UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: March 31, 2012
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from To
Commission file number 1-10254
Total System Services, Inc.
www.tsys.com
(Exact name of registrant as specified in its charter)
Georgia | 58-1493818 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
One TSYS Way, Post Office Box 1755, Columbus, Georgia 31902
(Address of principal executive offices) (Zip Code)
(706) 649-2310
(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 x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
CLASS |
OUTSTANDING AS OF: April 30, 2012 | |
Common Stock, $0.10 par value | 189,081,320 shares |
TOTAL SYSTEM SERVICES, INC.
Part I Financial Information
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except per share data) | March 31, 2012 | December 31, 2011 | ||||||
Assets |
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Current assets: |
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Cash and cash equivalents |
$ | 370,955 | 316,337 | |||||
Accounts receivable, net of allowance for doubtful accounts and billing adjustments of $3.7 million and $4.1 million at 2012 and 2011, respectively |
253,732 | 248,541 | ||||||
Deferred income tax assets |
7,695 | 12,872 | ||||||
Prepaid expenses and other current assets |
80,598 | 72,431 | ||||||
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Total current assets |
712,980 | 650,181 | ||||||
Goodwill |
356,121 | 355,498 | ||||||
Property and equipment, net of accumulated depreciation and amortization of $365.4 million and $357.1 million at 2012 and 2011, respectively |
260,900 | 266,608 | ||||||
Computer software, net of accumulated amortization of $584.2 million and $567.4 million at 2012 and 2011, respectively |
205,027 | 215,244 | ||||||
Contract acquisition costs, net of accumulated amortization of $279.5 million and $295.9 million at 2012 and 2011, respectively |
161,464 | 162,987 | ||||||
Equity investments |
85,891 | 82,924 | ||||||
Other intangible assets, net of accumulated amortization of $43.5 million and $39.8 million at 2012 and 2011, respectively |
79,440 | 81,250 | ||||||
Deferred income tax assets, net |
4,970 | 4,069 | ||||||
Other assets |
39,342 | 39,631 | ||||||
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Total assets |
$ | 1,906,135 | 1,858,392 | |||||
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Liabilities |
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Current liabilities: |
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Current portion of long-term debt |
$ | 181,301 | 181,251 | |||||
Accounts payable |
35,827 | 26,095 | ||||||
Accrued salaries and employee benefits |
13,971 | 33,004 | ||||||
Current portion of obligations under capital leases |
13,201 | 14,363 | ||||||
Other current liabilities |
138,734 | 125,863 | ||||||
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Total current liabilities |
383,034 | 380,576 | ||||||
Deferred income tax liabilities |
36,064 | 32,889 | ||||||
Long-term debt, excluding current portion |
34,269 | 39,104 | ||||||
Obligations under capital leases, excluding current portion |
23,418 | 24,489 | ||||||
Other long-term liabilities |
61,126 | 60,325 | ||||||
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Total liabilities |
537,911 | 537,383 | ||||||
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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; 202,447 and 201,860 issued at 2012 and 2011, respectively; 189,773 and 189,031 outstanding at 2012 and 2011, respectively |
20,245 | 20,186 | ||||||
Additional paid-in capital |
129,104 | 125,948 | ||||||
Accumulated other comprehensive income (loss), net |
3,489 | (445 | ) | |||||
Treasury stock, at cost (shares of 12,674 and 12,829 at 2012 and 2011, respectively) |
(221,927 | ) | (225,034 | ) | ||||
Retained earnings |
1,418,140 | 1,380,634 | ||||||
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Total shareholders equity |
1,349,051 | 1,301,289 | ||||||
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Noncontrolling interests in consolidated subsidiaries |
19,173 | 19,720 | ||||||
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Total equity |
1,368,224 | 1,321,009 | ||||||
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Commitments and contingencies |
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Total liabilities and equity |
$ | 1,906,135 | 1,858,392 | |||||
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See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
3
Condensed Consolidated Statements of Income
(Unaudited)
Three months ended March 31, | ||||||||
(in thousands except per share data) | 2012 | 2011 | ||||||
Total revenues |
$ | 461,162 | 429,430 | |||||
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Cost of services |
318,258 | 301,492 | ||||||
Selling, general and administrative expenses |
58,073 | 54,910 | ||||||
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Total operating expenses |
376,331 | 356,402 | ||||||
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Operating income |
84,831 | 73,028 | ||||||
Nonoperating expenses |
(405 | ) | (728 | ) | ||||
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Income before income taxes and equity in income of equity investments |
84,426 | 72,300 | ||||||
Income taxes |
29,556 | 25,158 | ||||||
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Income before equity in income of equity investments |
54,870 | 47,142 | ||||||
Equity in income of equity investments, net of tax |
2,774 | 2,270 | ||||||
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Net income |
57,644 | 49,412 | ||||||
Net income attributable to noncontrolling interests |
(1,249 | ) | (622 | ) | ||||
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Net income attributable to TSYS common shareholders |
$ | 56,395 | 48,790 | |||||
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Basic earnings per share (EPS) attributable to TSYS common shareholders (Note 13) |
$ | 0.30 | 0.25 | |||||
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Diluted EPS attributable to TSYS common shareholders |
$ | 0.30 | 0.25 | |||||
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See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
4
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Three months ended March 31, | ||||||||
(in thousands) | 2012 | 2011 | ||||||
Net income |
$ | 57,644 | 49,412 | |||||
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Other comprehensive income, net of tax: |
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Foreign currency translation adjustments |
2,963 | 10,271 | ||||||
Postretirement healthcare plan adjustments |
263 | (182 | ) | |||||
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Other comprehensive income |
3,226 | 10,089 | ||||||
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Comprehensive income |
60,870 | 59,501 | ||||||
Comprehensive income attributable to noncontrolling interests |
(541 | ) | (721 | ) | ||||
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Comprehensive income attributable to TSYS common shareholders |
$ | 60,329 | 58,780 | |||||
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See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
5
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three months ended March 31, | ||||||||
(in thousands) | 2012 | 2011 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
$ | 57,644 | 49,412 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Net loss on foreign currency |
504 | 352 | ||||||
Equity in income of equity investments, net of tax |
(2,774 | ) | (2,270 | ) | ||||
Dividends received from equity investments |
| 13 | ||||||
Depreciation and amortization |
40,873 | 41,068 | ||||||
Amortization of debt issuance costs |
47 | 26 | ||||||
Share-based compensation |
3,598 | 4,332 | ||||||
Excess tax benefit from share-based payment arrangements |
(510 | ) | (103 | ) | ||||
Asset impairments |
| 773 | ||||||
Provisions for (recoveries of) bad debt expenses and billing adjustments |
(144 | ) | 204 | |||||
Charges for transaction processing provisions |
1,063 | 1,296 | ||||||
Deferred income tax expense |
6,425 | 3,874 | ||||||
Gain on disposal of equipment, net |
(2 | ) | (1,497 | ) | ||||
Changes in operating assets and liabilities: |
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Accounts receivable |
(5,424 | ) | 2,971 | |||||
Prepaid expenses, other current assets and other long-term assets |
(7,044 | ) | 14,046 | |||||
Accounts payable |
9,825 | (4,635 | ) | |||||
Accrued salaries and employee benefits |
(19,111 | ) | (13,800 | ) | ||||
Other current liabilities and other long-term liabilities |
12,943 | 6,109 | ||||||
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Net cash provided by operating activities |
97,913 | 102,171 | ||||||
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Additions to contract acquisition costs |
(5,099 | ) | (7,202 | ) | ||||
Purchases of property and equipment, net |
(4,984 | ) | (5,960 | ) | ||||
Additions to internally developed computer software |
(4,435 | ) | (4,478 | ) | ||||
Additions to licensed computer software from vendors |
(2,593 | ) | (1,280 | ) | ||||
Cash used in acquisitions, net of cash acquired |
(1,750 | ) | | |||||
Purchase of private equity investments |
(499 | ) | | |||||
Proceeds from sale of tradenames |
| 4,500 | ||||||
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Net cash used in investing activities |
(19,360 | ) | (14,420 | ) | ||||
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Dividends paid on common stock |
(18,913 | ) | (13,556 | ) | ||||
Principal payments on long-term debt borrowings and capital lease obligations |
(6,505 | ) | (8,551 | ) | ||||
Subsidiary dividends paid to noncontrolling shareholders |
(1,087 | ) | | |||||
Excess tax benefit from share-based payment arrangements |
510 | 103 | ||||||
Purchase of noncontrolling interest |
| (174,050 | ) | |||||
Repurchase of common stock |
| (35,700 | ) | |||||
Proceeds from exercise of stock options |
2,701 | 1,119 | ||||||
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Net cash used in financing activities |
(23,294 | ) | (230,635 | ) | ||||
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CASH AND CASH EQUIVALENTS: |
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Effect of exchange rate changes on cash and cash equivalents |
(641 | ) | 577 | |||||
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Net increase (decrease) in cash and cash equivalents |
54,618 | (142,307 | ) | |||||
Cash and cash equivalents at beginning of period |
316,337 | 394,795 | ||||||
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Cash and cash equivalents at end of period |
$ | 370,955 | $ | 252,488 | ||||
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Supplemental cash flow information: |
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Interest paid |
$ | 724 | 709 | |||||
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Income taxes paid, net |
$ | 4,144 | 3,447 | |||||
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See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
6
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Total System Services, Inc.® (TSYS® or the Company) include the accounts of TSYS and its wholly and majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
These financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. The preparation of the consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. These estimates and assumptions are developed based upon all information available. Actual results could differ from estimated amounts. All adjustments, consisting of normal recurring accruals, which, in the opinion of management, are necessary for a fair presentation of financial position and results of operations for the periods covered by this report, have been included.
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Companys summary of significant accounting policies, consolidated financial statements and related notes appearing in the Companys Annual Report on Form 10-K for the year ended December 31, 2011. Results of interim periods are not necessarily indicative of results to be expected for the year.
In 2012, the Company adopted Accounting Standards Update (ASU) 2011-05, Comprehensive Income and ASU 2011-08, Intangibles - Goodwill and Other. The adoption of ASU 2011-05 and 2011-08 did not have a material impact on the Companys financial position, results of operations and cash flows.
Note 2 Fair Value Measurement
ASC 820, Fair Value Measurements and Disclosure, requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy for which these assets and liabilities must be grouped, based on significant level of inputs. The three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies, is as follows:
Level 1 Quoted prices for identical assets and liabilities in active markets.
Level 2 Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3 Unobservable inputs for the asset or liability.
In February 2007, the Financial Accounting Standards Board (FASB) issued authoritative guidance under ASC 825, Financial Instruments. ASC 825 permits the Company to choose to measure many financial instruments and certain other items at fair value. Upon adoption of the guidance on January 1, 2008, TSYS did not elect the fair value option for any financial instrument it did not currently report at fair value.
Goodwill and certain intangible assets not subject to amortization are assessed annually for impairment in the second quarter of each year using fair value measurement techniques. An entity can first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit (RU) is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a RU with its book value, including goodwill. If the fair value of the RU 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 RU 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 RUs goodwill with the book value of that goodwill. If the book value of the RUs 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 RU is allocated to all of the assets and liabilities of that unit as if the RU had been acquired in a business combination and the fair value of the RU was the purchase price paid to acquire the RU.
7
The estimate of fair value of the Companys RUs is determined using various valuation techniques, including using the combination of the market approach and the income approach. The market approach, which contains Level 2 inputs, utilizes readily available market valuation multiples to estimate fair value. The income approach is a valuation technique that utilizes the discounted cash flow (DCF) method, which includes Level 3 inputs. Under the DCF method, the fair value of the RU reflects the present value of the projected earnings that will be generated by each RU after taking into account the revenues and expenses associated with the asset, the relative risk that the cash flows will occur, the contribution of other assets, and an appropriate discount rate to reflect the value of the invested capital. Cash flows are estimated for future periods based upon historical data and projections by management.
At March 31, 2012, the Company had recorded goodwill in the amount of $356.1 million (Level 2).
The fair value of the Companys long-term debt and obligations under capital leases is not significantly different from its carrying value (Level 2).
Note 3 Supplementary Balance Sheet Information
Cash and Cash Equivalents
The Company maintains accounts outside the United States denominated in currencies other than the U.S. dollar. All amounts in domestic accounts are denominated in U.S. dollars.
Cash and cash equivalent balances are summarized as follows:
(in thousands) | March 31, 2012 | December 31, 2011 | ||||||
Cash and cash equivalents in domestic accounts |
$ | 305,325 | 263,853 | |||||
Cash and cash equivalents in foreign accounts |
65,630 | 52,484 | ||||||
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Total |
$ | 370,955 | 316,337 | |||||
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At March 31, 2012 and December 31, 2011, the Company had approximately $32.0 million and $22.0 million, respectively, in Money Market accounts that had an original maturity date of 90 days or less. The Company considers cash equivalents to be short-term, highly liquid investments that are both readily convertible to known amounts of cash and so near their maturity at the time of purchase that they present insignificant risk of changes in value because of change in interest rates.
Prepaid Expenses and Other Current Assets
Significant components of prepaid expenses and other current assets are summarized as follows:
(in thousands) | March 31, 2012 | December 31, 2011 | ||||||
Prepaid expenses |
$ | 36,231 | 20,917 | |||||
Supplies inventory |
7,784 | 10,053 | ||||||
Other |
36,583 | 41,461 | ||||||
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Total |
$ | 80,598 | 72,431 | |||||
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Contract Acquisition Costs, net
Significant components of contract acquisition costs, net of accumulated amortization, are summarized as follows:
(in thousands) | March 31, 2012 | December 31, 2011 | ||||||
Conversion costs, net of accumulated amortization of $88.5 million and $109.8 million at 2012 and 2011, respectively |
$ | 89,055 | 88,765 | |||||
Payments for processing rights, net of accumulated amortization of $191.0 million and $186.1 million at 2012 and 2011, respectively |
72,409 | 74,222 | ||||||
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Total |
$ | 161,464 | 162,987 | |||||
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Amortization expense related to conversion costs, which is recorded in cost of services, was $4.1 million and $4.5 million for the three months ended March 31, 2012 and 2011, respectively.
Amortization related to payments for processing rights, which is recorded as a reduction of revenues, was $3.9 million for both the three months ended March 31, 2012 and 2011.
8
During 2011, the Company recognized an impairment loss related to contract acquisition costs of $773,000.
Other Current Liabilities
Significant components of other current liabilities are summarized as follows:
(in thousands) | March 31, 2012 | December 31, 2011 | ||||||
Accrued expenses |
$ | 38,154 | 40,141 | |||||
Deferred revenues |
29,603 | 29,707 | ||||||
Accrued income taxes |
24,414 | 5,731 | ||||||
Dividends payable |
18,890 | 18,913 | ||||||
Other |
27,673 | 31,371 | ||||||
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Total |
$ | 138,734 | 125,863 | |||||
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Note 4 Long-Term Debt
Refer to Note 13 of the Companys audited financial statements for the year ended December 31, 2011, which are included as Exhibit 13.1 to the Companys Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission (SEC), for a discussion regarding long-term debt.
Note 5 Comprehensive Income
For the three months ended March 31, comprehensive income is summarized below:
Three months ended March 31, 2012 | Three months ended March 31, 2011 | |||||||||||||||||||||||
(in thousands) | TSYS Shareholders |
Noncontrolling Interests |
Total | TSYS Shareholders |
Noncontrolling Interests |
Total | ||||||||||||||||||
Net income |
$ | 56,395 | 1,249 | $ | 57,644 | $ | 48,790 | 622 | $ | 49,412 | ||||||||||||||
Other comprehensive income (OCI), net of tax: |
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Foreign currency translation adjustments |
3,671 | (708 | ) | 2,963 | 10,172 | 99 | 10,271 | |||||||||||||||||
Postretirement healthcare plan adjustments |
263 | | 263 | (182 | ) | | (182 | ) | ||||||||||||||||
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Total |
$ | 60,329 | 541 | $ | 60,870 | $ | 58,780 | 721 | $ | 59,501 | ||||||||||||||
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Consistent with its overall strategy of pursuing international investment opportunities, TSYS adopted the permanent reinvestment exception under ASC 740, Income Taxes, with respect to future earnings of certain foreign subsidiaries. Its decision to permanently reinvest foreign earnings offshore means TSYS will no longer allocate taxes to foreign currency translation adjustments associated with these foreign subsidiaries accumulated in OCI.
Note 6 Share-Based Compensation
The Companys Annual Report on Form 10-K for the year ended December 31, 2011, 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 cost of services and selling, general, and administrative expenses. TSYS does not include amounts associated with share-based compensation as costs capitalized as software development and contract acquisition costs, as these awards are typically granted to individuals not involved in capitalizable activities. For the three months ended March 31, 2012, share-based compensation was $3.6 million, compared to $4.3 million for the same period in 2011. Included in the $3.6 million amount for 2012 and $4.3 million amount for 2011 is approximately $1.1 million and $1.9 million, respectively, related to expensing the fair value of stock options.
9
Nonvested and Performance Share Awards
As of March 31, 2012, there was approximately $10.4 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements. That cost is expected to be recognized over a remaining weighted average period of 2.3 years.
On March 29, 2012, TSYS authorized a total grant of 241,095 performance shares to certain key executives with a performance based vesting schedule (2012 performance shares). These 2012 performance shares have a 2012-2014 performance period for which the Compensation Committee established two performance goals: revenues before reimbursable items and income from continuing operations and, if such goals are attained in 2014, the performance shares will vest, up to a maximum of 200% of the total grant. Compensation expense for the award is measured on the grant date based on the quoted market price of TSYS common stock. The Company will estimate the probability of achieving the goals through the performance period and will expense the award on a straight-line basis.
During the first three months of 2012, the Company issued 310,690 shares of TSYS common stock with a market value of $6.7 million to certain key employees under nonvested stock bonus awards for services to be provided in the future by such officers 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.
On March 15, 2011, TSYS authorized a total grant of 263,292 performance shares to certain key executives with a performance based vesting schedule (2011 performance shares). These 2011 performance shares have a 2011-2013 performance period for which the Compensation Committee established two performance goals: revenues before reimbursable items and income from continuing operations and, if such goals are attained in 2013, the performance shares will vest, up to a maximum of 200% of the total grant. Compensation expense for the award is measured on the grant date based on the quoted market price of TSYS common stock. The Company will estimate the probability of achieving the goals through the performance period and will expense the award on a straight-line basis.
During the first three months of 2011, the Company issued 193,971 shares of TSYS common stock with a market value of $3.4 million to certain key employees and non-management members of its Board of Directors under nonvested stock bonus awards for services to be provided in the future by such officers, directors and employees. The market value of the TSYS common stock at the date of issuance is amortized as compensation expense over the vesting period of the awards.
Compensation costs related to the performance shares compensation arrangements are expected to be recognized until the end of 2014.
Stock Option Awards
On March 29, 2012, the Company granted 730,574 stock options to key TSYS executive officers. The average fair value of the option grant was $5.27 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 $22.91; risk-free interest rate of 1.75%; expected volatility of 24%; expected term of 7.9 years; and dividend yield of 1.75%. The grant will vest over a period of 3 years.
During the first three months of 2011, the Company granted 699,426 stock options to key TSYS executive officers. The average fair value of the option grant was $5.77 per option and was estimated on the date of grant using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions: exercise price of $17.57; risk-free interest rate of 2.96%; expected volatility of 30.0%; expected term of 8.5 years; and dividend yield of 1.59%. The grant will vest over a period of 3 years.
On April 30, 2010, the Company granted 1.4 million stock options to key TSYS executive officers that are performance- and/or market conditions-based. These stock options will vest and become exercisable on April 30, 2013 only if the stock price is at least a specified percentage above the grant date stock price or TSYS reaches a specified EPS goal by December 31, 2012. Given the market conditions component, TSYS evaluated the impact using the Monte Carlo simulation to value these awards and ultimately determined that the impact was minimal. The average fair value of the option grants was $3.48 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 $16.19; risk-free interest rate of 2.07%; expected volatility of 30.0%; expected term of 4.0 years; and dividend yield of 1.79%.
As of March 31, 2012, there was approximately $8 million of total unrecognized compensation cost related to TSYS stock options that is expected to be recognized over a remaining weighted average period of 1.7 years.
10
Note 7 Income Taxes
TSYS is the parent of an affiliated group that files a consolidated U.S. Federal income tax return and most state and foreign income tax returns on a separate entity basis. In the normal course of business, the Company is subject to examinations by these taxing authorities unless statutory examination periods lapse. TSYS is no longer subject to U.S. Federal income tax examinations for years before 2008 and with a few exceptions, the Company is no longer subject to income tax examinations from state, local or foreign authorities for years before 2003. There are a number of tax examinations in progress by the relevant federal, foreign and state tax authorities. Although TSYS is unable to determine the ultimate outcome of these examinations, TSYS believes that its reserve for uncertain tax positions relating to these jurisdictions for such years is adequate.
TSYS effective tax rate attributable to continuing operations was 34.33% and 34.0% for the three months ended March 31, 2012 and 2011, respectively. The increased rate during the March 31, 2012 period was mostly due to changes in discrete items, tax credits and in the jurisdictional sources of income
TSYS continuously evaluates its ability to realize its deferred tax assets. Pursuant to such evaluations, TSYS established a valuation allowance in the amount of $0.6 million related to our international operations and released valuation allowances in the amount of $0.6 million related to our international and state operations during the three months ended March 31, 2012.
TSYS adopted the provisions of ASC 740 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 increased by $0.3 million during the three months ended March 31, 2012.
TSYS recognizes potential interest and penalties related to the underpayment of income taxes as income tax expense in the condensed consolidated statements of income. Gross accrued interest and penalties on unrecognized tax benefits totaled $0.7 million and $0.6 million as of March 31, 2012 and December 31, 2011, respectively. The total amounts of unrecognized income tax benefits as of March 31, 2012 and December 31, 2011 that, if recognized, would affect the effective tax rates are $5.8 million and $5.4 million (net of the Federal benefit on state tax issues), respectively, which include interest and penalties of $0.6 million and $0.5 million. TSYS does not expect any material changes to its calculation of uncertain tax positions during the next twelve months.
Note 8 Segment Reporting and Major Customers
The Company reports selected information about operating segments in accordance with ASC 280, Segment Reporting. The Companys segment information reflects the information that the chief operating decision maker (CODM) uses to make resource allocations and strategic decisions. The CODM at TSYS consists of the chairman of the board and chief executive officer, the president and the four senior executive vice presidents.
TSYS provides electronic payment processing and other services to card-issuing and merchant acquiring institutions in the United States and internationally through online accounting and electronic payment processing systems.
On May 2, 2011, TSYS completed its acquisition of all of the outstanding common stock of TermNet Merchant Services, Inc. (TermNet), an Atlanta-based merchant acquirer. TermNets financial results are included in the Merchant Services segment.
North America Services includes electronic payment processing services and other services provided from within the North America region. International Services includes electronic payment processing and other services provided from outside the North America region. Merchant Services includes electronic processing and other services provided to merchant acquiring institutions. Corporate administration expenses, such as finance, legal, human resources, mergers and acquisitions and investor relations, that exist in all operating segments are accumulated and categorized as Corporate Administration.
The Company believes the terms and conditions of transactions between the segments are comparable to those which could have been obtained in transactions with unaffiliated parties. TSYS operating segments share certain resources, such as Information Technology support, that TSYS allocates asymmetrically.
11
Operating Segments | Three months ended March 31, | |||||||||||||||
Change | ||||||||||||||||
(in thousands) | 2012 | 2011 | $ | % | ||||||||||||
Revenues before reimbursable items |
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North America Services |
$ | 204,050 | 194,590 | 9,460 | 4.9 | |||||||||||
International Services |
96,491 | 87,419 | 9,072 | 10.4 | ||||||||||||
Merchant Services |
98,356 | 86,519 | 11,837 | 13.7 | ||||||||||||
Intersegment revenues |
(3,718 | ) | (5,885 | ) | 2,167 | 36.8 | ||||||||||
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Revenues before reimbursable items from external customers |
$ | 395,179 | 362,643 | 32,536 | 9.0 | |||||||||||
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Total revenues |
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North America Services |
$ | 240,599 | 230,558 | 10,041 | 4.4 | |||||||||||
International Services |
100,360 | 90,710 | 9,650 | 10.6 | ||||||||||||
Merchant Services |
125,518 | 115,756 | 9,762 | 8.4 | ||||||||||||
Intersegment revenues |
(5,315 | ) | (7,594 | ) | 2,279 | 30.0 | ||||||||||
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Revenues from external customers |
$ | 461,162 | 429,430 | 31,732 | 7.4 | |||||||||||
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Depreciation and amortization |
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North America Services |
$ | 18,454 | 19,466 | (1,012 | ) | (5.2 | ) | |||||||||
International Services |
12,911 | 11,708 | 1,203 | 10.3 | ||||||||||||
Merchant Services |
8,786 | 9,146 | (360 | ) | (3.9 | ) | ||||||||||
Corporate Administration |
722 | 748 | (26 | ) | (3.5 | ) | ||||||||||
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Total depreciation and amortization |
$ | 40,873 | 41,068 | (195 | ) | (0.5 | ) | |||||||||
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Segment operating income |
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North America Services |
$ | 68,173 | 55,200 | 12,973 | 23.5 | |||||||||||
International Services |
4,113 | 11,025 | (6,912 | ) | (62.7 | ) | ||||||||||
Merchant Services |
34,219 | 26,923 | 7,296 | 27.1 | ||||||||||||
Corporate Administration |
(21,674 | ) | (20,120 | ) | (1,554 | ) | (7.7 | ) | ||||||||
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Operating income |
$ | 84,831 | 73,028 | 11,803 | 16.2 | |||||||||||
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Change | ||||||||||||||||
Total Assets | At March 31, 2012 | At December 31, 2011 | $ | % | ||||||||||||
North America Services |
$ | 1,676,032 | 1,621,664 | 54,368 | 3.4 | |||||||||||
International Services |
439,948 | 433,203 | 6,745 | 1.6 | ||||||||||||
Merchant Services |
498,586 | 487,858 | 10,728 | 2.2 | ||||||||||||
Corporate Administration |
(708,431 | ) | (684,333 | ) | (24,098 | ) | (3.5 | ) | ||||||||
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Total Assets |
$ | 1,906,135 | 1,858,392 | 47,743 | 2.6 | |||||||||||
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Revenues by Geographic Area
Revenues for North America Services and Merchant Services include electronic payment processing and other services provided from the United States to clients domiciled in the United States or other countries. Revenues for International Services include electronic payment processing and other services provided from facilities outside the United States to clients based predominantly outside the United States.
12
The following geographic data presents revenues based on the domicile of the Companys customers:
Three months ended March 31, | ||||||||
(in millions) | 2012 | 2011 | ||||||
United States |
$ | 305.5 | $ | 292.7 | ||||
Europe* |
73.0 | 65.8 | ||||||
Canada |
50.8 | 44.1 | ||||||
Japan* |
18.4 | 17.4 | ||||||
Mexico |
2.4 | 1.9 | ||||||
Other |
11.1 | 7.5 | ||||||
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Total |
$ | 461.2 | $ | 429.4 | ||||
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* | Revenues are impacted by movements in foreign currency exchange rates. Refer to the discussion under Revenues in the Results of Operations. |
The following table reconciles geographic revenues to revenues by operating segment based on the domicile of the Companys customers:
Three months ended March 31, | ||||||||||||||||||||||||
North America Services | International Services | Merchant Services | ||||||||||||||||||||||
(in millions) | 2012 | 2011 | 2012 | 2011 | 2012 | 2011 | ||||||||||||||||||
United States |
$ | 179.5 | 178.9 | | | 125.9 | 113.8 | |||||||||||||||||
Europe |
0.2 | 0.2 | 72.8 | 65.6 | | | ||||||||||||||||||
Canada |
50.7 | 44.0 | | | 0.1 | 0.1 | ||||||||||||||||||
Japan |
| | 18.4 | 17.4 | | | ||||||||||||||||||
Mexico |
2.4 | 1.9 | | | | | ||||||||||||||||||
Other |
2.6 | 2.5 | 8.4 | 4.8 | 0.2 | 0.2 | ||||||||||||||||||
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Total |
$ | 235.4 | 227.5 | 99.6 | 87.8 | 126.2 | 114.1 | |||||||||||||||||
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The Company maintains property and equipment, net of accumulated depreciation and amortization, in the following geographic areas:
(in millions) | At March 31, 2012 | At December 31, 2011 | ||||||
United States |
$ | 190.6 | 194.8 | |||||
Europe |
52.3 | 52.4 | ||||||
Japan |
8.5 | 9.7 | ||||||
Other |
9.5 | 9.7 | ||||||
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Total |
$ | 260.9 | 266.6 | |||||
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Major Customers
For the three months ended March 31, 2012, the Company had one major customer which accounted for approximately 10.5%, or $48.6 million, of total revenues. For the three months ended March 31, 2011, this major customer accounted for approximately 12.5%, or $53.6 million, of total revenues. Revenues from the major customer for the periods reported are primarily attributable to the North America Services and Merchant Services segments.
Note 9 Supplementary Cash Flow Information
Nonvested Awards
The Company issued shares of common stock to certain key employees and non-management members of its Board of Directors. The grants to certain key employees were issued under nonvested stock bonus awards for services to be provided in the future by such officers and employees. The grants to the Board of Directors were fully vested on the date of grant. Refer to Note 6 for more information.
13
Equipment and Software Acquired Under Capital Lease Obligations
The Company acquired equipment and software under capital lease obligations in the amount of $1 million during the first three months of 2012 related to storage and other peripheral hardware.
Note 10 Legal Proceedings
The Company is subject to various legal proceedings and claims and is also subject to information requests, inquiries and investigations arising out of the ordinary conduct of its business. The Company establishes reserves for litigation and similar matters when those matters present loss contingencies that TSYS determines to be both probable and reasonably estimable in accordance with ASC 450, Contingencies. In the opinion of management, based on current knowledge and in part upon the advice of legal counsel, all matters are believed to be adequately covered by insurance, or, if not covered, the possibility of losses from such matters are believed to be remote or such matters are of such kind or involve such amounts that would not have a material adverse effect on the financial position, results of operations or cash flows of the Company if disposed of unfavorably.
Note 11 Guarantees and Indemnifications
The Company has entered into processing and licensing agreements with its clients that include intellectual property indemnification clauses. The Company generally agrees to indemnify its clients, subject to certain exceptions, against legal claims that TSYS services or systems infringe on certain third party patents, copyrights or other proprietary rights. In the event of such a claim, the Company is generally obligated to hold the client harmless and pay for related losses, liabilities, costs and expenses, including, without limitation, court costs and reasonable attorneys fees. The Company has not made any indemnification payments pursuant to these indemnification clauses. In addition, the Company has indemnification obligations to Synovus Financial Corp. pursuant to the disaffiliation and related agreements entered into by the parties in connection with the corporate spin-off of TSYS from Synovus Financial Corp.
The Company has not recorded a liability for guarantees or indemnities in the accompanying condensed consolidated balance sheets, since neither a range nor a maximum amount of potential future payments under such guarantees and indemnities is determinable.
Note 12 Business Combinations
Refer to Note 24 of the Companys audited financial statements for the year ended December 31, 2011, as filed with the SEC, for a discussion regarding TSYS acquisitions.
Other
On February 1, 2012, TSYS acquired contract-based intangible assets in its Merchant Services segment for $1.7 million. These intangible assets are being amortized on a straight-line basis over their estimated useful lives of five years which approximates their usage.
Pro forma Results of Operations
The pro forma revenue and earnings of TSYS acquisitions are not material to the consolidated financial statements.
Note 13 Earnings Per Share
In June 2008, the FASB issued authoritative guidance under ASC 260, Earnings Per Share. The guidance under ASC 260 holds that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities as defined in ASC 260, and therefore should be included in computing earnings per share (EPS) using the two-class method.
The two-class method is an earnings allocation method for computing EPS when an entitys capital structure includes two or more classes of common stock or common stock and participating securities. It determines EPS based on dividends declared on common stock and participating securities and participation rights of participating securities in any undistributed earnings.
14
The following table illustrates basic and diluted EPS under the guidance of ASC 260 for the three months ended March 31, 2012 and 2011:
Three months ended | Three months ended | |||||||||||||||
March 31, 2012 | March 31, 2011 | |||||||||||||||
Common | Participating | Common | Participating | |||||||||||||
(in thousands, except per share data) | Stock | Securities | Stock | Securities | ||||||||||||
Basic EPS: |
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Net income |
$ | 56,395 | 48,790 | |||||||||||||
Less income allocated to nonvested awards |
(196 | ) | 196 | (191 | ) | 191 | ||||||||||
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Net income allocated to common stock for EPS calculation (a) |
$ | 56,199 | 196 | 48,599 | 191 | |||||||||||
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Average common shares outstanding (b) |
188,052 | 667 | 192,851 | 765 | ||||||||||||
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Basic EPS (a)/(b) |
$ | 0.30 | 0.29 | 0.25 | 0.25 | |||||||||||
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Diluted EPS: |
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Net income |
$ | 56,395 | 48,790 | |||||||||||||
Less income allocated to nonvested awards |
(196 | ) | 196 | (191 | ) | 191 | ||||||||||
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Net income allocated to common stock for EPS calculation (c) |
$ | 56,199 | 196 | 48,599 | 191 | |||||||||||
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Average common shares outstanding |
188,052 | 667 | 192,851 | 765 | ||||||||||||
Increase due to assumed issuance of shares related to common equivalent shares outstanding |
1,010 | 305 | ||||||||||||||
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Average common and common equivalent shares outstanding (d) |
189,062 | 667 | 193,156 | 765 | ||||||||||||
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Diluted EPS (c)/(d) |
$ | 0.30 | 0.29 | 0.25 | 0.25 | |||||||||||
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The diluted EPS calculation excludes stock options and nonvested awards that are convertible into 3.2 million common shares for the three months ended March 31, 2012, and excludes 8.7 million common shares for the three months ended March 31, 2011 because their inclusion would have been anti-dilutive.
Note 14 Subsequent Events
Management performed an evaluation of the Companys activity through the date these unaudited financial statements were issued, and has concluded that there are no significant subsequent events requiring disclosure.
15
Item 2 Managements Discussion and Analysis of Financial
Condition and Results of Operations
Financial Overview
Total System Services, Inc.s (TSYS or the Companys) revenues are derived from providing payment processing, merchant services and related services to financial and nonfinancial institutions, generally under long-term processing contracts. The Companys services are provided through three of the Companys operating segments: North America Services, International Services and Merchant Services.
Through the Companys North America Services and International Services segments, TSYS processes information through its cardholder systems to financial and nonfinancial institutions throughout the United States and internationally. The Companys North America Services segment provides these services in the United States to clients in the United States, Canada, Mexico and the Caribbean. The Companys International Services segment provides services in England, Japan and Brazil to clients in Europe, Asia Pacific, Brazil and the United States. The Companys Merchant Services segment provides merchant services to financial institutions and other organizations, primarily in the United States.
On May 2, 2011, TSYS completed its acquisition of all of the outstanding common stock of TermNet Merchant Services, Inc. (TermNet), an Atlanta-based merchant acquirer.
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, 2011.
A summary of the financial highlights for 2012, as compared to 2011, is provided below:
Three months ended March 31, | ||||||||||||
(in millions) | 2012 | 2011 | Percent Change | |||||||||
Total revenues |
$ | 461.2 | 429.4 | 7.4 | % | |||||||
Operating income |
84.8 | 73.0 | 16.2 | |||||||||
Net income attributable to TSYS common shareholders |
56.4 | 48.8 | 15.6 |
Financial Review
This Financial Review provides a discussion of critical accounting policies and estimates, related party transactions and off-balance sheet arrangements. This Financial Review also discusses the results of operations, financial position, liquidity and capital resources of TSYS and outlines the factors that have affected its recent earnings, as well as those factors that may affect its future earnings.
Critical Accounting Policies and Estimates
There have been no material changes other than what is noted below to the Companys critical accounting policies, estimates and assumptions or the judgments affecting the application of those estimates and assumptions in 2012. For a detailed discussion regarding the Companys critical accounting policies and estimates, see Item 7: Managements Discussion and Analysis of Financial Condition and Results of Operations, and for a detailed discussion regarding the Companys risk factors, see Item 1A: Risk Factors in the Companys Annual Report on Form 10-K for the year ended December 31, 2011.
Related Party Transactions
The Company believes the terms and conditions of transactions between the Company and its equity investments, Total System Services de México, S.A. de. C.V. (TSYS de México) and China UnionPay Data Co., Ltd. (CUP Data), are comparable to those which could have been obtained in transactions with unaffiliated parties. The Companys margins with respect to related party transactions are comparable to margins recognized in transactions with unrelated third parties.
Off-Balance Sheet Arrangements
Operating Leases: As a method of funding its operations, TSYS employs noncancelable operating leases for computer equipment, software and facilities. These leases allow the Company to provide the latest technology while avoiding the risk of ownership. Neither the assets nor obligations related to these leases are included on the balance sheet.
Contractual Obligations: The total liability for uncertain tax positions under ASC 740, Income Taxes, at March 31, 2012 is $6.1 million. Refer to Note 7 in the Notes to Unaudited Condensed Consolidated Financial Statements for more information on income taxes. The Company is not able to reasonably estimate the amount by which the liability will increase or decrease over time; however, at this time, the Company does not expect a significant payment related to these reserves within the next year.
16
As indicated in the Companys Annual Report on Form 10-K for the year ended December 31, 2011, total contractual cash obligations at December 31, 2011 were estimated at $506 million. These contractual cash obligations include lease payments and software arrangements.
Results of Operations
Revenues
The Company generates revenues by providing transaction processing and other payment-related services. The Companys pricing for transactions and services is complex. Each category of revenue has numerous fee components depending on the types of transactions or services provided. TSYS reviews its pricing and implements pricing changes on an ongoing basis. In addition, standard pricing varies among its regional businesses, and such pricing can be customized further for customers through tiered pricing of various thresholds for volume activity. TSYS revenues are based upon transactional information accumulated by its systems or reported by its customers. The Companys revenues are impacted by currency translation of foreign operations, as well as doing business in the current economic environment.
Total revenues increased $31.7 million, or 7.4% during the three months ended March 31, 2012, compared to the same period in 2011. The increase in revenues for the three months ended March 31, 2012 includes a decrease of $1.1 million, related to the effects of currency translation of foreign-based subsidiaries and branches. The Company has included reimbursements received for out-of-pocket expenses as revenues and expenses. The largest reimbursable expense item for which TSYS is reimbursed by clients is postage. The Companys reimbursable items are impacted with changes in postal rates and changes in the volumes of all mailing activities by its clients. Reimbursable items for the three months ended March 31, 2012 were $66.0 million, a decrease of $0.8 million or 1.2% compared to $66.8 million for the same period last year. Excluding reimbursable items, revenues increased $32.5 million, or 9.0%, during the three months ended March 31, 2012 compared to the same period in 2011.
Major Customers
A significant amount of the Companys revenues is derived from long-term contracts with large clients, including a major customer. TSYS derives revenues from providing various processing and other services to these clients, including processing of consumer and commercial accounts, as well as revenues for reimbursable items. The loss of the Companys major customer could have a material adverse effect on the Companys financial position, results of operations and cash flows.
For a detailed discussion regarding the Companys Major Customers, refer to Note 8 in the Notes to Unaudited Condensed Consolidated Financial Statements and 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, 2011.
Operating Segments
TSYS services are provided through its three operating segments: North America Services, International Services and Merchant Services. Refer to Note 8 in the Notes to Unaudited Condensed Consolidated Financial Statements for more information on the Companys Operating segments.
The Companys North America and International segments have many long-term customer contracts with card issuers providing account processing and output services for printing and embossing items. These contracts generally require advance notice prior to the end of the contract if a client chooses not to renew. Additionally, some contracts may allow for early termination upon the occurrence of certain events such as a change in control. The termination fees paid upon the occurrence of such events are designed primarily to cover balance sheet exposure related to items such as capitalized conversion costs or client incentives associated with the contract and, in some cases, may cover a portion of lost future revenue and profit. Although these contracts may be terminated upon certain occurrences, the contracts provide the segment with a steady revenue stream since a vast majority of the contracts are honored through the contracted expiration date.
A summary of each segments results follows:
North America Services
The North America Services segment provides payment processing and related services to clients based primarily in North America. This segment has two major customers.
17
Below is a summary of the North America Services segment:
Three months ended March 31, | ||||||||||||
(in millions) | 2012 | 2011 | Percent Change | |||||||||
Total revenues |
$ | 240.6 | 230.6 | 4.4 | % | |||||||
Operating income |
68.2 | 55.2 | 23.5 | |||||||||
Operating margin |
28.3 | % | 23.9 | % | ||||||||
Key indicators: |
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AOF |
361.8 | 309.6 | 16.9 | |||||||||
Transactions |
1,893.0 | 1,626.8 | 16.4 |
* | Note: Segment operating margins do not include expenses associated with Corporate Administration. Refer to Note 8 for more information on operating segments. |
The increase in total segment revenues for the three months ended March 31, 2012, as compared to the same period in 2011, is the result of new business and organic growth, which was partially offset by a decrease in revenues associated with client portfolio deconversions and price reductions.
International Services
The International Services segment provides issuer and merchant card solutions to financial institutions and other organizations primarily based outside the North America region. Changes in revenues in this segment are derived from retaining and growing the core business. Growing the core business comes primarily from an increase in account usage, growth from existing clients and sales to new clients and the related account conversions. This segment has one major customer.
Below is a summary of the International Services segment:
Three months ended March 31, | ||||||||||||
(in millions) | 2012 | 2011 | Percent Change | |||||||||
Total revenues |
$ | 100.4 | 90.7 | 10.6 | % | |||||||
Operating income |
4.1 | 11.0 | (62.7 | ) | ||||||||
Operating margin |
4.1 | % | 12.2 | % | ||||||||
Key indicators: |
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AOF |
54.1 | 47.2 | 14.7 | |||||||||
Transactions |
383.0 | 326.0 | 17.5 |
* | Note: Segment operating margins do not include expenses associated with Corporate Administration. Refer to Note 8 for more information on operating segments. |
The increase in total segment revenues for the three months ended March 31, 2012, as compared to 2011, is the result of new business and organic growth, which was partially offset by the impact of foreign currency translation, client deconversions, and price reductions.
The decrease in operating income for the three months ended March 31, 2012, as compared to 2011, is driven by an increase in employment expenses due to the dedication of more internal resources to the International Services segment that were previously shared between the North America Services and International Services segments.
Merchant Services
The Merchant Services segment provides merchant processing and related services to clients based primarily in the United States. Merchant services revenues are derived from providing processing services, acquiring solutions, related systems and integrated support services to merchant acquirers and merchants. Revenues from merchant services include processing all payment forms including credit, debit, prepaid, electronic benefit transfer and electronic check for merchants of all sizes across a wide array of market verticals. Merchant services include authorization and capture of transactions; clearing and settlement of transactions; information reporting services related to transactions; merchant billing services; and point-of-sale equipment sales and service. This segment has one major customer.
18
Below is a summary of the Merchant Services segment:
Three months ended March 31, | ||||||||||||
(in millions) | 2012 | 2011 | Percent Change | |||||||||
Total revenues |
$ | 125.5 | 115.8 | 8.4 | % | |||||||
Operating income |
34.2 | 26.9 | 27.1 | |||||||||
Operating margin |
27.2 | % | 23.3 | % | ||||||||
Key indicator: |
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POS Transactions |
1,219.7 | 1,206.8 | 1.1 |
* | Note: Segment operating margins do not include expenses associated with Corporate Administration. Refer to Note 8 for more information on operating segments. |
The increase in total segment revenues for the three months ended March 31, 2012, as compared to the same period in 2011, is the result of new business and organic growth, which was partially offset by a decrease for client deconversions and price reductions.
Merchant Services segments results are driven by the authorization and capture transactions processed at the point-of-sale and clearing and settlement transactions. This segments authorization and capture transactions are primarily through dial-up or Internet connectivity. The direct acquiring business is driven by dollar sales volume processed by merchants.
Refer to the discussion of Major Customers.
Operating Expenses
The Companys operating expenses consist of cost of services and selling, general and administrative expenses. Cost of services describes the direct expenses incurred in performing a particular service for our customers, including the cost of direct labor expense in placing the service in saleable condition. Selling, general and administrative expenses are incurred in selling or marketing and for the direction of the enterprise as a whole, including accounting, legal fees, officers salaries, investor relations and mergers and acquisitions.
The Companys cost of services were $318.3 million during the three months ended March 31, 2012, respectively, an increase of 5.6% compared to $301.5 million for the same period last year.
The Companys selling, general and administrative expenses were $58.1 million during the three months ended March 31, 2012, an increase of 5.8% compared to $54.9 million for the same period last year. The increase is the result of merit increases and the acquisition of TermNet, including amortization of acquisition intangibles.
Operating Income
Operating income increased 16.2% for the three months ended March 31, 2012, over the same period in 2011. The Companys operating profit margin for the three months ended March 31, 2012 was 18.4%, compared to 17.0% for the same period last year. TSYS operating margin increased for the three months ended March 31, 2012, as compared to the same period in 2011, as the result of an increase in revenues associated with growth in accounts on file and transactions.
Nonoperating Income (Expense)
Interest income for the three months ended March 31, 2012 was $394,000, an increase of $261,000, compared to $133,000 for the same period in 2011. The increase in interest income is primarily attributable to more money being deposited in interest bearing accounts in 2012 versus 2011.
Interest expense for the three months ended March 31, 2012 was $771,000, a decrease of $58,000 compared to $829,000 for the same period in 2011. The decrease in interest expense in 2012 compared to 2011 relates to lower interest expense related to lower rates on capital leases.
For the three months ended March 31, 2012 and 2011, the Company recorded a translation loss of approximately $504,000 and $352,000, respectively, related to intercompany loans and foreign-denominated balance sheet accounts.
Occasionally, the Company will provide financing to its subsidiaries in the form of an intercompany loan, which is required to be repaid in U.S. dollars. For its subsidiaries whose functional currency is something other than the U.S. dollar, the translated balance of the financing (liability) is adjusted upward or downward to match the U.S. dollar obligation (receivable) on the Companys financial statements. The upward or downward adjustment is recorded as a gain or loss on foreign currency translation.
The Company records foreign currency translation adjustments on foreign-denominated balance sheet accounts. The Company maintains several cash accounts denominated in foreign currencies, primarily in Euros and British Pounds Sterling. As the Company
19
translates the foreign-denominated cash balances into U.S. dollars, the translated cash balance is adjusted upward or downward depending upon the foreign currency exchange movements. The upward or downward adjustment is recorded as a gain or loss on foreign currency translation in the Companys statements of income. As those cash accounts have increased, the upward or downward adjustments have increased.
The balance of the Companys foreign-denominated cash accounts subject to risk of translation gains or losses at March 31, 2012 was approximately $3.3 million, the majority of which is denominated in Euros and British Pounds Sterling.
Income Taxes
TSYS effective income tax rate attributable to continuing operations for the three months ended March 31, 2012 was 34.3%, compared to 34.0% for the same period in 2011. The increase in the March 31, 2012 rate reflects changes in discrete items, tax credits and in the jurisdictional sources of income. The calculation of the effective tax rate is income taxes adjusted for income taxes associated with noncontrolling interest and equity income divided by TSYS pretax income adjusted for noncontrolling interests in consolidated subsidiaries net income and equity pre-tax earnings of its equity investments. Refer to Note 7 in the Notes to Unaudited Condensed Consolidated Financial Statements for more information on income taxes.
In the normal course of business, TSYS is subject to examinations from various tax authorities. These examinations may alter the timing or amount of taxable income or deductions or the allocation of income among tax jurisdictions.
TSYS continually monitors and evaluates the potential impact of current events and circumstances on the estimates and assumptions used in the analysis of its income tax positions, and, accordingly, TSYS effective tax rate may fluctuate in the future.
No provision for U.S. federal and state incomes taxes has been made in our consolidated financial statements for those non-U.S. subsidiaries whose earnings are considered to be reinvested. The amount of undistributed earnings considered to be reinvested which may be subject to tax upon distribution was approximately $55.2 million at March 31, 2012. A distribution of these non-U.S. earnings in the form of dividends, or otherwise, would subject the Company to both U.S. federal and state income taxes, as adjusted for non-U.S. tax credits, and withholding taxes payable to the various non-U.S. countries. Determination of the amount of any unrecognized deferred income tax liability on these undistributed earnings is not practicable.
Equity in Income of Equity Investments
The Company has two equity investments located in Mexico and China that are accounted for under the equity method of accounting. TSYS share of income from its equity in equity investments was $2.8 and $2.3 million for the three months ended March 31, 2012 and 2011, respectively. The increase in TSYS share of income from its equity in equity investments for the three months ended March 31, 2012, as compared to 2011, is due to timing of renewal contracts and new business.
Net Income
Net income for the three months ended March 31, 2012 increased 16.7%, or $8.3 million, to $57.7 million, compared to $49.4 million for the same period in 2011.
Net income attributable to TSYS common shareholders for the three months ended March 31, 2012 increased 15.6%, or $7.6 million, to $56.4 million, or basic and diluted earnings per share of $0.30, compared to $48.8 million, or basic and diluted earnings per share of $0.25, for the same period in 2011.
Projected Outlook for 2012
As compared to 2011, TSYS expects its 2012 income from continuing operations to increase by 8%-10%, its EPS from continuing operations available to TSYS common shareholders to increase by 10%-12%, its revenues before reimbursable items to increase by 2%-5% and its total revenues to increase by 0%-2%, based on the following assumptions with respect to 2012: (1) there will be no significant movements in LIBOR and TSYS will not make any significant draws on the remaining balance of its revolving credit facility; (2) there will be no significant movement in foreign currency exchange rates related to TSYS business; (3) TSYS will not incur significant expenses associated with the conversion of new large clients or acquisitions, or any significant impairment of goodwill or other intangibles; (4) there will be no deconversions of large clients during the year; and (5) the economy will not worsen.
Financial Position, Liquidity and Capital Resources
The Condensed Consolidated Statements of Cash Flows detail the Companys cash flows from operating, investing and financing activities. TSYS primary method of funding its operations and growth has been cash generated from current operations and the use of leases. TSYS has occasionally used borrowed funds to supplement financing of capital expenditures and acquisitions.
20
Cash Flows From Operating Activities
Three months ended March 31, | ||||||||
(in thousands) | 2012 | 2011 | ||||||
Net income |
$ | 57,644 | 49,412 | |||||
Depreciation and amortization |
40,873 | 41,068 | ||||||
Other noncash items and charges, net |
9,227 | 7,000 | ||||||
Net change in current and other assets and current and other liabilities |
(9,831 | ) | 4,691 | |||||
|
|
|
|
|||||
Net cash provided by operating activities |
$ | 97,913 | 102,171 | |||||
|
|
|
|
TSYS main source of funds is derived from operating activities, specifically net income. The decrease in 2012 in net cash provided by operating activities was primarily the result of the decrease in net change in current and other assets and current and other liabilities.
Net change in current and other assets and current and other liabilities include accounts receivable, prepaid expenses, other current assets and other assets, accounts payable, accrued salaries and employee benefits, other current liabilities and other liabilities. The change in accounts receivable at March 31, 2012, as compared to December 31, 2011, is the result of timing of collections compared to billings. The change in accounts payable and other liabilities for the same period is the result of the payments of vendor invoices and the timing of payments.
Cash Flows From Investing Activities
Three months ended March 31, | ||||||||
(in thousands) | 2012 | 2011 | ||||||
Additions to contract acquisition costs |
$ | (5,099 | ) | (7,202 | ) | |||
Purchases of property and equipment, net |
(4,984 | ) | (5,960 | ) | ||||
Additions to internally developed computer software |
(4,435 | ) | (4,478 | ) | ||||
Additions to licensed computer software from vendors |
(2,593 | ) | (1,280 | ) | ||||
Cash used in acquisitions, net of cash acquired |
(1,750 | ) | | |||||
Purchase of private equity investments |
(499 | ) | | |||||
Proceeds from sale of tradename |
| 4,500 | ||||||
|
|
|
|
|||||
Net cash used in investing activities |
$ | (19,360 | ) | (14,420 | ) | |||
|
|
|
|
The major uses of cash for investing activities have been acquisitions, the addition of property and equipment, primarily computer equipment, the purchase of licensed computer software and internal development of computer software, and investments in contract acquisition costs associated with obtaining and servicing new or existing clients. The major uses of cash for investing activities in 2012 was the investment in contract acquisition costs, the addition of property and equipment, the purchase of licensed computer software and internal development of computer software. The major uses of cash for investing activities in 2011 were for the additions to contract acquisition costs, equipment, licensed computer software from vendors and internally developed computer software. The main source of cash for investing activities in 2011 was for the sale of a tradename associated with the purchase of the remaining 49-percent interest in TSYS Merchant Solutions (TMS).
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 $5.1 million for the three months ended March 31, 2012, compared to $7.2 million for the three months ended March 31, 2011.
Purchase of Private Equity Investments
On May 31, 2011, the Company entered into a limited partnership agreement in connection with its agreement to invest in an Atlanta-based venture capital fund focused exclusively on investing in technology-enabled financial services companies. Pursuant to the limited partnership agreement, the Company has committed to invest up to $20 million in the fund so long as its ownership interest in the fund does not exceed 50%. In 2011, the Company made investments in the fund of $1.6 million. During the first three months of 2012, the Company made an additional investment of $0.5 million. In April 2012, the Company made an additional investment of $0.1 million.
21
Cash Flows From Financing Activities
Three months ended March 31, | ||||||||
(in thousands) | 2012 | 2011 | ||||||
Dividends paid on common stock |
$ | (18,913 | ) | (13,556 | ) | |||
Principal payments on long-term debt borrowings and capital lease obligations |
(6,505 | ) | (8,551 | ) | ||||
Purchase of noncontrolling interests |
| (174,050 | ) | |||||
Repurchase of common stock |
| (35,700 | ) | |||||
Other |
2,124 | 1,222 | ||||||
|
|
|
|
|||||
Net cash used in financing activities |
$ | (23,294 | ) | (230,635 | ) | |||
|
|
|
|
The major use of cash from financing activities has been the purchase of noncontrolling interests, repurchase of common stock and payment of dividends. The major uses of cash from financing activities in 2012 was the payment of dividends. The major uses of cash from financing activities in 2011 was for the acquisition of the remaining 49% interest in TMS, repurchase of common stock, and payment of dividends.
Borrowings
For a detailed discussion regarding the Companys borrowings, see Item 7: Managements Discussion and Analysis of Financial Condition and Results of Operations, and for a detailed discussion regarding the Companys long-term debt, see Note 13 Long-term Debt and Capital Lease Obligations in the Companys Annual Report on Form 10-K for the year ended December 31, 2011.
Stock Repurchase Plan
For a detailed discussion regarding the Companys stock repurchase plan, see Item 7: Managements Discussion and Analysis of Financial Condition and Results of Operations. At March 31, 2012, the Company had 5.3 million shares that could be repurchased under the plan.
Dividends
Dividends on common stock of $18.9 million were paid during the three months ended March 31, 2012, compared to $13.6 million paid during the three months ended March 31, 2011.
On October 25, 2011, TSYS announced that its Board of Directors approved a 42.9% increase in the regular quarterly dividend payable on the Companys common stock from $0.07 per share to $0.10 per share, payable on January 3, 2012 to shareholders of record as of the close of business on December 15, 2011.
Significant Noncash Transactions
Refer to Note 9 of the Notes to Unaudited Condensed Consolidated Financial Statements for more information about supplementary cash flow information.
Foreign Operations
TSYS operates internationally and is subject to adverse movements in foreign currency exchange rates. TSYS does not enter into foreign exchange forward contracts to reduce its exposure to foreign currency rate changes; however, the Company continues to analyze potential hedging instruments to safeguard it from significant foreign currency translation risks.
TSYS maintains operating cash accounts outside the United States. Refer to Note 3 in the Notes to Unaudited Condensed Consolidated Financial Statements for more information on cash and cash equivalents. TSYS has adopted the permanent reinvestment exception under ASC 740 with respect to future earnings of certain foreign subsidiaries. While some of the foreign cash is available to repay intercompany financing arrangements, remaining amounts are not presently available to fund domestic operations and obligations without paying a significant amount of taxes upon its repatriation. Demand on the Companys cash has increased as a result of its strategic initiatives. TSYS funds these initiatives through a balance of internally generated cash, external sources of capital, and, when advantageous, access to foreign cash in a tax efficient manner. Where local regulations limit an efficient intercompany transfer of amounts held outside of the U.S., TSYS will continue to utilize these funds for local liquidity needs. Under current law, balances available to be repatriated to the U.S. would be subject to U.S. federal income taxes, less applicable foreign tax credits. TSYS has provided for the U.S. federal tax liability on these amounts for financial statement purposes, except for foreign earnings that are considered permanently reinvested outside of the U.S. TSYS utilizes a variety of tax planning and financing strategies with the objective of having its worldwide cash available in the locations where it is needed.
Impact of Inflation
Although the impact of inflation on its operations cannot be precisely determined, the Company believes that by controlling its operating expenses, and by taking advantage of more efficient computer hardware and software, it can minimize the impact of inflation.
22
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 1.9:1. At March 31, 2012, TSYS had working capital of $329.9 million compared to $271.9 million at December 31, 2011.
Legal Proceedings
The Company is subject to various legal proceedings and claims and is also subject to information requests, inquiries and investigations arising out of the ordinary conduct of its business. The Company establishes reserves for litigation and similar matters when those matters present loss contingencies that TSYS determines to be both probable and reasonably estimable in accordance with ASC 450, Contingencies. In the opinion of management, based on current knowledge and in part upon the advice of legal counsel, all matters are believed to be adequately covered by insurance, or, if not covered, the possibility of losses from such matters are believed to be remote or such matters are of such kind or involve such amounts that would not have a material adverse effect on the financial position, results of operations or cash flows of the Company if disposed of unfavorably.
Recent Accounting Pronouncements
The Companys Annual Report on Form 10-K for the year ended December 31, 2011, 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 expectation that it will be able to fund a significant portion of its capital expenditure needs through internally generated cash in the future; (ii) TSYS earnings guidance for 2012 total revenues, revenues before reimbursable items, income from continuing operations and EPS from continuing operations; (iii)TSYS belief with respect to lawsuits, claims and other complaints; (iv) TSYS expectation with respect to certain tax matters, and the assumptions underlying such statements. In addition, certain statements in future filings by TSYS with the Securities and Exchange Commission, in press releases, and in oral and written statements made by or with the approval of TSYS which are not statements of historical fact constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenue, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans and objectives of TSYS or its management or Board of Directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as believes, anticipates, expects, intends, targeted, estimates, projects, plans, may, could, should, would, and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying these statements.
These statements are based upon the current beliefs and expectations of TSYS management and are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements. A number of important factors could cause actual results to differ materially from those contemplated by our forward-looking statements. Many of these factors are beyond TSYS ability to control or predict. These factors include, but are not limited to:
| movements in LIBOR are greater than expected and draws on the revolving credit facility are greater than expected; |
| TSYS incurs expenses associated with the signing of a significant client; |
| internal growth rates for TSYS existing clients are lower than anticipated whether as a result of unemployment rates, card delinquencies and charge off rates or otherwise; |
| TSYS does not convert and deconvert clients portfolios as scheduled; |
| adverse developments with respect to foreign currency exchange rates; |
| adverse developments with respect to entering into contracts with new clients and retaining current clients; |
| continued consolidation and turmoil in the financial services and other industries during 2012, including the merger of TSYS clients with entities that are not TSYS processing clients, the sale of portfolios by TSYS clients to entities that are not TSYS processing clients and the nationalization or seizure by banking regulators of TSYS clients; |
| the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act on TSYS and our clients; |
| adverse developments with respect to the credit card industry in general, including a decline in the use of cards as a payment mechanism; |
| TSYS is unable to successfully manage any impact from slowing economic conditions or consumer spending; |
| the impact of potential and completed acquisitions, including the costs associated therewith and their being more difficult to integrate than anticipated; |
23
| the impact of the application of and/or changes in accounting principles; |
| TSYS inability to timely, successfully and cost-effectively improve and implement processing systems to provide new products, increased functionality and increased efficiencies; |
| TSYS inability to anticipate and respond to technological changes, particularly with respect to e-commerce; |
| changes occur in laws, rules, regulations, credit card association rules or other industry standards affecting TSYS and our clients that may result in costly new compliance burdens on TSYS and our clients and lead to a decrease in the volume and/or number of transactions processed; |
| successfully managing the potential both for patent protection and patent liability in the context of rapidly developing legal framework for expansive patent protection; |
| the material breach of security of any of our systems; |
| overall market conditions; |
| the impact on TSYS business, as well as on the risks set forth above, of various domestic or international military or terrorist activities or conflicts; |
| other risk factors described in the Risk Factors and other sections of TSYS Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and other filings with the Securities and Exchange Commission; and |
| TSYS ability to manage the foregoing and other risks. |
These forward-looking statements speak only as of the date on which they are made and TSYS does not intend to update any forward-looking statement as a result of new information, future developments or otherwise.
24
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.
Currently, the Company does not use financial instruments to hedge exposure to exchange rate changes.
The following table presents the carrying value of the net assets of TSYS foreign operations in U.S. dollars at March 31, 2012:
(in millions) | March 31, 2012 | |||
Europe |
$ | 171.5 | ||
China |
78.9 | |||
Cyprus |
38.9 | |||
Japan |
24.7 | |||
Other |
11.0 |
TSYS records foreign currency translation adjustments associated with other balance sheet accounts. The Company maintains several cash accounts denominated in foreign currencies, primarily in Euros and British Pounds Sterling. As TSYS translates the foreign-denominated cash balances into U.S. dollars, the translated cash balance is adjusted upward or downward depending upon the foreign currency exchange movements. The upward or downward adjustment is recorded as a gain or loss on foreign currency translation in the statements of income. As those cash accounts have increased, the upward or downward adjustments have increased. TSYS recorded a net translation loss of approximately $0.5 million for the three months ended March 31, 2012 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, 2012 was approximately $3.3 million, the majority of which was denominated in Euros and British Pounds Sterling.
The Company provides financing to its international operation in Europe through an intercompany loan that requires the operation to repay the financing in U.S. dollars. The functional currency of the operation is the respective local currency. As it translates the foreign currency denominated financial statements into U.S. dollars, the translated balance of the financing (liability) is adjusted upward or downward to match the U.S. dollar obligation (receivable) on its financial statements. The upward or downward adjustment is recorded as a gain or loss on foreign currency translation.
The net asset account balance subject to foreign currency exchange rates between the local currencies and the U.S. dollar at March 31, 2012 was $14.6 million. The net asset account balance includes cash and net accounts receivable.
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 $17.9 million at March 31, 2012.
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 |
$ | 179 | 898 | 1,796 | (179 | ) | (898 | ) | (1,796 | ) |
25
TOTAL SYSTEM SERVICES, INC.
Item 3 Quantitative and Qualitative Disclosures About Market Risk (continued)
Interest Rate Risk
TSYS is also exposed to interest rate risk associated with the investing of available cash and the use of debt. TSYS invests available cash in conservative short-term instruments and is primarily subject to changes in the short-term interest rates.
The Companys Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the SEC, contains a discussion of interest rate risk and the Companys debt obligations that are sensitive to changes in interest rates.
On December 21, 2007, the Company entered into a Credit Agreement with Bank of America N.A., as Administrative Agent, The Royal Bank of Scotland plc, as Syndication Agent, and other lenders. The Credit Agreement provides for a $168 million unsecured five-year term loan to the Company and a $252 million five-year unsecured revolving credit facility. The principal balance of loans outstanding under the credit facility bears interest at a rate of London Interbank Offered Rate (LIBOR) plus an applicable margin of 0.60%. Interest is paid on the last date of each interest period; however, if the period exceeds three months, interest is paid every three months after the beginning of such interest period.
On October 31, 2008, the Companys International Services segment obtained a credit agreement from a third party to borrow up to ¥2.0 billion, or approximately $21 million, in a Yen-denominated three year loan to finance activities in Japan. The rate is LIBOR plus 80 basis points. The Company initially made a draw down of ¥1.5 billion, or approximately $15.1 million. In January 2009, the Company made an additional draw down of ¥250 million, or approximately $2.8 million. In April 2009, the Company made an additional draw down of ¥250 million, or approximately $2.5 million. On December 30, 2011, the Company renewed its loan to extend the maturity date to November 5, 2014.
26
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, 2012, TSYS disclosure controls and procedures were designed and effective to ensure that the information required to be disclosed by TSYS in reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms and were also designed and effective to ensure that the information required to be disclosed in the reports that TSYS files or submits under the Exchange Act is accumulated and communicated to management, as appropriate to allow timely decisions regarding required disclosure.
No change in TSYS internal control over financial reporting occurred during the period covered by this report that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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Part II Other Information
For information regarding TSYS Legal Proceedings, refer to Note 10 of the Notes to Unaudited Condensed Consolidated Financial Statements which is incorporated by reference into this item.
Factors Item 1A Risk Factors
In addition to the other information set forth in this report, one should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in the Companys Annual Report on Form 10-K for the year ended December 31, 2011, 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, 2012:
(in thousands, except per share data) Period |
Total Number
of Shares Purchased |
Average Price Paid per Share |
Total Number
of Shares Purchased as Part of Publicly Announced Plans or Programs |
Maximum Number
of Shares That May Yet Be Purchased Under the Plans or Programs |
||||||||||||
January 2012 |
13 | (1) | $ | 20.94 | 9,693 | 5,307 | ||||||||||
February 2012 |
| | 9,693 | 5,307 | ||||||||||||
March 2012 |
2 | (1) | 23.07 | 9,693 | 5,307 | |||||||||||
|
|
|
|
|||||||||||||
Total |
15 | (1) | $ | 21.29 | ||||||||||||
|
|
|
|
(1) | Consists of delivery of shares to TSYS on vesting of restricted shares to pay taxes. |
a) Exhibits
Exhibit Number |
Description | |
10.1 | Form of Senior Executive Stock Option Agreement for 2012 stock option awards under the Total System Services, Inc. 2008 Omnibus Plan | |
10.2 | Form of Senior Executive Performance Share Agreement for the 2012 performance share awards under the Total System Services, Inc. 2008 Omnibus Plan | |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
28
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, 2012 | by: | /s/ Philip W. Tomlinson | ||||
Philip W. Tomlinson | ||||||
Chairman of the Board and | ||||||
Chief Executive Officer | ||||||
Date: May 7, 2012 | by: | /s/ James B. Lipham | ||||
James B. Lipham | ||||||
Senior Executive Vice President | ||||||
and Chief Financial Officer |
29
Exhibit Index
Exhibit Number |
Description | |
10.1 | Form of Senior Executive Stock Option Agreement for 2012 stock option awards under the Total System Services, Inc. 2008 Omnibus Plan | |
10.2 | Form of Senior Executive Performance Share Agreement for the 2012 performance share awards under the Total System Services, Inc. 2008 Omnibus Plan | |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
30
Exhibit 10.1
TOTAL SYSTEM SERVICES, INC.
SENIOR EXECUTIVE STOCK OPTION AGREEMENT
THIS AGREEMENT (Agreement) is made effective as of , by and between TOTAL SYSTEM SERVICES, INC., a Georgia corporation (the Company), with its principal office at One TSYS Way, Columbus, Georgia, and you (Option Holder), an employee of the Company or a Subsidiary of the Company.
W I T N E S S E T H:
WHEREAS, the Board of Directors of the Company has adopted the Total System Services, Inc. 2008 Omnibus Plan (the Plan); and
WHEREAS, the Company recognizes the value to it of the services of the Option Holder and intends to provide the Option Holder with added incentive and inducement to contribute to the success of the Company; and
WHEREAS, the Company recognizes the potential benefits of providing employees the opportunity to acquire an equity interest in the Company and to more closely align the personal interests of employees with those of other shareholders; and
WHEREAS, effective , the Compensation Committee of the Board of Directors of the Company granted to the Option Holder, pursuant to Section 6 of the Plan, an Option in respect of the number of shares with an initial economic value equal to the product of (a) the Option Holders base salary on multiplied by (b) 50% of his LTIP multiplier as determined by the Compensation Committee prior to . The Compensation Committee also designated the Option a Non-Qualified Stock Option and fixed and determined the Option price and exercise and termination dates as set forth below.
NOW THEREFORE, in consideration of the mutual promises and representations herein contained and other good and valuable consideration, it is agreed by and between the parties hereto as follows:
1. The terms, provisions and definitions of the Plan are incorporated by reference and made a part hereof. All capitalized terms in this Agreement shall have the same meanings given to such terms in the Plan except where otherwise noted.
2. Subject to and in accordance with the provisions of the Plan, the Company hereby grants to the Option Holder a Non-Qualified Stock Option to purchase, on the terms and subject to the conditions hereinafter set forth, all or any part of the aggregate shares of the Common Stock ($0.10 par value) so granted of the Company at the purchase price of $ per share, exercisable in the amounts and at the times set forth in Paragraph 3 below, unless the Compensation Committee, in its sole and exclusive discretion, shall authorize the Option Holder to exercise all or part of the Option at an earlier date.
3. The Option will vest over the period (the Vesting Period) in accordance with the following schedule:
If employment continues through |
Percentage of Option Vested |
|||
33 | % | |||
67 | % | |||
100 | % |
(a) | In the event of Option Holders death or total and permanent disability, the Option shall become 100% vested and Option Holder (or the legal representative of Option Holders estate or legatee under Option Holders will) shall be able to exercise the Option in full for the remainder of the Options term. |
(b) | If Option Holder retires from the Company or an Affiliate on or after the date Option Holder attains age 65, or age 62 with 15 or more years of service, Option Holder shall be able to exercise the Option, as follows: |
(i) | If Option Holder retires during the first 18 months of the Vesting Period, the Option may be exercised to the extent exercisable upon such retirement pursuant to the schedule above. In addition, the Option also will be exercisable for an additional percentage of the Option determined by multiplying (1) the incremental percentage of the Option that would have become exercisable under such schedule on the next anniversary date if Option Holder had not retired, with such percentage to be expressed as a number of shares, by (2) the ratio of the number of months since the immediately preceding anniversary date (or since the date of grant, if the retirement occurs prior to ) that Option Holder has been employed to 12. Partial months of employment will be counted as full months for purposes of this proration calculation. To the extent the Option is exercisable pursuant to this paragraph; it will be exercisable for the remainder of the Options term. |
(ii) | If Option Holder retires during months 19-36 of the Vesting Period, the Option shall become 100% vested, and Option Holder shall be able to exercise the Option in full for the remainder of the Options term. |
If Option Holder is involuntarily terminated by the Company or an Affiliate, Option Holder will not be considered to have retired for purposes of this Section 3(b), regardless of whether Option Holders separation of
2
employment occurs on or after the date Option Holder attains age 65, or age 62 with 15 or more years of service, unless the Committee determines otherwise, in its sole discretion.
(c) | In the event of Option Holders separation of employment for any reason other than the reasons listed in Section 3(a) or 3(b), Option Holder shall be able to exercise the vested portion of the Option, determined as of the date of separation of employment, for 90 days following the date of such separation of employment. In the event of a Change of Control (as defined in Section 2.8 of the Plan), any applicable terms of Section 8 will supersede the terms of this Section 3. |
Unless sooner terminated as provided in the Plan or in this Agreement, the Option shall terminate, and all rights of the Option Holder hereunder, shall expire on . In no event may the Option be exercised after .
4. The Option or any part thereof, may, to the extent that it is vested and exercisable, be exercised in the manner provided in the Plan. Payment of the aggregate Option price for the number of shares purchased and any withholding taxes shall be made in the manner provided in the Plan.
5. The Option or any part thereof may be exercised during the lifetime of the Option Holder only by the Option Holder and only while the Option Holder is in the employ of the Company, except as otherwise provided in the Plan.
6. Unless otherwise designated by the Compensation Committee, the Option shall not be transferred, assigned, pledged or hypothecated in any way. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of a nontransferable Option or any right or privilege confirmed hereby contrary to the provisions hereof, the Option and the rights and privileges confirmed hereby shall immediately become null and void.
7. In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, or other change in corporate structure affecting the Companys Stock, any necessary adjustment shall be made in accordance with the provisions of Section 4.4 of the Plan.
8. In the event of a Change of Control (as defined in Section 2.8 of the Plan), the following provisions shall apply to the Option:
(a) | If the Company is the surviving entity and any adjustments necessary to preserve the intrinsic value of the Option Holders outstanding Option have been made, or the Companys successor at the time of the Change of Control irrevocably assumes the Companys obligations under the Plan and this Agreement or replaces the Option Holders outstanding Option with stock options having substantially the same intrinsic value and having terms and |
3
conditions no less favorable to the Option Holder than those applicable to the Option immediately prior to the Change of Control (collectively, an Equitable Assumption or Replacement), and if the Option Holders employment is terminated within two years following the date of such Change of Control either (i) by the Company for any reason other than Cause or (ii) by the Option Holder for Good Reason (as the terms Cause and Good Reason are defined in the Companys applicable Change of Control Agreement, the provisions of which are incorporated herein by reference), then the Option shall vest on a pro rata basis upon termination with the percentage that is exercisable to be determined by multiplying (i) the percentage of the Option that has not yet vested and that would have become exercisable on if Option Holders employment had not terminated, expressed as a number of shares, by (ii) the ratio of the number of months since the immediately preceding anniversary date (or since the date of grant, if the termination occurs prior to ) that Option Holder has been employed to the number of months left in the Vesting Period. Partial months of employment will be counted as full months for purposes of this proration calculation. To the extent the Option is exercisable pursuant to this paragraph, it will be exercisable for the remainder of the Options term. |
(b) | If there is no Equitable Assumption or Replacement, then the Option shall vest on a pro rata basis upon the Change of Control with the percentage that is exercisable to be determined by multiplying (i) the percentage of the Option that has not yet vested and that would have become exercisable on if the Change of Control had not occurred, expressed as a number of shares, by (ii) the ratio of the number of months since the immediately preceding anniversary date (or since the date of grant, if the Change of Control occurs prior to ) through the date of the Change of Control to number of months left in the Vesting Period. Partial months of employment will be counted as full months for purposes of this proration calculation. |
9. Any notice to be given to the Company shall be addressed to the President of the Company at One TSYS Way, Columbus, Georgia 31901.
10. Nothing herein contained shall affect the right of the Option Holder to participate in and receive benefits under and in accordance with the provisions of any pension, insurance or other benefit plan or program of the Company as in effect from time to time and for which the Option Holder is eligible.
11. Nothing herein contained shall affect the right of the Company, subject to the terms of any written contractual arrangement to the contrary, to terminate the Option Holders employment at any time for any reason whatsoever.
12. This Agreement shall be binding upon and inure to the benefit of the Option Holder, his personal representatives, heirs, legatees. However, neither this Agreement nor any rights hereunder shall be assignable or otherwise transferable by the Option Holder except as expressly set forth in this Agreement or in the Plan.
4
13. If this Option and the Common Stock acquired upon exercise of this Option are subject to recovery under any law, government regulation or stock exchange listing requirement, the Option and the Common Stock shall be subject to such deductions and clawback as may be required to be made pursuant to such law, government regulation or stock exchange listing requirement (or any policy adopted by the Company pursuant to any such law, government regulation or stock exchange listing requirement) and the Committee, in its sole and exclusive discretion, may require that Option Holder reimburse the Company all or part of any payment or transfer related to this Option award and the Common Stock.
14. Any Common Stock Option Holder receives pursuant to the exercise of the Option is subject to the TSYS Share Retention Policy for Senior Executives.
15. The Company has issued the Option subject to the foregoing terms and conditions and the provisions of the Plan. Option Holders acceptance of the Option shall be made by electronic acknowledgement of this Agreement, and Option Holder agrees that his electronic acknowledgment of this Agreement shall be considered the equivalent of his written signature.
5
Exhibit 10.2
TOTAL SYSTEM SERVICES, INC.
SENIOR EXECUTIVE PERFORMANCE SHARE AGREEMENT
Total System Services, Inc. (Company) confirms that, effective (the Grant Date), you were awarded the opportunity to receive Performance Shares with an initial economic value equal to the product of (a) your base salary on the Grant Date multiplied by (b) 50% of your LTIP multiplier as determined by the Committee prior to the Grant Date (such initial economic value being the Performance Opportunity), subject to adjustment based on specified performance measures for the period . The Performance Opportunity will be converted into Performance Shares pursuant to the provisions of Section 1 below, with one-half of the Performance Opportunity converted pursuant to Section 1(d) and the other half converted pursuant to Section 1(e). The Performance Shares that you receive in connection with this Performance Opportunity, if any, are subject to the terms and conditions of this Performance Share Agreement (this Agreement) and the Companys 2008 Omnibus Plan (the Plan). Any other capitalized word used in this Agreement and not defined in this Agreement, including each form of that word, is defined in the Plan.
1. Standard Performance Terms.
(a) In General. The terms of this Section 1 shall be referred to as the Standard Performance Terms and will apply to your Performance Shares except in so far as Sections 2 (Change of Employment Status) or 3 (Change of Control) apply.
(b) Performance Period. The number of Performance Shares you receive in connection with the Performance Opportunity will be determined on the basis of the Companys performance during the performance period beginning on and ending on (the Performance Period).
(c) Initial Performance Shares. The Performance Opportunity initially will equal a number of Performance Shares determined by dividing the Performance Opportunity by the closing price of the Companys Shares on the New York Stock Exchange on the Grant Date (your Initial Performance Shares).
(d) Performance Goals Based on Revenue Growth. The Committee will set the performance goals for one-half of your Initial Performance Shares based on the compounded annual growth rate of the Companys revenue before reimbursables (as shown on the Companys financial statement) for the Performance Period, subject to adjustment as provided in Section 1(f) (the Revenue Growth). Within 90 days after the beginning of the Performance Period, the Committee will establish a target Revenue Growth, as well as minimum and maximum threshold levels of Revenue Growth.
After the end of the Performance Period, the Committee will certify the Revenue Growth and the number of Performance Shares payable based on the Companys performance against the pre-established target, minimum and maximum threshold levels of Revenue Growth as set forth in this Section 1(d).
| If the Revenue Growth equals the target for the Performance Period, then the number of Performance Shares payable will equal 100% of your Initial Performance Shares that are subject to this Section 1(d); |
| If the Revenue Growth equals the minimum threshold for the Performance Period, then the number of Performance Shares payable will equal 50% of your Initial Performance Shares that are subject to this Section 1(d); |
| If the Revenue Growth equals or exceeds the maximum threshold for the Performance Period, then the number of Performance Shares payable will equal 200% of your Initial Performance Shares that are subject to this Section 1(d); |
| If the Revenue Growth falls between the minimum threshold and the target for the Performance Period, or between the target and the maximum threshold for the Performance Period, then the percentage of your Initial Performance Shares that are subject to this Section 1(d) and the number of Performance Shares that are payable will be mathematically interpolated; and |
| If the Revenue Growth is less than the minimum threshold for the Performance Period, then none of your Initial Performance Shares that are subject to this Section 1(d) will be payable. |
(e) Performance Goals Based on Income Growth. The Committee will set the performance goals for the other half of your Initial Performance Shares based on the compounded annual growth rate of the Companys income from continuing operations (as shown on the Companys financial statement) for the Performance Period, subject to adjustment as provided in Section 1(f) (the Income Growth). Within 90 days after the beginning of the Performance Period, the Committee will establish a target Income Growth, as well as minimum and maximum threshold levels of Income Growth.
After the end of the Performance Period, the Committee will certify the Income Growth and the number of Performance Shares payable based on the Companys performance against the pre-established target, minimum and maximum threshold levels of Income Growth as follows:
| If the Income Growth equals the target for the Performance Period, then the number of Performance Shares payable will equal 100% of your Initial Performance Shares that are subject to this Section 1(e); |
2
| If the Income Growth equals the minimum threshold for the Performance Period, then the number of Performance Shares payable will equal 50% of your Initial Performance Shares that are subject to this Section 1(e); |
| If the Income Growth equals or exceeds the maximum threshold for the Performance Period, then the number of Performance Shares payable will equal 200% of your Initial Performance Shares that are subject to this Section 1(e); |
| If the Income Growth falls between the minimum threshold and the target for the Performance Period, or between the target and the maximum threshold for the Performance Period, then the percentage of your Initial Performance Shares that are subject to this Section 1(e) and the number of Performance Shares that are payable will be mathematically interpolated; and |
| If the Income Growth is less than the minimum threshold for the Performance Period, then none of your Initial Performance Shares that are subject to this Section 1(e) will be payable. |
(f) Adjustments. In determining the Revenue Growth and Income Growth, the Committee will (i) exclude the effect of changes in tax laws, accounting principles, or other laws or provisions affecting reported results; (ii) exclude the effect of differences in currency rates compared to managements operating plan (constant currency); (iii) exclude foreign currency exchange gains or losses included in non-operating income; (iv) exclude the effect of extraordinary non-recurring items as described in ASC 225 and/or in managements discussion and analysis of financial condition and results of operations appearing in the Companys annual report to shareholders for 2014; (v) include the effect of all acquisitions during the Performance Period; and (vi) exclude a quantitative amount of income from the income from continuing operations performance result to adjust for any dilutive EPS effect from any transaction or series of transactions during the Performance Period.
2. Change of Employment Status. Except as otherwise provided in this Section 2 or Section 3, you must remain employed with the Company or an Affiliate through the Performance Period in order to fully vest in your Performance Shares. For purposes of this Section 2, your transfer between the Company and an Affiliate, or among Affiliates, will not be a termination of employment. In the event of a Change of Control, any applicable terms of Section 3 (Change of Control) will supersede the terms of this Section 2.
(a) Long-Term Disability or Death. If your employment with the Company or an Affiliate terminates during the Performance Period due to (i) your long-term disability (determined on the basis of your qualification for long-term disability benefits under a plan or arrangement offered by the Company or an Affiliate) or (ii) your
3
death, the number of Performance Shares that you, or your beneficiary, will be entitled to receive will equal the product of the number of your Initial Performance Shares multiplied by the ratio of the number of days you were employed during the Performance Period to the total number of days in the Performance Period.
(b) Retirement. If you retire from the Company or an Affiliate on or after the date you attain (i) age 65 or (ii) age 62 with 15 or more years of service, the Standard Performance Terms applicable to the entire Performance Period will continue to apply to determine the number of Performance Shares, except that the number of Performance Shares you receive at the end of the Performance Period will be prorated based on the ratio of the number of days you were employed during the Performance Period to the total number of days in the Performance Period. If you are involuntarily terminated by the Company or an Affiliate, you will not be considered to have retired for purposes of this Section 2(b), regardless of whether your termination occurs on or after the date you attained (i) age 65 or (ii) age 62 with 15 or more years of service, unless the Committee determines otherwise, in its sole discretion.
(c) Other Termination of Employment. Except as set forth in Section 2(a) or (b), if you voluntarily terminate employment or if you are involuntarily terminated by the Company or an Affiliate before the end of the Performance Period, your Initial Performance Shares will be forfeited immediately.
3. Change of Control. In the event of a Change of Control in which the Company is the surviving entity or in which the Companys successor assumes the Companys obligations under this Agreement, or if the Performance Shares are otherwise equitably converted or substituted, and if your employment is subsequently terminated within two (2) years following the date of such Change of Control (and before the end of the Performance Period) either (a) by the Company for any reason other than Cause or (b) by you for Good Reason (as the terms Cause and Good Reason are defined in the Companys Change of Control Plan Document, the provisions of which are incorporated herein by reference), then your Initial Performance Shares will be deemed to have been earned as of the date of termination and paid out on a pro rata basis as follows:
The number of Performance Shares you receive will equal the product of the number of your Initial Performance Shares multiplied by the ratio of the number of days you were employed during the Performance Period to the total number of days in the Performance Period.
4
In the event of a Change of Control in which the Companys successor does not assume the Companys obligations under this Agreement, or the Performance Shares are not otherwise equitably converted or substituted, your Initial Performance Shares will be deemed to have been earned as of the effective date of the Change of Control and paid out on a pro rata basis as follows:
The number of Performance Shares you receive will equal the product of the number of your Initial Performance Shares multiplied by the ratio of the number of days you were employed during the Performance Period to the total number of days in the Performance Period.
4. Nontransferability of Awards. Except as provided in Section 5 or as otherwise permitted by the Committee, you may not sell, transfer, pledge, assign or otherwise alienate or hypothecate any of your Performance Shares, and all rights with respect to your Performance Shares are exercisable during your lifetime only by you.
5. Beneficiary Designation. You may name any beneficiary or beneficiaries (who may be named contingently or successively) who may then exercise any right under this Agreement in the event of your death. Each beneficiary designation for such purpose will revoke all such prior designations. Beneficiary designations must be properly completed on a form prescribed by the Committee and must be filed with the Company during your lifetime. If you have not designated a beneficiary, your rights under this Agreement will pass to and may be exercised by your estate.
6. Tax Withholding. The Company will withhold from any payment made under this Agreement or any other amounts payable to you by the Company an amount sufficient to satisfy the minimum statutory Federal, state, and local tax withholding requirements relating to such payment.
7. Adjustments. In accordance with Section 4.4 of the Plan, the Committee will make appropriate adjustments in the terms and conditions of your Performance Shares in recognition of a corporate event or transaction affecting the Company (such as a common stock dividend, common stock split, recapitalization, payment of an extraordinary dividend, merger, consolidation, combination, spin-off, distribution of assets to stockholders other than ordinary cash dividends, exchange of shares, or other similar corporate change), to prevent unintended dilution or enlargement of the potential benefits of your Performance Shares. The Committees determinations pursuant to this Section 7 will be conclusive.
8. Timing and Form of Payment.
(a) This Agreement is intended to comply with Code Section 409A and shall be interpreted accordingly. If Shares are to be paid to you, you will receive evidence of ownership of those Shares.
(b) If payment is due and payable under the Standard Performance Terms or under Section 2(b), payment will be made in Shares in 2015 as soon as administratively practicable following the date the Committee certifies the Revenue Growth and Income Growth, and the number of Performance Shares payable based on the applicable pre-established target, minimum threshold and maximum threshold annual growth rate percentages.
5
(c) If payment is due and payable under Section 3, it will be made in Shares six (6) months and one day after your separation from service under Code Section 409A.
9. Dividend Equivalents. The Initial Performance Shares will be credited with dividend equivalents equal to the amount of cash dividend payments that would have otherwise been paid if the shares of the Companys common stock represented by the Initial Performance Shares (including deemed reinvested additional shares attributable to the Initial Performance Shares pursuant to this paragraph) were actually outstanding (the Dividend Equivalents). These Dividend Equivalents will be deemed to be reinvested in additional shares of the Companys common stock determined by dividing the deemed cash dividend amount by the Fair Market Value of a share of the Companys common stock on the applicable dividend payment date. Such credited amounts will be added to the Initial Performance Shares and will vest or be forfeited in accordance with Section 2 or 3, as applicable, based on the vesting or forfeiture of the Initial Performance Shares to which they are attributable. In addition, the Initial Performance Shares will be credited with any dividends or distributions that are paid in shares of the Companys common stock represented by the Initial Performance Shares and will otherwise be adjusted by the Committee for other capital or corporate events as provided for in the Plan.
10. No Guarantee of Employment. This Agreement is not a contract of employment and it is not a guarantee of employment for life or any period of time. Nothing in this Agreement interferes with or limits in any way the right of the Company or an Affiliate to terminate your employment at any time. This Agreement does not give you any right to continue in the employ of the Company or an Affiliate.
11. Governing Law; Choice of Forum. This Agreement will be construed in accordance with and governed by the laws of the State of Georgia, regardless of the law that might be applied under principles of conflict of laws. Any action to enforce this Agreement or any action otherwise regarding this Agreement must be brought in a court in the State of Georgia, to which jurisdiction the Company and you consent.
12. Miscellaneous. For purposes of this Agreement, Committee includes any direct or indirect delegate of the Committee (to the extent permitted by Code Section 162(m)), and, unless otherwise specified herein, the word Section refers to a Section in this Agreement. The Committee has absolute discretion to interpret and make determinations under this Agreement. Any determination or interpretation by the Committee pursuant to this Agreement will be final and conclusive. In the event of a conflict between any term of this Agreement and the terms of the Plan, the terms of the Plan control. This Agreement and the Plan represent the entire agreement between you and the Company, and you and all Affiliates, regarding your Performance Shares. No promises, terms, or agreements of any kind regarding your Performance Shares that are not set forth, or referred to, in this Agreement or in the Plan are part of this Agreement. In the event any provision of this Agreement is held illegal or invalid, the rest of this Agreement will remain enforceable. If you are an Employee of an Affiliate,
6
your Performance Shares are being provided to you by the Company on behalf of that Affiliate, and the value of your Performance Shares will be considered a compensation obligation of that Affiliate. Your Performance Shares are not Shares and do not give you the rights of a holder of Shares. The issuance of Shares pursuant to your Performance Shares is subject to all applicable laws, rules and regulations, and to any approvals by any governmental agencies or national securities exchanges as may be required. No Shares will be issued if that issuance would result in a violation of applicable law, including the federal securities laws and any applicable state or foreign securities laws.
13. Equity Recovery. If this award and the Performance Shares or Shares you receive pursuant to this Agreement are subject to recovery under any law, government regulation or stock exchange listing requirement, the award, the Performance Shares, and the Shares shall be subject to such deductions and clawback as may be required to be made pursuant to such law, government regulation or stock exchange listing requirement (or any policy adopted by the Company pursuant to any such law, government regulation or stock exchange listing requirement) and the Committee, in its sole and exclusive discretion, may require that you reimburse the Company all or part of any payment or transfer related to this award, the Performance Shares and the Shares.
14. Share Retention Policy. Any Shares you receive pursuant to this Agreement are subject to the TSYS Share Retention Policy for Senior Executives.
15. Amendments. The Committee has the exclusive right to amend this Agreement as long as the amendment does not adversely affect your Performance Opportunity in any material way (without your written consent) and is otherwise consistent with the Plan. The Company will give written notice to you (or, in the event of your death, to your beneficiary or estate) of any amendment as promptly as practicable after its adoption.
16. Electronic Signature. Your acceptance and execution of this Agreement shall be made by electronic acknowledgement, and you agree that your electronic acknowledgment of this Agreement shall be considered the equivalent of your written signature.
7
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Philip W. Tomlinson, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Total System Services, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: May 7, 2012 | /s/ Philip W. Tomlinson | |||||
Philip W. Tomlinson | ||||||
Chairman of the Board and | ||||||
Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, James B. Lipham, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Total System Services, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a- 15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: May 7, 2012 | /s/ James B. Lipham | |||||
James B. Lipham | ||||||
Senior Executive Vice President and | ||||||
Chief Financial Officer |
EXHIBIT 32
CERTIFICATION OF PERIODIC REPORT
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, Philip W. Tomlinson, the Chairman of the Board and Chief Executive Officer of Total System Services, Inc. (the Company), and James B. Lipham, the Senior Executive Vice President and Chief Financial Officer of the Company, hereby certify that, to the best of his knowledge:
(1) | The Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 (the Report) fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
May 7, 2012 | /s/ Philip W. Tomlinson | |||||
Philip W. Tomlinson | ||||||
Chairman of the Board and | ||||||
Chief Executive Officer | ||||||
May 7, 2012 | /s/ James B. Lipham | |||||
James B. Lipham | ||||||
Senior Executive Vice President and | ||||||
Chief Financial Officer |
This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q, irrespective of any general incorporation language contained in such filing).
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end
Segment Reporting and Major Customers - Additional Information (Detail) (USD $)
In Millions, unless otherwise specified |
3 Months Ended | |
---|---|---|
Mar. 31, 2012
Customer
|
Mar. 31, 2011
Customer
|
|
Segment Reporting Information [Line Items] | ||
Entity-wide revenue, major customer, number | 1 | 1 |
Percentage of total revenues, by major customer | 10.50% | 12.50% |
Entity-wide revenue, major customer, amount | $ 48.6 | $ 53.6 |
Share-Based Compensation - Additional Information (Detail) (USD $)
|
3 Months Ended | 1 Months Ended | 3 Months Ended | 1 Months Ended | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2012
|
Mar. 31, 2011
|
Mar. 31, 2012
Non vested Restricted Awards
Year
|
Mar. 31, 2011
Non vested Restricted Awards
|
Mar. 29, 2012
Stock Options
Year
|
Mar. 31, 2012
Stock Options
Year
|
Mar. 31, 2011
Stock Options
Year
|
Mar. 29, 2012
Performance Share Plan 2012
|
Mar. 29, 2012
Performance Share Plan 2012
Maximum
|
Mar. 29, 2012
Performance Share Plan 2012
Minimum
|
Mar. 15, 2011
Performance Share Plan 2011
|
Mar. 15, 2011
Performance Share Plan 2011
Maximum
|
Mar. 15, 2011
Performance Share Plan 2011
Minimum
|
Apr. 30, 2010
Performance Options
Year
|
Apr. 30, 2010
Performance Options
Stock Price At Specified Percentage Above Grant Date Stock Price
|
Apr. 30, 2010
Performance Options
Attainment Of Earnings Per Share Goals
|
|
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | ||||||||||||||||
Share-based compensation | $ 3,598,000 | $ 4,332,000 | ||||||||||||||
Share-based compensation related to expensing the fair value of stock options | 1,100,000 | 1,900,000 | ||||||||||||||
Unrecognized compensation cost related to non vested share-based compensation arrangements | 10,400,000 | 8,000,000 | ||||||||||||||
Unrecognized compensation cost related to non vested share-based compensation arrangements, recognition period | 2.3 | 1.7 | ||||||||||||||
Authorized shares of non vested stock to key executives | 241,095 | 263,292 | ||||||||||||||
Performance shares grant expected vesting Period | 2014 | 2012 | 2013 | 2011 | ||||||||||||
Percentage of performance shares grant expected to vest | 200.00% | 200.00% | ||||||||||||||
Shares of Common stock issued to certain key employees and non-management members of Board of Directors | 310,690 | 193,971 | ||||||||||||||
Value of Common stock issued to certain key employees and non-management members of Board of Directors | $ 6,700,000 | $ 3,400,000 | ||||||||||||||
Number of options granted | 730,574 | 699,426 | 1,400,000 | |||||||||||||
Share based compensation arrangement by share based payment award, vest and exercisable date | Apr. 30, 2013 | Dec. 31, 2012 | ||||||||||||||
Average fair value of option grant | $ 5.27 | $ 5.77 | $ 3.48 | |||||||||||||
Exercise price | $ 22.91 | $ 17.57 | $ 16.19 | |||||||||||||
Risk-free interest rate | 1.75% | 2.96% | 2.07% | |||||||||||||
Expected volatility | 24.00% | 30.00% | 30.00% | |||||||||||||
Expected term | 7.9 | 8.5 | 4.0 | |||||||||||||
Dividend yield | 1.75% | 1.59% | 1.79% | |||||||||||||
Grant vesting period | 3 | 3 |
Fair Value Measurement - Additional Information (Detail) (USD $)
In Thousands, unless otherwise specified |
Mar. 31, 2012
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Dec. 31, 2011
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Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items] | ||
Goodwill | $ 356,121 | $ 355,498 |
Supplementary Balance Sheet Information
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Mar. 31, 2012
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Supplementary Balance Sheet Information | Note 3 — Supplementary Balance Sheet Information Cash and Cash Equivalents The Company maintains accounts outside the United States denominated in currencies other than the U.S. dollar. All amounts in domestic accounts are denominated in U.S. dollars. Cash and cash equivalent balances are summarized as follows:
At March 31, 2012 and December 31, 2011, the Company had approximately $32.0 million and $22.0 million, respectively, in Money Market accounts that had an original maturity date of 90 days or less. The Company considers cash equivalents to be short-term, highly liquid investments that are both readily convertible to known amounts of cash and so near their maturity at the time of purchase that they present insignificant risk of changes in value because of change in interest rates. Prepaid Expenses and Other Current Assets Significant components of prepaid expenses and other current assets are summarized as follows:
Contract Acquisition Costs, net Significant components of contract acquisition costs, net of accumulated amortization, are summarized as follows:
Amortization expense related to conversion costs, which is recorded in cost of services, was $4.1 million and $4.5 million for the three months ended March 31, 2012 and 2011, respectively. Amortization related to payments for processing rights, which is recorded as a reduction of revenues, was $3.9 million for both the three months ended March 31, 2012 and 2011.
During 2011, the Company recognized an impairment loss related to contract acquisition costs of $773,000. Other Current Liabilities Significant components of other current liabilities are summarized as follows:
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