EX-13.1 2 d835889dex131.htm EX-13.1 EX-13.1

Exhibit 13.1

Selected Financial Data

The following financial data should be read in conjunction with the Consolidated Financial Statements and Notes thereto and Financial Review sections of the Annual Report. The historical trends in Total System Services, Inc.‘s (TSYS’ or the Company’s) results of operations and financial position over the last five years are presented below.

 

 

    Years Ended December 31,  
(in thousands, except per share data)   2014     2013     2012     2011     2010  

Income Statement Data:

         

Total revenues

  $ 2,446,877        2,064,305        1,793,557        1,733,237        1,657,196   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

  $ 431,640        382,500        354,969        321,120        310,213   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations, net of tax

  $ 280,751        254,542        248,928        218,446        210,711   

Income (Loss) from discontinued operations, net of tax

    48,655        2,055        995        4,216        (5,090
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    329,406        256,597        249,923        222,662        205,621   

Net income attributable to noncontrolling interests

    (6,534     (11,847     (5,643     (2,103     (11,674
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to TSYS common shareholders

  $ 322,872        244,750        244,280        220,559        193,947   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share (EPS)* attributable to TSYS common shareholders:

         

Income from continuing operations

  $ 1.48        1.31        1.31        1.14        1.02   

Gain (Loss) from discontinued operations

    0.26        (0.01     (0.02     0.01        (0.04
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 1.73        1.30        1.30        1.15        0.99   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted EPS* attributable to TSYS common shareholders:

         

Income from continuing operations

  $ 1.47        1.30        1.31        1.14        1.02   

Gain (Loss) from discontinued operations

    0.25        (0.01     (0.02     0.01        (0.04
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 1.72        1.29        1.29        1.15        0.99   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividends declared per share

  $ 0.40        0.40        0.40        0.31        0.28   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

 

     As of December 31,  
(in thousands)    2014      2013      2012      2011      2010  

Balance Sheet Data:

              

Total assets

   $ 3,733,581         3,686,568         2,023,838         1,858,392         1,952,261   

Obligations under long-term borrowings and capital leases, excluding current portion

     1,405,106         1,435,751         192,014         63,593         225,276   

 

 

 

* Basic and diluted EPS amounts for continuing operations and net income do not total due to rounding.

Financial Overview

TSYS’ revenues are derived from providing global payment processing services to financial and nonfinancial institutions, generally under long-term processing contracts. In addition, the Company derived revenues from providing processing services, acquiring solutions, related systems and integrated support services to merchant acquirers and merchants. The Company also derives revenues by providing general-purpose reloadable (GPR) prepaid debit cards and payroll cards and alternative financial services to underbanked and other consumers. The Company’s services are provided through the Company’s four operating segments: North America Services, International Services, Merchant Services and NetSpend.

Through the Company’s North America Services and International Services segments, TSYS processes information through its cardholder systems to financial institutions throughout the United States and internationally. The

 

11


Company’s North America Services segment provides these services to clients in the United States, Canada, Mexico and the Caribbean. The Company’s International Services segment provides services to clients in Europe, India, Middle East, Africa, Asia Pacific and Brazil. The Company’s Merchant Services segment provides merchant services to merchant acquirers and merchants in the United States. The Company’s NetSpend segment provides GPR prepaid debit and payroll cards and alternative financial service solutions to the underbanked and other consumers in the United States.

TSYS acquires other companies as part of its strategy for growth. In 2014, TSYS acquired an additional 15% equity interest in Central Payment Co., LLC (CPAY) from CPC Holding Company, LLC, a California limited liability company. This purchase increased TSYS’ ownership of CPAY to 75%.

The following table sets forth each segment’s revenues as a percentage of the Company’s total revenues:

 

 

     Years Ended December 31,  
     2014     2013     2012  

North America Services

     45     48     53

Merchant Services

     21        26        28   

NetSpend

     19        10          

International Services

     15        16        19   
  

 

 

   

 

 

   

 

 

 

Total revenues

     100     100     100
  

 

 

   

 

 

   

 

 

 

 

 

Due to the somewhat seasonal nature of the credit card industry, TSYS’ revenues and results of operations have generally increased in the fourth quarter of each year because of increased transaction and authorization volumes during the traditional holiday shopping season. Furthermore, growth or declines in card and merchant portfolios of existing clients, the conversion of cardholder and merchant accounts of new clients to the Company’s processing platforms, the receipt of fees for early contract termination and the loss of cardholder and merchant accounts either through purges or deconversions impact the results of operations from period to period.

Another factor which may affect TSYS’ revenues and results of operations from time to time is consolidation in the financial services or retail industries either through the sale, by a client, of its business, its card portfolio or a segment of its accounts to a party which processes cardholder or merchant accounts internally or uses another third-party processor. A change in the economic environment in the retail sector, or a change in the mix of payments between cash and cards could favorably or unfavorably impact TSYS’ financial position, results of operations and cash flows in the future.

TSYS’ reported financial results will also be impacted by significant shifts in currency conversion rates. TSYS does not view foreign currency as an economic event for the Company but as a financial reporting issue. Because changes in foreign currency exchange rates distort the operating growth rates, TSYS discloses the impact of foreign currency translation on its financial performance.

A significant amount of the Company’s revenues are derived from long-term contracts with large clients. Processing contracts with large clients, representing a significant portion of the Company’s total revenues, generally provide for discounts on certain services based on the size and activity of clients’ portfolios. Therefore, revenues and the related margins are influenced by the client mix relative to the size of client portfolios, as well as the number and activity of individual cardholder or merchant accounts processed for each client. Consolidation among financial institutions has resulted in an increasingly concentrated client base, which results in a change in client mix toward larger clients.

Regulation

Government regulation affects key areas of TSYS’ business, in the U.S. as well as internationally. TSYS, along with the rest of the financial services industry, continues to experience increased legislative and regulatory scrutiny, including the enactment of additional legislative and regulatory initiatives such as the Dodd-Frank Wall Street Reform and Consumer Protection Act (Financial Reform Act). This legislation, which provides for sweeping

 

12


financial regulatory reform, may have a significant and negative impact on the Company and its clients, which could impact TSYS’ earnings through fee reductions, higher costs (both regulatory and implementation) and new restrictions on operations. The Financial Reform Act may also impact the competitive dynamics of the financial services industry in the U.S. by more adversely impacting large financial institutions, some of which are TSYS clients, and by adversely impacting the competitive position of U.S. financial institutions in comparison to foreign competitors in certain businesses.

The Financial Reform Act, which includes the Durbin Amendment to the Electronic Funds Transfer Act, mandates that the Board of Governors of the Federal Reserve System (Board) limit debit card interchange fees. Final rules were issued in June 2011. The final rules cap interchange fees for debit transactions at $0.21 plus five basis points of the transaction and require that the amount of any debit interchange transaction fee charged be reasonable and proportional to the costs incurred in connection with the transaction. In July 2013, a federal court invalidated these rules and ordered the Board to revise them. However, a federal appeals court reversed the lower court decision, which effectively reinstated the Board’s interchange rules, and the U.S. Supreme Court determined not to review the appeals court decision.

Although this legislative action by the U.S. Congress had been anticipated for some time, it remains impossible to predict the impact, if any, that the law and the regulations to be promulgated thereunder may have on the Company’s operations or its financial condition in the future. However, as TSYS’ business is predominately credit card related, the Durbin Amendment is not expected to have a significant negative impact upon TSYS’ business.

The Financial Reform Act also created a new Consumer Financial Protection Bureau (“CFPB”) with responsibility for regulating consumer financial products and services and enforcing most federal consumer protection laws in the area of financial services, including consumer credit and the prepaid card industry. For example, the CFPB has proposed regulations regarding the prepaid industry, which, if adopted as proposed, could impose significant additional disclosure requirements, overdraft requirements, and other requirements on the prepaid card industry, including our NetSpend business, effective in 2016. Similarly, other future actions of the CFPB may make payment card or product transactions generally less attractive to card issuers, acquirers, consumers and merchants by further regulatory disclosures, payment card practices, fees, routing and other matters with respect to credit, debit and prepaid cards, and thus negatively impact our business.

Financial Review

This Financial Review provides a discussion of critical accounting policies and estimates, related party transactions and off-balance sheet arrangements. This Financial Review also discusses the results of operations, financial position, liquidity and capital resources of TSYS and outlines the factors that have affected its recent earnings, as well as those factors that may affect its future earnings. The accompanying Consolidated Financial Statements and related Notes are an integral part of this Financial Review and should be read in conjunction with it.

Critical Accounting Policies and Estimates

Risk factors that could affect the Company’s future operating results and cause actual results to vary materially from expectations are listed in the Company’s forward-looking statements. Negative developments in these or other risk factors could have a material adverse effect on the Company’s financial position, results of operations and cash flows.

TSYS’ financial position, results of operations and cash flows are impacted by the accounting policies the Company has adopted. Refer to Note 1 in the Consolidated Financial Statements for more information on the Company’s basis of presentation and a summary of significant accounting policies.

Management believes that the following accounting policies are the most critical to fully understand and evaluate the Company’s results. Within each critical policy, the Company makes estimates that require management’s subjective or complex judgments about the effects of matters that are inherently uncertain.

 

13


A summary of the Company’s critical accounting estimates applicable to the reportable operating segments follows:

Allowance for Doubtful Accounts and Billing Adjustments

The Company estimates the allowance for doubtful accounts. When estimating the allowance, the Company takes into consideration such factors as its knowledge of the financial position of specific clients, the industry and size of its clients, the overall composition of its accounts receivable aging, prior experience with specific customers of accounts receivable write-offs and prior history of allowances in proportion to the overall receivable balance. This analysis includes an ongoing and continuous communication with its largest clients and those clients with past due balances. A financial decline of any one of the Company’s large clients could have a material adverse effect on collectability of receivables and thus the adequacy of the allowance for doubtful accounts. If the actual collectability of clients’ accounts is not consistent with the Company’s estimates, bad debt expense, which is recorded in selling, general and administrative expenses, may be materially different than was initially recorded. The Company’s experience and extensive data accumulated historically indicates that these estimates have proven reliable over time.

The Company estimates allowances for billing adjustments for potential billing discrepancies. When estimating the allowance for billing adjustments, the Company considers its overall history of billing adjustments, as well as its history with specific clients and known disputes. If the actual adjustments to clients’ billing are not consistent with the Company’s estimates, billing adjustments, which are recorded as a reduction of revenues in the Company’s Consolidated Statements of Income, may be materially different than was initially recorded. The Company’s experience and extensive data accumulated historically indicates that these estimates have proven reliable over time. The allowance for doubtful accounts and billing adjustments on the Company’s Consolidated Balance Sheet as of December 31, 2014 was approximately $5.2 million.

Contract Acquisition Costs

In evaluating contract acquisition costs for recoverability, expected cash flows are estimated by management. The Company evaluates the carrying value of contract acquisition costs associated with each customer for impairment on the basis of whether these costs are fully recoverable from either contractual minimum fees (conversion costs) or from expected undiscounted net operating cash flows of the related contract (cash incentives paid). The determination of expected undiscounted net operating cash flows requires management to make estimates. If the actual cash flows are not consistent with the Company’s estimates, a material impairment charge may result and net income may be materially different than was initially recorded.

These costs may become impaired with the loss of a contract, the financial decline of a client, termination of conversion efforts after a contract is signed, or diminished prospects for current clients. Note 11 in the Consolidated Financial Statements contains a discussion of contract acquisition costs. The net carrying value of contract acquisition costs on the Company’s Consolidated Balance Sheet as of December 31, 2014 was $236.3 million.

Software Development Costs

In evaluating software development costs for recoverability, expected cash flows are estimated by management. The Company evaluates the unamortized capitalized costs of software development as compared to the net realizable value of the software product, which is determined by expected undiscounted net operating cash flows. The amount by which the unamortized software development costs exceed the net realizable value is written off in the period that such determination is made. If the actual cash flows are not consistent with the Company’s estimates, a material write-off may result and net income may be materially different than was initially recorded. Assumptions and estimates about future cash flows and remaining useful lives of software are complex and subjective. They can be affected by a variety of factors, including industry and economic trends, changes in the Company’s business strategy and changes in the internal forecasts. Note 9 in the Consolidated Financial Statements contains a discussion of internally developed software costs. The net carrying value of internally developed software on the Company’s Consolidated Balance Sheet as of December 31, 2014 was $100.5 million.

 

14


Acquisitions — Purchase Price Allocation

TSYS’ purchase price allocation methodology requires the Company to make assumptions and to apply judgment to estimate the fair value of acquired assets and liabilities. TSYS estimates the fair value of assets and liabilities based upon appraised market values, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows and market multiple analyses. Management determines the fair value of fixed assets and identifiable intangible assets such as developed technology or customer relationships, and any other significant assets or liabilities. TSYS adjusts the purchase price allocation, as necessary, up to one year after the acquisition closing date as TSYS obtains more information regarding asset valuations and liabilities assumed. Unanticipated events or circumstances may occur which could affect the accuracy of the Company’s fair value estimates, including assumptions regarding industry economic factors and business strategies, and result in an impairment or a new allocation of purchase price.

Given its history of acquisitions, TSYS may allocate part of the purchase price of future acquisitions to contingent consideration as required by generally accepted accounting principles (GAAP) for business combinations. The fair value calculation of contingent consideration will involve a number of assumptions that are subjective in nature and which may differ significantly from actual results. TSYS may experience volatility in its earnings to some degree in future reporting periods as a result of these fair value measurements.

Goodwill

In evaluating for impairment, discounted net cash flows for future periods are estimated by management. In accordance with the provisions of GAAP, goodwill is required to be tested for impairment at least annually. The combination of the income approach utilizing the discounted cash flow (DCF) method and the market approach, utilizing readily available market valuation multiples, is used to estimate the fair value. Under the DCF method, the fair value of the asset reflects the present value of the projected earnings that will be generated by each asset after taking into account the revenues and expenses associated with the asset, the relative risk that the cash flows will occur, the contribution of other assets, and an appropriate discount rate to reflect the value of invested capital. Cash flows are estimated for future periods based on historical data and projections provided by management. If the actual cash flows are not consistent with the Company’s estimates, a material impairment charge may result and net income may be materially different than was initially recorded. Note 7 in the Consolidated Financial Statements contains a discussion of goodwill. The net carrying value of goodwill on the Company’s Consolidated Balance Sheet as of December 31, 2014 was $1.5 billion.

Long-lived Assets and Intangibles

In evaluating long-lived assets and intangibles for recoverability, expected undiscounted net operating cash flows are estimated by management. The Company reviews long-lived assets, such as property and equipment and intangibles subject to amortization, including contract acquisition costs and certain computer software, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the actual cash flows are not consistent with the Company’s estimates, a material impairment charge may result and net income may be materially different than was initially recorded.

Revenue Recognition

The Company recognizes revenues in accordance with the provisions of GAAP, which sets forth guidance as to when revenue is realized or realizable and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been performed; (3) the seller’s price to the buyer is fixed or determinable; and (4) collectability is reasonably assured.

The Company evaluates its contractual arrangements that provide services to clients through a bundled sales arrangement in accordance with the provisions of GAAP to determine whether an arrangement involving more than one deliverable (a multiple element arrangement) contains more than one unit of accounting and how the arrangement consideration should be measured and allocated to the separate units of accounting.

 

15


A deliverable in multiple element arrangements includes any performance obligation on the part of the Company including obligations to perform different services, grant licenses or convey other rights. Revenue is allocated to the separate units of accounting in a multiple element arrangement based on the price at which the deliverable or unit of accounting would be sold on a standalone basis (the standalone selling price), provided the delivered element has standalone value to the customer and delivery of any undelivered items is probable and substantially within the Company’s control. An item has standalone value to the customer on a standalone basis if it is sold separately by any vendor or the customer could resell the deliverable on a standalone basis.

As TSYS’ business and service offerings change in the future, the determination of the number of deliverables in an arrangement and related units of accounting and future pricing practices may result in changes in the estimates of the standalone selling price, which may change the ratio of fees allocated to each service or unit of accounting in a given customer arrangement. There were no material changes or impact to revenue in the year ended December 31, 2014 due to any changes in the determination of the number of deliverables in an arrangement, units of accounting, or estimates of the standalone selling price for existing contractual arrangements.

Cardholders’ Reserve

The Company is exposed to losses due to cardholder fraud, payment defaults and other forms of cardholder activity as well as losses due to non-performance of third parties who receive cardholder funds for transmittal to the Issuing Banks (banks that issue MasterCard International or Visa USA, Inc. branded cards to customers). The Company establishes a reserve for the losses it estimates will arise from processing customer transactions, debit card overdrafts, chargebacks for unauthorized card use and merchant-related chargebacks due to non-delivery of goods or services. These reserves are established based upon historical loss and recovery rates and cardholder activity for which specific losses can be identified. The cardholders’ reserve was approximately $6.3 million as of December 31, 2014. The provision for cardholder losses is included in cost of services in the Consolidated Statements of Income. The Company regularly updates its estimate as new facts become known and events occur that may impact the settlement or recovery of losses.

Provision for Merchant Losses

The Company has potential liability for losses resulting from disputes between a cardholder and a merchant that arise as a result of, among other things, the cardholder’s dissatisfaction with merchandise quality or merchant services. Such disputes may not be resolved in the merchant’s favor. In these cases, the transaction is “charged back” to the merchant, which means the purchase price is refunded to the customer by the card-issuing bank and charged to the merchant. If the merchant is unable to fund the refund, TSYS must do so. TSYS also bears the risk of reject losses arising from the fact that TSYS collects fees from its merchants on the first day after the monthly billing period. If the merchant has gone out of business during such period, TSYS may be unable to collect such fees. TSYS maintains cash deposits or requires the pledge of a letter of credit from certain merchants, generally those with higher average transaction size where the card is not present when the charge is made or the product or service is delivered after the charge is made, in order to offset potential contingent liabilities such as chargebacks and reject losses that would arise if the merchant went out of business. Most chargeback and reject losses are charged to cost of services as they are incurred. However, the Company also maintains a provision against losses, including major fraud losses, which are both less predictable and involve larger amounts. The loss provision is established using historical loss rates, applied to recent bankcard processing volume. As of December 31, 2014, the Company had a merchant loss provision in the amount of $1.1 million.

Transaction Processing Provisions

The Company records estimates to provide for contract contingencies (performance penalties) and processing errors. A significant number of the Company’s contracts with large clients contain service level agreements which can result in TSYS incurring performance penalties if contractually required service levels are not met. When estimating these accruals, the Company takes into consideration such factors as the prior history of performance penalties and processing errors incurred, actual contractual penalties inherent in the Company’s contracts, progress towards milestones, and known processing errors not covered by insurance. If the actual performance penalties incurred are not consistent with the Company’s estimates, performance penalties and processing errors,

 

16


which are recorded in cost of services, may be materially different than were initially recorded. The Company’s experience and extensive data accumulated historically indicates that these estimates have proven reliable over time. As of December 31, 2014, the Company had a transaction processing provision in the amount of $4.6 million.

Income Taxes

In calculating its effective tax rate, the Company makes decisions regarding certain tax positions, including the timing and amount of deductions and allocations of income among various tax jurisdictions. The Company has various tax filing positions, including the timing and amount of deductions and credits, the establishment of reserves for audit matters and the allocation of income among various tax jurisdictions.

The Company makes estimates as to the amount of deferred tax assets and liabilities and records valuation allowances to reduce its deferred tax assets to reflect the amount that is more likely than not to be realized. The Company considers projected future taxable income and ongoing tax planning strategies in assessing the need for the valuation allowance. Actual results may differ from the Company’s estimates. If the Company realizes a deferred tax asset or the Company was unable to realize a net deferred tax asset, an adjustment to the deferred tax asset would increase or decrease earnings, respectively, in the period the difference is recognized.

Related Party Transactions

In December 2014, TSYS’ majority-owned subsidiary, TSYS Managed Services EMEA Ltd. (TSYS Managed Services), obtained a £900,000, or approximately $1.4 million, pound-denominated term loan bearing interest at a rate of LIBOR plus two percentage points. The loan matures in December 2017, and has monthly interest payments. The lender is Merchants Limited, who has a noncontrolling interest in TSYS Managed Services.

The Company provides electronic payment processing and other services to the Company’s equity investments, Total System Services de México, S.A. de C.V. (TSYS de México) and China UnionPay Data Co., Ltd. (CUP Data).

The related party services and arrangements are performed under contracts that are similar to its contracts with unrelated third party customers. The Company believes the terms and conditions of transactions between the Company and these related parties are comparable to those which could have been obtained in transactions with unaffiliated parties. The Company’s margins with respect to related party transactions are comparable to margins recognized in transactions with unrelated third parties. The amounts related to these transactions are immaterial. No significant changes have been made to the method of establishing terms with the affiliated companies during the periods presented.

Refer to Note 4 in the Consolidated Financial Statements for more information on transactions with affiliated companies.

Off-Balance Sheet Arrangements

OPERATING LEASES: As a method of funding its operations, TSYS employs noncancelable operating leases for computer equipment, software and facilities. These leases allow the Company to use the latest technology while avoiding the risk of ownership. Neither the assets nor obligations related to these leases are included on the balance sheet. Refer to Notes 1 and 16 in the Consolidated Financial Statements for further information on operating lease commitments.

CONTRACTUAL OBLIGATIONS: The total liability for uncertain tax positions as of December 31, 2014 is $6.7 million. Refer to Note 15 in the Consolidated Financial Statements for more information on income taxes. The Company is not able to reasonably estimate the amount by which the liability will increase or decrease over time; however, at this time, the Company does not expect any significant changes related to these obligations within the next year.

 

17


Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-08 “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” ASU 2014-08 addresses the accounting for the disposal of a component of an entity or a group of components of an entity. The amendments in this Update address those issues by changing the criteria for reporting discontinued operations and enhancing convergence of the FASB’s and the International Accounting Standard Board’s (IASB) reporting requirements for discontinued operations. For public entities, the ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The Company elected not to early adopt ASU 2014-08. The Company does not expect the adoption of this ASU to have a material impact on the financial position, results of operations or cash flows of the Company.

In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 addresses the accounting for the revenues associated with customer contracts. This Update enhances convergence of the FASB’s and the IASB’s reporting requirements for revenue recognition. For public entities, the ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is not permitted for entities applying U.S. GAAP. The Company is currently evaluating the adoption of this ASU and its impact on the financial position, results of operations and cash flows of the Company.

In June 2014, the FASB issued ASU 2014-12 “Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” ASU 2014-12 addresses the accounting for stock compensation for awards with a performance target that could be achieved after the requisite service period. For all entities, the ASU is effective either prospectively for share-based payment awards granted or modified on or after the effective date, or retrospectively, using a modified retrospective approach for share based awards outstanding as of the beginning of the earliest annual period presented in the financial statements on adoption, and to all new or modified awards thereafter. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted. The Company does not expect the adoption of this ASU to have a material impact on the financial position, results of operations or cash flows of the Company.

In January 2015, the FASB issued ASU 2015-01 “Income Statement – Extraordinary and Unusual Items” (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. ASU 2015-01 eliminates from GAAP the concept of extraordinary items. For all entities, the ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted provided the guidance is applied from the beginning of the fiscal year of adoption. The Company does not expect the adoption of this ASU to have a material impact on the financial position, results of operations or cash flows of the Company.

Results of Operations

Revenues

The Company generates revenues by providing transaction processing and other payment-related services. The Company’s pricing for transactions and services is complex. Each category of revenue has numerous fee components depending on the types of transactions processed or services provided. TSYS reviews its pricing and implements pricing changes on an ongoing basis. In addition, standard pricing varies among its regional businesses, and such pricing can be customized further for customers through tiered pricing of various thresholds for volume activity. TSYS’ revenues are based upon transactional information accumulated by its systems or reported by its customers. The Company’s revenues are impacted by currency translation of foreign operations, as well as doing business in the current economic environment.

The Company has included reimbursements received for out-of-pocket expenses as revenues and expenses. The largest reimbursable expense item for which TSYS is reimbursed by clients is postage. The Company’s

 

18


reimbursable items are impacted with changes in postal rates and changes in the volumes of mailing activities by its clients. Reimbursable items for the year ended December 31, 2014, were $253.9 million, an increase of $13.3 million or 5.5% compared to $240.6 million for the same period last year. Reimbursable items for the year ended December 31, 2013 decreased $11.9 million, or 4.7%, compared to $252.5 million for the same period in 2012.

TSYS’ revenues are generated from charges based on the number of accounts on file (AOF), transactions and authorizations processed, statements mailed, cards embossed and mailed, and other processing services for cardholder AOF. Cardholder AOF include active and inactive consumer credit, retail, prepaid, stored value, government services and commercial card accounts.

TSYS’ revenues in its North America Services and International Services segments are influenced by several factors, including volumes related to AOF and transactions. TSYS estimates that approximately 47.2% of these segments’ revenues is AOF and transaction volume driven. The remaining 52.8% of payment processing revenues are not AOF and transaction volume driven, and are derived from production and optional services TSYS considers to be value added products and services, custom programming and licensing arrangements.

Whether or not an account on file is active can impact TSYS’ revenues differently. Active accounts are accounts that have had monetary activity either during the current month or in the past 90 days based on contractual definition. Inactive accounts are accounts that have not had a monetary transaction (such as a purchase or payment) in the past 90 days. The more active an account is, the more revenue is generated for TSYS (items such as transactions and authorizations processed and statements billed).

Occasionally, a client will purge inactive accounts from its portfolio. An inactive account typically will only generate an AOF charge. A processing client will periodically review its cardholder portfolio based upon activity and usage. Each client, based upon criteria individually set by the client, will flag an account to be “purged” from TSYS’ system and deactivated.

A deconversion involves a client migrating all of its accounts to an in-house solution or another processor. Account deconversions include active and inactive accounts and can impact the Company’s revenues significantly more than an account purge.

A sale of a portfolio typically involves a client selling a portion of its accounts to another party. A sale of a portfolio and a deconversion impact the Company’s financial statements in a similar fashion, although a sale usually has a smaller financial impact due to the number of accounts typically involved.

TSYS’ revenues in its Merchant Services segment are influenced by several factors, including volumes related to transactions and dollar sales volume, which are approximately 92.6% of this segment’s revenues. The remaining 7.4% of Merchant Services’ revenues are derived from value added services, monthly statement fees, compliance fees, and miscellaneous services.

TSYS’ revenues in its NetSpend segment primarily consist of a portion of the service fees and interchange revenues received by NetSpend’s prepaid card Issuing Banks in connection with the programs managed by NetSpend. For the year ended December 31, 2014, 70.3% of revenues was derived from fees charged to cardholders and 29.7% of revenues was derived from interchange and other revenues. Service fee revenues are driven by the number of active cards, and in particular by the number of cards with direct deposit. Cardholders with direct deposit generally initiate more transactions and generate more revenues than those that do not take advantage of this feature. Interchange revenues are driven by gross dollar volume. Substantially all of the NetSpend segment’s revenues are volume driven as they are driven by the active card and gross dollar volume indicators.

 

19


A summary of the consolidated financial highlights for the years ended December 31, 2014, 2013, and 2012 is provided below:

 

 

     Years Ended December 31,      Percent Change  
(in millions)    2014      2013      2012      2014 vs. 2013     2013 vs. 2012  

Total revenues

   $ 2,446.9         2,064.3         1,793.6         18.5     15.1

Operating income

     431.6         382.5         355.0         12.8        7.8   

Net income attributable to TSYS common shareholders

     322.9         244.8         244.3         31.9        0.2   

Basic EPS attributable to TSYS common shareholders1

     1.73         1.30         1.30         33.5        0.0   

Diluted EPS attributable to TSYS common shareholders1

     1.72         1.29         1.29         33.6        (0.2

Adjusted earnings before interest, taxes, depreciation, and amortization (Adjusted EBITDA)2

     712.3         624.1         537.0         14.1        16.2   

Adjusted EPS from continuing operations3

     1.96         1.73         1.47         13.2        17.3   

Cash provided by operating activities

     560.2         452.4         455.8         23.8        (0.7

 

 

1 Basic and diluted EPS is computed based on the two-class method in accordance with the guidance under GAAP. Refer to Note 26 in the Consolidated Financial Statements for more information on EPS.
2 Adjusted EBITDA is net income excluding equity in income of equity investments, nonoperating income/(expense), income taxes, depreciation, amortization and stock-based compensation expenses and other non-recurring items.
3 Adjusted EPS is adjusted earnings divided by weighted average shares outstanding used for basic EPS calculations. Adjusted earnings is net income excluding the after-tax impact of stock-based compensation expenses, amortization of acquisition intangibles and other nonrecurring items.

Total revenues increased 18.5%, or $382.6 million, for the year ended December 31, 2014, compared to the year ended December 31, 2013, which increased 15.1%, or $270.7 million, compared to the year ended December 31, 2012. The increases in revenues for 2014 and 2013 include an increase of $14.9 million and a decrease of $5.3 million, respectively, related to the effects of currency translation of the Company’s foreign-based subsidiaries and branches.

Excluding reimbursable items, revenues increased 20.2%, or $369.3 million, for the year ended December 31, 2014, compared to the year ended December 31, 2013, which increased 18.3%, or $282.6 million, compared to the year ended December 31, 2012. The 20.2% increase in revenues excluding reimbursable items for the year ended December 31, 2014, as compared to the same period in 2013, is the result of increases of 15.0% in revenues associated with acquisitions, and 5.2% in organic growth. The Company expanded its product and service offerings through acquisitions during 2013 and 2012. The impact of these acquisitions for the years ended December 31, 2014, 2013 and 2012 was $274.8 million, $273.9 million and $27.1 million, respectively.

Below is a summary of AOF for the Company’s North America Services and International Services segments combined:

 

 

(in millions)    As of December 31,  
     2014      2013      Percent
Change
 

Consumer Credit

     270.0         228.9         18.0

Retail

     28.4         27.8         2.2   
  

 

 

    

 

 

    

Total Consumer

     298.4         256.7         16.3   

Commercial

     41.6         39.9         4.2   

Other

     22.4         18.9         18.7   
  

 

 

    

 

 

    

Subtotal1

     362.4         315.5         14.9   

Prepaid/Stored Value2

     127.3         118.0         7.9   

Government Services3

     67.4         62.2         8.2   

Commercial Card Single Use4

     59.6         45.3         31.5   
  

 

 

    

 

 

    

Total AOF

     616.7         541.0         14.0   
  

 

 

    

 

 

    

 

 

1 Traditional accounts include consumer, retail, commercial, debit and other accounts. These accounts are grouped together due to the tendency to have more transactional activity than prepaid, government services and single use accounts.
2 These accounts tend to have less transactional activity than the traditional accounts. Prepaid and stored value cards are issued by firms through retail establishments to be purchased by consumers to be used at a later date. These accounts tend to be the least active of all accounts on file.
3 Government services accounts are disbursements of student loan accounts issued by the Department of Education, which have minimal activity.
4 Commercial card single use accounts are one-time use accounts issued by firms to book lodging and other travel related expenses.

 

20


Major Customer

The Company works to maintain a large and diverse customer base across various industries. Although the Company does not have a major customer on a consolidated basis, a significant amount of the Company’s revenues are derived from long-term contracts with large clients. TSYS derives revenues from providing various processing and other services to these clients, including processing of consumer and commercial accounts, as well as revenues for reimbursable items. The loss of one of the Company’s large clients could have a material adverse effect on the Company’s financial position, results of operations and cash flows.

Refer to Note 22 in the Consolidated Financial Statements for more information on major customers.

Operating Segments

TSYS’ services are provided through four operating segments: North America Services, International Services, Merchant Services and NetSpend.

The Company’s North America Services and International Services segments have many long-term customer contracts with card issuers providing account processing and output services for printing and embossing items. These contracts generally require advance notice prior to the end of the contract if a client chooses not to renew. Additionally, some contracts may allow for early termination upon the occurrence of certain events such as a change in control. The termination fees paid upon the occurrence of such events are designed primarily to cover balance sheet exposure related to items such as capitalized conversion costs or client incentives associated with the contract and, in some cases, may cover a portion of lost future revenue and profit. Although these contracts may be terminated upon certain occurrences, the contracts provide the segment with a steady revenue stream since a vast majority of the contracts are honored through the contracted expiration date.

These services are provided throughout the period of each account’s use, starting from a card-issuing client processing an application for a card. Services may include processing the card application, initiating service for the cardholder, processing each card transaction for the issuing retailer or financial institution and accumulating the account’s transactions. Fraud management services monitor the unauthorized use of accounts which have been reported to be lost, stolen, or which exceed credit limits. Fraud detection systems help identify fraudulent transactions by monitoring each account holder’s purchasing patterns and flagging unusual purchases. Other services provided include customized communications to cardholders, information verification associated with granting credit, debt collection, and customer service.

TSYS’ revenues in its North America Services and International Services segments are derived from electronic payment processing. There are certain basic core services directly tied to accounts on file and transactions. These are provided to all of TSYS’ processing clients. The core services begin with an account on file.

The core services include housing an account on TSYS’ system (AOF), authorizing transactions (authorizations), accumulating monthly transactional activity (transactions) and providing a monthly statement (statement generation). From these core services, TSYS’ clients also have the option to use fraud and portfolio management services. Collectively, these services are considered volume-based revenues.

Non-volume related revenues include processing fees which are not directly associated with AOF and transactional activity, such as value added products and services, custom programming and certain other services, which are only offered to TSYS’ processing clients.

 

21


Value added products and services, which includes services such as data analytics and application processing, are primarily non-volume related, are only offered to TSYS’ processing clients (i.e., indirectly derived from accounts on file). These ancillary products and services, along with offerings such as card production, statement production, managed services, customized reporting and custom programming provided to clients at an hourly rate, are considered non-volume based products and services.

Additionally, certain clients license the Company’s processing systems and process in-house. Since the accounts are processed outside of TSYS for licensing arrangements, the AOF and other volumes are not available to TSYS. Thus, volumes reported by TSYS do not include volumes associated with licensing.

A summary of each segment’s results follows:

North America Services

The North America Services segment provides issuer account solutions for financial institutions and other organizations primarily based in North America. Growth in revenues and operating profit in this segment is derived from retaining and growing the core business and improving the overall cost structure. Growing the core business comes primarily from an increase in account usage, growth from existing clients (also referred to as organic growth) and sales to new clients and the related account conversions.

On July 19, 2012, TSYS announced that it finalized a master services agreement, with a minimum six year term, with Bank of America to provide processing services for its consumer credit card portfolios in the U.S. In addition, TSYS will continue to process Bank of America’s commercial credit card portfolios in the U.S. and internationally. In the first quarter of 2015, TSYS completed the conversion of Bank of America’s consumer card portfolio from its in-house processing system to TSYS’ processing system. Following the processing term, the agreement provides Bank of America the option to use the TS2 software pursuant to a license under a long-term payment structure for purposes of processing its consumer card portfolio.

The master services agreement with Bank of America provides for a tiered-pricing arrangement for both the consumer card portfolio and the existing commercial card portfolios.

This segment has one major customer. Below is a summary of the North America Services segment:

 

 

     Years Ended December 31,     Percent Change  
(in millions)    2014     2013     2012     2014 vs. 2013     2013 vs. 2012  

Total revenues

   $ 1,117.8        1,000.1        965.4        11.8     3.6

Revenues before reimbursable items

     954.1        860.6        826.8        10.9        4.1   

Adjusted segment operating income1

     351.5        321.6        295.2        9.3        9.0   

Adjusted segment operating margin2

     36.8     37.4     35.7    

Key indicators:

          

AOF

     550.0        481.9        424.8        14.1        13.4   

Transactions

     10,838.0        9,132.8        8,102.3        18.7        12.7   

 

 

1 Adjusted segment operating income excludes acquisition intangible amortization and expenses associated with Corporate Administration and Other.
2 Adjusted segment operating margin equals adjusted segment operating income divided by revenues before reimbursable items.

Total segment revenues increased $117.7 million for 2014, as compared to 2013. The increase is attributable to an increase in new business, internal growth and reimbursable items, partially offset by decreases related to client deconversions and price reductions. Total segment revenues increased $34.7 million for 2013, as compared to 2012. The increase is attributable to an increase in new business, internal growth and reimbursable items, partially offset by decreases related to client deconversion, price reductions and other adjustments. The decreases in 2013 and 2012 caused by price reductions are related to a tiered-pricing arrangement signed in the third quarter of 2012.

 

22


The increase in adjusted segment operating income for 2014, as compared to 2013, is driven by an increase in revenues partially offset by increases in total operating expenses. The increase in adjusted segment operating income for 2013, as compared to 2012, is also driven by an increase in revenues partially offset by increases in expenses.

For the year ended December 31, 2014, approximately 50.4% of revenues before reimbursable items of TSYS’ North America Services segment are driven by the volume of accounts on file and transactions processed and approximately 49.6% were derived from non-volume based revenues, such as processing fees, value-added products and services, custom programming and licensing arrangements.

 

 

     Years Ended December 31,      Percent Change  
(in millions)    2014      2013      2012      2014 vs. 2013     2013 vs. 2012  

Volume-based revenues

   $ 480.4         433.7         405.3         10.8     7.0
  

 

 

    

 

 

    

 

 

      

Non-volume related revenues:

             

Processing fees

     216.7         195.4         183.1         10.9        6.7   

Value-added, custom programming, licensing and other

     115.7         110.4         124.1         4.8        (11.0

Output and managed services

     141.3         121.1         114.3         16.7        5.9   
  

 

 

    

 

 

    

 

 

      

Total non-volume related revenues

     473.7         426.9         421.5         11.0        1.3   
  

 

 

    

 

 

    

 

 

      

Total revenues before reimbursable items

     954.1         860.6         826.8         10.9        4.1   

Reimbursable items

     163.7         139.5         138.6         17.4        0.7   
  

 

 

    

 

 

    

 

 

      

Total revenues

   $ 1,117.8         1,000.1         965.4         11.8     3.6
  

 

 

    

 

 

    

 

 

      

 

 

International Services

The International Services segment provides issuer card solutions to financial institutions and other organizations primarily based outside the North America region. Growth in revenues and operating profit in this segment is derived from retaining and growing the core business and improving the overall cost structure. Growing the core business comes primarily from an increase in account usage, growth from existing clients and sales to new clients and the related account conversions.

This segment has two major customers.

Below is a summary of the International Services segment:

 

 

     Years Ended December 31,     Percent Change  
(in millions)    2014     2013     2012     2014 vs. 2013     2013 vs. 2012  

Total revenues

   $ 363.4        341.5        336.0        6.4     1.6

Revenues before reimbursable items

     341.8        321.5        318.7        6.3        0.9   

Adjusted segment operating income1

     55.1        42.1        27.2        31.0        54.6   

Adjusted segment operating margin2

     16.1     13.1     8.5    

Key indicators:

          

AOF

     66.6        59.1        54.5        12.7        8.5   

Transactions

     2,268.4        2,007.4        1,667.6        13.0        20.4   

 

 

1 Adjusted segment operating income excludes acquisition intangible amortization and expenses associated with Corporate Administration and Other.
2 Adjusted segment operating margin equals adjusted segment operating income divided by revenues before reimbursable items.

The 6.4% increase in total segment revenues for the year ended December 31, 2014, as compared to 2013, is driven by increases in organic growth, including $14.8 million of currency translation. Reimbursable items for 2014 were $21.6 million, which was an increase of $1.5 million, or 7.5%, compared to $20.0 million for 2013.

 

23


Total segment revenues increased $5.5 million for 2013, as compared to 2012. The increase is mainly attributable to increases in organic growth and $2.7 million in reimbursable items, which is partially offset by a decrease of $5.6 million foreign currency translation and other adjustments.

Excluding reimbursable items, revenues increased 6.3% for 2014, as compared to 2013, and 2013 increased 0.9%, as compared to 2012, as a result of increases from organic growth, partially offset by decreases in client deconversions and pricing concessions.

The increase in adjusted segment operating income for 2014 as compared to 2013, is driven primarily from an increase in revenues partially offset by an increase in employee related expenses. Movements in foreign currency exchange rates as compared to the U.S. Dollar can result in foreign denominated financial statements being translated into more or fewer U.S. Dollars, which impacts the comparison to prior periods when the U.S. Dollar was stronger or weaker.

For the year ended December 31, 2014, approximately 38.4% of the revenues before reimbursable items of TSYS’ International Services segment are driven by the volume of accounts on file and transactions processed and approximately 61.6% are derived from non-volume based revenues, such as processing fees, value-added products and services, custom programming and licensing arrangements.

 

 

     Years Ended December 31,      Percent Change  
(in millions)      2014          2013          2012        2014 vs. 2013     2013 vs. 2012  

Volume-based revenues

   $ 131.3         126.7         125.1         3.6     1.3
  

 

 

    

 

 

    

 

 

      

Non-volume related revenues:

             

Processing fees

     69.4         61.5         53.4         12.7        15.3   

Value-added, custom programming, licensing and other

     95.0         92.8         94.4         2.4        (1.8

Output and managed services

     46.1         40.5         45.8         13.9        (11.6
  

 

 

    

 

 

    

 

 

      

Total non-volume related revenues

     210.5         194.8         193.6         8.1        0.6   
  

 

 

    

 

 

    

 

 

      

Total revenues before reimbursable items

     341.8         321.5         318.7         6.3        0.9   

Reimbursable items

     21.6         20.0         17.3         7.5        15.9   
  

 

 

    

 

 

    

 

 

      

Total revenues

   $ 363.4         341.5         336.0         6.4     1.6
  

 

 

    

 

 

    

 

 

      

 

 

Merchant Services

The Merchant Services segment provides merchant services and related services to clients based primarily in the United States. The Merchant Services segment’s revenues are derived from providing processing services, acquiring solutions, related systems and integrated support services to merchant acquirers and merchants. Revenues from merchant services include processing all payment forms including credit, debit, prepaid, electronic benefit transfer and electronic check for merchants of all sizes across a wide array of market verticals. Merchant services include authorization and capture of transactions; clearing and settlement of transactions; information reporting services related to transactions; merchant billing services; and point-of-sale equipment sales and service.

In June 2009, Bank of America announced that it formed a new joint venture to provide merchant services. In November 2010, TSYS and Bank of America agreed to a new agreement, during the term of which TSYS expects merchant services revenues from Bank of America to decline as Bank of America transitions its services to its new joint venture. The loss of Bank of America as a merchant services client is not expected to have a material adverse effect on TSYS’ financial position, results of operations or cash flows. However, the loss will have a significant adverse effect on the Merchant Services segment’s financial position, results of operations and cash flows.

Effective June 2013, the Company renewed its processing agreement, which includes revenue minimums, with Bank of America for an additional two years.

This segment has no major customers.

 

24


Below is a summary of the Merchant Services segment:

 

 

     Years Ended December 31,     Percent Change  
(in millions)    2014     2013     2012     2014 vs. 2013     2013 vs. 2012  

Total revenues

   $ 510.1        533.1        512.6        (4.3 )%      4.0

Revenues before reimbursable items

     435.6        446.3        409.7        (2.4     8.9   

Adjusted segment operating income1

     134.9        155.6        157.4        (13.3     (1.1

Adjusted segment operating margin2

     31.0     34.9     38.4    

Key indicators:

          

Point-of-Sale transactions

     4,052.7        4,359.8        4,877.6        (7.0     (10.6

Dollar sales volume

   $ 46,847.0        44,144.0        38,994.0        6.1        13.2   

 

 

1 Adjusted segment operating income excludes acquisition intangible amortization and expenses associated with Corporate Administration and Other.
2 Adjusted segment operating margin equals adjusted segment operating income divided by revenues before reimbursable items.

Total segment revenues decreased $23.0 million for 2014, as compared to 2013. This decrease includes $33.7 million associated with lost business, deconversions and price reductions and $12.3 million in reimbursable items offset by $23.0 million in new business and internal growth. Total segment revenues increased $20.5 million for 2013, as compared to 2012. This increase is attributable to a $62.4 million increase from acquisitions and $26.6 million in new business and internal growth partially offset by $52.4 million associated with lost business, deconversions and price reductions as well as a $16.1 million decrease in reimbursable items.

The decrease in adjusted segment operating income for 2014 and 2013 is driven by lower third party processing revenues and incremental costs related to integration projects.

The Merchant Services segment results are driven by dollar sales volume and the authorization and capture transactions processed at the point-of-sale and clearing and settlement transactions. This segment’s authorization and capture transactions are primarily through dial-up or Internet connectivity.

NetSpend

The NetSpend segment is a program manager for FDIC-insured depository institutions that issue GPR cards and payroll cards and provide alternative financial services to underbanked and other consumers in the United States. The products within this segment provide underbanked consumers with access to FDIC-insured depository accounts with a menu of pricing and features specifically tailored to their needs. This segment has an extensive distribution and reload network comprised of financial service centers, employers and retail locations throughout the United States. The NetSpend segment markets prepaid cards through multiple distribution channels, including alternative financial service providers, traditional retailers, direct-to-consumer and online marketing programs and contractual relationships with corporate employers.

The NetSpend segment’s revenues primarily consist of a portion of the service fees and interchange revenues received by NetSpend’s prepaid card Issuing Banks in connection with the programs managed by this segment. Cardholders are charged fees for transactions including fees for PIN and signature-based purchase transactions made using their prepaid cards, for ATM withdrawals or other transactions conducted at ATMs, for balance inquiries, and monthly maintenance fees among others. Cardholders are also charged fees associated with additional products and services offered in connection with certain cards including the use of overdraft features, bill payment options, custom card designs and card-to-card transfers of funds initiated through call centers. The NetSpend segment also earns revenues from a portion of the interchange fees remitted by merchants when cardholders make purchase transactions using their cards. Subject to applicable law, interchange fees are fixed by card associations and network organizations.

 

25


Below is a summary of the NetSpend segment:

 

 

     Years Ended December 31,     Percent Change  
(millions)          2014                 2013           2014 vs. 2013  

Total revenues (and revenues before reimbursable items)

   $ 482.7        207.9        nm   

Adjusted segment operating income1

     128.3        66.4        nm   

Adjusted segment operating margin2

     26.6     31.9  

Key indicators:

      

Number of active cards

     3.2        2.8        13.4   

Number of active cards with direct deposit

     1.6        1.3        21.9   

Percentage of active cards with direct deposit

     50.1     46.6  

Gross dollar volume

   $ 20,296.0        7,748.5        nm   

nm = not meaningful. Amounts are not comparable because the amounts for 2013 only include six months of results compared to twelve months of results for 2014

 

 

1 Adjusted segment operating income excludes acquisition intangible amortization and expenses associated with Corporate Administration and Other.
2 Adjusted segment operating margin equals adjusted segment operating income divided by revenues before reimbursable items.

The results noted above for the year 2013 are for the period from July 1, 2013, the date that TSYS acquired NetSpend, through December 31, 2013. Number of active cards represents the total number of prepaid cards that have had a PIN or signature-based purchase transaction, a point-of-sale load transaction or an ATM withdrawal within three months of the date of determination. Number of active cards with direct deposit represents the number of active cards that have had a direct deposit load within three months of the date of determination. Gross dollar volume represents the total dollar volume of debit transactions and cash withdrawals made using the prepaid cards the NetSpend segment manages.

NetSpend segment revenues increased $274.8 million for 2014, as compared to 2013. This increase is attributable mainly to the inclusion of a full twelve months of results in 2014. The $482.7 million of revenues for 2014 was a combination of 70.3% of revenues derived from fees charged to cardholders and 29.7% of revenues derived from interchange and other revenues. The $207.9 million of revenue for 2013 was a combination of 74.9% of revenues derived from fees charged to cardholders and 25.1% of revenues derived from interchange and other revenues. Service fee revenues are driven by the number of active cards which totaled approximately 3.2 million and 2.8 million as of December 31, 2014 and 2013, respectively, and in particular by the number of cards with direct deposit. Cardholders with direct deposit generally initiate more transactions and generate more revenues than those that do not take advantage of this feature. Interchange revenues are driven by gross dollar volume, which totaled approximately $20.3 billion and $7.7 billion for the periods ended December 31, 2014 and 2013, respectively. Substantially all of the NetSpend segment revenues are volume driven as they are driven by the active card and gross dollar volume indicators.

Cardholder funds and deposits related to NetSpend’s prepaid products are held at FDIC-insured Issuing Banks for the benefit of the cardholders. NetSpend currently has active agreements with five Issuing Banks.

NetSpend’s prepaid card business derived approximately one-third of its revenues from cardholders acquired through one of its third-party distributors.

Operating Expenses

The Company’s operating expenses consist of cost of services and selling, general and administrative expenses. Cost of services describes the direct expenses incurred in performing a particular service for customers, including the cost of direct labor expense in putting the service in saleable condition. Selling, general and administrative expenses are incurred in selling or marketing and for the direction of the enterprise as a whole, including accounting, legal fees, officers’ salaries, investor relations and mergers and acquisitions.

The changes in cost of services, and selling, general and administrative expenses for the years ended December 31, 2014 and 2013 include an increase of $5.9 million and a decrease of $16.9 million, respectively,

 

26


related to the effects of currency translation of the Company’s foreign-based subsidiaries and branches along with increases in expense due to the NetSpend acquisition and a significant nonrecurring charitable contribution in the fourth quarter of 2014. The impact of acquisitions on operating expenses was $238.3 million in 2014, $217.4 million in 2013, and $20.0 million in 2012.

Federal legislation was enacted which made extensive changes to the system of health care insurance and benefits. The Company estimates the legislation increased expenses in the years ended 2014, 2013, and 2012 by approximately $1.8 million, $1.1 million and $600,000 respectively.

The Company’s merger and acquisition expenses were $3.2 million, $14.2 million and $1.7 million for the years ended December 31, 2014, 2013 and 2012, respectively. These expenses consist of legal, accounting and professional fees, as well as, personnel costs for severance and retention.

Nonoperating Income (Expense)

Nonoperating income (expense) consists of interest income, interest expense, gains and losses on currency translations and gains and losses on investments in private equity. Nonoperating income (expense) decreased in 2014 as compared to 2013, and decreased in 2013 as compared to 2012.

Interest income for 2014 and 2013 was $1.1 million and $1.5 million, respectively, a decrease of 25.8%. Interest income in 2012 was $1.5 million. The variation in interest income is primarily attributable to changes in short-term interest rates in 2014 and 2013 and the amount of cash available for investments.

Interest expense for the year ended December 31, 2014 was $41.0 million, an $8.6 million increase when compared to $32.4 million in 2013. The interest expense on the bonds for the year ended December 31, 2014 was $33.7 million. The $32.4 million of interest expense for the year ended December 31, 2013 was a $29.5 million increase when compared to $2.9 million in 2012. The Company’s interest expense related to a bridge loan facility and bonds was $5.9 million and $20.0 million, respectively, for the year ended December 31, 2013. These expenses were related to financing the NetSpend acquisition.

For the years ended December 31, 2014, 2013 and 2012, the Company recorded a translation gain of approximately $142,000 and translation losses of approximately $1.0 million and $2.1 million, respectively, related to intercompany loans and foreign denominated cash and accounts receivable balances.

The Company recorded gains on its investments in private equity of $793,000, $966,000 and $898,000 for the years ended December 31, 2014, 2013 and 2012, respectively, due to changes in fair value.

Income Taxes

Income tax expense was $129.8 million, $111.0 million, and $114.1 million in 2014, 2013 and 2012, respectively, representing effective income tax rates of 32.0%, 31.5%, and 31.9%, respectively. The calculation of the effective tax rate excludes noncontrolling interest in consolidated subsidiaries’ net income and includes equity in income of equity investments in pretax income.

During 2014, the Company generated income tax credits in excess of its utilization capacity based on both the Company’s current operations and with consideration of future tax planning strategies. Based upon these same considerations, the Company reassessed its need for valuation allowances in all jurisdictions. Accordingly, the Company experienced a net increase in its valuation allowance for deferred income tax assets of $4.3 million.

TSYS has adopted the permanent reinvestment exception as allowed by GAAP, with respect to future earnings of certain foreign subsidiaries. As a result, TSYS considers foreign earnings related to these foreign operations to be permanently reinvested. No provision for U.S. federal and state incomes taxes has been made in the Consolidated Financial Statements for those non-U.S. subsidiaries whose earnings are considered to be reinvested. The amount of undistributed earnings considered to be “reinvested” which may be subject to tax

 

27


upon distribution was approximately $90.3 million as of December 31, 2014. Although TSYS does not intend to repatriate these earnings, a distribution of these non-U.S. earnings in the form of dividends, or otherwise, would subject the Company to both U.S. federal and state income taxes, as adjusted for non-U.S. tax credits, and withholding taxes payable to the various non-U.S. countries. Determination of the amount of any unrecognized deferred income tax liability on these undistributed earnings is not practicable.

In 2014, TSYS reassessed its contingencies for foreign, federal and state exposures, which resulted in a net increase in tax contingency amounts of approximately $4.0 million.

Refer to Note 15 in the Consolidated Financial Statements for more information on income taxes.

Equity in Income of Equity Investments

TSYS’ share of income from its equity in equity investments was $17.6 million, $13.0 million and $10.2 million for 2014, 2013 and 2012, respectively. The increase in equity income is the result of the growth in CUP Data. Refer to Note 12 in the Consolidated Financial Statements for more information on equity investments.

Discontinued Operations

TSYS sold its Japan-based operations during 2014 and recorded income from discontinued operations, net of tax, of $48.7 million, $2.1 million and $1.0 million for 2014, 2013 and 2012, respectively. All current and prior period results and discussions exclude the impact of any Japan-based operations occurring during the respective years. Refer to Note 2 in the Consolidated Financial Statements for more information on discontinued operations.

Net Income

Net income increased 28.4% to $329.4 million in 2014, compared to 2013. In 2013, net income increased 2.7% to $256.6 million, compared to $249.9 million in 2012.

Net income attributable to noncontrolling interests in 2014 decreased to $6.5 million, as compared to $11.8 million in 2013 and $5.6 million in 2012. The decrease in 2014 was a result of the purchase of an additional 15% equity interest in CPAY in 2014. The increase in 2013, as compared to 2012, was the result of a full year’s results following the acquisition of 60% of CPAY in 2012.

In 2014, net income attributable to TSYS common shareholders increased 31.9% to $322.9 million (basic and diluted EPS of $1.73 and $1.72, respectively), compared to $244.8 million (basic and diluted EPS of $1.30 and $1.29, respectively) in 2013. Net income attributable to TSYS common shareholders increased 0.2% in 2013, compared to $244.3 million (basic and diluted EPS of $1.30 and $1.29, respectively) in 2012.

Non-GAAP Financial Measures

Management evaluates the Company’s operating performance based upon operating margin excluding reimbursables, adjusted EPS and adjusted EBITDA, which are all non-generally accepted accounting principles (non-GAAP) measures. TSYS also uses these non-GAAP financial measures to evaluate and assess TSYS’ financial performance against budget.

Although not a substitute for GAAP, TSYS believes that non-GAAP financial measures are important to enable investors to understand and evaluate its ongoing operating results. Accordingly, TSYS includes non-GAAP financial measures when reporting its financial results to shareholders in order to provide them with an additional tool to evaluate TSYS’ ongoing business operations. TSYS believes that the non-GAAP financial measures are representative of comparative financial performance that reflects the economic substance of TSYS’ current and ongoing business operations.

Although non-GAAP financial measures are often used to measure TSYS’ operating results and assess its financial performance, they are not necessarily comparable to similarly titled captions of other companies due to potential inconsistencies in the method of calculation.

 

28


TSYS believes that its use of non-GAAP financial measures provides investors with the same key financial performance indicators that are utilized by management to assess TSYS’ operating results, evaluate the business and make operational decisions on a prospective, going-forward basis. Hence, management provides disclosure of non-GAAP financial measures to give shareholders and potential investors an opportunity to see TSYS as viewed by management, to assess TSYS with some of the same tools that management utilizes internally and to be able to compare such information with prior periods. TSYS believes that the presentation of GAAP financial measures alone would not provide its shareholders and potential investors with the ability to appropriately analyze its ongoing operational results, and therefore expected future results. TSYS therefore believes that inclusion of non-GAAP financial measures provides investors with additional information to help them better understand its financial statements just as management utilizes these non-GAAP financial measures to better understand the business, manage budgets and allocate resources.

The following tables provide a reconciliation of GAAP to non-GAAP financial measures:

Revenues Before Reimbursable Items and Operating Margin Excluding Reimbursable Items

 

 

 

                                                     
     Years Ended December 31,  
(in thousands except per share data)    2014     2013     2012  

Operating income (a)

   $ 431,640        382,500        354,969   
  

 

 

   

 

 

   

 

 

 

Total revenues (b)

   $ 2,446,877        2,064,305        1,793,557   

Less reimbursable items

     253,899        240,597        252,481   
  

 

 

   

 

 

   

 

 

 

Revenues before reimbursable items (c)

   $ 2,192,978        1,823,708        1,541,076   
  

 

 

   

 

 

   

 

 

 

Operating margin (as reported) (a)/(b)

     17.64     18.53     19.79
  

 

 

   

 

 

   

 

 

 

Operating margin excluding reimbursables (a)/(c)

     19.68     20.97     23.03
  

 

 

   

 

 

   

 

 

 

 

 

Adjusted EBITDA

 

 

                                                     
     Years Ended December 31,  
(in thousands)    2014      2013      2012  

Net income

   $ 329,406         256,597         249,923   

Adjusted for:

        

Income from discontinued operations

     (48,655      (2,055      (995

Equity in income of equity investments, net of taxes

     (17,583      (13,047      (10,171

Income taxes

     129,761         110,981         114,116   

Nonoperating expenses, net

     38,711         30,024         2,096   

Depreciation and amortization

     246,620         199,026         163,400   
  

 

 

    

 

 

    

 

 

 

EBITDA

     678,260         581,526         518,369   

Adjusted for:

        

Share-based compensation

     30,790         28,933         18,621   

NetSpend merger and acquisition expenses*

     3,217         13,634           
  

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 712,267         624,093         536,990   
  

 

 

    

 

 

    

 

 

 

 

 

* Excludes share-based compensation

 

29


Adjusted Earnings Per Share

 

 

 

     Years Ended December 31,  
(in thousands except per share data)    2014      2013      2012  

Income from continuing operations attributable to TSYS common shareholders

        

As reported (GAAP)

   $ 275,216         246,893         247,149   
  

 

 

    

 

 

    

 

 

 

Adjust for amounts attributable to TSYS common shareholders (net of taxes):

        

Acquisition intangible amortization

     65,127         43,743         17,272   

Share-based compensation

     20,944         19,830         12,676   

NetSpend merger and acquisition expenses

     3,115         15,251           
  

 

 

    

 

 

    

 

 

 

Adjusted earnings

   $ 364,402         325,717         277,097   
  

 

 

    

 

 

    

 

 

 

Basic EPS—Income from continuing operations attributable to TSYS common shareholders

        

As reported (GAAP)

   $ 1.48         1.31         1.31   
  

 

 

    

 

 

    

 

 

 

Adjust for amounts attributable to TSYS common shareholders (net of taxes):

        

Acquisition intangible amortization

     0.35         0.23         0.09   

Share-based compensation

     0.11         0.11         0.07   

NetSpend merger and acquisition expenses

     0.02         0.08           
  

 

 

    

 

 

    

 

 

 

Adjusted EPS*

   $ 1.96         1.73         1.47   
  

 

 

    

 

 

    

 

 

 

Average common shares and participating securities

     186,222         188,391         188,030   
  

 

 

    

 

 

    

 

 

 

 

 

* Adjusted EPS amounts do not total due to rounding.

Projected Outlook for 2015

As compared to 2014, TSYS expects its 2015 total revenues to increase by 7%-9%, its revenues before reimbursable items to increase by 8%-10%, and its adjusted EPS from continuing operations attributable to TSYS common shareholders to increase by 11%-13%, based on the following assumptions with respect to 2015: (1) there will be no significant movements in the London Interbank Offered Rate (LIBOR) and TSYS will not make any significant draws on the remaining balance of its revolving credit facility; (2) there will be no significant movement in foreign currency exchange rates related to TSYS’ business; (3) TSYS will not incur significant expenses associated with the conversion of new large clients other than that included in the 2015 estimate, additional acquisitions, or any significant impairment of goodwill or other intangibles; (4) there will be no deconversions of large clients during the year; and (5) the economy will not worsen. In addition, TSYS’ earnings guidance for 2015 does not include the impact of share repurchases.

Financial Position, Liquidity and Capital Resources

The Consolidated Statements of Cash Flows detail the Company’s cash flows from operating, investing and financing activities. TSYS’ primary methods for funding its operations and growth have been cash generated from current operations, the use of leases and the occasional use of borrowed funds to supplement financing of capital expenditures.

Cash Flows from Operating Activities

 

 

 

     Years Ended December 31,  
(in thousands)    2014     2013     2012  

Net income

   $ 329,406        256,597        249,923   

Depreciation and amortization

     248,018        205,351        170,610   

Other noncash items and charges, net

     (27,928     76,744        20,593   

Net change in current and other assets and current and other liabilities

     10,705        (86,294     14,627   
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

   $ 560,201        452,398        455,753   
  

 

 

   

 

 

   

 

 

 

 

 

 

30


TSYS’ main source of funds is derived from operating activities, specifically net income. The increase in 2014, as compared to 2013, in net cash provided by operating activities was primarily the result of increased earnings. The decrease in 2013, as compared to 2012, in net cash provided by operating activities was primarily the result of the net change in current and other assets and current and other liabilities partially offset by increased earnings.

Net change in current and other assets and current and other liabilities include accounts receivable, prepaid expenses, other current assets and other assets, accounts payable, accrued salaries and employee benefits and other liabilities. The change in accounts receivable between the years is the result of timing of collections compared to billings. The change in accounts payable and other liabilities between years is the result of the timing of payments and funding of performance-based incentives.

Cash Flows from Investing Activities

 

 

 

     Years Ended December 31,  
(in thousands)    2014     2013     2012  

Additions to contract acquisition costs

   $ (88,871     (55,965     (34,384

Purchases of property and equipment, net

     (75,913     (40,598     (31,395

Additions to internally developed computer software

     (41,501     (33,600     (19,285

Cash used in acquisitions, net of cash acquired

     (38,584     (1,314,660     (188,698

Additions to licensed computer software from vendors

     (29,638     (63,635     (33,001

Purchase of private equity investments

     (3,291     (1,378     (3,031

Proceeds from insurance recovery for loss on disposal

     6,212                 

Proceeds from dispositions, net of expenses paid and cash disposed

     44,979                 
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

   $ (226,607     (1,509,836     (309,794
  

 

 

   

 

 

   

 

 

 

 

 

The major uses of cash for investing activities in 2014, 2013 and 2012 were for additions to contract acquisition costs, equipment, acquisitions, internally developed computer software and licensed computer software from vendors.

Contract Acquisition Costs

TSYS makes cash payments for processing rights, third-party development costs and other direct salary-related costs in connection with converting new customers to the Company’s processing systems. The Company’s investments in contract acquisition costs were $88.9 million in 2014, $56.0 million in 2013 and $34.4 million in 2012. The Company made cash payments for processing rights of $21.7 million, $9.7 million and $14.4 million in 2014, 2013 and 2012, respectively. Conversion cost additions were $67.2 million, $46.3 million and $20.0 million in 2014, 2013 and 2012, respectively. The increase in conversion costs in 2014 compared to 2013 and 2013 compared to 2012 is primarily related to the conversion of Bank of America’s consumer card portfolio.

Property and Equipment

Capital expenditures for property and equipment were $75.9 million in 2014, compared to $40.6 million in 2013 and $31.4 million in 2012. The majority of capital expenditures in 2014 related to computer processing hardware. The majority of capital expenditures in 2013 related to investments in computer processing hardware and building improvements. The majority of capital expenditures in 2012 related to computer processing hardware.

Internally Developed Computer Software Costs

Additions to capitalized software development costs, including enhancements to, and development of, processing systems, were $41.5 million in 2014, $33.6 million in 2013, and $19.3 million in 2012. The increase in capitalized software development costs in 2014 and 2013 was the result of two corporate-wide initiatives. One initiative is a multi-year, multi-phase initiative that consists of enhancing TSYS’ issuing processing platforms. The other is an innovation initiative focused on enhancing existing product and service offerings through several new product concepts and ideas on how to change existing processes.

 

31


Cash Used in Acquisitions

In 2014, the Company paid $38.6 million to NetSpend dissenting shareholders to settle the outstanding lawsuit associated with the NetSpend acquisition. In 2013, the Company used cash of $1.3 billion in the acquisition of NetSpend. In 2012, the Company used cash of $188.7 million in the acquisitions of ProPay and CPAY. Refer to Note 24 in the Consolidated Financial Statements for more information on these acquisitions.

Licensed Computer Software from Vendors

Expenditures for licensed computer software from vendors for increases in processing capacity were $29.6 million in 2014, compared to $63.6 million in 2013 and $33.0 million in 2012. The increase in expenditures in 2013 was driven by purchases of software in anticipation of large conversions in 2014 and beyond.

Purchase of Private Equity Investments

In 2011, the Company entered into a limited partnership agreement in connection with its agreement to invest in an Atlanta, Georgia-based venture capital fund focused exclusively on investing in technology-enabled financial services companies. Pursuant to the limited partnership agreement, the Company has committed to invest up to $20 million in the fund so long as its ownership interest in the fund does not exceed 50%. The Company made investments in the fund of $3.3 million, $1.4 million and $3.0 million in 2014, 2013 and 2012, respectively. The Company recorded gains on this investment of $793,000, $966,000 and $898,000 for the years ended December 31, 2014, 2013 and 2012, respectively.

Proceeds from Insurance Recovery for Loss on Disposal

The Company received $6.2 million of proceeds from insurance coverage related to the destruction of property resulting from a fire. The Company recorded the loss on disposal which was more than offset by the insurance proceeds received.

Proceeds from Dispositions

During 2014, TSYS sold its Japan-based operations and received $45.0 million of proceeds, net of expenses paid and cash disposed in connection with this transaction. Refer to Note 2 in the Consolidated Financial Statements for more information on discontinued operations.

Cash Flows from Financing Activities

 

 

 

     Years Ended December 31,  
(in thousands)    2014     2013     2012  

Repurchase of common stock under plans and tax withholding

   $ (170,516     (103,857     (74,939

Dividends paid on common stock

     (74,796     (56,510     (94,035

Principal payments on long-term borrowings and capital lease obligations

     (69,939     (166,805     (200,052

Purchase of noncontrolling interest

     (37,500              

Subsidiary dividends paid to noncontrolling shareholders

     (7,172     (7,321     (2,797

Debt issuance costs

            (13,573     (2,073

Proceeds from long-term borrowings

     1,396        1,395,661        150,000   

Excess tax benefit from share-based payment arrangements

     7,185        3,528        1,259   

Proceeds from exercise of stock options

     34,869        40,691        9,672   
  

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

   $ (316,473     1,091,814        (212,965
  

 

 

   

 

 

   

 

 

 

 

 

The main source of cash from financing activities has been the use of borrowed funds. The major uses of cash for financing activities have been the purchase of stock under the stock repurchase plan as described below, payment of dividends, principal payment on long term debt and capital lease obligations, and purchase of noncontrolling interests. Net cash used in financing activities for the year ended December 31, 2014 was $316.5 million and was primarily the result of the repurchase of common stock, payment of dividends, and

 

32


principal payments on long-term debt borrowings and capital lease obligations offset by proceeds from the exercise of stock options. Net cash provided by financing activities for the year ended December 31, 2013 was $1.1 billion and was primarily the result of proceeds from long term borrowings in connection with the NetSpend acquisition. Net cash used in financing activities for the year ended December 31, 2012 was $213.0 million and was primarily the result of principal payments on long-term debt borrowings and capital lease obligations, the repurchase of common stock, and payment of dividends offset by proceeds from borrowings of long-term debt. Refer to Notes 13 and 24 in the Consolidated Financial Statements for more information on the long-term debt financing and acquisitions.

Financing

In connection with the NetSpend acquisition, the Company obtained commitments for a $1.2 billion 364-day bridge term loan facility. In May, 2013 the Company closed the bridge term loan and issued debt of $1.4 billion to finance the NetSpend acquisition. In April 2013, the Company entered into a new credit agreement that provided for a five-year term loan to the Company in the amount of $200.0 million. In May 2013, the Company closed its issuance of $550.0 million aggregate principal amount of 2.375% Senior Notes due 2018 and $550.0 million aggregate principal amount of 3.750% Senior Notes due 2023 (collectively, the “Notes”). The interest on the Notes is payable semiannually. Upon the issuance of the Notes, the Company eliminated its bridge term loan facility. In July 2013, the Company borrowed $100 million on its revolving credit facility which was repaid as of December 31, 2013. In connection with the bridge term loan facility and the aforementioned loans, the Company paid debt issuance costs of $13.6 million in 2013.

In September 2012, TSYS obtained a $150.0 million term loan, which was used to pay off an existing term loan. During 2008 and 2009, the Company’s International segment borrowed approximately ¥2.0 billion in a Yen-denominated three-year loan to finance activities in Japan. In December 2013, the Company repaid this loan for approximately $19.2 million.

Refer to Note 13 in the Consolidated Financial Statements for further information on TSYS’ long-term debt and financing arrangements.

Purchase of Noncontrolling Interest

In connection with the acquisition of CPAY, the Company is party to call and put arrangements with respect to the membership units that represent the remaining noncontrolling interest of CPAY. The call arrangement is exercisable by TSYS and the put arrangement is exercisable by the Seller. The put arrangement is outside the control of the Company by requiring the Company to purchase the Seller’s entire equity interest in CPAY at a put price at fair market value. At the time of the original acquisition, the redemption of the put option was considered probable based upon the passage of time of the second anniversary date. The put arrangement is recorded on the balance sheet and is classified as redeemable noncontrolling interest outside of permanent equity.

In February 2014, the Company purchased an additional 15% equity interest in CPAY for $37.5 million, reducing its redeemable noncontrolling interest to 25%. The call and put options for the Seller’s 25% equity interest were extended as a result of this transaction.

The put option is not currently redeemable, but redemption is considered probable based upon the passage of time toward the third anniversary date of the 2014 purchase of additional equity. The Company’s accounting policy is to accrete changes in the redemption value over the period from the date of issuance to the earliest redemption date, which the Company believes to be in 2017. The Company did not accrete any changes to the redemption value as the balance as of December 31, 2014 exceeded the accretion fair value amount.

Refer to Note 24 in the Consolidated Financial Statements for more information on this purchase.

 

33


Stock Repurchase Plan

In April 2010, TSYS announced a stock repurchase plan to purchase up to 10 million shares of TSYS stock. The shares may be purchased from time to time over the next two years at prices considered attractive to the Company. In May 2011, TSYS announced that its Board had approved an increase in the number of shares that may be repurchased under its current share repurchase plan from up to 10 million shares to up to 15 million shares of TSYS stock. The expiration date of the plan was also extended to April 30, 2013. In July 2012, TSYS announced that its Board had approved an increase in the number of shares that may be repurchased under its current share repurchase plan from up to 15 million shares to up to 20 million shares of TSYS stock. The expiration date of the plan was also extended to April 30, 2014. In January, 2014, TSYS announced that its Board had approved an increase in the number of shares that may be repurchased under its current share repurchase plan from up to 20 million shares to up to 28 million shares of TSYS stock. With the increase, TSYS had 6.8 million shares available to be repurchased. In addition, the expiration date of the plan was extended to April 30, 2015. Through December 31, 2014, the Company purchased 21.2 million shares for approximately $503.3 million, at an average price of $23.75.

On January 27, 2015, TSYS announced that its Board had approved a new stock repurchase plan to repurchase up to 20 million shares of TSYS stock. The shares may be purchased from time to time at prices considered appropriate. There is no expiration date for the plan. The plan discussed in the preceding paragraph was terminated.

Dividends

Dividends on common stock of $74.8 million were paid in 2014, compared to $56.5 million and $94.0 million in 2013 and 2012, respectively. The Company paid dividends of $0.40 per share in 2014, $0.30 per share in 2013 and $0.50 per share in 2012. The decrease in dividends paid in 2013 compared to 2012 is due to the acceleration of payment of the fourth quarter 2012 dividend. The fourth quarter 2012 dividend payment was paid in December, rather than January, to allow shareholders to benefit from the lower dividend tax rate that was set to expire on December 31, 2012.

Significant Noncash Transactions

During 2014, 2013 and 2012, the Company issued 673,000, 1.7 million and 311,000 shares of common stock, respectively, to certain key employees and non-management members of its Board of Directors. The grants to certain key employees were issued in the form of nonvested stock bonus awards for services to be provided in the future by such officers and employees. The grants to the Board of Directors were fully vested on the date of grant. The market value of the common stock at the date of issuance is amortized as compensation expense over the vesting period of the awards.

The Company acquired computer equipment and software under capital leases in the amount of $17.9 million, $14.8 million and $5.3 million in 2014, 2013 and 2012, respectively.

Refer to Notes 19 and 23 in the Consolidated Financial Statements for more information on share-based compensation and significant noncash transactions.

Additional Cash Flow Information

Off-Balance Sheet Financing

TSYS uses various operating leases in its normal course of business. These “off-balance sheet” arrangements obligate TSYS to make payments for computer equipment, software and facilities. These computer and software lease commitments may be replaced with new lease commitments due to new technology. Management expects that, as these leases expire, they will be evaluated and renewed or replaced by similar leases based on need.

 

34


The following table summarizes future contractual cash obligations, including lease payments and software arrangements, as of December 31, 2014, for the next five years and thereafter:

 

 

 

     Contractual Cash Obligations
Payments Due By Period
 
(in millions)    Total      1 Year
or Less
     2-3
Years
     4-5
Years
     After
5 Years
 

Debt obligations (principal)

   $ 1,446         44         162         690         550   

Debt obligations (interest)

     232         38         74         48         72   

Operating leases

     386         122         184         50         30   

Purchase commitments

     77         21         28         19         9   

Redeemable noncontrolling interest

     22                 22                   

Capital lease obligations

     15         8         6         1           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual cash obligations

   $ 2,178         233         476         808         661   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

Income Taxes

The total liability for uncertain tax positions as of December 31, 2014 is $6.7 million. Refer to Note 15 in the Consolidated Financial Statements for more information on income taxes. The Company is not able to reasonably estimate the amount by which the liability will increase or decrease over time; however, at this time, the Company does not expect any significant changes related to these obligations within the next twelve months.

Foreign Operations

TSYS operates internationally and is subject to the impact of adverse movements in foreign currency exchange rates. TSYS does not enter into foreign exchange forward contracts to reduce its exposure to foreign currency rate changes; however, the Company continues to analyze the potential use of hedging instruments to safeguard it from significant foreign currency translation risks.

TSYS maintains operating cash accounts outside the United States. Refer to Note 5 in the Consolidated Financial Statements for more information on cash and cash equivalents. TSYS has adopted the permanent reinvestment exception under GAAP with respect to future earnings of certain foreign subsidiaries. While some of the foreign cash is available to repay intercompany financing arrangements, remaining amounts are not presently available to fund domestic operations and obligations without paying a significant amount of taxes upon its repatriation. Demand on the Company’s cash has increased as a result of its strategic initiatives. TSYS funds these initiatives through a balance of internally generated cash, external sources of capital and, when advantageous, access to foreign cash in a tax efficient manner. Where local regulations limit an efficient intercompany transfer of amounts held outside of the U.S., TSYS will continue to utilize these funds for local liquidity needs. Under current law, balances available to be repatriated to the U.S. would be subject to U.S. federal income taxes, less applicable foreign tax credits. TSYS has provided for the U.S. federal tax liability on these amounts for financial statement purposes, except for foreign earnings that are considered permanently reinvested outside of the U.S. TSYS utilizes a variety of tax planning and financing strategies with the objective of having its worldwide cash available in the locations where it is needed.

Impact of Inflation

Although the impact of inflation on its operations cannot be precisely determined, the Company believes that by controlling its operating expenses and by taking advantage of more efficient computer hardware and software, it can minimize the impact of inflation.

Working Capital

TSYS may seek additional external sources of capital in the future. The form of any such financing will vary depending upon prevailing market and other conditions and may include short-term or long-term borrowings from financial institutions or the issuance of additional equity and/or debt securities such as industrial revenue

 

35


bonds. However, there can be no assurance that funds will be available on terms acceptable to TSYS. Management expects that TSYS will continue to be able to fund a significant portion of its capital expenditure needs through internally generated cash in the future, as evidenced by TSYS’ current ratio of 2.3:1. As of December 31, 2014, TSYS had working capital of $394.0 million, compared to $356.7 million in 2013 and $344.2 million in 2012.

Legal Proceedings

Refer to Note 16 in the Consolidated Financial Statements for information regarding the Company’s commitments and contingencies including legal proceedings.

Forward-Looking Statements

Certain statements contained in this filing which are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act (the Act). These forward-looking statements include, among others: (i) TSYS’ expectation that the loss of Bank of America as a merchant services client will not have a material adverse effect on TSYS’ business; (ii) TSYS’ expectation that the Durbin Amendment will not have a significant negative impact on TSYS’ business; (iii) TSYS’ expectation with respect to the effect of recent accounting pronouncements; (iv) TSYS’ expectation that it will be able to fund a significant portion of its capital expenditure needs through internally generated cash in the future; (v) TSYS’ earnings guidance for 2015 total revenues, revenues before reimbursable items, and adjusted EPS attributable to TSYS’ common shareholders from continuing operations; (vi) TSYS’ belief with respect to lawsuits, claims and other complaints; (vii) TSYS’ expectation with respect to certain tax matters; (viii) the Board’s intention to continue to pay cash dividends, and the assumptions underlying such statements. In addition, certain statements in future filings by TSYS with the Securities and Exchange Commission, in press releases, and in oral and written statements made by or with the approval of TSYS which are not statements of historical fact constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenue, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans and objectives of TSYS or its management or Board of Directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” “estimates,” “projects,” “plans,” “may,” “could,” “should,” “would,” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying these statements.

These statements are based upon the current beliefs and expectations of TSYS’ management and are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements. A number of important factors could cause actual results to differ materially from those contemplated by the Company’s forward-looking statements. Many of these factors are beyond TSYS’ ability to control or predict. These factors include, but are not limited to:

 

 

the material breach of security of any of TSYS’ systems;

 

 

TSYS incurs expenses associated with the signing of a significant client;

 

 

organic growth rates for TSYS’ existing clients are lower than anticipated whether as a result of unemployment rates, card delinquencies and charge off rates or otherwise or attrition rates of existing clients are higher than anticipated;

 

 

TSYS does not convert and deconvert clients’ portfolios as scheduled;

 

 

risks associated with foreign operations, including adverse developments with respect to foreign currency exchange rates;

 

 

adverse developments with respect to entering into contracts with new clients and retaining current clients;

 

 

consolidation in the financial services and other industries, including the merger of TSYS clients with entities that are not TSYS processing clients, the sale of portfolios by TSYS clients to entities that are not TSYS processing clients and financial institutions which are TSYS clients otherwise ceasing to exist;

 

36


 

the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act on TSYS and its clients;

 

 

adverse developments with respect to the payment card industry in general, including a decline in the use of cards as a payment mechanism;

 

 

the impact of potential and completed acquisitions, including the costs associated therewith, their being more difficult to integrate than anticipated, and the inability to achieve the anticipated growth opportunities and other benefits of the acquisitions;

 

 

the costs and effects of litigation, investigations or similar matters or adverse facts and developments relating thereto;

 

 

the impact of the application of and/or changes in accounting principles;

 

 

TSYS’ inability to timely, successfully and cost-effectively improve and implement processing systems to provide new products, increased functionality and increased efficiencies;

 

 

TSYS’ reliance on financial institution sponsors;

 

 

changes occur in laws, rules, regulations, credit card association rules, prepaid industry rules, or other industry standards affecting TSYS and its clients that may result in costly new compliance burdens on TSYS and its clients and lead to a decrease in the volume and/or number of transactions processed or limit the types and amounts of fees that can be charged to customers;

 

 

successfully managing the potential both for patent protection and patent liability in the context of rapidly developing legal framework for expansive patent protection;

 

 

one or more of the assumptions upon which TSYS’ earnings guidance for 2015 is based is inaccurate;

 

 

the effect of current domestic and worldwide economic and geopolitical conditions;

 

 

the impact on TSYS’ business, as well as on the risks set forth above, of various domestic or international military or terrorist activities or conflicts;

 

 

other risk factors described in the “Risk Factors” and other sections of TSYS’ Annual Report on Form 10-K for the fiscal year ended December 31, 2014 and other filings with the Securities and Exchange Commission; and

 

 

TSYS’ ability to manage the foregoing and other risks.

These forward-looking statements speak only as of the date on which they are made and TSYS does not intend to update any forward-looking statement as a result of new information, future developments or otherwise.

Subsequent Events

In the first quarter of 2015, TSYS completed the conversion of Bank of America’s consumer card portfolio from its in-house processing system to TSYS’ processing system.

Management performed an evaluation of the Company’s activity as of the date these audited financial statements were issued, and has concluded that, other than as set forth above, there are no significant additional subsequent events requiring disclosure.

 

37


Consolidated Balance Sheets

 

 

     December 31,  
(in thousands, except per share data)    2014     2013  

Assets

    

Current assets:

    

Cash and cash equivalents (Note 5)

   $ 289,183        247,700   

Accounts receivable, net of allowances for doubtful accounts and billing adjustments of $5.2 million and $3.4 million as of 2014 and 2013, respectively

     283,203        255,773   

Deferred income tax assets (Note 15)

     15,190        14,158   

Prepaid expenses and other current assets (Note 6)

     98,974        95,109   

Current assets of discontinued operations (Note 2)

     4,003        41,193   
  

 

 

   

 

 

 

Total current assets

     690,553        653,933   

Goodwill (Note 7)

     1,547,397        1,541,574   

Other intangible assets, net of accumulated amortization of $181.9 million and $105.4 million as of 2014 and 2013, respectively (Note 8)

     404,107        481,419   

Computer software, net of accumulated amortization of $613.3 million and $536.4 million as of 2014 and 2013, respectively (Note 9)

     366,148        363,880   

Property and equipment, net of accumulated depreciation and amortization of $423.2 million and $391.5 million as of 2014 and 2013, respectively (Note 10)

     290,585        259,968   

Contract acquisition costs, net of accumulated amortization of $276.1 million and $251.8 million as of 2014 and 2013, respectively (Note 11)

     236,305        184,828   

Equity investments, net (Note 12)

     100,468        94,133   

Deferred income tax assets (Note 15)

     7,002        3,972   

Other assets

     91,016        87,146   

Long-term assets of discontinued operations (Note 2)

            15,715   
  

 

 

   

 

 

 

Total assets

   $ 3,733,581        3,686,568   
  

 

 

   

 

 

 

Liabilities

    

Current liabilities:

    

Accounts payable

   $ 48,793        33,651   

Current portion of long-term borrowings (Note 13)

     43,784        34,257   

Accrued salaries and employee benefits

     38,001        38,339   

Current portion of obligations under capital leases (Note 13)

     7,127        22,662   

Other current liabilities (Note 14)

     154,805        159,170   

Current liabilities of discontinued operations (Note 2)

     4,003        9,136   
  

 

 

   

 

 

 

Total current liabilities

     296,513        297,215   

Long-term borrowings, excluding current portion (Note 13)

     1,398,132        1,428,251   

Deferred income tax liabilities (Note 15)

     211,820        228,727   

Obligations under capital leases, excluding current portion (Note 13)

     6,974        7,500   

Other long-term liabilities

     98,006        81,600   

Long-term liabilities of discontinued operations (Note 2)

            1,197   
  

 

 

   

 

 

 

Total liabilities

     2,011,445        2,044,490   
  

 

 

   

 

 

 

Redeemable noncontrolling interest in consolidated subsidiary

     22,492        39,652   
  

 

 

   

 

 

 

Commitments and contingencies (Note 16)

    

Equity

    

Shareholders’ equity: (Notes 18, 19, 20, and 21)

    

Common stock — $0.10 par value. Authorized 600,000 shares; 202,775 and 202,790 issued as of 2014 and 2013, respectively; 184,939 and 187,717 outstanding as of 2014 and 2013, respectively

     20,278        20,279   

Additional paid-in capital

     171,270        165,841   

Accumulated other comprehensive income, net

     (11,926     3,749   

Treasury stock, at cost (17,836 and 15,073 shares as of 2014 and 2013, respectively)

     (453,230     (326,996

Retained earnings

     1,966,370        1,718,204   
  

 

 

   

 

 

 

Total shareholders’ equity

     1,692,762        1,581,077   
  

 

 

   

 

 

 

Noncontrolling interests in consolidated subsidiaries

     6,882        21,349   
  

 

 

   

 

 

 

Total equity

     1,699,644        1,602,426   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 3,733,581        3,686,568   
  

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

38


Consolidated Statements of Income

 

 

     Years Ended December 31,  
(in thousands, except per share data)    2014     2013     2012  

Total revenues

   $ 2,446,877        2,064,305        1,793,557   
  

 

 

   

 

 

   

 

 

 

Cost of services

     1,668,892        1,369,438        1,189,341   

Selling, general and administrative expenses

     343,128        298,147        247,597   

Merger and acquisition expenses

     3,217        14,220        1,650   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     2,015,237        1,681,805        1,438,588   
  

 

 

   

 

 

   

 

 

 

Operating income

     431,640        382,500        354,969   

Nonoperating expenses, net

     (763     (804     (2,096

Merger and acquisition expenses—bridge loan facility and financings

     (37,948     (29,220       
  

 

 

   

 

 

   

 

 

 

Income before income taxes and equity in income of equity investments

     392,929        352,476        352,873   

Income taxes (Note 15)

     129,761        110,981        114,116   
  

 

 

   

 

 

   

 

 

 

Income before equity in income of equity investments

     263,168        241,495        238,757   

Equity in income of equity investments, net of tax (Note 12)

     17,583        13,047        10,171   
  

 

 

   

 

 

   

 

 

 

Income from continuing operations, net of tax

     280,751        254,542        248,928   

Income from discontinued operations, net of tax

     48,655        2,055        995   
  

 

 

   

 

 

   

 

 

 

Net income

     329,406        256,597        249,923   

Net income attributable to noncontrolling interests

     (6,534     (11,847     (5,643
  

 

 

   

 

 

   

 

 

 

Net income attributable to Total System Services, Inc. (TSYS) common shareholders

   $ 322,872        244,750        244,280   
  

 

 

   

 

 

   

 

 

 

Basic earnings per share (EPS) attributable to TSYS common shareholders (Note 26)

      

Income from continuing operations to TSYS common shareholders

   $ 1.48        1.31        1.31   

Gain (loss) from discontinued operations to TSYS common shareholders

     0.26        (0.01     (0.02
  

 

 

   

 

 

   

 

 

 

Net income attributable to TSYS common shareholders*

   $ 1.73        1.30        1.30   
  

 

 

   

 

 

   

 

 

 

Diluted EPS attributable to TSYS common shareholders (Note 26)

      

Income from continuing operations to TSYS common shareholders

   $ 1.47        1.30        1.31   

Gain (loss) from discontinued operations to TSYS common shareholders

     0.25        (0.01     (0.02
  

 

 

   

 

 

   

 

 

 

Net income attributable to TSYS common shareholders*

   $ 1.72        1.29        1.29   
  

 

 

   

 

 

   

 

 

 

Amounts attributable to TSYS common shareholders:

      

Income from continuing operations

   $ 275,216        246,893        247,149   

Gain (loss) from discontinued operations

     47,656        (2,143     (2,869
  

 

 

   

 

 

   

 

 

 

Net income

   $ 322,872        244,750        244,280   
  

 

 

   

 

 

   

 

 

 

 

* EPS amounts may not total due to rounding

See accompanying Notes to Consolidated Financial Statements

 

39


Consolidated Statements of Comprehensive Income

 

 

     Years Ended December 31,  
(in thousands)    2014     2013     2012  

Net income

   $ 329,406        256,597        249,923   

Other comprehensive income (loss), net of tax:

      

Foreign currency translation adjustments

     (19,531     (4,081     2,183   

Less reclassifications of foreign currency translation adjustments to net income

     3,514                 
  

 

 

   

 

 

   

 

 

 

Total foreign currency translation adjustments

     (16,017     (4,081     2,183   

Postretirement healthcare plan adjustments

     589        1,895        (1,666

Unrealized gain (loss) on available-for-sale securities

     (668     1,773          
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (16,096     (413     517   
  

 

 

   

 

 

   

 

 

 

Comprehensive income

     313,310        256,184        250,440   

Comprehensive income attributable to noncontrolling interests

     6,113        9,092        4,307   
  

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to TSYS common shareholders

   $ 307,197        247,092        246,133   
  

 

 

   

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

40


Consolidated Statements of Cash Flows

 

 

     Years Ended December 31,  
(in thousands)    2014     2013     2012  

Cash flows from operating activities:

      

Net income

   $ 329,406        256,597        249,923   

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization

     248,018        205,351        170,610   

Provisions for fraud and other losses

     38,381        11,912          

Share-based compensation

     30,790        28,933        18,621   

Charges for transaction processing provisions

     9,468        7,458        2,803   

Dividends received from equity investments

     9,189        8,595        7,524   

Provisions for bad debt expenses and billing adjustments

     2,823        2,000        1,054   

Amortization of debt issuance costs

     1,817        7,269        298   

Loss on foreign currency

     999        1,027        2,012   

Amortization of bond discount

     383        225          

(Gain) Loss on disposal of equipment, net

     (293     (79     324   

Changes in value of private equity investments

     (793     (966     (898

Excess tax benefit from share-based payment arrangements

     (7,185     (3,528     (1,259

Deferred income tax (benefit) expense

     (8,963     26,945        285   

Equity in income of equity investments

     (17,583     (13,047     (10,171

Gain on disposal of subsidiaries

     (86,961              

Changes in operating assets and liabilities:

      

Accounts receivable

     (33,406     (8,667     2,855   

Prepaid expenses, other current assets and other long-term assets

     (10,525     (571     (2,945

Accrued salaries and employee benefits

     414        (403     (7,083

Accounts payable

     8,765        (52,042     37,206   

Other current liabilities and other long-term liabilities

     45,457        (24,611     (15,406
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     560,201        452,398        455,753   
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Additions to contract acquisition costs

     (88,871     (55,965     (34,384

Purchases of property and equipment

     (75,913     (40,598     (31,395

Additions to internally developed computer software

     (41,501     (33,600     (19,285

Cash used in acquisitions, net of cash acquired

     (38,584     (1,314,660     (188,698

Additions to licensed computer software from vendors

     (29,638     (63,635     (33,001

Purchase of private equity investments

     (3,291     (1,378     (3,031

Proceeds from insurance recovery for loss on disposal

     6,212                 

Proceeds from dispositions, net of expenses paid and cash disposed

     44,979                 
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (226,607     (1,509,836     (309,794
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Repurchase of common stock under plans and tax withholding

     (170,516     (103,857     (74,939

Dividends paid on common stock

     (74,796     (56,510     (94,035

Principal payments on long-term borrowings and capital lease obligations

     (69,939     (166,805     (200,052

Purchase of noncontrolling interests

     (37,500              

Subsidiary dividends paid to noncontrolling shareholders

     (7,172     (7,321     (2,797

Debt issuance costs

            (13,573     (2,073

Proceeds from long-term borrowings

     1,396        1,395,661        150,000   

Excess tax benefit from share-based payment arrangements

     7,185        3,528        1,259   

Proceeds from exercise of stock options

     34,869        40,691        9,672   
  

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (316,473     1,091,814        (212,965
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents:

      

Effect of exchange rate changes on cash and cash equivalents

     (6,168     (3,758     (1,719
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     10,953        30,618        (68,725

Cash and cash equivalents at beginning of period

     278,230        247,612        316,337   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

     289,183        278,230        247,612   

Less cash and cash equivalents of discontinued operations at end of period

            (30,530     (23,353
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents of continued operations at end of period

   $ 289,183        247,700        224,259   
  

 

 

   

 

 

   

 

 

 

Supplemental cash flow information:

      

Interest paid

   $ 40,969        23,157        2,952   
  

 

 

   

 

 

   

 

 

 

Income taxes paid, net

   $ 135,770        80,033        106,778   
  

 

 

   

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

41


Consolidated Statements of Changes in Equity

 

 

          TSYS Shareholders              
    Redeemable
Noncontrolling

Interests
    Common Stock     Additional
Paid-In

Capital
    Accumulated
Other
Comprehensive

Income (Loss)
    Treasury
Stock
    Retained
Earnings
    Noncontrolling
Interests
    Total
Equity
 
(in thousands, except per share data)     Shares     Dollars              

Balance as of December 31, 2011

           201,860      $ 20,186        125,948        (445     (225,034     1,380,634        19,720      $ 1,321,009   

Net income

  $ 1,505                                           244,280        4,138        248,418   

Other comprehensive income (Note 21)

            1,853            (1,336     517   

Common stock issued from treasury shares for exercise of stock options (Note 19)

                         (2,386            12,377                      9,991   

Common stock issued for nonvested awards (Note 19)

           611        61        (61                                   

Common stock issued from treasury shares for nonvested awards (Note 19)

                         (628            628                        

Share-based compensation (Note 19)

                         18,623                                    18,623   

Cash dividends declared ($0.40 per share)

                                              (75,851            (75,851

Purchase of treasury shares (Note 20)

                                       (75,272                   (75,272

Subsidiary dividends paid to noncontrolling interests

                                                     (2,797     (2,797

Fair value of noncontrolling interest in CPAY

    38,000                                                           

Tax benefits associated with share-based compensation

                         297                                    297   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2012

    39,505        202,471        20,247        141,793        1,408        (287,301     1,549,063        19,725        1,444,935   

Net income

    6,515                                           244,750        5,331        250,081   

Other comprehensive income (Note 21)

                                2,341                      (2,754     (413

Replacement share-based awards issued in connection with acquisition (Note 19)

                         (1,167            16,723                      15,556   

Common stock issued from treasury shares for exercise of stock options (Note 19)

                         (700            41,391                      40,691   

Common stock issued for nonvested awards (Note 19)

           319        32        (32                                   

Common stock issued from treasury shares for nonvested awards (Note 19)

                         (5,747            5,747                        

Share-based compensation (Note 19)

                         28,972                                    28,972   

Common stock issued from treasury shares for dividend equivalents (Note 19)

                         36               301        161               498   

Cash dividends declared ($0.40 per share)

                                              (75,770            (75,770

Purchase of treasury shares (Note 20)

                                       (103,857                   (103,857

Subsidiary dividends paid to noncontrolling interests

    (6,368                                               (953     (953

Tax benefits associated with share-based compensation

                         2,686                                    2,686   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2013

    39,652        202,790        20,279        165,841        3,749        (326,996     1,718,204        21,349        1,602,426   

Net income

    4,650                                           322,872        1,884        324,756   

Other comprehensive income (Note 21)

                                (15,675                   (421     (16,096

Common stock issued from treasury shares for exercise of stock options (Note 19)

                         1,955               32,914                      34,869   

Common stock unissued due to forfeiture of nonvested awards

           (15     (1     1                                      

Common stock issued from treasury shares for nonvested awards (Note 19)

                         (11,142            11,142                        

Share-based compensation (Note 19)

                         30,312                                    30,312   

Common stock issued from treasury shares for dividend equivalents (Note 19)

                         185               226                      411   

Cash dividends declared ($0.40 per share)

                                              (74,706            (74,706

Purchase of treasury shares (Note 20)

                                       (170,516                   (170,516

Subsidiary dividends paid to noncontrolling interests

    (6,732                                               (440     (440

Fair value of noncontrolling interest

    (15,078                   (22,422                                 (22,422

Disposition of noncontrolling interest (Note 2)

                                                     (15,490     (15,490

Tax benefits associated with share-based compensation

                         6,540                                    6,540   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2014

  $ 22,492        202,775      $ 20,278        171,270        (11,926     (453,230     1,966,370        6,882      $ 1,699,644   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

42


Notes to Consolidated Financial Statements

 

Note 1: Basis of Presentation and Summary of Significant Accounting Policies

BUSINESS:    Total System Services, Inc.’s (TSYS’ or the Company’s) revenues are derived from providing payment processing, merchant services and related payment services to financial and nonfinancial institutions, generally under long-term processing contracts. The Company also derives revenues by providing general-purpose reloadable (GPR) prepaid debit cards and payroll cards and alternative financial services to underbanked and other consumers. The Company’s services are provided through the Company’s four operating segments: North America Services, International Services, Merchant Services and NetSpend.

Through the Company’s North America Services and International Services segments, TSYS processes information through its cardholder systems to financial and nonfinancial institutions throughout the United States and internationally. The Company’s North America Services segment provides these services to clients in the United States, Canada, Mexico and the Caribbean. The Company’s International Services segment provides services to clients in Europe, India, Middle East, Africa, Asia Pacific and Brazil. The Company’s Merchant Services segment provides merchant services to merchant acquirers and merchants mainly in the United States. The Company’s NetSpend segment provides services to consumers in the United States.

PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION:    The accompanying consolidated financial statements, which are prepared in accordance with generally accepted accounting principles (GAAP) include the accounts of TSYS and its wholly- and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. In addition, the Company evaluates its relationships with other entities to identify whether they are variable interest entities and to assess whether it is the primary beneficiary of such entities. If the determination is made that the Company is the primary beneficiary, then that entity is included in the consolidated financial statements.

RISKS AND UNCERTAINTIES AND USE OF ESTIMATES:    Factors that could affect the Company’s future operating results and cause actual results to vary materially from expectations include, but are not limited to, lower than anticipated growth from existing clients, an inability to attract new clients and grow internationally, loss of a major customer or other significant client, loss of a major supplier, an inability to grow through acquisitions or successfully integrate acquisitions, an inability to control expenses, technology changes, the impact of the application of and/or changes in accounting principles, financial services consolidation, changes in regulatory requirements, a decline in the use of cards as a payment mechanism, disruption of the Company’s international operations, breach of the Company’s security systems, a decline in the financial stability of the Company’s clients and uncertain economic conditions. Negative developments in these or other risk factors could have a material adverse effect on the Company’s financial position, results of operations and cash flows.

The Company has prepared the accompanying consolidated financial statements in conformity with U.S. GAAP. The preparation of the consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. These estimates and assumptions are developed based upon all information available. Actual results could differ from estimated amounts.

ACQUISITIONS — PURCHASE PRICE ALLOCATION:    TSYS’ purchase price allocation methodology requires the Company to make assumptions and to apply judgment to estimate the fair value of acquired assets and liabilities. TSYS estimates the fair value of assets and liabilities based upon appraised market values, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows and market multiple analyses. Management determines the fair value of fixed assets and identifiable intangible assets such as developed technology or customer relationships, and any other significant assets or liabilities. TSYS adjusts the purchase price allocation, as necessary, up to one year after the acquisition closing date as TSYS obtains more information regarding asset valuations and liabilities assumed. Unanticipated events or circumstances may occur which could affect the accuracy of the Company’s fair value estimates, including assumptions regarding industry economic factors and business strategies, and result in an impairment or a new allocation of purchase price.

 

43


Given its history of acquisitions, TSYS may allocate part of the purchase price of future acquisitions to contingent consideration as required by GAAP for business combinations. The fair value calculation of contingent consideration will involve a number of assumptions that are subjective in nature and which may differ significantly from actual results. TSYS may experience volatility in its earnings to some degree in future reporting periods as a result of these fair value measurements.

CASH AND CASH EQUIVALENTS:    Cash on hand and investments with a maturity of three months or less when purchased are considered to be cash equivalents.

ACCOUNTS RECEIVABLE:    Accounts receivable balances are stated net of allowances for doubtful accounts and billing adjustments.

TSYS records an allowance for doubtful accounts when it is probable that the accounts receivable balance will not be collected. When estimating the allowance for doubtful accounts, the Company takes into consideration such factors as its day-to-day knowledge of the financial position of specific clients, the industry and size of its clients, the overall composition of its accounts receivable aging, prior history with specific customers of accounts receivable write-offs and prior experience of allowances in proportion to the overall receivable balance. This analysis includes an ongoing and continuous communication with its largest clients and those clients with past due balances. A financial decline of any one of the Company’s large clients could have a material adverse effect on collectability of receivables and thus the adequacy of the allowance for doubtful accounts.

Increases in the allowance for doubtful accounts are recorded as charges to bad debt expense and are reflected in selling, general and administrative expenses in the Company’s Consolidated Statements of Income. Write-offs of uncollectible accounts are charged against the allowance for doubtful accounts.

TSYS records an allowance for billing adjustments for actual and potential billing discrepancies. When estimating the allowance for billing adjustments, the Company considers its overall history of billing adjustments, as well as its history with specific clients and known disputes. Increases in the allowance for billing adjustments are recorded as a reduction of revenues in the Company’s Consolidated Statements of Income and actual adjustments to invoices are charged against the allowance for billing adjustments.

UP-FRONT DISTRIBUTOR PAYMENTS:    The Company makes up-front contractual payments to third-party distribution partners. The Company assesses each up-front payment to determine whether it meets the criteria of an asset as defined by U.S. GAAP. If these criteria are met, the Company capitalizes the up-front payment and recognizes the capitalized amount as expense ratably over the benefit period, which is generally the contract period. If the contract requires the distributor to perform specific acts (i.e. achieve a sales goal) and no other conditions exist for the distributor to earn or retain the up-front payment, then the Company capitalizes the payment and recognizes it as an expense when the performance conditions have been met. Up-front distributor payments are classified on the Consolidated Balance Sheet as other non-current assets and recorded as a cost of services in the Consolidated Statements of Income.

PROPERTY AND EQUIPMENT:    Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. Buildings and improvements are depreciated over estimated useful lives of 5-40 years, computer and other equipment over estimated useful lives of 2-5 years, and furniture and other equipment over estimated useful lives of 3-15 years. The Company evaluates impairment losses on long-lived assets used in operations in accordance with the provisions of GAAP. All ordinary repairs and maintenance costs are expensed as incurred. Maintenance costs that extend the asset life are capitalized and amortized over the remaining estimated life of the asset.

LICENSED COMPUTER SOFTWARE:    The Company licenses software that is used in providing services to clients. Licensed software is obtained through perpetual licenses and site licenses and through agreements based on processing capacity (called “MIPS agreements”). Perpetual and site licenses are amortized using the straight-line method over their estimated useful lives which range from three to ten years. Software licensed under MIPS agreements is amortized using a units-of-production basis over the estimated useful life of the software, generally not to exceed ten years. At each balance sheet date, the Company evaluates impairment losses on long-lived assets used in operations in accordance with GAAP.

 

44


ACQUISITION TECHNOLOGY INTANGIBLES:    These identifiable intangible assets are software technology assets resulting from acquisitions. These assets are amortized using the straight-line method over periods not exceeding their estimated useful lives, which range from five to nine years. GAAP requires that intangible assets with estimated useful lives be amortized over their respective estimated useful lives to their residual values, and reviewed for impairment. Acquisition technology intangibles’ net book values are included in computer software, net in the accompanying balance sheets. Amortization expenses are charged to cost of services in the Company’s Consolidated Statements of Income.

SOFTWARE DEVELOPMENT COSTS:    Software development costs are capitalized once technological feasibility of the software product has been established. Costs incurred prior to establishing technological feasibility are expensed as incurred. Technological feasibility is established when the Company has completed a detailed program design and has determined that a product can be produced to meet its design specifications, including functions, features and technical performance requirements. Capitalization of costs ceases when the product is generally available to clients. At each balance sheet date, the Company evaluates the unamortized capitalized costs of software development as compared to the net realizable value of the software product which is determined by future undiscounted net cash flows. The amount by which the unamortized software development costs exceed the net realizable value is written off in the period that such determination is made. Software development costs are amortized using the straight-line method over its estimated useful life, which ranges from three to ten years.

The Company also develops software that is used internally. These software development costs are capitalized in accordance with GAAP. Internal-use software development costs are capitalized once: (1) the preliminary project stage is completed, (2) management authorizes and commits to funding a computer software project, and (3) it is probable that the project will be completed and the software will be used to perform the function intended. Costs incurred prior to meeting the qualifications are expensed as incurred. Capitalization of costs ceases when the project is substantially complete and ready for its intended use. Internal-use software development costs are amortized using the straight-line method over its estimated useful life which ranges from three to ten years. Software development costs may become impaired in situations where development efforts are abandoned due to the viability of the planned project becoming doubtful or due to technological obsolescence of the planned software product.

CONTRACT ACQUISITION COSTS:    The Company capitalizes contract acquisition costs related to signing or renewing long-term contracts and costs related to cash payments for rights to provide processing services. The Company capitalizes internal conversion costs in accordance with GAAP. All costs incurred prior to a signed agreement are expensed as incurred.

Contract acquisition costs are amortized using the straight-line method over the expected customer relationship (contract term) beginning when the client’s cardholder accounts are converted and producing revenues. The amortization of contract acquisition costs associated with cash payments for client incentives is included as a reduction of revenues in the Company’s Consolidated Statements of Income. The amortization of contract acquisition costs associated with conversion activity is recorded as cost of services in the Company’s Consolidated Statements of Income.

The Company evaluates the carrying value of contract acquisition costs associated with each customer for impairment on the basis of whether these costs are fully recoverable from either contractual minimum fees (contractual costs) or from expected undiscounted net operating cash flows of the related contract (cash incentives paid). The determination of expected undiscounted net operating cash flows requires management to make estimates. These costs may become impaired with the loss of a contract, the financial decline of a client, termination of conversion efforts after a contract is signed, diminished prospects for current clients or if the Company’s actual results differ from its estimates of future cash flows. The amount of the impairment is written off in the period that such a determination is made.

EQUITY INVESTMENTS:    TSYS’ 49% investment in Total System Services de México, S.A. de C.V. (TSYS de México), an electronic payment processing support operation located in Toluca, Mexico, is accounted for using the equity method of accounting, as is TSYS’ 44.56% investment in China UnionPay Data Co., Ltd. (CUP Data)

 

45


headquartered in Shanghai, China. TSYS’ equity investments are recorded initially at cost and subsequently adjusted for equity in earnings, cash contributions and distributions, and foreign currency translation adjustments.

GOODWILL:    Goodwill results from the excess of cost over the fair value of net assets of businesses acquired.

Goodwill and intangible assets with indefinite useful lives are tested for impairment at least annually. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values.

Equity investment goodwill, which is not reported as goodwill in the Company’s Consolidated Balance Sheet, but is reported as a component of the equity investment, was $51.4 million as of December 31, 2014.

OTHER INTANGIBLE ASSETS:    Identifiable intangible assets relate primarily to customer relationships, databases, channel relationships, covenants-not-to-compete, trade names and trade associations resulting from acquisitions. These identifiable intangible assets are amortized using the straight-line method over periods not exceeding the estimated useful lives, which range from three to ten years. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with GAAP. Amortization expenses are charged to selling, general and administrative expenses in the Company’s Consolidated Statements of Income.

FAIR VALUES OF FINANCIAL INSTRUMENTS:    The Company uses financial instruments in the normal course of its business. The carrying values of cash equivalents, accounts receivable, accounts payable, accrued salaries and employee benefits, and other current liabilities approximate their fair value due to the short-term maturities of these assets and liabilities. The fair value of the Company’s long-term debt and obligations under capital leases is not significantly different from its carrying value.

Investments in equity investments are accounted for using the equity method of accounting and pertain to privately held companies for which fair value is not readily available. The Company believes the fair values of its investments in equity investments exceed their respective carrying values.

IMPAIRMENT OF LONG-LIVED ASSETS:    The Company reviews long-lived assets, such as property and equipment and intangibles subject to amortization, including contract acquisition costs and certain computer software, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If upon a triggering event the Company determines that the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and would no longer be depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.

TRANSACTION PROCESSING PROVISIONS:    The Company has recorded an accrual for contract contingencies (performance penalties) and processing errors. A significant number of the Company’s contracts with large clients contain service level agreements which can result in TSYS incurring performance penalties if contractually required service levels are not met. When providing for these accruals, the Company takes into consideration such factors as the prior history of performance penalties and processing errors incurred, actual contractual penalties inherent in the Company’s contracts, progress towards milestones and known processing errors not covered by insurance.

These accruals are included in other current liabilities in the accompanying Consolidated Balance Sheets. Increases and decreases in transaction processing provisions are charged to cost of services in the Company’s Consolidated Statements of Income, and payments or credits for performance penalties and processing errors are charged against the accrual.

CARDHOLDERS’ RESERVE:    The Company is exposed to losses due to cardholder fraud, payment defaults and other forms of cardholder activity as well as losses due to non-performance of third parties who receive cardholder funds for transmittal to the Issuing Banks (banks that issue MasterCard International or Visa USA,Inc.

 

46


branded cards to customers). The Company establishes a reserve for the losses it estimates will arise from processing customer transactions, debit card overdrafts, chargebacks for unauthorized card use and merchant-related chargebacks due to non-delivery of goods and services. These reserves are established based upon historical loss and recovery rates and cardholder activity for which specific losses can be identified. The cardholders’ reserve was approximately $6.3 million as of December 31, 2014. The provision for cardholder losses is included in cost of services in the Consolidated Statements of Income. The Company regularly updates its reserve estimate as new facts become known and events occur that may impact the settlement or recovery of losses.

PROVISION FOR MERCHANT LOSSES:    The Company has potential liability for losses resulting from disputes between a cardholder and a merchant that arise as a result of, among other things, the cardholder’s dissatisfaction with merchandise quality or merchant services. Such disputes may not be resolved in the merchant’s favor. In these cases, the transaction is “charged back” to the merchant, which means the purchase price is refunded to the customer by the card-issuing bank and charged to the merchant. If the merchant is unable to fund the refund, TSYS must do so. TSYS also bears the risk of reject losses arising from the fact that TSYS collects fees from its merchants on the first day after the monthly billing period. If the merchant has gone out of business during such period, TSYS may be unable to collect such fees. TSYS maintains cash deposits or requires the pledge of a letter of credit from certain merchants, generally those with higher average transaction size where the card is not present when the charge is made or the product or service is delivered after the charge is made, in order to offset potential contingent liabilities such as chargebacks and reject losses that would arise if the merchant went out of business. Most chargeback and reject losses are charged to cost of services as they are incurred. However, the Company also maintains a provision against losses, including major fraud losses, which are both less predictable and involve larger amounts. The loss provision was established using historical loss rates, applied to recent bankcard processing volume. As of December 31, 2014, the Company had a merchant loss provision in the amount of $1.1 million.

REDEEMABLE NONCONTROLLING INTEREST:    In connection with the acquisition of Central Payment Co., LLC (CPAY), the Company is party to call and put arrangements with respect to the membership units that represent the remaining noncontrolling interest of CPAY. The call arrangement is exercisable by TSYS and the put arrangement is exercisable by the seller. The put arrangement is outside the control of the Company by requiring the Company to purchase the seller’s entire equity interest in CPAY at a put price at fair market value. The put arrangement is recorded on the balance sheet and is classified as redeemable noncontrolling interest outside of permanent equity.

FOREIGN CURRENCY TRANSLATION:    The Company maintains several different foreign operations whose functional currency is their local currency. Foreign currency financial statements of the Company’s Mexican and Chinese equity investments, the Company’s wholly owned subsidiaries and the Company’s majority owned subsidiaries, as well as the Company’s division and branches in the United Kingdom and China, are translated into U.S. dollars at current exchange rates, except for revenues, costs and expenses, and net income which are translated at the average exchange rates for each reporting period. Net gains or losses resulting from the currency translation of assets and liabilities of the Company’s foreign operations, net of tax when applicable, are accumulated in a separate section of shareholders’ equity titled accumulated other comprehensive income (loss). Gains and losses on transactions denominated in currencies other than the functional currencies are included in determining net income for the period in which exchange rates change.

TREASURY STOCK:    The Company uses the cost method when it purchases its own common stock as treasury shares or issues treasury stock upon option exercises and displays treasury stock as a reduction of shareholders’ equity.

REVENUE RECOGNITION:    Revenue is realized or realizable and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been performed; (3) the seller’s price to the buyer is fixed or determinable; and (4) collectability is reasonably assured. The Company accrues for rights of refund, processing errors or penalties, or other related allowances based on historical experience.

The Company’s North America and International Services revenues are derived from long-term processing contracts with financial and nonfinancial institutions and are generally recognized as the services are performed. Payment processing services revenues are generated primarily from charges based on the number of accounts on

 

47


file, transactions and authorizations processed, statements mailed, cards embossed and mailed and other processing services for cardholder accounts on file. Most of these contracts have prescribed annual revenue minimums, penalties for early termination, and service level agreements which may impact contractual fees if certain service levels are not achieved.

Revenue is recognized as the services are performed, primarily measured on a per unit basis. Processing contracts generally range from three to ten years in length. When providing payment processing services, the Company frequently enters into customer arrangements to provide multiple services that may also include conversion or implementation services, business process outsourcing services such as call center services, web-based services, and other payment processing-related services. Revenue for these services is generally recognized as they are performed on a per unit basis each month or ratably over the term of the contract.

The Company’s Merchant Services revenues are partially derived from relationships with thousands of individual merchants. Additionally, part of the revenues are derived from long-term processing contracts with large financial institutions, other merchant acquirers and merchant organizations which generally range from three to eight years and provide for penalties for early termination. Merchant services revenue is generated primarily from processing all payment forms including credit, debit, electronic benefits transfer and check truncation for merchants of all sizes across a wide array of retail market segments. The products and services offered include authorization and capture of electronic transactions, clearing and settlement of electronic transactions, information reporting services related to electronic transactions, merchant billing services, and point-of-sale terminal services. Revenue is recognized for merchant services as those services are performed, primarily measured on a per unit basis. When providing merchant processing services, the Company frequently enters into customer arrangements to provide multiple services that may also include conversion or implementation services, business process outsourcing services such as call center services, terminal services, and other merchant processing-related services. Revenue for these services is generally recognized as they are performed on a per unit basis each month or ratably over the term of the contract. Revenues on point-of-sale terminal equipment are recognized upon the transfer of ownership and shipment of product.

When a sale involves multiple deliverables, revenue recognition is affected by the determination of the number of deliverables in an arrangement, whether those deliverables may be separated into multiple units of accounting, and the valuation of each unit of accounting which affects the amount of revenue allocated to each unit. Pursuant to ASC 605, the Company uses vendor-specific objective evidence of selling price (VSOE) when it exists to determine the amount of revenue to allocate to each unit of accounting. The Company establishes VSOE of selling price using the price charged when the same service is sold separately (on a standalone basis). In certain situations, the Company does not have sufficient VSOE. In these situations, TSYS considered whether sufficient third party evidence (TPE) of selling price existed for the Company’s services. However, the Company typically is not able to determine TPE and has not used this measure of selling price due to the unique and proprietary nature of some of its services and the inability to reliably verify relevant standalone competitor prices. When there is insufficient evidence of VSOE and TPE, the Company has made its best estimate of the standalone selling price (ESP) of that service for purposes of allocating revenue to each unit of accounting. When determining ESP, TSYS uses limited standalone sales data that do not meet the Company’s criteria to establish VSOE, management pricing strategies, residual selling price data when VSOE exists for a group of elements, the cost of providing the services and the related margin objectives. Consideration is also given to geographies in which the services are sold or delivered, customer classifications, and market conditions including competitor pricing strategies and benchmarking studies. Revenue is recognized when the revenue recognition criteria for each unit of accounting have been met.

As business and service offerings change in the future, the determination of the number of deliverables in an arrangement and related units of accounting and the future pricing practices may result in changes in the estimates of VSOE and ESP, which may change the ratio of fees allocated to each service or unit of accounting in a given customer arrangement. There were no material changes or impact to revenue in revenue recognition for current contract arrangements in the year ended December 31, 2014 due to any changes in the determination of the number of deliverables in an arrangement, units of accounting, or estimates of VSOE or ESP.

In many situations, the Company enters into arrangements with customers to provide conversion or implementation services in addition to processing services where the conversion or implementation services do

 

48


not have standalone value. For these arrangements, conversion or implementation services that do not have standalone value, are recognized over the expected customer relationship (contract term) as the related processing services are performed.

The Company’s other services generally have standalone value and constitute separate units of accounting for revenue recognition purposes. Customer arrangements entered into prior to 2011 (prior to the adoption of Accounting Standard Update (ASU) 2009-13, “Multiple-Deliverable Revenue Arrangements,” an update to ASC Topic 605, “Revenue Recognition,” and formerly known as EITF 08-1, “Revenue Arrangements with Multiple Deliverables”) often included services for which sufficient objective and reliable evidence of fair value did not exist. In these situations, the deliverables were combined and recognized as a single unit of accounting based on the proportional performance for the combined unit. For pre-2011 arrangements that have not expired, have not been materially modified or amended, or terminated, the Company continues to recognize revenue in accordance with these policies in the accompanying financial statements. Beginning in 2011, services in new or materially modified arrangements of this nature were divided into separate units of accounting and revenue is now allocated to each unit of accounting based on the relative selling price method as disclosed above. As the services in the pre-2011 arrangements are generally delivered over the same term with consistent patterns of performance, there is no difference in the timing or pattern of revenue recognition for each group of arrangements (pre-2011 arrangements and those new or materially modified thereafter).

The Company’s multiple element arrangements may include one or more elements that are subject to other topics including software revenue recognition and leasing guidance. The consideration for these multiple element arrangements is allocated to each group of deliverables – those subject to ASC 605-25 and those subject to other topics based on the revised guidance in ASU 2009-13. Arrangement revenue for each group of deliverables is then further separated, allocated, and recognized based on applicable guidance.

The Company’s NetSpend revenues principally consist of a portion of the service fees and interchange revenues received by the Issuing Banks in connection with the programs NetSpend manages. Revenue is recognized when there is persuasive evidence of an arrangement, the relevant services have been rendered, the price is fixed or determinable and collectability is reasonably assured.

Cardholders are charged fees in connection with NetSpend’s products and services as follows:

 

 

Transactions — Cardholders are typically charged a fee for each PIN and signature-based purchase transaction made using their GPR cards, unless the cardholder is on a monthly or annual service plan, in which case the cardholder is instead charged a monthly or annual subscription fee, as applicable. Cardholders are also charged fees for ATM withdrawals and other transactions conducted at ATMs.

 

 

Customer Service and Maintenance-Cardholders are typically charged fees for balance inquiries made through NetSpend’s call centers. Cardholders are also charged a monthly maintenance fee after a specified period of inactivity.

 

 

Additional Products and Services-Cardholders are charged fees associated with additional products and services offered in connection with certain GPR cards, including the use of overdraft features, a variety of bill payment options, custom card designs and card-to-card transfers of funds initiated through the call centers.

 

 

Other-Cardholders are charged fees in connection with the acquisition and reloading of the GPR cards at retailers and the Company receives a portion of these amounts in some cases.

Revenue resulting from the service fees charged to the cardholders described above is recognized when the fees are charged because the earnings process is substantially complete, except for revenue resulting from the initial activation of cards and annual subscription fees. Revenue resulting from the initial activation of cards is recognized ratably, net of commissions paid to distributors, over the average account life, which is approximately six months for GPR cards. Revenue resulting from annual subscription fees is recognized ratably over the annual period to which the fees relate.

Revenues also include fees charged in connection with program management and processing services the Company provides for private-label programs. Revenue resulting from these fees is recognized when the Company has fulfilled its obligations under the underlying service agreements.

 

49


NetSpend earns revenues from a portion of the interchange fees remitted by merchants when cardholders make purchases using their GPR cards. Subject to applicable law, interchange fees are fixed by the card associations and network organizations (Networks). Interchange revenues are recognized net of sponsorship, licensing and processing fees charged by the Networks for services they provide in processing purchase transactions routed through them. Interchange revenue is recognized during the period that the purchase transactions occur. Also included in interchange revenue are fees earned from branding agreements with the Networks.

In regards to taxes assessed by a governmental authority imposed directly on a revenue producing transaction, the Company reports its revenues on a net basis.

REIMBURSABLE ITEMS:    Reimbursable items consist of out-of-pocket expenses which are reimbursed by the Company’s clients. These expenses consist primarily of postage, access fees and third party software.

SHARE-BASED COMPENSATION:    GAAP establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. A public entity must measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award.

The Company recognizes compensation costs for the nonvested portion of outstanding share-based compensation granted in the form of stock options based on the grant-date fair value of those awards calculated under the provisions of GAAP. Share-based compensation expenses include the impact of expensing the fair value of stock options, as well as expenses associated with nonvested shares.

The Company estimates forfeitures when recognizing compensation cost. The estimate of forfeitures will be adjusted by the Company as actual forfeitures differ from its estimates, resulting in compensation cost only for those awards that actually vest. The effect of the change in estimated forfeitures is recognized as compensation costs in the period the change in estimate occurred. In estimating its forfeiture rate, the Company stratified its data based upon historical experience to determine separate forfeiture rates for the different award grants. The Company currently estimates a forfeiture rate for existing stock option grants to TSYS non-executive employees, and a forfeiture rate for other TSYS share-based awards. Currently, TSYS estimates a forfeiture rate in the range of 0% to 10%.

The Company has issued its vested awards to directors and nonvested awards to certain employees. The market value of the common stock at the date of issuance is recognized as compensation expense immediately for vested awards and over the vesting period of the nonvested awards. For nonvested award grants that have pro rata vesting, the Company recognizes compensation expense using the straight-line method over the vesting period of the award.

LEASES:    The Company is obligated under noncancelable leases for computer equipment and facilities. As these leases expire, they will be evaluated and renewed or replaced by similar leases based on need. A lease is an agreement conveying the right to use property, plant or equipment (land and/or depreciable assets) usually for a stated period of time. For purposes of applying the accounting and reporting standards, leases are classified from the standpoint of the lessee as capital or operating leases.

Rental payments on operating leases are charged to expense over the lease term. If rental payments are not made on a straight-line basis, rental expense nevertheless shall be recognized on a straight-line basis unless another systematic and rational basis is more representative of the time pattern in which use benefit is derived from the leased property, in which case that basis shall be used.

Certain of the Company’s operating leases are for office space. The Company will make various alterations (leasehold improvements) to the office space and capitalize these costs as part of property and equipment. Leasehold improvements are amortized on a straight-line basis over the useful life of the improvement or the term of the lease, whichever is shorter.

 

50


ADVERTISING:    Advertising costs are expensed as incurred or the first time the advertising takes place except for direct-response advertising and television advertising production costs. Direct-response advertising consists of commission paid to affiliate marketers for the new funded customer accounts generated by them. Direct-response advertising costs are capitalized and amortized over the average life of the new accounts, which is approximately one year. Television advertising production costs consist of the costs of developing and filming television ads. Television advertising production costs are capitalized when the production services are received and expensed in the period when the advertising first takes place. Advertising expense for 2014, 2013 and 2012 was $5.7 million, $1.3 million and $1.0 million, respectively.

INCOME TAXES:    Income taxes reflected in TSYS’ consolidated financial statements are computed based on the taxable income of TSYS and its affiliated subsidiaries. A consolidated U.S. federal income tax return is filed for TSYS and its majority- owned U.S. subsidiaries. Additionally, income tax returns are also filed in states where TSYS and its subsidiaries have filing obligations and in foreign jurisdictions where TSYS has a foreign affiliate.

The Company accounts for income taxes in accordance with the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Reserves against the carrying value of a deferred tax asset are established when necessary to reflect the decreased likelihood of realization of a deferred asset in the future. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Income tax provisions require the use of management judgments, which are subject to challenge by various taxing authorities. Contingency reserves are periodically established where the amount of the contingency can be reasonably determined and is likely to occur. Reductions in contingency reserves are recognized when tax disputes are settled or examination periods lapse.

Significant estimates used in accounting for income taxes relate to the determination of taxable income, the determination of temporary differences between book and tax basis, as well as estimates on the realizability of tax credits and net operating losses.

TSYS recognizes potential interest and penalties related to the underpayment of income taxes as income tax expense in the Consolidated Statements of Income.

NONCONTROLLING INTEREST:    Noncontrolling interest in earnings of subsidiaries represents the minority shareholders’ share of the net income or loss of TSYS Managed Services EMEA Ltd. (TSYS Managed Services) and CPAY. The noncontrolling interest in the Consolidated Balance Sheet reflects the original investment by these shareholders in TSYS Managed Services and CPAY, their proportional share of the earnings or losses and their proportional share of net gains or losses resulting from the currency translation of assets and liabilities of TSYS Managed Services and CPAY. TSYS has adopted the accounting policy to recognize gains or losses on equity transactions of a subsidiary as a capital transaction.

EARNINGS PER SHARE:    Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are “participating securities” as defined by GAAP, and therefore should be included in EPS using the two-class method.

The two-class method is an earnings allocation method for computing EPS when an entity’s capital structure includes two or more classes of common stock or common stock and participating securities. It determines EPS based on dividends declared on common stock and participating securities and participation rights of participating securities in any undistributed earnings.

Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS is calculated to reflect the potential dilution that would occur if stock options or other contracts to issue common stock were exercised. Diluted EPS is calculated by dividing net income by weighted average common and common equivalent shares outstanding. Common equivalent shares are calculated using the treasury stock method.

 

51


RECLASSIFICATIONS:    Certain reclassifications have been made to the 2013 and 2012 financial statements to conform to the presentation adopted in 2014.

 

Note 2 Discontinued Operations

In accordance with GAAP, the Company determined its Japan-based businesses became discontinued operations in the first quarter of 2014.

The Company sold all of its stock of GP Network Corporation (GP Net) (representing 54% ownership of the company) and all of its stock of TSYS Japan Godo Kaisha (TSYS Japan) (representing 100% ownership of the company) in April 2014. Both entities were part of the International Services segment. The sale of the Company’s stock in both of its operations in Japan was the result of management’s decision during the first quarter of 2014, to divest non-strategic businesses and focus resources on core products and services. The Company had a gain of $48.6 million, net of tax, related to the sales of its operations in Japan.

GP Net and TSYS Japan were not significant components of TSYS’ consolidated results.

The following table presents the main classes of assets and liabilities held for sale as of December 31, 2014 and 2013:

 

 

 

(in thousands)    2014      2013  

Cash and cash equivalents

   $         30,530   

Other assets

     4,003         26,378   

Total liabilities

     4,003         10,333   

 

 

The following table presents the summarized results of discontinued operations for the years ended December 31, 2014, 2013 and 2012:

 

 

 

(in thousands)    2014     2013     2012  

Total revenues

   $ 16,376        68,048        77,415   
  

 

 

   

 

 

   

 

 

 

Income before taxes

   $ 1        3,443        1,982   
  

 

 

   

 

 

   

 

 

 

Income tax (benefit) expense

   $ (39     1,388        987   
  

 

 

   

 

 

   

 

 

 

Income from operating activities of discontinued operations, net of tax

   $ 40        2,055        995   
  

 

 

   

 

 

   

 

 

 

Gain on dispositions, net of tax

   $ 48,615                 
  

 

 

   

 

 

   

 

 

 

Income from discontinued operations, net of tax

   $ 48,655        2,055        995   
  

 

 

   

 

 

   

 

 

 

Income from discontinued operations, net of tax, attributable to noncontrolling interest

   $ 999        4,198        3,864   
  

 

 

   

 

 

   

 

 

 

Income (loss) from discontinued operations, net of tax, attributable to TSYS common shareholders

   $ 47,656        (2,143     (2,869
  

 

 

   

 

 

   

 

 

 

Interest allocated to discontinued operations1

   $        281        275   
  

 

 

   

 

 

   

 

 

 

 

 

 

1 Interest expense relates to borrowings directly for use by Japan-based operations

 

Note 3 Fair Value Measurement

GAAP requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy for which these assets and liabilities must be grouped, based on significant level of inputs. The three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies, is as follows:

Level 1 — Quoted prices for identical assets and liabilities in active markets.

 

52


Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3 — Unobservable inputs for the asset or liability.

Goodwill is assessed annually for impairment in the second quarter of each year using fair value measurement techniques. Specifically, goodwill impairment is determined using a two-step test. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit (RU) with its book value, including goodwill. If the fair value of the RU exceeds its book value, goodwill is considered not impaired and the second step of the impairment test is unnecessary. If the book value of the RU exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the RU’s goodwill with the book value of that goodwill. If the book value of the RU’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The fair value of the RU is allocated to all of the assets and liabilities of that unit as if the RU had been acquired in a business combination and the fair value of the RU was the purchase price paid to acquire the RU.

The estimate of fair value of the Company’s RUs is determined using various valuation techniques, including using an equally weighted combination of the market approach and the income approach. The market approach, which contains Level 2 inputs, utilizes readily available market valuation multiples to estimate fair value. The income approach is a valuation technique that utilizes the discounted cash flow (DCF) method, which includes Level 3 inputs. Under the DCF method, the fair value of the RU reflects the present value of the projected earnings that will be generated by each RU after taking into account the revenues and expenses associated with the asset, the relative risk that the cash flows will occur, the contribution of other assets, and an appropriate discount rate to reflect the value of the invested capital. Cash flows are estimated for future periods based upon historical data and projections by management.

As of December 31, 2014, the Company had recorded goodwill in the amount of $1.5 billion. The Company performed its annual impairment test of its goodwill balances as of May 31, 2014, and this test did not indicate any impairment. The fair value of the RUs substantially exceeds the carrying value. Refer to Note 7 for more information regarding goodwill.

The fair value of the Company’s long-term debt and obligations under capital leases is not significantly different from its carrying value.

 

Note 4 Relationships with Affiliated Companies

During December 2014, TSYS Managed Services obtained a £900,000, or approximately $1.4 million, pound-denominated term loan bearing interest at a rate of LIBOR plus two percent. The loan matures in December 2017, and has monthly interest payments. The lender in this transaction is Merchants Limited, who has a noncontrolling interest in TSYS Managed Services. Refer to Note 13 for more information regarding this loan.

The Company provides electronic payment processing and other services to the Company’s equity investments, TSYS de México and CUP Data.

The foregoing related party arrangements and services are performed under contracts that are similar to its contracts with unrelated third party customers. The Company believes the terms and conditions of transactions between the Company and these related parties are comparable to those which could have been obtained in transactions with unaffiliated parties.

Through its related party transactions, TSYS generates accounts receivable and liability accounts with TSYS de México and CUP Data.

 

53


The Company had the following balances with related parties as of December 31, 2014 and 2013:

 

 

 

(in thousands)    2014      2013  

Accounts receivable

   $ 19         7   

Account payable

     12         12   

 

 

The table below details revenues derived from affiliated companies for the years ended December 31, 2014, 2013 and 2012:

 

 

 

(in thousands)    2014      2013      2012  

Total revenues:

        

CUP Data

   $ 232         229         172   

TSYS de México

     78         68         72   
  

 

 

    

 

 

    

 

 

 

Total revenues

   $ 310         297         244   
  

 

 

    

 

 

    

 

 

 

Processing support fees paid to TSYS de Mexico1

   $ 148         148         186   
  

 

 

    

 

 

    

 

 

 

 

 

 

1 The Company and TSYS de México are parties to an agreement where TSYS de México provides processing support to the Company.

 

Note 5 Cash and Cash Equivalents

Cash and cash equivalent balances as of December 31, 2014 and 2013 are summarized as follows:

 

 

 

(in thousands)    2014      2013  

Cash and cash equivalents in domestic accounts

   $ 225,396         191,460   

Cash and cash equivalents in foreign accounts

     63,787         56,240   
  

 

 

    

 

 

 

Total

   $ 289,183         247,700   
  

 

 

    

 

 

 

 

 

The Company maintains operating accounts outside the United States denominated in currencies other than the U.S. dollar. All amounts in domestic accounts are denominated in U.S. dollars.

 

Note 6 Prepaid Expenses and Other Current Assets

Significant components of prepaid expenses and other current assets as of December 31, 2014 and 2013 are summarized as follows:

 

 

 

(in thousands)    2014      2013  

Prepaid expenses

   $ 35,334         41,905   

Supplies inventory

     14,340         12,142   

Other

     49,300         41,062   
  

 

 

    

 

 

 

Total

   $ 98,974         95,109   
  

 

 

    

 

 

 

 

 

 

Note 7 Goodwill

In 2013, the Company allocated $1.0 billion to goodwill due to the acquisition of NetSpend. In 2014, the Company adjusted the NetSpend purchase price allocation to add an additional $8.5 million for settlement of the dissenting shareholder lawsuit and adjustments to deferred taxes.

 

54


The gross amount and accumulated impairment losses of goodwill as of December 31, 2014 and 2013 are as follows:

 

 

 

    2014  
(in thousands)   North America
Services
    International
Services
    Merchant
Services
    NetSpend     Consolidated  

Gross amount

  $  70,796        31,681        415,973        1,032,959      $ 1,551,409   

Accumulated impairment losses

    (182     (1,605     (2,225            (4,012
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Goodwill, net

  $ 70,614        30,076        413,748        1,032,959      $ 1,547,397   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

 

 

    2013  
    North America
Services
    International
Services
    Merchant
Services
    NetSpend     Consolidated  

Gross amount

  $ 70,796        34,201        415,973        1,024,434      $ 1,545,404   

Accumulated impairment losses

                  (2,225            (2,225
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Goodwill, net

  $ 70,796        34,201        413,748        1,024,434      $ 1,543,179   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

The changes in the carrying amount of goodwill as of December 31, 2014 and 2013 are as follows:

 

 

 

(in thousands)   North America
Services
    International
Services
    Merchant
Services
    NetSpend     Consolidated  

Balance as of December 31, 2012

  $ 70,796        33,944        413,604             $ 518,344   

NetSpend purchase price allocation

                         1,024,434        1,024,434   

ProPay purchase price allocation

                  144               144   

Currency translation adjustments

           257                      257   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2013

  $ 70,796        34,201        413,748        1,024,434      $ 1,543,179   

Disposal of GP Net

    (182     (1,605                   (1,787

NetSpend purchase price allocation

                         8,525        8,525   

Currency translation adjustments

           (2,520                   (2,520
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2014

  $ 70,614      $ 30,076      $ 413,748      $ 1,032,959      $ 1,547,397   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

Refer to Note 24 for more information on acquisitions.

 

Note 8 Other Intangible Assets, net

In 2014, the changes related to other gross intangible assets were related to foreign currency translation. In 2013, TSYS allocated $401.6 million to other intangible assets due to the acquisition of NetSpend. Refer to Note 24 for more information on acquisitions.

Significant components of other intangible assets as of December 31, 2014 and 2013 are summarized as follows:

 

 

 

    2014  
(in thousands)   Gross     Accumulated
Amortization
    Net  

Channel relationships

  $  318,600        (60,079   $ 258,521   

Customer relationships

    167,140        (87,201     79,939   

Trade name

    46,480        (15,680     30,800   

Database

    28,000        (8,400     19,600   

Covenants-not-to-compete

    14,940        (5,551     9,389   

Trade association

    10,000        (4,750     5,250   

Favorable lease

    875        (267     608   
 

 

 

   

 

 

   

 

 

 

Total

  $ 586,035        (181,928   $ 404,107   
 

 

 

   

 

 

   

 

 

 

 

 

 

55


 

 

     2013  
(in thousands)    Gross      Accumulated
Amortization
    Net  

Channel relationships

   $ 318,600         (20,261   $ 298,339   

Customer relationships

     167,871         (69,114     98,757   

Trade name

     46,561         (6,527     40,034   

Database

     28,000         (2,800     25,200   

Covenants-not-to-compete

     14,940         (2,887     12,053   

Trade association

     10,000         (3,750     6,250   

Favorable lease

     875         (89     786   
  

 

 

    

 

 

   

 

 

 

Total

   $ 586,847         (105,428   $ 481,419   
  

 

 

    

 

 

   

 

 

 

 

 

Amortization related to other intangible assets, which is recorded in selling, general and administrative expenses, was $77.3 million, $50.0 million and $16.6 million for 2014, 2013 and 2012, respectively.

The weighted average useful life for each component of other intangible assets, and in total, as of December 31, 2014 is as follows:

 

 

 

     Weighted
Average
Amortization
Period (Yrs)
 

Channel relationships

     8.0   

Customer relationships

     8.2   

Trade name

     4.9   

Database

     5.0   

Covenants-not-to-compete

     5.3   

Trade association

     10.0   

Favorable Lease

     4.9   
  

 

 

 

Total

     7.6   
  

 

 

 

 

 

Estimated future amortization expense of other intangible assets as of December 31, 2014 for the next five years is:

 

 

 

(in thousands)       

2015

   $ 75,770   

2016

     75,213   

2017

     74,823   

2018

     60,166   

2019

     47,870   

 

 

 

56


Note 9 Computer Software, net

Computer software as of December 31, 2014 and 2013 is summarized as follows:

 

 

 

(in thousands)    2014      2013  

Licensed computer software

   $ 435,701         393,947   

Software development costs

     376,026         337,993   

Acquisition technology intangibles

     167,687         168,336   
  

 

 

    

 

 

 

Total computer software

     979,414         900,276   
  

 

 

    

 

 

 

Less accumulated amortization:

     

Licensed computer software

     243,866         207,496   

Software development costs

     275,512         254,046   

Acquisition technology intangibles

     93,888         74,854   
  

 

 

    

 

 

 

Total accumulated amortization

     613,266         536,396   
  

 

 

    

 

 

 

Computer software, net

   $ 366,148         363,880   
  

 

 

    

 

 

 

 

 

The Company allocated approximately $78.7 million to acquisition technology intangibles during 2013 due to the acquisition of NetSpend. Refer to Note 24 for more information on this acquisition.

Amortization expense includes amounts for computer software acquired under capital lease. The Company had the following amortization expense related to computer software for the years ended December 31, 2014, 2013 and 2012:

 

 

 

(in thousands)    2014      2013      2012  

Amortization expense related to:

        

Licensed computer software costs

   $ 36,775         33,511         33,393   

Software development costs

     25,248         21,430         23,044   

Acquisition technology intangibles

     19,683         15,855         9,712   

 

 

The company held the following computer software under capital lease as of as of December 31, 2014 and 2013:

 

 

 

     2014  
(in thousands)    Gross      Accumulated
Amortization
    Net  

Licensed computer software

   $  17,156         (4,816   $ 12,340   

 

 

 

 

 

     2013  
(in thousands)    Gross      Accumulated
Amortization
    Net  

Licensed computer software

   $ 13,175         (2,031   $ 11,144   

 

 

The weighted average useful life for each component of computer software, and in total, as of December 31, 2014, is as follows:

 

 

 

     Weighted
Average
Amortization
Period (Yrs)
 

Licensed computer software

     5.2   

Software development costs

     5.8   

Acquisition technology intangibles

     6.8   
  

 

 

 

Total

     5.7   
  

 

 

 

 

 

 

57


Estimated future amortization expense of licensed computer software, software development costs and acquisition technology intangibles as of December 31, 2014 for the next five years is:

 

 

 

(in thousands)    Licensed
Computer
Software
     Software
Development
Costs
     Acquisition
Technology
Intangibles
 

2015

   $ 41,956         25,334         16,670   

2016

     31,960         18,919         15,202   

2017

     21,326         13,770         13,718   

2018

     11,017         7,689         11,243   

2019

     6,097         1,568         11,243   

 

 

 

Note 10 Property and Equipment, net

Property and equipment balances as of December 31, 2014 and 2013 are as follows:

 

 

 

(in thousands)    2014      2013  

Computer and other equipment

   $ 317,862         261,937   

Buildings and improvements

     243,211         241,675   

Furniture and other equipment

     135,741         129,799   

Land

     16,763         17,021   

Other

     204         989   
  

 

 

    

 

 

 

Total property and equipment

     713,781         651,421   

Less accumulated depreciation and amortization

     423,196         391,453   
  

 

 

    

 

 

 

Property and equipment, net

   $ 290,585         259,968   
  

 

 

    

 

 

 

 

 

Depreciation and amortization expense includes amounts for computer equipment, furniture, and other equipment acquired under capital lease. Depreciation and amortization expense related to property and equipment was $53.5 million, $45.5 million and $43.4 million for the years ended December 31, 2014, 2013 and 2012, respectively.

The company held the following property and equipment under capital lease as of December 31, 2014 and 2013:

 

 

 

     2014  
(in thousands)    Gross      Accumulated
Amortization
    Net  

Computer and other equipment

   $  38,193         (29,816   $ 8,377   

Furniture and other equipment

     5,374         (1,666     3,708   
  

 

 

    

 

 

   

 

 

 

Total

   $ 43,567         (31,482   $ 12,085   
  

 

 

    

 

 

   

 

 

 

 

 

 

 

 

     2013  
(in thousands)    Gross      Accumulated
Amortization
    Net  

Computer and other equipment

   $ 35,335         (22,101   $ 13,234   

Furniture and other equipment

     2,382         (931     1,451   
  

 

 

    

 

 

   

 

 

 

Total

   $ 37,717         (23,032   $ 14,685   
  

 

 

    

 

 

   

 

 

 

 

 

 

58


Note 11 Contract Acquisition Costs, net

Significant components of contract acquisition costs as of December 31, 2014 and 2013 are summarized as follows:

 

 

 

(in thousands)    2014      2013  

Conversion costs, net

   $ 159,339         112,177   

Payments for processing rights, net

     76,966         72,651   
  

 

 

    

 

 

 

Total

   $ 236,305         184,828   
  

 

 

    

 

 

 

 

 

Amortization expense related to contract acquisition cost for the years ended December 31, 2014, 2013 and 2012 are as follows:

 

 

 

(in thousands)    2014      2013      2012  

Amortization expense related to:

        

Conversion costs

   $ 17,816         19,515         24,014   

Payments for processing rights

     16,209         13,099         13,290   

 

 

The weighted average useful life for each component of contract acquisition costs, and in total, as of December 31, 2014 is as follows:

 

 

 

     Weighted
Average
Amortization
Period (Yrs)
 

Payments for processing rights

     14.5   

Conversion costs

     12.3   
  

 

 

 

Total

     13.4   
  

 

 

 

 

 

Estimated future amortization expense of conversion costs and payments for processing rights as of December 31, 2014 for the next five years is:

 

 

 

(in thousands)    Conversion
Costs
     Payments for
Processing Rights
 

2015

   $ 30,060         16,897   

2016

     28,598         13,797   

2017

     26,210         11,691   

2018

     23,687         10,229   

2019

     20,715         8,322   

 

 

 

Note 12 Equity Investments

The Company has an equity investment in TSYS de México and records its 49% ownership using the equity method of accounting. The operation prints statements and provides card-issuing support services to the equity investment clients and others.

The Company has an equity investment in CUP Data and records its 44.56% ownership using the equity method of accounting. CUP Data is sanctioned by the People’s Bank of China, China’s central bank, and has become one of the world’s largest and fastest-growing payments networks. CUP Data currently provides transaction processing, disaster recovery and other services for banks and bankcard issuers in China.

TSYS’ equity investments are recorded initially at cost and subsequently adjusted for equity in earnings, cash contributions and distributions, and foreign currency translation adjustments. TSYS believes the carrying value approximates the underlying assets of the equity investments.

 

59


TSYS’ equity in income of equity investments (net of tax) for the years ended December 31, 2014, 2013 and 2012 was $17.6 million, $13.0 million and $10.2 million, respectively.

A summary of TSYS’ equity investments as of December 31, 2014 and 2013 is as follows:

 

 

 

(in thousands)    2014      2013  

CUP Data

   $ 92,738         86,549   

TSYS de México

     7,730         7,584   
  

 

 

    

 

 

 

Total

   $ 100,468