NetSpend 2012 Annual Report Download

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2012
2012 | TSYS Annual Report
Looking Back. Moving Forward.

Table of contents

  • Page 1
    2012 | TSYS Annual Report 2 0 1 2 Looking Back. Moving Forward.

  • Page 2
    ... charge cards in the United States at a time before companies like Visa® and MasterCard® were household names, the TSYS team embarked on a lifelong commitment to customer service, progress and bold thinking. This event was the catalyst that ultimately launched one of the world's premier payment...

  • Page 3
    financial information (dollars in thousands) (dollars in thousands, except per share data) Total revenues Operating income Net income attributable to TSYS common shareholders Basic earnings per share attributable to TSYS common shareholders Diluted earnings per share attributable to TSYS common ...

  • Page 4
    ...duplicate to 1099 tax form • View book-entry information our role in payments and grow our direct merchant-acquiring business, government agencies these clients serve. In addition to GPR cards, • Request a dividend check replacement • Request certificate issuance adding new sales your channels...

  • Page 5
    ...enroll online, and offer simplified pricing and the ability to accept a payment from their mobile or smart devices with secure processing and encryption. In July 2012, we announced a new long-term agreement with Bank of America® Corp. to begin processing for its U.S. consumer credit card portfolio...

  • Page 6
    ...in the direct merchant-acquiring business through internally generated growth as well as acquisitions. We have diversified our sales distribution model and introduced innovative new products. We are focused on helping businesses operate more efficiently. Today, more than half of the revenue within...

  • Page 7
    ... Vice President President, TSYS Merchant Services Paul M. Todd Executive Vice President, Strategy, Mergers & Acquisitions, Product & Marketing Connie C. Dudley Executive Vice President, North America Conversions Ryland L. Harrelson Executive Vice President & Chief Human Resource Officer Anthony...

  • Page 8
    ... Services and International Services segments, TSYS processes information through its cardholder systems to financial institutions throughout the United States and internationally. The Company's North America Services segment provides these services to clients in the United States, Canada, Mexico...

  • Page 9
    ...the Company's total revenues. As part of its strategic plan to diversify, the Company acquired companies between 2010 and 2012 to expand the Merchant Services segment in the direct acquiring business. Refer to Notes 1 and 24 in the consolidated financial statements for further information related to...

  • Page 10
    ...is predominately credit card related, the Durbin Amendment is not expected to have a significant negative impact upon TSYS' business. 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...

  • Page 11
    ... clients. Note 9 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, 2012 was $161.3 million. Acquisitions - Purchase Price Allocation TSYS...

  • Page 12
    ...2012 due to any changes in our determination of the number of deliverables in an arrangement, units of accounting, or estimates of VSOE or ESP. Long-lived Assets and Intangibles In evaluating for recoverability, expected undiscounted net operating cash flows are estimated by management. The Company...

  • Page 13
    ... 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...

  • Page 14
    ... foreign currency exposure and pricing, and increased 1.5% due to the impact of acquisitions and 4.1% as a result of volume changes. TSYS' revenues are generated primarily from charges based on the number of accounts on file (AOF), transactions and authorizations processed, statements mailed, cards...

  • Page 15
    ...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...

  • Page 16
    ... 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...

  • Page 17
    ... 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...

  • Page 18
    ..., 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...

  • Page 19
    ... in income of equity investments in pretax income. During 2012, the Company generated foreign net operating loss benefits and state tax credits in excess of its utilization capacity based on both the Company's current operations and with consideration of future tax planning strategies. Based upon...

  • Page 20
    ... statements for more information on equity investments. Non-GAAP Financial Measures Management evaluates the Company's operating performance based upon operating and net profit margins excluding reimbursable items, a nongenerally accepted accounting principles (non-GAAP) measure. TSYS also uses...

  • Page 21
    ... 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...

  • Page 22
    ... 2011 2010 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 $34...

  • Page 23
    ... and capital lease obligations and the payments of cash dividends. Refer to Note 13 in the consolidated financial statements for more information on the long-term debt financing. Purchase of Noncontrolling Interest With the acquisition of TMS, the Company was a party to put and call arrangements...

  • Page 24
    ... financial statements for more information on treasury stock. 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...

  • Page 25
    ...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...

  • Page 26
    ..., 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; (iv) statements regarding the pending acquisition of NetSpend...

  • Page 27
    ..., 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 costeffectively improve and implement processing systems to provide new products...

  • Page 28
    ... debit cards and related financial services to underbanked consumers in the United States, announced that they entered into a definitive agreement pursuant to which, upon the terms and subject to the conditions set forth in the agreement, TSYS will acquire NetSpend in an all cash transaction valued...

  • Page 29
    ... per share data) December 31, 2012 2011 Assets Current assets: Cash and cash equivalents (Note 5) ...Accounts receivable, net of allowance for doubtful accounts and billing adjustments of $3.9 million and $4.1 million at 2012 and 2011, respectively ...Deferred income tax assets (Note 20) ...Prepaid...

  • Page 30
    ... Ended December 31, 2012 2011 2010 Total revenues ...Cost of services ...Selling, general and administrative expenses ...Operating income ...Nonoperating expenses ...Income from continuing operations before income taxes and equity in income of equity investments ...Income taxes (Note 20) ...Income...

  • Page 31
    ...), net of tax: Foreign currency translation adjustments ...Postretirement healthcare plan adjustments ...Other comprehensive income (loss) ...Comprehensive income ...Comprehensive income attributable to noncontrolling interests ...Comprehensive income attributable to TSYS common shareholders ...See...

  • Page 32
    ...by operating activities ...Cash flows from investing activities: Cash used in acquisitions and equity investments, net of cash acquired ...Additions to contract acquisition costs ...Additions to licensed computer software from vendors ...Purchases of property and equipment ...Additions to internally...

  • Page 33
    ...-based compensation (Note 16) ...Cash dividends declared ($0.40 per share) ...Purchase of treasury shares (Note 17) ...Subsidiary dividends paid to noncontrolling interests ...Fair value of noncontrolling interest in CPAY ...Tax benefits associated with sharebased payment arrangements ...Balance as...

  • Page 34
    ... to form a new joint venture company, First National Merchant Solutions, LLC (FNMS), of which TSYS would own 51%. FNMS offers transaction processing, merchant support and underwriting, and value-added services, as well as Visa- and MasterCard-branded prepaid cards for businesses of any size. FNMS is...

  • Page 35
    ... 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...

  • Page 36
    ...estimated useful lives to their residual values, and reviewed for impairment in accordance with ASC 360. 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...

  • Page 37
    ... related to cash payments for rights to provide processing services is capitalized in accordance with the provisions of ASC 605. All costs incurred prior to a signed agreement are expensed as incurred. Contract acquisition costs are amortized using the straight-line method over the expected customer...

  • Page 38
    ... 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...

  • Page 39
    ... 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...

  • Page 40
    ... with financial and nonfinancial institutions and are generally recognized as the services are performed. Payment processing services revenues are generated primarily from charges based on the number of accounts on file, transactions and authorizations processed, statements mailed, cards embossed...

  • Page 41
    ... 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...

  • Page 42
    ... through the year ended December 31, 2012. 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...

  • Page 43
    ...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...

  • Page 44
    ...with Affiliated Companies The Company provides electronic payment processing and other services to the Company's equity investments, TSYS de México and CUP Data. The foregoing related party services are performed under contracts that are similar to its contracts with unrelated third party customers...

  • Page 45
    ... in Money Market accounts that had an original maturity date of 90 days or less. The Company considers cash equivalents to be shortterm, highly liquid investments that are both readily convertible to known amounts of cash and so near their maturity that they present insignificant risk of changes in...

  • Page 46
    ... Retail Gift program. The weighted average useful life for each component of computer software, and in total, at December 31, 2012, is as follows: Weighted Average Amortization Period (Yrs) Amortization related to payments for processing rights, which is recorded as a reduction of revenues, was...

  • Page 47
    ... NOTE 11 Equity Investments The Company has an equity investment with TSYS de Mexico 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...

  • Page 48
    ... on the Company's corporate credit rating. The revolving credit facility is scheduled to terminate on September 10, 2017 and the Company is required to repay the entire principal balance of loans outstanding under this facility in full on that same date. The Credit Agreement also provides for...

  • Page 49
    ... LIBOR borrowings. The Credit Agreement included covenants requiring the Company to maintain certain minimum financial ratios. The Company did not use the revolving credit facility in 2012, 2011 or 2010. Due to increases in transaction volumes, TSYS acquired additional mainframe software licenses to...

  • Page 50
    ... at prime. TSYS did not use the credit facility during 2012, 2011 or 2010. Long-term debt at December 31 consists of: (in thousands) The future minimum lease payments under capital leases at December 31, 2012 are summarized as follows: (in thousands) 2013 ...2014 ...2015 ...2016 ...2017 ...Total...

  • Page 51
    ... than January, to allow shareholders to benefit from the lower dividend tax rate that was set to expire on December 31, 2012. EQUITY COMPENSATION PLANS: The following table summarizes TSYS' equity compensation plans by category as of December 31, 2012: (a) Number of securities to be issued upon...

  • Page 52
    ... a personal stake in TSYS' growth, development and financial success. Awards under these plans are designed to motivate employees and directors to devote their best efforts to the business of TSYS. Awards will also help TSYS attract and retain the services of employees and directors who are in...

  • Page 53
    ...schedule (2010 performance shares). These 2010 performance shares had a 20102012 performance period for which the Compensation Committee established two performance goals: compound growth in revenues before reimbursable items and income from continuing operations using the 2010 annual operating plan...

  • Page 54
    ... key TSYS executive officers were issued under nonvested stock bonus awards for services to be provided in the future by such officers. The grants to the Board of Directors were fully vested on the date of grant. The average fair value of the options granted was estimated on the date of grant using...

  • Page 55
    ... in the Statement of Cash Flows. The Company has elected to use the short-cut method to calculate its historical pool of windfall tax benefits. As of December 31, 2012, there was approximately $3.9 million of total unrecognized compensation cost related to TSYS stock options that is expected to be...

  • Page 56
    ... its Board had approved an increase in the number of shares that may be repurchased under its current share repurchase plan from up to 15 million shares to up to 20 million shares of TSYS stock. The expiration date of the plan was also extended to April 30, 2014. During 2012, the Company purchased...

  • Page 57
    ... for TSYS consists of net income, cumulative foreign currency translation adjustments and the recognition of an overfunded or underfunded status of a defined benefit postretirement plan recorded as a component of shareholders' equity. The income tax effects allocated to and the cumulative balance of...

  • Page 58
    ...on the financial position, results of operations or cash flows of the Company if disposed of unfavorably. entitled Joan Litwin v. NetSpend Holdings, Inc. et al., was filed on February 22, 2013 in the Court of Chancery of the State of Delaware and names TSYS, NetSpend and the members of the board of...

  • Page 59
    ... from: International tax rate differential ...2,781 1,831 (4,376) State income tax expense (benefit), net of federal income tax effect ...2,143 3,164 2,326 Increase in valuation allowance ...193 3,773 2,564 Tax credits ...(3,762) (9,044) (2,824) Deduction for domestic production activities ...(5,727...

  • Page 60
    .... TSYS is the parent of an affiliated group that files a consolidated U.S. federal income tax return and most state and foreign income tax returns on a separate entity basis. In the normal course of business, the (in thousands) Deferred income tax assets: Net operating loss and income tax credit...

  • Page 61
    ... 15% of employee contributions and contributed 15% director voluntary contributions. The funds are used to purchase presently issued and outstanding shares of TSYS common stock on the open market at fair market value for the benefit of participants. The Director Stock Purchase Plan was terminated on...

  • Page 62
    ... for related disclosures about products and services, geographic area data and major customers. TSYS provides global payment processing and other services to card-issuing and merchant acquiring institutions in the United States and internationally through online accounting and electronic payment 59

  • Page 63
    ...Revenues from external customers ...Depreciation and amortization North America Services ...International Services ...Merchant Services ...Corporate Administration ...Total depreciation and amortization ...Segment operating income North America Services ...International Services ...Merchant Services...

  • Page 64
    ... by such officers and employees. Beginning in 2011, the grants to the Board of Directors were fully vested on the date of grant. Refer to Note 16 for more information on nonvested share awards. Equipment and Software Acquired Under Capital Lease Obligations The Company acquired computer equipment...

  • Page 65
    ... is tax deductible. Propay will be included as part of the Merchant Services segment. On August 8, 2012, TSYS completed its acquisition of 60% of CPAY, a privately held direct merchant acquirer, for $66 million in cash. CPAY provides merchant services to small- to medium-sized merchants through...

  • Page 66
    ... in the income statement for the year ended December 31, 2012. Other On February 1, 2012, TSYS acquired contract-based intangible assets in its Merchant Services segment for $1.7 million. These intangible assets are being amortized on a straight-line basis over their estimated useful lives of five...

  • Page 67
    ... and the related estimated weighted average useful lives are as follows: Fair Value Weighted Average (in millions) Useful Lives 2011 On May 2, 2011, TSYS completed its acquisition of all of the outstanding common stock of TermNet, an Atlanta-based merchant acquirer, for $42 million in cash. TermNet...

  • Page 68
    ...was rebranded as TSYS Merchant Solutions (TMS). TMS offers transaction processing, merchant support and underwriting, and business and value-added services, as well as Visa- and MasterCard-branded prepaid cards for businesses of any size. Under the terms of the Investment Agreement, TSYS acquired 51...

  • Page 69
    ...of the acquisition, TSYS had identified certain intangible assets that are expected to generate future earnings for the Company: customer-related intangible assets (such as customer lists), contractbased intangible assets (such as referral agreements), technology, and trademarks. The useful lives of...

  • Page 70
    ... debit cards and related financial services to underbanked consumers in the United States, announced that they entered into a definitive agreement pursuant to which, upon the terms and subject to the conditions set forth in the agreement, TSYS will acquire NetSpend in an all cash transaction valued...

  • Page 71
    ..., on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audits of internal control over financial reporting...

  • Page 72
    ... unauthorized use or disposition, transactions are executed in accordance with management's authorization and accounting records are reliable for preparing financial statements in accordance with accounting principles generally accepted in the United States. Internal control over financial reporting...

  • Page 73
    Quarterly Financial Data (Unaudited), Stock Price, Dividend Information TSYS' common stock trades on the New York Stock Exchange (NYSE) under the symbol "TSS." Price and volume information appears under the abbreviation "TotlSysSvc" in NYSE daily stock quotation listings. As of February 20, 2013, ...

  • Page 74
    ... graph compares the yearly percentage change in cumulative shareholder return on TSYS stock with the cumulative total return of the Standard & Poor's 500 Index and the Standard & Poor's Systems Software Index for the last five fiscal years (assuming a $100 investment on December 31, 2007 and...

  • Page 75
    ...financial services industry. Shares are sold weekly, or more often if volume dictates. Form 10-K A copy of the company's 2012 Annual Report on Form 10-K, filed with the Securities and Exchange Commission, is available at no charge upon written request to Investor Relations at the address below: TSYS...

  • Page 76
    ... people at the center of every decision we make, with unmatched customer service and industry insight, TSYS is able to support financial institutions, businesses and governments in more than 80 countries. Offering merchant payment-acceptance solutions as well as services in credit, debit, prepaid...