UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2014
Commission file number 1-10254
TOTAL SYSTEM
SERVICES, INC.
(Exact name of registrant as specified in its charter)
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| Georgia |
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58-1493818 |
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incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
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| One TSYS Way
Columbus, Georgia |
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31901 |
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(Zip Code) |
Registrant’s telephone number, including area code: (706) 649-2310
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class |
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Name of each exchange on which registered |
| Common Stock, $.10 Par Value |
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. YES x NO ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange
Act. YES ¨ NO x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90
days. YES x NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K. ¨
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
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| Large accelerated filer |
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Accelerated Filer |
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| Non-accelerated filer |
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Smaller reporting company |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). YES ¨ NO x
As of June 30, 2014, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was
approximately $5,670,370,000 based on the closing sale price as reported on the New York Stock Exchange.
As of February 18, 2015,
there were 185,053,781 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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| Incorporated Documents |
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Form 10-K Reference Locations |
| Portions of the Annual Report to Shareholders
for the year ended December 31, 2014 (“Annual Report”) |
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Parts I, II, III and IV |
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| Portions of the 2015 Proxy Statement for the Annual Meeting of Shareholders to be held April 28, 2015 (“Proxy Statement”) |
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Part III |
Table of Contents
PART I
Safe Harbor Statement
We have included or incorporated by reference in this Annual Report on Form 10-K, and from time to time our management may make, statements
that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts but instead represent only our
belief regarding future events, many of which by their nature are inherently uncertain and outside our control. These statements include statements other than historical information or statements of current condition and may relate to our future
plans, objectives and results, among other things, and also include (without limitation) statements made in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this annual
report. It is possible that our actual results may differ, possibly materially, from the anticipated results indicated in these forward-looking statements. Important factors that could cause actual results to differ from those in the forward-looking
statements include, among others, those discussed under “Risk Factors” in Part I, Item 1A of this annual report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II,
Item 7 of this annual report.
Accordingly, you are cautioned not to place undue reliance on forward-looking statements, which speak
only as of the date on which they are made. We undertake no obligation to update publicly or revise any forward-looking statements to reflect the impact of circumstances or events that arise after the dates they are made, whether as a result of new
information, future events or otherwise except as required by applicable law. You should, however, consult further disclosures we may make in future filings of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on
Form 8-K, and any amendments thereto.
Business. Based in Columbus, Georgia, and traded on the
New York Stock Exchange under the symbol “TSS,” we are a global payment solutions provider that provides services to financial and nonfinancial institutions. We also provide processing services, acquiring solutions, related systems and
integrated support services to merchant acquirers and merchants. In addition, we provide general purpose reloadable (“GPR”) prepaid and payroll cards and alternative financial service solutions to the underbanked and other consumers. The
services we provide are divided into four operating segments, North America Services, which accounted for 45% of our revenues in 2014, Merchant Services, which accounted for 21% of our revenues in 2014, NetSpend, which accounted for 19% of our
revenues in 2014, and International Services, which accounted for 15% of our revenues in 2014.
Seasonality. Due to
the somewhat seasonal nature of the credit card industry, our 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.
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Intellectual Property. Our intellectual property portfolio is a component of our
ability to be a leading provider of transaction processing and other payment-related services. We diligently protect and work to build our intellectual property rights through patent, servicemark and trade secret laws. We also use various licensed
intellectual property to conduct our business. In addition to using our intellectual property in our own operations, we grant licenses to certain of our clients to use our intellectual property.
Major Customers. A significant amount of our revenues is derived from long-term contracts with large clients. The loss of one of
our large clients could have a material adverse effect on our financial position, results of operations and cash flows. See “Major Customer” and “Operating Segments” under the “Financial Review” Section on pages 21
through 26, and Note 22 on pages 76 through 79 of the Annual Report which are incorporated in this document by reference.
Competition. We encounter vigorous competition in providing electronic payment services from several different sources.
TSYS’ business is primarily derived from third-party processing for issuers and merchant acquirers. Most of the national market in third party processors is presently being provided by approximately three vendors. We believe that as of
December 31, 2014 we are the largest third party card processor in the United States. In addition, we compete with banks and acquirers who choose to process payments in house through proprietary systems and with software vendors which provide
their products to institutions which process in house. We are presently encountering, and in the future anticipate continuing to encounter, substantial competition from data processing, bankcard computer service firms and third-party software
vendors within the United States and from certain international processors, in-country providers and third-party software vendors with respect to our International Services segment. In addition, payments networks such as Visa, MasterCard and
Discover are increasingly offering products and services that compete with our products and services.
Based upon available market share
data that includes cards processed in house, we believe that during 2014 we provided issuer processing services for approximately 29% of the domestic consumer credit card accounts in market, 51% of the domestic commercial credit cards issued in
market, 83% of the Canadian credit card accounts in market and 22% of credit card accounts in TSYS’ Home European Markets (UK, Ireland, Netherlands, Italy, Germany and Switzerland). With respect to the Merchant Services Segment, we provide
third party processing services to merchant acquirers and Independent Sales Organizations (“ISOs”) and we are also a direct merchant acquirer. We believe that we are the second largest processor of merchant accounts and process
transactions for approximately 20% of all bankcard accepting merchant locations in the United States. Our direct merchant acquirer business is ranked as the 7th largest merchant acquirer in the
U.S. based on active merchant outlets according to The Nilson Report dated March 2014. Through our NetSpend business, we are the 2nd largest program manager of GPR prepaid cards according
to Mercator Advisory Group, as ranked by dollars loaded (as of December 31, 2013).
Our major competitor in the card processing
industry is First Data Resources, LLC, a wholly owned subsidiary of First Data Corporation, which provides card processing services. The principal methods of competition between us and First Data Resources are price, system performance and
reliability, breadth of features and functionality, disaster recovery capabilities and business
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continuity preparedness, data security, scalability and flexibility of infrastructure and servicing capability. Other affiliates of First Data Corporation also compete with us with respect to the
provision of merchant services and GPR prepaid card services.
Regulation and Examination. Government regulation affects key
aspects of our business, in the U.S. as well as internationally. In addition, we are registered with Visa, MasterCard, American Express and the Discover Network as a service provider and are subject to their respective rules which subject us to a
variety of fines or penalties that may be levied by the card networks for certain acts or omissions. Set forth below is a brief summary of some of the significant laws and regulations that apply to us. These descriptions are not exhaustive and are
qualified in their entirety by reference to the particular statutory or regulatory provision.
Banking Laws and Regulations.
Because we provide electronic payment processing services to banks and other financial institutions, we are subject to examination by the Federal Financial Institutions Examination Council (“FFIEC”), an interagency body comprised primarily
of federal banking regulators, and also subject to examination by the various state financial regulatory agencies which supervise and regulate the financial institutions for which we provide electronic payment processing and other payment related
services. The FFIEC examines large data processors in order to identify and mitigate risks associated with systemically significant service providers, including specifically the risks they may pose to the banking industry.
Money Transmitter and Payment Instrument Laws and Regulations. Our NetSpend business is subject to money transfer and payment
instrument licensing regulations. We have obtained licenses to operate as a money transmitter in 45 states and the District of Columbia. The remaining U.S. jurisdictions either do not currently regulate money transmitters or have rendered a
regulatory determination or a legal interpretation that the money services laws of that jurisdiction do not require us to obtain a license in connection with the conduct of our business.
In those states where we are licensed as a money transmitter, our NetSpend business is subject to direct supervision and regulation by the
relevant state banking departments or similar agencies charged with enforcement of the money transmitter statutes and we must comply with various requirements, such as those related to the maintenance of a certain level of net worth, surety bonding,
selection and oversight of our authorized agents, maintaining permissible investments in an amount equal to our outstanding payment obligations, recordkeeping and reporting and disclosures to consumers. Our NetSpend business is also subject to
periodic examinations by the relevant licensing authorities, which may include reviews of our compliance practices, policies and procedures, financial position and related records, various agreements that we have with our issuing banks, distributors
and other third parties, privacy and data security policies and procedures and other matters related to our business.
Privacy and
Information Security Regulation. Aspects of our business are also subject, directly or indirectly, to privacy regulation in the United States, the European Union and elsewhere. For example, in the United States, we and our financial institution
clients are, respectively, subject to the Federal Trade Commission’s and the federal banking regulators’ privacy and information safeguarding requirements under the Gramm-Leach-Bliley Act. These requirements limit the manner in which
personal information may be collected, stored, used and disclosed. The Federal Trade Commission’s information safeguarding rules require us to develop, implement and maintain a written, comprehensive information security program containing
safeguards that are appropriate for our size and complexity, the nature and scope of our activities and the sensitivity of any
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customer information at issue. Our financial institution clients in the United States are subject to similar requirements under the guidelines issued by the federal banking regulators. As part of
their compliance with these requirements, each of our U.S. financial institution clients is expected to have a program in place for responding to unauthorized access to, or use of, customer information that could result in substantial harm or
inconvenience to customers.
Anti-money Laundering and Counter Terrorist Regulation. The Financial Crimes Enforcement Network of
the U.S. Department of the Treasury (“FinCEN”) has issued a rule regarding the applicability of the Bank Secrecy Act’s anti-money laundering provisions to “prepaid access programs.” This rulemaking clarifies the anti-money
laundering obligations for entities, such as our NetSpend business and its distributors, engaged in the provision and sale of prepaid access devices like our GPR prepaid debit cards. Our NetSpend business has registered with FinCEN as a money
services business. This registration results in our having direct responsibility to maintain and implement an anti-money laundering compliance program.
As are all U.S. persons, we are also subject to regulations imposed by the U.S. Treasury Office Department of Foreign Assets Control
(“OFAC”) which prohibit or restrict financial and other transactions with specified countries and designated individuals and entities such as terrorists and narcotics traffickers. We have procedures and controls in place which are designed
to protect against having direct business dealings with such prohibited countries, individuals or entities. We also have procedures and controls in place which are designed to allow our processing clients to protect against having direct business
dealings with such prohibited countries, individuals or entities.
The Dodd-Frank Act. We and the rest of the financial services
industry continue to experience increased legislative and regulatory scrutiny, including the enactment of additional legislative and regulatory initiatives such as the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Reform
Act”). This legislation, which provides for significant financial regulatory reform, may have a significant and negative impact on us and our clients, which could impact TSYS’ earnings through fee reductions, higher costs (both regulatory
and implementation) and new restrictions on our operations. The Reform Act, among other things, provides for the regulation and oversight by the Board of Governors of the Federal Reserve System (“Board”) of debit interchange fees that are
typically paid by acquirers and charged or received by a payment card network for the purpose of compensating an issuer for its involvement in an electronic debit transaction. As of October 1, 2011, in accordance with the Reform Act, the Board
capped the maximum U.S. debit interchange fee assessed for debit cards issued by large financial institutions at twenty-one cents plus five basis points, before applying a fraud prevention adjustment of up to an additional one cent. In July 2013, a
federal court invalidated these rules and ordered the Board to revise them. However, a federal appeals court reversed the lower court decision, which effectively reinstated the Board’s interchange rules, and the U.S. Supreme Court determined
not to review the appeals court decision. It remains difficult to predict the impact that the debit interchange regulations will ultimately have on us, but we do not expect that they will have a significant negative impact on our business.
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The Reform Act also created a new Consumer Financial Protection Bureau (“CFPB”) with
responsibility for regulating consumer financial products and services and enforcing most federal consumer protection laws in the area of financial services, including consumer credit and the prepaid card industry. For example, the CFPB has proposed
regulations regarding the prepaid industry, which, if adopted as proposed, could impose significant additional disclosure requirements, overdraft requirements, and other requirements on the prepaid card industry, including our NetSpend business,
effective in 2016. Similarly, other future actions of the CFPB may make payment card or product transactions generally less attractive to card issuers, acquirers, consumers and merchants by further regulatory disclosures, payment card practices,
fees, routing and other matters with respect to credit, debit and prepaid cards, and thus negatively impact our business. In addition, the Reform Act created a Financial Stability Oversight Council that has the authority to determine whether nonbank
financial companies such as TSYS should be supervised by the Board because they are systemically important to the U.S. financial system. To date, the Financial Stability Oversight Council does not appear to be focused on regulating entities such as
TSYS. However, any such future designation would result in increased regulatory burdens on our business.
State Wage Payment Laws and
Regulations. The use of payroll card programs as a means for an employer to remit wages or other compensation to its employees or independent contractors is governed by state labor laws related to wage payments. The paycard portion of our
NetSpend business includes payroll cards and convenience checks and is designed to allow employers to comply with applicable state wage and hour laws. Most states permit the use of payroll cards as a method of paying wages to employees, either
through statutory provisions allowing such use or, in the absence of specific statutory guidance, the adoption by state labor departments of formal or informal policies allowing for their use. Nearly every state allowing payroll cards places certain
requirements and/or restrictions on their use as a wage payment method, the most common of which involve obtaining the prior written consent of the employee, limitations on fees and disclosure requirements.
Employees. As of December 31, 2014, we had approximately 9,900 employees.
Available Information. Our website address is www.tsys.com. You may obtain free electronic copies of our Annual Reports
on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports in the Investor Relations section of our website under the heading “SEC Filings.” These reports are available on our website as
soon as reasonably practicable after we electronically file them with the Securities and Exchange Commission.
We have adopted a Code of
Business Conduct and Ethics for our directors, officers and employees and have also adopted Corporate Governance Guidelines. Our Code of Business Conduct and Ethics, Corporate Governance Guidelines and the charters of our board committees are
available in the Corporate Governance section of our website at www.tsys.com under “Investor Relations” then “Corporate Governance.”
For more information about our business see the “Financial Overview” Section on pages 11 through 13, the “Financial
Review” Section on pages 13 through 37 and Note 1, Note 2, Note 9, Note 16, Note 22, Note 24 and Note 27 of Notes to Consolidated Financial Statements on pages 43 through 51, page 52, pages 57 and 58, pages 66 through 68, pages 76 through 79,
pages 80 through 85, and page 86 of the Annual Report which are incorporated in this document by reference.
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This section highlights specific risks that could affect our business and
us. Although this section attempts to highlight key factors, please be aware that other risks may prove to be important in the future. New risks may emerge at any time and we cannot predict such risks or estimate the extent to which they may affect
our financial performance. In addition to the factors discussed elsewhere or incorporated by reference in this report, among the other factors that could cause actual results to differ materially are the following:
Security and privacy breaches of our systems may damage client relations, our reputation and expose us to financial liability.
The uninterrupted operation of our processing systems and the confidentiality of the client/consumer information that resides on our systems
is critical to the successful operation of our business. We have security, backup and recovery systems in place, as well as business continuity plans designed to ensure our systems will not be inoperable. Recently, a number of companies have
experienced security breaches in which credit card, debit card and other personal information has been stolen. Our visibility in the global payments industry may attract hackers to conduct attacks on our systems. Although we devote significant
resources to information security and have what we believe to be sufficient security around our systems to prevent unauthorized access, third parties may have the technology or know-how to breach the security of the information transmitted in
connection with payment processing transactions, and our security measures may not effectively prohibit others from obtaining improper access to this information. An information breach in the system and loss of confidential information could have a
longer and more significant impact on our business than a hardware failure. We electronically store personal information, such as credit card numbers and related information, about consumers who are customers of our clients. If we are unable to
protect, or our clients or consumers perceive that we are unable to protect, the security and privacy of our electronic transactions, our growth could be materially adversely affected. A security or privacy breach or a system failure may:
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cause our clients and consumers to lose confidence in our services; |
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expose us to financial liability, both as a result of litigation and contractually; |
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cause us to modify our protective measures which would increase our expenses; and |
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increase our expenses from potential remediation costs. |
Our financial exposure from the items
referenced above may either not be insured against or not fully covered through any insurance maintained by us. In addition, our ability to attract and retain clients and employees could be adversely affected to the extent our reputation is damaged.
While we believe we use proven applications designed for data security and integrity to process electronic transactions, there can be no assurance that our use of these applications will be sufficient to counter all current and emerging technology
threats designed to breach our systems in order to gain access to confidential information or our intellectual property or assurance that our use of these applications will be sufficient to address the security and privacy concerns of existing and
potential clients and consumers.
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Consolidation among financial institutions and retail clients, 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 could materially impact our financial position and results of operation.
Consolidation among financial institutions, particularly in the area of credit card operations, and consolidation in the retail industry,
continues to be a major risk. Specifically, we face the risk that our clients may merge with entities that are not our clients, our clients may sell portfolios to entities that are not our clients or our financial institution clients may otherwise
cease to exist, thereby negatively impacting our existing agreements and projected revenues with these clients. In addition, consolidation among financial institutions has led to an increasingly concentrated client base at TSYS which results in a
changing client mix toward larger clients. Continued consolidation among financial institutions could increase the bargaining power of our current and future clients and further increase our client concentration. Consolidation among financial
institutions and retail clients, the nationalization of financial institutions or the seizure by banking regulators of financial institutions and the resulting loss of any significant client by us could have a material adverse effect on our
financial position and results of operations.
If we do not successfully renew or renegotiate our agreements with our clients, our business will
suffer.
A significant amount of our revenues is derived from long-term contracts with large clients. The financial position of
these clients and their willingness to pay for our products and services are affected by general market positions, competitive pressures and operating margins within their industries. When our long-term contracts expire, the time of renewal or
renegotiation presents our clients with the opportunity to consider other providers, transition all or a portion of the services we provide in-house or seek lower rates for our services. The loss of our contracts with existing clients or
renegotiation of contracts at reduced rates or reduced service levels could have a material adverse effect on our financial position and results of operation.
Economic and geopolitical conditions could adversely affect our business.
A significant portion of our revenues is derived from the number of consumer payment transactions that we process which may be affected by,
among other things, overall economic conditions. The payment processing industry depends heavily upon the overall level of consumer, business and government spending to support the necessary volume of payment transactions. Any change in economic
factors, including a sustained deterioration in general economic conditions or consumer confidence, particularly in the United States or Europe, or increases in interest rates in key countries in which we operate may adversely affect our financial
performance by reducing the number of transactions involving credit, debit, GPR prepaid and other payment-related cards. Future reductions in consumer spending through credit, debit, GPR prepaid debit and other payment-related card usage would
likely have a material adverse effect on our financial position and results of operations.
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The ability to adapt technology to changing industry and client needs or trends may affect our
competitiveness or demand for our products, which may adversely affect our financial results.
The payment processing market in
which we compete is subject to rapid and significant technological changes, new product introductions, evolving industry standards and changing client needs and preferences. Also, our clients continue to adopt new technology for business and
personal uses. We must anticipate and respond to these industry and client changes in order to remain competitive. If we are unable to effectively respond to these changes, the competitiveness of and demand for our services and products will be
materially impaired and may result in our services being removed from the payments value chain. Our future success will depend in part on our ability to respond to new competitors and to develop or adapt to technological changes and evolving
industry standards. Our failure to do so could have a material adverse effect on our financial position and results of operation.
The market for
our electronic payment services is evolving and may not continue to develop or grow rapidly enough for us to maintain and increase our profitability.
If the number of electronic payment transactions of the type we process does not continue to grow or if businesses or consumers do not
continue to adopt our services, it could have a material adverse effect on the profitability of our business, financial position and results of operations. We believe future growth in the use of credit and debit cards and other electronic payments
will be driven by the cost, ease-of-use, and quality of products and services offered to consumers and businesses. In order to consistently increase and maintain our profitability, businesses and consumers must continue to use electronic payment
methods that we process, including credit and debit cards.
We may not convert and deconvert client’s portfolios as scheduled.
The timing of the conversion of card portfolios of new payment processing clients to our processing systems and the deconversion of existing
clients to other systems impacts our revenues and expenses. There is no guarantee that conversions and deconversions will occur as scheduled and this may have a material adverse effect on our financial position and results of operations.
Acquisitions and integrating such acquisitions create certain risks and may affect our financial results.
We have acquired businesses both in the U.S. and internationally and will continue to explore opportunities for strategic acquisitions in the
future. The acquisition and integration of businesses involves a number of risks. The core risks are in the areas of valuation (negotiating a fair price for the business based on inherently limited diligence) and integration (managing the complex
process of integrating the acquired company’s people, products, technology and other assets so as to realize the projected value of the acquired company and the synergies projected to be realized in connection with the acquisition). Other risks
include the inaccurate assessment of disclosed liabilities, inconsistencies in standards, controls, procedures and policies, including internal control and regulatory requirements under the Sarbanes-Oxley Act of 2002, and personnel turnover.
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The success of any future acquisitions will depend, in part, on our ability to realize the
anticipated benefits from integrating the acquired business with our existing businesses. The integration process may be complex, costly and time consuming. The process of integrating the operations of an acquisition could cause an interruption of,
or loss of momentum in, the activities of one or more of our combined businesses and the possible loss of key personnel. The diversion of management’s attention and any delays or difficulties encountered in connection with acquisitions and the
integration of the acquired companies’ operations could have an adverse effect on our financial position and results of operations.
In addition, the success of any acquisition will depend, in part, on the combined company’s ability to realize the anticipated benefits
from the acquisition, including anticipated synergies and costs savings. Furthermore, in order to finance acquisitions, we may incur significant amounts of additional debt.
Finally, any international acquisitions often involve additional or increased risks including for example:
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managing geographically separated organizations, systems and facilities; |
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integrating personnel with diverse business backgrounds and organizational cultures; |
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complying with foreign regulatory requirements; |
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fluctuations in currency exchange rates; |
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difficulty entering new foreign markets due to, among other things, customer acceptance and business knowledge of these new markets; and |
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general economic and political conditions. |
A negative perception of our company in the marketplace may
affect our brands and reputation, which are key assets of our business.
Our brands and their attributes are key assets of our
business. The ability to attract and retain business clients and consumers to TSYS and NetSpend branded products depends highly upon the external perceptions of our company and our industry’s quality of service, use and protection of account
holder data, regulatory compliance, financial condition, corporate responsibility and other factors. Negative perception or publicity, particularly in light of the rapid, widespread use of social media channels, could cause damage to our brands and
reputation.
If business clients and consumers turn away from our brand and products, we may be required to incur additional liabilities
and costs, result in greater regulatory or legislative scrutiny, and materially and adversely affect our financial position, results of operations and prospects for future growth and overall business.
Our business may be adversely affected by currency, geopolitical and other risks associated with foreign operations and, as we continue to expand
internationally, we may incur higher than anticipated costs and will become more susceptible to these risks.
We provide services
to our clients worldwide. As a result, our revenues derived from international operations are subject to risk of loss from foreign currency exchange rates. Revenue
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and profit generated by international operations will increase or decrease compared to prior periods as a result of changes in foreign currency exchange rates. We have not entered into foreign
exchange forward contracts to mitigate the risks associated with our foreign operations. In addition, we may become subject to exchange control regulations that might restrict or prohibit the conversion of our foreign currency into U.S. dollars. The
occurrence of any of these factors could decrease the value of revenues we receive from international operations and adversely affect our financial position and results of operations. In addition, our revenues derived from international operations
are subject to risk of loss as a result of social and geopolitical instability and unfavorable political or diplomatic developments which could negatively impact our financial results.
We may also incur higher than anticipated costs as we expand internationally and grow our international client base. If we are unable to
successfully manage these expenses as our business expands, our financial position and results of operations could be negatively impacted.
The
costs and effects of litigation, investigations or similar matters, or adverse facts and developments related thereto, could materially affect our financial position and results of operations.
We are involved in various litigation matters and from time to time may be involved in governmental or regulatory investigations or similar
matters arising out of our business. Our insurance may not cover all claims that may be asserted against it, and any claims asserted against us, regardless of merit or eventual outcome, may harm our reputation. Should the ultimate judgments or
settlements in any pending litigation or future litigation or investigation significantly exceed our insurance coverage, they could have a material adverse effect on our financial position and results of operations. In addition, we may not be able
to obtain appropriate types or levels of insurance in the future, nor may we be able to obtain adequate replacement policies with acceptable terms, if at all. For more information about our legal proceedings, see Item 3 of this annual report.
We operate in a competitive business environment, and if we are unable to compete effectively our financial position may be adversely affected.
The market for payment processing services is intensely competitive. Our competitors vary in size and in the scope and breadth of
the services they offer. We face direct competition from third parties, and since certain of our larger potential issuer clients develop their key applications in-house and therefore view their system requirements from a make-versus-buy perspective,
we often compete against our potential issuer clients’ in-house capacities. In addition, we expect that the markets in which we compete will continue to attract new competitors and new technologies. There can be no assurance that we will be
able to compete successfully against current or future competitors or that the competitive pressures we face in the markets in which we operate will not materially adversely affect our financial position and results of operations.
The market for prepaid cards and alternative financial services is highly competitive and competition is increasing as more companies endeavor to
address the needs of underbanked consumers.
With our 2013 acquisition of NetSpend, we added an aspect to our business to
complement our previous presence in the prepaid processing space to include GPR prepaid and payroll cards and
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alternative financial services. The alternative financial services industry, including the prepaid card market, is subject to intense and increasing competition. Our NetSpend business directly
competes with a number of companies that market open-loop prepaid cards and demand deposit accounts through retail and online distribution. In addition, we compete with banks that offer demand deposit accounts and other traditional issuers of debit
cards. We also compete against large retailers who are seeking to integrate more financial services into their product offerings. We anticipate increased competition from alternative financial services providers who are often well-positioned to
service the underbanked and who may wish to develop their own prepaid card or demand deposit account programs. The increased desire of banks, retailers and alternative financial services providers to develop and promote prepaid card and demand
deposit account programs could have an adverse effect on the NetSpend portion of our business. We also face strong price competition. To stay competitive, we may have to increase the incentives that we offer to our distributors and decrease the
prices of our products and services, which could adversely affect our operating results.
Our NetSpend business relies on certain relationships with
issuing banks and distributors. The loss of such relationships or if we are unable to maintain such relationships on terms that are favorable to us, our business, financial position and operating results may be materially adversely affected.
Our NetSpend business relies on arrangements we have with issuing banks to provide us with critical products and services,
including the FDIC-insured depository accounts tied to the cards we manage, access to the ATM networks, membership in the card associations and network organizations and other banking services. The majority of our active NetSpend cards are issued
through Meta Payment Systems (“MetaBank”). If our relationship with MetaBank deteriorates, it could have an adverse impact on the NetSpend business. If any material adverse event were to affect MetaBank, or one or more of our other issuing
banks or if we were to lose MetaBank or one or more of the other issuing banks, we would be forced to find an alternative provider of these critical banking services for our NetSpend business. It may not be possible to find a replacement bank on
terms that are acceptable to us or at all. Any change in the issuing banks could disrupt the business or result in arrangements with new banks that are less favorable to us than those we have with our existing issuing banks, either of which could
have a material adverse impact on our results of operations and our financial position.
Furthermore, our NetSpend business depends in
large part on establishing agreements with distributors, primarily alternative financial services providers as well as grocery and convenience stores and other traditional retailers. Some of these distributors may endeavor to internally develop
their own prepaid debit card programs or enter into exclusive relationships with our competitors to distribute their products. The loss of, or a substantial decrease in revenues from, one or more of our top distributors could have a material adverse
effect on the NetSpend business and our operating results.
Changes in the laws, regulations, policies, credit card association rules or other
industry standards affecting our business may impose costly compliance burdens and negatively impact our business.
There may be
changes in the laws, regulations, credit card association rules or other industry standards that affect our operating environment in substantial and unpredictable ways in the U.S. as well as internationally. Changes to statutes, regulations or
industry standards, including
11
interpretation and implementation of statutes, regulations or standards, could increase the cost of doing business or affect the competitive balance. Regulation of the payments industry has
increased significantly in recent years. Failure to comply with laws, rules and regulations or standards to which we are subject in the U.S. as well as internationally, including the card network rules and rules with respect to privacy and
information security, may result in the suspension or revocation of a license or registration, the limitation, suspension or termination of service, and the imposition of fines, sanctions or other penalties, which could have a material adverse
effect on our financial position and results of operations, as well as damage our reputation. Even if such a change to statutes, regulations or industry standards does not directly apply to us, the effects of such a change on our financial
institution clients could result in material, indirect effects on the way we operate or the costs to operate our business and impair the demand for our services amongst our financial institution clients.
We and the rest of the financial services industry continue to experience increased legislative and regulatory scrutiny, including the
enactment of additional legislative and regulatory initiatives such as the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Reform Act”). This legislation provides for significant financial regulatory reform. The Reform Act,
among other things, provides for the regulation and oversight by the Board of Governors of the Federal Reserve System (“Board”) of debit interchange fees that are typically paid by acquirers and charged or received by a payment card
network for the purpose of compensating an issuer for its involvement in an electronic debit transaction. The Reform Act also created a new Consumer Financial Protection Bureau (“CFPB”) with responsibility for regulating consumer financial
products and services and enforcing most federal consumer protection laws in the area of financial services, including consumer credit and the prepaid card industry. The CFPB recently mandated that supervised financial institutions, including our
clients, are required to ensure that their service providers are in compliance with applicable federal consumer laws, which may increase regulatory oversight and our cost of doing business. In addition, the CFPB has proposed regulations regarding
the prepaid industry, which regulations, if adopted as proposed, may have a negative impact on the revenues and financial position of our NetSpend business. Furthermore, the Reform Act created a Financial Stability Oversight Council that has the
authority to determine whether nonbank financial companies such as TSYS should be supervised by the Board because they are systemically important to the U.S. financial system. Any such designation would result in increased regulatory burdens on our
business. The overall impact of the Reform Act on TSYS is difficult to estimate. Current and future regulations as a result of the Reform Act may adversely affect our business or operations, directly or indirectly (if, for example, our clients’
businesses and operations are adversely affected).
With respect to our NetSpend business, because each distributor offers prepaid cards
and reload services as an agent of NetSpend, or another third party, we do not believe that the distributors themselves are required to become licensed as money transmitters in order to engage in such activity. However, there is a risk that a
federal or state regulator will take a contrary position and initiate enforcement or other proceedings against a distributor, us, our issuing banks or our other service providers. In addition, we understand that state banking departments, which are
charged with regulating the business of money transmission, have traditionally taken the position that the offering of payroll and other prepaid cards does not constitute money transmission and so we are not required to obtain a state money
transmission license in order to engage in this activity. However, there is a risk that a federal or state regulator will take a contrary position and initiate
12
enforcement or other proceedings against us or our issuing banks. If the relevant party is unsuccessful in making a persuasive argument that it should not be subject to such licensing
requirements, and is therefore deemed to be in violation of one or more of the state money transmitter statutes, it could result in the imposition of fines, the suspension of the relevant party’s ability to offer some or all of our prepaid
cards and related services in the relevant jurisdiction, civil liability and criminal liability, each of which could negatively impact our financial position and results of operations. Furthermore, if the federal government or one or more state
governments impose additional legislative or regulatory requirements on our NetSpend business, the issuing banks or the distributors, or prohibit or limit the activities of our NetSpend business as currently conducted, we may be required to modify
or terminate some or all of our NetSpend products and services offered in the relevant jurisdiction or certain of the issuing banks may terminate their relationship with us.
In addition, we are subject to tax laws in each jurisdiction where we do business. Changes in tax laws or their interpretations could decrease
the value of revenues we receive, the value of tax losses and tax credits carry forwards recorded on our balance sheet and the amount of our cash flow and have a material adverse effect on our financial position and results of operations.
Furthermore, changes in accounting policies can significantly affect how we calculate expenses and earnings.
We rely on financial institution
sponsors in order to process Visa, MasterCard, American Express and Discover transactions. If these sponsorships are terminated and we are unable to secure new sponsors our business and results of operations will be materially and adversely
affected.
In order to provide our Visa, MasterCard, American Express and Discover transaction processing services,
we must be either a direct participant or be registered as a merchant processor or service provider of Visa, MasterCard, American Express and Discover. Registration as a merchant processor or service provider is dependent upon our being sponsored by
member banks of these credit card companies. If our sponsor banks should stop providing sponsorship for us, we would need to find another financial institution to provide those services or we would need to attain direct participation, either of
which could prove to be difficult and expensive. If we are unable to find a replacement financial institution to provide sponsorship or attain direct participation, we may no longer be able to provide processing services to the affected customers,
which would have a material adverse effect on our business and results of operations.
If we fail to comply with the applicable requirements of the
card networks, they could seek to fine us, suspend us or terminate our registrations. If our merchants or independent sales organizations incur fines or penalties that we cannot collect from them, we could end up bearing the cost of such fines or
penalties.
We are subject to card association and network rules that could subject us to a variety of fines or penalties that may
be levied by the card networks for certain acts or omissions. The rules of the card networks are set by their boards, which may be influenced by card issuers, and some of those issuers are our competitors with respect to these processing services.
Many banks directly or indirectly sell processing services to merchants in direct competition with us. These banks could attempt, by virtue of their influence on the networks, to alter the networks’ rules or policies to the detriment of
non-members like us. The termination of our registrations or our status as a service provider or a merchant processor, or any changes in card association or other network rules or
13
standards, including interpretation and implementation of the rules or standards, that increase the cost of doing business or limit our ability to provide transaction processing services to our
customers, could have a material adverse effect on our financial position and results of operations. If a merchant or an ISO fails to comply with the applicable requirements of the card associations and networks, it could be subject to a variety of
fines or penalties that may be levied by the card associations or networks. If we cannot collect such amounts from the applicable merchant or ISO, we could end up bearing such fines or penalties, resulting in lower earnings for us.
The providers of alternative financial services that distribute our NetSpend products are subject to extensive and complex federal and state regulations
and new regulations and/or changes to existing regulations could adversely affect their ability to offer GPR cards through their locations, which in turn could have an adverse impact on our business.
The distributors include a large number of companies in industries that are highly regulated, such as payday lending and it is possible that
changes in the legal regime governing such businesses could limit their ability to distribute our NetSpend products or adversely impact their business and thereby have an indirect adverse impact on our NetSpend business. For example, a large number
of states have either prohibited, or imposed substantial restrictions upon, the offering of “payday loans” and this activity continues to draw substantial scrutiny from federal and state legislatures, regulatory authorities and various
consumer groups. Furthermore, the Reform Act grants supervisory authority over entities engaged in this activity to the CFPB, which is directed to promulgate regulations which may significantly impact the operations and/or viability of various
entities. As a number of our NetSpend distributors are engaged in offering payday loans, further legislative and regulatory restrictions that negatively impact their ability to continue their operations could have a corresponding negative impact on
our ability to offer GPR cards through their locations, potentially resulting in a significant decline in revenue from the NetSpend business.
We are subject to the business cycles and credit risk of our merchant customers and our independent sales organizations.
A recessionary economic environment could affect our merchants through a higher rate of business closures, resulting in lower revenues and
earnings for us. Our merchants are liable for any charges properly reversed by the card issuer on behalf of the cardholder. Our merchants and ISOs are also liable for any fines, or penalties, that may be assessed by any card networks. In the event,
however, that we are not able to collect such amounts from the merchants or ISOs, due to merchant fraud, breach of contract, insolvency, bankruptcy or any other reason, we may be liable for any such charges which could have a material adverse effect
on our financial position and results of operations.
We incur chargeback liability when our merchants refuse or cannot reimburse chargebacks
resolved in favor of their customers. We cannot accurately anticipate these liabilities, which may adversely affect our financial results.
In the event a billing dispute between a cardholder and a merchant is not resolved in favor of the merchant, the transaction is normally
“charged back” to the merchant and the purchase price is credited or otherwise refunded to the cardholder. If we are unable to collect such amounts from the merchant’s account or reserve account (if applicable), or if the merchant
refuses or is unable, due to closure, bankruptcy or other reasons, to reimburse us for a chargeback, we bear the loss for the
14
amount of the refund paid to the cardholder. We may experience significant losses from chargebacks in the future. Any increase in chargebacks not paid by our merchants could have a material
adverse effect on our financial position and results of operation. We have policies to manage merchant-related credit risk and often mitigate such risk by requiring collateral and monitoring transaction activity. Notwithstanding our programs and
policies for managing credit risk, it is possible that a default on such obligations by one or more of our merchants could have a material adverse effect on our business.
Fraudulent activities by merchants, prepaid card holders or others and losses from overdrawn cardholder accounts may adversely affect our financial
results.
We have potential liability for fraudulent bankcard transactions or credits initiated by merchants or others, and our
prepaid card programs expose us to threats involving the misuse of cards, collusion, fraud and identify theft. Examples of merchant fraud include when a merchant knowingly uses a stolen or counterfeit bankcard or card number to record a false sales
transaction, processes an invalid bankcard, or intentionally fails to deliver the merchandise or services sold in an otherwise valid transaction. Criminals are using increasingly sophisticated methods to engage in illegal activities such as
counterfeit and fraud. While we have systems and procedures designed to detect and reduce the impact of fraud, we cannot assure the effectiveness of these measures. It is possible that incidents of fraud could increase in the future. Although a
large portion of the fraudulent activity associated with the cards we manage is addressed through the chargeback systems and procedures maintained by the card associations and networks, we are often responsible for other losses due to merchant,
cardholder and other types of fraud. No system or procedures established to detect and reduce the impact of fraud are entirely effective. Although we actively devote efforts to effectively manage risk and prevent fraud, we could nevertheless
experience an increase in fraud losses over our historical experience. Failure to effectively manage risk and prevent fraud would increase our chargeback liability or other liability. Increases in chargebacks or other liability could have a material
adverse effect on our financial position and results of operations.
Our systems and our third-party providers’ systems may fail which could
interrupt our service, cause us to lose business, increase our costs and expose us to liability.
We depend on the efficient and
uninterrupted operation of our computer systems, software, data centers and telecommunications networks, as well as the systems and services of third parties. A system outage or data loss could have a material adverse effect on our business,
financial position and results of operations. Not only would we suffer damage to our reputation in the event of a system outage or data loss, we may also be liable to third parties. Many of our contractual agreements with financial institutions
require the payment of penalties if we do not meet certain operating standards. Our systems and operations or those of our third-party providers could be exposed to damage or interruption from events that may be outside our control. Events that
could cause system interruptions include, among other things, fire, natural disaster, power loss, telecommunications failure, terrorist acts, war, unauthorized entry and computer viruses or other defects. Defects in our systems or those of third
parties, errors or delays in the processing of payment transactions, telecommunications failures, or other difficulties could result in loss of revenue, loss of customers, loss of merchant and cardholder data, harm to our business or reputation,
exposure to fraud losses or other liabilities, negative publicity, additional operating and development costs, fines and other sanctions imposed by card networks, and/or diversion of technical and other resources.
15
We may not be able to successfully manage our intellectual property and may be subject to infringement
claims.
In the rapidly developing legal framework, we rely on a combination of contractual rights and copyright, trademark,
patent and trade secret laws to establish and protect our proprietary technology. Despite our efforts to protect our intellectual property, third parties may infringe or misappropriate our intellectual property or may develop software or technology
competitive to us. Our competitors may independently develop similar technology, duplicate our products or services or design around our intellectual property rights. We may have to litigate to enforce and protect our intellectual property rights,
trade secrets and know-how or to determine their scope, validity or enforceability, which is expensive and could cause a diversion of resources and may not prove successful. The loss of intellectual property protection or the inability to secure or
enforce intellectual property protection could harm our business and ability to compete.
We may also be subject to costly litigation in
the event our products and technology infringe upon another party’s proprietary rights. Third parties may have, or may eventually be issued, patents that would be infringed by our products or technology. Any of these third parties could make a
claim of infringement against us with respect to our products or technology. We may also be subject to claims by third parties for breach of copyright, trademark or license usage rights. Any such claims and any resulting litigation could subject us
to significant liability for damages. An adverse determination in any litigation of this type could limit our ability to use the intellectual property subject to these claims and require us to design around a third party’s patent, which may not
be possible, or to license alternative technology from another party, which may be costly. In addition, litigation is time consuming and expensive to defend and could result in the diversion of the time and attention of our management and employees.
If we lose key personnel or are unable to attract additional qualified personnel as we grow, our business could be adversely affected.
All of our businesses function at the intersection of rapidly changing technological, social, economic and regulatory developments that
requires a wide ranging set of expertise and intellectual capital. To successfully compete and grow, we must recruit, develop and retain the necessary personnel who can provide the needed expertise across the entire spectrum of intellectual capital
needs. In addition, we must develop our personnel to fulfill succession plans capable of maintaining continuity in the midst of the inevitable unpredictability of human capital. However, the market for qualified personnel is competitive and we may
not succeed in recruiting additional personnel or may fail to effectively replace current personnel who depart with qualified or effective successors. Our efforts to retain and develop personnel may also result in significant additional expenses,
which could negatively affect our profitability. We cannot assure that key personnel, including executive officers, will continue to be employed or that we will be able to attract and retain qualified personnel in the future. Failure to retain or
attract key personnel could have a material adverse effect on our business, financial position and results of operations.
| Item 1B. |
Unresolved Staff Comments |
Not Applicable.
16
As of December 31, 2014, we and our subsidiaries owned 12 facilities
encompassing approximately 1,446,568 square feet and leased 45 facilities encompassing approximately 918,610 square feet. These facilities are used for operational, sales and administrative purposes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Owned Facilities |
|
|
Leased Facilities |
|
| |
|
Number |
|
|
Square Footage |
|
|
Number |
|
|
Square Footage |
|
| North America Services |
|
|
10 |
|
|
|
1,350,200 |
|
|
|
8 |
|
|
|
298,334 |
|
| International Services |
|
|
2 |
|
|
|
96,368 |
|
|
|
15 |
|
|
|
204,404 |
|
| Merchant Services |
|
|
— |
|
|
|
— |
|
|
|
17 |
|
|
|
314,819 |
|
| NetSpend |
|
|
— |
|
|
|
— |
|
|
|
5 |
|
|
|
101,053 |
|
We believe that our facilities are suitable and adequate for our current business; however, we periodically
review our space requirements and may acquire new space to meet the needs of our businesses or consolidate and dispose of or sublet facilities which are no longer required.
See Note 1, Note 10, Note 16 and Note 22 of Notes to Consolidated Financial Statements on pages 43 through 51, page 58, pages 66 through 68,
and pages 76 through 79 and “Property and Equipment” under the “Financial Review” Section on page 31 of the Annual Report which are incorporated in this document by reference.
| Item 3. |
Legal Proceedings |
See Note 16 of Notes to Consolidated Financial Statements on pages 66
through 68 of the Annual Report which is incorporated in this document by reference.
| Item 4. |
Mine Safety Disclosures |
Not Applicable.
17
PART II
| Item 5. |
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Repurchases of Equity Securities |
The “Quarterly Financial Data (Unaudited), Stock Price, Dividend Information” Section on page 89, Note 20 of Notes to Consolidated
Financial Statements on page 75 and “Stock Performance Graph” on page 90 of the Annual Report are incorporated in this document by reference. The “Stock Performance Graph” is incorporated herein by reference; however, this
information shall not be deemed to be “soliciting material” or to be “filed” with the Commission or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended.
| Item 6. |
Selected Financial Data |
The “Selected Financial Data” Section which is set
forth on page 11 of the Annual Report is incorporated in this document by reference.
| Item 7. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The “Financial Overview” and “Financial Review” Sections which are set forth on pages 11 through 37 of the Annual Report
which includes the information encompassed within “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are incorporated in this document by reference.
| Item 7A. |
Quantitative and Qualitative Disclosures About Market Risk |
Foreign Exchange
Risk. We are exposed to foreign exchange risk because we have assets, liabilities, revenues and expenses denominated in foreign currencies. These currencies are translated into U.S. dollars at current exchange rates, except for
revenues, costs and expenses and net income, which are translated at the average exchange rate for each reporting period. Net exchange gains or losses resulting from the translation of assets and liabilities of our foreign operations, net of tax,
are accumulated in a separate section of shareholders’ equity entitled “accumulated other comprehensive income (loss), net.” The amount of other comprehensive (loss) income, net of tax, related to foreign currency translation for the
years ended December 31, 2014, 2013 and 2012 was:
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in millions) |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Comprehensive income (loss), net of tax |
|
($ |
15.6 |
) |
|
($ |
1.3 |
) |
|
$ |
3.5 |
|
Currently, we do not use financial instruments to hedge our exposure to exchange rate changes.
The following table presents the carrying value of the net assets of our foreign operations in U.S. dollars at December 31, 2014:
|
|
|
|
|
| (in millions) |
|
December 31, 2014 |
|
| Europe |
|
$ |
206.5 |
|
| China |
|
|
92.9 |
|
| Cyprus |
|
|
40.7 |
|
| Other |
|
|
9.6 |
|
We record foreign currency translation adjustments associated with other balance sheet accounts. See
“Nonoperating Income (Expense)” under the “Financial Review” Section on page 27 of the Annual Report which is incorporated in this document by reference. We maintain several cash accounts denominated in foreign currencies,
primarily in US dollars and Euros. As we translate the foreign-denominated cash balances into U.S. dollars, the translated cash balance is adjusted upward or downward depending upon the foreign currency exchange movements. The upward or downward
adjustment is recorded as a gain or loss on foreign currency translation in our statements of income. As those cash accounts have increased, the upward or downward adjustments have increased. We recorded a net translation loss of approximately $0.1
million for the year ended December 31, 2014 relating to the translation of foreign denominated balance sheet accounts, most of which were cash. The balance of the foreign-denominated cash accounts subject to risk of translation gains or losses
at December 31, 2014 was approximately $16.7 million, the majority of which is denominated in Euros.
18
We provide financing to our international operation in Europe through an intercompany loan that
requires the operation to repay the financing in U.S. dollars. The functional currency of each operation is the respective local currency. As we translate the foreign currency denominated financial statements into U.S. dollars, the translated
balance of the financing (liability) is adjusted upward or downward to match the U.S. dollar obligation (receivable) on our financial statements. The upward or downward adjustment is recorded as a gain or loss on foreign currency translation in
other comprehensive income.
The net asset account balance subject to foreign currency exchange rates between the local currencies and the
U.S. dollar at December 31, 2014 was $38.1 million.
The following table presents the potential effect on income before income taxes
of hypothetical shifts in the foreign currency exchange rate between the local currencies and the U.S. dollar of plus or minus 100 basis points, 500 basis points and 1,000 basis points based on the net asset account balance of $38.1 million at
December 31, 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Effect of Basis Point Change |
|
| |
|
Increase in basis point of |
|
|
Decrease in basis point of |
|
| (in thousands) |
|
100 |
|
|
500 |
|
|
1,000 |
|
|
100 |
|
|
500 |
|
|
1,000 |
|
| Effect on income before income taxes |
|
$ |
381 |
|
|
|
1,904 |
|
|
|
3,808 |
|
|
|
(381 |
) |
|
|
(1,904 |
) |
|
|
(3,808 |
) |
Interest Rate Risk. We are also exposed to interest rate risk associated with the investing of
available cash. We invest available cash in conservative short-term instruments and are primarily subject to changes in the short-term interest rates.
The following table provides information about our debt obligations that are sensitive to changes in interest rates. The table presents
principal cash flows and related weighted average interest rates by expected maturity dates. The information is presented in U.S. dollar equivalents, which is our reporting currency. The debt obligation’s actual cash flows are denominated in
U.S. dollars.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| At December 31, 2014 |
|
Expected maturity date |
|
| Liabilities |
|
2015 |
|
|
2016 |
|
|
2017 |
|
|
2018 |
|
|
2019 |
|
|
Thereafter |
|
|
TOTAL |
|
| (US$ Equivalent in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Long-term Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fixed Rate |
|
$ |
22.5 |
|
|
|
5.5 |
|
|
|
— |
|
|
|
550.0 |
|
|
|
— |
|
|
|
550.0 |
|
|
$ |
1,128.0 |
|
| Average interest rate |
|
|
3.04 |
% |
|
|
3.06 |
% |
|
|
3.06 |
% |
|
|
3.46 |
% |
|
|
— |
|
|
|
3.75 |
% |
|
|
3.47 |
% |
|
|
|
|
|
|
|
|
| Variable Rate |
|
$ |
21.3 |
|
|
|
30.0 |
|
|
|
126.4 |
|
|
|
140.0 |
|
|
|
— |
|
|
|
— |
|
|
$ |
317.7 |
|
| Average interest rate |
|
|
1.29 |
% |
|
|
1.29 |
% |
|
|
1.30 |
% |
|
|
1.29 |
% |
|
|
— |
|
|
|
— |
|
|
|
1.29 |
% |
19
| Item 8. |
Financial Statements and Supplementary Data |
The “Quarterly Financial Data
(Unaudited), Stock Price, Dividend Information” Section, which is set forth on page 89, and the “Consolidated Balance Sheets, Consolidated Statements of Income, Consolidated Statements of Comprehensive Income, Consolidated Statements of
Cash Flows, Consolidated Statements of Changes in Equity, Notes to Consolidated Financial Statements, Report of Independent Registered Public Accounting Firm and Management’s Report on Internal Control Over Financial Reporting,” which are
set forth on pages 38 through 88 of the Annual Report are incorporated in this document by reference.
| Item 9. |
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure |
Not Applicable.
| Item 9A. |
Controls and Procedures |
Evaluation of Disclosure 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 annual report as required by Rule 13a-15 of the Securities Exchange Act of 1934, as amended
(“Exchange Act”). This evaluation was carried out under the supervision and with the participation of our management, including our chief executive officer and chief financial officer. Based on this evaluation, the chief executive officer
and chief financial officer concluded that as of December 31, 2014, TSYS’ disclosure controls and procedures were designed and effective to ensure that the information required to be disclosed by TSYS in reports that it files under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and were also designed and effective to ensure that the information required to be disclosed in the reports that TSYS
files or submits under the Exchange Act is accumulated and communicated to management, as appropriate to allow timely decisions regarding required disclosure.
20
Management’s Report on Internal Control Over Financial Reporting and Report of
Independent Registered Public Accounting Firm. “Management’s Report on Internal Control Over Financial Reporting,” which is set forth on page 88 of the Annual Report, and “Report of Independent Registered Public
Accounting Firm,” which is set forth on page 87 of the Annual Report, are incorporated in this document by reference.
Changes
in Internal Control Over Financial Reporting. No change in our internal control over financial reporting occurred during the fourth fiscal quarter covered by this annual report that materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
| Item 9B. |
Other Information |
Not Applicable.
PART III
| Item 10. |
Directors, Executive Officers and Corporate Governance |
Information included under the
following captions in our Proxy Statement is incorporated in this document by reference:
| |
• |
|
“PROPOSALS TO BE VOTED ON” – “PROPOSAL 1: ELECTION OF DIRECTORS,” |
| |
• |
|
“SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE,” and |
| |
• |
|
“CORPORATE GOVERNANCE AND BOARD MATTERS” – “Committees of the Board.” |
We have a Code of Business Conduct and Ethics that applies to all directors, officers and employees, including our principal executive
officer, our principal financial officer and our chief accounting officer. You can find our Code of Business Conduct and Ethics in the Corporate Governance section of our website at www.tsys.com under “Investor Relations” then
“Corporate Governance.” We will post any amendments to the Code of Business Conduct and Ethics and any waivers that are required to be disclosed by the rules of either the SEC or the NYSE in the Corporate Governance section of our website.
| Item 11. |
Executive Compensation |
Information included under the following captions in our Proxy
Statement is incorporated in this document by reference:
| |
• |
|
“DIRECTOR COMPENSATION,” and |
| |
• |
|
“EXECUTIVE COMPENSATION” – “Compensation Discussion and Analysis,” “Compensation Committee Report,” “Summary Compensation Table” and the Compensation Tables and Narratives
which follow the Summary Compensation Table, and “Compensation Committee Interlocks and Insider Participation.” |
21
The information included under the heading “Compensation Committee Report” in our Proxy
Statement is incorporated herein by reference; however, this information shall not be deemed to be “soliciting material” or to be “filed” with the Commission or subject to Regulation 14A or 14C, or to the liabilities of
Section 18 of the Securities Exchange Act of 1934, as amended.
| Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Information pertaining to equity compensation plans is contained in Note 18 of Notes to Consolidated Financial Statements on page 69 of the
Annual Report and is incorporated in this document by reference.
Information included under the following captions in our Proxy Statement
is incorporated in this document by reference:
| |
• |
|
“STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS,” and |
| |
• |
|
“PRINCIPAL SHAREHOLDERS.” |
| Item 13. |
Certain Relationships and Related Transactions, and Director Independence |
Information
included under the following captions in our Proxy Statement is incorporated in this document by reference:
| |
• |
|
“CORPORATE GOVERNANCE AND BOARD MATTERS” – “Director Independence” and “Certain Relationships and Related Transactions.” |
| Item 14. |
Principal Accountant Fees and Services |
Information included under the following
captions in our Proxy Statement is incorporated in this document by reference:
| |
• |
|
“RATIFICATION OF APPOINTMENT OF THE INDEPENDENT AUDITOR” – “Audit and Non-Audit Fees.” |
PART IV
| Item 15. |
Exhibits and Financial Statement Schedules |
(a) 1. Financial
Statements
The following consolidated financial statements of TSYS are incorporated in this document by reference from
pages 38 through 88 of the Annual Report.
Consolidated Balance Sheets - December 31, 2014 and 2013
22
Consolidated Statements of Income - Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Comprehensive Income – Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Cash Flows - Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Changes in Equity - Years Ended December 31, 2014, 2013 and 2012
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Management’s Report on Internal Control Over Financial Reporting
| |
2. |
Financial Statement Schedules |
The following report of independent
registered public accounting firm and consolidated financial statement schedule of TSYS are included:
Report of Independent Registered
Public Accounting Firm
Schedule II - Valuation and Qualifying Accounts - Years Ended
December 31, 2014, 2013 and 2012
All other schedules are omitted because they are inapplicable or the required information is included in the consolidated financial statements
and notes thereto.
The following exhibits are filed herewith or are incorporated to
other documents previously filed with the SEC. Exhibits 10.6 through 10.37 pertain to executive compensation plans and arrangements. With the exception of those portions of the Annual Report and Proxy Statement that are expressly incorporated
by reference in this Form 10-K, such documents are not to be deemed filed as part of this Form 10-K.
|
|
|
| Exhibit
Number |
|
Description |
|
|
| 2.1 |
|
Agreement and Plan of Merger, dated as of February 19, 2013, by and among TSYS, General Merger Sub, Inc. and NetSpend Holdings Inc., incorporated by reference to Exhibit 2.1 of TSYS’ Current Report on Form 8-K dated February
19, 2013 |
|
|
| 2.2 |
|
First Amendment to the Agreement and Plan of Merger, dated as of May 29, 2013, which amended the Agreement and Plan of Merger, dated as of February 19, 2013, by and among TSYS, General Merger Sub, Inc. and NetSpend Holdings, Inc.,
incorporated by reference to Exhibit 2.1 of TSYS’ Current Report on Form 8-K dated May 29, 2013 |
23
|
|
|
|
|
| 3.1 |
|
Articles of Incorporation of TSYS, as amended, incorporated by reference to Exhibit 3.1 of TSYS’ Current Report on Form 8-K dated April 30, 2009 |
|
|
| 3.2 |
|
Bylaws of TSYS, as amended, incorporated by reference to Exhibit 3.1 of TSYS’ Current Report on Form 8-K dated July 28, 2009 |
|
|
| 4.1 |
|
Indenture, dated as of May 22, 2013, between TSYS and Wells Fargo Bank, National Association, as trustee, incorporated by reference to Exhibit 4.1 of TSYS’ Current Report on Form 8-K dated May 22, 2013 |
|
|
| 4.2 |
|
Form of 2.375% Senior Note due 2018, incorporated by reference to Exhibit 4.2 of TSYS’ Current Report on Form 8-K dated May 22, 2013 |
|
|
| 4.3 |
|
Form of 3.750% Senior Note due 2023, incorporated by reference to Exhibit 4.3 of TSYS’ Current Report on Form 8-K dated May 22, 2013 |
|
|
| 10.1 |
|
Credit Agreement of TSYS, dated as of September 10, 2012, with JPMorgan Chase Bank, N.A., as Administrative Agent, J.P. Morgan Securities LLC, The Bank of Tokyo-Mitsubishi UFJ, Ltd., Regions Capital Markets and U.S. Bank National
Association, as joint lead arrangers and joint bookrunners, and The Bank of Tokyo-Mitsubishi UFJ, Ltd., Regions Bank and U.S. Bank National Association, as Syndication Agents, and the other lenders named therein, incorporated by reference to Exhibit
10.1 of TSYS’ Current Report on Form 8-K dated September 11, 2012 |
|
|
| 10.2 |
|
First Amendment, dated as of April 8, 2013, to the Credit Agreement of TSYS, dated as of September 10, 2012, with JPMorgan Chase Bank, N.A., as Administrative Agent, J.P. Morgan Securities LLC, The Bank of Tokyo-Mitsubishi UFJ,
Ltd., Regions Capital Markets and U.S. Bank National Association, as joint lead arrangers and joint bookrunners, and The Bank of Tokyo-Mitsubishi UFJ, Ltd., Regions Bank and U.S. Bank National Association, as Syndication Agents, and the other
lenders named therein, incorporated by reference to Exhibit 10.2 of TSYS’ Current Report on Form 8-K dated April 8, 2013 |
|
|
| 10.3 |
|
Credit Agreement of TSYS, dated as of April 8, 2013, with JPMorgan Chase Bank, N.A., as Administrative Agent, The Bank of Tokyo-Mitsubishi UFJ, Ltd., as Syndication Agent, Regions Bank and U.S. Bank National Association, as
Documentation Agents, and other lenders party thereto, with J.P. Morgan Securities LLC, The Bank of Tokyo Mitsubishi UFJ, Ltd., Regional Capital Markets, and U.S. Bank National Association, as joint lead arrangers and joint bookrunners, incorporated
by reference to Exhibit 10.1 of TSYS’ Current Report on Form 8-K dated April 8, 2013 |
24
|
|
|
|
|
| 10.4 |
|
Voting Agreement, dated as of February 19, 2013, by and among TSYS and JLL Partners Fund IV, L.P., JLL Partners Fund V, L.P., Oak Investment Partners X, Limited Partnership and Oak X Affiliates Fund, L.P., incorporated by
reference to Exhibit 10.1 of TSYS’ Current Report on Form 8-K dated February 19, 2013 |
|
|
| 10.5 |
|
Commitment Letter, dated as of February 19, 2013, by and among TSYS, JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLC and The Bank of Tokyo-Mitsubishi UFJ, Ltd., incorporated by reference to Exhibit 10.2 of TSYS’ Current
Report on Form 8-K dated February 19, 2013 |
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
|
|
|
|
|
| 10.6 |
|
Total System Services, Inc. 2002 Long-Term Incentive Plan, incorporated by reference to Exhibit 10.2 of TSYS’ Annual Report on Form 10-K for the fiscal year ended December 31, 2001, as filed with the SEC on March 19,
2002 |
|
|
| 10.7 |
|
Amended and Restated Total System Services, Inc. Deferred Compensation Plan, incorporated by reference to Exhibit 10.1 of TSYS’ Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, as filed with the SEC on August
9, 2010 |
|
|
| 10.8 |
|
Amended and Restated Total System Services, Inc. Directors’ Deferred Compensation Plan, incorporated by reference to Exhibit 10.2 of TSYS’ Quarterly Report on Form 10-Q for the quarter ended June 30, 2008, as filed with
the SEC on August 7, 2008 |
|
|
| 10.9 |
|
Wage Continuation Agreement of TSYS, incorporated by reference to Exhibit 10.7 of TSYS’ Annual Report on Form 10-K for the fiscal year ended December 31, 1992, as filed with the SEC on March 18, 1993 |
25
|
|
|
|
|
| 10.10 |
|
Split Dollar Insurance Agreement of TSYS, incorporated by reference to Exhibit 10.10 of TSYS’ Annual Report on Form 10-K for the fiscal year ended December 31, 1993, as filed with the SEC on March 22, 1994 |
|
|
| 10.11 |
|
Change of Control Agreement for executive officers of TSYS, incorporated by reference to Exhibit 10.17 of TSYS’ Annual Report on Form 10-K for the fiscal year ended December 31, 2007, as filed with the SEC on February 29,
2008 |
|
|
| 10.12 |
|
Split Dollar Insurance Agreement and related Executive Benefit Substitution Agreement, incorporated by reference to Exhibit 10.19 of TSYS’ Annual Report on Form 10-K for the fiscal year ended December 31, 2001, as filed with
the SEC on March 19, 2002 |
|
|
| 10.13 |
|
Summary of Board of Directors Compensation, incorporated by reference to Exhibit 10.1 of TSYS’ Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, as filed with the SEC on August 6, 2012 |
|
|
| 10.14 |
|
Form of Stock Option Agreement for stock option awards under the Total System Services, Inc. 2002 Long-Term Incentive Plan for grants made subsequent to January 17, 2006, incorporated by reference to Exhibit 10.1 of TSYS’
Current Report on Form 8-K dated January 17, 2006 |
|
|
| 10.15 |
|
Total System Services, Inc. 2007 Omnibus Plan, incorporated by reference to Exhibit 10.1 of TSYS’ Current Report on Form 8-K dated April 24, 2007 |
|
|
| 10.16 |
|
Total System Services, Inc. 2012 Omnibus Plan (formerly named the 2008 Omnibus Plan), incorporated by reference to Exhibit 10.1 of TSYS’ Current Report on Form 8-K dated May 4, 2012 |
|
|
| 10.17 |
|
Form of Revised Stock Option Agreement for stock option awards under the Total System Services, Inc. 2008 Omnibus Plan, incorporated by reference to Exhibit 10.2 of TSYS’ Current Report on Form 8-K dated February 5,
2008 |
|
|
| 10.18 |
|
Form of Retention Restricted Stock Award Agreement for retention restricted stock awards under the Total System Services, Inc. 2008 Omnibus Plan, incorporated by reference to Exhibit 10.3 of TSYS’ Current Report on Form 8-K
dated February 5, 2008 |
26
|
|
|
|
|
| 10.19 |
|
Form of Amended and Revised Stock Option Agreement for stock option awards under the Total System Services, Inc. 2007 Omnibus Plan, incorporated by reference to Exhibit 10.1 of TSYS’ Current Report on Form 8-K dated
March 28, 2008 |
|
|
| 10.20 |
|
Form of Amended and Revised Stock Option Agreement for 2008 stock option awards under the Total System Services, Inc. 2008 Omnibus Plan, incorporated by reference to Exhibit 10.3 of TSYS’ Current Report on Form 8-K dated March
28, 2008 |
|
|
| 10.21 |
|
Form of Amended and Revised Stock Option Agreement for 2009 stock option awards under the Total System Services, Inc. 2007 and 2008 Omnibus Plans, incorporated by reference to Exhibit 10.40 of TSYS’ Annual Report on Form 10-K for the fiscal year ended December 31, 2008, as filed with the SEC on February 27, 2009 |
|
|
| 10.22 |
|
Form of Stock Option Agreement for 2010 stock option awards under the Total System Services, Inc. 2008 Omnibus Plan, incorporated by reference to Exhibit 10.4 of TSYS’ Quarterly Report on Form 10-Q for the quarter ended March
31, 2010, as filed with the SEC on May 7, 2010 |
|
|
| 10.23 |
|
Form of Performance-Based Special Stock Option Agreement for performance-based stock option awards under the Total System Services, Inc. 2008 Omnibus Plan, incorporated by reference to Exhibit 10.6 of TSYS’ Quarterly Report on
Form 10-Q for the quarter ended March 31, 2010, as filed with the SEC on May 7, 2010 |
|
|
| 10.24 |
|
Form of Non-Employee Director Fully Vested Stock Option Agreement for the Total System Services, Inc. 2007 Omnibus Plan, incorporated by reference to Exhibit 10.37 of TSYS’ Annual Report on Form 10-K for the fiscal year ended
December 31, 2010, as filed with the SEC on February 28, 2011 |
|
|
| 10.25 |
|
Form of Non-Employee Director Fully Vested Share Award Agreement for the Total System Services, Inc. 2007 Omnibus Plan, incorporated by reference to Exhibit 10.38 of TSYS’ Annual Report on Form 10-K for the fiscal year
ended December 31, 2010, as filed with the SEC on February 28, 2011 |
|
|
| 10.26 |
|
Form of Stock Option Agreement for 2011 stock option awards under the Total System Services, Inc. 2008 Omnibus Plan, incorporated by reference to Exhibit 10.1 of TSYS’ Quarterly Report on
Form 10-Q for the quarter ended March 31, 2011, as filed with the SEC on May 6, 2011 |
27
|
|
|
|
|
| 10.27 |
|
Form of Performance Share Agreement for 2011 performance share awards under the Total System Services, Inc. 2008 Omnibus Plan, incorporated by reference to Exhibit 10.2 of TSYS’ Quarterly Report on Form 10-Q for the quarter
ended March 31, 2011, as filed with the SEC on May 6, 2011 |
|
|
| 10.28 |
|
Form of Indemnification Agreement for directors and executive officers of TSYS, incorporated by reference to Exhibit 10.1 of TSYS’ Current Report on Form 8-K dated July 25, 2007 |
|
|
| 10.29 |
|
Form of Senior Executive Stock Option Agreement for 2012 stock option awards under the Total System Services, Inc. 2008 Omnibus Plan, incorporated by reference to Exhibit 10.1 of TSYS’ Quarterly Report on Form 10-Q for the
quarter ended March 31, 2012, as filed with the SEC on May 7, 2012 |
|
|
| 10.30 |
|
Form of Senior Executive Performance Share Agreement for 2012 performance share awards under the Total System Services, Inc. 2008 Omnibus Plan, incorporated by reference to Exhibit 10.2 of TSYS’ Quarterly Report on Form 10-Q
for the quarter ended March 31, 2012, as filed with the SEC on May 7, 2012 |
|
|
| 10.31 |
|
Form of Senior Executive Stock Option Agreement for 2013 stock option awards under the Total System Services, Inc. 2012 Omnibus Plan, incorporated by reference to Exhibit 10.3 of TSYS’ Quarterly Report on Form 10-Q for the
Quarter ended March 31, 2013, as filed with the SEC on May 8, 2013 |
|
|
| 10.32 |
|
Form of Senior Executive Performance Share Agreement for 2013 performance share awards under the Total System Services, Inc. 2012 Omnibus Plan, incorporated by reference to Exhibit 10.4 of TSYS’ Quarterly Report on Form 10-Q
for the Quarter ended March 31, 2013, as filed with the SEC on May 8, 2013 |
|
|
| 10.33 |
|
Form of Senior Executive Stock Option Agreement for 2014 stock option awards under the Total System Services, Inc. 2012 Omnibus Plan, incorporated by reference to Exhibit 10.1 of TSYS’ Quarterly Report on Form 10-Q for the
Quarter ended March 31, 2014, as filed with the SEC on May 8, 2014 |
|
|
| 10.34 |
|
Form of Senior Executive Performance Share Agreement for 2014 performance share awards under the Total System Services, Inc. 2012 Omnibus Plan, incorporated by reference to Exhibit 10.2 of TSYS’ Quarterly Report on Form 10-Q
for the Quarter ended March 31, 2014, as filed with the SEC on May 8, 2014 |
28
|
|
|
|
|
| 10.35 |
|
Transition and Retirement Agreement, dated June 23, 2014, between Philip W. Tomlinson and Total System Services, Inc., incorporated by reference to Exhibit 10.1 of TSYS’ Current Report on
Form 8-K dated June 23, 2014. |
|
|
| 10.36 |
|
Restrictive Covenant Agreement, dated June 23, 2014, between Philip W. Tomlinson and Total System Services, Inc., incorporated by reference to Exhibit 10.2 of TSYS’ Current Report on
Form 8-K dated June 23, 2014. |
|
|
| 10.37 |
|
Consulting Agreement, dated June 23, 2014, between Philip W. Tomlinson and Total System Services, Inc., incorporated by reference to Exhibit 10.3 of TSYS’ Current Report on Form 8-K dated June 23, 2014. |
|
|
| 13.1 |
|
Certain specified pages of TSYS’ 2014 Annual Report to Shareholders which are incorporated herein by reference |
|
|
| 21.1 |
|
Subsidiaries of Total System Services, Inc. |
|
|
| 23.1 |
|
Consent of Independent Registered Public Accounting Firm |
|
|
| 24.1 |
|
Powers of Attorney contained on the signature pages of this 2014 Annual Report on Form 10-K and incorporated herein by reference |
|
|
| 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 |
|
|
| 99.1 |
|
Annual Report on Form 11-K for the Total System Services, Inc. 2012 Employee Stock Purchase Plan for the year ended December 31, 2014 (to be filed as an amendment hereto within 120 days of the end of the period covered by this
report) |
|
|
| 101 |
|
Interactive Data File |
We agree to furnish the SEC, upon request, a copy of each instrument with respect to issues of long-term debt.
The principal amount of any individual instrument, which has not been previously filed, does not exceed ten percent of the total assets of TSYS and our subsidiaries on a consolidated basis.
29
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Total System Services,
Inc.:
Under date of February 25, 2015, we reported on the consolidated balance sheets of Total System Services, Inc. and subsidiaries as of
December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, cash flows, and changes in equity for each of the years in the three-year period ended December 31, 2014, which are included in the
December 31, 2014 annual report on Form 10-K. In connection with our audit of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule in
Schedule II. This financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on this financial statement schedule based on our audit.
In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Atlanta, Georgia
February 25, 2015
Schedule II
Schedule — Valuation and Qualifying Accounts
TOTAL SYSTEM SERVICES, INC.
Schedule II
Valuation and
Qualifying Accounts
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
Additions |
|
|
|
|
|
|
|
| |
|
|
|
|
Changes in |
|
|
|
|
|
|
|
| |
|
Balance at |
|
|
allowances, charges to |
|
|
|
|
|
Balance at |
|
| |
|
beginning |
|
|
expenses and changes |
|
|
|
|
|
end |
|
| |
|
of period |
|
|
to other accounts |
|
|
Deductions |
|
|
of period |
|
| Year ended December 31, 2012: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Provision for doubtful accounts |
|
$ |
2,108 |
|
|
|
2,045 |
(1) |
|
|
(1,539 |
)(3) |
|
$ |
2,614 |
|
| Provision for billing adjustments |
|
$ |
2,037 |
|
|
|
(991 |
)(1) |
|
|
251 |
(3) |
|
$ |
1,297 |
|
| Transaction processing provisions - processing errors |
|
$ |
5,322 |
|
|
|
2,805 |
(2) |
|
|
(6,403 |
)(3) |
|
$ |
1,724 |
|
| Deferred tax valuation allowance |
|
$ |
11,751 |
|
|
|
1,557 |
(4) |
|
|
(332 |
)(5) |
|
$ |
12,976 |
|
|
|
|
|
|
| Year ended December 31, 2013: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Provision for doubtful accounts |
|
$ |
2,614 |
|
|
|
2,375 |
(1) |
|
|
(2,232 |
)(3) |
|
$ |
2,757 |
|
| Provision for billing adjustments |
|
$ |
1,297 |
|
|
|
(376 |
)(1) |
|
|
(294 |
)(3) |
|
$ |
627 |
|
| Transaction processing provisions - processing errors |
|
$ |
1,724 |
|
|
|
7,458 |
(2) |
|
|
(6,773 |
)(3) |
|
$ |
2,409 |
|
| Provision for fraud losses |
|
$ |
— |
|
|
|
19,737 |
(1),(6) |
|
|
(13,953 |
)(3) |
|
$ |
5,784 |
|
| Deferred tax valuation allowance |
|
$ |
12,976 |
|
|
|
2,298 |
(4) |
|
|
(583 |
)(5) |
|
$ |
14,691 |
|
|
|
|
|
|
| Year ended December 31, 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Provision for doubtful accounts |
|
$ |
2,757 |
|
|
|
2,326 |
(1) |
|
|
(884 |
)(3) |
|
$ |
4,199 |
|
| Provision for billing adjustments |
|
$ |
627 |
|
|
|
497 |
(1) |
|
|
(117 |
)(3) |
|
$ |
1,007 |
|
| Transaction processing provisions - processing errors |
|
$ |
2,409 |
|
|
|
9,468 |
(2) |
|
|
(7,247 |
)(3) |
|
$ |
4,630 |
|
| Provision for fraud losses |
|
$ |
5,784 |
|
|
|
38,381 |
(1) |
|
|
(37,853 |
)(3) |
|
$ |
6,312 |
|
| Deferred tax valuation allowance |
|
$ |
14,691 |
|
|
|
5,534 |
(4) |
|
|
(1,262 |
)(5) |
|
$ |
18,963 |
|
| (1) |
Amount reflected includes charges to (recoveries of) bad debt expense which are classified in selling, general and administrative expenses and the charges for billing adjustment which are recorded against revenues.
|
| (2) |
Amount reflected is the change in transaction processing provisions reflected in cost of services expenses. |
| (3) |
Accounts deemed to be uncollectible and written off during the year as it relates to bad debts. Amounts that relate to billing adjustments and transaction processing provisions reflect actual billing adjustments and
processing errors charged against the allowances. |
| (4) |
Amount represents an increase in the amount of deferred tax assets, which more likely than not, will not be realized. |
| (5) |
Amount represents a decrease in the amount of deferred tax assets, which more likely than not, will not be realized. |
| (6) |
Includes $7.8 million of fraud losses on July 1, 2013 related to the acquisition of NetSpend. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, Total System Services, Inc. has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
|
|
|
|
|
TOTAL SYSTEM SERVICES, INC. |
|
|
|
|
(Registrant) |
|
|
|
|
| Date: February 25, 2015 |
|
|
|
By: |
|
/s/ M. Troy Woods |
|
|
|
|
|
|
M. Troy Woods, |
|
|
|
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
(Principal Executive Officer) |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints M. Troy Woods and Paul M. Todd each of
them, his true and lawful attorney(s)-in-fact and agent(s), with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this report and to file the same,
with all exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney(s)-in-fact and agent(s) full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney(s)-in-fact and agent(s), or their substitute(s), may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, as amended, this report has been signed by the following persons in the capacities and on the dates indicated.
|
|
|
|
|
| /s/ M. Troy Woods
M. Troy Woods, |
|
|
|
Date: February 25, 2015 |
| President, Chief Executive Officer and Director
(Principal Executive Officer) |
|
|
|
|
|
|
|
| /s/ Philip W. Tomlinson
Philip W. Tomlinson, |
|
|
|
Date: February 25, 2015 |
| Chairman of the Board |
|
|
|
|
|
|
|
|
|
|
|
|
| /s/ Paul M. Todd
Paul M. Todd, |
|
|
|
Date: February 25, 2015 |
| Senior Executive Vice President and Chief
Financial Officer (Principal Financial Officer) |
|
|
|
|
|
|
|
| /s/ Dorenda K. Weaver
Dorenda K. Weaver, |
|
|
|
Date: February 25, 2015 |
| Chief Accounting Officer (Principal Accounting
Officer) |
|
|
|
|
|
|
|
| /s/ James H. Blanchard
James H. Blanchard, |
|
|
|
Date: February 25, 2015 |
| Director |
|
|
|
|
|
|
|
| /s/ Kriss Cloninger III
Kriss Cloninger III, |
|
|
|
Date: February 25, 2015 |
| Director |
|
|
|
|
|
|
|
| /s/ Walter W. Driver, Jr.
Walter W. Driver, Jr., |
|
|
|
Date: February 25, 2015 |
| Director |
|
|
|
|
|
|
|
| /s/ Gardiner W. Garrard, Jr.
Gardiner W. Garrard, Jr., |
|
|
|
Date: February 25, 2015 |
| Director |
|
|
|
|
|
|
|
| /s/ Sidney E. Harris
Sidney E. Harris, |
|
|
|
Date: February 25, 2015 |
| Director |
|
|
|
|
|
|
|
| /s/ William M. Isaac
William M. Isaac, |
|
|
|
Date: February 25, 2015 |
| Director |
|
|
|
|
|
|
|
|
|
|
|
|
| /s/ Mason H. Lampton
Mason H. Lampton, |
|
|
|
Date: February 25, 2015 |
| Director |
|
|
|
|
|
|
|
| /s/ Connie D. McDaniel
Connie D. McDaniel, |
|
|
|
Date: February 25, 2015 |
| Director |
|
|
|
|
|
|
|
| /s/ H. Lynn Page
H. Lynn Page, |
|
|
|
Date: February 25, 2015 |
| Director |
|
|
|
|
|
|
|
| /s/ John T. Turner
John T. Turner, |
|
|
|
Date: February 25, 2015 |
| Director |
|
|
|
|
|
|
|
| /s/ Richard W. Ussery
Richard W. Ussery, |
|
|
|
Date: February 25, 2015 |
| Director |
|
|
|
|
|
|
|
| /s/ James D. Yancey
James D. Yancey, |
|
|
|
Date: February 25, 2015 |
| Director |
|
|
|
|
Exhibit 13.1
Selected Financial Data
The following financial data should be read in conjunction with the Consolidated Financial
Statements and Notes thereto and Financial Review sections of the Annual Report. The historical trends in Total System Services, Inc.‘s (TSYS’ or the Company’s) results of operations and financial position over the last five years are
presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
| (in thousands, except per share data) |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
2011 |
|
|
2010 |
|
| Income Statement Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total revenues |
|
$ |
2,446,877 |
|
|
|
2,064,305 |
|
|
|
1,793,557 |
|
|
|
1,733,237 |
|
|
|
1,657,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating income |
|
$ |
431,640 |
|
|
|
382,500 |
|
|
|
354,969 |
|
|
|
321,120 |
|
|
|
310,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income from continuing operations, net of tax |
|
$ |
280,751 |
|
|
|
254,542 |
|
|
|
248,928 |
|
|
|
218,446 |
|
|
|
210,711 |
|
| Income (Loss) from discontinued operations, net of tax |
|
|
48,655 |
|
|
|
2,055 |
|
|
|
995 |
|
|
|
4,216 |
|
|
|
(5,090 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income |
|
|
329,406 |
|
|
|
256,597 |
|
|
|
249,923 |
|
|
|
222,662 |
|
|
|
205,621 |
|
| Net income attributable to noncontrolling interests |
|
|
(6,534 |
) |
|
|
(11,847 |
) |
|
|
(5,643 |
) |
|
|
(2,103 |
) |
|
|
(11,674 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income attributable to TSYS common shareholders |
|
$ |
322,872 |
|
|
|
244,750 |
|
|
|
244,280 |
|
|
|
220,559 |
|
|
|
193,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic earnings per share (EPS)* attributable to TSYS common shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income from continuing operations |
|
$ |
1.48 |
|
|
|
1.31 |
|
|
|
1.31 |
|
|
|
1.14 |
|
|
|
1.02 |
|
| Gain (Loss) from discontinued operations |
|
|
0.26 |
|
|
|
(0.01 |
) |
|
|
(0.02 |
) |
|
|
0.01 |
|
|
|
(0.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income |
|
$ |
1.73 |
|
|
|
1.30 |
|
|
|
1.30 |
|
|
|
1.15 |
|
|
|
0.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Diluted EPS* attributable to TSYS common shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income from continuing operations |
|
$ |
1.47 |
|
|
|
1.30 |
|
|
|
1.31 |
|
|
|
1.14 |
|
|
|
1.02 |
|
| Gain (Loss) from discontinued operations |
|
|
0.25 |
|
|
|
(0.01 |
) |
|
|
(0.02 |
) |
|
|
0.01 |
|
|
|
(0.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income |
|
$ |
1.72 |
|
|
|
1.29 |
|
|
|
1.29 |
|
|
|
1.15 |
|
|
|
0.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash dividends declared per share |
|
$ |
0.40 |
|
|
|
0.40 |
|
|
|
0.40 |
|
|
|
0.31 |
|
|
|
0.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of December 31, |
|
| (in thousands) |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
2011 |
|
|
2010 |
|
| Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total assets |
|
$ |
3,733,581 |
|
|
|
3,686,568 |
|
|
|
2,023,838 |
|
|
|
1,858,392 |
|
|
|
1,952,261 |
|
| Obligations under long-term borrowings and capital leases, excluding current portion |
|
|
1,405,106 |
|
|
|
1,435,751 |
|
|
|
192,014 |
|
|
|
63,593 |
|
|
|
225,276 |
|
| * |
Basic and diluted EPS amounts for continuing operations and net income do not total due to rounding. |
Financial Overview
TSYS’ revenues are derived from providing global payment processing services to financial and
nonfinancial institutions, generally under long-term processing contracts. In addition, the Company derived revenues from providing processing services, acquiring solutions, related systems and integrated support services to merchant acquirers and
merchants. The Company also derives revenues by providing general-purpose reloadable (GPR) prepaid debit cards and payroll cards and alternative financial services to underbanked and other consumers. The Company’s services are provided through
the Company’s four operating segments: North America Services, International Services, Merchant Services and NetSpend.
Through the Company’s
North America Services and International Services segments, TSYS processes information through its cardholder systems to financial institutions throughout the United States and internationally. The
11
Company’s North America Services segment provides these services to clients in the United States, Canada, Mexico and the Caribbean. The Company’s International Services segment
provides services to clients in Europe, India, Middle East, Africa, Asia Pacific and Brazil. The Company’s Merchant Services segment provides merchant services to merchant acquirers and merchants in the United States. The Company’s
NetSpend segment provides GPR prepaid debit and payroll cards and alternative financial service solutions to the underbanked and other consumers in the United States.
TSYS acquires other companies as part of its strategy for growth. In 2014, TSYS acquired an additional 15% equity interest in Central Payment Co., LLC (CPAY) from CPC Holding Company, LLC, a California limited
liability company. This purchase increased TSYS’ ownership of CPAY to 75%.
The following table sets forth each segment’s revenues as a
percentage of the Company’s total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
| |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| North America Services |
|
|
45 |
% |
|
|
48 |
% |
|
|
53 |
% |
| Merchant Services |
|
|
21 |
|
|
|
26 |
|
|
|
28 |
|
| NetSpend |
|
|
19 |
|
|
|
10 |
|
|
|
— |
|
| International Services |
|
|
15 |
|
|
|
16 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total revenues |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 and merchant portfolios of existing clients, the conversion of cardholder and merchant accounts of new clients to the Company’s
processing platforms, the receipt of fees for early contract termination and the loss of cardholder and merchant accounts either through purges or deconversions 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 consolidation in the financial services or retail industries
either through the sale, by a client, of its business, its card portfolio or a segment of its accounts to a party which processes cardholder or merchant accounts internally or uses another third-party processor. 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.
TSYS’ reported financial results will also be impacted by significant shifts in currency conversion rates. TSYS does not view foreign currency as an economic
event for the Company but as a financial reporting issue. Because changes in foreign currency exchange rates distort the operating growth rates, TSYS discloses the impact of foreign currency translation on its financial performance.
A significant amount of the Company’s revenues are derived from long-term contracts with large clients. Processing contracts with large clients, representing
a significant portion of the Company’s total revenues, generally provide for discounts on certain services based on the size and activity of clients’ portfolios. Therefore, revenues and the related margins are influenced by the client mix
relative to the size of client portfolios, as well as the number and activity of individual cardholder or merchant 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 toward larger clients.
Regulation
Government regulation affects key areas of TSYS’ business, in the U.S. as well as internationally. TSYS, along with the rest of the financial services industry, continues to experience increased legislative
and regulatory scrutiny, including the enactment of additional legislative and regulatory initiatives such as the Dodd-Frank Wall Street Reform and Consumer Protection Act (Financial Reform Act). This legislation, which provides for sweeping
12
financial regulatory reform, may have a significant and negative impact on the Company and its clients, which could impact TSYS’ earnings through fee reductions, higher costs (both
regulatory and implementation) and new restrictions on operations. The Financial Reform Act may also impact the competitive dynamics of the financial services industry in the U.S. by more adversely impacting large financial institutions, some
of which are TSYS clients, and by adversely impacting the competitive position of U.S. financial institutions in comparison to foreign competitors in certain businesses.
The Financial Reform Act, which includes the Durbin Amendment to the Electronic Funds Transfer Act, mandates that the Board of Governors of the Federal Reserve System (Board) limit debit card interchange fees.
Final rules were issued in June 2011. The final rules cap interchange fees for debit transactions at $0.21 plus five basis points of the transaction and require that the amount of any debit interchange transaction fee charged be reasonable and
proportional to the costs incurred in connection with the transaction. In July 2013, a federal court invalidated these rules and ordered the Board to revise them. However, a federal appeals court reversed the lower court decision, which effectively
reinstated the Board’s interchange rules, and the U.S. Supreme Court determined not to review the appeals court decision.
Although this
legislative action by the U.S. Congress had been anticipated for some time, it remains impossible to predict the impact, if any, that the law and the regulations to be promulgated thereunder may have on the Company’s operations or its
financial condition in the future. However, as TSYS’ business is predominately credit card related, the Durbin Amendment is not expected to have a significant negative impact upon TSYS’ business.
The Financial Reform Act also created a new Consumer Financial Protection Bureau (“CFPB”) with responsibility for regulating consumer financial products
and services and enforcing most federal consumer protection laws in the area of financial services, including consumer credit and the prepaid card industry. For example, the CFPB has proposed regulations regarding the prepaid industry, which, if
adopted as proposed, could impose significant additional disclosure requirements, overdraft requirements, and other requirements on the prepaid card industry, including our NetSpend business, effective in 2016. Similarly, other future actions of the
CFPB may make payment card or product transactions generally less attractive to card issuers, acquirers, consumers and merchants by further regulatory disclosures, payment card practices, fees, routing and other matters with respect to credit, debit
and prepaid cards, and thus negatively impact our business.
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. The accompanying Consolidated Financial Statements
and related Notes are an integral part of this Financial Review and should be read in conjunction with it.
Critical Accounting Policies and
Estimates
Risk factors that could affect the Company’s future operating results and cause actual results to vary materially from expectations
are listed in the Company’s forward-looking statements. Negative developments in these or other risk factors could have a material adverse effect on the Company’s financial position, results of operations and cash flows.
TSYS’ financial position, results of operations and cash flows are impacted by the accounting policies the Company has adopted. Refer to Note 1 in the
Consolidated Financial Statements for more information on the Company’s basis of presentation and a summary of significant accounting policies.
Management believes that the following accounting policies are the most critical to fully understand and evaluate the Company’s results. Within each critical
policy, the Company makes estimates that require management’s subjective or complex judgments about the effects of matters that are inherently uncertain.
13
A summary of the Company’s critical accounting estimates applicable to the reportable operating segments follows:
Allowance for Doubtful Accounts and Billing Adjustments
The Company estimates the allowance for doubtful accounts. When estimating the allowance, the Company takes into consideration such factors as its knowledge of the financial position of specific clients, the
industry and size of its clients, the overall composition of its accounts receivable aging, prior experience with specific customers of accounts receivable write-offs and prior history of allowances in proportion to the overall receivable balance.
This analysis includes an ongoing and continuous communication with its largest clients and those clients with past due balances. A financial decline of any one of the Company’s large clients could have a material adverse effect on
collectability of receivables and thus the adequacy of the allowance for doubtful accounts. If the actual collectability of clients’ accounts is not consistent with the Company’s estimates, bad debt expense, which is recorded in selling,
general and administrative expenses, may be materially different than was initially recorded. The Company’s experience and extensive data accumulated historically indicates that these estimates have proven reliable over time.
The Company estimates allowances for billing adjustments for potential billing discrepancies. When estimating the allowance for billing adjustments, the Company
considers its overall history of billing adjustments, as well as its history with specific clients and known disputes. If the actual adjustments to clients’ billing are not consistent with the Company’s estimates, billing adjustments,
which are recorded as a reduction of revenues in the Company’s Consolidated Statements of Income, may be materially different than was initially recorded. The Company’s experience and extensive data accumulated historically indicates that
these estimates have proven reliable over time. The allowance for doubtful accounts and billing adjustments on the Company’s Consolidated Balance Sheet as of December 31, 2014 was approximately $5.2 million.
Contract Acquisition Costs
In evaluating contract
acquisition costs for recoverability, expected cash flows are estimated by management. The Company evaluates the carrying value of contract acquisition costs associated with each customer for impairment on the basis of whether these costs are fully
recoverable from either contractual minimum fees (conversion costs) or from expected undiscounted net operating cash flows of the related contract (cash incentives paid). The determination of expected undiscounted net operating cash flows requires
management to make estimates. If the actual cash flows are not consistent with the Company’s estimates, a material impairment charge may result and net income may be materially different than was initially recorded.
These costs may become impaired with the loss of a contract, the financial decline of a client, termination of conversion efforts after a contract is signed, or
diminished prospects for current clients. Note 11 in the Consolidated Financial Statements contains a discussion of contract acquisition costs. The net carrying value of contract acquisition costs on the Company’s Consolidated Balance Sheet as
of December 31, 2014 was $236.3 million.
Software Development Costs
In evaluating software development costs for recoverability, expected cash flows are estimated by management. The Company evaluates the unamortized capitalized costs of software development as compared to the net
realizable value of the software product, which is determined by expected undiscounted net operating cash flows. The amount by which the unamortized software development costs exceed the net realizable value is written off in the period that such
determination is made. If the actual cash flows are not consistent with the Company’s estimates, a material write-off may result and net income may be materially different than was initially recorded. Assumptions and estimates about future cash
flows and remaining useful lives of software are complex and subjective. They can be affected by a variety of factors, including industry and economic trends, changes in the Company’s business strategy and changes in the internal forecasts.
Note 9 in the Consolidated Financial Statements contains a discussion of internally developed software costs. The net carrying value of internally developed software on the Company’s Consolidated Balance Sheet as of December 31, 2014 was
$100.5 million.
14
Acquisitions — Purchase Price Allocation
TSYS’ purchase price allocation methodology requires the Company to make assumptions and to apply judgment to estimate the fair value of acquired assets and
liabilities. TSYS estimates the fair value of assets and liabilities based upon appraised market values, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows and market multiple
analyses. Management determines the fair value of fixed assets and identifiable intangible assets such as developed technology or customer relationships, and any other significant assets or liabilities. TSYS adjusts the purchase price allocation, as
necessary, up to one year after the acquisition closing date as TSYS obtains more information regarding asset valuations and liabilities assumed. Unanticipated events or circumstances may occur which could affect the accuracy of the Company’s
fair value estimates, including assumptions regarding industry economic factors and business strategies, and result in an impairment or a new allocation of purchase price.
Given its history of acquisitions, TSYS may allocate part of the purchase price of future acquisitions to contingent consideration as required by generally accepted accounting principles (GAAP) for business
combinations. The fair value calculation of contingent consideration will involve a number of assumptions that are subjective in nature and which may differ significantly from actual results. TSYS may experience volatility in its earnings to some
degree in future reporting periods as a result of these fair value measurements.
Goodwill
In evaluating for impairment, discounted net cash flows for future periods are estimated by management. In accordance with the provisions of GAAP, goodwill is
required to be tested for impairment at least annually. The combination of the income approach utilizing the discounted cash flow (DCF) method and the market approach, utilizing readily available market valuation multiples, is used to estimate the
fair value. Under the DCF method, the fair value of the asset reflects the present value of the projected earnings that will be generated by each asset after taking into account the revenues and expenses associated with the asset, the relative risk
that the cash flows will occur, the contribution of other assets, and an appropriate discount rate to reflect the value of invested capital. Cash flows are estimated for future periods based on historical data and projections provided by management.
If the actual cash flows are not consistent with the Company’s estimates, a material impairment charge may result and net income may be materially different than was initially recorded. Note 7 in the Consolidated Financial Statements contains a
discussion of goodwill. The net carrying value of goodwill on the Company’s Consolidated Balance Sheet as of December 31, 2014 was $1.5 billion.
Long-lived Assets and Intangibles
In evaluating long-lived assets and intangibles for recoverability,
expected undiscounted net operating cash flows are estimated by management. The Company reviews long-lived assets, such as property and equipment and intangibles subject to amortization, including contract acquisition costs and certain computer
software, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to
estimated undiscounted future cash flows expected to be generated by the asset. If the actual cash flows are not consistent with the Company’s estimates, a material impairment charge may result and net income may be materially different than
was initially recorded.
Revenue Recognition
The Company recognizes revenues in accordance with the provisions of GAAP, which sets forth guidance as to when revenue is realized or realizable and earned when all of the following criteria are met:
(1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been performed; (3) the seller’s price to the buyer is fixed or determinable; and (4) collectability is reasonably assured.
The Company evaluates its contractual arrangements that provide services to clients through a bundled sales arrangement in accordance with the
provisions of GAAP to determine whether an arrangement involving more than one deliverable (a multiple element arrangement) contains more than one unit of accounting and how the arrangement consideration should be measured and allocated to the
separate units of accounting.
15
A deliverable in multiple element arrangements includes any performance obligation on the part of the Company
including obligations to perform different services, grant licenses or convey other rights. Revenue is allocated to the separate units of accounting in a multiple element arrangement based on the price at which the deliverable or unit of accounting
would be sold on a standalone basis (the standalone selling price), provided the delivered element has standalone value to the customer and delivery of any undelivered items is probable and substantially within the Company’s control. An item
has standalone value to the customer on a standalone basis if it is sold separately by any vendor or the customer could resell the deliverable on a standalone basis.
As TSYS’ business and service offerings change in the future, the determination of the number of deliverables in an arrangement and related units of accounting and future pricing practices may result in
changes in the estimates of the standalone selling price, which may change the ratio of fees allocated to each service or unit of accounting in a given customer arrangement. There were no material changes or impact to revenue in the year ended
December 31, 2014 due to any changes in the determination of the number of deliverables in an arrangement, units of accounting, or estimates of the standalone selling price for existing contractual arrangements.
Cardholders’ Reserve
The Company is exposed to
losses due to cardholder fraud, payment defaults and other forms of cardholder activity as well as losses due to non-performance of third parties who receive cardholder funds for transmittal to the Issuing Banks (banks that issue MasterCard
International or Visa USA, Inc. branded cards to customers). The Company establishes a reserve for the losses it estimates will arise from processing customer transactions, debit card overdrafts, chargebacks for unauthorized card use and
merchant-related chargebacks due to non-delivery of goods or services. These reserves are established based upon historical loss and recovery rates and cardholder activity for which specific losses can be identified. The cardholders’ reserve
was approximately $6.3 million as of December 31, 2014. The provision for cardholder losses is included in cost of services in the Consolidated Statements of Income. The Company regularly updates its estimate as new facts become known and
events occur that may impact the settlement or recovery of losses.
Provision for Merchant Losses
The Company has potential liability for losses resulting from disputes between a cardholder and a merchant that arise as a result of, among other things, the
cardholder’s dissatisfaction with merchandise quality or merchant services. Such disputes may not be resolved in the merchant’s favor. In these cases, the transaction is “charged back” to the merchant, which means the purchase
price is refunded to the customer by the card-issuing bank and charged to the merchant. If the merchant is unable to fund the refund, TSYS must do so. TSYS also bears the risk of reject losses arising from the fact that TSYS collects fees from its
merchants on the first day after the monthly billing period. If the merchant has gone out of business during such period, TSYS may be unable to collect such fees. TSYS maintains cash deposits or requires the pledge of a letter of credit from certain
merchants, generally those with higher average transaction size where the card is not present when the charge is made or the product or service is delivered after the charge is made, in order to offset potential contingent liabilities such as
chargebacks and reject losses that would arise if the merchant went out of business. Most chargeback and reject losses are charged to cost of services as they are incurred. However, the Company also maintains a provision against losses, including
major fraud losses, which are both less predictable and involve larger amounts. The loss provision is established using historical loss rates, applied to recent bankcard processing volume. As of December 31, 2014, the Company had a merchant
loss provision in the amount of $1.1 million.
Transaction Processing Provisions
The Company records estimates to provide for contract contingencies (performance penalties) and processing errors. A significant number of the Company’s contracts with large clients contain service level
agreements which can result in TSYS incurring performance penalties if contractually required service levels are not met. When estimating these accruals, the Company takes into consideration such factors as the prior history of performance penalties
and processing errors incurred, actual contractual penalties inherent in the Company’s contracts, progress towards milestones, and known processing errors not covered by insurance. If the actual performance penalties incurred are not consistent
with the Company’s estimates, performance penalties and processing errors,
16
which are recorded in cost of services, may be materially different than were initially recorded. The Company’s experience and extensive data accumulated historically indicates that these
estimates have proven reliable over time. As of December 31, 2014, the Company had a transaction processing provision in the amount of $4.6 million.
Income Taxes
In calculating its effective tax rate, the Company makes decisions regarding certain tax
positions, including the timing and amount of deductions and allocations of income among various tax jurisdictions. The Company has various tax filing positions, including the timing and amount of deductions and credits, the establishment of
reserves for audit matters and the allocation of income among various tax jurisdictions.
The Company makes estimates as to the amount of deferred tax
assets and liabilities and records valuation allowances to reduce its deferred tax assets to reflect the amount that is more likely than not to be realized. The Company considers projected future taxable income and ongoing tax planning strategies in
assessing the need for the valuation allowance. Actual results may differ from the Company’s estimates. If the Company realizes a deferred tax asset or the Company was unable to realize a net deferred tax asset, an adjustment to the deferred
tax asset would increase or decrease earnings, respectively, in the period the difference is recognized.
Related Party Transactions
In December 2014, TSYS’ majority-owned subsidiary, TSYS Managed Services EMEA Ltd. (TSYS Managed Services), obtained a £900,000, or approximately $1.4
million, pound-denominated term loan bearing interest at a rate of LIBOR plus two percentage points. The loan matures in December 2017, and has monthly interest payments. The lender is Merchants Limited, who has a noncontrolling interest in TSYS
Managed Services.
The Company provides electronic payment processing and other services to the Company’s equity investments, Total System Services
de México, S.A. de C.V. (TSYS de México) and China UnionPay Data Co., Ltd. (CUP Data).
The related party services and arrangements are
performed under contracts that are similar to its contracts with unrelated third party 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 Company’s 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 immaterial. No significant changes have been made to the method of establishing terms with the affiliated companies during the periods presented.
Refer to Note 4 in the Consolidated Financial Statements for more information on transactions with affiliated companies.
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 use the latest technology while avoiding the risk of ownership. Neither the assets nor obligations related to these leases are
included on the balance sheet. Refer to Notes 1 and 16 in the Consolidated Financial Statements for further information on operating lease commitments.
CONTRACTUAL OBLIGATIONS: The total liability for uncertain tax positions as of December 31, 2014 is $6.7 million. Refer to Note 15 in the Consolidated Financial Statements for more information on
income taxes. The Company is not able to reasonably estimate the amount by which the liability will increase or decrease over time; however, at this time, the Company does not expect any significant changes related to these obligations within the
next year.
17
Recent Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-08 “Presentation of Financial Statements (Topic 205) and Property, Plant, and
Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” ASU 2014-08 addresses the accounting for the disposal of a component of an entity or a group of components of an
entity. The amendments in this Update address those issues by changing the criteria for reporting discontinued operations and enhancing convergence of the FASB’s and the International Accounting Standard Board’s (IASB) reporting
requirements for discontinued operations. For public entities, the ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted, but only for disposals
(or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The Company elected not to early adopt ASU 2014-08. The Company does not expect the adoption of this ASU to have a
material impact on the financial position, results of operations or cash flows of the Company.
In May 2014, the FASB issued ASU 2014-09
“Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 addresses the accounting for the revenues associated with customer contracts. This Update enhances convergence of the FASB’s and the IASB’s reporting
requirements for revenue recognition. For public entities, the ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is not permitted for entities applying
U.S. GAAP. The Company is currently evaluating the adoption of this ASU and its impact on the financial position, results of operations and cash flows of the Company.
In June 2014, the FASB issued ASU 2014-12 “Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could
Be Achieved after the Requisite Service Period.” ASU 2014-12 addresses the accounting for stock compensation for awards with a performance target that could be achieved after the requisite service period. For all entities, the ASU is
effective either prospectively for share-based payment awards granted or modified on or after the effective date, or retrospectively, using a modified retrospective approach for share based awards outstanding as of the beginning of the earliest
annual period presented in the financial statements on adoption, and to all new or modified awards thereafter. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Early adoption is
permitted. The Company does not expect the adoption of this ASU to have a material impact on the financial position, results of operations or cash flows of the Company.
In January 2015, the FASB issued ASU 2015-01 “Income Statement – Extraordinary and Unusual Items” (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of
Extraordinary Items. ASU 2015-01 eliminates from GAAP the concept of extraordinary items. For all entities, the ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Early adoption is
permitted provided the guidance is applied from the beginning of the fiscal year of adoption. The Company does not expect the adoption of this ASU to have a material impact on the financial position, results of operations or cash flows of the
Company.
Results of Operations
Revenues
The Company generates revenues by providing transaction processing and other payment-related services. The Company’s pricing for transactions
and services is complex. Each category of revenue has numerous fee components depending on the types of transactions processed or services provided. TSYS reviews its pricing and implements pricing changes on an ongoing basis. In addition, standard
pricing varies among its regional businesses, and such pricing can be customized further for customers through tiered pricing of various thresholds for volume activity. TSYS’ revenues are based upon transactional information accumulated by its
systems or reported by its customers. The Company’s revenues are impacted by currency translation of foreign operations, as well as doing business in the current economic environment.
The Company has included reimbursements received for out-of-pocket expenses as revenues and expenses. The largest reimbursable expense item for which TSYS is reimbursed by clients is postage. The Company’s
18
reimbursable items are impacted with changes in postal rates and changes in the volumes of mailing activities by its clients. Reimbursable items for the year ended December 31, 2014, were
$253.9 million, an increase of $13.3 million or 5.5% compared to $240.6 million for the same period last year. Reimbursable items for the year ended December 31, 2013 decreased $11.9 million, or 4.7%, compared to $252.5 million for the same
period in 2012.
TSYS’ revenues are generated from charges based on the number of accounts on file (AOF), transactions and authorizations
processed, statements mailed, cards embossed and mailed, and other processing services for cardholder AOF. Cardholder AOF include active and inactive consumer credit, retail, prepaid, stored value, government services and commercial card accounts.
TSYS’ revenues in its North America Services and International Services segments are influenced by several factors, including volumes related to
AOF and transactions. TSYS estimates that approximately 47.2% of these segments’ revenues is AOF and transaction volume driven. The remaining 52.8% of payment processing revenues are not AOF and transaction volume driven, and are derived from
production and optional services TSYS considers to be value added products and services, custom programming and licensing arrangements.
Whether or not
an account on file is active can impact TSYS’ revenues differently. Active accounts are accounts that have had monetary activity either during the current month or in the past 90 days based on contractual definition. Inactive accounts are
accounts that have not had a monetary transaction (such as a purchase or payment) in the past 90 days. The more active an account is, the more revenue is generated for TSYS (items such as transactions and authorizations processed and statements
billed).
Occasionally, a client will purge inactive accounts from its portfolio. An inactive account typically will only generate an AOF charge. A
processing client will periodically review its cardholder portfolio based upon activity and usage. Each client, based upon criteria individually set by the client, will flag an account to be “purged” from TSYS’ system and deactivated.
A deconversion involves a client migrating all of its accounts to an in-house solution or another processor. Account deconversions include active and
inactive accounts and can impact the Company’s revenues significantly more than an account purge.
A sale of a portfolio typically involves a
client selling a portion of its accounts to another party. A sale of a portfolio and a deconversion impact the Company’s financial statements in a similar fashion, although a sale usually has a smaller financial impact due to the number of
accounts typically involved.
TSYS’ revenues in its Merchant Services segment are influenced by several factors, including volumes related to
transactions and dollar sales volume, which are approximately 92.6% of this segment’s revenues. The remaining 7.4% of Merchant Services’ revenues are derived from value added services, monthly statement fees, compliance fees, and
miscellaneous services.
TSYS’ revenues in its NetSpend segment primarily consist of a portion of the service fees and interchange revenues
received by NetSpend’s prepaid card Issuing Banks in connection with the programs managed by NetSpend. For the year ended December 31, 2014, 70.3% of revenues was derived from fees charged to cardholders and 29.7% of revenues was derived
from interchange and other revenues. Service fee revenues are driven by the number of active cards, and in particular by the number of cards with direct deposit. Cardholders with direct deposit generally initiate more transactions and generate more
revenues than those that do not take advantage of this feature. Interchange revenues are driven by gross dollar volume. Substantially all of the NetSpend segment’s revenues are volume driven as they are driven by the active card and gross
dollar volume indicators.
19
A summary of the consolidated financial highlights for the years ended December 31, 2014, 2013, and 2012 is
provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
|
Percent Change |
|
| (in millions) |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
2014 vs. 2013 |
|
|
2013 vs. 2012 |
|
| Total revenues |
|
$ |
2,446.9 |
|
|
|
2,064.3 |
|
|
|
1,793.6 |
|
|
|
18.5 |
% |
|
|
15.1 |
% |
| Operating income |
|
|
431.6 |
|
|
|
382.5 |
|
|
|
355.0 |
|
|
|
12.8 |
|
|
|
7.8 |
|
| Net income attributable to TSYS common shareholders |
|
|
322.9 |
|
|
|
244.8 |
|
|
|
244.3 |
|
|
|
31.9 |
|
|
|
0.2 |
|
| Basic EPS attributable to TSYS common shareholders1 |
|
|
1.73 |
|
|
|
1.30 |
|
|
|
1.30 |
|
|
|
33.5 |
|
|
|
0.0 |
|
| Diluted EPS attributable to TSYS common shareholders1 |
|
|
1.72 |
|
|
|
1.29 |
|
|
|
1.29 |
|
|
|
33.6 |
|
|
|
(0.2 |
) |
| Adjusted earnings before interest, taxes, depreciation, and amortization (Adjusted EBITDA)2 |
|
|
712.3 |
|
|
|
624.1 |
|
|
|
537.0 |
|
|
|
14.1 |
|
|
|
16.2 |
|
| Adjusted EPS from continuing operations3 |
|
|
1.96 |
|
|
|
1.73 |
|
|
|
1.47 |
|
|
|
13.2 |
|
|
|
17.3 |
|
| Cash provided by operating activities |
|
|
560.2 |
|
|
|
452.4 |
|
|
|
455.8 |
|
|
|
23.8 |
|
|
|
(0.7 |
) |
| 1 |
Basic and diluted EPS is computed based on the two-class method in accordance with the guidance under GAAP. Refer to Note 26 in the Consolidated Financial Statements for more
information on EPS. |
| 2 |
Adjusted EBITDA is net income excluding equity in income of equity investments, nonoperating income/(expense), income taxes, depreciation, amortization and stock-based
compensation expenses and other non-recurring items. |
| 3 |
Adjusted EPS is adjusted earnings divided by weighted average shares outstanding used for basic EPS calculations. Adjusted earnings is net income excluding the after-tax impact
of stock-based compensation expenses, amortization of acquisition intangibles and other nonrecurring items. |
Total revenues increased
18.5%, or $382.6 million, for the year ended December 31, 2014, compared to the year ended December 31, 2013, which increased 15.1%, or $270.7 million, compared to the year ended December 31, 2012. The increases in revenues for
2014 and 2013 include an increase of $14.9 million and a decrease of $5.3 million, respectively, related to the effects of currency translation of the Company’s foreign-based subsidiaries and branches.
Excluding reimbursable items, revenues increased 20.2%, or $369.3 million, for the year ended December 31, 2014, compared to the year ended
December 31, 2013, which increased 18.3%, or $282.6 million, compared to the year ended December 31, 2012. The 20.2% increase in revenues excluding reimbursable items for the year ended December 31, 2014, as compared to the same
period in 2013, is the result of increases of 15.0% in revenues associated with acquisitions, and 5.2% in organic growth. The Company expanded its product and service offerings through acquisitions during 2013 and 2012. The impact of these
acquisitions for the years ended December 31, 2014, 2013 and 2012 was $274.8 million, $273.9 million and $27.1 million, respectively.
Below is a summary of AOF for the Company’s North America Services and International Services segments combined:
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in millions) |
|
As of December 31, |
|
| |
|
2014 |
|
|
2013 |
|
|
Percent
Change |
|
| Consumer Credit |
|
|
270.0 |
|
|
|
228.9 |
|
|
|
18.0 |
% |
| Retail |
|
|
28.4 |
|
|
|
27.8 |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Consumer |
|
|
298.4 |
|
|
|
256.7 |
|
|
|
16.3 |
|
| Commercial |
|
|
41.6 |
|
|
|
39.9 |
|
|
|
4.2 |
|
| Other |
|
|
22.4 |
|
|
|
18.9 |
|
|
|
18.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Subtotal1 |
|
|
362.4 |
|
|
|
315.5 |
|
|
|
14.9 |
|
| Prepaid/Stored
Value2 |
|
|
127.3 |
|
|
|
118.0 |
|
|
|
7.9 |
|
| Government
Services3 |
|
|
67.4 |
|
|
|
62.2 |
|
|
|
8.2 |
|
| Commercial Card Single Use4 |
|
|
59.6 |
|
|
|
45.3 |
|
|
|
31.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total AOF |
|
|
616.7 |
|
|
|
541.0 |
|
|
|
14.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1 |
Traditional accounts include consumer, retail, commercial, debit and other accounts. These accounts are grouped together due to the tendency to have more transactional activity
than prepaid, government services and single use accounts. |
| 2 |
These accounts tend to have less transactional activity than the traditional accounts. Prepaid and stored value cards are issued by firms through retail establishments to be
purchased by consumers to be used at a later date. These accounts tend to be the least active of all accounts on file. |
| 3 |
Government services accounts are disbursements of student loan accounts issued by the Department of Education, which have minimal activity. |
| 4 |
Commercial card single use accounts are one-time use accounts issued by firms to book lodging and other travel related expenses. |
20
Major Customer
The Company works to maintain a large and diverse customer base across various industries. Although the Company does not have a major customer on a consolidated
basis, a significant amount of the Company’s revenues are derived from long-term contracts with large clients. TSYS derives revenues from providing various processing and other services to these clients, including processing of consumer and
commercial accounts, as well as revenues for reimbursable items. The loss of one of the Company’s large clients could have a material adverse effect on the Company’s financial position, results of operations and cash flows.
Refer to Note 22 in the Consolidated Financial Statements for more information on major customers.
Operating Segments
TSYS’ services are provided through four operating segments: North America Services,
International Services, Merchant Services and NetSpend.
The Company’s North America Services and International Services segments have many
long-term customer contracts with card issuers providing account processing and output services for printing and embossing items. These contracts generally require advance notice prior to the end of the contract if a client chooses not to renew.
Additionally, some contracts may allow for early termination upon the occurrence of certain events such as a change in control. The termination fees paid upon the occurrence of such events are designed primarily to cover balance sheet exposure
related to items such as capitalized conversion costs or client incentives associated with the contract and, in some cases, may cover a portion of lost future revenue and profit. Although these contracts may be terminated upon certain occurrences,
the contracts provide the segment with a steady revenue stream since a vast majority of the contracts are honored through the contracted expiration date.
These services are provided throughout the period of each account’s use, starting from a card-issuing client processing an application for a card. Services
may include processing the card application, initiating service for the cardholder, processing each card transaction for the issuing retailer or financial institution and accumulating the account’s transactions. Fraud management services
monitor the unauthorized use of accounts which have been reported to be lost, stolen, or which exceed credit limits. Fraud detection systems help identify fraudulent transactions by monitoring each account holder’s purchasing patterns and
flagging unusual purchases. Other services provided include customized communications to cardholders, information verification associated with granting credit, debt collection, and customer service.
TSYS’ revenues in its North America Services and International Services segments are derived from electronic payment processing. There are certain basic core
services directly tied to accounts on file and transactions. These are provided to all of TSYS’ processing clients. The core services begin with an account on file.
The core services include housing an account on TSYS’ system (AOF), authorizing transactions (authorizations), accumulating monthly transactional activity (transactions) and providing a monthly statement
(statement generation). From these core services, TSYS’ clients also have the option to use fraud and portfolio management services. Collectively, these services are considered volume-based revenues.
Non-volume related revenues include processing fees which are not directly associated with AOF and transactional activity, such as value added products and
services, custom programming and certain other services, which are only offered to TSYS’ processing clients.
21
Value added products and services, which includes services such as data analytics and application processing, are
primarily non-volume related, are only offered to TSYS’ processing clients (i.e., indirectly derived from accounts on file). These ancillary products and services, along with offerings such as card production, statement production, managed
services, customized reporting and custom programming provided to clients at an hourly rate, are considered non-volume based products and services.
Additionally, certain clients license the Company’s processing systems and process in-house. Since the accounts are processed outside of TSYS for licensing
arrangements, the AOF and other volumes are not available to TSYS. Thus, volumes reported by TSYS do not include volumes associated with licensing.
A
summary of each segment’s results follows:
North America Services
The North America Services segment provides issuer account solutions for financial institutions and other organizations primarily based in North America. Growth in revenues and operating profit in this segment is
derived from retaining and growing the core business and improving the overall cost structure. Growing the core business comes primarily from an increase in account usage, growth from existing clients (also referred to as organic growth) and sales
to new clients and the related account conversions.
On July 19, 2012, TSYS announced that it finalized a master services agreement, with a minimum
six year term, with Bank of America to provide processing services for its consumer credit card portfolios in the U.S. In addition, TSYS will continue to process Bank of America’s commercial credit card portfolios in the U.S. and
internationally. In the first quarter of 2015, TSYS completed the conversion of Bank of America’s consumer card portfolio from its in-house processing system to TSYS’ processing system. Following the processing term, the agreement provides
Bank of America the option to use the TS2 software pursuant to a license under a long-term payment structure for purposes of processing its consumer card portfolio.
The master services agreement with Bank of America provides for a tiered-pricing arrangement for both the consumer card portfolio and the existing commercial card portfolios.
This segment has one major customer. Below is a summary of the North America Services segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
|
Percent Change |
|
| (in millions) |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
2014 vs. 2013 |
|
|
2013 vs. 2012 |
|
| Total revenues |
|
$ |
1,117.8 |
|
|
|
1,000.1 |
|
|
|
965.4 |
|
|
|
11.8 |
% |
|
|
3.6 |
% |
| Revenues before reimbursable items |
|
|
954.1 |
|
|
|
860.6 |
|
|
|
826.8 |
|
|
|
10.9 |
|
|
|
4.1 |
|
| Adjusted segment operating income1 |
|
|
351.5 |
|
|
|
321.6 |
|
|
|
295.2 |
|
|
|
9.3 |
|
|
|
9.0 |
|
| Adjusted segment operating margin2 |
|
|
36.8 |
% |
|
|
37.4 |
% |
|
|
35.7 |
% |
|
|
|
|
|
|
|
|
| Key indicators: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| AOF |
|
|
550.0 |
|
|
|
481.9 |
|
|
|
424.8 |
|
|
|
14.1 |
|
|
|
13.4 |
|
| Transactions |
|
|
10,838.0 |
|
|
|
9,132.8 |
|
|
|
8,102.3 |
|
|
|
18.7 |
|
|
|
12.7 |
|
| 1 |
Adjusted segment operating income excludes acquisition intangible amortization and expenses associated with Corporate Administration and Other. |
| 2 |
Adjusted segment operating margin equals adjusted segment operating income divided by revenues before reimbursable items. |
Total segment revenues increased $117.7 million for 2014, as compared to 2013. The increase is attributable to an increase in new business, internal growth and
reimbursable items, partially offset by decreases related to client deconversions and price reductions. Total segment revenues increased $34.7 million for 2013, as compared to 2012. The increase is attributable to an increase in new business,
internal growth and reimbursable items, partially offset by decreases related to client deconversion, price reductions and other adjustments. The decreases in 2013 and 2012 caused by price reductions are related to a tiered-pricing arrangement
signed in the third quarter of 2012.
22
The increase in adjusted segment operating income for 2014, as compared to 2013, is driven by an increase in revenues
partially offset by increases in total operating expenses. The increase in adjusted segment operating income for 2013, as compared to 2012, is also driven by an increase in revenues partially offset by increases in expenses.
For the year ended December 31, 2014, approximately 50.4% of revenues before reimbursable items of TSYS’ North America Services segment are driven by the
volume of accounts on file and transactions processed and approximately 49.6% were derived from non-volume based revenues, such as processing fees, value-added products and services, custom programming and licensing arrangements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
|
Percent Change |
|
| (in millions) |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
2014 vs. 2013 |
|
|
2013 vs. 2012 |
|
| Volume-based revenues |
|
$ |
480.4 |
|
|
|
433.7 |
|
|
|
405.3 |
|
|
|
10.8 |
% |
|
|
7.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Non-volume related revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Processing fees |
|
|
216.7 |
|
|
|
195.4 |
|
|
|
183.1 |
|
|
|
10.9 |
|
|
|
6.7 |
|
| Value-added, custom programming, licensing and other |
|
|
115.7 |
|
|
|
110.4 |
|
|
|
124.1 |
|
|
|
4.8 |
|
|
|
(11.0 |
) |
| Output and managed services |
|
|
141.3 |
|
|
|
121.1 |
|
|
|
114.3 |
|
|
|
16.7 |
|
|
|
5.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total non-volume related revenues |
|
|
473.7 |
|
|
|
426.9 |
|
|
|
421.5 |
|
|
|
11.0 |
|
|
|
1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total revenues before reimbursable items |
|
|
954.1 |
|
|
|
860.6 |
|
|
|
826.8 |
|
|
|
10.9 |
|
|
|
4.1 |
|
| Reimbursable items |
|
|
163.7 |
|
|
|
139.5 |
|
|
|
138.6 |
|
|
|
17.4 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total revenues |
|
$ |
1,117.8 |
|
|
|
1,000.1 |
|
|
|
965.4 |
|
|
|
11.8 |
% |
|
|
3.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Services
The International Services segment provides issuer card solutions to financial
institutions and other organizations primarily based outside the North America region. Growth in revenues and operating profit in this segment is derived from retaining and growing the core business and improving the overall cost structure. Growing
the core business comes primarily from an increase in account usage, growth from existing clients and sales to new clients and the related account conversions.
This segment has two major customers.
Below is a summary of the International Services segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
|
Percent Change |
|
| (in millions) |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
2014 vs. 2013 |
|
|
2013 vs. 2012 |
|
| Total revenues |
|
$ |
363.4 |
|
|
|
341.5 |
|
|
|
336.0 |
|
|
|
6.4 |
% |
|
|
1.6 |
% |
| Revenues before reimbursable items |
|
|
341.8 |
|
|
|
321.5 |
|
|
|
318.7 |
|
|
|
6.3 |
|
|
|
0.9 |
|
| Adjusted segment operating income1 |
|
|
55.1 |
|
|
|
42.1 |
|
|
|
27.2 |
|
|
|
31.0 |
|
|
|
54.6 |
|
| Adjusted segment operating margin2 |
|
|
16.1 |
% |
|
|
13.1 |
% |
|
|
8.5 |
% |
|
|
|
|
|
|
|
|
| Key indicators: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| AOF |
|
|
66.6 |
|
|
|
59.1 |
|
|
|
54.5 |
|
|
|
12.7 |
|
|
|
8.5 |
|
| Transactions |
|
|
2,268.4 |
|
|
|
2,007.4 |
|
|
|
1,667.6 |
|
|
|
13.0 |
|
|
|
20.4 |
|
| 1 |
Adjusted segment operating income excludes acquisition intangible amortization and expenses associated with Corporate Administration and Other. |
| 2 |
Adjusted segment operating margin equals adjusted segment operating income divided by revenues before reimbursable items. |
The 6.4% increase in total segment revenues for the year ended December 31, 2014, as compared to 2013, is driven by increases in organic growth, including
$14.8 million of currency translation. Reimbursable items for 2014 were $21.6 million, which was an increase of $1.5 million, or 7.5%, compared to $20.0 million for 2013.
23
Total segment revenues increased $5.5 million for 2013, as compared to 2012. The increase is mainly attributable to increases in organic growth and $2.7 million in reimbursable items, which is
partially offset by a decrease of $5.6 million foreign currency translation and other adjustments.
Excluding reimbursable items, revenues increased
6.3% for 2014, as compared to 2013, and 2013 increased 0.9%, as compared to 2012, as a result of increases from organic growth, partially offset by decreases in client deconversions and pricing concessions.
The increase in adjusted segment operating income for 2014 as compared to 2013, is driven primarily from an increase in revenues partially offset by an increase in
employee related expenses. Movements in foreign currency exchange rates as compared to the U.S. Dollar can result in foreign denominated financial statements being translated into more or fewer U.S. Dollars, which impacts the comparison to
prior periods when the U.S. Dollar was stronger or weaker.
For the year ended December 31, 2014, approximately 38.4% of the revenues before
reimbursable items of TSYS’ International Services segment are driven by the volume of accounts on file and transactions processed and approximately 61.6% are derived from non-volume based revenues, such as processing fees, value-added products
and services, custom programming and licensing arrangements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
|
Percent Change |
|
| (in millions) |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
2014 vs. 2013 |
|
|
2013 vs. 2012 |
|
| Volume-based revenues |
|
$ |
131.3 |
|
|
|
126.7 |
|
|
|
125.1 |
|
|
|
3.6 |
% |
|
|
1.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Non-volume related revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Processing fees |
|
|
69.4 |
|
|
|
61.5 |
|
|
|
53.4 |
|
|
|
12.7 |
|
|
|
15.3 |
|
| Value-added, custom programming, licensing and other |
|
|
95.0 |
|
|
|
92.8 |
|
|
|
94.4 |
|
|
|
2.4 |
|
|
|
(1.8 |
) |
| Output and managed services |
|
|
46.1 |
|
|
|
40.5 |
|
|
|
45.8 |
|
|
|
13.9 |
|
|
|
(11.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total non-volume related revenues |
|
|
210.5 |
|
|
|
194.8 |
|
|
|
193.6 |
|
|
|
8.1 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total revenues before reimbursable items |
|
|
341.8 |
|
|
|
321.5 |
|
|
|
318.7 |
|
|
|
6.3 |
|
|
|
0.9 |
|
| Reimbursable items |
|
|
21.6 |
|
|
|
20.0 |
|
|
|
17.3 |
|
|
|
7.5 |
|
|
|
15.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total revenues |
|
$ |
363.4 |
|
|
|
341.5 |
|
|
|
336.0 |
|
|
|
6.4 |
% |
|
|
1.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchant Services
The Merchant Services segment provides merchant services and related services to clients
based primarily in the United States. The Merchant Services segment’s revenues are derived from providing processing services, acquiring solutions, related systems and integrated support services to merchant acquirers and merchants. Revenues
from merchant services include processing all payment forms including credit, debit, prepaid, electronic benefit transfer and electronic check for merchants of all sizes across a wide array of market verticals. Merchant services include
authorization and capture of transactions; clearing and settlement of transactions; information reporting services related to transactions; merchant billing services; and point-of-sale equipment sales and service.
In June 2009, Bank of America announced that it formed a new joint venture to provide merchant services. In November 2010, TSYS and Bank of America agreed to a new
agreement, during the term of which TSYS expects merchant services revenues from Bank of America to decline as Bank of America transitions its services to its new joint venture. The loss of Bank of America as a merchant services client is not
expected to have a material adverse effect on TSYS’ financial position, results of operations or cash flows. However, the loss will have a significant adverse effect on the Merchant Services segment’s financial position, results of
operations and cash flows.
Effective June 2013, the Company renewed its processing agreement, which includes revenue minimums, with Bank of America for
an additional two years.
This segment has no major customers.
24
Below is a summary of the Merchant Services segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
|
Percent Change |
|
| (in millions) |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
2014 vs. 2013 |
|
|
2013 vs. 2012 |
|
| Total revenues |
|
$ |
510.1 |
|
|
|
533.1 |
|
|
|
512.6 |
|
|
|
(4.3 |
)% |
|
|
4.0 |
% |
| Revenues before reimbursable items |
|
|
435.6 |
|
|
|
446.3 |
|
|
|
409.7 |
|
|
|
(2.4 |
) |
|
|
8.9 |
|
| Adjusted segment operating income1 |
|
|
134.9 |
|
|
|
155.6 |
|
|
|
157.4 |
|
|
|
(13.3 |
) |
|
|
(1.1 |
) |
| Adjusted segment operating margin2 |
|
|
31.0 |
% |
|
|
34.9 |
% |
|
|
38.4 |
% |
|
|
|
|
|
|
|
|
| Key indicators: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Point-of-Sale transactions |
|
|
4,052.7 |
|
|
|
4,359.8 |
|
|
|
4,877.6 |
|
|
|
(7.0 |
) |
|
|
(10.6 |
) |
| Dollar sales volume |
|
$ |
46,847.0 |
|
|
|
44,144.0 |
|
|
|
38,994.0 |
|
|
|
6.1 |
|
|
|
13.2 |
|
| 1 |
Adjusted segment operating income excludes acquisition intangible amortization and expenses associated with Corporate Administration and Other. |
| 2 |
Adjusted segment operating margin equals adjusted segment operating income divided by revenues before reimbursable items. |
Total segment revenues decreased $23.0 million for 2014, as compared to 2013. This decrease includes $33.7 million associated with lost business, deconversions and
price reductions and $12.3 million in reimbursable items offset by $23.0 million in new business and internal growth. Total segment revenues increased $20.5 million for 2013, as compared to 2012. This increase is attributable to a $62.4 million
increase from acquisitions and $26.6 million in new business and internal growth partially offset by $52.4 million associated with lost business, deconversions and price reductions as well as a $16.1 million decrease in reimbursable items.
The decrease in adjusted segment operating income for 2014 and 2013 is driven by lower third party processing revenues and incremental costs related to
integration projects.
The Merchant Services segment results are driven by dollar sales volume and the authorization and capture transactions processed
at the point-of-sale and clearing and settlement transactions. This segment’s authorization and capture transactions are primarily through dial-up or Internet connectivity.
NetSpend
The NetSpend segment is a program manager for FDIC-insured depository institutions that issue GPR
cards and payroll cards and provide alternative financial services to underbanked and other consumers in the United States. The products within this segment provide underbanked consumers with access to FDIC-insured depository accounts with a menu of
pricing and features specifically tailored to their needs. This segment has an extensive distribution and reload network comprised of financial service centers, employers and retail locations throughout the United States. The NetSpend segment
markets prepaid cards through multiple distribution channels, including alternative financial service providers, traditional retailers, direct-to-consumer and online marketing programs and contractual relationships with corporate employers.
The NetSpend segment’s revenues primarily consist of a portion of the service fees and interchange revenues received by NetSpend’s prepaid
card Issuing Banks in connection with the programs managed by this segment. Cardholders are charged fees for transactions including fees for PIN and signature-based purchase transactions made using their prepaid cards, for ATM withdrawals or other
transactions conducted at ATMs, for balance inquiries, and monthly maintenance fees among others. Cardholders are also charged fees associated with additional products and services offered in connection with certain cards including the use of
overdraft features, bill payment options, custom card designs and card-to-card transfers of funds initiated through call centers. The NetSpend segment also earns revenues from a portion of the interchange fees remitted by merchants when cardholders
make purchase transactions using their cards. Subject to applicable law, interchange fees are fixed by card associations and network organizations.
25
Below is a summary of the NetSpend segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
|
Percent Change |
|
| (millions) |
|
2014 |
|
|
2013 |
|
|
2014 vs. 2013 |
|
| Total revenues (and revenues before reimbursable items) |
|
$ |
482.7 |
|
|
|
207.9 |
|
|
|
nm |
|
| Adjusted segment operating income1 |
|
|
128.3 |
|
|
|
66.4 |
|
|
|
nm |
|
| Adjusted segment operating margin2 |
|
|
26.6 |
% |
|
|
31.9 |
% |
|
|
|
|
| Key indicators: |
|
|
|
|
|
|
|
|
|
|
|
|
| Number of active cards |
|
|
3.2 |
|
|
|
2.8 |
|
|
|
13.4 |
|
| Number of active cards with direct deposit |
|
|
1.6 |
|
|
|
1.3 |
|
|
|
21.9 |
|
| Percentage of active cards with direct deposit |
|
|
50.1 |
% |
|
|
46.6 |
% |
|
|
|
|
| Gross dollar volume |
|
$ |
20,296.0 |
|
|
|
7,748.5 |
|
|
|
nm |
|
nm = not meaningful. Amounts are not comparable because the amounts for 2013 only include six months of results
compared to twelve months of results for 2014
| 1 |
Adjusted segment operating income excludes acquisition intangible amortization and expenses associated with Corporate Administration and Other. |
| 2 |
Adjusted segment operating margin equals adjusted segment operating income divided by revenues before reimbursable items. |
The results noted above for the year 2013 are for the period from July 1, 2013, the date that TSYS acquired NetSpend, through December 31, 2013. Number
of active cards represents the total number of prepaid cards that have had a PIN or signature-based purchase transaction, a point-of-sale load transaction or an ATM withdrawal within three months of the date of determination. Number of active cards
with direct deposit represents the number of active cards that have had a direct deposit load within three months of the date of determination. Gross dollar volume represents the total dollar volume of debit transactions and cash withdrawals made
using the prepaid cards the NetSpend segment manages.
NetSpend segment revenues increased $274.8 million for 2014, as compared to 2013. This increase
is attributable mainly to the inclusion of a full twelve months of results in 2014. The $482.7 million of revenues for 2014 was a combination of 70.3% of revenues derived from fees charged to cardholders and 29.7% of revenues derived from
interchange and other revenues. The $207.9 million of revenue for 2013 was a combination of 74.9% of revenues derived from fees charged to cardholders and 25.1% of revenues derived from interchange and other revenues. Service fee revenues are driven
by the number of active cards which totaled approximately 3.2 million and 2.8 million as of December 31, 2014 and 2013, respectively, and in particular by the number of cards with direct deposit. Cardholders with direct deposit
generally initiate more transactions and generate more revenues than those that do not take advantage of this feature. Interchange revenues are driven by gross dollar volume, which totaled approximately $20.3 billion and $7.7 billion for the periods
ended December 31, 2014 and 2013, respectively. Substantially all of the NetSpend segment revenues are volume driven as they are driven by the active card and gross dollar volume indicators.
Cardholder funds and deposits related to NetSpend’s prepaid products are held at FDIC-insured Issuing Banks for the benefit of the cardholders. NetSpend
currently has active agreements with five Issuing Banks.
NetSpend’s prepaid card business derived approximately one-third of its revenues from
cardholders acquired through one of its third-party distributors.
Operating Expenses
The Company’s operating expenses consist of cost of services and selling, general and administrative expenses. Cost of services describes the direct expenses incurred in performing a particular service for
customers, including the cost of direct labor expense in putting the service in saleable condition. Selling, general and administrative expenses are incurred in selling or marketing and for the direction of the enterprise as a whole, including
accounting, legal fees, officers’ salaries, investor relations and mergers and acquisitions.
The changes in cost of services, and selling, general
and administrative expenses for the years ended December 31, 2014 and 2013 include an increase of $5.9 million and a decrease of $16.9 million, respectively,
26
related to the effects of currency translation of the Company’s foreign-based subsidiaries and branches along with increases in expense due to the NetSpend acquisition and a significant
nonrecurring charitable contribution in the fourth quarter of 2014. The impact of acquisitions on operating expenses was $238.3 million in 2014, $217.4 million in 2013, and $20.0 million in 2012.
Federal legislation was enacted which made extensive changes to the system of health care insurance and benefits. The Company estimates the legislation increased
expenses in the years ended 2014, 2013, and 2012 by approximately $1.8 million, $1.1 million and $600,000 respectively.
The Company’s merger and
acquisition expenses were $3.2 million, $14.2 million and $1.7 million for the years ended December 31, 2014, 2013 and 2012, respectively. These expenses consist of legal, accounting and professional fees, as well as, personnel costs for
severance and retention.
Nonoperating Income (Expense)
Nonoperating income (expense) consists of interest income, interest expense, gains and losses on currency translations and gains and losses on investments in private equity. Nonoperating income (expense) decreased
in 2014 as compared to 2013, and decreased in 2013 as compared to 2012.
Interest income for 2014 and 2013 was $1.1 million and $1.5 million,
respectively, a decrease of 25.8%. Interest income in 2012 was $1.5 million. The variation in interest income is primarily attributable to changes in short-term interest rates in 2014 and 2013 and the amount of cash available for investments.
Interest expense for the year ended December 31, 2014 was $41.0 million, an $8.6 million increase when compared to $32.4 million in 2013. The
interest expense on the bonds for the year ended December 31, 2014 was $33.7 million. The $32.4 million of interest expense for the year ended December 31, 2013 was a $29.5 million increase when compared to $2.9 million in 2012. The
Company’s interest expense related to a bridge loan facility and bonds was $5.9 million and $20.0 million, respectively, for the year ended December 31, 2013. These expenses were related to financing the NetSpend acquisition.
For the years ended December 31, 2014, 2013 and 2012, the Company recorded a translation gain of approximately $142,000 and translation losses of
approximately $1.0 million and $2.1 million, respectively, related to intercompany loans and foreign denominated cash and accounts receivable balances.
The Company recorded gains on its investments in private equity of $793,000, $966,000 and $898,000 for the years ended December 31, 2014, 2013 and 2012,
respectively, due to changes in fair value.
Income Taxes
Income tax expense was $129.8 million, $111.0 million, and $114.1 million in 2014, 2013 and 2012, respectively, representing effective income tax rates of 32.0%, 31.5%, and 31.9%, respectively. The calculation of
the effective tax rate excludes noncontrolling interest in consolidated subsidiaries’ net income and includes equity in income of equity investments in pretax income.
During 2014, the Company generated income tax credits in excess of its utilization capacity based on both the Company’s current operations and with consideration of future tax planning strategies. Based upon
these same considerations, the Company reassessed its need for valuation allowances in all jurisdictions. Accordingly, the Company experienced a net increase in its valuation allowance for deferred income tax assets of $4.3 million.
TSYS has adopted the permanent reinvestment exception as allowed by GAAP, with respect to future earnings of certain foreign subsidiaries. As a result, TSYS
considers foreign earnings related to these foreign operations to be permanently reinvested. No provision for U.S. federal and state incomes taxes has been made in the Consolidated Financial Statements for those non-U.S. subsidiaries whose
earnings are considered to be reinvested. The amount of undistributed earnings considered to be “reinvested” which may be subject to tax
27
upon distribution was approximately $90.3 million as of December 31, 2014. Although TSYS does not intend to repatriate these earnings, a distribution of these non-U.S. earnings in the
form of dividends, or otherwise, would subject the Company to both U.S. federal and state income taxes, as adjusted for non-U.S. tax credits, and withholding taxes payable to the various non-U.S. countries. Determination of the amount
of any unrecognized deferred income tax liability on these undistributed earnings is not practicable.
In 2014, TSYS reassessed its contingencies for
foreign, federal and state exposures, which resulted in a net increase in tax contingency amounts of approximately $4.0 million.
Refer to Note 15
in the Consolidated Financial Statements for more information on income taxes.
Equity in Income of Equity Investments
TSYS’ share of income from its equity in equity investments was $17.6 million, $13.0 million and $10.2 million for 2014, 2013 and 2012, respectively. The
increase in equity income is the result of the growth in CUP Data. Refer to Note 12 in the Consolidated Financial Statements for more information on equity investments.
Discontinued Operations
TSYS sold its Japan-based operations during 2014 and recorded income from discontinued
operations, net of tax, of $48.7 million, $2.1 million and $1.0 million for 2014, 2013 and 2012, respectively. All current and prior period results and discussions exclude the impact of any Japan-based operations occurring during the respective
years. Refer to Note 2 in the Consolidated Financial Statements for more information on discontinued operations.
Net Income
Net income increased 28.4% to $329.4 million in 2014, compared to 2013. In 2013, net income increased 2.7% to $256.6 million, compared to
$249.9 million in 2012.
Net income attributable to noncontrolling interests in 2014 decreased to $6.5 million, as compared to $11.8 million in
2013 and $5.6 million in 2012. The decrease in 2014 was a result of the purchase of an additional 15% equity interest in CPAY in 2014. The increase in 2013, as compared to 2012, was the result of a full year’s results following the acquisition
of 60% of CPAY in 2012.
In 2014, net income attributable to TSYS common shareholders increased 31.9% to $322.9 million (basic and diluted EPS of
$1.73 and $1.72, respectively), compared to $244.8 million (basic and diluted EPS of $1.30 and $1.29, respectively) in 2013. Net income attributable to TSYS common shareholders increased 0.2% in 2013, compared to $244.3 million (basic and
diluted EPS of $1.30 and $1.29, respectively) in 2012.
Non-GAAP Financial Measures
Management evaluates the Company’s operating performance based upon operating margin excluding reimbursables, adjusted EPS and adjusted EBITDA, which are all non-generally accepted accounting principles
(non-GAAP) measures. TSYS also uses these non-GAAP financial measures to evaluate and assess TSYS’ financial performance against budget.
Although
not a substitute for GAAP, TSYS believes that non-GAAP financial measures are important to enable investors to understand and evaluate its ongoing operating results. Accordingly, TSYS includes non-GAAP financial measures when reporting its financial
results to shareholders in order to provide them with an additional tool to evaluate TSYS’ ongoing business operations. TSYS believes that the non-GAAP financial measures are representative of comparative financial performance that reflects the
economic substance of TSYS’ current and ongoing business operations.
Although non-GAAP financial measures are often used to measure TSYS’
operating results and assess its financial performance, they are not necessarily comparable to similarly titled captions of other companies due to potential inconsistencies in the method of calculation.
28
TSYS believes that its use of non-GAAP financial measures provides investors with the same key financial performance
indicators that are utilized by management to assess TSYS’ operating results, evaluate the business and make operational decisions on a prospective, going-forward basis. Hence, management provides disclosure of non-GAAP financial measures to
give shareholders and potential investors an opportunity to see TSYS as viewed by management, to assess TSYS with some of the same tools that management utilizes internally and to be able to compare such information with prior periods. TSYS believes
that the presentation of GAAP financial measures alone would not provide its shareholders and potential investors with the ability to appropriately analyze its ongoing operational results, and therefore expected future results. TSYS therefore
believes that inclusion of non-GAAP financial measures provides investors with additional information to help them better understand its financial statements just as management utilizes these non-GAAP financial measures to better understand the
business, manage budgets and allocate resources.
The following tables provide a reconciliation of GAAP to non-GAAP financial measures:
Revenues Before Reimbursable Items and Operating Margin Excluding Reimbursable Items
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
| (in thousands except per share data) |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Operating income (a) |
|
$ |
431,640 |
|
|
|
382,500 |
|
|
|
354,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total revenues (b) |
|
$ |
2,446,877 |
|
|
|
2,064,305 |
|
|
|
1,793,557 |
|
| Less reimbursable items |
|
|
253,899 |
|
|
|
240,597 |
|
|
|
252,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Revenues before reimbursable items (c) |
|
$ |
2,192,978 |
|
|
|
1,823,708 |
|
|
|
1,541,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating margin (as reported) (a)/(b) |
|
|
17.64 |
% |
|
|
18.53 |
% |
|
|
19.79 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating margin excluding reimbursables (a)/(c) |
|
|
19.68 |
% |
|
|
20.97 |
% |
|
|
23.03 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
| (in thousands) |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Net income |
|
$ |
329,406 |
|
|
|
256,597 |
|
|
|
249,923 |
|
| Adjusted for: |
|
|
|
|
|
|
|
|
|
|
|
|
| Income from discontinued operations |
|
|
(48,655 |
) |
|
|
(2,055 |
) |
|
|
(995 |
) |
| Equity in income of equity investments, net of taxes |
|
|
(17,583 |
) |
|
|
(13,047 |
) |
|
|
(10,171 |
) |
| Income taxes |
|
|
129,761 |
|
|
|
110,981 |
|
|
|
114,116 |
|
| Nonoperating expenses, net |
|
|
38,711 |
|
|
|
30,024 |
|
|
|
2,096 |
|
| Depreciation and amortization |
|
|
246,620 |
|
|
|
199,026 |
|
|
|
163,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| EBITDA |
|
|
678,260 |
|
|
|
581,526 |
|
|
|
518,369 |
|
| Adjusted for: |
|
|
|
|
|
|
|
|
|
|
|
|
| Share-based compensation |
|
|
30,790 |
|
|
|
28,933 |
|
|
|
18,621 |
|
| NetSpend merger and acquisition expenses* |
|
|
3,217 |
|
|
|
13,634 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Adjusted EBITDA |
|
$ |
712,267 |
|
|
|
624,093 |
|
|
|
536,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| * |
Excludes share-based compensation |
29
Adjusted Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
| (in thousands except per share data) |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Income from continuing operations attributable to TSYS common shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
| As reported (GAAP) |
|
$ |
275,216 |
|
|
|
246,893 |
|
|
|
247,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Adjust for amounts attributable to TSYS common shareholders (net of taxes): |
|
|
|
|
|
|
|
|
|
|
|
|
| Acquisition intangible amortization |
|
|
65,127 |
|
|
|
43,743 |
|
|
|
17,272 |
|
| Share-based compensation |
|
|
20,944 |
|
|
|
19,830 |
|
|
|
12,676 |
|
| NetSpend merger and acquisition expenses |
|
|
3,115 |
|
|
|
15,251 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Adjusted earnings |
|
$ |
364,402 |
|
|
|
325,717 |
|
|
|
277,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic EPS—Income from continuing operations attributable to TSYS common shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
| As reported (GAAP) |
|
$ |
1.48 |
|
|
|
1.31 |
|
|
|
1.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Adjust for amounts attributable to TSYS common shareholders (net of taxes): |
|
|
|
|
|
|
|
|
|
|
|
|
| Acquisition intangible amortization |
|
|
0.35 |
|
|
|
0.23 |
|
|
|
0.09 |
|
| Share-based compensation |
|
|
0.11 |
|
|
|
0.11 |
|
|
|
0.07 |
|
| NetSpend merger and acquisition expenses |
|
|
0.02 |
|
|
|
0.08 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Adjusted EPS* |
|
$ |
1.96 |
|
|
|
1.73 |
|
|
|
1.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Average common shares and participating securities |
|
|
186,222 |
|
|
|
188,391 |
|
|
|
188,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| * |
Adjusted EPS amounts do not total due to rounding. |
Projected
Outlook for 2015
As compared to 2014, TSYS expects its 2015 total revenues to increase by 7%-9%, its revenues before reimbursable items to increase
by 8%-10%, and its adjusted EPS from continuing operations attributable to TSYS common shareholders to increase by 11%-13%, based on the following assumptions with respect to 2015: (1) there will be no significant movements in the London
Interbank Offered Rate (LIBOR) and TSYS will not make any significant draws on the remaining balance of its revolving credit facility; (2) there will be no significant movement in foreign currency exchange rates related to TSYS’ business;
(3) TSYS will not incur significant expenses associated with the conversion of new large clients other than that included in the 2015 estimate, additional acquisitions, or any significant impairment of goodwill or other intangibles;
(4) there will be no deconversions of large clients during the year; and (5) the economy will not worsen. In addition, TSYS’ earnings guidance for 2015 does not include the impact of share repurchases.
Financial Position, Liquidity and Capital Resources
The
Consolidated Statements of Cash Flows detail the Company’s cash flows from operating, investing and financing activities. TSYS’ primary methods for funding its operations and growth have been cash generated from current operations, the use
of leases and the occasional use of borrowed funds to supplement financing of capital expenditures.
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
| (in thousands) |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Net income |
|
$ |
329,406 |
|
|
|
256,597 |
|
|
|
249,923 |
|
| Depreciation and amortization |
|
|
248,018 |
|
|
|
205,351 |
|
|
|
170,610 |
|
| Other noncash items and charges, net |
|
|
(27,928 |
) |
|
|
76,744 |
|
|
|
20,593 |
|
| Net change in current and other assets and current and other liabilities |
|
|
10,705 |
|
|
|
(86,294 |
) |
|
|
14,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net cash provided by operating activities |
|
$ |
560,201 |
|
|
|
452,398 |
|
|
|
455,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
TSYS’ main source of funds is derived from operating activities, specifically net income. The increase in 2014,
as compared to 2013, in net cash provided by operating activities was primarily the result of increased earnings. The decrease in 2013, as compared to 2012, in net cash provided by operating activities was primarily the result of the net change in
current and other assets and current and other liabilities partially offset by increased earnings.
Net change in current and other assets and current
and other liabilities include accounts receivable, prepaid expenses, other current assets and other assets, accounts payable, accrued salaries and employee benefits and other liabilities. The change in accounts receivable between the years is the
result of timing of collections compared to billings. The change in accounts payable and other liabilities between years is the result of the timing of payments and funding of performance-based incentives.
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
| (in thousands) |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Additions to contract acquisition costs |
|
$ |
(88,871 |
) |
|
|
(55,965 |
) |
|
|
(34,384 |
) |
| Purchases of property and equipment, net |
|
|
(75,913 |
) |
|
|
(40,598 |
) |
|
|
(31,395 |
) |
| Additions to internally developed computer software |
|
|
(41,501 |
) |
|
|
(33,600 |
) |
|
|
(19,285 |
) |
| Cash used in acquisitions, net of cash acquired |
|
|
(38,584 |
) |
|
|
(1,314,660 |
) |
|
|
(188,698 |
) |
| Additions to licensed computer software from vendors |
|
|
(29,638 |
) |
|
|
(63,635 |
) |
|
|
(33,001 |
) |
| Purchase of private equity investments |
|
|
(3,291 |
) |
|
|
(1,378 |
) |
|
|
(3,031 |
) |
| Proceeds from insurance recovery for loss on disposal |
|
|
6,212 |
|
|
|
— |
|
|
|
— |
|
| Proceeds from dispositions, net of expenses paid and cash disposed |
|
|
44,979 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net cash used in investing activities |
|
$ |
(226,607 |
) |
|
|
(1,509,836 |
) |
|
|
(309,794 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The major uses of cash for investing activities in 2014, 2013 and 2012 were for additions to contract acquisition costs, equipment, acquisitions, internally developed computer software and licensed computer
software from vendors.
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 Company’s processing systems. The Company’s investments in contract acquisition costs were $88.9 million in 2014, $56.0 million in 2013 and $34.4 million in 2012. The Company made cash payments for processing rights of $21.7
million, $9.7 million and $14.4 million in 2014, 2013 and 2012, respectively. Conversion cost additions were $67.2 million, $46.3 million and $20.0 million in 2014, 2013 and 2012, respectively. The increase in conversion costs in 2014 compared
to 2013 and 2013 compared to 2012 is primarily related to the conversion of Bank of America’s consumer card portfolio.
Property and Equipment
Capital expenditures for property and equipment were $75.9 million in 2014, compared to $40.6 million in 2013 and $31.4 million in 2012.
The majority of capital expenditures in 2014 related to computer processing hardware. The majority of capital expenditures in 2013 related to investments in computer processing hardware and building improvements. The majority of capital expenditures
in 2012 related to computer processing hardware.
Internally Developed Computer Software Costs
Additions to capitalized software development costs, including enhancements to, and development of, processing systems, were $41.5 million in 2014,
$33.6 million in 2013, and $19.3 million in 2012. The increase in capitalized software development costs in 2014 and 2013 was the result of two corporate-wide initiatives. One initiative is a multi-year, multi-phase initiative that
consists of enhancing TSYS’ issuing processing platforms. The other is an innovation initiative focused on enhancing existing product and service offerings through several new product concepts and ideas on how to change existing
processes.
31
Cash Used in Acquisitions
In 2014, the Company paid $38.6 million to NetSpend dissenting shareholders to settle the outstanding lawsuit associated with the NetSpend acquisition. In 2013, the Company used cash of $1.3 billion in the
acquisition of NetSpend. In 2012, the Company used cash of $188.7 million in the acquisitions of ProPay and CPAY. Refer to Note 24 in the Consolidated Financial Statements for more information on these acquisitions.
Licensed Computer Software from Vendors
Expenditures for
licensed computer software from vendors for increases in processing capacity were $29.6 million in 2014, compared to $63.6 million in 2013 and $33.0 million in 2012. The increase in expenditures in 2013 was driven by purchases of software
in anticipation of large conversions in 2014 and beyond.
Purchase of Private Equity Investments
In 2011, the Company entered into a limited partnership agreement in connection with its agreement to invest in an Atlanta, Georgia-based venture capital fund
focused exclusively on investing in technology-enabled financial services companies. Pursuant to the limited partnership agreement, the Company has committed to invest up to $20 million in the fund so long as its ownership interest in the fund does
not exceed 50%. The Company made investments in the fund of $3.3 million, $1.4 million and $3.0 million in 2014, 2013 and 2012, respectively. The Company recorded gains on this investment of $793,000, $966,000 and $898,000 for the years ended
December 31, 2014, 2013 and 2012, respectively.
Proceeds from Insurance Recovery for Loss on Disposal
The Company received $6.2 million of proceeds from insurance coverage related to the destruction of property resulting from a fire. The Company recorded the loss on
disposal which was more than offset by the insurance proceeds received.
Proceeds from Dispositions
During 2014, TSYS sold its Japan-based operations and received $45.0 million of proceeds, net of expenses paid and cash disposed in connection with this
transaction. Refer to Note 2 in the Consolidated Financial Statements for more information on discontinued operations.
Cash Flows from
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
| (in thousands) |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Repurchase of common stock under plans and tax withholding |
|
$ |
(170,516 |
) |
|
|
(103,857 |
) |
|
|
(74,939 |
) |
| Dividends paid on common stock |
|
|
(74,796 |
) |
|
|
(56,510 |
) |
|
|
(94,035 |
) |
| Principal payments on long-term borrowings and capital lease obligations |
|
|
(69,939 |
) |
|
|
(166,805 |
) |
|
|
(200,052 |
) |
| Purchase of noncontrolling interest |
|
|
(37,500 |
) |
|
|
— |
|
|
|
— |
|
| Subsidiary dividends paid to noncontrolling shareholders |
|
|
(7,172 |
) |
|
|
(7,321 |
) |
|
|
(2,797 |
) |
| Debt issuance costs |
|
|
— |
|
|
|
(13,573 |
) |
|
|
(2,073 |
) |
| Proceeds from long-term borrowings |
|
|
1,396 |
|
|
|
1,395,661 |
|
|
|
150,000 |
|
| Excess tax benefit from share-based payment arrangements |
|
|
7,185 |
|
|
|
3,528 |
|
|
|
1,259 |
|
| Proceeds from exercise of stock options |
|
|
34,869 |
|
|
|
40,691 |
|
|
|
9,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net cash (used in) provided by financing activities |
|
$ |
(316,473 |
) |
|
|
1,091,814 |
|
|
|
(212,965 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The main source of cash from financing activities has been the use of borrowed funds. The major uses of cash for financing activities have been the purchase of stock under the stock repurchase plan as described
below, payment of dividends, principal payment on long term debt and capital lease obligations, and purchase of noncontrolling interests. Net cash used in financing activities for the year ended December 31, 2014 was $316.5 million and was
primarily the result of the repurchase of common stock, payment of dividends, and
32
principal payments on long-term debt borrowings and capital lease obligations offset by proceeds from the exercise of stock options. Net cash provided by financing activities for the year ended
December 31, 2013 was $1.1 billion and was primarily the result of proceeds from long term borrowings in connection with the NetSpend acquisition. Net cash used in financing activities for the year ended December 31, 2012 was
$213.0 million and was primarily the result of principal payments on long-term debt borrowings and capital lease obligations, the repurchase of common stock, and payment of dividends offset by proceeds from borrowings of long-term debt. Refer
to Notes 13 and 24 in the Consolidated Financial Statements for more information on the long-term debt financing and acquisitions.
Financing
In connection with the NetSpend acquisition, the Company obtained commitments for a $1.2 billion 364-day bridge term loan facility. In May, 2013 the
Company closed the bridge term loan and issued debt of $1.4 billion to finance the NetSpend acquisition. In April 2013, the Company entered into a new credit agreement that provided for a five-year term loan to the Company in the amount of $200.0
million. In May 2013, the Company closed its issuance of $550.0 million aggregate principal amount of 2.375% Senior Notes due 2018 and $550.0 million aggregate principal amount of 3.750% Senior Notes due 2023 (collectively, the “Notes”).
The interest on the Notes is payable semiannually. Upon the issuance of the Notes, the Company eliminated its bridge term loan facility. In July 2013, the Company borrowed $100 million on its revolving credit facility which was repaid as of
December 31, 2013. In connection with the bridge term loan facility and the aforementioned loans, the Company paid debt issuance costs of $13.6 million in 2013.
In September 2012, TSYS obtained a $150.0 million term loan, which was used to pay off an existing term loan. During 2008 and 2009, the Company’s International segment borrowed approximately
¥2.0 billion in a Yen-denominated three-year loan to finance activities in Japan. In December 2013, the Company repaid this loan for approximately $19.2 million.
Refer to Note 13 in the Consolidated Financial Statements for further information on TSYS’ long-term debt and financing arrangements.
Purchase of Noncontrolling Interest
In connection with the acquisition of CPAY, the Company is party to call
and put arrangements with respect to the membership units that represent the remaining noncontrolling interest of CPAY. The call arrangement is exercisable by TSYS and the put arrangement is exercisable by the Seller. The put arrangement is outside
the control of the Company by requiring the Company to purchase the Seller’s entire equity interest in CPAY at a put price at fair market value. At the time of the original acquisition, the redemption of the put option was considered probable
based upon the passage of time of the second anniversary date. The put arrangement is recorded on the balance sheet and is classified as redeemable noncontrolling interest outside of permanent equity.
In February 2014, the Company purchased an additional 15% equity interest in CPAY for $37.5 million, reducing its redeemable noncontrolling interest to 25%. The
call and put options for the Seller’s 25% equity interest were extended as a result of this transaction.
The put option is not currently
redeemable, but redemption is considered probable based upon the passage of time toward the third anniversary date of the 2014 purchase of additional equity. The Company’s accounting policy is to accrete changes in the redemption value over the
period from the date of issuance to the earliest redemption date, which the Company believes to be in 2017. The Company did not accrete any changes to the redemption value as the balance as of December 31, 2014 exceeded the accretion fair value
amount.
Refer to Note 24 in the Consolidated Financial Statements for more information on this purchase.
33
Stock Repurchase Plan
In April 2010, TSYS announced a stock repurchase plan to purchase up to 10 million shares of TSYS stock. The shares may be purchased from time to time over the next two years at prices considered attractive to
the Company. In May 2011, TSYS announced that its Board had approved an increase in the number of shares that may be repurchased under its current share repurchase plan from up to 10 million shares to up to 15 million shares of TSYS stock.
The expiration date of the plan was also extended to April 30, 2013. In July 2012, TSYS announced that its Board had approved an increase in the number of shares that may be repurchased under its current share repurchase plan from up to
15 million shares to up to 20 million shares of TSYS stock. The expiration date of the plan was also extended to April 30, 2014. In January, 2014, TSYS announced that its Board had approved an increase in the number of shares that may
be repurchased under its current share repurchase plan from up to 20 million shares to up to 28 million shares of TSYS stock. With the increase, TSYS had 6.8 million shares available to be repurchased. In addition, the expiration date
of the plan was extended to April 30, 2015. Through December 31, 2014, the Company purchased 21.2 million shares for approximately $503.3 million, at an average price of $23.75.
On January 27, 2015, TSYS announced that its Board had approved a new stock repurchase plan to repurchase up to 20 million shares of TSYS stock. The
shares may be purchased from time to time at prices considered appropriate. There is no expiration date for the plan. The plan discussed in the preceding paragraph was terminated.
Dividends
Dividends on common stock of $74.8 million were paid in 2014, compared to $56.5 million and
$94.0 million in 2013 and 2012, respectively. The Company paid dividends of $0.40 per share in 2014, $0.30 per share in 2013 and $0.50 per share in 2012. The decrease in dividends paid in 2013 compared to 2012 is due to the acceleration of payment
of the fourth quarter 2012 dividend. The fourth quarter 2012 dividend payment was paid in December, rather than January, to allow shareholders to benefit from the lower dividend tax rate that was set to expire on December 31, 2012.
Significant Noncash Transactions
During 2014, 2013 and
2012, the Company issued 673,000, 1.7 million and 311,000 shares of common stock, respectively, to certain key employees and non-management members of its Board of Directors. The grants to certain key employees were issued in the form of
nonvested stock bonus awards for services to be provided in the future by such officers and employees. The grants to the Board of Directors were fully vested on the date of grant. The market value of the common stock at the date of issuance is
amortized as compensation expense over the vesting period of the awards.
The Company acquired computer equipment and software under capital leases in
the amount of $17.9 million, $14.8 million and $5.3 million in 2014, 2013 and 2012, respectively.
Refer to Notes 19 and 23 in the Consolidated
Financial Statements for more information on share-based compensation and significant noncash transactions.
Additional Cash Flow Information
Off-Balance Sheet Financing
TSYS uses
various operating leases in its normal course of business. These “off-balance sheet” arrangements obligate TSYS to make payments for computer equipment, software and facilities. These computer and software lease commitments may be replaced
with new lease commitments due to new technology. Management expects that, as these leases expire, they will be evaluated and renewed or replaced by similar leases based on need.
34
The following table summarizes future contractual cash obligations, including lease payments and software
arrangements, as of December 31, 2014, for the next five years and thereafter:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Contractual Cash Obligations
Payments Due By Period |
|
| (in millions) |
|
Total |
|
|
1 Year
or Less |
|
|
2-3
Years |
|
|
4-5
Years |
|
|
After
5 Years |
|
| Debt obligations (principal) |
|
$ |
1,446 |
|
|
|
44 |
|
|
|
162 |
|
|
|
690 |
|
|
|
550 |
|
| Debt obligations (interest) |
|
|
232 |
|
|
|
38 |
|
|
|
74 |
|
|
|
48 |
|
|
|
72 |
|
| Operating leases |
|
|
386 |
|
|
|
122 |
|
|
|
184 |
|
|
|
50 |
|
|
|
30 |
|
| Purchase commitments |
|
|
77 |
|
|
|
21 |
|
|
|
28 |
|
|
|
19 |
|
|
|
9 |
|
| Redeemable noncontrolling interest |
|
|
22 |
|
|
|
— |
|
|
|
22 |
|
|
|
— |
|
|
|
— |
|
| Capital lease obligations |
|
|
15 |
|
|
|
8 |
|
|
|
6 |
|
|
|
1 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total contractual cash obligations |
|
$ |
2,178 |
|
|
|
233 |
|
|
|
476 |
|
|
|
808 |
|
|
|
661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Taxes
The total liability for uncertain tax positions as of December 31, 2014 is
$6.7 million. Refer to Note 15 in the Consolidated Financial Statements for more information on income taxes. The Company is not able to reasonably estimate the amount by which the liability will increase or decrease over time; however, at this
time, the Company does not expect any significant changes related to these obligations within the next twelve months.
Foreign Operations
TSYS operates internationally and is subject to the impact of adverse movements in foreign currency exchange rates. TSYS does not enter into foreign
exchange forward contracts to reduce its exposure to foreign currency rate changes; however, the Company continues to analyze the potential use of hedging instruments to safeguard it from significant foreign currency translation risks.
TSYS maintains operating cash accounts outside the United States. Refer to Note 5 in the Consolidated Financial Statements for more information on cash and cash
equivalents. TSYS has adopted the permanent reinvestment exception under GAAP with respect to future earnings of certain foreign subsidiaries. While some of the foreign cash is available to repay intercompany financing arrangements, remaining
amounts are not presently available to fund domestic operations and obligations without paying a significant amount of taxes upon its repatriation. Demand on the Company’s cash has increased as a result of its strategic initiatives. TSYS funds
these initiatives through a balance of internally generated cash, external sources of capital and, when advantageous, access to foreign cash in a tax efficient manner. Where local regulations limit an efficient intercompany transfer of amounts held
outside of the U.S., TSYS will continue to utilize these funds for local liquidity needs. Under current law, balances available to be repatriated to the U.S. would be subject to U.S. federal income taxes, less applicable foreign tax credits. TSYS
has provided for the U.S. federal tax liability on these amounts for financial statement purposes, except for foreign earnings that are considered permanently reinvested outside of the U.S. TSYS utilizes a variety of tax planning and financing
strategies with the objective of having its worldwide cash available in the locations where it is needed.
Impact of Inflation
Although the impact of inflation on its operations cannot be precisely determined, the Company believes that by controlling its operating expenses and by taking
advantage of more efficient computer hardware and software, it can minimize the impact of inflation.
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
35
bonds. However, there can be no assurance that funds will be available on terms acceptable to TSYS. Management expects that TSYS will continue to be able to fund a significant portion of its
capital expenditure needs through internally generated cash in the future, as evidenced by TSYS’ current ratio of 2.3:1. As of December 31, 2014, TSYS had working capital of $394.0 million, compared to $356.7 million in 2013 and
$344.2 million in 2012.
Legal Proceedings
Refer
to Note 16 in the Consolidated Financial Statements for information regarding the Company’s commitments and contingencies including legal proceedings.
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 the loss of Bank of America as a
merchant services client will not have a material adverse effect on TSYS’ business; (ii) TSYS’ expectation that the Durbin Amendment will not have a significant negative impact on TSYS’ business; (iii) TSYS’ expectation
with respect to the effect of recent accounting pronouncements; (iv) TSYS’ expectation that it will be able to fund a significant portion of its capital expenditure needs through internally generated cash in the future; (v) TSYS’
earnings guidance for 2015 total revenues, revenues before reimbursable items, and adjusted EPS attributable to TSYS’ common shareholders from continuing operations; (vi) TSYS’ belief with respect to lawsuits, claims and other
complaints; (vii) TSYS’ expectation with respect to certain tax matters; (viii) the Board’s intention to continue to pay cash dividends, and the assumptions underlying such statements. In addition, certain statements in future
filings by TSYS with the Securities and Exchange Commission, in press releases, and in oral and written statements made by or with the approval of TSYS which are not statements of historical fact constitute forward-looking statements within the
meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenue, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial
items; (ii) statements of plans and objectives of TSYS or its management or Board of Directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions
underlying such statements. Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” “estimates,” “projects,” “plans,” “may,”
“could,” “should,” “would,” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying these statements.
These statements are based upon the current beliefs and expectations of TSYS’ management and are subject to significant risks and uncertainties. Actual
results may differ materially from those contemplated by the forward-looking statements. A number of important factors could cause actual results to differ materially from those contemplated by the Company’s forward-looking statements. Many of
these factors are beyond TSYS’ ability to control or predict. These factors include, but are not limited to:
| • |
|
the material breach of security of any of TSYS’ systems; |
| • |
|
TSYS incurs expenses associated with the signing of a significant client; |
| • |
|
organic growth rates for TSYS’ existing clients are lower than anticipated whether as a result of unemployment rates, card delinquencies and charge off
rates or otherwise or attrition rates of existing clients are higher than anticipated; |
| • |
|
TSYS does not convert and deconvert clients’ portfolios as scheduled; |
| • |
|
risks associated with foreign operations, including adverse developments with respect to foreign currency exchange rates; |
| • |
|
adverse developments with respect to entering into contracts with new clients and retaining current clients; |
| • |
|
consolidation in the financial services and other industries, including the merger of TSYS clients with entities that are not TSYS processing clients, the sale
of portfolios by TSYS clients to entities that are not TSYS processing clients and financial institutions which are TSYS clients otherwise ceasing to exist; |
36
| • |
|
the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act on TSYS and its clients; |
| • |
|
adverse developments with respect to the payment card industry in general, including a decline in the use of cards as a payment mechanism;
|
| • |
|
the impact of potential and completed acquisitions, including the costs associated therewith, their being more difficult to integrate than anticipated, and the
inability to achieve the anticipated growth opportunities and other benefits of the acquisitions; |
| • |
|
the costs and effects of litigation, investigations or similar matters or adverse facts and developments relating thereto; |
| • |
|
the impact of the application of and/or changes in accounting principles; |
| • |
|
TSYS’ inability to timely, successfully and cost-effectively improve and implement processing systems to provide new products, increased functionality and
increased efficiencies; |
| • |
|
TSYS’ reliance on financial institution sponsors; |
| • |
|
changes occur in laws, rules, regulations, credit card association rules, prepaid industry rules, or other industry standards affecting TSYS and its clients that
may result in costly new compliance burdens on TSYS and its clients and lead to a decrease in the volume and/or number of transactions processed or limit the types and amounts of fees that can be charged to customers; |
| • |
|
successfully managing the potential both for patent protection and patent liability in the context of rapidly developing legal framework for expansive patent
protection; |
| • |
|
one or more of the assumptions upon which TSYS’ earnings guidance for 2015 is based is inaccurate; |
| • |
|
the effect of current domestic and worldwide economic and geopolitical conditions; |
| • |
|
the impact on TSYS’ business, as well as on the risks set forth above, of various domestic or international military or terrorist activities or conflicts;
|
| • |
|
other risk factors described in the “Risk Factors” and other sections of TSYS’ Annual Report on Form 10-K for the fiscal year ended
December 31, 2014 and other filings with the Securities and Exchange Commission; and |
| • |
|
TSYS’ ability to manage the foregoing and other risks. |
These forward-looking statements speak only as of the date on which they are made and TSYS does not intend to update any forward-looking statement as a result of new information, future developments or otherwise.
Subsequent Events
In the first quarter of 2015, TSYS
completed the conversion of Bank of America’s consumer card portfolio from its in-house processing system to TSYS’ processing system.
Management performed an evaluation of the Company’s activity as of the date these audited financial statements were issued, and has concluded that, other than
as set forth above, there are no significant additional subsequent events requiring disclosure.
37
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| (in thousands, except per share data) |
|
2014 |
|
|
2013 |
|
| Assets |
|
|
|
|
|
|
|
|
| Current assets: |
|
|
|
|
|
|
|
|
| Cash and cash equivalents (Note 5) |
|
$ |
289,183 |
|
|
|
247,700 |
|
| Accounts receivable, net of allowances for doubtful accounts and billing adjustments of $5.2 million and $3.4 million as of 2014 and 2013,
respectively |
|
|
283,203 |
|
|
|
255,773 |
|
| Deferred income tax assets (Note 15) |
|
|
15,190 |
|
|
|
14,158 |
|
| Prepaid expenses and other current assets (Note 6) |
|
|
98,974 |
|
|
|
95,109 |
|
| Current assets of discontinued operations (Note 2) |
|
|
4,003 |
|
|
|
41,193 |
|
|
|
|
|
|
|
|
|
|
| Total current assets |
|
|
690,553 |
|
|
|
653,933 |
|
| Goodwill (Note 7) |
|
|
1,547,397 |
|
|
|
1,541,574 |
|
| Other intangible assets, net of accumulated amortization of $181.9 million and $105.4 million as of 2014 and 2013, respectively (Note
8) |
|
|
404,107 |
|
|
|
481,419 |
|
| Computer software, net of accumulated amortization of $613.3 million and $536.4 million as of 2014 and 2013, respectively (Note
9) |
|
|
366,148 |
|
|
|
363,880 |
|
| Property and equipment, net of accumulated depreciation and amortization of $423.2 million and $391.5 million as of 2014 and 2013,
respectively (Note 10) |
|
|
290,585 |
|
|
|
259,968 |
|
| Contract acquisition costs, net of accumulated amortization of $276.1 million and $251.8 million as of 2014 and 2013, respectively (Note
11) |
|
|
236,305 |
|
|
|
184,828 |
|
| Equity investments, net (Note 12) |
|
|
100,468 |
|
|
|
94,133 |
|
| Deferred income tax assets (Note 15) |
|
|
7,002 |
|
|
|
3,972 |
|
| Other assets |
|
|
91,016 |
|
|
|
87,146 |
|
| Long-term assets of discontinued operations (Note 2) |
|
|
— |
|
|
|
15,715 |
|
|
|
|
|
|
|
|
|
|
| Total assets |
|
$ |
3,733,581 |
|
|
|
3,686,568 |
|
|
|
|
|
|
|
|
|
|
| Liabilities |
|
|
|
|
|
|
|
|
| Current liabilities: |
|
|
|
|
|
|
|
|
| Accounts payable |
|
$ |
48,793 |
|
|
|
33,651 |
|
| Current portion of long-term borrowings (Note 13) |
|
|
43,784 |
|
|
|
34,257 |
|
| Accrued salaries and employee benefits |
|
|
38,001 |
|
|
|
38,339 |
|
| Current portion of obligations under capital leases (Note 13) |
|
|
7,127 |
|
|
|
22,662 |
|
| Other current liabilities (Note 14) |
|
|
154,805 |
|
|
|
159,170 |
|
| Current liabilities of discontinued operations (Note 2) |
|
|
4,003 |
|
|
|
9,136 |
|
|
|
|
|
|
|
|
|
|
| Total current liabilities |
|
|
296,513 |
|
|
|
297,215 |
|
| Long-term borrowings, excluding current portion (Note 13) |
|
|
1,398,132 |
|
|
|
1,428,251 |
|
| Deferred income tax liabilities (Note 15) |
|
|
211,820 |
|
|
|
228,727 |
|
| Obligations under capital leases, excluding current portion (Note 13) |
|
|
6,974 |
|
|
|
7,500 |
|
| Other long-term liabilities |
|
|
98,006 |
|
|
|
81,600 |
|
| Long-term liabilities of discontinued operations (Note 2) |
|
|
— |
|
|
|
1,197 |
|
|
|
|
|
|
|
|
|
|
| Total liabilities |
|
|
2,011,445 |
|
|
|
2,044,490 |
|
|
|
|
|
|
|
|
|
|
| Redeemable noncontrolling interest in consolidated subsidiary |
|
|
22,492 |
|
|
|
39,652 |
|
|
|
|
|
|
|
|
|
|
| Commitments and contingencies (Note 16) |
|
|
|
|
|
|
|
|
| Equity |
|
|
|
|
|
|
|
|
| Shareholders’ equity: (Notes 18, 19, 20, and 21) |
|
|
|
|
|
|
|
|
| Common stock — $0.10 par value. Authorized 600,000 shares; 202,775 and 202,790 issued as of 2014 and 2013, respectively; 184,939 and
187,717 outstanding as of 2014 and 2013, respectively |
|
|
20,278 |
|
|
|
20,279 |
|
| Additional paid-in capital |
|
|
171,270 |
|
|
|
165,841 |
|
| Accumulated other comprehensive income, net |
|
|
(11,926 |
) |
|
|
3,749 |
|
| Treasury stock, at cost (17,836 and 15,073 shares as of 2014 and 2013, respectively) |
|
|
(453,230 |
) |
|
|
(326,996 |
) |
| Retained earnings |
|
|
1,966,370 |
|
|
|
1,718,204 |
|
|
|
|
|
|
|
|
|
|
| Total shareholders’ equity |
|
|
1,692,762 |
|
|
|
1,581,077 |
|
|
|
|
|
|
|
|
|
|
| Noncontrolling interests in consolidated subsidiaries |
|
|
6,882 |
|
|
|
21,349 |
|
|
|
|
|
|
|
|
|
|
| Total equity |
|
|
1,699,644 |
|
|
|
1,602,426 |
|
|
|
|
|
|
|
|
|
|
| Total liabilities and equity |
|
$ |
3,733,581 |
|
|
|
3,686,568 |
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
38
Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
| (in thousands, except per share data) |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Total revenues |
|
$ |
2,446,877 |
|
|
|
2,064,305 |
|
|
|
1,793,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cost of services |
|
|
1,668,892 |
|
|
|
1,369,438 |
|
|
|
1,189,341 |
|
| Selling, general and administrative expenses |
|
|
343,128 |
|
|
|
298,147 |
|
|
|
247,597 |
|
| Merger and acquisition expenses |
|
|
3,217 |
|
|
|
14,220 |
|
|
|
1,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total operating expenses |
|
|
2,015,237 |
|
|
|
1,681,805 |
|
|
|
1,438,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating income |
|
|
431,640 |
|
|
|
382,500 |
|
|
|
354,969 |
|
| Nonoperating expenses, net |
|
|
(763 |
) |
|
|
(804 |
) |
|
|
(2,096 |
) |
| Merger and acquisition expenses—bridge loan facility and financings |
|
|
(37,948 |
) |
|
|
(29,220 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income before income taxes and equity in income of equity investments |
|
|
392,929 |
|
|
|
352,476 |
|
|
|
352,873 |
|
| Income taxes (Note 15) |
|
|
129,761 |
|
|
|
110,981 |
|
|
|
114,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income before equity in income of equity investments |
|
|
263,168 |
|
|
|
241,495 |
|
|
|
238,757 |
|
| Equity in income of equity investments, net of tax (Note 12) |
|
|
17,583 |
|
|
|
13,047 |
|
|
|
10,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income from continuing operations, net of tax |
|
|
280,751 |
|
|
|
254,542 |
|
|
|
248,928 |
|
| Income from discontinued operations, net of tax |
|
|
48,655 |
|
|
|
2,055 |
|
|
|
995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income |
|
|
329,406 |
|
|
|
256,597 |
|
|
|
249,923 |
|
| Net income attributable to noncontrolling interests |
|
|
(6,534 |
) |
|
|
(11,847 |
) |
|
|
(5,643 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income attributable to Total System Services, Inc. (TSYS) common shareholders |
|
$ |
322,872 |
|
|
|
244,750 |
|
|
|
244,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic earnings per share (EPS) attributable to TSYS common shareholders (Note 26) |
|
|
|
|
|
|
|
|
|
|
|
|
| Income from continuing operations to TSYS common shareholders |
|
$ |
1.48 |
|
|
|
1.31 |
|
|
|
1.31 |
|
| Gain (loss) from discontinued operations to TSYS common shareholders |
|
|
0.26 |
|
|
|
(0.01 |
) |
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income attributable to TSYS common shareholders* |
|
$ |
1.73 |
|
|
|
1.30 |
|
|
|
1.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Diluted EPS attributable to TSYS common shareholders (Note 26) |
|
|
|
|
|
|
|
|
|
|
|
|
| Income from continuing operations to TSYS common shareholders |
|
$ |
1.47 |
|
|
|
1.30 |
|
|
|
1.31 |
|
| Gain (loss) from discontinued operations to TSYS common shareholders |
|
|
0.25 |
|
|
|
(0.01 |
) |
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income attributable to TSYS common shareholders* |
|
$ |
1.72 |
|
|
|
1.29 |
|
|
|
1.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Amounts attributable to TSYS common shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
| Income from continuing operations |
|
$ |
275,216 |
|
|
|
246,893 |
|
|
|
247,149 |
|
| Gain (loss) from discontinued operations |
|
|
47,656 |
|
|
|
(2,143 |
) |
|
|
(2,869 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income |
|
$ |
322,872 |
|
|
|
244,750 |
|
|
|
244,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| * |
EPS amounts may not total due to rounding |
See accompanying Notes
to Consolidated Financial Statements
39
Consolidated Statements of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
| (in thousands) |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Net income |
|
$ |
329,406 |
|
|
|
256,597 |
|
|
|
249,923 |
|
| Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign currency translation adjustments |
|
|
(19,531 |
) |
|
|
(4,081 |
) |
|
|
2,183 |
|
| Less reclassifications of foreign currency translation adjustments to net income |
|
|
3,514 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total foreign currency translation adjustments |
|
|
(16,017 |
) |
|
|
(4,081 |
) |
|
|
2,183 |
|
| Postretirement healthcare plan adjustments |
|
|
589 |
|
|
|
1,895 |
|
|
|
(1,666 |
) |
| Unrealized gain (loss) on available-for-sale securities |
|
|
(668 |
) |
|
|
1,773 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other comprehensive income (loss) |
|
|
(16,096 |
) |
|
|
(413 |
) |
|
|
517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Comprehensive income |
|
|
313,310 |
|
|
|
256,184 |
|
|
|
250,440 |
|
| Comprehensive income attributable to noncontrolling interests |
|
|
6,113 |
|
|
|
9,092 |
|
|
|
4,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Comprehensive income attributable to TSYS common shareholders |
|
$ |
307,197 |
|
|
|
247,092 |
|
|
|
246,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
40
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
| (in thousands) |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Net income |
|
$ |
329,406 |
|
|
|
256,597 |
|
|
|
249,923 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Depreciation and amortization |
|
|
248,018 |
|
|
|
205,351 |
|
|
|
170,610 |
|
| Provisions for fraud and other losses |
|
|
38,381 |
|
|
|
11,912 |
|
|
|
— |
|
| Share-based compensation |
|
|
30,790 |
|
|
|
28,933 |
|
|
|
18,621 |
|
| Charges for transaction processing provisions |
|
|
9,468 |
|
|
|
7,458 |
|
|
|
2,803 |
|
| Dividends received from equity investments |
|
|
9,189 |
|
|
|
8,595 |
|
|
|
7,524 |
|
| Provisions for bad debt expenses and billing adjustments |
|
|
2,823 |
|
|
|
2,000 |
|
|
|
1,054 |
|
| Amortization of debt issuance costs |
|
|
1,817 |
|
|
|
7,269 |
|
|
|
298 |
|
| Loss on foreign currency |
|
|
999 |
|
|
|
1,027 |
|
|
|
2,012 |
|
| Amortization of bond discount |
|
|
383 |
|
|
|
225 |
|
|
|
— |
|
| (Gain) Loss on disposal of equipment, net |
|
|
(293 |
) |
|
|
(79 |
) |
|
|
324 |
|
| Changes in value of private equity investments |
|
|
(793 |
) |
|
|
(966 |
) |
|
|
(898 |
) |
| Excess tax benefit from share-based payment arrangements |
|
|
(7,185 |
) |
|
|
(3,528 |
) |
|
|
(1,259 |
) |
| Deferred income tax (benefit) expense |
|
|
(8,963 |
) |
|
|
26,945 |
|
|
|
285 |
|
| Equity in income of equity investments |
|
|
(17,583 |
) |
|
|
(13,047 |
) |
|
|
(10,171 |
) |
| Gain on disposal of subsidiaries |
|
|
(86,961 |
) |
|
|
— |
|
|
|
— |
|
| Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Accounts receivable |
|
|
(33,406 |
) |
|
|
(8,667 |
) |
|
|
2,855 |
|
| Prepaid expenses, other current assets and other long-term assets |
|
|
(10,525 |
) |
|
|
(571 |
) |
|
|
(2,945 |
) |
| Accrued salaries and employee benefits |
|
|
414 |
|
|
|
(403 |
) |
|
|
(7,083 |
) |
| Accounts payable |
|
|
8,765 |
|
|
|
(52,042 |
) |
|
|
37,206 |
|
| Other current liabilities and other long-term liabilities |
|
|
45,457 |
|
|
|
(24,611 |
) |
|
|
(15,406 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net cash provided by operating activities |
|
|
560,201 |
|
|
|
452,398 |
|
|
|
455,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Additions to contract acquisition costs |
|
|
(88,871 |
) |
|
|
(55,965 |
) |
|
|
(34,384 |
) |
| Purchases of property and equipment |
|
|
(75,913 |
) |
|
|
(40,598 |
) |
|
|
(31,395 |
) |
| Additions to internally developed computer software |
|
|
(41,501 |
) |
|
|
(33,600 |
) |
|
|
(19,285 |
) |
| Cash used in acquisitions, net of cash acquired |
|
|
(38,584 |
) |
|
|
(1,314,660 |
) |
|
|
(188,698 |
) |
| Additions to licensed computer software from vendors |
|
|
(29,638 |
) |
|
|
(63,635 |
) |
|
|
(33,001 |
) |
| Purchase of private equity investments |
|
|
(3,291 |
) |
|
|
(1,378 |
) |
|
|
(3,031 |
) |
| Proceeds from insurance recovery for loss on disposal |
|
|
6,212 |
|
|
|
— |
|
|
|
— |
|
| Proceeds from dispositions, net of expenses paid and cash disposed |
|
|
44,979 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net cash used in investing activities |
|
|
(226,607 |
) |
|
|
(1,509,836 |
) |
|
|
(309,794 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Repurchase of common stock under plans and tax withholding |
|
|
(170,516 |
) |
|
|
(103,857 |
) |
|
|
(74,939 |
) |
| Dividends paid on common stock |
|
|
(74,796 |
) |
|
|
(56,510 |
) |
|
|
(94,035 |
) |
| Principal payments on long-term borrowings and capital lease obligations |
|
|
(69,939 |
) |
|
|
(166,805 |
) |
|
|
(200,052 |
) |
| Purchase of noncontrolling interests |
|
|
(37,500 |
) |
|
|
— |
|
|
|
— |
|
| Subsidiary dividends paid to noncontrolling shareholders |
|
|
(7,172 |
) |
|
|
(7,321 |
) |
|
|
(2,797 |
) |
| Debt issuance costs |
|
|
— |
|
|
|
(13,573 |
) |
|
|
(2,073 |
) |
| Proceeds from long-term borrowings |
|
|
1,396 |
|
|
|
1,395,661 |
|
|
|
150,000 |
|
| Excess tax benefit from share-based payment arrangements |
|
|
7,185 |
|
|
|
3,528 |
|
|
|
1,259 |
|
| Proceeds from exercise of stock options |
|
|
34,869 |
|
|
|
40,691 |
|
|
|
9,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net cash (used in) provided by financing activities |
|
|
(316,473 |
) |
|
|
1,091,814 |
|
|
|
(212,965 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash and cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
| Effect of exchange rate changes on cash and cash equivalents |
|
|
(6,168 |
) |
|
|
(3,758 |
) |
|
|
(1,719 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net increase (decrease) in cash and cash equivalents |
|
|
10,953 |
|
|
|
30,618 |
|
|
|
(68,725 |
) |
| Cash and cash equivalents at beginning of period |
|
|
278,230 |
|
|
|
247,612 |
|
|
|
316,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash and cash equivalents at end of period |
|
|
289,183 |
|
|
|
278,230 |
|
|
|
247,612 |
|
| Less cash and cash equivalents of discontinued operations at end of period |
|
|
— |
|
|
|
(30,530 |
) |
|
|
(23,353 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash and cash equivalents of continued operations at end of period |
|
$ |
289,183 |
|
|
|
247,700 |
|
|
|
224,259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
| Interest paid |
|
$ |
40,969 |
|
|
|
23,157 |
|
|
|
2,952 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income taxes paid, net |
|
$ |
135,770 |
|
|
|
80,033 |
|
|
|
106,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
41
Consolidated Statements of Changes in Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
TSYS Shareholders |
|
|
|
|
|
|
|
| |
|
Redeemable
Noncontrolling
Interests
|
|
|
Common Stock |
|
|
Additional
Paid-In
Capital |
|
|
Accumulated
Other
Comprehensive
Income
(Loss) |
|
|
Treasury
Stock |
|
|
Retained
Earnings |
|
|
Noncontrolling
Interests |
|
|
Total
Equity |
|
| (in thousands, except per share data) |
|
|
Shares |
|
|
Dollars |
|
|
|
|
|
|
|
| Balance as of December 31, 2011 |
|
|
— |
|
|
|
201,860 |
|
|
$ |
20,186 |
|
|
|
125,948 |
|
|
|
(445 |
) |
|
|
(225,034 |
) |
|
|
1,380,634 |
|
|
|
19,720 |
|
|
$ |
1,321,009 |
|
| Net income |
|
$ |
1,505 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
244,280 |
|
|
|
4,138 |
|
|
|
248,418 |
|
| Other comprehensive income (Note 21) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,853 |
|
|
|
|
|
|
|
|
|
|
|
(1,336 |
) |
|
|
517 |
|
| Common stock issued from treasury shares for exercise of stock options (Note 19) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,386 |
) |
|
|
— |
|
|
|
12,377 |
|
|
|
— |
|
|
|
— |
|
|
|
9,991 |
|
| Common stock issued for nonvested awards (Note 19) |
|
|
— |
|
|
|
611 |
|
|
|
61 |
|
|
|
(61 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Common stock issued from treasury shares for nonvested awards (Note 19) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(628 |
) |
|
|
— |
|
|
|
628 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Share-based compensation (Note 19) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
18,623 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
18,623 |
|
| Cash dividends declared ($0.40 per share) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(75,851 |
) |
|
|
— |
|
|
|
(75,851 |
) |
| Purchase of treasury shares (Note 20) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(75,272 |
) |
|
|
— |
|
|
|
— |
|
|
|
(75,272 |
) |
| Subsidiary dividends paid to noncontrolling interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,797 |
) |
|
|
(2,797 |
) |
| Fair value of noncontrolling interest in CPAY |
|
|
38,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Tax benefits associated with share-based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
297 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance as of December 31, 2012 |
|
|
39,505 |
|
|
|
202,471 |
|
|
|
20,247 |
|
|
|
141,793 |
|
|
|
1,408 |
|
|
|
(287,301 |
) |
|
|
1,549,063 |
|
|
|
19,725 |
|
|
|
1,444,935 |
|
| Net income |
|
|
6,515 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
244,750 |
|
|
|
5,331 |
|
|
|
250,081 |
|
| Other comprehensive income (Note 21) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,341 |
|
|
|
— |
|
|
|
— |
|
|
|
(2,754 |
) |
|
|
(413 |
) |
| Replacement share-based awards issued in connection with acquisition (Note 19) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,167 |
) |
|
|
— |
|
|
|
16,723 |
|
|
|
— |
|
|
|
— |
|
|
|
15,556 |
|
| Common stock issued from treasury shares for exercise of stock options (Note 19) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(700 |
) |
|
|
— |
|
|
|
41,391 |
|
|
|
— |
|
|
|
— |
|
|
|
40,691 |
|
| Common stock issued for nonvested awards (Note 19) |
|
|
— |
|
|
|
319 |
|
|
|
32 |
|
|
|
(32 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Common stock issued from treasury shares for nonvested awards (Note 19) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5,747 |
) |
|
|
— |
|
|
|
5,747 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Share-based compensation (Note 19) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
28,972 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
28,972 |
|
| Common stock issued from treasury shares for dividend equivalents (Note 19) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
36 |
|
|
|
— |
|
|
|
301 |
|
|
|
161 |
|
|
|
— |
|
|
|
498 |
|
| Cash dividends declared ($0.40 per share) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(75,770 |
) |
|
|
— |
|
|
|
(75,770 |
) |
| Purchase of treasury shares (Note 20) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(103,857 |
) |
|
|
— |
|
|
|
— |
|
|
|
(103,857 |
) |
| Subsidiary dividends paid to noncontrolling interests |
|
|
(6,368 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(953 |
) |
|
|
(953 |
) |
| Tax benefits associated with share-based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,686 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance as of December 31, 2013 |
|
|
39,652 |
|
|
|
202,790 |
|
|
|
20,279 |
|
|
|
165,841 |
|
|
|
3,749 |
|
|
|
(326,996 |
) |
|
|
1,718,204 |
|
|
|
21,349 |
|
|
|
1,602,426 |
|
| Net income |
|
|
4,650 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
322,872 |
|
|
|
1,884 |
|
|
|
324,756 |
|
| Other comprehensive income (Note 21) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(15,675 |
) |
|
|
— |
|
|
|
— |
|
|
|
(421 |
) |
|
|
(16,096 |
) |
| Common stock issued from treasury shares for exercise of stock options (Note 19) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,955 |
|
|
|
— |
|
|
|
32,914 |
|
|
|
— |
|
|
|
— |
|
|
|
34,869 |
|
| Common stock unissued due to forfeiture of nonvested awards |
|
|
— |
|
|
|
(15 |
) |
|
|
(1 |
) |
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Common stock issued from treasury shares for nonvested awards (Note 19) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(11,142 |
) |
|
|
— |
|
|
|
11,142 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Share-based compensation (Note 19) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
30,312 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
30,312 |
|
| Common stock issued from treasury shares for dividend equivalents (Note 19) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
185 |
|
|
|
— |
|
|
|
226 |
|
|
|
— |
|
|
|
— |
|
|
|
411 |
|
| Cash dividends declared ($0.40 per share) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(74,706 |
) |
|
|
— |
|
|
|
(74,706 |
) |
| Purchase of treasury shares (Note 20) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(170,516 |
) |
|
|
— |
|
|
|
— |
|
|
|
(170,516 |
) |
| Subsidiary dividends paid to noncontrolling interests |
|
|
(6,732 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(440 |
) |
|
|
(440 |
) |
| Fair value of noncontrolling interest |
|
|
(15,078 |
) |
|
|
— |
|
|
|
— |
|
|
|
(22,422 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(22,422 |
) |
| Disposition of noncontrolling interest (Note 2) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(15,490 |
) |
|
|
(15,490 |
) |
| Tax benefits associated with share-based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6,540 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance as of December 31, 2014 |
|
$ |
22,492 |
|
|
|
202,775 |
|
|
$ |
20,278 |
|
|
|
171,270 |
|
|
|
(11,926 |
) |
|
|
(453,230 |
) |
|
|
1,966,370 |
|
|
|
6,882 |
|
|
$ |
1,699,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
42
Notes to Consolidated Financial Statements
| Note 1: |
Basis of Presentation and Summary of Significant Accounting Policies |
BUSINESS: Total System Services, Inc.’s (TSYS’ or the Company’s) revenues are derived from providing
payment processing, merchant services and related payment services to financial and nonfinancial institutions, generally under long-term processing contracts. The Company also derives revenues by providing general-purpose reloadable (GPR) prepaid
debit cards and payroll cards and alternative financial services to underbanked and other consumers. The Company’s services are provided through the Company’s four operating segments: North America Services, International Services,
Merchant Services and NetSpend.
Through the Company’s North America Services and International Services segments, TSYS processes information
through its cardholder systems to financial and nonfinancial institutions throughout the United States and internationally. The Company’s North America Services segment provides these services to clients in the United States, Canada, Mexico and
the Caribbean. The Company’s International Services segment provides services to clients in Europe, India, Middle East, Africa, Asia Pacific and Brazil. The Company’s Merchant Services segment provides merchant services to merchant
acquirers and merchants mainly in the United States. The Company’s NetSpend segment provides services to consumers in the United States.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION: The accompanying consolidated financial statements, which are prepared in
accordance with generally accepted accounting principles (GAAP) include the accounts of TSYS and its wholly- and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. In addition,
the Company evaluates its relationships with other entities to identify whether they are 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.
RISKS AND UNCERTAINTIES AND USE OF
ESTIMATES: Factors that could affect the Company’s future operating results and cause actual results to vary materially from expectations include, but are not limited to, lower than anticipated growth from existing
clients, an inability to attract new clients and grow internationally, loss of a major customer or other significant client, loss of a major supplier, an inability to grow through acquisitions or successfully integrate acquisitions, an inability to
control expenses, technology changes, the impact of the application of and/or changes in accounting principles, financial services consolidation, changes in regulatory requirements, a decline in the use of cards as a payment mechanism, disruption of
the Company’s international operations, breach of the Company’s security systems, a decline in the financial stability of the Company’s clients and uncertain economic conditions. Negative developments in these or other risk factors
could have a material adverse effect on the Company’s financial position, results of operations and cash flows.
The Company has prepared the
accompanying consolidated financial statements in conformity with U.S. GAAP. 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.
ACQUISITIONS — PURCHASE PRICE ALLOCATION: TSYS’ purchase price allocation
methodology requires the Company to make assumptions and to apply judgment to estimate the fair value of acquired assets and liabilities. TSYS estimates the fair value of assets and liabilities based upon appraised market values, the carrying value
of the acquired assets and widely accepted valuation techniques, including discounted cash flows and market multiple analyses. Management determines the fair value of fixed assets and identifiable intangible assets such as developed technology
or customer relationships, and any other significant assets or liabilities. TSYS adjusts the purchase price allocation, as necessary, up to one year after the acquisition closing date as TSYS obtains more information regarding asset valuations and
liabilities assumed. Unanticipated events or circumstances may occur which could affect the accuracy of the Company’s fair value estimates, including assumptions regarding industry economic factors and business strategies, and result in an
impairment or a new allocation of purchase price.
43
Given its history of acquisitions, TSYS may allocate part of the purchase price of future acquisitions to contingent
consideration as required by GAAP for business combinations. The fair value calculation of contingent consideration will involve a number of assumptions that are subjective in nature and which may differ significantly from actual results. TSYS may
experience volatility in its earnings to some degree in future reporting periods as a result of these fair value measurements.
CASH AND CASH
EQUIVALENTS: Cash on hand and investments with a maturity of three months or less when purchased are considered to be cash equivalents.
ACCOUNTS RECEIVABLE: Accounts receivable balances are stated net of allowances for doubtful accounts and billing adjustments.
TSYS records an allowance for doubtful accounts when it is probable that the accounts receivable balance will not be collected. When estimating the allowance for doubtful accounts, the Company takes into
consideration such factors as its day-to-day knowledge of the financial position of specific clients, the industry and size of its clients, the overall composition of its accounts receivable aging, prior history with specific customers of accounts
receivable write-offs and prior experience of allowances in proportion to the overall receivable balance. This analysis includes an ongoing and continuous communication with its largest clients and those clients with past due balances. A financial
decline of any one of the Company’s large clients could have a material adverse effect on collectability of receivables and thus the adequacy of the allowance for doubtful accounts.
Increases in the allowance for doubtful accounts are recorded as charges to bad debt expense and are reflected in selling, general and administrative expenses in the Company’s Consolidated Statements of
Income. Write-offs of uncollectible accounts are charged against the allowance for doubtful accounts.
TSYS records an allowance for billing adjustments
for actual and potential billing discrepancies. When estimating the allowance for billing adjustments, the Company considers its overall history of billing adjustments, as well as its history with specific clients and known disputes. Increases in
the allowance for billing adjustments are recorded as a reduction of revenues in the Company’s Consolidated Statements of Income and actual adjustments to invoices are charged against the allowance for billing adjustments.
UP-FRONT DISTRIBUTOR PAYMENTS: The Company makes up-front contractual payments to third-party distribution partners. The Company
assesses each up-front payment to determine whether it meets the criteria of an asset as defined by U.S. GAAP. If these criteria are met, the Company capitalizes the up-front payment and recognizes the capitalized amount as expense ratably over the
benefit period, which is generally the contract period. If the contract requires the distributor to perform specific acts (i.e. achieve a sales goal) and no other conditions exist for the distributor to earn or retain the up-front payment, then the
Company capitalizes the payment and recognizes it as an expense when the performance conditions have been met. Up-front distributor payments are classified on the Consolidated Balance Sheet as other non-current assets and recorded as a cost of
services in the Consolidated Statements of Income.
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. Buildings and improvements are depreciated over estimated useful lives of
5-40 years, computer and other equipment over estimated useful lives of 2-5 years, and furniture and other equipment over estimated useful lives of 3-15 years. The Company evaluates impairment losses on long-lived assets used in
operations in accordance with the provisions of GAAP. All ordinary repairs and maintenance costs are expensed as incurred. Maintenance costs that extend the asset life are capitalized and amortized over the remaining estimated life of the asset.
LICENSED COMPUTER SOFTWARE: The Company licenses software that is used in providing services to clients. Licensed
software is obtained through perpetual licenses and site licenses and through agreements based on processing capacity (called “MIPS agreements”). Perpetual and site licenses are amortized using the straight-line method over their estimated
useful lives which range from three to ten years. Software licensed under MIPS agreements is amortized using a units-of-production basis over the estimated useful life of the software, generally not to exceed ten years. At each balance sheet date,
the Company evaluates impairment losses on long-lived assets used in operations in accordance with GAAP.
44
ACQUISITION TECHNOLOGY INTANGIBLES: These identifiable intangible assets are software
technology assets resulting from acquisitions. These assets are amortized using the straight-line method over periods not exceeding their estimated useful lives, which range from five to nine years. GAAP requires that intangible assets with
estimated useful lives be amortized over their respective estimated useful lives to their residual values, and reviewed for impairment. Acquisition technology intangibles’ net book values are included in computer software, net in the
accompanying balance sheets. Amortization expenses are charged to cost of services in the Company’s Consolidated Statements of Income.
SOFTWARE
DEVELOPMENT COSTS: Software development costs are capitalized once technological feasibility of the software product has been established. Costs incurred prior to establishing technological feasibility are expensed as
incurred. Technological feasibility is established when the Company has completed a detailed program design and has determined that a product can be produced to meet its design specifications, including functions, features and technical performance
requirements. Capitalization of costs ceases when the product is generally available to clients. At each balance sheet date, the Company evaluates the unamortized capitalized costs of software development as compared to the net realizable value of
the software product which is determined by future undiscounted net cash flows. The amount by which the unamortized software development costs exceed the net realizable value is written off in the period that such determination is made. Software
development costs are amortized using the straight-line method over its estimated useful life, which ranges from three to ten years.
The Company also
develops software that is used internally. These software development costs are capitalized in accordance with GAAP. Internal-use software development costs are capitalized once: (1) the preliminary project stage is completed,
(2) management authorizes and commits to funding a computer software project, and (3) it is probable that the project will be completed and the software will be used to perform the function intended. Costs incurred prior to meeting the
qualifications are expensed as incurred. Capitalization of costs ceases when the project is substantially complete and ready for its intended use. Internal-use software development costs are amortized using the straight-line method over its
estimated useful life which ranges from three to ten years. Software development costs may become impaired in situations where development efforts are abandoned due to the viability of the planned project becoming doubtful or due to technological
obsolescence of the planned software product.
CONTRACT ACQUISITION COSTS: The Company capitalizes contract acquisition
costs related to signing or renewing long-term contracts and costs related to cash payments for rights to provide processing services. The Company capitalizes internal conversion costs in accordance with GAAP. All costs incurred prior to a signed
agreement are expensed as incurred.
Contract acquisition costs are amortized using the straight-line method over the expected customer relationship
(contract term) beginning when the client’s cardholder accounts are converted and producing revenues. The amortization of contract acquisition costs associated with cash payments for client incentives is included as a reduction of revenues in
the Company’s Consolidated Statements of Income. The amortization of contract acquisition costs associated with conversion activity is recorded as cost of services in the Company’s Consolidated Statements of Income.
The Company evaluates the carrying value of contract acquisition costs associated with each customer for impairment on the basis of whether these costs are fully
recoverable from either contractual minimum fees (contractual costs) or from expected undiscounted net operating cash flows of the related contract (cash incentives paid). The determination of expected undiscounted net operating cash flows requires
management to make estimates. These costs may become impaired with the loss of a contract, the financial decline of a client, termination of conversion efforts after a contract is signed, diminished prospects for current clients or if the
Company’s actual results differ from its estimates of future cash flows. The amount of the impairment is written off in the period that such a determination is made.
EQUITY INVESTMENTS: TSYS’ 49% investment in Total System Services de México, S.A. de C.V. (TSYS de México), an electronic payment processing support operation
located in Toluca, Mexico, is accounted for using the equity method of accounting, as is TSYS’ 44.56% investment in China UnionPay Data Co., Ltd. (CUP Data)
45
headquartered in Shanghai, China. TSYS’ equity investments are recorded initially at cost and subsequently adjusted for equity in earnings, cash contributions and distributions, and foreign
currency translation adjustments.
GOODWILL: Goodwill results from the excess of cost over the fair value of net assets of
businesses acquired.
Goodwill and intangible assets with indefinite useful lives are tested for impairment at least annually. Intangible assets with
estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values.
Equity investment goodwill, which
is not reported as goodwill in the Company’s Consolidated Balance Sheet, but is reported as a component of the equity investment, was $51.4 million as of December 31, 2014.
OTHER INTANGIBLE ASSETS: Identifiable intangible assets relate primarily to customer relationships, databases, channel relationships, covenants-not-to-compete, trade names and trade
associations resulting from acquisitions. These identifiable intangible assets are amortized using the straight-line method over periods not exceeding the estimated useful lives, which range from three to ten years. Intangible assets with estimable
useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with GAAP. Amortization expenses are charged to selling, general and administrative expenses in the
Company’s Consolidated Statements of Income.
FAIR VALUES OF FINANCIAL INSTRUMENTS: The Company uses financial
instruments in the normal course of its business. The carrying values of cash equivalents, accounts receivable, accounts payable, accrued salaries and employee benefits, and other current liabilities approximate their fair value due to the
short-term maturities of these assets and liabilities. The fair value of the Company’s long-term debt and obligations under capital leases is not significantly different from its carrying value.
Investments in equity investments are accounted for using the equity method of accounting and pertain to privately held companies for which fair value is not
readily available. The Company believes the fair values of its investments in equity investments exceed their respective carrying values.
IMPAIRMENT
OF LONG-LIVED ASSETS: The Company reviews long-lived assets, such as property and equipment and intangibles subject to amortization, including contract acquisition costs and certain computer software, for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted
future cash flows expected to be generated by the asset. If upon a triggering event the Company determines that the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by
which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and would no
longer be depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.
TRANSACTION PROCESSING PROVISIONS: The Company has recorded an accrual for contract contingencies (performance penalties) and
processing errors. A significant number of the Company’s contracts with large clients contain service level agreements which can result in TSYS incurring performance penalties if contractually required service levels are not met. When providing
for these accruals, the Company takes into consideration such factors as the prior history of performance penalties and processing errors incurred, actual contractual penalties inherent in the Company’s contracts, progress towards milestones
and known processing errors not covered by insurance.
These accruals are included in other current liabilities in the accompanying Consolidated Balance
Sheets. Increases and decreases in transaction processing provisions are charged to cost of services in the Company’s Consolidated Statements of Income, and payments or credits for performance penalties and processing errors are charged against
the accrual.
CARDHOLDERS’ RESERVE: The Company is exposed to losses due to cardholder fraud, payment defaults and
other forms of cardholder activity as well as losses due to non-performance of third parties who receive cardholder funds for transmittal to the Issuing Banks (banks that issue MasterCard International or Visa USA,Inc.
46
branded cards to customers). The Company establishes a reserve for the losses it estimates will arise from processing customer transactions, debit card overdrafts, chargebacks for unauthorized
card use and merchant-related chargebacks due to non-delivery of goods and services. These reserves are established based upon historical loss and recovery rates and cardholder activity for which specific losses can be identified. The
cardholders’ reserve was approximately $6.3 million as of December 31, 2014. The provision for cardholder losses is included in cost of services in the Consolidated Statements of Income. The Company regularly updates its reserve estimate
as new facts become known and events occur that may impact the settlement or recovery of losses.
PROVISION FOR MERCHANT
LOSSES: The Company has potential liability for losses resulting from disputes between a cardholder and a merchant that arise as a result of, among other things, the cardholder’s dissatisfaction with merchandise
quality or merchant services. Such disputes may not be resolved in the merchant’s favor. In these cases, the transaction is “charged back” to the merchant, which means the purchase price is refunded to the customer by the card-issuing
bank and charged to the merchant. If the merchant is unable to fund the refund, TSYS must do so. TSYS also bears the risk of reject losses arising from the fact that TSYS collects fees from its merchants on the first day after the monthly billing
period. If the merchant has gone out of business during such period, TSYS may be unable to collect such fees. TSYS maintains cash deposits or requires the pledge of a letter of credit from certain merchants, generally those with higher average
transaction size where the card is not present when the charge is made or the product or service is delivered after the charge is made, in order to offset potential contingent liabilities such as chargebacks and reject losses that would arise if the
merchant went out of business. Most chargeback and reject losses are charged to cost of services as they are incurred. However, the Company also maintains a provision against losses, including major fraud losses, which are both less predictable and
involve larger amounts. The loss provision was established using historical loss rates, applied to recent bankcard processing volume. As of December 31, 2014, the Company had a merchant loss provision in the amount of $1.1 million.
REDEEMABLE NONCONTROLLING INTEREST: In connection with the acquisition of Central Payment Co., LLC (CPAY), the Company is party to
call and put arrangements with respect to the membership units that represent the remaining noncontrolling interest of CPAY. The call arrangement is exercisable by TSYS and the put arrangement is exercisable by the seller. The put arrangement is
outside the control of the Company by requiring the Company to purchase the seller’s entire equity interest in CPAY at a put price at fair market value. The put arrangement is recorded on the balance sheet and is classified as redeemable
noncontrolling interest outside of permanent equity.
FOREIGN CURRENCY TRANSLATION: The Company maintains several
different foreign operations whose functional currency is their local currency. Foreign currency financial statements of the Company’s Mexican and Chinese equity investments, the Company’s wholly owned subsidiaries and the Company’s
majority owned subsidiaries, as well as the Company’s division and branches in the United Kingdom and China, 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 gains or losses resulting from the currency translation of assets and liabilities of the Company’s foreign operations, net of tax when applicable, are accumulated in a
separate section of shareholders’ equity titled accumulated other comprehensive income (loss). Gains and losses on transactions denominated in currencies other than the functional currencies are included in determining net income for the period
in which exchange rates change.
TREASURY STOCK: The Company uses the cost method when it purchases its own common stock
as treasury shares or issues treasury stock upon option exercises and displays treasury stock as a reduction of shareholders’ equity.
REVENUE
RECOGNITION: Revenue is realized or realizable and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been performed;
(3) the seller’s price to the buyer is fixed or determinable; and (4) collectability is reasonably assured. The Company accrues for rights of refund, processing errors or penalties, or other related allowances based on historical
experience.
The Company’s North America and International Services revenues are derived from long-term processing contracts with financial and
nonfinancial institutions and are generally recognized as the services are performed. Payment processing services revenues are generated primarily from charges based on the number of accounts on
47
file, transactions and authorizations processed, statements mailed, cards embossed and mailed and other processing services for cardholder accounts on file. Most of these contracts have
prescribed annual revenue minimums, penalties for early termination, and service level agreements which may impact contractual fees if certain service levels are not achieved.
Revenue is recognized as the services are performed, primarily measured on a per unit basis. Processing contracts generally range from three to ten years in length. When providing payment processing services, the
Company frequently enters into customer arrangements to provide multiple services that may also include conversion or implementation services, business process outsourcing services such as call center services, web-based services, and other payment
processing-related services. Revenue for these services is generally recognized as they are performed on a per unit basis each month or ratably over the term of the contract.
The Company’s Merchant Services revenues are partially derived from relationships with thousands of individual merchants. Additionally, part of the revenues are derived from long-term processing contracts with
large financial institutions, other merchant acquirers and merchant organizations which generally range from three to eight years and provide for penalties for early termination. Merchant services revenue is generated primarily from processing all
payment forms including credit, debit, electronic benefits transfer and check truncation for merchants of all sizes across a wide array of retail market segments. The products and services offered include authorization and capture of electronic
transactions, clearing and settlement of electronic transactions, information reporting services related to electronic transactions, merchant billing services, and point-of-sale terminal services. Revenue is recognized for merchant services as those
services are performed, primarily measured on a per unit basis. When providing merchant processing services, the Company frequently enters into customer arrangements to provide multiple services that may also include conversion or implementation
services, business process outsourcing services such as call center services, terminal services, and other merchant processing-related services. Revenue for these services is generally recognized as they are performed on a per unit basis each month
or ratably over the term of the contract. Revenues on point-of-sale terminal equipment are recognized upon the transfer of ownership and shipment of product.
When a sale involves multiple deliverables, revenue recognition is affected by the determination of the number of deliverables in an arrangement, whether those deliverables may be separated into multiple units of
accounting, and the valuation of each unit of accounting which affects the amount of revenue allocated to each unit. Pursuant to ASC 605, the Company uses vendor-specific objective evidence of selling price (VSOE) when it exists to determine the
amount of revenue to allocate to each unit of accounting. The Company establishes VSOE of selling price using the price charged when the same service is sold separately (on a standalone basis). In certain situations, the Company does not have
sufficient VSOE. In these situations, TSYS considered whether sufficient third party evidence (TPE) of selling price existed for the Company’s services. However, the Company typically is not able to determine TPE and has not used this measure
of selling price due to the unique and proprietary nature of some of its services and the inability to reliably verify relevant standalone competitor prices. When there is insufficient evidence of VSOE and TPE, the Company has made its best estimate
of the standalone selling price (ESP) of that service for purposes of allocating revenue to each unit of accounting. When determining ESP, TSYS uses limited standalone sales data that do not meet the Company’s criteria to establish VSOE,
management pricing strategies, residual selling price data when VSOE exists for a group of elements, the cost of providing the services and the related margin objectives. Consideration is also given to geographies in which the services are sold or
delivered, customer classifications, and market conditions including competitor pricing strategies and benchmarking studies. Revenue is recognized when the revenue recognition criteria for each unit of accounting have been met.
As business and service offerings change in the future, the determination of the number of deliverables in an arrangement and related units of accounting and the
future pricing practices may result in changes in the estimates of VSOE and ESP, which may change the ratio of fees allocated to each service or unit of accounting in a given customer arrangement. There were no material changes or impact to revenue
in revenue recognition for current contract arrangements in the year ended December 31, 2014 due to any changes in the determination of the number of deliverables in an arrangement, units of accounting, or estimates of VSOE or ESP.
In many situations, the Company enters into arrangements with customers to provide conversion or implementation services in addition to processing services where
the conversion or implementation services do
48
not have standalone value. For these arrangements, conversion or implementation services that do not have standalone value, are recognized over the expected customer relationship (contract term)
as the related processing services are performed.
The Company’s other services generally have standalone value and constitute separate units of
accounting for revenue recognition purposes. Customer arrangements entered into prior to 2011 (prior to the adoption of Accounting Standard Update (ASU) 2009-13, “Multiple-Deliverable Revenue Arrangements,” an update to ASC Topic
605, “Revenue Recognition,” and formerly known as EITF 08-1, “Revenue Arrangements with Multiple Deliverables”) often included services for which sufficient objective and reliable evidence of fair value did not
exist. In these situations, the deliverables were combined and recognized as a single unit of accounting based on the proportional performance for the combined unit. For pre-2011 arrangements that have not expired, have not been materially modified
or amended, or terminated, the Company continues to recognize revenue in accordance with these policies in the accompanying financial statements. Beginning in 2011, services in new or materially modified arrangements of this nature were divided
into separate units of accounting and revenue is now allocated to each unit of accounting based on the relative selling price method as disclosed above. As the services in the pre-2011 arrangements are generally delivered over the same term with
consistent patterns of performance, there is no difference in the timing or pattern of revenue recognition for each group of arrangements (pre-2011 arrangements and those new or materially modified thereafter).
The Company’s multiple element arrangements may include one or more elements that are subject to other topics including software revenue recognition and
leasing guidance. The consideration for these multiple element arrangements is allocated to each group of deliverables – those subject to ASC 605-25 and those subject to other topics based on the revised guidance in ASU 2009-13. Arrangement
revenue for each group of deliverables is then further separated, allocated, and recognized based on applicable guidance.
The Company’s NetSpend
revenues principally consist of a portion of the service fees and interchange revenues received by the Issuing Banks in connection with the programs NetSpend manages. Revenue is recognized when there is persuasive evidence of an arrangement, the
relevant services have been rendered, the price is fixed or determinable and collectability is reasonably assured.
Cardholders are charged fees in
connection with NetSpend’s products and services as follows:
| • |
|
Transactions — Cardholders are typically charged a fee for each PIN and signature-based purchase transaction made using their GPR cards, unless the
cardholder is on a monthly or annual service plan, in which case the cardholder is instead charged a monthly or annual subscription fee, as applicable. Cardholders are also charged fees for ATM withdrawals and other transactions conducted at ATMs.
|
| • |
|
Customer Service and Maintenance-Cardholders are typically charged fees for balance inquiries made through NetSpend’s call centers. Cardholders are also
charged a monthly maintenance fee after a specified period of inactivity. |
| • |
|
Additional Products and Services-Cardholders are charged fees associated with additional products and services offered in connection with certain GPR cards,
including the use of overdraft features, a variety of bill payment options, custom card designs and card-to-card transfers of funds initiated through the call centers. |
| • |
|
Other-Cardholders are charged fees in connection with the acquisition and reloading of the GPR cards at retailers and the Company receives a portion of these
amounts in some cases. |
Revenue resulting from the service fees charged to the cardholders described above is recognized when the fees
are charged because the earnings process is substantially complete, except for revenue resulting from the initial activation of cards and annual subscription fees. Revenue resulting from the initial activation of cards is recognized ratably, net of
commissions paid to distributors, over the average account life, which is approximately six months for GPR cards. Revenue resulting from annual subscription fees is recognized ratably over the annual period to which the fees relate.
Revenues also include fees charged in connection with program management and processing services the Company provides for private-label programs. Revenue resulting
from these fees is recognized when the Company has fulfilled its obligations under the underlying service agreements.
49
NetSpend earns revenues from a portion of the interchange fees remitted by merchants when cardholders make purchases
using their GPR cards. Subject to applicable law, interchange fees are fixed by the card associations and network organizations (Networks). Interchange revenues are recognized net of sponsorship, licensing and processing fees charged by the Networks
for services they provide in processing purchase transactions routed through them. Interchange revenue is recognized during the period that the purchase transactions occur. Also included in interchange revenue are fees earned from branding
agreements with the Networks.
In regards to taxes assessed by a governmental authority imposed directly on a revenue producing transaction, the Company
reports its revenues on a net basis.
REIMBURSABLE ITEMS: Reimbursable items consist of out-of-pocket expenses which are
reimbursed by the Company’s clients. These expenses consist primarily of postage, access fees and third party software.
SHARE-BASED
COMPENSATION: GAAP 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 entity’s equity instruments or that may be settled by the issuance of those equity instruments. A public entity must 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.
The Company recognizes 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 the provisions of GAAP. Share-based compensation expenses include the impact of expensing the fair value of stock options, as well as expenses associated with nonvested shares.
The Company estimates forfeitures when recognizing compensation cost. The estimate of forfeitures will be adjusted by the 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 the change in estimate occurred. 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 stock option grants to TSYS
non-executive employees, and a forfeiture rate for other TSYS share-based awards. Currently, TSYS estimates a forfeiture rate in the range of 0% to 10%.
The Company has issued its vested awards to directors and nonvested awards to certain employees. The market value of the common stock at the date of issuance is
recognized as compensation expense immediately for vested awards and over the vesting period of the nonvested awards. For nonvested award grants that have pro rata vesting, the Company recognizes compensation expense using the straight-line method
over the vesting period of the award.
LEASES: The Company is obligated under noncancelable leases for computer equipment
and facilities. As these leases expire, they will be evaluated and renewed or replaced by similar leases based on need. A lease is an agreement conveying the right to use property, plant or equipment (land and/or depreciable assets) usually for a
stated period of time. For purposes of applying the accounting and reporting standards, leases are classified from the standpoint of the lessee as capital or operating leases.
Rental payments on operating leases are charged to expense over the lease term. If rental payments are not made on a straight-line basis, rental expense nevertheless shall be recognized on a straight-line basis
unless another systematic and rational basis is more representative of the time pattern in which use benefit is derived from the leased property, in which case that basis shall be used.
Certain of the Company’s operating leases are for office space. The Company will make various alterations (leasehold improvements) to the office space and capitalize these costs as part of property and
equipment. Leasehold improvements are amortized on a straight-line basis over the useful life of the improvement or the term of the lease, whichever is shorter.
50
ADVERTISING: Advertising costs are expensed as incurred or the first time the
advertising takes place except for direct-response advertising and television advertising production costs. Direct-response advertising consists of commission paid to affiliate marketers for the new funded customer accounts generated by them. Direct-response advertising costs are capitalized and amortized over the average life of the new accounts, which is approximately one year. Television advertising production costs consist of the costs of developing
and filming television ads. Television advertising production costs are capitalized when the production services are received and expensed in the period when the advertising first takes place. Advertising expense for 2014, 2013 and 2012 was $5.7
million, $1.3 million and $1.0 million, respectively.
INCOME TAXES: Income taxes reflected in TSYS’ consolidated
financial statements are computed based on the taxable income of TSYS and its affiliated subsidiaries. A consolidated U.S. federal income tax return is filed for TSYS and its majority- owned U.S. subsidiaries. Additionally, income tax
returns are also filed in states where TSYS and its subsidiaries have filing obligations and in foreign jurisdictions where TSYS has a foreign affiliate.
The Company accounts for income taxes in accordance with the asset and liability method. Deferred income tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Reserves against the carrying value of a deferred tax asset are established when
necessary to reflect the decreased likelihood of realization of a deferred asset in the future. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Income tax provisions require the use of management judgments, which are subject to challenge by various taxing authorities. Contingency reserves are
periodically established where the amount of the contingency can be reasonably determined and is likely to occur. Reductions in contingency reserves are recognized when tax disputes are settled or examination periods lapse.
Significant estimates used in accounting for income taxes relate to the determination of taxable income, the determination of temporary differences between book
and tax basis, as well as estimates on the realizability of tax credits and net operating losses.
TSYS recognizes potential interest and penalties
related to the underpayment of income taxes as income tax expense in the Consolidated Statements of Income.
NONCONTROLLING
INTEREST: Noncontrolling interest in earnings of subsidiaries represents the minority shareholders’ share of the net income or loss of TSYS Managed Services EMEA Ltd. (TSYS Managed Services) and CPAY. The
noncontrolling interest in the Consolidated Balance Sheet reflects the original investment by these shareholders in TSYS Managed Services and CPAY, their proportional share of the earnings or losses and their proportional share of net gains or
losses resulting from the currency translation of assets and liabilities of TSYS Managed Services and CPAY. TSYS has adopted the accounting policy to recognize gains or losses on equity transactions of a subsidiary as a capital transaction.
EARNINGS PER SHARE: Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend
equivalents are “participating securities” as defined by GAAP, and therefore should be included in EPS using the two-class method.
The
two-class method is an earnings allocation method for computing EPS when an entity’s capital structure includes two or more classes of common stock or common stock and participating securities. It determines EPS based on dividends declared on
common stock and participating securities and participation rights of participating securities in any undistributed earnings.
Basic EPS is calculated
by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS is calculated to reflect the potential dilution that would occur if stock options or other contracts to issue common stock were
exercised. Diluted EPS is calculated by dividing net income by weighted average common and common equivalent shares outstanding. Common equivalent shares are calculated using the treasury stock method.
51
RECLASSIFICATIONS: Certain reclassifications have been made to the 2013 and 2012
financial statements to conform to the presentation adopted in 2014.
| Note 2 |
Discontinued Operations |
In accordance with GAAP, the Company determined its Japan-based businesses became discontinued operations in the first quarter of 2014.
The Company sold all of its stock of GP Network Corporation (GP Net) (representing 54% ownership of the company) and all of its stock of TSYS Japan
Godo Kaisha (TSYS Japan) (representing 100% ownership of the company) in April 2014. Both entities were part of the International Services segment. The sale of the Company’s stock in both of its operations in Japan was the result of
management’s decision during the first quarter of 2014, to divest non-strategic businesses and focus resources on core products and services. The Company had a gain of $48.6 million, net of tax, related to the sales of its operations in Japan.
GP Net and TSYS Japan were not significant components of TSYS’ consolidated results.
The following table presents the main classes of assets and liabilities held for sale as of December 31, 2014 and 2013:
|
|
|
|
|
|
|
|
|
| (in thousands) |
|
2014 |
|
|
2013 |
|
| Cash and cash equivalents |
|
$ |
— |
|
|
|
30,530 |
|
| Other assets |
|
|
4,003 |
|
|
|
26,378 |
|
| Total liabilities |
|
|
4,003 |
|
|
|
10,333 |
|
The following table presents the summarized results of discontinued operations for the years ended December 31, 2014, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in thousands) |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Total revenues |
|
$ |
16,376 |
|
|
|
68,048 |
|
|
|
77,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income before taxes |
|
$ |
1 |
|
|
|
3,443 |
|
|
|
1,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income tax (benefit) expense |
|
$ |
(39 |
) |
|
|
1,388 |
|
|
|
987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income from operating activities of discontinued operations, net of tax |
|
$ |
40 |
|
|
|
2,055 |
|
|
|
995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gain on dispositions, net of tax |
|
$ |
48,615 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income from discontinued operations, net of tax |
|
$ |
48,655 |
|
|
|
2,055 |
|
|
|
995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income from discontinued operations, net of tax, attributable to noncontrolling interest |
|
$ |
999 |
|
|
|
4,198 |
|
|
|
3,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income (loss) from discontinued operations, net of tax, attributable to TSYS common shareholders |
|
$ |
47,656 |
|
|
|
(2,143 |
) |
|
|
(2,869 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest allocated to discontinued operations1 |
|
$ |
— |
|
|
|
281 |
|
|
|
275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1 |
Interest expense relates to borrowings directly for use by Japan-based operations |
| Note 3 |
Fair Value Measurement |
GAAP requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy for which these assets and
liabilities must be grouped, based on significant level of inputs. The three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies, is as follows:
Level 1 — Quoted prices for identical assets and liabilities in active markets.
52
Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices
for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Unobservable inputs for the asset or liability.
Goodwill is assessed annually for impairment in the second quarter of each year using fair value measurement techniques. Specifically, goodwill impairment is determined using a two-step test. The first step of the
goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit (RU) with its book value, including goodwill. If the fair value of the RU exceeds its book value, goodwill is considered not impaired
and the second step of the impairment test is unnecessary. If the book value of the RU exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the
goodwill impairment test compares the implied fair value of the RU’s goodwill with the book value of that goodwill. If the book value of the RU’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in
an amount equal to that excess. The fair value of the RU is allocated to all of the assets and liabilities of that unit as if the RU had been acquired in a business combination and the fair value of the RU was the purchase price paid to acquire the
RU.
The estimate of fair value of the Company’s RUs is determined using various valuation techniques, including using an equally weighted
combination of the market approach and the income approach. The market approach, which contains Level 2 inputs, utilizes readily available market valuation multiples to estimate fair value. The income approach is a valuation technique that utilizes
the discounted cash flow (DCF) method, which includes Level 3 inputs. Under the DCF method, the fair value of the RU reflects the present value of the projected earnings that will be generated by each RU after taking into account the revenues and
expenses associated with the asset, the relative risk that the cash flows will occur, the contribution of other assets, and an appropriate discount rate to reflect the value of the invested capital. Cash flows are estimated for future periods based
upon historical data and projections by management.
As of December 31, 2014, the Company had recorded goodwill in the amount of $1.5 billion. The
Company performed its annual impairment test of its goodwill balances as of May 31, 2014, and this test did not indicate any impairment. The fair value of the RUs substantially exceeds the carrying value. Refer to Note 7 for more information
regarding goodwill.
The fair value of the Company’s long-term debt and obligations under capital leases is not significantly different from its
carrying value.
| Note 4 |
Relationships with Affiliated Companies |
During December 2014, TSYS Managed Services obtained a £900,000, or approximately $1.4 million, pound-denominated term loan bearing
interest at a rate of LIBOR plus two percent. The loan matures in December 2017, and has monthly interest payments. The lender in this transaction is Merchants Limited, who has a noncontrolling interest in TSYS Managed Services. Refer to
Note 13 for more information regarding this loan.
The Company provides electronic payment processing and other services to the Company’s
equity investments, TSYS de México and CUP Data.
The foregoing related party arrangements and services are performed under contracts that are
similar to its contracts with unrelated third party 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.
Through its related party transactions, TSYS generates accounts receivable and liability accounts with TSYS de México and
CUP Data.
53
The Company had the following balances with related parties as of December 31, 2014 and 2013:
|
|
|
|
|
|
|
|
|
| (in thousands) |
|
2014 |
|
|
2013 |
|
| Accounts receivable |
|
$ |
19 |
|
|
|
7 |
|
| Account payable |
|
|
12 |
|
|
|
12 |
|
The table below details revenues derived from affiliated companies for the years ended December 31, 2014, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in thousands) |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Total revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
| CUP Data |
|
$ |
232 |
|
|
|
229 |
|
|
|
172 |
|
| TSYS de México |
|
|
78 |
|
|
|
68 |
|
|
|
72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total revenues |
|
$ |
310 |
|
|
|
297 |
|
|
|
244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Processing support fees paid to TSYS de Mexico1 |
|
$ |
148 |
|
|
|
148 |
|
|
|
186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1 |
The Company and TSYS de México are parties to an agreement where TSYS de México provides processing support to the Company. |
| Note 5 |
Cash and Cash Equivalents |
Cash and cash equivalent balances as of December 31, 2014 and 2013 are summarized as follows:
|
|
|
|
|
|
|
|
|
| (in thousands) |
|
2014 |
|
|
2013 |
|
| Cash and cash equivalents in domestic accounts |
|
$ |
225,396 |
|
|
|
191,460 |
|
| Cash and cash equivalents in foreign accounts |
|
|
63,787 |
|
|
|
56,240 |
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
289,183 |
|
|
|
247,700 |
|
|
|
|
|
|
|
|
|
|
The Company maintains operating accounts outside the United States denominated in currencies other than the U.S. dollar. All amounts in domestic accounts are denominated in U.S. dollars.
| Note 6 |
Prepaid Expenses and Other Current Assets |
Significant components of prepaid expenses and other current assets as of December 31, 2014 and 2013 are summarized as follows:
|
|
|
|
|
|
|
|
|
| (in thousands) |
|
2014 |
|
|
2013 |
|
| Prepaid expenses |
|
$ |
35,334 |
|
|
|
41,905 |
|
| Supplies inventory |
|
|
14,340 |
|
|
|
12,142 |
|
| Other |
|
|
49,300 |
|
|
|
41,062 |
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
98,974 |
|
|
|
95,109 |
|
|
|
|
|
|
|
|
|
|
In 2013, the Company allocated $1.0 billion to goodwill due to the acquisition of NetSpend. In 2014, the Company adjusted the NetSpend purchase
price allocation to add an additional $8.5 million for settlement of the dissenting shareholder lawsuit and adjustments to deferred taxes.
54
The gross amount and accumulated impairment losses of goodwill as of December 31, 2014 and 2013 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
| (in thousands) |
|
North America
Services |
|
|
International
Services |
|
|
Merchant
Services |
|
|
NetSpend |
|
|
Consolidated |
|
| Gross amount |
|
$ |
70,796 |
|
|
|
31,681 |
|
|
|
415,973 |
|
|
|
1,032,959 |
|
|
$ |
1,551,409 |
|
| Accumulated impairment losses |
|
|
(182 |
) |
|
|
(1,605 |
) |
|
|
(2,225 |
) |
|
|
— |
|
|
|
(4,012 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Goodwill, net |
|
$ |
70,614 |
|
|
|
30,076 |
|
|
|
413,748 |
|
|
|
1,032,959 |
|
|
$ |
1,547,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2013 |
|
| |
|
North America
Services |
|
|
International
Services |
|
|
Merchant
Services |
|
|
NetSpend |
|
|
Consolidated |
|
| Gross amount |
|
$ |
70,796 |
|
|
|
34,201 |
|
|
|
415,973 |
|
|
|
1,024,434 |
|
|
$ |
1,545,404 |
|
| Accumulated impairment losses |
|
|
— |
|
|
|
— |
|
|
|
(2,225 |
) |
|
|
— |
|
|
|
(2,225 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Goodwill, net |
|
$ |
70,796 |
|
|
|
34,201 |
|
|
|
413,748 |
|
|
|
1,024,434 |
|
|
$ |
1,543,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The changes in the carrying amount of goodwill as of December 31, 2014 and 2013 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in thousands) |
|
North America
Services |
|
|
International
Services |
|
|
Merchant
Services |
|
|
NetSpend |
|
|
Consolidated |
|
| Balance as of December 31, 2012 |
|
$ |
70,796 |
|
|
|
33,944 |
|
|
|
413,604 |
|
|
|
— |
|
|
$ |
518,344 |
|
| NetSpend purchase price allocation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,024,434 |
|
|
|
1,024,434 |
|
| ProPay purchase price allocation |
|
|
— |
|
|
|
— |
|
|
|
144 |
|
|
|
— |
|
|
|
144 |
|
| Currency translation adjustments |
|
|
— |
|
|
|
257 |
|
|
|
— |
|
|
|
— |
|
|
|
257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance as of December 31, 2013 |
|
$ |
70,796 |
|
|
|
34,201 |
|
|
|
413,748 |
|
|
|
1,024,434 |
|
|
$ |
1,543,179 |
|
| Disposal of GP Net |
|
|
(182 |
) |
|
|
(1,605 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1,787 |
) |
| NetSpend purchase price allocation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8,525 |
|
|
|
8,525 |
|
| Currency translation adjustments |
|
|
— |
|
|
|
(2,520 |
) |
|
|
— |
|
|
|
— |
|
|
|
(2,520 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance as of December 31, 2014 |
|
$ |
70,614 |
|
|
$ |
30,076 |
|
|
$ |
413,748 |
|
|
$ |
1,032,959 |
|
|
$ |
1,547,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refer to Note 24 for more information on acquisitions.
| Note 8 |
Other Intangible Assets, net |
In 2014, the changes related to other gross intangible assets were related to foreign currency translation. In 2013, TSYS allocated $401.6
million to other intangible assets due to the acquisition of NetSpend. Refer to Note 24 for more information on acquisitions.
Significant
components of other intangible assets as of December 31, 2014 and 2013 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
| (in thousands) |
|
Gross |
|
|
Accumulated
Amortization |
|
|
Net |
|
| Channel relationships |
|
$ |
318,600 |
|
|
|
(60,079 |
) |
|
$ |
258,521 |
|
| Customer relationships |
|
|
167,140 |
|
|
|
(87,201 |
) |
|
|
79,939 |
|
| Trade name |
|
|
46,480 |
|
|
|
(15,680 |
) |
|
|
30,800 |
|
| Database |
|
|
28,000 |
|
|
|
(8,400 |
) |
|
|
19,600 |
|
| Covenants-not-to-compete |
|
|
14,940 |
|
|
|
(5,551 |
) |
|
|
9,389 |
|
| Trade association |
|
|
10,000 |
|
|
|
(4,750 |
) |
|
|
5,250 |
|
| Favorable lease |
|
|
875 |
|
|
|
(267 |
) |
|
|
608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
586,035 |
|
|
|
(181,928 |
) |
|
$ |
404,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2013 |
|
| (in thousands) |
|
Gross |
|
|
Accumulated
Amortization |
|
|
Net |
|
| Channel relationships |
|
$ |
318,600 |
|
|
|
(20,261 |
) |
|
$ |
298,339 |
|
| Customer relationships |
|
|
167,871 |
|
|
|
(69,114 |
) |
|
|
98,757 |
|
| Trade name |
|
|
46,561 |
|
|
|
(6,527 |
) |
|
|
40,034 |
|
| Database |
|
|
28,000 |
|
|
|
(2,800 |
) |
|
|
25,200 |
|
| Covenants-not-to-compete |
|
|
14,940 |
|
|
|
(2,887 |
) |
|
|
12,053 |
|
| Trade association |
|
|
10,000 |
|
|
|
(3,750 |
) |
|
|
6,250 |
|
| Favorable lease |
|
|
875 |
|
|
|
(89 |
) |
|
|
786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
586,847 |
|
|
|
(105,428 |
) |
|
$ |
481,419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization related to other intangible assets, which is recorded in selling, general and administrative expenses, was $77.3 million, $50.0 million and $16.6 million for 2014, 2013 and 2012, respectively.
The weighted average useful life for each component of other intangible assets, and in total, as of December 31, 2014 is as follows:
|
|
|
|
|
| |
|
Weighted
Average
Amortization
Period (Yrs) |
|
| Channel relationships |
|
|
8.0 |
|
| Customer relationships |
|
|
8.2 |
|
| Trade name |
|
|
4.9 |
|
| Database |
|
|
5.0 |
|
| Covenants-not-to-compete |
|
|
5.3 |
|
| Trade association |
|
|
10.0 |
|
| Favorable Lease |
|
|
4.9 |
|
|
|
|
|
|
| Total |
|
|
7.6 |
|
|
|
|
|
|
Estimated future amortization expense of other intangible assets as of December 31, 2014 for the next five years is:
|
|
|
|
|
| (in thousands) |
|
|
|
| 2015 |
|
$ |
75,770 |
|
| 2016 |
|
|
75,213 |
|
| 2017 |
|
|
74,823 |
|
| 2018 |
|
|
60,166 |
|
| 2019 |
|
|
47,870 |
|
56
| Note 9 |
Computer Software, net |
Computer software as of December 31, 2014 and 2013 is summarized as follows:
|
|
|
|
|
|
|
|
|
| (in thousands) |
|
2014 |
|
|
2013 |
|
| Licensed computer software |
|
$ |
435,701 |
|
|
|
393,947 |
|
| Software development costs |
|
|
376,026 |
|
|
|
337,993 |
|
| Acquisition technology intangibles |
|
|
167,687 |
|
|
|
168,336 |
|
|
|
|
|
|
|
|
|
|
| Total computer software |
|
|
979,414 |
|
|
|
900,276 |
|
|
|
|
|
|
|
|
|
|
| Less accumulated amortization: |
|
|
|
|
|
|
|
|
| Licensed computer software |
|
|
243,866 |
|
|
|
207,496 |
|
| Software development costs |
|
|
275,512 |
|
|
|
254,046 |
|
| Acquisition technology intangibles |
|
|
93,888 |
|
|
|
74,854 |
|
|
|
|
|
|
|
|
|
|
| Total accumulated amortization |
|
|
613,266 |
|
|
|
536,396 |
|
|
|
|
|
|
|
|
|
|
| Computer software, net |
|
$ |
366,148 |
|
|
|
363,880 |
|
|
|
|
|
|
|
|
|
|
The Company allocated approximately $78.7 million to acquisition technology intangibles during 2013 due to the acquisition of NetSpend. Refer to Note 24 for more information on this acquisition.
Amortization expense includes amounts for computer software acquired under capital lease. The Company had the following amortization expense related to
computer software for the years ended December 31, 2014, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in thousands) |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Amortization expense related to: |
|
|
|
|
|
|
|
|
|
|
|
|
| Licensed computer software costs |
|
$ |
36,775 |
|
|
|
33,511 |
|
|
|
33,393 |
|
| Software development costs |
|
|
25,248 |
|
|
|
21,430 |
|
|
|
23,044 |
|
| Acquisition technology intangibles |
|
|
19,683 |
|
|
|
15,855 |
|
|
|
9,712 |
|
The company held the following computer software under capital lease as of as of December 31, 2014 and 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
| (in thousands) |
|
Gross |
|
|
Accumulated
Amortization |
|
|
Net |
|
| Licensed computer software |
|
$ |
17,156 |
|
|
|
(4,816 |
) |
|
$ |
12,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2013 |
|
| (in thousands) |
|
Gross |
|
|
Accumulated
Amortization |
|
|
Net |
|
| Licensed computer software |
|
$ |
13,175 |
|
|
|
(2,031 |
) |
|
$ |
11,144 |
|
The weighted average useful life for each component of computer software, and in total, as of December 31, 2014, is as follows:
|
|
|
|
|
| |
|
Weighted
Average
Amortization
Period (Yrs) |
|
| Licensed computer software |
|
|
5.2 |
|
| Software development costs |
|
|
5.8 |
|
| Acquisition technology intangibles |
|
|
6.8 |
|
|
|
|
|
|
| Total |
|
|
5.7 |
|
|
|
|
|
|
57
Estimated future amortization expense of licensed computer software, software development costs and acquisition
technology intangibles as of December 31, 2014 for the next five years is:
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in thousands) |
|
Licensed
Computer
Software |
|
|
Software
Development
Costs |
|
|
Acquisition
Technology
Intangibles |
|
| 2015 |
|
$ |
41,956 |
|
|
|
25,334 |
|
|
|
16,670 |
|
| 2016 |
|
|
31,960 |
|
|
|
18,919 |
|
|
|
15,202 |
|
| 2017 |
|
|
21,326 |
|
|
|
13,770 |
|
|
|
13,718 |
|
| 2018 |
|
|
11,017 |
|
|
|
7,689 |
|
|
|
11,243 |
|
| 2019 |
|
|
6,097 |
|
|
|
1,568 |
|
|
|
11,243 |
|
| Note 10 |
Property and Equipment, net |
Property and equipment balances as of December 31, 2014 and 2013 are as follows:
|
|
|
|
|
|
|
|
|
| (in thousands) |
|
2014 |
|
|
2013 |
|
| Computer and other equipment |
|
$ |
317,862 |
|
|
|
261,937 |
|
| Buildings and improvements |
|
|
243,211 |
|
|
|
241,675 |
|
| Furniture and other equipment |
|
|
135,741 |
|
|
|
129,799 |
|
| Land |
|
|
16,763 |
|
|
|
17,021 |
|
| Other |
|
|
204 |
|
|
|
989 |
|
|
|
|
|
|
|
|
|
|
| Total property and equipment |
|
|
713,781 |
|
|
|
651,421 |
|
| Less accumulated depreciation and amortization |
|
|
423,196 |
|
|
|
391,453 |
|
|
|
|
|
|
|
|
|
|
| Property and equipment, net |
|
$ |
290,585 |
|
|
|
259,968 |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense includes amounts for computer equipment, furniture, and other equipment acquired under capital lease. Depreciation and amortization expense related to property and equipment
was $53.5 million, $45.5 million and $43.4 million for the years ended December 31, 2014, 2013 and 2012, respectively.
The company held the
following property and equipment under capital lease as of December 31, 2014 and 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
| (in thousands) |
|
Gross |
|
|
Accumulated
Amortization |
|
|
Net |
|
| Computer and other equipment |
|
$ |
38,193 |
|
|
|
(29,816 |
) |
|
$ |
8,377 |
|
| Furniture and other equipment |
|
|
5,374 |
|
|
|
(1,666 |
) |
|
|
3,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
43,567 |
|
|
|
(31,482 |
) |
|
$ |
12,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2013 |
|
| (in thousands) |
|
Gross |
|
|
Accumulated
Amortization |
|
|
Net |
|
| Computer and other equipment |
|
$ |
35,335 |
|
|
|
(22,101 |
) |
|
$ |
13,234 |
|
| Furniture and other equipment |
|
|
2,382 |
|
|
|
(931 |
) |
|
|
1,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
37,717 |
|
|
|
(23,032 |
) |
|
$ |
14,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
| Note 11 |
Contract Acquisition Costs, net |
Significant components of contract acquisition costs as of December 31, 2014 and 2013 are summarized as follows:
|
|
|
|
|
|
|
|
|
| (in thousands) |
|
2014 |
|
|
2013 |
|
| Conversion costs, net |
|
$ |
159,339 |
|
|
|
112,177 |
|
| Payments for processing rights, net |
|
|
76,966 |
|
|
|
72,651 |
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
236,305 |
|
|
|
184,828 |
|
|
|
|
|
|
|
|
|
|
Amortization expense related to contract acquisition cost for the years ended December 31, 2014, 2013 and 2012 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in thousands) |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Amortization expense related to: |
|
|
|
|
|
|
|
|
|
|
|
|
| Conversion costs |
|
$ |
17,816 |
|
|
|
19,515 |
|
|
|
24,014 |
|
| Payments for processing rights |
|
|
16,209 |
|
|
|
13,099 |
|
|
|
13,290 |
|
The weighted average useful life for each component of contract acquisition costs, and in total, as of December 31, 2014 is as follows:
|
|
|
|
|
| |
|
Weighted
Average
Amortization
Period (Yrs) |
|
| Payments for processing rights |
|
|
14.5 |
|
| Conversion costs |
|
|
12.3 |
|
|
|
|
|
|
| Total |
|
|
13.4 |
|
|
|
|
|
|
Estimated future amortization expense of conversion costs and payments for processing rights as of December 31, 2014 for the next five years is:
|
|
|
|
|
|
|
|
|
| (in thousands) |
|
Conversion
Costs |
|
|
Payments for
Processing Rights |
|
| 2015 |
|
$ |
30,060 |
|
|
|
16,897 |
|
| 2016 |
|
|
28,598 |
|
|
|
13,797 |
|
| 2017 |
|
|
26,210 |
|
|
|
11,691 |
|
| 2018 |
|
|
23,687 |
|
|
|
10,229 |
|
| 2019 |
|
|
20,715 |
|
|
|
8,322 |
|
| Note 12 |
Equity Investments |
The Company has an equity investment in TSYS de México and records its 49% ownership using the equity method of accounting. The operation
prints statements and provides card-issuing support services to the equity investment clients and others.
The Company has an equity investment in CUP
Data and records its 44.56% ownership using the equity method of accounting. CUP Data is sanctioned by the People’s Bank of China, China’s central bank, and has become one of the world’s 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
investments are recorded initially at cost and subsequently adjusted for equity in earnings, cash contributions and distributions, and foreign currency translation adjustments. TSYS believes the carrying value approximates the underlying assets of
the equity investments.
59
TSYS’ equity in income of equity investments (net of tax) for the years ended December 31, 2014, 2013 and
2012 was $17.6 million, $13.0 million and $10.2 million, respectively.
A summary of TSYS’ equity investments as of December 31, 2014 and
2013 is as follows:
|
|
|
|
|
|
|
|
|
| (in thousands) |
|
2014 |
|
|
2013 |
|
| CUP Data |
|
$ |
92,738 |
|
|
|
86,549 |
|
| TSYS de México |
|
|
7,730 |
|
|
|
7,584 |
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
100,468 |
|
|
|
94,133 |
|
|
|
|
|
|
|
|
|
|
| Note 13 |
Long-term Borrowings and Capital Lease Obligations |
Long-term debt as of December 31, 2014 and 2013 consists of:
|
|
|
|
|
|
|
|
|
| (in thousands) |
|
2014 |
|
|
2013 |
|
| $550,000,000 2.375% Senior Notes due June 1, 2018 (5 year tranche), net of discount |
|
$ |
549,889 |
|
|
|
549,858 |
|
| $550,000,000 3.75% Senior Notes due June 1, 2023 (10 year tranche), net of discount |
|
|
546,379 |
|
|
|
546,027 |
|
| LIBOR + 1.125%, unsecured term loan, due April 8, 2018, with quarterly principal and interest payments |
|
|
185,000 |
|
|
|
195,000 |
|
| LIBOR + 1.125%, unsecured term loan, due September 10, 2017, with quarterly principal and interest payments |
|
|
131,250 |
|
|
|
138,750 |
|
| 1.50% note payable, due September 30, 2016, with monthly interest and principal payments |
|
|
11,886 |
|
|
|
— |
|
| 1.50% note payable, due December 31, 2015, with monthly interest and principal payments |
|
|
10,075 |
|
|
|
20,000 |
|
| 1.50% note payable, due January 31, 2016, with monthly interest and principal payments |
|
|
4,332 |
|
|
|
8,269 |
|
| 1.50% note payable, due July 31, 2015, with monthly interest and principal payments |
|
|
1,709 |
|
|
|
4,604 |
|
| LIBOR + 2.0%, unsecured term loan, due December 7, 2017, with monthly interest payments and principal paid at maturity |
|
|
1,396 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
| Total debt |
|
|
1,441,916 |
|
|
|
1,462,508 |
|
| Less current portion |
|
|
43,784 |
|
|
|
34,257 |
|
|
|
|
|
|
|
|
|
|
| Noncurrent portion of long-term debt |
|
$ |
1,398,132 |
|
|
|
1,428,251 |
|
|
|
|
|
|
|
|
|
|
During December 2014, TSYS Managed Services obtained a £900,000, or approximately $1.4 million, pound-denominated term loan bearing interest at a rate of LIBOR plus two percent. The loan matures in December
2017, and has monthly interest payments. The lender in this transaction is Merchants Limited, who has a noncontrolling interest in TSYS Managed Services. The balance as of December 31, 2014 was $1.4 million.
In September 2014, the Company entered into a $13.6 million financing agreement for perpetual software licenses. The balance as of December 31, 2014 was $11.9
million.
In December 2013, the Company entered into a $20.0 million financing arrangement to purchase additional software licenses. The balance as of
December 31, 2014, was $10.1 million.
In February 2013, the Company and its wholly-owned merger subsidiary entered into an Agreement and Plan
of Merger (as amended on May 29, 2013, the “Merger Agreement”) with NetSpend, pursuant to which, upon the terms and subject to the conditions set forth in the Merger Agreement, the merger subsidiary merged with and into NetSpend on
July 1, 2013, with NetSpend continuing as the surviving corporation and as a wholly-owned subsidiary of TSYS (the “Merger”). Refer to Note 24 for more information about the acquisition.
60
TSYS also acquired additional mainframe software licenses to increase capacity in 2012. The Company entered into an
$8.6 million and an $11.9 million financing agreement in June and December of 2012, respectively, to purchase these additional software licenses. The balances as of December 31, 2014 were $1.7 million and $4.3 million, respectively.
In addition, TSYS maintains an unsecured credit agreement with Columbus Bank and Trust. The credit agreement has a maximum available principal balance
of $5.0 million, with interest at prime. TSYS did not use the credit facility during 2014, 2013 or 2012.
Acquisition-Related Borrowings
In April 2013, the Company entered into a Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as
Administrative Agent, The Bank of Tokyo-Mitsubishi UFJ, Ltd., as Syndication Agent, Regions Bank and U.S. Bank National Association, as Documentation Agents, and other lenders party thereto, with J.P. Morgan Securities LLC, The Bank of Tokyo
Mitsubishi UFJ, Ltd., Regions Capital Markets, and U.S. Bank National Association as joint lead arrangers and joint bookrunners. The Credit Agreement provides for a five-year term loan to the Company in the amount of $200.0 million (the “Term
Loan”) and bears interest at LIBOR plus 1.125%, which are subject to adjustment based on changes in the Company’s credit ratings, with margins ranging from 1.00% to 1.75%. As of December 31, 2014, the outstanding balance on the Credit
Agreement was $185.0 million.
Concurrently with entering into the Merger Agreement, TSYS obtained commitments for a $1.2 billion 364-day bridge term
loan facility from JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLC and The Bank of Tokyo-Mitsubishi UFJ, Ltd. Thereafter, JPMorgan Chase Bank, N.A. and The Bank of Tokyo-Mitsubishi UFJ, Ltd. assigned portions of their commitments to other
bridge facility lenders. The Company paid fees in 2013 associated with the bridge term loan of approximately $5.9 million. The total commitments under the bridge term loan facility were eliminated in May 2013 after the issuance of the Notes
described below.
In May 2013, the Company closed its issuance (the “Transaction”) of $550.0 million aggregate principal amount of 2.375%
Senior Notes due 2018 and $550.0 million aggregate principal amount of 3.750% Senior Notes due 2023 (collectively, the “Notes”) pursuant to an Underwriting Agreement with J.P. Morgan Securities LLC, as representative of certain
underwriters (the “Underwriters”), whereby the Company agreed to sell and the Underwriters agreed to purchase the Notes from the Company, subject to and upon the terms and conditions set forth in the Underwriting Agreement. The interest on
the Notes are payable semiannually. The Company paid fees in 2013 associated with the issuance of these Notes of approximately $8.9 million and recorded discounts of approximately $4.3 million that are being amortized over the life of the Notes. The
Company used the net proceeds of the Transaction to pay a portion of the $1.4 billion purchase price of the Company’s acquisition of NetSpend and related fees and expenses. The Notes were issued pursuant to an Indenture dated as of May 22,
2013 between the Company and Wells Fargo Bank, National Association, as trustee. The Company received a rating from Moody’s of Baa3 and a rating from Standard & Poor’s of BBB+ in connection with the Senior Notes at the time of
issuance.
The Notes also contain various affirmative and negative covenants, including those that create limitations on the Company’s:
| • |
|
merging or selling assets unless certain conditions are met; and |
| • |
|
entering into sale/leaseback transactions. |
The Notes also contain a provision that requires the Company to repurchase all or any portion of a holder’s Notes, at the holder’s option, if a Change in
Control Repurchase Event occurs.
Amendment to Existing Credit Agreement
In September 2012, the Company entered into a credit agreement with JPMorgan Chase Bank, N.A., as Administrative Agent, The Bank of Tokyo-Mitsubishi UFJ, Ltd., Regions Bank and U.S. Bank National Association,
as Syndication Agents, and the other lenders named therein, with J.P. Morgan Securities LLC, The Bank of Tokyo-Mitsubishi UFJ, Ltd., Regions Capital Markets and U.S. Bank National Association, as joint lead arrangers and
61
joint bookrunners (the “Existing Credit Agreement”). The Existing Credit Agreement provides for a $350.0 million five-year unsecured revolving credit facility (which may be
increased by up to an additional $350.0 million under certain circumstances) and includes a $50.0 million subfacility for the issuance of standby letters of credit and a $50.0 million subfacility for swingline loans. The Existing Credit
Agreement also provides for a $150 million five-year unsecured term loan, which was fully funded on the closing of the Existing Credit Agreement. As of December 31, 2014, the outstanding balance on the Existing Credit Agreement was $131.3
million.
In April 2013, the Company entered into the First Amendment to the Existing Credit Agreement (the “Revolver”) in order to
conform certain provisions of the Existing Credit Agreement to the Credit Agreement for the Term Loan. On July 1, 2013, an additional $100.0 million was used as funding in the NetSpend Merger. As of December 31, 2014, there was no
outstanding balance on the Revolver.
The Credit Agreement for the aforementioned loan provided for a $168.0 million unsecured five year term loan
to the Company and a $252.0 million five year unsecured revolving credit facility. The principal balance of loans outstanding under the credit facility bears interest at a rate of LIBOR plus an applicable margin of 0.60%. The applicable margin
could vary within a range from 0.27% to 0.725% depending on changes in the Company’s corporate credit rating. Interest was paid on the last date of each interest period; however, if the period exceeded three months, interest was paid every
three months after the beginning of such interest period. In addition, the Company paid each lender a fee in respect of the amount of such lender’s commitment under the revolving credit facility (regardless of usage), ranging from 0.08% to
0.15% (currently 0.10%) depending on the Company’s corporate credit rating.
The Company was not required to make any scheduled principal payments
other than payment of the entire outstanding balance on December 21, 2012. The Company was able to prepay the revolving credit facility and the term loan in whole or in part at any time without premium or penalty, subject to reimbursement of
the lenders’ customary breakage and redeployment costs in the case of prepayment of LIBOR borrowings. The Credit Agreement included covenants requiring the Company to maintain certain minimum financial ratios. The Company did not use the
revolving credit facility in 2014.
Required annual principal payments on long-term debt for the five years subsequent to December 31, 2014 are
summarized as follows:
|
|
|
|
|
| (in thousands) |
|
|
|
| 2015 |
|
$ |
43,784 |
|
| 2016 |
|
|
35,468 |
|
| 2017 |
|
|
126,396 |
|
| 2018 |
|
|
690,000 |
|
| 2019 |
|
|
— |
|
Capital lease obligations as of December 31, 2014 and 2013 consist of:
|
|
|
|
|
|
|
|
|
| (in thousands) |
|
2014 |
|
|
2013 |
|
| Capital lease obligations |
|
$ |
14,101 |
|
|
|
30,162 |
|
| Less current portion |
|
|
7,127 |
|
|
|
22,662 |
|
|
|
|
|
|
|
|
|
|
| Noncurrent portion of capital leases |
|
$ |
6,974 |
|
|
|
7,500 |
|
|
|
|
|
|
|
|
|
|
62
The future minimum lease payments under capital leases as of December 31, 2014 are summarized as follows:
|
|
|
|
|
| (in thousands) |
|
|
|
| 2015 |
|
$ |
7,355 |
|
| 2016 |
|
|
3,554 |
|
| 2017 |
|
|
2,627 |
|
| 2018 |
|
|
987 |
|
| 2019 |
|
|
63 |
|
|
|
|
|
|
| Total minimum lease payments |
|
|
14,586 |
|
| Less amount representing interest |
|
|
485 |
|
|
|
|
|
|
| Principal minimum lease payments |
|
$ |
14,101 |
|
|
|
|
|
|
| Note 14 |
Other Current Liabilities |
Significant components of other current liabilities as of December 31, 2014 and 2013 are summarized as follows:
|
|
|
|
|
|
|
|
|
| (in thousands) |
|
2014 |
|
|
2013 |
|
| Deferred revenues |
|
$ |
41,773 |
|
|
|
36,408 |
|
| Accrued expenses |
|
|
23,617 |
|
|
|
23,265 |
|
| Dividends payable |
|
|
19,006 |
|
|
|
19,508 |
|
| Dissenting shareholder liability1 |
|
|
— |
|
|
|
25,723 |
|
| Other |
|
|
70,409 |
|
|
|
54,266 |
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
154,805 |
|
|
|
159,170 |
|
|
|
|
|
|
|
|
|
|
| 1 |
Refer to Note 24 on acquisitions for additional information. |
The provision for income taxes includes income taxes currently payable and those deferred because of temporary differences between the financial
statement carrying amounts and tax bases of assets and liabilities.
The components of income tax expense included in the Consolidated Statements of
Income were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
| (in thousands) |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Current income tax expense: |
|
|
|
|
|
|
|
|
|
|
|
|
| Federal |
|
$ |
126,203 |
|
|
|
74,327 |
|
|
|
102,953 |
|
| State |
|
|
5,161 |
|
|
|
2,949 |
|
|
|
2,572 |
|
| Foreign |
|
|
7,694 |
|
|
|
6,822 |
|
|
|
8,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total current income tax expense |
|
|
139,058 |
|
|
|
84,098 |
|
|
|
113,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred income tax expense (benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
| Federal |
|
|
(3,623 |
) |
|
|
27,447 |
|
|
|
1,395 |
|
| State |
|
|
(2,039 |
) |
|
|
(55 |
) |
|
|
411 |
|
| Foreign |
|
|
(3,635 |
) |
|
|
(509 |
) |
|
|
(1,665 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total deferred income tax expense |
|
|
(9,297 |
) |
|
|
26,883 |
|
|
|
141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total income tax expense |
|
$ |
129,761 |
|
|
|
110,981 |
|
|
|
114,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
| (in thousands) |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Components of income before income tax expense: |
|
|
|
|
|
|
|
|
|
|
|
|
| Domestic |
|
$ |
369,888 |
|
|
|
328,052 |
|
|
|
319,709 |
|
| Foreign |
|
|
23,041 |
|
|
|
24,424 |
|
|
|
33,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total income before income tax expense |
|
$ |
392,929 |
|
|
|
352,476 |
|
|
|
352,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense differed from the amounts computed by applying the statutory U.S. federal income tax rate of 35% to income before income taxes, noncontrolling interest and equity in income of equity
investments as a result of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
| (in thousands) |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Computed “expected” income tax expense |
|
$ |
137,525 |
|
|
|
123,367 |
|
|
|
123,505 |
|
| Increase (decrease) in income tax expense resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
| International tax rate differential and equity income |
|
|
6,541 |
|
|
|
1,870 |
|
|
|
1,870 |
|
| State income tax expense, net of federal income tax effect |
|
|
4,823 |
|
|
|
3,408 |
|
|
|
2,101 |
|
| Increase (decrease) in valuation allowance |
|
|
(4,550 |
) |
|
|
1,715 |
|
|
|
1,239 |
|
| Tax credits |
|
|
(3,459 |
) |
|
|
(6,141 |
) |
|
|
(3,787 |
) |
| Deduction for domestic production activities |
|
|
(8,750 |
) |
|
|
(8,225 |
) |
|
|
(5,727 |
) |
| Permanent differences and other, net |
|
|
(2,369 |
) |
|
|
(5,013 |
) |
|
|
(5,085 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total income tax expense |
|
$ |
129,761 |
|
|
|
110,981 |
|
|
|
114,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities that give rise to significant portions of the net deferred tax liability as of December 31, 2014
and 2013 relate to the following:
|
|
|
|
|
|
|
|
|
| |
|
As of December 31, |
|
| (in thousands) |
|
2014 |
|
|
2013 |
|
| Deferred income tax assets: |
|
|
|
|
|
|
|
|
| Net operating loss and income tax credit carryforwards |
|
$ |
31,978 |
|
|
|
24,079 |
|
| Allowances for doubtful accounts and billing adjustments |
|
|
1,328 |
|
|
|
728 |
|
| Deferred revenue |
|
|
31,240 |
|
|
|
20,111 |
|
| Other, net |
|
|
49,192 |
|
|
|
50,960 |
|
|
|
|
|
|
|
|
|
|
| Total deferred income tax assets |
|
|
113,738 |
|
|
|
95,878 |
|
| Less valuation allowance for deferred income tax assets |
|
|
(18,963 |
) |
|
|
(14,691 |
) |
|
|
|
|
|
|
|
|
|
| Net deferred income tax assets |
|
|
94,775 |
|
|
|
81,187 |
|
|
|
|
|
|
|
|
|
|
| Deferred income tax liabilities: |
|
|
|
|
|
|
|
|
| Excess tax over financial statement depreciation |
|
|
(53,527 |
) |
|
|
(45,727 |
) |
| Computer software development costs |
|
|
(67,703 |
) |
|
|
(55,074 |
) |
| Purchase accounting adjustments |
|
|
(136,701 |
) |
|
|
(168,689 |
) |
| Foreign currency translation |
|
|
(7,642 |
) |
|
|
(10,291 |
) |
| Other, net |
|
|
(18,830 |
) |
|
|
(12,003 |
) |
|
|
|
|
|
|
|
|
|
| Total deferred income tax liabilities |
|
|
(284,403 |
) |
|
|
(291,784 |
) |
|
|
|
|
|
|
|
|
|
| Net deferred income tax liabilities |
|
$ |
(189,628 |
) |
|
|
(210,597 |
) |
|
|
|
|
|
|
|
|
|
| Total net deferred tax assets (liabilities): |
|
|
|
|
|
|
|
|
| Current |
|
$ |
15,190 |
|
|
|
14,158 |
|
| Noncurrent |
|
|
(204,818 |
) |
|
|
(224,755 |
) |
|
|
|
|
|
|
|
|
|
| Net deferred income tax liability |
|
$ |
(189,628 |
) |
|
|
(210,597 |
) |
|
|
|
|
|
|
|
|
|
64
As of December 31, 2014, TSYS had recognized deferred tax assets from net operating losses and federal and state
income tax credit carryforwards of $5.9 million and $26.1 million, respectively. As of December 31, 2013, TSYS had recognized deferred tax assets from net operating losses, capital losses and federal and state income tax credit carry
forwards of $11.4 million, $1.9 million and $10.8 million, respectively.
In assessing the realizability of deferred income tax assets, management
considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.
Management believes it is more likely than not that TSYS will realize the benefits of these deductible differences, net of existing valuation allowances. The
valuation allowance for deferred tax assets was $19.0 million and $14.7 million as of December 31, 2014 and 2013, respectively. The increase in the valuation allowance for deferred income tax assets was $4.3 million for 2014. The
increase in the valuation allowance for deferred income tax assets was $1.7 million for 2013. The increase relates to tax credits which, more likely than not, will not be realized in later years.
TSYS has adopted the permanent reinvestment exception under GAAP, with respect to future earnings of certain foreign subsidiaries. As a result, TSYS considers
foreign earnings related to these foreign operations to be permanently reinvested. No provision for U.S. federal and state incomes taxes has been made in the consolidated financial statements for those non-U.S. subsidiaries whose earnings
are considered to be reinvested. The amount of undistributed earnings considered to be “reinvested” which may be subject to tax upon distribution was approximately $90.3 million as of December 31, 2014. Although TSYS does not intend
to repatriate these earnings, a distribution of these non-U.S. earnings in the form of dividends, or otherwise, would subject the Company to both U.S. federal and state income taxes, as adjusted for non-U.S. tax credits, and
withholding taxes payable to the various non-U.S. countries. Determination of the amount of any unrecognized deferred income tax liability on these undistributed earnings is not practicable.
TSYS is the parent of an affiliated group that files a consolidated U.S. federal income tax return and most state and foreign income tax returns on a separate
entity basis. In the normal course of business, the Company is subject to examinations by these taxing authorities unless statutory examination periods lapse. TSYS is no longer subject to U.S. federal income tax examinations for years before
2011 and with few exceptions, the Company is no longer subject to income tax examinations from state and local or foreign tax authorities for years before 2005. There are currently federal income tax examinations in progress for the years 2009
through 2012 for a subsidiary which was acquired in 2013. Additionally, a number of tax examinations are in progress by the relevant state tax authorities. Although TSYS is unable to determine the ultimate outcome of these examinations, TSYS
believes that its liability for uncertain tax positions relating to these jurisdictions for such years is adequate.
GAAP prescribes a recognition
threshold and measurement attribute for the financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken in a tax return. During the year ended December 31, 2014, TSYS increased its liability for
prior year uncertain income tax positions as a discrete item by a net amount of approximately $4.0 million (net of the federal tax effect). The Company is not able to reasonably estimate the amount by which the liability will increase or
decrease over time; however, at this time, the Company does not expect any significant changes related to these obligations within the next twelve months.
65
A reconciliation of the beginning and ending amount of unrecognized tax liabilities is as
follows 1:
|
|
|
|
|
| (in millions) |
|
Year Ended
December 31, 2014 |
|
| Beginning balance |
|
$ |
2.7 |
|
| Current activity: |
|
|
|
|
| Additions based on tax positions related to current year |
|
|
0.9 |
|
| Additions for tax positions of prior years |
|
|
3.5 |
|
| Reductions for tax positions of prior years |
|
|
(0.4 |
) |
|
|
|
|
|
| Net, current activity |
|
|
4.0 |
|
|
|
|
|
|
| Ending balance |
|
$ |
6.7 |
|
|
|
|
|
|
| 1 |
Unrecognized state tax liabilities are not adjusted for the federal tax impact |
TSYS recognizes potential interest and penalties related to the underpayment of income taxes as income tax expense in the Consolidated Statements of Income. Gross accrued interest and penalties on unrecognized tax
benefits totaled $0.3 million and $0.3 million as of December 31, 2014 and December 31, 2013, respectively. The total amounts of unrecognized income tax benefits as of December 31, 2014 and December 31, 2013 that, if
recognized, would affect the effective tax rates are $6.5 million and $2.8 million (net of the federal benefit on state tax issues), respectively, which includes interest and penalties of $0.2 million and $0.2 million, respectively.
| Note 16 |
Commitments and Contingencies |
LEASE COMMITMENTS: TSYS is obligated under noncancelable operating leases for computer equipment and
facilities.
The future minimum lease payments under noncancelable operating leases with remaining terms greater than one year for the next five years
and thereafter and in the aggregate as of December 31, 2014, are as follows:
|
|
|
|
|
| (in thousands) |
|
|
|
| 2015 |
|
$ |
118,321 |
|
| 2016 |
|
|
121,745 |
|
| 2017 |
|
|
62,741 |
|
| 2018 |
|
|
27,184 |
|
| 2019 |
|
|
22,693 |
|
| Thereafter |
|
|
30,088 |
|
|
|
|
|
|
| Total future minimum lease payments |
|
$ |
382,772 |
|
|
|
|
|
|
The majority of computer equipment lease commitments come with a renewal option or an option to terminate the lease. These lease commitments may be replaced with new leases which allow the Company to continually
update its computer equipment. Total rental expense under all operating leases in 2014, 2013 and 2012 was $105.2 million, $93.4 million and $95.2 million, respectively.
CONTRACTUAL COMMITMENTS: In the normal course of its business, the Company maintains long-term processing contracts with its clients. These processing contracts contain commitments,
including, but not limited to, minimum standards and time frames against which the Company’s performance is measured. In the event the Company does not meet its contractual commitments with its clients, the Company may incur penalties and
certain clients may have the right to terminate their contracts with the Company. The Company does not believe that it will fail to meet its contractual commitments to an extent that will result in a material adverse effect on its financial
position, results of operations or cash flows.
66
CONTINGENCIES:
Legal Proceedings — General
The Company is subject to
various legal proceedings and claims and is also subject to information requests, inquiries and investigations arising out of the ordinary conduct of its business. The Company establishes reserves for litigation and similar matters when those
matters present loss contingencies that TSYS determines to be both probable and reasonably estimable in accordance with GAAP. In the opinion of management, based on current knowledge and in part upon the advice of legal counsel, all matters not
specifically discussed below are believed to be adequately covered by insurance, or, if not covered, the possibility of losses from such matters are believed to be remote or such matters are of such kind or involve such amounts that would not have a
material adverse effect on the financial position, results of operations or cash flows of the Company if disposed of unfavorably.
Telexfree
Matter
ProPay, Inc. (“ProPay”), a subsidiary of the Company, has been named as one of a number of defendants (including other merchant
processors) in several purported class action lawsuits relating to the activities of Telexfree, Inc. and its affiliates and principals. Telexfree is a former merchant customer of ProPay. With regard to Telexfree, each purported class action lawsuit
generally alleges that Telexfree engaged in an improper multi-tier marketing scheme involving voice-over Internet protocol telephone services. The plaintiffs in each of the purported class action complaints generally allege that the various merchant
processor defendants, including ProPay, knowingly furthered the improper activities of Telexfree with knowledge that Telexfree did not have legitimate business operations. Telexfree filed for bankruptcy protection in Nevada. The bankruptcy was
subsequently transferred to the Massachusetts Bankruptcy Court.
Specifically, ProPay has been named as one of a number of defendants (including other
merchant processors) in each of the following purported class action complaints relating to Telexfree: (i) Waldermara Martin, et al. v. TelexFree, Inc., et al. (Case No. BK-S-14-12524-ABL) filed on May 3, 2014 in the United States
Bankruptcy Court District of Nevada, (ii) Anthony Cellucci, et al. v. TelexFree, Inc., et. al. (Case No. 4:14-BK-40987) filed on May 15, 2014 in the United States Bankruptcy Court District of Massachusetts, (iii) Maduako C.
Ferguson Sr., et al. v. Telexelectric, LLLP, et. al (Case No. 5:14-CV-00316-D) filed on June 5, 2014 in the United States District Court of North Carolina, (iv) Todd Cook v. TelexElectric LLLP et al. (Case No. 2:14-CV-00134),
filed on June 24, 2014 in the United States District Court for the Northern District of Georgia, (v) Felicia Guevara v. James M. Merrill et al., CA No. 1:14-cv-22405-DPG), filed on June 27, 2014 in the United State District Court
for the Southern District of Florida, (vi) Reverend Jeremiah Githere, et al. v. TelexElectric LLLP et al. (Case No. 1:14-CV-12825-GAO), filed on June 30, 2014 in the United States District Court for the District of Massachusetts , and
(vii) Paulo Eduardo Ferrari et al. v. Telexfree, Inc. et al. (Case No. 14-04080), filed on August 20, 2014 in the United States Bankruptcy Court for the District of Massachusetts (together, the “Actions”). On
October 21, 2014, all of the above-referenced lawsuits, with the exception of the Ferrari case, were transferred to the United States District Court for the District of Massachusetts by the Judicial Panel on Multidistrict Litigation. ProPay has
not yet been served with the Ferrari complaint. The United States District Court for the District of Massachusetts has entered an order appointing lead counsel for the plaintiffs, but has not yet formally consolidated the Actions, and ProPay has not
yet been required to respond to any of the complaints.
In December 2014, ProPay was also named as a defendant in another putative class action relating
to TelexFree filed in the United States District Court for the Southern District of New York, , Abdelgadir v. TelexFree, Inc., et al., Case No. 14-CV-9857. The Abdelgadir complaint makes allegations that are substantially the same as those
contained in the other putative class actions described above. ProPay has not been served with the Abdelgadir complaint.
ProPay has also received
various subpoenas, a seizure warrant and other inquiries requesting information regarding Telexfree from (i) the Commonwealth of Massachusetts, Securities Division, (ii) United States Securities and Exchange Commission, (iii) US
Immigration and Customs Enforcement, and (iv) a “Notice of Potential Claim and Demand to Preserve Evidence” from the bankruptcy Trustee of the Chapter 11 entities of Telexfree, Inc., Telexfree, LLC and Telexfree Financial, Inc. ProPay
has produced documents to the above-named governmental entities and to the TelexFree bankruptcy Trustee pursuant to their requests. To date, none have taken any further action with respect to ProPay. Pursuant to the seizure warrant served by the
United States Attorney’s Office for
67
the District of Massachusetts, ProPay delivered all funds associated with Telexfree held for chargeback and other purposes by ProPay to US Immigration and Customs Enforcement.
The above proceedings and actions are preliminary in nature. While the Company and ProPay intend to vigorously defend matters arising out of the relationship of
ProPay with Telexfree and believe ProPay has substantial defenses related to these purported claims, the Company currently cannot reasonably estimate losses attributable to these matters.
GUARANTEES AND INDEMNIFICATIONS: The Company has entered into processing and licensing agreements with its clients that include intellectual property indemnification clauses. Under
these clauses, the Company generally agrees to indemnify its clients, subject to certain exceptions, against legal claims that TSYS’ services or systems infringe on certain third party patents, copyrights or other proprietary rights. In the
event of such a claim, the Company is generally obligated to hold the client harmless and pay for related losses, liabilities, costs and expenses, including, without limitation, court costs and reasonable attorney’s fees. The Company has not
made any indemnification payments pursuant to these indemnification clauses.
A portion of the Company’s business is conducted through distributors
that provide load and reload services to cardholders at their locations. Members of the Company’s distribution and reload network collect cardholder funds and remit them by electronic transfer to the Issuing Banks for deposit in the cardholder
accounts. The Company’s Issuing Banks typically receive cardholders’ funds no earlier than three business days after they are collected by the distributor. If any distributor fails to remit cardholders’ funds to the Company’s
Issuing Banks, the Company typically reimburses the Issuing Banks for the shortfall created thereby. The Company manages the risk associated with this process through a formalized set of credit standards, volume limits and deposit requirements for
certain distributors and by typically maintaining the right to offset any settlement shortfall against the commissions payable to the relevant distributor. To date, the Company has not experienced any significant losses associated with settlement
failures and the Company had not recorded a settlement guarantee liability as of December 31, 2014. As of December 31, 2014, the Company’s estimated gross settlement exposure was $11.1 million.
GPR cardholders can incur charges in excess of the funds available in their accounts and are liable for the resulting overdrawn account balance. Although the
Company generally declines authorization attempts for amounts that exceed the available balance in a cardholder’s account, the application of the Networks’ rules and regulations, the timing of the settlement of transactions and the
assessment of subscription, maintenance or other fees can, among other things, result in overdrawn card accounts. The Company also provides, as a courtesy and in its discretion, certain cardholders with a “cushion” that allows them to
overdraw their card accounts by up to $10. In addition, eligible cardholders may enroll in the Issuing Banks’ overdraft protection programs and fund transactions that exceed the available balance in their accounts. The Company generally
provides the funds used as part of these overdraft programs (one of the Company’s issuing banks will advance the first $1.0 million on behalf of its cardholders) and is responsible to the Issuing Banks for any losses associated with any
overdrawn account balances. As of December 31, 2014 and 2013, cardholders’ overdrawn account balances totaled $14.0 million and $13.8 million, respectively. As of December 31, 2014 and 2013, the Company’s reserves for the
losses it estimates will arise from processing customer transactions, debit card overdrafts, chargebacks for unauthorized card use and merchant-related chargebacks due to non-delivery of goods or services was $6.3 million and $5.8 million,
respectively.
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.
PRIVATE EQUITY
INVESTMENTS: On May 31, 2011, the Company entered into a limited partnership agreement in connection with its agreement to invest in an Atlanta, Georgia-based venture capital fund focused exclusively on investing in
technology-enabled financial services companies. Pursuant to the limited partnership agreement, the Company has committed to invest up to $20 million in the fund so long as its ownership interest in the fund does not exceed 50%. As of
December 31, 2014 and 2013, the Company’s investment balance in the fund was $9.3 million and $6.0 million, respectively. The Company recognized gains of $0.8 million, $1.0 million, and $0.9 million due to increases in fair value in
the years ended December 31, 2014, 2013 and 2012, respectively.
68
| Note 17 |
Employee Benefit Plans |
The Company provides benefits to its employees by offering employees participation in certain defined contribution plans. The employee benefit
plans through which TSYS provided benefits to its employees during 2014 are described as follows:
RETIREMENT SAVINGS AND STOCK PURCHASE
PLANS: TSYS maintains a single plan, the Retirement Savings Plan, which is designed to reward all team members of TSYS U.S.-based companies with a uniform employer contribution. The terms of the plan provide for the
Company to match 100% of the employee contribution up to 4% of eligible compensation. The Company can make discretionary contributions up to another 4% based upon business conditions.
The Company also maintains a stock purchase plan for employees. The Company contributes 15% of employee contributions. The funds are used to purchase presently issued and outstanding shares of TSYS common stock on
the open market at fair market value for the benefit of participants. The Company’s contributions to the plans charged to expense for the years ended December 31, 2014, 2013 and 2012 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in thousands) |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| TSYS Retirement Savings Plan |
|
$ |
17,531 |
|
|
|
14,506 |
|
|
|
13,421 |
|
| TSYS Stock Purchase Plan |
|
|
1,288 |
|
|
|
1,236 |
|
|
|
1,140 |
|
POSTRETIREMENT MEDICAL BENEFITS PLAN: TSYS provides certain medical benefits to qualified retirees through a postretirement medical benefits plan, which is immaterial to the
Company’s consolidated financial statements. The measurement of the benefit expense and accrual of benefit costs associated with the plan do not reflect the effects of the 2003 Medicare Act. Additionally, the benefit expense and accrued benefit
cost associated with the plan, as well as any potential impact of the effects of the 2003 Medicare Act, are not significant to the Company’s consolidated financial statements.
DIVIDENDS: Dividends on common stock of $74.8 million were paid in 2014, compared to $56.5 million and
$94.0 million in 2013 and 2012, respectively. The increase in dividends paid in 2014 compared to 2013 is due to the acceleration of payment of the fourth quarter 2012 dividend. The fourth quarter 2012 dividend payment was paid in December 2012,
rather than January 2013, to allow shareholders to benefit from the lower dividend tax rate that was set to expire on December 31, 2012.
EQUITY
COMPENSATION PLANS: The following table summarizes TSYS’ equity compensation plans by category as of December 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in thousands, except per share data) Plan Category |
|
(a)
Number of securities to
be
issued upon exercise of
outstanding options,
warrants and rights |
|
|
(b)
Weighted-average
exercise
price of
outstanding
options, warrants
and rights |
|
|
(c)
Number of securities remaining
available for future
issuance
under equity compensation plans
(excluding securities reflected in
column (a)) |
|
| Equity compensation plans approved by security holders |
|
|
4,892 |
|
|
$ |
23.83 |
|
|
|
9,879 |
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company does not have any equity compensation plans that were not approved by security holders.
| 1 |
Shares available for future grants under the Total System Services Inc. 2007 Omnibus Plan and 2012 Omnibus Plan, which could be in the form of options, nonvested awards and
performance shares |
| Note 19 |
Share-Based Compensation |
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.
69
Employee stock options granted during or after 2006 (other than performance-based stock options) generally become
exercisable in three equal annual installments on the anniversaries of the date of grant and expire ten years from the date of grant. Vesting for stock options granted during the years 2006 through 2009 (other than performance-based stock options)
accelerate upon retirement for employees who have reached age 62 and who also have no less than fifteen years of service, or are 65, at the date of their election to retire. For stock options granted during the years 2006 through 2009, share-based
compensation expense is fully recognized for plan participants upon meeting the retirement eligibility requirements of age and service. Employees not retirement eligible who terminate employment only received the shares for the full vesting periods
completed.
Stock options granted during 2010 and 2011 generally become exercisable in three equal annual installments on the anniversaries of the date
of grant and expire ten years from the date of grant. These options vest on a pro-rata basis upon retirement based upon the number of months employed during the year of retirement. For stock options granted during 2010 and 2011, share-based
compensation expense is fully recognized for plan participants upon meeting the retirement eligibility requirements of age and service. Employees not retirement eligible who terminate employment only received the shares for the full vesting periods
completed.
Stock options granted subsequent to 2011 generally become exercisable in three equal annual installments on the anniversaries of the date of
grant and expire ten years from the date of grant. For employees who retire during the first 18 months of the options term, the options vest on a pro-rata basis based upon the number of months employed during the year of retirement. If the employee
retires after the 18-month period, vesting is accelerated upon retirement. When an employee meets the requirements for retirement eligibility after the 18-month period but before the final vesting period, the employee is fully vested in the options
at that time. Employees not retirement eligible who terminate employment only received the shares for the full vesting periods completed.
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. Share-based compensation expense is recognized in income over the remaining nominal vesting period with consideration for retirement
eligibility.
Long-Term Incentive Plans
TSYS
maintains the Total System Services, Inc. 2012 Omnibus Plan, Total System Services, Inc. 2007 Omnibus Plan, Total System Services, Inc. 2002 Long-Term Incentive Plan,Total System Services, Inc. 2000 Long-Term Incentive Plan and the Amended and
Restated NetSpend Holdings Inc. 2004 Equity Incentive Plan for Options and Restricted Shares Assumed by Total System Services, Inc. to advance the interests of TSYS and its shareholders through awards that give employees and directors a personal
stake in TSYS’ growth, development and financial success. Awards under these plans are designed to motivate employees and directors to devote their best efforts to the business of TSYS. Awards will also help TSYS attract and retain the services
of employees and directors who are in a position to make significant contributions to TSYS’ success.
The plans are administered by the
Compensation Committee of the Company’s Board of Directors and enable the Company to grant nonqualified and incentive stock options, stock appreciation rights, restricted stock and restricted stock units, performance units or performance
shares, cash-based awards, and other stock-based awards.
All stock options must have a maximum life of no more than ten years from the date of grant.
The exercise price will not be less than 100% of the fair market value of TSYS’ common stock at the time of grant. Any shares related to awards which terminate by expiration, forfeiture, cancellation, or otherwise without the issuance of such
shares, are settled in cash in lieu of shares, or are exchanged with the Committee’s permission, prior to the issuance of shares, for awards not involving shares, shall be available again for grant under the various plans. The aggregate number
of shares of TSYS stock which may be granted to participants pursuant to awards granted under the various plans may not exceed the following: Total System Services, Inc. 2012 Omnibus Plan -17 million shares; Total System Services, Inc. 2007
Omnibus Plan -5 million shares; Total System Services, Inc. 2002 Long-Term Incentive Plan -9.4 million shares; and Total System Services, Inc. 2000 Long-Term Incentive Plan -2.4 million
70
shares. Effective February 1, 2010 and March 5, 2012, no additional awards may be made from the Total System Services, Inc. 2000 and 2002 Long-Term Incentive Plans, respectively.
Share-Based Compensation
Share-based
compensation costs are classified as selling, general and administrative expenses on the Company’s statements of income and corporate administration and other expenses for segment reporting purposes. TSYS does not include amounts associated
with share-based compensation as costs capitalized as software development and contract acquisition costs as these awards are typically granted to individuals not involved in capitalizable activities. For the year ended December 31, 2014,
share-based compensation was $30.8 million compared to $28.9 million and $18.6 million for the same periods in 2013 and 2012, respectively.
Nonvested Awards: The Company granted shares of TSYS common stock to certain key employees and non-management members of its Board of
Directors. The grants to certain key employees were issued under nonvested stock bonus awards for services to be provided in the future by such officers and employees. The grants to the Board of Directors were fully vested on the date of grant.
On July 1, 2013, the Company issued 870,361 shares of TSYS common stock as nonvested stock replacement awards with a market value of $21.5 million
as part of the NetSpend acquisition. The nonvested stock bonus awards to employees of NetSpend are for services to be provided in the future and vest over varying periods. The NetSpend awards were converted into equivalent shares of Company’s
common stock on the acquisition date. The value of the stock at the date of issuance is charged as compensation expense over the vesting periods of the awards.
On July 18, 2013, the Company issued 212,694 retention shares of TSYS common stock with a market value of $5.5 million to certain key employees of NetSpend. The nonvested stock bonus awards to certain key
employees are for services to be provided in the future and vest over periods ranging from two to four years. The market value of the TSYS common stock at the date of issuance is charged as compensation expense over the vesting periods of the
awards.
The following table summarizes the number of shares granted each year:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Number of shares |
|
|
672,724 |
|
|
|
1,667,246 |
|
|
|
310,690 |
|
| Market value (in millions) |
|
$ |
20.6 |
|
|
|
41.3 |
|
|
|
6.7 |
|
A summary of the status of TSYS’ nonvested shares as of December 31, 2014, 2013 and 2012 and the changes during the periods are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Nonvested shares (in
thousands, except per share data) |
|
Shares |
|
|
Weighted
Average
Grant-Date
Fair Value |
|
|
Shares |
|
|
Weighted
Average
Grant-Date
Fair Value |
|
|
Shares |
|
|
Weighted
Average
Grant-Date
Fair Value |
|
| Outstanding at beginning of year |
|
|
1,783 |
|
|
$ |
24.19 |
|
|
|
554 |
|
|
$ |
19.96 |
|
|
|
618 |
|
|
$ |
16.80 |
|
| Granted |
|
|
673 |
|
|
|
30.67 |
|
|
|
1,667
|
1
|
|
|
24.75 |
|
|
|
311 |
|
|
|
21.47 |
|
| Vested |
|
|
(602 |
) |
|
|
23.74 |
|
|
|
(328 |
) |
|
|
19.95 |
|
|
|
(366 |
) |
|
|
15.91 |
|
| Forfeited/canceled |
|
|
(85 |
) |
|
|
25.47 |
|
|
|
(110 |
) |
|
|
23.82 |
|
|
|
(9 |
) |
|
|
19.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Outstanding at end of year |
|
|
1,769 |
|
|
$ |
26.75 |
|
|
|
1,783 |
|
|
$ |
24.19 |
|
|
|
554 |
|
|
$ |
19.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1 |
Includes the issuance of approximately 870,361 stock replacement awards in connection with the acquisition of NetSpend in 2013. These awards had a market value of $21.5 million.
A portion of the expense associated with these options has been included as a component of the total purchase price of the NetSpend acquisition. Refer to Note 24. |
As of December 31, 2014, there was approximately $30.5 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements. That cost is expected to be recognized
over a remaining weighted average period of 2.0 years.
71
In 2014, TSYS authorized a total grant of 211,593 performance shares to certain key executives with a
performance-based vesting schedule (2014 performance shares). These 2014 performance shares have a 2014-2016 performance period for which the Compensation Committee of the Board of Directors established two
performance goals: revenues before reimbursable items and adjusted EPS and, if such goals are attained in 2016, the performance shares will vest, up to a maximum of 200% of the total grant. Compensation expense for the award is measured on the grant
date based on the quoted market price of TSYS common stock. The Company estimates the probability of achieving the goals through the performance period and expenses the award on a straight-line basis. Compensation costs related to these performance
shares are expected to be recognized through the end of 2016.
On July 18, 2013, TSYS issued 225,000 shares of TSYS common stock as a
performance-based retention stock award to a certain key executive with a performance-based vesting schedule through 2015. This award was forfeited in July 2014. The Company has reversed all previously recorded expense associated with this award.
On July 1, 2013, the Company issued 87,356 shares of TSYS common stock as a performance-based replacement stock award as part of the NetSpend
acquisition. The performance-based stock award has a 2013-2015 performance period for which the Compensation Committee of the Board of Directors established two performance goals: compound growth in revenues of the NetSpend segment and operating
income of the NetSpend segment and, if such goals are attained in 2015, the performance award will vest, up to a maximum of 100% of the total grant. The Company estimates the probability of achieving the goals through the performance period and
expenses the award on a straight-line basis. Compensation costs related to the performance-based stock award are expected to be recognized until the end of 2015.
In April 2013, TSYS authorized a total grant of 237,679 performance shares to certain key executives with a performance-based vesting schedule (2013 performance shares). These 2013 performance shares have a 2013-2015 performance period for which the Compensation Committee of the Board of Directors established two performance goals: compounded growth in revenues before reimbursable items and income from continuing
operations and, if such goals are attained in 2015, the performance shares will vest, up to a maximum of 200% of the total grant. Compensation expense for the award is measured on the grant date based on the quoted market price of TSYS common stock.
The Company estimates the probability of achieving the goals through the performance period and expenses the award on a straight-line basis. Compensation costs related to these performance shares are expected to be recognized until the end of 2015.
In March 2012, TSYS authorized a total grant of 241,095 performance shares to certain key executives with a performance based vesting schedule (2012
performance shares). These 2012 performance shares have a 2012-2014 performance period for which the Compensation Committee of the Board of Directors established two performance goals: compound growth in
revenues before reimbursable items and income from continuing operations and, if such goals are attained in 2014, the performance shares will vest, up to a maximum of 200% of the total grant. Compensation expense for the award is measured on the
grant date based on the quoted market price of TSYS common stock. On February 4, 2015, when the Committee certified performance, the performance shares vested at approximately 134% of the total grant.
As of December 31, 2014, there was approximately $10.4 million of total unrecognized compensation cost related to the 2013 and 2014 performance shares
compensation arrangements. That cost is expected to be recognized until the end of 2015.
A summary of the awards authorized in each year is below:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total Number of
Shares Awarded |
|
|
Potential
Number
of Performance-
Based Shares to be
Vested |
|
| 2014 |
|
|
211,593 |
|
|
|
211,593 |
|
|
|
(2017 |
) |
| 2013 |
|
|
563,803 |
|
|
|
325,035 |
|
|
|
(2016 |
) |
| 2012 |
|
|
241,095 |
|
|
|
458,082 |
|
|
|
(2015 |
) |
72
A summary of the status of TSYS’ performance-based nonvested shares as of December 31, 2014, 2013 and 2012
and changes during those periods are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Performance-based Nonvested
shares (in thousands, except per share data) |
|
Shares |
|
|
Weighted
Average
Grant Date
Fair Value |
|
|
Shares |
|
|
Weighted
Average
Grant Date
Fair Value |
|
|
Shares |
|
|
Weighted
Average
Grant Date
Fair Value |
|
| Outstanding at beginning of year |
|
|
1,049 |
|
|
$ |
22.75 |
|
|
|
809 |
|
|
$ |
18.76 |
|
|
|
580 |
|
|
$ |
16.68 |
|
| Granted |
|
|
211 |
|
|
|
30.89 |
|
|
|
564
|
1
|
|
|
24.88 |
|
|
|
278 |
|
|
|
22.91 |
|
| Vested |
|
|
(258 |
) |
|
|
17.57 |
|
|
|
(324 |
) |
|
|
15.93 |
|
|
|
(37 |
) |
|
|
18.08 |
|
| Forfeited/canceled |
|
|
(236 |
) |
|
|
25.62 |
|
|
|
— |
|
|
|
— |
|
|
|
(12 |
) |
|
|
16.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Outstanding at end of year |
|
|
766 |
|
|
$ |
25.86 |
|
|
|
1,049 |
|
|
$ |
22.75 |
|
|
|
809 |
|
|
$ |
18.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1 |
Includes the issuance of approximately 87,356 stock replacement awards in connection with the acquisition of NetSpend in 2013. These awards had a market value of $2.2 million. A
portion of the expense associated with these awards has been included as a component of the total purchase price of the NetSpend acquisition. Refer to Note 24. |
Stock Option Awards
During 2014, 2013 and 2012, the Company granted stock options to key TSYS executive
officers and non-management members of its Board of Directors. The grants to key TSYS executive officers were issued for services to be provided in the future and vest over a period of three years. The grants to the Board of Directors were fully
vested on the date of grant. The average fair value of the options granted was estimated on the date of grant using the Black-Scholes-Merton option-pricing model.
On July 1, 2013, the Company issued 1,060,148 stock option replacement awards with a market value of $13.7 million as part of the NetSpend acquisition. The weighted average fair value of the options was
$12.93 and was calculated on the date of grant using a conversion factor into equivalent shares of the Company’s common stock on the acquisition date. The grants vest over a period ranging from seven months to 45 months. The weighted average
fair value of the option grants was estimated on the date of grant using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions: exercise price of $11.68; risk-free interest rate of 1.31%; expected volatility
of 29.22%; expected term of 4.7 years; and dividend yield of 1.63%.
The following table summarizes the weighted average assumptions, and the weighted
average fair value of the options:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Number of options granted |
|
|
1,046,372 |
|
|
|
1,939,796 |
|
|
|
818,090 |
|
| Weighted average exercise price |
|
$ |
30.96 |
|
|
$ |
17.42 |
|
|
$ |
22.95 |
|
| Risk-free interest rate |
|
|
2.01 |
% |
|
|
1.31 |
% |
|
|
1.69 |
% |
| Expected volatility |
|
|
25.06 |
% |
|
|
26.81 |
% |
|
|
24.11 |
% |
| Expected term (years) |
|
|
6.5 |
|
|
|
6.0 |
|
|
|
7.9 |
|
| Dividend yield |
|
|
1.29 |
% |
|
|
1.64 |
% |
|
|
1.75 |
% |
| Weighted average fair value |
|
$ |
7.66 |
|
|
$ |
9.48 |
|
|
$ |
5.27 |
|
73
A summary of TSYS’ stock option activity as of December 31, 2014, 2013 and 2012, and changes during the
years ended on those dates is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| (in thousands, except per share
data) |
|
Options |
|
|
Weighted
Average
Exercise Price |
|
|
Options |
|
|
Weighted
Average
Exercise Price |
|
|
Options |
|
|
Weighted
Average
Exercise Price |
|
| Options: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Outstanding at beginning of year |
|
|
5,752 |
|
|
$ |
20.96 |
|
|
|
6,065 |
|
|
$ |
21.27 |
|
|
|
6,082 |
|
|
$ |
20.61 |
|
| Granted 1 |
|
|
1,046 |
|
|
|
30.96 |
|
|
|
1,940 |
|
|
|
17.42 |
|
|
|
818 |
|
|
|
22.95 |
|
| Exercised |
|
|
(1,850 |
) |
|
|
18.79 |
|
|
|
(2,177 |
) |
|
|
18.75 |
|
|
|
(619 |
) |
|
|
16.15 |
|
| Forfeited/canceled |
|
|
(56 |
) |
|
|
28.88 |
|
|
|
(76 |
) |
|
|
16.78 |
|
|
|
(216 |
) |
|
|
23.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Outstanding at end of year |
|
|
4,892 |
|
|
$ |
23.83 |
|
|
|
5,752 |
|
|
$ |
20.96 |
|
|
|
6,065 |
|
|
$ |
21.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Options exercisable at year-end |
|
|
2,781 |
|
|
$ |
22.86 |
|
|
|
3,232 |
|
|
$ |
23.02 |
|
|
|
3,235 |
|
|
$ |
24.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted average fair value of options granted during the year |
|
|
|
|
|
$ |
7.66 |
|
|
|
|
|
|
$ |
9.48 |
|
|
|
|
|
|
$ |
5.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1 |
Includes the issuance of approximately 1.1 million stock option replacement awards in connection with the acquisition of NetSpend in 2013. These awards had a market value of
$13.7 million. A portion of the expense associated with these awards has been included as a component of the total purchase price of the NetSpend acquisition. Refer to Note 24. |
As of December 31, 2014 the average remaining contractual life and intrinsic value of TSYS’ outstanding and exercisable stock options were as follows:
|
|
|
|
|
|
|
|
|
| |
|
Outstanding |
|
|
Exercisable |
|
| Average remaining contractual life (in years) |
|
|
6.6 |
|
|
|
5.1 |
|
| Aggregate intrinsic value (in thousands) |
|
$ |
49,548 |
|
|
|
30,866 |
|
Shares Issued for Options Exercised
During 2014, 2013 and 2012, employees of the Company exercised
options for shares of TSYS common stock that were issued from treasury. The table below summarizes these stock option exercises by year:
|
|
|
|
|
|
|
|
|
| (in thousands) |
|
Options Exercised
and Issued from
Treasury |
|
|
Intrinsic Value |
|
| 2014 |
|
|
(1,850 |
) |
|
$ |
22,883 |
|
| 2013 |
|
|
2,177 |
|
|
|
16,580 |
|
| 2012 |
|
|
619 |
|
|
|
4,243 |
|
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 and cash outflows
in the operating 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.
As of December 31, 2014, there was approximately $5.7 million of total unrecognized compensation cost related to TSYS stock options that is expected to be recognized over a remaining weighted average period of
1.2 years.
74
The following table summarizes shares held as treasury stock and their related carrying value as of December 31:
|
|
|
|
|
|
|
|
|
| (in thousands) |
|
Number of
Treasury
Shares |
|
|
Treasury
Shares Cost |
|
| 2014 |
|
|
17,836 |
|
|
$ |
453,230 |
|
| 2013 |
|
|
15,073 |
|
|
|
326,996 |
|
| 2012 |
|
|
15,440 |
|
|
|
287,301 |
|
Stock Repurchase Plan
On April 20, 2010, TSYS announced a stock repurchase plan to purchase up to
10 million shares of TSYS stock. The shares may be purchased from time to time over the next two years at prices considered attractive to the Company. On May 3, 2011, TSYS announced that its Board had approved an increase in the number of
shares that may be repurchased under its current share repurchase plan from up to 10 million shares to up to 15 million shares of TSYS stock. On July 24, 2012, TSYS announced that its Board had approved an increase in the number of
shares that may be repurchased under its current share repurchase plan from up to 15 million shares to up to 20 million shares of TSYS stock. The expiration date of the plan was also extended to April 30, 2014. During 2014, the
Company purchased 5.2 million shares for approximately $165.3 million, at an average price of $31.79. During 2013, the Company purchased 3.1 million shares for approximately $97.6 million, at an average price of $31.48. During 2012, the
Company purchased 3.2 million shares for approximately $74.6 million, at an average price of $23.31. In January 2014, the TSYS Board approved an increase in the number of shares that may be repurchased under its current share repurchase plan
from up to 20 million shares to up to 28 million shares of TSYS stock. With the increase, TSYS had 12.0 million shares available to be repurchased. In addition, the expiration date of the plan was extended to April 30, 2015.
On January 27, 2015, TSYS announced that its Board had approved a new stock repurchase plan to purchase up to 20 million shares of TSYS
stock. The shares may be purchased from time to time at prices considered appropriate. There is no expiration date for the plan. The plan discussed in the preceding paragraph was terminated.
The following table sets forth information regarding the Company’s purchases of its common stock on a monthly basis during the three months ended December 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in thousands, except per share data) |
|
Total Number
of Shares
Purchased |
|
|
Average Price
Paid per Share |
|
|
Total Number of
Cumulative shares Purchased
as Part of Publicly
announced Plans
or
Programs |
|
|
Maximum
Number of
Shares That
May Yet Be
Purchased
Under the Plans
or
Programs |
|
| October 2014 |
|
|
— |
|
|
$ |
— |
|
|
|
19,693 |
|
|
|
8,307 |
|
| November 2014 |
|
|
850 |
|
|
|
32.88 |
|
|
|
20,543 |
|
|
|
7,457 |
|
| December 2014 |
|
|
650 |
|
|
|
33.35 |
|
|
|
21,193 |
|
|
|
6,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
1,500 |
|
|
$ |
33.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Shares
In 2008, the Compensation Committee approved “share withholding for taxes” for all
employee nonvested awards, and also for employee stock options under specified circumstances. The dollar amount of the income tax liability from each exercise is converted into TSYS shares and withheld at the statutory minimum. The shares are added
to the treasury account and TSYS remits funds to the Internal Revenue Service to settle the tax liability. During 2014 and 2013, the Company acquired 162,489 shares for approximately $5.2 million and acquired 264,383 shares for approximately
$6.3 million, respectively, as a result of share withholding for taxes.
75
| Note 21 |
Other Comprehensive Income (Loss) |
Comprehensive income (loss) for TSYS consists of net income, cumulative foreign currency translation adjustments, unrealized gain on available
for sale securities and the recognition of an overfunded or underfunded status of a defined benefit postretirement plan recorded as a component of shareholders’ equity. The income tax effects allocated to and the cumulative balance of each
component of accumulated other comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in thousands) |
|
Beginning
Balance |
|
|
Pretax
amount |
|
|
Tax
effect |
|
|
Net-of-tax |
|
|
Ending
Balance |
|
| As of December 31, 2011 |
|
$ |
(2,585 |
) |
|
|
5,397 |
|
|
|
3,257 |
|
|
|
2,140 |
|
|
$ |
(445 |
) |
| Foreign currency translation adjustments |
|
$ |
(186 |
) |
|
|
4,875 |
|
|
|
1,357 |
|
|
|
3,518 |
|
|
$ |
3,332 |
|
| Transfer from noncontrolling interest (NCI) |
|
|
28 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
28 |
|
| Change in accumulated other comprehensive income (AOCI) related to postretirement healthcare plans |
|
|
(287 |
) |
|
|
(2,603 |
) |
|
|
(938 |
) |
|
|
(1,665 |
) |
|
|
(1,952 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31, 2012 |
|
$ |
(445 |
) |
|
|
2,272 |
|
|
|
419 |
|
|
|
1,853 |
|
|
$ |
1,408 |
|
| Foreign currency translation adjustments |
|
$ |
3,332 |
|
|
|
(295 |
) |
|
|
1,033 |
|
|
|
(1,328 |
) |
|
$ |
2,004 |
|
| Transfer from NCI |
|
|
28 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
28 |
|
| Gain on available for sale securities |
|
|
— |
|
|
|
2,810 |
|
|
|
1,037 |
|
|
|
1,773 |
|
|
|
1,773 |
|
| Change in AOCI related to postretirement healthcare plans |
|
|
(1,952 |
) |
|
|
1,926 |
|
|
|
30 |
|
|
|
1,896 |
|
|
|
(56 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31, 2013 |
|
$ |
1,408 |
|
|
|
4,441 |
|
|
|
2,100 |
|
|
|
2,341 |
|
|
$ |
3,749 |
|
| Foreign currency translation adjustments |
|
$ |
2,004 |
|
|
|
(17,143 |
) |
|
|
(1,547 |
) |
|
|
(15,596 |
) |
|
$ |
(13,592 |
) |
| Transfer from NCI |
|
|
28 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
28 |
|
| Gain on available for sale securities |
|
|
1,773 |
|
|
|
(1,058 |
) |
|
|
(390 |
) |
|
|
(668 |
) |
|
|
1,105 |
|
| Change in AOCI related to postretirement healthcare plans |
|
|
(56 |
) |
|
|
921 |
|
|
|
332 |
|
|
|
589 |
|
|
|
533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31, 2014 |
|
$ |
3,749 |
|
|
|
(17,280 |
) |
|
|
(1,605 |
) |
|
|
(15,675 |
) |
|
$ |
(11,926 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consistent with its overall strategy of pursuing international investment opportunities, TSYS adopted the permanent reinvestment exception under GAAP, 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.
| Note 22 |
Segment Reporting, including Geographic Area Data and Major Customers |
TSYS provides global payment processing and other services to card-issuing and merchant acquiring institutions in the United States and
internationally through online accounting and electronic payment processing systems. Corporate expenses, such as finance, legal, human resources, mergers and acquisitions and investor relations are categorized as Corporate Administration.
In the first quarter of 2014, the Company’s Japan-based entities qualified for discontinued operations treatment.
In July 2013, TSYS completed its acquisition of all the outstanding stock of NetSpend, which previously operated as a publicly traded company. NetSpend’s
financial results are included in the NetSpend segment.
In December 2012, TSYS completed its acquisition of all the outstanding stock of ProPay, a
privately-held payment solutions company. ProPay’s financial results are included in the Merchant Services segment.
In August 2012, TSYS completed
its acquisition of 60% of CPAY, a privately held direct merchant acquirer. CPAY’s financial results are included in the Merchant Services segment. In February, 2014, the Company purchased an additional 15% equity interest in CPAY.
Refer to Note 24 for more information on acquisitions.
76
North America Services includes electronic payment processing services and other services provided from within the
North America region. International Services includes electronic payment processing and other services provided from outside the North America region. Merchant Services includes electronic processing and other services provided to merchants and
merchant acquirers. The NetSpend segment provides GPR prepaid debit and payroll cards and alternative financial service solutions to the underbanked and other consumers in the United States.
At TSYS, the chief operating decision maker (CODM) is a group consisting of Senior Executive Management and above. In the first quarter of 2014, the CODM decided
that all share-based compensation costs should be included in the category “Corporate Administration and Other” for purposes of segment disclosures. All prior periods were restated to reflect this change. This change is used to evaluate
performance and assess resources starting in the first quarter of 2014. The information utilized by the CODM consists of the financial statements and the main metrics monitored are revenue growth and growth in profitability.
Upon completion of the NetSpend acquisition in 2013, the CODM implemented a new metric called adjusted segment operating income in order to analyze each
segment’s results of operations. This new metric consists of operating income adjusted for amortization of acquisition related intangibles and corporate administrative and other costs. All periods presented have been adjusted to reflect this
new measure. Depreciation and amortization for the segments changed as a result of this new metric removing amortization associated with intangible assets from the total for the segments.
In early 2013, TSYS embarked on two corporate-wide initiatives that impact more than one operating segment. One initiative is a multi-year, multi-phase initiative that consists of enhancing TSYS’ issuing
processing platforms. The other is an innovation initiative focused on enhancing existing product and service offerings through several new product concepts and ideas on how to change existing processes. The costs associated with these two new
initiatives are not allocated to the operating segments, but are combined, along with the existing corporate administration, in a grouping titled “Corporate Administration and Other.” This was a change the CODM requested and was used to
evaluate performance and assess resources starting in the first quarter of 2013. The following operating results by segment comparison reflects the change in segment reporting from these initiatives, including the 2012 results.
The Company believes the terms and conditions of transactions between the segments are comparable to those which could have been obtained in transactions with
unaffiliated parties. TSYS’ operating segments share certain resources, such as information technology support, that TSYS allocates asymmetrically.
77
|
|
|
|
|
|
|
|
|
|
|
|
|
| Years Ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
| (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
| Operating Segments |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| Revenues before reimbursable items |
|
|
|
|
|
|
|
|
|
|
|
|
| North America Services |
|
$ |
954,082 |
|
|
|
860,645 |
|
|
|
826,750 |
|
| International Services |
|
|
341,785 |
|
|
|
321,484 |
|
|
|
318,730 |
|
| Merchant Services |
|
|
435,649 |
|
|
|
446,277 |
|
|
|
409,698 |
|
| NetSpend |
|
|
482,686 |
|
|
|
207,851 |
|
|
|
— |
|
| Intersegment revenues |
|
|
(21,224 |
) |
|
|
(12,549 |
) |
|
|
(14,102 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Revenues before reimbursable items from external customers |
|
$ |
2,192,978 |
|
|
|
1,823,708 |
|
|
|
1,541,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total revenues |
|
|
|
|
|
|
|
|
|
|
|
|
| North America Services |
|
$ |
1,117,764 |
|
|
|
1,000,073 |
|
|
|
965,393 |
|
| International Services |
|
|
363,359 |
|
|
|
341,549 |
|
|
|
336,047 |
|
| Merchant Services |
|
|
510,120 |
|
|
|
533,050 |
|
|
|
512,580 |
|
| NetSpend |
|
|
482,686 |
|
|
|
207,851 |
|
|
|
— |
|
| Intersegment revenues |
|
|
(27,052 |
) |
|
|
(18,218 |
) |
|
|
(20,463 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Revenues from external customers |
|
$ |
2,446,877 |
|
|
|
2,064,305 |
|
|
|
1,793,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
| North America Services |
|
$ |
86,513 |
|
|
|
74,480 |
|
|
|
74,673 |
|
| International Services |
|
|
38,909 |
|
|
|
41,708 |
|
|
|
47,889 |
|
| Merchant Services |
|
|
14,571 |
|
|
|
12,034 |
|
|
|
12,083 |
|
| NetSpend |
|
|
7,509 |
|
|
|
3,121 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Segment depreciation and amortization |
|
|
147,502 |
|
|
|
131,343 |
|
|
|
134,645 |
|
| Acquisition intangible amortization |
|
|
96,971 |
|
|
|
65,893 |
|
|
|
26,264 |
|
| Corporate Administration and Other |
|
|
2,147 |
|
|
|
1,790 |
|
|
|
2,491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total depreciation and amortization |
|
$ |
246,620 |
|
|
|
199,026 |
|
|
|
163,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Adjusted segment operating income |
|
|
|
|
|
|
|
|
|
|
|
|
| North America Services |
|
$ |
351,512 |
|
|
|
321,619 |
|
|
|
295,171 |
|
| International Services |
|
|
55,123 |
|
|
|
42,068 |
|
|
|
27,211 |
|
| Merchant Services |
|
|
134,872 |
|
|
|
155,643 |
|
|
|
157,409 |
|
| NetSpend |
|
|
128,285 |
|
|
|
66,353 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total adjusted segment operating income |
|
|
669,792 |
|
|
|
585,683 |
|
|
|
479,791 |
|
| Acquisition intangible amortization |
|
|
(96,971 |
) |
|
|
(65,893 |
) |
|
|
(26,264 |
) |
| NetSpend merger and acquisition operating expenses |
|
|
(3,217 |
) |
|
|
(14,220 |
) |
|
|
— |
|
| Corporate Administration and Other |
|
|
(137,964 |
) |
|
|
(123,070 |
) |
|
|
(98,558 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating income |
|
$ |
431,640 |
|
|
|
382,500 |
|
|
|
354,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31, |
|
2014 |
|
|
2013 |
|
|
|
|
| Total assets |
|
|
|
|
|
|
|
|
|
|
|
|
| North America Services |
|
$ |
3,327,160 |
|
|
|
3,215,333 |
|
|
|
|
|
| International Services |
|
|
356,590 |
|
|
|
417,379 |
|
|
|
|
|
| Merchant Services |
|
|
695,744 |
|
|
|
676,592 |
|
|
|
|
|
| NetSpend |
|
|
1,556,369 |
|
|
|
1,596,150 |
|
|
|
|
|
| Intersegment assets |
|
|
(2,202,282 |
) |
|
|
(2,218,886 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total assets |
|
$ |
3,733,581 |
|
|
|
3,686,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
GEOGRAPHIC AREA DATA: The Company maintains property and equipment, net of accumulated
depreciation and amortization, in the following geographic areas:
|
|
|
|
|
|
|
|
|
| |
|
As of
December 31, |
|
| (in millions) |
|
2014 |
|
|
2013 |
|
| United States |
|
$ |
237.9 |
|
|
|
207.4 |
|
| Europe |
|
|
45.5 |
|
|
|
46.4 |
|
| Other |
|
|
7.2 |
|
|
|
6.2 |
|
|
|
|
|
|
|
|
|
|
| Totals |
|
$ |
290.6 |
|
|
|
260.0 |
|
|
|
|
|
|
|
|
|
|
GEOGRAPHIC AREA REVENUE BY OPERATING SEGMENT: The following tables reconcile segment external revenue to revenues by geography for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
| (in millions) |
|
North
America
Services |
|
|
International
Services |
|
|
Merchant
Services |
|
|
NetSpend |
|
|
Total |
|
|
% |
|
| United States |
|
$ |
778.8 |
|
|
|
— |
|
|
|
508.7 |
|
|
|
482.7 |
|
|
$ |
1,770.2 |
|
|
|
72.3 |
|
| Europe1 |
|
|
0.8 |
|
|
|
304.3 |
|
|
|
— |
|
|
|
— |
|
|
|
305.1 |
|
|
|
12.5 |
|
| Canada |
|
|
290.2 |
|
|
|
— |
|
|
|
0.3 |
|
|
|
— |
|
|
|
290.5 |
|
|
|
11.9 |
|
| Mexico |
|
|
16.2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
16.2 |
|
|
|
0.7 |
|
| Other1 |
|
|
16.3 |
|
|
|
47.9 |
|
|
|
0.7 |
|
|
|
— |
|
|
|
64.9 |
|
|
|
2.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
1,102.3 |
|
|
|
352.2 |
|
|
|
509.7 |
|
|
|
482.7 |
|
|
$ |
2,446.9 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2013 |
|
| (in millions) |
|
North
America
Services |
|
|
International
Services |
|
|
Merchant
Services |
|
|
NetSpend |
|
|
Total |
|
|
% |
|
| United States |
|
$ |
712.1 |
|
|
|
— |
|
|
|
533.9 |
|
|
|
207.9 |
|
|
$ |
1,453.9 |
|
|
|
70.4 |
|
| Europe1 |
|
|
0.8 |
|
|
|
293.8 |
|
|
|
— |
|
|
|
— |
|
|
|
294.6 |
|
|
|
14.3 |
|
| Canada |
|
|
243.0 |
|
|
|
— |
|
|
|
0.2 |
|
|
|
— |
|
|
|
243.2 |
|
|
|
11.8 |
|
| Mexico |
|
|
16.5 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
16.5 |
|
|
|
0.8 |
|
| Other1 |
|
|
14.5 |
|
|
|
41.0 |
|
|
|
0.6 |
|
|
|
— |
|
|
|
56.1 |
|
|
|
2.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
986.9 |
|
|
|
334.8 |
|
|
|
534.7 |
|
|
|
207.9 |
|
|
$ |
2,064.3 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2012 |
|
| (in millions) |
|
North
America
Services |
|
|
International
Services |
|
|
Merchant
Services |
|
|
NetSpend |
|
|
Total |
|
|
% |
|
| United States |
|
$ |
706.7 |
|
|
|
— |
|
|
|
514.4 |
|
|
|
— |
|
|
$ |
1,221.1 |
|
|
|
68.1 |
|
| Europe1 |
|
|
0.8 |
|
|
|
292.2 |
|
|
|
— |
|
|
|
— |
|
|
|
293.0 |
|
|
|
16.3 |
|
| Canada |
|
|
217.3 |
|
|
|
— |
|
|
|
0.2 |
|
|
|
— |
|
|
|
217.5 |
|
|
|
12.1 |
|
| Mexico |
|
|
11.7 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
11.7 |
|
|
|
0.7 |
|
| Other1 |
|
|
10.5 |
|
|
|
39.3 |
|
|
|
0.5 |
|
|
|
— |
|
|
|
50.3 |
|
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
947.0 |
|
|
|
331.5 |
|
|
|
515.1 |
|
|
|
— |
|
|
$ |
1,793.6 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1 |
Revenues are impacted by movements in foreign currency exchange rates. |
MAJOR CUSTOMER: For the years ended December 31, 2014, 2013 and 2012, the Company had no major customers.
79
| Note 23 |
Supplemental Cash Flow Information |
Nonvested Share Awards
The Company has
issued shares of TSYS common stock to certain key employees and non-management members of its Board of Directors. The grants to certain key employees were issued in the form of nonvested stock bonus awards for services to be provided in the future
by such officers and employees. The grants to the Board of Directors were fully vested on the date of grant. Refer to Note 18 for more information on nonvested share awards.
Equipment and Software Acquired Under Capital Lease Obligations
The Company acquired computer equipment and
software under capital leases in the amount of $17.9 million, $5.3 million and $8.1 million in 2014, 2013 and 2012, respectively.
Software Acquired
Under Direct Financing
The Company acquired software under direct financing in the amount of $13.6 million in 2014 . The Company did not acquire any
software under direct financing in 2013 and 2012. Refer to Note 13 for more information.
2014
In February 2014, the Company
acquired an additional 15% equity interest in CPAY from its privately held owner for $37.5 million, which increased its equity interest in CPAY from 60% to 75%. This purchase reduced the remaining redeemable noncontrolling interest in CPAY to 25% of
its total outstanding equity. The pro forma earnings from this acquisition are not material to the consolidated financial statements.
2013
On July 1, 2013, TSYS acquired all the outstanding stock of NetSpend, which previously operated as a publicly traded company and is a leading
provider of GPR prepaid debit and payroll cards and related financial services to underbanked and other consumers in the U.S. The acquisition complements the Company’s existing presence in the prepaid processing space. The results of the newly
acquired business are being reported by TSYS as a new operating segment titled NetSpend.
Under the terms of the Merger Agreement, TSYS acquired 100
percent ownership of NetSpend for approximately $1.4 billion, including $1.2 billion of cash to shareholders, $70.7 million of cash for payment to holders of vested stock options and awards, $58.3 million of cash for repayment of NetSpend’s
revolving credit facility and $15.6 million in replacement stock options and awards. NetSpend shareholders received $16.00 in cash for each share of NetSpend common stock. There were 1.6 million NetSpend shares held by five shareholders who
asserted appraisal (or dissenters’) rights with respect to their NetSpend shares, for a preliminary value of $25.7 million at $16.00 per share that were not funded at the closing of the acquisition. During 2014, TSYS paid $38.6 million to
dissenting shareholders to settle the lawsuit.
Under the terms of the Merger Agreement, the Company replaced unvested share-based awards for certain
current employees of NetSpend. The following table provides a list of all replacement awards and the estimated fair value of those awards issued in conjunction with the acquisition of NetSpend:
|
|
|
|
|
|
|
|
|
| |
|
Number of Shares
and Options Issued |
|
|
Fair Value
(in millions) |
|
| Time-based restricted stock |
|
|
870,361 |
|
|
$ |
21.5 |
|
| Non-qualified stock options |
|
|
530,696 |
|
|
|
8.4 |
|
| Incentive stock options |
|
|
529,452 |
|
|
|
5.3 |
|
| Performance-based restricted stock |
|
|
87,356 |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
2,017,865 |
|
|
$ |
37.4 |
|
|
|
|
|
|
|
|
|
|
80
The portion of the fair value of the replacement awards related to services provided prior to the business combination
was included in the total purchase price. The portion of the fair value associated with future service is recognized as expense over the future service period, which varies by award. The Company determined that $15.6 million ($11.1 million net of
tax) of the replacement awards was related to services rendered prior to the business combination.
The goodwill amount of $1.0 billion arising from the
acquisition consists largely of expansion of customer base, differentiation in market opportunity and economies of scale expected from combining the operations of TSYS and NetSpend. All of the goodwill was assigned to TSYS’ new NetSpend
segment. The goodwill recognized is not expected to be deductible for income tax purposes.
The following table summarizes the consideration paid for
NetSpend and the initially recognized amounts of the identifiable assets acquired and liabilities assumed on July 1, 2013 (the acquisition date).
|
|
|
|
|
| (in thousands) |
|
|
|
| Consideration |
|
|
|
|
| Cash |
|
$ |
1,355,270 |
|
| Equity instruments |
|
|
15,557 |
|
| Dissenting shareholder liability* |
|
|
25,723 |
|
|
|
|
|
|
| Fair value of total consideration transferred |
|
$ |
1,396,550 |
|
|
|
|
|
|
| Recognized amounts of identifiable assets acquired and liabilities assumed: |
|
|
|
|
| Cash |
|
$ |
40,610 |
|
| Accounts receivable |
|
|
11,335 |
|
| Property equipment and software |
|
|
11,657 |
|
| Identifiable intangible assets |
|
|
480,086 |
|
| Deferred tax asset |
|
|
10,165 |
|
| Other assets |
|
|
36,660 |
|
| Deferred tax liability |
|
|
(155,945 |
) |
| Financial liabilities |
|
|
(62,452 |
) |
|
|
|
|
|
| Total identifiable net assets |
|
|
372,116 |
|
| Goodwill |
|
|
1,024,434 |
|
|
|
|
|
|
|
|
$ |
1,396,550 |
|
|
|
|
|
|
| * |
Represents 1.6 million NetSpend shares held by dissenting shareholders |
As of December 31, 2014, goodwill related to NetSpend increased $8.5 million due to changes during the measurement period. For more information, refer to Note 7.
Identifiable intangible assets acquired in the NetSpend acquisition include channel relationships, current technology, a prospect database, the NetSpend trade name
and non-compete agreements.
The identifiable intangible assets had no significant estimated residual value. These intangible assets are being amortized
over their estimated useful lives of five to eight years based on the pattern of expected future economic benefit, which approximates a straight-line basis over the useful lives of the assets. The fair value of the acquired identifiable intangible
assets of $480.1 million was estimated using the income approach (discounted cash flow and relief from royalty methods) and cost approach. The fair values and useful lives of the identified intangible assets were primarily determined using
forecasted cash flows, which included estimates for certain assumptions such as revenues, expenses, attrition rates and royalty rates.
81
The estimated fair value of identifiable intangible assets acquired in the acquisitions and the related estimated
weighted average useful lives are as follows:
|
|
|
|
|
|
|
|
|
| (in thousands) |
|
Fair Value |
|
|
Weighted Average
Useful Life
(in
years) |
|
| Channel relationships |
|
$ |
317,000 |
|
|
|
8.0 |
|
| Current technology |
|
|
78,711 |
|
|
|
7.0 |
|
| Trade name |
|
|
44,000 |
|
|
|
5.0 |
|
| Database |
|
|
28,000 |
|
|
|
5.0 |
|
| Covenants-not-to-compete |
|
|
11,500 |
|
|
|
6.0 |
|
| Favorable lease |
|
|
875 |
|
|
|
4.9 |
|
|
|
|
|
|
|
|
|
|
| Total acquired identifiable intangible assets |
|
$ |
480,086 |
|
|
|
7.3 |
|
|
|
|
|
|
|
|
|
|
The fair value measurement of the identifiable intangible assets represents Level 2 and Level 3 measurements. Key assumptions include (a) cash flow projections based on market participant and internal data,
(b) a discount rate of 11%, (c) a pre-tax royalty rate range of 2.5-7.0%, (d) attrition rates of 5%-40%, (e) an effective tax rate of 40%, and (f) a terminal value based on a long-term sustainable growth rate of 3%.
In connection with the acquisition, TSYS incurred $3.2 million and $14.2 million in acquisition-related costs primarily related to professional legal,
finance, and accounting costs for the years ended December 31, 2014 and 2013, respectively. These costs were expensed as incurred and are included in merger and acquisition expenses on the income statement.
Pro Forma Results of Operations
The amounts of NetSpend
revenue and earnings included in TSYS’ consolidated income statement for the years ended December 31, 2013 and 2012, and the pro forma revenue and earnings of the combined entity had the acquisition date been January 1, 2012 are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Actual |
|
|
Supplemental pro
forma |
|
| |
|
Years Ended
December 31, |
|
|
Years Ended
December 31, |
|
| (in thousands, except per share data) |
|
2013 |
|
|
2012 |
|
|
2013 |
|
|
2012 |
|
| Revenue |
|
$ |
2,064,305 |
|
|
|
1,793,557 |
|
|
|
2,286,348 |
|
|
|
2,144,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income attributable to TSYS common shareholders |
|
$ |
244,750 |
|
|
|
244,280 |
|
|
|
239,775 |
|
|
|
193,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic EPS attributable to TSYS common shareholders |
|
$ |
1.30 |
|
|
|
1.30 |
|
|
|
1.28 |
|
|
|
1.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Diluted EPS attributable to TSYS common shareholders |
|
$ |
1.29 |
|
|
|
1.29 |
|
|
|
1.27 |
|
|
|
1.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unaudited pro forma financial information presented above does not purport to represent what the actual results of operations would have been if the acquisition of NetSpend’s operations had occurred
prior to January 1, 2012, nor is it indicative of the future operating results of TSYS. The unaudited pro forma financial information does not reflect the impact of future events that may occur after the acquisition, including, but not limited
to, anticipated cost savings from operating synergies.
The unaudited pro forma financial information presented in the table above has been
adjusted to give effect to adjustments that are (1) directly related to the business combination; (2) factually supportable; and (3) expected to have a continuing impact. These adjustments include, but are not limited to, the
application of accounting policies; and depreciation and amortization related to fair value adjustments to property, plant and equipment and intangible assets.
82
The pro forma adjustments do not reflect the following material items that result directly from the acquisition and
which impacted the statement of operations following the acquisition:
| • |
|
Acquisition and related financing transactions costs relating to fees to investment bankers, attorneys, accountants, and other professional advisors, and
other transaction-related costs that were not capitalized as deferred financing costs; and |
| • |
|
The effect of anticipated cost savings or operating efficiencies expected to be realized and related restructuring charges such as technology and
infrastructure integration expenses, and other costs related to the integration of NetSpend into TSYS. |
2012
On December 26, 2012, TSYS completed its acquisition of ProPay for $123.7 million. ProPay previously operated as a privately-held company, and offers simple,
secure and affordable payment solutions for organizations ranging from small, home based entrepreneurs to multi-billion dollar enterprises. The results of operations for ProPay are immaterial and therefore not included in the Company’s results
for the year ended December 31, 2012. The goodwill of $93.5 million recorded arises largely from synergies and economies of scale expected to be realized from combining the operations of TSYS and ProPay. None of the goodwill is tax deductible.
ProPay is included as part of the Merchant Services segment.
On August 8, 2012, TSYS completed its acquisition of 60% of CPAY, a privately held
direct merchant acquirer, for $66.0 million in cash. CPAY provides merchant services to small- to medium-sized merchants through an Independent Sales Agent (ISA) model, with a focus on merchants in the restaurant, personal services and retail
sectors. The acquisition of CPAY expands the Company’s presence in the merchant acquiring industry and enhances the Company’s distribution model with CPAY’s strong sales agent channel. The results of operations for CPAY have been
included in the Company’s results beginning August 8, 2012, and are included in the Merchant Services segment. The goodwill of $68.6 million recorded arises largely from synergies and economies of scale expected to be realized from
combining the operations of TSYS and CPAY. All of the goodwill is tax deductible.
The following table summarizes the consideration paid for
acquisitions and the preliminary recognized amounts of identifiable assets acquired and liabilities assumed during the year ended December 31, 2012.
|
|
|
|
|
| (in thousands) |
|
|
|
| Cash and restricted cash |
|
$ |
3,003 |
|
| Accounts receivable |
|
|
4,092 |
|
| Other assets |
|
|
12,522 |
|
| Identifiable intangible assets |
|
|
76,600 |
|
| Other liabilities |
|
|
(30,558 |
) |
| Noncontrolling interest in acquired entity |
|
|
(38,000 |
) |
| Goodwill |
|
|
162,090 |
|
|
|
|
|
|
| Total consideration |
|
$ |
189,749 |
|
|
|
|
|
|
The fair value of accounts receivable, accounts payable, accrued compensation, and other liabilities approximates the carrying amount of those assets and liabilities at the acquisition date. The fair value of
accounts receivable due under agreements with customers is $4.1 million. The gross amount due under the agreements is $4.8 million, of which approximately $688,000 is expected to be uncollectible.
Of the $123.7 million in consideration paid for ProPay, $12.5 million was placed in escrow for a period of 18 months to secure certain claims that may be brought
against the escrowed consideration by TSYS pursuant to the merger agreement. The 18-month period has been extended for an additional nine months in a subsequent tolling agreement between the parties. Consideration is contingent and may be returned
to the Company pursuant to indemnification commitments made by the shareholders which formerly owned ProPay related to a breach of the representations and warrantees made in the merger agreement. Such indemnification commitments are recognized as a
possible receivable and measured at fair value. Based upon the probability of
83
various possible outcomes related to the indemnification commitments, TSYS has determined that the fair value of any receivable asset would be immaterial. The maximum amount of contingent
consideration returnable to the Company related to certain indemnification commitments made by the Seller is $12.5 million. The maximum amount of contingent consideration returnable to the Company related to fundamental representations and
warranties made by the Seller is limited to the purchase price.
Of the $66.0 million in consideration paid for CPAY, $3.3 million was placed in escrow
for a period of 21 months to secure certain claims that may be brought against the escrowed consideration by TSYS pursuant to the Investment Agreement. The entire amount of the escrow was released to the Seller (as defined below) in May 2014
pursuant to the terms of the Escrow Agreement between the parties. Consideration is contingent and may be returned to the Company pursuant to indemnification commitments made by the company which formerly owned 100% of Central Payment (Seller)
related to, among other things, a breach of certain representations and warranties made in the Investment Agreement, and losses arising out of any of the Excluded Liabilities as defined in the Investment Agreement. Such indemnification commitments
are recognized as a possible asset receivable and measured at fair value. Based upon the probability of various possible outcomes related to the indemnification commitments, TSYS has determined that the fair value of any receivable asset would be
immaterial. The maximum amount of contingent consideration returnable to the Company related to certain indemnification commitments made by the Seller is $9.9 million. The maximum amount of contingent consideration returnable to the Company related
to fundamental representations and warranties made by the Seller is limited to the purchase price.
Identifiable intangible assets acquired in the
acquisitions had no significant estimated residual value. These intangible assets are being amortized over their estimated useful lives of two to ten years based on the pattern of expected future economic benefit, which approximates a
straight-line basis over the useful lives of the assets. The fair value of the acquired identifiable intangible assets of $76.6 million was estimated using the income approach (discounted cash flow and relief from royalty methods) and cost approach.
The fair values and useful lives of the identified intangible assets were primarily determined using forecasted cash flows, which included estimates for certain assumptions such as revenues, expenses, attrition rates, and royalty rates. The
estimated fair value of identifiable intangible assets acquired in the acquisitions and the related estimated weighted average useful lives are as follows:
|
|
|
|
|
|
|
|
|
| |
|
Fair Value
(in millions) |
|
|
Weighted
Useful Lives
(in years) |
|
| Customer relationships |
|
$ |
59.5 |
|
|
|
8.6 |
|
| Current technology |
|
|
13.0 |
|
|
|
5.0 |
|
| Covenants-not-to-compete |
|
|
2.9 |
|
|
|
2.8 |
|
| Trade name |
|
|
1.2 |
|
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
| Total acquired identifiable intangible assets |
|
$ |
76.6 |
|
|
|
7.7 |
|
|
|
|
|
|
|
|
|
|
This fair value measurement is based on significant inputs that are both observable (Level 2) and non-observable (Level 3) in the market. Key assumptions in the ProPay acquisition include (a) cash flow
projections based on market participant and internal data, (b) a discount rate of 14.0% for the overall Company and a discount rate of 14.5% for the intangible assets, (c) a pre-tax royalty rate of 1.0% for trade names and technology
(d) an attrition rate of 3.0%- 5.0%, (e) an effective tax rate of 39.0%, and (f) a terminal value based on a long-term sustainable growth rate of 3.0%.
Key assumptions in the CPAY acquisition include (a) cash flow projections based on market participant and internal data, (b) a discount rate of 19.0% for the overall company and a discount rate of 19.5%
for the intangible assets, (c) a pre-tax royalty rate of 1.0% for trade names and technology (d) an attrition rate of 25.0%, (e) an effective tax rate of 39.0%, and (f) a terminal value based on a long-term sustainable growth
rate of 3.0%.
In connection with these acquisitions, TSYS incurred $1.3 million in acquisition-related costs primarily related to professional legal,
finance, and accounting costs. These costs were expensed as incurred and are included in selling, general, and administrative expenses in the income statement for the year ended December 31, 2012.
84
Other
On
February 1, 2012, TSYS acquired contract-based intangible assets in its Merchant Services segment for $1.7 million. These intangible assets are being amortized on a straight-line basis over their estimated useful lives of five years which
approximates their usage.
Redeemable Noncontrolling Interest
The fair value of the noncontrolling interest in CPAY, owned by a private company, was based on the actual purchase price paid for the controlling interest in CPAY. Next, adjustments were made for lack of control
and lack of marketability that market participants would consider when estimating the fair value of the noncontrolling, non-marketable interest in CPAY.
In connection with the acquisition of CPAY, the Company is party to call and put arrangements with respect to the membership units that represent the remaining
noncontrolling interest of CPAY. The call arrangement is exercisable by TSYS and the put arrangement is exercisable by the Seller. The put arrangement is outside the control of the Company by requiring the Company to purchase the Seller’s
entire equity interest in CPAY at a put price at fair market value. At the time of the original acquisition, the redemption of the put option was considered probable based upon the passage of time of the second anniversary date. The put arrangement
is recorded on the balance sheet and is classified as redeemable noncontrolling interest outside of permanent equity.
In February 2014, the Company
purchased an additional 15% equity interest in CPAY for $37.5 million, reducing its redeemable noncontrolling interest in CPAY to 25%. As a result of this transaction, the call and put arrangements for CPAY, representing 25% of its total outstanding
equity interests, were extended and may now be exercised at the discretion of TSYS or the Seller on the third anniversary of the closing of the additional purchase and upon the recurrence of certain other specified events.
The put option is not currently redeemable, but redemption is considered probable based upon the passage of time of the third anniversary date of the 2014 purchase
of additional equity. As such, the Company has adopted the accounting policy to accrete changes in the redemption value over the period from the date of issuance to the earliest redemption date, which the Company believes to be in 2017. If the put
option was redeemable as of December 31, 2014, the redemption value was estimated to be approximately $22.5 million. The Company did not accrete any changes to the redemption value as the balance as of December 31, 2014 exceeded the
accretion fair value amount.
Pro forma Results of Operations
The pro forma revenue and earnings of TSYS’ acquisitions other than NetSpend are not material to the consolidated financial statements.
| Note 25 |
Collaborative Arrangement |
TSYS has a 45% ownership interest in an enterprise jointly owned with two other entities which operates aircraft for the owners’ internal
use. The arrangement allows each entity access to the aircraft and each entity pays for its usage of the aircraft. Each quarter, the net operating results of the enterprise are shared among the owners based on their respective ownership percentage.
TSYS records its usage of the aircraft and its share of net operating results of the enterprise in selling, general and administrative expenses.
85
| Note 26 |
Earnings Per Share |
The following table illustrates basic and diluted EPS under the guidance of GAAP for the years ended December 31, 2014, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
|
2012 |
|
| (in thousands, except per share data) |
|
Common
Stock |
|
|
Participating
Securities |
|
|
Common
Stock |
|
|
Participating
Securities |
|
|
Common
Stock |
|
|
Participating
Securities |
|
| Basic EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income |
|
$ |
322,872 |
|
|
|
|
|
|
$ |
244,750 |
|
|
|
|
|
|
$ |
244,280 |
|
|
|
|
|
| Less income allocated to nonvested awards |
|
|
(3,308 |
) |
|
|
3,308 |
|
|
|
(1,595 |
) |
|
|
1,595 |
|
|
|
(800 |
) |
|
|
800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income allocated to common stock for EPS calculation(a) |
|
$ |
319,564 |
|
|
|
3,308 |
|
|
$ |
243,155 |
|
|
|
1,595 |
|
|
$ |
243,480 |
|
|
|
800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Average common shares outstanding(b) |
|
|
184,297 |
|
|
|
1,925 |
|
|
|
187,145 |
|
|
|
1,246 |
|
|
|
187,403 |
|
|
|
627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic EPS(a)/(b) |
|
$ |
1.73 |
|
|
|
1.72 |
|
|
$ |
1.30 |
|
|
|
1.28 |
|
|
$ |
1.30 |
|
|
|
1.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income |
|
$ |
322,872 |
|
|
|
|
|
|
$ |
244,750 |
|
|
|
|
|
|
$ |
244,280 |
|
|
|
|
|
| Less income allocated to nonvested awards |
|
|
(3,288 |
) |
|
|
3,288 |
|
|
|
(1,585 |
) |
|
|
1,585 |
|
|
|
(796 |
) |
|
|
796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income allocated to common stock for EPS calculation(c) |
|
$ |
319,584 |
|
|
|
3,288 |
|
|
$ |
243,165 |
|
|
|
1,585 |
|
|
$ |
243,484 |
|
|
|
796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Average common shares outstanding |
|
|
184,297 |
|
|
|
1,925 |
|
|
|
187,145 |
|
|
|
1,246 |
|
|
|
187,403 |
|
|
|
627 |
|
| Increase due to assumed issuance of shares related to common equivalent shares outstanding |
|
|
1,459 |
|
|
|
|
|
|
|
1,648 |
|
|
|
|
|
|
|
1,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Average common and common equivalent shares outstanding(d) |
|
|
185,756 |
|
|
|
1,925 |
|
|
|
188,793 |
|
|
|
1,246 |
|
|
|
188,665 |
|
|
|
627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Diluted EPS(c)/(d) |
|
$ |
1.72 |
|
|
|
1.71 |
|
|
$ |
1.29 |
|
|
|
1.27 |
|
|
$ |
1.29 |
|
|
|
1.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The diluted EPS calculation excludes stock options and nonvested awards that are convertible into 1.1 million, 2.9 million and 3.6 million common shares for the years ended December 31, 2014,
2013 and 2012, respectively, because their inclusion would have been anti-dilutive.
| Note 27 |
Subsequent Events |
In the first quarter of 2015, TSYS completed the conversion of Bank of America’s consumer card portfolio from its in-house processing system
to TSYS’ processing system.
Management performed an evaluation of the Company’s activity as of the date these audited financial statements
were issued, and has concluded that, other than as set forth above, there are no additional significant subsequent events requiring disclosure.
86
Report of Independent Registered Public Accounting Firm
The Board of Directors
Total System Services, Inc.:
We have audited the accompanying consolidated balance sheets of Total System Services, Inc. and subsidiaries (the Company) as of December 31, 2014 and 2013, and the related consolidated statements of income,
comprehensive income, cash flows and equity for each of the years in the three-year period ended December 31, 2014. We also have audited the Company’s internal control over financial reporting as of December 31, 2014, based on
criteria established in Internal Control — Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these consolidated
financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal
Control Over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the
consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. Our audits of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Total
System Services, Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014, in conformity with
U.S. generally accepted accounting principles. Also in our opinion, Total System Services, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria
established in Internal Control — Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Atlanta, Georgia
February 25, 2015
87
Management’s Report on Internal Control Over Financial Reporting
The management of Total System Services, Inc. (the Company) is responsible for establishing and maintaining adequate internal control over financial reporting as
defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company maintains accounting and internal control systems which are intended to provide reasonable assurance that assets are safeguarded against loss from unauthorized use
or disposition, transactions are executed in accordance with management’s authorization and accounting records are reliable for preparing financial statements in accordance with accounting principles generally accepted in the United States.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent
limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be
circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these
inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, risk.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014. In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission in Internal Control — Integrated Framework 2013.
Based on our assessment, management believes that, as of December 31, 2014, the Company’s internal control over financial reporting is effective based on
those criteria.
KPMG LLP, the independent registered public accounting firm who audited the Company’s consolidated financial statements, has
issued an attestation report on the effectiveness of internal control over financial reporting as of December 31, 2014 that appears on the preceding page.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| M. Troy Woods President &
Chief Executive Officer |
|
|
|
Paul M. Todd Senior Executive Vice President
& Chief Financial Officer |
88
Quarterly Financial Data (Unaudited), Stock Price, Dividend Information
TSYS’ common stock trades on the New York Stock Exchange (NYSE) under the symbol “TSS.” Price and volume information appears under the abbreviation
“TotlSysSvc” in NYSE daily stock quotation listings. As of February 18, 2015, there were 21,713 holders of record of TSYS common stock, some of whom are holders in nominee name for the benefit of different shareholders.
The 2014 fourth quarter dividend of $0.10 per share was declared on December 2, 2014, and was paid January 2, 2015, to shareholders of record on
December 19, 2014. The 2013 fourth quarter dividend of $0.10 per share was declared on December 3, 2013, and was paid December 26, 2013, to shareholders of record on December 17, 2013. Total dividends declared in 2014 and in 2013
amounted to $74.8 million and $75.8 million, respectively. It is the present intention of the Board of Directors of TSYS to continue to pay cash dividends on its common stock.
Presented here is a summary of the unaudited quarterly financial data for the years ended December 31, 2014 and 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in thousands, except per share data) |
|
First
Quarter |
|
|
Second
Quarter |
|
|
Third
Quarter |
|
|
Fourth
Quarter |
|
| 2014 |
|
Revenues |
|
$ |
592,848 |
|
|
|
602,036 |
|
|
|
616,891 |
|
|
|
635,104 |
|
|
|
Operating income |
|
|
80,697 |
|
|
|
98,763 |
|
|
|
129,407 |
|
|
|
122,773 |
|
|
|
Net income attributable to TSYS common shareholders |
|
|
49,303 |
|
|
|
109,904 |
|
|
|
83,805 |
|
|
|
79,860 |
|
|
|
Basic earnings per share attributable to TSYS common shareholders |
|
|
0.26 |
|
|
|
0.59 |
|
|
|
0.45 |
|
|
|
0.43 |
|
|
|
Diluted earnings per share attributable to TSYS common shareholders |
|
|
0.26 |
|
|
|
0.58 |
|
|
|
0.45 |
|
|
|
0.43 |
|
|
|
Cash dividends declared |
|
|
0.10 |
|
|
|
0.10 |
|
|
|
0.10 |
|
|
|
0.10 |
|
|
|
Stock prices: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
|
33.28 |
|
|
|
32.70 |
|
|
|
32.41 |
|
|
|
34.41 |
|
|
|
Low |
|
|
28.71 |
|
|
|
28.70 |
|
|
|
30.63 |
|
|
|
28.83 |
|
|
|
Close |
|
|
30.41 |
|
|
|
31.41 |
|
|
|
30.96 |
|
|
|
33.96 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2013 |
|
Revenues |
|
$ |
448,791 |
|
|
|
461,860 |
|
|
|
570,551 |
|
|
|
583,103 |
|
|
|
Operating income |
|
|
74,520 |
|
|
|
94,642 |
|
|
|
104,479 |
|
|
|
108,858 |
|
|
|
Net income attributable to TSYS common shareholders |
|
|
57,029 |
|
|
|
57,716 |
|
|
|
64,350 |
|
|
|
65,655 |
|
|
|
Basic earnings per share attributable to TSYS common shareholders |
|
|
0.31 |
|
|
|
0.31 |
|
|
|
0.34 |
|
|
|
0.35 |
|
|
|
Diluted earnings per share attributable to TSYS common shareholders |
|
|
0.30 |
|
|
|
0.31 |
|
|
|
0.34 |
|
|
|
0.34 |
|
|
|
Cash dividends declared |
|
|
0.10 |
|
|
|
0.10 |
|
|
|
0.10 |
|
|
|
0.10 |
|
|
|
Stock prices: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
|
24.78 |
|
|
|
24.94 |
|
|
|
29.93 |
|
|
|
33.30 |
|
|
|
Low |
|
|
21.97 |
|
|
|
22.62 |
|
|
|
24.65 |
|
|
|
28.49 |
|
|
|
Close |
|
|
24.78 |
|
|
|
24.48 |
|
|
|
29.42 |
|
|
|
33.28 |
|
89
STOCK PERFORMANCE GRAPH
The following graph compares the yearly percentage change in cumulative shareholder return on TSYS stock with the cumulative total return of the Standard & Poor’s 500 Index and the Standard &
Poor’s Systems Software Index for the last five fiscal years (assuming a $100 investment on December 31, 2009 and reinvestment of all dividends).
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Among TSYS, the S&P 500 Index, and the
S&P Systems Software Index
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
| TSYS |
|
$ |
100.00 |
|
|
$ |
90.74 |
|
|
$ |
117.38 |
|
|
$ |
130.77 |
|
|
$ |
206.26 |
|
|
$ |
213.18 |
|
| S&P 500 |
|
$ |
100.00 |
|
|
$ |
115.06 |
|
|
$ |
117.49 |
|
|
$ |
136.30 |
|
|
$ |
180.44 |
|
|
$ |
205.14 |
|
| S&P SS |
|
$ |
100.00 |
|
|
$ |
104.80 |
|
|
$ |
94.37 |
|
|
$ |
108.74 |
|
|
$ |
144.51 |
|
|
$ |
177.76 |
|
90
Exhibit 21.1
SUBSIDIARIES OF TOTAL SYSTEM SERVICES, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
| Ownership
Percentage |
|
|
Name |
|
Place of
Incorporation |
| |
100 |
% |
|
|
Columbus Depot Equipment Company |
|
Georgia |
|
|
|
|
|
99 |
% |
|
TSYS Merchant Solutions, LLC (1) |
|
Delaware |
| |
100 |
% |
|
|
TSYS Canada, Inc. |
|
Georgia |
| |
100 |
% |
|
|
TSYS Managed Services Canada, Inc. |
|
Ontario |
| |
100 |
% |
|
|
TSYS U.S. Holdings, Inc. |
|
Georgia |
|
|
|
|
|
100 |
% |
|
ProPay, Inc. |
|
Utah |
|
|
|
|
|
|
|
|
100% |
|
ProPay Financial Solutions Canada, Inc. |
|
Utah |
|
|
|
|
|
|
|
|
100% |
|
ProPay Global, Ltd. |
|
England and Wales |
|
|
|
|
|
75 |
% |
|
Central Payment Co., LLC |
|
Delaware |
|
|
|
|
|
|
|
|
100% |
|
Central Payment Deployment, Inc. |
|
Delaware |
| |
100 |
% |
|
|
Columbus Productions, Inc. |
|
Georgia |
| |
100 |
% |
|
|
TSYS Advisors, Inc. |
|
Georgia |
| |
100 |
% |
|
|
TSYS Servicos de Transacoes Eletronicas Ltda (2) |
|
Brazil |
| |
100 |
% |
|
|
TSYS International Management Limited (3) |
|
England |
|
|
|
|
|
100 |
% |
|
Total System Services Processing Europe Limited |
|
England |
|
|
|
|
|
100 |
% |
|
TSYS Europe (Netherlands) B.V. |
|
Netherlands |
|
|
|
|
|
100 |
% |
|
TSYS Europe (Spain) S.L. |
|
Spain |
|
|
|
|
|
100 |
% |
|
TSYS Europe (Deutschland) GmBH |
|
Germany |
|
|
|
|
|
100 |
% |
|
TSYS Europe (Italia) S.r.l |
|
Italy |
|
|
|
|
|
100 |
% |
|
TSYS Card Tech Limited |
|
England |
|
|
|
|
|
100 |
% |
|
TSYS Card Tech Services Limited |
|
Cyprus |
|
|
|
|
|
|
|
|
100% |
|
TSYS Card Tech Services (Malaysia) Limited |
|
Malaysia |
|
|
|
|
|
|
|
|
100% |
|
TSYS Card Tech Services India Private Limited (4) |
|
India |
|
|
|
|
|
|
|
|
100% |
|
TSYS – Rus L.L.C. |
|
Russia |
|
|
|
|
|
55 |
% |
|
TSYS Managed Services EMEA Limited |
|
England |
|
|
|
|
|
|
|
|
100% |
|
TSYS Managed Services EMEA B.V. |
|
Netherlands |
|
|
|
|
|
|
|
|
100% |
|
TSYS Managed Services EMEA (Netherlands) B.V. |
|
Netherlands |
| |
100 |
% |
|
|
TSYS Acquiring Solutions, L.L.C. |
|
Delaware |
|
|
|
|
|
100 |
% |
|
Infonox Software Private Limited (2) |
|
India |
| |
100 |
% |
|
|
NetSpend Holdings, Inc. |
|
Delaware |
|
|
|
|
|
100 |
% |
|
NetSpend Corporation |
|
Delaware |
|
|
|
|
|
100 |
% |
|
Skylight Acquisition I, Inc. |
|
Delaware |
|
|
|
|
|
|
|
|
100% |
|
Skylight Financial, Inc. |
|
Delaware |
| |
49 |
% |
|
|
Total System Services de Mexico, S.A. de C.V. |
|
Mexico |
| |
49 |
% |
|
|
TSYS Servicios Corporativos, S.A. de C.V. |
|
Mexico |
| |
44.56 |
% |
|
|
China Unionpay Data Services Company Limited |
|
China |
| (1) |
1% is owned by TSYS U.S. Holdings, Inc. |
| (2) |
Less than .1% is owned by Columbus Depot Equipment Company. |
| (3) |
10% is owned by Columbus Depot Equipment Company. |
| (4) |
Less than .1% is owned by TSYS Card Tech Services (Malaysia) Limited. |
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Total System Services,
Inc.:
We consent to the incorporation by reference in the registration statements (No. 333-25401,
No. 333-41775, No. 333-104142, No. 333-142791, No. 333-148449, No. 333-181790, and No. 333-189733) on Form S-8 and the registration statements (No. 333-199964 and
No. 333-188453) on Form S-3 of Total System Services, Inc. of our reports dated February 25, 2015, with respect to the consolidated balance sheets of Total System Services, Inc. as of December 31, 2014 and 2013, and the related
consolidated statements of income, comprehensive income, cash flows, and changes in equity for each of the years in the three-year period ended December 31, 2014, and the related financial statement schedule, and the effectiveness of internal
control financial reporting as of December 31, 2014, which reports appears in the December 31, 2014 annual report on Form 10-K of Total System Services, Inc.
/s/ KPMG LLP
Atlanta, Georgia
February 25, 2015
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, M. Troy Woods, certify that:
| 1. |
I have reviewed this annual report on Form 10-K of Total System Services, Inc.; |
| 2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report; |
| 3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report; |
| 4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| |
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| |
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| |
(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and |
| |
(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter
in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions): |
| |
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and |
| |
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
|
|
|
|
|
|
|
| Date: February 25, 2015 |
|
|
|
|
|
/s/ M. Troy Woods |
|
|
|
|
|
|
M. Troy Woods |
|
|
|
|
|
|
President and Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Paul M. Todd, certify that:
| 1. |
I have reviewed this annual report on Form 10-K of Total System Services, Inc.; |
| 2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report; |
| 3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report; |
| 4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a- 15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| |
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| |
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| |
(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and |
| |
(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter
in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions): |
| |
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and |
| |
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
|
|
|
|
|
|
|
| Date: February 25, 2015 |
|
|
|
|
|
/s/ Paul M. Todd |
|
|
|
|
|
|
Paul M. Todd |
|
|
|
|
|
|
Chief Financial Officer |
Exhibit 32
CERTIFICATION OF PERIODIC REPORT
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, M. Troy Woods, the President and Chief Executive
Officer of Total System Services, Inc. (the “Company”), and Paul M. Todd, the Chief Financial Officer of the Company, hereby certify that, to the best of his knowledge:
(1) The Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (the “Report”) fully complies with the requirements of
section 13(a) or section 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
|
|
|
|
|
|
|
| February 25, 2015 |
|
|
|
|
|
/s/ M. Troy Woods |
|
|
|
|
|
|
M. Troy Woods |
|
|
|
|
|
|
President and Chief Executive Officer |
|
|
|
|
| February 25, 2015 |
|
|
|
|
|
/s/ Paul M. Todd |
|
|
|
|
|
|
Paul M. Todd |
|
|
|
|
|
|
Chief Financial Officer |
This certification “accompanies” the Form 10-K to which it relates, is not deemed filed with the SEC and is not to
be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-K, irrespective of any general
incorporation language contained in such filing.)
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