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| TSS > SEC Filings for TSS > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
Quarterly Report
Three months ended September 30, Nine months ended September 30,
(in millions, except per share data and employees) 2009 2008 Percent Change 2009 2008 Percent Change
Revenues before reimbursable items $ 359.0 372.7 (3.7 )% $ 1,055.1 1,088.9 (3.1 )%
Total revenues 432.3 439.4 (1.6 ) 1,253.2 1,288.9 (2.8 )
Operating income 87.9 95.3 (7.8 ) 248.7 278.2 (10.6 )
Net income attributable to TSYS 55.0 64.1 (14.1 ) 155.0 183.8 (15.7 )
Basic earnings per share (EPS)(1):
Income from continuing operations 0.29 0.32 (9.0 ) 0.81 0.92 (12.1 )
Net income 0.28 0.32 (13.9 ) 0.79 0.93 (15.3 )
Diluted EPS(1):
Income from continuing operations 0.29 0.32 (8.9 ) 0.81 0.92 (12.1 )
Net income 0.28 0.32 (13.9 ) 0.79 0.93 (15.3 )
Cash flows from operating activities 114.0 104.4 9.2 333.1 278.9 19.4
Other:
Average accounts on file 351.7 365.5 (3.8 ) 349.8 369.1 (5.2 )
Cardholder transactions processed 1,855.5 1,965.1 (5.6 ) 5,377.9 5,723.3 (6.0 )
Average full-time equivalent employees (FTE) 7,893 7,761 1.7 7,991 7,519 6.3
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(1) Basic and diluted EPS is computed based on the two-class method in accordance with the guidance under ASC 260. The impact on 2008 EPS (as recast to show retroactive adoption of ASC 260) caused quarterly basic and diluted EPS to be lower by $0.01, and year to date basic EPS to be lower by $0.01.
Significant highlights for 2009 include:
Corporate
Sold TDM, a wholly owned subsidiary involved in the late stage collection
and bankruptcy business.
North America
Renewed a longstanding relationship with Navy Federal Credit Union to
continue offering credit card processing products to members, as a major
component of Navy Federal's consumer and credit card lending operation.
Signed an agreement with Unicard Mexico, a wholly owned subsidiary of Unibanco Brasil, one of the world's top 20 banks and TSYS' first TS2 card issuing client in Mexico.
International
Announced that TSYS has signed a multi-year contract with Banco Carrefour
S.A., to process its hybrid and private label card business in Brazil. The
agreement includes an initial launch of a new MasterCard hybrid card in the
third quarter 2009 which will be followed by the conversion of the existing
six million private label cards in early 2010. TSYS will process the cards
on its TS Prime multi-client payments processing platform.
Reached an agreement with Travel Bank, Inc., a financial services company that is a part of the JTB Group, to process Japan's first Visa branded Prepaid card in July 2009. Consumers can use the cards to make payments at Visa merchants when traveling overseas or to withdraw cash from Visa ATMs.
Began offering merchant payment services to PaySquare in the Benelux, which is TSYS' first acquirer-processing client to go live in Europe.
Announced China UnionPay Data Services Co., Ltd. (CUP Data) (TSYS' joint venture with China UnionPay) signed two processing agreements. One agreement was with China Postal Savings Bank, China's fifth largest bank. The other agreement was with Bank of East Asia, Hong Kong's largest local independent bank and the first foreign bank to launch a card program in China.
Introduced its market-leading CentreSuite product to Europe. The commercial card management tool was first launched in North America in 2002 and is now employed by more than 140,000 businesses.
Merchant
Signed a client agreement during the third quarter to use TSYS' processing
services to connect associations and electronic transfer networks to
complete ATM cash withdrawals, credit card cash advances and point-of-sale
(POS) debit card transactions initiated by the patrons of client's casino
customers. The client provides cash access services in over 1100 casinos to
millions of gaming patrons worldwide.
Responded to Bank of America's announcement on June 29, 2009 that Bank of America and other parties are forming a new joint venture that will provide merchant processing services. TSYS provides accounting, settlement, authorization and other services to Bank of America pursuant to a contract that will expire in April 2010. Bank of America has indicated to TSYS that it is in the process of formulating its plans with respect to changes in its merchant processing relationship with TSYS but has not yet communicated to TSYS the timing or extent of the deconversion from TSYS' systems.
Announced availability of two new all-in-one POS solutions to help small- and mid-sized retailers integrate store operations with the point of purchase. Offered as a complete business-in-a-box, each solution includes quality hardware components and award winning Microsoft software to help retailers manage every aspect of their business.
Agreed to partner with mPay Gateway(TM) and Nova Libra to provide point-of-sale payment solutions that meet the needs of healthcare providers and their patients, as well as pharmacies and drug stores.
Economic Conditions
General economic conditions in the U.S. and other areas of the world weakened
in the second half of 2008 with a dramatic acceleration in the fourth quarter
which generally continued through the first nine months of 2009. Many of TSYS'
businesses rely in part on the number of consumer transactions which have been
challenged by a weakened U.S. and world economy and difficult credit markets.
General reduction in consumer spending did negatively impact the Company's
revenues through the first nine months of 2009. In addition, the Company's
revenues and operating profit during 2009 as compared to 2008 were adversely
impacted by shifts from credit card transactions to personal identification
number ("PIN") debit card transactions. Also as a result of the current economic
conditions in the U.S., credit card issuers have been reducing credit limits and
closing accounts and are more selective with regard to whom they issue credit
cards. This reduction in the number of accounts and account activity adversely
impacted the results for the North America Services segment during the three and
nine months ended September 30, 2009 as compared to the same periods last year.
A continuation of the economic slowdown could adversely impact future revenues
and profits of the Company.
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.
Critical Accounting Policies and Estimates
There have been no material changes to the Company's critical accounting
policies, estimates and assumptions or the judgments affecting the application
of those estimates and assumptions in 2009. For a detailed discussion regarding
the Company's critical accounting policies and estimates, see "Item 7:
Management's Discussion and Analysis of Financial Condition and Results of
Operations," and for a detailed discussion regarding the Company's risk factors,
see "Item 1A: Risk Factors" in the Company's Annual Report on Form 10-K for the
year ended December 31, 2008.
Related Party Transactions
The Company believes the terms and conditions of transactions between the
Company and its equity investments, Total System Services de M้xico, S.A. de.
C.V. (TSYS de M้xico) and CUP Data, 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.
Off-Balance Sheet Arrangements
Operating Leases: As a method of funding its operations, TSYS employs
noncancelable operating leases for computer equipment, software and facilities.
These leases allow the Company to provide the latest technology while avoiding
the risk of ownership. Neither the assets nor obligations related to these
leases are included on the balance sheet.
Contractual Obligations: The total liability (with state amounts tax effected)
for uncertain tax positions under ASC 740 at September 30, 2009 is $4.3 million.
Refer to Note 10 in the Notes to Unaudited Condensed 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 a significant
payment related to these obligations within the next year.
As indicated in the Company's Annual Report on Form 10-K for the year ended
December 31, 2008, total contractual cash obligations at December 31, 2008 were
estimated at $458.0 million. These contractual cash obligations include lease
payments and software arrangements.
Results of Operations
The following table sets forth certain income statement captions as a
percentage of total revenues and the percentage increases or decreases in those
items:
Three months ended September 30, Nine months ended September 30,
Percent Change Percent Change
% of Total Revenues in Dollar Amounts % of Total Revenues in Dollar Amounts
2009 2008 2009 vs. 2008 2009 2008 2009 vs. 2008
Revenues:
Electronic payment
processing services 55.2 % 57.9 % (6.3 )% 56.4 % 58.0 % (5.5 )%
Merchant acquiring services 16.6 14.7 11.3 16.5 14.9 7.9
Other services 11.2 12.2 (9.1 ) 11.3 11.6 (5.2 )
Revenues before
reimbursable items 83.0 84.8 (3.7 ) 84.2 84.5 (3.1 )
Reimbursable items 17.0 15.2 9.9 15.8 15.5 (1.0 )
Total revenues 100.0 100.0 (1.6 ) 100.0 100.0 (2.8 )
Expenses:
Salaries and other
personnel expenses 34.3 34.2 (1.4 ) 35.2 34.1 0.3
Net technology and
facilities expenses 17.8 17.1 2.5 17.9 17.2 1.0
Spin-related expenses - 0.3 (100.0 ) - 0.8 (100.0 )
Other operating expenses 10.6 11.5 (8.7 ) 11.3 10.8 1.5
Expenses before
reimbursable items 62.7 63.1 (2.3 ) 64.4 62.9 (0.5 )
Reimbursable items 17.0 15.2 9.9 15.8 15.5 (1.0 )
Total expenses 79.7 78.3 0.1 80.2 78.4 (0.6 )
Operating income 20.3 21.7 (7.8 ) 19.8 21.6 (10.6 )
Nonoperating expenses 0.1 0.0 nm (0.2 ) 0.1 nm
Income from continuing
operations before income
taxes and equity in income
of equity investments 20.4 21.7 (7.1 ) 19.6 21.7 (12.0 )
Income taxes 7.3 7.8 (6.7 ) 7.1 7.9 (12.4 )
Income from continuing
operations before equity in
income of equity
investments 13.1 13.9 (7.3 ) 12.5 13.8 (11.7 )
Equity in income of equity
investments 0.4 0.7 (47.0 ) 0.4 0.5 (32.2 )
Income from continuing
operations, net of tax 13.5 14.6 (9.2 ) 12.9 14.3 (12.4 )
(Loss) income from
discontinued operations,
net of tax (0.7 ) 0.1 nm (0.4 ) 0.1 nm
Net income 12.8 14.7 (14.2 ) 12.5 14.4 (15.6 )
Net income attributable to
the noncontrolling
interests (0.1 ) (0.1 ) 19.8 (0.1 ) (0.1 ) 2.8
Net income attributable to
TSYS 12.7 % 14.6 % (14.1 )% 12.4 % 14.3 % (15.7 )%
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Revenues
The Company generates revenues from the fees that it charges customers for
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 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 revenue growth was moderated by the currency
translation impact of foreign operations, as well as by doing business in a
competitive landscape. Of the total revenue changes of 1.6% for the third
quarter of 2009, the Company estimates revenues decreased by a net 2.8% due to
foreign currency exposure and pricing, and increased 1.1% for volume changes. Of
the total revenue changes of 2.8% for the first nine months of 2009, the Company
estimates revenues decreased by a net 4.6% due to foreign currency exposure and
pricing, and increased 1.9% for volume changes.
Total revenues decreased $7.2 million and $35.7 million, or 1.6% and 2.8%,
during the three and nine months ended September 30, 2009, respectively,
compared to the same periods in 2008. The decrease in revenues for the three and
nine months ended September 30, 2009 includes a decrease of $10.3 million and
$50.7 million, respectively, related to the effects of currency translation of
its foreign-based subsidiaries and branches. Excluding reimbursable items,
revenues decreased $13.7 million and $33.8 million, or 3.7% and 3.1%, during the
three and nine months ended September 30, 2009, respectively, compared to the
same periods in 2008.
International Revenues
TSYS provides services to its clients worldwide and plans to continue to
expand its service offerings internationally in the future.
Total revenues from clients domiciled outside the United States are
summarized below:
Three months ended September 30, Nine months ended September 30,
(in millions) 2009 2008 Percent Change 2009 2008 Percent Change
Europe $ 70.4 77.0 (8.6 ) $ 188.9 204.1 (7.5 )
Canada 36.5 31.8 14.7 100.7 94.7 6.2
Japan 11.5 7.2 60.0 33.6 22.8 47.9
Mexico 2.1 3.5 (39.0 ) 6.3 11.2 (43.4 )
Other 6.9 6.5 5.9 20.9 18.4 13.6
Totals $ 127.4 126.0 1.1 $ 350.4 351.2 (0.2 )
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Note: The Company
has two
equity
investments
located in
Mexico and
China that
are
accounted
for under
the equity
method of
accounting,
and
therefore,
TSYS does
not include
the revenues
of its
equity
investments
in
consolidated
revenues.
Revenues from clients in certain countries decreased as a result of pricing
compression and portfolio deconversions.
TSYS expects to continue to grow its international revenues in the future
through acquisitions, business expansion, new client signings and internal
growth.
Value Added Products and Services
The Company's revenues are impacted by client use of TSYS' processing
systems' optional value added products and services. Value added products and
services are optional features to which each client may choose to subscribe in
order to potentially increase the financial performance of its portfolio. Value
added products and services include: risk management tools and techniques, such
as credit evaluation, fraud detection and prevention, and behavior analysis
tools; revenue enhancement tools and customer retention programs; and data
warehouse services. These revenues can increase or decrease from period to
period as clients subscribe to or cancel these services. Value added products
and services are included primarily in electronic payment processing services
revenue. For the three months ended September 30, 2009 and 2008, value added
products and services represented 11.4% and 12.8%, respectively, of total
revenues. For the nine months ended September 30, 2009 and 2008, value added
products and services represented 11.7% and 12.6%, respectively, of total
revenues.
Major Customers
A significant amount of the Company's revenues is derived from long-term
contracts with large clients, including its major customers. TSYS derives
revenues from providing various processing, merchant acquiring and other
services to these clients, including processing of consumer and commercial
accounts, as well as revenues for reimbursable items. Refer to Note 11 in the
Notes to Unaudited Condensed Consolidated Financial Statements for more
information regarding major customers. The loss of these clients, or any
significant client, could have a material adverse effect on the Company's
financial position, results of operations and cash flows.
On June 29, 2009, Bank of America announced that it and other parties are
forming a new joint venture that will provide merchant processing services. TSYS
provides accounting, settlement, authorization and other services to Bank of
America pursuant to a contract that will expire in April 2010, which services
accounted for approximately 4.0% of TSYS' total revenues for 2008 and
approximately 5.7% of TSYS' total revenues for the third quarter of 2009.
Bank of America has indicated to TSYS that it is in the process of
formulating its plans with respect to changes in its merchant processing
relationship with TSYS, but has not yet communicated to TSYS the timing or
extent of the deconversion from TSYS' systems. TSYS provides a number of
additional services to Bank of America, including commercial card processing,
small business card processing and card production services.
Approximately 29% and 46% of the total revenues derived from providing
merchant processing services to Bank of America are attributable to reimbursable
items for 2008 and the third quarter of 2009, respectively.
TSYS will operate under the current contract until Bank of America informs
TSYS of the changes to the merchant processing relationships. TSYS expects that
the merchant processing business associated with Bank of America will contribute
approximately $0.02 per share to TSYS' projected earnings per share in 2009. The
potential loss of Bank of America as a merchant processing client is not
expected to have a material adverse effect on TSYS' financial position, results
of operations or cash flows.
Revenues from major customers for the periods reported are primarily
attributable to the North America Services segment and Merchant Services
segment.
Accounts on File (AOF) Data
At September 30, Percent
(in millions) 2009 2008 Change
At September 30, 342.1 355.5 (3.8 )
Quarter-to-date (QTD) Average 351.7 365.5 (3.8 )
Year-to-date (YTD) Average 349.8 369.1 (5.2 )
AOF by Portfolio Type
At September 30,
2009 2008 Percent
(in millions) AOF % AOF % Change
Consumer 189.2 55.3 211.1 59.4 (10.4 )
Retail 39.2 11.4 51.1 14.4 (23.4 )
Stored value 37.8 11.1 26.1 7.3 45.0
Commercial 46.0 13.4 41.8 11.7 10.1
Government services 24.6 7.2 20.5 5.8 19.9
Debit 5.3 1.6 4.9 1.4 8.8
Total 342.1 100.0 355.5 100.0 (3.8 )
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AOF by Geographic Area
At September 30,
2009 2008 Percent
(in millions) AOF % AOF % Change
U.S. 253.2 74.0 272.6 76.7 (7.1 )
Outside U.S. 88.9 26.0 82.9 23.3 7.3
Total 342.1 100.0 355.5 100.0 (3.8 )
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Note: The accounts
on file
distinction
between U.S.
and outside
U.S. is
based on the
geographic
domicile of
the
Company's
processing
clients.
Activity in AOF
September 2008 to September 2007 to
(in millions) September 2009 September 2008
Beginning balance 355.5 357.1
Internal growth of existing clients 29.6 38.7
New clients 25.7 27.8
Purges/Sales (31.3 ) (33.1 )
Deconversions (37.4 ) (35.0 )
Ending balance 342.1 355.5
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Electronic Payment Processing Services
Electronic payment processing services revenues are generated primarily from
charges based on the number of accounts on file, transactions and authorizations
processed, statements mailed, cards embossed and mailed, and other processing
services for cardholder accounts on file. Cardholder accounts on file include
active and inactive consumer credit, retail, debit, stored value, government
services and commercial card accounts. Revenues from electronic payment
processing services decreased $16.1 million and $41.2 million, or 6.3% and 5.5%,
for the three and nine months ended September 30, 2009, respectively, compared
to the same periods in 2008. The decrease for the three and nine months is
attributable to negative foreign currency translation, the loss of clients
through portfolio deconversions, as well as overall economic conditions causing
existing clients to be selective in the services being utilized, which decrease
was partially offset by new clients.
TSYS' electronic payment processing revenues are influenced by several
factors, including volumes related to AOF and transactions. TSYS estimates that
approximately 49% of total electronic payment processing revenues is AOF and
transaction volume driven, and are driven primarily from processing services.
The remaining 51% of electronic 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.
Active accounts are accounts that have had monetary activity either during
. . .
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