which include interest and penalties of $1.1 million and $1.1 million. TSYS does not
expect any material changes to its calculation of uncertain tax positions during the next twelve
months.
Note 11 Segment Reporting and Major Customers
The Company reports selected information about operating segments in accordance with Statement
of Financial Accounting Standards No. 131 (SFAS No. 131), Disclosures about Segments of an
Enterprise and Related Information. The Companys segment information reflects the information
that the chief operating decision maker (CODM) uses to make resource allocations and strategic
decisions. The CODM at TSYS consists of the chairman of the board and chief executive officer, the
president and the four senior executive vice presidents.
Through online accounting and electronic payment processing systems, TSYS provides electronic
payment processing and other services to card-issuing and merchant acquiring institutions in the
United States and internationally. During the second quarter of 2008, TSYS reorganized and renamed
its operating segments in a manner that reflects the way the CODM views the business. The new
operating segments are North America Services segment, International Services segment and Merchant
Services segment. As part of the reorganization, TSYS reclassified the segment results for TSYS de
Mexico from International Services to North America Services to reflect the change.
During the first quarter of 2009, the Company decided to sell TDM. As a result, TDM is
classified as discontinued operations for all periods. TDM was included in the North America
Services segment. Refer to Note 2 for more information.
North America Services includes electronic payment processing services and other services
provided from within the North America region. International Services includes electronic payment
processing and other services provided from outside the North America region. Merchant Services
includes electronic processing and other services provided to merchant acquiring institutions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
North America |
|
|
International |
|
|
Merchant |
|
|
Spin-Related |
|
|
|
|
Operating Segments |
|
Services |
|
|
Services |
|
|
Services |
|
|
Costs |
|
|
Consolidated |
|
At March 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets |
|
$ |
1,451,129 |
|
|
|
310,787 |
|
|
|
215,584 |
|
|
|
|
|
|
$ |
1,977,500 |
|
Intersegment eliminations |
|
|
(387,340 |
) |
|
|
(1,007 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
(388,348 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,063,789 |
|
|
|
309,780 |
|
|
|
215,583 |
|
|
|
|
|
|
$ |
1,589,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
North America |
|
|
International |
|
|
Merchant |
|
|
Spin-Related |
|
|
|
|
Operating Segments |
|
Services |
|
|
Services |
|
|
Services |
|
|
Costs |
|
|
Consolidated |
|
At December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets |
|
$ |
1,416,724 |
|
|
|
324,313 |
|
|
|
212,779 |
|
|
|
|
|
|
$ |
1,953,816 |
|
Intersegment eliminations |
|
|
(402,051 |
) |
|
|
(977 |
) |
|
|
¾ |
|
|
|
|
|
|
|
(403,028 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,014,673 |
|
|
|
323,336 |
|
|
|
212,779 |
|
|
|
|
|
|
$ |
1,550,788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursable items |
|
$ |
223,782 |
|
|
|
70,584 |
|
|
|
58,206 |
|
|
|
|
|
|
$ |
352,572 |
|
Intersegment revenues |
|
|
(5,888 |
) |
|
|
(845 |
) |
|
|
(393 |
) |
|
|
|
|
|
|
(7,126 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursable items from external customers |
|
$ |
217,894 |
|
|
|
69,739 |
|
|
|
57,813 |
|
|
|
|
|
|
$ |
345,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment total revenues |
|
$ |
268,789 |
|
|
|
73,802 |
|
|
|
75,498 |
|
|
|
|
|
|
$ |
418,089 |
|
Intersegment revenues |
|
|
(7,918 |
) |
|
|
(845 |
) |
|
|
(393 |
) |
|
|
|
|
|
|
(9,156 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
260,871 |
|
|
|
72,957 |
|
|
|
75,105 |
|
|
|
|
|
|
$ |
408,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
23,509 |
|
|
|
7,706 |
|
|
|
8,087 |
|
|
|
|
|
|
$ |
39,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment expenses |
|
$ |
1,311 |
|
|
|
(3,062 |
) |
|
|
(7,405 |
) |
|
|
|
|
|
$ |
(9,156 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
$ |
58,033 |
|
|
|
6,004 |
|
|
|
14,077 |
|
|
|
|
|
|
$ |
78,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes,
noncontrolling interest and equity in income of equity
investments |
|
$ |
58,055 |
|
|
|
4,787 |
|
|
|
13,814 |
|
|
|
|
|
|
$ |
76,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
19,594 |
|
|
|
2,877 |
|
|
|
4,944 |
|
|
|
|
|
|
$ |
27,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of equity investments |
|
$ |
666 |
|
|
|
377 |
|
|
|
|
|
|
|
|
|
|
$ |
1,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, net of tax |
|
$ |
39,127 |
|
|
|
2,287 |
|
|
|
8,870 |
|
|
|
|
|
|
$ |
50,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursable items |
|
$ |
235,860 |
|
|
|
67,957 |
|
|
|
55,129 |
|
|
|
|
|
|
$ |
358,946 |
|
Intersegment revenues |
|
|
(5,231 |
) |
|
|
(403 |
) |
|
|
(182 |
) |
|
|
|
|
|
|
(5,816 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursable items from external customers |
|
$ |
230,629 |
|
|
|
67,554 |
|
|
|
54,947 |
|
|
|
|
|
|
$ |
353,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment total revenues |
|
$ |
287,012 |
|
|
|
69,824 |
|
|
|
70,937 |
|
|
|
|
|
|
$ |
427,773 |
|
Intersegment revenues |
|
|
(7,362 |
) |
|
|
(403 |
) |
|
|
(182 |
) |
|
|
|
|
|
|
(7,947 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
279,650 |
|
|
|
69,421 |
|
|
|
70,755 |
|
|
|
|
|
|
$ |
419,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
24,732 |
|
|
|
7,695 |
|
|
|
6,554 |
|
|
|
|
|
|
$ |
38,981 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment expenses |
|
$ |
2,774 |
|
|
|
(3,541 |
) |
|
|
(7,180 |
) |
|
|
|
|
|
$ |
(7,947 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
$ |
70,471 |
|
|
|
7,446 |
|
|
|
15,074 |
|
|
|
(6,895 |
) |
|
$ |
86,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes,
noncontrolling interest and equity in income of equity
investments |
|
$ |
70,137 |
|
|
|
8,750 |
|
|
|
15,384 |
|
|
|
(6,895 |
) |
|
$ |
87,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
26,509 |
|
|
|
2,914 |
|
|
|
5,408 |
|
|
|
(1,924 |
) |
|
$ |
32,907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of equity investments |
|
$ |
888 |
|
|
|
1,274 |
|
|
|
|
|
|
|
|
|
|
$ |
2,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, net of tax |
|
$ |
44,516 |
|
|
|
7,111 |
|
|
|
9,976 |
|
|
|
(4,972 |
) |
|
$ |
56,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by Geographic Area
Revenues for North America Services and Merchant Services include electronic payment
processing and other services provided from the United States to clients domiciled in the United
States or other countries. Revenues for International Services include electronic payment
processing and other services provided from facilities outside the United States to clients based
predominantly outside the United States.
The following geographic data presents revenues for the three months ended March 31, 2009 and
2008, respectively, based on the domicile of the Companys customers.
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
(in millions) |
|
2009 |
|
|
2008 |
|
United States |
|
$ |
300.4 |
|
|
|
312.2 |
|
Europe |
|
|
57.8 |
|
|
|
58.9 |
|
Canada |
|
|
30.6 |
|
|
|
31.7 |
|
Japan |
|
|
11.1 |
|
|
|
7.4 |
|
Mexico |
|
|
2.2 |
|
|
|
3.7 |
|
Other |
|
|
6.8 |
|
|
|
5.9 |
|
|
|
|
|
|
|
|
Total |
|
$ |
408.9 |
|
|
|
419.8 |
|
|
|
|
|
|
|
|
The following table reconciles geographic revenues to revenues by reportable segment for the
three months ended March 31, 2009 and 2008, respectively, based on the domicile of the Companys
customers.
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America Services |
|
|
International Services |
|
|
Merchant Services |
|
(in millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
United States |
|
$ |
225.6 |
|
|
|
241.7 |
|
|
|
|
|
|
|
0.1 |
|
|
|
74.8 |
|
|
|
70.4 |
|
Europe |
|
|
0.2 |
|
|
|
0.3 |
|
|
|
57.6 |
|
|
|
58.6 |
|
|
|
|
|
|
|
|
|
Canada |
|
|
30.5 |
|
|
|
31.5 |
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
0.2 |
|
Japan |
|
|
|
|
|
|
|
|
|
|
11.1 |
|
|
|
7.4 |
|
|
|
|
|
|
|
|
|
Mexico |
|
|
2.2 |
|
|
|
3.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
2.4 |
|
|
|
2.4 |
|
|
|
4.2 |
|
|
|
3.3 |
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
260.9 |
|
|
|
279.6 |
|
|
|
72.9 |
|
|
|
69.4 |
|
|
|
75.1 |
|
|
|
70.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company maintains property and equipment, net of accumulated depreciation and
amortization, in the following geographic areas:
|
|
|
|
|
|
|
|
|
(in millions) |
|
At March 31, 2009 |
|
|
At December 31, 2008 |
|
United States |
|
$ |
207.8 |
|
|
|
215.5 |
|
Europe |
|
|
55.6 |
|
|
|
54.1 |
|
Japan |
|
|
3.3 |
|
|
|
3.5 |
|
Other |
|
|
6.3 |
|
|
|
6.6 |
|
|
|
|
|
|
|
|
Total |
|
$ |
273.0 |
|
|
|
279.7 |
|
|
|
|
|
|
|
|
Major Customers
For the three months ended March 31, 2009, the Company had one major customer which accounted
for approximately 12.5%, or $51.3 million, of total revenues. For the three months ended March 31,
2008, this major customer accounted for approximately 13.1%, or $54.8 million, of total revenues.
Revenues from major customers for the periods reported are primarily attributable to the North
America Services and Merchant Services segments.
Note 12 Supplementary Cash Flow Information
Contract Acquisition Costs
Cash used for contract acquisition costs for the three months ended March 31, 2009 and 2008,
respectively, are summarized as follows:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
March 31, 2009 |
|
|
March 31, 2008 |
|
Payments for processing rights |
|
$ |
2,769 |
|
|
|
6,984 |
|
Conversion costs |
|
|
8,223 |
|
|
|
10,184 |
|
|
|
|
|
|
|
|
Total |
|
$ |
10,992 |
|
|
|
17,168 |
|
|
|
|
|
|
|
|
Nonvested Awards
During the first three months of 2009 and 2008, the Company issued shares of common stock to
certain key employees and non-management members of its Board of Directors under nonvested stock
bonus awards for services to be provided by such key employees and directors in the future. Refer
to Note 8 for more information.
Equipment and Software Acquired Under Capital Lease Obligations
The Company acquired equipment and software under capital lease obligations in the amount of
$4.3 million during 2009 related to storage and other peripheral hardware. The Company acquired
software under capital lease obligations in the amount of $5.4 million for the three months ended
March 31, 2008 related to a software enterprise license agreement and storage and other peripheral
hardware.
Note 13 Legal Proceedings
The Company is subject to various legal proceedings and claims and is also subject to
information requests, inquiries and investigations arising out of the ordinary conduct of its
business. In the opinion of management, based in part upon the advice of legal
15
counsel, all matters are believed to be adequately covered by insurance, or if not covered,
are believed to be without merit or are of such kind or involve such amounts that would not have a
material adverse effect on the financial position, results of operations or cash flows of the
Company if disposed of unfavorably. The Company establishes reserves for litigation and similar
matters when those matters present loss contingencies that TSYS determines to be both probable and
reasonably estimable in accordance with Statement of Financial Accounting Standards No. 5 (SFAS No.
5), Accounting for Contingencies.
Note 14 Guarantees and Indemnifications
The Company has entered into processing and licensing agreements with its clients that include
intellectual property indemnification clauses. The Company generally agrees to indemnify its
clients, subject to certain exceptions, against legal claims that TSYS services or systems
infringe on certain third party patents, copyrights or other proprietary rights. In the event of
such a claim, the Company is generally obligated to hold the client harmless and pay for related
losses, liabilities, costs and expenses, including, without limitation, court costs and reasonable
attorneys fees. The Company has not made any indemnification payments pursuant to these
indemnification clauses. In addition, the Company has indemnification obligations to Synovus
Financial Corp. pursuant to the disaffiliation and related agreements entered into by the parties
in connection with the spin-off.
The Company has not recorded a liability for guarantees or indemnities in the accompanying
condensed consolidated balance sheet since neither a range nor a maximum amount of potential future
payments under such guarantees and indemnities is determinable.
Note 15 Business Combinations
Infonox on the Web
The Company acquired Infonox on the Web (Infonox) on November 4, 2008 for approximately
$50.5 million, with contingent payments over the next three years of up to $25 million based on
performance. The Company engaged a third-party valuation firm to identify and value acquisition
intangibles. Infonox provides payment products on self-service and full-service transaction touch
points in the gaming, banking and retail markets. The company delivers, manages, operates and
supports services for several large publicly traded companies. The acquisition will add new payment
technology and acceptance capabilities. Infonox is based in Sunnyvale, California, with an office
in Pune, India.
The preliminary purchase price allocation is presented below:
|
|
|
|
|
(in thousands) |
|
|
|
|
Cash and cash equivalents |
|
$ |
899 |
|
Intangible assets |
|
|
21,500 |
|
Goodwill |
|
|
28,694 |
|
Other assets |
|
|
3,222 |
|
|
|
|
|
Total assets acquired |
|
|
54,315 |
|
Liabilities assumed |
|
|
3,831 |
|
|
|
|
|
Net assets acquired |
|
$ |
50,484 |
|
|
|
|
|
Revenues associated with Infonox are included in merchant acquiring services and are included
in Merchant Services for segment reporting purposes.
Note 16 Collaborative Arrangement
In January 2009, TSYS adopted the Financial Accounting Standards Board (FASB) Emerging Issue
Task Force No. 07-1 (EITF 07-1), Accounting for Collaborative Arrangements. EITF 07-1 is
effective for reporting periods beginning after December 15, 2008, and it requires restatement of
prior periods for all collaborative arrangements existing as of the effective date. Prior to the
adoption of EITF 07-1, TSYS used the equity method of accounting for the joint ownership of the
aircraft enterprise.
In December 2007, TSYS acquired for approximately $12.1 million a 45% ownership interest in an
enterprise jointly owned with two other entities which operates aircraft for the owners internal
use. The arrangement allows each entity access to the aircraft and each entity pays for its usage
of the aircraft. Each quarter, the net operating results of the enterprise are shared among the
owners based on their respective ownership percentage.
16
TSYS records its usage of the aircraft and its share of net operating results of the
enterprise in Other Operating Expenses. The amounts of expense the Company recorded that is
attributable to the collaborative arrangement for the three months ended March 31, 2009 and 2008 is
$295,087 and $300,000, respectively.
The following table illustrates the effect of the retrospective application on its Expenses
and Equity income for its collaborative arrangements existing as of the effective date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2008 |
|
|
|
As |
|
|
|
|
|
|
|
|
|
Previously |
|
|
Effect of Adoption |
|
|
Currently |
|
(in thousands) |
|
Reported |
|
|
of EITF 07-1 |
|
|
Reported |
|
Other operating expenses |
|
$ |
|
|
|
|
300 |
|
|
$ |
300 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
|
|
|
|
300 |
|
|
$ |
300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
$ |
|
|
|
$ |
(300 |
) |
|
$ |
(300 |
) |
Equity in income of equity investments, net of tax |
|
|
(300 |
) |
|
|
300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
(300 |
) |
|
|
|
|
|
$ |
(300 |
) |
|
|
|
|
|
|
|
|
|
|
Note
17 Earnings Per Share
In June 2008, the FASB issued a FASB Staff Position EITF 03-6-1 (FSP EITF 03-6-1),
Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating
Securities. FSP EITF 03-6-1 holds that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents are participating securities as
defined in EITF 03-6, Participating Securities and the Two-Class Method under FASB Statement
No. 128, Earnings per Share, and therefore should be included in computing EPS using the
two-class method. The impact on first quarter 2009 and 2008 EPS (as recast to show retroactive
adoption of FSP EITF 03-6-1) does not change basic or diluted EPS.
The two-class method is an earnings allocation method for computing EPS when an entitys
capital structure includes two or more classes of common stock or common stock and participating
securities. It determines EPS based on dividends declared on common stock and participating
securities and participation rights of participating securities in any undistributed earnings. FSP
EITF 03-6-1 was effective for reporting periods beginning after December 15, 2008, and it requires
restatement of prior periods.
The diluted earnings per share calculation excludes stock options and nonvested awards that
are convertible into 6.8 million common shares for the three months ended March 31, 2009 and
excludes 6.3 million common shares for the three months ended March 31, 2008 because their
inclusion would have been anti-dilutive.
17
TOTAL SYSTEM SERVICES, INC.
Item 2 Managements Discussion and Analysis of Financial
Condition and Results of Operations
Financial Overview
Total System Services, Inc.s (TSYS or the Companys) revenues are derived from providing
electronic payment processing and related services to financial and nonfinancial institutions,
generally under long-term processing contracts. TSYS Total Debt Management, Inc. (TDM) was reported
under the North America Services operating segment prior to the Company reflecting it in
discontinued operations.
For a detailed discussion regarding the Companys Operations, see Item 7: Managements
Discussion and Analysis of Financial Condition and Results of Operations in the Companys Annual
Report on Form 10-K for the year ended December 31, 2008.
A summary of the financial highlights for 2009, as compared to 2008, is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
(in millions, except per share data and employees) |
|
2009 |
|
2008 |
|
Percent Change |
Revenues before reimbursable items |
|
$ |
345.4 |
|
|
|
353.1 |
|
|
|
(2.2 |
)% |
Total revenues |
|
|
408.9 |
|
|
|
419.8 |
|
|
|
(2.6 |
) |
Operating income |
|
|
78.1 |
|
|
|
86.1 |
|
|
|
(9.3 |
) |
Net income attributable to TSYS |
|
|
46.5 |
|
|
|
56.6 |
|
|
|
(17.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share (EPS)(1): |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
0.26 |
|
|
|
0.29 |
|
|
|
(10.3 |
) |
Net income |
|
|
0.24 |
|
|
|
0.29 |
|
|
|
(17.3 |
) |
Diluted EPS(1): |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
0.26 |
|
|
|
0.29 |
|
|
|
(10.2 |
) |
Net income |
|
|
0.24 |
|
|
|
0.29 |
|
|
|
(20.0 |
) |
Cash flows from operating activities |
|
|
98.7 |
|
|
|
100.0 |
|
|
|
(1.3 |
) |
Other: |
|
|
|
|
|
|
|
|
|
|
|
|
Average accounts on file (AOF) |
|
|
349.9 |
|
|
|
370.2 |
|
|
|
(5.5 |
) |
Cardholder transactions processed |
|
|
1,481.0 |
|
|
|
1,589.6 |
|
|
|
(6.8 |
) |
Average full-time equivalent employees (FTE) |
|
|
8,062 |
|
|
|
7,245 |
|
|
|
11.3 |
|
|
|
|
(1) |
|
Basic and diluted EPS is computed based on the two-class method in accordance with FSP EITF
03-6-1. The impact on first quarter 2009 and 2008 EPS (as recast to show retroactive adoption of
FSP EITF 03-6-1) does not change basic or diluted EPS. |
Significant highlights for 2009 include:
Corporate
|
|
|
Announced that TDM, a wholly owned subsidiary involved in the late stage collection and
bankruptcy business, was moved from continuing operations to discontinued operations pending
the closing of the sale of this subsidiary. |
North America
|
|
|
Renewed a longstanding relationship with Navy Federal Credit Union to continue offering
credit card processing products to members, as a major component of Navy Federals consumer
and credit card lending operation. |
|
|
|
|
Signed an agreement with Unicard Mexico, a wholly owned subsidiary of Unibanco Brasil,
one of the worlds top 20 banks and TSYS first TS2 card issuing client in Mexico. |
|
|
|
|
Incurred a one-time expense related to resolution of a client issue at TDM. |
International
|
|
|
Announced that TSYS has signed a multi-year contract with Banco Carrefour S.A., to
process its hybrid and private label card business in Brazil. The agreement includes an
initial launch of a new MasterCard hybrid card in June 2009 which will be followed by the
conversion of the existing six million private label cards in early 2010. TSYS will process
the cards on its TS Prime multi-client payments processing platform. |
18
|
|
|
Reached an agreement with Travel Bank, Inc., a financial services company that is a part
of the JTB Group, to process Japans first Visa branded Prepaid card in July 2009. Consumers
can use the cards to make payments at Visa merchants when traveling overseas or to withdraw
cash from Visa ATMs. |
|
|
|
|
Began offering merchant payment services to PaySquare in the Benelux, which is TSYS
first acquirer-processing client to go live in Europe. |
|
|
|
|
Announced China UnionPay Data Services Co., Ltd. (CUP Data) (TSYS joint venture with
China UnionPay) signed two processing agreements. One agreement was with China Postal
Savings Bank, Chinas fifth largest bank. The other agreement was with Bank of East Asia,
Hong Kongs largest local independent bank and the first foreign bank to launch a card
program in China. |
|
|
|
|
Introduced its market-leading CentreSuite product to Europe. The commercial card
management tool was first launched in North America in 2002 and is now employed by more than
140,000 businesses. |
Merchant
|
|
|
Announced availability of two new all-in-one point-of-sale (POS) solutions to help small-
and mid-sized retailers integrate store operations with the point of purchase. Offered as a
complete business-in-a-box, each solution includes quality hardware components and award
winning Microsoft software to help retailers manage every aspect of their business. |
|
|
|
|
Agreed to partner with mPay Gateway(TM) and Nova Libra to provide point-of-sale payment
solutions that meet the needs of healthcare providers and their patients, as well as
pharmacies and drug stores. |
Financial Review
This Financial Review provides a discussion of critical accounting policies and estimates,
related party transactions and off-balance sheet arrangements. This Financial Review also discusses
the results of operations, financial position, liquidity and capital resources of TSYS and outlines
the factors that have affected its recent earnings, as well as those factors that may affect its
future earnings.
Critical Accounting Policies and Estimates
The Companys financial position, results of operations and cash flows are impacted by the
accounting policies the Company has adopted. In order to gain a full understanding of the Companys
financial statements, one must have a clear understanding of the accounting policies employed.
Factors that could affect the Companys future operating results and cause actual results to
vary materially from expectations are set forth in the Companys forward-looking statements.
Negative developments in these or other risk factors could have a material adverse effect on the
Companys financial position, results of operations and cash flows. For a detailed discussion
regarding the Companys risk factors, see Item 1A: Risk Factors in the Companys Annual Report on
Form 10-K for the year ended December 31, 2008.
For a detailed discussion regarding the Companys critical accounting policies and estimates,
see Item 7: Managements Discussion and Analysis of Financial Condition and Results of Operations
in the Companys Annual Report on Form 10-K for the year ended December 31, 2008. There have been
no material changes to the Companys critical accounting policies, estimates and assumptions or the
judgments affecting the application of those estimates and assumptions in 2009.
Related Party Transactions
The Company believes the terms and conditions of transactions between the Company and its
equity investments, Total System Services de México, S.A. de. C.V. (TSYS de México) and CUP Data,
are comparable to those which could have been obtained in transactions with unaffiliated parties.
The Companys margins with respect to related party transactions are comparable to margins
recognized in transactions with unrelated third parties.
19
Off-Balance Sheet Arrangements
Operating Leases: As a method of funding its operations, TSYS employs noncancelable operating
leases for computer equipment, software and facilities. These leases allow the Company to provide
the latest technology while avoiding the risk of ownership. Neither the assets nor obligations
related to these leases are included on the balance sheet.
Contractual Obligations: The total liability (with state amounts tax effected) for uncertain tax
positions under FIN 48 at March 31, 2009 is $3.4 million. Refer to Note 10 in the Notes to
Unaudited Condensed Consolidated Financial Statements for more information on income taxes. The
Company is not able to reasonably estimate the amount by which the liability will increase or
decrease over time; however, at this time, the Company does not expect a significant payment
related to these obligations within the next year.
As indicated in the Companys 2008 Annual Report on Form 10-K, total contractual cash
obligations at December 31, 2008 were estimated at $458.0 million. These contractual cash
obligations include lease payments and software arrangements.
Results of Operations
The following table sets forth certain income statement captions as a percentage of total
revenues and the percentage increases or decreases in those items for the three months ended March
31, 2009 and 2008, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent Change |
|
|
% of Total Revenues |
|
in Dollar Amounts |
|
|
2009 |
|
2008 |
|
2009 vs. 2008 |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Electronic payment processing services |
|
|
56.8 |
% |
|
|
58.5 |
% |
|
|
(5.5 |
)% |
Merchant acquiring services |
|
|
16.0 |
|
|
|
14.7 |
|
|
|
6.1 |
|
Other services |
|
|
11.7 |
|
|
|
10.9 |
|
|
|
4.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursable items |
|
|
84.5 |
|
|
|
84.1 |
|
|
|
(2.2 |
) |
Reimbursable items |
|
|
15.5 |
|
|
|
15.9 |
|
|
|
(4.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
(2.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and other personnel expense |
|
|
35.3 |
|
|
|
34.6 |
|
|
|
(0.6 |
) |
Net technology and facilities expense |
|
|
18.1 |
|
|
|
17.2 |
|
|
|
2.4 |
|
Spin related expenses |
|
|
¾ |
|
|
|
1.6 |
|
|
|
(100.0 |
) |
Other operating expenses |
|
|
12.0 |
|
|
|
10.2 |
|
|
|
14.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses before reimbursable items |
|
|
65.4 |
|
|
|
63.6 |
|
|
|
0.1 |
|
Reimbursable items |
|
|
15.5 |
|
|
|
15.9 |
|
|
|
(4.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
80.9 |
|
|
|
79.5 |
|
|
|
(0.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
19.1 |
|
|
|
20.5 |
|
|
|
(9.3 |
) |
Nonoperating (expense) income |
|
|
(0.4 |
) |
|
|
0.3 |
|
|
nm |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
and equity in income of equity investments |
|
|
18.7 |
|
|
|
20.8 |
|
|
|
(12.3 |
) |
Income taxes |
|
|
6.7 |
|
|
|
7.8 |
|
|
|
(16.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before equity in
income of equity investments |
|
|
12.0 |
|
|
|
13.0 |
|
|
|
(9.6 |
) |
Equity in income of equity investments |
|
|
0.3 |
|
|
|
0.5 |
|
|
|
(51.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, net of tax |
|
|
12.3 |
|
|
|
13.5 |
|
|
|
(11.2 |
) |
(Loss) income from discontinued operations, net of tax |
|
|
(0.8 |
) |
|
|
0.1 |
|
|
nm |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
11.5 |
|
|
|
13.6 |
|
|
|
(17.5 |
) |
Net income attributable to the noncontrolling interests |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
(66.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to TSYS |
|
|
11.4 |
% |
|
|
13.5 |
% |
|
|
(17.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
The Company generates revenues from the fees that it charges customers for providing
transaction processing and other payment-related services. The Companys pricing for transactions
and services is complex. Each category of revenue has numerous fee components depending on the
types of transactions or services provided. TSYS reviews its pricing and implements pricing changes
on an ongoing basis. In addition, standard pricing varies among its regional businesses, and such
pricing can be customized further for customers through tiered pricing of various thresholds for
volume activity. TSYS revenues are based upon transactional information accumulated by its systems
or reported by its customers. The Companys revenue growth was moderated by currency translation
20
impact of foreign operations, as well as doing business in a competitive landscape. Of the
total revenue changes of 2.6% for the first quarter of 2009, the Company estimates revenues
decreased by a net 6.5% due to foreign currency exposure and pricing, and increased 3.9% for volume
changes.
Total revenues decreased $10.9 million, or 2.6%, during the three months ended March 31, 2009,
compared to the same period in 2008. The decrease in revenues for the three months ended March 31,
2009 includes a decrease of $22.6 million related to the effects of currency translation of its
foreign-based subsidiaries and branches. Excluding reimbursable items, revenues decreased $7.7
million, or 2.2%, during the three months ended March 31, 2009, compared to the same period in
2008.
International Revenues
TSYS provides services to its clients worldwide and plans to continue to expand its service
offerings internationally in the future.
Total revenues from clients domiciled outside the United States for the three months ended
March 31, 2009 and 2008 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
(in millions) |
|
2009 |
|
|
2008 |
|
|
Percent Change |
|
Europe |
|
$ |
57.8 |
|
|
|
58.9 |
|
|
|
(1.8 |
) |
Canada |
|
|
30.6 |
|
|
|
31.7 |
|
|
|
(3.2 |
) |
Japan |
|
|
11.1 |
|
|
|
7.4 |
|
|
|
49.2 |
|
Mexico |
|
|
2.2 |
|
|
|
3.7 |
|
|
|
(41.2 |
) |
Other |
|
|
6.8 |
|
|
|
5.9 |
|
|
|
14.4 |
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
108.5 |
|
|
|
107.6 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
Note: The Company has two equity investments located in Mexico and China that are accounted
for under the equity method of accounting, and therefore, TSYS does not include the revenues
of its equity investments in consolidated revenues.
The increase in revenues in 2009 from clients domiciled outside the United States was a result
of acquisitions, internal growth of existing clients, the increased use of value added products and
services, and the effects of currency translation. Revenues from clients in certain countries
decreased as a result of pricing compression and portfolio deconversions.
TSYS expects to continue to grow its international revenues in the future through
acquisitions, business expansion, new client signings and internal growth.
Value Added Products and Services
The Companys revenues are impacted by the use of optional value added products and services
of TSYS processing systems. Value added products and services are optional features to which each
client can choose to subscribe in order to potentially increase the financial performance of its
portfolio. Value added products and services include: risk management tools and techniques, such as
credit evaluation, fraud detection and prevention, and behavior analysis tools; revenue enhancement
tools and customer retention programs; and data warehouse services. These revenues can increase or
decrease from period to period as clients subscribe to or cancel these services. Value added
products and services are included primarily in electronic payment processing services revenue. For
the three months ended March 31, 2009 and 2008, value added products and services represented 11.7%
and 12.2%, respectively, of total revenues.
Major Customers
A significant amount of the Companys revenues is derived from long-term contracts with large
clients, including its major customers. TSYS derives revenues from providing various processing,
merchant acquiring and other services to these clients, including processing of consumer and
commercial accounts, as well as revenues for reimbursable items. Refer to Note 11 in the Notes to
Unaudited Condensed Consolidated Financial Statements for more information regarding major
customers. The loss of these clients, or any significant client, could have a material adverse
effect on the Companys financial position, results of operations and cash flows.
Revenues from major customers for the periods reported are primarily attributable to the North
America Services segment and Merchant Services segment.
21
AOF Data (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
2009 |
|
2008 |
|
Change |
At March 31, |
|
|
340.4 |
|
|
|
364.9 |
|
|
|
(6.7 |
) |
Year-to-date (YTD) Average |
|
|
349.9 |
|
|
|
370.2 |
|
|
|
(5.5 |
) |
AOF by Portfolio Type (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
Percent |
At March 31, |
|
AOF |
|
% |
|
AOF |
|
% |
|
Change |
Consumer |
|
|
186.5 |
|
|
|
54.8 |
|
|
|
211.4 |
|
|
|
57.9 |
|
|
|
(11.8 |
) |
Retail |
|
|
56.5 |
|
|
|
16.6 |
|
|
|
57.9 |
|
|
|
15.9 |
|
|
|
(2.6 |
) |
Stored value |
|
|
26.1 |
|
|
|
7.7 |
|
|
|
26.0 |
|
|
|
7.1 |
|
|
|
0.4 |
|
Commercial |
|
|
44.4 |
|
|
|
13.0 |
|
|
|
40.1 |
|
|
|
11.0 |
|
|
|
10.8 |
|
Government services |
|
|
21.7 |
|
|
|
6.4 |
|
|
|
24.1 |
|
|
|
6.6 |
|
|
|
(9.9 |
) |
Debit |
|
|
5.2 |
|
|
|
1.5 |
|
|
|
5.4 |
|
|
|
1.5 |
|
|
|
(3.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
340.4 |
|
|
|
100.0 |
|
|
|
364.9 |
|
|
|
100.0 |
|
|
|
(6.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOF by Geographic Area (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
Percent |
At March 31, |
|
AOF |
|
% |
|
AOF |
|
% |
|
Change |
Domestic |
|
|
252.0 |
|
|
|
74.0 |
|
|
|
283.4 |
|
|
|
77.7 |
|
|
|
(11.1 |
) |
International |
|
|
88.4 |
|
|
|
26.0 |
|
|
|
81.5 |
|
|
|
22.3 |
|
|
|
8.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
340.4 |
|
|
|
100.0 |
|
|
|
364.9 |
|
|
|
100.0 |
|
|
|
(6.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: The accounts on file distinction between domestic and international is based on the
geographic domicile of the Companys processing clients.
Activity in AOF (in millions)
|
|
|
|
|
|
|
|
|
|
|
March 2008 to |
|
March 2007 to |
|
|
March 2009 |
|
March 2008 |
Beginning balance |
|
|
364.9 |
|
|
|
422.7 |
|
Internal growth of existing clients |
|
|
32.0 |
|
|
|
53.9 |
|
New clients |
|
|
20.0 |
|
|
|
18.2 |
|
Purges/Sales |
|
|
(35.9 |
) |
|
|
(25.3 |
) |
Deconversions |
|
|
(40.6 |
) |
|
|
(104.6 |
) |
|
|
|
|
|
|
|
|
|
Ending balance |
|
|
340.4 |
|
|
|
364.9 |
|
|
|
|
|
|
|
|
|
|
Electronic Payment Processing Services
Electronic payment processing services revenues are generated primarily from charges based on
the number of accounts on file, transactions and authorizations processed, statements mailed, cards
embossed and mailed, and other processing services for cardholder accounts on file. Cardholder
accounts on file include active and inactive consumer credit, retail, debit, stored value,
government services and commercial card accounts. Revenues from electronic payment processing
services decreased $13.5 million, or 5.5%, for the three months ended March 31, 2009 compared to
the same period in 2008. The decrease for the three months is attributable to negative foreign
currency translation, the loss of clients through portfolio deconversions, as well as overall
economic conditions causing existing clients to be selective in the services being utilized,
partially offset by new clients.
Merchant Acquiring Services
Merchant acquiring services revenues are derived from providing processing services, acquiring
solutions, related systems and integrated support services to financial institutions and other
merchant acquirers. Revenues from merchant acquiring services include
22
processing all payment forms including credit, debit, prepaid, electronic benefit transfer and
electronic check for merchants of all sizes across a wide array of retail market segments. Merchant
acquiring services include authorization and capture of transactions; clearing and settlement of
transactions; information reporting services related to transactions; merchant billing services;
and point-of-sale equipment sales and service.
Revenues from merchant acquiring services are mainly generated by TSYS wholly owned
subsidiary TSYS Acquiring Solutions, L.L.C. (TSYS Acquiring) and majority owned subsidiary GP
Network Corporation. Merchant acquiring services revenues for the three months ended March 31, 2009
was $65.5 million compared to $61.7 million for the same period last year. The increase is
attributable to the addition of Infonox, internal growth of transactions of existing clients offset
by client deconversions and price compression.
TSYS Acquirings results are driven by the authorization and capture transactions processed at
the point-of-sale and clearing and settlement transactions. TSYS Acquirings authorization and
capture transactions are primarily through dial-up or Internet connectivity.
TSYS Acquiring also expanded its offerings during 2008 to include the Infonox solution set, a
host of new point-of-sale terminals and software applications including solutions for the health
care industry, PCI scanning and assessment services. These offerings compliment the existing
enhanced Dynamic Currency Conversion and multi-currency processing services, Spanish language
telephone processing, improved Internet-based research and portfolio reporting capabilities and new
Merchant Boarding and Maintenance capabilities.
Other Services
Revenues from other services consist primarily of revenues generated by TSYS wholly owned
subsidiaries not included in electronic payment processing services or merchant acquiring services,
as well as TSYS business process management services. Revenues from other services increased $2.1
million, or 4.6%, for the three months ended March 31, 2009 compared to the same period in 2008.
The increase is attributable to new call center business in the International Services segment.
Reimbursable Items
As a result of the FASBs Emerging Issues Task Force No. 01-14 (EITF No. 01-14), Income
Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred, the
Company has included reimbursements received for out-of-pocket expenses as revenues and expenses.
Reimbursable items decreased $3.2 million, or 4.8%, for the three months ended March 31, 2009
compared to the same period last year due to negative currency translation and less postage as a
result of client portfolio deconversions.
The majority of reimbursable items relates to the Companys domestic-based clients and is
primarily costs associated with postage. The Companys reimbursable items are impacted with changes
in postal rates and changes in the volumes of all mailing activities by its clients. The U.S.
Postal Service announced that the price of a first-class stamp will rise to $0.44 on May 11, 2009.
On May 12, 2008, the U.S. Postage Service increased the price of a first-class stamp $0.01 to
$0.42.
Operating Expenses
Total expenses decreased 0.9% for the three months ended March 31, 2009 compared to the same
period in 2008. The fluctuation in expense includes a decrease of $19.3 million for the three
months ended March 31, 2009 related to the effects of currency translation of its foreign-based
subsidiaries, branches and divisions. Excluding reimbursable items, total expenses increased 0.1%
for the three months ended March 31, 2009 compared to the same period in 2008. The fluctuation in
operating expenses is attributable to changes in each of the expense categories as described below.
Salaries and Other Personnel Expense
Summarized below are the major components of salaries and other personnel expense for the
three months ended March 31:
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
Change |
|
Salaries |
|
$ |
111,887 |
|
|
|
104,091 |
|
|
|
7.5 |
% |
Employee benefits |
|
|
23,622 |
|
|
|
29,043 |
|
|
|
(18.7 |
) |
Nonemployee wages |
|
|
12,250 |
|
|
|
13,738 |
|
|
|
(10.8 |
) |
Share-based compensation |
|
|
5,268 |
|
|
|
3,715 |
|
|
|
41.8 |
|
Other |
|
|
2,374 |
|
|
|
3,500 |
|
|
|
(32.2 |
) |
Less capitalized expenses |
|
|
(11,059 |
) |
|
|
(8,862 |
) |
|
|
24.8 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
144,342 |
|
|
|
145,225 |
|
|
|
(0.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Salaries and other personnel expense decreased $0.9 million, or 0.6%, for the three months
ended March 31, 2009 compared to the same period in 2008. The change in salaries and other
personnel expense is associated with the normal salary increases and related benefits, offset by
the higher level of employment costs capitalized as software development and contract acquisition
costs. Salaries and other personnel expense include the accrual for performance-based incentive
benefits, which includes bonuses, profit sharing and employer 401(k) expenses. For the three months
ended March 31, 2008, the Company accrued $4.5 million for performance-based incentives.
Prior to the spin-off by Synovus Financial Corp. (Synovus) to its shareholders of all the
shares of TSYS held by Synovus, Synovus provided certain administrative services, such as human
resources, legal, security and tax preparation and compliance, to TSYS in exchange for a management
fee, which is included in other operating expenses, to cover TSYS pro rata share of services. With
the spin-off, TSYS began recruiting employees and assumed these functions during 2008. During the
2008 transition period, TSYS continued to utilize Synovus administrative services until these
functions were operational within TSYS in exchange for an adjusted management fee based on
utilization. As it assumed these functions, salaries and other personnel expenses increased, while
other operating expenses decreased. TSYS headcount increased by approximately 60 people as these
administrative services transitioned to TSYS.
Capitalized salaries and personnel expenses increased $2.2 million for the three months ended
March 31, 2009 as compared to the same period in 2008, as a result of increased client conversion
and implementation activity in the International Services segment.
The Companys salaries and other personnel expense is greatly influenced by the number of
employees. Below is a summary of the Companys employee data:
Employee Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
(FTE) |
|
2009 |
|
2008 |
|
Change |
At March 31, |
|
|
8,068 |
|
|
|
7,547 |
|
|
|
6.9 |
% |
YTD Average |
|
|
8,061 |
|
|
|
7,245 |
|
|
|
11.3 |
|
The majority of the increase in the number of employees in 2009 as compared to 2008 is a
result of the expansion of TSYS international business.
Share-based compensation expenses include the impact of expensing the fair value of stock
options, as well as expenses associated with nonvested shares. For the three months ended March 31,
2009, share-based compensation was $5.3 million, compared to $3.7 million for the same period in
2008.
Net Technology and Facilities Expense
Summarized below are the major components of net technology and facilities expense for the
three months ended March 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
Change |
|
Depreciation and amortization |
|
$ |
26,413 |
|
|
|
28,436 |
|
|
|
(7.1 |
)% |
Equipment and software rentals |
|
|
22,230 |
|
|
|
20,478 |
|
|
|
8.6 |
|
Repairs and maintenance |
|
|
13,906 |
|
|
|
12,934 |
|
|
|
7.5 |
|
Other |
|
|
11,437 |
|
|
|
10,407 |
|
|
|
9.9 |
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
73,986 |
|
|
|
72,255 |
|
|
|
2.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
24
Net technology and facilities expense increased $1.7 million, or 2.4%, for the three months
ended March 31, 2009 over the same period in 2008.
Repairs and maintenance increased for the three months ended March 31, 2009, as compared to
the same period in 2008, as a result of support for additional software licenses and equipment.
Spin Related Expenses
Spin related expenses consist of expenses associated with the separation from Synovus. In
July 2007, Synovus Board of Directors appointed a special committee of independent directors to
make a recommendation with respect to whether to distribute Synovus ownership interest in TSYS to
Synovus shareholders. As a result, the TSYS Board of Directors formed a special committee of
independent TSYS directors to consider the terms of any proposed spin-off by Synovus of its
ownership interest in TSYS, including the size of the pre-spin cash dividend. TSYS incurred
expenses associated with advisory and legal services in connection with the spin assessment. As the
spin-off was finalized and completed, TSYS also incurred expenses for the incremental fair value
associated with converting Synovus stock options held by TSYS employees to TSYS options.
Other Operating Expenses
Summarized below are the major components of other operating expenses for the three months
ended March 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
Change |
|
Third-party data processing services |
|
$ |
11,134 |
|
|
|
10,125 |
|
|
|
10.0 |
% |
Professional advisory services |
|
|
7,524 |
|
|
|
3,337 |
|
|
|
125.5 |
|
Supplies and stationery |
|
|
5,975 |
|
|
|
5,336 |
|
|
|
12.0 |
|
Travel and business development |
|
|
5,885 |
|
|
|
7,247 |
|
|
|
(18.8 |
) |
Amortization of conversion costs |
|
|
4,019 |
|
|
|
3,458 |
|
|
|
16.2 |
|
Service level quality expenses |
|
|
1,537 |
|
|
|
244 |
|
|
nm |
|
Amortization of acquisition intangibles |
|
|
824 |
|
|
|
659 |
|
|
|
25.1 |
|
Bad debt (recoveries) expense |
|
|
180 |
|
|
|
(1,578 |
) |
|
nm |
|
Management fees |
|
|
37 |
|
|
|
36 |
|
|
|
3.1 |
|
Other |
|
|
11,889 |
|
|
|
13,795 |
|
|
|
(13.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
49,004 |
|
|
|
42,659 |
|
|
|
14.9 |
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses include, among other things, amortization of conversion costs, costs
associated with delivering merchant services, and professional advisory fees. Other operating
expenses also include charges for service level quality expenses, contractual commitments and bad
debt expense. As described in the Critical Accounting Policies section set forth in Item 7:
Managements Discussion and Analysis of Financial Condition and Results of Operations in the
Companys 2008 Form 10-K, managements evaluation of the adequacy of its transaction processing
reserves and allowance for doubtful accounts is based on a formal analysis which assesses the
probability of losses related to contractual contingencies, processing errors and uncollectible
accounts. Increases and decreases in transaction processing provisions and charges for bad debt
expense are reflected in other operating expenses.
Other operating expenses for the three months ended March 31, 2009 increased $6.3 million, or
14.9% as compared to the same period in 2008. The increase in operating expenses is primarily the
result of the use of more professional advisory services, increased service level quality expenses
and a recovery of a bad debt expense in 2008. The increase in the amount of service level quality
expenses is associated with changes in estimates for processing errors and contractual
contingencies.
Operating Income
Operating income decreased 9.3% for the three months ended March 31, 2009 over the same period
in 2008. The Companys operating profit margin for the three months ended March 31, 2009 was 19.1%
compared to 20.5% for the same period last year. TSYS operating margin decreased for the three
months ended March 31, 2009, as compared to the same period in 2008, as the result of the loss of
revenues associated with deconverted portfolios.
25
Nonoperating Income (Expense)
Interest income for the three months ended March 31, 2009 was $0.8 million, a decrease of $1.8
million, compared to $2.6 million for the same period in 2008. The decrease in interest income is
primarily attributable to the decline in interest rates.
Interest expense for the three months ended March 31, 2009 was $1.1 million, a decrease of
$2.2 million compared to $3.3 million for the same period in 2008. The decrease in interest expense
in 2009 compared to 2008 relates to the decline in interest rates.
For the three months ended March 31, 2009 and 2008, the Company recorded a translation loss of
approximately $0.9 million and a translation gain of approximately $1.9 million, respectively,
related to intercompany loans and foreign denominated balance sheet accounts.
Occasionally, the Company will provide financing to its subsidiaries in the form of an
intercompany loan, which is required to be repaid in U.S. dollars. For its subsidiaries whose
functional currency is something other than the U.S. dollar, the translated balance of the
financing (liability) is adjusted upward or downward to match the U.S.-dollar obligation
(receivable) on the Companys financial statements. The upward or downward adjustment is recorded
as a gain or loss on foreign currency translation.
The Company records foreign currency translation adjustments on foreign-denominated balance
sheet accounts. The Company maintains several cash accounts denominated in foreign currencies,
primarily in Euros and British Pounds Sterling. As the Company translates the foreign-denominated
cash balances into U.S. dollars, the translated cash balance is adjusted upward or downward
depending upon the foreign currency exchange movements. The upward or downward adjustment is
recorded as a gain or loss on foreign currency translation in the Companys statements of income.
As those cash accounts have increased, the upward or downward adjustments have increased. The
Company recorded a net translation loss of approximately $0.9 million for the three months ended
March 31, 2009 related to the translation of foreign denominated balance sheet accounts, most of
which were cash.
The balance of the Companys foreign-denominated cash accounts subject to risk of translation
gains or losses at March 31, 2009 was approximately $11.1 million, the majority of which is
denominated in Euros.
Income Taxes
TSYS effective income tax rate for the three months ended March 31, 2009 was 35.6%, compared
to 36.9% for the same period in 2008. The calculation of the effective tax rate is income taxes
plus income taxes associated with equity income divided by TSYS pretax income adjusted for
minority interests in consolidated subsidiaries net income and equity pre-tax earnings of its
equity investments. Refer to Note 10 in the Notes to Unaudited Condensed Consolidated Financial
Statements for more information on income taxes.
In the normal course of business, TSYS is subject to examinations from various tax
authorities. These examinations may alter the timing or amount of taxable income or deductions or
the allocation of income among tax jurisdictions.
TSYS continually monitors and evaluates the potential impact of current events and
circumstances on the estimates and assumptions used in the analysis of its income tax positions,
and, accordingly, TSYS effective tax rate may fluctuate in the future.
Equity in Income of Equity Investments
The Company has two equity investments located in Mexico and China that are accounted for
under the equity method of accounting. TSYS share of income from its equity in equity investments
was $1.0 million and $2.2 million for the three months ended March 31, 2009 and 2008, respectively.
(Loss)/Income from Discontinued Operations, net of tax
Loss from discontinued operations, net of tax for the three months ended March 31, 2009
increased $3.6 million, compared to the same period in 2008 mainly as the result of a one-time
expense related to resolution of a client issue at TDM.
Net Income Attributable to TSYS
Net income attributable to TSYS for the three months ended March 31, 2009 decreased 17.8%, or
$10.1 million, to $46.5 million, or basic and diluted earnings per share of $0.24, compared to
$56.6 million, or basic and diluted earnings per share of $0.29, for the same period in 2008.
26
Net Profit Margin
The Companys net profit margin for the three months ended March 31, 2009 was 11.4%, compared
to 13.5% for the same period last year. TSYS profit margin is impacted by the consolidation of
majority-owned subsidiaries. The Company recognizes only its share of net profits from these
entities, while consolidating all their revenues, which has the impact of lowering overall net
profit margins. TSYS net profit margin decreased for the quarter as the result of increased
interest expense due to long-term debt and the loss of revenues associated with deconverted
portfolios.
Operating Segments
North America Services
North America Services segment provides electronic payment processing and related services to
clients primarily based in North America. This segment has three major customers.
Below is a summary of the North America Services segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
(in millions) |
|
2009 |
|
2008 |
|
Percent Change |
Total revenues |
|
$ |
260.9 |
|
|
|
279.7 |
|
|
|
(6.7 |
)% |
Operating income |
|
|
58.0 |
|
|
|
70.5 |
|
|
|
(17.7 |
) |
Accounts on file (AOF) |
|
|
303.2 |
|
|
|
334.1 |
|
|
|
(9.2 |
) |
Transactions |
|
|
1,481.0 |
|
|
|
1,589.6 |
|
|
|
(6.8 |
) |
The decline in total segment revenues for the three months ended March 31, 2009, as compared
to the same period in 2008, is the result of a decrease in revenues associated with client
portfolio deconversions, as well as overall economic conditions causing existing clients to be
selective in the services being utilized.
International Services
International Services segment provides electronic payment processing and related services to
clients primarily based outside the North America region. This segment has one major customer.
Below is a summary of the International Services segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
(in millions) |
|
2009 |
|
2008 |
|
Percent Change |
Total revenues |
|
$ |
73.0 |
|
|
|
69.4 |
|
|
|
5.2 |
% |
Operating income |
|
|
6.0 |
|
|
|
7.4 |
|
|
|
(18.9 |
) |
AOF |
|
|
37.2 |
|
|
|
30.9 |
|
|
|
20.4 |
|
Transactions |
|
|
247.9 |
|
|
|
217.4 |
|
|
|
14.0 |
|
The increase in total segment revenues for the three months ended March 31, 2009, as compared
to the same period in 2008, is the result of revenues associated with new clients as a result of
portfolio conversions, partially offset by negative foreign currency translation and overall
economic conditions causing existing clients to be selective in the services being utilized.
Merchant Services
Merchant Services segment provides merchant processing and related services to clients
primarily based in the United States. This segment has one major customer.
Below is a summary of the Merchant Services segment:
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
(in millions) |
|
2009 |
|
|
2008 |
|
|
Percent Change |
|
Total revenues |
|
$ |
75.1 |
|
|
|
70.8 |
|
|
|
6.1 |
% |
Operating income |
|
|
14.1 |
|
|
|
15.1 |
|
|
|
(6.6 |
) |
Point-of-sale transactions |
|
|
1,226.1 |
|
|
|
1,218.0 |
|
|
|
0.7 |
|
The increase in total segment revenues is the result of the acquisition of Infonox, a new
client and increase in processing volumes.
Non-GAAP Financial Measures
The non-generally accepted accounting principles (GAAP) financial measure of reimbursable
items presented by TSYS is utilized by management to better understand and assess TSYS operating
results and financial performance. Management evaluates the Companys operating performance based
upon operating and net profit margins excluding reimbursable items, a non-GAAP measure. TSYS also
uses this non-GAAP financial measure to evaluate and assess TSYS financial performance against
budget. TSYS believes that this non-GAAP financial measure is important to enable investors to
understand and evaluate its ongoing operating results.
TSYS believes that this non-GAAP financial measure is a representative measure of comparative
financial performance that reflect the economic substance of TSYS current and ongoing business
operations. Although non-GAAP financial measures are often used to measure TSYS operating results
and assess its financial performance, they are not necessarily comparable to similarly titled
captions of other companies due to potential inconsistencies in the method of calculation.
TSYS believes that its use of this non-GAAP financial measure provides investors with the same
key financial performance indicators that are utilized by management to assess TSYS operating
results, to evaluate the business and to make operational decisions on a prospective, going-forward
basis. Hence, management provides disclosure of non-GAAP financial measures in order to allow
shareholders and potential investors an opportunity to see TSYS as viewed by management, assess
TSYS with some of the same tools that management utilizes internally and compare such information
with prior periods.
Profit Margins and Reimbursable Items
Management believes that operating and net profit margins excluding reimbursable items are
more useful because reimbursable items do not impact profitability as the Company receives
reimbursement for expenses incurred on behalf of its clients. TSYS believes that the presentation
of GAAP financial measures alone would not provide its shareholders and investors with the ability
to appropriately analyze its ongoing operational results, and therefore expected future results.
TSYS therefore believes that inclusion of this non-GAAP financial measure provides investors with
more information to help them better understand its financial statements just as management
utilizes these non-GAAP financial measures to better understand the business, manage its budget and
allocate its resources.
Below is the reconciliation between reported margins and adjusted margins excluding
reimbursable items for the three months ended March 31, 2009 and 2008, respectively:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
(in thousands) |
|
2009 |
|
|
2008 |
|
Operating income |
|
$ |
78,114 |
|
|
|
86,096 |
|
|
|
|
|
|
|
|
Net income attributable to TSYS |
|
$ |
46,526 |
|
|
|
56,614 |
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
408,933 |
|
|
|
419,826 |
|
|
|
|
|
|
|
|
Operating margin (as reported) |
|
|
19.1 |
% |
|
|
20.5 |
% |
|
|
|
|
|
|
|
Net profit margin (as reported) |
|
|
11.4 |
% |
|
|
13.5 |
% |
|
|
|
|
|
|
|
Revenue before reimbursable items |
|
$ |
345,446 |
|
|
|
353,130 |
|
|
|
|
|
|
|
|
Adjusted operating margin |
|
|
22.6 |
% |
|
|
24.4 |
% |
|
|
|
|
|
|
|
Adjusted net profit margin |
|
|
13.5 |
% |
|
|
16.0 |
% |
|
|
|
|
|
|
|
Projected Outlook for 2009
TSYS expects its 2009 net income to decline by 13%-11% as compared to 2008, based on the
following assumptions: (1) the sale of TDM will close in the second quarter; (2) there will be no
significant movements in LIBOR and TSYS will not make any significant draws on the remaining
balance of the revolving credit facility; (3) anticipated levels in employment, technology and
other
28
expenses will be accomplished; (4) there will be no significant movement in foreign currency
exchange rates related to TSYS business subsequent to March 31, 2009; (5) TSYS will not incur
significant expenses associated with the conversion of new large clients or acquisitions, other
than those already identified, or any significant impairment of goodwill or other intangibles; (6)
there will be no significant portfolio deconversions other than as previously announced; and (7)
estimated total revenues will decline by 5%-3%.
Financial Position, Liquidity and Capital Resources
The Condensed Consolidated Statements of Cash Flows detail the Companys cash flows from
operating, investing and financing activities. TSYS primary method of funding its operations and
growth has been cash generated from current operations and the use of leases. TSYS has occasionally
used borrowed funds to supplement financing of capital expenditures, acquisitions and most recently
the spin-off.
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
(in thousands) |
|
2009 |
|
|
2008 |
|
Net income attributable to TSYS |
|
$ |
46,526 |
|
|
|
56,614 |
|
Depreciation and amortization |
|
|
39,850 |
|
|
|
39,229 |
|
Other noncash items and charges, net |
|
|
4,411 |
|
|
|
(337 |
) |
Net change in current and long-term assets and current and long-term liabilities |
|
|
7,883 |
|
|
|
4,493 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
98,670 |
|
|
|
99,999 |
|
|
|
|
|
|
|
|
TSYS main source of funds is derived from operating activities, specifically net income.
During the three months ended March 31, 2009, the Company generated $98.7 million in cash from
operating activities compared with $100.0 million for the same period last year. The decrease in
2009 in net cash provided by operating activities was primarily the result of TSYS decreased net
income.
Net change in current and long-term assets and current and long-term liabilities include
accounts receivable, prepaid expenses, other current assets and other assets, accounts payable,
accrued salaries and employee benefits, other current liabilities and other liabilities. The change
in accounts receivable at March 31, 2009, as compared to December 31, 2008, is the result of timing
of collections compared to billings. The change in accounts payable and other liabilities for the
same period is the result of the timing of payments, funding of performance-based incentives and
payments of vendor invoices.
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
(in thousands) |
|
2009 |
|
|
2008 |
|
Purchases of property and equipment, net |
|
$ |
(2,181 |
) |
|
|
(14,350 |
) |
Additions to licensed computer software from vendors |
|
|
(5,932 |
) |
|
|
(2,351 |
) |
Additions to internally developed computer software |
|
|
(5,828 |
) |
|
|
(2,413 |
) |
Cash used in acquisitions, net of cash acquired |
|
|
(205 |
) |
|
|
¾ |
|
Additions to contract acquisition costs |
|
|
(10,992 |
) |
|
|
(17,168 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
$ |
(25,138 |
) |
|
|
(36,282 |
) |
|
|
|
|
|
|
|
The major uses of cash for investing activities have been the addition of property and
equipment, primarily computer equipment, the purchase of licensed computer software and internal
development of computer software, investments in contract acquisition costs associated with
obtaining and servicing new or existing clients, and business acquisitions. The Company used $25.1
million in cash for investing activities for the three months ended March 31, 2009, compared to
$36.3 million for the same period in 2008. The major uses of cash for investing activities in 2009
was for the additions to contract acquisition costs, licensed computer software from vendors and
internally developed computer software. The major uses of cash for investing activities in 2008 was
for the additions of equipment and contract acquisition costs.
Contract Acquisition Costs
TSYS makes cash payments for processing rights, third-party development costs and other direct
salary-related costs in connection with converting new customers to the Companys processing
systems. The Companys investments in contract acquisition costs were $11.0 million for the three
months ended March 31, 2009, compared to $17.2 million for the three months ended March 31, 2008.
The
29
Company had cash payments for processing rights of approximately $2.8 million during the three
months ended March 31, 2009, compared to $7.0 million for the same period last year.
Conversion cost additions were $8.2 million and $10.2 million for the three months ended March
31, 2009 and 2008, respectively. The decrease in the amount of conversion cost additions for 2009,
as compared to 2008, is the result of the timing of conversion activity in 2009 versus 2008.
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
(in thousands) |
|
2009 |
|
|
2008 |
|
Dividends paid on common stock |
|
$ |
(13,779 |
) |
|
|
(13,858 |
) |
Proceeds from borrowings of long-term debt |
|
|
2,809 |
|
|
|
|
|
Repurchase of common stock |
|
|
(329 |
) |
|
|
(11,369 |
) |
Principal payments on long-term debt borrowings and capital lease obligations |
|
|
(3,622 |
) |
|
|
(4,976 |
) |
Other |
|
|
¾ |
|
|
|
126 |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
$ |
(14,921 |
) |
|
|
(30,077 |
) |
|
|
|
|
|
|
|
The major use of cash for financing activities has been the payment of dividends and
repurchase of common stock. The main source of cash from financing activities has been the
occasional use of borrowed funds and the exercise of stock options. Net cash used in financing
activities for the three months ended March 31, 2009 was $14.9 million mainly as a result of the
payment of dividends. Net cash used in financing activities for the three months ended March 31,
2008 was $30.1 million mainly as a result of the payment of dividends and the repurchase of common
stock.
Borrowings
On October 31, 2008, the Companys International Services segment obtained a credit agreement
from a third-party to borrow up to approximately ¥2.0 billion, or $21 million, in a Yen-denominated
three year loan to finance activities in Japan. The rate is LIBOR plus 80 basis points. The
Company initially made a draw down of ¥1.5 billion, or approximately $15.1 million. In January
2009, the Company made another draw down of ¥250 million, or approximately $2.8 million.
Stock Repurchase Plan
On April 20, 2006, TSYS announced that its Board had approved a stock repurchase plan to
purchase up to 2 million shares, which at the time represented slightly more than five percent of
the shares of TSYS stock held by shareholders other than Synovus. The shares were to be purchased
from time to time over a two year period and would depend on various factors including price,
market conditions, acquisitions and the general financial position of TSYS. Repurchased shares are
to be used for general corporate purposes.
With the completion of the spin-off, the TSYS Board of Directors extended to April 2010 TSYS
current share repurchase program that was set to expire in April 2008 and increased the number of
shares that may be repurchased under the plan from 2 million to 10 million.
The Company has approximately 6,928,000 shares remaining that could be repurchased under the
stock repurchase plan.
Dividends
Dividends on common stock of $13.8 million were paid during the three months ended March 31,
2009 compared to $13.9 million paid during the three months ended March 31, 2008.
Significant Noncash Transactions
Refer to Note 12 of the Notes to Unaudited Condensed Consolidated Financial Statements for
more information about supplementary cash flow information.
30
Foreign Exchange
TSYS operates internationally and is subject to potentially adverse movements in foreign
currency exchange rates. Since December 2000, TSYS has not entered into foreign exchange forward
contracts to reduce its exposure to foreign currency rate changes. TSYS continues to analyze
potential hedging instruments to safeguard it from significant foreign currency translation risks.
Impact of Inflation
Although the impact of inflation on its operations cannot be precisely determined, the Company
believes that by controlling its operating expenses, and by taking advantage of more efficient
computer hardware and software, it can minimize the impact of inflation.
Working Capital
TSYS may seek additional external sources of capital in the future. The form of any such
financing will vary depending upon prevailing market and other conditions and may include
short-term or long-term borrowings from financial institutions or the issuance of additional equity
and/or debt securities such as industrial revenue bonds. However, there can be no assurance that
funds will be available on terms acceptable to TSYS. Management expects that TSYS will continue to
be able to fund a significant portion of its capital expenditure needs through internally generated
cash in the future, as evidenced by TSYS current ratio of 2.7:1. At March 31, 2009, TSYS had
working capital of $423.7 million compared to $395.5 million at December 31, 2008.
Legal Proceedings
The Company is subject to various legal proceedings and claims and is also subject to
information requests, inquiries and investigations arising out of the ordinary conduct of its
business. In the opinion of management, based in part upon the advice of legal counsel, all matters
are believed to be adequately covered by insurance, or if not covered, are believed to be without
merit or are of such kind or involve such amounts that would not have a material adverse effect on
the financial position, results of operations or cash flows of the Company if disposed of
unfavorably. The Company establishes reserves for litigation and similar matters when those matters
present loss contingencies that TSYS determines to be both probable and reasonably estimable in
accordance with Statement of Financial Accounting Standards No. 5 (SFAS No. 5), Accounting for
Contingencies.
Recent Accounting Pronouncements
The Companys Annual Report on Form 10-K for the year ended December 31, 2008, as filed with
the SEC, contains a discussion of recent accounting pronouncements and the expected impact on the
Companys financial statements.
Forward-Looking Statements
Certain statements contained in this filing which are not statements of historical fact
constitute forward-looking statements within the meaning of the Private Securities Litigation
Reform Act (the Act). These forward-looking statements include, among others: (i) TSYS plans to
continue to expand its service offerings internationally and expectation that international
revenues will continue to grow; (ii) TSYS expectation that it will maintain the card processing
functions of Capital One for at least five years; (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 expected decline in net income for 2009; (v) TSYS belief with respect to
lawsuits, claims and other complaints; and (vi) TSYS expectation with respect to certain tax
matters; and the assumptions underlying such statements, including, with respect to TSYS expected
decline in net income for 2009: (a) the sale of TDM will close in the second quarter; (b) there
will be no significant movements in LIBOR and TSYS will not make any significant draws on its
revolving credit facility; (c) estimated total revenues will decline by 5% to 3% in 2009; (d) there
will be no significant movement in foreign currency exchange rates related to TSYS business
subsequent to March 31, 2009; (e) anticipated levels in employment, technology and other expenses
will be accomplished; (f) TSYS will not incur significant expenses associated with the conversion
of new large clients and/or acquisitions, other than as previously identified, or any significant
impairment of goodwill or other intangibles; and (g) there will be no significant portfolio
deconversions during the year other than as previously identified. 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,
31
targeted, estimates, projects, plans, may, could, should, would, and similar
expressions are intended to identify forward-looking statements but are not the exclusive means of
identifying these statements.
These statements are based upon the current beliefs and expectations of TSYS management and
are subject to significant risks and uncertainties. Actual results may differ materially from those
contemplated by the forward-looking statements. A number of important factors could cause actual
results to differ materially from those contemplated by our forward looking statements. Many of
these factors are beyond TSYS ability to control or predict. These factors include, but are not
limited to:
|
|
|
revenues that are lower than anticipated; |
|
|
|
|
expenses associated with the spin-off are higher than expected; |
|
|
|
|
movements in LIBOR are greater than expected and draws on the revolving credit facility
are greater than expected; |
|
|
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|
TSYS incurs expenses associated with the signing of a significant client; |
|
|
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|
internal growth rates for TSYS existing clients are lower than anticipated; |
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|
TSYS does not convert and deconvert clients portfolios as scheduled; |
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|
adverse developments with respect to foreign currency exchange rates; |
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|
adverse developments with respect to entering into contracts with new clients and
retaining current clients; |
|
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|
|
continued consolidation and turmoil in the financial services industry, including the
merger of TSYS clients with entities that are not TSYS processing clients, the sale of
portfolios by TSYS clients to entities that are not TSYS processing clients and the seizure
by federal banking regulators of TSYS clients; |
|
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|
TSYS is unable to control expenses and increase market share, both domestically and
internationally; |
|
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|
adverse developments with respect to the credit card industry in general, including a
decline in the use of cards as a payment mechanism; |
|
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|
TSYS is unable to successfully manage any impact from slowing economic conditions or
consumer spending; |
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the impact of potential and completed acquisitions, including the costs associated
therewith and their being more difficult to integrate than anticipated; |
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the costs and effects of litigation, investigations or similar matters or adverse facts
and developments relating thereto; |
|
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the impact of the application of and/or changes in accounting principles; |
|
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|
TSYS inability to timely, successfully and cost-effectively improve and implement
processing systems to provide new products, increased functionality and increased
efficiencies; |
|
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|
TSYS inability to anticipate and respond to technological changes, particularly with
respect to e-commerce; |
|
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|
changes occur in laws, regulations, credit card associations rules or other industry
standards affecting TSYS business which require significant product redevelopment efforts
or reduce the market for or value of its products; |
|
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|
successfully managing the potential both for patent protection and patent liability in
the context of rapidly developing legal framework for expansive patent protection; |
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|
no material breach of security of any of our systems; |
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|
overall market conditions; |
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|
the loss of a major supplier; |
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|
the impact on TSYS business, as well as on the risks set forth above, of various
domestic or international military or terrorist activities or conflicts; |
|
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the sale of TDM does not take place as expected; and |
|
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|
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.
32
TOTAL SYSTEM SERVICES, INC.
Item 3 Quantitative and Qualitative Disclosures About Market Risk
Foreign Exchange Risk
The Company is exposed to foreign exchange risk because it has assets, liabilities, revenues
and expenses denominated in foreign currencies other than the U.S. dollar. These currencies are
translated into U.S. dollars at current exchange rates, except for revenues, costs and expenses and
net income, which are translated at the average exchange rate for each reporting period. Net
exchange gains or losses resulting from the translation of assets and liabilities of foreign
operations, net of tax, are accumulated in a separate section of shareholders equity entitled
accumulated other comprehensive income, net. The following represents the amount of other
comprehensive (loss) gain for the three months ended March 31, 2009 and 2008, respectively:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
(in millions) |
|
2009 |
|
2008 |
Other comprehensive (loss) gain |
|
$ |
(3.8 |
) |
|
|
4.4 |
|
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 our foreign operations in
U.S. dollars at March 31, 2009:
|
|
|
|
|
(in millions) |
|
March 31, 2009 |
Europe |
|
$ |
138.6 |
|
China |
|
|
66.7 |
|
Mexico |
|
|
8.6 |
|
Japan |
|
|
2.6 |
|
Canada |
|
|
0.7 |
|
Other |
|
|
17.7 |
|
TSYS records foreign currency translation adjustments associated with other balance sheet
accounts. The Company maintains several cash accounts denominated in foreign currencies, primarily
in Euros and British Pounds Sterling. As TSYS translates the foreign-denominated cash balances into
U.S. dollars, the translated cash balance is adjusted upward or downward depending upon the foreign
currency exchange movements. The upward or downward adjustment is recorded as a gain or loss on
foreign currency translation in the statements of income. As those cash accounts have increased,
the upward or downward adjustments have increased. TSYS recorded a translation loss of
approximately $0.9 million for the three months ended March 31, 2009 relating to the translation of
cash and other balance sheet accounts. The balance of the Companys foreign-denominated cash
accounts subject to risk of translation gains or losses at March 31, 2009 was approximately $11.1
million, the majority of which is denominated in Euros.
The Company provides financing to its international operation in Europe through an
intercompany loan that requires the operation to repay the financing in U.S. dollars. The
functional currency of the operation is the respective local currency. As it translates the foreign
currency denominated financial statements into U.S. dollars, the translated balance of the
financing (liability) is adjusted upward or downward to match the U.S. dollar obligation
(receivable) on its financial statements. The upward or downward adjustment is recorded as a gain
or loss on foreign currency translation.
The net asset account balance subject to foreign currency exchange rates between the local
currencies and the U.S. dollar at March 31, 2009 was $11.1 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 $11.1 million at March 31, 2009.
|
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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 |
|
$ |
111 |
|
|
|
553 |
|
|
|
1,106 |
|
|
|
(111 |
) |
|
|
(553 |
) |
|
|
(1,106 |
) |
33
Interest Rate Risk
TSYS is also exposed to interest rate risk associated with the investing of available cash and
the use of debt. TSYS invests available cash in conservative short-term instruments and is
primarily subject to changes in the short-term interest rates.
On December 21, 2007, the Company entered into a Credit Agreement with Bank of America N.A.,
as Administrative Agent, The Royal Bank of Scotland plc, as Syndication Agent, and the other
lenders. The Credit Agreement provides for a $168 million unsecured five year term loan to the
Company and a $252 million five year unsecured revolving credit facility. The principal balance of
loans outstanding under the credit facility bears interest at a rate of London Interbank Offered
Rate (LIBOR) plus an applicable margin of 0.60%. Interest is paid on the last date of each interest
period; however, if the period exceeds three months, interest is paid every three months after the
beginning of such interest period.
On October 31, 2008, the Companys International Services segment obtained a credit agreement
from a third-party to borrow up to approximately ¥2.0 billion, or $21 million, in a Yen-denominated
three year loan to finance activities in Japan. The rate is LIBOR plus 80 basis points. The
Company initially made a draw down of ¥1.5 billion, or approximately $15.1 million. In January
2009, the Company made another draw down of ¥250 million, or approximately $2.8 million.
In connection with the formation of TSYS Managed Services EMEA Ltd. (TSYS Managed Services),
both TSYS and Merchants agreed to provide long-term financing arrangements to TSYS Managed Services
to fund future growth and expansion. At the end of March 2009, the balance of the loan from
Merchants was approximately £2.0 million, or approximately $2.9 million, payable in total in five
years, at an interest rate of LIBOR plus 2%, with interest payable quarterly.
In June 2008, TSYS Managed Services borrowed £1.3 million, or approximately $2.5 million,
through a short-term note. At the end of March 2009, the balance of the loan was approximately £1.3
million, or approximately $1.8 million. The interest rate on the note is LIBOR plus 2%, with
interest payable quarterly. The term of the note is eleven months.
34
TOTAL SYSTEM SERVICES, INC.
Item 4 Controls and Procedures
We have evaluated the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this quarterly report as required by Rule 13a-15
of the Securities Exchange Act of 1934, as amended (Exchange Act). This evaluation was carried
out under the supervision and with the participation of our management, including our chief
executive officer and chief financial officer. Based on this evaluation, the chief executive
officer and chief financial officer concluded that as of March 31, 2009, TSYS disclosure controls
and procedures were designed and effective to ensure that the information required to be disclosed
by TSYS in reports that it files under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms and also designed 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.
35
TOTAL SYSTEM SERVICES, INC.
Part II Other Information
Item 1A Risk Factors
In addition to the other information set forth in this report, one should carefully consider
the factors discussed in Part I, Item 1A. Risk Factors in the Companys Annual Report on Form
10-K for the year ended December 31, 2008, which could materially affect the Companys financial
position, results of operations or cash flows. The risks described in the Companys Annual Report
on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not
currently known to the Company or that the Company currently deems to be immaterial also may
materially adversely affect the Companys financial position, results of operations or cash flows.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth information regarding the Companys purchases of its common
stock on a monthly basis during the three months ended March 31, 2009:
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|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Maximum Number of |
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
|
Shares That May Yet |
|
|
|
|
|
|
|
|
|
|
|
Part of Publicly |
|
|
Be Purchased |
|
(in thousands, except per share data) |
|
Total Number of |
|
|
Average Price |
|
|
Announced Plans |
|
|
Under the Plans |
|
Period |
|
Shares Purchased |
|
|
Paid per Share |
|
|
or Programs |
|
|
or Programs |
|
January 2009 |
|
|
25 |
(1) |
|
$ |
12.91 |
|
|
|
3,072 |
|
|
|
6,928 |
|
February 2009 |
|
|
|
|
|
|
|
|
|
|
3,072 |
|
|
|
6,928 |
|
March 2009 |
|
|
|
|
|
|
|
|
|
|
3,072 |
|
|
|
6,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
25 |
(1) |
|
$ |
12.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
(1) |
|
Consists of delivery of shares to TSYS on vesting of restricted shares to pay taxes. |
Item 6 Exhibits
a) Exhibits
|
|
|
Exhibit |
|
|
Number |
|
Description |
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 |
36
TOTAL SYSTEM SERVICES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
TOTAL SYSTEM SERVICES, INC. |
|
|
Date: May 7, 2009 |
by: |
/s/ Philip W. Tomlinson
|
|
|
|
Philip W. Tomlinson |
|
|
|
Chairman of the Board and
Chief Executive Officer |
|
|
|
|
|
Date: May 7, 2009 |
by: |
/s/ James B. Lipham
|
|
|
|
James B. Lipham |
|
|
|
Senior Executive Vice President
and Chief Financial Officer |
|
37
TOTAL SYSTEM SERVICES, INC.
Exhibit Index
|
|
|
Exhibit Number |
|
Description |
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 |
38