NetSpend 2013 Annual Report Download

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  
People-Centered Payments®

Table of contents

  • Page 1
    2012 annual report People-Centered Payments®

  • Page 2
    ... to TSYS common shareholders Return on average shareholder equity Operating margin Net profit margin Adjusted EBITDA* Adjusted cash earnings per share* * Revenues before reimbursable items, adjusted EBITDA and adjusted cash earnings per share are explained further on pages 23-24 of this report...

  • Page 3
    ... our service capabilities, a carefully-crafted vision from our executives and Board of Directors, and the dedication and passion of more than 9,800 team members around the world. • Revenue: Our total revenues exceeded $2 billion for the first time in our history. For the year, total revenues were...

  • Page 4
    .... At that time, TSYS will process 40 percent of the Visa and MasterCard consumer credit card accounts issued by the Our Strategic Plays For years, TSYS' core business has been third-party processing for bank issuers and merchant acquirers. In the United States, our issuer processing business has...

  • Page 5
    ... a direct merchant acquirer. top-50 Visa and MasterCard consumer credit card issuers in the United States.* TS2 is the processing platform of choice for banks in North America and Europe. We also have a growing licensing business for our issuer, acquirer and prepaid card management software (PRIMESM...

  • Page 6
    ...to enter the direct merchant acquiring business by buying the merchant services unit of First National Bank of Omaha (FNBO). In early 2014, we completed the final phase of a three-year migration of that business from the legacy FNBO platform to a new TSYS platform. We now process nearly 100 percent...

  • Page 7
    ...nd it challenging to conduct the simplest financial transactions, we believe experiences with alternative financial service providers should be positive and empowering. We recently elected two new members to our company's Board of Directors. Bill Isaac and Connie McDaniel each bring a wealth of...

  • Page 8
    ... President & Chief Information Officer Executive Vice Presidents Connie C. Dudley North America Conversions Charles J. Harris President, NetSpend Anthony W. Hodge Application Systems Stephen W. Humber Software Management Dennis Jones Business Operations, International Services Kelley C. Knutson...

  • Page 9
    ... TSYS' revenues are derived from providing global payment services to financial and nonfinancial institutions, generally under long-term processing contracts. The Company's services are provided through the Company's four operating segments: North America Services, International Services, Merchant...

  • Page 10
    On July 1, 2013, TSYS completed its acquisition of all the outstanding stock of NetSpend Holdings, Inc. (NetSpend). NetSpend operates as a single reportable business segment and provides general purpose reloadable (GPR) prepaid debit and payroll cards and alternative financial service solutions to ...

  • Page 11
    ...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...

  • Page 12
    ... 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...

  • Page 13
    ... 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 nondelivery of goods or services. These...

  • Page 14
    ... 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...

  • Page 15
    ... 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...

  • Page 16
    ... 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...

  • Page 17
    ...AOF for the Company's North America Services and International Services segments: (in millions) As of December 31, Percent 2013 2012 Change Consumer Credit ...Retail ...Total Consumer ...Commercial ...Other ...Subtotal1 ...Prepaid/Stored Value2 ...Government Services3 ...Commercial Card Single Use4...

  • Page 18
    ... 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 19
    ... to use fraud and portfolio management services. Collectively, these services are considered volumebased 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...

  • Page 20
    ... of the International Services segment: Years Ended December 31, Percent Change 2013 2012 vs. vs. 2012 2011 (in millions) 2013 2012 2011 (in millions) Non-volume related revenues: Processing fees ...Value-added, custom programming, licensing and other ...Output and managed services ...Total non...

  • Page 21
    ... 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...

  • Page 22
    ... 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...

  • Page 23
    ... 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, 2013 and 2012 include an increase of $18.8 million...

  • Page 24
    ... in income of equity investments in pretax income. During 2013, the Company generated foreign net operating losses and state tax credits in excess of its utilization capacity based on both the Company's current operations and with consideration of future tax planning strategies. Based upon these...

  • Page 25
    ...) 2013 2012 2011 Net income attributable to TSYS common shareholders As reported (GAAP) ...$244,750 244,280 220,559 Adjust for amounts attributable to TSYS common shareholders (net of taxes): Acquisition intangible amortization ...Share-based compensation ...Cash earnings ...NetSpend merger and...

  • Page 26
    ... 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 included in the 2014 estimate, additional...

  • Page 27
    ... 31, 2013 2012 2011 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...

  • Page 28
    ...financial statements for more information on the long-term debt financing and acquisitions. Cash Flows from Financing Activities (in thousands) Years Ended December 31, 2013 2012 2011 Financing In connection with the NetSpend acquisition, the Company obtained commitments for a $1.2 billion 364-day...

  • Page 29
    ... 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. Through December 31, 2013, the Company...

  • Page 30
    ... expiration date of the plan was extended to April 30, 2015. 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...

  • Page 31
    ... 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...

  • Page 32
    ...the timing of the conversion of Bank of America's consumer card portfolios; (v) TSYS' expectation that it will be able to fund a significant portion of its capital expenditure needs through internally generated cash in the future; (vi) TSYS' earnings guidance for 2014 total revenues, revenues before...

  • Page 33
    ..., credit card association rules, the prepaid industry, 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; successfully managing the...

  • Page 34
    ... (Note 9) ...Contract acquisition costs, net of accumulated amortization (Note 10) ...Equity investments, net (Note 11) ...Deferred income tax assets (Note 14) ...Other assets ...Total assets ...Liabilities Current liabilities: Accrued salaries and employee benefits ...Accounts payable ...Current...

  • Page 35
    Consolidated Statements of Income (in thousands, except per share data) Years Ended December 31, 2013 2012 2011 Total revenues ...Cost of services ...Selling, general and administrative expenses ...Merger and acquisition expenses ...Total operating expenses ...Operating income ...Nonoperating ...

  • Page 36
    ... Statements of Comprehensive Income (in thousands) Years Ended December 31, 2013 2012 2011 Net income ...Other comprehensive income (loss), net of tax: Foreign currency translation adjustments ...Postretirement healthcare plan adjustments ...Unrealized gain on available-for-sale securities...

  • Page 37
    ... employee benefits ...Other current liabilities and other long-term liabilities ...Net cash provided by operating activities ...Cash flows from investing activities: Cash used in acquisitions, net of cash acquired ...Additions to contract acquisition costs ...Additions to licensed computer software...

  • Page 38
    ... ...Tax benefits associated with share-based compensation ...Balance as of December 31, 2012 ...Net income ...Other comprehensive income ...Replacement share-based awards issued in connection with acquisition (Note 18) ...Common stock issued from treasury shares for exercise of stock options (Note...

  • Page 39
    ... 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...

  • Page 40
    .... 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...

  • Page 41
    ... 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 42
    ... 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 43
    ... 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...

  • Page 44
    ..., 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...

  • Page 45
    ... 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...

  • Page 46
    ... the use of overdraft features, a variety of bill payment options, custom card designs and card-to-card transfers of funds initiated through NetSpend's call centers. Other - Cardholders are charged fees in connection with the acquisition and reloading of the GPR cards at retailers and the Company...

  • Page 47
    ...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. EARNINGS PER SHARE: The guidance under ASC 260, "Earnings Per Share," holds that unvested share-based payment...

  • Page 48
    ... of the invested capital. Cash flows are estimated for future periods based upon historical data and projections by management. As of December 31, 2013, 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...

  • Page 49
    ... amounts in domestic accounts are denominated in U.S. dollars. As of December 31, 2013 and 2012, the Company had $5.0 million and $2.5 million, respectively, of cash and cash equivalents in Money Market accounts that had an original maturity date of 90 days or less. Total revenues: CUP Data ...TSYS...

  • Page 50
    ...The changes in the carrying amount of goodwill as of December 31, 2013 and 2012 are as follows: (in thousands) North America Services International Services Merchant Services NetSpend Consolidated Balance as of December 31, 2011 ...CPAY purchase price allocation ...ProPay purchase price allocation...

  • Page 51
    ...618 2014 2015 2016 2017 2018 ... $77,218 75,770 75,213 74,822 60,166 NOTE 8 Computer Software, net Computer software as of December 31 is summarized as follows: (in thousands) 2013 2012 (55,164) $130,054 Amortization related to other intangible assets, which is recorded in selling, general and...

  • Page 52
    ... December 31, 2013 for the next five years is: Licensed Computer Software Software Development Costs Acquisition Technology Intangibles Conversion costs, net ...Payments for processing rights, net ...Total ... $112,239 72,651 $184,890 85,402 75,865 161,267 (in thousands) 2014 2015 2016 2017 2018...

  • Page 53
    ... 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...

  • Page 54
    ... million was used as funding in the NetSpend Merger. As of December 31, 2013, there was no outstanding balance on the Revolver. On September 10, 2012 and in connection with entering into the credit facilities described above, the Company terminated its existing credit agreement dated as of December...

  • Page 55
    ... not use the revolving credit facility in 2012 or 2011. TSYS acquired additional mainframe and distributed software licenses to increase capacity as a result of continued increases in transaction volumes. The Company entered into a $20.0 million financing agreement in December 2013 to purchase these...

  • Page 56
    ... tax expense included in the Consolidated Statements of Income were as follows: Years Ended December 31, 2013 2012 2011 98,153 2,572 14,092 83,518 4,666 12,922 2014 2015 2016 2017 2018 ... $23,424 3,607 2,397 1,461 247 31,136 604 $30,532 Total minimum lease payments ...Less amount representing...

  • Page 57
    ... for deferred income tax assets was $0.5 million for 2013. The increase in the valuation allowance for deferred income tax assets was $0.2 million for 2012. The increase relates to foreign losses and state tax credits which, more likely than not, will not be realized in later years. TSYS has adopted...

  • Page 58
    ... tax effect). This decrease resulted from refunds received and TSYS reassessing its tax positions. 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...

  • Page 59
    ... the State of Delaware on March 1, 2013 and a putative class action entitled Bushansky v. NetSpend Holdings, Inc. et al. (together with the Koehler action, the "Actions") was filed in the District Court of Travis County, Texas on February 25, 2013, each in connection with TSYS' proposed merger with...

  • Page 60
    ... account balances totaled $13.8 million. As of December 31, 2013, the Company's reserves 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 nondelivery of goods or services...

  • Page 61
    ... 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, 2013: (b) Weighted-average exercise price of outstanding options, warrants...

  • Page 62
    ...their best efforts to the business of TSYS. Awards will also help TSYS attract and retain the services of employees and directors who are in a position to make significant contributions to TSYS' success. The plans are administered by the Compensation Committee of the Company's Board of Directors and...

  • Page 63
    ...and March 5, 2012, no additional awards may be made from the Total System Services, Inc. 2000 and 2002 Long-Term Incentive Plans, respectively. Nonvested Awards: The Company granted shares of TSYS common stock to certain key employees and non-management members of its Board of Directors. The grants...

  • Page 64
    ...on a straight-line basis. Compensation costs related to the performancebased stock award are expected to be recognized until the end of 2015. On July 1, 2013, the Company issued 87,356 shares of TSYS common stock as a performance-based replacement stock award as part of the NetSpend acquisition. The...

  • Page 65
    ... of 4.7 years; and dividend yield of 1.63%. During 2013, 2012 and 2011, the Company granted stock options to key TSYS executive officers and nonmanagement members of its Board of Directors. The grants to key TSYS executive officers were issued for services to be provided in the future and vest over...

  • Page 66
    ...A summary of TSYS' stock option activity as of December 31, 2013, 2012 and 2011, and changes during the years ended on those dates is presented below: 2013 Weighted Average Options Exercise Price 2012 Weighted Average Options Exercise Price 2011 Weighted Average Options Exercise Price (in thousands...

  • Page 67
    ...dollar amount of the income tax liability from each exercise is converted into TSYS shares and withheld at the statutory minimum. The shares are added to the treasury account and TSYS remits funds to the Internal Revenue Service to settle the tax liability. During 2013 and 2012, the Company acquired...

  • Page 68
    ... standards for related disclosures about products and services, geographic area data and major customers. TSYS provides global payment processing and other services to card-issuing and merchant acquiring institutions in the United States and internationally through online accounting and electronic...

  • Page 69
    ... electronic processing and other services provided to merchants and merchant acquirers. The NetSpend segment provides GPR prepaid debit and payroll cards and alternative financial service solutions to the underbanked and other consumers in the United States. At TSYS, the chief operating decision...

  • Page 70
    ... Operating Segments 2013 2012 2011 Revenues before reimbursable items North America Services ...International Services ...Merchant Services ...NetSpend ...Intersegment revenues ...Revenues before reimbursable items from external customers ...Total revenues North America Services ...International...

  • Page 71
    ... REVENUE BY OPERATING SEGMENT: The following table reconciles segment revenue to revenues by geography for the years ended December 31: North America Services International Services 2013 2012 2011 2013 2012 2011 Merchant Services 2013 2012 2011 NetSpend 2013 2012 2011 (in millions) United States...

  • Page 72
    ... of GPR prepaid debit and payroll cards and related financial services to underbanked consumers in the U.S. The acquisition complements the Company's existing presence in the prepaid processing space. The results of the newly acquired business are being reported by TSYS as a new operating segment...

  • Page 73
    ... growth rate of 3%. In connection with the acquisition, TSYS incurred $14.2 million in acquisition-related costs primarily related to professional legal, finance, and accounting costs. These costs were expensed as incurred and are included in merger and acquisition expenses on the income statement...

  • Page 74
    ... charges such as technology and infrastructure integration expenses, and other costs related to the integration of NetSpend into TSYS. 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...

  • Page 75
    ... 18 months to secure certain claims that may be brought against the escrowed consideration by TSYS pursuant to the merger agreement. Consideration is contingent and may be returned to the Company pursuant to indemnification commitments made by the shareholders which formerly owned ProPay related to...

  • Page 76
    ... fair value amount. In February 2014, with cash on hand, the Company purchased an additional 15% equity interest in CPAY, reducing its redeemable noncontrolling interest in CPAY to 25%. Other On February 1, 2012, TSYS acquired contract-based intangible assets in its Merchant Services segment for...

  • Page 77
    ...Services segment for $2.6 million. These intangible assets are being amortized on a straight-line basis over their estimated useful lives of five years. In May 2011, TSYS made a payment of $6.0 million of contingent merger consideration in connection with the purchase of Infonox, which was accounted...

  • Page 78
    ... internal use. The arrangement NOTE 25 Earnings Per Share The following table illustrates basic and diluted EPS under the guidance of ASC 260: December 31, 2013 December 31, 2012 December 31, 2011 Common Participating Common Participating Common Participating Stock Securities Stock Securities Stock...

  • Page 79
    ..., on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting...

  • Page 80
    ...financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company maintains accounting and internal control systems which are intended to provide reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition, transactions are...

  • Page 81
    ... income attributable to TSYS common shareholders ...Basic earnings per share attributable to TSYS common shareholders ...Diluted earnings per share attributable to TSYS common shareholders ...Cash dividends declared ...Stock prices: High ...Low ...Close ...Revenues ...Operating income ...Net income...

  • Page 82
    ... 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, 2008 and...

  • Page 83
    ...A copy of the company's 2013 Annual Report on Form 10-K, filed with the Securities and Exchange Commission, is available at no charge upon written request to Investor Relations at the address below: TSYS Investor Relations One TSYS Way Columbus, GA 31901 [email protected] Annual Shareholders' Meeting The...

  • Page 84
    ...countries. Through NetSpend®, A TSYS Company, we empower consumers with the convenience, security, and freedom to be self-banked. TSYS offers issuer services and merchant payment acceptance for credit, debit, prepaid, healthcare and business solutions. SM TSYS' headquarters are located in Columbus...