10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended: September 30, 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
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58-1493818 |
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
One TSYS Way, Post Office Box 1755, Columbus, Georgia 31902
(Address of principal executive offices) (Zip Code)
(706) 649-2310
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is
a large accelerated filer, an accelerated filer, a non-accelerated filer or a
smaller reporting company. See the definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of
the Exchange Act. (Check one):
Large accelerated filer þ |
Accelerated filer o | Non-accelerated filer
o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
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CLASS
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OUTSTANDING AS OF: November 5, 2008 |
Common Stock, $0.10 par value
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196,828,728 |
TOTAL SYSTEM SERVICES, INC.
INDEX
2
TOTAL SYSTEM SERVICES, INC.
Part I Financial Information
Condensed Consolidated Balance Sheets
(Unaudited)
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September 30, |
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December 31, |
|
(in thousands, except per share data) |
|
2008 |
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2007 |
|
Assets |
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Current assets: |
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|
|
|
|
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Cash and cash equivalents (includes $136.4 million on deposit with a related party at 2007) |
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$ |
309,004 |
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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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19,453 |
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29,688 |
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Accounts receivable, net of allowance for doubtful accounts and billing adjustments of
$8.3 million and $10.1 million at 2008 and 2007, respectively (includes $331 due from a
related party at 2007) |
|
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260,843 |
|
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|
256,970 |
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Deferred income tax assets |
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36,457 |
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|
17,152 |
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Prepaid expenses and other current assets |
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68,875 |
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|
72,250 |
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|
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Total current assets |
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694,632 |
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586,578 |
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Property and equipment, net of accumulated depreciation and amortization of $290.5 million
and $266.4 million at 2008 and 2007, respectively |
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283,400 |
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283,138 |
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Computer software, net of accumulated amortization of $414.5 million and $365.6 million at
2008 and 2007, respectively |
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193,083 |
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205,830 |
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Contract acquisition costs, net |
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150,845 |
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|
151,599 |
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Goodwill |
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141,688 |
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|
142,545 |
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Equity investments |
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85,187 |
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80,905 |
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Other intangible assets, net of accumulated amortization of $14.8 million and $12.8 million
at 2008 and 2007, respectively |
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11,599 |
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|
13,462 |
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Other assets |
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26,063 |
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14,963 |
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Total assets |
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$ |
1,586,497 |
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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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$ |
70,184 |
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|
8,648 |
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Current portion of obligations under capital leases |
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4,030 |
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3,080 |
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Accrued salaries and employee benefits |
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51,244 |
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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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36,504 |
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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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144,025 |
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135,108 |
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Total current liabilities |
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305,987 |
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273,795 |
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Long-term debt, excluding current portion |
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182,148 |
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252,659 |
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Deferred income tax liabilities |
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72,782 |
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67,428 |
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Obligations under capital leases, excluding current portion |
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7,062 |
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3,934 |
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Other long-term liabilities |
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27,707 |
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28,151 |
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Total liabilities |
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595,686 |
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|
625,967 |
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Minority interests in consolidated subsidiaries |
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|
9,554 |
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|
8,580 |
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Shareholders equity: |
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Common stock $0.10 par value. Authorized 600,000 shares; 200,360 and 199,660 issued at
2008 and 2007, respectively; 197,676 and 197,965 outstanding at 2008 and 2007,
respectively |
|
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20,036 |
|
|
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19,966 |
|
Additional paid-in capital |
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|
125,801 |
|
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|
104,762 |
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Accumulated other comprehensive income, net |
|
|
25,235 |
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|
28,322 |
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Treasury stock, at cost (shares of 2,684 and 1,695 at 2008 and 2007, respectively) |
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(57,554 |
) |
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(34,138 |
) |
Retained earnings |
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|
867,739 |
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|
725,561 |
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Total shareholders equity |
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981,257 |
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844,473 |
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Total liabilities and shareholders equity |
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$ |
1,586,497 |
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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 |
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September 30, |
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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 $1.3 million from related parties for 2007) |
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$ |
250,066 |
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240,608 |
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Merchant acquiring services |
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64,540 |
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65,163 |
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Other services (includes $2.4 million from related parties for 2007) |
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68,193 |
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53,251 |
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Revenues before reimbursable items |
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382,799 |
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|
359,022 |
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Reimbursable items (includes $0.6 million from related parties for 2007) |
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|
117,593 |
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|
98,543 |
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Total revenues |
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500,392 |
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|
457,565 |
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Expenses: |
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Salaries and other personnel expense |
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153,263 |
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|
144,990 |
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Net occupancy and equipment expense |
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|
75,399 |
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|
68,715 |
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Spin related expenses |
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|
1,719 |
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|
1,692 |
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Other operating expenses (includes $2.4 million to related parties for 2007) |
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|
56,510 |
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|
52,406 |
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Expenses before reimbursable items |
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|
286,891 |
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|
267,803 |
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Reimbursable items |
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|
117,593 |
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|
98,543 |
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|
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Total expenses |
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404,484 |
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|
366,346 |
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|
|
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|
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Operating income |
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95,908 |
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|
91,219 |
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Nonoperating income (expense): |
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|
|
|
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Interest income (includes $4.1 million from related parties for 2007) |
|
|
2,572 |
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|
6,983 |
|
Interest expense |
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|
(2,737 |
) |
|
|
(916 |
) |
Gain on foreign currency translation, net |
|
|
1,092 |
|
|
|
905 |
|
Other (expense) income |
|
|
(992 |
) |
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|
21 |
|
|
|
|
|
|
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|
Total nonoperating income (expense) |
|
|
(65 |
) |
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|
6,993 |
|
|
|
|
|
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Income before income taxes, minority interests and equity in income of equity investments |
|
|
95,843 |
|
|
|
98,212 |
|
Income taxes |
|
|
34,229 |
|
|
|
30,947 |
|
|
|
|
|
|
|
|
Income before minority interests and equity in income of equity investments |
|
|
61,614 |
|
|
|
67,265 |
|
Minority interests in consolidated subsidiaries net income, net of tax |
|
|
(374 |
) |
|
|
(484 |
) |
Equity in income of equity investments, net of tax |
|
|
2,834 |
|
|
|
2,021 |
|
|
|
|
|
|
|
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Net income |
|
$ |
64,074 |
|
|
|
68,802 |
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.33 |
|
|
|
0.35 |
|
|
|
|
|
|
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|
Diluted earnings per share |
|
$ |
0.33 |
|
|
|
0.35 |
|
|
|
|
|
|
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|
Weighted average common shares outstanding |
|
|
196,000 |
|
|
|
196,740 |
|
Increase due to assumed issuance of shares related to common equivalent shares |
|
|
450 |
|
|
|
349 |
|
|
|
|
|
|
|
|
Weighted average common and common equivalent shares outstanding |
|
|
196,450 |
|
|
|
197,089 |
|
|
|
|
|
|
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|
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
4
TOTAL SYSTEM SERVICES, INC.
Condensed Consolidated Statements of Income
(Unaudited)
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Nine months ended |
|
|
|
September 30, |
|
(in thousands, except per share data) |
|
2008 |
|
|
2007 |
|
Revenues: |
|
|
|
|
|
|
|
|
Electronic payment processing services (includes $4.1 million from related parties for 2007) |
|
$ |
733,765 |
|
|
|
715,417 |
|
Merchant acquiring services |
|
|
191,806 |
|
|
|
190,120 |
|
Other services (includes $6.8 million from related parties for 2007) |
|
|
189,645 |
|
|
|
161,190 |
|
|
|
|
|
|
|
|
Revenues before reimbursable items |
|
|
1,115,216 |
|
|
|
1,066,727 |
|
Reimbursable items (includes $1.8 million from related parties for 2007) |
|
|
330,012 |
|
|
|
280,597 |
|
|
|
|
|
|
|
|
Total revenues |
|
|
1,445,228 |
|
|
|
1,347,324 |
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Salaries and other personnel expense |
|
|
449,246 |
|
|
|
430,966 |
|
Net occupancy and equipment expense |
|
|
223,075 |
|
|
|
205,342 |
|
Spin related expenses |
|
|
9,869 |
|
|
|
1,692 |
|
Other operating expenses (includes $7.1 million to related parties for 2007) |
|
|
152,696 |
|
|
|
155,913 |
|
|
|
|
|
|
|
|
Expenses before reimbursable items |
|
|
834,886 |
|
|
|
793,913 |
|
Reimbursable items |
|
|
330,012 |
|
|
|
280,597 |
|
|
|
|
|
|
|
|
Total expenses |
|
|
1,164,898 |
|
|
|
1,074,510 |
|
|
|
|
|
|
|
|
Operating income |
|
|
280,330 |
|
|
|
272,814 |
|
|
|
|
|
|
|
|
Nonoperating income (expense): |
|
|
|
|
|
|
|
|
Interest income (includes $10.7 million from related parties for 2007) |
|
|
6,833 |
|
|
|
18,630 |
|
Interest expense |
|
|
(8,964 |
) |
|
|
(1,492 |
) |
Gain on foreign currency translation, net |
|
|
3,233 |
|
|
|
744 |
|
Other (expense) income |
|
|
(278 |
) |
|
|
79 |
|
|
|
|
|
|
|
|
Total nonoperating income |
|
|
824 |
|
|
|
17,961 |
|
|
|
|
|
|
|
|
Income before income taxes, minority interests and equity in income of equity investments |
|
|
281,154 |
|
|
|
290,775 |
|
Income taxes |
|
|
101,386 |
|
|
|
101,442 |
|
|
|
|
|
|
|
|
Income before minority interests and equity in income of equity investments |
|
|
179,768 |
|
|
|
189,333 |
|
Minority interests in consolidated subsidiaries net income, net of tax |
|
|
(1,322 |
) |
|
|
(1,435 |
) |
Equity in income of equity investments, net of tax |
|
|
5,326 |
|
|
|
3,865 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
183,772 |
|
|
|
191,763 |
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.94 |
|
|
|
0.98 |
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.93 |
|
|
|
0.97 |
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
196,342 |
|
|
|
196,641 |
|
Increase due to assumed issuance of shares related to common equivalent shares |
|
|
629 |
|
|
|
429 |
|
|
|
|
|
|
|
|
Weighted average common and common equivalent shares outstanding |
|
|
196,971 |
|
|
|
197,070 |
|
|
|
|
|
|
|
|
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
5
TOTAL SYSTEM SERVICES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
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|
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|
Nine months ended |
|
|
|
September 30, |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
183,772 |
|
|
|
191,763 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Minority interests in consolidated subsidiaries net income, net of tax |
|
|
1,322 |
|
|
|
1,435 |
|
Gain on foreign currency, net |
|
|
(3,233 |
) |
|
|
(744 |
) |
Equity in income of equity investments, net of tax |
|
|
(5,326 |
) |
|
|
(3,865 |
) |
Dividends received from equity investments |
|
|
6,421 |
|
|
|
2,994 |
|
Depreciation and amortization |
|
|
120,163 |
|
|
|
114,213 |
|
Amortization of debt issuance costs |
|
|
115 |
|
|
|
|
|
Share-based compensation |
|
|
21,260 |
|
|
|
9,881 |
|
Excess tax benefit from share-based payment arrangements |
|
|
(82 |
) |
|
|
(4,022 |
) |
Asset impairments |
|
|
|
|
|
|
1,158 |
|
Provisions for bad debt expenses and billing adjustments |
|
|
2,779 |
|
|
|
1,612 |
|
Charges for transaction processing provisions |
|
|
1,415 |
|
|
|
531 |
|
Deferred income tax benefit |
|
|
(12,471 |
) |
|
|
(6,828 |
) |
Loss on disposal of equipment, net |
|
|
180 |
|
|
|
497 |
|
(Increase) decrease in: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(10,701 |
) |
|
|
(5,627 |
) |
Prepaid expenses, other current assets and other long-term assets |
|
|
(14,722 |
) |
|
|
(1,041 |
) |
Increase (decrease) in: |
|
|
|
|
|
|
|
|
Accounts payable |
|
|
(1,150 |
) |
|
|
6,148 |
|
Accrued salaries and employee benefits |
|
|
(33,770 |
) |
|
|
(9,341 |
) |
Other current liabilities and other long-term liabilities |
|
|
23,428 |
|
|
|
(51,286 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
279,400 |
|
|
|
247,478 |
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases of property and equipment, net |
|
|
(35,502 |
) |
|
|
(36,420 |
) |
Additions to licensed computer software from vendors |
|
|
(18,614 |
) |
|
|
(8,194 |
) |
Additions to internally developed computer software |
|
|
(14,976 |
) |
|
|
(11,749 |
) |
Cash used in acquisitions and equity investments |
|
|
(1,459 |
) |
|
|
(472 |
) |
Subsidiary repurchase of minority interest |
|
|
(343 |
) |
|
|
|
|
Additions to contract acquisition costs |
|
|
(34,612 |
) |
|
|
(20,878 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(105,506 |
) |
|
|
(77,713 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Dividends paid on common stock (includes $33.5 million paid to related parties during 2007) |
|
$ |
(41,358 |
) |
|
|
(41,425 |
) |
Subsidiary dividends paid to noncontrolling shareholders |
|
|
(241 |
) |
|
|
|
|
Repurchase of common stock |
|
|
(23,594 |
) |
|
|
|
|
Excess tax benefit from share-based payment arrangements |
|
|
82 |
|
|
|
4,022 |
|
Principal payments on long-term debt borrowings and capital lease obligations |
|
|
(11,501 |
) |
|
|
(3,893 |
) |
Proceeds from borrowings |
|
|
2,506 |
|
|
|
73,968 |
|
Proceeds from exercise of stock options |
|
|
266 |
|
|
|
5,258 |
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(73,840 |
) |
|
|
37,930 |
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(1,568 |
) |
|
|
(3,984 |
) |
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
98,486 |
|
|
|
203,711 |
|
Cash and cash equivalents at beginning of year |
|
|
210,518 |
|
|
|
389,123 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
309,004 |
|
|
|
592,834 |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
8,944 |
|
|
|
1,492 |
|
|
|
|
|
|
|
|
Cash paid for income taxes, net of refunds |
|
$ |
99,999 |
|
|
|
143,066 |
|
|
|
|
|
|
|
|
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
6
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 immaterial 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:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
September 30, 2008 |
|
|
December 31, 2007 |
|
Cash and cash equivalents in domestic accounts |
|
$ |
256,205 |
|
|
|
171,715 |
|
Cash and cash equivalents in foreign accounts |
|
|
52,799 |
|
|
|
38,803 |
|
|
|
|
|
|
|
|
Total |
|
$ |
309,004 |
|
|
|
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) |
|
September 30, 2008 |
|
|
December 31, 2007 |
|
Prepaid expenses |
|
$ |
9,545 |
|
|
|
12,766 |
|
Supplies inventory |
|
|
10,396 |
|
|
|
8,725 |
|
Other |
|
|
48,934 |
|
|
|
50,759 |
|
|
|
|
|
|
|
|
Total |
|
$ |
68,875 |
|
|
|
72,250 |
|
|
|
|
|
|
|
|
7
Contract Acquisition Costs, net
Significant components of contract acquisition costs, net of accumulated amortization, are
summarized as follows:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
September 30, 2008 |
|
|
December 31, 2007 |
|
Payments for processing rights,
net of accumulated amortization
of $127.2 million and $108.0
million at 2008 and 2007,
respectively |
|
$ |
88,580 |
|
|
|
96,449 |
|
Conversion costs, net of
accumulated amortization of
$55.5 million and $45.5 million
at 2008 and 2007, respectively |
|
|
62,265 |
|
|
|
55,150 |
|
|
|
|
|
|
|
|
Total |
|
$ |
150,845 |
|
|
|
151,599 |
|
|
|
|
|
|
|
|
Amortization related to payments for processing rights, which is recorded as a reduction of
revenues, was $7.5 million and $6.6 million for the three months ended September 30, 2008 and 2007,
respectively. For the nine months ended September 30, 2008 and 2007, amortization related to
payments for processing rights was $21.2 million and $18.3 million, respectively.
Amortization expense related to conversion costs was $4.1 million and $3.8 million for the
three months ended September 30, 2008 and 2007, respectively. For the nine months ended September
30, 2008 and 2007, amortization related to conversion costs was $10.8 million and $11.9 million,
respectively.
Other Current Liabilities
Significant components of other current liabilities are summarized as follows:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
September 30, 2008 |
|
|
December 31, 2007 |
|
Accrued expenses |
|
$ |
40,475 |
|
|
|
32,520 |
|
Client liabilities |
|
|
27,494 |
|
|
|
32,199 |
|
Deferred revenues |
|
|
27,034 |
|
|
|
25,733 |
|
Dividends payable |
|
|
14,094 |
|
|
|
13,859 |
|
Transaction processing provisions |
|
|
6,654 |
|
|
|
8,525 |
|
Accrued income taxes |
|
|
6,119 |
|
|
|
2,657 |
|
Client postage deposits |
|
|
3,337 |
|
|
|
4,244 |
|
Other |
|
|
18,818 |
|
|
|
15,371 |
|
|
|
|
|
|
|
|
Total |
|
$ |
144,025 |
|
|
|
135,108 |
|
|
|
|
|
|
|
|
Note 3 Comprehensive Income
For the three and nine months ended September 30, comprehensive income is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
64,074 |
|
|
|
68,802 |
|
|
|
183,772 |
|
|
|
191,763 |
|
Other comprehensive income (OCI), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
(7,908 |
) |
|
|
2,259 |
|
|
|
(3,178 |
) |
|
|
4,934 |
|
Change in accumulated OCI related to
postretirement healthcare plans |
|
|
67 |
|
|
|
|
|
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
56,233 |
|
|
|
71,061 |
|
|
|
180,685 |
|
|
|
196,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
September 30, 2008 |
|
Foreign currency translation adjustments |
|
$ |
29,202 |
|
|
$ |
(2,923 |
) |
|
|
(255 |
) |
|
$ |
(3,178 |
) |
|
$ |
26,024 |
|
Change in accumulated OCI related to
postretirement healthcare plans |
|
|
(880 |
) |
|
|
157 |
|
|
|
(66 |
) |
|
|
91 |
|
|
|
(789 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
28,322 |
|
|
$ |
(2,766 |
) |
|
|
(321 |
) |
|
$ |
(3,087 |
) |
|
$ |
25,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consistent with its overall strategy of pursuing international investment opportunities, TSYS
adopted the permanent reinvestment exception under Accounting Principles Board Opinion No. 23 (APB
23) Accounting for Income Taxes Special Areas, with respect to future earnings of certain
foreign subsidiaries. Its decision to permanently reinvest foreign earnings offshore means TSYS
will no longer allocate taxes to foreign currency translation adjustments associated with these
foreign subsidiaries accumulated in other comprehensive income.
8
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 four senior executive vice presidents.
Through online accounting and electronic payment processing systems, TSYS provides electronic
payment processing and other services to card-issuing and merchant acquiring institutions in the
United States and internationally. During the second quarter of 2008, TSYS reorganized and renamed
its operating segments in a manner that reflects the way the CODM views the business. The new
operating segments are North American Services segment, Global Services segment and Merchant
Services segment. As part of the reorganization, TSYS reclassified the segment results for TSYS de
Mexico from Global Services to North American Services to reflect the change.
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 North American Services to Merchant
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).
North American Services include electronic payment processing services and other services
provided from within the North American region. Global Services include electronic payment
processing and other services provided from outside the North American region. Merchant Services
include electronic processing and other services provided to merchant acquiring institutions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
,(in thousands) |
|
North American |
|
|
Global |
|
|
Merchant |
|
|
Spin-Related |
|
|
|
|
Operating Segments |
|
Services |
|
|
Services |
|
|
Services |
|
|
Costs |
|
|
Consolidated |
|
At September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets |
|
$ |
1,378,606 |
|
|
|
360,002 |
|
|
|
169,389 |
|
|
|
|
|
|
$ |
1,907,997 |
|
Intersegment eliminations |
|
|
(320,524 |
) |
|
|
(960 |
) |
|
|
(16 |
) |
|
|
|
|
|
|
(321,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,058,082 |
|
|
|
359,042 |
|
|
|
169,373 |
|
|
|
|
|
|
$ |
1,586,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursables |
|
$ |
245,172 |
|
|
|
85,118 |
|
|
|
58,357 |
|
|
|
|
|
|
$ |
388,647 |
|
Intersegment revenues |
|
|
(5,205 |
) |
|
|
(351 |
) |
|
|
(292 |
) |
|
|
|
|
|
|
(5,848 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursables from external customers |
|
$ |
239,967 |
|
|
|
84,767 |
|
|
|
58,065 |
|
|
|
|
|
|
$ |
382,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment total revenues |
|
$ |
345,881 |
|
|
|
88,090 |
|
|
|
74,613 |
|
|
|
|
|
|
$ |
508,584 |
|
Intersegment revenues |
|
|
(7,549 |
) |
|
|
(351 |
) |
|
|
(292 |
) |
|
|
|
|
|
|
(8,192 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
338,332 |
|
|
|
87,739 |
|
|
|
74,321 |
|
|
|
|
|
|
$ |
500,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
23,967 |
|
|
|
9,658 |
|
|
|
6,783 |
|
|
|
|
|
|
$ |
40,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment expenses |
|
$ |
2,494 |
|
|
|
(3,012 |
) |
|
|
(7,638 |
) |
|
|
|
|
|
$ |
(8,156 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
$ |
63,786 |
|
|
|
16,751 |
|
|
|
17,090 |
|
|
|
(1,719 |
) |
|
$ |
95,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes, minority interest and
equity in income of equity investments |
|
$ |
62,948 |
|
|
|
17,370 |
|
|
|
17,244 |
|
|
|
(1,719 |
) |
|
$ |
95,843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
22,742 |
|
|
|
6,014 |
|
|
|
6,089 |
|
|
|
(616 |
) |
|
$ |
34,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of equity investments |
|
$ |
670 |
|
|
|
2,164 |
|
|
|
|
|
|
|
|
|
|
$ |
2,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
40,876 |
|
|
|
13,146 |
|
|
|
11,155 |
|
|
|
(1,103 |
) |
|
$ |
64,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursables |
|
$ |
242,574 |
|
|
|
64,148 |
|
|
|
59,471 |
|
|
|
|
|
|
$ |
366,193 |
|
Intersegment revenues |
|
|
(6,960 |
) |
|
|
(106 |
) |
|
|
(105 |
) |
|
|
|
|
|
|
(7,171 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursables from external customers |
|
$ |
235,614 |
|
|
|
64,042 |
|
|
|
59,366 |
|
|
|
|
|
|
$ |
359,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment total revenues |
|
$ |
323,973 |
|
|
|
66,779 |
|
|
|
76,185 |
|
|
|
|
|
|
$ |
466,937 |
|
Intersegment revenues |
|
|
(9,162 |
) |
|
|
(106 |
) |
|
|
(104 |
) |
|
|
|
|
|
|
(9,372 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
314,811 |
|
|
|
66,673 |
|
|
|
76,081 |
|
|
|
|
|
|
$ |
457,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
24,581 |
|
|
|
6,455 |
|
|
|
6,570 |
|
|
|
|
|
|
$ |
37,606 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment expenses |
|
$ |
3,515 |
|
|
|
(4,996 |
) |
|
|
(7,892 |
) |
|
|
|
|
|
$ |
(9,373 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
,(in thousands) |
|
North American |
|
|
Global |
|
|
Merchant |
|
|
Spin-Related |
|
|
|
|
Operating Segments |
|
Services |
|
|
Services |
|
|
Services |
|
|
Costs |
|
|
Consolidated |
|
Segment operating income |
|
$ |
62,415 |
|
|
|
11,542 |
|
|
|
18,954 |
|
|
|
(1,692 |
) |
|
$ |
91,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes, minority interest and
equity in income of equity investments |
|
$ |
68,514 |
|
|
|
12,130 |
|
|
|
19,260 |
|
|
|
(1,692 |
) |
|
$ |
98,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
19,999 |
|
|
|
4,033 |
|
|
|
6,915 |
|
|
|
|
|
|
$ |
30,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of equity investments |
|
$ |
1,027 |
|
|
|
994 |
|
|
|
|
|
|
|
|
|
|
$ |
2,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
49,541 |
|
|
|
8,607 |
|
|
|
12,346 |
|
|
|
(1,692 |
) |
|
$ |
68,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursables |
|
$ |
730,192 |
|
|
|
230,107 |
|
|
|
171,777 |
|
|
|
|
|
|
$ |
1,132,076 |
|
Intersegment revenues |
|
|
(15,099 |
) |
|
|
(1,040 |
) |
|
|
(721 |
) |
|
|
|
|
|
|
(16,860 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursables from external customers |
|
$ |
715,093 |
|
|
|
229,067 |
|
|
|
171,056 |
|
|
|
|
|
|
$ |
1,115,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment total revenues |
|
$ |
1,010,958 |
|
|
|
237,816 |
|
|
|
220,117 |
|
|
|
|
|
|
$ |
1,468,891 |
|
Intersegment revenues |
|
|
(21,902 |
) |
|
|
(1,040 |
) |
|
|
(721 |
) |
|
|
|
|
|
|
(23,663 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
989,056 |
|
|
|
236,776 |
|
|
|
219,396 |
|
|
|
|
|
|
$ |
1,445,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
73,994 |
|
|
|
26,150 |
|
|
|
20,019 |
|
|
|
|
|
|
$ |
120,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment expenses |
|
$ |
7,941 |
|
|
|
(9,201 |
) |
|
|
(22,332 |
) |
|
|
|
|
|
$ |
(23,592 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
$ |
204,012 |
|
|
|
35,937 |
|
|
|
50,250 |
|
|
|
(9,869 |
) |
|
$ |
280,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes, minority interest and
equity in income of equity investments |
|
$ |
203,126 |
|
|
|
36,989 |
|
|
|
50,908 |
|
|
|
(9,869 |
) |
|
$ |
281,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
73,013 |
|
|
|
13,226 |
|
|
|
18,134 |
|
|
|
(2,987 |
) |
|
$ |
101,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of equity investments |
|
$ |
1,586 |
|
|
|
3,740 |
|
|
|
|
|
|
|
|
|
|
$ |
5,326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
131,700 |
|
|
|
26,180 |
|
|
|
32,774 |
|
|
|
(6,882 |
) |
|
$ |
183,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursables |
|
$ |
736,246 |
|
|
|
175,154 |
|
|
|
174,160 |
|
|
|
|
|
|
$ |
1,085,560 |
|
Intersegment revenues |
|
|
(17,490 |
) |
|
|
(701 |
) |
|
|
(642 |
) |
|
|
|
|
|
|
(18,833 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursables from external customers |
|
$ |
718,756 |
|
|
|
174,453 |
|
|
|
173,518 |
|
|
|
|
|
|
$ |
1,066,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment total revenues |
|
$ |
970,666 |
|
|
|
182,913 |
|
|
|
218,821 |
|
|
|
|
|
|
$ |
1,372,400 |
|
Intersegment revenues |
|
|
(23,733 |
) |
|
|
(701 |
) |
|
|
(642 |
) |
|
|
|
|
|
|
(25,076 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
946,933 |
|
|
|
182,212 |
|
|
|
218,179 |
|
|
|
|
|
|
$ |
1,347,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
76,272 |
|
|
|
17,762 |
|
|
|
20,179 |
|
|
|
|
|
|
$ |
114,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment expenses |
|
$ |
10,052 |
|
|
|
(11,961 |
) |
|
|
(23,162 |
) |
|
|
|
|
|
$ |
(25,071 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
$ |
194,474 |
|
|
|
32,702 |
|
|
|
47,330 |
|
|
|
(1,692 |
) |
|
$ |
272,814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes, minority interest and
equity in income of equity investments |
|
$ |
211,234 |
|
|
|
32,562 |
|
|
|
48,671 |
|
|
|
(1,692 |
) |
|
$ |
290,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
73,529 |
|
|
|
10,441 |
|
|
|
17,472 |
|
|
|
|
|
|
$ |
101,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of equity investments |
|
$ |
2,768 |
|
|
|
1,097 |
|
|
|
|
|
|
|
|
|
|
$ |
3,865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
140,474 |
|
|
|
21,782 |
|
|
|
31,199 |
|
|
|
(1,692 |
) |
|
$ |
191,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by Geographic Area
Revenues for North American Services and Merchant Services include electronic payment
processing and other services provided from the United States to clients domiciled in the United
States or other countries. Revenues for Global Services include electronic payment processing and
other services provided from facilities outside the United States to clients based predominantly
outside the United States.
The following geographic data presents revenues for the three and nine months ended September
30, 2008 and 2007, respectively, based on the domicile of the Companys customers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(in millions) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
United States |
|
$ |
374.4 |
|
|
|
352.3 |
|
|
|
1,094.0 |
|
|
|
1,052.5 |
|
Europe |
|
|
77.0 |
|
|
|
56.1 |
|
|
|
204.1 |
|
|
|
151.1 |
|
Canada |
|
|
31.8 |
|
|
|
32.3 |
|
|
|
94.7 |
|
|
|
93.1 |
|
Japan |
|
|
7.2 |
|
|
|
6.3 |
|
|
|
22.8 |
|
|
|
17.7 |
|
Mexico |
|
|
3.5 |
|
|
|
3.6 |
|
|
|
11.2 |
|
|
|
10.2 |
|
Other |
|
|
6.5 |
|
|
|
7.0 |
|
|
|
18.4 |
|
|
|
22.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
500.4 |
|
|
|
457.6 |
|
|
|
1,445.2 |
|
|
|
1,347.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table reconciles geographic revenues to revenues by reportable segment for the
three months ended September 30, 2008 and 2007, respectively, based on the domicile of the
Companys customers.
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Services |
|
|
Global Services |
|
|
Merchant Services |
|
(in millions) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
United States |
|
$ |
300.4 |
|
|
|
276.1 |
|
|
|
|
|
|
|
0.5 |
|
|
|
74.0 |
|
|
|
75.7 |
|
Europe |
|
|
0.2 |
|
|
|
0.4 |
|
|
|
76.8 |
|
|
|
55.7 |
|
|
|
|
|
|
|
|
|
Canada |
|
|
31.7 |
|
|
|
32.1 |
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
0.2 |
|
Japan |
|
|
|
|
|
|
|
|
|
|
7.2 |
|
|
|
6.3 |
|
|
|
|
|
|
|
|
|
Mexico |
|
|
3.5 |
|
|
|
3.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
2.5 |
|
|
|
2.6 |
|
|
|
3.8 |
|
|
|
4.2 |
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
338.3 |
|
|
|
314.8 |
|
|
|
87.8 |
|
|
|
66.7 |
|
|
|
74.3 |
|
|
|
76.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table reconciles geographic revenues to revenues by reportable segment for the
nine months ended September 30, 2008 and 2007, respectively, based on the domicile of the Companys
customers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Services |
|
|
Global Services |
|
|
Merchant Services |
|
(in millions) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
United States |
|
$ |
875.4 |
|
|
|
834.7 |
|
|
|
0.2 |
|
|
|
0.6 |
|
|
|
218.4 |
|
|
|
217.2 |
|
Europe |
|
|
0.7 |
|
|
|
1.3 |
|
|
|
203.4 |
|
|
|
149.8 |
|
|
|
|
|
|
|
|
|
Canada |
|
|
94.3 |
|
|
|
92.7 |
|
|
|
|
|
|
|
|
|
|
|
0.4 |
|
|
|
0.4 |
|
Japan |
|
|
|
|
|
|
|
|
|
|
22.8 |
|
|
|
17.7 |
|
|
|
|
|
|
|
|
|
Mexico |
|
|
11.2 |
|
|
|
10.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
7.4 |
|
|
|
8.0 |
|
|
|
10.4 |
|
|
|
14.1 |
|
|
|
0.6 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
989.0 |
|
|
|
946.9 |
|
|
|
236.8 |
|
|
|
182.2 |
|
|
|
219.4 |
|
|
|
218.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company maintains property and equipment, net of accumulated depreciation and
amortization, in the following geographic areas:
|
|
|
|
|
|
|
|
|
|
|
At |
|
|
At |
|
|
|
September 30, |
|
|
December 31, |
|
(in millions) |
|
2008 |
|
|
2007 |
|
United States |
|
$ |
208.0 |
|
|
|
208.3 |
|
Europe |
|
|
68.7 |
|
|
|
70.3 |
|
Japan |
|
|
2.8 |
|
|
|
1.9 |
|
Other |
|
|
3.9 |
|
|
|
2.6 |
|
|
|
|
|
|
|
|
Total |
|
$ |
283.4 |
|
|
|
283.1 |
|
|
|
|
|
|
|
|
Major Customers
For the three months ended September 30, 2008, the Company had two major customers which
accounted for approximately 27.9%, or $139.5 million, of total revenues. For the three months ended
September 30, 2007, these two major customers accounted for approximately 26.1%, or $119.5 million,
of total revenues. For the nine months ended September 30, 2008, the Company had two major
customers which accounted for approximately 27.8%, or $401.3 million, of total revenues. For the
nine months ended September 30, 2007, these two major customers accounted for approximately 24.8%,
or $333.7 million, of total revenues. Revenues from major customers for the periods reported are
primarily attributable to the North American Services and Merchant Services segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
(in millions) |
|
|
|
|
|
Total |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Total |
|
Revenue |
|
Dollars |
|
|
Revenues |
|
|
Dollars |
|
|
Revenues |
|
|
Dollars |
|
|
Revenues |
|
|
Dollars |
|
|
Revenues |
|
Client 1 |
|
$ |
85.1 |
|
|
|
17.0 |
|
|
$ |
62.7 |
|
|
|
13.7 |
|
|
$ |
235.7 |
|
|
|
16.3 |
|
|
$ |
172.5 |
|
|
|
12.8 |
|
Client 2 |
|
|
54.4 |
|
|
|
10.9 |
|
|
|
56.8 |
|
|
|
12.4 |
|
|
|
165.6 |
|
|
|
11.5 |
|
|
|
161.2 |
|
|
|
12.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
139.5 |
|
|
|
27.9 |
|
|
$ |
119.5 |
|
|
|
26.1 |
|
|
$ |
401.3 |
|
|
|
27.8 |
|
|
$ |
333.7 |
|
|
|
24.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
other personnel expenses and spin-related expenses. TSYS does not include amounts associated with
share-based compensation as costs capitalized as software development and contract acquisition
costs as these awards are typically granted to individuals not involved in capitalizable
activities. For the three months ended September 30, 2008, share-based compensation was $5.6
million, compared to $3.3 million for the same period in 2007. Included in the $5.6 million amount
for 2008 and $3.3 million amount for 2007 is approximately $1.9 million and $1.5
million, respectively, related to expensing the fair value of stock options. For the nine
months ended September 30, 2008, share-based compensation was $21.3 million, compared to $9.9
million for the same period in 2007. Included in the $21.3 million amount for 2008
11
and $9.9 million
amount for 2007 is approximately $11.6 million and $4.8 million, respectively, related to expensing
the fair value of stock options.
Nonvested Share Awards
During the first nine months of 2008, the Company issued 697,911 shares of TSYS common stock
with a market value of $15.3 million to certain key employees and non-management members of its
Board of Directors under nonvested stock bonus awards for services to be provided in the future by
such officers, directors and employees. The market value of the TSYS common stock at the date of
issuance is amortized as compensation expense over the vesting period of the awards.
During the first nine months of 2007, the Company issued 241,260 shares of TSYS common stock
with a market value of $7.6 million to certain key employees and non-management members of its
Board of Directors under nonvested stock bonus awards for services to be provided by such officers,
directors and employees in the future. The market value of the TSYS common stock at the date of
issuance is amortized as compensation expense over the vesting period of the awards.
As of September 30, 2008, there was approximately $18.7 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 2.6 years.
During the first nine months of 2008, TSYS authorized a total grant of 182,816 shares of
nonvested stock to two key executives with a performance-vesting schedule (2008 performance-vesting
shares). These 2008 performance-vesting shares have seven one-year performance periods (2008-2014)
during each of which the Compensation Committee establishes an earnings per share goal and, if such
goal is attained during any performance period, 20% of the performance-vesting shares will vest, up
to a maximum of 100% of the total grant. Compensation expense for each years award is measured on
the grant date based on the quoted market price of TSYS common stock and is expensed on a
straight-line basis for the year.
During 2005, TSYS authorized a total grant of 126,087 shares of nonvested stock to two key
executives with a performance-vesting schedule (2005 performance-vesting shares). These
performance-vesting shares have seven one-year performance periods (2005-2011) during each of which
the Compensation Committee establishes an earnings per share goal and, if such goal is attained
during any performance period, 20% of the performance-vesting shares will vest, up to a maximum of
100% of the total grant. Compensation expense for each years award is measured on the grant date
based on the quoted market price of TSYS common stock and is expensed on a straight-line basis for
the year.
As of September 30, 2008, there was approximately $432,000 of total unrecognized compensation
cost related to both the 2008 grant and 2005 grant of nonvested performance-vesting share-based
compensation arrangements. That cost is expected to be recognized over the remainder of 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 a
three-year Total Shareholder Return (2008-2010) versus peers. 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). Although the TSYS Board of Directors authorized the award on
March 31, 2008, the final amount of the awards cannot be known until early 2009 due to the
discretion that the Compensation Committee has in determining the final terms of the award. The
Company has engaged a third-party valuation specialist to ascertain the fair value of this award.
The third-party specialist completed the evaluation during the third quarter of 2008 and determined
the valuation of the award to be approximately $2.7 million. The award will be amortized through
December 2010. Until the award is deemed granted, TSYS will exclude the issuance of these units in
reporting shares outstanding from the calculation of basic and diluted EPS (although related
compensation expense on these awards are included properly in net income and related EPS
calculation).
Stock Option Awards
During the first nine months of September 2008, the Company granted 771,892 stock options to
key TSYS executive officers. The average fair value of the option grant was $9.73 per option and
was estimated on the date of grant using the Black-Scholes-Merton
option-pricing model with the following weighted average assumptions: exercise price of
$23.15; risk-free interest rate of 3.42%; expected volatility of 36.57%; expected term of 8.7
years; and dividend yield of 1.21%.
12
As of September 30, 2008, there was approximately $6.9 million of total unrecognized
compensation expense cost related to TSYS stock options that is expected to be recognized over a
remaining weighted average period of 2.3 years.
Earnings Per Share
The diluted earnings per share calculation excludes stock options and nonvested awards that
are convertible into 5.9 million common shares for the three and nine months ended September 30,
2008, respectively, and excludes 17,500 and 7,500 common shares for the three and nine months ended
September 30, 2007, respectively, 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.
In June 2008, TSYS Managed Services EMEA, Ltd. borrowed £1.3 million, or approximately $2.5
million, through a short-term note. At the end of September 2008, the balance of the loan was
approximately £1.3 million, or approximately $2.3 million. The interest rate on the note is the
London Interbank Offered Rate (LIBOR) plus 2%, with interest payable quarterly. The term of the
note is one year.
Note 7 Supplementary Cash Flow Information
Contract Acquisition Costs
Cash used for contract acquisition costs for the nine months ended September 30, 2008 and
2007, respectively, are summarized as follows:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
September 30, 2008 |
|
|
September 30, 2007 |
|
Payments for processing rights |
|
$ |
15,664 |
|
|
|
12,760 |
|
Conversion costs |
|
|
18,948 |
|
|
|
8,118 |
|
|
|
|
|
|
|
|
Total |
|
$ |
34,612 |
|
|
|
20,878 |
|
|
|
|
|
|
|
|
Nonvested Awards
During the first nine months 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
$8.2 million during 2008 related to a software enterprise license agreement and storage and other
peripheral hardware. The Company acquired software under capital lease obligations in the amount of
$4.1 million during 2007 related to a three year software agreement.
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
13
TSYS services or systems
infringe on certain third party patents, copyrights or other proprietary rights. In the event of
such a claim, the Company is generally obligated to hold the client harmless and pay for related
losses, liabilities, costs and expenses, including, without limitation, court costs and reasonable
attorneys fees. The Company has not made any indemnification payments pursuant to these
indemnification clauses. In addition, the Company has indemnification obligations to Synovus
Financial Corp. pursuant to the disaffiliation and related agreements entered into by the parties
in connection with the spin-off.
The Company has not recorded a liability for guarantees or indemnities in the accompanying
condensed consolidated balance sheet since neither a range nor a maximum amount of potential future
payments under such guarantees and indemnities is determinable.
Note 10 Income Taxes
TSYS is the parent of an affiliated group that files a consolidated U.S. Federal income tax
return and most state and foreign income tax returns on a separate entity basis. In the normal
course of business, the Company is subject to examinations by these taxing authorities unless
statutory examination periods lapse. TSYS is no longer subject to U.S. Federal income tax
examinations for years before 2005 and with a few exceptions, the Company is no longer subject to
income tax examinations from state and local authorities for years before 2001 and from foreign
authorities before 2003. There are currently no Federal tax examinations in progress. However, a
number of tax examinations are in progress by the relevant foreign and state tax authorities.
Although TSYS is unable to determine the ultimate outcome of these examinations, TSYS believes that
its liability for uncertain tax positions relating to these jurisdictions for such years is
adequate.
TSYS effective tax rate was 35.1% and 31.1% for the three months ended September 30, 2008 and
September 30, 2007, respectively. TSYS effective tax rate for the nine months ended September 30,
2008 was 35.7%, compared to 34.7% for the same period in 2007. The decreased rate during the
September 30, 2007 period was mostly due to the release of FIN 48 reserves as triggered by the
favorable settlement of a state audit during the 2007 period.
TSYS adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes an Interpretation of FASB Statement 109 (FIN 48) on January 1, 2007. This
interpretation prescribed a recognition threshold and measurement attribute for the financial
statement recognition, measurement and disclosure of a tax position taken or expected to be taken
in a tax return.
During the three months ended September 30, 2008, TSYS decreased its liability for prior year
uncertain income tax positions by a net amount of approximately $0.8 million. This net decrease
mostly resulted from decreases in reserves for Federal liabilities due to the expiration of a
statute of limitations and decreases in State liabilities due to a recalculation of state uncertain
tax positions.
TSYS recognizes potential interest and penalties related to the underpayment of income taxes
as income tax expense in the condensed consolidated statements of income. Gross accrued interest
and penalties on unrecognized tax benefits totaled $1.6 million and $1.3 million as of June 30,
2008 and September 30, 2008, respectively. The total amounts of unrecognized income tax benefits as
of June 30, 2008 and September 30, 2008 that, if recognized, would affect the effective tax rates
are $4.5 million and $3.9 million (net of the Federal benefit on state tax issues), respectively,
which include interest and penalties of $1.2 million and $1.0 million. TSYS does not expect any
material changes to its calculation of uncertain tax positions during the next twelve months.
Note 11 Fair Value Measurement
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 157 (SFAS No. 157), Fair Value Measurements. Although this
statement does not require any new fair value measurements, in certain cases its application has
changed previous practice in determining fair value. SFAS No. 157 became effective for the Company
beginning January 1, 2008 as it relates to fair value measurements of financial assets and
liabilities and certain non-financial assets and liabilities that are recognized at fair value in
its financial statements on a recurring basis (at least annually). It will be effective beginning
January 1, 2009 for certain other non-financial assets and non-financial liabilities.
SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at the measurement
date. It establishes a hierarchy for fair value measurements based upon the inputs to the valuation
and the degree to which they are observable or not observable in the market. The three levels in
the hierarchy are as follows:
|
|
|
Level 1 Inputs to the valuation based upon quoted prices (unadjusted) for identical
assets or liabilities in active markets that are accessible as of the measurement date. |
|
|
|
|
Level 2 Inputs to the valuation include quoted prices in either markets that are not
active, or in active markets for similar assets or liabilities, inputs other than quoted
prices that are observable, and inputs that are derived principally from or corroborated by
observable market data. |
|
|
|
|
Level 3 Inputs to the valuation that are unobservable inputs for the asset or
liability. |
14
SFAS No. 157 assigns the highest priority to Level 1 inputs and the lowest priority to Level 3
inputs.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (SFAS
No. 159), The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159
permits the Company to choose to measure many financial instruments and certain other items at fair
value. Upon adoption of SFAS No. 159 on January 1, 2008, TSYS did not elect the fair value option
for any financial instrument it did not currently report at fair value.
The adoption of SFAS No. 157 and SFAS No. 159 did not have a material impact upon the
Companys financial position, results of operations and cash flows.
Note 12 Cost of Services and Selling, General and Administrative Expenses
The Companys operating expenses consists of cost of services and selling, general and
administrative expenses. The Company presents these expenses as employment, occupancy and
equipment and other expenses. Overall, the Company believes its expenses consist predominately of
cost of sales type expenses, while selling, general and administrative expenses are insignificant.
Note 13 Subsequent Events
Long-term Debt
On October 31, 2008, the Company repaid its Global Services loan that it acquired in August
2007. The loan was scheduled to mature in January 2009. The Company paid £33 million, or
approximately $54.1 million. The Company will provide long-term financing to its Global Services
segment through an intercompany loan.
On October 30, 2008, the Companys Global Services segment obtained a credit agreement from a
third-party to borrow up to approximately ¥2.0 billion, or $21 million, in a Yen-denominated three
year loan to finance activities in Japan. The rate is YEN LIBOR plus 80 basis points. The Company
initially made a draw of ¥1.5 billion Yen, or approximately $15.1 million.
Acquisition
The Company acquired Infonox on the Web on November 4, 2008 for approximately $50.0 million,
with contingent payments over the next three years of up to $25 million based on performance. The
Company has engaged a third-party valuation firm to identify and value acquisition intangibles.
Infonox provides payment products on self-service and full-service transaction touch points in the
gaming, banking and retail markets. The company delivers, manages, operates and supports services
for several large publicly traded companies. The acquisition will add new payment technology and
acceptance capabilities. Infonox is based in Sunnyvale, California, with an office in Pune, India,
and will be part of TSYS Merchant Services segment.
15
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 September 30, |
|
Nine months ended September 30, |
(in millions, except per share data and employees) |
|
2008 |
|
2007 |
|
% Change |
|
2008 |
|
2007 |
|
% Change |
Revenues before reimbursables |
|
$ |
382.8 |
|
|
|
359.0 |
|
|
|
6.6 |
% |
|
$ |
1,115.2 |
|
|
|
1,066.7 |
|
|
|
4.5 |
% |
Total revenues |
|
|
500.4 |
|
|
|
457.6 |
|
|
|
9.4 |
|
|
|
1,445.2 |
|
|
|
1,347.3 |
|
|
|
7.3 |
|
Operating income |
|
|
95.9 |
|
|
|
91.2 |
|
|
|
5.1 |
|
|
|
280.3 |
|
|
|
272.8 |
|
|
|
2.8 |
|
Net income |
|
|
64.1 |
|
|
|
68.8 |
|
|
|
(6.9 |
) |
|
|
183.8 |
|
|
|
191.8 |
|
|
|
(4.2 |
) |
Basic earnings per share (EPS) |
|
|
0.33 |
|
|
|
0.35 |
|
|
|
(6.5 |
) |
|
|
0.94 |
|
|
|
0.98 |
|
|
|
(4.0 |
) |
Diluted EPS |
|
|
0.33 |
|
|
|
0.35 |
|
|
|
(6.6 |
) |
|
|
0.93 |
|
|
|
0.97 |
|
|
|
(4.1 |
) |
Cash flows from operating activities |
|
|
104.6 |
|
|
|
128.0 |
|
|
|
(18.2 |
) |
|
|
279.4 |
|
|
|
247.5 |
|
|
|
12.9 |
|
Other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average accounts on file (AOF) |
|
|
365.5 |
|
|
|
384.3 |
|
|
|
(4.9 |
) |
|
|
369.1 |
|
|
|
412.1 |
|
|
|
(10.4 |
) |
Cardholder transactions processed |
|
|
1,965.1 |
|
|
|
2,177.6 |
|
|
|
(9.8 |
) |
|
|
5,723.3 |
|
|
|
7,519.8 |
|
|
|
(23.9 |
) |
Average full-time equivalent employees (FTE) |
|
|
7,761 |
|
|
|
6,751 |
|
|
|
15.0 |
|
|
|
7,519 |
|
|
|
6,752 |
|
|
|
11.4 |
|
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. |
North American
|
|
|
Signed a multi-year commercial and consumer credit card processing agreement with First
Citizens Bank of Raleigh, North Carolina. TSYS also provides merchant acquiring services to
First Citizens. |
|
|
|
|
Signed a multi-year agreement with Banco Wal-Mart de México Adelante, S.A. to launch its
consumer credit card that includes fraud detection and analytic services. |
|
|
|
|
Signed an agreement with Metrofinanciera for the launch of a new credit card program in
Mexico. |
|
|
|
|
Announced a partnership with Paragon Benefits in the roll-out of the My Care
CardSM to provide an off-the-shelf card product for flexible benefit payment
processing. |
|
|
|
|
Announced the signing of a payments processing agreement with Globalcard for the launch
of its consumer card portfolio. Under terms of the agreement, TSYS will provide account
processing services, risk management, portfolio management and reporting tools to
Globalcard, a Mexican-based credit card company. |
|
|
|
|
Announced an agreement with PartnersFirst Affinity Services, a division of Torrey Pines
Bank, to process its consumer credit card portfolio. In addition to core processing,
PartnersFirst will leverage TSYS gold-standard technology for online credit card services
and instant application; card, statement and letter production; and a full suite of customer
care offerings. The partnership between TSYS and PartnersFirst offers consumers a full
spectrum of credit card services for the small and mid-sized affinity partner market. |
16
|
|
|
Announced the renewal of its agreement with Canadian Tire Financial Services, a division
of Canadian Tire Corporation, Limited, to exclusively process its payment cards programs.
The multi-year agreement includes Canadian Tires MasterCard-branded and private label
retail portfolios. |
|
|
|
|
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 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. |
|
|
|
|
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. |
Global
|
|
|
Signed a multi-year agreement to service approximately 3 million private-label store
accounts for Argos and Homebase retail brands that are part of Home Retail Group, the UKs
leading home and general goods retailer. |
|
|
|
|
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 countries on other continents,
including the key financial centers of Europe, the Americas and Asia. |
Industry
|
|
|
Experienced significant market turmoil during the year, especially during the third
quarter of 2008. As a result, several financial institutions were acquired or taken over in
both private and brokered transactions. Two financial institutions that were acquired or
are in the process of being acquired, Washington Mutual and Wachovia, are clients of the
Company. The Company is monitoring both situations. |
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
17
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 September 30, 2008 is $3.9 million. Refer to Note 10 in the Notes to
Unaudited Condensed Consolidated Financial Statements for more information on income taxes. The
Company is not able to reasonably estimate the amount by which the liability will increase or
decrease over time; however, at this time, the Company does not expect a significant payment
related to these obligations within the next year.
As indicated in the Companys 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.
Results of Operations
The following table sets forth certain income statement captions as a percentage of total
revenues and the percentage increases or decreases in those items for the three months ended
September 30, 2008 and 2007, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change |
|
|
% of Total Revenues |
|
in Dollar Amounts |
|
|
2008 |
|
2007 |
|
2008 vs. 2007 |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Electronic payment processing services |
|
|
50.0 |
% |
|
|
52.6 |
% |
|
|
3.9 |
% |
Merchant acquiring services |
|
|
12.9 |
|
|
|
14.2 |
|
|
|
(1.0 |
) |
Other services |
|
|
13.6 |
|
|
|
11.7 |
|
|
|
28.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursable items |
|
|
76.5 |
|
|
|
78.5 |
|
|
|
6.6 |
|
Reimbursable items |
|
|
23.5 |
|
|
|
21.5 |
|
|
|
19.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
9.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and other personnel expense |
|
|
30.6 |
|
|
|
31.7 |
|
|
|
5.7 |
|
Net occupancy and equipment expense |
|
|
15.1 |
|
|
|
15.0 |
|
|
|
9.7 |
|
Spin related expenses |
|
|
0.3 |
|
|
|
0.4 |
|
|
|
1.6 |
|
Other operating expenses |
|
|
11.3 |
|
|
|
11.4 |
|
|
|
7.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses before reimbursable items |
|
|
57.3 |
|
|
|
58.5 |
|
|
|
7.1 |
|
Reimbursable items |
|
|
23.5 |
|
|
|
21.5 |
|
|
|
19.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
80.8 |
|
|
|
80.0 |
|
|
|
10.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
19.2 |
|
|
|
20.0 |
|
|
|
5.1 |
|
Nonoperating income |
|
|
0.0 |
|
|
|
1.5 |
|
|
|
(100.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes, minority interest and
equity in income of equity investments |
|
|
19.2 |
|
|
|
21.5 |
|
|
|
(2.4 |
) |
Income taxes |
|
|
6.9 |
|
|
|
6.8 |
|
|
|
10.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest and equity in income
of equity investments |
|
|
12.3 |
|
|
|
14.7 |
|
|
|
(8.4 |
) |
Minority interests in consolidated subsidiaries net income |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
(22.6 |
) |
Equity in income of equity investments |
|
|
0.6 |
|
|
|
0.4 |
|
|
|
40.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
12.8 |
% |
|
|
15.0 |
% |
|
|
(6.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
18
The following table sets forth certain income statement captions as a percentage of total
revenues and the percentage increases or decreases in those items for the nine months ended
September 30, 2008 and 2007, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change |
|
|
% of Total Revenues |
|
in Dollar Amounts |
|
|
2008 |
|
2007 |
|
2008 vs. 2007 |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Electronic payment processing services |
|
|
50.8 |
% |
|
|
53.1 |
% |
|
|
2.6 |
% |
Merchant acquiring services |
|
|
13.3 |
|
|
|
14.1 |
|
|
|
0.9 |
|
Other services |
|
|
13.1 |
|
|
|
12.0 |
|
|
|
17.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursable items |
|
|
77.2 |
|
|
|
79.2 |
|
|
|
4.5 |
|
Reimbursable items |
|
|
22.8 |
|
|
|
20.8 |
|
|
|
17.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
7.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and other personnel expense |
|
|
31.1 |
|
|
|
32.0 |
|
|
|
4.2 |
|
Net occupancy and equipment expense |
|
|
15.4 |
|
|
|
15.3 |
|
|
|
8.6 |
|
Spin related expenses |
|
|
0.7 |
|
|
|
0.1 |
|
|
nm |
|
Other operating expenses |
|
|
10.6 |
|
|
|
11.6 |
|
|
|
(2.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses before reimbursable items |
|
|
57.8 |
|
|
|
59.0 |
|
|
|
5.2 |
|
Reimbursable items |
|
|
22.8 |
|
|
|
20.8 |
|
|
|
17.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
80.6 |
|
|
|
79.8 |
|
|
|
8.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
19.4 |
|
|
|
20.2 |
|
|
|
2.8 |
|
Nonoperating income |
|
|
0.1 |
|
|
|
1.3 |
|
|
|
(95.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes, minority interest and
equity in income of equity investments |
|
|
19.5 |
|
|
|
21.5 |
|
|
|
(3.3 |
) |
Income taxes |
|
|
7.1 |
|
|
|
7.5 |
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest and equity in income
of equity investments |
|
|
12.4 |
|
|
|
14.0 |
|
|
|
(5.1 |
) |
Minority interests in consolidated subsidiaries net income |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
(7.9 |
) |
Equity in income of equity investments |
|
|
0.4 |
|
|
|
0.3 |
|
|
|
37.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
12.7 |
% |
|
|
14.2 |
% |
|
|
(4.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
The Company generates revenues from the fees that it charges customers for providing
transaction processing and other payment-related services. The Companys pricing for transactions
and services is complex. Each category of revenue has numerous fee components depending on the
types of transactions or services provided. TSYS reviews its pricing and implements pricing changes
on an ongoing basis. In addition, standard pricing varies among its regional businesses, and such
pricing can be customized further for customers through tiered pricing of various thresholds for
volume activity. TSYS revenues are based upon transactional information accumulated by its systems
or reported by its customers. The Companys revenue growth was moderated by currency translation
impact of foreign operations, as well as doing business in a competitive landscape. Of the total
revenue changes of 9.4% for the third quarter of 2008, the Company estimates revenues decreased by
a net 1.7% due to foreign currency exposure and pricing, and increased 11.1% for volume changes. Of
the total revenue changes of 7.3% for the first nine months of 2008, the Company estimates revenues
decreased by a net 1.0% due to foreign currency exposure and pricing, and increased 8.3% for volume
changes.
Total revenues increased $42.8 million and $97.9 million, or 9.4% and 7.3%, respectively,
during the three and nine months ended September 30, 2008, compared to the same periods in 2007.
The increase in revenues for the three and nine months ended September 30, 2008 includes a decrease
of $4.6 million and $2.4 million, respectively, related to the effects of currency translation of
its foreign-based subsidiaries and branches. Excluding reimbursable items, revenues increased $23.8
million and $48.5 million, or 6.6% and 4.5%, respectively, during the three and nine months ended
September 30, 2008, compared to the same periods 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 and nine months
ended September 30, 2008 and 2007, respectively, are summarized below:
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(in millions) |
|
2008 |
|
|
2007 |
|
|
% Change |
|
|
2008 |
|
|
2007 |
|
|
% Change |
|
Europe |
|
$ |
77.0 |
|
|
|
56.1 |
|
|
|
37.2 |
|
|
$ |
204.1 |
|
|
|
151.1 |
|
|
|
35.1 |
|
Canada |
|
|
31.8 |
|
|
|
32.3 |
|
|
|
(1.5 |
) |
|
|
94.7 |
|
|
|
93.1 |
|
|
|
1.7 |
|
Japan |
|
|
7.2 |
|
|
|
6.3 |
|
|
|
13.1 |
|
|
|
22.8 |
|
|
|
17.7 |
|
|
|
28.4 |
|
Mexico |
|
|
3.5 |
|
|
|
3.6 |
|
|
|
(3.8 |
) |
|
|
11.2 |
|
|
|
10.2 |
|
|
|
10.1 |
|
Other |
|
|
6.5 |
|
|
|
7.0 |
|
|
|
(6.3 |
) |
|
|
18.4 |
|
|
|
22.7 |
|
|
|
(18.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
126.0 |
|
|
|
105.3 |
|
|
|
19.7 |
|
|
$ |
351.2 |
|
|
|
294.8 |
|
|
|
19.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: The Company has two equity investments located in Mexico and China that are accounted for
under the equity method of accounting, and therefore, TSYS does not include the revenues of its
equity investments in consolidated revenues.
The increase in revenues in 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. Revenues from clients in certain countries
decreased as a result of pricing compression and portfolio deconversions.
TSYS expects to continue to grow its international revenues in the future through
acquisitions, business expansion, new client signings and internal growth.
Value Added Products and Services
The Companys revenues are impacted by the use of optional value added products and services
of TSYS processing systems. Value added products and services are optional features to which each
client can choose to subscribe in order to potentially increase the financial performance of its
portfolio. Value added products and services include: risk management tools and techniques, such as
credit evaluation, fraud detection and prevention, and behavior analysis tools; and revenue
enhancement tools and customer retention programs, such as loyalty programs and bonus rewards.
These revenues can increase or decrease from period to period as clients subscribe to or cancel
these services. Value added products and services are included primarily in electronic payment
processing services revenue. For the three months ended September 30, 2008 and 2007, value added
products and services represented 12.2% and 12.8%, respectively, of total revenues. For the nine
months ended September 30, 2008 and 2007, value added products and services represented 12.2% and
13.0%, 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.
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.
Revenues from major customers for the periods reported are primarily attributable to the North
American Services segment and Merchant Services segment.
AOF Data (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
% Change |
At September 30, |
|
|
355.5 |
|
|
|
357.1 |
|
|
|
(0.5 |
) |
QTD Average |
|
|
365.5 |
|
|
|
384.3 |
|
|
|
(4.9 |
) |
YTD Average |
|
|
369.1 |
|
|
|
412.1 |
|
|
|
(10.4 |
) |
20
AOF by Portfolio Type (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
At September 30, |
|
AOF |
|
% |
|
AOF |
|
% |
|
% Change |
Consumer |
|
|
211.1 |
|
|
|
59.4 |
|
|
|
197.0 |
|
|
|
55.2 |
|
|
|
7.2 |
|
Retail |
|
|
51.1 |
|
|
|
14.4 |
|
|
|
47.9 |
|
|
|
13.4 |
|
|
|
6.5 |
|
Stored value |
|
|
26.1 |
|
|
|
7.3 |
|
|
|
46.3 |
|
|
|
13.0 |
|
|
|
(43.8 |
) |
Commercial |
|
|
41.8 |
|
|
|
11.7 |
|
|
|
37.5 |
|
|
|
10.5 |
|
|
|
11.4 |
|
Government services |
|
|
20.5 |
|
|
|
5.8 |
|
|
|
23.2 |
|
|
|
6.5 |
|
|
|
(11.5 |
) |
Debit |
|
|
4.9 |
|
|
|
1.4 |
|
|
|
5.2 |
|
|
|
1.4 |
|
|
|
(5.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
355.5 |
|
|
|
100.0 |
|
|
|
357.1 |
|
|
|
100.0 |
|
|
|
(0.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOF by Geographic Area (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
At September 30, |
|
AOF |
|
% |
|
AOF |
|
% |
|
% Change |
Domestic |
|
|
272.6 |
|
|
|
76.7 |
|
|
|
284.5 |
|
|
|
79.7 |
|
|
|
(4.2 |
) |
International |
|
|
82.9 |
|
|
|
23.3 |
|
|
|
72.6 |
|
|
|
20.3 |
|
|
|
14.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
355.5 |
|
|
|
100.0 |
|
|
|
357.1 |
|
|
|
100.0 |
|
|
|
(0.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: The accounts on file distinction between domestic and international is based on the
geographic domicile of the Companys processing clients.
Activity in AOF (in millions)
|
|
|
|
|
|
|
|
|
|
|
September 2007 to |
|
September 2006 to |
|
|
September 2008 |
|
September 2007 |
Beginning balance |
|
|
357.1 |
|
|
|
400.0 |
|
Internal growth of existing clients |
|
|
38.7 |
|
|
|
32.0 |
|
New clients |
|
|
27.8 |
|
|
|
71.0 |
|
Purges/Sales |
|
|
(33.1 |
) |
|
|
(9.6 |
) |
Deconversions |
|
|
(35.0 |
) |
|
|
(136.3 |
) |
|
|
|
|
|
|
|
|
|
Ending balance |
|
|
355.5 |
|
|
|
357.1 |
|
|
|
|
|
|
|
|
|
|
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 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 $9.5 million, or 3.9%, and $18.3 million, or 2.6%,
for the three and nine months ended September 30, 2008, respectively, compared to the same periods
in 2007. The increase for the three and nine months is attributable to new business and growth of
existing clients.
Two of the Companys credit card processing clients, Washington Mutual Bank and Wachovia, have
recently been acquired, or are in the process of being acquired. Washington Mutual Bank, for which
TSYS provides consumer card processing services, was acquired by JP Morgan Chase Bank (Chase) from
the FDIC as receiver, and Wachovia, for which TSYS provides consumer and commercial card processing
services, is to be acquired by Wells Fargo.
Chase is a licensee of the Companys TS2 card processing software and processes its consumer
credit card portfolio in-house using that software. Chase has indicated to the Company its desire
to migrate the Washington Mutual Bank consumer credit card portfolio from TSYS to its in-house
processing platform.
TSYS provides selected processing services to Wells Fargo, including merchant acquiring and
commercial card processing services, but TSYS does not provide consumer credit card processing
services to Wells Fargo. TSYS expects to continue to provide commercial card processing services
for the Wachovia commercial card portfolio to be acquired by Wells Fargo, but TSYS has had no
communication with Wells Fargo about its processing plans for the Wachovia consumer card portfolio.
21
Though the Company has long term processing agreements with both Washington Mutual Bank and
Wachovia, the Company can not at this time predict if it will ultimately receive the full benefits
of the Washington Mutual Bank or the Wachovia processing agreements. The loss of either, or both,
of Washington Mutual Bank and Wachovia as processing clients is not expected to have a material
adverse effect on TSYS financial position, results of operations or cash flows.
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 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.
Merchant Acquiring Services
Merchant acquiring services revenues are derived from providing point-of-sale solutions,
acquirer systems and integrated support services for financial institutions, independent sales
organizations and other merchant acquirers and service providers. Revenues from merchant acquiring
services include processing all payment forms including credit, debit, prepaid, electronic benefit
transfer and electronic check for merchants of all sizes across a wide array of retail market
segments. Merchant acquiring services products and services include: authorization and capture of
transactions; clearing and settlement of transactions; information reporting services related to
transactions; merchant billing services; and point-of-sale equipment sales and service.
Revenues from merchant acquiring services are mainly generated by TSYS wholly owned
subsidiary TSYS Acquiring Solutions, L.L.C. (TSYS Acquiring) and majority owned subsidiary GP
Network Corporation. Merchant acquiring services revenues for the three and nine months ended
September 30, 2008 was $64.5 million and $191.8 million, respectively, compared to $65.2 million
and $190.1 million for the same periods 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 $14.9
million, or 28.1%, and $28.5 million, or 17.7%, for the three and nine months ended September 30,
2008, respectively, compared to the same periods in 2007. The increase is attributable to new call
center business in the Global Services segment.
Reimbursable Items
As a result of the FASBs Emerging Issues Task Force No. 01-14 (EITF No. 01-14), Income
Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred, the
Company has included reimbursements received for out-of-pocket expenses as revenues and expenses.
Reimbursable items increased $19.0 million, or 19.3%, and $49.4 million, or 17.6%, for the three
and nine months ended September 30, 2008, respectively, compared to the same periods last year.
TSYS recognized approximately $50.8 million and $129.7 million of attorney fees and court costs as
additional reimbursable items for the three and nine months ended September 30, 2008, respectively.
The majority of reimbursable items relates to the Companys domestic-based clients and is
primarily costs associated with postage and court costs. The Companys reimbursable items are
impacted with changes in postal rates and changes in the volumes of all
22
mailing activities by its clients. Effective May 14, 2007, and then again on May 12, 2008, the
United States Postal Service increased the rate of first class mail.
Operating Expenses
Total expenses increased 10.4% and 8.4% for the three and nine months ended September 30,
2008, respectively, compared to the same periods in 2007. The fluctuation in expense includes a
decrease of $3.1 million and $0.6 million for the three and nine months ended September 30, 2008,
respectively, related to the effects of currency translation of its foreign-based subsidiaries,
branches and divisions. Excluding reimbursable items, total expenses increased 7.1% and 5.2% for
the three and nine months ended September 30, 2008, respectively, compared to the same periods 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 and nine months ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
|
% Change |
|
|
2008 |
|
|
2007 |
|
|
% Change |
|
Salaries |
|
$ |
116,279 |
|
|
|
107,601 |
|
|
|
8.1 |
% |
|
$ |
335,618 |
|
|
|
312,784 |
|
|
|
7.3 |
% |
Employee benefits |
|
|
23,486 |
|
|
|
25,567 |
|
|
|
(8.1 |
) |
|
|
73,179 |
|
|
|
78,644 |
|
|
|
(6.9 |
) |
Nonemployee wages |
|
|
14,632 |
|
|
|
12,829 |
|
|
|
14.1 |
|
|
|
45,360 |
|
|
|
36,083 |
|
|
|
25.7 |
|
Share-based compensation |
|
|
5,162 |
|
|
|
3,285 |
|
|
|
57.2 |
|
|
|
14,905 |
|
|
|
9,881 |
|
|
|
50.9 |
|
Other |
|
|
2,508 |
|
|
|
3,445 |
|
|
|
(27.2 |
) |
|
|
9,418 |
|
|
|
10,113 |
|
|
|
(6.9 |
) |
Less capitalized expenses |
|
|
(8,804 |
) |
|
|
(7,737 |
) |
|
|
13.8 |
|
|
|
(29,234 |
) |
|
|
(16,539 |
) |
|
|
76.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
153,263 |
|
|
|
144,990 |
|
|
|
5.7 |
% |
|
$ |
449,246 |
|
|
|
430,966 |
|
|
|
4.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and other personnel expense increased $8.3 million, or 5.7%, and $18.3 million, or
4.2%, for the three and nine months ended September 30, 2008, respectively, compared to the same
periods 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 September 30, 2008 and 2007, the
Company accrued $1.2 million and $10.2 million, respectively, for performance-based incentives. For
the nine months ended September 30, 2008 and 2007, the Company accrued $5.7 million and $28.4
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 Synovus, Synovus provided certain administrative services, such as human
resources, legal, security and tax preparation and compliance, to TSYS in exchange for a management
fee, which is included in other operating expenses, to cover TSYS pro rata share of services. With
the spin-off, TSYS began recruiting employees and 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 has increased by
approximately 60 people as these administrative services transition.
Capitalized salaries and personnel expenses increased $1.1 million and $12.7 million for the
three and nine months ended September 30, 2008, respectively, as compared to the same periods 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 September 30, |
|
|
7,772 |
|
|
|
6,774 |
|
|
|
14.7 |
|
QTD Average |
|
|
7,761 |
|
|
|
6,751 |
|
|
|
15.0 |
|
YTD Average |
|
|
7,519 |
|
|
|
6,752 |
|
|
|
11.4 |
|
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.
23
Share-based compensation expenses include the impact of expensing the fair value of stock
options, as well as expenses associated with nonvested shares. For the three months ended September
30, 2008, share-based compensation was $5.6 million, compared to $3.3 million for the same period
in 2007. For the nine months ended September 30, 2008, share-based compensation was $21.3 million,
compared to $9.9 million for the same period in 2007. The increase is attributable to grants
awarded in 2008.
Net Occupancy and Equipment Expense
Summarized below are the major components of net occupancy and equipment expense for the three
and nine months ended September 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
|
% Change |
|
|
2008 |
|
|
2007 |
|
|
% Change |
|
Depreciation and amortization |
|
$ |
28,075 |
|
|
|
26,530 |
|
|
|
5.8 |
% |
|
$ |
86,021 |
|
|
|
81,465 |
|
|
|
5.6 |
% |
Equipment and software rentals |
|
|
22,569 |
|
|
|
18,896 |
|
|
|
19.4 |
|
|
|
64,244 |
|
|
|
62,026 |
|
|
|
3.6 |
|
Repairs and maintenance |
|
|
12,972 |
|
|
|
12,342 |
|
|
|
5.1 |
|
|
|
38,658 |
|
|
|
33,889 |
|
|
|
14.1 |
|
Asset impairments |
|
|
|
|
|
|
538 |
|
|
nm |
|
|
|
|
|
|
|
538 |
|
|
nm |
|
Other |
|
|
11,783 |
|
|
|
10,409 |
|
|
|
13.2 |
|
|
|
34,152 |
|
|
|
27,424 |
|
|
|
24.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
75,399 |
|
|
|
68,715 |
|
|
|
9.7 |
% |
|
$ |
223,075 |
|
|
|
205,342 |
|
|
|
8.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net occupancy and equipment expense increased $6.7 million, or 9.7%, and $17.7 million, or
8.6%, for the three and nine months ended September 30, 2008, respectively, over the same periods
in 2007.
Repairs and maintenance increased for the three and nine months ended September 30, 2008, as
compared to the same periods in 2007, as a result of support for additional software licenses and
equipment.
Spin Related Expenses
Spin related expenses consist of expenses associated with the separation from Synovus. In
July 2007, Synovus Board of Directors appointed a special committee of independent directors to
make a recommendation with respect to whether to distribute Synovus ownership interest in TSYS to
Synovus shareholders. As a result, the TSYS Board of Directors formed a special committee of
independent TSYS directors to consider the terms of any proposed spin-off by Synovus of its
ownership interest in TSYS, including the size of the pre-spin cash dividend. TSYS incurred
expenses associated with advisory and legal services in connection with the spin assessment. As the
spin-off was finalized and completed, TSYS also incurred expenses for the incremental fair value
associated with converting Synovus stock options held by TSYS employees to TSYS options. During the
three and nine months ended September 30, 2008, the Company incurred approximately $1.7 million and
$9.9 million, respectively, 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 and nine
months ended September 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
|
% Change |
|
|
2008 |
|
|
2007 |
|
|
% Change |
|
Third-party data processing services |
|
$ |
10,349 |
|
|
|
9,334 |
|
|
|
10.9 |
|
|
$ |
31,352 |
|
|
|
30,046 |
|
|
|
4.3 |
|
Travel and business development |
|
|
5,256 |
|
|
|
5,907 |
|
|
|
(11.0 |
) |
|
|
18,602 |
|
|
|
18,238 |
|
|
|
2.0 |
|
Supplies and stationery |
|
|
6,439 |
|
|
|
4,729 |
|
|
|
36.2 |
|
|
|
17,780 |
|
|
|
14,821 |
|
|
|
20.0 |
|
Professional advisory services |
|
|
6,017 |
|
|
|
9,310 |
|
|
|
(35.4 |
) |
|
|
16,922 |
|
|
|
21,713 |
|
|
|
(22.1 |
) |
Amortization of conversion costs |
|
|
4,127 |
|
|
|
3,775 |
|
|
|
9.3 |
|
|
|
10,794 |
|
|
|
11,915 |
|
|
|
(9.4 |
) |
Court costs associated with debt collection services |
|
|
5,504 |
|
|
|
2,541 |
|
|
nm |
|
|
|
12,159 |
|
|
|
9,458 |
|
|
|
(28.6 |
) |
Amortization of acquisition intangibles |
|
|
662 |
|
|
|
704 |
|
|
|
(6.0 |
) |
|
|
1,993 |
|
|
|
2,466 |
|
|
|
(19.2 |
) |
Service level quality expenses |
|
|
1,956 |
|
|
|
93 |
|
|
nm |
|
|
|
1,415 |
|
|
|
531 |
|
|
nm |
|
Asset impairments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
620 |
|
|
nm |
|
Terminal deployment costs |
|
|
|
|
|
|
93 |
|
|
nm |
|
|
|
45 |
|
|
|
217 |
|
|
|
(79.3 |
) |
Management fees |
|
|
37 |
|
|
|
2,251 |
|
|
|
(98.3 |
) |
|
|
110 |
|
|
|
6,792 |
|
|
|
(98.4 |
) |
Bad debt (recoveries) expense |
|
|
(420 |
) |
|
|
318 |
|
|
nm |
|
|
|
(1,751 |
) |
|
|
507 |
|
|
nm |
|
Other |
|
|
16,583 |
|
|
|
13,351 |
|
|
|
24.2 |
|
|
|
43,275 |
|
|
|
38,589 |
|
|
|
12.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
56,510 |
|
|
|
52,406 |
|
|
|
7.8 |
|
|
$ |
152,696 |
|
|
|
155,913 |
|
|
|
(2.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
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
service level quality expenses, contractual commitments and bad debt expense. As described in the
Critical Accounting Policies section set forth in Item 7: Managements Discussion and Analysis of
Financial Condition and Results of Operations in the Companys 2007 Form 10-K, managements
evaluation of the adequacy of its transaction processing reserves and allowance for doubtful
accounts is based on a formal analysis which assesses the probability of losses related to
contractual contingencies, processing errors and uncollectible accounts. Increases and decreases in
transaction processing provisions and charges for bad debt expense are reflected in other operating
expenses.
Other operating expenses for the three and nine months ended September 30, 2008 increased $4.1
million, or 7.8%, and decreased $3.2 million, or 2.1%, respectively, as compared to the same
periods in 2007. The decrease in operating expenses is primarily the result of the decrease in
management fees due to the transitioning away from administrative services previously supplied by
Synovus. The increase in the amount of service level quality expenses is associated with changes in
estimates for processing errors and contractual contingencies.
Operating Income
Operating income increased 5.1% and 2.8% for the three and nine months ended September 30,
2008, respectively, over the same periods in 2007. The Companys operating profit margin for the
three and nine months ended September 30, 2008 was 19.2% and 19.4%, respectively, compared to 19.9%
and 20.2% for the same periods last year. TSYS operating margin decreased for the three and nine
months ended September 30, 2008, as compared to the same periods in 2007, as the result of spin
related costs.
Nonoperating Income (Expense)
Interest income for the three months ended September 30, 2008 was $2.6 million, a decrease of
$4.4 million, compared to $7.0 million for the same period in 2007. Interest income for the nine
months ended September 30, 2008 was $6.8 million, a decrease of $11.8 million, compared to $18.6
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 September 30, 2008 was $2.7 million, an increase
of $1.8 million compared to $916,000 for the same period in 2007. Interest expense for the nine
months ended September 30, 2008 was $9.0 million, an increase of $7.5 million compared to $1.5
million 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 September 30, 2008 and 2007, the Company recorded a translation
gain of approximately $1.1 million and $905,000, respectively, related to intercompany loans and
foreign denominated balance sheet accounts. For the nine months ended September 30, 2008 and 2007,
the Company recorded a translation gain of approximately $3.2 million and $744,000, 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 of $180,000 and $420,000 on the Companys
financing for the three and nine months ended September 30, 2008, respectively. The balance of
these financing arrangements at September 30, 2008 was approximately $11.0 million.
25
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 $912,000 and $2.8
million for the three and nine months ended September 30, 2008, respectively, 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
September 30, 2008 was approximately $20.6 million, the majority of which is denominated in Euros.
Income Taxes
TSYS effective income tax rate for the three months ended September 30, 2008 was 35.1%,
compared to 31.1% for the same period in 2007. TSYS effective tax rate for the nine months ended
September 30, 2008 was 35.7%, compared to 34.7% 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 investments. Refer to Note 10 in the Notes to Unaudited Condensed
Consolidated Financial Statements for more information on income taxes.
In the normal course of business, TSYS is subject to examinations from various tax
authorities. These examinations may alter the timing or amount of taxable income or deductions or
the allocation of income among tax jurisdictions.
TSYS continually monitors and evaluates the potential impact of current events and
circumstances on the estimates and assumptions used in the analysis of its income tax positions,
and, accordingly, TSYS effective tax rate may fluctuate in the future.
Equity in Income of Equity Investments
The Company has 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 $2.8 million and $2.0 million for the three months ended September 30, 2008
and 2007, respectively. TSYS share of income from its equity in equity investments was $5.3
million and $3.9 million for the nine months ended September 30, 2008 and 2007, respectively.
Net Income
Net income for the three months ended September 30, 2008 decreased 6.9%, or $4.7 million, to
$64.1 million, or basic and diluted earnings per share of $0.33, compared to $68.8 million, or
basic and diluted earnings per share of $0.35, for the same period in 2007. Net income for the nine
months ended September 30, 2008 decreased 4.2%, or $8.0 million, to $183.8 million, or basic and
diluted earnings per share of $0.94 and $0.93, respectively, compared to $191.8 million, or basic
and diluted earnings per share of $0.98 and $0.97, respectively, for the same period in 2007.
Net Profit Margin
The Companys net profit margin for the three months ended September 30, 2008 was 12.8%,
compared to 15.0% for the same period last year. The Companys net profit margin for the nine
months ended September 30, 2008 was 12.7%, compared to 14.2% for the same period last year. TSYS
profit margin is impacted by the consolidation of majority-owned subsidiaries. The Company
recognizes only its share of net profits from these entities, while consolidating all their
revenues, which has the impact of lowering overall net profit margins. TSYS net profit margin
decreased for the quarter as the result of increased interest expense due to long-term debt and
decreased for the year as the result of spin related costs.
Operating Segments
North American Services
North American Services segment provides electronic payment processing and related services,
including debt collection services, to clients primarily based in North America.
For the third quarter of 2008, total revenues for North American Services segment were $338.3
million, an increase of 7.5%, compared to $314.8 million for the same period last year.
Year-to-date total revenues for North American Services segment were
26
$989.1 million, an increase of
4.4%, compared to $946.9 million for the same period last year. The increase is attributable to the
increase in reimbursable items, primarily court costs, new clients and internal growth of
existing clients, partially offset by the decline in accounts on file and transaction volumes.
At the end of September 2008, North American Services had 322.6 million accounts on file, a
decrease of 3.5%, compared to 334.1 million accounts on file last year. For the third quarter of
2008, North American Services processed 1.7 billion transactions, a decrease of 13.9%, compared to
2.0 billion for the same period last year. Excluding the impact of deconverted clients in 2007,
transactions processed increased 4.0%. Through the first nine months of 2008, North American
Services processed 5.0 billion transactions, a decrease of 28.0%, compared to 6.9 billion for the
same period last year. Excluding the impact of deconverted clients in 2007, transactions processed
increased 6.3%. This segment has two major customers.
For the third quarter of 2008, North American Services segments operating income was $63.8
million, an increase of 2.2%, compared to $62.4 million for the same period last year. For the nine
months ended September 30, 2008, North American Services segments operating income was $204.0
million, an increase of 4.9%, compared to $194.5 million for the same period last year.
Global Services
Global Services segment provides electronic payment processing and related services to clients
primarily based outside the North America region.
For the third quarter of 2008, total revenues for Global Services segment were $87.7 million,
an increase of 31.6%, compared to $66.7 million for the same period last year. Year-to-date total
revenues for Global Services segment were $236.8 million, an increase of 29.9%, compared to $182.2
million for the same period last year. The increase is driven by growth in accounts and
transactions processed.
At the end of September 2008, Global Services had 32.9 million accounts on file, an increase
of 43.2%, compared to 22.9 million accounts on file last year. For the third quarter of 2008,
Global Services processed 272.1 million transactions, an increase of 28.3%, compared to 212.0
million for the same period last year. Through the first nine months of 2008, Global Services
processed 754.0 million transactions, an increase of 22.6%, compared to 615.2 million for the same
period last year. This segment has two major customers.
For the third quarter of 2008, Global Services segments operating income was $16.8 million,
an increase of 45.1%, compared to $11.5 million for the same period last year. For the nine months
ended September 30, 2008, Global Services segments operating income was $35.9 million, an increase
of 9.9%, compared to $32.7 million for the same period last year. The increase in operating income
for the nine month period is the result of new processing and related business.
Merchant Services
Merchant Services segment provides merchant processing and related services to clients
primarily based in the United States.
For the third quarter of 2008, total revenues for Merchant Services segment were $74.3
million, a decrease of 2.3%, compared to $76.1 million for the same period last year. Year-to-date
total revenues for Merchant Services segment were $219.4 million, an increase of 0.6%, compared to
$218.2 million for the same period last year. During the third quarter of 2008, Merchant Services
processed 1.29 billion Point-of-Sale transactions, an increase of 2%, compared to 1.26 billion for
the same period last year. Through the first nine months of 2008, Merchant Services processed 3.82
billion Point-of-Sale transactions, an increase of 3%, compared to 3.72 billion for the same period
last year. Merchant Services segment continues to be impacted by price compression and
deconversions. This segment has one major customer.
For the third quarter of 2008, Merchant Services segments operating income was $17.1 million,
a decrease of 9.8%, compared to $19.0 million. For the nine months ended September 30, 2008,
Merchant Services segments operating income was $50.3 million, an increase of 6.2%, compared to
$47.3 million for the same period last year.
Profit Margins and Reimbursable Items
Management believes that reimbursable items distort operating and net profit margins as
defined by generally accepted accounting principles (GAAP). Management evaluates the Companys
operating performance based upon operating and net profit margins excluding reimbursable items, a
non-GAAP measure. The non-GAAP financial measure presented by TSYS is utilized by
27
management to
better understand and assess TSYS operating results and financial performance. TSYS also uses this
non-GAAP
financial measure to evaluate and assess TSYS financial performance against budget. TSYS
believes that this non-GAAP financial measure is important to enable investors to understand and
evaluate its ongoing operating results.
TSYS believes that the non-GAAP financial measure is a representative measure of comparative
financial performance that reflects the economic substance of TSYS current and ongoing business
operations. Although non-GAAP financial measures are often used to measure TSYS operating results
and assess its financial performance, they are not necessarily comparable to similarly titled
captions of other companies due to potential inconsistencies in the method of calculation.
TSYS believes that its use of this non-GAAP financial measure provides investors with the same
key financial performance indicators that are utilized by management to assess TSYS operating
results, to evaluate the business and to make operational decisions on a prospective, going-forward
basis. Hence, management provides disclosure of non-GAAP financial measures in order to allow
shareholders and investors an opportunity to see TSYS as viewed by management, to assess TSYS with
some of the same tools that management utilizes internally and to be able to compare such
information with prior periods.
Management believes that operating and net profit margins excluding reimbursable items are
more useful because reimbursable items do not impact profitability as the Company receives
reimbursement for expenses incurred on behalf of its clients. TSYS believes that the presentation
of GAAP financial measures alone would not provide its shareholders and investors with the ability
to appropriately analyze its ongoing operational results, and therefore expected future results.
TSYS therefore believes that inclusion of this non-GAAP financial measure provides investors with
more information to help them better understand its financial statements just as management
utilizes these non-GAAP financial measures to better understand the business, manage its budget and
allocate its resources.
Below is the reconciliation between reported margins and adjusted margins excluding
reimbursable items for the three and nine months ended September 30, 2008 and 2007, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Operating income |
|
$ |
95,908 |
|
|
|
91,219 |
|
|
$ |
280,330 |
|
|
|
272,814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
64,074 |
|
|
|
68,802 |
|
|
$ |
183,772 |
|
|
|
191,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
500,392 |
|
|
|
457,565 |
|
|
$ |
1,445,228 |
|
|
|
1,347,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin (as reported) |
|
|
19.2 |
% |
|
|
19.9 |
% |
|
|
19.4 |
% |
|
|
20.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net profit margin (as reported) |
|
|
12.8 |
% |
|
|
15.0 |
% |
|
|
12.7 |
% |
|
|
14.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue before reimbursable items |
|
$ |
382,799 |
|
|
|
359,022 |
|
|
$ |
1,115,216 |
|
|
|
1,066,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating margin |
|
|
25.1 |
% |
|
|
25.4 |
% |
|
|
25.1 |
% |
|
|
25.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net profit margin |
|
|
16.7 |
% |
|
|
19.2 |
% |
|
|
16.5 |
% |
|
|
18.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected Outlook for 2008
TSYS expects its 2008 net income to increase between 5-7% as compared to 2007, based on the
following assumptions: (1) expenses associated with the spin-off, net of tax, will be approximately
$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 6% to 8% 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
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.
28
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
183,772 |
|
|
|
191,763 |
|
Depreciation and amortization |
|
|
120,163 |
|
|
|
114,213 |
|
Dividends from equity investments |
|
|
6,421 |
|
|
|
2,994 |
|
Other noncash items and charges, net |
|
|
5,959 |
|
|
|
(345 |
) |
Net change in current and long-term assets and current and long-term liabilities |
|
|
(36,915 |
) |
|
|
(61,147 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
279,400 |
|
|
|
247,478 |
|
|
|
|
|
|
|
|
TSYS main source of funds is derived from operating activities, specifically net income.
During the nine months ended September 30, 2008, the Company generated $279.4 million in cash from
operating activities compared with $247.5 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 in the current period compared to a decrease in the prior year period.
Net change in current and long-term assets and current and long-term liabilities include
accounts receivable, prepaid expenses, other current assets and other assets, accounts payable,
accrued salaries and employee benefits, other current liabilities and other liabilities. The change
in accounts receivable at September 30, 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.
Dividends Received from Equity Investments
During the first nine months of 2008, the Company received a dividend payment of $3.2 million
from TSYS de Mexico, compared to $3.0 million for the same period last year. The Company also
received a dividend payment of $3.2 million from CUP Data, its joint venture with China UnionPay Co., Ltd., during the first nine months of 2008.
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
Purchases of property and equipment, net |
|
$ |
(35,502 |
) |
|
|
(36,420 |
) |
Additions to licensed computer software from vendors |
|
|
(18,614 |
) |
|
|
(8,194 |
) |
Additions to internally developed computer software |
|
|
(14,976 |
) |
|
|
(11,749 |
) |
Cash used in acquisitions and equity investments, net of cash acquired |
|
|
(1,459 |
) |
|
|
(472 |
) |
Additions to contract acquisition costs |
|
|
(34,612 |
) |
|
|
(20,878 |
) |
Other |
|
|
(343 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
$ |
(105,506 |
) |
|
|
(77,713 |
) |
|
|
|
|
|
|
|
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 $105.5
million in cash for investing activities for the nine months ended September 30, 2008, compared to
$77.7 million for the same period in 2007. The major uses of cash for investing activities in 2008
was for the addition of equipment and 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 $6.2 million for the three
months ended September 30, 2008, bringing the total for 2008 to $34.6 million compared to $20.9
million for the nine months ended September 30, 2007. The Company had cash payments for processing
rights of approximately $3.3 million and $15.7 million during the three and nine months ended
September 30, 2008, respectively, compared to $6.9 million and $12.8 million for the same periods
last year.
Conversion cost additions were $18.9 million and $8.1 million for the nine months ended
September 30, 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.
29
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
Dividends paid on common stock |
|
$ |
(41,358 |
) |
|
|
(41,425 |
) |
Proceeds from borrowings |
|
|
2,506 |
|
|
|
73,968 |
|
Repurchase of common stock |
|
|
(23,594 |
) |
|
|
|
|
Principal payments on long-term debt borrowings and capital lease obligations |
|
|
(11,501 |
) |
|
|
(3,893 |
) |
Other |
|
|
107 |
|
|
|
9,280 |
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
$ |
(73,840 |
) |
|
|
37,930 |
|
|
|
|
|
|
|
|
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 nine months ended September 30, 2008 was $73.8 million mainly as a result of the
payment of dividends and repurchase of TSYS common stock. Net cash provided by financing activities
for the nine months ended September 30, 2007 was $37.9 million mainly as a result of the proceeds
from borrowings.
Borrowings
In June 2008, TSYS Managed Services EMEA, Ltd. borrowed £1.3 million, or approximately $2.5
million, through a short-term note. The interest rate on the note is the London Interbank Offered
Rate (LIBOR) plus 2%, with interest payable quarterly. The term of the note is one year.
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 nine months ended September 30, 2008, TSYS purchased 1 million shares of TSYS
common stock. The Company has approximately 7,898,000 shares remaining that could be repurchased
under the stock repurchase plan.
Dividends
Dividends on common stock of $13.6 million were paid during the three months ended September
30, 2008, bringing the total for 2008 to $41.4 million compared to $41.4 million paid during the
nine months ended September 30, 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.
30
Working Capital
TSYS may seek additional external sources of capital in the future. The form of any such
financing will vary depending upon prevailing market and other conditions and may include
short-term or long-term borrowings from financial institutions or the issuance of additional equity
and/or debt securities such as industrial revenue bonds. However, there can be no assurance that
funds will be available on terms acceptable to TSYS. Management expects that TSYS will continue to
be able to fund a significant portion of its capital expenditure needs through internally generated
cash in the future, as evidenced by TSYS current ratio of 2.3:1. At September 30, 2008, TSYS had
working capital of $388.6 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.
In June 2008, the Financial Accounting Standards Board (FASB) issued a FASB Staff Position
EITF 03-6-1 (FSP EITF 03-6-1), Determining Whether Instruments Granted in Share-Based Payment
Transactions are Participating Securities. FSP EITF 03-6-1 holds that unvested share-based payment
awards that contain nonforfeitable rights to dividends or dividend equivalents are participating
securities as defined in Emerging Issues Task Force (EITF) 03-6 (EITF 03-6), Participating
Securities and the Two-Class Method under FASB Statement No. 128, Earnings per Share, and
therefore should be included in computing earnings per share (EPS) using the two-class method.
The two-class method is an earnings allocation method for computing EPS when an entitys
capital structure includes two or more classes of common stock or common stock and participating
securities. It determines EPS based on dividends declared on common stock and participating
securities and participation rights of participating securities in any undistributed earnings. FSP
EITF 03-6-1 is effective for reporting periods beginning after December 15, 2008, and it requires
restatement of prior periods. The Company is in the process of evaluating the impact of adopting
FSP EITF 03-6-1, and the potential impact of adopting FSP EITF 03-6-1 is not yet determinable, but
it is not expected to be material.
In April 2008, the FASB issued FASB Staff Position FAS 142-3 (FSP FAS 142-3), Determination
of the Useful Life of Intangible Assets. The guidance in FSP FAS 142-3 is to clarify the useful
life of a recognized intangible asset and the period of expected cash flows used to measure the
fair value of the asset. Historical experience (adjusted for entity-specific factors) should be
considered in developing renewal or extension assumptions used to determine the useful life of a
recognized intangible asset. In the absence of historical experience, market participant
assumptions should be used consistent with the highest and best use of the asset (adjusted for
entity-specific factors). FSP FAS 142-3 is effective for reporting periods beginning after
December 15, 2008. The Company is in the process of evaluating the impact of adopting FSP FAS
142-3, and the potential impact of adopting FSP FAS 142-3 is not yet determinable, but it is not
expected to be material.
In December 2007, the FASB issued an Emerging Issues Task Force No. 07-1(EITF 07-1),
Collaborative Arrangements. The guidance in EITF 07-1 is to define collaborative arrangements and
to establish reporting requirements for transactions between participants in a collaborative
arrangement and between participants in the arrangement and third parties. A collaborative
arrangement is a contractual arrangement that involves a joint operating activity and involves two
or more parties who are both (a) active participants in the activity and (b) exposed to significant
risks and rewards dependent on the commercial success of the activity. EITF 07-1 is effective for
reporting periods beginning after December 15, 2008, and it requires restatement of prior periods
for all collaborative arrangements existing as of the effective date. The Company is in the process
of evaluating the impact of adopting EITF 07-1, and the potential impact of adopting EITF 07-1 is
not yet determinable, but it is not expected to be material.
31
Forward-Looking Statements
Certain statements contained in this filing which are not statements of historical fact constitute
forward-looking statements within the meaning of the Private Securities Litigation Reform Act (the
Act). These forward-looking statements include, among others: (i) TSYS expectation that it will
continue to provide commercial card processing services for the Wachovia commercial card portfolio
to be acquired by Wells Fargo; (ii) TSYS expectation that the loss of either, or both, of
Washington Mutual Bank and Wachovia as processing clients will not have a material adverse affect
on TSYS; (iii) TSYS plans to continue to expand its service offerings internationally and
expectation that international revenues will continue to grow; (iv) TSYS expectation that it will
maintain the card processing functions of Capital One for at least five years; (v) 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;
(vi) TSYS belief that Targets credit facility with Chase will not impact TSYS processing
relationship with Target; (vii) TSYS expectation with respect to spin-related costs; (viii) TSYS
expectation that it will be able to fund a significant portion of its capital expenditure needs
through internally generated cash in the future; (ix) TSYS expected net income growth for 2008;
(x) TSYS belief with respect to lawsuits, claims and other complaints; (xi) the expected financial
impact of recent accounting pronouncements; (xii) 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
6% to 8% 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
these factors are beyond TSYS ability to control or predict. These factors include, but are not
limited to:
|
|
|
revenues that are lower than anticipated; |
|
|
|
|
expenses associated with the spin-off are higher than expected; |
|
|
|
|
movements in LIBOR are greater than expected and draws on the revolving credit facility
are greater than expected; |
|
|
|
|
TSYS incurs expenses associated with the signing of a significant client; |
|
|
|
|
internal growth rates for TSYS existing clients are lower than anticipated; |
|
|
|
|
TSYS does not convert and deconvert clients portfolios as scheduled; |
|
|
|
|
adverse developments with respect to foreign currency exchange rates; |
|
|
|
|
adverse developments with respect to entering into contracts with new clients and
retaining current clients; |
|
|
|
|
continued consolidation and turmoil in the financial services industry, including the
merger of TSYS clients with entities that are not TSYS processing clients, the sale of
portfolios by TSYS clients to entities that are not TSYS processing clients and the seizure
by federal banking regulators of TSYS clients; |
|
|
|
|
TSYS is unable to control expenses and increase market share, both domestically and
internationally; |
|
|
|
|
adverse developments with respect to the credit card industry in general, including a
decline in the use of cards as a payment mechanism; |
|
|
|
|
TSYS is unable to successfully manage any impact from slowing economic conditions or
consumer spending; |
|
|
|
|
the impact of potential and completed acquisitions, including the costs associated
therewith and their being more difficult to integrate than anticipated; |
|
|
|
|
the costs and effects of litigation, investigations or similar matters or adverse facts
and developments relating thereto; |
|
|
|
|
the impact of the application of and/or changes in accounting principles; |
|
|
|
|
TSYS inability to timely, successfully and cost-effectively improve and implement
processing systems to provide new products, increased functionality and increased
efficiencies; |
32
|
|
|
TSYS inability to anticipate and respond to technological changes, particularly with
respect to e-commerce; |
|
|
|
|
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; |
|
|
|
|
successfully managing the potential both for patent protection and patent liability in
the context of rapidly developing legal framework for expansive patent protection; |
|
|
|
|
no material breach of security of any of our systems; |
|
|
|
|
overall market conditions; |
|
|
|
|
the loss of a major supplier; |
|
|
|
|
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 |
|
|
|
|
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.
33
TOTAL SYSTEM SERVICES, INC.
Item 3 Quantitative and Qualitative Disclosures About Market Risk
Foreign Exchange Risk
The Company is exposed to foreign exchange risk because it has assets, liabilities, revenues
and expenses denominated in foreign currencies other than the U.S. dollar. These currencies are
translated into U.S. dollars at current exchange rates, except for revenues, costs and expenses and
net income, which are translated at the average exchange rate for each reporting period. Net
exchange gains or losses resulting from the translation of assets and liabilities of foreign
operations, net of tax, are accumulated in a separate section of shareholders equity entitled
accumulated other comprehensive income, net. The following represents the amount of other
comprehensive (loss) gain for the three and nine months ended September 30, 2008 and 2007,
respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
(in millions) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Other comprehensive (loss) gain |
|
$ |
(7.9 |
) |
|
|
2.3 |
|
|
$ |
(3.1 |
) |
|
|
4.9 |
|
Currently, the Company does not use financial instruments to hedge exposure to exchange rate
changes.
The following table presents the carrying value of the net assets of our foreign operations in
U.S. dollars at September 30, 2008:
|
|
|
|
|
(in millions) |
|
September 30, 2008 |
Europe |
|
$ |
150.5 |
|
China |
|
|
69.0 |
|
Mexico |
|
|
7.1 |
|
Japan |
|
|
3.4 |
|
Canada |
|
|
0.9 |
|
Other |
|
|
16.0 |
|
TSYS records foreign currency translation adjustments associated with other balance sheet
accounts. The Company maintains several cash accounts denominated in foreign currencies, primarily
in Euros and BPS. As TSYS translates the foreign-denominated cash balances into U.S. dollars, the
translated cash balance is adjusted upward or downward depending upon the foreign currency exchange
movements. The upward or downward adjustment is recorded as a gain or loss on foreign currency
translation in the statements of income. As those cash accounts have increased, the upward or
downward adjustments have increased. TSYS recorded a translation gain of approximately $912,000 and
$2.8 million for the three and nine months ended September 30, 2008, respectively, relating to the
translation of cash and other balance sheet accounts. The balance of the foreign-denominated cash
accounts subject to risk of translation gains or losses at September 30, 2008 was approximately
$20.6 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 of $180,000 and $420,000 on the financing with foreign
operations during the three and nine months ended September 30, 2008, respectively. The balance of
the financing arrangements at September 30, 2008 was approximately $11.0 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) |
|
|
|
September 30, 2008 |
|
Asset |
|
Cash |
|
$ |
20.6 |
|
Liability |
|
Intercompany financing arrangements |
|
|
(11.0 |
) |
|
|
|
|
|
|
|
|
Net account balances |
|
$ |
9.6 |
|
|
|
|
|
|
|
34
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 $9.6 million at September 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Basis Point Change |
|
|
Increase in basis point of |
|
Decrease in basis point of |
(in thousands) |
|
100 |
|
500 |
|
1,000 |
|
100 |
|
500 |
|
1,000 |
Effect on income before income taxes |
|
$ |
96 |
|
|
|
479 |
|
|
|
958 |
|
|
|
(96 |
) |
|
|
(479 |
) |
|
|
(958 |
) |
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 EMEA, Ltd. (TSYS Managed Services),
both TSYS and Merchants agreed to provide long-term financing arrangements to TSYS Managed Services
to fund future growth and expansion. At the end of September 2008, the balance of the loan from
Merchants was approximately £2.0 million, or approximately $3.7 million, payable in total in five
years, at an interest rate of the LIBOR plus 2%, with interest payable quarterly.
In June 2008, TSYS Managed Services borrowed £1.3 million, or approximately $2.5 million,
through a short-term note. At the end of September 2008, the balance of the loan was approximately
£1.3 million, or approximately $2.3 million. The interest rate on the note is the London Interbank
Offered Rate (LIBOR) plus 2%, with interest payable quarterly. The term of the note is one year.
35
TOTAL SYSTEM SERVICES, INC.
Item 4 Controls and Procedures
We have evaluated the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this quarterly report as required by Rule 13a-15
of the Securities Exchange Act of 1934, as amended (Exchange Act). This evaluation was carried
out under the supervision and with the participation of our management, including our chief
executive officer and chief financial officer. Based on this evaluation, the chief executive
officer and chief financial officer concluded that as of September 30, 2008, TSYS disclosure
controls and procedures were designed and effective to ensure that the information required to be
disclosed by TSYS in reports that it files under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SECs rules and forms and also
designed to ensure that the information required to be disclosed in the reports that TSYS files or
submits under the Exchange Act is accumulated and communicated to management, as appropriate to
allow timely decisions regarding required disclosure. Other than as set forth in the paragraph
below, no change in TSYS internal control over financial reporting occurred during the period
covered by this report that materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
The Companys TSYS Acquiring subsidiary converted to the Companys enterprise resource
planning system. This new system was implemented for TSYS Acquiring in August 2008. The
implementation is expected to materially impact the Companys internal control over financial
reporting by providing more timely financial and accounting information, reducing manual processes
and providing a flexible architecture to easily interface with other systems to reduce data entry.
36
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 September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
July 2008 |
|
|
|
|
|
$ |
|
|
|
|
2,102 |
|
|
|
7,898 |
|
August 2008 |
|
|
|
|
|
|
|
|
|
|
2,102 |
|
|
|
7,898 |
|
September 2008 |
|
|
|
|
|
|
|
|
|
|
2,102 |
|
|
|
7,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
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 |
38
TOTAL SYSTEM SERVICES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
TOTAL SYSTEM SERVICES, INC.
|
|
Date: November 5, 2008 |
by: |
/s/ Philip W. Tomlinson
|
|
|
|
Philip W. Tomlinson |
|
|
|
Chairman of the Board and
Chief Executive Officer |
|
|
|
|
|
Date: November 5, 2008 |
by: |
/s/ James B. Lipham
|
|
|
|
James B. Lipham |
|
|
|
Senior Executive Vice President
and Chief Financial Officer |
|
39
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 |
40