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 June 30, 2011

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 July 29, 2011, there were 141,552,439 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      13   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      21   

Item 4.

   Controls and Procedures      22   

PART II - OTHER INFORMATION

  

Item 1.

   Legal Proceedings      22   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      22   

Item 6.

   Exhibits      23   
   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
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  

Revenue:

        

Processing and services

   $ 884      $ 856      $ 1,746      $ 1,687   

Product

     181        166        367        343   
                                

Total revenue

     1,065        1,022        2,113        2,030   
                                

Expenses:

        

Cost of processing and services

     479        457        953        919   

Cost of product

     145        129        295        265   

Selling, general and administrative

     190        185        393        357   
                                

Total expenses

     814        771        1,641        1,541   
                                

Operating income

     251        251        472        489   

Interest expense, net

     (48     (46     (93     (91

Loss on early debt extinguishment

     (61     —          (61     —     
                                

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

     142        205        318        398   

Income tax provision

     (49     (78     (113     (151

Income from investment in unconsolidated affiliate

     4        3        6        6   
                                

Income from continuing operations

     97        130        211        253   

Loss from discontinued operations, net of income taxes

     (7     (3     (9     (5
                                

Net income

   $ 90      $ 127      $ 202      $ 248   
                                

Net income (loss) per share - basic:

        

Continuing operations

   $ 0.68      $ 0.86      $ 1.46      $ 1.66   

Discontinued operations

     (0.05     (0.02     (0.06     (0.03
                                

Total

   $ 0.63      $ 0.84      $ 1.40      $ 1.63   
                                

Net income (loss) per share - diluted:

        

Continuing operations

   $ 0.67      $ 0.85      $ 1.45      $ 1.65   

Discontinued operations

     (0.05     (0.02     (0.06     (0.03
                                

Total

   $ 0.62      $ 0.83      $ 1.39      $ 1.62   
                                

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

        

Basic

     142.5        151.4        144.2        152.0   

Diluted

     144.2        152.6        146.0        153.2   

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

FISERV, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

 

     June 30,
2011
    December 31,
2010
 
ASSETS     

Cash and cash equivalents

   $ 675      $ 563   

Trade accounts receivable, net

     547        572   

Deferred income taxes

     42        37   

Prepaid expenses and other current assets

     259        245   
                

Total current assets

     1,523        1,417   

Property and equipment, net

     272        267   

Intangible assets, net

     1,855        1,879   

Goodwill

     4,392        4,377   

Other long-term assets

     354        341   
                

Total assets

   $ 8,396      $ 8,281   
                
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Accounts payable and accrued expenses

   $ 518      $ 537   

Current maturities of long-term debt

     303        3   

Deferred revenue

     333        351   
                

Total current liabilities

     1,154        891   

Long-term debt

     3,350        3,353   

Deferred income taxes

     636        627   

Other long-term liabilities

     170        181   
                

Total liabilities

     5,310        5,052   
                

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

     761        750   

Accumulated other comprehensive loss

     (47     (50

Retained earnings

     5,069        4,867   

Treasury stock, at cost, 56.4 million and 51.0 million shares

     (2,699     (2,340
                

Total shareholders’ equity

     3,086        3,229   
                

Total liabilities and shareholders’ equity

   $ 8,396      $ 8,281   
                

See accompanying notes to condensed consolidated financial statements.

 

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FISERV, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

     Six Months Ended
June 30,
 
     2011     2010  

Cash flows from operating activities:

    

Net income

   $ 202      $ 248   

Adjustment for discontinued operations

     9        5   

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

    

Depreciation and other amortization

     96        94   

Amortization of acquisition-related intangible assets

     77        73   

Share-based compensation

     21        20   

Deferred income taxes

     2        9   

Loss on early debt extinguishment

     61        —     

Settlement of interest rate hedge contracts

     (6     —     

Other non-cash items

     (14     (13

Changes in assets and liabilities, net of effects from acquisitions:

    

Trade accounts receivable

     28        58   

Prepaid expenses and other assets

     (34     (6

Accounts payable and other liabilities

     (2     (43

Deferred revenue

     (22     (14
                

Net cash provided by operating activities from continuing operations

     418        431   
                

Cash flows from investing activities:

    

Capital expenditures, including capitalization of software costs

     (102     (84

Payment for acquisitions of businesses, net of cash acquired

     (49     (8

Other investing activities

     (4     14   
                

Net cash used in investing activities from continuing operations

     (155     (78
                

Cash flows from financing activities:

    

Proceeds from long-term debt

     998        —     

Repayments of long-term debt, including premium and costs

     (757     (202

Issuance of common stock and treasury stock

     50        30   

Purchases of treasury stock

     (433     (206

Other financing activities

     (2     5   
                

Net cash used in financing activities from continuing operations

     (144     (373
                

Net change in cash and cash equivalents from continuing operations

     119        (20

Net cash flows from discontinued operations

     (7     (5

Beginning balance

     563        363   
                

Ending balance

   $ 675      $ 338   
                

See accompanying 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 and six-month periods ended June 30, 2011 and 2010 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, 2010.

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. Acquisitions

In June 2011, the Company entered into a definitive agreement to acquire CashEdge Inc. (“CashEdge”), a leading provider of consumer and business payments solutions such as account-to-account transfer, account opening and funding, data aggregation, small business payments, and person-to-person payments, for $465 million payable in cash at closing. The acquisition of CashEdge is expected to advance the Company’s digital payments and channel strategies. The Company anticipates the acquisition will close by the end of the third quarter of 2011 subject to the parties obtaining necessary regulatory approvals and other customary closing conditions.

In the first quarter of 2011, the Company completed the acquisition of Mobile Commerce Ltd. (“M-Com”), an international mobile banking and payments provider, and two other companies for an aggregate purchase price of $49 million, net of cash acquired. M-Com enhances the Company’s mobile channel and payments capabilities, and the other acquired companies add to or enhance specific products or services that the Company already provides. The preliminary purchase price allocations for these acquisitions resulted in technology and customer intangible assets of approximately $40 million. The remaining purchase price was primarily allocated to goodwill. The results of operations of all acquired businesses have been included in the accompanying condensed consolidated statements of income from the dates of acquisition. Pro forma information for these acquisitions is not provided because they did not have a material effect on the Company’s consolidated results of operations.

3. Fair Value Measurements

The Company applies fair value accounting for all assets and liabilities that are recognized or disclosed at fair value in its financial statements on a recurring basis. Fair value represents the amount that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities which are required to be recorded at fair value, the Company considers the principal or most advantageous market and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability.

The fair values of cash equivalents, trade accounts receivable, settlement assets and obligations, accounts payable and accrued expenses approximate the carrying values due to the short period of time to maturity. The fair values of interest rate hedge contracts are described in Note 9 and were based on valuation models using inputs which are available through third party dealers and are related to market price risk, such as the LIBOR interest rate curve, credit risk and time value. The fair value of the Company’s total debt was $3.7 billion and $3.5 billion at June 30, 2011 and December 31, 2010, respectively, and was estimated using discounted cash flows based on the Company’s current incremental borrowing rates or quoted prices in active markets.

 

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4. Share-Based Compensation

The Company recognized $9 million and $21 million of share-based compensation expense during the three and six months ended June 30, 2011, respectively, and $10 million and $20 million of share-based compensation expense during the three and six months ended June 30, 2010, respectively. The Company’s annual grant of share-based awards generally occurs in the first quarter. During the six months ended June 30, 2011, the Company granted 1.0 million stock options and 0.3 million restricted stock units at weighted-average estimated fair values of $22.69 and $61.74, respectively. During the six months ended June 30, 2010, the Company granted 1.1 million stock options and 0.4 million restricted stock units at weighted-average estimated fair values of $17.46 and $47.77, respectively. During the six months ended June 30, 2011 and 2010, stock options to purchase 1.1 million shares and 0.9 million shares, respectively, were exercised.

5. Shares Used in Computing Net Income Per Share

The computation of shares used in calculating basic and diluted net income per common share is as follows:

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
(In millions)    2011      2010      2011      2010  

Weighted-average shares outstanding used for the calculation of net income per share - basic

     142.5         151.4         144.2         152.0   

Common stock equivalents

     1.7         1.2         1.8         1.2   
                                   

Total shares used for the calculation of net income per share - diluted

     144.2         152.6         146.0         153.2   
                                   

For the three months ended June 30, 2011 and 2010, stock options for 1.0 million and 3.0 million shares, respectively, were excluded from the calculation of diluted weighted-average outstanding shares because their impact was anti-dilutive. For the six months ended June 30, 2011 and 2010, stock options for 0.8 million and 2.8 million shares, respectively, were excluded from the calculation of diluted weighted-average outstanding shares because their impact was anti-dilutive.

6. Comprehensive Income

Comprehensive income was as follows:

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
(In millions)    2011     2010     2011     2010  

Net income

   $ 90      $ 127      $ 202      $ 248   
                                

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

        

Fair market value adjustments on cash flow hedges

     (15     (7     (15     (15

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

     8        8        16        16   

Foreign currency translation and other

     1        (7     2        (8
                                

Other comprehensive income (loss)

     (6     (6     3        (7
                                

Comprehensive income

   $ 84      $ 121      $ 205      $ 241   
                                

 

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7. Intangible Assets

Intangible assets consisted of the following:

 

June 30, 2011

(In millions)

   Gross
Carrying
Amount
     Accumulated
Amortization
     Net Book
Value
 

Customer related intangible assets

   $ 1,646       $ 391       $ 1,255   

Acquired software and technology

     378         177         201   

Trade names

     114         17         97   

Capitalized software development costs

     744         512         232   

Purchased software

     372         302         70   
                          

Total

   $ 3,254       $ 1,399       $ 1,855   
                          

 

December 31, 2010

(In millions)

   Gross
Carrying
Amount
     Accumulated
Amortization
     Net Book
Value
 

Customer related intangible assets

   $ 1,639       $ 343       $ 1,296   

Acquired software and technology

     339         152         187   

Trade names

     114         14         100   

Capitalized software development costs

     730         512         218   

Purchased software

     377         299         78   
                          

Total

   $ 3,199       $ 1,320       $ 1,879   
                          

With respect to the Company’s acquired intangible assets at June 30, 2011, annual amortization expense is estimated to be approximately $160 million in 2011, $150 million in each of 2012 and 2013, and $140 million in each of 2014 and 2015.

8. Long-Term Debt

In June 2011, the Company issued $1.0 billion of senior notes comprised of $600 million of 3.125% senior notes due in June 2016 and $400 million of 4.75% senior notes due in June 2021. The notes pay interest semi-annually on June 15 and December 15, commencing on December 15, 2011. The interest rates applicable to these notes are subject to an increase of up to two percent in the event that the Company’s credit rating is downgraded below investment grade. The indenture governing the senior notes contains covenants that, among other matters, limit: the Company’s ability to consolidate or merge into, or convey, transfer or lease all or substantially all of its properties and assets to, another person; the Company’s and certain of its subsidiaries’ ability to create or assume liens; and the Company’s and certain of its subsidiaries’ ability to engage in sale and leaseback transactions.

In June 2011, the Company purchased in a tender offer $700 million aggregate principal amount of its 6.125% senior notes due in November 2012 (“2012 Notes”) for $754 million. In the second quarter of 2011, the Company recorded a pre-tax loss on early debt extinguishment of $61 million for the premium paid and other costs associated with this tender offer. In July 2011, the Company redeemed the remaining $300 million aggregate principal amount of 2012 Notes, which amount was included in current maturities of long-term debt in the consolidated balance sheet at June 30, 2011. In the third quarter of 2011, the Company expects to record a pre-tax charge of approximately $25 million for the early repayment premium and other costs associated with redeeming the remaining 2012 Notes.

 

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9. Interest Rate Hedge Contracts

The Company maintains interest rate swap agreements (“Swaps”) with total notional values of $1.0 billion at June 30, 2011 and December 31, 2010 to hedge against changes in interest rates and forward-starting interest rate swap agreements (“Forward-Starting Swaps”) with total notional values of $550 million and $200 million at June 30, 2011 and December 31, 2010, respectively, to hedge against changes in interest rates applicable to forecasted fixed rate borrowings. The Swaps and Forward-Starting Swaps expire in September 2012 and have been designated by the Company as cash flow hedges. The Swaps effectively fix the interest rates on floating rate term loan borrowings at a weighted-average rate of approximately 5.0%, prior to financing spreads and related fees. The Forward-Starting Swaps effectively fix the benchmark interest rate on forecasted five-year and ten-year borrowings at weighted-average rates of approximately 3.2% and 3.9%, respectively. The fair values of the Swaps and Forward-Starting Swaps totaled $62 million at June 30, 2011 and were recorded in other long-term liabilities and in accumulated other comprehensive loss, net of income taxes, in the consolidated balance sheet. At December 31, 2010, the fair values of the Swaps and Forward-Starting Swaps totaled $65 million and were recorded as a $76 million long-term liability and an $11 million long-term asset, respectively. The components of other comprehensive income pertaining to interest rate hedge contracts are presented in Note 6. In the first six months of 2011 and 2010, 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 June 30, 2011, the Company estimates that it will recognize approximately $40 million in interest expense during the next twelve months related to interest rate hedge contracts.

In conjunction with its issuance of senior notes in June 2011, the Company entered into a series of treasury lock agreements (“Treasury Locks”), which were designated as cash flow hedges, with total notional values of $600 million to hedge against changes in interest rates. Upon issuance of the senior notes, the Company paid $6 million to settle the Treasury Locks. This payment was recorded in accumulated other comprehensive loss, net of income taxes of $2 million, and will be recognized as interest expense over the terms of the senior notes.

10. Cash Flow Information

Supplemental cash flow information related to the Company’s continuing operations was as follows:

 

     Six Months Ended
June  30,
 
(In millions)    2011      2010  

Interest paid

   $ 97       $ 92   

Income taxes paid

     105         114   

11. 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 presentment services and debit and other card-based payment products and services to meet the electronic transaction processing needs of the financial services industry. The businesses in this segment also provide Internet banking, investment account processing services for separately managed accounts, card and print personalization services, 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 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 June 30, 2011

          

Processing and services revenue

   $ 429       $ 458       $ (3   $ 884   

Product revenue

     150         39         (8     181   
                                  

Total revenue

   $ 579       $ 497       $ (11   $ 1,065   
                                  

Operating income

   $ 164       $ 153       $ (66   $ 251   
                                  

Three Months Ended June 30, 2010

          

Processing and services revenue

   $ 406       $ 450       $ —        $ 856   

Product revenue

     133         37         (4     166   
                                  

Total revenue

   $ 539       $ 487       $ (4   $ 1,022   
                                  

Operating income

   $ 151       $ 151       $ (51   $ 251   
                                  

Six Months Ended June 30, 2011

          

Processing and services revenue

   $ 848       $ 902       $ (4   $ 1,746   

Product revenue

     311         75         (19     367   
                                  

Total revenue

   $ 1,159       $ 977       $ (23   $ 2,113   
                                  

Operating income

   $ 320       $ 292       $ (140   $ 472   
                                  

Six Months Ended June 30, 2010

          

Processing and services revenue

   $ 803       $ 882       $ 2      $ 1,687   

Product revenue

     276         77         (10     343   
                                  

Total revenue

   $ 1,079       $ 959       $ (8   $ 2,030   
                                  

Operating income

   $ 299       $ 287       $ (97   $ 489   
                                  

Goodwill in the Payments and Financial segments was $3.1 billion and $1.3 billion, respectively, as of June 30, 2011 and December 31, 2010.

12. 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 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. In the fourth quarter of 2010, one of the Company’s subsidiaries, which was not previously a guarantor subsidiary, was merged with and into a guarantor subsidiary. The following condensed consolidating financial information reflects this merger for all periods presented.

 

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CONDENSED CONSOLIDATING STATEMENT OF INCOME

THREE MONTHS ENDED JUNE 30, 2011

 

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

Revenue:

          

Processing and services

   $ —        $ 638      $ 279      $ (33   $ 884   

Product

     —          164        32        (15     181   
                                        

Total revenue

     —          802        311        (48     1,065   
                                        

Expenses:

          

Cost of processing and services

     —          352        159        (32     479   

Cost of product

     —          134        27        (16     145   

Selling, general and administrative

     23        118        49        —          190   
                                        

Total expenses

     23        604        235        (48     814   
                                        

Operating income (loss)

     (23     198        76        —          251   

Interest expense, net

     (41     (5     (2     —          (48

Loss on early debt extinguishment

     (61     —          —          —          (61
                                        

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

     (125     193        74        —          142   

Income tax (provision) benefit

     51        (72     (28     —          (49

Income from investment in unconsolidated affiliate

     —          4        —          —          4   
                                        

Income (loss) from continuing operations

     (74     125        46        —          97   

Equity in earnings of consolidated affiliates

     171        —          —          (171     —     

Loss from discontinued operations, net of income taxes

     (7     —          —          —          (7
                                        

Net income

   $ 90      $ 125      $ 46      $ (171   $ 90   
                                        

CONDENSED CONSOLIDATING STATEMENT OF INCOME

THREE MONTHS ENDED JUNE 30, 2010

 

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

Revenue:

          

Processing and services

   $ —        $ 605      $ 276      $ (25   $ 856   

Product

     —          141        29        (4     166   
                                        

Total revenue

     —          746        305        (29     1,022   
                                        

Expenses:

          

Cost of processing and services

     2        323        156        (24     457   

Cost of product

     —          112        22        (5     129   

Selling, general and administrative

     24        111        50        —          185   
                                        

Total expenses

     26        546        228        (29     771   
                                        

Operating income (loss)

     (26     200        77        —          251   

Interest expense, net

     (12     (31     (3     —          (46
                                        

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

     (38     169        74        —          205   

Income tax (provision) benefit

     15        (65     (28     —          (78

Income from investment in unconsolidated affiliate

     —          3        —          —          3   
                                        

Income (loss) from continuing operations

     (23     107        46        —          130   

Equity in earnings of consolidated affiliates

     151        —          —          (151     —     

Loss from discontinued operations, net of income taxes

     (1     —          (2     —          (3
                                        

Net income

   $ 127      $ 107      $ 44      $ (151   $ 127   
                                        

 

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CONDENSED CONSOLIDATING STATEMENT OF INCOME

SIX MONTHS ENDED JUNE 30, 2011

 

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

Revenue:

          

Processing and services

   $ —        $ 1,267      $ 541      $ (62   $ 1,746   

Product

     —          338        63        (34     367   
                                        

Total revenue

     —          1,605        604        (96     2,113   
                                        

Expenses:

          

Cost of processing and services

     —          702        312        (61     953   

Cost of product

     —          276        53        (34     295   

Selling, general and administrative

     45        247        102        (1     393   
                                        

Total expenses

     45        1,225        467        (96     1,641   
                                        

Operating income (loss)

     (45     380        137        —          472   

Interest expense, net

     (81     (8     (4     —          (93

Loss on early debt extinguishment

     (61     —          —          —          (61
                                        

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

     (187     372        133        —          318   

Income tax (provision) benefit

     76        (139     (50     —          (113

Income from investment in unconsolidated affiliate

     —          6        —          —          6   
                                        

Income (loss) from continuing operations

     (111     239        83        —          211   

Equity in earnings of consolidated affiliates

     324        —          —          (324     —     

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

     (11     —          2        —          (9
                                        

Net income

   $ 202      $ 239      $ 85      $ (324   $ 202   
                                        

CONDENSED CONSOLIDATING STATEMENT OF INCOME

SIX MONTHS ENDED JUNE 30, 2010

 

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

Revenue:

          

Processing and services

   $ —        $ 1,194      $ 536      $ (43   $ 1,687   

Product

     —          297        59        (13     343   
                                        

Total revenue

     —          1,491        595        (56     2,030   
                                        

Expenses:

          

Cost of processing and services

     1        645        317        (44     919   

Cost of product

     —          232        44        (11     265   

Selling, general and administrative

     42        220        95        —          357   
                                        

Total expenses

     43        1,097        456        (55     1,541   
                                        

Operating income (loss)

     (43     394        139        (1     489   

Interest (expense) income, net

     2        (88     (5     —          (91
                                        

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

     (41     306        134        (1     398   

Income tax (provision) benefit

     17        (117     (51     —          (151

Income from investment in unconsolidated affiliate

     —          6        —          —          6   
                                        

Income (loss) from continuing operations

     (24     195        83        (1     253   

Equity in earnings of consolidated affiliates

     275        —          —          (275     —     

Loss from discontinued operations, net of income taxes

     (3     —          (2     —          (5
                                        

Net income

   $ 248      $ 195      $ 81      $ (276   $ 248   
                                        

 

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CONDENSED CONSOLIDATING BALANCE SHEET

JUNE 30, 2011

 

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

Cash and cash equivalents

   $ 452       $ 66      $ 157      $ —        $ 675   

Trade accounts receivable, net

     —           349        198        —          547   

Prepaid expenses and other current assets

     45         154        102        —          301   
                                         

Total current assets

     497         569        457        —          1,523   

Investments in consolidated affiliates

     7,681         —          —          (7,681     —     

Goodwill and intangible assets, net

     13         5,373        861        —          6,247   

Other long-term assets

     28         491        107        —          626   
                                         

Total assets

   $ 8,219       $ 6,433      $ 1,425      $ (7,681   $ 8,396   
                                         
LIABILITIES AND SHAREHOLDERS’ EQUITY            

Total current liabilities

   $ 369       $ 496      $ 289      $ —        $ 1,154   

Long-term debt

     3,345         5        —          —          3,350   

Due to (from) consolidated affiliates

     671         (384     (287     —          —     

Other long-term liabilities

     748         37        21        —          806   
                                         

Total liabilities

     5,133         154        23        —          5,310   

Total shareholders’ equity

     3,086         6,279        1,402        (7,681     3,086   
                                         

Total liabilities and shareholders’ equity

   $ 8,219       $ 6,433      $ 1,425      $ (7,681   $ 8,396   
                                         

CONDENSED CONSOLIDATING BALANCE SHEET

DECEMBER 31, 2010

 

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

Cash and cash equivalents

   $ 343      $ 68      $ 152      $ —        $ 563   

Trade accounts receivable, net

     (2     374        200        —          572   

Prepaid expenses and other current assets

     40        130        112        —          282   
                                        

Total current assets

     381        572        464        —          1,417   

Investments in consolidated affiliates

     7,387        —          —          (7,387     —     

Goodwill and intangible assets, net

     7        5,405        844        —          6,256   

Other long-term assets

     38        470        100        —          608   
                                        

Total assets

   $ 7,813      $ 6,447      $ 1,408      $ (7,387   $ 8,281   
                                        
LIABILITIES AND SHAREHOLDERS’ EQUITY           

Total current liabilities

   $ 87      $ 490      $ 314      $ —        $ 891   

Long-term debt

     3,347        6        —          —          3,353   

Due to (from) consolidated affiliates

     396        (152     (244     —          —     

Other long-term liabilities

     754        39        15        —          808   
                                        

Total liabilities

     4,584        383        85        —          5,052   

Total shareholders’ equity

     3,229        6,064        1,323        (7,387     3,229   
                                        

Total liabilities and shareholders’ equity

   $ 7,813      $ 6,447      $ 1,408      $ (7,387   $ 8,281   
                                        

 

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2011

 

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

Cash flows from operating activities:

          

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

   $ (35   $ 359      $ 94      $ —        $ 418   
                                        

Cash flows from investing activities:

          

Capital expenditures, including capitalization of software costs

     (8     (80     (14     —          (102

Payment for acquisitions of businesses, net of cash acquired

     —          (4     (45     —          (49

Other investing activities

     303        2        (6     (303     (4
                                        

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

     295        (82     (65     (303     (155
                                        

Cash flows from financing activities:

          

Proceeds from (repayments of) long-term debt, net

     242        (1     —          —          241   

Purchases of treasury stock

     (433     —          —          —          (433

Other financing activities

     47        (278     (24     303        48   
                                        

Net cash used in financing activities from continuing operations

     (144     (279     (24     303        (144
                                        

Net change in cash and cash equivalents from continuing operations

     116        (2     5        —          119   

Net cash flows from discontinued operations

     (7     —          —          —          (7

Beginning balance

     343        68        152        —          563   
                                        

Ending balance

   $ 452      $ 66      $ 157      $ —        $ 675   
                                        

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 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

   $ 18      $ 306      $ 111      $ (4   $ 431   
                                        

Cash flows from investing activities:

          

Capital expenditures, including capitalization of software costs

     (2     (66     (16     —          (84

Other investing activities

     349        —          19        (362     6   
                                        

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

     347        (66     3        (362     (78
                                        

Cash flows from financing activities:

          

Repayments of long-term debt

     (200     (2     —          —          (202

Purchases of treasury stock

     (206     —          —          —          (206

Other financing activities

     33        (255     (109     366        35   
                                        

Net cash used in financing activities from continuing operations

     (373     (257     (109     366        (373
                                        

Net change in cash and cash equivalents from continuing operations

     (8     (17     5        —          (20

Net cash flows from discontinued operations

     (5     —          —          —          (5

Beginning balance

     55        169        139        —          363   
                                        

Ending balance

   $ 42      $ 152      $ 144      $ —        $ 338   
                                        

 

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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; legislative and regulatory actions in the United States, including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and related regulations, and internationally; our ability to obtain regulatory approvals for, and to close, the CashEdge Inc (“CashEdge”) acquisition on our anticipated terms and timetable, and to successfully integrate CashEdge into our operations; changes in client demand for our products or services; pricing or other actions by competitors; the impact of our strategic 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, 2010 and in other documents that we file with the Securities and Exchange Commission. You should consider these factors carefully in evaluating forward-looking statements and are cautioned not to place undue reliance on such 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.

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:

 

   

Overview. This section contains background information on our company and the services and products that we provide, our enterprise priorities, and the trends and business developments affecting our industry in order to provide context for management’s discussion and analysis of our financial condition and results of operations.

 

   

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 three and six months ended June 30, 2011 to the comparable periods in 2010.

 

   

Liquidity and capital resources. This section provides an analysis of our cash flows and a discussion of our outstanding debt as of June 30, 2011.

Overview

Company Background

We provide financial services technology solutions, including electronic commerce systems and services such as transaction processing, electronic bill payment and presentment, business process outsourcing, document distribution services, and software and systems solutions. We serve approximately 16,000 clients worldwide including banks, thrifts, credit unions, investment management firms, leasing and finance companies, retailers, merchants, and government agencies. The majority of our revenue is generated from recurring account and transaction fees under contracts with terms ranging from three to five years, and we benefit from high contract renewal rates with our existing clients. The majority of the services we provide to our clients are non-discretionary in nature and are necessary for them to operate their business.

Our operations are primarily in the United States and 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 presentment services and debit and other card-based payment

 

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products and services to meet the electronic transaction processing needs of the financial services industry. The businesses in this segment also provide Internet banking, investment account processing services for separately managed accounts, card and print personalization services, 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 expenses, amortization of acquisition-related intangible assets and intercompany eliminations.

In June 2011, we entered into a definitive agreement to acquire CashEdge, a leading provider of consumer and business payments solutions such as account-to-account transfer, account opening and funding, data aggregation, small business payments, and person-to-person payments, for $465 million payable in cash at closing. The acquisition of CashEdge is expected to advance our digital payments and channel strategies. We anticipate the acquisition will close by the end of the third quarter of 2011 subject to the parties obtaining necessary regulatory approvals and other customary closing conditions.

In the first quarter of 2011, we completed the acquisition of Mobile Commerce Ltd. (“M-Com”), an international mobile banking and payments provider, and two other companies for an aggregate purchase price of $49 million. M-Com enhances our mobile channel and payments capabilities, and the other acquired companies add to or enhance specific products or services that we already provide.

Enterprise Priorities

We continue to implement a series of strategic initiatives to help accomplish our mission of providing integrated technology and services solutions which enable best-in-class results for our clients. These strategic initiatives include active portfolio management of our various businesses, enhancing the overall value of our existing client relationships, improving operational effectiveness, being disciplined in our allocation of capital, and differentiating through innovation in our products and services. Our three key enterprise priorities for 2011 are: (i) to deliver an increased level of high quality revenue growth and increase our earnings per share as compared to 2010; (ii) to further center the Fiserv culture on growth resulting in more clients, deeper client relationships and a higher share of strategic solutions; and (iii) to provide innovative solutions that increase differentiation and enhance results for our clients. We believe we are making progress toward achieving our 2011 enterprise priorities.

Industry Trends

Market and regulatory conditions have continued to create a difficult operating environment for financial institutions and other businesses in the United States and internationally. As a result, financial institutions have exercised caution in their information technology spending. Despite this environment, our revenue growth was 1% in 2010 and 4% in the first six months of 2011. We believe this revenue growth demonstrates the resilience of our recurring fee-based revenue model, the largely non-discretionary nature of our products and services, and, in 2011, mild improvement in the general condition of the financial industry. We believe that financial institutions are increasingly focused on technology solutions that can help them win and retain customers, generate incremental revenue and enhance their operating efficiency. We anticipate that we will benefit over the long term from the trend of financial institutions moving from in-house transaction processing solutions to outsourced solutions.

In each of 2010 and 2009, approximately 1% of all financial institutions in the United States failed or were subject to government action, which resulted in the loss of a small number of our clients. However, during the first six months of 2011 the number of government actions and the average size of institutions impacted by such actions decreased as compared to the same period in 2010. Bank failures and forced consolidations have been, to some extent, offset by a general decline in the level of acquisition activity among financial institutions. A consolidation benefits us when a newly combined institution is processed on our platform, or elects to move to one of our platforms, and negatively impacts us when a competing platform is selected. Consolidations and acquisitions also impact our financial results due to early contract termination fees in our multi-year client contracts. These fees are primarily generated when an existing client is acquired by another financial institution and can vary from period to period based on the number and size of clients that are acquired and how early in the contract term the contract is terminated. We generally do not receive contract termination fees when a financial institution is subject to a government action.

 

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In addition, legislation such as the Dodd-Frank Wall Street Reform and Consumer Protection Act will result in numerous new regulations that will impact the financial industry, although it is too early to fully determine the overall impact of this complex legislation on us or our clients over the long term.

Business Developments

We continue to invest in the development of new and strategic products in categories such as payments, including ZashPay®, our person-to-person payment service; mobile banking; account processing, including AcumenTM, our next generation account processing platform for large credit unions; and others that we believe will increase value to our clients and enhance the capabilities of our existing solutions. We believe our wide range of market-leading solutions along with the investments we are making in new and differentiated products will favorably position us and our clients to capitalize on the opportunities in the marketplace.

 

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Results of Operations

The following table presents 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 June 30,  
                 Percentage of
Revenue (1)
    Increase (Decrease)  
(In millions)    2011     2010     2011     2010     $     %  

Revenue:

            

Processing and services

   $ 884      $ 856        83.0     83.8   $ 28        3

Product

     181        166        17.0     16.2     15        9
                                                

Total revenue

     1,065        1,022        100.0     100.0     43        4
                                                

Expenses:

            

Cost of processing and services

     479        457        54.2     53.4     22        5

Cost of product

     145        129        80.1     77.7     16        12
                                                

Sub-total

     624        586        58.6     57.3     38        6

Selling, general and administrative

     190        185        17.8     18.1     5        3
                                                

Total expenses

     814        771        76.4     75.4     43        6
                                                

Operating income

     251        251        23.6     24.5     —          —     

Interest expense, net

     (48     (46     (4.5 %)      (4.5 %)      2        4

Loss on early debt extinguishment

     (61     —          (5.7 %)      —          61        —     
                                                

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

   $ 142      $ 205        13.3     20.1   $ (63     (31 %) 
                                                
     Six Months Ended June 30,  
                 Percentage of
Revenue (1)
    Increase (Decrease)  
(In millions)    2011     2010     2011     2010     $     %  

Revenue:

            

Processing and services

   $ 1,746      $ 1,687        82.6     83.1   $ 59        3

Product

     367        343        17.4     16.9     24        7
                                                

Total revenue

     2,113        2,030        100.0     100.0     83        4
                                                

Expenses:

            

Cost of processing and services

     953        919        54.6     54.5     34        4

Cost of product

     295        265        80.4     77.3     30        11
                                                

Sub-total

     1,248        1,184        59.1     58.3     64        5

Selling, general and administrative

     393        357        18.6     17.6     36        10
                                                

Total expenses

     1,641        1,541        77.7     75.9     100        6
                                                

Operating income

     472        489        22.3     24.1     (17     (3 %) 

Interest expense, net

     (93     (91     (4.4 %)      (4.5 %)      2        2

Loss on early debt extinguishment

     (61     —          (2.9 %)      —          61        —     
                                                

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

   $ 318      $ 398        15.0     19.6   $ (80     (20 %) 
                                                

 

(1) 

Percentage of revenue is calculated as the relevant revenue, expense, income or loss 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.

 

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Total Revenue

 

     Three Months Ended June 30,  
(In millions)    Payments     Financial     Corporate
and Other
    Total  

Total revenue:

        

2011

   $ 579      $ 497      $ (11   $ 1,065   

2010

     539        487        (4     1,022   

Revenue growth

   $ 40      $ 10      $ (7   $ 43   

Revenue growth percentage

     7     2       4
     Six Months Ended June 30,  
(In millions)    Payments     Financial     Corporate
and Other
    Total  

Total revenue:

        

2011

   $ 1,159      $ 977      $ (23   $ 2,113   

2010

     1,079        959        (8     2,030   

Revenue growth

   $ 80      $ 18      $ (15   $ 83   

Revenue growth percentage

     7     2       4

Total revenue increased $43 million, or 4%, in the second quarter of 2011 compared to 2010 and increased $83 million, or 4%, in the first six months of 2011 compared to 2010. Revenue growth in 2011 was driven by improved growth in both our Payments and Financial segments as compared to 2010. Revenue from acquired companies contributed $5 million to revenue in the second quarter of 2011 and $7 million to revenue in the first six months of 2011.

Total revenue in our Payments segment during the second quarter and first six months of 2011 increased $40 million, or 7%, and $80 million, or 7%, respectively, compared to 2010. Payments segment revenue growth during 2011 was driven primarily by new clients and increased transaction volumes from existing clients in our electronic payments businesses, including our electronic banking and card services businesses. In addition, higher postage pass-through revenue, which is included in both product revenue and cost of product, in our output solutions business contributed approximately two percentage points of growth in this segment in the second quarter and first six months of 2011.

Total revenue in our Financial segment during the second quarter and first six months of 2011 increased $10 million, or 2%, and $18 million, or 2%, respectively, compared to 2010. Revenue growth in our Financial segment during 2011 was favorably impacted by increased processing and services revenue in our bank and credit union account processing businesses, partially offset by continued volume declines in our check processing business, which we expect will continue during the second half of 2011. A decline in contract termination fee revenue negatively impacted revenue growth in this segment by approximately one percentage point in the second quarter of 2011.

Total Expenses

Total expenses increased $43 million, or 6%, in the second quarter of 2011 compared to 2010 and increased $100 million, or 6%, in the first six months of 2011 compared to 2010. Total expenses as a percentage of total revenue were 76.4% and 75.4% in the second quarter of 2011 and 2010, respectively, and were 77.7% and 75.9% in the first six months of 2011 and 2010, respectively.

Cost of processing and services as a percentage of processing and services revenue of 54.2% and 53.4% in the second quarter of 2011 and 2010, respectively, and 54.6% and 54.5% in the first six months of 2011 and 2010, respectively, were relatively consistent in 2011 compared with the 2010 periods.

Cost of product as a percentage of product revenue increased from 77.7% and 77.3% in the second quarter and first six months of 2010, respectively, to 80.1% and 80.4% in the second quarter and first six months of 2011, respectively. The

 

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increase in cost of product as a percentage of product revenue was due primarily to an increase in postage pass-through revenue and expenses in our output solutions business.

Selling, general and administrative expenses increased $5 million, or 3%, in the second quarter of 2011 compared to 2010 and increased $36 million, or 10%, in the first six months of 2011 compared to 2010. The increase in selling, general and administrative expenses in the first six months of 2011 compared to 2010 was primarily due to $18 million of employee severance expenses recognized in the first quarter of 2011, higher legal costs of approximately $6 million, and a $5 million gain on the sale of a facility which reduced expenses in the first quarter of 2010.

Operating Income and Operating Margin

 

     Three Months Ended June 30,  
(In millions)    Payments     Financial     Corporate
and Other
    Total  

Operating income:

        

2011

   $ 164      $ 153      $ (66   $ 251   

2010

     151        151        (51     251   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income growth (decline)

   $ 13      $ 2      $ (15   $ —     

Operating income growth percentage

     9     1       —     

Operating margin:

        

2011

     28.4     30.8       23.6

2010

     28.0     30.9       24.5

Operating margin growth (decline) (1)

     0.4     (0.1 %)        (0.9 %) 
     Six Months Ended June 30,  
(In millions)    Payments     Financial     Corporate
and Other
    Total  

Operating income:

        

2011

   $ 320      $ 292      $ (140   $ 472   

2010

     299        287        (97     489   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income growth (decline)

   $ 21      $ 5      $ (43   $ (17

Operating income growth (decline) percentage

     7     2       (3 %) 

Operating margin:

        

2011

     27.6     29.9       22.3

2010

     27.7     29.9       24.1

Operating margin growth (decline) (1)

     (0.1 %)      —            (1.8 %) 

 

(1) 

Represents the percentage point improvement or decline in operating margin.

Total operating income of $251 million in the second quarter of 2011 was consistent with the second quarter of 2010 and total operating income of $472 million in the first six months of 2011 decreased $17 million, or 3%, compared to 2010. Operating income in our Payments and Financial segments increased 7% and 2%, respectively, and the operating loss in our Corporate and Other segment increased $43 million in the first six months of 2011 compared to 2010. Our operating margin decreased 90 basis points and 180 basis points to 23.6% and 22.3% in the second quarter and first six months of 2011, respectively, primarily due to increased operating losses in our Corporate and Other segment.

Operating income in our Payments segment increased $13 million, or 9%, in the second quarter of 2011 compared to 2010. Operating margin increased 40 basis points to 28.4% in the second quarter of 2011 compared to 28.0% in the second quarter of 2010. In the first six months of 2011, operating income in our Payments segment increased $21 million, or 7%, and operating margin decreased 10 basis points to 27.6% compared to 2010. Operating margins in 2011 were favorably

 

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impacted by increased operating leverage and scale efficiencies in our electronic payments businesses and negatively impacted by increased expenses associated with the development and support of new and existing products and services and an increase in postage pass-through costs, which are included in both revenue and expenses.

Operating income in our Financial segment in the second quarter and first six months of 2011 increased $2 million, or 1%, and $5 million, or 2%, respectively, compared to 2010. Operating margin decreased 10 basis points to 30.8% in the second quarter of 2011 compared to the second quarter of 2010 and was consistent at 29.9% in the first six months of 2011 and 2010. Operating income and operating margins in 2011 were positively impacted by revenue growth and scale efficiencies in our account processing businesses and were negatively impacted by a decrease in higher margin contract termination fee revenue.

The operating loss in our Corporate and Other segment increased $15 million and $43 million in the second quarter and first six months of 2011, respectively, compared to 2010. The increase in the second quarter of 2011 was due primarily to higher legal, merger and integration related costs and an increase in amortization of acquisition-related intangible assets. In the first six months of 2011, the increase was due primarily to employee severance costs of $18 million in the first quarter of 2011, higher legal, merger and integration related expenses totaling $12 million, a $4 million increase in amortization of acquisition-related intangible assets, and a $5 million gain on the sale of a facility recorded in the first quarter of 2010.

Interest Expense, Net

In the second quarter and first six months of 2011, net interest expense increased $2 million in each period compared to 2010 and was $48 million and $93 million, respectively.

Loss on Early Debt Extinguishment

In June 2011, we issued $1 billion of senior notes in a public offering with a weighted-average interest rate of 3.8% and used the proceeds from this offering to repay our 6.125% senior notes due in 2012 (the “2012 Notes”). In June 2011, we purchased in a tender offer $700 million aggregate principal amount of 2012 Notes and, as a result, we recorded a pre-tax loss on early debt extinguishment of $61 million in the second quarter of 2011 for the premium paid and other costs associated with the tender offer. In July 2011, we redeemed the remaining $300 million aggregate principal amount of 2012 Notes, and we expect to record a pre-tax loss on early debt extinguishment of approximately $25 million in the third quarter of 2011.

Income Tax Provision

Our effective income tax rate was 34.7% and 35.6% in the second quarter and first six months of 2011, respectively, and 38.3% and 38.1% in the second quarter and first six months of 2010, respectively. The lower effective tax rates in 2011 were primarily due to increased research and development credits and an approximate two percentage point benefit to our effective tax rate in the second quarter of 2011 associated with changes in state tax laws. Because the research and development tax credit was enacted in the fourth quarter of 2010, the related benefit was not included in the determination of our effective tax rate for the six month period ended June 30, 2010.

Net Income Per Share – Diluted from Continuing Operations

Net income per share-diluted from continuing operations was $0.67 and $0.85 in the second quarter of 2011 and 2010, respectively, and was $1.45 and $1.65 in the first six months of 2011 and 2010, respectively. Net income per share-diluted from continuing operations in the second quarter and first six months of 2011 was negatively impacted by $0.26 per share due to a loss on early debt extinguishment. In addition, net income per share-diluted from continuing operations in the first six months of 2011 was negatively impacted by $0.08 per share due to employee severance expenses in the first quarter of 2011. The amortization of acquisition-related intangible assets reduced net income per share-diluted from continuing operations by $0.18 per share and $0.15 per share in the second quarter of 2011 and 2010, respectively, and $0.34 per share and $0.30 per share in the first six months of 2011 and 2010, respectively.

 

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Liquidity and Capital Resources

General

Our primary liquidity needs are: (i) to fund normal operating expenses; (ii) to meet the interest and principal requirements of our outstanding indebtedness; (iii) to fund capital expenditures and operating lease payments; and (iv) to fund acquisitions. We believe these needs will be satisfied using cash flow generated by our operations, our cash and cash equivalents of $675 million at June 30, 2011, and available borrowings under our revolving credit facility of $972 million at June 30, 2011.

 

     Six Months Ended
June 30,
    Increase
(Decrease)
 
(In millions)    2011     2010     $     %  

Income from continuing operations

   $ 211      $ 253      $ (42  

Depreciation and amortization

     173        167        6     

Share-based compensation

     21        20        1     

Loss on early debt extinguishment

     61        —          61     

Net changes in working capital and other

     (48     (9     (39  
  

 

 

   

 

 

   

 

 

   

Operating cash flow

   $ 418      $ 431      $ (13     (3 %) 

Capital expenditures

   $ 102      $ 84      $ 18        21

Our net cash provided by operating activities from continuing operations, or operating cash flow, was $418 million in the first six months of 2011, a decrease of 3% compared with $431 million in 2010. This decrease was primarily due to the timing of working capital, including accounts receivable and accounts payable. 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. Capital expenditures increased $18 million in the first six months of 2011, compared to 2010, and were less than 5% of our total revenue in the first six months of 2011 and 2010. The increase in capital expenditures was primarily due to equipment purchases associated with a new data center.

In the first six months of 2011, we acquired three companies for an aggregate purchase price of $49 million, and we entered into a definitive agreement to acquire CashEdge for $465 million payable in cash at closing. We anticipate that the acquisition of CashEdge will close by the end of the third quarter of 2011, subject to regulatory approvals and customary closing conditions, and we expect to fund the acquisition with cash and, to the extent necessary, with borrowings under our revolving credit facility.

In the first six months of 2011, we purchased $433 million of our common stock. As of June 30, 2011, we had approximately 6.7 million shares remaining under our existing authorization. Shares repurchased are generally held for issuance in connection with our equity plans.

In July 2011, we received a $54 million dividend from StoneRiver Group, L.P., an entity of which we own 49%, and we redeemed the remaining $300 million aggregate principal amount of our senior notes due in 2012.

 

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Table of Contents

Long-Term Debt

 

(In millions)    June 30,
2011
     December 31,
2010
 

Senior term loan

   $ 1,100       $ 1,100   

6.125% senior notes due 2012 (1)

     300         999   

3.125% senior notes due 2015

     299         299   

3.125% senior notes due 2016

     600         —     

6.8% senior notes due 2017

     500         500   

4.625% senior notes due 2020

     449         449   

4.75% senior notes due 2021

     399         —     

Other borrowings

     6         9   
                 

Long-term debt (including current maturities)

   $ 3,653       $ 3,356   
                 

 

(1)

In July 2011, we redeemed the remaining $300 million aggregate principal amount of our senior notes due in 2012, which reduced our long-term debt, including current maturities, to $3.35 billion at July 31, 2011.

In June 2011, we issued senior notes due in 2016 and 2021 for a total of $1.0 billion with a weighted-average interest rate of 3.8% and used the proceeds to repay our 2012 Notes. In June 2011, we purchased in a tender offer $700 million aggregate principal amount of 2012 Notes for $754 million and recorded a pre-tax loss on early debt extinguishment of $61 million for the premium paid and other costs associated with the tender offer. In July 2011, we redeemed the remaining $300 million aggregate principal amount of 2012 Notes for approximately $325 million including the early repayment premium and other costs associated with redeeming the remaining 2012 Notes.

At June 30, 2011, our long-term debt consisted primarily of $2.55 billion of senior notes (including $300 million aggregate principal amount of 2012 Notes redeemed in July 2011) and $1.1 billion under our unsecured senior term loan facility. Interest on our senior notes is paid semi-annually. The 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. The term loan facility contains various restrictions and covenants substantially similar to those contained in the revolving credit facility described below.

To manage exposure to fluctuations in interest rates, we maintain a series of interest rate swap agreements (“Swaps”) with total notional values of $1.0 billion. The Swaps effectively fix interest rates on floating rate term loan borrowings at a weighted-average rate of approximately 5.0%, prior to financing spreads and related fees, and expire in September 2012. In addition, we maintain a series of forward-starting interest rate swap agreements (“Forward-Starting Swaps”) with total notional values of $550 million to hedge against changes in interest rates applicable to forecasted fixed rate borrowings. The Forward-Starting Swaps, which expire in September 2012, effectively fix the benchmark interest rate on forecasted five-year and ten-year borrowings at weighted-average rates of approximately 3.2% and 3.9%, respectively.

We maintain a $1.0 billion revolving credit facility with a syndicate of banks. Borrowings under this revolving credit facility bear interest at a variable rate based on LIBOR plus a specified margin or the bank’s base rate. There are no significant commitment fees and no compensating balance requirements. The revolving credit facility contains various restrictions and covenants that require us, among other things, to (i) 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 (ii) maintain consolidated net earnings before interest, taxes, depreciation and amortization and certain other adjustments of at least three times consolidated interest expense. The facility expires in September 2014. As of June 30, 2011, there were letters of credit totaling $28 million outstanding under the facility, and we had available borrowings of $972 million. During the first six months of 2011, we were in compliance with all financial debt covenants, 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, 2010 and have not materially changed since December 31, 2010.

 

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Table of Contents
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 June 30, 2011.

Changes in internal control over financial reporting

There was no change in our internal control over financial reporting that occurred during the quarter ended June 30, 2011 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.

 

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 June 30, 2011:

 

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)
 

April 1-30, 2011

     100,000       $ 62.89         100,000         1,654,665   

May 1-31, 2011

     1,700,000         62.36         1,700,000         7,454,665   

June 1-30, 2011

     800,000         63.23         800,000         6,654,665   
  

 

 

       

 

 

    

Total

     2,600,000            2,600,000      
  

 

 

       

 

 

    

 

(1) On November 16, 2010, our board of directors authorized the purchase of up to 7.0 million shares of our common stock. In May 2011, we utilized the balance of this authorization. On May 25, 2011, we announced our board of directors authorized the purchase of up to 7.5 million additional shares of our common stock. This repurchase authorization does not expire.

 

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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: August 2, 2011   By:  

/s/ THOMAS J. HIRSCH

    Thomas J. Hirsch
    Executive Vice President,
    Chief Financial Officer,
    Treasurer and Assistant Secretary


Table of Contents

Exhibit Index

 

Exhibit
Number

  

Exhibit Description

    4.1    Seventh Supplemental Indenture, dated as of June 14, 2011, among Fiserv, Inc., the guarantors named therein and U.S. Bank National Association (1)
    4.2    Eighth Supplemental Indenture, dated as of June 14, 2011, among Fiserv, Inc., the guarantors named therein and U.S. Bank National Association (1)
  31.1    Certification of the Chief Executive Officer, dated August 2, 2011
  31.2    Certification of the Chief Financial Officer, dated August 2, 2011
  32    Certification of the Chief Executive Officer and Chief Financial Officer, dated August 2, 2011
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 and six months ended June 30, 2011 and 2010, (ii) the Condensed Consolidated Balance Sheets at June 30, 2011 and December 31, 2010, (iii) the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010, and (iv) Notes to Condensed Consolidated Financial Statements.
(1) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed on June 14, 2011 and incorporated herein by reference.