2011 | TSYS Annual Report
TSYS processes an average of
38 million
transactions a day.
But she’ll only remember this one —
the purchase that turned her
weekend getaway into the trip
she’ll never forget.
lasting
relationships
empowering
people
empowering
people
lasting
relationships
being
proactive
being
proactive
Processing millions of transactions
each day, it can be easy to lose
sight of the fact that behind each
transaction is a person and a unique
story. Offering products to meet the
needs of modern lifestyles, TSYS®
realizes it’s the little things that can
make a big difference to consumers.
At TSYS, we believe payments
should revolve around people,
not the other way around.
So how will we put people at the center of payments?
In the Changing World of Commerce
Over the last few years, the global economy and businesses around the world have faced numerous challenges
and changes. At TSYS, we are accountable for meeting consumers’ ever-growing need for more innovation.
We must proactively respond with new payment options and solutions to grow our clients’ businesses. And we
realize that we are an integral part of a diverse payments industry that never sleeps.
There are a few things that remain the same at TSYS, and those are our commitment to:
(cid:344)(cid:3)(cid:3)(cid:50)(cid:88)(cid:85)(cid:3)(cid:70)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73) integrity, relationships, growth, innovation and excellence
(cid:344)(cid:3)(cid:36)(cid:3)relentless focus on our customers
(cid:344)(cid:3)(cid:3)(cid:50)(cid:88)(cid:85)(cid:3)(cid:85)(cid:72)(cid:83)(cid:88)(cid:87)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)doing the right thing
Building Upon Our Strengths
We’ve identified the areas in which we truly excel: moving information, directing the movement of funds among
multiple parties and providing stellar service.
Today, businesses and governments leverage our experience to simplify payments. This simplification requires
that we focus on efficiency, speed-to-market and our customers’ experience.
Here’s how we’ll make it happen:
(cid:344)(cid:3)(cid:3)(cid:37)(cid:92)(cid:3)(cid:69)(cid:72)(cid:76)(cid:81)(cid:74)(cid:3)(cid:72)(cid:68)(cid:86)(cid:92)(cid:3)(cid:87)(cid:82)(cid:3)(cid:71)(cid:82)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:29) In a global and multi-cultural market, our clients want and expect us to
act as a can-do partner to get things done.
(cid:344)(cid:3)(cid:3)(cid:37)(cid:92)(cid:3)(cid:69)(cid:72)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:85)(cid:82)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:86)(cid:82)(cid:79)(cid:89)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:85)(cid:82)(cid:69)(cid:79)(cid:72)(cid:80)(cid:86)(cid:29) We’ll anticipate and solve the problems facing our clients and
their customers around the world.
(cid:344)(cid:3)(cid:3)(cid:37)(cid:92)(cid:3)(cid:72)(cid:80)(cid:83)(cid:82)(cid:90)(cid:72)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:72)(cid:82)(cid:83)(cid:79)(cid:72)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:83)(cid:68)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:82)(cid:83)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:29) We’ll enable payment options that provide more choices
for making payments and increasing access for people not supported by traditional payment methods.
Providing Future Innovation
The people of TSYS are part of something bigger. We have the opportunity to touch millions of people and
businesses each and every day — both a tremendous honor and a huge responsibility. By putting people at
the center of every decision we make, we can change lives.
We will position ourselves as thought leaders in three broad areas:
1. We will identify solutions and services that improve the way payments operate.
2. We will deliver intelligent information designed to improve our clients’ businesses and the
relationships they have with their customers.
3. We will (cid:74)(cid:85)(cid:82)(cid:90)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:70)(cid:79)(cid:76)(cid:72)(cid:81)(cid:87)(cid:86)(cid:337)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:72)(cid:86) by looking for new solutions that drive more transactions
and greater revenue.
fellow sh areholders a nd fri ends:
In February of this year, we shared with the TSYS team a higher
purpose that will guide our business and define our reason for
being. In fact, it’s written on the front cover of this report —
“We believe payments should revolve around people, not
the other way around.”
From our company’s earliest days, the
It also frames our thinking and actions
people of TSYS have been what has set
to focus on the 38 million times each
us apart. Our clients have told us that
day the people of TSYS facilitate a
our team’s dedication to service and
transaction that touches someone’s
relationships is what distinguishes us
life or business. We want you to know
from the rest. Now we’ve reaffirmed
that the phrase “People-Centered
our commitment to putting people
Payments” is more than a slogan —
at the center of every decision, so
it is an honor and responsibility
together, we can improve consumers’
our team shares in how we deliver
lives and businesses.
This ideal builds on our core values
of integrity, relationships, excellence,
innovation and growth. It is part of
the transformation under way at TSYS,
as we aspire to move from being a
technology-centric processor to an
innovative payment products and
solutions firm, helping banks and
businesses grow.
Philip W. Tomlinson
Chairman of the Board & Chief Executive Officer
1
service, innovation and quality
year progressed, both consumer
year’s end was up 27 percent, and
throughout our daily work.
and business outlooks for the future
our total shareholder return for 2011
The Year in Review
we began to see the positive impacts
indicate that our business and
We started 2011 with a cautious
of these shifts on our business. By
our clients’ businesses got healthier
improved, spending increased, and
was 29 percent. All of these factors
outlook characteristic of the
the end of 2011, when the full results
in 2011.
economic climate and the immense
of these shifts were recorded, we
strain on our banking customers
had met or exceeded the high end of
We deployed our capital strategi-
from regulatory reforms, pricing
our guidance with total revenues up
cally, which included the repurchase
restrictions and increased capital
5.3 percent for the year. Additionally,
of 6.6 million shares of stock
requirements. We positioned
our EPS was $1.15 for the full year,
(twice the number we purchased
TSYS to weather those storms
up 14.4 percent. Revenues before
in 2010), for a total of $121 million,
by keeping a sharp focus on
reimbursable items were $1,540.7
demonstrating our confidence in the
our business operations and
million, an increase of 6.8 percent for
long-term strength of our business.
expense control. Yet, as the
the year. Our closing stock price at
Other capital deployments included
2011 in review
s
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$4 7 2,23
Q4
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$4 5 9,74
Q3
7
$4 4 7,55
Q2
4
$4 2 9,43
Q1
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,
Q2
Q1
(dollars in thousands)
Q 3
Q 4
issuer accounts on file
(in millions)
Q1
Q2
Q3
Q4
$0.25
Q1
Q1
356.7 376.0 392.4 404.2
.
8
2
5
9
1
,
$214 million for acquisitions focused
the long- and short-term. Our
industry-leading shareholder
on building our direct merchant
ultimate objective is to be a
value at the same time.
business. Our continued strategic
top-10 global acquirer and
focus remains on deploying our
the leading credit card processor
Our company is the leader among
capital in ways that most benefit
in the world, having already
a handful of others in our industry,
the long-term operations of TSYS,
achieved top-10 U.S. acquirer
and we provide a distinct set of
which, in turn, creates long-term
status in 2011. To that end, we
solutions that businesses, banks
benefits in shareholder return.
have diversified our business to
and governments need and depend
We also increased our annual
now support what happens on
upon to operate efficiently and
dividend by 43 percent to 40
both sides of a payment transaction
drive revenue. Our strong business
cents per share beginning
— issuing and acquiring — and
model delivers a highly desirable
in 2012.
everything in between. Going
recurring revenue stream.
It’s only natural to turn our
company at a faster rate than the
We manage our company, its
focus toward future goals in
payments industry while creating
resources and operations along
forward, we’d also like to grow this
$0.31
Q4
merchant services highlights
$0.30
Q3
$0.28
Q2
basic earnings
per share
Q2
Q3
Q4
.
7
5
3
1
2
,
.
3
3
3
2
2
,
.
0
6
6
3
2
,
issuer
cardholder
transactions
(in millions)
19.7%
Merchant Locations
Increased
9.4%
Merchant Sales Volume
Increased
6 billion
Transactions Processed
3
three reporting segments in order
In 2011, we celebrated the long-term
While we experienced some
to drive greater accountability,
renewal of one of our largest clients
margin improvement over the
measure performance and reward
and one of the largest card issuers
year, we expect margin compression
success. Let’s take a look at key
in the United States both by volume
in this segment in the coming
highlights from each segment
and outstandings. Another notewor-
year as we focus on building scale
in 2011.
thy milestone in the North America
in the areas where we have a
segment was the long-term agree-
footprint. You’ve heard us say
North America Successes
ment with BancorpSouth, a regional
before that success depends on
North America remains the
bank holding company, to process
building scale, so we’re acutely
stalwart segment for TSYS.
its debit, consumer and commercial
focused on winning new business,
By the end of the last quarter of
credit card portfolios.
tightly managing expenses,
streamlining operations and
2011, accounts on file were up
Solid growth and increased
improving cross-sell opportunities
18.5 percent — their highest level
market share in Canada prompted
with existing clients.
since 2007. Same-client transactions
us to open a financial services
were up 12 percent for the full year,
support center in Sudbury, Ontario
In Brazil, we completed the final
and total transactions were more
to support the growing client interest
phase of the Carrefour conversion in
than seven billion, up 13 percent
in outsourcing customer care and
early February 2012. We believe we
from a year ago — the highest
back-office functions.
are now well positioned to grow our
number of transactions since 2007.
business in the world’s fourth-largest
International Services Progress
payments card market.
2011 was a significant year for
our International segment, as
Other noteworthy events included
we expanded our geographic
our pilot with U.S. Bank for European
footprint to enter Italy, Switzerland
corporate cards, renewals from
and Brazil, and completed 14
Barclay’s commercial card in the UK
conversions. We also expanded
and Rabobank in the Netherlands,
our suite of solutions in our licensing
and we added debit processing
business, commercial card and
services to our relationship with
managed services areas.
Bank of Ireland.
lasting
lasting
rerelations phipss
relationships
4
being
being
proroa tivctiveeve
proactive
We signed a licensing agreement
Merchant Services Results
average more than a decade of
with Bank Standard, the largest
We were proud that the financial
partnership with TSYS. In 2011, we
private bank in Azerbaijan, for credit,
performance of our Merchant
established 11 new relationships and
debit and prepaid cards in addition
Services segment included increases
renewed six existing relationships.
to its merchant acquiring business.
in overall revenues, transactions
In the merchant loyalty area, we
We continue to grow our licensing
and operating income. In 2011,
expanded our reach into the online
business in key international markets
we focused on further expanding
daily deal market by signing 12 new
where we offer the PRIME card
our direct merchant business and
customers. Our direct merchant
management software.
enjoyed growth in its small business
acquiring business grew more than
and national merchant sectors.
9 percent in merchant sales volume.
We had a 22-percent growth in our
equity income from joint ventures.
We completed the purchase of the
In October, we acquired the
The joint venture we have with
remaining 49 percent of First National
merchant portfolio and sales
China UnionPay and the success it’s
Bank of Omaha’s acquiring business,
channels of Vanguard Payment
experiencing in putting cards into the
hands of millions of Chinese citizens
is worthy of mention. We have seen
which we have now rebranded as
TSYS Merchant Solutions.SM Then
in May, we acquired TermNet
Systems in Florida and continue to
look for opportunities to build on
the foundation we have put in place
a steady increase every year building
Merchant Services in Atlanta, a solid,
in the direct merchant business.
from virtually a zero base. Over
high-quality addition to our direct
the last year, the number of cards
merchant business that expands our
Looking Ahead
China UnionPay Data Services Co.,
sales and distribution channels. We
From a business development
Ltd. (CUP Data) processes has
are now building out an elite sales
standpoint, our prospect pipeline
grown by 50 percent, and CUP
force focused on developing long-
is as strong as it has ever been,
Data maintains a dominant share
term relationships and providing
and it continues to grow on a
of the market for banks that
solutions that bring integrity and
global basis. In terms of our
outsource their cards business.
transparency to the industry.
operational structure, we are
China is certainly a success
placing an increased focus on
story that reinforces growth
Our third-party merchant processing
product development, and have
of electronic transactions in
business is based upon long-term
created a global product group
developing card markets.
relationships — our top customers
to enhance the offerings we
5
honors
In late 2011, TSYS was a
bronze recipient of Military
Times EDGE Magazine’s
“Best for Vets” 2011
Employers Award.
And in March of this year,
TSYS was named one of the
2012 World’s Most Ethical
Companies by Ethisphere,
a global ethics think tank.
currently have and position new products
in those markets and verticals we’ve never
touched before.
Throughout this letter, you can sense the
optimism we feel as a leadership team. My
hope is that the economy will continue its
turnaround — consumers are feeling better
as recently evidenced by increased holiday
spend, and they are demonstrating more
control over their financial destiny. Paying with
plastic is the consumers’ preferred choice of
payment — whatever the type may be — and
it offers speed, security and convenience.
The next wave of growth for TSYS is just ahead,
as we focus on helping shape big ideas that
put people at the center of payments.
Though much has changed since we got our
start nearly 30 years ago, our focus is the
same — serving customers, solving problems
facing our clients and empowering people
with payment options.
I can say with confidence that we are
hopeful and energized about what’s on
the horizon for TSYS.
Respectfully,
Philip W. Tomlinson
Chairman of the Board
& Chief Executive Officer
6
financial information
(dollars in thousands)
,
$
1
7
1
1
5
3
4
,
,
$
1
6
7
7
4
8
3
,
,
$
1
7
1
7
5
7
7
,
,
$
1
8
0
8
9
6
6
,
$
3
7
1
1
2
2
,
$
3
4
4
0
2
6
,
$
3
0
9
4
2
9
,
$
3
2
2
4
5
6
,
$
2
5
0
1
0
0
,
$
2
1
5
2
1
3
,
$
1
9
3
9
4
7
,
$
2
2
0
5
5
9
,
08
09
10
11
08
09
10
11
08
09
10
11
Total revenues
Operating income
(cid:49)(cid:72)(cid:87)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:68)(cid:87)(cid:87)(cid:85)(cid:76)(cid:69)(cid:88)(cid:87)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)
TSYS common shareholders
(dollars in thousands, except per share data)
2011
2010
% Change
Total 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*
Return on average shareholder equity
Operating margin
Net profit margin
* from continuing operations
$1,808,966
1,717,577
5.3
322,456
309,429
4.2
220,559
193,947
13.7
1.15
1.15
17.4%
17.8%
12.3%
1.00
14.4
1.00
14.3
16.0%
18.0%
12.0%
7
board of directors
James H. Blanchard
Chairman of the Board &
Chief Executive Officer, retired
Synovus
Chairman of the Board
Jordan-Blanchard Capital, LLC
Richard Y. Bradley
Attorney at Law
Bradley & Hatcher
Kriss Cloninger III
President & Chief Financial Officer
Aflac Incorporated
emeritus directors
Richard H. Bickerstaff
Manager
Broken Arrow Land
Company, LLC
Lovick P. Corn
Advisory Director
W.C. Bradley Co.
leadership
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
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
John P. Illges III
Senior Vice President, retired
The Robinson-Humphrey
Company, Inc.
William B. Turner
Chairman of the Executive
Committee, retired
Synovus
W.C. Bradley Co.
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
Executive Management
Management Committee
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 Merchant Services
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,
International Services
Kelley C. Knutson
Executive Vice President,
International Services
Colleen W. Kynard
Executive Vice President,
Relationship Management
International Managing Directors
David E. Duncan
Brazil
Robert E. Evans
Europe
Hitoshi Kondo
Japan
Paul M. Todd
Executive Vice President,
Strategy, Mergers & Acquisitions,
Product & Marketing
Dorenda K. Weaver
Executive Vice President
& Chief Accounting Officer
Bruce L. Bacon
Group Executive,
Chief Sales Officer,
North America Services
Amit Sethi
India
Jesús M. Navarro Torres
Mexico
Group Executives
Jaffar Agha-Jaffar
Gracie H. Allmond
Ronald L. Barnes
Paul Bridgewater
Carey R. Blackstone Jr.
Rodney Q. Boyer
David L. Chew
David R. Figgat
John Dale Hester Jr.
Anthony W. Hodge
Virginia A. Holman
William T. Hunt
G. Clyde Jinks III
Dennis Jones
Bruce A. Jones
Robert A. Kellum III
Billy J. Kilgore II
Suzanne Kump
John C. Latimer
Richard J. Machold
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
Treasurer
James B. Cosgrove
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.
Years Ended December 31,
(in thousands, except per share data)
2011
2010
2009
2008
2007
Income Statement Data:
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,808,966 1,717,577 1,677,483 1,711,534 1,651,981
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 322,456
309,429
344,026
371,122
351,437
Income from continuing operations, net of tax . . . . $ 222,662
(Loss) income from discontinued operations, net of
tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
208,866
225,720
253,085
239,315
(3,245)
(6,544)
(1,409)
104
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to noncontrolling
222,662
205,621
219,176
251,676
239,419
interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,103)
(11,674)
(3,963)
(1,576)
(1,976)
Net income attributable to TSYS common
shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 220,559
193,947
215,213
250,100
237,443
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 . . . . . . . . . . . . . . $
1.15
—
1.15
1.15
—
1.15
0.31
1.00
(0.02)
0.99
1.00
(0.02)
0.99
0.28
1.12
(0.03)
1.09
1.12
(0.03)
1.09
0.28
At December 31,
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
(in thousands)
2011
2010
2009
2008
2007
Balance Sheet Data:
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,858,392 1,952,261 1,710,954 1,550,024 1,479,081
Obligations under long-term debt and capital
leases, excluding current portion . . . . . . . . . . . .
63,593
225,276
205,123
209,871
3,687
* 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
9
information through its cardholder systems to
financial institutions throughout the United States and
internationally. The Company’s North America
Services segment provides these services to clients in
the United States, Canada, Mexico and the
Caribbean. The Company’s International Services
segment provides services to clients in Europe, India,
Middle East, Africa, Asia Pacific and Brazil. The
Company’s Merchant Services segment provides
merchant services to merchant acquirers and
merchants in the United States.
On May 2, 2011, TSYS completed its acquisition of all
of the outstanding common stock of TermNet
Merchant Services, Inc. (TermNet), an Atlanta-based
merchant acquirer, for $42 million in cash. TermNet
provides merchant services to qualified merchants
serving a diverse base of over 18,000 merchants. The
acquisition of TermNet expands the Company’s
presence in the merchant acquiring industry. The
results of operations for TermNet have been included
in the Company’s results beginning May 2, 2011, and
are included in the Merchant Services segment.
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 transaction
processing, merchant support and underwriting, and
value-added services, as well as Visa- and
MasterCard-branded prepaid cards for businesses of
any size. FNMS is included in the Merchant Services
segment. The effective date of the acquisition was
April 1, 2010. On January 4, 2011, TSYS announced it
had acquired, effective January 1, 2011, the
remaining 49% interest in FNMS, from FNBO. The
company has been 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 season. Furthermore, growth or
declines in card and merchant portfolios of existing
clients, the conversion of cardholder and merchant
accounts of new clients to the Company’s processing
platforms, the receipt of fees for early contract
termination and the loss of cardholder and merchant
accounts either through purges or deconversions
impact the results of operations from period to
period.
Another factor which may affect TSYS’ revenues and
results of operations from time to time is
10
consolidation in the financial services or retail industries
either through the sale by a client of its business, its
card portfolio or a segment of its accounts to a party
which processes cardholder or merchant accounts
internally or uses another third-party processor. A
change in the economic environment in the retail
sector, or a change in the mix of payments between
cash and cards could favorably or unfavorably impact
TSYS’ financial position, results of operations and cash
flows in the future.
TSYS’ reported financial results will also be impacted
by significant shifts in currency conversion rates. TSYS
does not view foreign currency as an economic event
for the Company but as a financial reporting issue.
Because changes in foreign currency exchange rates
distort the operating growth rates, TSYS discloses the
impact of foreign currency translation on its financial
performance.
A significant amount of the Company’s revenues 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.
Consolidation among financial institutions has resulted
in an increasingly 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 during
most of 2009 but showed improvement during 2010
and 2011. 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. Beginning in 2010, improving economic
conditions 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, continues to
experience increased legislative and regulatory
scrutiny, including the enactment of additional
legislative and regulatory initiatives such as the
Dodd-Frank Wall Street Reform and Consumer
Protection Act (Financial Reform Act). This legislation,
which provides for sweeping 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 U.S. by more adversely
impacting large financial institutions, some of which
are TSYS clients, and by adversely impacting the
competitive position of U.S. financial institutions in
comparison to foreign competitors in certain
businesses.
The Financial Reform Act, which includes the Durbin
Amendment to the Electronic Funds Transfer Act,
mandates that the Federal Reserve Board limit debit
card interchange fees. Final rules were issued in June
2011. The final rules cap interchange fees for debit
transactions at $0.21 plus five basis points of the
transaction and required that the amount of any debit
interchange transaction fee charged be reasonable
and proportional to the costs incurred in connection
with the transaction.
Although this legislative action by the U.S. Congress
had been anticipated for some time, it remains
impossible to predict the impact, if any, that the law
and the regulations to be promulgated thereunder
may have on the Company’s operations or its
financial condition in the future. However, as TSYS’
business is predominately credit card related, the
Durbin Amendment is not expected to have a
significant negative impact upon TSYS’ business.
Financial Review
This Financial Review provides a discussion of critical
accounting policies and estimates, related party
transactions and off-balance sheet arrangements.
This Financial Review also discusses the results of
operations, financial position, liquidity, and capital
resources of TSYS and outlines the factors that have
affected its recent earnings, as well as those factors
that may affect its future earnings. The accompanying
Consolidated Financial Statements and related Notes
are an integral part of this Financial Review and
should be read in conjunction with it.
Critical Accounting Policies and
Estimates
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
accounting policies employed.
Refer to Note 1 in the consolidated financial
statements for more information on the Company’s
basis of presentation and a summary of significant
accounting policies.
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 applicable 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 Company takes into
consideration such factors as its day-to-day
knowledge of the financial position of specific clients,
the industry and size of its clients, the overall
composition of its accounts receivable aging, prior
11
discussion of contract acquisition costs. The net
carrying value of contract acquisition costs on the
Company’s Consolidated Balance Sheet as of
December 31, 2011 was $163.0 million.
Software Development Costs
In evaluating for recoverability, expected
undiscounted net operating cash flows are estimated
by management. The Company evaluates the
unamortized capitalized costs of software
development as compared to the net realizable value
of the software product, which is determined by
expected undiscounted net operating cash flows. The
amount by which the unamortized software
development costs exceed the net realizable value is
written off in the period that such determination is
made. If the actual cash flows are not consistent with
the Company’s estimates, a material write-off may
result and net income may be materially different
than was initially recorded. Assumptions and
estimates about future cash flows and remaining
useful lives of our software are complex and
subjective. They can be affected by a variety of
factors, including industry and economic trends,
changes in our business strategy, and changes in our
internal forecasts. 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,
2011 was $74.7 million.
Acquisitions — Purchase Price
Allocation
TSYS’ purchase price allocation methodology
requires the Company to make assumptions and to
apply judgment to estimate the fair value of acquired
assets and liabilities. TSYS estimates the fair value of
assets and liabilities based upon appraised market
experience with specific customers of accounts
receivable write-offs and prior history of allowances in
proportion to the overall receivable balance. This
analysis includes an ongoing and continuous
communication with its largest clients and those
clients with past due balances. A financial decline of
any one of the Company’s large clients could have a
material adverse effect on collectability of receivables
and thus the adequacy of the allowance for doubtful
accounts. If the actual collectability of clients’
accounts is not consistent with the Company’s
estimates, bad debt expense, which is recorded in
selling, general and administrative expenses, may be
materially different than was initially recorded. The
Company’s experience and extensive data
accumulated historically indicates that these
estimates have proven reliable over time.
The Company estimates allowances for billing
adjustments for potential billing discrepancies. When
estimating the allowance for billing adjustments, the
Company considers its overall history of billing
adjustments, as well as its history with specific clients
and known disputes. If the actual adjustments to
clients’ billing 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 extensive data accumulated
historically indicates that these estimates have proven
reliable over time.
Contract Acquisition Costs
In evaluating for recoverability, expected
undiscounted net operating cash flows are estimated
by management. The Company evaluates the
carrying value of contract acquisition costs associated
with each customer for impairment on the basis of
whether these costs are fully recoverable from either
contractual minimum fees (conversion costs) or from
expected undiscounted net operating cash flows of
the related contract (cash incentives paid). The
determination of expected undiscounted net
operating cash flows requires management to make
estimates. If the actual cash flows are not consistent
with the Company’s estimates, a material impairment
charge may result and net income may be materially
different than was initially recorded.
These costs may become impaired with the loss of a
contract, the financial decline of a client, termination
of conversion efforts after a contract is signed, or
diminished prospects for current clients. Note 9 in
the consolidated financial statements contains a
12
values, the carrying value of the acquired assets and
widely accepted valuation techniques, including
discounted cash flows and market multiple analyses.
Management determines the fair value of fixed assets
and identifiable intangible assets such as developed
technology or customer relationships, and any other
significant assets or liabilities. TSYS adjusts the
purchase price allocation, as necessary, up to one
year after the acquisition closing date as TSYS
obtains more information regarding asset valuations
and liabilities assumed. Unanticipated events or
circumstances may occur which could affect the
accuracy of the Company’s fair value estimates,
including assumptions regarding industry economic
factors and business strategies, and result in an
impairment or a new allocation of purchase price.
Given its history of acquisitions, TSYS may allocate
part of the purchase price of future acquisitions to
contingent consideration as required by 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 discount rate to
reflect the value of invested capital. Cash flows are
estimated for future periods based on historical data
and projections provided by management. If the
actual cash flows are not consistent with the
Company’s estimates, a material impairment charge
may result and net income may be materially
different than was initially recorded. Note 10 in the
consolidated financial statements contains a
discussion of goodwill. The net carrying value of
goodwill on the Company’s Consolidated Balance
Sheet as of December 31, 2011 was $355.5 million.
Long-lived Assets and Intangibles
In evaluating for recoverability, expected
undiscounted net operating cash flows are estimated
by management. The Company reviews long-lived
assets, such as property and equipment and
intangibles subject to amortization, including contract
acquisition costs and certain computer software, for
impairment whenever events or changes in
circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of
assets to be held and used is measured by a
comparison of the carrying amount of an asset to
estimated undiscounted future cash flows expected
to be generated by the asset. If the actual cash flows
are not consistent with the Company’s estimates, a
material impairment charge may result and net
income may be materially different than was initially
recorded.
Revenue Recognition
Revenue is recognized when all of the following
criteria are met: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred or
services have been performed; (3) the seller’s price to
the buyer is fixed or determinable; and
(4) collectability is reasonably assured. In situations
where contractual provisions are such that the fees
are not fixed or determinable, the Company
recognizes revenue net of an allowance for refunds,
processing errors or penalties, or other related
customer credits based on historical experience.
When a sale involves multiple deliverables, the
deliverables in the arrangement are evaluated to
determine the units of accounting and the entire fee
from the arrangement is allocated to each unit of
accounting based on the relative selling price of the
underlying deliverables. Revenue is recognized when
the revenue recognition criteria for each unit of
accounting have been met.
Revenue recognition is affected by our determination
of the number of deliverables in an arrangement,
whether those deliverables may be separated into
separate units of accounting, and our valuation of
each unit of accounting which affects the amount of
revenue allocated to each unit. Pursuant to
Accounting Standards Codification (ASC) 605,
Revenue Recognition, we use vendor-specific
objective evidence of selling price (VSOE) when it
13
exists to determine the amount of revenue to allocate
to each unit of accounting. The Company establishes
VSOE of selling price using the priced charged when
the same service is sold separately. In certain
situations, the Company does not have sufficient
VSOE. In these situations, we considered whether
sufficient third party evidence (TPE) of selling price
existed for the Company’s services. However, the
Company typically is not able to determine TPE and
has not used this measure of selling price due to the
unique and proprietary nature of some of its services
and the inability to reliably verify relevant standalone
competitor prices. When there is insufficient evidence
of VSOE and TPE, we have made our best estimate of
the standalone selling price (ESP) of that service for
purposes of allocating revenue to each unit of
accounting. When determining ESP, we use limited
standalone sales data that do not meet the
Company’s criteria to establish VSOE, management
pricing strategies, residual selling price data when
VSOE exists for a group of elements, and margin
objectives. Consideration is also given to
geographies in which the services are sold or
delivered, customer classifications, and market
conditions including competitor pricing strategies
and benchmarking studies.
As our business and service offerings change in the
future, our determination of the number of
deliverables in an arrangement and related units of
accounting and our future pricing practices may
result in changes in our estimates of VSOE and ESP,
which may change the ratio of fees allocated to each
service or unit of accounting in a given customer
arrangement. There were no material changes in
revenue recognition in the year ended December 31,
2011 due to any potential changes in our
determination of the number of deliverables in an
arrangement, units of accounting, or estimates of
VSOE or ESP, nor do we expect a material impact to
revenue in the year ended December 31, 2012 due
to changes in these judgments and estimates.
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 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
amounts. The loss reserve was established using
historical loss rates, applied to recent bankcard
processing volume. At December 31, 2011, the
Company had a merchant loss reserve in the amount
of $397,000.
Transaction Processing Provisions
The Company records estimates to accrue for
contract contingencies (performance penalties) and
processing errors. A significant number of the
Company’s contracts with large clients contain
service level agreements which can result in TSYS
incurring performance penalties if contractually
required service levels are not met. When estimating
these accruals, the Company takes into consideration
such factors as the prior history of performance
penalties and processing errors incurred, actual
contractual penalties inherent in the Company’s
contracts, progress towards milestones, and known
processing errors not covered by insurance. If the
actual performance penalties incurred are not
14
consistent 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.
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.
Income Taxes
In calculating its effective tax rate, the Company
makes decisions regarding certain tax positions,
including the timing and amount of deductions and
allocations of income among various tax jurisdictions.
The Company has various tax filing positions,
including the timing and amount of deductions and
credits, the establishment of reserves for audit
matters and the allocation of income among various
tax jurisdictions.
The Company makes estimates as to the amount of
deferred tax assets and liabilities and records
valuation allowances to reduce its deferred tax assets
to reflect the amount that is more likely than not to
be realized. The Company considers projected future
taxable income and ongoing tax planning strategies
in assessing the need for the valuation allowance.
Actual results may differ from the Company’s
estimates. If the Company realizes a deferred tax
asset or the Company was unable to realize a net
deferred tax asset, an adjustment to the deferred tax
asset would increase or decrease earnings,
respectively, in the period the difference is
recognized.
Related Party Transactions
The Company provides electronic payment
processing and other services to the Company’s
equity investments, Total System Services de México,
S.A. de C.V. (TSYS de México) and China UnionPay
Data Co., Ltd. (CUP Data).
The related party services 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
Off-Balance Sheet Arrangements
OPERATING LEASES: As a method of funding its
operations, TSYS employs noncancelable operating
leases for computer equipment, software and
facilities. These leases allow the Company to provide
the latest technology while avoiding the risk of
ownership. Neither the assets nor obligations related
to these leases are included on the balance sheet.
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, 2011 is $5.7 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
ASU 2011-12, “Deferral of the Effective Date for
Amendments to the Presentation of Reclassifications
of Items Out of Accumulated Other Comprehensive
Income” in Accounting Standards Update
No. 2011-05
In December 2011, the FASB issued ASU 2011-12,
“Deferral of the Effective Date for Amendments to
the Presentation of Reclassifications of Items Out of
Accumulated Other Comprehensive Income” in
Accounting Standards Update No. 2011-05, which
defers the requirement under ASU 2011-05,
“Presentation of Comprehensive Income,” to present
items that are reclassified from accumulated other
comprehensive income to net income separately with
their respective components of net income and other
comprehensive income (for both interim and annual
financial statements). All other requirements in ASU
2011-05 are not affected by this update. The
amendments in this update are effective for fiscal
years, and interim periods within those years,
beginning after December 15, 2011.
15
ASU 2011-08, “Testing Goodwill for Impairment”
In September 2011, the FASB issued ASU 2011-08,
“Testing Goodwill for Impairment,” which amends
ASC Topic 350, “Intangibles – Goodwill and Other.”
ASU 2011-08 permits an entity to first assess
qualitative factors to determine whether it is more
likely than not that the fair value of a reporting unit is
less than its carrying amount as a basis for
determining whether it is necessary to perform the
two-step goodwill impairment test described in Topic
350. The amendments are effective for annual and
interim goodwill impairment tests performed for fiscal
years beginning after December 15, 2011, and early
adoption is permitted. The Company has determined
the impact of adopting ASU 2011-08 on its financial
position, results of operations and cash flows to be
immaterial.
ASU 2011-05, “Presentation of Comprehensive
Income”
In June 2011, the FASB issued ASU 2011-05,
“Presentation of Comprehensive Income.” ASU
2011-05 amends ASC Topic 220, “Comprehensive
Income,” and eliminates the option in US GAAP to
present other comprehensive income in the
statement of changes in equity. An entity has the
option to present the total of comprehensive income,
the components of net income, and the components
of other comprehensive income either in a single
continuous statement of comprehensive income or in
two separate but consecutive statements. It is
effective for fiscal years, and interim periods within
those years, beginning after December 15, 2011, with
early adoption permitted. The Company has
determined the impact of adopting ASU 2011-05 on
its financial position, results of operations and cash
flows to be immaterial.
ASU 2011-04, “Amendments to Achieve Common
Fair Value Measurement and Disclosure
Requirements in U.S.GAAP and IFRSs”
In May 2011, the FASB issued ASU 2011-04,
“Amendments to Achieve Common Fair Value
Measurement and Disclosure Requirements in
US GAAP and IFRSs,” to converge fair value
measurement and disclosure guidance in US GAAP
with the guidance in the International Accounting
Standards Board’s (“IASB”) concurrently issued IFRS
13, Fair Value Measurement. It is prospectively
effective for interim and annual periods beginning
after December 15, 2011, and early adoption is not
permitted. The Company has determined the impact
of adopting ASU 2011-04 on its financial position,
results of operations and cash flows to be immaterial.
16
ASU 2009-13, “Multiple-Deliverable Revenue
Arrangement,”
In October 2009, the FASB issued ASU 2009-13,
“Multiple-Deliverable Revenue Arrangements,” an
update to ASC Topic 605, “Revenue Recognition,”
and formerly known as EITF 08-1, “Revenue
Arrangements with Multiple Deliverables.” ASU
2009-13 amends ASC 650-25 to revise the guidance
for determining whether multiple deliverables in an
arrangement can be separated for revenue
recognition and how the consideration should be
allocated. It eliminates the use of the residual method
of revenue recognition and the requirement that all
undelivered elements have vendor-specific objective
evidence (VSOE) or third-party evidence (TPE) of fair
value before an entity can separate its deliverables
for revenue recognition. The revised guidance
requires the allocation of vendor consideration to
each deliverable using the relative selling price
method. The selling price for each deliverable is
based on VSOE if available, TPE if VSOE is not
available, or best estimated selling price (ESP) if
neither VSOE nor TPE is available. Effective
January 1, 2011, the Company adopted the
provisions of ASU 2009-13 on a prospective basis for
all new and materially modified arrangements.
The Company’s North America and International
Services revenues are derived from long-term
payment 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,
transactions and authorizations processed,
statements mailed, cards embossed and mailed and
other processing services for cardholder accounts on
file. Most of these contracts have prescribed annual
revenue minimums, penalties for early termination,
and service level agreements which may impact
contractual fees if certain service levels are not
achieved. Revenue is recognized as the services are
performed, primarily on a per unit basis. Processing
contracts generally range from three to ten years in
length and provide for penalties for early termination.
When providing payment processing services, the
Company frequently enters into customer
arrangements to provide multiple services that may
also include conversion or implementation services,
business process outsourcing services such as call
center services, web-based services, and other
payment processing-related services. Revenue for
these services is generally recognized as they are
performed on a per unit basis each month or ratably
over the term of the contract.
The Company’s Merchant Services revenues are
derived from long-term processing contracts with
large financial institutions, other merchant acquirers
and merchant organizations which generally range
from three to eight years and provide for penalties
for early termination. Merchant services revenue is
generated primarily from processing all payment
forms including credit, debit, electronic benefits
transfer and check truncation for merchants of all
sizes across a wide array of retail market segments.
The products and services offered include
authorization and capture of electronic transactions,
clearing and settlement of electronic transactions,
information reporting services related to electronic
transactions, merchant billing services, and
point-of-sale terminal services. Revenue is recognized
for merchant services as those services are
performed, primarily on a per unit basis. When
providing merchant processing services, the
Company frequently enters into customer
arrangements to provide multiple services that may
also include conversion or implementation services,
business process outsourcing services such as call
center services, terminal services, and other merchant
processing-related services. Revenue for these
services is generally recognized as they are
performed on a per unit basis each month or ratably
over the term of the contract.
The Company recognizes revenues in accordance
with the provisions of Staff Accounting Bulletin
(“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 arrangement exists;
(2) delivery has occurred or services have been
performed; (3) the seller’s price to the buyer is fixed
or determinable; and (4) collectability is reasonably
assured. The Company accrues for rights of refund,
processing errors or penalties, or other related
allowances based on historical experience. In many
situations, the Company enters into arrangements
with customers to provide conversion or
implementation services in addition to processing
services where the conversion or implementation
services do not have standalone value. In these
situations, the deliverables do not meet the criteria of
ASC 605-25 for separation and the deliverables are
combined as a single unit of accounting for revenue
recognition. For these arrangements, conversion or
implementation services revenue is recognized as the
related processing services are performed, and
revenue continues to be recognized in a single unit of
accounting upon adoption of ASU 2009-13 in 2011.
The Company’s other services generally have
standalone value and constitute separate units of
accounting for revenue recognition purposes.
However, customer arrangements entered into prior
to January 1, 2011 often included services for which
sufficient objective and reliable evidence of fair value
did not exist. In certain situations, sufficient objective
and reliable evidence of fair value did not exist for
multiple undelivered services, and the deliverables
were combined and recognized as a single unit of
accounting based on the proportional performance
for the combined unit. Beginning on January 1, 2011,
services in new or materially modified arrangements
of this nature are now divided into separate units of
accounting and revenue is allocated to each unit
based on the relative selling price method. As the
services in these arrangements are generally
delivered over the same term with consistent patterns
of performance, there is no change in the timing or
pattern of revenue recognition upon adoption of ASU
2009-13, and it is not expected to have a material
effect on revenue recognition for these arrangements
in future periods.
In certain situations, VSOE existed for all but one of
the shorter services (for which standalone value
existed), and the Company allocated revenue to each
of the deliverables under the residual method of
accounting whereby the difference between the total
arrangement consideration and VSOE for the
undelivered services was allocated to the other
service. While there is no change in the units of
accounting for these arrangements, beginning on
January 1, 2011, revenue for services in new or
materially modified arrangements of this nature will
be allocated based on the relative selling price
method. The residual amount of revenue historically
allocated to the shorter services in these
arrangements is generally consistent with our best
estimate of selling price for those services. In
situations where this may not have been the case,
services in these arrangements were delivered over
the same term with consistent patterns of
performance. Accordingly, there is no change in the
pattern of revenue recognition upon adoption of ASU
2009-13, and it is not expected to have a material
effect on revenue recognition for these arrangements
in future periods.
In many situations, VSOE exists for the Company’s
payment processing services and certain other
processing-related services. The Company
establishes VSOE of selling price using the priced
charged when the same service is sold separately. In
certain situations, the Company does not have
sufficient VSOE based on its related accounting
17
policy due to limited standalone sales of certain
services for a particular group of customers, limited
sales history for certain services, and/or disparity in
pricing for a given service. In these situations, we
considered whether sufficient TPE of selling price
existed for the Company’s services. TPE is
established by evaluating similar or interchangeable
competitor products or services in standalone sale to
similarly situated customers. The Company typically is
not able to determine TPE and has not used this
measure of selling price due to the unique and
proprietary nature of some of its services and the
inability to reliably verify relevant standalone
competitor prices. ESP has been established in these
situations using limited standalone sales that do not
meet the Company’s criteria to establish VSOE,
management pricing strategies, residual selling price
data when VSOE exists for a group of elements, and
margin objectives. Consideration is also given to
geographies in which the services are sold or
delivered, customer classifications, and market
conditions including competitor pricing strategies
and benchmarking studies.
The Company’s multiple element arrangements may
include one or more elements that are subject to
other topics including software revenue recognition
and leasing guidance. The consideration for these
multiple element arrangements is allocated to each
group of deliverables – those subject to ASC 605-25
and those subject to other topics based on the
revised guidance in ASC 2009-13. Arrangement
revenue for each group of deliverables is then further
separated, allocated, and recognized based on
applicable guidance.
The Company regularly reviews the evidence of
selling price for its services and maintains internal
controls over the establishment and updates of these
estimates. There were no material changes in
estimated selling price for its services during the year
and the Company does not expect a material impact
from changes in selling price in the foreseeable
future.
If the Company were to apply the new revenue
recognition guidance as if it had early adopted the
guidance for the year ended December 31, 2010,
there would have been no material impact to revenue
in the earlier period. As previously disclosed, there
were changes to the units of accounting and changes
in the way arrangement consideration is allocated for
certain types of the Company’s arrangements;
however, the adoption of ASU 2009-13 did not have
a material impact on revenue for the year ended
December 31, 2011 when compared to the revenue
that would have been recognized under the guidance
in effect prior to adoption of ASU 2009-13. The
impact of adopting this guidance in future periods
will depend on the nature of the Company’s
customer arrangements in those periods, including
the nature of products and services included in those
arrangements, the magnitude of revenue associated
with certain deliverables in those arrangements, and
the timing of delivery of the related products or
services in those arrangements, among other
considerations. While the impact in future periods is
dependent on these factors and future go-to-market
strategies, the Company does not currently expect
the adoption of this guidance to have a material
impact on the timing and pattern of revenue
recognition in future periods. The Company does not
expect this new guidance to impact future pricing
practices or go-to-market strategies.
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 5.3% for the year
ended December 31, 2011, the Company estimates revenues increased by a net 0.3% due to foreign currency
exposure and pricing, 2.5% due to the impact of acquisitions and increased 2.5% 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.
18
TSYS’ payment processing revenues are influenced by several factors, including volumes related to AOF and
transactions. TSYS estimates that approximately 53% of total payment processing revenues is AOF and
transaction volume driven, and are driven primarily from processing services. The remaining 47% 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.
A summary of the consolidated financial highlights for the years ended December 31, 2011, 2010 and 2009 is
provided below:
(in millions, except per share data)
2011
2010
2009
2011 vs. 2010
2010 vs. 2009
Years Ended December 31,
Percent Change
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . $1,809.0 1,717.6 1,677.5
Operating income . . . . . . . . . . . . . . . . . . . . .
344.0
Net income attributable to TSYS common
322.5
309.4
5.3%
4.2
2.4%
(10.1)
shareholders . . . . . . . . . . . . . . . . . . . . . . . .
220.6
193.9
215.2
13.7
(9.9)
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 . . . . . .
Key indicators:
1.15
1.15
1.00
0.99
1.12
1.09
1.15
1.15
435.9
1.00
0.99
389.2
1.12
1.09
423.1
AOF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cardholder transactions processed . . . . .
404.2
344.8
342.9
8,687.8 7,670.4 7,272.9
14.4
16.3
14.3
16.2
12.0
17.9
13.3
(10.7)
(9.5)
(10.8)
(9.6)
(8.0)
(0.5)
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 26 in the consolidated financial statements for
more information on earnings per share.
19
Total revenues increased 5.3%, or $91.4 million, for the year ended December 31, 2011, compared to the year
ended December 31, 2010, which increased 2.4%, or $40.1 million, compared to the year ended December 31,
2009. The increase in revenues for 2011 and 2010 include an increase of $16.8 million and $1.0 million,
respectively, related to the effects of currency translation of the Company’s foreign-based subsidiaries and
branches.
Excluding reimbursable items, revenues increased 6.8%, or $98.3 million, for the year ended December 31, 2011,
compared to the year ended December 31, 2010, which increased 2.5%, or $35.1 million, compared to the year
ended December 31, 2009. The Company expanded its product and service offerings through acquisitions
during 2011 and 2010. The impact of these acquisitions on consolidated total revenues during the year of
acquisition was $ 42.4 million and $97.7 million in 2011 and 2010, respectively.
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 4.9%, 6.0% and 5.3% of TSYS’ total revenues for 2011, 2010 and 2009, 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 44%, 46% and 40% of the total revenues
derived from providing merchant services to Bank of America are attributable to reimbursable items for 2011,
2010 and 2009, respectively, which are provided at no margin.
In November 2010, TSYS and Bank of America agreed to a new agreement, during the term of which TSYS
expects merchant services revenues from Bank of America to decline as Bank of America transitions its services to
its new joint venture.
The loss of Bank of America as a merchant services client is not expected to have a material adverse effect on
TSYS’ financial position, results of operations or cash flows.
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
organizations primarily based in North America.
Growth in revenues and operating profit in this
segment is derived from retaining and growing the
core business and improving the overall cost
structure. Growing the core business comes primarily
from an increase in account usage, growth from
existing clients (also referred to as organic growth)
and sales to new clients and the related account
conversions.
The North America Services segment provides issuer
account solutions for financial institutions and other
This segment has many long-term customer contracts
with card issuers providing account processing and
20
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 the 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 purchasing
patterns and flagging unusual purchases. Other
services provided include customized
communications to cardholders, information
verification associated with granting credit, debt
collection, and customer service.
This segment has two major customers. Below is a summary of the North America Services segment:
(in millions)
Years Ended December 31,
Percent Change
2011
2010
2009
2011 vs. 2010
2010 vs. 2009
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . $ 954.6
930.7
External revenues . . . . . . . . . . . . . . . . . . . . .
145.5
Reimbursable items . . . . . . . . . . . . . . . . . . . .
253.8
Operating income* . . . . . . . . . . . . . . . . . . . .
Operating margin* . . . . . . . . . . . . . . . . . . . .
Key indicators: . . . . . . . . . . . . . . . . . . . . . . . .
AOF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transactions . . . . . . . . . . . . . . . . . . . . . . . .
351.4
956.5 1,048.9
927.6 1,016.3
168.3
147.5
285.4
245.0
(0.2)%
0.3
(1.4)
3.6
(8.8)%
(8.7)
(12.3)
(14.2)
26.6% 25.6% 27.2%
305.2
296.7
7,261.2 6,410.6 6,136.9
18.5
13.3
(2.8)
4.5
* Note: Segment operating results do not include expenses associated with Corporate Administration. Refer to Note 22 for
more information on operating segments.
The $3.1 million increase in segment external revenues for 2011, as compared to 2010, is attributable to a $1.6
million decrease in reimbursable items due to lost business and a $55.9 million decrease related to client
deconversion, price reductions and termination fees. This decrease was offset by a $60.6 million increase in new
business and internal growth. 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.
International Services
The International Services segment provides issuer
card solutions to financial institutions and other
organizations primarily based outside the North
America region. Growth in revenues and operating
profit in this segment is derived from retaining and
growing the core business and improving the overall
cost structure. Growing the core business comes
primarily from an increase in account usage, growth
from existing clients and sales to new clients and the
related account conversions.
This segment has 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
21
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 has one major customer.
Below is a summary of the International Services segment:
Years Ended December 31,
Percent Change
2009 2011 vs. 2010 2010 vs. 2009
2010
2011
(in millions)
Total revenues . . . . . . $ 394.8 335.0 337.8
390.9 332.2 335.6
External revenue . . . . .
14.7
15.1
13.1
Reimbursable items . .
41.4
Operating income* . .
57.7
42.7
10.5% 12.7% 17.1%
Operating margin* . . .
. . . . . .
Key indicators:
AOF . . . . . . . . . . . . .
39.5
Transactions . . . . . . 1,426.6 1,259.9 1,136.0
52.8
46.3
17.9%
17.7
10.7
(3.0)
14.0
13.3
(0.8)%
(1.0)
(13.0)
(26.0)
17.1
10.9
* Note: Segment operating results do not include expenses
associated with Corporate Administration. Refer to Note 22 for
more information on operating segments.
The $58.7 million increase in segment external revenues for
2011, as compared to 2010, is attributable to a $42.1 million
increase in new business and organic growth and a $16.8
million increase related to the impact of foreign currency
translation, which is partially offset by lost business. 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
business 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.
TSYS will be terminating its Japan Gift Card program in June
2012 due to negative future cash flows resulting from the loss
of two of its major customers. The program’s negative future
cash flows indicate that the carrying value of its assets will not
Below is a summary of the Merchant Services segment:
be recovered. As a result, a provision for the program’s future
losses was made and its assets were written down to zero.
Movements in foreign currency exchange rates as compared
to the U.S. dollar can result in foreign denominated financial
statements being translated into fewer U.S. dollars, which
impact the comparison to prior periods when the U.S. dollar
was weaker. For 2012, TSYS does not expect any significant
movements from the rates that existed at December 31, 2011.
On March 11, 2011, an earthquake struck off the northeast
coast of Japan, triggering a tsunami. TSYS’ operations in
Japan were not directly impacted by the natural disaster.
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
processing services, acquiring solutions, related systems and
integrated support services to merchant acquirers and
merchants. Revenues from merchant services include
processing all payment forms including credit, debit, prepaid,
electronic benefit transfer and electronic check for merchants
of all sizes across a wide array of market verticals. Merchant
services include authorization and capture of transactions;
clearing and settlement of transactions; information reporting
services related to transactions; merchant billing services; and
point-of-sale equipment sales and service.
With the acquisitions of TMS and TermNet, 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 the United States by dollar volume (The Nilson
Report, March 2011), TMS has a 57-year history in the
acquiring industry with more than 300,000 merchant outlets in
its diverse portfolio.
This segment has one major customer.
Years Ended December 31,
Percent Change
(in millions)
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 488.0
487.4
External revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
114.8
Reimbursable items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
113.0
Operating income* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating margin* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Key indicator:
2011
Point-of-sale transactions . . . . . . . . . . . . . . . . . . . . . . . . . .
2010
458.9
457.8
121.7
102.4
2009
327.1
325.6
94.8
71.4
2011 vs. 2010
6.3%
6.5
(5.7)
10.3
2010 vs. 2009
40.3%
40.6
28.4
43.4
(6.8)
2.3
23.2% 22.3% 21.8%
4,955.5 5,315.4 5,194.4
* Note: Segment operating results do not include expenses associated with Corporate Administration. Refer to Note 22 for more information on
operating segments.
22
The $29.6 million increase in segment external revenues for 2011, as compared to 2010, is attributable to a $42.4
million increase for acquisitions offset by lower volume, the impact of the Durbin amendment, deconversions,
and price compression. 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 Merchant Services segment 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, 2011 and 2010 include an increase of $16.2 million and $1.6 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 $39.1 million in 2011. 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,
estimates the impact of the legislation on 2011 was approximately $1.4 million.
Nonoperating Income (Expense)
Nonoperating income (expense) consists of interest
income, interest expense and gains and losses on
currency translations. Nonoperating income
decreased in 2011 as compared to 2010, and
increased in 2010 as compared to 2009.
Interest income for 2011 was $620,000, a 2.8%
decrease compared to $638,000 in 2010, which was a
65.7% decrease compared to $1.9 million in 2009.
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 2011 was $3.2 million, an
increase of $348,000 compared to $2.9 million in
2010, which was a decrease of $1.2 million compared
to $4.1 million in 2009. The increase in interest
expense in 2011 compared to 2010 is attributable to
additional debt borrowings during the fourth quarter
of 2010. The decrease in interest expense in 2010
compared to 2009 is attributable to the changes in
interest rates.
For the years ended December 31, 2011, 2010 and
2009, the Company recorded a translation loss of
approximately $3.1 million, $162,000 and
$2.6 million, respectively, related to intercompany
loans and foreign denominated cash and accounts
receivable balances.
Income Taxes
Income tax expense was $102.6 million,
$106.1 million, and $121.9 million in 2011, 2010 and
2009, respectively, representing effective income tax
rates of 31.6%, 34.9%, and 35.4%, respectively. The
calculation of the effective tax rate excludes
noncontrolling interest in consolidated subsidiaries’
net income and includes equity in income of equity
investments in pretax income.
During 2011, the Company generated foreign net
operating loss benefits and state tax credits in excess
of its utilization capacity based on both the
Company’s current operations and with consideration
of future tax planning strategies. Based upon these
same considerations, the Company reassessed its
need for valuation allowances in other foreign
jurisdictions. Accordingly, the Company experienced
23
a net increase in its valuation allowance for deferred
income tax assets of $3.8 million.
6.2% to $205.6 million, compared to $219.2 million
in 2009.
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 considers foreign
earnings related to these foreign operations to be
permanently reinvested. No provision for U.S. federal
and state incomes taxes has been made in our
consolidated financial statements for those
non-U.S. subsidiaries whose earnings are considered
to be reinvested. The amount of undistributed
earnings considered to be “reinvested” which may
be subject to tax upon distribution was approximately
$51.2 million at December 31, 2011. Although TSYS
does not intend to repatriate these earnings, a
distribution of these non-U.S. earnings in the form of
dividends, or otherwise, would subject the Company
to both U.S. federal and state income taxes, as
adjusted for non-U.S. tax credits, and withholding
taxes payable to the various non-U.S. countries.
Determination of the amount of any unrecognized
deferred income tax liability on these undistributed
earnings is not practicable.
In 2011, TSYS reassessed its contingencies for
foreign, federal and state exposures, which resulted
in a net increase in tax contingency amounts of
approximately $1.2 million.
Equity in Income of Equity Investments
TSYS’ share of income from its equity in equity
investments was $8.7 million, $7.1 million, and
$7.0 million for 2011, 2010 and 2009, respectively.
Refer to Note 11 in the consolidated financial
statements for more information on equity
investments.
Loss from Discontinued Operations, net
of tax
Loss from discontinued operations, net of tax
contains the operating 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. Refer to Note 2 in the consolidated
financial statements for more information on
discontinued operations.
Net Income
Net income increased 8.3% to $222.7 million in 2011,
compared to 2010. In 2010, net income decreased
24
Net income attributable to TSYS common
shareholders increased 13.7% to $220.6 million (basic
and diluted EPS of $1.15) in 2011, compared to 2010.
In 2010, net income attributable to TSYS common
shareholders decreased 9.9% to $193.9 million (basic
and diluted EPS of $0.99), compared to
$215.2 million (basic and diluted EPS of $1.09) in
2009.
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 representative 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 prospective, 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 management, assess TSYS with some of
the same tools that management utilizes internally
and compare such information with prior periods.
Profit Margins and Reimbursable Items
Management believes that operating and net profit
margins excluding reimbursable items are more
useful because reimbursable items do not impact
profitability as the Company receives reimbursement
for expenses incurred on behalf of its clients. 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, 2011, 2010 and 2009:
(in thousands)
Operating
Years Ended December 31,
2011
2010
2009
income . . . . . . . $ 322,456
309,429
344,026
Net income . . . . . . $ 222,662
205,621
219,176
Total revenues . . . $1,808,966 1,717,577 1,677,483
Less reimbursable
items . . . . . . . . .
268,268
270,178
275,141
Revenues before
reimbursable
items . . . . . . . . . $1,540,698 1,442,436 1,407,305
Operating margin
(as reported) . . .
Net profit margin
(as reported) . . .
Adjusted
operating
margin . . . . . . . .
Adjusted net profit
margin . . . . . . . .
17.8%
18.0%
20.5%
12.3%
12.0%
13.1%
20.9%
21.5%
24.4%
rates related to TSYS’ business; (3) TSYS will not incur
significant expenses associated with the conversion
of new large clients or acquisitions, or any significant
impairment of goodwill or other intangibles; (4) there
will be no deconversions of large clients during the
year; and (5) the economy will not worsen.
Financial Position, Liquidity
and Capital Resources
The Consolidated Statements of Cash Flows detail
the Company’s cash flows from operating, investing
and financing activities. TSYS’ primary methods for
funding its operations and growth have been cash
generated from current operations, the use of leases
and the occasional use of borrowed funds to
supplement financing of capital expenditures.
Cash Flows from Operating Activities
(in thousands)
Years Ended December 31,
2011
2010
2009
Net income . . . . . . . . . $222,662 205,621 219,176
Depreciation and
amortization . . . . . . .
169,165 163,111 156,471
Net change in current
and other assets and
current and other
liabilities
. . . . . . . . .
Other noncash items
and charges, net . . .
Dividends from equity
investments . . . . . . .
Loss on disposal of
subsidiary . . . . . . . . .
Net cash provided by
18,682
4,520
15,489
18,975
7,745
21,346
6,835
6,572
4,942
— 1,591
5,713
14.5%
14.3%
15.6%
operating
activities . . . . . . . . . . $436,319 389,160 423,137
Projected Outlook for 2012
As compared to 2011, TSYS expects its 2012 income
from continuing operations to increase by 8%-10%,
its EPS from continuing operations available to TSYS
common shareholders to increase by 10%-12%, its
revenues before reimbursable items to increase by
2%-5% and its total revenues to increase by 0%-2%,
based on the following assumptions with respect to
2012: (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
TSYS’ main source of funds is derived from operating
activities, specifically net income. The increase in
2011, as compared to 2010, in net cash provided by
operating activities was primarily the result of
increased earnings and the net change in current and
other assets and current and other liabilities. 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.
25
Net change in current and other assets and current
and other liabilities include accounts receivable,
prepaid expenses, other current assets and other
assets, accounts payable, accrued salaries and
employee benefits and other liabilities. The change in
accounts receivable between the years is the result of
timing of collections compared to billings. The
change in accounts payable and other liabilities
between years is the result of the timing of payments
and funding of performance-based incentives.
Cash Flows from Investing Activities
(in thousands)
Cash used in
Years Ended December 31,
2011
2010
2009
contract acquisition costs, equipment, licensed
computer software from vendors and internally
developed software.
Property and Equipment
Capital expenditures for property and equipment
were $26.9 million in 2011, compared to
$46.5 million in 2010 and $34.0 million in 2009. The
majority of capital expenditures in 2011, 2010 and
2009 related to investments in new computer
processing hardware. The decrease in capital
expenditures in 2011, as compared to 2010, is
attributable to the purchase of distributed systems
software from a third-party vendor in 2010.
acquisitions and
equity investments,
net of cash
acquired . . . . . . . . . $ (47,909) (148,531)
Licensed Computer Software from Vendors
(294)
Expenditures for licensed computer software from
vendors were $19.5 million in 2011 compared to
$69.8 million in 2010 and $20.1 million in 2009.
Additions to contract
acquisition costs . . .
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 . . . . .
Other . . . . . . . . . . . . . .
Net cash used in
(31,623)
(75,669)
(35,596)
(26,938)
(46,547)
(34,017)
(19,502)
(69,826)
(20,059)
(17,882)
(25,466)
(31,445)
Internally Developed Computer Software Costs
Additions to capitalized software development costs,
including enhancements to and development of
processing systems, were $17.9 million in 2011,
$25.5 million in 2010 and $31.4 million in 2009.
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 TermNet, TMS
and Infonox.
4,500
(2,066)
4,265
68
1,979
—
Cash Used in Acquisitions
investing
activities . . . . . . . . . . $(141,420) (361,706) (119,432)
The major uses of cash for investing activities in 2011
were for the acquisition of all of TermNet’s
outstanding stock, and additions to contract
acquisition costs, equipment, licensed computer
software from vendors and internally developed
computer software. The main source of cash for
investing activities in 2011 was cash from the sale of a
trade name associated with the purchase of the
remaining 49% interest in TMS. 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 were for additions to
26
In May 2011, TSYS acquired TermNet for an
aggregate consideration of $42.0 million. The
Company has allocated approximately $28.9 million
to goodwill. In May 2011, TSYS made a payment of
$6.0 million of contingent merger consideration in
connection with the purchase of Infonox on the Web
(Infonox), which was accounted for under Statement
of Financial Accounting Standard No. 141, “Business
Combinations”. The payment of the contingent
merger consideration by TSYS was recorded as
goodwill and had no impact on our results of
operations. In October 2011, TSYS acquired contract-
based intangible assets in its merchant services
segment for $2.6 million. 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 acquisitions.
Contract Acquisition Costs
TSYS makes cash payments for processing rights,
third-party development costs and other direct
salary-related costs in connection with converting
new customers to the Company’s processing
systems. The Company’s investments in contract
acquisition costs were $31.6 million in 2011,
$75.7 million in 2010 and $35.6 million in 2009. The
Company made cash payments for processing rights
of $5.2 million, $45.4 million and $9.3 million in 2011,
2010 and 2009, respectively. Conversion cost
additions were $26.4 million, $30.3 million and
$26.3 million in 2011, 2010 and 2009, respectively.
Purchase of Private Equity Investments
On May 31, 2011, the Company entered into a
limited partnership agreement in connection with its
agreement to invest in an Atlanta-based venture
capital fund focused exclusively on investing in
technology-enabled financial services companies.
Pursuant to the limited partnership agreement, the
Company has committed to invest up to $20 million
in the fund so long as its ownership interest in the
fund does not exceed 50%. In 2011, the Company
made investments in the fund of $1.6 million.
Cash Flows from Financing Activities
(in thousands)
Purchase of
Years Ended December 31,
2011
2010
2009
noncontrolling
interests . . . . . . . . $(174,050)
—
—
Repurchase of
common stock . . .
(121,271)
(46,228)
(328)
Principal payments
on long-term debt
borrowings and
capital lease
obligations . . . . . .
Dividends paid on
common stock . . .
Subsidiary dividends
per share . . . . . . .
Proceeds from
borrowings of
long-term debt . .
Other . . . . . . . . . . . .
Net cash used in
(28,892)
(11,741)
(18,869)
(53,949)
(55,087)
(55,208)
(433)
(9,031)
(235)
— 39,757
654
7,542
5,334
8
financing
activities . . . . . . . . $ 371,053 (81,676)
(69,298)
The major uses of cash for financing activities have
been the purchase of noncontrolling interests,
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, 2011 was $370.7 million and was
primarily the result of the acquisition of the remaining
49% interest in TMS, payment of dividends and the
repurchase of common stock. Net cash used in
financing activities for the year ended December 31,
2010 was $81.7 million and was primarily the result of
payments of cash dividends 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. Refer to Note 13 in the
consolidated financial statements for more
information on the long-term debt financing.
Redeemable Noncontrolling Interest
With the acquisition of TMS, the Company was a
party to put and call arrangements with respect to
the membership units that represented the remaining
noncontrolling interest of FNMS Holding. The call
and put arrangements could have been 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 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 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%, (c) a terminal value based on a
long-term sustainable growth rate of approximately
3%, (d) an effective tax rate of approximately 36%,
(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
27
participants would consider when estimating 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.
Stock Repurchase Plan
On April 20, 2010, TSYS announced a stock
repurchase plan to purchase up to 10 million shares
of TSYS stock. The shares may be purchased from
time to time over the next two years at prices
considered attractive to the Company. On May 3,
2011, TSYS announced that its Board had approved
an increase in the number of shares that may be
repurchased under its current share repurchase plan
from up to 10 million shares to up to 15 million
shares of TSYS stock. The expiration date of the plan
was also extended to April 30, 2013. Through
December 31, 2011, the Company purchased
6.6 million shares for approximately $120.6 million, at
an average price of $18.28. The Company has
5.3 million shares remaining under the plan. Refer to
Note 17 of the Notes to the consolidated financial
statements for more information on treasury stock.
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 segment obtained a credit agreement from a
third-party to borrow up to approximately ¥2.0 billion,
or $21 million, in a Yen-denominated three-year loan
to finance activities in Japan. The rate is 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. On
December 3, 2011, the Company modified its loan to
extend the maturity date to November 5, 2014.
28
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 $53.9 million were
paid in 2011, compared to $55.1 million and
$55.2 million in 2010 and 2009, respectively. The
Company paid an annual dividend of $0.28 per share
in 2011, 2010 and 2009, respectively. On
October 25, 2011, TSYS announced that its Board of
Directors approved a 42.9% increase in the regular
quarterly dividend payable on the Company’s
common stock from $0.07 per share to $0.10 per
share, payable on January 3, 2012 to Shareholders of
record as of the close of business on December 15,
2011.
Significant Noncash Transactions
During 2011, 2010 and 2009, the Company issued
206,000, 197,000, and 514,000 shares of common
stock, respectively, to certain key employees and
non-management members of its Board of Directors.
The grants to certain key employees were issued in
the form of nonvested stock bonus awards for
services to be provided in the future by such officers
and employees. Beginning in 2011, the grants to the
Board of Directors were fully vested on the date of
grant. The market value of the common stock at the
date of issuance is amortized as compensation
expense over the vesting period of the awards.
Refer to Notes 16 and 23 in the consolidated financial
statements for more information on share-based
compensation and significant noncash transactions.
Additional Cash Flow Information
Off-Balance Sheet Financing
TSYS uses various operating leases in its normal
course of business. These “off-balance sheet”
arrangements obligate TSYS to make payments for
computer equipment, software and facilities. These
computer and software lease commitments may be
replaced with new lease commitments due to new
technology. Management expects that, as these
leases expire, they will be evaluated and renewed or
replaced by similar leases based on need.
The following table summarizes future contractual
cash obligations, including lease payments and
software arrangements, as of December 31, 2011, for
the next five years and thereafter:
Contractual Cash Obligations
Payments Due By Period
Total
1 Year
or Less
2 - 3
Years
4 - 5
Years
After
5 Years
(in millions)
Operating
leases . . . . . . . $247
93
114
17
Debt
obligations . . .
220
181
39 —
Capital lease
obligations . . .
39
13
24
2
23
—
—
Total contractual
cash
obligations . . . $506
287
177
19
23
Income Taxes
The total liability for uncertain tax positions under
ASC 740, “Income Taxes,” at December 31, 2011 is
$5.7 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.
Foreign Operations
TSYS operates internationally and is subject to
adverse movements in foreign currency exchange
rates. TSYS does not enter into foreign exchange
forward contracts to reduce its exposure to foreign
currency rate changes; however, the Company
continues to analyze the potential use of hedging
instruments to safeguard it from significant foreign
currency translation risks.
TSYS maintains operating cash accounts outside the
United States. Refer to Note 3 in the Notes to
Unaudited Condensed Consolidated Financial
Statements for more information on cash and cash
equivalents. TSYS has adopted the permanent
reinvestment exception under ASC 740 with respect
to future earnings of certain foreign subsidiaries.
While some of the foreign cash is available to repay
intercompany financing arrangements, remaining
amounts are not presently available to fund domestic
operations and obligations without paying a
significant amount of taxes upon its repatriation.
Demand on the Company’s cash has increased as a
result of its strategic initiatives. TSYS funds these
initiatives through a balance of internally generated
cash, external sources of capital, and, when
advantageous, access to foreign cash in a tax efficient
manner. Where local regulations limit an efficient
intercompany transfer of amounts held outside of the
U.S., TSYS will continue to utilize these funds for local
liquidity needs. Under current law, balances available
to be repatriated to the U.S. would be subject to U.S.
federal income taxes, less applicable foreign tax
credits. TSYS has provided for the U.S. federal tax
liability on these amounts for financial statement
purposes, except for foreign earnings that are
considered permanently reinvested outside of the
U.S. TSYS utilizes a variety of tax planning and
financing strategies with the objective of having its
worldwide cash available in the locations where it is
needed.
Impact of Inflation
Although the impact of inflation on its operations
cannot be precisely determined, the Company
believes that by controlling its operating expenses
and by taking advantage of more efficient computer
hardware and software, it can minimize the impact of
inflation.
Working Capital
TSYS may seek additional external sources of capital
in the future. The form of any such financing will vary
depending upon prevailing market and other
conditions and may include short-term or long-term
borrowings from financial institutions or the issuance
of additional equity and/or debt securities such as
industrial revenue bonds. However, there can be no
assurance that funds will be available on terms
acceptable to TSYS. Management expects that TSYS
will continue to be able to fund a significant portion
of its capital expenditure needs through internally
generated cash in the future, as evidenced by TSYS’
current ratio of 1.7:1. At December 31, 2011, TSYS
had working capital of $269.6 million, compared to
$494.5 million in 2010 and $590.1 million in 2009.
29
Legal Proceedings
The Company is subject to various legal proceedings
and claims and is also subject to information
requests, inquiries and investigations arising out of
the ordinary conduct of its business. The Company
establishes reserves for litigation and similar matters
when those matters present loss contingencies that
TSYS determines to be both probable and reasonably
estimable in accordance with ASC 450,
“Contingencies.” In the opinion of management,
based on current knowledge and in part upon the
advise of legal counsel, all matters are believed to be
adequately covered by insurance, or, if not covered,
the possibility of losses from such matters are
believed to be remote or such matters are of such
kind or involve such amounts that would not have a
material adverse effect on the financial position,
results of operations or cash flows of the Company if
disposed of unfavorably.
Forward-Looking Statements
Certain statements contained in this filing which are
not statements of historical fact constitute forward-
looking statements within the meaning of the Private
Securities Litigation Reform Act (the Act). These
forward-looking statements include, among others
(i) TSYS’ expectation that the 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 generated 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 pronouncements; (vii) TSYS’
expectation with respect to certain tax matters;
(viii) TSYS’ expectation with respect to foreign
currency exchange rates; (ix) TSYS’ earnings guidance
for 2012 total revenues, revenues before
reimbursable items, income from continuing
operations and EPS from continuing operations, and
the assumptions underlying such statements
including, with respect to TSYS’ earnings guidance
for 2012, during 2012 (a) the economy will not
worsen (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 (d) TSYS will not incur
significant expenses associated with the conversion
of new large clients or acquisitions, or any significant
impairment of goodwill or other intangibles; and
30
(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) projections of revenue, income
or loss, earnings or loss per share, the payment or
nonpayment of dividends, capital structure and other
financial items; (ii) statements of plans and objectives
of TSYS or its management or Board of Directors,
including those relating to products or services;
(iii) statements of future economic performance; and
(iv) statements of assumptions underlying such
statements. Words such as “believes,” “anticipates,”
“expects,” “intends,” “targeted,” “estimates,”
“projects,” “plans,” “may,” “could,” “should,”
“would,” and similar expressions are intended to
identify forward-looking statements but are not the
exclusive means of identifying these statements.
These statements are based upon the current beliefs
and expectations of TSYS’ management and are
subject to significant risks and uncertainties. Actual
results may differ materially from those contemplated
by the forward-looking statements. A number of
important factors could cause actual results to differ
materially from those contemplated by our forward-
looking statements. Many of these factors are beyond
TSYS’ ability to control or predict. These factors
include, but are not limited to:
• movements in LIBOR are greater than expected
and draws on the revolving credit facility are
greater than expected;
• TSYS incurs expenses associated with the signing
of a significant client;
• internal growth rates for TSYS’ existing clients are
lower than anticipated 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 2012, 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;
• 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;
• 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,
2011 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.
31
Consolidated Balance Sheets
(in thousands, except per share data)
Assets
Current assets:
December 31,
2011
2010
Cash and cash equivalents (Note 5)
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net of allowance for doubtful accounts and billing adjustments
of $4.1 million and $4.5 million at 2011 and 2010, respectively . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax assets (Note 20)
Prepaid expenses and other current assets (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 316,337
—
394,795
434
237,646
11,090
77,848
721,813
248,541
12,872
72,431
650,181
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)
Deferred income tax assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
300,102
246,424
166,251
320,399
77,127
83,118
2,704
34,323
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,858,392 1,952,261
266,608
215,244
162,987
355,498
82,924
81,250
4,069
39,631
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)
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; 201,860 and 201,326
issued at 2011 and 2010, respectively; 189,031 and 194,528 outstanding at 2011
and 2010, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock (shares of 12,829 and 6,798 at 2011 and 2010, respectively) . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncontrolling interests in consolidated subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
33,004
26,095
181,251
14,363
125,863
380,576
39,104
32,889
24,489
60,325
27,414
36,068
39,557
13,191
111,040
227,270
194,703
42,547
30,573
53,363
537,383
548,456
— 146,000
20,186
125,948
(445)
(225,034)
20,133
119,722
(2,585)
(115,449)
1,380,634 1,219,303
1,301,289 1,241,124
16,681
1,321,009 1,257,805
19,720
Commitments and contingencies (Note 19)
Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,858,392 1,952,261
See accompanying Notes to Consolidated Financial Statements
32
Consolidated Statements of Income
(in thousands, except per share data)
Years Ended December 31,
2011
2010
2009
Total revenues (Notes 4 and 22)
Cost of services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,808,966 1,717,577 1,677,483
1,257,970 1,201,012 1,149,883
183,574
228,540
207,136
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonoperating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
322,456
(5,905)
309,429
(1,617)
344,026
(3,441)
Income from continuing operations before income taxes and equity in
income of equity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes (Note 20) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
316,551
102,597
307,812
106,088
340,585
121,850
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 from discontinued operations, net of tax . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to noncontrolling interests . . . . . . . . . . . . . . . . .
213,954
8,708
222,662
—
222,662
(2,103)
201,724
7,142
208,866
(3,245)
205,621
(11,674)
218,735
6,985
225,720
(6,544)
219,176
(3,963)
Net income attributable to TSYS common shareholders . . . . . . . . . . . . . . $ 220,559
193,947
215,213
Basic earnings per share (EPS)* attributable to TSYS common
shareholders (Note 26):
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.15
—
1.15
1.15
—
1.15
1.00
(0.02)
0.99
1.00
(0.02)
0.99
1.12
(0.03)
1.09
1.12
(0.03)
1.09
Amounts attributable to TSYS common shareholders:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 220,559
—
Loss from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
197,192
(3,245)
221,757
(6,544)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 220,559
193,947
215,213
* 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
33
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Years Ended December 31,
2011
2010
2009
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating activities:
$ 222,662
205,621
219,176
Net loss on foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in income of equity investments, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends received from equity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax expense (benefit) from share-based payment arrangements . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provisions for (recoveries of ) bad debt expenses and billing adjustments . . . . . . . . . . . .
Charges for transaction processing provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Gain) 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,091
(8,708)
6,835
16,477
523
169,165
160
799
1,552
4,750
1,491
(1,159)
—
(7,044)
23,099
(15,512)
4,492
13,646
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
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
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
436,319
389,160
423,137
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 sale of trade name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from disposition, net of expenses paid and cash disposed . . . . . . . . . . . . . . . . . .
Cash used in acquisitions and equity investments, net of cash acquired . . . . . . . . . . . . . . .
Purchase of private equity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends received from equity investments as return of capital . . . . . . . . . . . . . . . . . . . . . .
Subsidiary repurchase of noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions to contract acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(26,938)
(19,502)
(17,882)
4,500
—
(47,909)
(1,573)
—
(493)
(31,623)
(46,547)
(69,826)
(25,466)
—
4,265
(148,531)
—
68
—
(75,669)
(34,017)
(20,059)
(31,445)
—
1,979
(294)
—
—
—
(35,596)
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(141,420)
(361,706)
(119,432)
Cash flows from financing activities:
Purchase of noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchases of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal payments on long-term debt borrowings and capital lease obligations . . . . . . . .
Subsidiary dividends paid to noncontrolling shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax expense (benefit) from share-based payment arrangements . . . . . . . . . . . . . . . .
Proceeds from borrowings of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(174,050)
(121,271)
(53,949)
(28,892)
(433)
(523)
—
8,065
—
(46,228)
(55,087)
(11,741)
(9,031)
111
39,757
543
—
(328)
(55,208)
(18,869)
(235)
6
5,334
2
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(371,053)
(81,676)
(69,298)
Cash and cash equivalents:
Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . .
(2,304)
(938)
(4,470)
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(78,458)
394,795
(55,160)
449,955
229,937
220,018
Cash and cash equivalents at end of year
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 316,337
394,795
449,955
Supplemental cash flow information:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
3,088
2,191
3,368
Cash paid for income taxes, net of refunds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 82,084
122,173
104,004
Significant noncash transactions (Note 23)
See accompanying Notes to Consolidated Financial Statements
34
Consolidated Statements of Equity and Comprehensive Income
TSYS Shareholders
Redeemable
Noncontrolling
Interests
Common Stock Additional
Shares Dollars
Paid-In
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Retained
Earnings
Noncontrolling
Interests
Total
Equity
200,354 $ 20,036
126,889
(6,627)
(69,641)
920,292
—
— 215,213
9,901
3,963
$ 1,000,850
219,176
(in thousands, except per share data)
Balance as of December 31, 2008 . . . . . . . . . .
Comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive (loss) income (OCI),
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 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax shortfalls associated with share based
payment arrangements . . . . . . . . . . . . . . . . .
Balance as of December 31, 2010 . . . . . . . . . .
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 16) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock issued for nonvested
awards (Note 16) . . . . . . . . . . . . . . . . . . . . .
Common stock issued from treasury
shares for nonvested awards
(Note 16) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation (Note 16) . . . . .
Cash dividends declared ($0.31 per
share) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of treasury shares (Note 17) . . . .
Adjustment to fair value of non-controlling
interest in TMS . . . . . . . . . . . . . . . . . . . . . . .
Redemption of redeemable noncontrolling
interests . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subsidiary dividends paid to
noncontrolling interests . . . . . . . . . . . . . . .
Subsidiary repurchase of noncontrolling
interests . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefits associated with share based
payment arrangements . . . . . . . . . . . . . . .
$
—
—
—
—
—
—
—
—
—
—
—
145,659
9,122
—
—
—
—
—
—
—
(8,781)
—
(1,364)
—
—
—
—
—
—
—
—
29,414
(174,050)
—
—
—
—
—
—
—
—
506
—
—
—
—
—
—
—
50
—
—
—
—
—
—
(17)
(50)
16,225
—
—
—
—
(3,305)
12,145
155
—
—
—
—
—
—
—
—
19
—
—
—
(328)
—
—
—
—
—
(55,255)
—
—
—
17
—
—
—
—
—
—
(235)
—
12,162
155
12,317
231,493
2
—
16,225
(55,255)
(328)
(235)
(3,305)
200,860
20,086
139,742
5,673
(69,950) 1,080,250
13,646
1,189,447
—
—
—
—
—
466
—
—
—
—
—
— (34,659)
—
—
—
—
47
—
—
—
—
—
—
—
—
(186)
(47)
15,796
—
—
—
(924)
—
—
(7,529)
(729)
—
—
—
—
—
—
—
—
—
—
— 193,947
2,552
—
—
729
—
—
—
(46,228)
—
—
—
—
—
—
—
(54,894)
—
—
—
733
—
—
—
—
—
—
(250)
—
(34,659)
196,499
(6,796)
(729)
(7,525)
188,974
543
—
15,796
(54,894)
(46,228)
(250)
(924)
—
—
—
—
—
—
—
—
—
—
534
—
53
(3,450)
(53)
—
—
—
—
—
—
—
—
—
—
(172)
— 16,513
—
—
—
—
—
—
—
—
—
(6,828)
—
—
77
139
1,056
1,056
—
—
—
—
—
—
—
—
11,515
—
172
—
(121,272)
— (59,228)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
28
—
603
—
—
—
—
—
—
—
—
—
(433)
(598)
—
1,659
1,056
2,715
226,741
8,065
—
—
16,513
(59,228)
(121,272)
(6,828)
—
(433)
(493)
139
146,000
201,326
20,133
119,722
(2,585)
(115,449) 1,219,303
16,681
1,257,805
—
— 220,559
3,467
224,026
Balance as of December 31, 2011 . . . . . . . .
$
201,860 $20,186
125,948
(445)
(225,034) 1,380,634
19,720
$1,321,009
See accompanying Notes to Consolidated Financial Statements
35
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
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 cardholder systems to
financial institutions throughout the United States and
internationally. The Company’s North America
Services segment provides these services to clients in
the United States, Canada, Mexico and the
Caribbean. The Company’s International Services
segment provides services to clients in Europe, India,
Middle East, Africa, Asia Pacific and Brazil. The
Company’s Merchant Services segment provides
merchant services to merchant acquirers and
merchants in the United States.
On May 2, 2011, TSYS completed its acquisition of all
of the outstanding common stock of TermNet
Merchant Services, Inc. (TermNet), an Atlanta-based
merchant acquirer.
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 transaction
processing, merchant support and underwriting, and
value-added services, as well as Visa- and
MasterCard-branded prepaid cards for businesses of
any size. FNMS is included in the Merchant Services
segment. The effective date of the acquisition was
April 1, 2010. On January 4, 2011, TSYS announced it
had acquired effective January 1, 2011, the
remaining 49% interest in FNMS from FNBO. The
company has been rebranded as TSYS Merchant
Solutions (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
36
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 assumed arising from contingencies,
requiring the capitalization of in-process research and
development at fair value, and requiring 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
accuracy of the Company’s fair value estimates,
including assumptions regarding industry economic
factors and business strategies, and result in an
impairment or a new allocation of purchase price.
Given its history of acquisitions, TSYS may allocate
part of the purchase price of future acquisitions to
contingent consideration as required by 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.
PRINCIPLES OF CONSOLIDATION AND BASIS OF
PRESENTATION: The accompanying consolidated
financial statements of Total System Services, Inc.
include the accounts of TSYS and its majority owned
subsidiaries. All significant intercompany accounts
and transactions have been eliminated in
consolidation. In addition, the Company evaluates its
relationships with other entities to identify whether
they are variable interest entities as defined in
accordance with the provisions of Accounting
Standards Codification (ASC) 810, “Consolidation,”
and to assess whether it is the primary beneficiary of
such entities. If the determination is made that the
Company is the primary beneficiary, then that entity
is included in the consolidated financial statements in
accordance with 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 consolidation, changes in
regulatory requirements, a decline in the use of cards
as a payment mechanism, disruption of the
Company’s international operations, breach of the
Company’s security systems, a decline in the financial
stability of the Company’s clients and uncertain
economic conditions. Negative developments in
these or other risk factors could have a material
adverse effect on the Company’s financial position,
results of operations and cash flows.
The Company has prepared the accompanying
consolidated financial statements in conformity with
accounting principles generally accepted in the
United States of America. The preparation of the
consolidated financial statements requires
management of the Company to make a number of
estimates and assumptions relating to the reported
amounts of assets and liabilities at the date of the
consolidated financial statements and the reported
amounts of revenues and expenses during the
period. These estimates and assumptions are
developed based upon all information available.
Actual results could differ from estimated amounts.
CASH EQUIVALENTS:
of three months or less when purchased are
considered to be cash equivalents.
Investments with a maturity
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 adjustments of $4.1 million and
$4.5 million at December 31, 2011 and
December 31, 2010, respectively.
TSYS records an allowance for doubtful accounts
when it is probable that the accounts receivable
balance will not be collected. When estimating the
allowance for doubtful accounts, the Company takes
into consideration such factors as its day-to-day
knowledge of the financial position of specific clients,
the industry and size of its clients, the overall
composition of its accounts receivable aging, prior
history with specific customers of accounts receivable
write-offs and prior experience of allowances in
proportion to the overall receivable balance. This
analysis includes an ongoing and continuous
communication with its largest clients and those
clients with past due balances. A financial decline of
any one of the Company’s large clients could have a
material adverse effect on collectability of receivables
and thus the adequacy of the allowance for doubtful
accounts.
Increases in the allowance for doubtful accounts are
recorded as charges to bad debt expense and are
reflected in selling, general and administrative
expenses in the Company’s consolidated statements
of income. Write-offs of uncollectible accounts are
charged against the allowance for doubtful accounts.
TSYS records an allowance for billing adjustments for
actual and potential billing discrepancies. When
estimating the allowance for billing adjustments, the
Company considers its overall history of billing
adjustments, as well as its history with specific
clients and known disputes. Increases in the
allowance for billing adjustments are recorded as
a reduction of revenues in the Company’s
37
consolidated statements of income and actual
adjustments to 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
estimated useful lives of 3-15 years. The Company
evaluates impairment losses on long-lived assets
used in operations in accordance with the provisions
of ASC 205, “Presentation of Financial Statements.”
All ordinary repairs and maintenance costs are
expensed as incurred. Maintenance costs that extend
the asset life are capitalized and amortized over the
remaining estimated life of the asset.
LICENSED COMPUTER SOFTWARE: The
Company licenses software that is used in providing
services to clients. Licensed software is obtained
through perpetual licenses and site licenses and
through agreements based on processing capacity
(called “MIPS agreements”). Perpetual and site
licenses are amortized using the straight-line method
over their estimated useful lives which range from
three to ten years. Software licensed under MIPS
agreements is amortized using a units-of-production
basis over the estimated useful life of the software,
generally not to exceed ten years. At each balance
sheet date, the Company evaluates impairment
losses on long-lived assets used in operations in
accordance with ASC 205.
ACQUISITION TECHNOLOGY INTANGIBLES:
These identifiable intangible assets are software
technology assets resulting from acquisitions. These
assets are amortized using the straight-line method
over periods not exceeding their estimated useful
lives, which range from five to nine years. The
provisions of ASC 350, “Intangibles — Goodwill and
Other,” require that intangible 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 consolidated statements of income.
38
SOFTWARE DEVELOPMENT COSTS:
In
accordance with the provisions of ASC 985,
“Software,” software development costs are
capitalized once technological feasibility of the
software product has been established. Costs
incurred prior to establishing technological feasibility
are expensed as incurred. Technological feasibility is
established when the Company has completed a
detailed program design and has determined that a
product can be produced to meet its design
specifications, including functions, features and
technical performance requirements. Capitalization of
costs ceases when the product is generally available
to clients. At each balance sheet date, the Company
evaluates the unamortized capitalized costs of
software development as compared to the net
realizable value of the software product which is
determined by future undiscounted net cash flows.
The amount by which the unamortized software
development costs exceed the net realizable value is
written off in the period that such determination is
made. Software development costs are amortized
using the 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
qualifications are expensed as incurred. Capitalization
of costs ceases when the project is substantially
complete and ready for its intended use. Internal-use
software development costs are amortized using 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 obsolescence 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
accordance 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 for
client incentives is included as a reduction of
revenues in the Company’s consolidated statements
of income. The amortization of contract acquisition
costs associated with conversion activity is recorded
as cost of services in the Company’s consolidated
statements of income.
The Company evaluates the carrying value of contract
acquisition costs associated with each customer for
impairment on the basis of whether these costs are
fully recoverable from either contractual minimum
fees (contractual costs) or from expected
undiscounted net operating cash flows of the related
contract (cash incentives paid). The determination of
expected undiscounted net operating cash flows
requires management to make estimates. These costs
may become impaired with the loss of a contract, the
financial decline of a client, termination of conversion
efforts after a contract is signed, diminished
prospects for current clients or if the Company’s
actual results differ from its estimates of future cash
flows. The amount of the impairment is written off in
the period that such a determination is made.
EQUITY INVESTMENTS: TSYS’ 49% investment in
Total System Services de México, S.A. de C.V. (TSYS
de México), an electronic payment processing
support operation located in Toluca, Mexico, is
accounted for using the equity method of
accounting, as is TSYS’ 44.56% investment in China
UnionPay Data Co., Ltd. (CUP Data) headquartered in
Shanghai, China. TSYS’ equity investments are
recorded initially at cost and subsequently adjusted
for equity in earnings, cash contributions and
distributions, and foreign currency translation
adjustments.
GOODWILL: Goodwill results from the excess of cost
over the fair value of net assets of businesses acquired.
Goodwill and intangible assets with indefinite useful
lives are tested for impairment at least annually in
accordance with the provisions of ASC 350. ASC 350
also 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.
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 method goodwill shall not be
reviewed for impairment in accordance 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 $50.6 million at December 31,
2011.
At December 31, 2011, the Company had goodwill in
the amount of $355.5 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,
2011, 2010 and 2009, respectively.
OTHER INTANGIBLE ASSETS:
Identifiable
intangible assets relate primarily to customer
relationships, covenants-not-to-compete, trade
names and trade associations resulting from
acquisitions. These identifiable intangible assets are
amortized using the straight-line method over
periods not exceeding the estimated useful lives,
which range from three to ten years. 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 current liabilities approximate their fair value
due to the short-term maturities of these assets and
liabilities. The fair value of the Company’s long-term
debt and obligations under capital leases is not
significantly different from its carrying value.
Investments in equity investments are accounted for
using the equity method of accounting and pertain to
39
privately held companies for which fair value is not
readily available. The Company believes the fair
values of its investments in equity investments
exceed their respective carrying values.
In
IMPAIRMENT OF LONG-LIVED ASSETS:
accordance with ASC 205, the Company reviews
long-lived assets, such as property and equipment
and intangibles subject to amortization, including
contract acquisition costs and certain computer
software, for impairment whenever events or changes
in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a
comparison of the carrying amount of an asset to
estimated undiscounted future cash flows expected
to be generated by the asset. If upon a triggering
event the Company determines that the carrying
amount of an asset exceeds its estimated
undiscounted future cash flows, an impairment
charge is recognized by the amount by which the
carrying amount of the asset exceeds the fair value of
the asset. Assets to be disposed of would be
separately presented in the balance sheet and
reported at the lower of the carrying amount or fair
value less costs to sell, and would no longer be
depreciated. The assets and liabilities of a disposed
group classified as held for sale would be presented
separately in the appropriate asset and liability
sections of the balance sheet.
TRANSACTION PROCESSING PROVISIONS: The
Company has recorded an accrual for contract
contingencies (performance penalties) and
processing errors. A significant number of the
Company’s contracts with large clients contain
service level agreements which can result in TSYS
incurring performance penalties if contractually
required service levels are not met. When providing
for these accruals, the Company takes into
consideration such factors as the prior history of
performance penalties and processing errors
incurred, actual contractual penalties inherent in the
Company’s contracts, progress towards milestones
and known processing errors not covered by
insurance.
These accruals are included in other current liabilities
in the accompanying consolidated balance sheets.
Increases and decreases in transaction processing
provisions are charged to cost of services in the
Company’s consolidated statements of income, and
payments or credits for performance penalties and
processing errors are charged against the accrual.
40
REDEEMABLE NONCONTROLLING INTEREST:
In connection with the 2010 acquisition of TMS, the
Company was a party to call and put arrangements
with respect to the membership units that
represented the remaining noncontrolling interest of
FNMS Holding. The call arrangement was exercisable
by TSYS and the put arrangement was exercisable by
FNBO. The put arrangement was 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 was recorded on the balance sheet and
was 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, could have been 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 Company bought the remaining 49% interest for
$174.1 million, and paid net cash of $169.6 million
($174.1 million less $4.5 million for a trade name
sold). With the purchase, the Company eliminated
the redeemable noncontrolling interest of $144.6
million and adjusted the remaining balance through
additional paid-in capital and deferred taxes.
NONCONTROLLING INTEREST:
In December
2007, 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 noncontrolling interests as a component of
consolidated shareholders’ 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 proportional 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
amounts. The loss reserve was established using
historical loss rates, applied to recent bankcard
processing volume. At December 31, 2011, the
Company had a merchant loss reserve in the amount
of $397,000.
FOREIGN CURRENCY TRANSLATION: The
Company maintains several different foreign
operations whose functional currency is their local
currency. Foreign currency financial statements of the
Company’s Mexican and Chinese equity investments,
the Company’s wholly owned subsidiaries and the
Company’s majority owned subsidiaries, as well as
the Company’s division and branches in the United
Kingdom and China, are translated into U.S. dollars at
current exchange rates, except for revenues, costs
and expenses, and net income which are translated at
the average exchange rates for each reporting
period. Net gains or losses resulting from the
currency translation of assets and liabilities of the
Company’s foreign operations, net of tax when
applicable, are accumulated in a separate section of
shareholders’ equity titled accumulated other
comprehensive income (loss). Gains and losses on
transactions denominated in currencies other than
the functional currencies are included in determining
net income for the period in which exchange rates
change.
COMPREHENSIVE INCOME: The provisions of
ASC 220, “Comprehensive Income,” require
companies to display, with the same prominence as
other financial statements, the components 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: ASC 815, “Derivatives and Hedging”
requires that all derivative instruments be recorded
on the balance sheet at their respective fair values.
The Company did not have any outstanding
derivative instruments or hedging transactions at
December 31, 2011.
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, transactions and authorizations
processed, statements mailed, cards embossed and
mailed and other processing services for cardholder
accounts on file. Most of these contracts have
prescribed annual revenue minimums. 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
41
from processing all payment forms including credit,
debit, electronic benefits transfer and check
truncation for merchants of all sizes across a wide
array of retail market segments. The products and
services offered include authorization and capture of
electronic transactions, clearing and settlement of
electronic transactions, information reporting services
related to electronic transactions, merchant billing
services, and point-of-sale terminal 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 transfer of
ownership and shipment of product.
The Company recognizes revenues in accordance
with the provisions 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
arrangement exists; (2) delivery has occurred or
services have been performed; (3) the seller’s price to
the buyer is fixed or determinable; and
(4) collectability is reasonably assured.
The Company evaluates its contractual arrangements
that provide services to clients through a bundled
sales arrangement in accordance with the provisions
of 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 standalone value to the
customer and delivery of any undelivered items is
probable and substantially within the Company’s
control. Evidence 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.
42
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, “Compensation — 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
transactions in which an entity incurs liabilities in
exchange for goods or services that are based on the
fair value of the entity’s equity instruments or that
may be settled by the issuance of those equity
instruments. 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 compensation granted in the form of stock
options based on the grant-date fair value of those
awards calculated under the provisions of ASC 718,
for pro forma disclosures. Share-based compensation
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 January 1, 2006 using the
modified-prospective-transition method.
ASC 718 requires companies to estimate forfeitures
when recognizing compensation cost. The estimate
of forfeitures will be adjusted by the Company as
actual forfeitures differ from its estimates, resulting in
compensation cost only for those awards that actually
vest. The effect of the change in estimated forfeitures
is recognized as compensation costs in the period
the change in estimate occurred. In estimating its
forfeiture rate, the Company stratified its data based
upon historical experience to determine separate
forfeiture rates for the different award grants. The
Company currently estimates a forfeiture rate for
existing stock option grants to TSYS non-executive
employees, and a forfeiture rate for other TSYS share-
based awards. Currently, TSYS estimates a forfeiture
rate in the range of 0% to 10.0%.
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 recognized as compensation
expense over the vesting period of the awards. For
nonvested award grants that have pro rata vesting,
the Company recognizes compensation expense
using the straight-line method over the vesting
period of the award.
LEASES: The Company is obligated under
noncancelable leases for computer equipment and
facilities. As these leases expire, they will be
evaluated and renewed or replaced by similar leases
based on need. A lease is an agreement conveying
the right to use property, plant, or equipment (land
and/or depreciable assets) usually for a stated period
of time. For purposes of applying the accounting and
reporting standards, leases are classified from the
standpoint of the lessee as capital or operating
leases. 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% 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% 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.
ADVERTISING: Advertising costs, consisting mainly
of advertising in trade publications, are expensed as
incurred or the first time the advertising takes place.
Advertising expense for 2011, 2010 and 2009 was
$813,000, $690,000 and $327,000, respectively.
Income taxes reflected in TSYS’
INCOME TAXES:
consolidated financial statements are computed
based on the taxable income of TSYS and its
affiliated subsidiaries. A consolidated U.S. federal
income tax return is filed for TSYS and its majority
owned U.S. subsidiaries through the year ended
December 31, 2011. 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
attributable to differences between the financial
statement carrying amounts of existing assets and
liabilities and their respective tax bases and
operating loss and tax credit carry forwards. Deferred
tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the
years in which those temporary differences are
expected to be recovered or settled. Reserves
against the carrying value of a deferred tax asset are
established when necessary to reflect the decreased
likelihood of realization of a deferred asset in the
future. The effect on deferred income tax assets and
liabilities of a change in tax rates is recognized in
income in the period that includes the enactment
date.
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.
Income tax provisions require the use of
management judgments, which are subject to
challenge by various taxing authorities. Contingency
reserves are periodically established where the
amount of the contingency can be reasonably
determined and is likely to occur. Reductions in
contingency reserves are recognized when tax
disputes are settled or examination periods lapse.
Certain of the Company’s operating leases are for
office space. The Company will make various
alterations (leasehold improvements) to the office
space and capitalize these costs as part of property
and equipment. Leasehold improvements are
amortized on a straight-line basis over the useful life
of the improvement or the term of the lease,
whichever is shorter.
Significant estimates used in accounting for income
taxes relate to the determination of taxable income,
the determination of temporary differences between
book and tax bases, as well as estimates on the
realizability of tax credits and net operating losses.
TSYS recognizes potential interest and penalties
related to the underpayment of income taxes as
income tax expense in the consolidated statements
of income.
43
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 neither 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.
The following table presents the summarized results
of discontinued operations for the years ended
December 31, 2010 and 2009:
(in thousands)
Total revenues . . . . . . . . . . . . . . . $ 7,430 181,060
2009
2010
Operating loss . . . . . . . . . . . . . . . $(1,840)
(4,890)
Income taxes . . . . . . . . . . . . . . . . $ (621)
(1,626)
Loss from discontinued
operations, net of tax . . . . . . . $(1,243)
Loss on disposition, net of
tax . . . . . . . . . . . . . . . . . . . . . . . $(2,002)
(3,219)
(3,325)
The Consolidated Statements of Cash Flows include
TPOS and TDM through the respective dates of
disposition.
TSYS adopted the authoritative guidance under
ASC 740, “Income Taxes,” on January 1, 2007. This
interpretation prescribed a recognition threshold and
measurement attribute for the financial statement
recognition, measurement and disclosure of a tax
position taken or expected to be taken in a tax
return.
In June 2008, the FASB
EARNINGS PER SHARE:
issued authoritative guidance under ASC 260,
“Earnings Per Share.” The guidance 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 computing EPS when an entity’s capital
structure includes two or more classes of common
stock or common stock and participating securities. It
determines EPS based on dividends declared on
common stock and participating securities and
participation rights of participating securities in any
undistributed earnings. 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 that would
occur if stock options or other contracts to issue
common stock were exercised. Diluted EPS is
calculated by dividing net income by weighted
average common and common equivalent shares
outstanding. Common equivalent shares are
calculated using the treasury stock method.
RECLASSIFICATIONS: Certain reclassifications
have been made to the 2010 and 2009 financial
statements to conform to the presentation adopted
in 2011.
NOTE 2 Discontinued Operations
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
44
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.
Goodwill and certain intangible assets not subject to
amortization are assessed annually for impairment in
the second quarter of each year using fair value
measurement techniques. Specifically, goodwill
impairment is determined using a two-step test. The
first step of the goodwill impairment test is used to
identify potential impairment by comparing the fair
value of a reporting unit (RU) with its book value,
including goodwill. If the fair value of the RU exceeds
its book value, goodwill is considered not impaired
and the second step of the impairment test is
unnecessary. If the book value of the RU exceeds its
fair value, the second step of the goodwill
impairment test is performed to measure the amount
of impairment loss, if any. The second step of the
goodwill impairment test compares the implied fair
value of the RU’s goodwill with the book value of that
goodwill. If the book value of the RU’s goodwill
exceeds the implied fair value of that goodwill, an
impairment loss is recognized in an amount equal to
that excess. The fair value of the RU is allocated to all
of the assets and liabilities of that unit as if the RU
had been acquired in a business combination and the
fair value of the RU was the purchase price paid to
acquire the RU.
The estimate of fair value of the Company’s RUs is
determined using various valuation techniques,
including using an equally weighted combination of
the market approach and the income approach. The
market approach, which contains Level 2 inputs,
utilizes readily available market valuation multiples to
estimate fair value. The income approach is a
valuation technique that utilizes the discounted cash
flow (DCF) method, which includes Level 3 inputs.
Under the DCF method, the fair value of the RU
reflects the present value of the projected earnings
that will be generated by each RU after taking into
account the revenues and expenses associated with
the asset, the relative risk that the cash flows will
occur, the contribution of other assets, and an
appropriate discount rate to reflect the value of the
invested capital. Cash flows are estimated for future
periods based upon historical data and projections
by management.
At December 31, 2011, the Company had recorded
goodwill in the amount of $355.5 million. The
Company performed its annual impairment tests of
its unamortized goodwill balance as of May 31,
2011, and these tests did not indicate any
impairment. The fair value of the RUs 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 contracts that are similar to its contracts with
unrelated third party customers. The Company
believes the terms and conditions of transactions
between the Company and these related parties are
comparable to those which could have been
obtained in transactions with unaffiliated parties.
Through its related party transactions, TSYS
generates accounts receivable and liability accounts
with TSYS de México and CUP Data. At
December 31, 2011, the Company had an accounts
receivable balance of $9,700 associated with related
parties. At December 31, 2011, the Company had an
accounts payable balance of $32,400 associated with
related parties.
45
The table below details revenues derived from
affiliated companies for the years ended
December 31, 2011, 2010 and 2009:
(in thousands)
Total revenues:
2011
2010
2009
CUP Data . . . . . . . . . . . . . . . . . $136
62
TSYS de México . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . $198
130
51
181
75
51
126
The Company and TSYS de México are parties to an
agreement where TSYS de México provides
processing support to the Company. Processing
support fees paid to TSYS de México were $168,000,
$149,000 and $147,000 for the years ended
December 31, 2011, 2010 and 2009, respectively.
NOTE 5 Cash and Cash Equivalents
Cash and cash equivalent balances at December 31
are summarized as follows:
(in thousands)
Cash and cash equivalents in
2011
2010
domestic accounts . . . . . . . . $263,853 347,734
Cash and cash equivalents in
foreign accounts . . . . . . . . . .
47,061
. . . . . . . . . . . . . . . . . . . . . $316,337 394,795
52,484
Total
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, 2011 and 2010, the Company had
$22.0 million and $29.9 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
convertible 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.
NOTE 6 Prepaid Expenses and Other
Current Assets
Significant components of prepaid expenses and
other current assets at December 31 are summarized
as follows:
2011
(in thousands)
Prepaid expenses . . . . . . . . . . . . . $20,917 15,421
Supplies inventory . . . . . . . . . . . .
7,138
126 12,977
Income taxes receivable . . . . . . .
41,335 42,312
Other . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . $72,431 77,848
Total
10,053
2010
46
NOTE 7 Property and Equipment, net
Property and equipment balances at December 31
are as follows:
(in thousands)
2011
2010
Computer and other
Buildings and improvements . . . . .
Furniture and other equipment . . .
Land . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . .
equipment . . . . . . . . . . . . . . . . . . $248,592 230,773
230,797 227,881
127,425 125,627
16,729
16,461
623,738 617,471
16,794
130
Total property and equipment . . .
Less accumulated depreciation
and amortization . . . . . . . . . . . . .
Property and equipment, net
357,130 317,369
. . . . $266,608 300,102
Depreciation and amortization expense related to
property and equipment was $49.3 million,
$50.1 million and $50.6 million for the years ended
December 31, 2011, 2010 and 2009, respectively.
Depreciation expense includes amounts for
equipment acquired under capital lease. The
decrease in other property and equipment assets for
2011 as compared to 2010 is primarily due to the
Company’s reclassification of assets from
construction in progress to other noncurrent assets.
NOTE 8 Computer Software, net
Computer software at December 31 is summarized as
follows:
(in thousands)
Licensed computer software . . $423,100 403,115
283,452 265,029
Software development costs . .
Acquisition technology
2010
2011
intangibles . . . . . . . . . . . . . . .
Total computer software . . . . . .
Less accumulated amortization:
Licensed computer
software . . . . . . . . . . . . . . .
Software development
costs . . . . . . . . . . . . . . . . . .
Acquisition technology
intangibles . . . . . . . . . . . . .
76,055
75,891
782,607 744,035
309,571 275,145
208,781 183,853
49,011
38,613
Total accumulated
amortization . . . . . . . . . . . . . .
567,363 497,611
Computer software, net . . . . . . $215,244 246,424
TSYS acquired 51% ownership in TMS in April 2010.
TSYS acquired the remaining 49% interest in TMS in
January 2011. The Company allocated approximately
$20.3 million to acquisition technology intangibles
during 2010. Refer to Note 24 for more information
on TMS.
Amortization expense related to licensed computer
software costs was $37.1 million, $33.4 million and
$31.4 million for the years ended December 31,
2011, 2010 and 2009, respectively. Amortization
expense includes amounts for computer software
acquired under capital lease. Amortization of
software development costs was $24.4 million,
$23.1 million and $20.0 million for the years ended
December 31, 2011, 2010 and 2009, respectively.
Amortization expense related to acquisition
technology intangibles was $10.3 million for 2011,
$9.9 million for 2010 and $6.9 million for 2009.
During the year ended December 31, 2011, the
Company recognized an impairment loss of $960,000
related to the Japan Retail Gift program.
The weighted average useful life for each component
of computer software, and in total, at December 31,
2011, is as follows:
Weighted
Average
Amortization
Period (Yrs)
Licensed computer software . . . . . . . . . . . .
Software development costs . . . . . . . . . . .
Acquisition technology intangibles . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.6
6.0
6.9
5.9
Estimated future amortization expense of licensed
computer software, software development costs and
acquisition technology intangibles as of
December 31, 2011 for the next five years is:
(in thousands)
Licensed
Computer
Software
Software
Development
Costs
Acquisition
Technology
Intangibles
2012 . . . . . . . . . . . . $38,573
30,891
2013 . . . . . . . . . . . .
22,125
2014 . . . . . . . . . . . .
15,287
2015 . . . . . . . . . . . .
6,349
2016 . . . . . . . . . . . .
38,456
14,968
11,135
7,302
1,892
9,319
7,665
5,873
2,828
1,359
NOTE 9 Contract Acquisition Costs, net
Significant components of contract acquisition costs
at December 31 are summarized as follows:
(in thousands)
Conversion costs, net . . . . . . . . . . .
Payments for processing rights,
net . . . . . . . . . . . . . . . . . . . . . . . . .
2011
2010
$ 88,765
80,521
74,222
85,730
Total . . . . . . . . . . . . . . . . . . . . . . . . .
$162,987
166,251
Amortization related to payments for processing
rights, which is recorded as a reduction of revenues,
was $15.9 million, $17.7 million and $25.5 million for
2011, 2010 and 2009, respectively.
Amortization expense related to conversion costs was
$18.8 million, $17.5 million and $17.8 million for
2011, 2010 and 2009, respectively.
During the year ended December 31, 2011, the
Company recognized an impairment loss related to
payments for processing rights of $750,000 and an
impairment loss related to conversion costs of $49,000.
The weighted average useful life for each component
of contract acquisition costs, and in total, at
December 31, 2011 is as follows:
Weighted
Average
Amortization
Period (Yrs)
Payments for processing rights . . . . . . . . .
Conversion costs . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9.6
7.4
8.6
Estimated future amortization expense on payments
for processing rights and conversion costs as of
December 31, 2011 for the next five years is:
(in thousands)
2012 . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . .
Payments for
Processing Rights
Conversion
Costs
$14,742
14,355
12,289
8,429
8,608
17,825
18,115
15,906
13,838
11,149
NOTE 10 Goodwill
On May 2, 2011, TSYS completed its acquisition of all
of the outstanding common stock of TermNet, an
Atlanta-based merchant acquirer, for $42 million in
cash. The Company has allocated approximately
$28.9 million to goodwill. Refer to Note 24 for more
information on TermNet.
In May 2011, TSYS made a payment of $6.0 million of
contingent merger consideration in connection with
the purchase of Infonox on the Web (Infonox), which
was accounted for under Statement of Financial
Accounting Standard No. 141 (SFAS No. 141),
“Business Combinations.” The payment of
the
contingent merger
consideration by TSYS was
recorded as goodwill.
On April 1, 2010, TSYS acquired 51% ownership of
TMS for approximately $150.5 million. TSYS acquired
the remaining 49% interest in TMS on January 1, 2011
for approximately $174.1 million. The Company has
allocated approximately $155.5 million to goodwill.
Refer to Note 24 for more information on TMS.
47
With the sale of certain assets and liabilities of TPOS
in 2010, the Company 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.
The gross amount and accumulated impairment loss of goodwill at December 31, 2011 and 2010 is as follows:
Gross amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated impairment losses . . . . . . . . . . . . . . . . . . . .
Goodwill, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$70,614
—
$70,614
33,369
—
33,369
253,740
(2,225)
251,515
$357,723
(2,225)
$355,498
North America
Services
International
Services
Merchant
Services
Consolidated
2011
Gross amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated impairment losses . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill, net
2010
North America
Services
$70,614
—
$70,614
International
Services
33,188
—
33,188
Merchant
Services
218,822
(2,225)
216,597
Consolidated
$322,624
(2,225)
$320,399
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, 2011 and 2010 are as follows:
(in thousands)
Balance as of December 31, 2009 . . . . . . . . . . . . . . . . . . .
TMS purchase price allocation . . . . . . . . . . . . . . . . . . . . . .
Currency translation adjustments . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2010 . . . . . . . . . . . . . . . . . . .
TermNet purchase price allocation . . . . . . . . . . . . . . . .
Infonox additional purchase consideration . . . . . . . . . .
Currency translation adjustments . . . . . . . . . . . . . . . . .
Balance as of December 31, 2011 . . . . . . . . . . . . . . . . .
North America
Services
International
Services
Merchant
Services
Consolidated
$ 70,614
—
—
70,614
—
—
—
$70,614
34,181
—
(993)
33,188
—
—
181
33,369
61,101
155,496
—
216,597
28,918
6,000
—
251,515
$ 165,896
155,496
(993)
320,399
28,918
6,000
181
$355,498
NOTE 11 Equity Investments
The Company has an equity investment with
Promocíón y Operación, 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.
The Company has an equity investment with China
UnionPay Co., Ltd.(CUP) 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 provides transaction
processing, disaster recovery and other services for
banks and bankcard issuers in China.
TSYS’ equity investments are recorded initially at cost
and subsequently adjusted for equity in earnings,
48
cash contributions and distributions, and foreign
currency translation adjustments. TSYS believes the
carrying value approximates the underlying assets of
the equity investments.
TSYS’ equity in income of equity investments (net of
tax) for the years ended December 31, 2011, 2010
and 2009 was $8.7 million, $7.1 million and
$7.0 million, respectively.
A summary of TSYS’ equity investments at
December 31 is as follows:
(in thousands)
CUP Data . . . . . . . . . . . . . . . . . . . . . . . . .
TSYS de México . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011
$76,110
6,814
$82,924
2010
70,479
6,648
77,127
NOTE 12 Other Intangible Assets, net
On May 2, 2011, TSYS completed its acquisition of all of the
outstanding common stock of TermNet, an Atlanta-based
merchant acquirer, for $42 million in cash. The Company
allocated approximately $11.7 million to other intangible
assets as part of the purchase price allocation to customer
relationships, channel relationships and
covenant-not-to-compete. Refer to Note 24 for more
information on TermNet.
Estimated future amortization expense on other intangible
assets as of December 31, 2011 for the next five years is:
(in thousands)
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$14,145
12,848
12,575
11,896
11,766
In April 2010, TSYS acquired 51% ownership in TMS. TSYS
acquired the remaining 49% interest in January 2011. The
Company allocated approximately $80.5 million to other
intangible 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.
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 purchase of distributed systems software.
Significant components of other intangible assets at
December 31 are summarized as follows:
Gross
(in thousands)
Customer relationships . . . . . $106,312
10,000
Trade association . . . . . . . . . .
2,024
Trade name . . . . . . . . . . . . . . .
1,600
Channel relationships . . . . . . .
1,140
Covenants-not-to-compete . .
Total . . . . . . . . . . . . . . . . . . . . . $121,076
Gross
(in thousands)
Customer relationships . . . . . . . $ 93,727
10,000
Trade association . . . . . . . . . . . .
6,031
Trade name . . . . . . . . . . . . . . . .
Covenants-not-to-compete . . . .
1,000
. . . . . . . . . . . . . . . . . . . . . . $110,758
Total
2011
Accumulated
Amortization
(34,899)
(1,750)
(2,024)
(107)
(1,046)
(39,826)
Net
$71,413
8,250
—
1,493
94
$81,250
2010
Accumulated
Amortization
(22,859)
(750)
(3,031)
(1,000)
(27,640)
Net
$70,868
9,250
3,000
—
$83,118
Amortization related to other intangible assets, which is
recorded in selling, general and administrative expenses, was
$13.2 million, $11.2 million and $3.4 million for 2011, 2010
and 2009, respectively.
The weighted average useful life for each component of other
intangible assets, and in total, at December 31, 2011 is as
follows:
Weighted
Average
Amortization
Period (Yrs)
Channel relationships . . . . . . . . . . . . . . . . . . . . . . . .
Trade association . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . . . . . . . . . . . . . . .
Trade name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Covenant-not-to-compete . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
10.0
10.0
7.9
2.8
2.7
8.0
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 applicable margin of 0.60%. The
applicable margin could vary within a range from 0.27% to
0.725% depending on changes in the Company’s corporate
credit rating 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
2011, 2010 or 2009.
The proceeds will be used for working capital and other
corporate purposes, including financing the repurchase by
TSYS of its capital stock.
On October 30, 2008, the Company’s International Services
segment obtained a credit agreement from a third-party to
borrow up to approximately ¥2.0 billion, or $21 million, in a
49
Yen-denominated 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. On
December 30, 2011, the Company modified its loan
to extend the maturity date to November 5, 2014.
In connection with the formation of TSYS Managed
Services, TSYS and Merchants, a customer-contact
company and a wholly owned subsidiary of
Dimension Data, agreed to provide long-term
financing to TSYS Managed Services. In November
2011, the Company repaid the TSYS Managed
Services loan of £504,000, or approximately
$788,000.
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 2011, 2010 or 2009.
Long-term debt at December 31 consists of:
(in thousands)
LIBOR + 0.60%, unsecured
2011
2010
term loan, due
December 21, 2012, with
principal to be paid at
maturity . . . . . . . . . . . . . . . . . $168,000 168,000
Required annual principal payments on long-term
debt for the five years subsequent to December 31,
2011 are summarized as follows:
(in thousands)
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $181,251
13,452
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25,652
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital lease obligations at December 31 consist of:
(in thousands)
2010
Capital lease obligations . . . . . . . $38,852 43,764
14,363 13,191
Less current portion . . . . . . . . . . .
Noncurrent portion of capital
2011
leases . . . . . . . . . . . . . . . . . . . . . $24,489 30,573
The future minimum lease payments under capital
leases at December 31, 2011 are summarized as
follows:
(in thousands)
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,861
12,393
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,910
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,607
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
302
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40,073
Total minimum lease payments . . . . . . . . . .
1,221
. . . . . . .
Less amount representing interest
$38,852
1.50% note payable, due
December 31, 2013, with
monthly interest and
principal payments . . . . . . . .
LIBOR + 0.80%, unsecured
term loan, due November 5,
2014, 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 . . . . . . . . . . . . . . . . .
Total debt . . . . . . . . . . . . . . .
Less current portion . . . . . . .
Noncurrent portion of long-
NOTE 14 Other Current Liabilities
26,703
39,758
Significant components of other current liabilities at
December 31 are summarized as follows:
2011
(in thousands)
Accrued expenses . . . . . . . . . . $ 40,141
29,707
Deferred revenues . . . . . . . . . .
18,913
Dividends payable . . . . . . . . . .
5,731
Accrued income taxes . . . . . . .
Transaction processing
2010
29,999
34,184
13,634
2,920
provisions . . . . . . . . . . . . . . .
Client postage deposits . . . . .
Other . . . . . . . . . . . . . . . . . . . . .
Total
5,221
3,708
21,374
. . . . . . . . . . . . . . . . . . . . . $125,863 111,040
5,382
3,562
22,427
25,652
23,937
—
1,790
—
775
220,355 234,260
181,251
39,557
term debt . . . . . . . . . . . . . $ 39,104 194,703
50
NOTE 15 Equity
DIVIDENDS: Dividends on common stock of $53.9 million were paid in 2011, compared to $55.1 million and
$55.2 million in 2010 and 2009, respectively.
EQUITY COMPENSATION PLANS: The following table summarizes TSYS’ equity compensation plans by
category; as of December 31, 2011:
(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))
6,082(1)
—
6,082
$22.04
—
$22.04
21,515(2)
—
21,515
(1)
(2)
Includes 1.4 million performance share awards, which will only be issued if certain performance goals are met. The
weighted-average exercise price in column (b) does not take these awards into account. Does not include an aggregate of
1.2 million shares of nonvested awards which will vest over the remaining years through 2013.
Includes 21,514,634 shares available for future grants under the Total System Services, Inc. 2002 Long-Term Incentive Plan,
2007 Omnibus Plan and 2008 Omnibus Plan, which could be in the form of options, nonvested awards and performance
shares.
CHANGES IN TSYS’ OWNERSHIP INTEREST IN
SUBSIDIARIES: TSYS’ subsidiary, GP Net
repurchased 400 common shares on December 29,
2011 from its noncontrolling interest. As a result of
the transaction, TSYS’ ownership increased to 54.08%
from 53.00%. The following table presents the effect
on TSYS’ shareholders’ equity from GP Net’s
acquisition of treasury shares:
(in thousands)
Year Ended
December 31, 2011
Increase in other comprehensive
income (OCI) . . . . . . . . . . . . . .
Increase in additional paid in
$ 28
capital
. . . . . . . . . . . . . . . . . . .
77
Effect from change in
noncontrolling interests . . . . .
$105
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 participants upon meeting the
retirement eligibility requirements of age and service.
Stock options granted prior to 2006 generally
become exercisable at the end of a two to three-year
period and expire ten years from the date of grant.
Vesting for stock options granted prior to 2006
accelerates upon retirement for plan participants who
have reached age 50 and who also have no less than
fifteen years of service at the date of their election to
retire. Following adoption of ASC 718, share-based
compensation expense is recognized in income over
the remaining nominal vesting period with
consideration for retirement eligibility.
The performance-based stock options awarded to
TSYS executives effective April 30, 2010 become
51
exercisable only upon satisfaction of certain
performance conditions. Share-based compensation
expense is recognized in income based upon the
Company’s estimate of the probability of achieving
the specified 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, development and financial success.
Awards under these plans are designed to motivate
employees and directors to devote their best efforts
to the business of TSYS. Awards will also help TSYS
attract and retain the services of employees and
directors who are in a position to make significant
contributions to TSYS’ success.
The plans are administered by the Compensation
Committee of the Company’s Board of Directors and
enable the Company to grant nonqualified and
incentive stock options, stock appreciation rights,
restricted stock and restricted stock units,
performance units or performance shares, cash-based
awards, and other stock-based awards.
All stock options must have a maximum life of no
more than ten years from the date of grant. The
exercise price will not be less than 100% of the fair
market value of TSYS’ common stock at the time of
grant. Any shares related to awards which terminate
by expiration, forfeiture, cancellation, or otherwise
without the issuance of such shares, are settled in
cash in lieu of shares, or are exchanged with the
Committee’s permission, prior to the issuance of
shares, for awards not involving shares, shall be
available again for grant under the various plans. The
aggregate number of shares of TSYS stock which may
be granted to participants pursuant to awards
granted under the various plans may not exceed the
following: Total System Services, Inc. 2008 Omnibus
Plan — 17 million shares; Total System Services, Inc.
2007 Omnibus Plan — 5 million shares; Total System
Services, Inc. 2002 Long-Term Incentive Plan
— 9.4 million shares; and Total System Services, Inc.
2000 Long-Term Incentive Plan — 2.4 million 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
compensation as costs capitalized as software
development and contract acquisition costs as these
awards are typically granted to individuals not
involved in capitalizable activities. For the year ended
December 31, 2011, share-based compensation was
$16.5 million compared to $15.8 million and
$16.1 million for the same periods in 2010 and 2009,
respectively.
Nonvested Awards: The Company granted shares
of TSYS common stock to certain key employees and
non-management members of its Board of Directors.
The grants to certain key employees were issued
under nonvested stock bonus awards for services to
be provided in the future by such officers, and
employees. Beginning in 2011, the grants to the
Board of Directors were fully vested on the date of
grant. The following table summarizes the number of
shares granted each year:
2011
2010
2009
Number of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
513,920
Market value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3.6 million $3.1 million $6.8 million
197,186
206,040
52
A summary of the status of TSYS’ nonvested shares as of December 31, 2011, 2010 and 2009, respectively, and
the changes during the periods are presented below:
Nonvested shares
(in thousands, except per share data)
Outstanding at beginning of year
. . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited/canceled . . . . . . . . . . . . . . . . . . . . . . . . .
2011
Weighted
Average
Grant-Date
Fair Value
$16.91
17.67
17.60
15.71
Shares
821
206
(376)
(33)
2010
2009
Weighted
Average
Grant-Date
Fair Value
$18.60
15.55
20.63
17.32
Shares
1,084
197
(416)
(44)
Weighted
Average
Grant-Date
Fair Value
$23.46
13.28
23.77
20.34
Shares
1,014
514
(414)
(30)
Outstanding at end of year . . . . . . . . . . . . . . . . . . .
618
$16.80
821
$16.91
1,084
$18.60
As of December 31, 2011, there was approximately $5.8 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 1.6 years.
In March 2011, TSYS authorized a total grant of 263,292 performance shares to certain key executives with a
performance based vesting schedule (2011 performance shares). These 2011 performance shares have a 2011-
2013 performance period for which the Compensation Committee established two performance goals:
compound growth in revenues before reimbursables and income from continuing. The Compensation Committee
will certify the attainment level of such goals following the end of 2013, 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.
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, 2011, there was approximately $4.2 million of total unrecognized compensation cost related
to the 2010 and 2011 performance shares compensation arrangement. That cost is expected to be recognized
until the end of 2013.
During 2008, 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.
A summary of the awards authorized in each year is below:
Year of Initial Award
Total Number of
Shares Awarded
Potential Number of
Performance-Based
Shares to be Vested
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
263,292
279,831
182,816
263,292
279,831
(2014)
(2013)
73,125 (2012-2014)
53
A summary of the status of TSYS’ performance-based nonvested shares as of December 31, 2011, 2010 and
2009, 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 . . . . . . . . . . . . . . . . . . .
2011
Weighted
Average
Grant Date
Fair Value
$15.65
17.63
15.61
—
$16.68
Shares
316
300
(36)
—
580
2010
2009
Weighted
Average
Grant-Date
Fair Value
$13.69
15.65
13.69
—
$15.65
Shares
62
62
(62)
—
62
Weighted
Average
Grant-Date
Fair Value
$23.32
13.69
23.32
—
$13.69
Shares
62
316
(62)
—
316
Stock Option Awards
During 2011, the Company granted stock options to key TSYS executive officers and non-management members
of its Board of Directors. During 2010 and 2009, the Company granted stock options to key TSYS executive
officers. The grants to key TSYS executive officers were issued under nonvested stock bonus awards for services
to be provided in the future by such officers. The grants to the Board of Directors were fully vested on the date of
grant. The average fair value of the options granted was estimated on the date of grant using the Black-Scholes-
Merton option-pricing model. The following table summarizes the weighted average assumptions, and the
weighted average fair value of the options:
2011
2010
2009
Number of options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average exercise price . . . . . . . . . . . . . . . . . . . . . . . . . $ 17.61 $
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected term (years)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2.96%
29.98%
8.5
1.59%
5.78 $
716,508
2,176,963
1,047,949
13.11
16.01 $
2.65%
30.00%
4.9
1.79%
4.11 $
3.19%
42.00%
8.6
2.14%
5.31
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.
54
A summary of TSYS’ stock option activity as of December 31, 2011, 2010 and 2009, and changes during the years
ended on those dates is presented below:
(in thousands,
except per share data)
Options:
Outstanding at beginning of year
. .
Granted . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . .
Forfeited/canceled . . . . . . . . . . . . . .
Outstanding at end of year . . . . . . . .
Options exercisable at year-end . . . .
Weighted average fair value of
options granted during the
year . . . . . . . . . . . . . . . . . . . . . . . . .
Options
8,810
717
(597)
(2,848)
6,082
3,122
2011
Weighted
Average
2010
Weighted
Average
Exercise Price Options
Exercise Price Options
2009
Weighted
Average
Exercise Price
$23.40
17.61
13.51
29.46
$20.61
$25.00
6,955
2,177
(41)
(281)
8,810
$25.54
15.89
13.11
19.83
$23.40
6,185
1,048
(1)
(277)
6,955
$27.59
13.11
1.83
24.36
$25.54
5,712
$27.48
5,357
$28.15
$ 5.78
$ 4.11
$ 5.31
Average remaining contractual life (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.9
4.0
Aggregate intrinsic value (in thousands)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(6,401)
$(16,967)
Outstanding
Exercisable
Shares Issued for Options Exercised
During 2011, 2010 and 2009, employees of the Company exercised options for shares of TSYS common stock
that were issued from treasury. The table below summarizes these stock option exercises by year:
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
597,161
41,403
1,205
597,161
41,403
1,205
$ 3,627,000
90,400
$
14,300
$
Options Exercised Shares Issued from Treasury
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, 2011, there was approximately $4.9 million of total unrecognized compensation cost related
to TSYS stock options that is expected to be recognized over a remaining weighted average period of 1.7 years.
NOTE 17 Treasury Stock
The following table summarizes shares held as treasury stock and their related carrying value:
At December 31,
(in thousands)
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of
Treasury
Shares
12,829
6,798
3,680
Treasury
Shares Cost
$225,034
115,449
69,950
55
Stock Repurchase Plan
On April 20, 2010, TSYS announced a stock repurchase plan to purchase up to 10 million shares of TSYS stock.
The shares may be purchased from time to time over the next two years at prices considered attractive to the
Company. On May 3, 2011, TSYS announced that its Board had approved an increase in the number of shares
that may be repurchased under its current share repurchase plan from up to 10 million shares to up to 15 million
shares of TSYS stock. The expiration date of the plan was also extended to April 30, 2013. Through
December 31, 2011, the Company purchased 6.6 million shares for approximately $120.6 million, at an average
price of $18.28.Through December 31, 2010, the Company purchased 3.1 million shares for approximately $45.1
million, at an average price of $14.60.
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, 2011:
(in thousands, except per share data)
October 2011 . . . . . . . . . . . . . . . .
November 2011 . . . . . . . . . . . . . .
December 2011 . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . .
Total Number
of Shares
Purchased
Average Price
Paid per Share
—
—
2,400
2,400
$ —
—
19.89
$19.89
Total Number of
Cumulative Shares Purchased
as Part of Publicly
Announced Plans or
Programs
7,293
7,293
9,693
Maximum
Number of
Shares That
May Yet Be
Purchased
Under the Plans
or Programs
7,707
7,707
5,307
Treasury Shares
In 2008, the Compensation Committee approved “share withholding for taxes” for all employee nonvested
awards, and also for employee stock options under specified circumstances. The dollar amount of the income tax
liability from each exercise is converted into TSYS shares and withheld at the statutory minimum. The shares are
added to the treasury account and TSYS remits funds to the Internal Revenue Service to settle the tax liability.
During 2011 and 2010, the Company acquired 37,081 shares for approximately $636,000 and 66,553 shares for
approximately $1.1 million, 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, which 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 non-owners.
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.
56
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)
Beginning
Balance
Pretax
amount
Tax
effect
Net-of-Tax
Amount
Ending
Balance
December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$28,322
(43,121)
(8,172)
(34,949)
$(6,627)
Foreign currency translation adjustments . . . . . . . . . . . . . . . .
Change in accumulated OCI related to postretirement
$ (5,858)
14,140
1,995
12,145
$ 6,287
healthcare plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(769)
235
80
155
(614)
December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (6,627)
14,375
2,075
12,300
$ 5,673
Foreign currency translation adjustments . . . . . . . . . . . . . . . .
Change in accumulated OCI related to postretirement
$ 6,287
(8,609)
(1,080)
(7,529)
$(1,242)
healthcare plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(614)
(1,138)
(409)
(729)
(1,343)
December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5,673
(9,747)
(1,489)
(8,258)
$(2,585)
Foreign currency translation adjustments . . . . . . . . . . . . . .
Transfer from noncontrolling interest (NCI)
. . . . . . . . . . . .
Change in accumulated OCI related to postretirement
$(1,242)
—
3,718
28
2,662
—
1,056
28
$ (186)
28
healthcare plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,343)
1,651
595
1,056
(287)
December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(2,585)
5,397
3,257
2,140
$ (445)
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
noncancelable operating leases for computer
equipment and facilities.
The future minimum lease payments under
noncancelable operating leases with remaining terms
greater than one year for the next five years and
thereafter and in the aggregate as of December 31,
2011, are as follows:
(in thousands)
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 86,882
78,946
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35,061
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,328
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,257
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23,327
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total future minimum lease payments . . . . $240,801
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 2011, 2010 and 2009 was $97.5 million,
$102.1 million and $105.4 million, respectively. Total
rental expense under sublease arrangements in 2010
and 2009 was $675,000 and $720,000, respectively.
The rental income under sublease arrangements in
2010 and 2009 was $809,000 and $863,000,
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
57
with the Company. The Company does not believe
that it will fail to meet its contractual commitments to
an extent that will result in a material adverse effect
on its financial position, results of operations or cash
flows.
Company has committed to invest up to $20 million
in the fund so long as its ownership interest in the
fund does not exceed 50%. At December 31, 2011,
the Company had made investments in the fund of
$1.6 million.
CONTINGENCIES: The Company is subject to
various legal proceedings and claims and is also
subject to information requests, inquiries and
investigations arising out of the ordinary conduct of
its business. The Company establishes reserves for
litigation and similar matters when those matters
present loss contingencies that TSYS determines to
be both probable and reasonably estimable in
accordance with ASC 450, “Contingencies.” In the
opinion of management, based on current
knowledge and in part upon the advise of legal
counsel, all matters are believed to be adequately
covered by insurance, or, if not covered, the
possibility of losses from such matters are believed to
be remote or such matters are of such kind or involve
such amounts that would not have a material adverse
effect on the financial position, results of operations
or cash flows of the Company if disposed of
unfavorably.
GUARANTEES AND INDEMNIFICATIONS: The
Company has entered into processing and licensing
agreements with its clients that include intellectual
property indemnification clauses. Under these
clauses, the Company generally agrees to indemnify
its clients, subject to certain exceptions, against legal
claims that TSYS’ services or systems infringe on
certain third party patents, copyrights or other
proprietary rights. In the event of such a claim, the
Company is generally obligated to hold the client
harmless and pay for related losses, liabilities, costs
and expenses, including, without limitation, court
costs and reasonable attorney’s fees. The Company
has not made any indemnification payments pursuant
to these indemnification clauses.
The Company has not recorded a liability for
guarantees or indemnities in the accompanying
consolidated balance sheet since the maximum
amount of potential future payments under such
guarantees and indemnities is not determinable
PRIVATE EQUITY INVESTMENTS: On May 31,
2011, the Company entered into a limited
partnership agreement in connection with its
agreement to invest in an Atlanta-based venture
capital fund focused exclusively on investing in
technology-enabled financial services companies.
Pursuant to the limited partnership agreement, the
58
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 consolidated statements of income were as
follows:
(in thousands)
Current income tax
Years Ended December 31,
2011
2009
2010
expense:
Federal . . . . . . . $ 83,518 98,802 $115,301
4,666
4,311
State . . . . . . . . .
Foreign . . . . . . . 12,922
6,185
4,221
8,682
Total current income
tax expense . . . . . 101,106 111,705
125,797
Deferred income tax
expense (benefit):
Federal . . . . . . .
State . . . . . . . . .
Foreign . . . . . . .
Total deferred
income tax
expense
(benefit)
. . . . . . . .
Total income tax
3,126 (2,970)
(643)
(2,004)
61
(1,696)
(4,210)
947
(684)
1,491
(5,617)
(3,947)
expense . . . . . . . . $102,597 106,088 $ 121,850
(in thousands)
2011
2010
2009
Years Ended December 31,
Components of
income before
income tax
expense :
Domestic . . . . $296,475 282,492 $300,388
40,197
Foreign . . . . .
20,076
25,320
Total income
before income
tax expense . . . $316,551 307,812 $340,585
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:
Temporary differences between the financial statement
carrying amounts and tax bases of assets and liabilities that
give rise to significant portions of the net deferred tax
liability at December 31, 2011 and 2010 relate to the
following:
(in thousands)
2011
2010
2009
(in thousands)
Years Ended December 31,
At December 31,
2011
2010
Computed “expected”
Deferred income tax assets:
income tax expense . . . . . $110,793 107,734 119,205
Net operating loss and income tax
credit carryforwards . . . . . . . . . . . $ 25,937
19,884
Allowances for doubtful accounts
and billing adjustments . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . .
Purchase accounting
adjustments . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . .
1,113
19,031
1,304
16,244
15,889
37,123
—
33,980
Total deferred income tax assets . . . .
99,093
71,412
Less valuation allowance for
deferred income tax assets . . . . .
(19,207)
(15,434)
Net deferred income tax assets . . . . .
79,886
55,978
Increase (decrease) in
income tax expense
resulting from:
International tax rate
differential
. . . . . . . . . . .
1,831
(4,376)
1,075
3,164
2,326
3,418
3,773
(9,044)
2,564
(2,824)
(6,159)
(4,299)
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 . . . . . .
Deduction for domestic
production activities . . .
Permanent differences and
other, net . . . . . . . . . . . .
—
— 9,844
(5,524)
—
—
Deferred income tax liabilities:
Excess tax over financial statement
depreciation . . . . . . . . . . . . . . . . .
Computer software development
(42,351)
(35,878)
costs . . . . . . . . . . . . . . . . . . . . . . . .
(40,339)
(38,797)
(2,396)
664
(1,234)
Purchase accounting
Total income tax expense . . $102,597 106,088 121,850
adjustments . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . .
—
(6,432)
(6,712)
(1,438)
(3,771)
(4,847)
Total deferred income tax
liabilities . . . . . . . . . . . . . . . . . . . .
(95,834)
(84,731)
Net deferred income tax
liabilities . . . . . . . . . . . . . . . . . . . . $(15,948)
(28,753)
Total net deferred tax assets
(liabilities):
Current
Noncurrent . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . $ 12,872
(28,820)
11,090
(39,843)
Net deferred income tax liability . . . . $(15,948)
(28,753)
As of December 31, 2011, TSYS had recognized deferred
tax assets from net operating losses, capital losses and
federal and state income tax credit carryforwards of
$15.5 million, $1.9 million and $8.5 million, respectively. As
of December 31, 2010, TSYS had recognized deferred tax
assets from net operating losses, capital losses and federal
and state income tax credit carry forwards of $15.3 million,
$2.1 million and $2.5 million, respectively. The credits will
begin to expire in the year 2012. The net operating losses
will begin to expire in the year 2012.
59
subject to income tax examinations from state and
local or foreign tax authorities for years before 2005.
There are currently no federal or foreign tax
examinations in progress. However, a number of tax
examinations are in progress by the relevant state tax
authorities. Although TSYS is unable to determine the
ultimate outcome of these examinations, TSYS
believes that its liability for uncertain tax positions
relating to these jurisdictions for such years is
adequate.
A reconciliation of the beginning and ending amount
of unrecognized 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 . . . . . . . . .
Year Ended
December 31,
2011
$ 4.5
1.4
1.4
(1.6)
—
1.2
Ending balance . . . . . . . . . . . . . . . . . . .
$ 5.7
(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 $0.6 million and
$1.1 million as of December 31, 2011 and
December 31, 2010, respectively. The total amounts
of unrecognized income tax benefits as of
December 31, 2011 and December 31, 2010 that, if
recognized, would affect the effective tax rates are
$5.4 million and $4.2 million (net of the federal
benefit on state tax issues), respectively, which
includes interest and penalties of $0.5 million and
$1.0 million, respectively.
In assessing the realizability of deferred income tax
assets, management considers whether it is more
likely than not that some portion or all of the deferred
income tax assets will not be realized. The ultimate
realization of deferred income tax assets is
dependent upon the generation of future taxable
income during the periods in which those temporary
differences become deductible. Management
considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax
planning strategies in making this assessment.
Management believes it is more likely than not that
TSYS will realize the benefits of these deductible
differences, net of existing valuation allowances. The
valuation allowance for deferred tax assets was
$19.2 million and $15.4 million at December 31, 2011
and 2010, respectively. The increase in the valuation
allowance for deferred income tax assets was
$3.8 million for 2011. The increase in the valuation
allowance for deferred income tax assets was
$2.6 million for 2010. The increase relates to foreign
losses and state tax credits, which, more likely than
not, will not be realized in later years.
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 considers foreign
earnings related to these foreign operations to be
permanently reinvested. No provision for U.S. federal
and state incomes taxes has been made in our
consolidated financial statements for those non-U.S.
subsidiaries whose earnings are considered to be
reinvested. The amount of undistributed earnings
considered to be “reinvested” which may be subject
to tax upon distribution was approximately $51.2
million at December 31, 2011. Although TSYS does
not intend to repatriate these earnings, a distribution
of these non-U.S. earnings in the form of dividends,
or otherwise, would subject the Company to both
U.S. federal and state income taxes, as adjusted for
non-U.S. tax credits, and withholding taxes payable
to the various non-U.S. countries. Determination of
the amount of any unrecognized deferred income tax
liability on these undistributed earnings is not
practicable.
TSYS is the parent of an affiliated group that files a
consolidated U.S. federal income tax return and most
state and foreign income tax returns on a separate
entity basis. In the normal course of business, the
Company is subject to examinations by these taxing
authorities unless statutory examination periods
lapse. TSYS is no longer subject to U.S. federal
income tax examinations for years before 2008 and
with few exceptions, the Company is no longer
60
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 benefits to its
employees during 2011 are described as follows:
TSYS RETIREMENT SAVINGS PLAN: Beginning 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 contributions up to
another 4% based upon business conditions.
MONEY PURCHASE PLAN: During 2009, the
Company’s employees were eligible to participate in
the Total System Services, Inc. Money Purchase
Pension Plan, a defined contribution pension plan.
The terms of the plan provide for the Company to
make annual contributions to the plan equal to 7% of
participant compensation, as defined.
401(K) PLAN: During 2009, the Company’s
employees were eligible to participate in the TSYS
401(k) Plan. The terms of the plan allow employees to
contribute eligible pretax compensation 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:
(in thousands)
TSYS Retirement
2011
2010
2009
Savings Plan . . . . . . . $15,951 15,430
—
Money Purchase
Plan . . . . . . . . . . . . . .
401(k) Plan . . . . . . . . . . .
—
—
— 19,307
306
—
STOCK PURCHASE PLAN: The Company
maintains stock purchase 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 on the open market at fair
value for the benefit of participants. The Director
Stock Purchase Plan was terminated on November
30, 2011. The Company’s contributions to these
plans charged to expense for the years ended
December 31 are as follows:
(in thousands)
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,177
1,260
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,764
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
POSTRETIREMENT MEDICAL BENEFITS
PLAN: TSYS provides certain medical benefits to
qualified retirees through a postretirement medical
benefits plan, which is immaterial to the Company’s
consolidated financial statements. The measurement
of the benefit expense and accrual of benefit costs
associated with the plan do not reflect the effects of
the 2003 Medicare Act. Additionally, the benefit
expense and accrued benefit cost associated with the
plan, as well as any potential impact of the effects of
the 2003 Medicare Act, are not significant to the
Company’s consolidated financial statements.
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 electronic payment
processing systems. During 2010, TSYS reorganized
its operating segments in a manner that reflects the
way the chief operating decision maker (CODM)
views the business. The change involved
accumulating corporate administration expenses,
such as finance, legal, human resources, mergers and
acquisitions and investor relations, that existed in all
operating segments and categorizing them, and spin-
related costs, as Corporate Administration.
On May 2, 2011, TSYS completed its acquisition of all
of the outstanding common stock of TermNet an
Atlanta-based
61
merchant acquirer. TermNet’s financial results are
included in the Merchant Services segment.
North America Services includes electronic payment
processing services and other services provided from
within the North America region. International
Services includes electronic payment processing and
other services provided from outside the North
America region. Merchant Services includes
electronic processing and other services provided to
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. TSYS’ operating
segments share certain resources, such as
Information Technology support, that TSYS allocates
asymmetrically.
Years ended December 31,
(in thousands)
Operating Segments
2011
2010
2009
Revenues before reimbursable items
North America Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 809,069
380,129
International Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
373,159
Merchant Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(21,659)
Intersegment revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
880,668
322,697
232,262
(28,322)
Revenues before reimbursable items from external customers . . . . . . . $1,540,698 1,442,436 1,407,305
809,012
321,846
337,178
(25,600)
Total revenues
North America Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 954,550
394,831
International Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
487,997
Merchant Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(28,412)
Intersegment revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
956,546 1,048,932
337,757
334,954
327,055
458,921
(36,261)
(32,844)
Revenues from external customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,808,966 1,717,577 1,677,483
Depreciation and amortization
North America Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
International Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merchant Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
78,155
51,888
36,124
2,998
Total depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 169,165
Segment operating income
North America Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 253,844
41,408
International Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
112,986
Merchant Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(85,782)
Corporate Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 322,456
78,834
40,792
40,298
3,003
162,927
244,989
42,689
102,444
(80,693)
309,429
84,577
34,791
32,590
3,690
155,648
285,409
57,654
71,437
(70,474)
344,026
At December 31,
2011
2010
2009
Total assets
North America Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,621,664 1,632,882 1,535,129
379,606
International Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
215,855
Merchant Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(419,636)
Intersegment assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,858,392 1,952,261 1,710,954
433,203
487,858
(684,333)
408,880
460,750
(550,251)
GEOGRAPHIC AREA DATA: The Company maintains property and equipment, net of accumulated
depreciation and amortization, in the following geographic areas:
2010
(in millions)
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $194.8 203.8
58.3
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11.3
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26.7
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $266.6 300.1
52.4
9.7
9.7
At
December 31,
2011
62
The following geographic area data represents revenues for the years ended December 31 based on the
domicile of the Company’s customers:
(in millions)
2011
%
2010
%
2009
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,227.8
283.5
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
171.5
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
76.3
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.8
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42.1
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
67.9 $1,204.4
15.7
250.2
9.5
161.9
4.2
61.3
0.4
7.9
2.3
31.9
70.1 $1,183.8
269.4
14.6
139.7
9.4
48.9
3.6
8.1
0.5
27.6
1.8
%
70.6
16.1
8.3
2.9
0.5
1.6
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,809.0 100.0 $1,717.6 100.0 $1,677.5 100.0
GEOGRAPHIC AREA REVENUE BY OPERATING SEGMENT: The following table reconciles segment revenue
to revenues by geography for the years ended December 31:
(in millions)
2011
2010
2009
2011
2010
2009
2011
2010
2009
North America Services
International Services
Merchant Services
United States . . . . . . . . . . . . . . . . . $741.5 748.2
Europe . . . . . . . . . . . . . . . . . . . . . .
0.8
171.1 161.4
Canada . . . . . . . . . . . . . . . . . . . . . .
—
Japan . . . . . . . . . . . . . . . . . . . . . . .
7.9
Mexico . . . . . . . . . . . . . . . . . . . . . .
9.3
Other . . . . . . . . . . . . . . . . . . . . . . .
—
7.8
9.6
0.7
859.5 $ —
—
0.8
139.2
—
8.1
8.7
282.8 249.4 268.6
—
48.9
—
18.1
—
76.3
—
31.8
—
61.3
—
21.5
— $486.3 456.2 324.3
—
0.5
—
—
0.8
—
0.4
—
—
0.7
—
0.5
—
—
1.1
Totals . . . . . . . . . . . . . . . . . . . . . $930.7 927.6 1,016.3 $390.9 332.2 335.6 $487.4 457.8 325.6
MAJOR CUSTOMER: For the years ended December 31, 2011, 2010 and 2009, the Company had one major
customer which accounted for approximately $210.9 million, or 11.7%, $221.0 million, or 12.9%, and
$217.7 million, or 12.0%, respectively, of total revenues. Revenues from the major customer for the years ended
December 31, 2011, 2010 and 2009, respectively, are primarily attributable to the North America Services
segment and the Merchant Services segment.
NOTE 23 Supplemental Cash Flow
NOTE 24 Acquisitions
Information
Nonvested Share Awards
The Company issued shares of TSYS common stock to
certain key employees and non-management members
of its Board of Directors. The grants to certain key
employees were issued in the form of nonvested stock
bonus awards for services to be provided in the future
by such officers and employees. Beginning in 2011, the
grants to the Board of Directors were fully vested on
the date of grant. 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 $8.1
million, $14.9 million and $6.7 million in 2011, 2010
and 2009, respectively.
TermNet Merchant Services, Inc.
On May 2, 2011, TSYS completed its acquisition of all
of the outstanding common stock of TermNet, an
Atlanta-based merchant acquirer, for $42 million in
cash. TermNet provides merchant services to
qualified merchants serving a diverse merchant base
of over 18,000 merchants. The acquisition of
TermNet expands the Company’s presence in the
merchant acquiring industry. The results of
operations for TermNet have been included in the
Company’s results beginning May 2, 2011, and are
included in the Merchant Services segment. The
goodwill of $28.9 million recorded arises largely from
synergies and economies of scale expected to be
realized from combining the operations of TSYS and
TermNet. Goodwill recognized in the acquisition of
TermNet is not deductible for income tax purposes.
63
The following table summarizes the
consideration paid for TermNet and the
recognized amounts of identifiable assets
acquired and liabilities assumed effective May 2,
2011:
(in thousands)
Cash and restricted cash . . . . . . . . . . . . . . . $ 2,691
10,253
Accounts receivable, net . . . . . . . . . . . . . . .
1,516
Other assets . . . . . . . . . . . . . . . . . . . . . . . . .
11,740
Identifiable intangible assets . . . . . . . . . . . .
28,918
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
(5,578)
Accounts payable . . . . . . . . . . . . . . . . . . . . .
(2,683)
Accrued compensation . . . . . . . . . . . . . . . . .
(4,506)
Deferred income tax liability . . . . . . . . . . . .
(351)
Other liabilities . . . . . . . . . . . . . . . . . . . . . . .
Total consideration . . . . . . . . . . . . . . . . . . $42,000
The fair value of accounts receivable, accounts
payable, accrued compensation, and other liabilities
approximates the carrying amount of those assets
and liabilities at the acquisition date. The fair value of
accounts receivable due under agreements with
customers is $10.3 million. The gross amount due
under the agreements is $10.4 million, of which
approximately $100,000 is expected to be
uncollectible. Of the $42 million in consideration paid
for TermNet, $8.4 million has been placed in escrow
for a period of 18 months to secure certain claims
that may be brought against the escrowed
consideration by TSYS pursuant to the merger
agreement. Consideration is contingent and may be
returned to the Company pursuant to indemnification
commitments made by, in general, the shareholders
of TermNet related to, among other things, a breach
of the representations and warrantees made in the
merger agreement, possible excess merchant
chargebacks, and losses arising out of certain asset
dispositions and lease terminations. Such
indemnification commitments are recognized as a
possible asset receivable and measured at fair value.
Based upon the probability of various possible
outcomes related to the indemnification
commitments, TSYS has determined that the fair
value of any receivable asset would be immaterial.
The maximum amount of contingent consideration
returnable to the Company related to certain
indemnification commitments made by TermNet is
limited to the consideration held in escrow. The
maximum amount of contingent consideration
returnable to the Company related to fundamental
representations and warranties made by TermNet is
unlimited.
64
Identifiable intangible assets acquired in the TermNet
acquisition include customer relationships, channel
relationships, and non-compete agreements. The
identifiable intangible assets had no significant
estimated residual value. These intangible assets are
being amortized over their estimated useful lives of 2
to 10 years based on the pattern of expected future
economic benefit, which approximates a straight-line
basis over the useful lives of the assets. The fair value
of the acquired identifiable intangible assets of $11.7
million was estimated using the income approach
(discounted cash flow and relief from royalty
methods) and cost approach. The fair values and
useful lives of the identified intangible assets were
primarily determined using forecasted cash flows,
which included estimates for certain assumptions
such as revenues, expenses, attrition rates, and
royalty rates. The estimated fair value of identifiable
intangible assets acquired in the acquisition of
TermNet and the related estimated weighted
average useful lives are as follows:
Fair Value
(in millions)
Weighted Average
Useful Lives
Customer relationships . . .
Channel relationships . . . .
Covenants-not-to-compete
$10.0
1.6
0.1
7.0 years
10.0 years
2.0 years
Total acquired
identifiable intangible
assets . . . . . . . . . . . . . .
$11.7
7.3 years
The fair value measurement of the identifiable
intangible assets is based on significant inputs that
are not observable in the market and therefore,
represents a Level 3 measurement as defined in ASC
820. Key assumptions include (a) cash flow
projections based on market participant and internal
data, (b) a discount rate of 14%, (c) a pre-tax royalty
rate range of 3-10%, (d) an attrition rate of 20%,
(e) an effective tax rate of 36%, and (f) a terminal
value based on a long-term sustainable growth rate
of 3%.
In connection with the TermNet acquisition, TSYS
incurred $192,000 in acquisition-related costs
primarily related to professional legal, finance, and
accounting costs. These costs were expensed as
incurred and are included in selling, general, and
administrative expenses in the income statement for
2011.
TSYS Merchant Solutions
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 (FNMS). On
January 4, 2011, TSYS announced it had acquired the
remaining 49 interest in FNMS, effective January 1,
2011, from FNBO. The entity was rebranded as TSYS
Merchant Solutions (TMS).
TMS 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% ownership of FNMS Holding, LLC
(“FNMS Holding”), which owned 100% of FNMS, for
approximately $150.5 million, while FNBO owned the
remaining 49%. 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 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,
which has since expired. Contingently returnable
consideration is recognized as an asset and measured
at fair value. Based upon the probability of outcomes,
TSYS determined the fair value of the contingently
returnable consideration would approximate zero.
The maximum amount of contingently returnable
consideration is not significant.
65
The fair value of the acquired identifiable intangible assets of
$100.8 million was estimated using the income approach
(discounted 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
measurement 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% to 14%, (c) a
royalty rate range of 1.5% to 7%, (d) an attrition rate range of
10% to 30%, and (e) an effective tax rate of approximately
36%.
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 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 range of 12% to 14%, (c) a
terminal value based on long-term sustainable growth rates
ranging between 3% and 5%, (d) an effective tax rate of
approximately 36%, (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 estimating the fair value of
the noncontrolling interest in TMS.
With the acquisition of TMS on April 1, 2010, TSYS’
incremented revenue compared to the prior year associated
with acquisitions was $32.7 million and $97.7 million for the
years ended December 31, 2011 and 2010, respectively. For
the years ended December 31, 2011 and 2010, TSYS has
included approximately $4.2 million and $12.7 million,
respectively, in income netted against acquisition related costs
associated with TMS.
Other
On October 1, 2011, TSYS acquired contract-based intangible
assets in its Merchant Services segment for $2.6 million. These
intangible assets are being amortized on a straight-line basis
over their estimated useful lives of five years.
In May 2011, TSYS made a payment of $6.0 million of
contingent merger consideration in connection with the
purchase of Infonox, which was accounted for under SFAS No.
141. The payment of the contingent merger consideration by
TSYS was recorded as goodwill and had no impact on our
results of operations.
Pro forma Results of Operations
The pro forma revenue and earnings of TermNet are not
material to the consolidated financial statements. The amounts
of TMS’ revenue and earnings included in TSYS’ consolidated
income statement for the years ended December 31, 2011
and 2010, and the pro forma revenue and earnings of the
combined entity had the acquisition date been January 1,
2010 are:
(in thousands)
Revenue
Net Income
Attributable
to TSYS
Common
Shareholders
Basic EPS
Attributable
to TSYS
Common
Shareholders
Diluted EPS
Attributable
to TSYS
Common
Shareholders
Actual from
1/1/2011-
12/31/2011 . . . $1,808,966 $220,559
Actual from
1/1/2010-
12/31/2010 . . . $1,717,577 $193,947
Supplemental pro
forma for
1/1/2010-
12/31/2010 . . . $1,745,244 $202,242
$1.15
$1.15
$0.99
$0.99
$1.03
$1.03
NOTE 25 Collaborative Arrangement
In January 2009, TSYS adopted the authoritative guidance
under ASC 808, “Collaborative Arrangements.” The guidance
under ASC 808 is effective for reporting periods beginning
after December 15, 2008, and it requires restatement of prior
periods for all collaborative arrangements existing as of the
effective date.
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.
66
TSYS records its usage of the aircraft and its share of net operating results of the enterprise in selling, general and
administrative expenses.
NOTE 26 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, 2011
December 31, 2010
December 31, 2009
Common
Stock
Participating
Securities
Common
Stock
Participating
Securities
Common
Stock
Participating
Securities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $220,559
Less income allocated to nonvested
193,947
215,213
awards . . . . . . . . . . . . . . . . . . . . . . . . . . .
(805)
805
(959)
959
(1,644)
1,644
Net income allocated to common stock
for EPS calculation(a) . . . . . . . . . . . . . . $219,754
805
192,988
959
213,569
1,644
Average common shares
outstanding(b) . . . . . . . . . . . . . . . . . . . . . 191,239
Basic EPS(a)/(b) . . . . . . . . . . . . . . . . . . . . . . $
1.15
Diluted EPS:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $220,559
Less income allocated to nonvested
707
1.14
195,378
0.99
975
0.98
195,623
1,511
1.09
1.09
193,947
215,213
awards . . . . . . . . . . . . . . . . . . . . . . . . . . .
(804)
804
(959)
959
(1,644)
1,644
Net income allocated to common stock
for EPS calculation(c) . . . . . . . . . . . . . . $219,755
Average common shares outstanding . . . 191,239
Increase due to assumed issuance of
shares related to common equivalent
shares outstanding . . . . . . . . . . . . . . . . .
345
Average common and common
equivalent shares outstanding(d) . . . . . . 191,584
Diluted EPS(c)/(d)
. . . . . . . . . . . . . . . . . . . . $
1.15
804
707
192,988
195,378
959
975
213,569
1,644
195,623
1,511
193
63
707
1.14
195,571
0.99
975
0.98
195,686
1,511
1.09
1.09
The diluted EPS calculation excludes stock options and nonvested awards that are convertible into 3.6 million
common shares for the year ended December 31, 2011, and excludes 9.0 million and 7.0 million common shares
for the years ended December 31, 2010 and 2009, respectively, because their inclusion would have been
anti-dilutive.
67
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, 2011 and 2010, 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,
2011. We also have audited the Company’s internal control over financial reporting as of December 31, 2011,
based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these
consolidated financial statements, for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion
on these consolidated financial statements and an opinion on the Company’s internal control over financial
reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audits to obtain reasonable assurance
about whether the financial statements are free of material misstatement and whether effective internal control
over financial reporting was maintained in all material respects. Our audits of the consolidated financial
statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audits of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of
the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Total System Services, Inc. and subsidiaries as of December 31, 2011 and 2010, and the
results of their operations and their cash flows for each of the years in the three-year period ended December 31,
2011, 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, 2011, based on criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
Atlanta, Georgia
February 24, 2012
68
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, 2011. 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, 2011, 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, 2011 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
69
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 21, 2012, there were 27,064 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 $0.10 per share was declared on October 25, 2011, and was paid January 3, 2012,
to shareholders of record on December 15, 2011. Total dividends declared in 2011 and in 2010 amounted to
$59.2 million and $54.9 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, 2011 and 2010.
(in thousands, except per share data)
2011 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to TSYS common shareholders . . . . . . . . . . .
Basic earnings per share attributable to TSYS common
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$429,430
73,028
48,790
447,555
78,530
53,747
459,747
81,180
58,148
472,234
89,718
59,874
shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.25
0.28
0.30
0.31
Diluted earnings per share attributable to TSYS common
shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock prices:
High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Close . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.25
0.07
18.16
17.99
18.02
0.28
0.07
18.64
18.36
18.58
0.30
0.07
17.25
16.86
16.93
0.31
0.10
19.71
19.54
19.56
$ 413,464
79,713
51,328
0.26
430,886
79,828
49,703
0.25
433,236
78,914
45,743
0.23
439,991
70,974
47,173
0.24
0.26
0.07
17.75
14.11
15.66
0.25
0.07
16.99
13.52
13.60
0.23
0.07
15.74
13.41
15.24
0.24
0.07
16.10
14.97
15.38
2010
70
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, 2006 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
$140
$120
$100
$80
$60
$40
$20
$0
12/06
12/07
12/08
12/09
12/10
12/11
Total System Services, Inc.
S&P 500
S&P Systems Software
TSYS
S&P 500
S&P SS
2006
2007
2008
2009
2010
2011
$100 $120
$100 $105
$100 $120
$61
$66
$75
$ 76 $ 69 $ 90
$ 84 $ 97 $ 99
$113 $119 $107
71
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 Computershare 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 2011 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 1, 2012, 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
Computershare 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:
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(cid:344)(cid:3)(cid:57)(cid:76)(cid:72)(cid:90)(cid:3)(cid:69)(cid:82)(cid:82)(cid:78)(cid:16)(cid:72)(cid:81)(cid:87)(cid:85)(cid:92)(cid:3)(cid:76)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)
(cid:344)(cid:3)(cid:53)(cid:72)(cid:84)(cid:88)(cid:72)(cid:86)(cid:87)(cid:3)(cid:70)(cid:72)(cid:85)(cid:87)(cid:76)(cid:373)(cid:70)(cid:68)(cid:87)(cid:72)(cid:3)(cid:76)(cid:86)(cid:86)(cid:88)(cid:68)(cid:81)(cid:70)(cid:72)
(cid:344)(cid:3)(cid:40)(cid:86)(cid:87)(cid:68)(cid:69)(cid:79)(cid:76)(cid:86)(cid:75)(cid:3)(cid:82)(cid:85)(cid:3)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:92)(cid:82)(cid:88)(cid:85)(cid:3)(cid:51)(cid:44)(cid:49)
(cid:344)(cid:3)(cid:57)(cid:76)(cid:72)(cid:90)(cid:3)(cid:83)(cid:68)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:75)(cid:76)(cid:86)(cid:87)(cid:82)(cid:85)(cid:92)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:71)(cid:76)(cid:89)(cid:76)(cid:71)(cid:72)(cid:81)(cid:71)(cid:86)
(cid:344)(cid:3)(cid:48)(cid:68)(cid:78)(cid:72)(cid:3)(cid:68)(cid:71)(cid:71)(cid:85)(cid:72)(cid:86)(cid:86)(cid:3)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:86)
(cid:344)(cid:3)(cid:50)(cid:69)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:68)(cid:3)(cid:71)(cid:88)(cid:83)(cid:79)(cid:76)(cid:70)(cid:68)(cid:87)(cid:72)(cid:3)(cid:20)(cid:19)(cid:28)(cid:28)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)(cid:73)(cid:82)(cid:85)(cid:80)
(cid:344)(cid:3)(cid:53)(cid:72)(cid:84)(cid:88)(cid:72)(cid:86)(cid:87)(cid:3)(cid:68)(cid:3)(cid:71)(cid:76)(cid:89)(cid:76)(cid:71)(cid:72)(cid:81)(cid:71)(cid:3)(cid:70)(cid:75)(cid:72)(cid:70)(cid:78)(cid:3)(cid:85)(cid:72)(cid:83)(cid:79)(cid:68)(cid:70)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)
(cid:344)(cid:3)(cid:53)(cid:72)(cid:70)(cid:72)(cid:76)(cid:89)(cid:72)(cid:3)(cid:68)(cid:81)(cid:81)(cid:88)(cid:68)(cid:79)(cid:3)(cid:80)(cid:72)(cid:72)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:80)(cid:68)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:86)(cid:3)(cid:72)(cid:79)(cid:72)(cid:70)(cid:87)(cid:85)(cid:82)(cid:81)(cid:76)(cid:70)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3)
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.
© 2012 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
At TSYS, (NYSE: TSS), we believe payments should revolve around people, not the other way around.SM
We call this belief “People-Centered Payments.SM” By putting people at the center of every decision we
make, with unmatched customer service and industry insight, TSYS is able to support financial institutions,
businesses and governments in more than 80 countries. Offering merchant payment-acceptance solutions
as well as services in credit, debit, prepaid, mobile, chip, healthcare and more, we make 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, and
has been named one of the 2012 World’s Most Ethical Companies by Ethisphere. For more information,
please visit us at www.tsys.com.
NYSE: TSS
TSYS®
One TSYS Way
P.O. Box 2567
Columbus, GA 31902-2567
+1.706.649.2310
www.tsys.com