TOTAL SYSTEM SERVICES, INC.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended: September 30, 2007
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from To
Commission file number 1-10254
Total System Services, Inc.
www.tsys.com
(Exact name of registrant as specified in its charter)
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Georgia
(State or other jurisdiction of incorporation or organization)
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58-1493818
(I.R.S. Employer Identification No.) |
1600 First Avenue, Post Office Box 1755, Columbus, Georgia 31902
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(Address of principal executive offices)
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(Zip Code) |
(706) 649-2262
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule
12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
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CLASS |
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OUTSTANDING AS OF: November 7, 2007 |
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Common Stock, $0.10 par value
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197,911,497 shares |
TOTAL SYSTEM SERVICES, INC.
INDEX
-2-
TOTAL SYSTEM SERVICES, INC.
Part I Financial Information
Condensed Consolidated Balance Sheets
(Unaudited)
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|
|
|
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|
|
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|
September 30, |
|
December 31, |
(in thousands, except per share information) |
|
2007 |
|
2006 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents (includes $318.2 million and $241.0 million on
deposit with a related party at 2007 and
2006, respectively) |
|
$ |
592,834 |
|
|
|
389,123 |
|
Restricted cash (includes $5.4 million
and $5.0 million on deposit with a
related party at 2007 and 2006,
respectively) |
|
|
32,079 |
|
|
|
31,568 |
|
Accounts receivable, net of allowance for
doubtful accounts and billing adjustments
of $10.2 million and $11.0 million at
2007 and 2006, respectively (includes
$894 and $34 due from a related party at
2007 and 2006, respectively) |
|
|
251,778 |
|
|
|
246,637 |
|
Deferred income tax assets |
|
|
27,909 |
|
|
|
21,556 |
|
Prepaid expenses and other current assets |
|
|
58,809 |
|
|
|
55,832 |
|
|
|
|
Total current assets |
|
|
963,409 |
|
|
|
744,716 |
|
Property and equipment, net of accumulated
depreciation and amortization of $258.6
million and $226.4 million at 2007 and
2006, respectively |
|
|
276,113 |
|
|
|
271,321 |
|
Computer software, net of accumulated
amortization of $364.5 million and $337.7
million at 2007 and 2006, respectively |
|
|
190,338 |
|
|
|
216,450 |
|
Contract acquisition costs, net |
|
|
161,239 |
|
|
|
167,449 |
|
Goodwill, net |
|
|
142,450 |
|
|
|
133,337 |
|
Equity investments |
|
|
65,669 |
|
|
|
62,064 |
|
Other intangible assets, net of accumulated
amortization of $12.2 million and $9.6
million at 2007 and 2006, respectively |
|
|
13,999 |
|
|
|
21,314 |
|
Other assets |
|
|
13,669 |
|
|
|
17,590 |
|
|
|
|
Total assets |
|
$ |
1,826,886 |
|
|
|
1,634,241 |
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|
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
-3-
TOTAL SYSTEM SERVICES, INC.
Condensed Consolidated Balance Sheets (continued)
(Unaudited)
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September 30, |
|
December 31, |
(in thousands, except per share information) |
|
2007 |
|
2006 |
|
Liabilities and Shareholders Equity |
|
|
|
|
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|
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|
Current liabilities: |
|
|
|
|
|
|
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|
Accrued salaries and employee benefits |
|
$ |
71,335 |
|
|
|
80,697 |
|
Accounts payable (includes $230 and $95 payable to related
parties at 2007 and 2006, respectively) |
|
|
37,419 |
|
|
|
31,589 |
|
Current portion of obligations under capital leases |
|
|
3,655 |
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|
|
3,156 |
|
Current portion of notes payable |
|
|
2,167 |
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|
|
|
|
Other current liabilities (includes $11.2 million payable to
related parties for both 2007 and 2006, respectively) |
|
|
137,704 |
|
|
|
180,345 |
|
|
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|
Total current liabilities |
|
|
252,280 |
|
|
|
295,787 |
|
Deferred income tax liabilities |
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|
72,318 |
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|
|
75,019 |
|
Notes payable, excluding current portion |
|
|
70,146 |
|
|
|
|
|
Obligations under capital leases, excluding current portion |
|
|
3,716 |
|
|
|
3,625 |
|
Other long-term liabilities |
|
|
30,718 |
|
|
|
36,221 |
|
|
|
|
Total liabilities |
|
|
429,178 |
|
|
|
410,652 |
|
|
|
|
Minority interests in consolidated subsidiaries |
|
|
7,943 |
|
|
|
6,229 |
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
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|
Common stock $0.10 par value. Authorized 600,000 shares;
199,199 and 198,676 issued at 2007 and 2006, respectively;
197,494 and 196,912 outstanding at 2007 and 2006,
respectively |
|
|
19,920 |
|
|
|
19,868 |
|
Additional paid-in capital |
|
|
84,835 |
|
|
|
66,677 |
|
Accumulated other comprehensive income, net |
|
|
25,575 |
|
|
|
20,641 |
|
Treasury stock (1,705 shares at 2007 and 1,764 shares at 2006) |
|
|
(34,300 |
) |
|
|
(35,233 |
) |
Retained earnings |
|
|
1,293,735 |
|
|
|
1,145,407 |
|
|
|
|
Total shareholders equity |
|
|
1,389,765 |
|
|
|
1,217,360 |
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
1,826,886 |
|
|
|
1,634,241 |
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|
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|
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
-4-
TOTAL SYSTEM SERVICES, INC.
Condensed Consolidated Statements of Income
(Unaudited)
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Three months ended |
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September 30, |
(in thousands, except per share information) |
|
2007 |
|
2006 |
|
Revenues: |
|
|
|
|
|
|
|
|
Electronic payment processing services (includes $1.3 million and
$1.2 million from related parties for 2007 and 2006, respectively) |
|
$ |
240,608 |
|
|
|
232,175 |
|
Merchant acquiring services |
|
|
65,163 |
|
|
|
65,548 |
|
Other services (includes $2.4 million and $2.0 million from
related parties for 2007 and 2006, respectively) |
|
|
53,251 |
|
|
|
44,615 |
|
|
|
|
Revenues before reimbursable items |
|
|
359,022 |
|
|
|
342,338 |
|
Reimbursable items (includes $0.6 million and $0.4 million from
related parties for 2007 and 2006, respectively) |
|
|
98,543 |
|
|
|
99,477 |
|
|
|
|
Total revenues |
|
|
457,565 |
|
|
|
441,815 |
|
|
|
|
|
|
|
|
|
|
|
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|
Expenses: |
|
|
|
|
|
|
|
|
Salaries and other personnel expense |
|
|
144,990 |
|
|
|
139,206 |
|
Net occupancy and equipment expense |
|
|
68,715 |
|
|
|
77,883 |
|
Spin assessment expenses |
|
|
1,692 |
|
|
|
|
|
Other operating expenses (includes $2.4 million and $2.0 million
to related parties for 2007 and 2006, respectively) |
|
|
52,406 |
|
|
|
52,992 |
|
|
|
|
Expenses before reimbursable items |
|
|
267,803 |
|
|
|
270,081 |
|
Reimbursable items |
|
|
98,543 |
|
|
|
99,477 |
|
|
|
|
Total expenses |
|
|
366,346 |
|
|
|
369,558 |
|
|
|
|
Operating income |
|
|
91,219 |
|
|
|
72,257 |
|
|
|
|
Nonoperating income (expense): |
|
|
|
|
|
|
|
|
Interest income (includes $4.1 million and $1.7 million from
related parties for 2007 and 2006, respectively) |
|
|
6,983 |
|
|
|
3,363 |
|
Interest expense |
|
|
(916 |
) |
|
|
(235 |
) |
Gain on foreign currency translation, net |
|
|
905 |
|
|
|
282 |
|
Other |
|
|
21 |
|
|
|
|
|
|
|
|
Total nonoperating income |
|
|
6,993 |
|
|
|
3,410 |
|
|
|
|
Income before income taxes, minority interest and equity in income
of equity investments |
|
|
98,212 |
|
|
|
75,667 |
|
Income taxes |
|
|
30,947 |
|
|
|
22,380 |
|
|
|
|
Income before minority interest and equity in income of equity
investments |
|
|
67,265 |
|
|
|
53,287 |
|
Minority interests in consolidated subsidiaries net income, net of tax |
|
|
(483 |
) |
|
|
(183 |
) |
Equity in income of equity investments, net of tax |
|
|
2,020 |
|
|
|
1,202 |
|
|
|
|
Net income |
|
$ |
68,802 |
|
|
|
54,306 |
|
|
|
|
Basic earnings per share |
|
$ |
0.35 |
|
|
|
0.28 |
|
|
|
|
Diluted earnings per share |
|
$ |
0.35 |
|
|
|
0.28 |
|
|
|
|
Weighted average common shares outstanding |
|
|
196,740 |
|
|
|
196,500 |
|
Increase due to assumed issuance of shares related to common
equivalent shares |
|
|
349 |
|
|
|
331 |
|
|
|
|
Weighted average common and common equivalent shares outstanding |
|
|
197,089 |
|
|
|
196,831 |
|
|
|
|
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
-5-
TOTAL SYSTEM SERVICES, INC.
Condensed Consolidated Statements of Income
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
September 30, |
(in thousands, except per share information) |
|
2007 |
|
2006 |
|
Revenues: |
|
|
|
|
|
|
|
|
Electronic payment processing services (includes $4.1 million and
$3.7 million from related parties for 2007 and 2006, respectively) |
|
$ |
715,417 |
|
|
|
685,537 |
|
Merchant acquiring services |
|
|
190,120 |
|
|
|
195,317 |
|
Other services (includes $6.6 million and $5.7 million from
related parties for 2007 and 2006, respectively) |
|
|
161,190 |
|
|
|
133,827 |
|
|
|
|
Revenues before reimbursable items |
|
|
1,066,727 |
|
|
|
1,014,681 |
|
Reimbursable items (includes $1.8 million and $1.4 million from
related parties for 2007 and 2006, respectively) |
|
|
280,597 |
|
|
|
268,589 |
|
|
|
|
Total revenues |
|
|
1,347,324 |
|
|
|
1,283,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Salaries and other personnel expense |
|
|
430,966 |
|
|
|
380,931 |
|
Net occupancy and equipment expense |
|
|
205,342 |
|
|
|
234,453 |
|
Spin assessment expenses |
|
|
1,692 |
|
|
|
|
|
Other operating expenses (includes $7.1 million and $7.2 million
to related parties for 2007 and 2006, respectively) |
|
|
155,913 |
|
|
|
170,452 |
|
|
|
|
Expenses before reimbursable items |
|
|
793,913 |
|
|
|
785,836 |
|
Reimbursable items |
|
|
280,597 |
|
|
|
268,589 |
|
|
|
|
Total expenses |
|
|
1,074,510 |
|
|
|
1,054,425 |
|
|
|
|
Operating income |
|
|
272,814 |
|
|
|
228,845 |
|
|
|
|
Nonoperating income (expense): |
|
|
|
|
|
|
|
|
Interest income (includes $10.7 million and $4.9 million from
related parties for 2007 and 2006, respectively) |
|
|
18,630 |
|
|
|
9,297 |
|
Interest expense |
|
|
(1,492 |
) |
|
|
(364 |
) |
Gain on foreign currency translation, net |
|
|
744 |
|
|
|
195 |
|
Other |
|
|
79 |
|
|
|
|
|
|
|
|
Total nonoperating income |
|
|
17,961 |
|
|
|
9,128 |
|
|
|
|
Income before income taxes, minority interest and equity in income
of equity investments |
|
|
290,775 |
|
|
|
237,973 |
|
Income taxes |
|
|
101,442 |
|
|
|
78,492 |
|
|
|
|
Income before minority interest and equity in income of equity
investments |
|
|
189,333 |
|
|
|
159,481 |
|
Minority interests in consolidated subsidiaries net income, net of tax |
|
|
(1,435 |
) |
|
|
(448 |
) |
Equity in income of equity investments, net of tax |
|
|
3,865 |
|
|
|
3,073 |
|
|
|
|
Net income |
|
$ |
191,763 |
|
|
|
162,106 |
|
|
|
|
Basic earnings per share |
|
$ |
0.98 |
|
|
|
0.82 |
|
|
|
|
Diluted earnings per share |
|
$ |
0.97 |
|
|
|
0.82 |
|
|
|
|
Weighted average common shares outstanding |
|
|
196,641 |
|
|
|
196,891 |
|
Increase due to assumed issuance of shares related to common
equivalent shares |
|
|
429 |
|
|
|
302 |
|
|
|
|
Weighted average common and common equivalent shares outstanding |
|
|
197,070 |
|
|
|
197,193 |
|
|
|
|
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
-6-
|
|
TOTAL SYSTEM SERVICES, INC. |
|
|
Condensed Consolidated Statements of Cash Flows |
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
September 30, |
(in thousands) |
|
2007 |
|
2006 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
191,763 |
|
|
|
162,106 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
Minority interests in consolidated subsidiaries net
income,
net of tax |
|
|
1,435 |
|
|
|
448 |
|
Gain on foreign currency, net |
|
|
(744 |
) |
|
|
(195 |
) |
Equity in income of equity investments, net of tax |
|
|
(3,865 |
) |
|
|
(3,073 |
) |
Dividends received from equity investments |
|
|
2,994 |
|
|
|
2,371 |
|
Depreciation and amortization |
|
|
114,213 |
|
|
|
130,306 |
|
Share-based compensation |
|
|
9,881 |
|
|
|
6,574 |
|
Asset impairments |
|
|
1,158 |
|
|
|
|
|
Provisions for bad debt expenses and billing adjustments |
|
|
1,612 |
|
|
|
948 |
|
Charges for transaction processing provisions |
|
|
531 |
|
|
|
7,914 |
|
Deferred income tax benefit |
|
|
(6,828 |
) |
|
|
(24,150 |
) |
Loss on disposal of equipment, net |
|
|
497 |
|
|
|
105 |
|
(Increase) decrease in: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(5,627 |
) |
|
|
(40,765 |
) |
Prepaid expenses, other current assets and other long-term assets |
|
|
(1,041 |
) |
|
|
8,923 |
|
Increase (decrease) in: |
|
|
|
|
|
|
|
|
Accounts payable |
|
|
6,148 |
|
|
|
14,323 |
|
Accrued salaries and employee benefits |
|
|
(9,341 |
) |
|
|
(18,936 |
) |
Excess tax benefit from share-based payment arrangements |
|
|
(4,022 |
) |
|
|
(1,646 |
) |
Other current liabilities and other long-term liabilities |
|
|
(51,286 |
) |
|
|
(14,849 |
) |
|
|
|
Net cash provided by operating activities |
|
|
247,478 |
|
|
|
230,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases of property and equipment, net |
|
|
(36,420 |
) |
|
|
(21,203 |
) |
Additions to licensed computer software from vendors |
|
|
(8,194 |
) |
|
|
(9,650 |
) |
Additions to internally developed computer software |
|
|
(11,749 |
) |
|
|
(13,699 |
) |
Cash acquired in acquisitions |
|
|
|
|
|
|
4,341 |
|
Cash used in acquisitions |
|
|
(472 |
) |
|
|
(74,919 |
) |
Additions to contract acquisition costs |
|
|
(20,878 |
) |
|
|
(39,578 |
) |
|
|
|
Net cash used in investing activities |
|
|
(77,713 |
) |
|
|
(154,708 |
) |
|
|
|
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
-7-
TOTAL SYSTEM SERVICES, INC.
Condensed Consolidated Statements of Cash Flows (continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
September 30, |
(in thousands) |
|
2007 |
|
2006 |
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Dividends paid on common stock (includes $33.5 million and
$30.3 million paid to related parties during 2007 and 2006,
respectively) |
|
$ |
(41,425 |
) |
|
|
(37,504 |
) |
Repurchase of common stock |
|
|
|
|
|
|
(21,843 |
) |
Excess tax benefit from share-based payment arrangements |
|
|
4,022 |
|
|
|
1,646 |
|
Principal payments on long-term debt borrowings and capital
lease obligations |
|
|
(3,893 |
) |
|
|
(1,561 |
) |
Proceeds from borrowings of long-term debt |
|
|
73,968 |
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
5,258 |
|
|
|
3,725 |
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
37,930 |
|
|
|
(55,537 |
) |
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(3,984 |
) |
|
|
(2,006 |
) |
|
|
|
Net increase in cash and cash equivalents |
|
|
203,711 |
|
|
|
18,153 |
|
Cash and cash equivalents at beginning of year |
|
|
389,123 |
|
|
|
237,569 |
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
592,834 |
|
|
|
255,722 |
|
|
|
|
Cash paid for interest |
|
$ |
1,492 |
|
|
|
364 |
|
|
|
|
Cash paid for income taxes, net of refunds |
|
$ |
143,066 |
|
|
|
118,649 |
|
|
|
|
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
-8-
TOTAL SYSTEM SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Total System
Services, Inc.® (TSYS® or the Company) include the accounts of TSYS and its
wholly owned subsidiaries and TSYS majority owned foreign subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation. In addition, the
Company evaluates its relationship with other entities to identify whether they are variable
interest entities as defined by the Financial Accounting Standards Boards (FASBs) Interpretation
No. 46(R) (FIN No. 46R), Consolidation of Variable Interest Entities, and to assess whether it is
the primary beneficiary of such entities. If the determination is made that the Company is the
primary beneficiary, then that entity is included in the consolidated financial statements in
accordance with FIN No. 46R.
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 2006 Annual Report previously filed on Form
10-K. Results of interim periods are not necessarily indicative of results to be expected for the
year.
Certain reclassifications have been made to the 2006 financial statements to conform to the
presentation adopted in 2007.
Note 2 Supplementary Balance Sheet Information
Cash and Cash Equivalents
Cash and cash equivalent balances are summarized as follows:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
September 30, 2007 |
|
|
December 31, 2006 |
|
|
|
|
|
|
Cash and cash equivalents in domestic accounts |
|
$ |
532,849 |
|
|
|
344,197 |
|
Cash and cash equivalents in
foreign accounts |
|
|
59,985 |
|
|
|
44,926 |
|
|
|
|
|
|
|
|
Total |
|
$ |
592,834 |
|
|
|
389,123 |
|
|
|
|
|
|
|
|
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.
-9-
Prepaid Expenses and Other Current Assets
Significant components of prepaid expenses and other current assets are summarized as follows:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
September 30, 2007 |
|
|
December 31, 2006 |
|
|
|
|
|
|
Prepaid expenses |
|
$ |
13,041 |
|
|
|
14,837 |
|
Supplies inventory |
|
|
9,285 |
|
|
|
12,311 |
|
Other |
|
|
36,483 |
|
|
|
28,684 |
|
|
|
|
|
|
|
|
Total |
|
$ |
58,809 |
|
|
|
55,832 |
|
|
|
|
|
|
|
|
Contract Acquisition Costs, net
Significant components of contract acquisition costs, net of accumulated amortization, are
summarized as follows:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
September 30, 2007 |
|
|
December 31, 2006 |
|
|
|
|
|
|
Payments for processing rights, net |
|
$ |
103,246 |
|
|
|
107,896 |
|
Conversion costs, net |
|
|
57,993 |
|
|
|
59,553 |
|
|
|
|
|
|
|
|
Total |
|
$ |
161,239 |
|
|
|
167,449 |
|
|
|
|
|
|
|
|
Amortization related to payments for processing rights, which is recorded as a reduction of
revenues, was $6.6 million and $6.8 million for the three months ended September 30, 2007 and 2006,
respectively. For the nine months ended September 30, 2007 and 2006, amortization related to
payments for processing rights was $18.3 million and $20.6 million, respectively.
Amortization expense related to conversion costs was $3.8 million and $4.5 million for the
three months ended September 30, 2007 and 2006, respectively. For the nine months ended September
30, 2007 and 2006, amortization related to conversion costs was $11.9 million and $13.9 million,
respectively.
Other Current Liabilities
Significant components of other current liabilities are summarized as follows:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
September 30, 2007 |
|
|
December 31, 2006 |
|
|
|
|
|
|
Client liabilities |
|
$ |
36,535 |
|
|
|
36,161 |
|
Accrued expenses |
|
|
36,520 |
|
|
|
44,578 |
|
Deferred revenues |
|
|
22,533 |
|
|
|
19,311 |
|
Dividends payable |
|
|
13,825 |
|
|
|
13,785 |
|
Transaction processing provisions |
|
|
10,286 |
|
|
|
12,645 |
|
Accrued income taxes |
|
|
(6,213 |
) |
|
|
25,384 |
|
Client postage deposits |
|
|
3,920 |
|
|
|
6,736 |
|
Other |
|
|
20,298 |
|
|
|
21,745 |
|
|
|
|
|
|
|
|
Total |
|
$ |
137,704 |
|
|
|
180,345 |
|
|
|
|
|
|
|
|
Note 3 Comprehensive Income
For the three and nine months ended September 30, comprehensive income is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
September 30, |
|
September 30, |
(in thousands) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
-10-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
68,802 |
|
|
|
54,306 |
|
|
|
191,763 |
|
|
|
162,106 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustments, net of tax |
|
|
2,259 |
|
|
|
6,116 |
|
|
|
4,934 |
|
|
|
10,822 |
|
|
|
|
Total |
|
$ |
71,061 |
|
|
|
60,422 |
|
|
|
196,697 |
|
|
|
172,928 |
|
|
|
|
The income tax effects allocated to and the cumulative balance of accumulated other
comprehensive income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance |
|
Pretax |
|
|
|
|
|
|
|
|
|
Ending Balance |
(in thousands) |
|
December 31, 2006 |
|
Amount |
|
Tax Effect |
|
Net-of-Tax Amount |
|
September 30, 2007 |
|
Foreign currency
translation
adjustments |
|
$ |
21,570 |
|
|
$ |
7,312 |
|
|
|
(2,415 |
) |
|
$ |
4,897 |
|
|
$ |
26,467 |
|
Underfunded defined
benefit
postretirement plan |
|
|
(929 |
) |
|
|
57 |
|
|
|
(20 |
) |
|
|
37 |
|
|
|
(892 |
) |
|
|
|
|
|
$ |
20,641 |
|
|
$ |
7,369 |
|
|
|
(2,435 |
) |
|
$ |
4,934 |
|
|
$ |
25,575 |
|
|
|
|
Note 4 Segment Reporting and Major Customers
The Company reports selected information about operating segments in accordance with Statement
of Financial Accounting Standards No. 131 (SFAS No. 131), Disclosures about Segments of an
Enterprise and Related Information. The Companys segment information reflects the information
that the chief operating decision maker (CODM) uses to make resource allocations and strategic
decisions. The CODM at TSYS consists of the chairman of the board and chief executive officer, the
president and the three senior executive vice presidents.
Through online accounting and electronic payment processing systems, TSYS provides electronic
payment processing and other services to card-issuing and merchant acquiring institutions in the
United States and internationally. The Company has three reportable segments: domestic-based
support services, international-based support services and merchant acquiring services.
In April 2007, TSYS wholly-owned subsidiary, Enhancement Services Corporation, changed its
name to TSYS Loyalty, Inc. (TSYS Loyalty).
Domestic-based support services include electronic payment processing services and other
services provided from within the United States. The domestic-based support services segment
includes the financial results of TSYS, excluding its foreign branch offices and divisions, and
including the following subsidiaries: Columbus Depot Equipment Company, Columbus Productions, Inc.,
TSYS Canada, Inc., TSYS Total Debt Management, Inc., ProCard, Inc., TSYS Technology Center, Inc.,
TSYS Prepaid, Inc., Merlin Solutions, L.L.C. and TSYS Loyalty and its wholly owned subsidiary,
Golden Retriever Systems, L.L.C.
International-based support services include electronic payment processing and other services
provided from outside the United States. International-based support services include the
financial results of GP Network Corporation, TSYS Japan Co., Ltd., TSYS Servicos de Transacoes
Eletronicas Ltda., Total System Services Holding Europe LP and its subsidiaries and TSYS foreign
branch offices and divisions. TSYS share of the equity earnings of 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 included in international-based support services because TSYS de Méxicos and CUP Datas
operations and client bases are located outside the United States.
-11-
Merchant acquiring services include the financial results of TSYS Acquiring Solutions, L.L.C.,
and its wholly owned subsidiary TSYS POS Systems and Services, L.L.C.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic- |
|
|
International- |
|
|
Merchant |
|
|
|
|
(in thousands) |
|
based support |
|
|
based support |
|
|
acquiring |
|
|
|
|
Operating Segments |
|
services |
|
|
services |
|
|
services |
|
|
Consolidated |
|
|
At September 30, 2007 |
|
Identifiable assets |
|
$ |
1,623,928 |
|
|
|
365,066 |
|
|
|
188,765 |
|
|
$ |
2,177,759 |
|
Intersegment eliminations |
|
|
(349,626 |
) |
|
|
(1,094 |
) |
|
|
(153 |
) |
|
|
(350,873 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,274,302 |
|
|
|
363,972 |
|
|
|
188,612 |
|
|
$ |
1,826,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006 |
|
Identifiable assets |
|
$ |
1,517,299 |
|
|
|
308,713 |
|
|
|
210,117 |
|
|
$ |
2,036,129 |
|
Intersegment eliminations |
|
|
(400,957 |
) |
|
|
(894 |
) |
|
|
(37 |
) |
|
|
(401,888 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,116,342 |
|
|
|
307,819 |
|
|
|
210,080 |
|
|
$ |
1,634,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2007 |
|
Revenues before reimbursables |
|
$ |
243,404 |
|
|
|
64,148 |
|
|
|
58,641 |
|
|
$ |
366,193 |
|
Intersegment revenues |
|
|
(6,960 |
) |
|
|
(106 |
) |
|
|
(105 |
) |
|
|
(7,171 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursables
from external customers |
|
$ |
236,444 |
|
|
|
64,042 |
|
|
|
58,536 |
|
|
$ |
359,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment total revenues |
|
$ |
324,803 |
|
|
|
66,779 |
|
|
|
75,356 |
|
|
$ |
466,938 |
|
Intersegment revenues |
|
|
(9,162 |
) |
|
|
(106 |
) |
|
|
(105 |
) |
|
|
(9,373 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
315,641 |
|
|
|
66,673 |
|
|
|
75,251 |
|
|
$ |
457,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
24,591 |
|
|
|
6,455 |
|
|
|
6,561 |
|
|
$ |
37,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment expenses |
|
$ |
3,506 |
|
|
|
(4,995 |
) |
|
|
(7,884 |
) |
|
$ |
(9,373 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
$ |
59,889 |
|
|
|
12,569 |
|
|
|
18,761 |
|
|
$ |
91,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes, minority
interest and equity in income of equity
investments |
|
$ |
67,060 |
|
|
|
12,130 |
|
|
|
19,022 |
|
|
$ |
98,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
20,084 |
|
|
|
4,033 |
|
|
|
6,830 |
|
|
$ |
30,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of equity investments |
|
$ |
|
|
|
|
2,020 |
|
|
|
|
|
|
$ |
2,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
48,890 |
|
|
|
7,720 |
|
|
|
12,192 |
|
|
$ |
68,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2006 |
|
Revenues before reimbursables |
|
$ |
242,584 |
|
|
|
44,320 |
|
|
|
59,723 |
|
|
$ |
346,627 |
|
Intersegment revenues |
|
|
(4,258 |
) |
|
|
|
|
|
|
(31 |
) |
|
|
(4,289 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursables
from external customers |
|
$ |
238,326 |
|
|
|
44,320 |
|
|
|
59,692 |
|
|
$ |
342,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment total revenues |
|
$ |
325,919 |
|
|
|
51,591 |
|
|
|
70,592 |
|
|
$ |
448,102 |
|
Intersegment revenues |
|
|
(6,256 |
) |
|
|
|
|
|
|
(31 |
) |
|
|
(6,287 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
319,663 |
|
|
|
51,591 |
|
|
|
70,561 |
|
|
$ |
441,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
32,156 |
|
|
|
5,328 |
|
|
|
6,674 |
|
|
$ |
44,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment expenses |
|
$ |
3,668 |
|
|
|
(2,343 |
) |
|
|
(7,599 |
) |
|
$ |
(6,274 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
$ |
48,666 |
|
|
|
7,946 |
|
|
|
15,645 |
|
|
$ |
72,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes, minority
interest and equity in income of equity
investments |
|
$ |
52,688 |
|
|
|
6,602 |
|
|
|
16,377 |
|
|
$ |
75,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
14,722 |
|
|
|
(31 |
) |
|
|
7,689 |
|
|
$ |
22,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of equity investments |
|
$ |
|
|
|
|
1,202 |
|
|
|
|
|
|
$ |
1,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
38,821 |
|
|
|
6,797 |
|
|
|
8,688 |
|
|
$ |
54,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-12-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic- |
|
|
International- |
|
|
Merchant |
|
|
|
|
(in thousands) |
|
based support |
|
|
based support |
|
|
acquiring |
|
|
|
|
Operating Segments |
|
services |
|
|
services |
|
|
services |
|
|
Consolidated |
|
|
Nine months ended September 30, 2007 |
|
Revenues before reimbursables |
|
$ |
738,712 |
|
|
|
175,154 |
|
|
|
171,694 |
|
|
$ |
1,085,560 |
|
Intersegment revenues |
|
|
(17,495 |
) |
|
|
(701 |
) |
|
|
(637 |
) |
|
|
(18,833 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursables
from external customers |
|
$ |
721,217 |
|
|
|
174,453 |
|
|
|
171,057 |
|
|
$ |
1,066,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment total revenues |
|
$ |
973,133 |
|
|
|
182,913 |
|
|
|
216,354 |
|
|
$ |
1,372,400 |
|
Intersegment revenues |
|
|
(23,738 |
) |
|
|
(701 |
) |
|
|
(637 |
) |
|
|
(25,076 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
949,395 |
|
|
|
182,212 |
|
|
|
215,717 |
|
|
$ |
1,347,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
76,305 |
|
|
|
17,762 |
|
|
|
20,146 |
|
|
$ |
114,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment expenses |
|
$ |
9,897 |
|
|
|
(11,961 |
) |
|
|
(23,007 |
) |
|
$ |
(25,071 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
$ |
190,336 |
|
|
|
35,570 |
|
|
|
46,908 |
|
|
$ |
272,814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes, minority
interest and equity in income of equity
investments |
|
$ |
210,027 |
|
|
|
32,661 |
|
|
|
48,087 |
|
|
$ |
290,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
73,737 |
|
|
|
10,441 |
|
|
|
17,264 |
|
|
$ |
101,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of equity investments |
|
$ |
|
|
|
|
3,865 |
|
|
|
|
|
|
$ |
3,865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
138,625 |
|
|
|
22,316 |
|
|
|
30,822 |
|
|
$ |
191,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2006 |
|
Revenues before reimbursables |
|
$ |
740,341 |
|
|
|
109,178 |
|
|
|
178,729 |
|
|
$ |
1,028,248 |
|
Intersegment revenues |
|
|
(13,471 |
) |
|
|
|
|
|
|
(96 |
) |
|
|
(13,567 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursables
from external customers |
|
$ |
726,870 |
|
|
|
109,178 |
|
|
|
178,633 |
|
|
$ |
1,014,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment total revenues |
|
$ |
963,855 |
|
|
|
128,163 |
|
|
|
211,659 |
|
|
$ |
1,303,677 |
|
Intersegment revenues |
|
|
(20,311 |
) |
|
|
|
|
|
|
(96 |
) |
|
|
(20,407 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
943,544 |
|
|
|
128,163 |
|
|
|
211,563 |
|
|
$ |
1,283,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
95,759 |
|
|
|
14,101 |
|
|
|
20,446 |
|
|
$ |
130,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment expenses |
|
$ |
18,949 |
|
|
|
(15,448 |
) |
|
|
(23,864 |
) |
|
$ |
(20,363 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
$ |
176,412 |
|
|
|
12,029 |
|
|
|
40,404 |
|
|
$ |
228,845 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes, minority
interest and equity in income of equity
investments |
|
$ |
186,170 |
|
|
|
9,718 |
|
|
|
42,085 |
|
|
$ |
237,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
58,636 |
|
|
|
2,461 |
|
|
|
17,395 |
|
|
$ |
78,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of equity investments |
|
$ |
|
|
|
|
3,073 |
|
|
|
|
|
|
$ |
3,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
128,352 |
|
|
|
9,064 |
|
|
|
24,690 |
|
|
$ |
162,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues for domestic-based support services and merchant acquiring 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-based support
services include electronic payment processing and other services provided from facilities outside
the United States to clients based predominantly outside the United States.
The following geographic data presents revenues for the three and nine months ended September
30, 2007 and 2006, respectively, based on the domicile of the Companys customers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
(in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
United States |
|
$ |
352.2 |
|
|
|
359.6 |
|
|
|
1,052.4 |
|
|
|
1,069.8 |
|
Europe |
|
|
56.1 |
|
|
|
43.7 |
|
|
|
151.1 |
|
|
|
112.6 |
|
Canada |
|
|
32.4 |
|
|
|
25.4 |
|
|
|
93.2 |
|
|
|
71.5 |
|
Japan |
|
|
6.3 |
|
|
|
5.0 |
|
|
|
17.7 |
|
|
|
13.4 |
|
-13-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
(in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Mexico |
|
|
3.6 |
|
|
|
3.2 |
|
|
|
10.2 |
|
|
|
8.5 |
|
Other |
|
|
7.0 |
|
|
|
4.9 |
|
|
|
22.7 |
|
|
|
7.5 |
|
|
Total |
|
$ |
457.6 |
|
|
|
441.8 |
|
|
|
1,347.3 |
|
|
|
1,283.3 |
|
|
|
|
The following table reconciles geographic revenues to revenues by reportable segment for the
three months ended September 30, 2007 and 2006, respectively, based on the domicile of the
Companys customers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic-based |
|
International-based |
|
Merchant acquiring |
|
|
support services |
|
support services |
|
services |
(in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
United States |
|
$ |
276.8 |
|
|
|
289.3 |
|
|
|
0.5 |
|
|
|
|
|
|
|
74.9 |
|
|
|
70.3 |
|
Europe |
|
|
0.4 |
|
|
|
0.4 |
|
|
|
55.7 |
|
|
|
43.3 |
|
|
|
|
|
|
|
|
|
Canada |
|
|
32.2 |
|
|
|
25.2 |
|
|
|
|
|
|
|
|
|
|
|
0.2 |
|
|
|
0.1 |
|
Japan |
|
|
|
|
|
|
|
|
|
|
6.3 |
|
|
|
5.0 |
|
|
|
|
|
|
|
|
|
Mexico |
|
|
3.6 |
|
|
|
3.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
2.6 |
|
|
|
1.6 |
|
|
|
4.2 |
|
|
|
3.3 |
|
|
|
0.2 |
|
|
|
0.1 |
|
|
Total |
|
$ |
315.6 |
|
|
|
319.7 |
|
|
|
66.7 |
|
|
|
51.6 |
|
|
|
75.3 |
|
|
|
70.5 |
|
|
|
|
The following table reconciles geographic revenues to revenues by reportable segment for the
nine months ended September 30, 2007 and 2006, respectively, based on the domicile of the Companys
customers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic-based |
|
International-based |
|
Merchant acquiring |
|
|
support services |
|
support services |
|
services |
(in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
United States |
|
$ |
837.1 |
|
|
|
859.0 |
|
|
|
0.6 |
|
|
|
|
|
|
|
214.7 |
|
|
|
210.7 |
|
Europe |
|
|
1.3 |
|
|
|
1.1 |
|
|
|
149.8 |
|
|
|
111.5 |
|
|
|
|
|
|
|
|
|
Canada |
|
|
92.8 |
|
|
|
71.1 |
|
|
|
|
|
|
|
|
|
|
|
0.4 |
|
|
|
0.4 |
|
Japan |
|
|
|
|
|
|
|
|
|
|
17.7 |
|
|
|
13.4 |
|
|
|
|
|
|
|
|
|
Mexico |
|
|
10.2 |
|
|
|
8.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
8.0 |
|
|
|
3.8 |
|
|
|
14.1 |
|
|
|
3.3 |
|
|
|
0.6 |
|
|
|
0.5 |
|
|
Total |
|
$ |
949.4 |
|
|
|
943.5 |
|
|
|
182.2 |
|
|
|
128.2 |
|
|
|
215.7 |
|
|
|
211.6 |
|
|
|
|
The Company maintains property and equipment, net of accumulated depreciation and
amortization, in the following geographic areas:
|
|
|
|
|
|
|
|
|
|
|
At September 30, |
|
At December 31, |
(in thousands) |
|
2007 |
|
2006 |
|
United States |
|
$ |
205,580 |
|
|
|
204,662 |
|
Europe |
|
|
66,397 |
|
|
|
63,099 |
|
Japan |
|
|
1,951 |
|
|
|
1,935 |
|
Canada |
|
|
52 |
|
|
|
55 |
|
Other |
|
|
2,133 |
|
|
|
1,570 |
|
|
Total |
|
$ |
276,113 |
|
|
|
271,321 |
|
|
|
|
-14-
Major Customers
For the three months ended September 30, 2007, the Company had three major customers which
accounted for approximately 32.2%, or $147.3 million, of total revenues. For the three months
ended September 30, 2006, these three major customers accounted for approximately 39.7%, or $175.3
million, of total revenues. For the nine months ended September 30, 2007, the Company had three
major customers which accounted for approximately 33.4%, or $449.3 million, of total revenues. For
the nine months ended September 30, 2006, these three major customers accounted for approximately
37.8%, or $485.8 million, of total revenues. Revenues from major customers for the periods reported are primarily
attributable to the domestic-based support services and merchant acquiring services segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
|
|
|
% of |
Revenue |
|
|
|
|
|
Total |
|
|
|
|
|
Total |
|
|
|
|
|
Total |
|
|
|
|
|
Total |
(in millions) |
|
Dollars |
|
Revenues |
|
Dollars |
|
Revenues |
|
Dollars |
|
Revenues |
|
Dollars |
|
Revenues |
|
|
|
|
|
|
|
|
|
Client 1 |
|
$ |
62.7 |
|
|
|
13.7 |
|
|
$ |
19.3 |
|
|
|
4.4 |
|
|
$ |
172.5 |
|
|
|
12.8 |
|
|
$ |
43.8 |
|
|
|
3.4 |
|
Client 2 |
|
|
56.8 |
|
|
|
12.4 |
|
|
|
109.1 |
|
|
|
24.7 |
|
|
|
161.2 |
|
|
|
12.0 |
|
|
|
307.2 |
|
|
|
23.9 |
|
Client 3 |
|
|
27.8 |
|
|
|
6.1 |
|
|
|
46.9 |
|
|
|
10.6 |
|
|
|
115.6 |
|
|
|
8.6 |
|
|
|
134.8 |
|
|
|
10.5 |
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
147.3 |
|
|
|
32.2 |
|
|
$ |
175.3 |
|
|
|
39.7 |
|
|
$ |
449.3 |
|
|
|
33.4 |
|
|
$ |
485.8 |
|
|
|
37.8 |
|
|
|
|
|
|
|
|
|
|
Note 5 Share-Based Compensation
The Companys Annual Report on Form 10-K for the year ended December 31, 2006, as filed with
the SEC, contains a discussion of the Companys share-based compensation plans and policy.
Share-Based Compensation
TSYS share-based compensation costs are included as expenses and classified as salaries and
other personnel expenses. TSYS does not include amounts associated with share-based compensation
as costs capitalized as software development and contract acquisition costs. For the three months
ended September 30, 2007, share-based compensation was $3.3 million, compared to $2.1 million for
the same period in 2006. Included in the $3.3 million amount for 2007 and $2.1 million amount for
2006 is approximately $1.5 million and $1.6 million, respectively, related to expensing the fair
value of stock options. For the nine months ended September 30, 2007, share-based compensation was
$9.9 million, compared to $6.6 million for the same period in 2006. Included in the $9.9 million
amount for 2007 and $6.6 million amount for 2006 is approximately $4.8 million and $5.1 million,
respectively, related to expensing the fair value of stock options.
Nonvested Awards
During the first nine months of 2007, the Company issued 241,260 shares of TSYS common stock
with a market value of $7.6 million to certain key employees and non-management members of its
board of directors under nonvested stock bonus awards for services to be provided by such officers,
directors and employees in the future. The market value of the common stock at the date of
issuance is amortized as compensation expense over the vesting period of the awards.
During the first nine months of 2006, the Company issued 150,775 shares of TSYS common stock
with a market value of $3.0 million to certain key employees and non-management members of its
board of directors under nonvested stock bonus awards for services to be provided by such officers
and directors in the future.
-15-
As of September 30, 2007, there was approximately $12.5 million of total unrecognized
compensation cost related to nonvested share-based compensation arrangements. That cost is
expected to be recognized over a remaining weighted average period of 2.1 years.
During 2005, TSYS authorized a total grant of 126,087 shares of nonvested stock to two key
executives with a performance-vesting schedule (performance-vesting shares). These
performance-vesting shares have seven one-year performance periods (2005-2011) during which the Compensation Committee
establishes an earnings per share goal. Each years award is 20% of the total authorized shares.
Compensation expense for each years award is measured on the grant date based on the quoted market
price of TSYS common stock and is expensed on a straight-line basis for the year.
As of September 30, 2007, there was approximately $244,000 of total unrecognized compensation
cost related to nonvested performance-vesting share-based compensation arrangements. That cost is
expected to be recognized over the remainder of 2007.
Stock Option Awards
The Company did not grant any TSYS stock options during the nine months ended September 30,
2007 and 2006, respectively.
As of September 30, 2007, there was approximately $7,500 of total unrecognized compensation
expense cost related to TSYS stock options that is expected to be recognized over a remaining
weighted average period of 0.2 year.
Long-Term Incentive Plans Synovus
During the first nine months of 2007, Synovus Financial Corp. (Synovus) granted 102,653 stock
options to key TSYS officers and employees. The fair value of the option grant was $7.22 per
option and was estimated on the date of grant using the Black-Scholes-Merton option-pricing model
with the following weighted average assumptions: risk-free interest rate of 4.78%; expected
volatility of 21.76%; expected life of 6.0 years; and dividend yield of 2.60%. The expected life
of 6.0 years was determined using the simplified method, as prescribed by SECs Staff Accounting
Bulletin No. 107.
During the first nine months of 2006, Synovus granted 304,933 stock options to key TSYS
executive officers. The fair value of the option grant was $6.57 per option and was estimated on
the date of grant using the Black-Scholes-Merton option-pricing model with the following weighted
average assumptions: risk-free interest rate of 4.48%; expected volatility of 25.1%; expected life
of 6.0 years; and dividend yield of 2.80%. The expected life of 6.0 years was determined using the
simplified method, as prescribed by SECs Staff Accounting Bulletin No. 107.
As of September 30, 2007, there was $5.3 million of total unrecognized compensation expense
cost related to Synovus stock options that is expected to be recognized over a remaining weighted
average period of 0.9 years.
With the completion of the spin, TSYS expects to convert the Synovus options granted to TSYS
employees to TSYS options. The number of TSYS options and exercise price will be based on Synovus
share price immediately preceding the spin-off and TSYS share price during a 10-day trading period
post-spin. All other terms and conditions of the original option grant will remain the same. As a
result of the conversion, TSYS expects to incur additional stock option expense for the converted
options. Refer to Note 12 in the Notes to Unaudited Condensed Consolidated Financial Statements for
more information regarding the intended spin by Synovus.
-16-
Earnings Per Share
The diluted earnings per share calculation excludes stock options and nonvested awards that
are convertible into 17,500 and 7,500 common shares for the three and nine months ended September
30, 2007, respectively, and excludes 26,500 common shares for the three and nine months ended
September 30, 2006, respectively, because their inclusion would have been anti-dilutive.
Note 6 Long-Term Debt
On October 25, 2007, TSYS announced that it has entered into an agreement and plan of
distribution with Synovus under which Synovus plans to distribute all of its shares of TSYS stock
to Synovus shareholders in a spin-off. Synovus currently owns 80.7% of TSYS. Prior to the
spin-off transaction and in accordance with the agreement and plan of distribution, TSYS has agreed
to pay a one-time aggregate cash dividend of $600 million to all TSYS shareholders, including
Synovus. TSYS expects that the dividend will be funded by a combination of cash on hand and the
use of a revolving credit facility. A $500 million revolving credit facility is anticipated to be
finalized prior to the spin-off, of which $200 million will be used to fund the cash dividend.
Refer to Note 12 for more information on the TSYS spin-off subsequent event.
On August 3, 2007, the Companys European operation obtained a loan of approximately £33
million or approximately $67.7 million from a third party mainly to repay the U.S. parent loan that
was used for the acquisitions. The loan is payable in 18 months at a rate of the one-month London
Interbank Offered Rate (LIBOR) plus 45 basis points. The interest is payable monthly. The
Companys plan is to finance international expansion through its European operations. The loan
will result in increased interest expense and will eliminate the foreign currency translation gains
and losses associated with the Companys intercompany note. The loan is guaranteed by the parent
company (TSYS).
In January 2007, the Companys operation in Japan borrowed ¥250 million, or approximately $2.1
million, through a short-term note. The interest rate on the note is the Japan prime rate plus 375
basis points. The term of the note is one year.
In November 2006, TSYS announced an agreement to form a new venture called TSYS Managed
Services EMEA, Ltd. (TSYS Managed Services) with Merchants. Refer to Note 10 for more information
about the acquisition of TSYS Managed Services.
In connection with the formation of TSYS Managed Services, both TSYS and Merchants agreed to
provide long-term financing arrangements to TSYS Managed Services to fund future growth and
expansion. At the end of September 2007, the balance of the loan from Merchants was approximately
£2.0 million, or approximately $4.0 million, payable in total in five years, at an interest rate of
the London Interbank Offered Rate (LIBOR) plus 2%, with interest payable quarterly.
TSYS maintains an unsecured credit agreement with Columbus Bank & Trust. The credit agreement
has a maximum available principal balance of $5.0 million, with interest at prime. TSYS did not
use the credit facility for the nine months ended September 30, 2007 or 2006.
Note 7 Supplementary Cash Flow Information
Contract Acquisition Costs
Cash used for contract acquisition costs for the nine months ended September 30, 2007 and
2006, respectively, are summarized as follows:
-17-
|
|
|
|
|
|
|
|
|
(in thousands) |
|
September 30, 2007 |
|
September 30, 2006 |
|
Payments for processing rights |
|
$ |
12,760 |
|
|
|
10,663 |
|
Conversion costs |
|
|
8,118 |
|
|
|
28,915 |
|
|
Total |
|
$ |
20,878 |
|
|
|
39,578 |
|
|
|
|
Nonvested Awards
During the first quarter of 2007, the Company issued shares of common stock to certain key
employees and non-management members of its board of directors under nonvested stock bonus awards
for services to be provided by such key employees and directors in the future. Refer to Note 5 for
more information.
Equipment and Software Acquired Under Capital Lease Obligations
The Company acquired equipment and software under capital lease obligations in the amount of
$4.1 million during 2007 related to a three year software agreement and $5,000 during 2006 related
to equipment.
Note 8 Legal Proceedings
The Company is subject to lawsuits, claims and other complaints arising out of the ordinary
conduct of its business. In the opinion of management, based in part upon the advice of legal
counsel, all matters are believed to be adequately covered by insurance, or if not covered, are
believed to be without merit or are of such kind or involve such amounts that would not have a
material adverse effect on the financial position, results of operations or cash flows of the
Company if disposed of unfavorably. The Company establishes reserves for expected future
litigation exposures that TSYS determines to be both probable and reasonably estimable.
Note 9 Guarantees and Indemnifications
The Company has entered into processing and licensing agreements with 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.
The Company has not recorded a liability for guarantees or indemnities in the accompanying
consolidated balance sheet since the maximum amount of potential future payments under such
guarantees and indemnities is not determinable.
Note 10 Business Combinations
TSYS Managed Services
On November 16, 2006, TSYS announced an agreement with Merchants, a customer-contact company
and a wholly owned subsidiary of Dimension Data, to deliver a comprehensive range of managed
services to institutions across Europe, the Middle East and Africa. The agreement combines the
call-center capabilities of Merchants with TSYS special business unit, both of which specialize in
customer-servicing operations, including back-office, cross-selling and up-selling activities for
financial institutions engaged in card issuing and merchant acquiring. The new venture is called
TSYS Managed Services and includes existing Merchants centers that comprise more than 200 seats in
Milton Keynes, England, near London, and Barneveld, The Netherlands, near Amsterdam. TSYS paid an
aggregate consideration of approximately $2.8 million, including direct acquisition costs.
-18-
Prior to the new agreement, TSYS contracted with Merchants to provide these services to TSYS
international clients. TSYS consolidated TSYS Managed Services balance sheet and results of
operations, as of November 16, 2006. The Company recorded the acquisition of majority ownership as
a business combination requiring the Company to allocate the purchase price for the assets acquired
and liabilities assumed based upon
their relative fair values. The Company has preliminarily allocated $625,000 to goodwill
related to TSYS Managed Services.
The acquisition of TSYS Managed Services allows TSYS to deliver the same managed services to
clients in Europe and the broader region as it does to its domestic clients. TSYS Managed Services
operates as a separate, majority owned subsidiary of TSYS. Revenues associated with TSYS Managed
Services are included in other services and are included in international-based support services
for segment reporting purposes.
TSYS Card Tech
On July 11, 2006, TSYS acquired Card Tech, Ltd., a privately owned London-based payments firm,
and related companies, increasing TSYS card issuing and merchant acquiring capabilities and
extending its geographic reach to Asia Pacific, Europe, the Middle East and Africa. TSYS paid an
aggregate consideration of approximately $59.5 million, including direct acquisition costs.
Card Tech, Ltd. was established in 1989 and maintains service centers in London, England;
Dubai, United Arab Emirates; Nicosia, Cyprus; Kuala Lumpur, Malaysia; and Noida, India.
Card Tech, Ltd. has implemented its payments software for six of the 25 largest global banks
and three of the largest global card issuers. TSYS formed and/or acquired five companies in
connection with the Card Tech, Ltd. acquisition, which the Company collectively refers to as TSYS
Card Tech.
TSYS Card Techs software applications are utilized globally. TSYS Card Tech offers a
server-based system with an established global footprint for comprehensive issuing and acquiring
services. TSYS Card Tech offers products and services for installment loans, credit, debit,
merchant acquiring and prepaid payment platforms in addition to fraud, risk management,
authorizations, chargebacks, e-commerce and m-commerce solutions designed for the bankcard market.
TSYS Card Techs applications are browser-based, multilingual, multicurrency and multi-country
(including double-byte-enabled).
TSYS consolidated TSYS Card Techs balance sheet and results of operations as of July 11,
2006. The purchase price allocation is presented below:
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Cash and cash equivalents |
|
$ |
4,265 |
|
Intangible assets |
|
|
19,100 |
|
Goodwill |
|
|
32,700 |
|
Other assets |
|
|
12,095 |
|
|
|
|
|
Total assets acquired |
|
|
68,160 |
|
|
|
|
|
Other liabilities |
|
|
8,693 |
|
|
|
|
|
Total liabilities assumed |
|
|
8,693 |
|
|
|
|
|
Net assets acquired |
|
$ |
59,467 |
|
|
|
|
|
Revenues associated with TSYS Card Tech are included in electronic payment processing services
and are included in internationalbased support services for segment reporting purposes.
-19-
Pro forma
The pro forma impact of the TSYS Card Tech and TSYS Managed Services acquisitions on revenues
and net income for periods prior to the acquisition was not material.
Note 11 Income Taxes
TSYS is a member 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 2004 and with few exceptions, the Company is no longer subject to
income tax examinations from state and local or foreign tax authorities for years before 2001.
There is currently no Federal or foreign tax examinations in progress. However, a number of tax
examinations are in progress by the relevant state tax authorities. Although, TSYS is unable to
determine the ultimate outcome of these examinations, TSYS believes that its liability for
uncertain tax positions relating to these jurisdictions for such years is adequate.
TSYS adopted the provisions of FASB Interpretation No. 48, Accounting for Income Taxes an
Interpretation of FASB Statement 109 (FIN 48) on January 1, 2007. This interpretation prescribed
a recognition threshold and measurement attribute for the financial statement recognition,
measurement and disclosure of a tax position taken or expected to be taken in a tax return.
As a result of the implementation of FIN 48, the Company recognized approximately a $2.0
million increase in the liability for unrecognized income tax benefits, which was accounted for as
a reduction to the January 1, 2007, balance of retained earnings. This adjustment was the
cumulative effect of applying a different measurement standard in accounting for uncertainty in
income taxes. During the nine months ended September 30, 2007, TSYS decreased its liability for
prior year uncertain income tax positions as a discrete item by a net amount of approximately $2.9
million (net of the federal tax effect) including $0.9 million in interest and penalties. This
decrease resulted from resolving a state tax examination, expiring state audit period statutes and
other new information impacting the potential resolution of material uncertain tax positions.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows
(1):
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
(in millions) |
|
September 30, 2007 |
|
September 30, 2007 |
|
Beginning balance |
|
$ |
12.3 |
|
|
|
7.4 |
|
|
|
|
Current activity: |
|
|
|
|
|
|
|
|
Additions
based on tax positions related to current year |
|
|
|
|
|
|
0.4 |
|
Additions for tax positions of prior years |
|
|
|
|
|
|
4.5 |
|
Reductions for tax positions of prior years |
|
|
(7.5 |
) |
|
|
(7.5 |
) |
Settlements |
|
|
|
|
|
|
|
|
|
|
|
Net, current activity |
|
|
(7.5 |
) |
|
|
(2.6 |
) |
|
|
|
Ending balance |
|
$ |
4.8 |
|
|
|
4.8 |
|
|
|
|
|
|
|
(1) |
|
Unrecognized State tax benefits are not adjusted for the Federal tax impact. |
-20-
TSYS recognizes potential interest and penalties related to the underpayment of income taxes
as income tax expense in the consolidated statements of income. Gross accrued interest and
penalties on unrecognized tax benefits totaled $1.4 million and $1.0 million as of January 1, 2007
and September 30, 2007, respectively. The total amounts of unrecognized income tax benefits as of
January 1, 2007 and September 30, 2007 that, if recognized, would affect the effective tax rates
are $6.2 million and $4.5 million (net of the Federal benefit on State tax issues) respectively,
which includes interest and penalties of $0.9 million and $0.8 million.
Note 12 Subsequent Event
On October 25, 2007, the Company announced that it has entered into an agreement and plan of
distribution with Synovus, under which Synovus plans to distribute all of its shares of TSYS common
stock in a spin-off to Synovus shareholders. Under the terms and conditions of the agreement, TSYS
will become a fully independent company, allowing for broader diversification of the Companys
shareholder base, more liquidity of the Companys shares and additional investment in strategic
growth opportunities and potential acquisitions.
Prior to the spin-off transaction and in accordance with the agreement and plan of
distribution, TSYS has agreed to pay a one-time aggregate cash dividend of $600 million to all TSYS
shareholders, including Synovus. TSYS expects that the dividend will be funded by a combination of
cash on hand and the use of a revolving credit facility. Refer to Note 6 for more information on
the revolving credit facility.
In the spin-off, Synovus will distribute its 80.7 percent equity stake in TSYS, on a pro rata
basis, to Synovus shareholders as of a record date to be determined by the Synovus board (expected
to be on or around December 18, 2007). Based on the number of Synovus and TSYS shares outstanding
as of September 30, 2007, Synovus shareholders can expect to receive approximately 0.49 shares of
TSYS common stock for every share they own of Synvous; however, this is subject to change based on
the number of Synovus shares outstanding on the record date.
Based on the number of TSYS shares outstanding as of September 30, 2007, it is expected that
TSYS shareholders as of a record date to be determined by the TSYS board (expected to be on or
around December 17, 2007), will receive a cash dividend of $3.04 per share. The final per share
dividend will be determined based on the number of TSYS shares outstanding on the record date for
the TSYS cash dividend. TSYS intends for its annual dividend per share to remain at $0.28.
Subject to the completion of the spin-off, the TSYS Board of Directors has extended to April
2010 TSYS current share repurchase program that was set to expire in April 2008 and increased the
number of shares that may be repurchased under the plan from up to 2 million to up to 10 million.
-21-
TOTAL SYSTEM SERVICES, INC.
Item 2 Managements Discussion and Analysis of Financial
Condition and Results of Operations
Financial Overview
Total System Services, Inc.s (TSYS or the Companys) revenues are derived from providing
electronic payment processing and related services to financial and nonfinancial institutions,
generally under long-term processing contracts.
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, 2006.
A summary of the financial highlights for 2007, as compared to 2006, is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
September 30, |
|
September 30, |
(in millions, except per share |
|
|
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
|
|
|
Percent |
data and employees) |
|
2007 |
|
2006 |
|
Change |
|
2007 |
|
2006 |
|
Change |
|
Revenues before reimbursables |
|
$ |
359.0 |
|
|
|
342.3 |
|
|
|
4.9 |
% |
|
$ |
1,066.7 |
|
|
|
1,014.7 |
|
|
|
5.1 |
% |
Total revenues |
|
|
457.6 |
|
|
|
441.8 |
|
|
|
3.6 |
|
|
|
1,347.3 |
|
|
|
1,283.3 |
|
|
|
5.0 |
|
Operating income |
|
|
91.2 |
|
|
|
72.3 |
|
|
|
26.2 |
|
|
|
272.8 |
|
|
|
228.8 |
|
|
|
19.2 |
|
Net income |
|
|
68.8 |
|
|
|
54.3 |
|
|
|
26.7 |
|
|
|
191.8 |
|
|
|
162.1 |
|
|
|
18.3 |
|
Basic earnings per share (EPS) |
|
|
0.35 |
|
|
|
0.28 |
|
|
|
26.5 |
|
|
|
0.98 |
|
|
|
0.82 |
|
|
|
18.4 |
|
Diluted EPS |
|
|
0.35 |
|
|
|
0.28 |
|
|
|
26.5 |
|
|
|
0.97 |
|
|
|
0.82 |
|
|
|
18.4 |
|
Other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average accounts on file
(AOF) |
|
|
384.3 |
|
|
|
385.8 |
|
|
|
(0.4 |
) |
|
|
412.1 |
|
|
|
413.6 |
|
|
|
(0.4 |
) |
Average full-time equivalent
employees (FTE) |
|
|
6,751 |
|
|
|
6,640 |
|
|
|
1.7 |
|
|
|
6,752 |
|
|
|
6,616 |
|
|
|
2.0 |
|
|
|
|
The impact of acquisitions on consolidated total revenues for the three and nine
months ended September 30, 2007 was $12.0 million and $31.6 million, respectively. The
impact of acquisitions on consolidated revenues before reimbursable items for the three
and nine months ended September 30, 2007 was $15.7 million and $43.3 million,
respectively. Refer to Other Services revenues on page 32 for the characterization from
reimbursable items to other services revenues for the TSYS Managed Services acquisition.
The impact of acquisitions on consolidated total expenses for the three and nine months
ended September 30, 2007 was $10.1 million and $26.5 million, respectively. The impact
of acquisitions on consolidated expenses before reimbursable items for the three and
nine months ended September 30, 2007 was $13.8 million and $38.3 million, respectively. |
|
|
|
|
Cash flows from operating activities were $247.5 million for the nine months ended
September 30, 2007, compared to $230.4 million for the same period in 2006. |
-22-
Significant highlights for 2007 include:
Domestic
|
|
|
TSYS and Discover Financial Services signed an issuer processor agreement. Under the
terms of the agreement, TSYS will begin processing prepaid and credit card transactions
on the Discover Network, a business unit of Discover Financial Services. |
|
|
|
|
Commerce Bancorp, Inc. selected the TSYS Collections and Recovery System to manage
its entire collections and recovery inventory. This allows the bank to more effectively
work all of its delinquent and charged-off card and installment accounts, including
automobile loans and mortgages. |
|
|
|
|
TSYS successfully completed the pilot program for the Wal-Mart MoneyCard, issued by
GE and reloaded through Green Dots national reloading network. The Visa-branded prepaid
product was first piloted in November of 2006 with TSYS, and was available in 2,600
Wal-Mart stores at the end of July 2007. |
|
|
|
|
JP Morgan Chase & Co. (Chase) discontinued its processing agreement at the end of
July 2007 according to the original schedule and began processing in-house using a
modified version of TSYS processing system. |
|
|
|
|
During the first quarter, TSYS completed the Capital One conversion. |
International
|
|
|
TSYS has signed a long-term agreement with Nationwide, the worlds largest Building
Society, to process Nationwides credit card account portfolio and to build, operate and
manage a new customer care center for member support services. Based on the scope of
services, Nationwide would rank among TSYS largest clients. Servicing of Nationwides
more than 1 million credit card Visa accounts and operation of a customer care center
for Nationwide is planned for the first quarter of 2008. |
|
|
|
|
TSYS signed Tinkoff Credit Systems, a Moscow-based consumer lending bank, to supply
its card management and authorization system. The bank plans to become the first credit
card monoliner in Russia and will focus exclusively on issuing credit cards. |
|
|
|
|
TSYS and Lloyds TSB have successfully launched a new money transfer card in the UK.
The new Silver account from Lloyds TSB includes an innovative money transfer prepaid
product, aimed particularly at the growing number of newly arrived immigrants living and
working in the U.K. |
|
|
|
|
TSYS and The Gift Voucher Shop (GVS) announced the successful launch of GVS One4all
retail gift card campaign in hundreds of Post Offices in Ireland and on the GVS Web
site. |
|
|
|
|
TSYS introduced Chip and PIN Secure Payments in Cyprus with the introduction of EMV
cards through partnerships with three Cyprus-based banks, Marfin Popular Bank (formerly
Laiki Bank, Cyprus), Hellenic Bank and Universal Bank. The Commercial Bank of Qatar also
issued its first EMV card program utilizing TSYS card-management solution, PRIME. |
-23-
|
|
|
TSYS launched the Rewards card pilot program in the United Kingdom with Norwich Union
(NU), which is now the second program that NU has live on the TSYS Prepaid platform. |
|
|
|
TSYS announced that CUP Data, TSYS joint venture with China UnionPay, has recently
begun providing processing services for Huaxia Bank Co., Ltd, one of Chinas largest
nationwide banks. CUP Data now provides processing services for three of the four
largest issuing banks in China that use outsourced services to support their payment
programs. |
|
|
|
|
TSYS signed a contract extension with Spira de México, S.A. de C.V. (Spira), to
continue processing its consumer-credit portfolio. Under terms of the agreement, TSYS
will continue to provide risk management, portfolio management and reporting tools to
Spira. |
|
|
|
|
TSYS PRIME card- and merchant-management system was chosen by Norways largest
financial-services group, DnB NOR Bank ASA, to manage the fast-growing cards portfolio
of its market-leading credit-card operator, DnB NOR Kort. DnB NOR Kort has plans to
further expand its service solutions for DnB NOR Kort customers. |
Merchant Acquiring
|
|
|
TSYS renewed merchant-processing service agreements with Merchant Management Systems,
Moneris Solutions and Sage Payment Solutions covering its U.S. portfolio. |
|
|
|
|
TSYS signed agreements to provide merchant-processing services for Veracity Payment
Solutions, Clearent, National Processing Company (formerly Iron Triangle Payment
Systems), mPay Gateway and The Bancorp Bank. |
Corporate
|
|
|
TSYS announced that it has entered into an agreement and plan of distribution with
Synovus Financial Corp. (Synovus), under which Synovus plans to distribute all of its
shares of TSYS common stock in a spin-off to Synovus shareholders. Under the terms and
conditions of the agreement, TSYS will become a fully independent company. |
Industry
A number of companies in the electronic payment processing and merchant acquiring services
industries have recently announced transactions pursuant to which they were being acquired, being
spun from their current owner to the public or filing initial public offering statements in
anticipation of becoming a publicly traded entity.
Financial Review
This Financial Review provides a discussion of critical accounting policies and estimates,
related party transactions and off-balance sheet arrangements. This Financial Review also
discusses the results of operations, financial position, liquidity and capital resources of TSYS
and outlines the factors that have affected its recent earnings, as well as those factors that may
affect its future earnings.
Critical Accounting Policies and Estimates
The Companys financial position, results of operations and cash flows are impacted by the
accounting policies the Company has adopted. In order to gain a full understanding of the
Companys financial statements, one must have a clear understanding of the accounting policies
employed.
-24-
Factors that could affect the Companys future operating results and cause actual results to
vary materially from expectations are listed in the Companys forward-looking statements. Negative
developments in these or other risk factors could have a material adverse effect on the Companys
financial position, results of operations and cash flows. For a detailed discussion regarding the
Companys risk factors, see Item 1A: Risk Factors in the Companys Annual Report on Form 10-K for
the year ended December 31, 2006.
For a detailed discussion regarding the Companys critical accounting policies and estimates,
see Item 7: Managements Discussion and Analysis of Financial Condition and Results of Operations
in the Companys Annual Report on Form 10-K for the year ended December 31, 2006. There have been
no material changes to the Companys critical accounting policies, estimates and assumptions or the
judgments affecting the application of those estimates and assumptions in 2007.
Related Party Transactions
The Company provides electronic payment processing and other services to its parent company,
Synovus and its affiliates, and to the Companys equity investments, Total System Services de
México, S.A. de. C.V. (TSYS de México) and China UnionPay Data Co., Ltd. (CUP Data). The services
are performed under contracts that are similar to its contracts with other customers. The Company
believes the terms and conditions of transactions between the Company and these related parties are
comparable to those which could have been obtained in transactions with unaffiliated parties. The
Companys margins with respect to related party transactions are comparable to margins recognized
in transactions with unrelated third parties. The amounts related to these transactions are
disclosed on the face of TSYS Unaudited Condensed Consolidated Financial Statements.
Off-Balance Sheet Arrangements
Operating Leases: As a method of funding its operations, TSYS employs noncancelable operating
leases for computer equipment, software and facilities. These leases allow the Company to provide
the latest technology while avoiding the risk of ownership. Neither the assets nor obligations
related to these leases are included on the balance sheet.
Contractual Obligations: The total liability (with state amounts tax effected) for uncertain tax
positions under FIN 48 at September 30, 2007 is $4.5 million. Refer to Note 11 in the Notes to
Unaudited Condensed Consolidated Financial Statements for more information on income taxes. The
Company is not able to reasonably estimate the amount by which the liability will increase or
decrease over time; however, at this time, the Company does not expect a significant payment
related to these obligations within the next year.
As indicated in the Companys 2006 Annual Report on Form 10-K, total contractual cash
obligations at December 31, 2006 were estimated at $229.4 million. These contractual cash
obligations include lease payments and software arrangements.
Results of Operations
The following table sets forth certain income statement captions as a percentage of total
revenues and the percentage increases or decreases in those items for the three months ended
September 30, 2007 and 2006, respectively:
-25-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of |
|
Percentage Change |
|
|
Total Revenues |
|
in Dollar Amounts |
|
|
2007 |
|
2006 |
|
2007 vs. 2006 |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Electronic payment processing services |
|
|
52.6 |
% |
|
|
52.6 |
% |
|
|
3.6 |
% |
Merchant acquiring services |
|
|
14.3 |
|
|
|
14.8 |
|
|
|
(0.6 |
) |
Other services |
|
|
11.6 |
|
|
|
10.1 |
|
|
|
19.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursable items |
|
|
78.5 |
|
|
|
77.5 |
|
|
|
4.9 |
|
Reimbursable items |
|
|
21.5 |
|
|
|
22.5 |
|
|
|
(0.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
3.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and other personnel expense |
|
|
31.7 |
|
|
|
31.5 |
|
|
|
4.2 |
|
Net occupancy and equipment expense |
|
|
15.0 |
|
|
|
17.6 |
|
|
|
(11.8 |
) |
Spin assessment expenses |
|
|
0.4 |
|
|
|
|
|
|
nm |
Other operating expenses |
|
|
11.4 |
|
|
|
12.0 |
|
|
|
(1.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses before reimbursable items |
|
|
58.5 |
|
|
|
61.1 |
|
|
|
(0.8 |
) |
Reimbursable items |
|
|
21.5 |
|
|
|
22.5 |
|
|
|
(0.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
80.0 |
|
|
|
83.6 |
|
|
|
(0.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
20.0 |
|
|
|
16.4 |
|
|
|
26.2 |
|
Nonoperating income |
|
|
1.5 |
|
|
|
0.7 |
|
|
|
105.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes,
minority interest and equity in
income of equity investments |
|
|
21.5 |
|
|
|
17.1 |
|
|
|
29.8 |
|
Income taxes |
|
|
6.8 |
|
|
|
5.1 |
|
|
|
38.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest
and equity in income of equity
investments |
|
|
14.7 |
|
|
|
12.0 |
|
|
|
26.2 |
|
Minority interests in consolidated
subsidiaries net income |
|
|
(0.1 |
) |
|
|
(0.0 |
) |
|
|
163.7 |
|
Equity in income of equity investments |
|
|
0.4 |
|
|
|
0.3 |
|
|
|
68.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
15.0 |
% |
|
|
12.3 |
% |
|
|
26.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth certain income statement captions as a percentage of total
revenues and the percentage increases or decreases in those items for the nine months ended
September 30, 2007 and 2006, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of |
|
Percentage Change |
|
|
Total Revenues |
|
in Dollar Amounts |
|
|
2007 |
|
2006 |
|
2007 vs. 2006 |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Electronic payment processing services |
|
|
53.1 |
% |
|
|
53.4 |
% |
|
|
4.4 |
% |
Merchant acquiring services |
|
|
14.1 |
|
|
|
15.2 |
|
|
|
(2.7 |
) |
Other services |
|
|
12.0 |
|
|
|
10.5 |
|
|
|
20.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursable items |
|
|
79.2 |
|
|
|
79.1 |
|
|
|
5.1 |
|
Reimbursable items |
|
|
20.8 |
|
|
|
20.9 |
|
|
|
4.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-26-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of |
|
Percentage Change |
|
|
Total Revenues |
|
in Dollar Amounts |
|
|
2007 |
|
2006 |
|
2007 vs. 2006 |
Total revenues |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
5.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and other personnel expense |
|
|
32.0 |
|
|
|
29.7 |
|
|
|
13.1 |
|
Net occupancy and equipment expense |
|
|
15.3 |
|
|
|
18.3 |
|
|
|
(12.4 |
) |
Spin assessment expenses |
|
|
0.1 |
|
|
|
|
|
|
nm |
Other operating expenses |
|
|
11.6 |
|
|
|
13.3 |
|
|
|
(8.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses before reimbursable items |
|
|
59.0 |
|
|
|
61.3 |
|
|
|
1.0 |
|
Reimbursable items |
|
|
20.8 |
|
|
|
20.9 |
|
|
|
4.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
79.8 |
|
|
|
82.2 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
20.2 |
|
|
|
17.8 |
|
|
|
19.2 |
|
Nonoperating income |
|
|
1.3 |
|
|
|
0.7 |
|
|
|
96.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes,
minority interest and equity in
income of equity investments |
|
|
21.5 |
|
|
|
18.5 |
|
|
|
22.2 |
|
Income taxes |
|
|
7.5 |
|
|
|
6.1 |
|
|
|
29.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest
and equity in income of equity
investments |
|
|
14.0 |
|
|
|
12.4 |
|
|
|
18.7 |
|
Minority interests in consolidated
subsidiaries net income |
|
|
(0.1 |
) |
|
|
(0.0 |
) |
|
|
220.4 |
|
Equity in income of equity investments |
|
|
0.3 |
|
|
|
0.2 |
|
|
|
25.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
14.2 |
% |
|
|
12.6 |
% |
|
|
18.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
Total revenues increased $15.8 million and $64.1 million, or 3.6% and 5.0%, respectively,
during the three and nine months ended September 30, 2007, compared to the same periods in 2006.
The increase in revenues for the three and nine months ended September 30, 2007 includes an
increase of $4.3 million and $13.5 million, respectively, related to the effects of currency
translation of its foreign-based subsidiaries and branches. The impact of acquisitions on
consolidated total revenues for the three and nine months ended September 30, 2007 was $12.0
million and $31.6 million, respectively. Excluding reimbursable items, revenues increased $16.7
million and $52.0 million, or 4.9% and 5.1%, respectively, during the three and nine months ended
September 30, 2007, compared to the same periods in 2006.
International Revenues
TSYS provides services to its clients worldwide and plans to continue to expand its service
offerings internationally in the future. With the acquisitions of TSYS Card Tech and TSYS Managed
Services, TSYS has extended its geographic reach into Asia Pacific, Europe, the Middle East and
Africa, and as such, has increased its international revenues.
Total revenues from clients domiciled outside the United States for the three and nine months
ended September 30, 2007 and 2006, respectively, are summarized below:
-27-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
September 30, |
|
September 30, |
(in thousands) |
|
2007 |
|
2006 |
|
% Change |
|
2007 |
|
2006 |
|
% Change |
|
|
|
|
|
Europe |
|
$ |
56,107 |
|
|
|
43,692 |
|
|
|
28.4 |
|
|
$ |
151,100 |
|
|
|
112,598 |
|
|
|
34.2 |
|
Canada |
|
|
32,384 |
|
|
|
25,359 |
|
|
|
27.7 |
|
|
|
93,225 |
|
|
|
71,486 |
|
|
|
30.4 |
|
Japan |
|
|
6,338 |
|
|
|
5,051 |
|
|
|
25.5 |
|
|
|
17,713 |
|
|
|
13,419 |
|
|
|
32.0 |
|
Mexico |
|
|
3,617 |
|
|
|
3,163 |
|
|
|
14.4 |
|
|
|
10,155 |
|
|
|
8,540 |
|
|
|
18.9 |
|
Other |
|
|
6,941 |
|
|
|
4,910 |
|
|
|
41.4 |
|
|
|
22,728 |
|
|
|
7,468 |
|
|
|
204.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
105,387 |
|
|
|
82,175 |
|
|
|
28.2 |
|
|
$ |
294,921 |
|
|
|
213,511 |
|
|
|
38.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: The Company has two equity investments located in Mexico and China that are
accounted for under the equity method of accounting, and therefore, TSYS does not
include the revenues of its equity investments in consolidated revenues.
The increase in revenues in 2007 from clients domiciled outside the United States was a result
of acquisitions, internal growth of existing clients, the increased use of value added products and
services, and the effects of currency translation.
International revenues for the nine months ended September 30, 2007 include revenues of
approximately $31.6 million associated with the impact of acquisitions for several countries and
regions, including Europe, Japan and Other.
TSYS expects to continue to grow its international revenues in the future through
acquisitions, business expansion, new client signings and internal growth. TSYS may also grow as
European financial institutions phase-in the Single Euro Payments Area (SEPA) requirements.
The purpose of SEPA is to treat all Euro payments in the Euro area as domestic payments and
move the Euro area towards a more integrated payments market. The European Payments Councils plan
for implementation of SEPA is structured in three phases: a design phase, an implementation phase
and a migration phase. Currently, the implementation phase is scheduled to be completed at the end
of 2007. The migration phase, which is scheduled to be complete by the end of 2010, is a period in
which the European national payment schemes will coexist with the new SEPA schemes in order to
allow a gradual market-driven migration to SEPA. As the deadlines approach, more European
financial institutions may look to outsource their payment processing functions to third-party
providers, such as TSYS.
The Company has also seen some growth in international revenues as a result of providing
products and services to implement the EMV standard for secure payments. EMV is a standard for
interoperation of IC cards (chip cards) and IC capable POS terminals, for authenticating credit and
debit card payments. The name EMV is derived from the initial letters of Europay, MasterCard and
VISA, the three companies which originally cooperated to develop the standard. JCB (formerly Japan
Credit Bureau) joined the organization in December 2004. IC card systems based on EMV are being
phased in across the world, under names such as IC Credit and Chip and PIN.
-28-
The purpose and goal of the EMV standard is to specify interoperation between EMV compliant IC
cards and EMV compliant credit card payment terminals throughout the world. There are two major
benefits to moving to smart card based credit card payment systems: improved security (with
associated fraud reduction), and the possibility for finer control of offline credit card
transaction approvals. EMV financial transactions are more secure against fraud than traditional
credit card payments which use the data encoded in a magnetic stripe on the back of the card.
Although not the only possible method, the majority of implementations of EMV cards and terminals
confirm the identity of the cardholder by requiring the entry of a PIN (Personal Identification
Number) rather than signing a paper receipt.
Value Added Products and Services
The Companys revenues are impacted by the use of optional value added products and services
of TSYS processing systems. Value added products and services are optional features to which each
client can choose to subscribe in order to potentially increase the financial performance of its
portfolio. Value added products and services include: risk management tools and techniques, such as
credit evaluation, fraud detection and prevention, and behavior analysis tools; and revenue
enhancement tools and customer retention programs, such as loyalty programs and bonus rewards.
These revenues can increase or decrease from period to period as clients subscribe to or cancel
these services. Value added products and services are included primarily in electronic payment
processing services revenue.
For the three months ended September 30, 2007 and 2006, value added products and services
represented 12.8% and 12.5%, respectively, of total revenues. For the nine months ended September
30, 2007 and 2006, value added products and services represented 13.0% and 12.7%, respectively, of
total revenues. Revenues from these products and services, which include some reimbursable items
paid to third-party vendors, increased 6.1%, or $3.4 million, and 7.4%, or $12.0 million, for the
three and nine months ended September 30, 2007 compared to the same periods last year.
The majority of the $12.0 million increase in 2007 in value added products and services
relates to the suite of tools the Company offers related to fraud detection. TSYS offers a suite
of detection, prevention and management tools to more effectively manage portfolio risk and protect
against fraud. These tools evaluate authorizations, payments, non-authorized transactions and
account maintenance for fraud risk and help identify potential fraud patterns. Through the first
nine months of 2007, fraud detection represents approximately 41.9% of the total value added
products and services offered by the Company, as compared to 38.3% for the same period last year.
Major Customers
A significant amount of the Companys revenues is derived from long-term contracts with large
clients, including its major customers. TSYS derives revenues from providing various processing,
merchant acquiring and other services to these clients, including processing of consumer and
commercial accounts, as well as revenues for reimbursable items. Refer to Note 4 in the Notes to
Unaudited Condensed Consolidated Financial Statements for more information on major customers. The
loss of these clients, or any significant client, could have a material adverse effect on the
Companys financial position, results of operations and cash flows.
In October 2006, TSYS deconverted the Bank of America consumer card portfolio. TSYS continues
to provide commercial and small business card processing for Bank of America and MBNA, as well as
merchant processing for Bank of America, according to the terms of the existing agreements for
those services. In 2007 TSYS provided debit card embossing services to Bank of America.
-29-
In October 2004, TSYS finalized a definitive agreement with Chase to service the combined card
portfolios of Chase Card Services and to upgrade its card-processing technology. Pursuant to the
agreement, TSYS converted the consumer accounts of Chase to the modified version of TSYS
processing system in July 2005. In July 2007, Chase had the option to either extend the processing
agreement for up to five additional two-year periods or migrate the portfolio in-house, under a
perpetual license of a modified version of TSYS processing system with a six-year payment term.
Chase discontinued its processing agreement at the end of July 2007 according to the original
schedule and began processing in-house using a modified version of TSYS processing system.
Although the revenues associated with the Chase licensing arrangement are expected to be much
lower than the revenues associated with the Chase consumer processing arrangement, management
believes the impact should not have a material adverse effect on TSYS financial position, results
of operations or cash flows, as TSYS has planned and implemented a paring down of the resources
dedicated to the consumer portfolio through employee attrition and/or redeployment, as well as
through equipment lease expirations. TSYS expects to continue to support Chase in processing its
commercial portfolio.
With the migration to a licensing arrangement and the resulting reduction in revenues, TSYS
believes that the revenues from Chase for periods following the migration will represent less than
10% of TSYS total consolidated revenues.
Revenues from major customers for the periods reported are primarily attributable to the
domestic-based support services segment and merchant acquiring services segment.
Electronic Payment Processing Services
Electronic payment processing services revenues are generated primarily from charges based on
the number of accounts on file, transactions and authorizations processed, statements mailed, cards
embossed and mailed, and other processing services for cardholder accounts on file. Cardholder
accounts on file include active and inactive consumer credit, retail, debit, stored value,
government services and commercial card accounts. Due to the strong organic growth of TSYS clients
and the expanding use of cards, as well as increases in the scope of services offered to clients,
revenues relating to electronic payment processing services have continued to grow. Revenues from
electronic payment processing services increased $8.4 million, or 3.6%, and $29.9 million, or 4.4%,
for the three and nine months ended September 30, 2007 compared to the same periods in 2006. The
impact of acquisitions on consolidated electronic payment processing services revenues for the
three and nine months ended September 30, 2007 was $8.8 million and $25.5 million, respectively.
TSYS deconverted the consumer portfolio of Bank of America in October 2006, and the Sears
consumer MasterCard and private-label accounts in June 2006. The results for both the three and
nine months ended September 30, 2006 include processing revenues of approximately $43.4 million and
$158.0 million, respectively, associated with deconverted portfolios, including Bank of America and
Sears. The Company was able to offset these losses in revenues in 2007 with the conversion of new
accounts and the strong internal growth of existing clients.
-30-
In August 2005, TSYS finalized a five year definitive agreement with Capital One Financial
Corporation (Capital One) to provide processing services for its North American portfolio of
consumer and small business credit card accounts. TSYS completed the conversion of Capital Ones
portfolio from its in house processing system to TSYS processing system in March 2007. TSYS
expects to maintain the card processing functions of Capital One for at least five years. After a
minimum of three years of processing with TSYS, the agreement provides Capital One the opportunity
to license TSYS processing system under a long-term payment structure.
AOF Data (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
% Change |
At September 30, |
|
|
357.1 |
|
|
|
400.0 |
|
|
|
(10.7 |
) |
QTD Average |
|
|
384.3 |
|
|
|
385.8 |
|
|
|
(0.4 |
) |
YTD Average |
|
|
412.1 |
|
|
|
413.6 |
|
|
|
(0.4 |
) |
AOF by Portfolio Type (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
|
At September 30, |
|
AOF |
|
% |
|
AOF |
|
% |
|
% Change |
Consumer |
|
|
197.0 |
|
|
|
55.2 |
|
|
|
259.3 |
|
|
|
64.8 |
|
|
|
(24.0 |
) |
Retail |
|
|
47.9 |
|
|
|
13.4 |
|
|
|
51.5 |
|
|
|
12.9 |
|
|
|
(7.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
|
At September 30, |
|
AOF |
|
% |
|
AOF |
|
% |
|
% Change |
Stored value |
|
|
46.3 |
|
|
|
13.0 |
|
|
|
31.7 |
|
|
|
7.9 |
|
|
|
46.2 |
|
Commercial |
|
|
37.5 |
|
|
|
10.5 |
|
|
|
32.5 |
|
|
|
8.1 |
|
|
|
15.6 |
|
Government services |
|
|
23.2 |
|
|
|
6.5 |
|
|
|
20.7 |
|
|
|
5.2 |
|
|
|
11.8 |
|
Debit |
|
|
5.2 |
|
|
|
1.4 |
|
|
|
4.3 |
|
|
|
1.1 |
|
|
|
19.4 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
357.1 |
|
|
|
100.0 |
|
|
|
400.0 |
|
|
|
100.0 |
|
|
|
(10.7 |
) |
|
|
|
|
|
|
|
|
|
AOF by Geographic Area (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
|
At September 30, |
|
AOF |
|
% |
|
AOF |
|
% |
|
% Change |
Domestic |
|
|
284.5 |
|
|
|
79.7 |
|
|
|
334.0 |
|
|
|
83.5 |
|
|
|
(14.8 |
) |
International |
|
|
72.6 |
|
|
|
20.3 |
|
|
|
66.0 |
|
|
|
16.5 |
|
|
|
10.0 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
357.1 |
|
|
|
100.0 |
|
|
|
400.0 |
|
|
|
100.0 |
|
|
|
(10.7 |
) |
|
|
|
|
|
|
|
|
|
Note: The accounts on file distinction between domestic and international is based on
the geographic domicile of the Companys processing clients.
Activity in AOF (in millions):
|
|
|
|
|
|
|
|
|
|
|
September 2006 to |
|
September 2005 to |
|
|
September 2007 |
|
September 2006 |
Beginning balance |
|
|
400.0 |
|
|
|
430.1 |
|
Internal growth of existing clients |
|
|
32.0 |
|
|
|
38.0 |
|
New clients |
|
|
71.0 |
|
|
|
33.1 |
|
Purges/Sales |
|
|
(9.6 |
) |
|
|
(13.9 |
) |
Deconversions |
|
|
(136.3 |
) |
|
|
(87.3 |
) |
|
|
|
|
|
|
|
|
|
Ending balance |
|
|
357.1 |
|
|
|
400.0 |
|
|
|
|
|
|
|
|
|
|
-31-
Merchant Acquiring Services
Merchant acquiring services revenues are derived from providing acquiring solutions, related
systems and integrated support services to financial institutions and other merchant acquirers.
Revenues from merchant acquiring services include processing all payment forms including credit,
debit, prepaid, electronic benefit transfer and electronic check for merchants of all sizes across
a wide array of retail market segments. Merchant acquiring services products and services include:
authorization and capture of transactions; clearing and settlement of transactions; information
reporting services related to transactions; merchant billing services; and point-of-sale equipment
sales and service.
Revenues from merchant acquiring services are mainly generated by TSYS wholly owned
subsidiary TSYS Acquiring Solutions, L.L.C. (TSYS Acquiring) and majority owned subsidiary GP
Network Corporation. Merchant acquiring services revenues for the three and nine months ended
September 30, 2007 was $65.2 million and $190.1 million, respectively, compared to $65.5 million
and $195.3 million for the same periods last year. The decrease is attributable to client
deconversions in the terminal distribution businesses and price compression. The losses were
mitigated by the internal transaction growth of existing clients.
TSYS Acquirings results are driven by the authorization and capture transactions processed at
the point-of-sale and clearing and settlement transactions. TSYS Acquirings authorization and
capture transactions
are primarily through dial-up or Internet connectivity.
Revenues from other services consist primarily of revenues generated by TSYS wholly owned
subsidiaries not included in electronic payment processing services or merchant acquiring services,
as well as TSYS business process management services. Revenues from other services increased $8.6
million, or 19.4%, and $27.4 million, or 20.4%, for the three and nine months ended September 30,
2007, compared to the same periods in 2006. The impact of acquisitions on consolidated other
services revenues for the three and nine months ended September 30, 2007 was $6.9 million and $17.8
million, respectively.
On November 16, 2006, TSYS announced a joint venture with Merchants called TSYS Managed
Services. Refer to Note 10 in the Notes to Unaudited Condensed Consolidated Financial Statements
for more information on TSYS Managed Services.
Prior to the agreement, TSYS contracted with Merchants to provide managed services to TSYS
international clients, and these services were characterized as reimbursable items. With the new
agreement, these services are now characterized as other services revenues. TSYS Managed Services
operates as a separate, majority-owned subsidiary of TSYS.
In May 2006, TSYS collection subsidiary renegotiated a contract with its largest client. One
of the provisions that was changed related to the handling of attorney fees and court costs. In
reviewing the indicators set forth in EITF 99-19, Reporting Revenue Gross as a Principal versus
Net as an Agent, TSYS met the indicators of gross reporting, specifically TSYS is the primary
obligor and adds value as part of the service. As a result, TSYS has recognized $28.7 million and
$72.6 million of attorney fees and court costs for the three and nine months ended September 30,
2007, respectively, as reimbursable items in reimbursable revenues and reimbursable expenses.
-32-
Reimbursable Items
As a result of the FASBs Emerging Issues Task Force No. 01-14 (EITF No. 01-14), Income
Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred, the
Company has included reimbursements received for out-of-pocket expenses as revenues and expenses.
Reimbursable items decreased $933,000, or 0.9%, and increased $12.0 million, or 4.5%, for the three
and nine months ended September 30, 2007, respectively, as compared to the same periods last year.
The impact of acquisitions on consolidated reimbursable items for the three and nine months ended
September 30, 2007 was a decrease of $3.7 million and $11.8 million, respectively, related to the
recharacterization of TSYS Managed Services revenues discussed above. In connection with the
renegotiated contract discussed in other services revenues, TSYS recognized approximately $28.7
million and $72.6 million of attorney fees and court costs as additional reimbursable items for the
three and nine months ended September 30, 2007, respectively.
The majority of reimbursable items relates to the Companys domestic-based clients and is
primarily costs associated with postage. The Companys reimbursable items are impacted with
changes in postal rates and changes in the volumes of all mailing activities by its clients.
Effective May 14, 2007, the United States Postal Service increased the rate of first class mail.
Operating Expenses
Total expenses decreased 0.9% and increased 1.9% for the three and nine months ended September
30, 2007, respectively, compared to the same periods in 2006. The fluctuation in expense includes
an increase of $3.4 million and $10.6 million for the three and nine months ended September 30,
2007, respectively, related to the effects of currency translation of its foreign-based
subsidiaries, branches and divisions. The impact of acquisitions on consolidated total expenses for the three and nine months ended September 30,
2007 was $10.1 million and $26.5 million, respectively. Excluding reimbursable items, total
expenses decreased 0.8% and increased 1.0% for the three and nine months ended September 30, 2007,
respectively, compared to the same periods in 2006. The fluctuation in operating expenses is
attributable to changes in each of the expense categories as described below.
Salaries and Other Personnel Expense
Summarized below are the major components of salaries and other personnel expense for the
three and nine months ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
September 30, |
|
September 30, |
(in thousands) |
|
2007 |
|
2006 |
|
% Change |
|
2007 |
|
2006 |
|
% Change |
|
|
|
Salaries |
|
$ |
107,601 |
|
|
|
101,050 |
|
|
|
6.5 |
% |
|
$ |
312,784 |
|
|
|
284,959 |
|
|
|
9.8 |
% |
Employee benefits |
|
|
25,567 |
|
|
|
31,124 |
|
|
|
(17.9 |
) |
|
|
78,644 |
|
|
|
79,949 |
|
|
|
(1.6 |
) |
Nonemployee wages |
|
|
12,829 |
|
|
|
12,405 |
|
|
|
3.4 |
|
|
|
36,083 |
|
|
|
33,201 |
|
|
|
8.7 |
|
Share-based compensation |
|
|
3,285 |
|
|
|
2,129 |
|
|
|
54.3 |
|
|
|
9,881 |
|
|
|
6,574 |
|
|
|
50.3 |
|
Other |
|
|
3,445 |
|
|
|
2,810 |
|
|
|
22.6 |
|
|
|
10,113 |
|
|
|
9,030 |
|
|
|
12.0 |
|
Less capitalized expenses |
|
|
(7,737 |
) |
|
|
(10,312 |
) |
|
|
(25.0 |
) |
|
|
(16,539 |
) |
|
|
(32,782 |
) |
|
|
(49.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
144,990 |
|
|
|
139,206 |
|
|
|
4.2 |
% |
|
$ |
430,966 |
|
|
|
380,931 |
|
|
|
13.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
-33-
Salaries and other personnel expense increased $5.8 million, or 4.2%, and $50.0 million, or
13.1%, for the three and nine months ended September 30, 2007, respectively, compared to the same
periods in 2006. The impact of acquisitions on consolidated salaries and other personnel expenses
for the three and nine months ended September 30, 2007 was $9.6 million and $24.3 million,
respectively. In addition, the change in salaries and other personnel expense is associated with
the normal salary increases and related benefits, offset by the lower level of employment costs
capitalized as software development and contract acquisition costs. Salaries and other personnel
expense include the accrual for performance-based incentive benefits, which includes bonuses,
profit sharing and employer 401(k) expenses. For the three months ended September 30, 2007 and
2006, the Company accrued $10.7 million and $14.8 million, respectively, for performance-based
incentives. For the nine months ended September 30, 2007 and 2006, the Company accrued $30.4
million and $26.3 million, respectively, for performance-based incentives.
Capitalized salaries and personnel expenses decreased $2.6 million and $16.2 million for the
three and nine months ended September 30, 2007, respectively, as compared to the same periods in
2006, as a result of client conversion activity in 2006 being substantially completed by the fourth
quarter of 2006.
The Companys salaries and other personnel expense is greatly influenced by the number of
employees. Below is a summary of the Companys employee data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Data: |
|
|
|
|
|
|
(Full-time Equivalents) |
|
2007 |
|
2006 |
|
% Change |
At September 30, |
|
|
6,775 |
|
|
|
6,788 |
|
|
|
(0.2 |
) |
QTD Average |
|
|
6,751 |
|
|
|
6,640 |
|
|
|
1.7 |
|
YTD Average |
|
|
6,752 |
|
|
|
6,616 |
|
|
|
2.0 |
|
The Company gained 544 employees through the acquisitions of TSYS Card Tech and TSYS Managed
Services.
Share-based compensation expenses include the impact of expensing the fair value of stock
options in 2007, as well as expenses associated with nonvested shares. For the three months ended
September 30, 2007, share-based compensation was $3.3 million, compared to $2.1 million for the
same period in 2006. For the nine months ended September 30, 2007, share-based compensation was
$9.9 million, compared to $6.6 million for the same period in 2006.
Net Occupancy and Equipment Expense
Summarized below are the major components of net occupancy and equipment expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
September 30, |
|
September 30, |
(in thousands) |
|
2007 |
|
2006 |
|
% Change |
|
2007 |
|
2006 |
|
% Change |
|
|
|
Depreciation and amortization |
|
$ |
26,530 |
|
|
|
31,223 |
|
|
|
(15.0 |
)% |
|
$ |
81,465 |
|
|
|
92,422 |
|
|
|
(11.9 |
)% |
Equipment and software rentals |
|
|
18,896 |
|
|
|
26,451 |
|
|
|
(28.6 |
) |
|
|
62,026 |
|
|
|
83,494 |
|
|
|
(25.7 |
) |
Repairs and maintenance |
|
|
12,342 |
|
|
|
12,647 |
|
|
|
(2.4 |
) |
|
|
33,889 |
|
|
|
34,254 |
|
|
|
(1.1 |
) |
Asset impairments |
|
|
538 |
|
|
|
|
|
|
nm |
|
|
538 |
|
|
|
|
|
|
nm |
Other |
|
|
10,409 |
|
|
|
7,562 |
|
|
|
37.7 |
|
|
|
27,424 |
|
|
|
24,283 |
|
|
|
12.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
68,715 |
|
|
|
77,883 |
|
|
|
(11.8 |
)% |
|
$ |
205,342 |
|
|
|
234,453 |
|
|
|
(12.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
-34-
Net occupancy and equipment expense decreased $9.2 million, or 11.8%, and $29.1 million, or
12.4%, for the three and nine months ended September 30, 2007, respectively, over the same periods
in 2006. The impact of acquisitions on consolidated net occupancy and equipment expenses for the
three and nine months ended September 30, 2007 was $1.8 million and $4.8 million, respectively.
Depreciation and amortization decreased for the three and nine months ended September 30,
2007, as compared to the same periods in 2006, as a result of the acceleration in 2006 of
amortization of software licenses that were based on processing capacity agreements commonly
referred to as millions of instructions per second or MIPS. These licenses are amortized using a
units-of-production basis. As a result of the deconversions in 2006, TSYS total future MIPS
declined, resulting in a decrease in software amortization for the periods subsequent to the
deconversion dates.
The Companys equipment and software rentals also decreased for the three and nine months
ended September 30, 2007, as compared to the three and nine months ended September 30, 2006, as a
result of software licenses that are leased under processing capacity or MIPS agreements and the
leasing of less equipment in 2007 compared to the same periods in 2006.
Spin Assessment Expenses
In July, Synovus Board of Directors appointed a special committee of independent directors to
make a recommendation with respect to whether to distribute Synovus ownership interest in TSYS to
Synovus shareholders. As a result, the TSYS Board of Directors formed a special committee of
independent TSYS directors to consider the terms of any proposed spin-off by Synovus of its ownership interest in
TSYS, including the size of the pre-spin cash dividend. TSYS incurred expenses associated with
advisory and legal services in connection with the spin assessment. During the three and nine
months ended September 30, 2007, the Company incurred approximately $1.7 million of spin assessment
expenses. The Company expects to incur more of these expenses in the fourth quarter of 2007.
Other Operating Expenses
Summarized below are the major components of other operating expenses for the three and nine
months ended September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
September 30, |
|
September 30, |
(in thousands) |
|
2007 |
|
2006 |
|
% Change |
|
2007 |
|
2006 |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party
data processing services |
|
$ |
9,334 |
|
|
|
9,479 |
|
|
|
(1.5 |
) |
|
$ |
30,046 |
|
|
|
30,256 |
|
|
|
(0.7 |
) |
Professional advisory services |
|
|
9,310 |
|
|
|
5,621 |
|
|
|
65.6 |
|
|
|
21,713 |
|
|
|
17,314 |
|
|
|
25.4 |
|
Travel and business development |
|
|
5,907 |
|
|
|
5,383 |
|
|
|
9.7 |
|
|
|
18,238 |
|
|
|
14,324 |
|
|
|
27.3 |
|
Supplies and stationery |
|
|
4,729 |
|
|
|
6,811 |
|
|
|
(30.6 |
) |
|
|
14,821 |
|
|
|
21,693 |
|
|
|
(31.7 |
) |
Amortization of conversion costs |
|
|
3,775 |
|
|
|
4,533 |
|
|
|
(16.7 |
) |
|
|
11,915 |
|
|
|
13,913 |
|
|
|
(14.4 |
) |
Court costs
associated with debt collection services |
|
|
2,541 |
|
|
|
6,576 |
|
|
|
(61.4 |
) |
|
|
9,458 |
|
|
|
20,647 |
|
|
|
(54.2 |
) |
Management fees |
|
|
2,251 |
|
|
|
1,953 |
|
|
|
15.3 |
|
|
|
6,792 |
|
|
|
6,784 |
|
|
|
0.1 |
|
Amortization
of acquisition intangibles |
|
|
704 |
|
|
|
1,518 |
|
|
|
(53.6 |
) |
|
|
2,466 |
|
|
|
3,234 |
|
|
|
(23.7 |
) |
Bad debt expense (recoveries) |
|
|
318 |
|
|
|
157 |
|
|
|
102.5 |
|
|
|
507 |
|
|
|
(60 |
) |
|
nm |
Terminal deployment costs |
|
|
256 |
|
|
|
|
|
|
nm |
|
|
583 |
|
|
|
125 |
|
|
|
366.4 |
|
-35-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
September 30, |
|
September 30, |
(in thousands) |
|
2007 |
|
2006 |
|
% Change |
|
2007 |
|
2006 |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction processing provisions |
|
|
93 |
|
|
|
414 |
|
|
|
(77.5 |
) |
|
|
531 |
|
|
|
7,914 |
|
|
|
(93.3 |
) |
Other |
|
|
13,188 |
|
|
|
10,547 |
|
|
|
25.0 |
|
|
|
38,843 |
|
|
|
34,308 |
|
|
|
13.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
52,406 |
|
|
|
52,992 |
|
|
|
(1.1 |
) |
|
$ |
155,913 |
|
|
|
170,452 |
|
|
|
(8.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses include, among other things, amortization of conversion costs, costs
associated with delivering merchant services, professional advisory fees and court costs associated
with the Companys debt collection business. Other operating expenses also include charges for
processing errors, contractual commitments and bad debt expense. As described in the Critical
Accounting Policies section in the 2006 Form 10-K, managements evaluation of the adequacy of its
transaction processing reserves and allowance for doubtful accounts is based on a formal analysis
which assesses the probability of losses related to contractual contingencies, processing errors
and uncollectible accounts. Increases and decreases in transaction processing provisions and
charges for bad debt expense are reflected in other operating expenses.
Other operating expenses for the three and nine months ended September 30, 2007 decreased $0.6
million, or 1.1%, and decreased $14.5 million, or 8.5%, respectively, as compared to the same
periods in 2006. The decrease in operating expenses is primarily the result of the recognition of
attorney fees and court costs associated with debt collection services as reimbursable items. The
impact of acquisitions on consolidated other operating expenses for the three and nine months ended
September 30, 2007 was $2.4 million and $9.1 million, respectively.
Operating Income
Operating income increased 26.2% and 19.2% for the three and nine months ended September 30,
2007, respectively, over the same periods in 2006. The Companys operating profit margin for the
three and nine months ended September 30, 2007 was 19.9% and 20.2%, respectively, compared to 16.4%
and 17.8% for the same periods last year. TSYS operating margin increased for the three and nine
months ended September 30, 2007, as compared to the same periods in 2006, as the result of cost
control measures that allowed the Company to decrease expenses at a rate greater than the
previously forecasted decreases in revenues.
Nonoperating Income (Expense)
Interest income for the three months ended September 30, 2007 was $7.0 million, an increase of
$3.6 million, compared to $3.4 million for the same period in 2006. Interest income for the nine
months ended September 30, 2007 was $18.6 million, an increase of $9.3 million, compared to $9.3
million for the same period in 2006. The increase in interest income is primarily attributable to
the accumulation of cash available for investment and changes in short-term interest rates.
Interest expense for the three months ended September 30, 2007 was $916,000, an increase of
$681,000 compared to $235,000 for the same period in 2006. Interest expense for the nine months
ended September 30, 2007 was $1.5 million, an increase of $1.1 million compared to $364,000 for the
same period in 2006. The increase in interest expense in 2007 compared to 2006 relates to the
increased borrowings undertaken by the Company. Refer to Note 6 in the Notes to Unaudited
Condensed Consolidated Financial Statements for more information on long-term debt.
-36-
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. As a result of these financing arrangements,
the Company recorded a foreign currency translation gain on the Companys financing for the three
and nine months ended September 30, 2007 of $2.0 million and $3.3 million, respectively. The
balance of these financing arrangements at September 30, 2007 was approximately $4.8 million.
On August 3, 2007, the Companys European operation obtained a loan of approximately £33.0
million or approximately $67.7 million from a third party mainly to repay the U.S. parent loan.
Refer to Note 6 in the Notes to Unaudited Condensed Consolidated Financial Statements for more
information on the long-term financing arrangement.
The Company records foreign currency translation adjustments on foreign-denominated balance
sheet accounts. The Company maintains several cash accounts denominated in foreign currencies,
primarily in Euros and British Pounds Sterling (BPS). As the Company translates the
foreign-denominated cash balances into U.S. dollars, the translated cash balance is adjusted upward
or downward depending upon the foreign currency exchange movements. The upward or downward
adjustment is recorded as a gain or loss on foreign currency translation in the Companys
statements of income. As those cash accounts have increased, the upward or downward adjustments
have increased. The translation loss related to these and other balance sheet accounts was $1.1
million and $2.6 million for the three and nine months ended September 30, 2007, respectively. The balance of the Companys foreign-denominated cash accounts subject to risk of translation
gains or losses at September 30, 2007 was approximately $57.1 million, the majority of which is
denominated in Euros.
Income Taxes
TSYS effective income tax rate for the three months ended September 30, 2007 was 31.1%,
compared to 29.4% for the same period in 2006. The effective income tax rate for the nine months
ended September 30, 2007 was 34.7% compared to 32.8% for the same period in 2006. The calculation
of the effective tax rate is income taxes plus income taxes associated with equity income divided
by TSYS pretax income adjusted for minority interests in consolidated subsidiaries net income and
equity pre-tax earnings of its equity investments. Refer to Note 11 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. During the third quarter, the resolution of a
state income tax examination resulted in a reduction in previously recorded income tax liabilities
of $5.7 million. The majority of this reduction in the liability reduced income tax expense for
the three months ended September 30, 2007 and lowered the effective tax rate by 5.7%.
In July 2006, TSYS changed the structure of its European operation from a branch structure that
will facilitate continued expansion in the European region. As a result of the new structure, TSYS
reduced previously established tax reserves that would no longer be required under the new
structure in the amount of $5.6 million in the third quarter of 2006. In the third quarter of
2006, TSYS also reassessed its contingencies for federal and state exposures, which resulted in an
increase in tax liability by approximately $1.5 million.
-37-
TSYS continually monitors and evaluates the potential impact of current events and
circumstances on the estimates and assumptions used in the analysis of its income tax positions,
and, accordingly, TSYS effective tax rate may fluctuate in the future.
Equity in Income of Equity Investments
The Company has two equity investments located in Mexico and China that are accounted for
under the equity method of accounting. TSYS share of income from its equity in equity investments
was $2.0 million and $1.2 million for the three months ended September 30, 2007 and 2006,
respectively. TSYS share of income from its equity in equity investments was $3.9 million and
$3.1 million for the nine months ended September 30, 2007 and 2006, respectively.
Net Income
Net income for the three months ended September 30, 2007 increased 26.7%, or $14.5 million, to
$68.8 million, or basic and diluted earnings per share of $0.35, compared to $54.3 million, or
basic and diluted earnings per share of $0.28, for the same period in 2006. Net income for the
nine months ended September 30, 2007 increased 18.3%, or $29.7 million, to $191.8 million, or basic
and diluted earnings per share of $0.98 and $0.97, respectively, compared to $162.1 million, or
basic and diluted earnings per share of $0.82, for the same period in 2006.
Net Profit Margin
The Companys net profit margin for the three months ended September 30, 2007 was 15.0%,
compared to 12.3% for the same period last year. The Companys net profit margin for the nine
months ended September 30, 2007 was 14.2%, compared to 12.6% for the same period last year.
TSYS net profit margin increased for the quarter and year-to-date as the result of
managements focus on expense controls, decreased amortization and increased interest income offset
by increased expenses associated with a higher effective tax rate.
Profit Margins and Reimbursable Items
Management believes that reimbursable items distort operating and net profit margins as
defined by generally accepted accounting principles. Management evaluates the Companys operating
performance based upon operating and net profit margins excluding reimbursable items. Management
believes that operating and net profit margins excluding reimbursable items are more useful because
reimbursable items do not impact profitability as the Company receives reimbursement for expenses
incurred on behalf of its clients.
Below is the reconciliation between reported margins and adjusted margins excluding
reimbursable items for the three and nine months ended September 30, 2007 and 2006, respectively:
-38-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
(in thousands) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Operating income |
|
$ |
91,219 |
|
|
|
72,257 |
|
|
|
272,814 |
|
|
|
228,845 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
68,802 |
|
|
|
54,306 |
|
|
|
191,763 |
|
|
|
162,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
457,565 |
|
|
|
441,815 |
|
|
|
1,347,324 |
|
|
|
1,283,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin (as reported) |
|
|
19.9 |
% |
|
|
16.4 |
% |
|
|
20.2 |
% |
|
|
17.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net profit margin (as reported) |
|
|
15.0 |
% |
|
|
12.3 |
% |
|
|
14.2 |
% |
|
|
12.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue before reimbursable items |
|
$ |
359,022 |
|
|
|
342,338 |
|
|
|
1,066,727 |
|
|
|
1,014,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating margin |
|
|
25.4 |
% |
|
|
21.1 |
% |
|
|
25.6 |
% |
|
|
22.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net profit margin |
|
|
19.2 |
% |
|
|
15.9 |
% |
|
|
18.0 |
% |
|
|
16.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected Outlook for 2007
Excluding the one-time Bank of America contract-termination fee in 2006 of approximately $68.9
million and the acceleration of amortization of Bank of America contract acquisition costs of
approximately $6 million, net income is expected to increase between 20%-22% in 2007 compared to
2006. Based on generally accepted accounting principles (GAAP), TSYS estimated 2007 net income is
expected to increase between 0%-2% as compared to 2006. TSYS earnings guidance does not include
the expenses associated with the intended spin-off of TSYS by Synovus.
TSYS 2007 earnings guidance is based on the following assumptions: (1) Including the Bank of
America contract termination fee of approximately $68.9 million in 2006 and an acceleration of
amortization of contract acquisition costs of approximately $6 million, estimated total revenues
will decline 3%-2% in 2007. Excluding the termination fee and reimbursable items, revenues will
increase by 3%-5% over 2006; (2) expense reductions in employment, equipment, leases and other
areas that are included in 2007 estimates will be accomplished; and (3) TSYS will not incur
significant expenses associated with the conversion of new large clients and/or acquisitions, or
any significant impairment of goodwill or other intangibles.
Presentation of revenues and net income excluding the Bank of America termination fee,
acceleration of amortization of contract acquisition costs and reimbursable items are non-GAAP
financial measures. The following table reconciles the range of changes from 2006 to 2007,
comparing non-GAAP financial measures to GAAP financial measures.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Guidance |
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
|
|
|
|
|
|
|
2007 Forecast |
|
|
2006 |
|
|
Percent Change |
|
|
Net income |
|
$ |
250 to $255 |
|
|
$ |
249 |
|
|
0% to 2% |
Less: termination fee, net of acceleration of amortization of
contract
acquisition costs, net of tax |
|
|
|
|
|
|
($41 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, excluding impact of termination fee, net of acceleration
of amortization of contract acquisition costs |
|
$ |
250 to $255 |
|
|
$ |
208 |
|
|
20% to 22% |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
1,742 to $1,760 |
|
|
$ |
1,787 |
|
|
(3%) to (2%) |
Less: reimbursable items |
|
|
($329 |
) |
|
|
($353 |
) |
|
|
|
|
Less: termination fee, net of related contract acquisition cost
amortization* |
|
|
|
|
|
|
($65 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, excluding reimbursable items and net termination fee |
|
$ |
1,413 to $1,431 |
|
|
$ |
1,369 |
|
|
3% to 5% |
|
|
|
|
|
|
|
|
|
|
|
-39-
|
|
|
* |
|
Note: TSYS accelerated the amortization of approximately $6 million in contract acquisition
costs (comprised of $4 million of amortization related to payments for processing rights, which
was recorded as a reduction of revenues, and $2 million of amortization expense related to
conversion costs). |
TSYS believes the table above presents meaningful information to assist investors in
understanding the companys financial estimates for changes in total revenues and net income from
2006 to 2007 as a result of the Bank of America consumer portfolio deconversion, as the non-GAAP
financial measures exclude amounts that the Company does not consider part of ongoing operating
results. The non-GAAP financial percentage changes should not be considered by themselves or as a
substitute for the GAAP percentage changes year over year. The non-GAAP measures should be
considered as an additional view of the way TSYS financial measures are affected by the one-time
Bank of America contract termination fee, acceleration of amortization of contract acquisition
costs and reimbursable items; and should be used in conjunction with all publicly filed financial
statements and reports.
Financial Position, Liquidity and Capital Resources
The Condensed Consolidated Statements of Cash Flows detail the Companys cash flows from
operating, investing and financing activities. TSYS primary method of funding its operations and
growth has been cash generated from current operations and the use of leases. TSYS has occasionally
used borrowed funds to supplement financing of capital expenditures and acquisitions.
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
(in thousands) |
|
2007 |
|
2006 |
|
Net income |
|
$ |
191,763 |
|
|
|
162,106 |
|
Depreciation and amortization |
|
|
114,213 |
|
|
|
130,306 |
|
Dividends from equity investments |
|
|
2,994 |
|
|
|
2,371 |
|
Other noncash items and charges, net |
|
|
(346 |
) |
|
|
(11,429 |
) |
Net change in current and long-term assets and
current and long-term liabilities |
|
|
(61,146 |
) |
|
|
(52,950 |
) |
|
|
|
Net cash provided by operating activities |
|
$ |
247,478 |
|
|
|
230,404 |
|
|
|
|
TSYS main source of funds is derived from operating activities, specifically net income.
During the nine months ended September 30, 2007, the Company generated $247.5 million in cash from
operating activities compared with $230.4 million for the same period last year. The increase in
2007 in net cash provided by operating activities was primarily the result of increased net income
offset by lower depreciation and amortization.
Net change in current and long-term assets and current and long-term liabilities include
accounts receivable, prepaid expenses, other current assets and other assets, accounts payable,
accrued salaries and employee benefits, other current liabilities and other liabilities. The
change in accounts receivable at September 30, 2007, as compared to December 31, 2006, is the
result of timing of collections compared to billings. The change in accounts payable and other
liabilities for the same period is the result of the timing of payments, funding of
performance-based incentives and payments of vendor invoices.
-40-
Dividends Received from Equity Investments
During the first nine months of 2007, the Company received a dividend payment of $3.0 million
from TSYS de México, compared to $2.4 million for the same period last year.
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
(in thousands) |
|
2007 |
|
2006 |
|
Purchases of property and equipment, net |
|
$ |
(36,420 |
) |
|
|
(21,203 |
) |
Additions to
licensed computer software from vendors |
|
|
(8,194 |
) |
|
|
(9,650 |
) |
Additions to internally developed computer software |
|
|
(11,749 |
) |
|
|
(13,699 |
) |
Cash used in acquisitions, net of cash acquired |
|
|
(472 |
) |
|
|
(70,578 |
) |
Additions to contract acquisition costs |
|
|
(20,878 |
) |
|
|
(39,578 |
) |
|
|
|
Net cash used in investing activities |
|
$ |
(77,713 |
) |
|
|
(154,708 |
) |
|
|
|
The major uses of cash for investing activities have been the addition of property and
equipment, primarily computer equipment, the purchase of licensed computer software and internal
development of computer software, investments in contract acquisition costs associated with
obtaining and servicing new or existing clients, and business acquisitions. The Company used $77.7
million in cash for investing activities for the nine months ended September 30, 2007, compared to
$154.7 million for the same period in 2006. The major use of cash for investing activities in 2007
was for the addition of equipment and contract acquisition costs. The major use of cash for
investing activities in 2006 was for acquisitions.
Property and Equipment
Capital expenditures for property and equipment during the three month periods ended September
30, 2007 and 2006 were $15.0 million and $6.9 million, respectively. For the nine month period
ended September 30, 2007 capital expenditures for property and equipment were $36.4 million
compared to $21.2 million for the same period last year. The increase in capital expenditures for
property and equipment in 2007 related to production and processing equipment.
Licensed Computer Software from Vendors
Expenditures for licensed computer software from vendors were $3.4 million and $5.2 million
for the three months ended September 30, 2007 and 2006, respectively. Expenditures for licensed
computer software from vendors were $8.2 million and $9.6 million for the nine months ended
September 30, 2007 and 2006, respectively.
Internally Developed Computer Software Costs
Additions to capitalized software development costs for the nine months ended September 30,
2007 were $11.7 million compared to $13.7 million for the same period in 2006.
Cash Used in Acquisitions
The Companys cash used in acquisitions, net of cash acquired was $0.5 million compared to
$70.6 million for the nine months ended September 30, 2007 and 2006, respectively. In 2006, TSYS
acquired TSYS Card Tech for approximately $59.3 million and increased its ownership in CUP Data for
approximately $15.6 million.
Contract Acquisition Costs
TSYS makes cash payments for processing rights, third-party development costs and other direct
salary-related costs in connection with converting new customers to the Companys processing
systems. The Companys investments in contract acquisition costs were $11.3 million for the three
months ended September 30, 2007, bringing the total for 2007 to $20.9 million, compared to $39.6
million for the nine months ended September 30, 2006. The Company had cash payments for processing
rights of approximately $6.9 million and $12.8 million during the three and nine months ended
September 30, 2007, respectively, compared to $7.5 million and $10.7 million for the same periods
last year.
Conversion cost additions were $8.1 million and $28.9 million for the nine months ended
September 30, 2007 and 2006, respectively. The decrease in the amount of conversion cost additions
for 2007, as compared to 2006, is the result of decreased activity related to fewer conversions
occurring in 2007 versus 2006.
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
(in thousands) |
|
2007 |
|
2006 |
|
Dividends paid on common stock |
|
$ |
(41,425 |
) |
|
|
(37,504 |
) |
Repurchase of common stock |
|
|
|
|
|
|
(21,843 |
) |
Proceeds from borrowings of long-term debt |
|
|
73,968 |
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
5,258 |
|
|
|
3,725 |
|
Excess tax benefit from share-based payment arrangements |
|
|
4,022 |
|
|
|
1,646 |
|
Principal payments on long-term debt borrowings and
capital lease obligations |
|
|
(3,893 |
) |
|
|
(1,561 |
) |
|
|
|
Net cash provided by (used in) financing activities |
|
$ |
37,930 |
|
|
|
(55,537 |
) |
|
|
|
The major use of cash for financing activities has been the payment of dividends and
repurchase of common stock. The main source of cash from financing activities has been the
occasional use of borrowed funds and the exercise of stock options. Net cash provided by financing
activities for the nine months ended September 30, 2007 was $37.9 million mainly as proceeds from
borrowings of long-term debt. Net cash used in financing activities for the nine months ended
September 30, 2006 was $55.5 million mainly as a result of the payments of dividends.
On October 25, 2007, TSYS announced that it has entered into an agreement and plan of
distribution with Synovus under which Synovus plans to distribute all of its shares of TSYS stock
to Synovus shareholders in a spin-off. Synovus currently owns 80.7% of TSYS. Prior to the
spin-off transaction and in accordance with the agreement and plan of distribution, TSYS has agreed
to pay a one-time aggregate cash dividend of $600 million to all TSYS shareholders, including
Synovus. TSYS expects that the dividend will be funded by a combination of cash on hand and the
use of a revolving credit facility. A $500 million revolving credit facility is anticipated to be
finalized prior to the spin-off, of which $200 million will be used to fund the cash dividend. The
remaining $400 million to fund the dividend will be from cash on hand. Refer to Notes 6 and 12 for
more information on the TSYS spin-off subsequent event and long-term debt financing.
Through the first nine months of 2007, the Company recognized $4.0 million of tax benefits
from share-based compensation, as compared to $1.6 million for the same period in 2006. For
share-based payment arrangements, the Company recognizes tax benefits from the exercise of stock
options. The Company records these tax benefits from share-based compensation costs as cash inflows
in the financing section in the Statement of Cash Flows.
-41-
Stock Repurchase Plan
On April 20, 2006, TSYS announced that its board had approved a stock repurchase plan to
purchase up to 2 million shares, which represents slightly more than five percent of the shares of
TSYS stock held by shareholders other than Synovus. The shares may be purchased from time to time
over a two year period and will depend on various factors including price, market conditions,
acquisitions and the general financial position of TSYS. Repurchased shares will be used for
general corporate purposes.
Subject to the completion of the spin-off, the TSYS Board of Directors has extended to April
2010 TSYS current share repurchase program that was set to expire in April 2008 and increased the
number of shares that may be repurchased under the plan from up to 2 million to up to 10 million.
Refer to Note 12 in the Notes to Unaudited Condensed Consolidated Financial Statements for more
information on the TSYS spin-off subsequent event.
During the nine months ended September 30, 2007, TSYS did not purchase any shares of TSYS
common stock. The Company has approximately 898,000 shares remaining that could be repurchased
under the share repurchase plan.
Financing
On August 3, 2007, the Companys European operation obtained a loan of approximately £33.0
million or approximately $67.7 million from a third party mainly to repay the U.S. parent loan.
Refer to Note 6 in the Notes to Unaudited Condensed Consolidated Financial Statements for more
information on the long-term financing arrangement.
In January 2007, the Companys operation in Japan borrowed ¥250 million, or approximately $2.1
million, through a short-term note. The interest rate on the note is the Japan prime rate plus 375
basis points. The term of the note is one year.
In connection with the formation of TSYS Managed Services, TSYS and Merchants agreed to
provide long-term financing to TSYS Managed Services. Refer to Note 6 of the Notes to Unaudited
Condensed Consolidated Financial Statements for more information regarding the long-term financing
arrangement between TSYS Managed Services and Merchants. At the end of September 2007, the balance
of the financing arrangement was approximately £2.0 million, or approximately $4.0 million.
Dividends
Dividends on common stock of $13.8 million were paid during the three months ended September
30, 2007, bringing the total for 2007 to $41.4 million compared to $37.5 million paid during the
nine months ended September 30, 2006. On May 25, 2006, the Company announced an increase in its
quarterly dividend of 16.7% from $0.06 to $0.07 per share.
-42-
On October 25, 2007, TSYS announced that it has entered into an agreement and plan of
distribution with Synovus under which Synovus plans to distribute all of its shares of TSYS stock
to Synovus shareholders in a spin-off. Synovus currently owns 80.7% of TSYS. Based on the number
of TSYS shares outstanding as of September 30, 2007, it is expected that TSYS shareholders as of a
record date to be determined by the TSYS board (expected to be on or around December 17, 2007),
will receive a special cash dividend of approximately $3.04 per share. The final per share
dividend will be determined based on the number of TSYS shares outstanding on the record date for
the TSYS cash dividend. TSYS intends for its annual dividend per share to remain at $0.28. Refer
to Note 12 of the Notes to Unaudited Condensed Consolidated Financial Statements for more
information on the TSYS spin-off subsequent event.
Significant Noncash Transactions
Refer to Note 7 of the Notes to Unaudited Condensed Consolidated Financial Statements for more
information about supplementary cash flow information.
Foreign Exchange
TSYS operates internationally and is subject to potentially adverse movements in foreign
currency exchange rates. Since December 2000, TSYS has not entered into foreign exchange forward
contracts to reduce its exposure to foreign currency rate changes. TSYS continues to analyze
potential hedging instruments to safeguard it from significant foreign currency translation risks.
Impact of Inflation
Although the impact of inflation on its operations cannot be precisely determined, the Company
believes that by controlling its operating expenses, and by taking advantage of more efficient
computer hardware and software, it can minimize the impact of inflation.
Working Capital
TSYS may seek additional external sources of capital in the future. The form of any such
financing will vary depending upon prevailing market and other conditions and may include
short-term or long-term borrowings from financial institutions or the issuance of additional equity
and/or debt securities such as industrial revenue bonds. However, there can be no assurance that
funds will be available on terms acceptable to TSYS. Management expects that TSYS will continue to
be able to fund a significant portion of its capital expenditure needs through internally generated
cash in the future, as evidenced by TSYS current ratio of 3.8:1. At September 30, 2007, TSYS had
working capital of $711.1 million compared to $448.9 million at December 31, 2006.
Legal Proceedings
The Company is subject to lawsuits, claims and other complaints arising out of the ordinary
conduct of its business. In the opinion of management, based in part upon the advice of legal
counsel, all matters are believed to be adequately covered by insurance, or if not covered, are
believed to be without merit or are of such kind or involve such amounts that would not have a
material adverse effect on the financial position, results of operations or cash flows of the
Company if disposed of unfavorably. The Company establishes reserves for expected future
litigation exposures that TSYS determines to be both probable and reasonably estimable.
Recent Accounting Pronouncements
The Companys Annual Report on Form 10-K for the year ended December 31, 2006, as filed with
the SEC, contains a discussion of recent accounting pronouncements and the expected impact on the
Companys financial statements.
-43-
In March 2007, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No.
06-10 (EITF 06-10), Accounting for Collateral Split-Dollar Life Insurance Arrangements. This
guidance requires that for an endorsement split-dollar life insurance arrangement (in which a
company owns and controls the insurance policy), an employer should recognize a liability for
future benefits in accordance with either Statement of Financial Accounting Standards No. 106,
Employers Accounting for Postretirement Benefits Other Than Pensions or Accounting Principles
Board Opinion No. 12, Omnibus Opinion1967 if the employer has agreed to maintain a life
insurance policy during the employees retirement or provide the employee with a death benefit
based on the substantive arrangement with the employee. Entities should recognize the effects of
applying the consensus in this guidance as a change in accounting principle through a
cumulative-effect adjustment to retained earnings and other components of equity or net assets in
the statement of financial position. EITF 06-10 is effective for fiscal years beginning after
December 15, 2007. The Company is currently evaluating the impact of adopting EITF 06-10 on its
financial position, results of operations and cash flows, but has not yet completed its assessment.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (SFAS
No. 159), The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159
permits entities to choose to measure many financial instruments and certain other items at fair
value at specified election dates. An entity shall report unrealized gains and losses on items for
which the fair value option has been elected in earnings at each subsequent reporting date. SFAS
No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently
evaluating the impact of adopting SFAS No. 159 on its financial position, results of operations and
cash flows, but has not yet completed its assessment.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (SFAS
No. 157), Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles and expands disclosures about fair
value measurements. SFAS No. 157 is effective for fiscal periods beginning after November 15, 2007.
The Company does not expect the impact of adopting SFAS No. 157 on its financial position, results
of operations and cash flows to be material.
In September 2006, the EITF reached a consensus on EITF Issue No. 06-4 (EITF 06-4),
Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements. EITF 06-4 requires an employer to recognize a liability
for future benefits based on the substantive agreement with the employee. EITF 06-4 requires a
company to use the guidance prescribed in FASB Statement No. 106, Employers Accounting for
Postretirement Benefits Other Than Pensions and Accounting Principles Board Opinion No. 12,
Omnibus Opinion 1967, when entering into an endorsement split-dollar life insurance agreement
and recognizing the liability. EITF 06-4 is effective for fiscal periods beginning after December
15, 2007. The Company is currently evaluating the impact of adopting EITF 06-4 on its financial
position, results of operations and cash flows, but has yet to complete its assessment.
Forward-Looking Statements
Certain statements contained in this filing which are not statements of historical fact
constitute forward-looking statements within the meaning of the Private Securities Litigation
Reform Act (the Act). These forward-looking statements include, among others: (i) TSYS plans to
continue to expand its service offerings internationally; (ii) TSYS expectation that it will
continue to grow its international revenues in the future through acquisitions, business expansion,
new client signings and internal growth; (iii) TSYS expectation that the migration of Chase from a
processing arrangement to a licensing arrangement will not have a material adverse impact on TSYS;
(iv) TSYS expectation that it will continue to support Chase in processing its commercial
portfolio; (v) TSYS expectation that it will maintain the card processing functions
-44-
of Capital One
for at least five years; (vi) TSYS expected net income growth for 2007; (vii) managements
expectation that TSYS will continue to be able to fund a significant portion of its capital
expenditure needs through internally generated cash in the future; (viii) TSYS belief with respect
to lawsuits, claims and other complaints; (ix) the expected financial impact of recent accounting
pronouncements; (x) managements expectations about the spin-off, the pre-spin cash dividend and
the timing and funding thereof, and the benefits associated with the spin-off; (xi) TSYS
expectation with respect to the amount of the annual dividend to shareholders; and the assumptions
underlying such statements, including, with respect to TSYS expected increase in net income for
2007: (a) including the Bank of America contract termination fee in 2006 of approximately $68.9
million and an acceleration of amortization of contract acquisition costs of approximately $6
million, estimated total revenues will decline 3%-2% in 2007 and excluding the termination fee and
reimbursable items, estimated revenues will increase by 3%-5% over 2006; (b) expense reductions in
employment, equipment, leases and other areas which are included in 2007 estimates will be
accomplished; and (c) TSYS will not incur significant expenses associated with the conversion of
new large clients and/or acquisitions, or any significant impairment of goodwill or other
intangibles. 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: (i) revenues that are lower than anticipated; (ii) TSYS incurs expenses associated with
the signing of a significant client; (iii) internal growth rates for TSYS existing clients are
lower than anticipated; (iv) TSYS does not convert and deconvert clients portfolios as scheduled;
(v) adverse developments with respect to foreign currency exchange rates; (vi) adverse developments
with respect to entering into contracts with new clients and retaining current clients; (vii)
continued consolidation in the financial services industry, including the merger of TSYS clients
with entities that are not TSYS clients or the sale of portfolios by TSYS clients to entities that
are not TSYS clients; (viii) TSYS is unable to control expenses and increase market share, both
domestically and internationally; (ix) adverse developments with respect to the credit card
industry in general, including a decline in the use of cards as a payment mechanism; (x) TSYS is
unable to successfully manage any impact from slowing economic conditions or consumer spending;
(xi) the impact of acquisitions, including their being more difficult to integrate than
anticipated; (xii) the costs and effects of litigation, investigations or similar matters or
adverse facts and developments relating thereto; (xiii) the impact of the application of and/or
changes in accounting principles; (xiv) TSYS inability to timely, successfully and
cost-effectively improve and implement processing systems to provide new products, increased
functionality and increased efficiencies; (xv) TSYS inability to anticipate and respond to
technological changes, particularly with respect to e-commerce; (xvi) changes occur in laws,
regulations, credit card associations rules or other industry standards affecting TSYS business
which require significant product redevelopment efforts or reduce the market for or value of its
products; (xvii) successfully managing the potential both for patent protection and patent
liability in the
-45-
context of rapidly developing legal framework for expansive patent protection;
(xviii) no material breach of security of any of our systems; (xix) overall market conditions; (xx)
the loss of a major supplier; (xxi) 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; (xxii)
the expected benefits associated with the intended spin-off of TSYS by Synovus may not be achieved;
and (xxiii) 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.
-46-
TOTAL SYSTEM SERVICES, INC.
Item 3 Quantitative and Qualitative Disclosures About Market Risk
Foreign Exchange Risk
The Company is exposed to foreign exchange risk because it has assets, liabilities, revenues
and expenses denominated in foreign currencies other than the U.S. dollar. These currencies are
translated into U.S. dollars at current exchange rates, except for revenues, costs and expenses and
net income, which are translated at the average exchange rate for each reporting period. Net
exchange gains or losses resulting from the translation of assets and liabilities of foreign
operations, net of tax, are accumulated in a separate section of shareholders equity entitled
accumulated other comprehensive income, net. The following represents the amount of other
comprehensive gain for the three and nine months ended September 30, 2007 and 2006, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
(in millions) |
|
September 30, |
|
September 30, |
|
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
Other comprehensive gain |
|
$ |
2.3 |
|
|
|
6.1 |
|
|
|
4.9 |
|
|
|
10.8 |
|
Currently, the Company does not use financial instruments to hedge exposure to exchange rate
changes.
The following table presents the carrying value of the net assets of our foreign operations in
U.S. dollars at September 30, 2007:
|
|
|
|
|
|
(in millions) |
|
September 30, 2007 |
|
Europe |
|
$ |
192.6 |
|
China |
|
|
60.0 |
|
Japan |
|
|
6.2 |
|
Mexico |
|
|
7.1 |
|
Canada |
|
|
0.5 |
|
Other |
|
|
9.0 |
|
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 BPS. As TSYS translates the foreign-denominated cash balances into U.S. dollars, the
translated cash balance is adjusted upward or downward depending upon the foreign currency exchange
movements. The upward or downward adjustment is recorded as a gain or loss on foreign currency
translation in the statements of income. As those cash accounts have increased, the upward or
downward adjustments have increased. TSYS recorded a translation loss of approximately $1.1 million
and $2.6 million for the three and nine months ended September 30, 2007, respectively, relating to
the translation of cash and other balance sheet accounts. The balance of the foreign-denominated
cash accounts subject to risk of translation gains or losses at September 30, 2007 was
approximately $57.1 million, the majority of which is denominated in Euros.
The Company provides financing to its international operations in Europe and Japan through
intercompany loans that require each operation to repay the financing in U.S. dollars. The
functional currency of each 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
-47-
TOTAL SYSTEM SERVICES, INC.
Item 3 Quantitative and Qualitative Disclosures About Market Risk (continued)
adjustment is recorded as a gain or loss on foreign currency translation. As a result of these
financing arrangements, TSYS recorded a foreign currency translation gain on the financing with
foreign operations during the three and nine months ended September 30, 2007 of $2.0 million and
$3.3 million, respectively. The balance of the financing arrangements at September 30, 2007 was
approximately $4.8 million.
A summary of account balances subject to foreign currency exchange rates between the local
currencies and the U.S. dollar follows:
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
(in millions) |
|
|
|
September 30, 2007 |
|
Asset |
|
Cash |
|
$ |
57.1 |
|
Liability |
|
Intercompany financing arrangements |
|
|
(4.8 |
) |
|
|
|
|
|
|
|
|
Net account balances |
|
$ |
52.3 |
|
|
|
|
|
|
|
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 $52.3 million at September 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Basis Point Change |
|
|
Increase in basis point of |
|
Decrease in basis point of |
(in millions) |
|
100 |
|
500 |
|
1,000 |
|
100 |
|
500 |
|
1,000 |
Effect on income
before income taxes |
|
$ |
0.5 |
|
|
|
2.6 |
|
|
|
5.2 |
|
|
|
(0.5 |
) |
|
|
(2.6 |
) |
|
|
(5.2 |
) |
Interest Rate Risk
TSYS is also exposed to interest rate risk associated with the investing of available cash and
the use of debt. TSYS invests available cash in conservative short-term instruments and is
primarily subject to changes in the short-term interest rates.
On August 3, 2007, the Companys European operation obtained a loan of approximately £33
million or approximately $67.7 million from a third party mainly to repay the U.S. parent loan that
was used for the acquisitions. The loan is payable in 18 months at a rate of the one-month London
Interbank Offered Rate (LIBOR) plus 45 basis points. The interest is payable monthly. The
Companys plan is to finance international expansion through its European operations. The loan
will result in increased interest expense and will eliminate the foreign currency translation gains
and losses associated with the Companys intercompany note.
In connection with the formation of TSYS Managed Services, both TSYS and Merchants agreed to
provide long-term financing arrangements to TSYS Managed Services to fund future growth and
expansion. At the end of September 2007, the balance of the loan from Merchants was approximately
£2.0 million, or approximately $4.0 million, payable in total in five years, at an interest rate of
the London Interbank Offered Rate (LIBOR) plus 2%, with interest payable quarterly.
-48-
TOTAL SYSTEM SERVICES, INC.
Item 3 Quantitative and Qualitative Disclosures About Market Risk (continued)
In January 2007, the Companys operation in Japan borrowed ¥250 million, or approximately $2.1
million, through a short-term note. The interest rate on the note is the Japan prime rate plus 375
basis points. The term of the note is one year.
-49-
TOTAL SYSTEM SERVICES, INC.
Item 4 Controls and Procedures
We have evaluated the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this quarterly report as required by Rule 13a-15
of the Securities Exchange Act of 1934, as amended. 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, these officers have concluded that our
disclosure controls and procedures are effective in timely alerting them to material information
relating to TSYS (including its consolidated subsidiaries) required to be included in our periodic
SEC filings. Other than as set forth in the paragraph below, 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, other than as follows:
In September 2007, the Company implemented a new enterprise resource planning system that will
serve as its general ledger of record going forward. This new system will be implemented across
the vast majority of TSYS subsidiaries in phases (began in September 2007) and is expected to be
completed by the end of 2008. The implementation is expected to materially impact the Companys
internal control over financial reporting by providing more timely financial and accounting
information, reducing manual processes and providing a flexible architecture to easily interface
with other systems to reduce data entry.
-50-
TOTAL SYSTEM SERVICES, INC.
Part II Other Information
Item 1A Risk Factors
In addition to the other information set forth in this report, one should carefully consider
the factors discussed in Part I, Item 1A. Risk Factors in the Companys Annual Report on Form
10-K for the year ended December 31, 2006, 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 September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Maximum Number of |
|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
Shares That May Yet |
|
|
|
|
|
|
|
|
|
|
Part of Publicly |
|
Be Purchased |
|
|
Total Number of |
|
Average Price |
|
Announced Plans |
|
Under the Plans |
Period |
|
Shares Purchased |
|
Paid per Share |
|
or Programs |
|
or Programs |
|
July 2007 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
898,000 |
|
August 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
898,000 |
|
September 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
898,000 |
|
|
Total |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-51-
TOTAL SYSTEM SERVICES, INC.
Part II Other Information
Item 6 Exhibits
a) Exhibits
|
|
|
|
|
Exhibit Number |
|
Description |
|
|
|
|
|
|
3.2 |
|
|
Bylaws of Total System Services, Inc., as amended on October 24, 2007 |
|
|
|
|
|
|
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 |
-52-
TOTAL SYSTEM SERVICES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
TOTAL SYSTEM SERVICES, INC.
|
|
Date: November 7, 2007 |
by: |
/s/ Philip W. Tomlinson
|
|
|
|
Philip W. Tomlinson |
|
|
|
Chairman of the Board and
Chief Executive Officer |
|
|
|
|
|
Date: November 7, 2007 |
by: |
/s/ James B. Lipham
|
|
|
|
James B. Lipham |
|
|
|
Senior Executive Vice President and
Chief Financial Officer |
|
-53-
TOTAL SYSTEM SERVICES, INC.
Exhibit Index
|
|
|
|
|
Exhibit Number |
|
Description |
|
|
|
|
|
|
3.2 |
|
|
Bylaws of Total System Services, Inc. |
|
|
|
|
|
|
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 |
-54-