hold on to your fork
2010 | TSYS Annual Report
“When I was a kid, my family ate
dinner together almost every
night. After the table was cleared,
my mother would sometimes
say, ‘Hold on to your fork.’ And
although our dinners were
top-notch, this phrase meant
that something even better
was coming.
At TSYS,® although we’ve made
significant progress in recent
years, we are holding on to
our forks. Because we know
the best is yet to come for
our company, and we’re
starting to feel it.”
because the best is yet to come.
Dear Shareholders and Friends:
Last year, I wrote to you that TSYS would
on January 1st of this year, we purchased the
emerge from 2010 as a stronger, leaner
remaining 49 percent of FNMS, which we
and more diversified company. As we
rebranded as TSYS Merchant Solutions.SM
close the books on a defining year in
As I have said before, this acquisition will
our company’s history, I am pleased
not be our last. We will continue to explore
to report that we accomplished
opportunities to pursue and invest in
those objectives and managed the
strategically sound acquisitions within
business well amidst an uncertain
and outside the United States to make
economic environment and a changing
TSYS an even stronger company.
payments industry. After facing a
series of challenging years, TSYS has
turned the corner and will continue
to grow in 2011 and beyond. We truly
believe the best is yet to come for TSYS.
We have focused on getting closer to
the merchant to make payments more
convenient and efficient while also
getting closer to the consumer in order
to make the payment experience more
rewarding. In April, we took a major step
forward in achieving this important goal
by entering into a joint venture with
First National Bank of Omaha and its
merchant acquiring business, First
National Merchant Solutions (FNMS).
We acquired a 51 percent stake, giving
us a top-10 presence in the merchant
acquiring market in the United States,
according to The Nilson Report. Then
PhiliP W. Tomlinson
Chairman of the Board &
Chief Executive Officer
1
We have also managed our company’s
resources to reflect a sense of steward-
ship in the investment you have made
in us. We manage our business by
doing more with less, keeping a
tight rein on expenses, and by wisely
allocating our capital, equipment, time
and talent for the greatest possible
value creation.
Taking into consideration all of these
factors, fiscal year 2010 stands out
as a year spent building a foundation
that will support scale in new countries,
on new systems and in growing
payment channels such as healthcare,
prepaid and mobile.
NORTH AMERICA RESULTS
We are pleased with our progress in
the North America segment of our
business. In 2010, an important
milestone for TSYS came with the
signing of Bank of Montreal, one of
Canada’s five largest banks and its
largest MasterCard issuer. Upon the
conversion of Bank of Montreal’s
portfolio, TSYS’ share of the Canadian
credit card market will approach 64
percent. We also successfully launched
a credit card for Walmart Canada,
where more than one million people
shop in one of 323 national locations
each day.*
bu ilding
momentum
Just what do we
mean by building
momentum?
We also signed an enterprise-wide
agreement with Simmons First, a
“super prime” issuer that offers some
of the most sought after credit card
products available to consumers today.
In addition, we signed Caterpillar
Financial Services Corporation, the
end-to-end healthcare payment
financial arm of Caterpillar Inc.
solution. Our solutions continue to
be regarded as among the best in
TSYS also renewed long-term agree-
the healthcare payments industry.
ments with both Canadian Imperial
Bank of Commerce and U.S. Bank.
MERCHANT SERVICES SUCCESSES
In addition to supporting U.S. Bank’s
In 2010, we were pleased to welcome
commercial card payment services, we
Mark D. Pyke, a 26-year veteran
also became its exclusive partner in
of the payments and financial
providing card processing services
services industry, as president of
for the bank’s Consumer Directed
TSYS Acquiring Solutions.® Mark
Healthcare (CDH) benefit cards.
has held leadership positions in
The cards will eventually allow U.S.
the acquiring industry for more than
Bank cardholders to access multiple
two decades, and his promising
healthcare-related spending accounts,
tenure has already been marked by
cash and lines of credit.
sound strategies to advance us in
the industry. Mark will now lead
The topic of healthcare created waves
the merchant services segment
in the political sector, and generated
that includes our merchant
excitement amongst our client base
processing and our merchant
as well. In May, we announced an
acquiring businesses.
agreement with Lighthouse1, which
offers CDH administration software
TSYS Acquiring Solutions renewed an
solutions, to provide an integrated
agreement with Sage Payment Services
* Source: walmartstores.com/pressroom/news/10519.aspx
2
To us, it means making constant, significant
progress toward our strategic goals. One goal
is to grow revenue before reimbursables by
6-8 percent, faster than the payments industry
at large. We’re also focusing on continuing to
diversify beyond the issuer credit processing
markets. And we’re ready to continue our
international expansion to grow revenue in
countries where we have a presence.
to provide authorization, settlement
size in every industry, including
and terminal services to its 155,000
complementary services that support
merchants. We also signed Cynergy
their operations. As part of our mer-
Data, a leading ISO provider to 120,000
chant acquiring strategy, we intend
merchants. In addition, we extended
to grow our existing restaurant, retail
our agreement with Bank of America
and home services verticals, while
Merchant Services in late 2010, but
expanding into new and different
we expect this business to decline
verticals and building scale through
over time as it transitions to a new
direct sales and the acquisition of
joint venture.
portfolios. In addition, we will expand
our offer of traditional authorization
TSYS Acquiring Solutions signed an
and settlement services in areas such
authorization and capture agreement
as healthcare, retail, e-Commerce
with Central Payments Co., one of
and prepaid.
the fastest growing transaction
processors in the United States,
Of note, TSYS Merchant Solutions
and we also extended our existing
signed Nebraska Methodist
agreement with Planet Payment.
Health System, our first large-scale
health system client, and also signed
Heading up TSYS Merchant Solutions
SmartyPig, an online savings account
is president Diana Mehochko. As a
provider. SmartyPig was our first cli-
merchant acquirer, TSYS Merchant
ent to leverage our prepaid platform
Solutions delivers a full set of products
combined with the strength of TSYS
and services for merchants of every
Merchant Solutions.
INTERNATIONAL SERVICES
PROGRESS
TSYS continues to grow on an
international scale, focusing on
our “home markets” of the United
Kingdom, Ireland, the Netherlands
and Germany, and selected target
markets, particularly Brazil, India,
Italy and Switzerland.
We will reach a significant milestone
this year as TSYS EuropeSM celebrates
its ten-year anniversary. Our leadership
in the region is widely recognized, as
we were named Card Processor of the
Year by Cards International in 2010.
Key TSYS clients also received awards
for innovation and best card products.
We couldn’t be prouder of this
prestigious recognition.
Last year, we signed Swisscard,
a joint venture between Credit
Suisse and American Express, and
the only Swiss company to offer its
cardholders American Express,
MasterCard and Visa credit cards. It
boasts a multi-product card portfolio
of 1.2 million and is scheduled to
be converted in mid-year 2011.
Tesco Bank, one of the UK’s most
successful supermarket banks, selected
us to support its credit card business,
3
and Bank of Ireland extended its
Kenya on PRIME and upgraded Qatar
Europe, and announced the signing
agreement with us for consumer
Islamic Bank to PRIME as well. In
of Cedacri, a provider of outsourced
and commercial processing, as well.
the Commonwealth of Independent
payment services.
TSYS also signed an agreement with
States region, we signed Standard
Permanent TSB, a Dublin-based retail
Bank of Azerbaijan. These moves
We are extremely proud of the
banking company, marking our first
demonstrate our commitment to
performance of CUP Data, our joint
European debit client.
building our licensing business.
venture with China UnionPay, which
now has more than 90 percent of the
We strengthened our presence in
We gained considerable traction
medium-tier outsourced processing
the Nordic region by signing a large
in Germany, and began the year
market. CUP Data continues to solidify
Nordic bank as a PRIME licensing
by announcing an agreement with
its reputation as a leading provider of
client. Also in the region, we
Frankfurt-based Degussa Bank to
outsourced credit payments while
completed the integration of DnB
provide payment services to its
expanding into the segments of
NOR Kort, Norway’s largest financial
corporate and business clients. We
debit and prepaid, as well.
services group, for its MasterCard
also signed B+S Card Service, one
brand on our PRIME licensing platform.
of Europe’s leading acquirers with a
In Japan, a leading Internet bank,
presence and scale in 12 European
SBI Sumishin Net Bank (SSNB),
Our PRIME licensing business
countries, to provide it with back-
selected TSYS to process its start-
continues to grow at a positive rate.
office merchant acceptance services
up payment card portfolio. We will
In Africa, we signed Imperial Bank of
across Europe. In response to our
provide processing and back-office
2010 stands out as a
year spent building
a foundation that will
support scale in new
countries, on new systems
impressive growth in Germany,
operation services for SSNB to issue
we expanded our relationship
cards to consumers, including retail
management team on the ground
membership cards, a proprietary
to make these clients’ transitions
private-label credit card and
as seamless as possible. Each of
network-branded credit cards.
these deals, in its own right, is
noteworthy and reinforces our
In Brazil, we successfully completed
ongoing commitment to Europe.
the second phase of a three-part
conversion for Carrefour onto
TS Prime,SM a new server-based,
processing system that will enable
and in growing payment
We continued a keen focus on Italy,
channels such as health-
care, prepaid and mobile.
the seventh-largest card market in
4
Carrefour to further grow its cards
business in the future. Brazil is the
fourth-largest card market in the
world, and one of the fastest
growing. We are eager to reap
the rewards from our investment
in the region to build scale with
additional retailers and banks.
LOOKING AHEAD
I am asked frequently about the result
of regulation (past, present and future)
on our industry and our company. In
2010, TSYS proactively helped our
clients navigate the new regulations
resulting from the Card Act in the U.S.,
along with similar changes in Canada
and the UK. We are proactively
engaged in regulatory changes
occurring in multiple regions of
the world.
Looking ahead, we face additional
challenges with the potential effects
on debit interchange. While we don’t
know how the legislation will ultimately
play out, we know that we will support
our clients to ensure they are compli-
ant, and we will use these changes as a
catalyst to drive innovation and deliver
new products that meet the needs of
today’s and tomorrow’s consumers.
the f utu re of the credit card
What is the outlook for the long-term
viability of credit products?
Given the pending regulations surrounding debit
cards, it’s important to highlight the superior
consumer protections credit affords to those
who are victims of fraud or misrepresentation.
Also, consumers benefit from their ability to
pay later when they use credit to buy gas, rent
a car or reserve a hotel room, unlike debit cards
which freeze funds, resulting in consumers
unknowingly overdrawing the account. And
these perks are becoming more apparent as
benefits to other payment products threaten to
disappear. We built our business on credit, and
although we are diversifying our product suite
at a rapid pace, we believe in the long-term
viability of credit cards.
5
TSYS across t he “value chain”
How exactly do we link buyers and sellers?
You’ll often hear us reference the payments “value chain.” From the time a buyer steps up
to the point of sale to the time when the transaction is accepted and the merchant is paid,
there’s a rapid succession of activities that occur, all in harmony with one another. The
merchant acquirer and acquirer processor authorize and route the transaction, all while
providing terminal support, connection to networks, fraud prevention and billing and
settlement. Issuers and issuer processors support the processing of the transaction, detect
fraud, issue statements, and a host of other back-end program management activities.
With TSYS Merchant Solutions, we now touch every link in the payments value chain to
support all payments.
We spend a great deal of time focusing on our strategic
But some things remain markedly the same. For TSYS, the
plans for the company’s future, and the topic of leadership
spirit of innovation and customer service has grown even
succession is a central element of those long-term initiatives.
stronger since our inception nearly three decades ago. It’s
I think it is important to mention that there are well-devel-
an indelible part of our corporate culture, and we know it
oped plans in place to ensure that appropriate succession
helps us build a better, stronger and more transparent
candidates are fully developed and capable of ascending to
company for future generations. While this past year
the next level — this is true for all executive-level positions,
proved to be challenging, TSYS emerged as an even
including mine. Whether changes occur tomorrow or years
stronger company. And, most important, I believe we
from now, we are continuously cultivating our team to fill key
are better suited for a future of growth and continued
leadership roles throughout the company, and our board of
leadership in the market.
directors contributes to these plans on a regular basis.
Thank you for your continued support and for being
In the decades since a small group of local bankers founded
alongside us every step of the way.
this now global business nearly 30 years ago, many things
have changed. Today, the world is smaller and infinitely
Respectfully,
more connected, with global consumers that have more
precise requirements and higher service expectations.
Making digital payments — plastic, mobile, RFID and
more — has become a staple of everyday life for consumers
Philip W. Tomlinson
across every age, geography and socioeconomic status.
Chairman of the Board & Chief Executive Officer
6
Financial Information
(dollars in thousands)
,
$
1
6
5
1
9
8
1
,
,
$
1
7
1
1
5
3
4
,
,
$
1
6
7
7
4
8
3
,
,
$
1
7
1
7
5
7
7
,
$
3
5
1
4
3
7
,
$
3
7
1
1
2
2
,
$
3
4
4
0
2
6
,
$
3
0
9
4
2
9
,
$
2
3
7
4
4
3
,
$
2
5
0
1
0
0
,
$
2
1
5
2
1
3
,
$
1
9
3
9
4
7
,
07
08
09
10
07
08
09
10
07
08
09
10
Total revenues
Operating income
Net income attributable to
TSYS common shareholders
(dollars in thousands, except per share data)
2010
2009
% Change
Total revenues
Operating income
$1,717,577
1,677,483
2.4
309,429
344,026
(10.1)
Net income attributable to TSYS common shareholders
193,947
215,213
(9.9)
Basic earnings per share attributable to TSYS common shareholders*
Diluted earnings per share attributable to TSYS common shareholders*
Return on average shareholder equity
Operating margin
Net profit margin
* from continuing operations
1.00
1.00
16.0%
18.0%
12.0%
1.12
(10.7)
1.12
(10.8)
19.9%
20.5%
13.1%
7
Board of Directors
Richard E. Anthony
Chairman of the Board
Chief Executive Officer, retired
Synovus
James H. Blanchard
Chairman of the Board &
Chief Executive Officer, retired
Synovus
Chairman of the Executive Committee
TSYS
Richard Y. Bradley
Attorney at Law
Bradley & Hatcher
Kriss Cloninger III
President & Chief Financial Officer
Aflac Incorporated
Walter W. Driver Jr.
Chairman-Southeast
Goldman, Sachs & Co.
Gardiner W. Garrard Jr.
Chairman of the Board
The Jordan Company
Sidney E. Harris
Professor
Georgia State University,
J. Mack Robinson College of Business
John P. Illges III
Senior Vice President, retired
The Robinson-Humphrey
Company, Inc.
Emeritus Directors
Richard H. Bickerstaff
Manager
Broken Arrow Land
Company, LLC
Lovick P. Corn
Advisory Director
W.C. Bradley Co.
Leadership
Executive Management
Management Committee
Mason H. Lampton
Chairman of the Board
Standard Concrete Products
W. Walter Miller Jr.
Group Executive, retired
TSYS
H. Lynn Page
Vice Chairman of the Board, retired
Synovus
TSYS
Philip W. Tomlinson
Chairman of the Board &
Chief Executive Officer
TSYS
John T. Turner
Private Investor
Richard W. Ussery
Chairman of the Board, retired
TSYS
M. Troy Woods
President & Chief Operating Officer
TSYS
James D. Yancey
Chairman of the Board, retired
Synovus
Chairman of the Board
Columbus Bank and Trust
Rebecca K. Yarbrough
Private Investor
Samuel A. Nunn
Co-Chairman &
Chief Executive Officer
Nuclear Threat Initiative
Distinguished Professor
The Sam Nunn School
of International Affairs,
Georgia Institute of Technology
Former U.S. Senator
William B. Turner
Chairman of the Executive
Committee, retired
Synovus
W.C. Bradley Co.
George C. Woodruff Jr.
Real Estate Developer
Group Executives
Gracie H. Allmond
Ronald L. Barnes
Carey R. Blackstone Jr.
Rodney Q. Boyer
David L. Chew
James B. Cosgrove
David R. Figgat
John Dale Hester Jr.
Anthony W. Hodge
Virginia A. Holman
William T. Hunt
J. Matthew Jardina
G. Clyde Jinks III
Bruce A. Jones
Billy J. Kilgore II
Suzanne Kump
John C. Latimer
Kathleen Moates
Timothy L. Munto
Michael F. Peck
Keith D. Pierce
Daryl A. Seaman
B. Wayne Smith
Mary M. Stewart
Barry J. Tompkins
R. Carlton Wilkinson
Marie T. Williams
Kathy L. Wills
Olin M. Wise
David E. Wood
Philip W. Tomlinson
Chairman of the Board &
Chief Executive Officer
M. Troy Woods
President &
Chief Operating Officer
G. Sanders Griffith III
Senior Executive Vice President,
General Counsel & Secretary
James B. Lipham
Senior Executive Vice President
& Chief Financial Officer
William A. Pruett
Senior Executive Vice President
President, North America Services
Kenneth L. Tye
Senior Executive Vice President
& Chief Information Officer
Gaylon Jowers Jr.
Executive Vice President
President, TSYS International
Mark D. Pyke
Executive Vice President
President, TSYS Acquiring Solutions
8
Connie C. Dudley
Executive Vice President,
Client Development
W. Allen Pettis
Executive Vice President,
Relationship Management
Ryland L. Harrelson
Executive Vice President
& Chief Human Resource Officer
Stephen W. Humber
Executive Vice President
& Chief Technology Officer
Kelley C. Knutson
Executive Vice President,
International Services
Colleen W. Kynard
Executive Vice President,
Customer Care
International Managing Directors
David E. Duncan
China
Robert E. Evans
Europe
Paul M. Todd
Executive Vice President,
Strategy, Mergers & Acquisitions
& Product
Dorenda K. Weaver
Executive Vice President
& Chief Accounting Officer
Bruce L. Bacon
Group Executive,
Chief Sales Officer
Diana M. Mehochko
Group Executive
President, TSYS Merchant Solutions
Hitoshi Kondo
Japan
Amit Sethi
India
Jaffar Agha-Jaffar
Middle East, Africa & Commonwealth
of Independent States
Jesús M. Navarro Torres
Mexico
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 TSYS’ results of operations and financial position over the last five years are
presented below.
(in thousands, except per share data)
Income Statement Data:
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,717,577
2010
Years Ended December 31,
2009
2008
2007
2006
1,677,483
1,711,534
1,651,981
1,690,605
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 309,429
344,026
371,122
351,437
353,616
Income from continuing operations, net of tax . . . . . . . . . . . . . . . $ 208,866
(3,245)
(Loss) income from discontinued operations, net of tax . . . . . . . . .
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to noncontrolling interests . . . . . . . . . .
205,621
(11,674)
225,720
(6,544)
219,176
(3,963)
253,085
(1,409)
251,676
(1,576)
239,315
104
239,419
(1,976)
250,057
(142)
249,915
(752)
Net income attributable to TSYS common shareholders . . . . . . . $ 193,947
215,213
250,100
237,443
249,163
Basic earnings per share (EPS)* attributable to TSYS common
shareholders:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . $
(Loss) income from discontinued operations . . . . . . . . . . . . . . .
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted EPS* attributable to TSYS common shareholders:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . $
(Loss) income from discontinued operations . . . . . . . . . . . . . . .
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash dividends declared per share . . . . . . . . . . . . . . . . . . . . . . . $
1.00
(0.02)
0.99
1.00
(0.02)
0.99
0.28
(in thousands)
Balance Sheet Data:
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,952,261
Obligations under long-term debt and capital leases, excluding
2010
1.12
(0.03)
1.09
1.12
(0.03)
1.09
0.28
1.27
(0.01)
1.26
1.27
(0.01)
1.26
0.28
1.20
0.00
1.20
1.20
0.00
1.20
3.31
1.26
(0.00)
1.26
1.26
(0.00)
1.26
0.27
At December 31,
2009
2008
2007
2006
1,710,954
1,550,024
1,479,081
1,634,241
current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
225,276
205,123
209,871
3,687
3,625
* Note: Basic and diluted EPS amounts for continuing operations and net income do not total due to rounding.
Financial Overview
Total System Services, Inc.’s (TSYS’ or the Company’s) revenues
are derived from providing global payment provider services to
financial and nonfinancial institutions, generally under long-term
processing contracts. The Company’s services are provided
through the Company’s three operating segments: North America
Services, International Services and Merchant Services.
Through the Company’s North America Services and International
Services segments, TSYS processes information through its card-
holder
the
United States and internationally. The Company’s North America
to financial
throughout
institutions
systems
Services segment provides these services to clients in the
United States, Canada, Mexico and the Caribbean. The Compa-
ny’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 ser-
vices to merchant acquirers and merchants in the United States.
On March 1, 2010, TSYS announced the signing of an Investment
Agreement with First National Bank of Omaha (FNBO) to form a
new joint venture company, First National Merchant Solutions,
LLC (FNMS), of which TSYS would own 51%. FNMS offers trans-
action processing, merchant support and underwriting, and
value-added services, as well as Visa- and MasterCard-branded
9
prepaid cards for businesses of any size. FNMS is included within
the Merchant Services segment. The effective date of the acqui-
sition was April 1, 2010. On January 4, 2011, TSYS announced it
had acquired, effective January 1, 2011, the remaining 49-percent
interest in FNMS, from FNBO. The company is being rebranded
as TSYS Merchant Solutions (TMS).
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 sea-
son. 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 decon-
versions 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 signifi-
cant 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
foreign currency translation on its financial
the impact of
performance.
A significant amount of the Company’s revenues is derived from
long-term contracts with large clients, including a certain major
customer. 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. Con-
solidation among financial institutions has resulted in an increas-
ingly concentrated client base, which results in a change in client
mix toward larger clients.
Economic Conditions
General economic conditions in the U.S. and other areas of the
world dramatically weakened in the second half of 2008 and most
of 2009 but showed improvement during 2010. Many of TSYS’
businesses rely in part on the number of consumer credit
transactions which have been reduced by a weakened U.S. and
world economy and difficult credit markets.
General reduction in consumer credit card spending negatively
impacted the Company’s revenues during 2009. Also as a result of
the current economic conditions in the U.S., credit card issuers
have been reducing credit limits and closing accounts and are
more selective with respect to whom they issue credit cards. In
2010, improving economic conditions have led card issuers to
increase card solicitations. Continued improvement of economic
conditions in the U.S. could positively impact future revenues and
profits of the Company.
Regulation
Government regulation affects key areas of TSYS’ business, in the
U.S. as well as internationally. As a result of the financial crisis,
TSYS, along with the rest of the financial services industry, con-
tinues 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 Con-
sumer Protection Act (Financial Reform Act). This legislation,
which provides for sweeping financial regulatory reform, may
have a significant and negative impact on the Company’s clients,
which could impact TSYS’ earnings through fee reductions, higher
costs (both regulatory and implementation) and new restrictions
on our operations. The Financial Reform Act may also impact the
competitive dynamics of the financial services industry in the
institutions,
U.S. by more adversely impacting large financial
some of which are TSYS clients, and by adversely impacting
the competitive position of U.S. financial institutions in compar-
ison to foreign competitors in certain businesses.
The Financial Reform Act mandates that the Federal Reserve
Board limit debit card interchange fees. Under the Financial
Reform Act, which includes the Durbin Amendment to the Elec-
tronic Funds Transfer Act, the Federal Reserve must adopt rules
within nine months of enactment of this legislation regarding the
interchange fees that may be charged with respect to electronic
debit transactions. Those rules will take effect in July 2011.
Although this legislative action by the U.S. Congress has 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 predomi-
nately credit card related, the Durbin Amendment is not expected
to have a significant negative impact upon TSYS’ 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
liquidity and capital
financial position,
results of operations,
10
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
TSYS’ financial position, results of operations and cash flows are
impacted by the accounting policies the Company has adopted.
In order to gain a full understanding of the Company’s financial
statements, one must have a clear understanding of the account-
ing policies employed.
Refer to Note 1 in the consolidated financial statements for more
information on the Company’s basis of presentation and a sum-
mary of significant accounting policies.
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.
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.
A summary of the Company’s critical accounting estimates appli-
cable to all three reportable operating segments follows:
Allowance for Doubtful Accounts and Billing
Adjustments
The Company estimates the allowances for doubtful accounts.
When estimating the allowances for doubtful accounts, the Com-
pany takes into consideration such factors as its day-to-day knowl-
edge of the financial position of specific clients, the industry and
size of its clients, the overall composition of its accounts receiv-
able 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 ongo-
ing 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 collectibility of receivables and thus the adequacy of the
allowance for doubtful accounts. If the actual collectibility 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 is not
consistent with the Company’s estimates, billing adjustments,
which is 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 exten-
sive data accumulated historically indicates that these estimates
have proven reliable over time.
Contract Acquisition Costs
In evaluating for recoverability, expected undiscounted net oper-
ating cash flows are estimated by management. The Company
evaluates the carrying value of contract acquisition costs associ-
ated 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 oper-
ating 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 9 in the consolidated financial statements contains a dis-
cussion of contract acquisition costs. The net carrying value of
contract acquisition costs on the Company’s Consolidated Bal-
ance Sheet as of December 31, 2010 was $166.3 million.
Software Development Costs
In evaluating for recoverability, expected undiscounted net oper-
ating cash flows are estimated by management. The Company
evaluates the unamortized capitalized costs of software develop-
ment 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. Note 8 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, 2010 was $81.2 million.
11
Acquisitions — Purchase Price Allocation
TSYS adopted revised generally accepted accounting principles
(GAAP) relating to business combinations as of January 1, 2009.
The revised guidance retains the purchase method of accounting
for acquisitions and requires a number of changes to the previous
guidance, including changes in the way assets and liabilities are
recognized in purchase accounting. Other changes include requir-
ing the recognition of assets acquired and liabilities assumed aris-
ing from contingencies, requiring the capitalization of in-process
research and development at fair value, and requiring the expens-
ing of acquisition-related costs as incurred.
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 cus-
tomer 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 infor-
mation regarding asset valuations and liabilities assumed. Unantic-
ipated events or circumstances may occur which could affect the
accuracy of the Company’s fair value estimates, including assump-
tions 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 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 ASC 350, “Intangibles — Goodwill and Other,”
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 dis-
count rate to reflect the value of invested capital. Cash flows are
estimated for future periods based on historical data and projec-
tions 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 10 in the consolidated financial state-
ments contains a discussion of goodwill. The net carrying value of
goodwill on the Company’s Consolidated Balance Sheet as of
December 31, 2010 was $320.4 million.
Long-lived Assets and Intangibles
In evaluating for recoverability, expected undiscounted net oper-
ating 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 estimates revenue for service billings not yet
invoiced. Since TSYS invoices clients for processing services
monthly in arrears, the Company estimates revenues for one
month of service billings not yet invoiced. If actual client revenue
billing is not consistent with the Company’s estimates, processing
revenues may be materially different than was initially recorded.
The Company’s experience and extensive data accumulated his-
torically indicates that these estimates have proven reliable over
time.
Reserve 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, TMS must do so. TMS also bears the risk of reject losses
arising from the fact that TMS 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, TMS may be unable to
collect such fees. TMS 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
12
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. How-
ever, the Company also maintains a reserve against losses, includ-
ing major fraud losses, which are both less predictable and involve
larger amounts. The loss reserve was established using historical
loss rates, applied to recent bankcard processing volume. TSYS
only assumed liabilities as of April 1, 2010 on a go forward basis
and thus, has no material merchant loss reserve recorded.
Transaction Processing Provisions
The Company records estimates to accrue for contract contin-
gencies (performance penalties) and processing errors. A signif-
icant number of the Company’s contracts with large clients contain
service level agreements which can result in TSYS incurring per-
formance 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 pen-
alties inherent in the Company’s contracts, progress towards
milestones and known processing errors not covered by insur-
ance. If the actual performance penalties incurred are not con-
sistent with the Company’s estimates, performance penalties and
processing errors, which is recorded in cost of services, 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.
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 juris-
dictions. The Company has various tax filing positions, including
the timing and amount of deductions and credits, the establish-
ment 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
The Company provides electronic payment processing and other
services to the Company’s equity investments, Total System Ser-
vices de México, S.A. de C.V.
(TSYS de México) and China
UnionPay Data Co., Ltd. (CUP Data).
The related party 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. 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 Com-
pany to provide the latest technology while avoiding the risk of
ownership. Neither the assets nor obligations related to these
leases are included on the balance sheet. Refer to Notes 1 and 19
in the consolidated financial statements for further information on
operating lease commitments.
CONTRACTUAL OBLIGATIONS: The total liability for uncertain
tax positions under ASC 740, “Income Taxes,” at December 31,
2010 is $4.5 million. Refer to Note 20 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.
Recent Accounting Pronouncements
In December 2010, the Task Force issued Accounting Standards
Update (ASU) No. 2010-29, “Business Combinations: Disclosure
of Supplementary Pro Forma Information for Business Combina-
tions (A consensus of the FASB Emerging Issues Task Force).” The
Task Force reached a consensus that when a public entity presents
comparative financial statements, the entity should disclose rev-
enue and earnings of the combined entity as though the business
combination(s) that occurred during the current year had occurred
as of the beginning of the comparable prior annual reporting
period only. This ASU also expands the supplemental pro forma
disclosures to include a description of the nature and the amount
of material, nonrecurring pro forma adjustments directly
13
attributable to the business combination included in the reported
pro forma revenue and earnings. ASU 2010-29 is effective pro-
spectively for business combinations for which the acquisition
date Is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2010. The Company
has determined the impact of adopting ASU 2010-29 on its
financial position, results of operations and cash flows to be
immaterial.
In December 2010, the Task Force issued ASU No. 2010-28,
“Intangibles — Goodwill and Other (Topic 350): When to Perform
Step 2 of the Goodwill Impairment Test for Reporting Units with
Zero or Negative Carrying Amounts (A consensus of the FASB
Emerging Issues Task Force).” The Task Force reached a consen-
impairment test for
sus that modifies Step 1 of the goodwill
reporting units with zero or negative carrying amounts. For those
reporting units, an entity is required to perform Step 2 of the
goodwill impairment test if it is more likely than not that a goodwill
impairment exists. ASU 2010-28 is effective for public entities for
fiscal years and interim periods within those years, beginning after
December 15, 2010. The Company has determined the impact of
adopting ASU 2010-28 on its financial position, results of oper-
ations and cash flows to be immaterial.
In August 2010, the Task Force issued ASU No. 2010-22,
“Accounting for Various Topics — Technical Corrections to SEC
Paragraphs.” This ASU is based upon external comments
received from the staff of the SEC and the issuance of Staff
Accounting Bulletin No. 112, which amends or rescinds portions
of certain SAB topics. ASU 2010-22 is effective immediately. The
Company has determined the impact of adopting ASU 2010-22
on its financial position, results of operations and cash flows to be
immaterial.
In August 2010, the Task Force issued ASU No. 2010-21,
“Accounting for Technical Amendments to Various SEC Rules
and Schedules.” This ASU amends various SEC paragraphs pur-
suant to the issuance of Release No. 33-9026: Technical Amend-
ments to Rules, Forms, Schedules and Codification of Financial
Reporting Policies. ASU 2010-21 is effective immediately. The
Company has determined the impact of adopting ASU 2010-21
on its financial position, results of operations and cash flows to be
immaterial.
In April 2010, the Task Force issued ASU No. 2010-17, “Revenue
Recognition (Topic 605): Milestone Method of Revenue Recogni-
tion (A consensus of the FASB Emerging Issues Task Force).” The
Task Force reached a consensus on the criteria that should be met
for determining whether the milestone method of revenue rec-
ognition is appropriate. ASU 2010-17 will be effective on a pro-
spective basis for milestones achieved in fiscal years, and interim
periods within those fiscal years, beginning on or after June 15,
2010, with early adoption permitted. The Company has
determined the impact of adopting ASU 2010-17 on its financial
position, results of operations and cash flows to be immaterial.
In April 2010, the Task Force issued ASU No. 2010-13, “Com-
pensation — Stock Compensation (Topic 718): Effect of Denom-
inating the Exercise Price of a Share-Based Payment Award in the
Currency of the Market in Which the Underlying Equity Security
Trades (A consensus of the FASB Emerging Issues Task Force).”
The Task Force reached a consensus that an employee share-
based payment with an exercise price denominated in the cur-
rency of a market in which a substantial portion of the entity’s
equity securities trade should be considered an equity classified
award assuming all other criteria for equity classification are met.
ASU 2010-13 will be effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15,
2010, with early adoption permitted. The Company has deter-
mined the impact of adopting ASU 2010-13 on its financial posi-
tion, results of operations and cash flows to be immaterial.
In February 2010, the Financial Accounting Standards Board
(FASB) issued ASU 2010-08, “Technical Corrections to Various
Topics,” which eliminates inconsistencies and outdated provi-
sions and provides clarifications within current Accounting Stan-
dards Codification. ASU 2010-08 is effective for the first reporting
period (including interim periods) beginning after issuance. The
Company does not expect the impact of adopting ASU 2010-08
on its financial position, results of operations and cash flows to be
material.
In January 2010, the FASB issued ASU 2010-06, “Fair Value
Measurements and Disclosures (Topic 820): Improving Disclo-
sures about Fair Value Measurements,” which adds new require-
ments for disclosures about transfers into and out of Levels 1 and 2
and separate disclosures about purchases, sales, issuances and
settlements relating to Level 3 measurements. ASU 2010-06 is
effective for the first reporting period (including interim periods)
beginning after December 15, 2010. The Company does not
expect the impact of adopting ASU 2010-06 on its financial
position, results of operations and cash flows to be material.
In October 2009, the FASB issued ASU 2009-14, “Certain Reve-
nue Arrangements that Include Software Elements,” an update to
ASC 985-605, “Software-Revenue Recognition,” and formerly
known as EITF 09-3, “Revenue Arrangements that Include Soft-
ware Elements.” ASU 2009-14 amends ASC Subtopic 985-605 to
exclude from its scope tangible products that contain both soft-
ware and non-software components that function together to
deliver a product’s essential functionality. ASU 2009-14 will be
effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15,
2010. Early adoption is permitted. The Company has determined
the impact of adopting ASU 2009-14 on its financial position,
results of operations and cash flows to be immaterial.
14
In October 2009, the FASB issued ASU 2009-13, “Multiple Deliv-
erable Revenue Arrangements,” an update to ASC Topic 605,
“Revenue Recognition,” and formerly known as EITF 08-1, “Rev-
enue Arrangements with Multiple Deliverables.” ASU 2009-13
amends ASC 650-25 to eliminate the requirement that all unde-
livered elements have vendor-specific objective evidence (VSOE)
or third-party evidence (TPE) before an entity can recognize the
portion of an overall arrangement fee that is attributable to items
that already have been delivered. The overall arrangement fee will
be allocated to each element (both delivered and undelivered
items) based on their relative selling prices, regardless of whether
those selling prices are evidenced by VSOE or TPE or are based
on the entity’s estimated selling price. ASU 2009-13 will be effec-
tive prospectively for revenue arrangements entered into or mate-
rially modified in fiscal years beginning on or after June 15, 2010.
Early adoption is permitted. The Company has determined the
impact of adopting ASU 2009-13 on its financial position, results
of operations and cash flows to be immaterial.
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. Of the total revenue increase of 2.4% for the year ended December 31, 2010, the Company estimates revenues
decreased by a net 1.7% due to foreign currency exposure and pricing, and increased 4.1% for volume changes.
TSYS’ revenues are generated primarily 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, debit, stored value, government services and commercial card accounts.
TSYS’ payment processing revenues are influenced by several factors, including volumes related to AOF and transactions. TSYS estimates that
approximately 49% of total payment processing revenues is AOF and transaction volume driven, and are driven primarily from processing
services. The remaining 51% 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 transaction 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.
15
Years Ended December 31,
2010
2009
2008
A summary of the consolidated financial highlights for the years ended December 31, 2010, 2009 and 2008 is provided below:
Percent Change
(in millions, except per share data)
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,717.6
309.4
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
193.9
Net income attributable to TSYS common shareholders. . . . . . . . . .
Basic EPS(1) attributable to TSYS common shareholders:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted EPS(1) attributable to TSYS common shareholders:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from operating activities . . . . . . . . . . . . . . . . . . . . . . . .
Other:
1.00
0.99
1.00
0.99
389.2
1,677.5
344.0
215.2
1,711.5
371.1
250.1
1.12
1.09
1.12
1.09
423.1
1.27
1.26
1.27
1.26
352.8
AOF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cardholder transactions processed . . . . . . . . . . . . . . . . . . . . . . .
342.9
7,670.4
344.8
7,272.9
352.5
7,694.1
2010 vs. 2009
2009 vs. 2008
2.4%
(10.1)
(9.9)
(10.7)
(9.5)
(10.8)
(9.6)
(8.0)
(0.5)
5.5
(2.0)%
(7.3)
(13.9)
(11.6)
(13.7)
(11.6)
(13.7)
19.9
(2.2)
(5.5)
(1) Basic and diluted EPS is computed based on the two-class method in accordance with the guidance under Accounting Standards Codification (ASC)
260. Refer to Note 27 in the consolidated financial statements for more information on earnings per share.
Total revenues increased 2.4%, or $40.1 million, for the year ended December 31, 2010, compared to the year ended December 31, 2009,
which decreased 2.0%, or $34.0 million, compared to the year ended December 31, 2008. The increase in revenues for 2010 and the
decrease in revenues in 2009 include an increase of $1.0 million and a decrease of $46.8 million, respectively, related to the effects of
currency translation of the Company’s foreign-based subsidiaries and branches.
Excluding reimbursable items, revenues increased 2.5%, or $35.1 million, for the year ended December 31, 2010, compared to the year
ended December 31, 2009, which decreased 2.7%, or $39.3 million, compared to the year ended December 31, 2008. The Company
expanded its product and service offerings through an acquisition in 2010. The impact of that acquisition on consolidated total revenues
was $97.7 million in 2010.
Major Customer
A significant amount of the Company’s revenues is derived from long-term contracts with large clients, including a major customer. 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. Revenues from the major customer for the periods reported are primarily attributable
to the North America Services segment and Merchant Services segment. The loss of the Company’s major customer could have a material
adverse effect on the Company’s financial position, results of operations and cash flows.
In June 2009, Bank of America announced that it formed a new joint venture to provide merchant services. TSYS provides accounting,
settlement, authorization and other services to Bank of America, which services accounted for approximately 6.0%, 5.3% and 4.3% of
TSYS’ total revenues for 2010, 2009 and 2008, respectively.
TSYS provides a number of additional services to Bank of America, including commercial card processing, small business card processing
and card production services. Approximately 46%, 40% and 29% of the total revenues derived from providing merchant services to Bank of
America are attributable to reimbursable items for 2010, 2009 and 2008, respectively, which are provided at no margin.
In November 2010, TSYS and Bank of America agreed to a new agreement, during 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.
Refer to Note 22 in the consolidated financial statements for more information on the major customer.
The Company works to maintain a large and diverse customer base across various industries. However, in addition to its major customer,
the Company has other large clients representing a significant portion of its total revenues. The loss of any 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.
Operating Segments
TSYS’ services are provided through three operating segments:
North America Services,
International Services and Merchant
Services.
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
16
based in North America. Growth in revenues and operating profit in
this segment is derived from retaining and growing the core busi-
ness 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.
This segment has 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.
This segment provides services 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. The segment’s fraud
management services monitor the unauthorized use of accounts
which have been reported to be lost, stolen, or which exceed
credit limits. The segment’s fraud detection systems help identify
fraudulent transactions by monitoring each account holder’s pur-
chasing patterns and flagging unusual purchases. Other services
provided include customized communications to cardholders,
information verification associated with granting credit, debt col-
lection, and customer service.
This segment has two major customers. Below is a summary of the North America Services segment:
Years Ended December 31,
Percent Change
(in millions)
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 956.5
927.6
External revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
147.5
Reimbursable items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
245.0
Operating income* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating margin*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Key indicators:
25.6%
2010
2009
2008
2010 vs. 2009
2009 vs. 2008
1,048.9
1,016.3
168.3
285.4
1,136.9
1,107.2
198.5
325.6
27.2%
28.6%
(8.8)%
(8.7)
(12.3)
(14.2)
(7.7)%
(8.2)
(15.2)
(12.3)
AOF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
296.7
6,410.6
305.2
6,136.9
319.0
6,658.2
(2.8)
4.5
(4.3)
(7.8)
* Note: Segment operating results do not include expenses associated with Corporate Administration. Refer to Note 22 for more information on operating
segments.
The $88.7 million decrease in segment external total revenues in 2010 as compared to 2009 is attributable to $20.0 million decrease in
reimbursable items due to lost business, $97.1 million related to client deconversions and price compression. This decrease was partially
offset by $28.4 million in new business and internal growth. The $90.8 million decrease in segment external total revenues for 2009 as
compared to 2008 is the result of client deconverions and portfolio sales.
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 oper-
ating profit in this segment is derived from retaining and growing
the core business and improving the overall cost structure. Grow-
ing 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 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 termi-
nated 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.
This segment has one major customer.
17
Below is a summary of the International Services segment:
Years Ended December 31,
2010
2009
2008
(in millions)
Total revenues . . . . . $ 335.0
337.8
332.2
External revenue . . .
335.5
13.1
Reimbursable items . .
15.1
42.7
57.7
Operating income* . .
12.7% 17.1% 17.5%
Operating margin* . .
Key indicators:
318.5
316.9
11.2
55.6
AOF . . . . . . . . . .
Transactions . . . . .
46.3
33.5
1,259.9 1,136.0 1,035.8
39.5
Percent Change
2010 vs. 2009 2009 vs. 2008
(0.8)%
(1.0)
(13.0)
(26.0)
6.0%
5.9
34.8
3.7
17.1
10.9
18.0
9.7
* Note: Segment operating results do not include expenses associated
with Corporate Administration. Refer to Note 22 for more information
on operating segments.
The decrease in segment external total revenues for 2010, as
compared to 2009, is driven by $19.8 million of lost business and
price compression, partially offset by $26.2 million of new busi-
ness and organic growth and $1.1 million increase related to the
impact of foreign currency translation. The segment revenues for
2009 also included a deconversion fee received from a client for
the discontinuance of an account portfolio.
The $18.6 million increase in segment external total revenues for
2009, as compared to 2008, is the result of an increase from internal
growth of existing clients, deconversion fee of approximately
$10.8 million, approximately $26.3 million in new business, and
a decrease of $46.8 million impact related to foreign currency
translation.
financial statements were translated into fewer U.S. dollars, which
impact the comparison to prior periods when the U.S. dollar was
weaker. For 2011, TSYS does not expect any significant move-
ments from the rates that existed at December 31, 2010.
Merchant Services
The Merchant Services segment provides merchant services and
related services to clients based primarily in the United States.
Merchant services revenues are derived from providing process-
ing 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.
With the acquisition of TMS, the Company has expanded its
service offerings to include merchant support and underwriting,
and business and value-added services, as well as Visa- and
MasterCard-branded prepaid cards for businesses of any size.
Ranked as the 10th-largest merchant acquirer in North America by
dollar volume (The Nilson Report, March 2010), TMS has a 57-year
history in the acquiring industry with more than 300,000 merchant
outlets in its diverse portfolio.
During the fourth quarter of 2008, the U.S. dollar strengthened
against the British Pound. As a result, foreign denominated
This segment has one major customer.
Below is a summary of the Merchant Services segment:
Years Ended December 31,
2010
2009
2008
Percent Change
2010 vs. 2009
2009 vs. 2008
(in millions)
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 458.9
457.8
External revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
121.7
Reimbursable items. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
102.4
Operating income* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating margin* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Key indicator:
22.3%
327.1
325.6
94.8
71.4
21.8%
288.7
287.5
64.3
74.7
25.9%
40.3%
40.6
28.4
43.4
Dollar sales volume . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 49,142
5,315.4
Point-of-sale transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
nm
5,194.4
nm
5,057.9
nm
2.3
13.3%
13.3
47.4
(4.4)
nm
2.7
* Note: Segment operating results do not include expenses associated with Corporate Administration. Refer to Note 22 for more information on operating
segments.
nm = not meaningful
The $132.2 million increase in segment external total revenues for 2010, as compared to 2009, is the result of $17.9 million of organic
growth and $91.8 million net increase for acquisitions, and was partially offset by price compression and deconversions. The $38.1 million
increase in segment external total revenues for 2009, as compared to 2008, is the result of $30.5 million increase in reimbursable items
related to the increase in Visa access fees, $5.4 million from acquisitions, and internal growth.
18
Merchant Services segment’s results are driven by the authorization and capture transactions processed at the point-of-sale and clearing
and settlement transactions at the end of the day. This segment’s authorization and capture transactions are primarily through dial-up or
Internet connectivity. With the acquisition of TMS, dollar sales volume also drives the Merchant Services segment’s results.
Operating Expenses
The changes in cost of services, and selling, general and administrative expenses for the years ended December 31, 2010 and 2009 include
an increase of $1.6 million and a decrease of $39.6 million, respectively, related to the effects of currency translation of the Company’s
foreign based subsidiaries and branches. The impact of acquisitions on consolidated total expenses was $83.1 million in 2010, including
$4.1 million of professional and legal fees associated with the acquisition of TMS.
In February 2010, the Company reduced its overall workforce by approximately 5%, primarily from the U.S., through a targeted workforce
reduction and attrition. Some positions were eliminated and some employees were terminated with severance.
Federal legislation was recently enacted which makes extensive changes to the current system of health care insurance and benefits. The
Company has reviewed the legislation and, based upon information available, expects the impact of the legislation on 2011 to be
approximately $2.2 million.
Spin Related Expenses
Income Taxes
Spin related expenses consist of expenses associated with the sep-
aration from Synovus Financial Corp. (Synovus). As the spin-off was
finalized and completed, TSYS incurred expenses for the incremental
fair value associated with converting Synovus stock options held by
TSYS employees to TSYS options. During the year ended Decem-
ber 31, 2008, the Company incurred approximately $11.1 million of
spin related expenses. Refer to Note 25 in the consolidated financial
statements for more information on the spin-off.
Nonoperating Income (Expense)
Nonoperating income (expense) consists of interest income, inter-
est expense and gains and losses on currency translations. Non-
operating income increased in 2010 as compared to 2009, and
decreased in 2009 as compared to 2008.
Interest income for 2010 was $638,000, a 65.7% decrease com-
pared to $1.9 million in 2009, which was a 78.5% decrease com-
pared to $8.6 million in 2008. The variation in interest income is
primarily attributable to changes in short-term interest rates in
2010 and 2009 and the amount of cash available for investments.
Interest expense for 2010 was $2.9 million, a decrease of
$1.2 million compared to $4.1 million in 2009, which was a
decrease of $7.2 million compared to $11.3 million in 2008.
The decrease in interest expense in 2010 compared to 2009 is
attributable to the changes in interest rates. The decrease in
interest expense in 2009 compared to 2008 relates to changes
in interest rates.
For the years ended December 31, 2010, 2009 and 2008, the
Company recorded a translation loss of approximately $162,000
and $2.6 million and a translation gain of $10.5 million, respec-
tively, related to intercompany loans and foreign denominated
cash and accounts receivable balances.
Income tax expense was $106.1 million, $121.9 million and
$131.2 million in 2010, 2009 and 2008, respectively, representing
effective income tax rates of 34.9%, 35.4% and 34.4%, respec-
tively. The calculation of the effective tax rate excludes noncon-
trolling interest in consolidated subsidiaries’ net income and
includes equity in income of equity investments in pretax income.
During 2010, the Company generated foreign net operating loss
benefits in excess of its utilization capacity based on both the
Company’s current operations and with consideration of future tax
planning strategies. Additionally, the Company reassessed its
need for federal and state valuation allowances based upon these
same considerations. Accordingly, the Company experienced a
net increase in its valuation allowance for deferred income tax
assets of $2.6 million.
TSYS has adopted the permanent reinvestment exception under
ASC 740, “Income Taxes,” with respect to future earnings of certain
foreign subsidiaries. As a result, TSYS now considers foreign earnings
related to these foreign operations to be permanently reinvested.
In 2010, TSYS reassessed its contingencies for foreign, federal and
state exposures, which resulted in a net decrease in tax contin-
gency amounts of approximately $0.5 million.
Equity in Income of Equity Investments
TSYS’ share of income from its equity in equity investments was
$7.1 million, $7.0 million and $7.4 million for 2010, 2009 and
2008, respectively. Refer to Note 11 in the consolidated financial
statements for more information on equity investments.
19
Loss from Discontinued Operations, net of tax
Profit Margins and Reimbursable Items
Loss from discontinued operations, net of tax contains the oper-
ating results of TSYS Total Debt Management Inc. (TDM) and TSYS
POS Systems and Services, LLC (TPOS) and the loss on the sale of
both subsidiaries. Final adjustments related to the sales, if any, are
expected to be included in the financial results of 2011. Refer to
Note 2 in the consolidated financial statements for more infor-
mation on discontinued operations.
Net Income
Net income decreased 6.2% to $205.6 million in 2010, compared
to 2009. In 2009, net income decreased 12.9% to $219.2 million,
compared to $251.7 million in 2008.
Net
income attributable to TSYS common shareholders
decreased 9.9% to $193.9 million (basic and diluted EPS of
$0.99) in 2010, compared to 2009. In 2009, net income attribut-
able to TSYS common shareholders decreased 13.9% to
$215.2 million (basic and diluted EPS of $1.09), compared to
$250.1 million (basic and diluted EPS of $1.26) in 2008.
Non-GAAP Financial Measures
Management evaluates the Company’s operating performance based
upon operating and net profit margins excluding reimbursable items,
a non-generally accepted accounting principles (non-GAAP) measure.
TSYS also uses these non-GAAP financial measures to evaluate and
assess TSYS’ financial performance against budget. TSYS believes
that these non-GAAP financial measures are important to enable
investors to understand and evaluate its ongoing operating results.
TSYS believes that these non-GAAP financial measures are rep-
resentative measures of comparative financial performance that
reflect the economic substance of TSYS’ current and ongoing
business operations. Although non-GAAP financial measures are
often used to measure TSYS’ operating results and assess its
financial performance, they are not necessarily comparable to
similarly titled captions of other companies due to potential
inconsistencies in the method of calculation.
TSYS believes that its use of these 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 prospec-
tive, going-forward basis. Hence, management provides disclosure of
non-GAAP financial measures in order to allow shareholders and
potential investors an opportunity to see TSYS as viewed by man-
agement, assess TSYS with some of the same tools that management
utilizes internally and compare such information with prior periods.
Management believes that operating and net profit margins
excluding reimbursable items are more useful because reimburs-
able items do not impact profitability as the Company receives
reimbursement for expenses incurred on behalf of its clients. TSYS
believes that the presentation of GAAP financial measures alone
would not provide its shareholders and potential investors with
the ability to appropriately analyze its ongoing operational
results, and therefore expected future results. TSYS therefore
believes that inclusion of these non-GAAP financial measures
provides investors with more information to help them better
understand its financial statements just as management utilizes
these non-GAAP financial measures to better understand the
business, measure performance and allocate its resources.
Below is the reconciliation between reported margins and
adjusted margins excluding reimbursable items for the years
ended December 31, 2010, 2009 and 2008:
Years Ended December 31,
(in thousands)
Operating income . . . . $ 309,429
2010
2009
2008
344,026
371,122
Net income . . . . . . . . $ 205,621
219,176
251,676
Total revenues . . . . . . $1,717,577
Less reimbursable
1,677,483
1,711,534
items . . . . . . . . . . .
275,141
270,178
264,892
Revenues before
reimbursable
items . . . . . . . . . . . $1,442,436
1,407,305
1,446,642
Operating margin (as
reported). . . . . . . . .
Net profit margin (as
reported). . . . . . . . .
Adjusted operating
margin . . . . . . . . . .
Adjusted net profit
margin . . . . . . . . . .
18.0%
20.5%
21.7%
12.0%
13.1%
14.7%
21.5%
24.4%
25.7%
14.3%
15.6%
17.4%
Projected Outlook for 2011
As compared to 2010, TSYS expects its 2011 income from con-
tinuing operations available to TSYS common shareholders to
increase by 7%-9%, its EPS from continuing operations to increase
by 9%-11%, its revenues before reimbursable items to increase by
3%-5% and its total revenues to increase by 2%-4%, based on the
following assumptions: (1) there will be no significant movements
in 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 during 2011; (3) TSYS will not incur significant
expenses associated with the conversion of new large clients or
20
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 during 2011.
and other liabilities between years is the result of the timing of
payments and funding of performance-based incentives.
Financial Position, Liquidity and
Capital Resources
(in thousands)
Purchases of property and
Years Ended December 31,
2010
2009
2008
equipment, net . . . . . . . $ (46,547)
(34,017)
(47,969)
Cash Flows from Investing Activities
The Consolidated Statements of Cash Flows detail the Company’s
investing and financing activities.
cash flows from operating,
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
(in thousands)
Net income . . . . . . . . . . . . . $205,621
Depreciation and
Years Ended December 31,
2010
2009
2008
219,176
251,676
amortization. . . . . . . . . . .
163,111
156,471
164,643
Loss on disposal of
subsidiary . . . . . . . . . . . .
1,591
5,713
—
Other noncash items and
charges, net. . . . . . . . . . .
7,745
21,346
6,452
Dividends from equity
investments . . . . . . . . . . .
6,572
4,942
6,421
Net change in current and
other assets and current
and other liabilities. . . . . .
Net cash provided by
4,520
15,489
(76,357)
operating activities . . . . . . $389,160
423,137
352,835
TSYS’ main source of funds is derived from operating activities,
specifically net income. The decrease in 2010, as compared to
2009, in net cash provided by operating activities was primarily
the result of decreased earnings and the net change in current and
other assets and current and other liabilities. The increase in 2009,
as compared to 2008, 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.
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 sala-
ries 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
Additions to licensed
computer software from
vendors . . . . . . . . . . . .
Additions to internally
developed computer
software . . . . . . . . . . . .
Proceeds from disposition,
net of expenses paid
and cash disposed. . . . .
Cash used in acquisitions
and equity investments,
net of cash acquired . . .
Additions to contract
acquisition costs . . . . . .
Other. . . . . . . . . . . . . . . .
Net cash used in investing
(69,826)
(20,059)
(31,499)
(25,466)
(31,445)
(21,777)
4,265
1,979
—
(148,531)
(294)
(50,017)
(75,669)
68
(35,596)
—
(41,456)
(343)
activities . . . . . . . . . . . . $(361,706)
(119,432)
(193,061)
The major uses of cash for investing activities in 2010 were for the
purchase of TMS, the purchase of property and equipment and
additions to licensed computer software from vendors. The major
uses of cash for investing activities in 2009 was for additions to
contract acquisition costs, equipment, licensed computer soft-
ware from vendors and internally developed software. The major
uses of cash for investing activities in 2008 was for the purchase of
Infonox, the purchase of property and equipment and additions
to licensed computer software from vendors.
Property and Equipment
Capital expenditures
for property and equipment were
$46.5 million in 2010, compared to $34.0 million in 2009 and
$48.0 million in 2008. The majority of capital expenditures in
2010, 2009 and 2008 related to investments in new computer
processing hardware.
Licensed Computer Software from Vendors
Expenditures for licensed computer software from vendors were
$69.8 million in 2010, compared to $20.1 million in 2009 and
$31.5 million in 2008.
21
Internally Developed Computer Software Costs
Additions to capitalized software development costs, including
enhancements to and development of processing systems, were
$25.5 million in 2010, $31.4 million in 2009 and $21.8 million in
2008.
The Company remains committed to developing and enhancing
its processing solutions to expand its service offerings. In addition
to developing solutions, the Company has expanded its service
offerings through strategic acquisitions, such as TMS and Infonox.
Cash Used in Acquisitions
In 2010, TSYS acquired TMS for an aggregate consideration of
approximately $150.5 million. The Company has allocated
approximately $155.5 million to goodwill. Refer to Note 24 in
the consolidated financial statements for more information on
TMS.
In 2008, TSYS acquired Infonox for an aggregate consideration of
approximately $50.6 million, with contingent payments over the
next three years of up to $25.0 million based on performance. The
Company has allocated approximately $29.1 million to goodwill.
Refer to Note 24 in the consolidated financial statements for more
information on Infonox.
Contract Acquisition Costs
TSYS makes cash payments for processing rights, third-party
development costs and other direct salary-related costs in con-
nection with converting new customers to the Company’s pro-
cessing systems. The Company’s
in contract
acquisition costs were $75.7 million in 2010, $35.6 million in
2009 and $41.5 million in 2008. The Company made cash pay-
ments for processing rights of $45.4 million, $9.3 million and
$20.1 million in 2010, 2009 and 2008, respectively. Conversion
investments
cost additions were $30.3 million, $26.3 million and $21.4 million
in 2010, 2009 and 2008, respectively.
Cash Flows from Financing Activities
(in thousands)
Proceeds from borrowings of
Years Ended December 31,
2010
2009
2008
long-term debt . . . . . . . . . $ 39,757
5,334
18,575
Principal payments on long-
term debt borrowings and
capital lease obligations . .
Dividends paid on common
(11,741)
(18,869)
(67,631)
stock . . . . . . . . . . . . . . . .
(55,087)
(55,208)
(55,449)
Repurchase of common
stock . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . .
Subsidiary dividends per
share . . . . . . . . . . . . . . . .
Net cash used in financing
(46,228)
654
(328)
8
(35,698)
358
(9,031)
(235)
(241)
activities . . . . . . . . . . . . . . $(81,676)
(69,298)
(140,086)
The major uses of cash for financing activities have been the
payment of dividends, principal payment on capital lease and
software obligations and the purchase of stock under the stock
repurchase plan as described below. The main source of cash from
financing activities has been the use of borrowed funds. Net cash
used in financing activities for the year ended December 31, 2010
was $81.7 million primarily as a result of payments of cash divi-
dends and repurchase of common stock. The Company used
$69.3 million in cash for financing activities for the year ended
December 31, 2009 primarily for payments on long-term debt and
capital lease obligations and the payments of cash dividends. Net
cash used in financing activities for the year ended December 31,
2008 was $140.1 million primarily as a result of payments of cash
dividends, repurchase of common stock and principal payments
on long-term debt and capital lease obligations. Refer to Note 13
in the consolidated financial statements for more information on
the long-term debt financing. Refer to Note 25 in the consoli-
dated financial statements for more information on the spin-off.
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. Through December 31,
2010, the Company purchased 3.1 million shares for approximately
$45.1 million, at an average price of $14.60. As of December 31,
2010, the Company had approximately 6.9 million shares remain-
ing that could be repurchased under the stock repurchase plan.
22
On April 20, 2006, TSYS announced that its board had approved a
stock repurchase plan to purchase up to 2 million shares, which
represented slightly more than five percent of the shares of TSYS
stock held by shareholders other than Synovus, which plan was
extended by the TSYS Board until April 2010 and the number of
shares was increased to 10 million. The shares may be purchased
from time to time over a two year period and will depend on
various factors including price, market conditions, acquisitions
and the general financial position of TSYS. Repurchased shares
will be used for general corporate purposes.
During 2008, TSYS purchased 2.0 million shares of TSYS common
stock through open market transactions for an aggregate pur-
chase price of $35.7 million, or an average per share price of
$18.13. The plan expired in April 2010.
Financing
In December 2010, TSYS obtained a $39.8 million note payable
from a third-party vendor related to financing the purchase of
distributed systems software.
In April 2009, the Company repaid its International Services’ loan
of £1.3 million, or approximately $1.8 million, which it obtained in
May 2008.
On October 31, 2008, the Company repaid its International
Services’ loan of £33.0 million, or approximately $54.1 million,
which it obtained in August 2007.
On October 30, 2008, the Company’s International Services seg-
ment obtained a credit agreement from a third-party to borrow up
to approximately ¥2.0 billion, or $21 million, in a Yen-denomi-
nated three-year loan to finance activities in Japan. The rate is the
London Interbank Offered Rate (LIBOR) plus 80 basis points. The
Company initially made a draw of ¥1.5 billion, or approximately
$15.1 million. In January 2009, the Company made an additional
draw down of ¥250 million, or approximately $2.8 million. In April
2009,
the Company made an additional draw down of
¥250 million, or approximately $2.5 million.
In December 2007, TSYS entered into a credit agreement with
Bank of America N.A., Royal Bank of Scotland plc, and other
lenders which provides for a $252.0 million five year unsecured
revolving credit facility and a $168.0 million unsecured term loan.
The proceeds from the credit facility will be used for working
capital and other corporate purposes, including to finance the
repurchase by TSYS of its capital stock. As of December 31, 2010,
the Company has not drawn on the $252.0 million credit facility.
Refer to Note 13 in the consolidated financial statements for further
information on TSYS’ long-term debt and financing arrangements.
Dividends
Dividends on common stock of $55.1 million were paid in 2010,
compared to $55.2 million and $55.4 million in 2009 and 2008,
respectively. The Company paid an annual dividend of $0.28 per
share in 2010, 2009 and 2008, respectively.
Significant Noncash Transactions
During 2010, 2009 and 2008, the Company issued 197,000,
514,000 and 698,000 shares of common stock, respectively, to
certain key employees and non-management members of its
Board of Directors under nonvested shares for services to be
provided in the future by such individuals. The market value of the
common stock at the date of issuance is amortized as compen-
sation expense over the vesting period of the awards.
Refer to Notes 16 and 23 in the consolidated financial statements
for more information on share-based compensation and signifi-
cant noncash transactions.
Additional Cash Flow Information
Off-Balance Sheet Financing
TSYS uses various operating leases in its normal course of busi-
ness. 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.
The following table summarizes future contractual cash obliga-
tions, including lease payments and software arrangements, as of
December 31, 2010, for the next five years and thereafter:
Total
(in millions)
Operating leases . . $334
Debt obligations . .
234
Redeemable
noncontrolling
interests(1) . . . . .
146
Capital lease
obligations . . . . .
44
Total contractual
cash
obligations . . . . . $758
Contractual Cash Obligations
Payments Due By Period
1 Year
2 - 3
Years
or Less
4 - 5
Years
After
5 Years
98
39
—
13
158
195
—
20
67
—
146
11
11
—
—
—
150
373
224
11
(1) Fair value at December 31, 2010 of redemption value of put option.
23
Income Taxes
Impact of Inflation
liability for uncertain tax positions under ASC 740,
The total
“Income Taxes,” at December 31, 2010 is $4.5 million. Refer to
Note 20 in the consolidated financial statements for more infor-
mation on income taxes. The Company is not able to reasonably
increase or
estimate the amount by which the liability will
decrease over time; however, at this time, the Company does
not expect any significant changes related to these obligations
within the next year.
Redeemable Noncontrolling Interest
With the acquisition of TMS, the Company is a party to put and call
arrangements with respect to the membership units that repre-
sent the remaining noncontrolling interest of FNMS Holding. The
call and put arrangements may be exercised at the discretion of
TSYS or FNBO on April 1, 2015, 2016 and 2017, upon the dilution
of FNBO’s equity ownership in FNMS Holding below a designated
threshold and in connection with certain acquisitions by TSYS or
FNMS Holding in excess of designated value thresholds.
The fair value of the noncontrolling interest in TMS, owned by a
private company at December 31, 2010, was estimated by apply-
ing the income and market approaches. In particular, a discounted
cash flow method, a guideline companies method, and a recent
equity transaction were employed. This fair value measurement is
based on significant inputs that are both observable (Level 2) and
non-observable (Level 3) in the market as defined in ASC 820. Key
assumptions include (a) cash flow projections based on market
participant data and developed by Company management, (b) a
discount rate of approximately 13 percent, (c) a terminal value
based on a long-term sustainable growth rate of approximately
3 percent, (d) an effective tax rate of approximately 36 percent,
(e) financial multiples of companies deemed to be similar to TMS,
and (f) adjustments because of the lack of control or lack of
marketability that market participants would consider when esti-
mating the fair value of the noncontrolling interest in TMS.
Refer to Note 24 of the Notes in the consolidated financial
statements for more information on the acquisition of TMS.
Foreign Exchange
TSYS operates internationally and is subject to potentially adverse
movements in foreign currency exchange rates. TSYS has not
entered into foreign exchange forward contracts to reduce its
exposure to foreign currency rate changes. The Company con-
tinues to analyze potential hedging instruments to safeguard it
from significant currency translation risks.
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 prevail-
ing market and other conditions and may include short-term or
long-term borrowings from financial institutions or the issuance of
additional equity and/or debt securities such as industrial revenue
bonds. However, there can be no assurance that funds will be
available on terms acceptable to TSYS. Management expects that
TSYS will continue to be able to fund a significant portion of its
capital expenditure needs through internally generated cash in
the future, as evidenced by TSYS’ current ratio of 3.2:1. At
December 31, 2010, TSYS had working capital of $494.5 million,
compared to $590.1 million in 2009 and $396.2 million in 2008.
Legal Proceedings
General
The Company is subject to various legal proceedings and claims
and is also subject to information requests, inquiries and investiga-
tions arising out of the ordinary conduct of its business. The Com-
pany 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
ASC 450, “Contingencies.” In the opinion of management, based
on current knowledge and in part upon the advice of legal counsel,
all matters are believed to be adequately covered by insurance, or if
not covered, are believed to be without merit or are of such kind or
involve such amounts that would not have a material adverse effect
on the financial position, results of operations or cash flows of the
Company if disposed of unfavorably.
Infonox Matter
On September 22, 2010, Safwan Shah filed a lawsuit in the Superior
Court of California, Santa Clara County, against Total System Ser-
vices, Inc., TSYS Acquiring Solutions, L.L.C. and Infonox, a TSYS
Company (Case No. 1-10-CV-183173). The claims arise out of TSYS’
purchase of Infonox on the Web (“Infonox”) in November 2008.
The Agreement and Plan of Merger in connection with the trans-
action provided that certain “remaining shareholders” of Infonox
could receive “contingent merger consideration” if
Infonox
reached certain revenue targets during the three years following
the closing of the transaction. Plaintiff, a former shareholder of
Infonox, alleges that the defendants have wrongfully refused to pay
24
$25 million in “contingent merger consideration” as provided for in
the Agreement and Plan of Merger. Plaintiff brings the claim in his
individual capacity and also as a representative of other former
Infonox shareholders. Plaintiff’s claims allege fraud, fraudulent
inducement, negligent misrepresentation, breach of contract,
and breach of duty of good faith and fair dealing. In January 2011,
Plaintiff and TSYS entered into an Arbitration Agreement, pursuant
to which Shah agreed to stay the lawsuit pending in the Superior
Court of California, Santa Clara County and to arbitrate the claims
he has asserted in the lawsuit. The arbitration is currently scheduled
for July 2011. Defendants believe that the allegations are without
merit and plan to vigorously defend themselves against the alle-
gations. Based on information that is presently available to it, TSYS’
management is unable to predict the outcome of the case and
cannot currently reasonably determine the probability of a material
adverse result or reasonably estimate a range of potential expo-
sure, if any. Although the ultimate outcome of this case cannot be
ascertained at this time, based upon current knowledge, TSYS’
management does not believe the eventual outcome of this case
will have a material adverse effect on TSYS’ financial position,
results of operations or cash flows. However, it is possible that
the ultimate outcome of this case may be material to TSYS’ results
of operations for any particular period.
Electronic Payment Systems Matter
In February 2007, TSYS Acquiring Solutions, L.L.C., a wholly
owned subsidiary of TSYS (“TSYS Acquiring”), filed a demand
for arbitration for payment of past due processing fees pursuant
to a contract with Electronic Payment Systems LLC (“EPS”), an
acquiring independent sales organization. EPS counterclaimed
and alleged certain monetary damages.
In April 2008, EPS
amended its counterclaims, adding a claim for a declaration that
the arbitrator award EPS ownership, control and access to the
1-800 number that connects EPS’ merchants to TSYS Acquiring as
EPS’ processor. On January 20, 2009, the arbitrator denied all
TSYS Acquiring’s claims, awarded EPS approximately $3.3 million
in damages and fees and awarded EPS immediate ownership,
control and access over the 1-800 number.
On January 26, 2009, TSYS Acquiring filed an action (the “First
Action”) in the United States District Court for the District of
Arizona (Civil Action No. CV09-00155-PHX-JAT) seeking to vacate
the arbitration award. However, on October 22, 2009, the court
granted summary judgment in favor of EPS. On May 4, 2010, after
the court denied post-judgment motions filed by TSYS Acquiring,
the court confirmed the monetary judgment and TSYS Acquiring
paid the monetary judgment to EPS. TSYS Acquiring had been
using seven 1-800 numbers to connect EPS’ merchants and the
court interpreted the arbitrator’s award to include all seven
numbers.
On May 14, 2010, TSYS Acquiring filed a second action (the
“Second Action”)
in the United States District Court for the
District of Arizona (Civil Action No. CV10-01060-PHX-DGC) seek-
ing a declaratory judgment that TSYS did not need to give EPS
ownership and control of the seven 1-800 numbers. EPS filed a
motion for summary judgment on the request for declaratory
relief. EPS also filed a counterclaim arguing that TSYS Acquiring
should be required to pay EPS for its continued use of the 1-800
number and seeking punitive damages based on various con-
sumer protection statutes. On November 9, 2010, the court
granted EPS’ motion for summary judgment. The EPS counter-
claims that were not previously dismissed in the Second Action
remain pending.
On December 3, 2010, EPS filed a motion to compel in the First
Action seeking to require TSYS Acquiring to provide EPS with
immediate ownership, control and access over the seven 1-800
numbers used by EPS merchants.
On January 24, 2011, TSYS Acquiring filed a petition with the
Federal Communications Commission (“FCC”) seeking a ruling
that the enforcement of the arbitration award regarding the 1-800
numbers would violate the FCC’s rules regarding the allocation
and transfer of 1-800 numbers.
On February 15, 2011, the court in the First Action issued an order
(the “Order”) requiring TSYS Acquiring to comply with the arbi-
tration award by moving all non-EPS merchants off of 1-800
numbers used by EPS merchants, and to then transfer to EPS
the seven toll free numbers at issue. The Order requires compli-
ance within 90 days. In addition, the court rejected TSYS Acquir-
ing’s arguments that the award cannot be enforced because it
violates FCC regulations.
On February 24, 2011, the FCC released a Declaratory Ruling
granting TSYS Acquiring’s petition by affirming that the FCC has
exclusive jurisdiction over the transfer of toll free numbers, and
noting that several aspects of the arbitrator’s ruling and the affir-
mation of that ruling by the United States District Court for the
District of Arizona conflicted with the FCC’s rules and related
tariffs governing the transfer of toll free numbers. Because of this,
the Declaratory Ruling proceeded to direct those third parties
charged with the administration of the seven toll free numbers for
TSYS Acquiring, as well as the Toll Free Number Administrator
charged with administering the database of toll free numbers, to
reject any requests seeking a transfer of those numbers from TSYS
Acquiring to another party, absent a specific directive from the
FCC.
In light of the FCC’s Declaratory Ruling that the toll free numbers
may not be transferred by an order of the court or the arbitrator,
TSYS Acquiring intends to continue to vigorously defend itself
against enforcement of the Order in the United States District
25
Court for the District of Arizona, and if necessary, the Ninth Circuit
Court of Appeals.
If the Order is not vacated or modified in response to the FCC’s
recent Declaratory Ruling, it would require TSYS Acquiring to
move over 750,000 merchants that use one of the seven numbers
that EPS seeks to possess to other toll free numbers. TSYS Acquir-
ing cannot estimate the cost of such compliance, but TSYS Acquir-
ing believes the cost of such compliance would be substantial.
Further, if TSYS Acquiring is unable to comply with the order
within 90 days, the court could impose sanctions which could be
substantial. Based upon current knowledge, TSYS’ management
does not believe that the eventual outcome of this case will have a
material adverse effect on TSYS’ financial position, results of
operations or cash flows. However, it is possible that the ultimate
outcome of this case may be material to TSYS’ results of opera-
tions for any particular period.
Forward-Looking Statements
Certain statements contained in this filing which are not state-
ments 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 Durbin Amendment will not
have a significant negative impact on TSYS’ business; (ii) TSYS’
expectation that the loss of Bank of America as a merchant
services client will not have a material adverse effect on TSYS;
(iii) TSYS’ expectation that it will be able to fund a significant
portion of its capital expenditure needs through internally gen-
erated cash in the future; (iv) the Board’s intention to continue to
pay cash dividends on TSYS stock; (v) TSYS’ belief with respect to
contractual commitments, lawsuits, claims and other complaints;
(vi) the expected financial
impact of recent accounting pro-
nouncements; (vii) TSYS’ expectation with respect to certain tax
matters; (viii) TSYS’ earnings guidance for 2011 total revenues,
revenues before reimbursable items, income from continuing
operations and EPS from continuing operations, and the assump-
tions underlying such statements including, with respect to TSYS’
earnings guidance for 2011: (a) the economy will not worsen
during 2011; (b) there will be no deconversions of large clients
during the year; (c) there will be no significant movements in
foreign currency exchange rates related to TSYS’ business during
2011; (d) TSYS will not incur significant expenses associated with
the conversion of new large clients or acquisitions, or any signif-
icant impairment of goodwill or other intangibles; and (e) there
will be no significant movements in LIBOR, and no significant
draws on the remaining balance of TSYS’ revolving credit facility.
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) pro-
jections 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 perfor-
mance; and (iv) statements of assumptions underlying such state-
ments. 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 expec-
tations of TSYS’ management and are subject to significant risks
and uncertainties. Actual results may differ materially from those
contemplated by the forward-looking statements. A number of
important factors could cause actual results to differ materially
from those contemplated by our forward-looking statements.
Many of these factors are beyond TSYS’ ability to control or
predict. These factors include, but are not limited to:
• movements in LIBOR are greater than expected and draws on
the revolving credit facility are greater than expected;
• TSYS incurs expenses associated with the signing of a signifi-
cant client;
• internal 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;
• TSYS does not convert and deconvert clients’ portfolios as
scheduled;
• adverse developments with respect
to foreign currency
exchange rates;
• adverse developments with respect to entering into contracts
with new clients and retaining current clients;
• continued consolidation and turmoil in the financial services
industry throughout 2011, 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 clients
and the nationalization or seizure by banking regulators of TSYS
clients;
• the impact of
the Dodd-Frank Wall Street Reform and
Consumer Protection Act on TSYS and our clients;
• changes occur in laws, rules, regulations, credit card association
rules or other industry standards affecting TSYS and our clients
that may result in costly new compliance burdens on TSYS and
our clients and lead to a decrease in the volume and/or number
of transactions processed;
26
• adverse developments with respect to the credit card industry
in general, including a decline in the use of credit cards as a
payment mechanism;
• TSYS is unable to successfully manage any impact from slowing
economic conditions or consumer spending;
• the impact of potential and completed acquisitions, including
the costs associated therewith and their being more difficult to
integrate than anticipated;
• the costs and effects of litigation,
investigations or similar
matters or adverse facts and developments relating thereto,
including the pending litigation discussed in this filing;
• 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’
inability to anticipate and respond to technological
changes, particularly with respect to e-commerce;
• successfully managing the potential both for patent protection
and patent liability in the context of rapidly developing legal
framework for expansive patent protection;
• the material breach of security of any of our systems;
• overall market 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, 2010 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 Event
On January 4, 2011, TSYS announced that it acquired the remain-
ing 49-percent interest in First National Merchant Solutions, LLC,
from First National Bank of Omaha for a net of $169.6 million. The
transaction closed January 1, 2011. The company is being
rebranded as TSYS Merchant Solutions. Management believed
that total ownership of the joint venture was important to TSYS’
diversification strategy and believed the timing was right for all
parties involved.
27
Consolidated Balance Sheets
(in thousands, except per share data)
Assets
Current assets:
December 31,
2010
2009
Cash and cash equivalents (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 394,795
434
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net of allowance for doubtful accounts and billing adjustments of $4.5 million and
$6.3 million at 2010 and 2009, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax assets (Note 20) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets (Note 6). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current assets of discontinued operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
238,283
11,090
77,211
—
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net of accumulated depreciation and amortization (Notes 7 and 22)
. . . . . . . . .
Computer software, net of accumulated amortization (Note 8). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contract acquisition costs, net of accumulated amortization (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity investments (Note 11). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets, net of accumulated amortization (Note 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term assets of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
721,813
300,102
246,424
166,251
320,399
77,127
83,118
37,027
—
450,254
46,190
231,162
11,302
68,527
3,461
810,896
289,069
196,764
128,038
165,896
75,495
14,132
27,940
2,724
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,952,261
1,710,954
Liabilities
Current liabilities:
Accrued salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accounts payable (Note 4). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of long-term debt (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of obligations under capital leases (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities (Note 14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current liabilities of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt, excluding current portion (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax liabilities (Note 20)
Obligations under capital leases, excluding current portion (Note 13)
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redeemable noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity
Shareholders’ equity (Notes 15, 16, 17 and 18):
Common stock — $0.10 par value. Authorized 600,000 shares; 201,326 and 200,860 issued at 2010 and
2009, respectively; 194,528 and 197,180 outstanding at 2010 and 2009, respectively . . . . . . . . . . . . .
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income (loss), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock (shares of 6,798 and 3,680 at 2010 and 2009, respectively)
. . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncontrolling interests in consolidated subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27,414
36,068
39,557
13,191
111,040
—
227,270
194,703
42,547
30,573
53,363
548,456
146,000
32,231
21,487
6,988
6,289
152,742
1,042
220,779
192,367
47,162
12,756
48,443
521,507
—
20,133
119,722
(2,585)
(115,449)
1,219,303
1,241,124
16,681
20,086
139,742
5,673
(69,950)
1,080,250
1,175,801
13,646
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,257,805
1,189,447
Commitments and contingencies (Note 19)
Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,952,261
1,710,954
See accompanying Notes to Consolidated Financial Statements
28
Consolidated Statements of Income
Years Ended December 31,
(in thousands, except per share data)
Total revenues (Notes 4 and 22) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,717,577
1,201,012
Cost of services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
207,136
Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Spin-related expenses (Note 25). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010
2009
2008
1,677,483
1,149,883
183,574
—
1,711,534
1,152,648
176,624
11,140
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonoperating income (expenses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
309,429
(1,617)
344,026
(3,441)
371,122
5,772
Income from continuing operations before income taxes and equity in income of equity
investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes (Note 20) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations before equity in income of equity investments . . . . . . . .
Equity in income of equity investments, net of tax (Note 11) . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) income from discontinued operations, net of tax. . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
307,812
106,088
201,724
7,142
208,866
(3,245)
205,621
(11,674)
340,585
121,850
218,735
6,985
225,720
(6,544)
219,176
(3,963)
376,894
131,206
245,688
7,397
253,085
(1,409)
251,676
(1,576)
Net income attributable to TSYS common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . $ 193,947
215,213
250,100
Basic earnings per share (EPS)* attributable to TSYS common shareholders (Note 27):
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Loss from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted EPS* attributable to TSYS common shareholders:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Loss from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.00
(0.02)
0.99
1.00
(0.02)
0.99
1.12
(0.03)
1.09
1.12
(0.03)
1.09
1.27
(0.01)
1.26
1.27
(0.01)
1.26
Amounts attributable to TSYS common shareholders:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 197,192
(3,245)
Loss from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
221,757
(6,544)
251,509
(1,409)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 193,947
215,213
250,100
* Note: Basic and diluted EPS amounts for continuing operations and net income may not total due to rounding.
See accompanying Notes to Consolidated Financial Statements
29
Consolidated Statements of Cash Flows
Years Ended December 31,
2010
2009
2008
(in thousands)
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 205,621
Adjustments to reconcile net income to net cash provided by operating activities:
Net loss (gain) on foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in income of equity investments, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends received from equity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit from share-based payment arrangements . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provisions for (recoveries of ) bad debt expenses and billing adjustments . . . . . . . . . . . . . . . .
Charges for transaction processing provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax benefit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal of equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal of subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses, other current assets and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities and other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from investing activities:
Purchases of property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions to licensed computer software from vendors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions to internally developed computer software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from disposition, net of expenses paid and cash disposed . . . . . . . . . . . . . . . . . . . . . .
Cash used in acquisitions and equity investments, net of cash acquired . . . . . . . . . . . . . . . . . . .
Dividends received from equity investments as return of capital . . . . . . . . . . . . . . . . . . . . . . . . .
Subsidiary repurchase of minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions to contract acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from financing activities:
Proceeds from borrowings of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit from share-based payment arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal payments on long-term debt borrowings and capital lease obligations . . . . . . . . . . . . .
Dividends paid on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subsidiary dividends paid to noncontrolling shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchases of common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
162
(7,142)
6,572
15,832
(111)
163,111
154
(798)
3,891
(4,388)
145
1,591
(7,138)
(1,495)
13,916
(21,965)
21,202
389,160
(46,547)
(69,826)
(25,466)
4,265
(148,531)
68
—
(75,669)
(361,706)
39,757
111
(11,741)
(55,087)
(9,031)
543
(46,228)
(81,676)
Cash and cash equivalents:
(938)
Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . .
(55,160)
Net increase (decrease) in cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
449,955
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 394,795
219,176
251,676
2,607
(6,985)
4,942
16,128
(6)
156,471
154
6,381
6,556
(3,864)
375
5,713
10,807
27,893
(11,883)
(11,697)
369
423,137
(34,017)
(20,059)
(31,445)
1,979
(294)
—
—
(35,596)
(119,432)
5,334
6
(18,869)
(55,208)
(235)
2
(328)
(69,298)
(4,470)
229,937
220,018
449,955
(10,481)
(7,397)
6,421
24,733
(90)
164,643
154
618
3,172
(4,439)
182
—
(15,490)
(48,024)
4,550
(25,267)
7,874
352,835
(47,969)
(31,499)
(21,777)
—
(50,017)
—
(343)
(41,456)
(193,061)
18,575
90
(67,631)
(55,449)
(241)
268
(35,698)
(140,086)
(10,188)
9,500
210,518
220,018
Supplemental cash flow information:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,191
3,368
11,299
Cash paid for income taxes, net of refunds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 122,173
104,004
151,165
Significant noncash transactions (Note 23)
See accompanying Notes to Consolidated Financial Statements
30
Consolidated Statements of Equity and Comprehensive Income
(in thousands, except per share data)
Balance as of December 31, 2007 . . . . . . . . . . . . . . . . . . . . .
Comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive (loss) income, net of tax (Note 18):
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . .
Change in accumulated OCI related to postretirement
healthcare plans . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive (loss) income . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock issued from treasury shares for exercise of stock
options (Note 17)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . .
Common stock issued for exercise of stock options (Note 16)
. . . . . . . .
Common stock issued for nonvested awards (Note 16)
Share-based compensation (Note 16) . . . . . . . . . . . . . . . . . . .
Cash dividends declared ($0.28 per share) . . . . . . . . . . . . . . . .
Purchase of treasury shares (Note 17) . . . . . . . . . . . . . . . . . . .
Subsidiary dividends paid to noncontrolling interests . . . . . . . . .
Pre-spin tax benefits adjustment . . . . . . . . . . . . . . . . . . . . . .
Tax shortfalls associated with share based payment arrangements . .
Balance as of December 31, 2008 . . . . . . . . . . . . . . . . . . . . .
Comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive (loss) income, net of tax (Note 18):
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . .
Change in accumulated OCI related to postretirement
healthcare plans . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock issued from treasury shares for exercise of stock
options (Note 17)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . .
Common stock issued for nonvested awards (Note 16)
Share-based compensation (Note 16) . . . . . . . . . . . . . . . . . . .
Cash dividends declared ($0.28 per share) . . . . . . . . . . . . . . . .
Purchase of treasury shares (Note 17) . . . . . . . . . . . . . . . . . . .
Subsidiary dividends paid to noncontrolling interests . . . . . . . . .
Tax shortfalls associated with share based payment arrangements . .
Balance as of December 31, 2009 . . . . . . . . . . . . . . . . . . . . .
Fair value of non-controlling interest in TMS . . . . . . . . . . . . .
Comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive (loss) income, net of tax (Note 18):
Foreign currency translation . . . . . . . . . . . . . . . . . . . . .
Change in accumulated OCI related to postretirement
healthcare plans . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock issued from treasury shares for exercise of stock
options (Note 17) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock issued for nonvested awards (Note 16)
. . . . . .
Share-based compensation (Note 16) . . . . . . . . . . . . . . . . . .
Cash dividends declared ($0.28 per share)
. . . . . . . . . . . . . .
Purchase of treasury shares (Note 17) . . . . . . . . . . . . . . . . .
Subsidiary dividends paid to noncontrolling interests. . . . . . . .
Tax shortfalls associated with share based payment
arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2010 . . . . . . . . . . . . . . . . . . . .
— 200,354
20,036
126,889
(6,627)
(69,641)
920,292
9,901
1,000,850
Redeemable
Noncontrolling
Interests
Common Stock
Shares Dollars
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income (Loss)
TSYS Shareholders
Treasury
Stock
Retained
Earnings
Noncontrolling
Interests
Total
Equity
$
— 199,660 $ 19,966 $ 104,762
$ 28,322
$ (34,138) $
725,561
$ 8,580
$
853,053
—
—
—
—
—
—
—
(35,060)
111
—
—
—
—
—
250,100
1,576
251,676
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2
692
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
506
—
—
—
—
(14)
—
—
—
—
—
—
—
(241)
—
—
(35,074)
111
(34,963)
216,713
225
43
—
24,584
(55,369)
(35,698)
(241)
(1,820)
(640)
30
—
42
1
(69)
69
— 24,584
—
—
—
—
—
—
(1,820)
(640)
—
—
—
—
—
—
—
—
195
—
—
—
—
(35,698)
—
—
—
—
—
—
(55,369)
—
—
—
—
—
—
—
—
—
—
12,145
155
(17)
—
(50)
50
— 16,225
—
—
—
—
—
(3,305)
—
—
—
—
—
—
5,673
—
—
(7,529)
(729)
—
—
—
19
—
—
—
(328)
—
215,213
3,963
219,176
—
—
—
—
—
(55,255)
—
—
17
—
—
—
—
—
—
(235)
—
12,162
155
12,317
231,493
2
—
16,225
(55,255)
(328)
(235)
(3,305)
(69,950)
—
1,080,250
—
13,646
—
1,189,447
(34,659)
— 193,947
2,552
196,499
—
—
—
—
— 200,860
—
145,659
20,086
139,742
— (34,659)
9,122
—
—
—
—
—
—
—
(8,781)
—
—
—
—
—
466
—
—
—
—
—
—
—
—
—
—
—
—
(186)
(47)
47
— 15,796
—
—
—
—
—
—
—
(924)
—
—
—
—
—
—
—
729
—
—
—
(46,228)
—
—
—
—
(54,894)
—
—
—
—
$146,000
201,326 $20,133 $119,722
$ (2,585)
$(115,449) $1,219,303
$16,681
See accompanying Notes to Consolidated Financial Statements
733
—
—
—
—
—
—
(250)
—
(6,796)
(729)
(7,525)
188,974
543
—
15,796
(54,894)
(46,228)
(250)
(924)
$1,257,805
31
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 global payment provider
services to financial and nonfinancial institutions, generally under
long-term processing contracts. The Company’s services are pro-
vided through the Company’s three operating segments: North
America Services, International Services and Merchant Services.
systems
institutions
to financial
Through the Company’s North America Services and International
Services segments, TSYS processes information through its card-
the
holder
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 Compa-
ny’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 ser-
vices to merchant acquirers and merchants in the United States.
throughout
On March 1, 2010, TSYS announced the signing of an Investment
Agreement with First National Bank of Omaha (FNBO) to form a
new joint venture company, First National Merchant Solutions,
LLC (FNMS). FNMS offers transaction processing, merchant sup-
port and underwriting, and business and value-added services, as
well as Visa- and MasterCard-branded prepaid cards for busi-
nesses of any size. FNMS is included within the Merchant Services
segment. The effective date of the acquisition was April 1, 2010.
On January 4, 2011, TSYS announced it had acquired the remain-
ing 49-percent interest in FNMS, effective January 1, 2011, from
FNBO. The company will be rebranded as TSYS Merchant Solu-
tions (TMS).
As a result of the sale of certain assets and liabilities of TSYS POS
Systems and Services, LLC (TPOS) in 2010 and the sale of TSYS
Total Debt Management, Inc. (TDM) in 2009, as discussed in
Note 2, the Company’s financial statements reflect TPOS and
TDM as discontinued operations. The Company segregated the
net assets, net liabilities and operating results from continuing
operations in the Consolidated Balance Sheets and Consolidated
Statements of Income for all periods presented.
ACQUISITIONS — PURCHASE PRICE ALLOCATION: TSYS
adopted revised generally accepted accounting principles
(GAAP) relating to business combinations as of January 1,
2009. The revised guidance retains the purchase method of
accounting for acquisitions and requires a number of changes
to the previous guidance, including changes in the way assets and
liabilities are recognized in purchase accounting. Other changes
include requiring the recognition of assets acquired and liabilities
32
assumed arising from contingencies, requiring the capitalization
of in-process research and development at fair value, and requir-
ing the expensing of acquisition-related costs as incurred.
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 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.
the accuracy of
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.
significant
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESEN-
TATION: The accompanying consolidated financial statements
of Total System Services, Inc. include the accounts of TSYS and its
majority owned subsidiaries. All
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 as
defined in accordance with the provisions of Accounting Stan-
dards Codification (ASC) 810, “Consolidation,” and to assess
whether it is the primary beneficiary of such entities. If the deter-
mination is made that the Company is the primary beneficiary,
then that entity is included in the consolidated financial state-
ments in accordance with ASC 810.
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 con-
solidation, changes in regulatory requirements, a decline in the
use of cards as a payment mechanism, disruption of the Compa-
ny’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 develop-
ments 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 finan-
cial statements in conformity with accounting principles generally
accepted in the United States of America. The preparation of the
consolidated financial statements requires management of the Com-
pany to make a number of estimates and assumptions relating to the
reported amounts of assets and liabilities at the date of the consol-
idated 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.
CASH EQUIVALENTS:
Investments with a maturity of three
months or less when purchased are considered to be cash
equivalents.
RESTRICTED CASH: Restricted cash balances relate to cash
balances collected on behalf of customers and held in escrow.
TSYS records a corresponding liability for the obligation to the
customer which is reflected in other current liabilities in the
accompanying consolidated balance sheets. In 2010, TSYS began
shifting the responsibility for funds management for its clients to
the client’s issuer bank. Therefore, client funds are no longer
maintained in a TSYS bank account.
ACCOUNTS RECEIVABLE: Accounts receivable balances are
stated net of allowances for doubtful accounts and billing adjust-
ments of $4.5 million and $6.3 million at December 31, 2010 and
December 31, 2009, respectively.
TSYS records an allowance for doubtful accounts when it is prob-
able that the accounts receivable balance will not be collected.
When estimating the allowance for doubtful accounts, the Com-
pany takes into consideration such factors as its day-to-day knowl-
edge of the financial position of specific clients, the industry and
size of its clients, the overall composition of its accounts receiv-
able aging, prior history with specific customers of accounts
receivable write-offs and prior experience of allowances in pro-
portion 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 con-
income and actual adjustments to
solidated statements of
invoices are charged against
the allowance for billing
adjustments.
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 esti-
mated useful lives of 3-15 years. The Company evaluates impair-
ment losses on long-lived assets used in operations in accordance
with the provisions of ASC 205, “Presentation of Financial
Statements.”
All ordinary repairs and maintenance costs are expensed as
incurred. Maintenance costs that extend the asset life are capi-
talized 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 ASC 205.
ACQUISITION TECHNOLOGY INTANGIBLES: These identifi-
able 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
33
lives, which range from five to nine years. The provisions of
ASC 350, “Intangibles — Goodwill and Other,” require that intan-
gible assets with estimated useful lives be amortized over their
respective estimated useful
lives to their residual values, and
reviewed for impairment in accordance with ASC 205. 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 con-
solidated statements of income.
SOFTWARE DEVELOPMENT COSTS:
In accordance with the
provisions of ASC 985, “Software,” software development costs
are capitalized once technological feasibility of the software prod-
uct 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. Cap-
italization 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 com-
pared 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 amor-
tized using the greater of (1) the straight-line method over its
estimated useful life, which ranges from three to ten years or
(2) the ratio of current revenues to total anticipated revenue over
its useful life.
The Company also develops software that is used internally.
These software development costs are capitalized based upon
the provisions of ASC 350. 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 qualifica-
tions 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 amor-
tized using an estimated useful life of three to five 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 obso-
lescence of the planned software product.
CONTRACT ACQUISITION COSTS: The Company capitalizes
contract acquisition costs related to signing or renewing long-
term contracts. The Company capitalizes internal conversion costs
in accordance with the provisions of Staff Accounting Bulletin
(SAB) No. 104, “Revenue Recognition” and ASC 605, “Revenue
Recognition.” The capitalization of costs related to cash payments
for rights to provide processing services is capitalized in accor-
dance with the provisions of ASC 605. 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 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 Compa-
ny’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 contrac-
tual minimum fees (contractual costs) or from expected undis-
counted net operating cash flows of the related contract (cash
incentives paid). The determination of expected undiscounted
net operating cash flows requires management to make esti-
mates. These costs may become impaired with the loss of a
contract, the financial decline of a client, termination of conver-
sion 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 Sys-
tem Services de México, S.A. de C.V. (TSYS de México), an elec-
tronic 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) headquartered in Shanghai, China. TSYS’ equity
investments are recorded initially at cost and subsequently
adjusted for equity in earnings, cash contributions and distribu-
tions, 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 in accordance with the
provisions of ASC 350. ASC 350 also requires that intangible
assets with estimable useful lives be amortized over their respec-
tive estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with ASC 205.
The portion of the difference between the cost of an investment
and the amount of underlying equity in net assets of an equity
method investee that is recognized as goodwill in accordance
with the provisions of ASC 323, “Investments — Equity Method
and Joint Ventures,” shall not be amortized. However, equity
34
method goodwill shall not be reviewed for impairment in accor-
dance with ASC 350, but instead should continue to be reviewed
for impairment in accordance with paragraph 19(h) of ASC 323.
Equity method 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 $48.1 million at
December 31, 2010.
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.
At December 31, 2010, the Company had goodwill in the amount
of $320.4 million. The Company performed its annual impairment
analyses of its goodwill balance, and these tests did not indicate
any impairment for the periods ended December 31, 2010, 2009
and 2008, respectively.
OTHER INTANGIBLE ASSETS:
Identifiable intangible assets
relate primarily to customer relationships, covenants-not-to-com-
pete, 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. ASC 350 requires that intangible
assets with estimable useful lives be amortized over their respective
estimated useful
lives to their estimated residual values, and
reviewed for impairment in accordance with ASC 205. 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 cur-
rent 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 com-
panies 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:
In accordance with
ASC 205, the Company reviews long-lived assets, such as prop-
erty and equipment and intangibles subject to amortization,
including contract acquisition costs and certain computer soft-
ware, for impairment whenever events or changes in circum-
stances 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 gen-
erated 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
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 agree-
ments 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 process-
ing 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.
REDEEMABLE NONCONTROLLING INTEREST:
In connec-
tion with the 2010 acquisition of TMS, the Company is party to
call and put arrangements with respect to the membership units
that represent the remaining noncontrolling interest of FNMS
Holding. The call arrangement is exercisable by TSYS and the
put arrangement is exercisable by FNBO. The put arrangement is
outside the control of the Company by requiring the Company to
purchase FNBO’s entire equity interest in FNMS Holding 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.
The call and put arrangements for FNMS Holding, representing
49% of its total outstanding equity interests, may be exercised at
the discretion of TSYS or FNBO on April 1, 2015, 2016 and 2017,
upon the dilution of FNBO’s equity ownership in FNMS Holding
below a designated threshold and in connection with certain
acquisitions by TSYS or FNMS Holding in excess of designated
value thresholds.
The put option is not currently redeemable, but a redemption is
considered probable. 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 imminent as of
December 31, 2010. The redemption value at December 31,
2010 to a market participant is estimated to be approximately
35
$146.0 million. The Company did reflect this as an adjustment to
additional paid-in capital during 2010 to the extent that the fair
value amount exceeded the cumulative balance recorded under
ASC 810 at December 31, 2010. Refer to Note 28 for more infor-
mation on subsequent event.
amounts. The loss reserve was established using historical loss
rates, applied to recent bankcard processing volume. TSYS only
assumed liabilities as of April 1, 2010 with the acquisition of TMS
on a go forward basis and thus, has no material merchant loss
reserve recorded.
In December 2007,
NONCONTROLLING INTEREST:
the
Financial Accounting Standards Board (FASB) issued authoritative
guidance under ASC 810, “Consolidation.” ASC 810 changes the
accounting for noncontrolling (minority) interests in consolidated
financial statements, including the requirements to classify non-
controlling interests as a component of consolidated sharehold-
ers’ equity, the elimination of “minority interest” accounting in
results of operations and changes in the accounting for both
increases and decreases in a parent’s controlling ownership
interest.
Noncontrolling interest in earnings of subsidiaries represents the
minority shareholders’ share of the net income or loss of GP
Network Corporation (GP Net) and TSYS Managed Services
EMEA Ltd. (TSYS Managed Services). The noncontrolling interest
in the consolidated balance sheet reflects the original investment
by these shareholders in GP Net and TSYS Managed Services,
their proportional share of the earnings or losses and their pro-
portional share of net gains or losses resulting from the currency
translation of assets and liabilities of GP Net and TSYS Managed
Services. TSYS has adopted the accounting policy to recognize
gains or losses on equity transactions of a subsidiary as a capital
transaction.
RESERVE 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 reserve against losses, including major
fraud losses, which are both less predictable and involve larger
FOREIGN CURRENCY TRANSLATION: The Company main-
tains several different foreign operations whose functional cur-
rency 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 major-
ity 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.
COMPREHENSIVE INCOME: The provisions of ASC 220,
“Comprehensive Income,” require companies to display, with
the same prominence as other financial statements, the compo-
nents of comprehensive income (loss). TSYS displays the items of
other comprehensive income (loss) in its consolidated statements
of equity and comprehensive income.
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.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:
In
June 1998 and June 2000, the FASB issued authoritative guidance
under ASC 815, “Derivatives and Hedging.” ASC 815 requires
that all derivative instruments be recorded on the balance sheet at
their respective fair values. The Company did not have any out-
standing derivative instruments or hedging transactions at
December 31, 2010.
REVENUE RECOGNITION: 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 file, transac-
tions and authorizations processed, statements mailed, cards
embossed and mailed and other processing services for card-
holder accounts on file. Most of these contracts have prescribed
36
annual revenue minimums. Processing contracts generally range
from three to ten years in length and provide for penalties for early
termination.
The Company’s merchant services revenues are derived from
long-term processing contracts with large financial institutions
and other merchant acquirers which generally range from three
to eight years and provide for penalties for early termination.
Merchant services revenues are generated primarily from pro-
cessing all payment forms including credit, debit, electronic ben-
efits 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 transac-
tions, clearing and settlement of electronic transactions, informa-
tion reporting services
related to electronic transactions,
merchant billing services, and point-of-sale terminal sales and
services. Revenue is recognized for merchant services as those
services are performed, primarily on a per unit basis. Revenues on
point-of-sale terminal equipment are recognized upon the trans-
fer of ownership and shipment of product.
The Company recognizes revenues in accordance with the pro-
visions of SAB No. 104. SAB No. 104 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 arrange-
ment exists; (2) delivery has occurred or services have been per-
formed; (3) the seller’s price to the buyer is fixed or determinable;
and (4) collectibility is reasonably assured.
The Company evaluates its contractual arrangements that pro-
vide services to clients through a bundled sales arrangement in
accordance with the provisions of ASC 605. ASC 605 addresses
the determination of whether an arrangement involving more
than one deliverable contains more than one unit of accounting
and how the arrangement consideration should be measured and
allocated to the separate units of accounting.
A deliverable in multiple element arrangements indicates any
performance obligation on the part of the seller and includes
any combination of obligations to perform different services,
grant licenses or other rights. Revenue is allocated to the separate
units of accounting in a multiple element arrangement based on
relative fair values, provided the delivered element has standa-
lone value to the customer, the fair value of any undelivered items
can be readily determined, and delivery of any undelivered items
is probable and substantially within the Company’s control. Evi-
dence of fair value must be objective and reliable. An item has
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.
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. The Company accounts for reimbursable
items in accordance with the provisions of ASC 605.
SHARE-BASED COMPENSATION:
In December 2004, the
FASB issued authoritative guidance under ASC 718, “Compen-
sation — Stock Compensation.” ASC 718 establishes standards
for the accounting for transactions in which an entity exchanges its
equity instruments for goods or services. It also addresses trans-
actions 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. This Statement requires a public entity to measure
the cost of employee services received in exchange for an award
of equity instruments based on the grant-date fair value of the
award (with limited exceptions). That cost will be recognized over
the period during which an employee is required to provide
service in exchange for the award.
ASC 718 is effective for all awards granted on or after January 1,
2006, and to awards modified, repurchased or cancelled after that
date. ASC 718 requires the Company to recognize compensation
costs for the nonvested portion of outstanding share-based com-
pensation granted in the form of stock options based on the
grant-date fair value of those awards calculated under the provi-
sions of ASC 718, for pro forma disclosures. Share-based com-
pensation expenses include the impact of expensing the fair value
of stock options, as well as expenses associated with nonvested
shares. TSYS adopted the provisions of ASC 718 effective Janu-
ary 1, 2006 using the modified-prospective-transition method.
ASC 718 requires companies to estimate forfeitures when recog-
nizing compensation cost. The estimate of forfeitures will be
adjusted by a company as actual forfeitures differ from its esti-
mates, 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 occured. 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 Com-
pany 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 for-
feiture rate in the range of 0% to 10.0%.
The Company has issued its common stock to directors and to
certain employees under nonvested awards. The market value of
the common stock at the date of issuance is recorded as a
reduction of shareholders’ equity in the Company’s consolidated
balance sheet and is amortized as compensation expense over
the vesting period of the awards. For nonvested award grants that
have pro rata vesting, the Company recognizes compensation
37
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 deprecia-
ble 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. The provisions of ASC 840, “Leases,” establish standards
of financial accounting and reporting for leases by lessees and
lessors. If at inception a lease meets one or more of the following
four criteria, the lease shall be classified as a capital lease by the
lessee: (a) the lease transfers ownership of the property to the
lessee by the end of the lease term; (b) the lease contains a
bargain purchase option; (c) the lease term is equal to 75 percent
or more of the estimated economic life of the leased property;
and (d) the present value at the beginning of the lease term of the
minimum lease payments equals or exceeds 90 percent of the fair
value of the leased property. If the lease does not meet one or
more of the criteria, it shall be classified as an operating lease.
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 improve-
ments) 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.
ADVERTISING: Advertising costs, consisting mainly of adver-
tising in trade publications, are expensed as incurred or the first
time the advertising takes place. Advertising expense for 2010,
2009 and 2008 was $690,000, $327,000 and $1.2 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. sub-
sidiaries through the year ended December 31, 2010. Income tax
returns are also filed 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 attrib-
utable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. 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 rec-
ognized 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 recog-
nized 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 tem-
porary differences between book and tax bases, as well as esti-
mates 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.
TSYS adopted the authoritative guidance under ASC 740,
“Income Taxes,” on January 1, 2007. This interpretation pre-
scribed 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.
EARNINGS PER SHARE:
In June 2008, the FASB issued author-
itative guidance under ASC 260, “Earnings Per Share.” The guid-
ance under ASC 260 holds that unvested share-based payment
awards that contain nonforfeitable rights to dividends or dividend
equivalents are “participating securities” as defined in ASC 260,
and therefore should be included in computing earnings per
share (EPS) using the two-class method.
The two-class method is an earnings allocation method for com-
puting 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.
The guidance under ASC 260 was effective for reporting periods
beginning after December 15, 2008.
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
38
that would occur if stock options or other contracts to issue
common stock were exercised. Diluted EPS is calculated by divid-
ing net income by weighted average common and common
equivalent shares outstanding. Common equivalent shares are
calculated using the treasury stock method.
RECLASSIFICATIONS: Certain reclassifications have been
made to the 2009 and 2008 financial statements to conform to
the presentation adopted in 2010.
The following table presents the summarized results of discon-
tinued operations for the years ended December 31, 2010, 2009
and 2008:
(in thousands)
2010
2009
2008
Total revenues . . . . . . . . . . . . $ 7,430
181,060
227,074
Operating (loss) income . . . . . $(1,840)
(4,890)
Income taxes . . . . . . . . . . . . . $ (621)
(1,626)
(898)
588
NOTE 2 Discontinued Operations
Loss from discontinued
The Company sold certain assets and liabilities of TPOS on
September 30, 2010. The sale of certain assets and liabilities of
TPOS was the result of management’s decision during the third
quarter of 2010 to divest non-strategic businesses and focus
resources on core products and services. The Company had a
pre-tax goodwill
impairment of $2.2 million (approximately
$1.5 million after-tax) related to TPOS, which was included in
discontinued operations as part of the sale. This transaction
resulted in the assumed lease of its Sacramento, California, facility
and the closure of its Columbus, Georgia-based distribution center.
TSYS will continue to use the buyer in a referral arrangement for
customers who approach TSYS Acquiring Solutions for terminal
services, and will also subcontract existing relationships to the buyer
for a period no longer than two years. However, TSYS will not have
significant continuing involvement after the sale to the buyer.
TPOS was not a significant component of the Merchant Services
segment, nor TSYS’ consolidated results.
The Company sold TDM on August 31, 2009. The sale of the TDM
business was the result of management’s decision to divest non-
strategic businesses and focus resources on core products and
services. TDM was part of the North America Services segment.
In accordance with the provisions of ASC 205, the Company
determined the TPOS business became a discontinued operation
in the third quarter of 2010 and the TDM business became a
discontinued operation in the first quarter of 2009.
operations, net of tax . . . . . $(1,243)
(3,219)
(1,409)
Loss on disposition, net of
tax . . . . . . . . . . . . . . . . . . . $(2,002)
(3,325)
—
The Consolidated Statements of Cash Flows include TPOS and
TDM through the respective dates of disposition.
NOTE 3 Fair Value Measurement
ASC 820, “Fair Value Measurements and Disclosure,” 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.
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.
In February 2007, the FASB issued authoritative guidance under
ASC 825, “Financial Instruments.” ASC 825 permits the Company
to choose to measure many financial instruments and certain
other items at fair value. Upon adoption of the guidance on
January 1, 2008, TSYS did not elect the fair value option for
any financial instrument it did not currently report at fair value.
Goodwill is assessed annually for impairment in the second quar-
ter of each year using fair value measurement techniques. Spe-
cifically, 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 with its book value, including goodwill. If the fair value of the
reporting unit exceeds its book value, goodwill is considered not
impaired and the second step of the impairment test is unnec-
essary. If the book value of the reporting unit exceeds its fair value,
the second step of the goodwill impairment test is performed to
39
Data. At December 31, 2010, the Company had an accounts
payable balance of $12,500 associated with related parties.
The table below details revenues derived from affiliated compa-
nies for the years ended December 31, 2010, 2009 and 2008:
(in thousands)
Total revenues:
2010
2009
2008
TSYS de México . . . . . . . . . . . . . . . . . $51
CUP Data . . . . . . . . . . . . . . . . . . . . . —
Total revenues . . . . . . . . . . . . . . . . . . . . $51
51
75
126
54
44
98
The Company and TSYS de México are parties to an agreement
where TSYS de México provides processing support to the Com-
pany. Processing support fees paid to TSYS de México was
$149,000, $147,000 and $141,000 for the years ended Decem-
ber 31, 2010, 2009 and 2008, respectively.
NOTE 5 Cash and Cash Equivalents
Cash and cash equivalent balances at December 31 are summa-
rized as follows:
(in thousands)
Cash and cash equivalents in domestic
2010
2009
accounts . . . . . . . . . . . . . . . . . . . . .
$347,734
403,720
Cash and cash equivalents in foreign
accounts . . . . . . . . . . . . . . . . . . . . .
47,061
46,534
Total . . . . . . . . . . . . . . . . . . . . . . . . . .
$394,795
450,254
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.
At December 31, 2010 and 2009, the Company had $29.9 million
and $32.2 million, respectively, of cash and cash equivalents in
Money Market accounts that had an original maturity date of
90 days or less. The Company considers cash equivalents to be
short-term, highly liquid investments that are both readily con-
vertible to known amounts of cash and so near their maturity that
they present insignificant risk of changes in value because of
change in interest rates.
measure the amount of impairment loss, if any. The second step of
the goodwill impairment test compares the implied fair value of
the reporting unit’s goodwill with the book value of that goodwill.
If the book value of the reporting unit’s goodwill exceeds the
implied fair value of that goodwill, an impairment loss is recog-
nized in an amount equal to that excess. The fair value of the
reporting unit is allocated to all of the assets and liabilities of that
unit as if the reporting unit had been acquired in a business
combination and the fair value of the reporting unit was the
purchase price paid to acquire the reporting unit.
The estimate of fair value of the Company’s reporting units is
determined using various valuation techniques, including using
the combination of
the income approach and the market
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 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 dis-
count rate to reflect the value of the invested capital. Cash flows
are estimated for future periods based upon historical data and
projections by management.
At December 31, 2010, the Company had unamortized goodwill
in the amount of $320.4 million. The Company performed its
annual impairment analyses of its unamortized goodwill balance
as of May 31, 2010, and these tests did not indicate any impair-
ment. The fair value of the reporting units substantially exceeds
the carrying value.
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
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 services are performed under con-
tracts 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 trans-
actions with unaffiliated parties.
Through its related party transactions, TSYS generates accounts
receivable and liability accounts with TSYS de México and CUP
40
NOTE 6 Prepaid Expenses and Other Current
NOTE 8 Computer Software, net
Assets
Significant components of prepaid expenses and other current
assets at December 31 are summarized as follows:
(in thousands)
Prepaid expenses . . . . . . . . . . . . . . . . . .
Supplies inventory . . . . . . . . . . . . . . . . . .
Income taxes receivable . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010
2009
$15,421
7,138
12,977
41,675
14,071
7,668
72
46,716
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$77,211
68,527
NOTE 7 Property and Equipment, net
Property and equipment balances at December 31 are as follows:
(in thousands)
Computer and other equipment . . . . . .
Buildings and improvements . . . . . . . . .
Furniture and other equipment . . . . . . .
Land . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . .
Total property and equipment . . . . . . .
Less accumulated depreciation and
2010
2009
$230,773
227,881
125,627
16,729
16,461
229,522
224,973
112,538
16,882
12,926
617,471
596,841
amortization . . . . . . . . . . . . . . . . . . .
317,369
307,772
Property and equipment, net . . . . . . . .
$300,102
289,069
Depreciation and amortization expense related to property and
equipment was $50.1 million, $50.6 million and $47.8 million for
the years ended December 31, 2010, 2009 and 2008, respectively.
Depreciation expense includes amounts for equipment acquired
under capital lease. The increase in depreciation expense for 2009
as compared to 2008 is primarily due to the Company’s infra-
structure requirements in order to support the Company’s South
America client base. This includes equipment not yet placed in
service as well as building improvements.
Computer software at December 31 is summarized as follows:
(in thousands)
Licensed computer software . . . . . . . . .
Software development costs . . . . . . . . .
Acquisition technology intangibles . . . .
2010
2009
$403,115
265,029
75,891
381,657
240,541
55,975
Total computer software . . . . . . . . . . . .
744,035
678,173
Less accumulated amortization:
Licensed computer software . . . . . . .
Software development costs . . . . . . .
Acquisition technology intangibles . . .
275,145
183,853
38,613
290,872
161,579
28,958
Total accumulated amortization . . . . . . .
497,611
481,409
Computer software, net . . . . . . . . . . . .
$246,424
196,764
TSYS acquired 51 percent ownership in TMS in April 2010. The
Company allocated approximately $20.3 million to acquisition
technology intangibles. Refer to Note 24 for more information on
TMS.
TSYS acquired Infonox on the Web (Infonox) in November 2008.
The Company has allocated approximately $14.5 million to acqui-
sition technology intangibles. Refer to Note 24 for more infor-
mation on Infonox.
Amortization expense related to licensed computer software
costs was $33.4 million, $31.4 million and $38.4 million for the
years ended December 31, 2010, 2009 and 2008, respectively.
Amortization expense includes amounts for computer software
acquired under capital lease. Amortization of software develop-
ment costs was $23.1 million, $20.0 million and $19.8 million for
the years ended December 31, 2010, 2009 and 2008, respectively.
Amortization expense related to acquisition technology intangi-
bles was $9.9 million for 2010, $6.9 million for 2009 and
$5.9 million for 2008.
life for each component of
The weighted average useful
computer software, and in total, at December 31, 2010, is as
follows:
At December 31, 2010
Weighted
Average
Amortization
Period (Yrs)
Licensed computer software . . . . . . . . . . . . . . .
Software development costs . . . . . . . . . . . . . . .
Acquisition technology intangibles . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.9
6.1
6.9
6.6
41
Estimated future amortization expense of licensed computer soft-
ware, software development costs and acquisition technology
intangibles as of December 31, 2010 for the next five years is:
(in thousands)
2011 . . . . . . . . . . . . .
2012 . . . . . . . . . . . . .
2013 . . . . . . . . . . . . .
2014 . . . . . . . . . . . . .
2015 . . . . . . . . . . . . .
Licensed
Computer
Software
Software
Development
Costs
Acquisition
Technology
Intangibles
$37,443
34,502
27,070
17,733
11,140
25,536
21,308
15,338
11,702
7,291
10,187
9,479
7,552
5,873
2,828
Estimated future amortization expense on payments for process-
ing rights and conversion costs as of December 31, 2010 for the
next five years is:
(in thousands)
2011 . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . .
Payments for
Processing Rights
Conversion
Costs
$15,528
16,568
16,966
14,580
9,990
20,479
18,151
14,908
12,717
10,463
NOTE 9 Contract Acquisition Costs, net
NOTE 10 Goodwill
On April 1, 2010, TSYS acquired 51 percent ownership of TMS for
approximately $150.5 million. The Company has allocated approx-
imately $155.5 million to goodwill. Refer to Note 24 for more infor-
mation on TMS.
With the sale of certain assets and liabilities of TPOS, the Com-
pany incurred a pre-tax goodwill
impairment of $2.2 million
(approximately $1.5 million after-tax), which is included in loss
on discontinued operations, net of tax. TPOS was not a significant
component to the Merchant Services segment.
In November 2008, TSYS acquired Infonox for an aggregate
consideration of approximately $50.5 million, with contingent
payments over the next three years of up to $25.0 million based
on performance. The Company did not make any contingent
payments in 2010. The Company has allocated approximately
$29.1 million to goodwill. Refer to Note 24 for more information
on Infonox.
Significant
components of
December 31 are summarized as follows:
contract acquisition costs at
(in thousands)
Payments for processing rights, net . . . . $ 85,730
80,521
Conversion costs, net . . . . . . . . . . . . . .
2010
2009
59,085
68,953
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $166,251
128,038
Amortization related to payments for processing rights, which is
recorded as a reduction of
revenues, was $17.7 million,
$25.5 million and $28.5 million for 2010, 2009 and 2008,
respectively.
Amortization expense related to conversion costs was
$17.5 million, $17.8 million and $14.4 million for 2010, 2009
and 2008, respectively.
The weighted average useful life for each component of contract
acquisition costs, and in total, at December 31, 2010 is as follows:
At December 31, 2010
Weighted
Average
Amortization
Period (Yrs)
Payments for processing rights. . . . . . . . . . . . . .
Conversion costs . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.7
6.6
7.8
The gross amount and accumulated impairment loss of goodwill at December 31, 2010 and 2009 is as follows:
Gross amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated impairment losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$70,614
—
$70,614
33,188
—
33,188
218,822
(2,225)
216,597
$322,624
(2,225)
$320,399
North America
Services
International
Services
Merchant
Services
Consolidated
2010
42
North America
Services
International
Services
Merchant
Services
Consolidated
2009
Gross amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated impairment losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$70,614
—
$70,614
34,181
—
34,181
63,326
—
63,326
$168,121
—
$168,121
In 2010, the Company sold certain assets and liabilities of TPOS, for which the Company had a pre-tax goodwill impairment of $2.2 million
and is included in discontinued operations as part of the sale.
The changes in the carrying amount of goodwill at December 31, 2010 and 2009 are as follows:
(in thousands)
Balance as of December 31, 2008. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Infonox purchase price allocation adjustment
. . . . . . . . . . . . . . . . . . . . .
Currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2009. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TMS purchase price allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
North America
Services
International
Services
Merchant
Services
Consolidated
$ 70,614
—
—
70,614
—
—
$70,614
32,802
—
1,379
34,181
—
(993)
33,188
60,354
747
—
61,101
155,496
—
216,597
$ 163,770
747
1,379
165,896
155,496
(993)
$320,399
NOTE 11 Equity Investments
NOTE 12 Other Intangible Assets, net
The Company has an equity investment with Promocíón y Oper-
ación, S.A. de C.V. and records its 49% ownership using the equity
method of accounting. The operation, TSYS de México, prints
statements and provides card-issuing support services to the
equity investment clients and others.
In April 2010, TSYS acquired 51 percent ownership in TMS. The
Company allocated approximately $80.5 million to other intan-
gible assets as part of the purchase price allocation to customer
relationships, trade name and trade association. Refer to Note 24
for more information on TMS.
The Company has an equity investment with China UnionPay Co.,
Ltd. and records its 44.56% ownership using the equity method of
accounting. CUP 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 pro-
vides transaction processing, disaster recovery and other services
for banks and bankcard issuers in China.
TSYS’ equity investments are recorded initially at cost and sub-
sequently adjusted for equity in earnings, cash contributions and
distributions, and foreign currency translation adjustments.
TSYS’ equity in income of equity investments (net of tax) for the
years ended December 31, 2010, 2009 and 2008 was $7.1 million,
$7.0 million and $7.4 million, respectively.
A summary of TSYS’ equity investments at December 31 is as
follows:
(in thousands)
CUP Data . . . . . . . . . . . . . . . . . . . . . . . . $70,479
6,648
TSYS de México . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $77,127
2010
2009
68,022
7,473
75,495
In November 2008, TSYS acquired Infonox. The Company has
allocated approximately $7.0 million to other intangible assets as
part of the purchase price allocation to customer relationships,
convenants-not-to-compete and trade name. Refer to Note 24 for
more information on Infonox.
Significant components of other intangible assets at December 31
are summarized as follows:
Gross
(in thousands)
Customer relationships . . . . . $ 93,727
1,000
Covenants-not-to-compete . .
6,031
Trade name . . . . . . . . . . . . .
10,000
Trade association . . . . . . . . .
2010
Accumulated
Amortization
(22,859)
(1,000)
(3,031)
(750)
Net
$70,868
—
3,000
9,250
Total . . . . . . . . . . . . . . . . . . $110,758
(27,640)
$83,118
43
Gross
(in thousands)
Customer relationships . . . . . $27,796
1,000
Covenants-not-to-compete . .
2,084
Trade name . . . . . . . . . . . . .
2009
Accumulated
Amortization
(14,151)
(775)
(1,822)
Net
$13,645
225
262
Total . . . . . . . . . . . . . . . . . . $30,880
(16,748)
$14,132
Amortization related to other intangible assets, which is recorded
in selling, general and administrative expenses, was $11.2 million,
$3.4 million and $2.9 million for 2010, 2009 and 2008,
respectively.
The weighted average useful life for each component of other
intangible assets, and in total, at December 31, 2010 is as follows:
At December 31, 2010
Weighted
Average
Amortization
Period (Yrs)
Customer relationships . . . . . . . . . . . . . . . . . . .
Covenant-not-to-compete . . . . . . . . . . . . . . . . .
Trade name . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade association . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.1
2.8
3.0
10.0
8.0
Estimated future amortization expense on other intangible assets
as of December 31, 2010 for the next five years is:
(in thousands)
2011. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,301
13,301
2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,051
2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,468
2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,788
2015. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NOTE 13 Long-term Debt and Capital Lease
Obligations
In December 2010, the Company obtained a $39.8 million note
payable from a third-party vendor related to financing the pur-
chase of distributed systems software.
On December 21, 2007, the Company entered into a Credit
Agreement with Bank of America N.A., as Administrative Agent,
The Royal Bank of Scotland plc, as Syndication Agent, and the
other lenders. The Credit Agreement provides for a $168 million
unsecured five year term loan to the Company and a $252 million
five year unsecured revolving credit facility. The principal balance
of loans outstanding under the credit facility bears interest at a
rate of the London Interbank Offered Rate (LIBOR) plus an appli-
cable 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 which is currently a “BBB”
investment grade rating from Standard and Poors. Interest is paid
on the last date of each interest period; however, if the period
exceeds three months, interest is paid every three months after
the beginning of such interest period. In addition, the Company is
to pay 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 is not required to make any scheduled principal
payments other than payment of the entire outstanding balance
on December 21, 2012. The Company may 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
includes covenants requiring the Company to maintain certain
minimum financial ratios. The Company did not use the revolving
credit facility in 2010, 2009 or 2008.
The proceeds will be used for working capital and other corporate
purposes, including financing the repurchase by TSYS of its capital
stock.
In April 2009, the Company repaid its International Services’ loan
of £1.3 million, or approximately $1.8 million, which it obtained in
May 2008.
On October 30, 2008, the Company’s International Services seg-
ment obtained a credit agreement from a third-party to borrow up
to approximately ¥2.0 billion, or $21 million, in a Yen-denomi-
nated three-year loan to finance activities in Japan. The rate is
LIBOR plus 80 basis points. The Company initially made a draw of
¥1.5 billion, or approximately $15.1 million. In January 2009, the
Company made an additional draw down of ¥250 million, or
approximately $2.8 million. In April 2009, the Company made
an additional draw down of ¥250 million, or approximately
$2.5 million.
In connection with the formation of TSYS Managed Services, TSYS
and Merchants agreed to provide long-term financing to TSYS
Managed Services. At the end of December 2010, the balance of
the financing arrangement with Merchants was approximately
£504,000, or approximately $775,000.
In addition, TSYS maintains an unsecured credit agreement with
CB&T. 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 2010, 2009 or 2008.
44
Long-term debt at December 31 consists of:
Capital lease obligations at December 31 consists of:
(in thousands)
LIBOR + 0.60%, unsecured term loan,
2010
2009
due December 21, 2012, with
principal to be paid at maturity . . . . . $168,000
168,000
1.50% note payable, due December 31,
2013, with monthly interest and
principal payments . . . . . . . . . . . . . .
LIBOR + 0.80%, unsecured term loan,
due November 2, 2011, with principal
paid at maturity . . . . . . . . . . . . . . . .
3.95% note payable, due March 1,
2011, with monthly interest and
principal payments . . . . . . . . . . . . . .
LIBOR + 2.00%, unsecured term loan,
due November 16, 2011, with
quarterly interest payments and
principal to be paid at maturity . . . . .
39,758
—
23,937
21,773
1,790
8,778
775
804
Total debt . . . . . . . . . . . . . . . . . . . .
Less current portion . . . . . . . . . . . . .
234,260
39,557
199,355
6,988
Noncurrent portion of long-term
debt . . . . . . . . . . . . . . . . . . . . . . . $194,703
192,367
Required annual principal payments on long-term debt for the five
years subsequent to December 31, 2010 are summarized as
follows:
(in thousands)
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,557
181,251
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,452
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(in thousands)
Capital lease obligations . . . . . . . . . . . . . $43,764
13,191
Less current portion . . . . . . . . . . . . . . . . .
2010
2009
19,045
6,289
Noncurrent portion of capital leases . . . . . $30,573
12,756
The future minimum lease payments under capital
December 31, 2010 are summarized as follows:
leases at
(in thousands)
2011. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,947
11,047
2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,105
2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,555
2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
813
2015. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total minimum lease payments. . . . . . . . . . . . . . . . .
Less amount representing interest . . . . . . . . . . . . . .
45,467
1,703
$43,764
NOTE 14 Other Current Liabilities
Significant components of other current liabilities at December 31
are summarized as follows:
2010
(in thousands)
Client liabilities . . . . . . . . . . . . . . . . . . $ 21,296
29,999
Accrued expenses . . . . . . . . . . . . . . . .
34,184
Deferred revenues . . . . . . . . . . . . . . . .
13,634
Dividends payable . . . . . . . . . . . . . . . .
5,221
Transaction processing provisions . . . . .
3,708
Client postage deposits . . . . . . . . . . . .
2,920
Accrued income taxes . . . . . . . . . . . . .
78
Other . . . . . . . . . . . . . . . . . . . . . . . . .
2009
45,824
32,909
31,244
13,828
5,484
3,736
252
19,465
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $111,040
152,742
45
NOTE 15 Equity
DIVIDENDS: Dividends on common stock of $55.1 million were paid in 2010, compared to $55.2 million and $55.4 million in 2009 and
2008, respectively.
EQUITY COMPENSATION PLANS: The following table summarizes TSYS’ equity compensation plans by category:
(in thousands, except per share data)
Plan Category
Equity compensation plans approved by security
holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity compensation plans not approved by
security holders . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(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))
8,810(1)
—
8,810
$23.40
—
$23.40
20,163(2)
—
20,163
(1) Does not include an aggregate of 389,519 shares of nonvested awards which will vest over the remaining years through 2012.
(2) Includes 20,162,500 shares available for future grants under the Total System Services, Inc. 2002 Long-Term Incentive Plan, 2007 Omnibus Plan and 2008
Omnibus Plan.
NOTE 16 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.
Employee stock options granted during or after 2006 (other than
performance-based stock options) generally become exercisable at
the end of the three-year period and expire ten years from the date
of grant. Vesting for stock options granted during or after 2006
(other than performance-based stock options) accelerates upon
retirement for plan participants who have reached age 62 and
who also have no less than fifteen years of service at the date of
their election to retire. For stock options granted in 2006, share-
based compensation expense is fully recognized for plan partici-
pants upon meeting the retirement eligibility requirements of age
and service.
Stock options granted prior to 2006 generally become exercis-
able 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. Following adoption of
ASC 718, share-based compensation expense is recognized in
income over the remaining nominal vesting period with consid-
eration for retirement eligibility.
The performance-based stock options awarded to TSYS execu-
tives effective April 30, 2010 become exercisable only upon sat-
certain performance conditions. Share-based
isfaction of
compensation expense is recognized in income based upon
the Company’s estimate of the probability of achieving the spec-
ified EPS goal. The Company historically issues new shares or uses
treasury shares to satisfy share option exercises.
Long-Term Incentive Plans
TSYS maintains the Total System Services, Inc. 2008 Omnibus
Plan, Total System Services, Inc. 2007 Omnibus Plan, Total System
Services, Inc. 2002 Long-Term Incentive Plan and Total System
Services, Inc. 2000 Long-Term Incentive Plan to advance the
interests of TSYS and its shareholders through awards that give
employees and directors a personal stake in TSYS’ growth, devel-
opment and financial success. Awards under these plans are
designed to motivate employees and directors to devote their
best interests 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 apprecia-
tion rights, restricted stock and restricted stock units, perfor-
mance 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
46
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. 2008 Omnibus Plan (cid:31)17 million shares; Total System
Services, Inc. 2007 Omnibus Plan (cid:31)5 million shares; Total System
Services, Inc. 2002 Long-Term Incentive Plan (cid:31)9.4 million shares;
and Total System Services, Inc. 2000 Long-Term Incentive Plan
(cid:31)2.4 million shares. Effective February 1, 2010, no additional
awards may be made from the Total System Services, Inc. 2000
Long-Term Incentive Plan.
Share-Based Compensation
TSYS’share-based compensation costs are included as expenses and
classified as cost of services and selling, general and administrative.
TSYS does not include amounts associated with share-based com-
pensation 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 Decem-
ber 31, 2010, share-based compensation was $15.8 million com-
pared to $16.2 million and $17.8 million (excluding $6.8 million
included in spin-related expenses) for the same periods in 2009
and 2008, respectively.
Nonvested Awards: The Company granted shares of TSYS
common stock to certain key employees and non-management
members of its Board of Directors under nonvested stock bonus
awards for services to be provided in the future by such officers,
directors and employees. The following table summarizes the
number of shares granted each year:
2010
2009
2008
197,186
Number of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3.1 million
513,920
$6.8 million
697,911
$15.3 million
A summary of the status of TSYS’ nonvested shares as of December 31, 2010, 2009 and 2008, respectively, and the changes during the
periods are presented below:
Nonvested shares
(in thousands, except per share data)
Outstanding at beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,084
197
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(416)
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(44)
Forfeited/canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
821
Outstanding at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares
2010
2009
2008
Weighted
Average
Grant-Date
Fair Value
$18.60
15.55
20.63
17.32
$16.91
Shares
1,014
514
(414)
(30)
1,084
Grant-Date
Fair Value
$23.46
13.28
23.77
20.34
$18.60
Shares
591
698
(258)
(17)
1,014
Weighted
Average
Grant-Date
Fair Value
$26.15
21.89
25.24
25.19
$23.46
As of December 31, 2010, there was approximately $8.0 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 1.8 years.
In March 2010, TSYS authorized a total grant of 279,831 performance shares to certain key executives with a performance based vesting
schedule (2010 performance shares). These 2010 performance shares have a 2010-2012 performance period for which the Compensation
Committee established two performance goals: compound growth in revenues before reimbursables and income from continuing
operations using the 2010 annual operating plan as the base. The Compensation Committee will certify the attainment level of such goals
following the end of 2012, and the number of performance shares that 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 will estimate the probability of achieving the goals through the performance period and will expense the award on a straight-line
basis.
As of December 31, 2010, there was approximately $2.9 million of total unrecognized compensation cost related to the 2010 performance
shares compensation arrangement. That cost is expected to be recognized until the end of 2012.
During 2008 and 2005, respectively, TSYS authorized a grant of non-vested awards to two key executives with separate performance
vesting schedules. These grants have separate one-year performance periods that vest over five to seven years during each of which the
Compensation Committee establishes an earnings per share goal and, if such goal is attained during any performance period, 20% of the
performance-based shares will vest, up to a maximum of 100% of the total grant. Compensation expense for each year’s award is measured
on the grant date based on the quoted market price of TSYS common stock and is expensed on a straight-line basis for the year.
47
A summary of the awards authorized in each year is below:
Year of Initial Award
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Number of
Shares Awarded
Potential Number of
Performance-Based
Shares to be Vested
279,831
182,816
279,831
109,688
(2013)
(2011-2014)
A summary of the status of TSYS’ performance-based nonvested shares as of December 31, 2010, 2009 and 2008, respectively, and
changes during those periods are presented below:
Performance-based
Nonvested shares
(in thousands, except per share data)
Outstanding at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited/canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010
2009
2008
Weighted
Average
Grant Date
Fair Value
$13.69
15.65
13.69
—
$15.65
Weighted
Average
Grant-Date
Fair Value
$23.32
13.69
23.32
—
$13.69
Weighted
Average
Grant-Date
Fair Value
$32.27
23.32
32.27
—
$23.32
Shares
25
62
(25)
—
62
Shares
62
62
(62)
—
62
Shares
62
316
(62)
—
316
Stock Option Awards
During 2010, 2009 and 2008, the Company granted stock options to key TSYS executive officers. The average fair value of the options
granted for both years was estimated on the date of grant using the Black-Scholes-Merton option-pricing model. The following table
summarizes the weighted average assumptions, and the fair value of the options:
2010
2009
2008
Number of options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average exercise price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected term (years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,176,963
16.01
1,047,949
13.11
$
771,892
$ 23.15
2.65%
30.00%
4.89
1.79%
4.11
$
3.19%
42.00%
8.6
2.14%
5.31
$
3.42%
36.57%
8.7
1.21%
9.73
In April 2010, the Company granted 1.4 million stock options to key TSYS executive officers that are performance- and/or market
conditions-based. These stock options will vest and become exercisable only if the stock price is at least a specified percentage above the
grant date stock price on April 30, 2013 or TSYS reaches a specified EPS goal by December 31, 2012. Given the market conditions
component, TSYS evaluated the impact using the Monte Carlo simulation to value these awards and ultimately determined that the impact
was minimal. The average fair value of the option grants was $3.48 per option and was estimated on the date of grant using the Black-
Scholes-Merton option-pricing model with the following weighted average assumptions: exercise price of $16.19; risk-free interest rate of
2.07%; expected volatility of 30.0%; expected term of 4.0 years; and dividend yield of 1.79%.
In March 2010, the Company also granted 736,000 stock options to key TSYS executive officers. The average fair value of the option grant
was $5.33 per option and was estimated on the date of grant using the Black-Scholes-Merton option-pricing model with the following
weighted average assumptions: exercise price of $15.66; risk-free interest rate of 3.77%; expected volatility of 30.0%; expected term of 8.6
years; and dividend yield of 1.79%. The grant will vest over a period of 3 years.
The expected term of years for the 2008 grant was determined under the “simplified” method as prescribed by the SEC’s SAB No. 107.
48
A summary of TSYS’ stock option activity as of December 31, 2010, 2009 and 2008, and changes during the years ended on those dates is
presented below:
(in thousands,
except per share data)
Options:
2010
Weighted
Average
Exercise Price
Options
Outstanding at beginning of year . . . . . . . . . . . . . . . . . . . . 6,955
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,177
(41)
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(281)
Forfeited/canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at end of year. . . . . . . . . . . . . . . . . . . . . . . . . 8,810
Options exercisable at year-end . . . . . . . . . . . . . . . . . . . . . 5,712
Weighted average fair value of options granted during the
year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$25.54
15.89
13.11
19.83
$23.40
$27.48
$ 4.11
Options
6,185
1,048
(1)
(277)
6,955
5,357
2009
Weighted
Average
Exercise Price
$27.59
13.11
1.83
24.36
$25.54
$28.15
$ 5.31
Options
5,439
771
(14)
(11)
6,185
5,250
2008
Weighted
Average
Exercise Price
$28.20
23.15
18.62
28.40
$27.59
$28.14
$ 9.73
Outstanding
Exercisable
Average remaining contractual life (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.9
2.5
Aggregate intrinsic value (in thousands)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(53,967)
$(58,343)
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41,403
1,205
14,399
$90,400
$14,300
$64,000
Options Exercised
Intrinsic Value
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, 2010, there was approximately $8.8 million of total unrecognized compensation cost related to TSYS stock options
that is expected to be recognized over a remaining weighted average period of 2.0 years.
NOTE 17 Treasury Stock
The following table summarizes shares held as treasury stock and their related carrying value:
(in thousands)
December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of
Treasury
Shares
6,798
3,680
3,652
Treasury
Shares Cost
$115,449
69,950
69,641
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. Through December 31, 2010, the
Company purchased 3.1 million shares for approximately $45.1 million, at an average price of $14.60.
49
On April 20, 2006, TSYS announced that its board had approved a stock repurchase plan to purchase up to 2 million shares, which
represented slightly more than five percent of the shares of TSYS stock held by shareholders other than Synovus. The shares may be
purchased from time to time over a two year period and will depend on various factors including price, market conditions, acquisitions and
the general financial position of TSYS. Repurchased shares will be used for general corporate purposes.
With the completion of the spin-off, the TSYS Board of Directors extended to April 2010 TSYS’ current share repurchase program that was
set to expire in April 2008 and increased the number of shares that may be repurchased under the plan from 2 million to 10 million.
During 2008, TSYS purchased approximately 2.0 million shares of TSYS common stock through privately negotiated and open market
transactions for an aggregate purchase price of $35.7 million, or an average per share price of $18.13. The Company had approximately
6,928,000 shares remaining that could be repurchased under the stock repurchase plan. The plan expired in April 2010.
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, 2010:
(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
October 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
November 2010 . . . . . . . . . . . . . . . . . . . . . . . . . .
December 2010 . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
—
$—
—
—
$—
3,093
3,093
3,093
Maximum
Number of
Shares That
May Yet Be
Purchased
Under the Plans
or Programs
6,907
6,907
6,907
Shares Issued for Options Exercised
During 2010, 2009 and 2008, employees of the Company exercised options for shares of TSYS common stock that were issued from
treasury or newly issued shares. The table below summarizes these stock option exercises by year:
Issued from treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,403
—
Newly issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,205
—
12,198
2,201
2010
2009
2008
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. The shares are added to the treasury account and TSYS remits funds to the Internal Revenue Service to settle the tax liability. During
2010 and 2009, the Company acquired 66,553 shares for approximately $1.1 million and 29,221 shares for approximately $329,000,
respectively, as a result of share withholding for taxes.
NOTE 18 Other Comprehensive Income (Loss)
In June 1997, the FASB issued authoritative guidance under ASC 220. ASC 220 established certain standards for reporting and presenting
comprehensive income in the general-purpose financial statements. The purpose of ASC 220 was to report all items that met the definition
of “comprehensive income” in a prominent financial statement for the same period in which they were recognized. Comprehensive
income includes all changes in owners’ equity that resulted from transactions of the business entity with nonowners.
Comprehensive income is the sum of net income and other items that must bypass the income statement because they have not been
realized, including items such as an unrealized holding gain or loss from available for sale securities and foreign currency translation gains
or losses. These items are not part of net income, yet are important enough to be included in comprehensive income, giving the user a
more comprehensive picture of the organization as a whole. Items included in comprehensive income, but not net income, are reported
under the accumulated other comprehensive income section of shareholders’ equity.
50
In September 2006, the FASB issued authoritative guidance under ASC 715, “Compensation — Retirement Benefits.” ASC 715 requires
an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its
statement of financial position and to recognize changes in the funded status in the year in which the changes occur through
comprehensive income.
Comprehensive income (loss) for TSYS consists of net income, cumulative foreign currency translation adjustments 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)
December 31, 2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Beginning
Balance
Pretax
amount
Tax
effect
Net-of-Tax
Amount
Ending
Balance
$20,641
9,532
1,851
7,681
$28,322
Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in accumulated OCI related to postretirement healthcare plans . . . .
$29,202
(880)
(43,315)
194
(8,255)
83
(35,060)
111
$ (5,858)
(769)
December 31, 2008. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$28,322
(43,121)
(8,172)
(34,949)
$ (6,627)
Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in accumulated OCI related to postretirement healthcare plans . . . .
$ (5,858)
(769)
14,140
235
December 31, 2009. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (6,627)
14,375
1,995
80
2,075
12,145
155
$ 6,287
(614)
12,300
$ 5,673
Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . .
Change in accumulated OCI related to postretirement healthcare
$ 6,287
(8,609)
(1,080)
(7,529)
$(1,242)
plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(614)
(1,138)
(409)
(729)
(1,343)
December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5,673
(9,747)
(1,489)
(8,258)
$(2,585)
Consistent with its overall strategy of pursuing international investment opportunities, TSYS adopted the permanent reinvestment
exception under ASC 740, “Income Taxes,” 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 19 Commitments and Contingencies
LEASE COMMITMENTS: TSYS is obligated under noncancel-
able operating leases for computer equipment and facilities.
The future minimum lease payments under noncancelable oper-
ating leases with remaining terms greater than one year for the
next five years and thereafter and in the aggregate as of
December 31, 2010, are as follows:
(in thousands)
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 85,987
83,765
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
73,969
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40,259
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26,983
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,796
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total future minimum lease payments . . . . . . . . . . . $321,759
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 2010, 2009
and 2008 was $102.1 million, $105.4 million and $101.4 million,
respectively. Total rental expense under sublease arrangements in
2010, 2009 and 2008 was $675,000, $720,000 and $702,000,
respectively. The rental income under sublease arrangements in
2010, 2009 and 2008 was $809,000, $863,000 and $842,000,
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
51
material adverse effect on its financial position, results of opera-
tions or cash flows.
CONTINGENCIES:
Legal Proceedings-General
The Company is subject to various legal proceedings and claims
and is also subject to information requests, inquiries and inves-
tigations 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 deter-
mines to be both probable and reasonably estimable in accor-
dance with ASC 450, “Contingencies.” In the opinion of
management, based on current knowledge and in part upon
the advice of legal counsel, all matters are believed to be ade-
quately covered by insurance, or if not covered, are believed to be
without merit or are of such kind or involve such amounts that
would not have a material adverse effect on the financial position,
results of operations or cash flows of the Company if disposed of
unfavorably.
Infonox Matter
On September 22, 2010, Safwan Shah filed a lawsuit in the Superior
Court of California, Santa Clara County, against Total System Ser-
vices, Inc., TSYS Acquiring Solutions, L.L.C. and Infonox, a TSYS
Company (Case No. 1-10-CV-183173). The claims arise out of TSYS’
purchase of Infonox on the Web (“Infonox”) in November 2008. The
Agreement and Plan of Merger in connection with the transaction
provided that certain “remaining shareholders” of Infonox could
receive “contingent merger consideration” if Infonox reached cer-
tain revenue targets during the three years following the closing of
the transaction. Plaintiff, a former shareholder of Infonox, alleges
that the defendants have wrongfully refused to pay $25 million in
“contingent merger consideration” as provided for in the Agree-
ment and Plan of Merger. Plaintiff brings the claim in his individual
capacity and also as a representative of other former Infonox share-
holders. Plaintiff’s claims allege fraud, fraudulent inducement, neg-
ligent misrepresentation, breach of contract, and breach of duty of
good faith and fair dealing. In January 2011, Plaintiff and TSYS
entered into an Arbitration Agreement, pursuant to which Shah
agreed to stay the lawsuit pending in the Superior Court of
California, Santa Clara County and to arbitrate the claims he has
asserted in the lawsuit. The arbitration is currently scheduled for July
2011. Defendants believe that the allegations are without merit and
plan to vigorously defend themselves against the allegations. Based
on information that is presently available to it, TSYS’ management is
unable to predict the outcome of the case and cannot currently
reasonably determine the probability of a material adverse result or
reasonably estimate a range of potential exposure, if any. Although
the ultimate outcome of this case cannot be ascertained at this time,
based upon current knowledge, TSYS’ management does not
believe the eventual outcome of this case will have a material
adverse effect on TSYS’ financial position, results of operations or
cash flows. However, it is possible that the ultimate outcome of this
case may be material to TSYS’ results of operations for any particular
period.
Electronic Payment Systems Matter
In February 2007, TSYS Acquiring Solutions, L.L.C., a wholly
owned subsidiary of TSYS (“TSYS Acquiring”), filed a demand
for arbitration for payment of past due processing fees pursuant
to a contract with Electronic Payment Systems LLC (“EPS”), an
acquiring independent sales organization. EPS counterclaimed
and alleged certain monetary damages.
In April 2008, EPS
amended its counterclaims, adding a claim for a declaration that
the arbitrator award EPS ownership, control and access to the
1-800 number that connects EPS’ merchants to TSYS Acquiring as
EPS’ processor. On January 20, 2009, the arbitrator denied all
TSYS Acquiring’s claims, awarded EPS approximately $3.3 million
in damages and fees and awarded EPS immediate ownership,
control and access over the 1-800 number.
On January 26, 2009, TSYS Acquiring filed an action (the “First
Action”) in the United States District Court for the District of
Arizona (Civil Action No. CV09-00155-PHX-JAT) seeking to vacate
the arbitration award. However, on October 22, 2009, the court
granted summary judgment in favor of EPS. On May 4, 2010, after
the court denied post-judgment motions filed by TSYS Acquiring,
the court confirmed the monetary judgment and TSYS Acquiring
paid the monetary judgment to EPS. TSYS Acquiring had been
using seven 1-800 numbers to connect EPS’ merchants and the
court interpreted the arbitrator’s award to include all seven
numbers.
On May 14, 2010, TSYS Acquiring filed a second action (the
in the United States District Court for the
“Second Action”)
District of Arizona (Civil Action No. CV10-01060-PHX-DGC) seek-
ing a declaratory judgment that TSYS did not need to give EPS
ownership and control of the seven 1-800 numbers. EPS filed a
motion for summary judgment on the request for declaratory
relief. EPS also filed a counterclaim arguing that TSYS Acquiring
should be required to pay EPS for its continued use of the 1-800
number and seeking punitive damages based on various con-
sumer protection statutes. On November 9, 2010, the court
granted EPS’ motion for summary judgment. The EPS counter-
claims that were not previously dismissed in the Second Action
remain pending.
On December 3, 2010, EPS filed a motion to compel in the First
Action seeking to require TSYS Acquiring to provide EPS with
immediate ownership, control and access over the seven 1-800
numbers used by EPS merchants.
52
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, includ-
ing, without limitation, court costs and reasonable attorney’s fees.
The Company has not made any indemnification payments pur-
suant to these indemnification clauses.
The Company has not recorded a liability for guarantees or
indemnities in the accompanying consolidated balance sheet
since the maximum amount of potential future payments under
such guarantees and indemnities is not determinable.
NOTE 20 Income Taxes
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 consol-
idated statements of income were as follows:
(in thousands)
Current income tax expense
(benefit):
Federal . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . .
Total current income tax
Years Ended December 31,
2010
2009
2008
$98,802
4,221
8,682
115,301
4,311
6,185
125,743
4,678
5,075
expense . . . . . . . . . . . . .
111,705
125,797
135,496
Deferred income tax
expense (benefit):
Federal . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . .
Total deferred income tax
(2,970)
(643)
(2,004)
(4,210)
947
(684)
(3,469)
(390)
(431)
benefit . . . . . . . . . . . . . .
(5,617)
(3,947)
(4,290)
Total income tax expense. . . $106,088
121,850
131,206
On January 24, 2011, TSYS Acquiring filed a petition with the
Federal Communications Commission (“FCC”) seeking a ruling
that the enforcement of the arbitration award regarding the 1-800
numbers would violate the FCC’s rules regarding the allocation
and transfer of 1-800 numbers.
On February 15, 2011, the court in the First Action issued an order
(the “Order”) requiring TSYS Acquiring to comply with the arbi-
tration award by moving all non-EPS merchants off of 1-800
numbers used by EPS merchants, and to then transfer to EPS
the seven toll free numbers at issue. The Order requires compli-
ance within 90 days. In addition, the court rejected TSYS Acquir-
ing’s arguments that the award cannot be enforced because it
violates FCC regulations.
On February 24, 2011, the FCC released a Declaratory Ruling
granting TSYS Acquiring’s petition by affirming that the FCC has
exclusive jurisdiction over the transfer of toll free numbers, and
noting that several aspects of the arbitrator’s ruling and the affir-
mation of that ruling by the United States District Court for the
District of Arizona conflicted with the FCC’s rules and related
tariffs governing the transfer of toll free numbers. Because of this,
the Declaratory Ruling proceeded to direct those third parties
charged with the administration of the seven toll free numbers for
TSYS Acquiring, as well as the Toll Free Number Administrator
charged with administering the database of toll free numbers, to
reject any requests seeking a transfer of those numbers from TSYS
Acquiring to another party, absent a specific directive from the
FCC.
In light of the FCC’s Declaratory Ruling that the toll free numbers
may not be transferred by an order of the court or the arbitrator,
TSYS Acquiring intends to continue to vigorously defend itself
against enforcement of the Order in the United States District
Court for the District of Arizona, and if necessary, the Ninth Circuit
Court of Appeals.
If the Order is not vacated or modified in response to the FCCs
recent Declaratory Ruling, it would require TSYS Acquiring to
move over 750,000 merchants that use one of the seven numbers
that EPS seeks to possess to other toll free numbers. TSYS Acquir-
ing cannot estimate the cost of such compliance, but TSYS Acquir-
ing believes the cost of such compliance would be substantial.
Further, if TSYS Acquiring is unable to comply with the order
within 90 days, the court could impose sanctions which could be
substantial. Based upon current knowledge, TSYS’ management
does not believe that the eventual outcome of this case will have a
material adverse effect on TSYS’ financial position, results of
operations or cash flows. However, it is possible that the ultimate
outcome of this case may be material to TSYS’ results of opera-
tions for any particular period.
GUARANTEES AND INDEMNIFICATIONS: The Company has
entered into processing and licensing agreements with its clients
53
2,326
3,418
2,787
Net deferred income tax assets . . . . . . .
55,978
52,364
income tax assets . . . . . . . . . . . . . .
(15,434)
(12,870)
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:
significant portions of
December 31, 2010 and 2009 relate to the following:
the net deferred tax liability at
At December 31,
2010
2009
Years Ended December 31,
2010
2009
2008
(in thousands)
Deferred income tax assets:
income tax expense . . . . . $107,734
119,205
131,057
(in thousands)
Computed “expected”
Increase (decrease) in
income tax expense
resulting from:
International earnings not
taxable in the U.S.
. . . .
State income tax expense
(benefit), net of federal
income tax effect . . . . .
Increase (decrease) in
valuation allowance . . . .
Tax credits . . . . . . . . . . . .
Federal income tax
expense resulting from
ASC 740 Election . . . . .
Permanent differences and
other, net . . . . . . . . . . .
(9,014)
(891)
(4,935)
2,564
(2,824)
(6,159)
(4,299)
5,006
(4,131)
—
9,844
—
5,302
732
1,422
Total income tax expense. . . $106,088
121,850
131,206
Temporary differences between the financial statement carrying
amounts and tax bases of assets and liabilities that give rise to
54
Net operating loss and income tax
credit carryforwards . . . . . . . . . . . . . $ 19,884
18,653
Allowances for doubtful accounts and
billing adjustments . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . .
Total deferred income tax assets . . . . . . .
Less valuation allowance for deferred
1,304
16,244
33,980
71,412
2,114
14,857
29,610
65,234
Deferred income tax liabilities:
Excess tax over financial statement
depreciation . . . . . . . . . . . . . . . . . .
(35,878)
(36,223)
Computer software development
costs . . . . . . . . . . . . . . . . . . . . . . .
Purchase accounting adjustments . . . .
Foreign currency translation . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . .
(38,797)
(1,438)
(3,771)
(4,848)
(39,150)
(1,672)
(4,851)
(6,328)
Total deferred income tax liabilities . . .
(84,732)
(88,224)
Net deferred income tax liabilities . . . . $(28,754)
(35,860)
Total net deferred tax assets (liabilities):
Current . . . . . . . . . . . . . . . . . . . . . . . $ 11,090
(39,844)
Noncurrent. . . . . . . . . . . . . . . . . . . . .
11,302
(47,162)
Net deferred income tax liability . . . . . . . $(28,754)
(35,860)
As of December 31, 2010, TSYS had recognized deferred tax
assets from net operating losses, capital losses and federal and
state income tax credit carryforwards of $15.3 million, $2.1 million
and $2.5 million, respectively. As of December 31, 2009, TSYS had
recognized deferred tax assets from net operating losses, capital
losses and federal and state income tax credit carryforwards of
$13.2 million, $2.4 million and $3.1 million, respectively. The
credits will begin to expire in the year 2011. The net operating
losses will begin to expire in the year 2011.
In assessing the realizability of deferred income tax assets, man-
agement 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 depen-
dent 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 strat-
egies 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 $15.4 million and $12.9 million at December 31, 2010
and 2009, respectively. The increase in the valuation allowance for
deferred income tax assets was $2.6 million for 2010. The
decrease in the valuation allowance for deferred income tax assets
was $6.1 million for 2009. The increase relates to foreign losses,
which, more likely than not, will not be realized in later years.
No provision for U.S. federal and state incomes taxes has been
made in our consolidated financial statements for
those
non-U.S. subsidiaries whose earnings are considered to be rein-
vested. 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 unrec-
ognized deferred income tax liability on these undistributed earn-
ings 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 2007 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 2003. There are currently no
federal or foreign tax examinations in progress. However, a num-
ber of tax examinations are in progress by the relevant state tax
authorities. Although TSYS is unable to determine the ultimate
outcome of these examinations, TSYS believes that its liability for
uncertain tax positions relating to these jurisdictions for such years
is adequate.
TSYS adopted the provisions of ASC 740 on January 1, 2007 which
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, 2010, TSYS decreased its
liability for prior year uncertain income tax positions as a discrete
item by a net amount of approximately $0.7 million (net of the
federal tax effect). This decrease resulted from recalculating state
liabilities and expiring federal and state audit period statutes and
other new information impacting the potential resolution of mate-
rial uncertain tax positions. The Company is not able to reason-
ably 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.
A reconciliation of the beginning and ending amount of unrec-
ognized tax benefits is as follows(1):
(in millions)
Beginning balance . . . . . . . . . . . . . . . .
Current activity:
Additions based on tax positions
related to current year . . . . . . . . . .
Additions for tax positions of prior
years . . . . . . . . . . . . . . . . . . . . . . .
Reductions for tax positions of prior
years . . . . . . . . . . . . . . . . . . . . . . .
Settlements. . . . . . . . . . . . . . . . . . . .
Net, current activity . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . .
Year Ended
December 31,
2010
$ 5.0
0.1
0.5
(1.1)
—
(0.5)
$ 4.5
(1) Unrecognized state tax benefits 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 $1.1 million and
$0.7 million as of December 31, 2010 and December 31, 2009,
respectively. The total amounts of unrecognized income tax ben-
efits as of December 31, 2010 and December 31, 2009 that, if
recognized, would affect the effective tax rates are $4.2 million
and $4.2 million (net of the federal benefit on state tax issues),
respectively, which includes interest and penalties of $1.0 million
and $0.6 million, respectively.
NOTE 21 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 ben-
efits to its employees during 2010 are described as follows:
TSYS RETIREMENT SAVINGS PLAN:
In 2010, all qualified
plans maintained by TSYS were combined into 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 contribu-
tions up to another 4% based upon business conditions.
MONEY PURCHASE PLAN: During 2009 and 2008, the Com-
pany’s employees were eligible to participate in the Total System
Services, Inc. (TSYS) Money Purchase Pension Plan, a defined
contribution pension plan. The terms of the plan provide for
55
the Company to make annual contributions to the plan equal to
7% of participant compensation, as defined.
PROFIT SHARING PLAN: During 2009 and 2008, the Compa-
ny’s employees were eligible to participate in the TSYS Profit
Sharing Plan. The Company’s contributions to the plan are con-
tingent upon achievement of certain financial goals. The terms of
the plan limit the Company’s contribution to 7% of participant
compensation, as defined, not to exceed the maximum allowable
deduction under Internal Revenue Service guidelines.
401(K) PLAN: During 2009 and 2008, the Company’s employ-
ees were eligible to participate in the TSYS 401(k) Plan. The terms
of the plan allow employees to contribute eligible pretax com-
pensation with a discretionary company contribution up to a
maximum of 7% of participant compensation, as defined, based
upon the Company’s attainment of certain financial goals.
The Company’s contributions to the plans charged to expense for
the years ended December 31 are as follows:
2010
2009
2008
(in thousands)
TSYS Retirement Savings Plan . . $15,430
Money Purchase Plan . . . . . . . .
Profit Sharing Plan. . . . . . . . . . .
401(k) Plan . . . . . . . . . . . . . . . .
—
— 19,307
—
—
—
306
—
19,185
4,473
625
STOCK PURCHASE PLAN: The Company maintains stock pur-
chase plans for employees and directors. Prior to July 2009, the
Company made contributions equal to one-half of employee and
director voluntary contributions. Beginning in July 2009, the
Company changed its contribution to 15% of employee and
director voluntary contributions. The funds are used to purchase
presently issued and outstanding shares of TSYS common stock
for the benefit of participants. The Company’s contributions to
these plans charged to expense for the years ended December 31
are as follows:
(in thousands)
2010
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,260
3,764
5,864
POSTRETIREMENT MEDICAL BENEFITS PLAN: TSYS pro-
vides certain medical benefits to qualified retirees through a
postretirement medical benefits plan, which is immaterial to
the Company’s consolidated financial statements. The measure-
ment of the benefit expense and accrual of benefit costs associ-
ated with the plan do not reflect the effects of the 2003 Medicare
Act. Additionally, the benefit expense and accrued benefit cost
56
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.
NOTE 22 Segment Reporting, including
Geographic Area Data and Major
Customers
In June 1997, the FASB issued guidance in accordance with
ASC 280, “Segment Reporting.” ASC 280 establishes standards
for the way public business enterprises are to report information
about operating segments in annual financial statements and
requires those enterprises to report selected financial information
about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures
about products and services, 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 elec-
tronic payment processing systems. During 2010, TSYS reorga-
nized its operating segments in a manner that reflects the way the
chief operating decision maker (CODM) views the business. The
change
administration
involved
legal, human resources, mergers
expenses, such as finance,
and acquisitions and investor relations, that existed in all oper-
ating segments and categorizing them, and spin-related costs, as
Corporate Administration.
accumulating
corporate
In September 2010, the Company sold certain assets and liabil-
ities of TPOS. As a result, TPOS was classified as discontinued
operations for all periods. TPOS was included in the Merchant
Services segment.
In April 2010, TSYS acquired 51% of TMS. Refer to Note 24 for
more information on the acquisition of TMS. Since the acquisition,
TSYS has included the financial results of TMS in the Merchant
Services segment.
North America Services includes electronic payment processing
services and other services provided from within the North Amer-
ica 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 merchant acquiring institutions.
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.
(in thousands)
Operating Segments
2010
2009
2008
2010 vs. 2009
Change
$
%
2009 vs. 2008
Change
$
%
Revenues before reimbursable items
North America Services . . . . . . . . . . . . . . . . . . . . . . $ 809,012
321,846
International Services . . . . . . . . . . . . . . . . . . . . . . . .
337,178
Merchant Services . . . . . . . . . . . . . . . . . . . . . . . . . .
(25,600)
Intersegment revenues. . . . . . . . . . . . . . . . . . . . . . .
Revenues before reimbursable items from external
880,668
322,697
232,262
(28,322)
938,442
307,361
224,356
(23,516)
(71,656)
(851)
104,916
2,722
(8.1)% $ (57,774)
(0.3)% 15,336
45.2%
7,906
9.6%
(4,806)
(6.2)%
5.0%
3.5%
(20.4)%
customers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,442,436 1,407,305 1,446,643
35,131
2.5% $ (39,338)
(2.7)%
Total revenues
North America Services . . . . . . . . . . . . . . . . . . . . . . $ 956,546 1,048,932 1,136,901
318,534
International Services . . . . . . . . . . . . . . . . . . . . . . . .
288,680
Merchant Services . . . . . . . . . . . . . . . . . . . . . . . . . .
(32,581)
Intersegment revenues. . . . . . . . . . . . . . . . . . . . . . .
Revenues from external customers. . . . . . . . . . . . . $1,717,577 1,677,483 1,711,534
334,954
458,921
(32,844)
337,757
327,055
(36,261)
(92,386)
(2,803)
131,866
3,417
40,094
(8.8)% $ (87,969)
(0.8)% 19,223
40.3% 38,375
9.4%
(3,680)
2.4% $ (34,051)
(7.7)%
6.0%
13.3%
(11.3)%
(2.0)%
Depreciation and amortization
North America Services . . . . . . . . . . . . . . . . . . . . . . $
International Services . . . . . . . . . . . . . . . . . . . . . . . .
Merchant Services . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate Administration . . . . . . . . . . . . . . . . . . . . .
78,834
40,792
40,298
3,003
Total depreciation and amortization . . . . . . . . . . . . $ 162,927
Segment operating income
North America Services . . . . . . . . . . . . . . . . . . . . . . $ 244,989
42,689
International Services . . . . . . . . . . . . . . . . . . . . . . . .
102,444
Merchant Services . . . . . . . . . . . . . . . . . . . . . . . . . .
(80,693)
Corporate Administration . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . $ 309,429
84,577
34,791
32,590
3,690
155,648
285,409
57,654
71,437
(70,474)
344,026
95,350
33,271
27,371
1,874
157,866
(5,743)
6,001
7,708
(687)
7,279
(6.8)% $ (10,773)
17.2%
1,520
23.7%
5,219
(18.6)%
1,816
4.7% $ (2,218)
(11.3)%
4.6%
19.1%
96.9%
(1.4)%
325,595
55,595
74,719
(84,787)
371,122
(40,420)
(14,965)
31,007
(10,219)
(34,597)
(14.2)% $ (40,186)
(12.3)%
(26.0)%
3.7%
2,059
43.4%
(4.4)%
(3,282)
(14.5)% 14,313 (16.9)%
(10.1)% $ (27,096)
(7.3)%
Total assets
North America Services . . . . . . . . . . . . . . . . . . . . . . $1,632,882 1,535,129 1,434,070
324,313
International Services . . . . . . . . . . . . . . . . . . . . . . . .
212,779
Merchant Services . . . . . . . . . . . . . . . . . . . . . . . . . .
(421,138)
Intersegment assets . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,952,261 1,710,954 1,550,024
408,880
460,750
(550,251)
379,606
215,855
(419,636)
97,753
29,274
6.4% $101,059
7.7% 55,293
244,895 113.5%
3,076
(31.1)%
(130,615)
1,502
14.1% $160,930
241,307
7.0%
17.0%
1.4%
0.4%
10.4%
GEOGRAPHIC AREA DATA: The Company maintains property and equipment, net of accumulated depreciation and amortization, in
the following geographic areas:
(in millions)
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $203.8
58.3
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11.3
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26.7
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
203.5
60.7
6.4
18.5
At
December 31,
2010
2009
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $300.1
289.1
57
The following geographic area data represents revenues for the years ended December 31 based on the domicile of the Company’s
customers:
(in millions)
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,208.2
249.7
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
161.9
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
61.3
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.9
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28.6
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010
%
70.3
14.5
9.4
3.6
0.5
1.7
2009
$1,183.8
269.4
139.7
48.9
8.1
27.6
%
70.6
16.1
8.3
2.9
0.5
1.6
2008
$1,243.0
269.1
127.1
33.9
13.4
25.0
%
72.6
15.7
7.4
2.0
0.8
1.5
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,717.6
100.0
$1,677.5
100.0
$1.711.5
100.0
GEOGRAPHIC AREA REVENUE BY OPERATING SEGMENT: The following table reconciles segment revenue to revenues by
geography for the years ended December 31:
2010
(in millions)
United States . . . . . . . . . . . . . . . . . . . . . $ 863.9
0.8
Europe . . . . . . . . . . . . . . . . . . . . . . . . . .
161.4
Canada . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.9
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . .
9.4
Other . . . . . . . . . . . . . . . . . . . . . . . . . . .
North America Services
2009
2008
International Services
2009
2010
2008
Merchant Services
2009
2010
2008
862.0
0.9
139.1
—
8.1
9.7
957.0
0.9
126.5
—
13.4
9.0
$
0.5
248.9
—
61.3
—
18.1
0.1
268.5
—
48.9
—
17.1
0.2
268.2
—
33.9
—
15.2
$343.8
—
0.5
—
—
1.1
321.7
—
0.6
—
—
0.8
285.8
—
0.6
—
—
0.8
Totals . . . . . . . . . . . . . . . . . . . . . . . . . $1,043.4
1,019.8
1,106.8
$328.8
334.6
317.5
$345.4
323.1
287.2
MAJOR CUSTOMER: For the years ended December 31, 2010, 2009 and 2008, the Company had one major customer which accounted
for approximately $221.0 million, or 12.9%, $217.7 million, or 12.0%, and $220.3 million, or 11.4%, respectively, of total revenues.
Revenues from the major customer for the years ended December 31, 2010, 2009 and 2008, respectively, are primarily attributable to the
North America Services segment and the Merchant Services segment.
NOTE 23 Supplemental Cash Flow Information
NOTE 24 Acquisitions
Nonvested Share Awards
TSYS Merchant Solutions
The Company issued shares of TSYS common stock to certain key
employees and non-management members of its Board of Direc-
tors under nonvested stock bonus awards for services to be
provided in the future by such officers, directors and employees.
Refer to Note 16 for more information on nonvested share awards.
Equipment and Software Acquired Under Capital
Lease Obligations
The Company acquired computer equipment and software under
capital lease in the amount of $14.9 million, $6.7 million and
$18.1 million in 2010, 2009 and 2008, respectively.
On March 1, 2010, TSYS announced the signing of an Investment
Agreement with FNBO to form a new joint venture company,
FNMS.
FNMS offers transaction processing, merchant support and
underwriting, and business and value-added services, as well as
Visa- and MasterCard-branded prepaid cards for businesses of
any size.
Under the terms of the Investment Agreement, TSYS acquired
51 percent ownership of FNMS Holding, LLC (“FNMS Holding”),
which owns 100 percent of FNMS,
for approximately
$150.5 million, while FNBO owns the remaining 49 percent.
The transaction closed on April 1, 2010.
The goodwill amount of $155.5 million arising from the acquisition
consists largely of economies of scale expected to be realized
from combining the operations of TSYS and TMS. TMS is included
within the Merchant Services segment, and as such, all of the
58
goodwill was assigned to that segment. The goodwill recognized
is expected to be deductible for income tax purposes.
The following table summarizes the consideration paid for TMS
and the amounts of the assets acquired and liabilities assumed
recognized on April 1, 2010 (the acquisition date), as well as the
fair value at the acquisition date of the noncontrolling interest in
TMS. TSYS assumed no liabilities in connection with the
acquisition.
(in thousands)
Consideration:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 150,450
—
Equity instruments . . . . . . . . . . . . . . . . . . . . . . . .
—
Contingent consideration arrangement . . . . . . . . .
Fair value of total consideration transferred . . . . . .
Fair value of TSYS’ equity interest in TMS held
before the business combination . . . . . . . . . . . .
150,450
—
$ 150,450
Acquisition-related costs (included in selling,
general, and administrative expenses in TSYS’
income statement for the twelve months ended
December 31, 2010) . . . . . . . . . . . . . . . . . . . . . $
4,130
Recognized amounts of identifiable assets acquired
and liabilities assumed:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Property and equipment . . . . . . . . . . . . . . . . . . . .
Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Identifiable intangible assets . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . .
Liability arising from a contingency . . . . . . . . . . . .
1,919
1,788
243
100,800
1,204
—
—
Total identifiable net assets . . . . . . . . . . . . . . . .
Noncontrolling interest in TMS . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
105,954
(111,000)
155,496
$ 150,450
The Investment Agreement includes a contingent right of TSYS to
receive a return of consideration paid (“contingently returnable
consideration”) if certain specified major customer contracts are
terminated or modified prior to the first anniversary of the closing.
Contingently returnable consideration is recognized as an asset
and measured at fair value. Based upon the probability of out-
comes, TSYS determined the fair value of the contingently return-
able consideration would approximate zero. The maximum
amount of contingently returnable consideration is not significant.
The fair value of the acquired identifiable intangible assets of
$100.8 million was estimated using the income approach (dis-
counted cash flow and relief from royalty methods) and cost
approach. At the time of the acquisition, TSYS had identified
certain intangible assets that are expected to generate future
earnings for the Company: customer-related intangible assets
(such as customer lists), contract-based intangible assets (such
as referral agreements), technology, and trademarks. The useful
lives of the identified intangible assets were primarily determined
by forecasted cash flows, which include estimates for certain
assumptions such as revenues, expenses, attrition rates, and
royalty rates. The useful lives of these identified assets ranged
from 3 to 10 years and are being amortized on a straight-line basis
based upon their estimated pattern of economic benefit.
This fair value measurement is based on significant inputs that are
not observable in the market and thus represents a Level 3 mea-
surement as defined in ASC 820. Key assumptions include (a) cash
flow projections based on market participant and internal data,
(b) a discount rate range of 4 percent to 14 percent, (c) a royalty
rate range of 1.5 percent to 7 percent, (d) an attrition rate range of
10 percent to 30 percent, and (e) an effective tax rate of approx-
imately 36 percent.
The fair value of the noncontrolling interest in TMS, owned by a
private company, was estimated by applying the income and
market approaches. In particular, a discounted cash flow method,
a guideline companies method, and a recent equity transaction
were employed. This fair value measurement is based on signif-
icant inputs that are both observable (Level 2) and non-observable
(Level 3) in the market as defined in ASC 820. Key assumptions
include (a) cash flow projections based on market participant data
and developed by Company management, (b) a discount rate
range of 12 percent to 14 percent, (c) a terminal value based on
long-term sustainable growth rates ranging between 3 percent
and 5 percent, (d) an effective tax rate of approximately 36 per-
cent, (e) financial multiples of companies deemed to be similar to
TMS, and (f) adjustments because of the lack of control or lack of
marketability that market participants would consider when esti-
mating the fair value of the noncontrolling interest in TMS.
Since the acquisition of TMS, TSYS has included approximately
$97.7 million in revenues associated with TMS for the year ended
December 31, 2010,
the year ended
December 31, 2010, TSYS has included approximately $5.6 mil-
lion in income netted against acquisition related costs associated
with TMS.
respectively. For
The amounts of TMS revenue and earnings included in TSYS’
consolidated income statement for the year ended December 31,
2010, and the pro forma revenue and earnings of the combined
59
entity had the acquisition date been January 1, 2010, or January 1,
2009, are:
NOTE 25 Synovus Spin-off of TSYS
Net Income
Attributable
to TSYS
Common
Shareholders
Revenue
(in thousands)
Actual from
1/1/2010-
12/31/2010 . . $1,717,577 $193,947
Basic EPS
Attributable
to TSYS
Common
Shareholders
Diluted EPS
Attributable
to TSYS
Common
Shareholders
$0.99
$0.99
Actual from
1/1/2009-
12/31/2009 . . 1,677,483
Supplemental
pro forma for
1/1/2010-
12/31/2010 . . 1,746,617
Supplemental
pro forma for
1/1/2009-
12/31/2009 . . 1,794,195
215,213
1.09
1.09
198,149
1.01
1.01
221,171
1.12
1.12
On January 4, 2011, TSYS announced that, on January 1, 2011, it
acquired the remaining 49 percent of FNMS and is rebranding it
as TMS.
Infonox on the Web
The Company acquired Infonox on November 4, 2008 for approx-
imately $50.6 million, with contingent payments over the next
three years of up to $25 million based on performance. Infonox
provides payment products on self-service and full-service trans-
action touch points in the gaming, banking and retail markets. The
company delivers, manages, operates and supports services for
several large publicly traded companies. The acquisition added
new payment technology and acceptance capabilities. Infonox is
based in Sunnyvale, California, with an office in Pune, India.
The final purchase price allocation is presented below:
(in thousands)
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
899
21,500
29,142
3,222
Total assets acquired . . . . . . . . . . . . . . . . . . . . . .
54,763
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities assumed . . . . . . . . . . . . . . . . . . . .
4,190
4,190
Net assets acquired . . . . . . . . . . . . . . . . . . . . . $50,573
Revenues associated with Infonox are included in merchant ser-
vices and are included in Merchant Services for segment reporting
purposes.
60
In July 2007, Synovus Financial Corp’s (Synovus’) Board of Direc-
tors appointed a special committee of independent directors to
make a recommendation with respect to whether to distribute
Synovus’ ownership interest in TSYS to Synovus’ shareholders. As
a result, the TSYS Board of Directors formed a special committee
of independent TSYS directors to consider the terms of any
proposed spin-off by Synovus of its ownership interest in TSYS,
including the size of the pre-spin cash dividend.
On October 25, 2007, the Company entered into an agreement
and plan of distribution with Synovus, under which Synovus
planned to distribute all of its shares of TSYS common stock in
a spin-off to Synovus shareholders. Under the terms and condi-
tions of the agreement, TSYS would become a fully independent
company, allowing for broader diversification of the Company’s
shareholder base, more liquidity of the Company’s shares and
additional
investment in strategic growth opportunities and
potential acquisitions.
In accordance with the agreement and plan of distribution by and
among TSYS, Synovus and CB&T, on November 30, 2007, TSYS
entered into a Transition Services Agreement, an Employee Mat-
ters Agreement, an Indemnification and Insurance Matters Agree-
ment, a Master Confidential Disclosure Agreement and an
Assignment and Assumption Agreement with Synovus. On
November 30, 2007, TSYS also entered into a Tax Sharing Agree-
ment with CB&T and Synovus. On November 30, 2007, TSYS,
Synovus and CB&T also entered into an amendment to the Dis-
tribution Agreement which clarified that the effective time of the
spin-off transaction would be prior to the close of business on
December 31, 2007.
Prior to the spin-off transaction and in accordance with the agree-
ment and plan of distribution, TSYS agreed to pay a one-time
aggregate cash dividend of $600 million to all TSYS shareholders,
including Synovus. The per share amount of the $600 million
special cash dividend was determined to be $3.0309 per share,
based on the number of TSYS shares outstanding as of the close of
business on December 17, 2007, the record date. TSYS funded
the dividend with a combination of cash on hand and the use of a
revolving credit facility. Refer to Note 13 for more information on
the revolving credit facility.
Synovus distributed 0.483921 of a share of TSYS common stock
on December 31, 2007 for each share of Synovus common stock
outstanding on December 18, 2007, the record date.
The spin-off was completed on December 31, 2007. TSYS
incurred expenses in 2008 associated with advisory and legal
services in connection with the spin-off assessment. TSYS also
fair value
incurred expenses in 2008 for
the incremental
associated with converting Synovus stock options held by TSYS
employees to TSYS options.
NOTE 26 Collaborative Arrangement
In January 2009, TSYS adopted the authoritative guidance under
ASC 808, “Collaborative.” The guidance under ASC 808 is effec-
tive for reporting periods beginning after December 15, 2008,
and it requires restatement of prior periods for all collaborative
arrangements existing as of the effective date.
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.
NOTE 27 Earnings Per Share
The following table illustrates basic and diluted EPS under the guidance of ASC 260:
(in thousands, except per share data)
Basic EPS:
December 31, 2010
December 31, 2009
December 31, 2008
Common
Stock
Participating
Securities
Common
Stock
Participating
Securities
Common
Stock
Participating
Securities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $193,947
(959)
Less income allocated to nonvested awards. . . . . . . . . .
Net income allocated to common stock for EPS
calculation(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $192,988
Average common shares outstanding(b)
. . . . . . . . . . . .
195,378
Basic EPS(a)/(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.99
Diluted EPS:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $193,947
(959)
Less income allocated to nonvested awards. . . . . . . . . .
Net income allocated to common stock for EPS
calculation(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $192,988
Average common shares outstanding . . . . . . . . . . . . . .
Increase due to assumed issuance of shares related to
common equivalent shares outstanding . . . . . . . . . . .
195,378
193
Average common and common equivalent shares
outstanding(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
195,571
Diluted EPS(c)/(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.99
959
959
975
0.98
959
959
975
975
0.98
215,213
(1,644)
213,569
195,623
1.09
215,213
(1,644)
213,569
195,623
63
1,644
1,644
1,511
1.09
1,644
1,644
1,511
250,100
(2,069)
248,031
196,106
1.26
250,100
(2,069)
248,031
196,106
20
2,069
2,069
1,640
1.26
2,069
2,069
1,640
195,686
1.09
1,511
1.09
196,126
1.26
1,640
1.26
The diluted EPS calculation excludes stock options and nonvested awards that are convertible into 9.0 million common shares for the year
ended December 31, 2010, and excludes 7.0 million and 5.6 million common shares for the years ended December 31, 2009 and 2008,
respectively, because their inclusion would have been anti-dilutive.
NOTE 28 Subsequent Event
On January 4, 2011, TSYS announced it had acquired the remaining 49-percent interest in FNMS, effective January 1, 2011, from FNBO.
The company is being rebranded as TMS.
The Company acquired the remaining 49-percent for a net consideration of approximately $174.1 million. The Company acquired the
remaining 49-percent for a net consideration of approximately $174.1 million. In connection with the acquisition, TSYS is relinquishing its
right to certain trademarks associated with the TMS acquisition on April 1, 2010.
61
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, 2010 and 2009, and the related consolidated statements of income, cash flows, and equity and comprehensive income for
each of the years in the three-year period ended December 31, 2010. We also have audited Company’s internal control over financial
reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Company 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 audit 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 audit 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, 2010 and 2009, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2010, 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, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
As discussed in the notes to the consolidated financial statements, the Company changed the manner in which it accounts for
noncontrolling interests as of January 1, 2009 (note 1) and earnings per share as of January 1, 2009 (notes 1 and 27).
Atlanta, Georgia
February 25, 2011
62
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,
2010. 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.
Based on our assessment management believes that, as of December 31, 2010, 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, 2010 that appears on the
proceeding page.
Philip W. Tomlinson
Chairman of the Board &
Chief Executive Officer
James B. Lipham
Senior Executive Vice President &
Chief Financial Officer
63
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 23, 2011, there were 28,847 holders of record of
TSYS common stock, some of whom are holders in nominee name for the benefit of different shareholders.
The fourth quarter dividend of $0.07 per share was declared on November 16, 2010, and was paid January 3, 2011, to shareholders of
record on December 16, 2010. Total dividends declared in 2010 and in 2009 amounted to $54.9 million and $55.3 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, 2010 and 2009.
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
430,886
79,828
49,702
0.25
0.25
0.07
16.99
13.52
13.60
409,242
83,054
53,447
0.27
0.27
0.07
14.79
12.20
13.39
433,236
78,914
45,743
0.23
0.23
0.07
15.74
13.41
15.24
428,917
88,294
55,026
0.28
0.28
0.07
16.43
12.61
16.11
439,991
70,974
47,173
0.24
0.24
0.07
16.10
14.97
15.38
432,529
93,908
60,214
0.31
0.31
0.07
17.71
14.76
17.27
(in thousands, except per share data)
2010 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to TSYS common shareholders . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share attributable to TSYS common shareholders . . . . . . . . . . . . . . .
Diluted earnings per share attributable to TSYS common shareholders . . . . . . . . . . . . .
Cash dividends declared. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock prices:
High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Close . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to TSYS common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share attributable to TSYS common shareholders . . . . . . . . . . . . . . . . . .
Diluted earnings per share attributable to TSYS common shareholders . . . . . . . . . . . . . . . .
Cash dividends declared . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock prices:
$413,464
79,713
51,328
0.26
0.26
0.07
17.75
14.11
15.66
$ 406,795
78,771
46,526
0.24
0.24
0.07
High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Close . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15.07
11.33
13.81
64
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, 2005 and reinvestment of all dividends).
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
AMONG TSYS, THE S&P 500 INDEX
AND THE S&P SYSTEMS SOFTWARE INDEX
$180
$160
$140
$120
$100
$80
$60
$40
$20
$0
2005
2006
2007
2008
2009
2010
Total System Services, Inc.
S&P 500
S&P Systems Software
TSYS
S&P 500
S&P SS
2005
$100
$100
$100
2006
$135
$116
$118
2007
$162
$122
$142
2008
$82
$77
$88
2009
$103
$ 97
$134
2010
$ 94
$112
$140
65
Shareholder Information
Corporate Headquarters
TSYS
One TSYS Way
P.O. Box 2567
Columbus, GA 31902-2567
www.tsys.com
+1.706.649.2310
Stock Trading Information
TSYS common stock is traded as “TSS” on the New York Stock
Exchange (NYSE). Price and volume information appear
under the abbreviation “TotlSysSvc” in NYSE daily stock
quotation listings.
Dividend Reinvestment and Direct Stock
Purchase Plan
The TSYS Dividend Reinvestment and Direct Stock Purchase
Plan (“Plan”) provides a comprehensive package of services
designed to make investing in TSYS stock easy, convenient
and more affordable. You may request information about
the Plan over the phone at +1.866.204.8467.
New Investors
You can join the Plan by making an initial investment of
at least $250, which includes an enrollment fee of $15.
TSYS Shareholders
You can participate by submitting a completed enrollment
form. If your shares are held in a brokerage account, you
must first register some or all of your shares in your name.
Dividend Reinvestment
You can invest all or a part of your cash dividends to
accumulate more shares without paying fees.
Optional Cash Investments
You can purchase additional shares by investing between
$50 at any one time and $250,000 in total per calendar
year. If you wish, we can withdraw funds automatically
from your bank account each month to purchase shares.
Purchases are made weekly, or more often if volume
dictates. Fees are lower than those typically charged
by the financial services industry.
Safekeeping
You can deposit your certificates with us for safekeeping
at no cost to you. You can request a certificate any time
at no cost.
Gifts and Transfers of Shares
You can make gifts or transfers to others. Contact BNY
Mellon Shareowner Services at +1.866.204.8467 or
your brokerage firm for more information.
Sale of Shares
You can sell some or all of your shares when you choose
at fees lower than those typically charged by the financial
services industry. Shares are sold weekly, or more often
if volume dictates.
Form 10-K
A copy of the company’s 2010 Annual Report on Form 10-K,
filed with the Securities and Exchange Commission, is
available at no charge upon written request to Investor
Relations at the address below:
TSYS Investor Relations
P.O. Box 2567
Columbus, GA 31902-2567
ir@tsys.com
Annual Shareholders’ Meeting
The Annual Meeting of Shareholders will be held on
May 3, 2011, at 10 a.m. EDT at the TSYS Riverfront
Campus Auditorium in Columbus, Georgia.
Independent Auditors
KPMG LLP, Atlanta, Georgia
Investor Relations
Analysts, investors and others seeking additional
information not available at tsys.com should contact:
Shawn Roberts
TSYS Investor Relations
P.O. Box 2567
Columbus, GA 31902-2567
+1.706.644.6081
shawnroberts@tsys.com
Current shareholders requiring
assistance should contact
BNY Mellon Shareowner Services:
P.O. Box 358015
Pittsburgh, PA 15252-8015
Registered Mail or Overnight Delivery:
480 Washington Blvd.
Jersey City, NJ 07310-1900
Telephone Inquiries:
+1.866.204.8467
Internet:
www.bnymellon.com/shareowner/equityaccess
ONlINe ACCeSS
Online Services at tsys.com
You can purchase your initial shares online at tsys.com. TSYS makes it easy and convenient to get current information on your shareholder account any time.
You will have access to:
• View account status
• Purchase or sell shares
• View book-entry information
• Request certificate issuance
• Establish or change your PIN
• View payment history for dividends
• Make address changes
• Obtain a duplicate 1099 tax form
• Request a dividend check replacement
• Receive annual meeting materials electronically
Cautionary language regarding forward-looking statements:
This annual report to shareholders contains forward-looking statements, which by their nature involve risks and uncertainties. Please refer to TSYS’ Annual Report on Form 10-K filed with
the Securities and Exchange Commission for information concerning forward-looking statements, under the caption “Safe Harbor Statement,” and for a description of certain factors that
may cause actual results to differ from goals referred to in this report or contemplated by such statements.
© 2011 Total System Services, Inc.® All rights reserved worldwide. Total System Services, Inc. and TSYS® are federally registered service marks of Total System Services, Inc., in the United
States. Total System Services, Inc., and its affiliates own a number of service marks that are registered in the United States and in other countries. All other products and company names
are trademarks of their respective companies.
About TSYS
TSYS (NYSE: TSS) is reshaping a new era in digital commerce, connecting consumers, merchants,
financial institutions, businesses and governments. Through unmatched customer service and industry
insight, TSYS creates a better experience for buyers and sellers, supporting cross-border payments
in more than 85 countries. Offering merchant payment-acceptance solutions as well as services in
credit, debit, prepaid, mobile, chip, healthcare, installments, money transfer and more, TSYS makes
it possible for those in the global marketplace to conduct safe and secure electronic transactions
with trust and convenience.
TSYS’ headquarters are located in Columbus, Georgia, with local offices spread across the Americas,
EMEA and Asia-Pacific. TSYS provides services to more than half of the top 20 international banks.
NYSE: TSS
TSYS®
One TSYS Way
P.O. Box 2567
Columbus, GA 31902-2567
+1.706.649.2310
www.tsys.com