Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended March 31, 2010

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from              to             

Commission File Number 0-14948

 

 

FISERV, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

WISCONSIN   39-1506125

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I. R. S. Employer

Identification No.)

 

255 FISERV DRIVE, BROOKFIELD, WI   53045
(Address of Principal Executive Offices)   (Zip Code)

(262) 879-5000

(Registrant’s Telephone Number, Including Area Code)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of May 4, 2010, there were 152,610,235 shares of common stock, $.01 par value, of the registrant outstanding.

 

 

 


Table of Contents

INDEX

 

          Page

PART I - FINANCIAL INFORMATION

  

Item 1.

   Financial Statements   
  

Condensed Consolidated Statements of Income

   1
  

Condensed Consolidated Balance Sheets

   2
  

Condensed Consolidated Statements of Cash Flows

   3
  

Notes to Condensed Consolidated Financial Statements

   4

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    10

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    14

Item 4.

   Controls and Procedures    14

PART II - OTHER INFORMATION

  

Item 1.

   Legal Proceedings    14

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    15

Item 6.

   Exhibits    15
   Signatures   
   Exhibit Index   


Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

FISERV, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In millions, except per share data)

(Unaudited)

 

     Three Months Ended
March 31,
 
     2010     2009  

Revenue:

    

Processing and services

   $ 831      $ 831   

Product

     177        192   
                

Total revenue

     1,008        1,023   
                

Expenses:

    

Cost of processing and services

     462        458   

Cost of product

     136        142   

Selling, general and administrative

     172        198   
                

Total expenses

     770        798   
                

Operating income

     238        225   

Interest expense, net

     (45     (54
                

Income from continuing operations before income taxes and income from investment in unconsolidated affiliate

     193        171   

Income tax provision

     (73     (66

Income from investment in unconsolidated affiliate, net of income taxes

     3        1   
                

Income from continuing operations

     123        106   

Loss from discontinued operations, net of income taxes

     (2     (3
                

Net income

   $ 121      $ 103   
                

Net income (loss) per share - basic:

    

Continuing operations

   $ 0.81      $ 0.68   

Discontinued operations

     (0.01     (0.02
                

Total

   $ 0.79      $ 0.66   
                

Net income (loss) per share - diluted:

    

Continuing operations

   $ 0.80      $ 0.68   

Discontinued operations

     (0.01     (0.02
                

Total

   $ 0.79      $ 0.66   
                

Shares used in computing net income (loss) per share:

    

Basic

     152.5        155.5   

Diluted

     153.7        156.0   

See notes to condensed consolidated financial statements.

 

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FISERV, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in millions)

(Unaudited)

 

     March 31,
2010
    December 31,
2009
 
ASSETS     

Cash and cash equivalents

   $ 416      $ 363   

Trade accounts receivable, net

     514        554   

Deferred income taxes

     44        46   

Prepaid expenses and other current assets

     270        314   
                

Total current assets

     1,244        1,277   
                

Property and equipment, net

     281        293   

Intangible assets, net

     1,970        2,006   

Goodwill

     4,369        4,371   

Other long-term assets

     445        431   
                

Total assets

   $ 8,309      $ 8,378   
                
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Accounts payable and accrued expenses

   $ 510      $ 565   

Deferred revenue

     347        337   

Current maturities of long-term debt

     133        259   
                

Total current liabilities

     990        1,161   
                

Long-term debt

     3,381        3,382   

Deferred income taxes

     583        580   

Other long-term liabilities

     237        229   
                

Total liabilities

     5,191        5,352   
                

Commitments and contingencies

    

Shareholders’ equity:

    

Preferred stock, no par value: 25.0 million shares authorized; none issued

     —          —     

Common stock, $0.01 par value: 450.0 million shares authorized; 197.9 million shares issued

     2        2   

Additional paid-in capital

     729        727   

Accumulated other comprehensive loss

     (70     (69

Accumulated earnings

     4,492        4,371   

Treasury stock, at cost, 45.3 million and 44.7 million shares

     (2,035     (2,005
                

Total shareholders’ equity

     3,118        3,026   
                

Total liabilities and shareholders’ equity

   $ 8,309      $ 8,378   
                

See notes to condensed consolidated financial statements.

 

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FISERV, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

     Three Months Ended
March 31,
 
     2010     2009  

Cash flows from operating activities:

    

Net income

   $ 121      $ 103   

Adjustment for discontinued operations

     2        3   

Adjustments to reconcile net income to net cash provided by operating activities from continuing operations:

    

Depreciation and other amortization

     47        47   

Amortization of acquisition-related intangible assets

     37        34   

Share-based compensation

     10        11   

Deferred income taxes

     5        3   

Other non-cash items

     (10     (1

Changes in assets and liabilities:

    

Trade accounts receivable

     39        52   

Prepaid expenses and other assets

     (12     4   

Accounts payable and other liabilities

     11        (13

Deferred revenue

     10        (12
                

Net cash provided by operating activities from continuing operations

     260        231   
                

Cash flows from investing activities:

    

Capital expenditures, including capitalization of software costs

     (42     (45

Other investing activities

     7        3   
                

Net cash used in investing activities from continuing operations

     (35     (42
                

Cash flows from financing activities:

    

Repayments of long-term debt

     (126     (101

Issuance of common stock and treasury stock

     21        10   

Purchases of treasury stock

     (71     (25

Other financing activities

     5        4   
                

Net cash used in financing activities from continuing operations

     (171     (112
                

Net change in cash and cash equivalents from continuing operations

     54        77   

Net cash transactions transferred to discontinued operations

     (1     —     

Beginning balance

     363        230   
                

Ending balance

   $ 416      $ 307   
                

Discontinued operations cash flow information:

    

Net cash (used in) provided by operating activities

   $ (3   $ 1   

Net cash provided by investing activities

     2        1   

Net cash used in financing activities

     —          (2
                

Net change in cash and cash equivalents from discontinued operations

     (1     —     

Net cash transactions transferred from continuing operations

     1        —     

Beginning balance - discontinued operations

     —          38   
                

Ending balance - discontinued operations

   $ —        $ 38   
                

See notes to condensed consolidated financial statements.

 

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FISERV, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Principles of Consolidation

The condensed consolidated financial statements for the three-month periods ended March 31, 2010 and 2009 are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the condensed consolidated financial statements have been included. Such adjustments consisted of normal recurring items. Interim results are not necessarily indicative of results for a full year. The condensed consolidated financial statements and accompanying notes are presented as permitted by Form 10-Q and do not contain certain information included in the annual consolidated financial statements and accompanying notes of Fiserv, Inc. (the “Company”). These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

The condensed consolidated financial statements include the accounts of Fiserv, Inc. and all 100% owned subsidiaries. Investments in less than 50% owned affiliates in which the Company has significant influence are accounted for using the equity method of accounting. All intercompany transactions and balances have been eliminated in consolidation.

2. Fair Value Measurements

Assets and liabilities which are measured at fair value are classified in the following categories:

Level 1 – At March 31, 2010 and December 31, 2009, the fair values of available-for-sale investments in asset-backed securities of $10 million and $11 million, respectively, were based on quoted prices in active markets for identical instruments as of the reporting date.

Level 2 – At March 31, 2010 and December 31, 2009, the fair values of available-for-sale investments in asset-backed securities of $5 million and $6 million, respectively, and liabilities for interest rate hedge contracts of $93 million and $92 million, respectively, were determined from market based valuation models for which pricing inputs were either directly or indirectly observable as of the reporting date.

Level 3 – At March 31, 2010 and December 31, 2009, the fair values of available-for-sale investments of $23 million were based on valuation models with unobservable pricing inputs and management estimates. Unrealized losses of $2 million were recorded in accumulated other comprehensive loss at March 31, 2010 and December 31, 2009.

The fair value of the Company’s total debt was estimated using discounted cash flows based on the Company’s current incremental borrowing rates or quoted prices in active markets and totaled $3.6 billion and $3.8 billion at March 31, 2010 and December 31, 2009, respectively.

3. Share-Based Compensation

The Company recognized $10 million and $11 million of share-based compensation during the first quarter of 2010 and 2009, respectively. The Company’s annual grant of share-based awards generally occurs in the first quarter. During the first quarter of 2010, the Company granted 1.1 million stock options and 0.4 million restricted stock units at weighted-average estimated fair values of $17.48 and $47.73, respectively. During the first quarter of 2009, the Company granted 1.4 million stock options and 0.5 million restricted stock units at weighted-average estimated fair values of $12.40 and $32.78, respectively. During the first quarter of 2010 and 2009, stock options to purchase 0.8 million shares and 0.2 million shares, respectively, were exercised.

 

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4. Shares Used in Computing Net Income Per Share

Basic weighted-average outstanding shares used in calculating net income per share were 152.5 million and 155.5 million for the first quarter of 2010 and 2009, respectively. Diluted weighted-average outstanding shares used in calculating net income per share were 153.7 million and 156.0 million for the first quarter of 2010 and 2009, respectively, and included 1.2 million and 0.5 million common stock equivalents, respectively. For the first quarter of 2010 and 2009, stock options for 2.5 million shares and 6.4 million shares, respectively, were excluded from the calculation of diluted weighted-average outstanding shares because their impact was anti-dilutive.

5. Interest Rate Hedge Contracts

To manage exposure to fluctuations in interest rates, the Company maintains a series of interest rate swap agreements (“Swaps”) with total notional values of $1.2 billion at March 31, 2010 and December 31, 2009. The Swaps have been designated by the Company as cash flow hedges, effectively fix interest rates on floating rate term loan borrowings at a weighted-average rate of approximately 4.8% prior to financing spreads and related fees, and have expiration dates through September 2012. The fair values of the Swaps, as discussed in Note 2, were recorded in other long-term liabilities and in accumulated other comprehensive loss, net of income taxes, in the condensed consolidated balance sheets. The components of other comprehensive income (loss) pertaining to interest rate hedge contracts are presented in Note 6. In the first quarter of 2010 and 2009, interest expense recognized due to hedge ineffectiveness was not significant, and no amounts were excluded from the assessments of hedge effectiveness. Based on the amounts recorded in accumulated other comprehensive loss at March 31, 2010, the Company estimates that it will recognize approximately $40 million in interest expense related to interest rate hedge contracts during the next twelve months.

6. Comprehensive Income

Comprehensive income was as follows:

 

     Three Months Ended
March 31,
 
(In millions)    2010     2009  

Net income

   $ 121      $ 103   
                

Other comprehensive income (loss), net of income taxes:

    

Fair market value adjustments on investments

     1        10   

Fair market value adjustments on cash flow hedges

     (8     (3

Reclassification adjustment for net realized losses on cash flow hedges included in interest expense

     8        8   

Foreign currency translation adjustments

     (2     (1
                

Other comprehensive income (loss)

     (1     14   
                

Comprehensive income

   $ 120      $ 117   
                

7. Business Segment Information

The Company’s operations are comprised of the Payments and Industry Products (“Payments”) segment, the Financial Institution Services (“Financial”) segment, and the Corporate and Other segment. The Payments segment primarily provides electronic bill payment and settlement, electronic funds transfer, and debit processing products and services to meet the electronic transaction processing needs of the financial services industry. The businesses in this segment also provide card and print personalization services, Internet banking, investment account processing services for separately managed accounts, and fraud and risk management products and services. The Financial segment provides banks, thrifts and credit unions with account processing services, item processing services, loan origination and servicing products, cash management and consulting services, and other products and services that support numerous types of financial transactions. The Corporate and Other segment primarily consists of unallocated corporate overhead expenses, amortization of acquisition-related intangible assets and intercompany eliminations.

 

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(In millions)    Payments    Financial    Corporate
and Other
    Total

Three Months Ended March 31, 2010

          

Processing and services revenue

   $ 397    $ 432    $ 2      $ 831

Product revenue

     143      40      (6     177
                            

Total revenue

   $ 540    $ 472    $ (4   $ 1,008
                            

Operating income

   $ 148    $ 136    $ (46   $ 238
                            

Three Months Ended March 31, 2009

          

Processing and services revenue

   $ 386    $ 445    $ —        $ 831

Product revenue

     158      43      (9     192
                            

Total revenue

   $ 544    $ 488    $ (9   $ 1,023
                            

Operating income

   $ 155    $ 142    $ (72   $ 225
                            

8. Subsidiary Guarantors of Long-Term Debt

Certain of the Company’s 100% owned domestic subsidiaries (“Guarantor Subsidiaries”) jointly and severally, and fully and unconditionally guarantee the Company’s indebtedness under its revolving credit facility, senior term loan and senior notes. The following condensed consolidating financial information is presented on the equity method and reflects the summarized financial information for: (a) the Company; (b) the Guarantor Subsidiaries on a combined basis; and (c) the Company’s non-guarantor subsidiaries on a combined basis.

CONDENSED CONSOLIDATING STATEMENT OF INCOME

THREE MONTHS ENDED MARCH 31, 2010

 

(In millions)    Parent
Company
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenue:

          

Processing and services

   $ —        $ 589      $ 260      $ (18   $ 831   

Product

     —          156        30        (9     177   
                                        

Total revenue

     —          745        290        (27     1,008   
                                        

Expenses:

          

Cost of processing and services

     (1     322        161        (20     462   

Cost of product

     —          120        22        (6     136   

Selling, general and administrative

     18        109        45        —          172   
                                        

Total expenses

     17        551        228        (26     770   
                                        

Operating income (loss)

     (17     194        62        (1     238   

Interest (expense) income, net

     14        (57     (2     —          (45
                                        

Income (loss) from continuing operations before income taxes and income from investment in unconsolidated affiliate

     (3     137        60        (1     193   

Income tax (provision) benefit

     2        (52     (23     —          (73

Income from investment in unconsolidated affiliate, net of income taxes

     —          —          3        —          3   
                                        

Income (loss) from continuing operations

     (1     85        40        (1     123   

Equity in earnings of consolidated affiliates

     124        —          —          (124     —     

Loss from discontinued operations, net of income taxes

     (2     —          —          —          (2
                                        

Net income

   $ 121      $ 85      $ 40      $ (125   $ 121   
                                        

 

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CONDENSED CONSOLIDATING STATEMENT OF INCOME

THREE MONTHS ENDED MARCH 31, 2009

 

(In millions)    Parent
Company
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenue:

          

Processing and services

   $ —        $ 584      $ 264      $ (17   $ 831   

Product

     —          171        27        (6     192   
                                        

Total revenue

     —          755        291        (23     1,023   
                                        

Expenses:

          

Cost of processing and services

     2        311        158        (13     458   

Cost of product

     —          130        26        (14     142   

Selling, general and administrative

     25        115        58        —          198   
                                        

Total expenses

     27        556        242        (27     798   
                                        

Operating income (loss)

     (27     199        49        4        225   

Interest (expense) income, net

     10        (61     (3     —          (54
                                        

Income (loss) from continuing operations before income taxes and income from investment in unconsolidated affiliate

     (17     138        46        4        171   

Income tax (provision) benefit

     6        (53     (17     (2     (66

Income from investment in unconsolidated affiliate, net of income taxes

     —          —          1        —          1   
                                        

Income (loss) from continuing operations

     (11     85        30        2        106   

Equity in earnings of consolidated affiliates

     114        —          —          (114     —     

(Loss) income from discontinued operations, net of income taxes

     —          (4     1        —          (3
                                        

Net income

   $ 103      $ 81      $ 31      $ (112   $ 103   
                                        

CONDENSED CONSOLIDATING BALANCE SHEET

MARCH 31, 2010

 

(In millions)    Parent
Company
    Guarantor
Subsidiaries
   Non-
Guarantor
Subsidiaries
   Eliminations     Consolidated
ASSETS             

Cash and cash equivalents

   $ 116      $ 152    $ 148    $ —        $ 416

Trade accounts receivable, net

     (2     341      175      —          514

Prepaid expenses and other current assets

     58        137      119      —          314
                                    

Total current assets

     172        630      442      —          1,244
                                    

Investments in consolidated affiliates

     5,163        —        —        (5,163     —  

Goodwill and intangible assets, net

     2        5,413      924      —          6,339

Other long-term assets

     113        300      313      —          726
                                    

Total assets

   $ 5,450      $ 6,343    $ 1,679    $ (5,163   $ 8,309
                                    
LIABILITIES AND SHAREHOLDERS’ EQUITY             

Total current liabilities

   $ 229      $ 439    $ 322    $ —        $ 990
                                    

Long-term debt

     3,373        8      —        —          3,381

Due to (from) consolidated affiliates

     (2,053     1,961      92      —          —  

Other long-term liabilities

     783        36      1      —          820
                                    

Total liabilities

     2,332        2,444      415      —          5,191
                                    

Total shareholders’ equity

     3,118        3,899      1,264      (5,163     3,118
                                    

Total liabilities and shareholders’ equity

   $ 5,450      $ 6,343    $ 1,679    $ (5,163   $ 8,309
                                    

 

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CONDENSED CONSOLIDATING BALANCE SHEET

DECEMBER 31, 2009

 

(In millions)    Parent
Company
    Guarantor
Subsidiaries
   Non-Guarantor
Subsidiaries
   Eliminations     Consolidated
ASSETS             

Cash and cash equivalents

   $ 55      $ 169    $ 139    $ —        $ 363

Trade accounts receivable, net

     (2     361      195      —          554

Prepaid expenses and other current assets

     91        135      134      —          360
                                    

Total current assets

     144        665      468      —          1,277
                                    

Investments in consolidated affiliates

     3,154        —        —        (3,154     —  

Goodwill and intangible assets, net

     2        5,447      928      —          6,377

Other long-term assets

     114        305      305      —          724
                                    

Total assets

   $ 3,414      $ 6,417    $ 1,701    $ (3,154   $ 8,378
                                    
LIABILITIES AND SHAREHOLDERS’ EQUITY             

Total current liabilities

   $ 337      $ 488    $ 336    $ —        $ 1,161
                                    

Long-term debt

     3,373        9      —        —          3,382

Due to (from) consolidated affiliates

     (4,094     3,973      121      —          —  

Other long-term liabilities

     772        34      3      —          809
                                    

Total liabilities

     388        4,504      460      —          5,352
                                    

Total shareholders’ equity

     3,026        1,913      1,241      (3,154     3,026
                                    

Total liabilities and shareholders’ equity

   $ 3,414      $ 6,417    $ 1,701    $ (3,154   $ 8,378
                                    

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2010

 

(In millions)    Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash flows from operating activities:

          

Net cash provided by operating activities from continuing operations

   $ 76      $ 120      $ 63      $ 1      $ 260   
                                        

Cash flows from investing activities:

          

Capital expenditures, including capitalization of software costs

     —          (34     (8     —          (42

Other investing activities

     150        —          7        (150     7   
                                        

Net cash (used in) provided by investing activities from continuing operations

     150        (34     (1     (150     (35
                                        

Cash flows from financing activities:

          

Repayments of long-term debt

     (126     —          —          —          (126

Purchases of treasury stock

     (71     —          —          —          (71

Other financing activities

     33        (103     (53     149        26   
                                        

Net cash used in financing activities from continuing operations

     (164     (103     (53     149        (171
                                        

Net change in cash and cash equivalents from continuing operations

     62        (17     9        —          54   

Net cash transactions transferred to discontinued operations

     (1     —          —          —          (1

Beginning balance

     55        169        139        —          363   
                                        

Ending balance

   $ 116      $ 152      $ 148      $ —        $ 416   
                                        

 

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2009

 

(In millions)    Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash flows from operating activities:

          

Net cash provided by operating activities from continuing operations

   $ 56      $ 97      $ 83      $ (5   $ 231   
                                        

Cash flows from investing activities:

          

Capital expenditures, including capitalization of software costs

     (1     (38     (6     —          (45

Other investing activities

     —          (42     (51     96        3   
                                        

Net cash used in investing activities from continuing operations

     (1     (80     (57     96        (42
                                        

Cash flows from financing activities:

          

Repayments of long-term debt

     (100     —          (1     —          (101

Purchases of treasury stock

     (25     —          —          —          (25

Other financing activities

     102        (1     4        (91     14   
                                        

Net cash (used in) provided by financing activities from continuing operations

     (23     (1     3        (91     (112
                                        

Net change in cash and cash equivalents from continuing operations

     32        16        29        —          77   

Net cash transactions transferred from (to) discontinued operations

     10        (10     —          —          —     

Beginning balance

     32        104        94        —          230   
                                        

Ending balance

   $ 74      $ 110      $ 123      $ —        $ 307   
                                        

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This quarterly report contains “forward-looking statements” intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include those that express a plan, belief, expectation, estimation, anticipation, intent, contingency, future development or similar expression, and can generally be identified as forward-looking because they include words such as “believes,” “anticipates,” “expects,” “could,” “should” or words of similar meaning. Statements that describe our objectives or goals are also forward-looking statements. The forward-looking statements in this report involve significant risks and uncertainties, and a number of factors, both foreseen and unforeseen, that could cause actual results to differ materially from our current expectations. The factors that may affect our results include, among others: the impact on our business of the current state of the economy, including the risk of reduction in revenue resulting from decreased spending on the products and services we offer or from the elimination of existing or potential clients due to consolidation or financial failures in the financial services industry; changes in client demand for our products or services; pricing or other actions by competitors; the impact of our Fiserv 2.0 initiatives; our ability to comply with government regulations, including privacy regulations; and other factors identified in our Annual Report on Form 10-K for the year ended December 31, 2009 and in other documents that we file with the Securities and Exchange Commission. We urge you to consider these factors carefully in evaluating forward-looking statements and caution you not to place undue reliance on forward-looking statements, which speak only as of the date of this report. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this report.

Overview

We provide integrated information management and electronic commerce systems and services, including transaction processing, electronic bill payment and presentment, business process outsourcing, document distribution services, and software and systems solutions. Our operations are primarily in the United States and are comprised of our Payments and Industry Products (“Payments”) segment, Financial Institution Services (“Financial”) segment, and Corporate and Other segment. The Payments segment primarily provides electronic bill payment and settlement, electronic funds transfer, and debit processing products and services to meet the electronic transaction processing needs of the financial services industry. Our businesses in this segment also provide card and print personalization services, Internet banking, investment account processing services for separately managed accounts, and fraud and risk management products and services. The Financial segment provides banks, thrifts and credit unions with account processing services, item processing services, loan origination and servicing products, cash management and consulting services, and other products and services that support numerous types of financial transactions. The Corporate and Other segment primarily consists of unallocated corporate overhead expenses, amortization of acquisition-related intangible assets and intercompany eliminations.

Management’s discussion and analysis of financial condition and results of operations is provided as a supplement to our unaudited condensed consolidated financial statements and accompanying footnotes to help provide an understanding of our financial condition, the changes in our financial condition and our results of operations. Our discussion is organized as follows:

 

   

Results of operations. This section contains an analysis of our results of operations presented in the accompanying unaudited condensed consolidated statements of income by comparing the results for the quarter ended March 31, 2010 to the comparable period in 2009.

 

   

Liquidity and capital resources. This section provides an analysis of our cash flows and a discussion of our outstanding debt as of March 31, 2010.

 

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Results of Operations

The following table presents, for the periods indicated, certain amounts included in our condensed consolidated statements of income, the relative percentage that those amounts represent to revenue, and the change in those amounts from year to year. This information should be read together with the condensed consolidated financial statements and accompanying notes.

 

     Three Months Ended March 31,  
(In millions)                Percentage of
Revenue  (1)
    Increase (Decrease)  
     2010     2009     2010     2009     $     %  

Revenue:

            

Processing and services

   $ 831      $ 831      82.4   81.2   $ —        —     

Product

     177        192      17.6   18.8     (15   (8 )% 
                                          

Total revenue

     1,008        1,023      100.0   100.0     (15   (1 )% 
                                          

Expenses:

            

Cost of processing and services

     462        458      55.6   55.1     4      1

Cost of product

     136        142      76.8   74.0     (6   (4 )% 
                                          

Sub-total

     598        600      59.3   58.7     (2   —     

Selling, general and administrative

     172        198      17.1   19.4     (26   (13 )% 
                                          

Total expenses

     770        798      76.4   78.0     (28   (4 )% 
                                          

Operating income

     238        225      23.7   22.0     13      6

Interest expense, net

     (45     (54   (4.5 )%    (5.3 )%      (9   (17 )% 
                                          

Income from continuing operations before income taxes and income from investment in unconsolidated affiliate

   $ 193      $ 171      19.1   16.7   $ 22      13
                                          

 

(1)

Each percentage of revenue is calculated as the relevant revenue, expense or income amount divided by total revenue, except for cost of processing and services and cost of product amounts which are divided by the related component of revenue.

Total Revenue

 

     Three Months Ended March 31,  
(In millions)    Payments     Financial     Corporate
and Other
    Total  

Total revenue:

        

2010

   $ 540      $ 472      $ (4   $ 1,008   

2009

     544        488        (9     1,023   

Revenue growth (decline)

   $ (4   $ (16   $ 5      $ (15

Revenue growth (decline) percentage

     (1 )%      (3 )%        (1 )% 

Total revenue decreased $15 million, or 1%, in the first quarter of 2010 compared to 2009. Revenue in our Payments segment decreased $4 million, or 1%, and revenue in our Financial segment decreased $16 million, or 3%. The decrease in Payments segment revenue was primarily due to lower product revenue in our output solutions business, including pass-through postage revenue, partially offset by revenue increases driven by new clients and increased transaction volumes from existing clients in our electronic payments businesses. The decrease in Financial segment revenue was primarily due to volume declines in our check processing business and lower specialty consulting and software license revenue, partially offset by increased revenue in our bank and credit union account processing businesses.

 

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Total Expenses

Total expenses decreased $28 million, or 4%, to $770 million in the first quarter of 2010 compared to 2009. Total expenses as a percentage of total revenue were 76.4% and 78.0% in the first quarter of 2010 and 2009, respectively. Cost of processing and services as a percentage of processing and services revenue in the first quarter of 2010 was 55.6%, which was relatively consistent compared to the first quarter of 2009. Cost of product as a percentage of product revenue increased from 74.0% in the first quarter of 2009 to 76.8% in 2010, due primarily to a decline in higher margin software license revenue which negatively impacted our operating margin. Selling, general and administrative expenses decreased $26 million, or 13%, in the first quarter of 2010 compared to 2009, due primarily to $15 million of employee severance expenses recognized in the first quarter of 2009 and a decline in merger and integration costs associated with our acquisition of CheckFree Corporation (“CheckFree”).

Operating Income and Operating Margin

 

     Three Months Ended March 31,  
(In millions)    Payments     Financial     Corporate
and Other
    Total  

Operating income:

        

2010

   $ 148      $ 136      $ (46   $ 238   

2009

     155        142        (72     225   
                                

Operating income growth (decline)

   $ (7   $ (6   $ 26      $ 13   

Operating income growth (decline) percentage

     (5 )%      (4 )%        6

Operating margin:

        

2010

     27.5     28.8       23.7

2009

     28.5     29.3       22.0

Operating margin growth (decline) (1)

     (1.0 %)      (0.5 %)        1.7

 

(1)

Represents the percentage point improvement or decline in operating margin.

Total operating income increased $13 million, or 6%, in the first quarter of 2010 compared to 2009. Our operating margin was 23.7% and 22.0% in the first quarter of 2010 and 2009, respectively.

Operating income in our Payments segment decreased $7 million, or 5%, and operating margin decreased 100 basis points to 27.5% in the first quarter of 2010 compared to 2009. The decreases in operating income and operating margin resulted primarily from a decline in higher margin project revenue in our output solutions business and increased expenditures associated with the development of new products, partially offset by improved operating leverage in our electronic funds transfer businesses.

Operating income in our Financial segment decreased $6 million, or 4%, and operating margin decreased 50 basis points to 28.8% in the first quarter of 2010 compared to 2009. Operating income and operating margin were negatively impacted by decreases in higher margin software license and specialty consulting revenue and volume declines in our check processing business. These negative factors were partially offset by revenue growth and scale efficiencies in our bank and credit union account processing businesses.

The operating loss in our Corporate and Other segment decreased $26 million in the first quarter of 2010 compared to 2009, due primarily to $15 million of employee severance expenses recognized in the first quarter of 2009 and lower merger and integration costs associated with our acquisition of CheckFree.

Interest Expense, Net

Interest expense decreased $9 million, or 17%, in the first quarter of 2010 compared to 2009 primarily due to decreases in total outstanding borrowings and interest rates.

 

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Income Tax Provision

The income tax provision increased $7 million from $66 million in the first quarter of 2009 to $73 million in the first quarter of 2010. Our effective income tax rate was 37.9% and 38.3% in the first quarter of 2010 and 2009, respectively.

Net Income Per Share – Diluted from Continuing Operations

Net income per share-diluted from continuing operations was $0.80 and $0.68 in the first quarter of 2010 and 2009, respectively. Net income per share-diluted from continuing operations in 2009 was negatively impacted by approximately $0.09 per share due to employee severance expenses and merger costs. The amortization of acquisition-related intangible assets reduced net income per share-diluted from continuing operations by $0.15 per share and $0.14 per share in the first quarter of 2010 and 2009, respectively.

Liquidity and Capital Resources

General

Our primary liquidity needs are: (i) to fund normal operating expenses; (ii) to meet the principal and interest requirements of our outstanding indebtedness; and (iii) to fund capital expenditures and operating lease payments. We believe these needs will be satisfied using cash flows generated by operations, our cash and cash equivalents at March 31, 2010 of $416 million and available borrowings under our revolving credit facility of $870 million at March 31, 2010.

 

     Three Months Ended
March 31,
   Increase (Decrease)  
(In millions)    2010    2009    $     %  

Income from continuing operations

   $ 123    $ 106    $ 17     

Depreciation and amortization

     84      81      3     

Share-based compensation

     10      11      (1  

Net changes in working capital and other

     43      33      10     
                        

Operating cash flow

   $ 260    $ 231    $ 29      13

Capital expenditures

   $ 42    $ 45    $ (3   (7 )% 

Our net cash provided by operating activities from continuing operations, or operating cash flow, was $260 million in the first quarter of 2010, an increase of 13% compared with $231 million in 2009. Our current policy is to use our operating cash flow primarily to repay debt and fund capital expenditures, acquisitions and share repurchases, rather than to pay dividends. Our capital expenditures decreased $3 million to $42 million in the first quarter of 2010 compared to 2009. Capital expenditures were 4% of our total revenue in the first quarter of 2010 and 2009.

Share Repurchases

In the first quarter of 2010, we purchased approximately 1.4 million shares of our common stock for $67 million and, as of March 31, 2010, we had approximately 5.8 million shares remaining under our existing authorizations. Shares repurchased are generally held for issuance in connection with our equity plans.

Indebtedness

 

(In millions)    March 31,
2010
   December 31,
2009

Long-term debt (including current maturities)

   $ 3,514    $ 3,641

In the first quarter of 2010, we used a portion of our operating cash flow to repay approximately $125 million of long-term debt, which reduced our outstanding debt, including current maturities, to approximately $3.5 billion at March 31, 2010. Our long-term debt currently consists primarily of $1.75 billion under our unsecured senior term loan facility and $1.75 billion of senior notes. The

 

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unsecured senior term loan bears interest at a variable rate based on LIBOR plus a specified margin or the bank’s base rate and matures in November 2012. To manage exposure to fluctuations in interest rates, we maintain a series of interest rate swap agreements (“Swaps”) with total notional values of $1.2 billion. The Swaps effectively fix interest rates on floating rate term loan borrowings at a weighted-average rate of approximately 4.8%, prior to financing spreads and related fees, and have expiration dates through September 2012. The next scheduled principal payment of $130 million on our senior term loan is due in December 2010. The term loan facility contains various restrictions and covenants substantially similar to those contained in the revolving credit facility described below. In addition, we have $1.25 billion of 6.125% senior notes due in November 2012 and $500 million of 6.8% senior notes due in November 2017, which pay interest at the stated rate on May 20 and November 20 of each year.

We maintain a $900 million revolving credit facility with a syndicate of banks. Borrowings under this facility bear interest at a variable rate based on LIBOR plus a specified margin or the bank’s base rate. The facility, as amended, contains various restrictions and covenants that require us, among other things, to limit our consolidated indebtedness to no more than three and one-half times consolidated net earnings before interest, taxes, depreciation and amortization and certain other adjustments and to maintain consolidated net earnings before interest, taxes, depreciation and amortization and certain other adjustments of at least three times consolidated interest expense. There are no significant commitment fees or compensating balance requirements. The facility expires on March 24, 2011. As of March 31, 2010, we had issued letters of credit totaling $30 million under this facility and our available borrowings were $870 million. During the first quarter of 2010, we were in compliance with all financial debt covenants in this and our other credit facilities, including those contained in our senior term loan and our senior notes.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The quantitative and qualitative disclosures about market risk required by this item are incorporated by reference to Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2009 and have not materially changed since December 31, 2009.

 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), our management, with the participation of our chief executive officer and chief financial officer, evaluated the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2010.

Changes in internal control over financial reporting

There was no change in our internal control over financial reporting that occurred during the quarter ended March 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

In the normal course of business, we and our subsidiaries are named as defendants in lawsuits in which claims are asserted against us. In the opinion of management, the liabilities, if any, which may ultimately result from such lawsuits are not expected to have a material adverse effect on our financial statements.

 

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The table below sets forth information with respect to purchases made by or on behalf of the company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act) of shares of our common stock during the quarter ended March 31, 2010:

 

Period

   Total Number
of Shares
Purchased
   Average Price Paid
per Share
   Total Number of
Shares
Purchased as Part
of Publicly
Announced Plans
or Programs (1)
   Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs (1)

January 1-31, 2010

   472,960    $ 47.74    472,960    1,693,352

February 1-28, 2010

   675,000      46.57    675,000    6,018,352

March 1-31, 2010

   260,800      49.25    260,800    5,757,552
               

Total

   1,408,760       1,408,760   

 

(1) The purchases shown in the table above were made pursuant to a May 20, 2009 authorization of our board of directors to purchase up to 5 million shares of our common stock. On February 24, 2010, our board of directors authorized the repurchase of up to 5 million additional shares of our common stock. These repurchase authorizations do not expire.

 

ITEM 6. EXHIBITS

The exhibits listed in the accompanying exhibit index are filed as part of this Quarterly Report on Form 10-Q.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    FISERV, INC.
Date: May 6, 2010     By:   /S/    THOMAS J. HIRSCH        
     

Thomas J. Hirsch

Executive Vice President,

Chief Financial Officer,

Treasurer and Assistant Secretary


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Exhibit Index

 

Exhibit
Number

  

Exhibit Description

  10.1    Agreement with Peter J. Kight, dated March 31, 2010
  31.1    Certification of the Chief Executive Officer, dated May 6, 2010
  31.2    Certification of the Chief Financial Officer, dated May 6, 2010
  32    Certification of the Chief Executive Officer and Chief Financial Officer, dated May 6, 2010
101.INS*    XBRL Instance Document
101.SCH*    XBRL Taxonomy Extension Schema Document
101.CAL*    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*    XBRL Taxonomy Extension Label Linkbase Document
101.PRE*    XBRL Taxonomy Extension Presentation Linkbase Document

 

* Furnished with this quarterly report on Form 10-Q are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Income for the three months ended March 31, 2010 and 2009, (ii) the Condensed Consolidated Balance Sheets at March 31, 2010 and December 31, 2009, (iii) the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009, and (iv) Notes to Condensed Consolidated Financial Statements.