TOTAL SYSTEM SERVICES, INC.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: September 30, 2006
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from To
Commission file number 1-10254
Total System Services, Inc.
www.tsys.com
(Exact name of registrant as specified in its charter)
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Georgia
(State or other jurisdiction of incorporation or organization)
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58-1493818
(I.R.S. Employer Identification No.) |
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1600 First Avenue, Post Office
Box 1755, Columbus, Georgia
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31902 |
(Address of principal executive offices)
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(Zip Code) |
(706) 649-2262
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.
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CLASS
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OUTSTANDING AS OF: November 6, 2006 |
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Common Stock, $0.10 par value
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196,936,671 shares |
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 information) |
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2006 |
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2005 |
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Assets |
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Current assets: |
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|
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Cash and cash equivalents (includes $160.1
million and $152.6 million on deposit with a
related party at 2006 and 2005, respectively) |
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$ |
255,722 |
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|
237,569 |
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Restricted cash (includes $5.5 million and
$4.1 million on deposit with a related party
at 2006 and 2005, respectively) |
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38,069 |
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29,688 |
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Accounts receivable, net of allowance for
doubtful accounts and billing adjustments of
$11.5 million and $12.6 million at 2006 and
2005, respectively (includes $0.4 million and
$0.1 million due from a related party at 2006
and 2005, respectively) |
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233,359 |
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184,532 |
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Deferred income tax assets |
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20,147 |
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15,264 |
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Prepaid expenses and other current assets |
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45,365 |
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45,236 |
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Total current assets |
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592,662 |
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512,289 |
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Property and equipment, net of accumulated
depreciation and amortization of $218.4 million
and $188.1 million at 2006 and 2005,
respectively |
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266,993 |
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267,979 |
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Computer software, net of accumulated
amortization of $378.6 million and $317.1
million at 2006 and 2005, respectively |
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230,715 |
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267,988 |
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Contract acquisition costs, net |
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172,988 |
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163,861 |
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Goodwill, net |
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143,595 |
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112,865 |
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Equity investments |
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60,410 |
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42,731 |
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Other intangible assets, net of accumulated
amortization of $8.5 million and $5.4 million at
2006 and 2005, respectively |
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26,349 |
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13,580 |
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Other assets |
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26,245 |
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29,604 |
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Total assets |
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$ |
1,519,957 |
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1,410,897 |
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See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
- 3 -
TOTAL SYSTEM SERVICES, INC.
Condensed Consolidated Balance Sheets (continued)
(Unaudited)
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September 30, |
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December 31, |
(in thousands, except per share information) |
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2006 |
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2005 |
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Liabilities and Shareholders Equity |
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Current liabilities: |
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Accounts
payable (includes $0.1 million and $0.1 million payable to related parties at 2006 and 2005, respectively) |
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$ |
44,673 |
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29,464 |
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Accrued salaries and employee benefits |
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65,451 |
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84,348 |
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Current portion of obligations under capital leases |
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2,337 |
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2,078 |
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Other current liabilities (includes $11.2 million and $9.9
million payable to related parties at 2006 and 2005,
respectively) |
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163,557 |
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161,122 |
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Total current liabilities |
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276,018 |
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277,012 |
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Obligations under capital leases, excluding current portion |
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1,740 |
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3,555 |
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Deferred income tax liabilities |
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70,944 |
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89,478 |
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Other long-term liabilities |
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30,636 |
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24,398 |
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Total liabilities |
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379,338 |
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394,443 |
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Minority interests in consolidated subsidiary |
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4,114 |
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3,682 |
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Shareholders equity: |
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Common stock $0.10 par value. Authorized 600,000 shares;
198,401 and 197,975 issued at 2006 and 2005, respectively;
196,653 and 197,283 outstanding at 2006 and 2005,
respectively |
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19,840 |
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19,797 |
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Additional paid-in capital |
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62,634 |
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50,666 |
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Accumulated other comprehensive income, net |
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16,507 |
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5,685 |
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Treasury stock (1,748 shares at 2006 and 692 shares at 2005) |
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(34,601 |
) |
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(12,841 |
) |
Retained earnings |
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1,072,125 |
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949,465 |
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Total shareholders equity |
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1,136,505 |
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1,012,772 |
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Total liabilities and shareholders equity |
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$ |
1,519,957 |
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1,410,897 |
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See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
- 4 -
TOTAL SYSTEM SERVICES, INC.
Condensed Consolidated Statements of Income
(Unaudited)
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Three months ended |
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September 30, |
(in thousands, except per share information) |
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2006 |
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2005 |
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Revenues: |
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Electronic payment processing services (includes $1.2 million and
$1.3 million from related parties for 2006 and 2005, respectively) |
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$ |
232,171 |
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224,394 |
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Merchant acquiring services |
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65,548 |
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74,207 |
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Other services (includes $2.0 million and $1.6 million from
related parties for 2006 and 2005, respectively) |
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44,619 |
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43,499 |
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Revenues before reimbursable items |
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342,338 |
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342,100 |
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Reimbursable items (includes $0.4 million and $0.4 million from
related parties for 2006 and 2005, respectively) |
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99,477 |
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79,869 |
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Total revenues |
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441,815 |
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421,969 |
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Expenses: |
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Salaries and other personnel expense |
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139,182 |
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121,389 |
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Net occupancy and equipment expense |
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75,811 |
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|
77,134 |
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Other operating expenses (includes $2.0 million and $2.2 million
to related parties for 2006 and 2005, respectively) |
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55,088 |
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71,245 |
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Expenses before reimbursable items |
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270,081 |
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269,768 |
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Reimbursable items |
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|
99,477 |
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|
79,869 |
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Total expenses |
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369,558 |
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349,637 |
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Operating income |
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|
72,257 |
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|
|
72,332 |
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Nonoperating income (expense): |
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Interest income (includes $1.7 million and $867 from related
parties for 2006 and 2005, respectively) |
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3,363 |
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1,592 |
|
Interest expense |
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(235 |
) |
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(84 |
) |
Gain on foreign currency, net |
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|
282 |
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|
66 |
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Total nonoperating income |
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3,410 |
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1,574 |
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Income before income taxes, minority interest and equity in income
of equity investments |
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|
75,667 |
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|
|
73,906 |
|
Income taxes |
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|
22,380 |
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|
26,777 |
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|
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Income before minority interest and equity in income of equity
investments |
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|
53,287 |
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|
47,129 |
|
Minority interests in consolidated subsidiaries net income |
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|
(183 |
) |
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|
(64 |
) |
Equity in income of equity investments |
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|
1,202 |
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|
991 |
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Net income |
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$ |
54,306 |
|
|
|
48,056 |
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Basic earnings per share |
|
$ |
0.28 |
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|
|
0.24 |
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Diluted earnings per share |
|
$ |
0.28 |
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|
0.24 |
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|
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|
Weighted average common shares outstanding |
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|
196,500 |
|
|
|
197,198 |
|
Increase due to assumed issuance of shares related to common
equivalent shares |
|
|
331 |
|
|
|
185 |
|
|
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|
Weighted average common and common equivalent shares outstanding |
|
|
196,831 |
|
|
|
197,383 |
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|
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
- 5 -
TOTAL SYSTEM SERVICES, INC.
Condensed Consolidated Statements of Income
(Unaudited)
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Nine months ended |
|
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September 30, |
(in thousands, except per share information) |
|
2006 |
|
2005 |
|
Revenues: |
|
|
|
|
|
|
|
|
Electronic payment processing services (includes $3.7 million and
$3.7 million from related parties for 2006 and 2005, respectively) |
|
$ |
685,532 |
|
|
|
646,199 |
|
Merchant acquiring services (includes $2.4 million from related
parties for 2005) |
|
|
195,318 |
|
|
|
170,008 |
|
Other services (includes $5.7 million and $4.7 million from
related parties for 2006 and 2005, respectively) |
|
|
133,831 |
|
|
|
137,337 |
|
|
|
|
Revenues before reimbursable items |
|
|
1,014,681 |
|
|
|
953,544 |
|
Reimbursable items (includes $1.4 million and $2.6 million from
related parties for 2006 and 2005, respectively) |
|
|
268,589 |
|
|
|
228,652 |
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|
|
|
Total revenues |
|
|
1,283,270 |
|
|
|
1,182,196 |
|
|
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|
Expenses: |
|
|
|
|
|
|
|
|
Salaries and other personnel expense |
|
|
380,945 |
|
|
|
334,341 |
|
Net occupancy and equipment expense |
|
|
226,864 |
|
|
|
212,770 |
|
Other operating expenses (includes $7.2 million and $6.7 million
to related parties for 2006 and 2005, respectively) |
|
|
178,027 |
|
|
|
191,449 |
|
|
|
|
Expenses before reimbursable items |
|
|
785,836 |
|
|
|
738,560 |
|
Reimbursable items |
|
|
268,589 |
|
|
|
228,652 |
|
|
|
|
Total expenses |
|
|
1,054,425 |
|
|
|
967,212 |
|
|
|
|
Operating income |
|
|
228,845 |
|
|
|
214,984 |
|
|
|
|
Nonoperating income (expense): |
|
|
|
|
|
|
|
|
Interest income (includes $4.9 million and $1.7 million from
related parties for 2006 and 2005, respectively) |
|
|
9,297 |
|
|
|
3,889 |
|
Interest expense |
|
|
(364 |
) |
|
|
(259 |
) |
Gain (loss) on foreign currency, net |
|
|
195 |
|
|
|
(761 |
) |
|
|
|
Total nonoperating income |
|
|
9,128 |
|
|
|
2,869 |
|
|
|
|
Income before income taxes, minority interest and equity in income
of equity investments |
|
|
237,973 |
|
|
|
217,853 |
|
Income taxes |
|
|
78,492 |
|
|
|
78,186 |
|
|
|
|
Income before minority interest and equity in income of equity
investments |
|
|
159,481 |
|
|
|
139,667 |
|
Minority interests in consolidated subsidiaries net income |
|
|
(448 |
) |
|
|
(176 |
) |
Equity in income of equity investments |
|
|
3,073 |
|
|
|
5,331 |
|
|
|
|
Net income |
|
$ |
162,106 |
|
|
|
144,822 |
|
|
|
|
Basic earnings per share |
|
$ |
0.82 |
|
|
|
0.73 |
|
|
|
|
Diluted earnings per share |
|
$ |
0.82 |
|
|
|
0.73 |
|
|
|
|
Weighted average common shares outstanding |
|
|
196,891 |
|
|
|
197,100 |
|
Increase due to assumed issuance of shares related to common
equivalent shares |
|
|
302 |
|
|
|
224 |
|
|
|
|
Weighted average common and common equivalent shares outstanding |
|
|
197,193 |
|
|
|
197,324 |
|
|
|
|
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
- 6 -
TOTAL SYSTEM SERVICES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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|
Nine months ended |
|
|
September 30, |
(in thousands) |
|
2006 |
|
2005 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
162,106 |
|
|
|
144,822 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
Minority interests in consolidated subsidiaries net income |
|
|
448 |
|
|
|
176 |
|
(Gain) loss on foreign currency, net |
|
|
(195 |
) |
|
|
761 |
|
Equity in income of equity investments |
|
|
(3,073 |
) |
|
|
(5,331 |
) |
Depreciation and amortization |
|
|
130,306 |
|
|
|
108,698 |
|
Share-based compensation |
|
|
6,574 |
|
|
|
849 |
|
Impairment of developed software |
|
|
|
|
|
|
3,619 |
|
Provisions for bad debt expenses and billing adjustments |
|
|
948 |
|
|
|
5,451 |
|
Charges for transaction processing provisions |
|
|
7,914 |
|
|
|
7,634 |
|
Deferred income tax (benefit) expense |
|
|
(24,150 |
) |
|
|
6,574 |
|
Loss on disposal of equipment, net |
|
|
105 |
|
|
|
1,802 |
|
(Increase) decrease in: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(40,765 |
) |
|
|
(40,072 |
) |
Prepaid expenses, other current assets and other long-term
assets |
|
|
8,923 |
|
|
|
6,962 |
|
Increase (decrease) in: |
|
|
|
|
|
|
|
|
Accounts payable |
|
|
14,323 |
|
|
|
(59,241 |
) |
Accrued salaries and employee benefits |
|
|
(18,936 |
) |
|
|
4,408 |
|
Other current liabilities and other long-term liabilities |
|
|
(16,495 |
) |
|
|
(63,175 |
) |
|
|
|
Net cash provided by operating activities |
|
|
228,033 |
|
|
|
123,937 |
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases of property and equipment, net |
|
|
(21,203 |
) |
|
|
(33,540 |
) |
Additions to licensed computer software from vendors |
|
|
(9,650 |
) |
|
|
(10,049 |
) |
Additions to internally developed computer software |
|
|
(13,699 |
) |
|
|
(17,435 |
) |
Cash acquired in acquisitions |
|
|
4,341 |
|
|
|
38,798 |
|
Cash used in acquisitions |
|
|
(74,919 |
) |
|
|
(95,796 |
) |
Dividends received from equity investments |
|
|
2,371 |
|
|
|
1,658 |
|
Additions to contract acquisition costs |
|
|
(39,578 |
) |
|
|
(11,756 |
) |
|
|
|
Net cash used in investing activities |
|
|
(152,337 |
) |
|
|
(128,120 |
) |
|
|
|
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
- 7 -
TOTAL SYSTEM SERVICES, INC.
Condensed Consolidated Statements of Cash Flows (continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
September 30, |
(in thousands) |
|
2006 |
|
2005 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Dividends paid on common stock (includes $30.3 million and
$22.4 million paid to related parties during 2006 and 2005,
respectively) |
|
$ |
(37,504 |
) |
|
|
(27,582 |
) |
Repurchase of common stock |
|
|
(21,843 |
) |
|
|
|
|
Excess tax benefit from share-based payment arrangements |
|
|
1,646 |
|
|
|
|
|
Principal payments on long-term debt borrowings and capital
lease obligations |
|
|
(1,561 |
) |
|
|
(49,360 |
) |
Proceeds from borrowings of long-term debt |
|
|
|
|
|
|
48,143 |
|
Proceeds from exercise of stock options |
|
|
3,725 |
|
|
|
2,920 |
|
|
|
|
Net cash used in financing activities |
|
|
(55,537 |
) |
|
|
(25,879 |
) |
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(2,006 |
) |
|
|
(2,388 |
) |
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
18,153 |
|
|
|
(32,450 |
) |
Cash and cash equivalents at beginning of year |
|
|
237,569 |
|
|
|
231,806 |
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
255,722 |
|
|
|
199,356 |
|
|
|
|
Cash paid for interest |
|
$ |
364 |
|
|
|
259 |
|
|
|
|
Cash paid for income taxes, net of refunds |
|
$ |
118,649 |
|
|
|
100,839 |
|
|
|
|
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
- 8 -
TOTAL SYSTEM SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Total System
Services, Inc.® (TSYS® or the Company) include the accounts of TSYS and its
wholly owned subsidiaries and TSYS majority owned foreign subsidiary. All significant
intercompany accounts and transactions have been eliminated in consolidation. In addition, the
Company evaluates its relationship with other entities to identify whether they are variable
interest entities as defined by the Financial Accounting Standards Boards (FASBs) Interpretation
No. 46(R) (FIN No. 46R), Consolidation of Variable Interest Entities, and to assess whether it is
the primary beneficiary of such entities. If the determination is made that the Company is the
primary beneficiary, then that entity is included in the consolidated financial statements in
accordance with FIN No. 46R.
On July 11, 2006, TSYS acquired Card Tech, Ltd. and related companies, increasing TSYS card
issuing and merchant acquiring capabilities and extending TSYS geographic reach to Asia Pacific,
Europe, the Middle East and Africa. TSYS rebranded the group of companies as TSYS Card Tech, which
companies are collectively hereafter referred to as TSYS Card Tech. TSYS has consolidated TSYS Card
Techs balance sheet and results of operations since the acquisition.
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 2005 annual report previously filed on Form
10-K. Results of interim periods are not necessarily indicative of results to be expected for the
year.
Certain reclassifications have been made to the 2005 financial statements to conform to the
presentation adopted in 2006.
Note 2 Supplementary Balance Sheet Information
Cash and Cash Equivalents
Cash and cash equivalent balances are summarized as follows:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
September 30, 2006 |
|
|
December 31, 2005 |
|
Cash and cash equivalents in
domestic accounts |
|
$ |
224,953 |
|
|
|
191,837 |
|
Cash and cash equivalents in
foreign accounts |
|
|
30,769 |
|
|
|
45,732 |
|
|
|
|
|
|
|
|
Total |
|
$ |
255,722 |
|
|
|
237,569 |
|
|
|
|
|
|
|
|
-9-
The Company maintains accounts outside the United States denominated in U.S. dollars, Euros,
British Pounds Sterling (BPS), Canadian dollars, Japanese Yen, Chinese Renminbi, Brazilian Real,
Cypriot Pounds and Malaysian Ringgets. 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, 2006 |
|
|
December 31, 2005 |
|
|
|
|
|
|
|
|
Prepaid expenses |
|
$ |
15,048 |
|
|
|
15,053 |
|
Supplies inventory |
|
|
9,055 |
|
|
|
9,742 |
|
Other |
|
|
21,262 |
|
|
|
20,441 |
|
|
|
|
|
|
|
|
Total |
|
$ |
45,365 |
|
|
|
45,236 |
|
|
|
|
|
|
|
|
Contract Acquisition Costs, net
Significant components of contract acquisition costs, net of accumulated amortization, are
summarized as follows:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
September 30, 2006 |
|
|
December 31, 2005 |
|
|
|
|
|
|
|
|
Payments for processing rights, net |
|
$ |
113,222 |
|
|
|
120,015 |
|
Conversion costs, net |
|
|
59,766 |
|
|
|
43,846 |
|
|
|
|
|
|
|
|
Total |
|
$ |
172,988 |
|
|
|
163,861 |
|
|
|
|
|
|
|
|
Amortization related to payments for processing rights, which is recorded as a reduction of
revenues, was $6.8 million and $3.5 million for the three months ended September 30, 2006 and 2005,
respectively. For the nine months ended September 30, 2006 and 2005, amortization related to
payments for processing rights was $20.6 million and $10.6 million, respectively.
Amortization expense related to conversion costs was $4.5 million and $3.2 million for the
three months ended September 30, 2006 and 2005, respectively. For the nine months ended September
30, 2006 and 2005, amortization related to conversion costs was $13.9 million and $9.3 million,
respectively.
The increase in the amortization of contract acquisition costs is the result of the
acceleration of amortization costs related to clients portfolios scheduled to deconvert in 2006
and the consolidation of the financial results of TSYS Acquiring Solutions, L.L.C. (TSYS
Acquiring).
Other Current Liabilities
Significant components of other current liabilities are summarized as follows:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
September 30, 2006 |
|
|
December 31, 2005 |
|
Client liabilities |
|
$ |
42,327 |
|
|
|
34,381 |
|
Accrued expenses |
|
|
41,155 |
|
|
|
39,882 |
|
Dividends payable |
|
|
13,774 |
|
|
|
11,832 |
|
Deferred revenues |
|
|
13,490 |
|
|
|
6,421 |
|
Transaction processing provisions |
|
|
12,652 |
|
|
|
9,453 |
|
-10-
|
|
|
|
|
|
|
|
|
(in thousands) |
|
September 30, 2006 |
|
|
December 31, 2005 |
|
Accrued income taxes |
|
|
7,182 |
|
|
|
25,443 |
|
Client postage deposits |
|
|
6,808 |
|
|
|
7,459 |
|
Other |
|
|
26,169 |
|
|
|
26,251 |
|
|
|
|
|
|
|
|
Total |
|
$ |
163,557 |
|
|
|
161,122 |
|
|
|
|
|
|
|
|
Note 3 Comprehensive Income
In June 1997, the FASB released Statement of Financial Accounting Standards No. 130 (SFAS No.
130), Reporting of Comprehensive Income. SFAS No. 130 established certain standards for reporting
and presenting comprehensive income in the general-purpose financial statements. The purpose of
SFAS 130 was to report all items that met the definition of comprehensive income in a prominent
financial statement for the same period in which they were recognized. In accordance with the
definition provided by Statement of Financial Accounting Concepts No. 6, comprehensive income
includes all changes in owners equity that resulted from transactions of the business entity with
nonowners.
Comprehensive income is the sum of net income and other items that must bypass the income
statement because they have not been realized, including items such as an unrealized holding gain
or loss from available for sale securities and foreign currency translation gains or losses. These
items are not part of net income, yet are important enough to be included in comprehensive income,
giving the user a more comprehensive picture of the organization as a whole. Items included in
comprehensive income, but not net income, are reported under the accumulated other comprehensive
income section of shareholders equity.
Comprehensive income for TSYS consists of net income and foreign currency translation
adjustments recorded as a component of shareholders equity.
For the three and nine months ended September 30, comprehensive income is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
(in thousands) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
Net income |
|
$ |
54,306 |
|
|
|
48,056 |
|
|
|
162,106 |
|
|
|
144,822 |
|
Other comprehensive income
(loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustments, net of tax |
|
|
6,116 |
|
|
|
(2,325 |
) |
|
|
10,822 |
|
|
|
(7,692 |
) |
|
|
|
Total |
|
$ |
60,422 |
|
|
|
45,731 |
|
|
|
172,928 |
|
|
|
137,130 |
|
|
|
|
The income tax effects allocated to and the cumulative balance of accumulated other
comprehensive income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
Pretax |
|
|
|
|
|
|
Balance at |
|
(in thousands) |
|
December 31, 2005 |
|
|
amount |
|
|
Tax effect |
|
|
September 30, 2006 |
|
|
Foreign currency
translation
adjustments |
|
$ |
5,685 |
|
|
|
14,406 |
|
|
|
(3,584 |
) |
|
$ |
16,507 |
|
|
|
|
In July 2006, TSYS restructured its European branch operation into a new statutory structure
that facilitates continued expansion in the European region. As a result, TSYS UK branch
structure was
terminated with some of the former UK branch assets and workforce being contributed into the new
European statutory structure. Consistent with its overall strategy of pursuing international
investment opportunities, TSYS adopted the permanent reinvestment exception under Accounting
Principles Board Opinion No. 23
-11-
(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.
This treatment is reflected beginning with the third quarter.
Note 4 Segment Reporting and Major Customers
The Company reports selected information about operating segments in accordance with Statement
of Financial Accounting Standards No. 131 (SFAS No. 131), Disclosures about Segments of an
Enterprise and Related Information. The Companys segment information reflects the information
that the chief operating decision maker (CODM) uses to make resource allocations and strategic
decisions. The CODM at TSYS consists of the chairman of the board and chief executive officer, the
president and the three senior executive vice presidents.
Through online accounting and electronic payment processing systems, TSYS provides electronic
payment processing and other services to card-issuing institutions in the United States and
internationally. The Company has three reportable segments: domestic-based support services,
international-based support services and merchant acquiring services.
On July 11, 2006, TSYS acquired TSYS Card Tech, increasing TSYS card issuing and merchant
acquiring capabilities and extending TSYS geographic reach to Asia Pacific, Europe, the Middle
East and Africa. Since the acquisition, TSYS has included the financial results of TSYS Card Tech
in the international-based support services segment.
In July 2006, TSYS restructured its European branch operation into a new statutory structure
that will facilitate future expansion in the European region. As a result, TSYS terminated its UK
branch structure and established a new statutory structure in Europe. In establishing the new
structure, TSYS has contributed its European subsidiary investments as well as some of the assets
of the prior UK branch. TSYS Card Tech will be included in the new statutory structure.
In April 2006, TSYS renamed Vital Processing Services, L.L.C. as TSYS Acquiring. Effective
January 1, 2006, Golden Retriever Systems L.L.C. became a wholly owned subsidiary of Enhancement
Services Corporation (ESC). Also effective January 1, 2006, Merlin Solutions, L.L.C. became a
wholly owned subsidiary of TSYS. Both entities were previously wholly owned subsidiaries of TSYS
Acquiring and were reported under the merchant acquiring services segment. Effective January 1,
2006, the financial results of the two entities are included in the domestic-based support services
segment. The results for previous periods have been reclassified to reflect these changes.
On March 1, 2005, TSYS acquired the remaining 50% equity stake that Visa U.S.A. held in TSYS
Acquiring. As a result of the acquisition, the Company revised its segment information to reflect
the information that the CODM uses to make resource allocations and strategic decisions. The
revision included adding a new segment, merchant acquiring services, to include the financial
information of TSYS Acquiring.
Domestic-based support services include electronic payment processing services and other
services provided from within the United States. Domestic-based support services segment includes
the financial results of TSYS, excluding its foreign branch offices and divisions, and including
the following subsidiaries: Columbus
Depot Equipment Company (CDEC), Columbus Productions, Inc. (CPI), TSYS Canada, Inc. (TSYS
Canada), TSYS Total Debt Management, Inc. (TDM), ProCard, Inc. (ProCard), TSYS Technology Center,
Inc. (TTC), TSYS Prepaid, Inc. (TPI), Merlin Solutions, L.L.C. (Merlin) and ESC and its wholly
owned subsidiary, Golden Retriever Systems, L.L.C.
-12-
International-based support services include electronic payment processing and other services
provided from outside the United States. International-based support services include the
financial results of GP Network Corporation (GP Net), TSYS Japan Co., Ltd. (TSYS Japan), TSYS
Servicos De Transacoes Eletronicas Ltda. (TSYS Brazil), Total System Services Holding Europe LP and
its subsidiaries and TSYS foreign branch offices and divisions. TSYS share of the equity earnings
of its equity investments, Total System Services de México, S.A. de C.V. (TSYS de México) and China
UnionPay Data Co., Ltd. (CUP Data), are included in international-based support services because
TSYS de Méxicos and CUP Datas operations and client bases are located outside the United States.
Merchant acquiring services include the financial results of TSYS Acquiring. For periods
prior to the acquisition, TSYS has reclassified TSYS share of its equity earnings of TSYS
Acquiring from domestic-based support services to merchant acquiring services.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic- |
|
|
International- |
|
|
Merchant |
|
|
|
|
(in thousands) |
|
based support |
|
|
based support |
|
|
acquiring |
|
|
|
|
Operating Segments |
|
services |
|
|
services |
|
|
services |
|
|
Consolidated |
|
|
At September 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets |
|
$ |
1,410,363 |
|
|
|
285,917 |
|
|
|
240,979 |
|
|
$ |
1,937,259 |
|
Intersegment eliminations |
|
|
(416,964 |
) |
|
|
(195 |
) |
|
|
(143 |
) |
|
|
(417,302 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
993,399 |
|
|
|
285,722 |
|
|
|
240,836 |
|
|
$ |
1,519,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets |
|
$ |
1,320,552 |
|
|
|
178,135 |
|
|
|
230,712 |
|
|
$ |
1,729,399 |
|
Intersegment eliminations |
|
|
(318,475 |
) |
|
|
(1 |
) |
|
|
(26 |
) |
|
|
(318,502 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,002,077 |
|
|
|
178,134 |
|
|
|
230,686 |
|
|
$ |
1,410,897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursables |
|
$ |
242,584 |
|
|
|
44,320 |
|
|
|
59,723 |
|
|
$ |
346,627 |
|
Intersegment revenues |
|
|
(4,258 |
) |
|
|
|
|
|
|
(31 |
) |
|
|
(4,289 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursables
from external customers |
|
$ |
238,326 |
|
|
|
44,320 |
|
|
|
59,692 |
|
|
$ |
342,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment total revenues |
|
$ |
325,919 |
|
|
|
51,591 |
|
|
|
70,592 |
|
|
$ |
448,102 |
|
Intersegment revenues |
|
|
(6,256 |
) |
|
|
|
|
|
|
(31 |
) |
|
|
(6,287 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
319,663 |
|
|
|
51,591 |
|
|
|
70,561 |
|
|
$ |
441,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
32,156 |
|
|
|
5,328 |
|
|
|
6,674 |
|
|
$ |
44,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment expenses |
|
$ |
3,668 |
|
|
|
(2,343 |
) |
|
|
(7,599 |
) |
|
$ |
(6,274 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
$ |
48,666 |
|
|
|
7,946 |
|
|
|
15,645 |
|
|
$ |
72,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes, minority
interest and equity in income of
equity
investments |
|
$ |
52,688 |
|
|
|
6,602 |
|
|
|
16,377 |
|
|
$ |
75,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
14,722 |
|
|
|
(31 |
) |
|
|
7,689 |
|
|
$ |
22,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of equity investments |
|
$ |
|
|
|
|
1,202 |
|
|
|
|
|
|
$ |
1,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
38,821 |
|
|
|
6,797 |
|
|
|
8,688 |
|
|
$ |
54,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursables |
|
$ |
244,302 |
|
|
|
31,389 |
|
|
|
70,333 |
|
|
$ |
346,024 |
|
Intersegment revenues |
|
|
(3,867 |
) |
|
|
|
|
|
|
(57 |
) |
|
|
(3,924 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursables
from external customers |
|
$ |
240,435 |
|
|
|
31,389 |
|
|
|
70,276 |
|
|
$ |
342,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment total revenues |
|
$ |
308,889 |
|
|
|
37,862 |
|
|
|
81,948 |
|
|
$ |
428,699 |
|
Intersegment revenues |
|
|
(6,673 |
) |
|
|
|
|
|
|
(57 |
) |
|
|
(6,730 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
302,216 |
|
|
|
37,862 |
|
|
|
81,891 |
|
|
$ |
421,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-13-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic- |
|
|
International- |
|
|
Merchant |
|
|
|
|
(in thousands) |
|
based support |
|
|
based support |
|
|
acquiring |
|
|
|
|
Operating Segments |
|
services |
|
|
services |
|
|
services |
|
|
Consolidated |
|
|
Depreciation and amortization |
|
$ |
29,503 |
|
|
|
4,399 |
|
|
|
7,587 |
|
|
$ |
41,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment expenses |
|
$ |
5,627 |
|
|
|
(4,294 |
) |
|
|
(8,064 |
) |
|
$ |
(6,731 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
$ |
52,834 |
|
|
|
6,137 |
|
|
|
13,361 |
|
|
$ |
72,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes, minority
interest and equity in income of
equity
investments |
|
$ |
54,823 |
|
|
|
5,483 |
|
|
|
13,600 |
|
|
$ |
73,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
18,381 |
|
|
|
3,227 |
|
|
|
5,169 |
|
|
$ |
26,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of equity investments |
|
$ |
|
|
|
|
991 |
|
|
|
|
|
|
$ |
991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
36,238 |
|
|
|
3,353 |
|
|
|
8,465 |
|
|
$ |
48,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursables |
|
$ |
740,341 |
|
|
|
109,178 |
|
|
|
178,729 |
|
|
$ |
1,028,248 |
|
Intersegment revenues |
|
|
(13,471 |
) |
|
|
|
|
|
|
(96 |
) |
|
|
(13,567 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursables
from external customers |
|
$ |
726,870 |
|
|
|
109,178 |
|
|
|
178,633 |
|
|
$ |
1,014,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment total revenues |
|
$ |
963,855 |
|
|
|
128,163 |
|
|
|
211,659 |
|
|
$ |
1,303,677 |
|
Intersegment revenues |
|
$ |
(20,311 |
) |
|
|
|
|
|
|
(96 |
) |
|
$ |
(20,407 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
943,544 |
|
|
|
128,163 |
|
|
|
211,563 |
|
|
$ |
1,283,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
95,759 |
|
|
|
14,101 |
|
|
|
20,446 |
|
|
$ |
130,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment expenses |
|
$ |
18,949 |
|
|
|
(15,448 |
) |
|
|
(23,864 |
) |
|
$ |
(20,363 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
$ |
176,412 |
|
|
|
12,029 |
|
|
|
40,404 |
|
|
$ |
228,845 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes, minority
interest and equity in income of
equity
investments |
|
$ |
186,170 |
|
|
|
9,718 |
|
|
|
42,085 |
|
|
$ |
237,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
58,636 |
|
|
|
2,461 |
|
|
|
17,395 |
|
|
$ |
78,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of equity investments |
|
$ |
|
|
|
|
3,073 |
|
|
|
|
|
|
$ |
3,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
128,352 |
|
|
|
9,064 |
|
|
|
24,690 |
|
|
$ |
162,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursables |
|
$ |
713,390 |
|
|
|
92,717 |
|
|
|
156,486 |
|
|
$ |
962,593 |
|
Intersegment revenues |
|
|
(8,946 |
) |
|
|
|
|
|
|
(103 |
) |
|
|
(9,049 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursables
from external customers |
|
$ |
704,444 |
|
|
|
92,717 |
|
|
|
156,383 |
|
|
$ |
953,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment total revenues |
|
$ |
904,700 |
|
|
|
109,604 |
|
|
|
182,877 |
|
|
$ |
1,197,181 |
|
Intersegment revenues |
|
|
(14,882 |
) |
|
|
|
|
|
|
(103 |
) |
|
|
(14,985 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
889,818 |
|
|
|
109,604 |
|
|
|
182,774 |
|
|
$ |
1,182,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
84,209 |
|
|
|
12,416 |
|
|
|
12,073 |
|
|
$ |
108,698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment expenses |
|
$ |
24,861 |
|
|
|
(21,833 |
) |
|
|
(18,022 |
) |
|
$ |
(14,994 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
$ |
176,346 |
|
|
|
8,143 |
|
|
|
30,495 |
|
|
$ |
214,984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes, minority
interest and equity in income of
equity
investments |
|
$ |
180,558 |
|
|
|
6,345 |
|
|
|
30,950 |
|
|
$ |
217,853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
61,003 |
|
|
|
4,294 |
|
|
|
12,889 |
|
|
$ |
78,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of equity investments |
|
$ |
|
|
|
|
2,090 |
|
|
|
3,241 |
|
|
$ |
5,331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
118,692 |
|
|
|
4,773 |
|
|
|
21,357 |
|
|
$ |
144,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues for domestic-based support services and merchant acquiring services include
electronic payment processing and other services provided from the United States to clients
domiciled in the United States or other countries. Revenues for international-based support
services include electronic payment processing and other services provided from facilities outside
the United States to clients based predominantly outside the United States.
-14-
The following geographic data presents revenues for the three and nine months ended September
30, 2006 and 2005, respectively, based on the domicile of the Companys customers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
(in millions) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
United States |
|
$ |
359.6 |
|
|
|
358.1 |
|
|
|
1,069.8 |
|
|
|
998.0 |
|
Europe |
|
|
43.7 |
|
|
|
34.2 |
|
|
|
112.6 |
|
|
|
98.9 |
|
Canada |
|
|
25.4 |
|
|
|
23.2 |
|
|
|
71.5 |
|
|
|
66.6 |
|
Japan |
|
|
5.0 |
|
|
|
4.0 |
|
|
|
13.4 |
|
|
|
11.6 |
|
Mexico |
|
|
3.2 |
|
|
|
1.9 |
|
|
|
8.5 |
|
|
|
5.3 |
|
Other |
|
|
4.9 |
|
|
|
0.6 |
|
|
|
7.5 |
|
|
|
1.8 |
|
|
Total |
|
$ |
441.8 |
|
|
|
422.0 |
|
|
|
1,283.3 |
|
|
|
1,182.2 |
|
|
The following table reconciles geographic revenues to revenues by reporting segment for the
three months ended September 30, 2006 and 2005, respectively, based on the domicile of the
Companys customers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic-based |
|
|
International-based |
|
|
Merchant acquiring |
|
|
|
support services |
|
|
support services |
|
|
services |
|
(in millions) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
United States |
|
$ |
289.3 |
|
|
|
276.4 |
|
|
|
|
|
|
|
|
|
|
|
70.3 |
|
|
|
81.7 |
|
Europe |
|
|
0.4 |
|
|
|
0.4 |
|
|
|
43.3 |
|
|
|
33.9 |
|
|
|
|
|
|
|
|
|
Canada |
|
|
25.2 |
|
|
|
23.0 |
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
0.1 |
|
Japan |
|
|
|
|
|
|
|
|
|
|
5.0 |
|
|
|
4.0 |
|
|
|
|
|
|
|
|
|
Mexico |
|
|
3.2 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
1.6 |
|
|
|
0.5 |
|
|
|
3.3 |
|
|
|
|
|
|
|
0.1 |
|
|
|
0.1 |
|
|
Total |
|
$ |
319.7 |
|
|
|
302.2 |
|
|
|
51.6 |
|
|
|
37.9 |
|
|
|
70.5 |
|
|
|
81.9 |
|
|
Note: The 2005 geographic revenues by operating segment have been reclassified to reflect
the changes in operating segments.
The following table reconciles geographic revenues to revenues by reporting segment for the
nine months ended September 30, 2006 and 2005, respectively, based on the domicile of the Companys
customers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic-based |
|
|
International-based |
|
|
Merchant acquiring |
|
|
|
support services |
|
|
support services |
|
|
services |
|
(in millions) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
United States |
|
$ |
859.0 |
|
|
|
815.7 |
|
|
|
|
|
|
|
|
|
|
|
210.7 |
|
|
|
182.1 |
|
Europe |
|
|
1.1 |
|
|
|
1.0 |
|
|
|
111.5 |
|
|
|
98.0 |
|
|
|
|
|
|
|
|
|
Canada |
|
|
71.1 |
|
|
|
66.4 |
|
|
|
|
|
|
|
|
|
|
|
0.4 |
|
|
|
0.3 |
|
Japan |
|
|
|
|
|
|
|
|
|
|
13.4 |
|
|
|
11.6 |
|
|
|
|
|
|
|
|
|
Mexico |
|
|
8.5 |
|
|
|
5.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
3.8 |
|
|
|
1.4 |
|
|
|
3.3 |
|
|
|
|
|
|
|
0.5 |
|
|
|
0.4 |
|
|
Total |
|
$ |
943.5 |
|
|
|
889.8 |
|
|
|
128.2 |
|
|
|
109.6 |
|
|
|
211.6 |
|
|
|
182.8 |
|
|
Note: The 2005 geographic revenues by operating segment have been reclassified to reflect
the changes in operating segments.
-15-
The Company maintains property and equipment, net of accumulated depreciation and
amortization, in the following geographic areas:
|
|
|
|
|
|
|
|
|
|
|
At September 30, |
|
|
At December 31, |
|
(in millions) |
|
2006 |
|
|
2005 |
|
|
United States |
|
$ |
206.2 |
|
|
|
211.2 |
|
Europe |
|
|
57.3 |
|
|
|
55.3 |
|
Japan |
|
|
2.0 |
|
|
|
1.4 |
|
Canada |
|
|
0.1 |
|
|
|
0.1 |
|
Other |
|
|
1.4 |
|
|
|
|
|
|
|
|
Total |
|
$ |
267.0 |
|
|
|
268.0 |
|
|
|
|
Major Customers
For the three months ended September 30, 2006, the Company had two major customers which
accounted for approximately 35.3%, or $156.0 million, of total revenues. Bank of America, one of
TSYS major customers, accounted for approximately 24.7%, or $109.1 million of total revenues for
the three months ended September 30, 2006. For the three months ended September 30, 2005, the
Company had two major customers that accounted for approximately 32.3%, or $136.4 million, of total
revenues. Bank of America accounted for approximately 21.7%, or $91.5 million of total revenues
for the three months ended September 30, 2005.
For the nine months ended September 30, 2006, the Company had two major customers which
accounted for approximately 34.5%, or $442.1 million, of total revenues. Bank of America accounted
for approximately 23.9%, or $307.2 million of total revenues for the nine months ended September
30, 2006. For the nine months ended September 30, 2005, the Company had two major customers which
accounted for approximately 31.9%, or $377.4 million, of total revenues. Bank of America accounted
for approximately 22.1%, or $261.5 million of total revenues for the nine months ended September
30, 2005.
Revenues from major customers for the periods reported are primarily attributable to the
domestic-based support services and merchant acquiring services segments.
Note 5 Share-Based Compensation
Accounting Policy
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123
(revised) (SFAS No. 123R), Share-Based Payment. SFAS No. 123R establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments for goods or
services. It also addresses transactions in which an entity incurs liabilities in exchange for
goods or services that are based on the fair value of the entitys equity instruments or that may
be settled by the issuance of those equity instruments. This
Statement requires a public entity to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant-date fair value of the award (with limited
exceptions). That cost will be recognized over the period during which an employee is required to
provide service in exchange for the award.
SFAS No. 123R is effective for all awards granted on or after January 1, 2006, and to awards
modified, repurchased or cancelled after that date. SFAS No. 123R requires the Company to recognize
compensation costs for the nonvested portion of outstanding share-based compensation granted in the
form of stock options based on the grant-date fair value of those awards calculated under Statement
of Financial Accounting Standards No. 123 (SFAS No. 123), Accounting for Stock-Based
Compensation, for pro forma disclosures. Share-based compensation expenses include the impact of
expensing the fair value of stock options in 2006, as
-16-
well as expenses associated with nonvested
shares. In the future, the Company expects nonvested share awards to replace stock options as TSYS
primary method of share-based compensation. TSYS adopted the provisions of SFAS No. 123R effective
January 1, 2006 using the modified-prospective-transition method.
Prior to 2006, the Company applied the intrinsic-value based method of accounting prescribed
by Accounting Principles Board (APB) Opinion No. 25 (APB 25), Accounting for Stock Issued to
Employees, and related interpretations, including FASB Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25, to
account for its fixed-plan stock options. Under this method, compensation expense was recorded only
if, on the date of grant, the market price of the underlying stock exceeded the exercise price. The
Company elected to adopt only the disclosure requirements of SFAS No. 123.
The following table illustrates the effect on net income and earnings per share for the three
and nine months ended September 30, 2005 if the Company had applied the fair value recognition
provisions of SFAS No. 123, to share-based employee compensation granted in the form of TSYS and
Synovus Financial Corp. (Synovus) stock options.
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
(in thousands, except per share data) |
|
September 30, 2005 |
|
|
September 30, 2005 |
|
|
Net Income |
|
$ |
48,056 |
|
|
|
144,822 |
|
Add: Stock-based employee
compensation expense, net of
related income tax effects |
|
|
185 |
|
|
|
549 |
|
Deduct: Stock-based employee
compensation expense determined
under the fair value based method
for all awards, net of related
income tax effects |
|
|
1,201 |
|
|
|
3,927 |
|
|
|
|
Net income, as adjusted |
|
$ |
47,040 |
|
|
|
141,444 |
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
0.24 |
|
|
|
0.73 |
|
|
|
|
Basic as adjusted |
|
$ |
0.24 |
|
|
|
0.72 |
|
|
|
|
Diluted as reported |
|
$ |
0.24 |
|
|
|
0.73 |
|
|
|
|
Diluted as adjusted |
|
$ |
0.24 |
|
|
|
0.72 |
|
|
|
|
Prior to the adoption of SFAS No. 123R, the Company elected to recognize compensation cost
assuming all options would vest and reverse any recognized compensation costs for forfeited awards
when the awards were actually forfeited. SFAS No. 123R eliminates this option and requires
companies to estimate
forfeitures when recognizing compensation cost. The estimate of forfeitures will be adjusted by a
company as actual forfeitures differ from its estimates, resulting in compensation cost only for
those awards that actually vest. The effect of the change in estimated forfeitures is recognized
as compensation costs in the period of the change in estimate. In estimating its forfeiture rate,
the Company stratified its data based upon historical experience to determine separate forfeiture
rates for the different award grants. The Company currently estimates a forfeiture rate for
existing Synovus stock option grants to TSYS non-executive employees, and a forfeiture rate for all
other TSYS and Synovus share-based awards. Currently, TSYS estimates a forfeiture rate in the range
of 0% to 9.0%.
-17-
General Description of Share-Based Compensation Plans
TSYS has various long-term incentive plans under which the Compensation Committee of the Board
of Directors has the authority to grant share-based compensation to TSYS employees. Long-term
performance awards can be granted to TSYS employees under the TSYS Long-Term Incentive Plans as
well as the Synovus Long-Term Incentive Plans.
Vesting for stock options granted during 2006 accelerates upon retirement for plan
participants who have reached age 62 and who also have no less than fifteen years of service at the
date of their election to retire. For stock options granted in 2006, share-based compensation
expense is fully recognized for plan participants upon meeting the retirement eligibility
requirements of age and service.
Stock options granted prior to 2006 generally become exercisable at the end of a two to
three-year period and expire ten years from the date of grant. Vesting for stock options granted
prior to 2006 accelerates upon retirement for plan participants who have reached age 50 and who
also have no less than fifteen years of service at the date of their election to retire. Prior to
adoption of SFAS No. 123R on January 1, 2006, share-based compensation expense was recognized in
the pro forma disclosure over the nominal vesting period without consideration for retirement
eligibility. Following adoption of SFAS No. 123R, stock-based compensation expense is recognized in
income over the remaining nominal vesting period with consideration for retirement eligibility.
The Company historically issues new shares or uses treasury shares to satisfy share option
exercises. On April 20, 2006, TSYS announced that its board had approved a stock repurchase plan
to purchase up to 2 million shares. The shares will be purchased from time to time over a two year
period and purchases will depend on various factors including price, market conditions,
acquisitions and the general financial position of TSYS. Repurchased shares will be used for
general corporate purposes, including, but not limited to, fulfilling stock option exercises and
the granting of nonvested shares.
Long-Term Incentive Plans TSYS
TSYS 2002 Long-Term Incentive Plan: TSYS compensation program includes long-term performance
awards under the Total System Services, Inc. 2002 Long-Term Incentive Plan (TSYS 2002 Plan), which
is used to attract, retain, motivate and reward employees and non-employee directors who make a
significant contribution to the Companys long-term success. The TSYS 2002 Plan is administered by
the Compensation Committee of the Companys Board of Directors and enables the Company to grant
stock options, stock appreciation rights, restricted stock and performance awards; 9.4 million
shares of TSYS common stock are reserved for distribution under the TSYS 2002 Plan. Options granted
under the TSYS 2002 Plan may be incentive stock options or nonqualified stock options as determined
by the Committee at the time of grant.
Incentive stock options are granted at a price not less than 100% of the fair market value of
the stock on the grant date, and nonqualified options are granted at a price to be determined by
the Committee. Option vesting terms are established by the Committee at the time of grant and
presently range from one to five years.
The expiration date of options granted under the TSYS 2002 Plan is determined at the time of
grant and may not exceed ten years from the date of the grant. At September 30, 2006, there were
options outstanding under the TSYS 2002 Plan to purchase 338,521 shares of the Companys common
stock, of which 316,021 were exercisable. The Company has also issued its common stock to directors
and to certain employees under
nonvested stock awards. There were 8.5 million shares available for grant at September 30,
2006 under the TSYS 2002 plan.
2000 Long-Term Incentive Plan: TSYS maintains the 2000 Long-Term Incentive Plan (LTI Plan) to
attract, retain, motivate and reward employees who make a significant contribution to the Companys
long-term
-18-
success and to enable such employees to acquire and maintain an equity interest in the
Company. The LTI Plan is administered by the Compensation Committee of the Companys Board of
Directors and enables the Company to grant stock options, stock appreciation rights, restricted
stock and performance awards; 3.2 million shares of common stock were reserved for distribution
under the LTI Plan. Options granted under the LTI Plan may be incentive stock options or
nonqualified stock options as determined by the Committee at the time of grant.
Incentive stock options are granted at a price not less than 100% of the fair market value of
the stock on the grant date, and nonqualified options are granted at a price to be determined by
the Committee. Option vesting terms are established by the Committee at the time of grant and
presently range from one to five years. The expiration date of options granted under the LTI Plan
is determined at the time of grant and may not exceed ten years from the date of the grant. At
September 30, 2006, there were options outstanding under the LTI Plan to purchase 714,700 shares of
the Companys common stock, all of which were exercisable.
There were no shares available for grant at September 30, 2006 under the LTI Plan.
Other Share-Based Issuances: TSYS has granted options to purchase 37,500 shares of the Companys
common stock to attract a key individual to the Company. At September 30, 2006, options to purchase
37,500 shares were outstanding and exercisable.
Share-Based Compensation
TSYS share-based compensation costs are included as expenses and classified as salaries and
other personnel expenses. TSYS does not include amounts associated with share-based compensation
as costs capitalized as software development and contract acquisition costs. For the three months
ended September 30, 2006, share-based compensation was $2.1 million, compared to $0.6 million for
the same period in 2005. Included in the $2.1 million amount for 2006 is approximately $1.6
million related to expensing the fair value of stock options. For the nine months ended September
30, 2006, share-based compensation was $6.6 million, compared to $0.8 million for the same period
in 2005. Included in the $6.6 million amount for 2006 is approximately $5.1 million related to
expensing the fair value of stock options.
Nonvested Awards: During the first nine months of 2006, the Company issued 150,775 shares of TSYS
common stock with a market value of $3.0 million to certain key executive officers and
non-management members of its board of directors under nonvested stock bonus awards for services to
be provided by such officers and directors in the future. The market value of the common stock at
the date of issuance is amortized as compensation expense over the vesting period of the awards.
During the first nine months of 2005, the Company issued 95,815 shares of TSYS common stock
with a market value of $2.2 million to certain key executive officers and non-management members of
its board of directors under nonvested stock bonus awards for services to be provided by such
officers and directors in the future.
A summary of the status of TSYS nonvested shares as of September 30, 2006 and changes during
the nine months ended September 30, 2006 is presented below:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Weighted Average |
Nonvested shares: |
|
Shares |
|
Grant-Date Fair Value |
|
Outstanding at beginning of year |
|
|
101 |
|
|
$ |
23.11 |
|
Granted |
|
|
151 |
|
|
|
19.64 |
|
Vested |
|
|
(13 |
) |
|
|
23.08 |
|
-19-
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Weighted Average |
Nonvested shares: |
|
Shares |
|
Grant-Date Fair Value |
|
Forfeited/Canceled |
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period |
|
|
239 |
|
|
$ |
20.92 |
|
|
|
|
As of September 30, 2006, there was approximately $3.6 million of total unrecognized
compensation cost related to nonvested share-based compensation arrangements. That cost is
expected to be recognized over a weighted average period of 2.5 years.
During 2005, TSYS authorized a total grant of 126,087 shares of nonvested stock to two key
executives with a performance-vesting schedule (performance-vesting shares). These
performance-vesting shares have seven one-year performance periods (2005-2011) during which the
Compensation Committee establishes an earnings per share goal. Each years award is 20% of the
total authorized shares. Compensation expense for each years award is measured on the grant date
based on the quoted market price of TSYS common stock and is expensed on a straight-line basis for
the year.
A summary of the status of TSYS performance-based nonvested shares as of September 30, 2006
and changes during the nine months ended September 30, 2006 is presented below:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
Performance-based |
|
|
|
|
|
Weighted Average |
Nonvested shares: |
|
Shares |
|
Grant-Date Fair Value |
|
Outstanding at beginning of year |
|
|
25 |
|
|
$ |
24.93 |
|
Granted |
|
|
25 |
|
|
|
20.00 |
|
Vested |
|
|
(25 |
) |
|
|
24.93 |
|
Forfeited/Canceled |
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period |
|
|
25 |
|
|
$ |
20.00 |
|
|
|
|
As of September 30, 2006, there was approximately $0.1 million of total unrecognized
compensation cost related to nonvested performance-vesting share-based compensation arrangements.
That cost is expected to be recognized over the remainder of 2006.
Stock Option Awards
The Company did not grant any TSYS stock options during the nine months ended September 30,
2006 and 2005, respectively. A summary of the TSYS stock option activity as of September 30, 2006
and changes during the nine months ended on September 30, 2006 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Weighted |
|
Average |
|
|
|
|
|
|
|
|
Average |
|
Remaining |
|
Aggregate |
(in thousands) |
|
|
|
|
|
Exercise |
|
Contractual Life |
|
Intrinsic |
Options: |
|
Options |
|
Price |
|
(in years) |
|
Value |
|
Outstanding at beginning of year |
|
|
1,382 |
|
|
$ |
15.19 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(280 |
) |
|
|
13.29 |
|
|
|
|
|
|
|
|
|
Forfeited/Canceled |
|
|
(11 |
) |
|
|
19.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period |
|
|
1,091 |
|
|
$ |
15.63 |
|
|
|
2.6 |
|
|
$ |
10,903 |
|
|
|
|
Options exercisable at period-end |
|
|
1,068 |
|
|
$ |
15.38 |
|
|
|
2.5 |
|
|
$ |
10,472 |
|
|
|
|
Weighted average fair value of
options granted during the
period |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-20-
During the nine months ended September 30, 2006, there were 280,150 TSYS stock options
exercised that had an intrinsic value of approximately $2.6 million. The stock options exercised
during 2006 were fully vested before January 1, 2006. During the nine months ended September 30,
2005, there were 199,100 TSYS stock options exercised that had an intrinsic value of approximately
$1.9 million. For awards granted before January 1, 2006 that were not fully vested on January 1,
2006, the Company will record the tax benefits from the exercise of stock options as increases to
the Additional paid-in capital line item of the Consolidated Balance Sheets. If the Company does
recognize tax benefits, the Company will record these tax benefits from share-based compensation
costs as cash inflows in the financing section in the Statement of Cash Flows. The Company has
elected to use the short-cut method to calculate its historical pool of windfall tax benefits, and
as a result, will not record any benefits received from previous stock option exercises in the
operating section in the Statement of Cash Flows.
As of September 30, 2006, there was approximately $66,100 of total unrecognized compensation
expense cost related to TSYS stock options that is expected to be recognized over a weighted
average period of 0.5 year.
Long-Term Incentive Plans Synovus
During the first nine months of 2006, Synovus granted stock options to key TSYS executive
officers. The fair value of the option grant was $6.57 and was estimated on the date of grant
using the Black-Scholes-Merton option-pricing model with the following weighted average
assumptions: risk-free interest rate of 4.48%; expected volatility of 25.1%; expected life of 6.0
years; and dividend yield of 2.80%. The expected life of 6.0 years was determined using the
simplified method, as prescribed by SECs Staff Accounting Bulletin No. 107.
A summary of the option activity related to option grants of Synovus common stock to TSYS
employees as of September 30, 2006 and changes during the nine months ended on September 30, 2006
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Weighted |
|
Average |
|
|
|
|
|
|
|
|
Average |
|
Remaining |
|
Aggregate |
(in thousands) |
|
|
|
|
|
Exercise |
|
Contractual Life |
|
Intrinsic |
Options: |
|
Options |
|
Price |
|
(in years) |
|
Value |
|
Outstanding at beginning of year |
|
|
6,451 |
|
|
$ |
25.79 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
305 |
|
|
|
27.67 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(503 |
) |
|
|
20.53 |
|
|
|
|
|
|
|
|
|
Net Synovus/TSYS employee transfers
between entities |
|
|
(3 |
) |
|
|
22.13 |
|
|
|
|
|
|
|
|
|
Forfeited/Canceled |
|
|
(56 |
) |
|
|
24.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period |
|
|
6,194 |
|
|
$ |
26.32 |
|
|
|
5.3 |
|
|
$ |
54,303 |
|
|
|
|
Options exercisable at period-end |
|
|
2,739 |
|
|
$ |
23.59 |
|
|
|
4.0 |
|
|
$ |
21,424 |
|
|
|
|
Weighted average fair value of
options granted during the period |
|
|
|
|
|
$ |
6.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the first nine months of 2005, Synovus granted 203,440 stock options to key TSYS
executive officers. The fair value of the option grant was $7.56 and was estimated on the date of
grant using the Black-
-21-
Scholes-Merton option-pricing model with the following weighted average
assumptions: risk-free interest rate of 4.43%; expected volatility of 25.6%; expected life of 8.8
years; and dividend yield of 2.60%.
The total intrinsic value of Synovus options exercised during the nine months ended September
30, 2006 was $2.8 million. As of September 30, 2006, there was $10.2 million of total unrecognized
compensation expense cost related to Synovus stock options that is expected to be recognized over a
weighted average period of 1.6 years.
The total intrinsic value of Synovus options exercised during the nine months ended September
30, 2005 was $2.8 million.
Earnings Per Share
The diluted earnings per share calculation excludes stock options and nonvested awards that
are convertible into 26,500 common shares for the three and nine months ended September 30, 2006,
and excludes 22,500 common shares for the three and nine months ended September 30, 2005, because
their inclusion would have been anti-dilutive.
Note 6 Long-Term Debt
On June 30, 2003, TSYS obtained a $45.0 million long-term line of credit from a banking
affiliate of Synovus. The line was an automatic draw down facility. The interest rate for the
line of credit was the London Interbank Offered Rate (LIBOR) plus 150 basis points. In addition,
there was a charge of 15 basis points on any funds unused. The line of credit was unsecured and
included covenants requiring the Company to maintain certain minimum financial ratios. The line of
credit expired on June 30, 2006.
Note 7 Supplementary Cash Flow Information
Contract Acquisition Costs
Cash used for contract acquisition costs for the nine months ended September 30, 2006 and
2005, respectively, are summarized as follows:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
September 30, 2006 |
|
September 30, 2005 |
|
Conversion costs |
|
$ |
28,915 |
|
|
|
11,756 |
|
Payments for processing rights |
|
|
10,663 |
|
|
|
|
|
|
|
|
Total |
|
$ |
39,578 |
|
|
|
11,756 |
|
|
|
|
Nonvested Awards
During the first quarter of 2006, the Company issued nonvested shares of common stock to
certain key executive officers and non-management members of its board of directors under nonvested
shares for services to be provided by such officers and directors in the future. Refer to Note 5
for more information.
Note 8 Legal Proceedings
The Company is subject to lawsuits, claims and other complaints arising out of the ordinary
conduct of its business. In the opinion of management, based in part upon the advice of legal
counsel, all matters are believed to be adequately covered by insurance, or if not covered, are
believed to be without merit or are of such kind or involve such amounts that would not have a
material adverse effect on the financial position, results of operations or cash flows of the
Company if disposed of unfavorably. The Company establishes reserves for expected future
litigation exposures that TSYS determines to be both probable and reasonably estimable.
-22-
Note 9 Guarantees and Indemnifications
The Company has entered into processing and licensing agreements with clients that include
intellectual property indemnification clauses. The Company generally agrees to indemnify its
clients, subject to certain exceptions, against legal claims that TSYS services or systems
infringes 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 in relation to these
indemnification clauses.
The Company has not recorded a liability for guarantees or indemnities in the accompanying
consolidated balance sheet since the maximum amount of potential future payments under such
guarantees and indemnities is not determinable.
Note 10 Business Combinations
TSYS Card Tech
On July 11, 2006, TSYS acquired Card Tech, Ltd., a privately owned London-based payments firm,
and related companies, increasing TSYS card issuing and merchant acquiring capabilities and
extending its geographic reach to Asia Pacific, Europe, the Middle East and Africa. TSYS paid an
aggregate consideration of approximately $59.3 million, including direct acquisition costs.
Card Tech, Ltd. was established in 1989 and maintains service centers in London, England;
Dubai, United Arab Emirates; Nicosia, Cyprus; and Kuala Lumpur, Malaysia. TSYS operates facilities
in North America, Europe and the Asia-Pacific for a combined total of 12 countries worldwide.
Card Tech has implemented its payments software for six of the 25 largest global banks and
three of the largest global card issuers. Worldwide, the company has approximately 190 clients from
70 countries primarily banks. Its applications are certified by all of the major global payment
networks. TSYS formed and/or acquired five companies in connection with the Card Tech, Ltd.
acquisition, which the Company collectively refers to as TSYS Card Tech.
TSYS Card Techs software applications are utilized globally. TSYS Card Tech offers a
server-based system with an established global footprint for comprehensive issuing and acquiring
services. TSYS Card Tech offers products and services for installment loans, credit, debit,
merchant acquiring and prepaid payment platforms in addition to fraud, risk management,
authorizations, chargebacks, e-commerce and m-commerce solutions designed for the bankcard market.
TSYS Card Techs applications are browser-based, multilingual, multicurrency and multi-country
(including double-byte-enabled).
TSYS consolidated TSYS Card Techs balance sheet and results of operations, as of July 11,
2006. The Company is in the process of finalizing the purchase price allocation and has
preliminarily allocated approximately $36.3 million to goodwill, approximately $15.5 million to
other identifiable intangible assets and the remaining amounts to other assets and liabilities
acquired. The preliminary purchase price allocation is presented below:
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Cash and cash equivalents |
|
$ |
4,341 |
|
Intangible assets |
|
|
15,500 |
|
Goodwill |
|
|
36,336 |
|
Other assets |
|
|
12,803 |
|
|
|
|
|
-23-
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Total assets acquired |
|
|
68,980 |
|
|
|
|
|
Other liabilities |
|
|
9,689 |
|
|
|
|
|
Total liabilities assumed |
|
|
9,689 |
|
|
|
|
|
Net assets acquired |
|
$ |
59,291 |
|
|
|
|
|
Revenues associated with TSYS Card Tech are included in electronic payment processing services
and are included in internationalbased support services for segment reporting purposes.
China UnionPay Data Co., Ltd.
Effective November 1, 2005, TSYS purchased an initial 34.04% equity interest in China UnionPay
Data Co., Ltd., the payments-processing subsidiary of China UnionPay Co., Ltd. (CUP). Effective
August 1, 2006, TSYS increased its ownership interest to 44.56% of CUP Data for $15.6 million. CUP
is sanctioned by the Peoples Bank of China, Chinas central bank, to perform payments-processing.
CUP Data currently provides transaction processing, disaster recovery and other services for banks
and bankcard issuers in China.
The Company is using the equity method of accounting to account for its investment in CUP
Data. The difference between the cost of the investment and the amount of underlying equity in net
assets of CUP Data is recognized as goodwill. The preliminary purchase price allocation related to
the acquisition is presented below:
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Total assets acquired |
|
$ |
12,830 |
|
Goodwill |
|
|
39,772 |
|
|
|
|
|
Net assets acquired |
|
$ |
52,602 |
|
|
|
|
|
|
The goodwill associated with CUP Data is not reported as goodwill in the Companys balance
sheet, but is reported as a component of the equity investment.
TSYS Acquiring Solutions, L.L.C.
Vital Processing Services, L.L.C. (Vital), a limited liability company, was established in May
1996 as a 50/50 joint venture between TSYS and Visa U.S.A. (Visa). Vital was rebranded as TSYS
Acquiring in April 2006. TSYS Acquiring provides integrated end-to-end electronic transaction
processing services to financial institutions and other merchant acquirers. TSYS Acquiring
processes 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.
On March 1, 2005, TSYS acquired the remaining 50% of Vital from Visa for $95.8 million in
cash, including direct acquisition costs of $794,000. TSYS Acquiring is now a separate, wholly
owned subsidiary of TSYS. As a result of the acquisition of control of TSYS Acquiring, TSYS
changed from the equity method of accounting for the investment in TSYS Acquiring and began
consolidating TSYS Acquirings balance sheet and results of operations in TSYS consolidated
financial statements. In accordance with authoritative accounting guidelines, TSYS recorded the
acquisition of the incremental 50% interest as a business combination, requiring that TSYS allocate
the purchase price to the assets acquired and liabilities assumed based on their relative fair
values. The Company finalized the purchase price allocation during the first quarter of 2006 and
has allocated $30.2 million to goodwill, $30.5 million to other identifiable intangible assets and
the remaining amount to the assets and liabilities acquired. Of the $30.5 million other
identifiable intangible assets, the Company has allocated $18.5 million to computer software and
the remaining amount to other intangible assets. The acquisition of TSYS Acquiring allows TSYS to
be a provider of value-based
-24-
services at both ends of the payment chain and allows TSYS to expand
the services offered to the Companys largest customers. Revenues associated with TSYS Acquiring
are included in merchant services and are classified in merchant acquiring services for segment
reporting purposes.
Since TSYS acquired less than 100% of the outstanding shares of the acquired enterprise, the
valuation of assets acquired and liabilities assumed in the acquisition was based on a pro rata
allocation of the fair values of the assets acquired and liabilities assumed and the historical
financial statement carrying amounts of the assets and liabilities of the acquired enterprise. As a
result, TSYS recorded the fair value of the 50% interest of TSYS Acquirings assets acquired and
liabilities assumed as of March 1, 2005. The Company recorded the remaining 50% interest of TSYS
Acquirings assets and liabilities at historical carrying values. The purchase price allocation is
presented below:
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Cash and cash equivalents |
|
$ |
19,399 |
|
Intangible assets |
|
|
30,500 |
|
Goodwill |
|
|
30,211 |
|
Other assets |
|
|
47,563 |
|
|
|
|
|
Total assets acquired |
|
|
127,673 |
|
|
|
|
|
Other liabilities |
|
|
31,830 |
|
|
|
|
|
Total liabilities assumed |
|
|
31,830 |
|
|
|
|
|
Minority interest |
|
|
49 |
|
|
|
|
|
Net assets acquired |
|
$ |
95,794 |
|
|
|
|
|
Pro forma
Presented below are the pro forma consolidated results of operations for the nine months ended
September 30, 2005, as though the acquisition of TSYS Acquiring had occurred on January 1, 2005.
This pro forma information is based on the historical financial statements of TSYS Acquiring. Pro
forma results do not include any actual or anticipated cost savings or expenses of the planned
integration of TSYS and TSYS Acquiring, and are not necessarily indicative of the results which
would have occurred if the business combinations had been in effect on the dates indicated, or
which may result in the future.
|
|
|
|
|
|
|
Nine months ended |
(in thousands, except per share data) |
|
September 30, 2005 |
|
Revenues |
|
$ |
1,225,786 |
|
Net income |
|
|
146,826 |
|
Basic earnings per share |
|
|
0.74 |
|
Diluted earnings per share |
|
|
0.74 |
|
The pro forma impact of the TSYS Card Tech acquisition on revenues and net income for periods
prior to the acquisition was not material.
-25-
TOTAL SYSTEM SERVICES, INC.
Item 2 Managements Discussion and Analysis of Financial
Condition and Results of Operations
Financial Overview
Total System Services, Inc.s (TSYS or the Companys) revenues are derived from providing
electronic payment processing and related services to financial and nonfinancial institutions,
generally under long-term processing contracts. TSYS services are provided primarily through the
Companys cardholder systems, TS2 and TS1, to financial institutions and other organizations
throughout the United States and internationally. The Company currently offers merchant acquiring
services to financial institutions and other organizations mainly through its majority owned
subsidiary, GP Network Corporation (GP Net), and its wholly owned subsidiary, TSYS Acquiring
Solutions, L.L.C. (TSYS Acquiring).
Due to the somewhat seasonal nature of the credit card industry, TSYS revenues and results of
operations have generally increased in the fourth quarter of each year because of increased
transaction and authorization volumes during the traditional holiday shopping season. Furthermore,
growth or declines in card portfolios of existing clients, the conversion of cardholder accounts of
new clients to the Companys processing platforms, and the loss of cardholder accounts impact the
results of operations from period to period. Another factor which may affect TSYS revenues and
results of operations from time to time, is the sale by a client of its business, its card
portfolio or a segment of its accounts to a party which processes cardholder accounts internally or
uses another third-party processor. Consolidation in either the financial services or retail
industries, a change in the economic environment in the retail sector, or a change in the mix of
payments between cash and cards could favorably or unfavorably impact TSYS financial position,
results of operations and cash flows in the future.
A significant amount of the Companys revenues is derived from long-term contracts with large
clients, including certain major customers. Processing contracts with large clients, representing a
significant portion of the Companys total revenues, generally provide for discounts on certain
services based on the size and activity of clients portfolios. Therefore, electronic payment
processing revenues and the related margins are influenced by the client mix relative to the size
of client card portfolios, as well as the number and activity of individual cardholder accounts
processed for each client. Consolidation among financial institutions has resulted in an
increasingly concentrated client base, which results in a change in client mix directed toward
larger clients and increasing pressure on the Companys operating profit margins.
With the purchase of TSYS Card Tech, Ltd. on July 11, 2006, the Company began offering
server-based software license arrangements, consulting and implementation services, maintenance
agreements, as well as processing services, for comprehensive TSYS card issuing and merchant
acquiring capabilities worldwide. New software license revenue is generally recognized together
with the associated services based on contract accounting using either the percentage-of-completion
or completed-contract method, provided that vendor specific objective evidence (VSOE) exists with
respect to any undelivered element, which is generally the maintenance agreement. Maintenance and
processing revenues are recognized ratably over the terms of their respective contracts. Revenue
from third party software and hardware sales is recognized when all revenue recognition criteria
have been met.
The Company provides services to its clients including processing consumer, retail,
commercial, government services, stored value and debit cards. Below is a general description of
each type of account:
-26-
|
|
|
Account type |
|
Description |
Consumer
|
|
Visa and MasterCard credit cards; American Express cards |
|
|
|
Retail
|
|
Private label |
|
|
|
Commercial
|
|
Purchasing cards, corporate cards and fleet cards for employees |
|
|
|
Government services
|
|
Student loan processing accounts |
|
|
|
Stored value
|
|
Prepaid cards, including loyalty incentive cards, flexible
spending cards and gift cards |
|
|
|
Debit
|
|
On-line (PIN-based) and off-line (signature-based) accounts |
Refer to the tables in Electronic Payment Processing Services of Results of Operations for
more information summarizing TSYS accounts on file (AOF) information as of September 30, 2006 and
2005, respectively.
A summary of the financial highlights for 2006, as compared to 2005, is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
September 30, |
|
September 30, |
(in millions, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
% Change |
|
2006 |
|
2005 |
|
% Change |
|
Revenues before reimbursables |
|
$ |
342.3 |
|
|
|
342.1 |
|
|
|
0.1 |
% |
|
$ |
1,014.7 |
|
|
|
953.5 |
|
|
|
6.4 |
% |
Total revenues |
|
|
441.8 |
|
|
|
422.0 |
|
|
|
4.7 |
|
|
|
1,283.3 |
|
|
|
1,182.2 |
|
|
|
8.5 |
|
Operating income |
|
|
72.3 |
|
|
|
72.3 |
|
|
|
(0.1 |
) |
|
|
228.8 |
|
|
|
215.0 |
|
|
|
6.4 |
|
Net income |
|
|
54.3 |
|
|
|
48.1 |
|
|
|
13.0 |
|
|
|
162.1 |
|
|
|
144.8 |
|
|
|
11.9 |
|
Basic EPS |
|
|
0.28 |
|
|
|
0.24 |
|
|
|
13.4 |
|
|
|
0.82 |
|
|
|
0.73 |
|
|
|
12.0 |
|
Diluted EPS |
|
|
0.28 |
|
|
|
0.24 |
|
|
|
13.3 |
|
|
|
0.82 |
|
|
|
0.73 |
|
|
|
12.0 |
|
Significant highlights for 2006 include:
Corporate
|
|
|
Announced that its Board of Directors approved a share repurchase plan to purchase up
to 2 million shares of the Companys stock. |
|
|
|
|
Announced that its Board of Directors approved a quarterly cash dividend of $0.07 per
share, an increase of 16.7 percent from the previous dividend rate of $0.06 per share. |
Domestic
|
|
|
Converted the vast majority of the Capital One account portfolio onto its TS2
platform. In a related transaction, Capital One became the first client on the new TSYS
Loyalty Platform, and is currently processing loyalty transactions on this
industry-leading platform. |
|
|
|
|
Converted approximately 6 million accounts for The Toronto-Dominion Bank, known as TD
Bank Financial Group, and is providing a range of processing and support services for
its consumer and commercial credit card accounts. |
|
|
|
|
Reached a long-term agreement with Wachovia Corporation to provide core-processing
and other related services in support of their re-entry into the consumer credit-card
line of business. |
-27-
|
|
|
Renewed its multi-year agreement to provide CompuCredit Corp. of Atlanta, Ga., one of
the nations largest credit card providers, processing and related services for its
portfolio of cardholder accounts. |
|
|
|
|
Deconverted the Sears consumer MasterCard and private-label accounts in June 2006, as
well as deconverted the Bank of America consumer card portfolio in October 2006. |
International
|
|
|
Announced Toyota Finance Corporation as TSYS first processing relationship in Japan.
TSYS now supports a new co-branded Visa offered by Toyota Finance and Nikko Cordial
Securities. Through this relationship, TSYS provides multi-currency and multi-function
support for cardholders with domestic and overseas transactions, making it the first
product of its kind in Japan. |
|
|
|
|
Announced a new relationship in Japan with United Cinemas Co. to process its new
Cinema Gift Card, a prepaid product. |
|
|
|
|
Increased its equity interest in China UnionPay Data Services Co., Ltd (CUP Data),
to 44.56%. The partnership is further strengthened by continued technology and service
expertise offered by TSYS. |
|
|
|
|
Continued expansion of TSYS global footprint with the acquisition of London-based
Card Tech, Ltd., now known as TSYS Card Tech, for an aggregate consideration of
approximately $59.3 million. The acquisition enables TSYS to offer more technology
choices with the right combination of scale and functionality that are attractive to
small, medium and large banks in global emerging markets. The acquisition of TSYS Card
Tech expands the number of countries in which TSYS has clients to 76. |
Merchant Acquiring
|
|
|
Announced plans with Discover Financial Services LLC for TSYS Acquiring to integrate
clearing and settlement processing for Discover Network card acceptance into its
offering for merchant acquirers and independent sales organizations. |
|
|
|
|
Reached agreements through TSYS Acquiring with Delta Payment Solutions and New
England Bankcard Association to provide merchant acquiring services. |
|
|
|
|
Renewed a long term relationship with Heartland Payment Systems, one of the nations
largest merchant acquiring services entities. |
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.
-28-
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.
The Company has prepared the accompanying unaudited condensed consolidated financial
statements 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.
Factors that could affect the Companys future operating results and cause actual results to
vary materially from expectations include, but are not limited to, lower than anticipated growth
from existing customers, an inability to attract new customers and grow internationally, loss of
the Companys major customers or other significant clients, an inability to grow through
acquisitions or successfully integrate acquisitions, an inability to control expenses, technology
changes, financial services consolidation, change in regulatory mandates, a decline in the use of
cards as a payment mechanism, a decline in the financial stability of the Companys clients and
uncertain economic conditions. 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, 2005.
For a detailed discussion regarding the Companys critical accounting policies and estimates,
see Item 7: Managements Discussion and Analysis of Financial Condition and Results of Operations
in the Companys Annual Report on Form 10-K for the year ended December 31, 2005. 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 2006.
GOODWILL: The Companys annual impairment analyses of its unamortized goodwill balances as of May
31, 2006 did not indicate any impairment.
Related Party Transactions
The Company provides electronic payment processing and other services to its parent company,
Synovus Financial Corp. (Synovus) and its affiliates, and to the Companys equity investment, Total
System Services de México, S.A. de. C.V. (TSYS de México). The services are performed under
contracts that are similar to its contracts with other customers. The Company believes the terms
and conditions of transactions between the Company and these related parties are comparable to
those which could have been obtained in transactions with unaffiliated parties. The Companys
margins with respect to related party transactions are comparable to margins recognized in
transactions with unrelated third parties. The amounts related to these transactions are disclosed
on the face of TSYS consolidated financial statements.
Line of Credit
TSYS had a $45.0 million long-term line of credit from a banking affiliate of Synovus. The
line was an automatic draw down facility. Refer to Note 6 of Notes to Unaudited Condensed
Consolidated Financial Statements for more information on TSYS line of credit.
-29-
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.
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, 2006 and 2005, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of |
|
|
Percentage Change |
|
|
|
Total Revenues |
|
|
in Dollar Amounts |
|
|
|
2006 |
|
|
2005 |
|
|
2006 vs. 2005 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Electronic payment processing services |
|
|
52.5 |
% |
|
|
53.2 |
% |
|
|
3.5 |
% |
Merchant acquiring services |
|
|
14.8 |
|
|
|
17.6 |
|
|
|
(11.7 |
) |
Other services |
|
|
10.2 |
|
|
|
10.3 |
|
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursable items |
|
|
77.5 |
|
|
|
81.1 |
|
|
|
0.1 |
|
Reimbursable items |
|
|
22.5 |
|
|
|
18.9 |
|
|
|
24.5 |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
4.7 |
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and other personnel expense |
|
|
31.5 |
|
|
|
28.8 |
|
|
|
14.7 |
|
Net occupancy and equipment expense |
|
|
17.2 |
|
|
|
18.3 |
|
|
|
(1.7 |
) |
Other operating expenses |
|
|
12.4 |
|
|
|
16.9 |
|
|
|
(22.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
Expenses before reimbursable items |
|
|
61.1 |
|
|
|
64.0 |
|
|
|
0.1 |
|
Reimbursable items |
|
|
22.5 |
|
|
|
18.9 |
|
|
|
24.5 |
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
83.6 |
|
|
|
82.9 |
|
|
|
5.7 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
16.4 |
|
|
|
17.1 |
|
|
|
(0.1 |
) |
Nonoperating income |
|
|
0.7 |
|
|
|
0.4 |
|
|
|
116.7 |
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes,
minority interest and equity in
income of equity investments |
|
|
17.1 |
|
|
|
17.5 |
|
|
|
2.4 |
|
Income taxes |
|
|
5.1 |
|
|
|
6.3 |
|
|
|
(16.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest
and equity in income of equity
investments |
|
|
12.0 |
|
|
|
11.2 |
|
|
|
13.1 |
|
Minority interests in consolidated
subsidiaries net income |
|
|
0.0 |
|
|
|
0.0 |
|
|
|
191.1 |
|
Equity in income of equity investments |
|
|
0.3 |
|
|
|
0.2 |
|
|
|
21.3 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
12.3 |
% |
|
|
11.4 |
% |
|
|
13.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
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, 2006 and 2005, respectively:
-30-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of |
|
|
Percentage Change |
|
|
|
Total Revenues |
|
|
in Dollar Amounts |
|
|
|
2006 |
|
|
2005 |
|
|
2006 vs. 2005 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Electronic payment processing services |
|
|
53.4 |
% |
|
|
54.7 |
% |
|
|
6.1 |
% |
Merchant acquiring services |
|
|
15.2 |
|
|
|
14.4 |
|
|
|
14.9 |
|
Other services |
|
|
10.5 |
|
|
|
11.6 |
|
|
|
(2.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursable items |
|
|
79.1 |
|
|
|
80.7 |
|
|
|
6.4 |
|
Reimbursable items |
|
|
20.9 |
|
|
|
19.3 |
|
|
|
17.5 |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
8.5 |
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and other personnel expense |
|
|
29.7 |
|
|
|
28.3 |
|
|
|
13.9 |
|
Net occupancy and equipment expense |
|
|
17.7 |
|
|
|
18.0 |
|
|
|
6.6 |
|
Other operating expenses |
|
|
13.9 |
|
|
|
16.2 |
|
|
|
(7.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
Expenses before reimbursable items |
|
|
61.3 |
|
|
|
62.5 |
|
|
|
6.4 |
|
Reimbursable items |
|
|
20.9 |
|
|
|
19.3 |
|
|
|
17.5 |
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
82.2 |
|
|
|
81.8 |
|
|
|
9.0 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
17.8 |
|
|
|
18.2 |
|
|
|
6.4 |
|
Nonoperating income |
|
|
0.7 |
|
|
|
0.2 |
|
|
|
218.2 |
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes,
minority interest and equity in
income of equity investments |
|
|
18.5 |
|
|
|
18.4 |
|
|
|
9.2 |
|
Income taxes |
|
|
6.1 |
|
|
|
6.6 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest
and equity in income of equity
investments |
|
|
12.4 |
|
|
|
11.8 |
|
|
|
14.2 |
|
Minority interests in consolidated
subsidiaries net income |
|
|
0.0 |
|
|
|
0.0 |
|
|
|
155.8 |
|
Equity in income of equity investments |
|
|
0.2 |
|
|
|
0.5 |
|
|
|
(42.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
12.6 |
% |
|
|
12.3 |
% |
|
|
11.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
Revenues
Total revenues increased $19.8 million and $101.1 million, or 4.7% and 8.5%, respectively,
during the three and nine months ended September 30, 2006, compared to the same periods in 2005.
The increase in revenues for the three and nine months ended September 30, 2006 includes an
increase of $2.0 million and a decrease of $2.1 million, respectively, related to the effects of
currency translation of its foreign-based subsidiaries and branches. Excluding reimbursable items,
revenues increased $238,000 and $61.1 million, or 0.1% and 6.4%, respectively, during the three and
nine months ended September 30, 2006, compared to the same periods in 2005. Total revenues also
include $6.3 million of revenue for TSYS Card Tech for the three months and the nine months ended
September 30, 2006.
International Revenues
TSYS provides services to its clients worldwide and plans to continue to expand its service
offerings internationally in the future. With the acquisition of TSYS Card Tech, TSYS has extended
its geographic reach into Asia Pacific, Europe, the Middle East and Africa, and as such, has
increased its international revenues.
Total revenues from clients domiciled outside the United States for the three and nine months
ended September 30, 2006 and 2005, respectively, are summarized below:
-31-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
September 30, |
|
September 30, |
(in millions) |
|
2006 |
|
2005 |
|
% Change |
|
2006 |
|
2005 |
|
% Change |
Europe |
|
$ |
43.7 |
|
|
|
34.2 |
|
|
|
27.6 |
% |
|
$ |
112.6 |
|
|
|
98.9 |
|
|
|
14.5 |
% |
Canada |
|
|
25.4 |
|
|
|
23.2 |
|
|
|
9.5 |
|
|
|
71.5 |
|
|
|
66.6 |
|
|
|
7.3 |
|
Japan |
|
|
5.0 |
|
|
|
4.0 |
|
|
|
26.8 |
|
|
|
13.4 |
|
|
|
11.6 |
|
|
|
15.5 |
|
Mexico |
|
|
3.2 |
|
|
|
1.9 |
|
|
|
63.2 |
|
|
|
8.5 |
|
|
|
5.3 |
|
|
|
60.9 |
|
Other |
|
|
4.9 |
|
|
|
0.6 |
|
|
nm |
|
|
|
7.5 |
|
|
|
1.8 |
|
|
nm |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
82.2 |
|
|
|
63.9 |
|
|
|
28.6 |
% |
|
$ |
213.5 |
|
|
|
184.2 |
|
|
|
15.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: TSYS international revenues are generated by TSYS and its consolidated
entities. 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.
Total revenues from clients based in Europe were $43.7 million and $112.6 million for the
three and nine months ended September 30, 2006, a 27.6% and 14.5% increase compared to $34.2
million and $98.9 million for the same periods last year. The increase in revenues in 2006 from
clients based in Europe was a result of internal growth of existing clients and the increased use
of value added products and services, netted against the effects of currency translation, which
were approximately $1.1 million for the nine months ended September 30, 2006.
Total revenues from clients based in Mexico were $3.2 million and $8.5 million for the three
and nine months ended September 30, 2006, a 63.2% and 60.9% increase compared to the $1.9 million
and $5.3 million for the same periods last year. The growth in revenues in 2006 from clients based
in Mexico was a result of the conversion of new accounts and the growth of existing clients.
International revenues for the quarter ended September 30, 2006 include revenues of
approximately $6.3 million associated with TSYS Card Tech for several countries and regions,
including Europe, Japan and Other.
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 mainly in electronic payment
processing services revenue.
For the three months ended September 30, 2006 and 2005, value added products and services
represented 12.5% and 12.4%, respectively, of total revenues. For the nine months ended September
30, 2006 and 2005, value added products and services represented 12.7% and 12.5%, respectively, of
total revenues. Revenues from these products and services, which include some reimbursable items
paid to third-party
-32-
vendors,
increased 5.6%, or $2.9 million, and 10.18%, or $15.0 million, for the three and nine months
ended September 30, 2006 compared to the same periods last year.
Major Customers
A significant amount of the Companys revenues is derived from long-term contracts with large
clients, including its major customers, one of which is Bank of America. TSYS derives revenues
from providing various processing and other services to these clients, including processing of
consumer and commercial accounts, as well as revenues for reimbursable items. With the acquisition
of TSYS Acquiring on March 1, 2005, the Companys revenues include revenues derived from providing
merchant acquiring services to one of these clients, Bank of America. Refer to Notes 4 and 10 in
the Notes to Unaudited Condensed Consolidated Financial Statements for more information on the
major customers and the acquisition of TSYS Acquiring, respectively.
On January 25, 2005, the Company announced that it had extended its agreement with Bank of
America for an additional five years through 2014. Additionally, on October 6, 2005, TSYS Acquiring
announced the renewal of its agreement to provide merchant acquiring services to Bank of America.
On June 30, 2005, Bank of America announced its planned acquisition of MBNA. In December
2005, TSYS received official notification from Bank of America of its intent, pending its
acquisition of MBNA, to shift the processing of its consumer card portfolio in house in October
2006. On January 1, 2006, Bank of Americas acquisition of MBNA was completed and 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.
TSYS processing agreement with Bank of America provided that Bank of America could terminate
its agreement with TSYS for consumer credit card services upon the payment of a termination fee,
the amount of which was dependent upon several factors. This fee of approximately $68.9 million
was received in October 2006 in conjunction with the Bank of America consumer card portfolio
deconversion. As a result of the deconversion, TSYS accelerated the amortization of approximately
$6 million in contract acquisition costs (comprised of $4 million of amortization related to
payments for processing rights, which was recorded as a reduction of revenues, and $2 million of
amortization expense related to conversion costs). The loss of Bank of America, or any significant
client, could have a material adverse effect on the Companys financial position, results of
operations and cash flows. TSYS management believes that the loss of revenues from the
Bank of America consumer card portfolio for the months of 2006 subsequent to the deconversion,
combined with decreased expenses from the reduction in hardware and software and the redeployment
of personnel, should not have a material adverse effect on the Companys financial position,
results of operations or cash flows for the year ending December 31, 2006. However, the Companys
management believes that the termination fee associated with the Bank of America deconversion,
offset by the loss of processing revenues subsequent to the deconversion and the acceleration of
amortization of contract acquisition costs, will have a positive effect on the Companys financial
position, results of operations and cash flows for the year ending December 31, 2006.
For the three and nine months ended September 30, 2006, Bank of America accounted for
approximately 24.7%, or $109.1 million, and 23.9%, or $307.2 million, respectively, of total
revenues. This amount consists of processing revenues for consumer, commercial and merchant
services, as well as reimbursable items. Of the $109.1 million for the three months ended September
30, 2006, approximately $40.7 million, or 37.3%, was derived from Bank of America for reimbursable
items. Of the $307.2 million for the nine months ended September 30, 2006, approximately $112.8
million, or 36.7%, was derived from Bank
-33-
of America for reimbursable items. Bank of America accounted for approximately $68.4 million, or
20.0%, and $194.4 million, or 19.2%, of revenues before reimbursable items for the three and nine
months ended September 30, 2006, respectively. For the three and nine months ended September 30,
2005, Bank of America accounted for 21.7%, or $91.5 million, and 22.1%, or $261.5 million,
respectively, of total revenues. The majority of the increase in revenues derived from Bank of
America for 2006, as compared to 2005, is the result of including TSYS Acquirings revenues for
merchant acquiring services from Bank of America.
For the three and nine months ended September 30, 2006, the Company had another major client
that accounted for approximately 10.6%, or $46.8 million, and 10.5%, or $134.9 million,
respectively, of total revenues. For the three and nine months ended September 30, 2005, this
client accounted for approximately 10.7%, or $45.0 million, and 9.8%, or $115.9 million,
respectively, of total revenues. The loss of this client, or any significant client, could have a
material adverse effect on the Companys financial position, results of operations and cash flows.
Revenues from major customers for the periods reported are primarily attributable to the
domestic-based support services segment and merchant acquiring services segment.
Electronic Payment Processing Services
Electronic payment processing services revenues are generated primarily from charges based on
the number of accounts on file, transactions and authorizations processed, statements mailed, cards
embossed and mailed, and other processing services for cardholder accounts on file. Cardholder
accounts on file include active and inactive consumer credit, retail, debit, stored value,
government services and commercial card accounts. Due to the number of cardholder accounts
processed by TSYS 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 $7.8 million, or 3.5%, and
$39.3 million, or 6.1%, for the three and nine months ended September 30, 2006, respectively,
compared to the same periods in 2005. Included in electronic payment processing services are
revenues of approximately $5.9 million related to TSYS Card Tech.
AOF Data (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
% Change |
At September 30, |
|
|
400.0 |
|
|
|
430.1 |
|
|
|
(7.0 |
) |
QTD Average |
|
|
385.8 |
|
|
|
424.6 |
|
|
|
(9.2 |
) |
YTD Average |
|
|
413.6 |
|
|
|
389.4 |
|
|
|
6.2 |
|
AOF by Portfolio Type (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
|
At September 30, |
|
AOF |
|
% |
|
AOF |
|
% |
|
% Change |
Consumer |
|
|
259.3 |
|
|
|
64.8 |
|
|
|
264.1 |
|
|
|
61.4 |
|
|
|
(1.8 |
) |
Retail |
|
|
51.5 |
|
|
|
12.9 |
|
|
|
85.4 |
|
|
|
19.9 |
|
|
|
(39.7 |
) |
Commercial |
|
|
32.5 |
|
|
|
8.1 |
|
|
|
30.1 |
|
|
|
7.0 |
|
|
|
7.9 |
|
Stored value |
|
|
31.7 |
|
|
|
7.9 |
|
|
|
24.7 |
|
|
|
5.7 |
|
|
|
28.3 |
|
Government services |
|
|
20.7 |
|
|
|
5.2 |
|
|
|
18.3 |
|
|
|
4.3 |
|
|
|
13.3 |
|
Debit |
|
|
4.3 |
|
|
|
1.1 |
|
|
|
7.5 |
|
|
|
1.7 |
|
|
|
(41.7 |
) |
|
|
|
|
|
|
|
|
|
Total |
|
|
400.0 |
|
|
|
100.0 |
|
|
|
430.1 |
|
|
|
100.0 |
|
|
|
(7.0 |
) |
|
|
|
|
|
|
|
|
|
Note: Certain accounts previously classified as Retail have been reclassified as
Stored Value to conform with the presentation adopted in the second quarter of 2006.
-34-
AOF by Geographic Area (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
|
|
At September 30, |
|
AOF |
|
|
% |
|
|
AOF |
|
|
% |
|
|
% Change |
|
Domestic |
|
|
334.8 |
|
|
|
83.7 |
|
|
|
375.3 |
|
|
|
87.3 |
|
|
|
(10.8 |
) |
International |
|
|
65.2 |
|
|
|
16.3 |
|
|
|
54.8 |
|
|
|
12.7 |
|
|
|
19.0 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
400.0 |
|
|
|
100.0 |
|
|
|
430.1 |
|
|
|
100.0 |
|
|
|
(7.0 |
) |
|
|
|
|
|
|
|
|
|
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 2005 to |
|
|
September 2004 to |
|
|
|
September 2006 |
|
|
September 2005 |
|
Beginning balance |
|
|
430.1 |
|
|
|
315.3 |
|
Internal growth of existing clients |
|
|
38.0 |
|
|
|
44.5 |
|
New clients |
|
|
33.1 |
|
|
|
79.3 |
|
Purges/Sales |
|
|
(13.9 |
) |
|
|
(7.9 |
) |
Deconversions |
|
|
(87.3 |
) |
|
|
(1.1 |
) |
|
|
|
|
|
|
|
Ending balance |
|
|
400.0 |
|
|
|
430.1 |
|
|
|
|
|
|
|
|
On March 31, 2004, Bank of America acquired FleetBoston. In connection with the extended
agreement with Bank of America, TSYS converted the FleetBoston card portfolio to TSYS processing
system in March 2005.
On October 13, 2004, TSYS finalized a definitive agreement with J.P. Morgan Chase & Co.
(Chase) to service the combined card portfolios of Chase Card Services and to upgrade its
card-processing technology. Pursuant to the agreement, TSYS converted the consumer accounts of
Chase to the modified version of TS2 in July 2005. TSYS expects to maintain the card-processing
functions of Chase Card Services for at least two years. Chase Card Services then has 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 TS2 with a six-year payment
term. TSYS expects that Chase will discontinue its processing agreement according to the original
schedule and will license TSYS processing software in 2007.
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 plans to complete the conversion of Capital
Ones portfolio from its in house processing system to TS2 in phases, beginning in July 2006 and
ending in early 2007. In October 2006, TSYS converted the vast majority of the Capital One
portfolio onto its TS2 platform. 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.
Current 2006 earnings estimates assume that TSYS will recognize revenues and costs associated
with converting, processing and servicing the Capital One portfolio beginning in the fourth quarter
of 2006.
In July 2003, Sears and Citigroup announced an agreement for the sale by Sears to Citigroup of
the Sears credit card and financial services businesses. The TSYS/Sears agreement granted to Sears
the one-time
right to market test TSYS pricing and functionality after May 1, 2004, which right was
exercised by Citigroup. In June 2005, TSYS announced that Citigroup would move the Sears consumer
MasterCard and
-35-
private-label accounts from TSYS in a deconversion that occurred in June 2006. For
the nine months ended September 30, 2006, TSYS revenues from the agreement with Sears represented
less than 10% of TSYS consolidated revenues. TSYS expects to continue supporting commercial card
accounts for Citibank, as well as Citibanks Banamex USA consumer accounts, according to the terms
of the existing agreements for those portfolios. TSYS management believes that the loss of
revenues from the Sears portfolio for the months of 2006 subsequent to the deconversion, combined
with decreased expenses from the reduction in hardware and software and the redeployment of
personnel, should not have a material adverse effect on the Companys financial position, results
of operations or cash flows for the year ending December 31, 2006.
Merchant Acquiring Services
Merchant acquiring services revenues are derived from providing acquiring solutions, related
systems and integrated support services to financial institutions and other merchant acquirers.
Revenues from merchant acquiring services include processing all payment forms including credit,
debit, prepaid, electronic benefit transfer and electronic check for merchants of all sizes across
a wide array of retail market segments. Merchant acquiring services products and services include:
authorization and capture of transactions; clearing and settlement of transactions; information
reporting services related to transactions; merchant billing services; and point-of-sale equipment
sales and service.
On March 1, 2005, TSYS acquired the remaining 50% of TSYS Acquiring, formerly operating as
Vital Processing Services, L.L.C., from Visa for $95.8 million in cash, including direct
acquisition costs of $794,000. TSYS Acquiring is now a separate, wholly owned subsidiary of TSYS.
As a result of the acquisition of control of TSYS Acquiring, TSYS changed from the equity method of
accounting for the investment in TSYS Acquiring and began consolidating TSYS Acquirings balance
sheet and results of operations. Refer to Note 10 in the Notes to Unaudited Condensed Consolidated
Financial Statements for more information on the acquisition of TSYS Acquiring.
Revenues from merchant acquiring services are mainly generated by TSYS wholly owned
subsidiary TSYS Acquiring and majority owned subsidiary GP Net. Revenue for the three and nine
months ended September 30, 2006 was $65.5 million and $195.3 million, respectively, compared to
$74.2 million and $170.0 million for the same periods last year. The increase for the nine months
is completely attributable to the consolidation of TSYS Acquirings results effective March 1,
2005. Prior to the acquisition of TSYS Acquiring, TSYS revenues included fees TSYS charged to TSYS
Acquiring for back-end processing support.
Revenues from merchant acquiring services are down for the three months ended September 30,
2006, as compared to the same period in 2005, as the result of closing the point of sale terminal
distribution sales office during the first quarter of 2006. TSYS Acquiring is also experiencing a
moderate market price compression and reduction of revenues due to deconversions.
TSYS Acquirings results are driven by the authorization and capture transactions processed at
the point-of-sale and the number of clearing and settlement transactions. TSYS Acquirings
authorizations and data capture transactions are primarily through dial-up or Internet
connectivity.
During the third quarter of 2006, TSYS Acquiring renewed long-term agreements with two
clients, as well as signed five new clients. TSYS Acquiring also announced plans to integrate
clearing and settlement processing for Discover Network card acceptance into its offering for
merchant acquirers and independent sales organizations.
TSYS Acquiring is also expanding its product and service offerings to include enhanced gift
card, enhanced statements, new Internet-based reporting capabilities and contactless payments.
During the third
-36-
quarter of 2006, TSYS Acquiring began offering merchant cash advance services and
upgraded Dynamic Currency Conversion (DCC) multi-currency processing services.
Effective January 1, 2006, Golden Retriever Systems L.L.C. became a wholly owned subsidiary of
Enhancement Services Corporation. Also effective January 1, 2006, Merlin Solutions, L.L.C. became a
wholly owned subsidiary of TSYS. Both entities were previously wholly owned subsidiaries of TSYS
Acquiring and were reported under the merchant acquiring services segment. Effective January 1,
2006, the financial results of the two entities are included in the domestic-based support services
segment. The segment results for previous periods have been reclassified to reflect the change.
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 services, as well
as TSYS business process management services. Revenues from other services increased $1.1 million,
or 2.6%, for the three months ended September 30, 2006, compared to the same period in 2005.
Revenues from other services decreased $3.5 million, or 2.6%, for the nine months ended September
30, 2006, compared to the same period in 2005. Other services revenue for the third quarter
increased as a result of greater growth in redemption services from ESC Loyalty. Other services
revenue decreased for the nine months primarily due to the loss of call center revenue.
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 $19.6 million, or 24.5%, for the three months ended September 30,
2006, as compared to the same period last year. Reimbursable items increased $39.9 million, or
17.5%, for the nine months ended September 30, 2006, as compared to the same period last year. Of
the $39.9 million increase for the nine months ended September 30, 2006, $7.3 million is
attributable to TSYS Acquiring.
The majority of reimbursable items relates to the Companys domestic-based clients and is
primarily costs associated with postage. The Companys reimbursable items are impacted with
changes in postal rates and changes in the volumes of all mailing activities by its clients.
Effective January 8, 2006, the United States Postal Service increased the rate of first class mail.
The increase in reimbursable items due to the increase in postal rates is expected to be negatively
impacted by the decrease in reimbursable items associated with the deconversion of the Citibank
Sears portfolio in June 2006 and Bank of Americas consumer card portfolio in October 2006.
In May 2006, TSYS collection subsidiary renegotiated a contract with its largest client. One
of the provisions that was changed related to the handling of attorney fees and court costs. In
reviewing the indicators set forth in EITF 99-19, Reporting Revenue Gross as a Principal versus
Net as an Agent, TSYS met the indicators of gross reporting, specifically TSYS is the primary
obligor and adds value as part of the service. As a result, TSYS has recognized $6.3 million and
$7.7 million of attorney fees and court costs for the three months and nine months ended September
30, 2006, respectively, as reimbursable items.
A summary of reimbursable item revenues for the three and nine months ended September 30,
2006, as compared to 2005, is provided below:
-37-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
(in thousands) |
|
September 30, |
|
September 30, |
|
|
2006 |
|
2005 |
|
% Change |
|
2006 |
|
2005 |
|
% Change |
Postage |
|
$ |
48,783 |
|
|
|
37,955 |
|
|
|
28.5 |
% |
|
$ |
134,384 |
|
|
|
120,592 |
|
|
|
11.4 |
% |
Card
association
access fees |
|
|
19,344 |
|
|
|
19,635 |
|
|
|
(1.5 |
) |
|
|
57,237 |
|
|
|
47,930 |
|
|
|
19.4 |
|
Other |
|
|
31,350 |
|
|
|
22,279 |
|
|
|
40.7 |
|
|
|
76,968 |
|
|
|
60,130 |
|
|
|
28.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
99,477 |
|
|
|
79,869 |
|
|
|
24.5 |
% |
|
$ |
268,589 |
|
|
|
228,652 |
|
|
|
17.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
Total expenses increased 5.7% and 9.0% for the three and nine months ended September 30, 2006,
compared to the same periods in 2005. The increase in expense includes an increase of $1.6 million
and a decrease of $2.5 million for the three and nine months ended September 30, 2006,
respectively, related to the effects of currency translation of its foreign-based subsidiaries,
branches and divisions. Excluding reimbursable items, total expenses increased 0.1% and 6.4% for
the three and nine months ended September 30, 2006, respectively, compared to the same periods in
2005. The increase in operating expenses is attributable to changes in each of the expense
categories as described below.
Salaries and Other Personnel Expense
Summarized below are the major components of salaries and other personnel expense for the
three and nine months ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
September 30, |
|
September 30, |
(in thousands) |
|
2006 |
|
2005 |
|
% Change |
|
2006 |
|
2005 |
|
% Change |
Salaries |
|
$ |
101,050 |
|
|
|
91,344 |
|
|
|
10.6 |
% |
|
$ |
285,030 |
|
|
|
256,496 |
|
|
|
11.1 |
% |
Employee benefits |
|
|
31,124 |
|
|
|
27,277 |
|
|
|
14.1 |
|
|
|
79,944 |
|
|
|
76,079 |
|
|
|
5.1 |
|
Nonemployee wages |
|
|
12,381 |
|
|
|
8,577 |
|
|
|
44.4 |
|
|
|
33,148 |
|
|
|
26,294 |
|
|
|
26.1 |
|
Share-based compensation |
|
|
2,129 |
|
|
|
566 |
|
|
nm |
| |
|
6,574 |
|
|
|
849 |
|
|
nm |
|
Other |
|
|
2,810 |
|
|
|
2,210 |
|
|
|
27.2 |
|
|
|
9,030 |
|
|
|
5,766 |
|
|
|
56.6 |
|
Less capitalized expenses |
|
|
(10,312 |
) |
|
|
(8,585 |
) |
|
|
20.1 |
|
|
|
(32,781 |
) |
|
|
(31,143 |
) |
|
|
5.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
139,182 |
|
|
|
121,389 |
|
|
|
14.7 |
% |
|
$ |
380,945 |
|
|
|
334,341 |
|
|
|
13.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and other personnel expense increased $17.8 million, or 14.7%, for the three months
ended September 30, 2006, compared to the same period in 2005. For the nine months ended September
30, 2006, salaries and other personnel expense increased $46.6 million, or 13.9%, compared to the
same period in 2005. Of the $46.6 million increase for the nine months for 2006, $11.8 million is
the result of employee-related expenses of TSYS Acquiring. In addition, the change in salaries and
other personnel expense is associated with the normal salary increases and related benefits, offset
by the 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 salary bonuses, profit sharing and employer 401(k) expenses. For the
three months ended September 30, 2006 and 2005, the Company accrued $14.8 million and
$13.5 million, respectively, for performance-based incentives. For the nine months ended
September 30, 2006 and 2005, the Company accrued $26.3 million and $33.0 million, respectively, for
performance-based incentives.
-38-
With the acquisition of TSYS Card Tech, TSYS added 204 employees and approximately $2.9
million of employment expenses for the three months and nine months ended September 30, 2006,
respectively.
The Companys salaries and other personnel expense is greatly influenced by the number of
employees. Below is a summary of the Companys employee data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Data: |
|
|
|
|
|
|
(Full-time Equivalents) |
|
2006 |
|
2005 |
|
% Change |
At September 30, |
|
|
6,779 |
|
|
|
6,522 |
|
|
|
3.9 |
|
QTD Average |
|
|
6,639 |
|
|
|
6,483 |
|
|
|
2.4 |
|
YTD Average |
|
|
6,616 |
|
|
|
6,223 |
|
|
|
6.3 |
|
The Company maintains share-based employee compensation plans for purposes of incenting and
retaining employees. In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123 (revised) (SFAS No. 123R) Share-Based Payment, which the Company adopted on January 1,
2006. SFAS No. 123R requires the Company to recognize compensation expense for the nonvested
portion of outstanding share-based compensation granted in the form of stock options based on the
grant-date fair value of those awards. Refer to Note 5 of Notes to Unaudited Condensed Consolidated
Financial Statements for more information on share-based compensation.
Share-based compensation expenses include the impact of expensing the fair value of stock
options in 2006, as well as expenses associated with nonvested shares. For the three months ended
September 30, 2006, share-based compensation was $2.1 million, compared to $566,000 for the same
period in 2005. For the nine months ended September 30, 2006, share-based compensation was $6.6
million, compared to $849,000 for the same period in 2005.
TSYS also announced the discontinuance of operations at its Jacksonville, Florida office
effective November 2006, affecting 74 employees. The Jacksonville office provided information
technology support for several processing products.
Net Occupancy and Equipment Expense
Summarized below are the major components of net occupancy and equipment expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
(in thousands) |
|
2006 |
|
|
2005 |
|
|
% Change |
|
|
2006 |
|
|
2005 |
|
|
% Change |
|
Depreciation and amortization |
|
$ |
31,385 |
|
|
|
28,864 |
|
|
|
8.7 |
% |
|
$ |
92,584 |
|
|
|
80,381 |
|
|
|
15.2 |
% |
Equipment and software rentals |
|
|
26,451 |
|
|
|
28,687 |
|
|
|
(7.8 |
) |
|
|
83,494 |
|
|
|
74,420 |
|
|
|
12.2 |
|
Repairs and maintenance |
|
|
12,546 |
|
|
|
11,855 |
|
|
|
5.8 |
|
|
|
33,943 |
|
|
|
33,657 |
|
|
|
0.8 |
|
Impairment of developed
software |
|
|
|
|
|
|
482 |
|
|
nm |
|
|
|
|
|
|
|
3,619 |
|
|
nm |
|
Other |
|
|
5,429 |
|
|
|
7,246 |
|
|
|
(25.1 |
) |
|
|
16,843 |
|
|
|
20,693 |
|
|
|
(18.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
75,811 |
|
|
|
77,134 |
|
|
|
(1.7 |
)% |
|
$ |
226,864 |
|
|
|
212,770 |
|
|
|
6.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
nm = not meaningful
Net occupancy and equipment expense decreased $1.3 million, or 1.7%, and increased $14.1
million, or 6.6%, for the three and nine months ended September 30, 2006 over the same periods in
2005, respectively. Of the $14.1 million increase for the nine months ended September 30, 2006,
$5.7 million is the result of
-39-
occupancy and equipment related expenses of TSYS Acquiring. With the
acquisition of TSYS Card Tech, TSYS added approximately $0.9 million of occupancy and equipment
expenses for the three months and nine months ended September 30, 2006, respectively.
Depreciation and amortization increased for the three and nine months ended September 30,
2006, as compared to the same periods in 2005, as a result of the depreciation and amortization
associated with TSYS Acquiring, as well as the acceleration of amortization of software licenses
that are under processing capacity or MIPS agreements. These licenses are amortized using a
units-of-production basis. As a result of the deconversions scheduled during this year and next
year, TSYS total future MIPS are expected to decline, resulting in an increase in software
amortization for the periods prior to the deconversion dates. As it converted the vast majority of
the Capital One portfolio, TSYS was operating at its highest production capacity in the Companys
history. This capacity level was designed to maintain the service the processing needs of all
clients and will be reduced as certain clients begin deconverting, starting in October 2006.
The Companys equipment and software rentals increased for the nine months in 2006, as
compared to 2005, as a result of software licenses that are leased under processing capacity or
MIPS agreements, as well as increased equipment expenses associated with providing additional
capacity for the scheduled Capital One portfolio conversions.
Through December 2004, the Company invested a total of $6.3 million in developing its
Integrated Payments (IP) Platform supporting the on-line and off-line debit and stored value
markets. IP Platform would have given clients access to all national and regional networks, EBT
programs, ATM driving and switching services for online debit processing..
Development relating specifically to the IP on-line debit platform primarily consisted of a
third-party software solution. During the first quarter of 2005, the Company evaluated its debit
solution and decided to modify its approach in the debit processing market. With the acquisition
of TSYS Acquiring and debit alternatives now available, TSYS determined that it would no longer
market this third-party software product as its on-line debit solution. TSYS will continue to
support this product for existing clients and will enhance and develop a new solution. As a
result, TSYS recognized an impairment charge in net occupancy and equipment expense of
approximately $3.1 million related to this asset during the first quarter of 2005. The impairment
charge is reflected in the domestic-based support services segment. As of September 30, 2006, the
Company has $0.7 million capitalized, net of amortization, related to this asset.
Other Operating Expenses
Summarized below are the major components of other operating expenses for the three and nine
months ended September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
September 30, |
|
September 30, |
(in thousands) |
|
2006 |
|
2005 |
|
% Change |
|
2006 |
|
2005 |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party data processing services |
|
$ |
9,399 |
|
|
|
14,055 |
|
|
|
(33.1 |
)% |
|
$ |
30,157 |
|
|
|
30,505 |
|
|
|
(1.1 |
)% |
Supplies and stationery |
|
|
7,332 |
|
|
|
7,109 |
|
|
|
3.1 |
|
|
|
21,515 |
|
|
|
21,179 |
|
|
|
1.6 |
|
Court costs associated with debt
collection services |
|
|
6,576 |
|
|
|
8,211 |
|
|
|
(19.9 |
) |
|
|
20,647 |
|
|
|
24,487 |
|
|
|
(15.7 |
) |
Professional advisory services |
|
|
5,621 |
|
|
|
7,824 |
|
|
|
(28.2 |
) |
|
|
17,322 |
|
|
|
15,717 |
|
|
|
10.2 |
|
Travel and business development |
|
|
5,383 |
|
|
|
4,181 |
|
|
|
28.8 |
|
|
|
14,324 |
|
|
|
11,567 |
|
|
|
23.8 |
|
Amortization of conversion costs |
|
|
4,533 |
|
|
|
4,142 |
|
|
|
8.1 |
|
|
|
13,913 |
|
|
|
11,450 |
|
|
|
21.5 |
|
-40-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
September 30, |
|
September 30, |
(in thousands) |
|
2006 |
|
2005 |
|
% Change |
|
2006 |
|
2005 |
|
% Change |
|
|
|
|
|
|
|
|
|
Terminal deployment costs |
|
|
2,500 |
|
|
|
6,772 |
|
|
|
(63.1 |
) |
|
|
10,134 |
|
|
|
16,483 |
|
|
|
(38.5 |
) |
Management fees |
|
|
1,953 |
|
|
|
2,054 |
|
|
|
(4.6 |
) |
|
|
6,784 |
|
|
|
6,145 |
|
|
|
10.4 |
|
Amortization of acquisition intangibles |
|
|
1,356 |
|
|
|
868 |
|
|
|
56.2 |
|
|
|
3,072 |
|
|
|
2,343 |
|
|
|
31.1 |
|
Transaction processing provisions |
|
|
414 |
|
|
|
3,039 |
|
|
|
(86.4 |
) |
|
|
7,914 |
|
|
|
7,634 |
|
|
|
3.7 |
|
Bad debt expense |
|
|
157 |
|
|
|
1,637 |
|
|
|
(90.4 |
) |
|
|
(60 |
) |
|
|
4,125 |
|
|
|
(101.4 |
) |
Other |
|
|
9,864 |
|
|
|
11,353 |
|
|
|
(12.8 |
) |
|
|
32,305 |
|
|
|
39,814 |
|
|
|
(18.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
55,088 |
|
|
|
71,245 |
|
|
|
(22.7 |
)% |
|
$ |
178,027 |
|
|
|
191,449 |
|
|
|
(7.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses include, among other things, amortization of conversion costs, costs
associated with delivering merchant services, professional advisory fees and court costs associated
with the Companys debt collection business. Other operating expenses also include charges for
processing errors, contractual commitments and bad debt expense. As described in the Critical
Accounting Policies section in the 2005 Form 10-K, managements evaluation of the adequacy of its
transaction processing reserves and allowance for doubtful accounts is based on a formal analysis
which assesses the probability of losses related to contractual contingencies, processing errors
and uncollectible accounts. Increases and decreases in transaction processing provisions and
charges for bad debt expense are reflected in other operating expenses.
Other operating expenses for the three months ended September 30, 2006 decreased $16.2
million, or 22.7%, as compared to the same period in 2005. Other operating expenses for the nine
months ended September 30, 2006 decreased $13.4 million, or 7.0%, as compared to the same period in
2005. The decrease of $13.4 million in operating expenses for the nine months ended September 30,
2006, as compared to the same period in 2005, is primarily the result of decline in the terminal
deployment expenses associated with the point of sale terminal distribution sales office and the
recognized attorney fees and court costs associated with debt collection services as reimbursable
items.
With the acquisition of TSYS Card Tech, TSYS added approximately $2.2 million of other
expenses for the three months and nine months ended September 30, 2006, respectively.
Operating Income
Operating income decreased 0.1% and increased 6.4% for the three and nine months ended
September 30, 2006 over the same periods in 2005. The Companys operating profit margin for the
three and nine months ended September 30, 2006 was 16.4% and 17.8%, respectively, compared to 17.1%
and 18.2% for the same periods last year. TSYS operating margin decreased for the three months
and nine months ended September 30, 2006, as compared to the same periods in 2005, as the result of
expenses increasing at a faster rate than revenues. The growth in expenses for the three months
and nine months ended September 30, 2006, respectively, was the result of increased expenses
associated with maintaining processing capacity at the high levels necessary to convert new
processing clients prior to clients deconverting, as well as increased expenses associated with
performance-based incentives.
Nonoperating Income (Expense)
Interest income for the three months ended September 30, 2006 was $3.4 million, an increase of
$1.8 million, compared to $1.6 million for the same period in 2005. Interest income for the nine
months ended September 30, 2006 was $9.3 million, an increase of $5.4 million, compared to $3.9
million for the same period in 2005. The increase in interest income is primarily attributable to
the fluctuations in cash available for investment and changes in short-term interest rates.
Interest expense for the three months ended September 30, 2006 was $235,000, an increase of
$151,000, compared to $84,000 for the same period in 2005. Interest expense for the nine months
ended
-41-
September 30, 2006 was $364,000, an increase of $105,000, compared to $259,000 for the same
period in 2005.
In connection with the acquisition of TSYS Card Tech, the Company loaned $59.3 million to its
UK operation as an intercompany loan. The financing requires the unit to repay the loan in US
dollars. The functional currency of the European operations is the British Pound Sterling (BPS).
As the Company translates the European financial statements into US dollars, the translated balance
of the financing (liability) is adjusted upward or downward to match the US-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 the restructuring, the Company
recorded a foreign currency translation gain on the Companys financing with its European
operations during the third quarter of 2006 of $1.6 million. The balance of the financing at
September 30, 2006 was approximately $59.3 million.
The Company records foreign currency translation adjustments on foreign-denominated balance
sheet accounts. The Company maintains several cash accounts denominated in foreign currencies,
primarily in Euros and British Pounds Sterling (BPS). As the Company translates the
foreign-denominated cash balances into US 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 majority of the translation gain of $282,000 and $195,000 for the three and
nine months ended September 30, 2006, respectively, relates to the translation of cash accounts.
The balance of the Companys foreign-denominated cash accounts subject to risk of translation gains
or losses at September 30, 2006 was approximately $30.2 million, the majority of which is
denominated in Euros.
Income Taxes
TSYS effective income tax rate for the three months ended September 30, 2006 was 29.4%,
compared to 36.1% for the same period in 2005. TSYS effective income tax rate for the nine months
ended September 30, 2006 was 32.8%, compared to 35.3% for the same period in 2005. 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.
In July 2006, TSYS changed the structure of its European operation from a branch
structure to a statutory structure that will facilitate continued expansion in the European
region. 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. As a result, TSYS now considers foreign earnings
related to these foreign operations to be permanently reinvested.
The new statutory structure provides TSYS with marketing and personnel hiring
advantages when compared to the former branch office, as well as providing TSYS with certain
U.S. and U.K. tax benefits. As a result of the new structure, TSYS reduced previously established
tax reserves that would no longer be required under the new structure in the amount of $5.6
million in the third quarter of 2006. In third quarter of 2006, TSYS also reassessed its
contingencies for federal and state exposures, which resulted in an increase in tax
contingency amounts by approximately $1.5 million.
-42-
During the first quarter of 2006, TSYS received notices of proposed adjustments relating
to taxes due for the years 2000 through 2003. As a result, TSYS recorded a reduction in previously
recorded income tax liabilities of $1.7 million which reduced income tax expense for the first
quarter of 2006.
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
TSYS share of income from its equity in equity investments was $1.2 million and $991,000 for
the three months ended September 30, 2006 and 2005, respectively. TSYS share of income from its
equity in equity investments was $3.1 million and $5.3 million for the nine months ended September
30, 2006 and 2005, respectively. The decrease for the first nine months is primarily attributable
to the purchase of the remaining 50% of TSYS Acquiring on March 1, 2005 and the inclusion of TSYS
Acquirings operating results in TSYS consolidated statement of income. Refer to Note 10 in the
Notes to Unaudited Condensed Consolidated Financial Statements for more information on the
acquisition of TSYS Acquiring.
Total System Services de México, S.A. de C.V.
The Company has an equity investment with a number of Mexican banks and records its 49%
ownership in the equity investment using the equity method of accounting. The operation, Total
System Services de México, S.A. de C.V. (TSYS de México), prints statements and provides
card-issuing support services to the equity investment clients.
During the three and nine months ended September 30, 2006, the Companys equity in income of
equity investments related to TSYS de México was $857,000 and $2.5 million, respectively,
representing a 4.7% decrease and 18.2% increase, or $134,000 and $380,000, compared to $991,000 and
$2.1 million, respectively, for the same periods last year.
TSYS pays TSYS de México a processing support fee for certain client relationship and network
services that TSYS de México has assumed from TSYS. TSYS paid TSYS de México a processing support
fee of $32,000 and $36,000 for the three months ended September 30, 2006 and 2005, respectively.
TSYS paid TSYS de México a processing support fee of $112,000 and $105,000 for the nine months
ended September 30, 2006 and 2005, respectively.
China UnionPay Data Co., Ltd.
Effective November 1, 2005, the Company purchased an initial 34.04% equity interest in China
UnionPay Data Co., Ltd. (CUP Data), the payments-processing subsidiary of China UnionPay Co., Ltd.
(CUP). CUP is sanctioned by the Peoples Bank of China, Chinas central bank, and has become one of
the worlds largest and fastest growing payments networks. CUP Data currently provides transaction
processing, disaster recovery and other services for banks and bankcard issuers in China. TSYS
equity in income of equity
investments related to CUP Data was approximately $345,000 and $604,000 for the three and nine
months ended September 30, 2006.
Effective August 1, 2006, TSYS increased its ownership interest in CUP Data to 44.56% upon its
receipt of regulatory approval in China. Refer to Note 10 in the Notes to Unaudited Condensed
Consolidated Financial Statements for more information on the acquisition of CUP Data.
-43-
TSYS Acquiring Solutions, L.L.C.
As a result of the acquisition of control of TSYS Acquiring, TSYS changed from the equity
method of accounting for the investment in TSYS Acquiring and began consolidating TSYS Acquirings
balance sheet and results of operations in TSYS consolidated financial statements beginning March
1, 2005. For the two months in 2005 prior to the acquisition, the Companys equity in income of
equity investments related to TSYS Acquiring was $3.2 million.
Net Income
Net income for the three months ended September 30, 2006 increased 13.0%, or $6.2 million, to
$54.3 million, or basic and diluted earnings per share of $0.28, compared to $48.1 million, or
basic and diluted earnings per share of $0.24, for the same period in 2005. Net income for the
nine months ended September 30, 2006 increased 11.9%, or $17.3 million, to $162.1 million, or basic
and diluted earnings per share of $0.82, compared to $144.8 million, or basic and diluted earnings
per share of $0.73, for the same period in 2005.
Net Profit Margin
The Companys net profit margin for the three months ended September 30, 2006 was 12.3%,
compared to 11.4% for the same period last year. The Companys net profit margin for the nine
months ended September 30, 2006 was 12.6%, compared to 12.3% for the same period last year.
The Companys net profit margin is also impacted by the acquisition of TSYS Acquiring. Prior
to acquiring control, TSYS accounted for its investment in TSYS Acquiring using the equity method
of accounting. Only TSYS share of TSYS Acquirings earnings was included in TSYS net income.
After acquiring control of TSYS Acquiring, TSYS began consolidating TSYS Acquirings results of
operations on March 1, 2005. By consolidating the results of TSYS Acquiring, the impact is a lower
net profit margin as compared to periods that used the equity method of accounting. TSYS net
profit margin increased for the quarter as the result of managements focus on expense controls,
lower effective tax rate and increased interest income offset by increased expenses associated with
share-based compensation and increased amortization.
Profit Margins and Reimbursable Items
Management believes that reimbursable items distort operating and net profit margins as
defined by generally accepted accounting principles. Management evaluates the Companys operating
performance based upon operating and net profit margins excluding reimbursable items. Management
believes that operating and net profit margins excluding reimbursable items are more useful because
reimbursable items do not impact profitability as the Company receives reimbursement for expenses
incurred on behalf of its clients.
Below is the reconciliation between reported margins and adjusted margins excluding
reimbursable items for the three and nine months ended September 30, 2006 and 2005, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
(in thousands) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
72,257 |
|
|
|
72,332 |
|
|
|
228,845 |
|
|
|
214,984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
54,306 |
|
|
|
48,056 |
|
|
|
162,106 |
|
|
|
144,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
441,815 |
|
|
|
421,969 |
|
|
|
1,283,270 |
|
|
|
1,182,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin (as reported) |
|
|
16.4 |
% |
|
|
17.1 |
% |
|
|
17.8 |
% |
|
|
18.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net profit margin (as reported) |
|
|
12.3 |
% |
|
|
11.4 |
% |
|
|
12.6 |
% |
|
|
12.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue before reimbursable
items |
|
$ |
342,338 |
|
|
|
342,100 |
|
|
|
1,014,681 |
|
|
|
953,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating margin |
|
|
21.1 |
% |
|
|
21.1 |
% |
|
|
22.6 |
% |
|
|
22.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net profit margin |
|
|
15.9 |
% |
|
|
14.0 |
% |
|
|
16.0 |
% |
|
|
15.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
-44-
Projected Outlook for 2006
TSYS expects its 2006 earnings growth to be in the range of 26%-28%, based on the following
assumptions: total revenues will increase 9%-11% in 2006; accounts on file at the end of 2006 will
be approximately 395 million to 405 million; recognition of revenues and expenses associated with
the Capital One agreement will begin in the fourth quarter of 2006; and the international corporate
restructuring will result in a lower effective tax rate.
Projected Outlook for 2007
TSYS estimated 2007 earnings are expected to decline between 9-7% as compared to estimated
2006 earnings, based on the following assumptions: (1) 2006 earnings growth will be in the 26%-28%
range; (2) including the Bank of America termination payment, estimated total revenues will decline
5%-3% in 2007; (3) the conversion of the Capital One portfolio will be completed in 2007; (4) Chase
will discontinue its processing agreement according to the original schedule and will license TSYS
processing software in 2007; (5) expense reductions in employment, equipment, leases and other
areas which are included in 2007 estimates will be accomplished; and (6) 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.
Financial Position, Liquidity and Capital Resources
The Condensed Consolidated Statements of Cash Flows detail the Companys cash flows from
operating, investing and financing activities. TSYS primary method of funding its operations and
growth has been cash generated from current operations and the use of leases. TSYS has occasionally
used borrowed funds to supplement financing of capital expenditures and acquisitions.
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
(in thousands) |
|
2006 |
|
2005 |
|
|
|
Net income |
|
$ |
162,106 |
|
|
|
144,822 |
|
Depreciation and amortization |
|
|
130,306 |
|
|
|
108,698 |
|
Other noncash items and charges, net |
|
|
(11,429 |
) |
|
|
21,535 |
|
Net change in current and long-term assets and
current and long-term liabilities |
|
|
(52,950 |
) |
|
|
(151,118 |
) |
|
|
|
Net cash provided by operating activities |
|
$ |
228,033 |
|
|
|
123,937 |
|
|
|
|
TSYS main source of funds is derived from operating activities, specifically net income.
During the nine months ended September 30, 2006, the Company generated $228.0 million in cash from
operating activities compared with $123.9 million for the same period last year. The increase in
2006 in net cash provided by operating activities was primarily the result of the change in the use
of cash related to net change in current and long-term assets and current and long-term
liabilities.
Net change in current and long-term assets and current and long-term liabilities include
accounts receivable, prepaid expenses, other current assets and other assets, accounts payable,
accrued salaries and employee benefits, other current liabilities and other liabilities. The
change in accounts receivable at September 30, 2006 as compared to December 31, 2005 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.
-45-
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
(in thousands) |
|
2006 |
|
2005 |
|
|
|
Purchases of property and equipment, net |
|
$ |
(21,203 |
) |
|
|
(33,540 |
) |
Additions to licensed computer software from
vendors |
|
|
(9,650 |
) |
|
|
(10,049 |
) |
Additions to internally developed computer software |
|
|
(13,699 |
) |
|
|
(17,435 |
) |
Cash used in acquisitions, net of cash acquired |
|
|
(70,578 |
) |
|
|
(56,998 |
) |
Dividends from equity investments |
|
|
2,371 |
|
|
|
1,658 |
|
Additions to contract acquisition costs |
|
|
(39,578 |
) |
|
|
(11,756 |
) |
|
|
|
Net cash used in investing activities |
|
$ |
(152,337 |
) |
|
|
(128,120 |
) |
|
|
|
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
$152.3 million in cash for investing activities for the nine months ended September 30, 2006,
compared to $128.1 million for the same period in 2005. The major use of cash for investing
activities in 2005 was for the purchase of TSYS Acquiring. The major use of cash for investing in
2006 was for the purchase of TSYS Card Tech and an increase in ownership equity of CUP Data.
Property and Equipment
Capital expenditures for property and equipment during the three month periods ended September
30, 2006 and 2005 were $6.9 million and $13.1 million, respectively. For the nine month period
ended September 30, 2006, capital expenditures for property and equipment were $21.2 million
compared to $33.5 million for the same period last year.
Licensed Computer Software from Vendors
Expenditures for licensed computer software from vendors were $5.2 million and $598,000 for
the three months ended September 30, 2006 and 2005, respectively. Expenditures for licensed
computer software from vendors were $9.6 million and $10.0 million for the nine months ended
September 30, 2006 and 2005, respectively. These additions relate to annual site licenses for
mainframe processing systems whose fees are based upon a measure of TSYS computer processing
capacity, commonly referred to as millions of instructions per second or MIPS.
Internally Developed Computer Software Costs
Additions to capitalized software development costs for the nine months ended September 30,
2006 were $13.7 million, compared to $17.4 million for the same period in 2005.
The amount capitalized as software development costs in 2006, is mainly attributable to TSYS
Acquirings development of Merchant Boarding and Maintenance (MBM) and ESCs development of TSYS
Loyalty Platform (TLP). The Company remains committed to developing and enhancing its processing
solutions to expand its service offerings. In addition to developing solutions, the Company
has expanded its service offerings through strategic acquisitions, such as TSYS Acquiring.
Through its TSYS Acquiring subsidiary, the Company is internally developing MBM, which is a
tool that will provide a single point of entry system which will enable acquirers to more easily
load and maintain their merchant populations. The Company expects to complete MBM in phases, and
the first phase was introduced in the marketplace in July 2005. The remaining phases continue to
be developed and are expected to be introduced in the marketplace during 2007. This project had
reached technological feasibility prior to TSYS acquisition of control of TSYS Acquiring. The
Company capitalized approximately $2.3 million
-46-
during the three months ended September 30, 2006, and has a total of $28.6 million capitalized since the project began.
Through its ESC subsidiary, the Company is internally developing an advanced loyalty platform
TLP. TLP is designed to support transactional speed, complex reward programs and robust
analytics tools. The platform offers critical support to all elements of loyalty management,
including points processing, tracking, communications, redemption systems and analytics. The
Company capitalized approximately $0.8 million during the three months ended September 30, 2006,
and has a total of $8.5 million capitalized since the project began. The project was made available
for use in July 2006.
The Company was developing its Integrated Payments Platform supporting the on-line and
off-line debit and stored value markets, which would have given clients access to all national and
regional networks, EBT programs, ATM driving and switching services for online debit processing.
The Company invested a total of $6.3 million since the project began. As previously mentioned in
Net Occupancy and Equipment Expense of Results of Operations, the Company evaluated its debit
solution and decided to modify its approach in the debit processing market. In March 2005, TSYS
recognized an impairment charge in net occupancy and equipment expense of approximately $3.1
million related to its on-line debit solution. As of September 30, 2006, the Company has $0.7
million capitalized, net of amortization, related to this asset.
Cash Used in Acquisitions
Effective August 1, 2006, TSYS increased its ownership interest to 44.56% of CUP Data for
approximately $15.6 million.
On July 11, 2006, TSYS acquired Card Tech, Ltd. and related companies for an aggregate
consideration of approximately $59.3 million, including direct acquisition costs, and has renamed
the business as TSYS Card Tech. Refer to Note 10 in the notes to Unaudited Condensed Consolidated
Financial Statements for more information on the acquisition of TSYS Card Tech.
During the first quarter of 2005, the Company purchased TSYS Acquiring for approximately $95.8
million, including direct acquisition costs of $794,000.
Dividends Received from Equity Investments
During 2006, the Company received a dividend payment of $2.4 million from TSYS de México,
compared to $1.7 million for the same period last year.
Contract Acquisition Costs
TSYS makes cash payments for processing rights, third-party development costs and other direct
salary-related costs in connection with converting new customers to the Companys processing
systems. The Companys investments in contract acquisition costs were $17.2 million for the three
months ended September 30, 2006, bringing the total for 2006 to $39.6 million, compared to $11.8 million for the nine
months ended September 30, 2005. The Company had cash payments for processing rights of
approximately $7.5 million and $10.7 million during the three and nine months ended September 30,
2006, respectively. The Company did not have any cash payments for processing rights during the
same periods last year.
Conversion cost additions were $28.9 million and $11.8 million for the nine months ended
September 30, 2006 and 2005, respectively. The increase in the amount of conversion cost additions
for 2006, as compared to 2005, is the result of capitalized costs related to conversions scheduled
to occur during the year.
-47-
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
(in thousands) |
|
2006 |
|
2005 |
|
|
|
Dividends paid on common stock |
|
$ |
(37,504 |
) |
|
|
(27,582 |
) |
Repurchase of common stock |
|
|
(21,843 |
) |
|
|
|
|
Principal payments on long-term debt borrowings
and capital lease obligations |
|
|
(1,561 |
) |
|
|
(49,360 |
) |
Proceeds from borrowings of long-term debt |
|
|
|
|
|
|
48,143 |
|
Other |
|
|
5,371 |
|
|
|
2,920 |
|
|
|
|
Net cash used in financing activities |
|
$ |
(55,537 |
) |
|
|
(25,879 |
) |
|
|
|
The major use of cash for financing activities has been the principal payments on long-term
debt borrowings and capital lease obligations, repurchase of common stock and the payment of
dividends. The main source of cash from financing activities has been the occasional use of
borrowed funds. Net cash used in financing activities for the nine months ended September 30, 2006
was $55.5 million mainly as a result of the payments of dividends and repurchase of common stock.
Net cash used in financing activities for the nine months ended September 30, 2005 was $25.9
million mainly as a result of the payments of dividends.
Line of Credit
TSYS had a $45.0 million long-term line of credit from a banking affiliate of Synovus. A
detailed discussion related to the line of credit is in Note 6 in the Notes to Unaudited Condensed
Consolidated Financial Statements. During the nine months ended September 30, 2005, the Company
utilized the automatic draw-down facility for temporary funding and repaid the balances within days
of borrowing. The line of credit expired on June 30, 2006.
Stock Repurchase Plan
On April 20, 2006, TSYS announced that its board had approved a stock repurchase plan to
purchase up to 2 million shares, which represents slightly more than five percent of the shares of
TSYS stock held by shareholders other than Synovus. The shares may be purchased from time to time
over a two year period and will depend on various factors including price, market conditions,
acquisitions and the general financial position of TSYS. Repurchased shares will be used for
general corporate purposes.
During the three months ended September 30, 2006, TSYS purchased approximately 1.1 million
shares of TSYS common stock through privately negotiated and open market transactions for an
aggregate purchase price of $21.8 million, or an average per share price of $20.59. The Company
has approximately 939,000 shares remaining that could be repurchased under the share repurchase
plan.
Dividends
Dividends on common stock of $13.8 million were paid during the three months ended September
30, 2006, bringing the total for 2006 to $37.5 million compared to $27.6 million paid during the
nine months ended September 30, 2005. On May 25, 2006, the Company announced an increase in its
quarterly dividend of 16.7% from $0.06 to $0.07 per share. On April 21, 2005, the Company
announced an increase in its quarterly dividend of 50% from $0.04 to $0.06 per share.
Significant Noncash Transactions
During the first quarter of 2006, the Company issued 150,775 shares of common stock with a
market value of $3.0 million compared to 221,902 shares of common stock with a market value of $5.1
million in the first quarter of 2005. These shares are issued to certain key executive officers
and non-management members of its board of directors under nonvested shares for services to be
provided by such officers and directors in
-48-
the future. The market value of the common stock at the
date of issuance is amortized as compensation expense over the vesting period of the awards.
Refer to Notes 5 and 7 of Notes to Unaudited Condensed Consolidated Financial Statements for
more information about share-based compensation.
Foreign Exchange
TSYS operates internationally and is subject to potentially adverse movements in foreign
currency exchange rates. Since December 2000, TSYS has not entered into foreign exchange forward
contracts to reduce its exposure to foreign currency rate changes. TSYS continues to analyze
potential hedging instruments to safeguard it from significant foreign currency translation risks.
Impact of Inflation
Although the impact of inflation on its operations cannot be precisely determined, the Company
believes that by controlling its operating expenses, and by taking advantage of more efficient
computer hardware and software, it can minimize the impact of inflation.
Working Capital
TSYS may seek additional external sources of capital in the future. The form of any such
financing will vary depending upon prevailing market and other conditions and may include
short-term or long-term borrowings from financial institutions or the issuance of additional equity
and/or debt securities such as industrial revenue bonds. However, there can be no assurance that
funds will be available on terms acceptable to TSYS. Management expects that TSYS will continue to
be able to fund a significant portion of its capital expenditure needs through internally generated
cash in the future, as evidenced by TSYS current ratio of 2.1:1. At September 30, 2006, TSYS had
working capital of $316.6 million compared to $235.3 million at December 31, 2005.
Legal Proceedings
The Company is subject to lawsuits, claims and other complaints arising out of the ordinary
conduct of its business. In the opinion of management, based in part upon the advice of legal
counsel, all matters are believed to be adequately covered by insurance, or if not covered, are
believed to be without merit or are of such kind or involve such amounts that would not have a
material adverse effect on the financial position, results of operations or cash flows of the
Company if disposed of unfavorably. The Company establishes reserves for expected future
litigation exposures that TSYS determines to be both probable and reasonably estimable.
Recent Accounting Pronouncements
The Companys Annual Report on Form 10-K for the year ended December 31, 2005, as filed with
the SEC, contains a discussion of recent accounting pronouncements and the expected impact on the
Companys financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (SFAS
No. 157), Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles and expands disclosures about fair value measurements.
SFAS No. 157 is effective for fiscal periods beginning after November 15, 2007.
The Company does not expect the impact of adopting SFAS No. 157 on its financial position,
results of operations and cash flows to be material.
-49-
In September 2006, the FASB issued Statement of Financial Accounting Standards No.158 (SFAS
No. 158), Employers Accounting for Defined Benefit Pension and Other Postretirement Plans. SFAS
No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit
postretirement plan as an asset or liability in its statement of financial position and to
recognize changes in the funded status in the year in which the changes occur through comprehensive
income. SFAS No. 158 is effective for fiscal periods ending after December 15, 2006. The Company
does not expect the impact of adopting SFAS No. 158 on its financial position to be material.
There should be no impact of adopting SFAS No. 158 on the Companys results of operations and cash
flows.
In June 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty
in Income Taxes, an Interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in a companys financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return.
FIN 48 provides a two-step process in the evaluation of a tax position. The first step is
recognition. The Company determines whether it is more-likely-than-not that a tax position will be
sustained upon examination, including a resolution of any related appeals or litigation processes,
based upon the technical merits of the position. The second step is measurement. A tax position
that meets the more- likely-than-not recognition threshold is measured at the largest amount of
benefit that is greater than 50 percent likely of being realized upon ultimate settlement.
FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is
currently evaluating the impact of adopting FIN 48 on its financial position, results of operations
and cash flows, but has yet to complete its assessment.
In September 2006, the FASB issued FASB Staff Position No. AUG AIR-1 (FSP No. AUG AIR-1),
Accounting for Planned Major Maintenance Activities. FSP No. AUG AIR-1 prohibits the use of the
accrue-in-advance method of accounting for planned major maintenance activities in annual and
interim reporting periods. The accrue-in-advance method of accounting causes the recognition of a
liability in a period prior to the occurrence of the transaction or event obligating the entity.
FSP No. AUG AIR-1 is effective for fiscal periods beginning after December 15, 2006. The Company
does not expect the impact of adopting FSP No. AUG AIR-1 on its financial position, results of
operations and cash flows to be material.
In June 2006, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No. 06-3
(EITF 06-3), How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement (That Is, Gross versus Net Presentation). This guidance
requires disclosure of the accounting policy for any tax assessed by a governmental authority that
is directly imposed on a revenue-producing transaction (i.e., sales, use, value added) on a gross
(included in revenues and costs) or net (excluded from revenues) basis. If taxes are reported on a
gross basis, an entity is required to disclose the
amounts of those taxes for each period for which an income statement is presented, if
material. EITF 06-3 is effective for fiscal periods beginning after December 15, 2006. The Company
does not expect the impact of adopting EITF 06-3 on its financial position, results of operations
and cash flows to be material.
In September 2006, the EITF reached a consensus on EITF Issue No. 06-4 (EITF 06-4),
Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements. EITF 06-4 requires an employer to recognize a liability
for future benefits based on the substantive agreement with the employee. EITF 06-4 requires a
company to use the guidance prescribed in
-50-
FASB Statement No. 106, Employers Accounting for
Postretirement Benefits Other Than Pensions and Accounting Principles Board Opinion No. 12,
Omnibus Opinion, when entering into an endorsement split-dollar life insurance agreement and
recognizing the liability. EITF 06-4 is effective for fiscal periods beginning after December 15,
2007. The Company is currently evaluating the impact of adopting EITF 06-4 on its financial
position, results of operations and cash flows, but has yet to complete its assessment.
In September 2006, the EITF reached a consensus on EITF Issue No. 06-5 (EITF 06-5),
Accounting for Purchases of Life InsuranceDetermining the Amount That Could Be Realized in
Accordance with FASB Technical Bulletin No. 85-4. EITF 06-5 requires that a determination of the
amount that could be realized under an insurance contract should (1) consider any additional
amounts beyond cash surrender value included in the contractual terms of the policy and (2) be
based on an assumed surrender at the individual policy or certificate level, unless all policies or
certificates are required to be surrendered as a group. EITF 06-5 is effective for fiscal periods
beginning after December 15, 2006. The Company is currently evaluating the impact of adopting EITF
06-5 on its financial position, results of operations and cash flows, but has yet to complete its
assessment.
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 108 (SAB No. 108), Considering the Effects of Prior Year Misstatements When
Quantifying Misstatements in Current Year Financial Statements. SAB No. 108 states that
registrants should use both a balance sheet (iron curtain) approach and an income statement
(rollover) approach when quantifying and evaluating the materiality of a misstatement and provides
transition guidance for correcting errors existing in prior years. SAB No. 108 is effective for
periods ending after November 15, 2006. The Company does not expect the impact of adopting SAB No.
108 on its financial position, results of operations and cash flows to be material.
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 providing commercial and small business card processing for Bank of America and MBNA, as
well as merchant processing for Bank of America; (ii) TSYS belief that the loss of revenues from
the Bank of America consumer card portfolio for 2006 should not have a material adverse effect on
TSYS for 2006 and that the payment of the termination fee associated with the deconversion should
have a positive effect on TSYS for 2006; (iii) TSYS expectation that it will convert Capital Ones
portfolio in phases beginning in July 2006 and ending in early 2007; (iv) TSYS expectation that it
will maintain the card processing functions of Capital One for at least five years; (v) TSYS
expectation that it will maintain the card processing functions of Chase for at least two years and
that Chase
will discontinue its processing agreement according to the original schedule and license TSYS
processing software in 2007; (vi) TSYS expectation that it will continue to process commercial
card accounts for Citibank, as well as Citibanks Banamex USA consumer accounts; (vii) TSYS belief
that the loss of revenue from the Sears portfolio for 2006 should not have a material adverse
effect on TSYS for 2006; (viii) TSYS
expected earnings growth for 2006; (ix) TSYS estimated 2007 earnings; (x) TSYS belief with
respect to lawsuits, claims and other complaints; (xi) the expected market introduction dates of
various development projects; (xii) the expected financial impact of recent accounting
pronouncements; and the assumptions underlying such statements, including, with respect to TSYS
expected increase in earnings for 2006: (a) an increase in revenues of 9%-11%; (b) accounts on file
at the end of 2006 will be approximately 395 million to 405 million; (c) recognition of revenues
and expenses associated with the Capital One agreement will begin in the fourth quarter of 2006;
and (d) international corporate restructuring will result in a lower effective tax rate, and
further including, with respect to TSYS estimated 2007 earnings: (a) 2006 earnings growth will be
in the 26-28% range; (b) including the Bank of America termination
-51-
payment, estimated total
revenues will decline 5-3% in 2007; (c) the conversion of the Capital One portfolio will be
successfully completed in 2007; (d) Chase will discontinue its processing agreement according to
the original schedule and will license TSYS processing software in 2007; (e) expense reductions in
employment, equipment, leases and other areas which are included in 2007 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 other significant impairment of goodwill or other
intangibles. In addition, certain statements in future filings by TSYS with the Securities and
Exchange Commission, in press releases, and in oral and written statements made by or with the
approval of TSYS which are not statements of historical fact constitute forward-looking statements
within the meaning of the Act. Examples of forward-looking statements include, but are not limited
to: (i) projections of revenue, income or loss, earnings or loss per share, the payment or
nonpayment of dividends, capital structure and other financial items; (ii) statements of plans and
objectives of TSYS or its management or Board of Directors, including those relating to products or
services; (iii) statements of future economic performance; and (iv) statements of assumptions
underlying such statements. Words such as believes, anticipates, expects, intends,
targeted, estimates, projects, plans, may, could, should, would, and similar
expressions are intended to identify forward-looking statements but are not the exclusive means of
identifying these statements.
These statements are based upon the current beliefs and expectations of TSYS management and
are subject to significant risks and uncertainties. Actual results may differ materially from those
contemplated by the forward-looking statements. A number of important factors could cause actual
results to differ materially from those contemplated by our forward-looking statements. Many of
these factors are beyond TSYS ability to control or predict. These factors include, but are not
limited to: (i) revenues that are lower than anticipated; (ii) accounts on file at the end of 2006
are lower than anticipated; (iii) TSYS incurs expenses associated with the signing of a significant
client; (iv) internal growth rates for TSYS existing clients are lower than anticipated; (v) TSYS
does not convert and deconvert clients portfolios as scheduled; (vi) adverse developments with
respect to foreign currency exchange rates; (vii) adverse developments with respect to entering
into contracts with new clients and retaining current clients; (viii) continued consolidation in
the financial services industry, including the merger of TSYS clients with entities that are not
TSYS clients or the sale of portfolios by TSYS clients to entities that are not TSYS clients; (ix)
TSYS is unable to control expenses and increase market share, both domestically and
internationally; (x) adverse developments with respect to the credit card industry in general,
including a decline in the use of cards as a payment mechanism; (xi) TSYS is unable to successfully
manage any impact from slowing economic conditions or consumer spending; (xii) the impact of
acquisitions, including their being more difficult to integrate than anticipated; (xiii) the costs
and effects of litigation, investigations or similar matters or adverse facts and developments
relating thereto; (xiv) the impact of the application of and/or changes in accounting principles;
(xv) TSYS inability to timely, successfully and cost-effectively improve and implement processing
systems to provide new products, increased
functionality and increased efficiencies; (xvi) TSYS inability to anticipate and respond to
technological changes, particularly with respect to e-commerce; (xvii) 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; (xviii) successfully managing the
potential both for patent protection and patent liability in the context of rapidly developing
legal framework for expansive patent protection; (xix) no material breach of security of any of our
systems; (xx) overall market conditions; (xxi) the loss of a major supplier; (xxii) 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 (xxiii) TSYS ability to manage the foregoing
and other risks.
These forward-looking statements speak only as of the date on which they are made and TSYS
does not intend to update any forward-looking statement as a result of new information, future
developments or otherwise.
-52-
TOTAL SYSTEM SERVICES, INC.
Item 3 Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Risk
TSYS is exposed to foreign exchange risk because it has assets, liabilities, revenues and
expenses denominated in foreign currencies including the Euro, British Pounds Sterling (BPS),
Mexican Peso, Canadian Dollar, Japanese Yen, Chinese Renminbi, Brazilian Real, Cypriot Pounds and
Malaysian Ringgets. 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 rates for each reporting period. Net exchange gains or losses resulting from the
translation of assets and liabilities of TSYS foreign operations, net of tax, are accumulated in a
separate section of shareholders equity, titled accumulated other comprehensive income or loss.
The following represents the amount of other comprehensive gain and loss for the three and nine
months ended September 30, 2006 and 2005, respectively:
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Three months ended |
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Nine months ended |
(in millions) |
|
September 30, |
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September 30, |
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2006 |
|
2005 |
|
2006 |
|
2005 |
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|
|
Other comprehensive gain
(loss) |
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$ |
6.1 |
|
|
|
(2.3 |
) |
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|
10.8 |
|
|
|
(7.7 |
) |
Currently, TSYS does not use financial instruments to hedge its exposure to exchange rate
changes.
The following represents the carrying value of the net assets of its foreign operations in
U.S. dollars at September 30, 2006:
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|
(in millions) |
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September 30, 2006 |
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Europe |
|
$ |
155.9 |
|
China |
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|
54.5 |
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Japan |
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|
8.6 |
|
Mexico |
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|
6.1 |
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Canada |
|
|
0.7 |
|
Other |
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|
6.0 |
|
The Company also 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 the Company translates the foreign-denominated cash
balances into US 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 majority of the
translation gain of $282,000 and $195,000 for the three and nine months ended September 30, 2006,
respectively, relates to the translation of cash accounts. The balance of the foreign-denominated
cash accounts subject to risk of translation gains or losses at September 30, 2006 was
approximately $30.2 million, the majority of which is denominated in Euros.
The following represents the potential effect on income before income taxes of hypothetical
shifts in the foreign currency exchange rates and the U.S. dollar of plus or minus 100 basis
points, 500
-53-
TOTAL SYSTEM SERVICES, INC.
Item 3 Quantitative and Qualitative Disclosures About Market Risk (continued)
basis points and 1,000 basis points based on the foreign-denominated cash account balance at
September 30, 2006.
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|
Effect of Basis Point Change |
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|
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 |
|
$ |
(302 |
) |
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|
(1,510 |
) |
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|
(3,021 |
) |
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|
302 |
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|
1,510 |
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|
3,021 |
|
The foreign currency risks associated with other currencies is not significant.
The following represents the potential effect on income before income taxes of hypothetical
shifts in the foreign currency exchange rate between the British Pound Sterling and the U.S. dollar
of plus or minus 100 basis points, 500 basis points and 1,000 points based on the intercompany loan
balance of $59.3 million at September 30, 2006.
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|
Effect of Basis Point Change |
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|
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 |
|
$ |
(593 |
) |
|
|
(2,965 |
) |
|
|
(5,929 |
) |
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|
593 |
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|
2,965 |
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|
5,929 |
|
Interest Rate Risk
TSYS is also exposed to interest rate risk associated with the investing of available cash.
TSYS invests available cash in conservative short-term instruments and is primarily subject to
changes in the short-term interest rates.
Concentration of Credit Risk
TSYS works to maintain a large and diverse client base across various industries to minimize
the credit risk of any one client to TSYS accounts receivable amounts. In addition, TSYS performs
ongoing credit evaluations of its certain clients and certain suppliers financial condition. TSYS
does, however, have two major customers that account for a large portion of its revenues, which
subjects it to credit risk.
-54-
TOTAL SYSTEM SERVICES, INC.
Item 3 Quantitative and Qualitative Disclosures About Market Risk (continued)
Concentration of Client Base
A significant amount of TSYS revenues are derived from long-term contracts with large
clients, including certain major customers. Processing contracts with large clients, representing a
significant portion of TSYS total revenues, generally provide for discounts on certain services
based on the size and activity of clients portfolios. Therefore, electronic payment and merchant
services processing revenues and the related margins are influenced by the client mix relative to
the size of client card portfolios, as well as the number and activity of individual cardholder
accounts processed for each client. Consolidation among financial institutions has resulted in an
increasingly concentrated client base, which results in a change in client mix directed toward
larger clients.
TSYS works to minimize the risk of any one client accounting for a large portion of its
revenues. TSYS has two major customers that account for a large portion of its revenues. In
addition to the two major customers, the Company has other large clients representing a significant
portion of its total revenues. The loss of any one of its large clients could have a material
adverse effect on the financial position, results of operations and cash flows.
Concentration of Suppliers
TSYS utilizes several large and diverse suppliers across various industries to minimize its
reliance on any one supplier. However, TSYS does rely on a relatively few major suppliers for a
significant portion of its licensed computer software and hardware needs. The relationship with
these particular vendors is well established. These particular vendors are large, well-known and
respected entities in their industry, which is believed to minimize the Companys risk, but the
loss of any one of these major licensed computer software and hardware suppliers could have a
material adverse effect on the financial position, results of operations and cash flows.
-55-
TOTAL SYSTEM SERVICES, INC.
Item 4 Controls and Procedures
We have evaluated the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this quarterly report as required by Rule 13a-15
of the Securities Exchange Act of 1934, as amended. This evaluation was carried out under the
supervision and with the participation of our management, including our chief executive officer and
chief financial officer. Based on this evaluation, these officers have concluded that our
disclosure controls and procedures are effective in timely alerting them to material information
relating to TSYS (including its consolidated subsidiaries) required to be included in our periodic
SEC filings. No change in TSYS internal control over financial reporting occurred during the
period covered by this report that materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
-56-
TOTAL SYSTEM SERVICES, INC.
Part II Other Information
Item 1A Risk Factors
In addition to the other information set forth in this report, you 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, 2005, 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, 2006:
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Maximum Number |
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Total Number of |
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of Shares That |
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Shares Purchased |
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May Yet Be |
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as Part of Publicly |
|
Purchased Under |
|
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Total Number of |
|
Average Price |
|
Announced Plans |
|
the Plans or |
Period |
|
Shares Purchased |
|
Paid per Share |
|
or Programs |
|
Programs |
|
July 2006 |
|
|
820,800 |
|
|
$ |
20.00 |
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|
820,800 |
|
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|
1,179,200 |
|
August 2006 |
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|
111,200 |
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|
22.71 |
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|
111,200 |
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|
1,068,000 |
|
September 2006 |
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|
129,000 |
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|
22.50 |
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|
129,000 |
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|
939,000 |
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Total |
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|
1,061,000 |
|
|
$ |
20.59 |
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In April 2006, the Company announced a plan to purchase up to 2.0 million shares of its common
stock from time to time and at prices attractive to management over the ensuing two years.
-57-
TOTAL SYSTEM SERVICES, INC.
Part II Other Information
Item 6 Exhibits
a) Exhibits
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|
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 |
-58-
TOTAL SYSTEM SERVICES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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TOTAL SYSTEM SERVICES, INC.
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Date: November 6, 2006
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|
by: /s/ Philip W. Tomlinson |
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|
Philip W. Tomlinson |
|
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|
|
Chairman of the Board and |
|
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|
|
Chief Executive Officer |
|
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|
|
Date: November 6, 2006
|
|
by: /s/ James B. Lipham |
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|
|
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|
|
James B. Lipham |
|
|
|
|
Senior Executive Vice President and |
|
|
|
|
Chief Financial Officer |
|
|
-59-
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 |
-60-