TOTAL SYSTEM SERVICES, INC.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For
the quarterly period ended: March 31, 2008
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) 649-2310
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated
filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting
company o |
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(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
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CLASS
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OUTSTANDING AS OF: May 7, 2008 |
Common Stock, $0.10 par value
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198,184,002 shares |
TOTAL SYSTEM SERVICES, INC.
INDEX
2
TOTAL SYSTEM SERVICES, INC.
Part I Financial Information
Condensed Consolidated Balance Sheets
(Unaudited)
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(in thousands, except per share data) |
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March 31, 2008 |
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December 31, 2007 |
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Assets |
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Current assets: |
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Cash and cash equivalents (includes $136.4 million on deposit with a related party at 2007) |
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$ |
242,649 |
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210,518 |
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Restricted cash (includes $8.2 million on deposit with a related party at 2007) |
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25,706 |
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29,688 |
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Accounts receivable, net of allowance for doubtful accounts and billing adjustments of
$7.8 million and $10.1 million at 2008 and 2007, respectively (includes $331 due from a
related party at 2007) |
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261,935 |
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256,970 |
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Deferred income tax assets |
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19,787 |
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17,152 |
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Prepaid expenses and other current assets |
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75,492 |
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72,250 |
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Total current assets |
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625,569 |
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586,578 |
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Property and equipment, net of accumulated depreciation and amortization of $277.2 million
and $266.4 million at 2008 and 2007, respectively |
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287,594 |
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283,138 |
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Computer
software, net of accumulated amortization of $383.5 million and
$365.6 million at
2008 and 2007, respectively |
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195,853 |
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205,830 |
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Contract acquisition costs, net |
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159,778 |
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151,599 |
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Goodwill, net |
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143,555 |
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142,545 |
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Equity investments |
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85,189 |
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80,905 |
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Other intangible assets, net of accumulated amortization of $13.7 million and $12.8 million
at 2008 and 2007, respectively |
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13,209 |
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13,462 |
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Other assets |
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12,230 |
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14,963 |
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Total assets |
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$ |
1,522,977 |
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1,479,020 |
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Liabilities and Shareholders Equity |
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Current liabilities: |
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Current portion of long-term debt |
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$ |
71,776 |
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8,648 |
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Current portion of obligations under capital leases |
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3,552 |
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3,080 |
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Accrued salaries and employee benefits |
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50,787 |
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85,142 |
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Accounts payable (includes $12 and $281 payable to related parties at 2008 and 2007,
respectively) |
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43,638 |
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41,817 |
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Other current liabilities (includes $11.2 million payable to related parties for 2007) |
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163,905 |
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135,108 |
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Total current liabilities |
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333,658 |
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273,795 |
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Long-term debt, excluding current portion |
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186,292 |
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252,659 |
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Deferred income tax liabilities |
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67,232 |
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67,428 |
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Obligations under capital leases, excluding current portion |
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7,562 |
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3,934 |
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Other long-term liabilities |
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30,524 |
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28,151 |
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Total liabilities |
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625,268 |
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625,967 |
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Minority interests in consolidated subsidiaries |
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9,793 |
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8,580 |
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Shareholders equity: |
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Common stock $0.10 par value. Authorized 600,000 shares; 200,375 and 199,660 issued at
2008 and 2007, respectively; 198,182 and 197,965 outstanding at 2008 and 2007,
respectively |
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20,038 |
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19,966 |
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Additional paid-in capital |
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112,402 |
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104,762 |
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Accumulated other comprehensive income, net |
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32,687 |
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28,322 |
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Treasury stock, at cost (shares of 2,193 and 1,695 at 2008 and 2007, respectively) |
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(45,475 |
) |
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(34,138 |
) |
Retained earnings |
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768,264 |
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725,561 |
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Total shareholders equity |
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887,916 |
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844,473 |
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Total liabilities and shareholders equity |
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$ |
1,522,977 |
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1,479,020 |
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See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
3
TOTAL SYSTEM SERVICES, INC.
Condensed Consolidated Statements of Income
(Unaudited)
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Three months ended March 31, |
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(in thousands, except per share data) |
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2008 |
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2007 |
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Revenues: |
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Electronic payment processing services (includes $1.3 million from related parties for 2007) |
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$ |
241,279 |
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230,060 |
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Merchant acquiring services |
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61,667 |
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60,680 |
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Other services (includes $2.1 million from related parties for 2007) |
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57,095 |
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52,871 |
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Revenues before reimbursable items |
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360,041 |
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343,611 |
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Reimbursable items (includes $0.5 million from related parties for 2007) |
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101,682 |
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85,992 |
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Total revenues |
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461,723 |
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429,603 |
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Expenses: |
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Salaries and other personnel expense |
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148,317 |
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140,445 |
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Net occupancy and equipment expense |
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72,886 |
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67,348 |
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Spin related expenses |
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6,895 |
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Other operating expenses (includes $2.4 million to related parties for 2007) |
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45,168 |
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50,139 |
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Expenses before reimbursable items |
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273,266 |
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257,932 |
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Reimbursable items |
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101,682 |
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85,992 |
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Total expenses |
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374,948 |
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343,924 |
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Operating income |
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86,775 |
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85,679 |
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Nonoperating income (expense): |
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Interest income (includes $3.3 million from related parties for 2007) |
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2,563 |
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5,488 |
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Interest expense |
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(3,340 |
) |
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(210 |
) |
Gain on foreign currency translation, net |
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1,943 |
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683 |
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Other income |
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134 |
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15 |
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Total nonoperating income |
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1,300 |
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5,976 |
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Income before income taxes, minority interests and equity in income of equity investments |
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88,075 |
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91,655 |
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Income taxes |
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33,035 |
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34,892 |
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Income before minority interests and equity in income of equity investments |
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55,040 |
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56,763 |
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Minority interests in consolidated subsidiaries net income, net of tax |
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(250 |
) |
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(350 |
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Equity in income of equity investments, net of tax |
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1,824 |
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860 |
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Net income |
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$ |
56,614 |
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57,273 |
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Basic earnings per share |
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$ |
0.29 |
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0.29 |
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Diluted earnings per share |
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$ |
0.29 |
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0.29 |
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Weighted average common shares outstanding |
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196,745 |
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196,487 |
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Increase due to assumed issuance of shares related to common equivalent shares |
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561 |
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451 |
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Weighted average common and common equivalent shares outstanding |
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197,306 |
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196,938 |
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See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
4
TOTAL SYSTEM SERVICES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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Three months ended March 31, |
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(in thousands) |
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2008 |
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2007 |
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Cash flows from operating activities: |
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Net income |
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$ |
56,614 |
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57,273 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Minority interests in consolidated subsidiaries net income, net of tax |
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250 |
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350 |
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Gain on foreign currency, net |
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(1,943 |
) |
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(683 |
) |
Equity in income of equity investments, net of tax |
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(1,824 |
) |
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(860 |
) |
Depreciation and amortization |
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39,229 |
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38,597 |
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Share-based compensation |
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7,895 |
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3,036 |
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Asset impairments |
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620 |
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Provisions for (recoveries of) bad debt expenses and billing adjustments |
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2,101 |
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(1,239 |
) |
Charges for transaction processing provisions |
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265 |
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(792 |
) |
Deferred income tax benefit |
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(6,875 |
) |
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(1,006 |
) |
Loss on disposal of equipment, net |
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161 |
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20 |
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(Increase) decrease in: |
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Accounts receivable |
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(6,140 |
) |
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9,089 |
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Prepaid expenses, other current assets and other long-term assets |
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2,530 |
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(3,518 |
) |
Increase (decrease) in: |
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Accounts payable |
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3,426 |
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|
735 |
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Accrued salaries and employee benefits |
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(34,401 |
) |
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(39,211 |
) |
Excess tax benefit from share-based payment arrangements |
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(67 |
) |
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(2,503 |
) |
Other current liabilities and other long-term liabilities |
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38,778 |
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6,542 |
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Net cash provided by operating activities |
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99,999 |
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|
66,450 |
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Cash flows from investing activities: |
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Purchases of property and equipment, net |
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(14,350 |
) |
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(17,232 |
) |
Additions to licensed computer software from vendors |
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(2,351 |
) |
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(3,884 |
) |
Additions to internally developed computer software |
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(2,413 |
) |
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(3,039 |
) |
Cash used in acquisitions |
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(472 |
) |
Additions to contract acquisition costs |
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(17,168 |
) |
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(7,145 |
) |
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Net cash used in investing activities |
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(36,282 |
) |
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(31,772 |
) |
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Cash flows from financing activities: |
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Dividends paid on common stock (includes $11.2 million paid to related parties during 2007) |
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$ |
(13,858 |
) |
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|
(13,783 |
) |
Repurchase of common stock |
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(11,369 |
) |
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Excess tax benefit from share-based payment arrangements |
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67 |
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|
2,503 |
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Principal payments on long-term debt borrowings and capital lease obligations |
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(4,976 |
) |
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(562 |
) |
Proceeds from borrowings of long-term debt |
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|
6,805 |
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Proceeds from exercise of stock options |
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59 |
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|
3,518 |
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Net cash used in financing activities |
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(30,077 |
) |
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(1,519 |
) |
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Effect of exchange rate changes on cash and cash equivalents |
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(1,509 |
) |
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(571 |
) |
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Net increase in cash and cash equivalents |
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|
32,131 |
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|
32,588 |
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Cash and cash equivalents at beginning of year |
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|
210,518 |
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|
389,123 |
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Cash and cash equivalents at end of period |
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$ |
242,649 |
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|
421,711 |
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Cash paid for interest |
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$ |
3,340 |
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|
210 |
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Cash paid for income taxes, net of refunds |
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$ |
1,095 |
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|
26,464 |
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|
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
5
TOTAL SYSTEM SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Total System
Services, Inc.® (TSYS® or the Company) include the accounts of TSYS and its wholly owned
subsidiaries and TSYS majority owned foreign subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
These financial statements have been prepared in accordance with the instructions to Form 10-Q
and do not include all information and footnotes necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with accounting principles generally
accepted in the United States of America. The preparation of the consolidated financial statements
requires management of the Company to make a number of estimates and assumptions relating to the
reported amounts of assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the period. These estimates and assumptions
are developed based upon all information available. Actual results could differ from estimated
amounts. All adjustments, consisting of normal recurring accruals, which, in the opinion of
management, are necessary for a fair presentation of financial position and results of operations
for the periods covered by this report have been included.
The accompanying unaudited condensed consolidated financial statements should be read in
conjunction with the Companys summary of significant accounting policies, consolidated financial
statements and related notes appearing in the Companys 2007 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 2007 financial statements to conform to the
presentation adopted in 2008.
Note 2 Supplementary Balance Sheet Information
Cash and Cash Equivalents
Cash and cash equivalent balances are summarized as follows:
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|
|
|
|
|
|
(in thousands) |
|
March 31, 2008 |
|
|
December 31, 2007 |
|
Cash and cash equivalents in domestic accounts |
|
$ |
205,992 |
|
|
|
171,715 |
|
Cash and cash equivalents in foreign accounts |
|
|
36,657 |
|
|
|
38,803 |
|
|
|
|
|
|
|
|
Total |
|
$ |
242,649 |
|
|
|
210,518 |
|
|
|
|
|
|
|
|
The Company maintains accounts outside the United States denominated in currencies other than
the U.S. dollar. All amounts in domestic accounts are denominated in U.S. dollars.
Prepaid Expenses and Other Current Assets
Significant components of prepaid expenses and other current assets are summarized as follows:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
March 31, 2008 |
|
|
December 31, 2007 |
|
Prepaid expenses |
|
$ |
11,367 |
|
|
|
12,766 |
|
Income taxes receivable |
|
|
|
|
|
|
10,838 |
|
Supplies inventory |
|
|
8,326 |
|
|
|
8,725 |
|
Other |
|
|
55,799 |
|
|
|
39,921 |
|
|
|
|
|
|
|
|
Total |
|
$ |
75,492 |
|
|
|
72,250 |
|
|
|
|
|
|
|
|
6
Contract Acquisition Costs, net
Significant components of contract acquisition costs, net of accumulated amortization, are
summarized as follows:
|
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|
|
|
|
|
|
|
(in thousands) |
|
March 31, 2008 |
|
|
December 31, 2007 |
|
Payments for processing rights, net |
|
$ |
97,442 |
|
|
|
96,449 |
|
Conversion costs, net |
|
|
62,336 |
|
|
|
55,150 |
|
|
|
|
|
|
|
|
Total |
|
$ |
159,778 |
|
|
|
151,599 |
|
|
|
|
|
|
|
|
Amortization related to payments for processing rights, which is recorded as a reduction of
revenues, was $6.3 million and $5.9 million for the three months ended March 31, 2008 and 2007,
respectively.
Amortization expense related to conversion costs was $3.5 million and $3.9 million for the
three months ended March 31, 2008 and 2007, respectively.
Other Current Liabilities
Significant components of other current liabilities are summarized as follows:
|
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|
|
|
|
|
|
|
(in thousands) |
|
March 31, 2008 |
|
|
December 31, 2007 |
|
Client liabilities |
|
$ |
33,993 |
|
|
|
32,199 |
|
Accrued expenses |
|
|
33,489 |
|
|
|
32,520 |
|
Accrued income taxes |
|
|
28,123 |
|
|
|
2,657 |
|
Deferred revenues |
|
|
24,267 |
|
|
|
25,733 |
|
Dividends payable |
|
|
13,912 |
|
|
|
13,859 |
|
Transaction processing provisions |
|
|
6,256 |
|
|
|
8,525 |
|
Client postage deposits |
|
|
4,389 |
|
|
|
4,244 |
|
Other |
|
|
19,476 |
|
|
|
15,371 |
|
|
|
|
|
|
|
|
Total |
|
$ |
163,905 |
|
|
|
135,108 |
|
|
|
|
|
|
|
|
Note 3 Comprehensive Income
For the three months ended March 31, comprehensive income is summarized below:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
56,614 |
|
|
|
57,273 |
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
4,353 |
|
|
|
(108 |
) |
Change in accumulated OCI related to
postretirement healthcare plans |
|
|
12 |
|
|
|
|
|
|
|
|
Total |
|
$ |
60,979 |
|
|
|
57,165 |
|
|
|
|
|
|
|
|
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, 2007 |
|
|
Amount |
|
|
Tax Effect |
|
|
Net-of-Tax Amount |
|
|
March 31, 2008 |
|
Foreign currency translation adjustments |
|
$ |
29,202 |
|
|
$ |
5,441 |
|
|
|
(1,088 |
) |
|
$ |
4,353 |
|
|
$ |
33,555 |
|
Change in accumulated OCI related to
postretirement healthcare plans |
|
|
(880 |
) |
|
|
19 |
|
|
|
(7 |
) |
|
|
12 |
|
|
|
(868 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
28,322 |
|
|
$ |
5,460 |
|
|
|
(1,095 |
) |
|
$ |
4,365 |
|
|
$ |
32,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
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.
Effective January 1, 2008, TSYS merged the operations of TSYS Prepaid, Inc. into TSYS.
Effective February 1, 2008, TSYS merged the operations of Golden Retriever, L.L.C. (Golden
Retriever) with TSYS Acquiring Solutions, L.L.C. (TSYS Acquiring). As a result, previous segment
results were reclassified to move Golden Retriever from domestic-based support services to merchant
acquiring services to reflect the change related to the merger.
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.,
Merlin Solutions, L.L.C. and TSYS Loyalty.
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.
Merchant acquiring services include the financial results of TSYS Acquiring, and its wholly
owned subsidiary TSYS POS Systems and Services, L.L.C.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic- |
|
|
International- |
|
|
Merchant |
|
|
|
|
|
|
|
(in thousands) |
|
Based Support |
|
|
Based Support |
|
|
Acquiring |
|
|
Spin-Related |
|
|
|
|
Operating Segments |
|
Services |
|
|
Services |
|
|
Services |
|
|
Costs |
|
|
Consolidated |
|
At March 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets |
|
$ |
1,296,349 |
|
|
|
353,655 |
|
|
|
188,360 |
|
|
|
|
|
|
$ |
1,838,364 |
|
Intersegment eliminations |
|
|
(312,664 |
) |
|
|
(1,514 |
) |
|
|
(1,209 |
) |
|
|
|
|
|
|
(315,387 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
983,685 |
|
|
|
352,141 |
|
|
|
187,151 |
|
|
|
|
|
|
$ |
1,522,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets |
|
$ |
1,278,403 |
|
|
|
319,279 |
|
|
|
189,956 |
|
|
|
|
|
|
$ |
1,787,638 |
|
Intersegment eliminations |
|
|
(305,847 |
) |
|
|
(1,526 |
) |
|
|
(1,245 |
) |
|
|
|
|
|
|
(308,618 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
972,556 |
|
|
|
317,753 |
|
|
|
188,711 |
|
|
|
|
|
|
$ |
1,479,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursables |
|
$ |
242,771 |
|
|
|
67,957 |
|
|
|
55,129 |
|
|
|
|
|
|
$ |
365,857 |
|
Intersegment revenues |
|
|
(5,231 |
) |
|
|
(403 |
) |
|
|
(182 |
) |
|
|
|
|
|
|
(5,816 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursables from
external customers |
|
$ |
237,540 |
|
|
|
67,554 |
|
|
|
54,947 |
|
|
|
|
|
|
$ |
360,041 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment total revenues |
|
$ |
328,909 |
|
|
|
69,824 |
|
|
|
70,937 |
|
|
|
|
|
|
$ |
469,670 |
|
Intersegment revenues |
|
|
(7,362 |
) |
|
|
(403 |
) |
|
|
(182 |
) |
|
|
|
|
|
|
(7,947 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
321,547 |
|
|
|
69,421 |
|
|
|
70,755 |
|
|
|
|
|
|
$ |
461,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
24,980 |
|
|
|
7,695 |
|
|
|
6,554 |
|
|
|
|
|
|
$ |
39,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic- |
|
|
International- |
|
|
Merchant |
|
|
|
|
|
|
|
(in thousands) |
|
Based Support |
|
|
Based Support |
|
|
Acquiring |
|
|
Spin-Related |
|
|
|
|
Operating Segments |
|
Services |
|
|
Services |
|
|
Services |
|
|
Costs |
|
|
Consolidated |
|
Intersegment expenses |
|
$ |
2,774 |
|
|
|
(3,541 |
) |
|
|
(7,180 |
) |
|
|
|
|
|
$ |
(7,947 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
$ |
71,150 |
|
|
|
7,446 |
|
|
|
15,074 |
|
|
|
(6,895 |
) |
|
$ |
86,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes, minority
interest and equity in income of
equity investments |
|
$ |
70,836 |
|
|
|
8,750 |
|
|
|
15,384 |
|
|
|
(6,895 |
) |
|
$ |
88,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
26,637 |
|
|
|
2,914 |
|
|
|
5,408 |
|
|
|
(1,924 |
) |
|
$ |
33,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of equity investments |
|
$ |
(338 |
) |
|
|
2,162 |
|
|
|
|
|
|
|
|
|
|
$ |
1,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
45,917 |
|
|
|
5,693 |
|
|
|
9,976 |
|
|
|
(4,972 |
) |
|
$ |
56,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursables |
|
$ |
240,106 |
|
|
|
52,963 |
|
|
|
55,681 |
|
|
|
|
|
|
$ |
348,750 |
|
Intersegment revenues |
|
|
(4,776 |
) |
|
|
(223 |
) |
|
|
(140 |
) |
|
|
|
|
|
|
(5,139 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursables from
external customers |
|
$ |
235,330 |
|
|
|
52,740 |
|
|
|
55,541 |
|
|
|
|
|
|
$ |
343,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment total revenues |
|
$ |
313,595 |
|
|
|
55,400 |
|
|
|
67,747 |
|
|
|
|
|
|
$ |
436,742 |
|
Intersegment revenues |
|
|
(6,776 |
) |
|
|
(223 |
) |
|
|
(140 |
) |
|
|
|
|
|
|
(7,139 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
306,819 |
|
|
|
55,177 |
|
|
|
67,607 |
|
|
|
|
|
|
$ |
429,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
25,951 |
|
|
|
5,800 |
|
|
|
6,846 |
|
|
|
|
|
|
$ |
38,597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment expenses |
|
$ |
3,476 |
|
|
|
(3,239 |
) |
|
|
(7,371 |
) |
|
|
|
|
|
$ |
(7,134 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
$ |
62,481 |
|
|
|
11,112 |
|
|
|
12,086 |
|
|
|
|
|
|
$ |
85,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes, minority
interest and equity in income of
equity investments |
|
$ |
67,613 |
|
|
|
11,379 |
|
|
|
12,663 |
|
|
|
|
|
|
$ |
91,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
26,186 |
|
|
|
4,172 |
|
|
|
4,534 |
|
|
|
|
|
|
$ |
34,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of equity investments |
|
$ |
|
|
|
|
860 |
|
|
|
|
|
|
|
|
|
|
$ |
860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
41,547 |
|
|
|
7,597 |
|
|
|
8,129 |
|
|
|
|
|
|
$ |
57,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 months ended March 31, 2008 and
2007, respectively, based on the domicile of the Companys customers.
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
(in millions) |
|
2008 |
|
|
2007 |
|
United States |
|
$ |
354.1 |
|
|
|
337.7 |
|
Europe |
|
|
58.9 |
|
|
|
45.9 |
|
Canada |
|
|
31.7 |
|
|
|
30.0 |
|
Japan |
|
|
7.4 |
|
|
|
5.3 |
|
Mexico |
|
|
3.7 |
|
|
|
3.3 |
|
Other |
|
|
5.9 |
|
|
|
7.4 |
|
|
|
|
|
|
|
|
Total |
|
$ |
461.7 |
|
|
|
429.6 |
|
|
|
|
|
|
|
|
The following table reconciles geographic revenues to revenues by reportable segment for the
three months ended March 31, 2008 and 2007, respectively, based on the domicile of the Companys
customers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic-Based |
|
|
International-Based |
|
|
Merchant Acquiring |
|
|
|
Support Services |
|
|
Support Services |
|
|
Services |
|
(in millions) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
United States |
|
$ |
283.6 |
|
|
|
270.3 |
|
|
|
0.1 |
|
|
|
|
|
|
|
70.4 |
|
|
|
67.4 |
|
Europe |
|
|
0.3 |
|
|
|
0.4 |
|
|
|
58.6 |
|
|
|
45.5 |
|
|
|
|
|
|
|
|
|
Canada |
|
|
31.5 |
|
|
|
29.9 |
|
|
|
|
|
|
|
|
|
|
|
0.2 |
|
|
|
0.1 |
|
Japan |
|
|
|
|
|
|
|
|
|
|
7.4 |
|
|
|
5.3 |
|
|
|
|
|
|
|
|
|
Mexico |
|
|
3.7 |
|
|
|
3.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
2.4 |
|
|
|
2.9 |
|
|
|
3.3 |
|
|
|
4.4 |
|
|
|
0.2 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
321.5 |
|
|
|
306.8 |
|
|
|
69.4 |
|
|
|
55.2 |
|
|
|
70.8 |
|
|
|
67.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
The Company maintains property and equipment, net of accumulated depreciation and
amortization, in the following geographic areas:
|
|
|
|
|
|
|
|
|
(in millions) |
|
At March 31, 2008 |
|
|
At December 31, 2007 |
|
United States |
|
$ |
207.8 |
|
|
|
208.3 |
|
Europe |
|
|
74.8 |
|
|
|
70.3 |
|
Japan |
|
|
2.3 |
|
|
|
1.9 |
|
Other |
|
|
2.7 |
|
|
|
2.6 |
|
|
|
|
|
|
|
|
Total |
|
$ |
287.6 |
|
|
|
283.1 |
|
|
|
|
|
|
|
|
Major Customers
For the three months ended March 31, 2008, the Company had three major customers which
accounted for approximately 30.8%, or $142.0 million, of total revenues. For the three months ended
March 31, 2007, these three major customers accounted for approximately 33.7%, or $144.6 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 March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
Revenue |
|
|
|
|
|
Total |
|
|
|
|
|
|
Total |
|
(in millions) |
|
Dollars |
|
|
Revenues |
|
|
Dollars |
|
|
Revenues |
|
Client 1 |
|
$ |
69.1 |
|
|
|
15.0 |
|
|
$ |
52.5 |
|
|
|
12.2 |
|
Client 2 |
|
|
54.8 |
|
|
|
11.9 |
|
|
|
48.8 |
|
|
|
11.4 |
|
Client 3 |
|
|
18.1 |
|
|
|
3.9 |
|
|
|
43.3 |
|
|
|
10.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
142.0 |
|
|
|
30.8 |
|
|
$ |
144.6 |
|
|
|
33.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 5 Share-Based Compensation
The Companys Annual Report on Form 10-K for the year ended December 31, 2007, 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 and spin-related 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 March 31, 2008, share-based compensation was $7.9 million,
compared to $3.0 million for the same period in 2007. Included in the $7.9 million amount for 2008
and $3.0 million amount for 2007 is approximately $5.7 million and $1.7 million, respectively,
related to expensing the fair value of stock options.
Non-vested Share Awards
During the first three months of 2008, the Company issued 695,411 shares of TSYS common stock
with a market value of $15.2 million to certain key employees and non-management members of its
board of directors under nonvested stock bonus awards for services to be provided 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 three 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.
As of March 31, 2008, there was approximately $23.9 million of total unrecognized compensation
cost related to nonvested share-based compensation arrangements. That cost is expected to be
recognized over a remaining weighted average period of 2.9 years.
During the first three months of 2008, TSYS authorized a total grant of 182,816 shares of
nonvested stock to two key executives with a performance-vesting schedule (2008 performance-vesting
shares). These 2008 performance-vesting shares have seven one-year
10
performance periods (2008-2014) 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.
During 2005, TSYS authorized a total grant of 126,087 shares of nonvested stock to two key
executives with a performance-vesting schedule (2005 performance-vesting shares). These
performance-vesting shares have seven one-year performance periods (2005-2011) during 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 March 31, 2008, there was approximately $1.3 million of total unrecognized compensation
cost related to both the 2008 grant and 2005 grant of nonvested performance-vesting share-based
compensation arrangements. That cost is expected to be recognized over the remainder of 2008.
On March 31, 2008, TSYS authorized performance based awards that have a market condition
calculated on a combination of 2008 earnings per share growth and TSYS performance compared to the
S&P 500 Technology Index during 2009 and 2010. Vesting of this award will occur on the last day of
the three-year market condition valuation period if the participant is still employed on that date.
Retirement for purposes of this award is defined as age 62 with 15 years of service, or age 65
regardless of service. The fair value of the award is based on a Monte Carlo simulation as
prescribed by Statement of Financial Accounting Standards No. 123 (Revised) (SFAS No. 123R)
Share-Based Payment (Revised). The Company has engaged a third-party valuation specialist to
ascertain the fair value of this award. The third-party specialist is expected to complete the
evaluation during the second quarter of 2008.
Stock Option Awards
During the first three months of March 2008, the Company granted 768,855 stock options to key
TSYS executive officers. The average fair value of the option grant was $9.73 per option and was
estimated on the date of grant using the Black-Scholes-Merton option-pricing model with the
following weighted average assumptions: risk-free interest rate of 3.42%; expected volatility of
36.57%; expected term of 8.7 years; and dividend yield of 1.21%.
As of March 31, 2008, there was approximately $10.0 million of total unrecognized compensation
expense cost related to TSYS stock options that is expected to be recognized over a remaining
weighted average period of 2.4 years.
Earnings Per Share
The diluted earnings per share calculation excludes stock options and nonvested awards that
are convertible into 6.3 million common shares for the three months ended March 31, 2008, and
excludes 11,000 common shares for the three months ended March 31, 2007 because their inclusion
would have been anti-dilutive.
Note 6 Long-Term Debt
Refer to Note 11 of the Companys audited financial statements for the year ended December 31,
2007 which are included as Exhibit 13.1 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2007, as filed with the SEC, for a discussion regarding long-term debt.
The Company did not enter into any new long-term borrowing arrangements during the first
quarter of 2008.
Note 7 Supplementary Cash Flow Information
Contract Acquisition Costs
Cash used for contract acquisition costs for the three months ended March 31, 2008 and 2007,
respectively, are summarized as follows:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
March 31, 2008 |
|
|
March 31, 2007 |
|
Payments for processing rights |
|
$ |
6,984 |
|
|
|
1,852 |
|
Conversion costs |
|
|
10,184 |
|
|
|
5,293 |
|
|
|
|
|
|
|
|
Total |
|
$ |
17,168 |
|
|
|
7,145 |
|
|
|
|
|
|
|
|
11
Nonvested Awards
During the first quarter of 2008 and 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
$5.4 million for the three months ended March 31, 2008 related to a software enterprise license
agreement and storage and other peripheral hardware.
Note 8 Legal Proceedings
The Company is subject to various legal proceedings and claims and is also subject to
information requests, inquiries and investigations arising out of the ordinary conduct of its
business. In the opinion of management, based in part upon the advice of legal counsel, all matters
are believed to be adequately covered by insurance, or if not covered, are believed to be without
merit or are of such kind or involve such amounts that would not have a material adverse effect on
the financial position, results of operations or cash flows of the Company if disposed of
unfavorably. The Company establishes reserves for litigation and similar matters when those matters
present loss contingencies that TSYS determines to be both probable and reasonably estimable in
accordance with Statement of Financial Accounting Standards No. 5 (SFAS No. 5), Accounting for
Contingencies.
Note 9 Guarantees and Indemnifications
The Company has entered into processing and licensing agreements with its clients that include
intellectual property indemnification clauses. The Company generally agrees to indemnify its
clients, subject to certain exceptions, against legal claims that TSYS services or systems
infringe on certain third party patents, copyrights or other proprietary rights. In the event of
such a claim, the Company is generally obligated to hold the client harmless and pay for related
losses, liabilities, costs and expenses, including, without limitation, court costs and reasonable
attorneys fees. The Company has not made any indemnification payments pursuant to these
indemnification clauses.
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 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 a few exceptions, the Company is no longer subject to
income tax examinations from state and local authorities for years before 2001 and from foreign
authorities before 2003. There are currently no Federal 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.
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 $1.2 million and $1.4 million as of December 31,
2007 and March 31, 2008, respectively. The total amounts of unrecognized income tax benefits as of
December 31, 2007 and March 31, 2008 that, if recognized, would affect the effective tax rates are
$5.5 million and $5.7 million (net of the Federal benefit on state tax issues), respectively, which
include interest and penalties of $0.9 million and $1.0 million.
12
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, 2007.
A summary of the financial highlights for 2008, as compared to 2007, is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
(in millions, except per share data and employees) |
|
2008 |
|
2007 |
|
Percent Change |
Revenues before reimbursables |
|
$ |
360.0 |
|
|
|
343.6 |
|
|
|
4.8 |
% |
Total revenues |
|
|
461.7 |
|
|
|
429.6 |
|
|
|
7.5 |
|
Operating income |
|
|
86.8 |
|
|
|
85.7 |
|
|
|
1.3 |
|
Net income |
|
|
56.6 |
|
|
|
57.3 |
|
|
|
(1.2 |
) |
Basic earnings per share (EPS) |
|
|
0.29 |
|
|
|
0.29 |
|
|
|
(1.3 |
) |
Diluted EPS |
|
|
0.29 |
|
|
|
0.29 |
|
|
|
(1.3 |
) |
Cash flows from operating activities |
|
|
100.0 |
|
|
|
66.5 |
|
|
|
50.4 |
|
Other: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts on file (AOF) |
|
|
364.9 |
|
|
|
422.7 |
|
|
|
(13.7 |
) |
Average full-time equivalent employees (FTE) |
|
|
7,245 |
|
|
|
6,740 |
|
|
|
7.5 |
|
Significant highlights for 2008 include:
Corporate
|
|
|
Announced the launch of ingenuity in action: n>genSM, a new business
paradigm that makes it easy for TSYS clients to efficiently and thoroughly manage all their
complex payments-related business needs with point-and-click ease. n>gen is not a new
platform and use of n>gen will not require conversion to a new platform it adds a new
level of business intelligence made available through analytical-based services, giving
institutions a total view of their portfolios to make actionable, well-informed decisions
on growth opportunities and overall risk. |
|
|
|
|
Recently named Rod Boyer, a 21-year veteran of the payments and technology industries,
president of TSYS Loyalty. |
Domestic
|
|
|
Announced the renewal of a long-term agreement with Target Corporation, the operator of
Target and SuperTarget stores, to service its REDcard portfolio. The multi-year agreement
will include systems processing for Target® Visa® Credit Card, Target
Credit CardSM, Target Check CardSM and the Target Business
Card®. Target began working with TSYS in 2000 for the launch of its Visa product.
TSYS began supporting the Target Credit CardSM portfolio in 2005. Target
recently announced that it had entered into a $3.6 billion credit facility with Chase Bank
USA, N.A. secured by an undivided interest in approximately 47% of its credit card
receivables. Based upon information currently available to it, TSYS believes that, even
after the creation of this credit facility, Target retains control of its credit card
portfolio and the creation of this credit facility does not impact its recently extended
processing relationship with Target. |
|
|
|
|
Announced the development by TSYS Loyalty of an innovative product that calculates points
and rewards for customers who subscribe to multiple products with a single financial
institution, including direct deposit, credit, mortgage, insurance and Certificate of
Deposit accounts. TSYS Enterprise RewardsSM (patent pending) also supports a Web
interface, which allows the subscriber to manage their total relationship with a single
access point. |
13
|
|
|
Announced the successful market launch of what we believe is the industrys most advanced
benefits payments system. Fringe Benefits Management Company, the first third-party
administrator to use this innovative solution, offers its subscribers the ability to pay
from multiple healthcare tax-advantaged accounts, credit accounts and cash accounts through
a single card. |
International
|
|
|
Completed a contract to provide Standard Bank of South Africa card issuing, merchant
acquiring and related payment services for the multiple countries across Africa in which
Standard Bank operates. The South African-based financial services company has a global
presence, operating in 18 countries in Africa and 20 on other continents, including the key
financial centers of Europe, the Americas and Asia. |
Financial Review
This Financial Review provides a discussion of critical accounting policies and estimates,
related party transactions and off-balance sheet arrangements. This Financial Review also discusses
the results of operations, financial position, liquidity and capital resources of TSYS and outlines
the factors that have affected its recent earnings, as well as those factors that may affect its
future earnings.
Critical Accounting Policies and Estimates
The Companys financial position, results of operations and cash flows are impacted by the
accounting policies the Company has adopted. In order to gain a full understanding of the Companys
financial statements, one must have a clear understanding of the accounting policies employed.
Factors that could affect the Companys future operating results and cause actual results to
vary materially from expectations are set forth in the Companys forward-looking statements.
Negative developments in these or other risk factors could have a material adverse effect on the
Companys financial position, results of operations and cash flows. For a detailed discussion
regarding the Companys risk factors, see Item 1A: Risk Factors in the Companys Annual Report on
Form 10-K for the year ended December 31, 2007.
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, 2007. 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 2008.
Related Party Transactions
The Company believes the terms and conditions of transactions between the Company and its
equity investments, Total System Services de México, S.A. de. C.V. (TSYS de México) and China
UnionPay Data Co., Ltd. (CUP Data), are comparable to those which could have been obtained in
transactions with unaffiliated parties. The Companys margins with respect to related party
transactions are comparable to margins recognized in transactions with unrelated third parties.
Off-Balance Sheet Arrangements
Operating Leases: As a method of funding its operations, TSYS employs noncancelable operating
leases for computer equipment, software and facilities. These leases allow the Company to provide
the latest technology while avoiding the risk of ownership. Neither the assets nor obligations
related to these leases are included on the balance sheet.
Contractual Obligations: The total liability (with state amounts tax effected) for uncertain tax
positions under FIN 48 at March 31, 2008 is $5.7 million. Refer to Note 10 in the Notes to
Unaudited Condensed Consolidated Financial Statements for more information regarding 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 2007 Annual Report on Form 10-K, total contractual cash
obligations at December 31, 2007 were estimated at $591.3 million. These contractual cash
obligations include lease payments and software arrangements.
14
Results of Operations
The following table sets forth certain income statement captions as a percentage of total
revenues and the percentage increases or decreases in those items for the three months ended March
31, 2008 and 2007, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of |
|
Percentage Change |
|
|
Total Revenues |
|
in Dollar Amounts |
|
|
2008 |
|
2007 |
|
2008 vs. 2007 |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Electronic payment processing services |
|
|
52.2 |
% |
|
|
53.6 |
% |
|
|
4.9 |
% |
Merchant acquiring services |
|
|
13.4 |
|
|
|
14.1 |
|
|
|
1.6 |
|
Other services |
|
|
12.4 |
|
|
|
12.3 |
|
|
|
8.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursable items |
|
|
78.0 |
|
|
|
80.0 |
|
|
|
4.8 |
|
Reimbursable items |
|
|
22.0 |
|
|
|
20.0 |
|
|
|
18.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
7.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and other personnel expense |
|
|
32.1 |
|
|
|
32.7 |
|
|
|
5.6 |
|
Net occupancy and equipment expense |
|
|
15.8 |
|
|
|
15.7 |
|
|
|
8.2 |
|
Spin related expenses |
|
|
1.5 |
|
|
|
|
|
|
nm |
|
Other operating expenses |
|
|
9.8 |
|
|
|
11.7 |
|
|
|
(9.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses before reimbursable items |
|
|
59.2 |
|
|
|
60.1 |
|
|
|
5.9 |
|
Reimbursable items |
|
|
22.0 |
|
|
|
20.0 |
|
|
|
18.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
81.2 |
|
|
|
80.1 |
|
|
|
9.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
18.8 |
|
|
|
19.9 |
|
|
|
1.3 |
|
Nonoperating income |
|
|
0.3 |
|
|
|
1.4 |
|
|
|
(78.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes, minority interest and
equity in income of equity investments |
|
|
19.1 |
|
|
|
21.3 |
|
|
|
(3.9 |
) |
Income taxes |
|
|
7.2 |
|
|
|
8.1 |
|
|
|
(5.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest and equity in income
of equity investments |
|
|
11.9 |
|
|
|
13.2 |
|
|
|
(3.0 |
) |
Minority interests in consolidated subsidiaries net income |
|
|
(0.0 |
) |
|
|
(0.1 |
) |
|
nm |
|
Equity in income of equity investments |
|
|
0.4 |
|
|
|
0.2 |
|
|
|
112.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
12.3 |
% |
|
|
13.3 |
% |
|
|
(1.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
Total revenues increased $32.1 million, or 7.5%, during the three months ended March 31, 2008,
compared to the same period in 2007. The increase in revenues for the three months ended March 31,
2008 includes an increase of $1.6 million related to the effects of currency translation of its
foreign-based subsidiaries and branches. Excluding reimbursable items, revenues increased $16.4
million, or 4.8%, during the three months ended March 31, 2008, compared to the same period in
2007.
International Revenues
TSYS provides services to its clients worldwide and plans to continue to expand its service
offerings internationally in the future.
Total revenues from clients domiciled outside the United States for the three months ended
March 31, 2008 and 2007, respectively, are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
(in millions) |
|
2008 |
|
|
2007 |
|
|
% Change |
|
Europe |
|
$ |
58.9 |
|
|
|
45.9 |
|
|
|
28.2 |
|
Canada |
|
|
31.7 |
|
|
|
30.0 |
|
|
|
5.4 |
|
Japan |
|
|
7.4 |
|
|
|
5.3 |
|
|
|
40.0 |
|
Mexico |
|
|
3.7 |
|
|
|
3.3 |
|
|
|
14.4 |
|
Other |
|
|
5.9 |
|
|
|
7.4 |
|
|
|
(19.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
107.6 |
|
|
|
91.9 |
|
|
|
17.1 |
|
|
|
|
|
|
|
|
|
|
|
|
15
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 2008 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.
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. SEPA went live on January 28, 2008. 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 deadline approaches, 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.
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 March 31, 2008 and 2007, value added
products and services represented 12.0% and 12.8%, respectively, of total revenues.
Major Customers
A significant amount of the Companys revenues is derived from long-term contracts with large
clients, including its major customers. TSYS derives revenues from providing various processing,
merchant acquiring and other services to these clients, including processing of consumer and
commercial accounts, as well as revenues for reimbursable items. Refer to Note 4 in the Notes to
Unaudited Condensed Consolidated Financial Statements for more information regarding major
customers. The loss of these clients, or any significant client, could have a material adverse
effect on the Companys financial position, results of operations and cash flows.
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 TS2 under a long-term payment structure.
16
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.
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 a modified version of TS2 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.
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.
AOF Data (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
% Change |
At March 31, |
|
|
364.9 |
|
|
|
422.7 |
|
|
|
(13.7 |
) |
YTD Average |
|
|
370.2 |
|
|
|
418.3 |
|
|
|
(11.5 |
) |
AOF by Portfolio Type (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
At March 31, |
|
AOF |
|
% |
|
AOF |
|
% |
|
% Change |
Consumer |
|
|
211.4 |
|
|
|
57.9 |
|
|
|
268.9 |
|
|
|
63.6 |
|
|
|
(21.4 |
) |
Retail |
|
|
57.9 |
|
|
|
15.9 |
|
|
|
52.5 |
|
|
|
12.4 |
|
|
|
10.4 |
|
Stored value |
|
|
26.0 |
|
|
|
7.1 |
|
|
|
42.2 |
|
|
|
10.0 |
|
|
|
(38.4 |
) |
Commercial |
|
|
40.1 |
|
|
|
11.0 |
|
|
|
32.8 |
|
|
|
7.8 |
|
|
|
22.1 |
|
Government services |
|
|
24.1 |
|
|
|
6.6 |
|
|
|
21.5 |
|
|
|
5.1 |
|
|
|
11.8 |
|
Debit |
|
|
5.4 |
|
|
|
1.5 |
|
|
|
4.8 |
|
|
|
1.1 |
|
|
|
12.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
364.9 |
|
|
|
100.0 |
|
|
|
422.7 |
|
|
|
100.0 |
|
|
|
(13.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOF by Geographic Area (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
At March 31, |
|
AOF |
|
% |
|
AOF |
|
% |
|
% Change |
Domestic |
|
|
283.4 |
|
|
|
77.7 |
|
|
|
353.5 |
|
|
|
83.6 |
|
|
|
(19.8 |
) |
International |
|
|
81.5 |
|
|
|
22.3 |
|
|
|
69.2 |
|
|
|
16.4 |
|
|
|
17.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
364.9 |
|
|
|
100.0 |
|
|
|
422.7 |
|
|
|
100.0 |
|
|
|
(13.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: The accounts on file distinction between domestic and international is based on the
geographic domicile of the Companys processing clients.
Activity in AOF (in millions)
|
|
|
|
|
|
|
|
|
|
|
March 2007 to |
|
March 2006 to |
|
|
March 2008 |
|
March 2007 |
Beginning balance |
|
|
422.7 |
|
|
|
440.4 |
|
Internal growth of existing clients |
|
|
53.9 |
|
|
|
36.2 |
|
17
|
|
|
|
|
|
|
|
|
|
|
March 2007 to |
|
March 2006 to |
|
|
March 2008 |
|
March 2007 |
New clients |
|
|
18.2 |
|
|
|
96.1 |
|
Purges/Sales |
|
|
(25.3 |
) |
|
|
(19.2 |
) |
Deconversions |
|
|
(104.6 |
) |
|
|
(130.8 |
) |
|
|
|
|
|
|
|
|
|
Ending balance |
|
|
364.9 |
|
|
|
422.7 |
|
|
|
|
|
|
|
|
|
|
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 $11.2 million, or 4.9%, for the three months ended
March 31, 2008 compared to the same period in 2007.
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 months ended March 31, 2008
was $61.7 million compared to $60.7 million for the same period last year. The increase is
attributable to internal growth of transactions of existing clients offset by client deconversions
in the terminal distribution business and price compression.
TSYS Acquirings results are driven by the authorization and capture transactions processed at
the point-of-sale and clearing and settlement transactions. TSYS Acquirings authorization and
capture transactions are primarily through dial-up or Internet connectivity.
Other Services
Revenues from other services consist primarily of revenues generated by TSYS wholly owned
subsidiaries not included in electronic payment processing services or merchant acquiring services,
as well as TSYS business process management services. Revenues from other services increased $4.2
million, or 8.0%, for the three months ended March 31, 2008, compared to the same period in 2007.
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 increased $15.7 million, or 18.2% for the three months ended March 31, 2008 as
compared to the same period last year. TSYS recognized approximately $34.8 million of attorney fees
and court costs as additional reimbursable items for the three months ended March 31, 2008.
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. Effective May
12, 2008, the United States Postal Service is expected to increase the rate of first class mail by
$0.01.
Operating Expenses
18
Total expenses increased 9.0% for the three months ended March 31, 2008, respectively,
compared to the same period in 2007. The fluctuation in expense includes an increase of $1.4
million for the three months ended March 31, 2008 related to the effects of currency translation of
its foreign-based subsidiaries, branches and divisions. Excluding reimbursable items, total
expenses increased 5.9% for the three months ended March 31, 2008 compared to the same period in
2007. The fluctuation in operating expenses is attributable to changes in each of the expense
categories as described below.
Salaries and Other Personnel Expense
Summarized below are the major components of salaries and other personnel expense for the
three months ended March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
|
% Change |
|
Salaries |
|
$ |
106,606 |
|
|
|
101,491 |
|
|
|
5.0 |
% |
Employee benefits |
|
|
29,518 |
|
|
|
26,835 |
|
|
|
10.0 |
|
Nonemployee wages |
|
|
13,810 |
|
|
|
9,917 |
|
|
|
39.3 |
|
Share-based compensation |
|
|
3,745 |
|
|
|
3,048 |
|
|
|
22.9 |
|
Other |
|
|
3,586 |
|
|
|
2,801 |
|
|
|
28.0 |
|
Less capitalized expenses |
|
|
(8,948 |
) |
|
|
(3,647 |
) |
|
|
145.3 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
148,317 |
|
|
|
140,445 |
|
|
|
5.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
Salaries and other personnel expense increased $7.9 million, or 5.6%, for the three months
ended March 31, 2008 compared to the same period in 2007. The change in salaries and other
personnel expense is associated with the normal salary increases and related benefits, offset by
the higher level of employment costs capitalized as software development and contract acquisition
costs. Salaries and other personnel expense include the accrual for performance-based incentive
benefits, which includes bonuses, profit sharing and employer 401(k) expenses. For the three months
ended March 31, 2008 and 2007, the Company accrued $4.4 million and $7.5 million, respectively, for
performance-based incentives.
Prior to the spin-off by Synovus Financial Corp. (Synovus) to its shareholders of all the
shares of TSYS held by Synvous, Synovus provided certain administrative services, such as human
resources, legal, security and tax preparation and compliance, to TSYS in exchange for a management
fee, which is included in other operating expenses, to cover TSYS pro rata share of services.
With the spin-off, TSYS will begin recruiting employees and assuming these functions during 2008.
During this transition period, TSYS will continue to utilize Synovus administrative services until
these functions are operational within TSYS in exchange for an adjusted management fee based on
utilization. As it assumes these functions, the Company expects salaries and other personnel
expenses to increase, while other operating expenses decrease. TSYS headcount will also increase
by approximately 60 people as these administrative services transition.
Capitalized salaries and personnel expenses increased $5.3 million for the three months ended
March 31, 2008 as compared to the same period in 2007, as a result of increased client conversion
and implementation activity in the international segment.
The Companys salaries and other personnel expense is greatly influenced by the number of
employees. Below is a summary of the Companys employee data:
Employee Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
(FTE) |
|
2008 |
|
2007 |
|
% Change |
At March 31, |
|
|
7,548 |
|
|
|
6,804 |
|
|
|
10.9 |
|
YTD Average |
|
|
7,245 |
|
|
|
6,740 |
|
|
|
7.5 |
|
The majority of the increase in the number of employees in 2008 as compared to 2007 is a
result of the expansion of TSYS international business.
Share-based compensation expenses include the impact of expensing the fair value of stock
options in 2008, as well as expenses associated with nonvested shares. For the three months ended
March 31, 2008, share-based compensation was $3.7 million, compared to $3.0 million for the same
period in 2007.
Net Occupancy and Equipment Expense
19
Summarized below are the major components of net occupancy and equipment expense for the three
months ended March 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
|
% Change |
|
Depreciation and amortization |
|
$ |
28,683 |
|
|
|
28,003 |
|
|
|
2.4 |
% |
Equipment and software rentals |
|
|
20,511 |
|
|
|
20,836 |
|
|
|
(1.6 |
) |
Repairs and maintenance |
|
|
12,948 |
|
|
|
10,274 |
|
|
|
26.0 |
|
Other |
|
|
10,744 |
|
|
|
8,235 |
|
|
|
30.5 |
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
72,886 |
|
|
|
67,348 |
|
|
|
8.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
Net occupancy and equipment expense increased $5.5 million, or 8.2%, for the three months
ended March 31, 2008 over the same period in 2007.
Repairs and maintenance increased for the three months ended March 31, 2008, as compared to
the same period in 2007, as a result of support for additional software licenses and equipment.
Spin Related Expenses
In July 2007, Synovus Board of Directors appointed a special committee of independent
directors to make a recommendation with respect to whether to distribute Synovus ownership
interest in TSYS to Synovus shareholders. As a result, the TSYS Board of Directors formed a
special committee of independent TSYS directors to consider the terms of any proposed spin-off by
Synovus of its ownership interest in TSYS, including the size of the pre-spin cash dividend. TSYS
incurred expenses associated with advisory and legal services in connection with the spin
assessment. As the spin-off was finalized and completed, TSYS also incurred expenses for the
incremental fair value associated with converting Synovus stock options held by TSYS employees to
TSYS options. During the three months ended March 31, 2008, the Company incurred approximately
$6.9 million of spin related expenses. TSYS expects to incur additional spin related costs in 2008
associated with legal and advisory services, incremental fair value associated with the Synovus
stock option conversion and other costs associated with unwinding the different commingled
processes that Synovus and TSYS previously shared. TSYS estimates that it will incur approximately
$16.0 million of spin related costs in operating expenses in 2008.
Other Operating Expenses
Summarized below are the major components of other operating expenses for the three months
ended March 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
|
% Change |
|
Third-party data processing services |
|
$ |
9,934 |
|
|
|
9,364 |
|
|
|
6.1 |
|
Travel and business development |
|
|
6,985 |
|
|
|
6,349 |
|
|
|
10.0 |
|
Supplies and stationery |
|
|
5,368 |
|
|
|
4,700 |
|
|
|
14.2 |
|
Professional advisory services |
|
|
3,628 |
|
|
|
5,563 |
|
|
|
(34.8 |
) |
Amortization of conversion costs |
|
|
3,458 |
|
|
|
3,855 |
|
|
|
(10.3 |
) |
Court costs associated with debt
collection services |
|
|
2,080 |
|
|
|
4,270 |
|
|
|
(51.3 |
) |
Amortization of acquisition intangibles |
|
|
659 |
|
|
|
834 |
|
|
|
(21.0 |
) |
Transaction processing provisions |
|
|
265 |
|
|
|
(792 |
) |
|
|
(133.4 |
) |
Terminal deployment costs |
|
|
227 |
|
|
|
|
|
|
nm   |
Management fees |
|
|
36 |
|
|
|
2,272 |
|
|
|
(98.4 |
) |
Bad debt (recoveries) expense |
|
|
(1,562 |
) |
|
|
67 |
|
|
nm |
Other |
|
|
14,090 |
|
|
|
13,657 |
|
|
|
3.2 |
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
45,168 |
|
|
|
50,139 |
|
|
|
(9.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
nm = not meaningful
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 set forth in Item 7: Managements Discussion and Analysis of Financial
Condition and Results of Operations in the Companys 2007 Form 10-K, managements evaluation of
the adequacy of its transaction processing reserves and allowance for
20
doubtful accounts is based on a formal analysis which assesses the probability of losses related to
contractual contingencies, processing errors and uncollectible accounts. Increases and decreases in
transaction processing provisions and charges for bad debt expense are reflected in other operating
expenses.
Other operating expenses for the three months ended March 31, 2008 decreased $5.0 million, or
9.9%, as compared to the same period in 2007. 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 and the decrease in management fees due to the transitioning away from
administrative services previously supplied by Synovus.
Operating Income
Operating income increased 1.3% for the three months ended March 31, 2008 over the same period
in 2007. The Companys operating profit margin for the three months ended March 31, 2008 was 18.8%
compared to 19.9% for the same period last year. TSYS operating margin decreased for the three
months ended March 31, 2008, as compared to the same period in 2007, as the result of spin related
costs.
Nonoperating Income (Expense)
Interest income for the three months ended March 31, 2008 was $2.6 million, a decrease of $2.9
million, compared to $5.5 million for the same period in 2007. The decrease in interest income is
primarily attributable to less cash available to invest primarily due to the payment of the
one-time special dividend of $600 million paid in December 2007 associated with the spin-off.
Interest expense for the three months ended March 31, 2008 was $3.3 million, an increase of
$3.1 million compared to $210,000 for the same period in 2007. The increase in interest expense in
2008 compared to 2007 relates to the increased borrowings undertaken by the Company in 2007,
primarily associated with paying the one-time special dividend.
On October 25, 2007, TSYS announced that it had entered into an agreement and plan of
distribution with Synovus under which Synovus planned to distribute all of its shares of TSYS stock
to Synovus shareholders in a spin-off transaction, which spin-off took place on December 31, 2007.
Prior to the spin-off transaction and in accordance with the agreement and plan of distribution,
TSYS agreed to pay a one-time aggregate cash dividend of $600 million to all TSYS shareholders,
including Synovus. TSYS funded the dividend with a combination of cash on hand and the use of a
revolving credit facility.
For the three months ended March 31, 2008 and 2007, the Company recorded a translation gain of
approximately $1.9 million and $683,000, respectively, related to intercompany loans and foreign
denominated balance sheet accounts.
Occasionally, the Company will provide financing to its subsidiaries in the form of an
intercompany loan, which is required to be repaid in U.S. dollars. For its subsidiaries whose
functional currency is something other than the U.S. dollar, the translated balance of the
financing (liability) is adjusted upward or downward to match the U.S.-dollar obligation
(receivable) on the Companys financial statements. The upward or downward adjustment is recorded
as a gain or loss on foreign currency translation. As a result of these financing arrangements, the
Company recorded a foreign currency translation gain on the Companys financing for the three
months ended March 31, 2008 of $941,000. The balance of these financing arrangements at March 31,
2008 was approximately $8.6 million.
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 Company recorded a net translation gain of approximately $1.0 million for the
three months ended March 31, 2008 related to the translation of foreign denominated balance sheet
accounts, most of which were cash. The balance of the Companys foreign-denominated cash accounts
subject to risk of translation gains or losses at March 31, 2008 was approximately $16.3 million,
the majority of which is denominated in Euros.
Income Taxes
TSYS effective income tax rate for the three months ended March 31, 2008 was 36.9%, compared
to 37.9% for the same period in 2007. 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
21
investments. Refer to Note 10 in the Notes to Unaudited Condensed Consolidated Financial
Statements for more information regarding income taxes.
In the normal course of business, TSYS is subject to examinations from various tax
authorities. These examinations may alter the timing or amount of taxable income or deductions or
the allocation of income among tax jurisdictions.
TSYS continually monitors and evaluates the potential impact of current events and
circumstances on the estimates and assumptions used in the analysis of its income tax positions,
and, accordingly, TSYS effective tax rate may fluctuate in the future.
Equity in Income of Equity Investments
The Company has three equity investments located in the United States, Mexico and China that
are accounted for under the equity method of accounting. TSYS share of income from its equity in
equity investments was $1.8 million and $860,000 for the three months ended March 31, 2008 and
2007, respectively.
Net Income
Net income for the three months ended March 31, 2008 decreased 1.2%, or $0.7 million, to $56.6
million, or basic and diluted earnings per share of $0.29, compared to $57.3 million, or basic and
diluted earnings per share of $0.29, for the same period in 2007.
Net Profit Margin
The Companys net profit margin for the three months ended March 31, 2008 was 12.3%, compared
to 13.3% for the same period last year. TSYS profit margin is impacted by the consolidation of
majority-owned subsidiaries. The Company recognizes only its share of net profits from these
entities, while consolidating all their revenues, which has the impact of lowering overall net
profit margins. TSYS net profit margin decreased for the quarter as the result of spin related
costs.
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 months ended March 31, 2008 and 2007, respectively:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
Operating income |
|
$ |
86,775 |
|
|
|
85,679 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
56,614 |
|
|
|
57,273 |
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
461,723 |
|
|
|
429,603 |
|
|
|
|
|
|
|
|
Operating margin (as reported) |
|
|
18.8 |
% |
|
|
19.9 |
% |
|
|
|
|
|
|
|
Net profit margin (as reported) |
|
|
12.3 |
% |
|
|
13.3 |
% |
|
|
|
|
|
|
|
Revenue before reimbursable items |
|
$ |
360,041 |
|
|
|
343,611 |
|
|
|
|
|
|
|
|
Adjusted operating margin |
|
|
24.1 |
% |
|
|
24.9 |
% |
|
|
|
|
|
|
|
Adjusted net profit margin |
|
|
15.7 |
% |
|
|
16.7 |
% |
|
|
|
|
|
|
|
Projected Outlook for 2008
TSYS expects its 2008 net income to increase between 7-9% as compared to 2007, based on the
following assumptions: (1) expenses associated with the spin-off net of tax will be $10 million;
(2) there will be no significant movements in LIBOR and TSYS will not make any significant draws on
its $252 million revolving credit facility; (3) estimated total revenues will increase 7% to 9% in
2008; (4) anticipated growth levels in employment, equipment and other expenses, which are included
in 2008 estimates, will be accomplished; (5) there will be no significant movement in foreign
currency exchange rates related to TSYS business; and (6) TSYS
22
will not incur significant expenses associated with the conversion of new large clients or
acquisitions, or any significant impairment of goodwill or other intangibles, and there will be no
significant portfolio deconversions.
Financial Position, Liquidity and Capital Resources
The Condensed Consolidated Statements of Cash Flows detail the Companys cash flows from
operating, investing and financing activities. TSYS primary method of funding its operations and
growth has been cash generated from current operations and the use of leases. TSYS has occasionally
used borrowed funds to supplement financing of capital expenditures, acquisitions and most recently
the spin-off.
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
56,614 |
|
|
|
57,273 |
|
Depreciation and amortization |
|
|
39,229 |
|
|
|
38,597 |
|
Other noncash items and charges, net |
|
|
(37 |
) |
|
|
(3,057 |
) |
Net change in current and long-term assets and current and long-term liabilities |
|
|
4,193 |
|
|
|
(26,363 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
99,999 |
|
|
|
66,450 |
|
|
|
|
|
|
|
|
TSYS main source of funds is derived from operating activities, specifically net income.
During the three months ended March 31, 2008, the Company generated $100.0 million in cash from
operating activities compared with $66.5 million for the same period last year. The increase in
2008 in net cash provided by operating activities was primarily the result of increased current and
long-term liabilities.
Net change in current and long-term assets and current and long-term liabilities include
accounts receivable, prepaid expenses, other current assets and other assets, accounts payable,
accrued salaries and employee benefits, other current liabilities and other liabilities. The change
in accounts receivable at March 31, 2008, as compared to December 31, 2007, is the result of timing
of collections compared to billings. The change in accounts payable and other liabilities for the
same period is the result of the timing of payments, funding of performance-based incentives and
payments of vendor invoices.
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
Purchases of property and equipment, net |
|
$ |
(14,350 |
) |
|
|
(17,232 |
) |
Additions to licensed computer software from vendors |
|
|
(2,351 |
) |
|
|
(3,884 |
) |
Additions to internally developed computer software |
|
|
(2,413 |
) |
|
|
(3,039 |
) |
Cash used in acquisitions, net of cash acquired |
|
|
|
|
|
|
(472 |
) |
Additions to contract acquisition costs |
|
|
(17,168 |
) |
|
|
(7,145 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
$ |
(36,282 |
) |
|
|
(31,772 |
) |
|
|
|
|
|
|
|
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 $36.3
million in cash for investing activities for the three months ended March 31, 2008, compared to
$31.8 million for the same period in 2007. The major use of cash for investing activities in 2008
was for the addition to contract acquisition costs. The major use of cash for investing activities
in 2007 was for the addition of equipment.
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 $17.2 million for the three
months ended March 31, 2008, compared to $7.1 million for the three months ended March 31, 2007.
The Company had cash payments for processing rights of approximately $7.0 million during the three
months ended March 31, 2008, compared to $5.3 million for the same period last year.
23
Conversion cost additions were $10.2 million and $1.9 million for the three months ended March
31, 2008 and 2007, respectively. The increase in the amount of conversion cost additions for 2008,
as compared to 2007, is the result of increased activity related to more conversions occurring in
2008 versus 2007.
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
Dividends paid on common stock |
|
$ |
(13,858 |
) |
|
|
(13,783 |
) |
Proceeds from borrowings of long-term debt |
|
|
|
|
|
|
6,805 |
|
Repurchase of common stock |
|
|
(11,369 |
) |
|
|
|
|
Principal payments on long-term debt borrowings and capital lease obligations |
|
|
(4,976 |
) |
|
|
(562 |
) |
Other |
|
|
126 |
|
|
|
6,021 |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
$ |
(30,077 |
) |
|
|
(1,519 |
) |
|
|
|
|
|
|
|
The major use of cash for financing activities has been the payment of dividends and
repurchase of common stock. The main source of cash from financing activities has been the
occasional use of borrowed funds and the exercise of stock options. Net cash used in financing
activities for the three months ended March 31, 2008 was $30.1 million mainly as a result of the
payment of dividends and repurchase of common stock. Net cash used in financing activities for the
three months ended March 31, 2007 was $1.5 million mainly as a result of the payment of dividends.
Stock Repurchase Plan
On April 20, 2006, TSYS announced that its board had approved a stock repurchase plan to
purchase up to 2 million shares, which at the time represented slightly more than five percent of
the shares of TSYS stock held by shareholders other than Synovus. The shares were to be purchased
from time to time over a two year period and would depend on various factors including price,
market conditions, acquisitions and the general financial position of TSYS. Repurchased shares are
to be used for general corporate purposes.
With the completion of the spin-off, the TSYS Board of Directors extended to April 2010 TSYS
current share repurchase program that was set to expire in April 2008 and increased the number of
shares that may be repurchased under the plan from 2 million to 10 million.
During the three months ended March 31, 2008, TSYS purchased 500,000 shares of TSYS common
stock. The Company has approximately 8,398,000 shares remaining that could be repurchased under the
stock repurchase plan.
Dividends
Dividends on common stock of $13.9 million were paid during the three months ended March 31,
2008 compared to $13.8 million paid during the three months ended March 31, 2007.
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.
24
Working Capital
TSYS may seek additional external sources of capital in the future. The form of any such
financing will vary depending upon prevailing market and other conditions and may include
short-term or long-term borrowings from financial institutions or the issuance of additional equity
and/or debt securities such as industrial revenue bonds. However, there can be no assurance that
funds will be available on terms acceptable to TSYS. Management expects that TSYS will continue to
be able to fund a significant portion of its capital expenditure needs through internally generated
cash in the future, as evidenced by TSYS current ratio of 1.9:1. At March 31, 2008, TSYS had
working capital of $291.9 million compared to $312.8 million at December 31, 2007.
Legal Proceedings
The Company is subject to various legal proceedings and claims and is also subject to
information requests, inquiries and investigations arising out of the ordinary conduct of its
business. In the opinion of management, based in part upon the advice of legal counsel, all matters
are believed to be adequately covered by insurance, or if not covered, are believed to be without
merit or are of such kind or involve such amounts that would not have a material adverse effect on
the financial position, results of operations or cash flows of the Company if disposed of
unfavorably. The Company establishes reserves for litigation and similar matters when those matters
present loss contingencies that TSYS determines to be both probable and reasonably estimable in
accordance with Statement of Financial Accounting Standards No. 5 (SFAS No. 5), Accounting for
Contingencies".
Recent Accounting Pronouncements
The Companys Annual Report on Form 10-K for the year ended December 31, 2007, as filed with
the SEC, contains a discussion of recent accounting pronouncements and the expected impact on the
Companys financial statements.
Forward-Looking Statements
Certain statements contained in this filing which are not statements of historical fact
constitute forward-looking statements within the meaning of the Private Securities Litigation
Reform Act (the Act). These forward-looking statements include, among others: (i) TSYS plans to
continue to expand its service offerings internationally and expectation that international
revenues will continue to grow; (ii) TSYS expectation that it will maintain the card processing
functions of Capital One for at least five years; (iii) managements belief that Chases
discontinuation of its processing agreement will not have a material adverse affect on TSYS and
that TSYS will continue to support Chase in processing its commercial portfolio; (iv) TSYS belief
that Targets credit facility with Chase will not impact TSYS processing relationship with Target;
(v) TSYS expectation with respect to spin-related costs; (vi) TSYS expectation that it will be
able to fund a significant portion of its capital expenditure needs through internally generated
cash in the future; (vii) TSYS expected net income growth for 2008; (viii) TSYS belief with
respect to lawsuits, claims and other complaints; (ix) the expected financial impact of recent
accounting pronouncements; (x) TSYS expectation with respect to certain tax matters; and the
assumptions underlying such statements, including, with respect to TSYS expected increase in net
income for 2008: (a) expenses associated with the spin-off will be approximately $10 million net of
tax; (b) there will be no significant movements in LIBOR and TSYS will not make any significant
draws on its revolving credit facility; (c) estimated total revenues will increase 7% to 9% in
2008; (d) there will be no significant movement in foreign currency exchange rates related to TSYS
business; (e) anticipated growth levels in employment, equipment and other expenses, which are
included in 2008 estimates, will be accomplished; and (f) 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, and there will be no significant portfolio
deconversions. 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
25
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) expenses associated with the
spin-off are higher than expected; (iii) movements in LIBOR are greater than expected and draws on
the revolving credit facility are greater than expected; (iv) TSYS incurs expenses associated with
the signing of a significant client; (v) internal growth rates for TSYS existing clients are lower
than anticipated; (vi) TSYS does not convert and deconvert clients portfolios as scheduled; (vii)
adverse developments with respect to foreign currency exchange rates; (viii) adverse developments
with respect to entering into contracts with new clients and retaining current clients; (ix)
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; (x) TSYS is unable to control expenses and increase market share, both
domestically and internationally; (xi) adverse developments with respect to the credit card
industry in general, including a decline in the use of cards as a payment mechanism; (xii) TSYS is
unable to successfully manage any impact from slowing economic conditions or consumer spending;
(xiii) the impact of acquisitions, including their being more difficult to integrate than
anticipated; (xiv) the costs and effects of litigation, investigations or similar matters or
adverse facts and developments relating thereto; (xv) the impact of the application of and/or
changes in accounting principles; (xvi) TSYS inability to timely, successfully and
cost-effectively improve and implement processing systems to provide new products, increased
functionality and increased efficiencies; (xvii) TSYS inability to anticipate and respond to
technological changes, particularly with respect to e-commerce; (xviii) 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; (xix) successfully managing the potential both for patent protection and patent liability
in the context of rapidly developing legal framework for expansive patent protection; (xx) no
material breach of security of any of our systems; (xxi) overall market conditions; (xxii) the loss
of a major supplier; (xxiii) 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; and (xxiv)
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.
26
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 months ended March 31, 2008 and 2007, respectively:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
(in millions) |
|
2008 |
|
2007 |
Other comprehensive gain (loss) |
|
$ |
4.4 |
|
|
|
(0.1 |
) |
Currently, the Company does not use financial instruments to hedge exposure to exchange rate
changes.
The following table presents the carrying value of the net assets of our foreign operations in
U.S. dollars at March 31, 2008:
|
|
|
|
|
(in millions) |
|
March 31, 2008 |
Europe |
|
$ |
142.6 |
|
China |
|
|
66.6 |
|
Japan |
|
|
7.0 |
|
Mexico |
|
|
8.6 |
|
Canada |
|
|
0.6 |
|
Other |
|
|
14.2 |
|
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 gain of approximately $1.0 million
for the three months ended March 31, 2008 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 March 31, 2008 was approximately $16.3 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 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
months ended March 31, 2008 of $941,000. The balance of the financing arrangements at March 31,
2008 was approximately $8.6 million.
A summary of account balances subject to foreign currency exchange rate changes between the
local currencies and the U.S. dollar follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
(in millions) |
|
|
|
|
March 31, 2008 |
|
Asset |
|
Cash |
|
$ |
16.3 |
|
Liability |
|
Intercompany financing arrangements |
|
|
(8.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net account balances |
|
$ |
7.7 |
|
|
|
|
|
|
|
|
|
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 $7.7 million at March 31, 2008.
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
0.1 |
|
|
|
0.4 |
|
|
|
0.8 |
|
|
|
(0.1 |
) |
|
|
(0.4 |
) |
|
|
(0.8 |
) |
Interest Rate Risk
TSYS is also exposed to interest rate risk associated with the investing of available cash and
the use of debt. TSYS invests available cash in conservative short-term instruments and is
primarily subject to changes in the short-term interest rates.
On December 21, 2007, the Company entered into a Credit Agreement with Bank of America N.A.,
as Administrative Agent, The Royal Bank of Scotland plc, as Syndication Agent, and the other
lenders. The Credit Agreement provides for a $168 million unsecured five year term loan to the
Company and a $252 million five year unsecured revolving credit facility. The principal balance of
loans outstanding under the credit facility bears interest at a rate of London Interbank Offered
Rate (LIBOR) plus an applicable margin of 0.60%. Interest is paid on the last date of each
interest period; however, if the period exceeds three months, interest is paid every three months
after the beginning of such interest period.
On 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 LIBOR
plus 45 basis points. The interest is payable monthly.
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 March 2008, the balance of the loan from Merchants was approximately £2.0
million, or approximately $3.9 million, payable in total in five years, at an interest rate of the
LIBOR plus 2%, with interest payable quarterly.
28
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. 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.
29
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, 2007, which could materially affect the Companys financial
position, results of operations or cash flows. The risks described in the Companys Annual Report
on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not
currently known to the Company or that the Company currently deems to be immaterial also may
materially adversely affect the Companys financial position, results of operations or cash flows.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth information regarding the Companys purchases of its common
stock on a monthly basis during the three months ended March 31, 2008:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Maximum Number of |
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
|
Shares That May Yet |
|
|
|
|
|
|
|
|
|
|
|
Part of Publicly |
|
|
Be Purchased |
|
(in thousands, except per share data) |
|
Total Number of |
|
|
Average Price |
|
|
Announced Plans |
|
|
Under the Plans |
|
Period |
|
Shares Purchased |
|
|
Paid per Share |
|
|
or Programs |
|
|
or Programs |
|
January 2008 |
|
|
|
|
|
$ |
|
|
|
|
1,102 |
|
|
|
8,898 |
|
February 2008 |
|
|
130 |
|
|
|
23.33 |
|
|
|
1,232 |
|
|
|
8,768 |
|
March 2008 |
|
|
370 |
|
|
|
22.53 |
|
|
|
1,602 |
|
|
|
8,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
500 |
|
|
$ |
22.74 |
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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|
|
|
|
|
30
TOTAL SYSTEM SERVICES, INC.
Part II Other Information
Item 6 Exhibits
a) Exhibits
|
|
|
Exhibit |
|
|
Number |
|
Description |
31.1
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32
|
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |
31
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.
|
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|
|
|
|
TOTAL SYSTEM SERVICES, INC.
|
|
Date: May 7, 2008 |
by: |
/s/ Philip W. Tomlinson
|
|
|
|
Philip W. Tomlinson |
|
|
|
Chairman of the Board and
Chief Executive Officer |
|
|
|
|
|
Date: May 7, 2008 |
by: |
/s/ James B. Lipham
|
|
|
|
James B. Lipham |
|
|
|
Senior Executive Vice President and
Chief Financial Officer |
|
32
TOTAL SYSTEM SERVICES, INC.
Exhibit Index
|
|
|
Exhibit Number |
|
Description |
31.1
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32
|
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |
33