Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 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 September 30, 2012

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 October 25, 2012, there were 133,472,676 shares of common stock, $.01 par value, of the registrant outstanding.

 

 

 


Table of Contents

INDEX

 

         Page  

PART I - FINANCIAL INFORMATION

  

Item 1.

  Financial Statements (Unaudited)   
 

Consolidated Statements of Income

     1   
 

Consolidated Statements of Comprehensive Income

     2   
 

Consolidated Balance Sheets

     3   
 

Consolidated Statements of Cash Flows

     4   
 

Notes to Consolidated Financial Statements

     5   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      14   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      22   

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      23   

Item 6.

  Exhibits      23   
  Signatures   
  Exhibit Index   


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FISERV, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In millions, except per share data)

(Unaudited)

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2012     2011     2012     2011  

Revenue:

        

Processing and services

   $ 933      $ 882      $ 2,759      $ 2,628   

Product

     185        181        567        548   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     1,118        1,063        3,326        3,176   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Cost of processing and services

     494        490        1,476        1,443   

Cost of product

     150        141        464        436   

Selling, general and administrative

     207        189        619        582   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     851        820        2,559        2,461   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     267        243        767        715   

Interest expense

     (48     (45     (135     (144

Interest and investment income

     —          —          6        6   

Loss on early debt extinguishment

     —          (24     —          (85
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     219        174        638        492   

Income tax provision

     (80     (55     (209     (168

Income from investment in unconsolidated affiliate

     3        8        9        14   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     142        127        438        338   

Loss from discontinued operations, net of income taxes

     (3     —          (6     (9
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 139      $ 127      $ 432      $ 329   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share—basic:

        

Continuing operations

   $ 1.05      $ 0.90      $ 3.20      $ 2.36   

Discontinued operations

     (0.01     —          (0.04     (0.07
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1.03      $ 0.90      $ 3.16      $ 2.30   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share—diluted:

        

Continuing operations

   $ 1.03      $ 0.89      $ 3.16      $ 2.33   

Discontinued operations

     (0.01     —          (0.04     (0.07
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1.02      $ 0.89      $ 3.12      $ 2.27   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Basic

     134.9        141.1        136.6        143.2   

Diluted

     136.6        142.6        138.3        144.8   

See accompanying notes to consolidated financial statements.

 

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FISERV, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2012     2011     2012     2011  

Net income

   $ 139      $ 127      $ 432      $ 329   

Other comprehensive income (loss):

        

Fair market value adjustment on cash flow hedges, net of income taxes of $1 million, $21 million, $8 million and $31 million

     (2     (32     (12     (47

Reclassification adjustment for net realized losses on cash flow hedges included in interest expense, net of income taxes of $7 million, $5 million, $16 million and $16 million

     10        8        24        24   

Foreign currency translation

     4        (8     5        (6
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     12        (32     17        (29
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 151      $ 95      $ 449      $ 300   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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FISERV, INC.

CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

 

     September 30,     December 31,  
     2012     2011  
ASSETS     

Cash and cash equivalents

   $ 307      $ 337   

Trade accounts receivable, net

     643        666   

Deferred income taxes

     37        44   

Prepaid expenses and other current assets

     338        309   
  

 

 

   

 

 

 

Total current assets

     1,325        1,356   

Property and equipment, net

     256        258   

Intangible assets, net

     1,782        1,881   

Goodwill

     4,719        4,720   

Other long-term assets

     371        333   
  

 

 

   

 

 

 

Total assets

   $ 8,453      $ 8,548   
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Accounts payable and accrued expenses

   $ 719      $ 836   

Current maturities of long-term debt

     2        179   

Deferred revenue

     330        369   
  

 

 

   

 

 

 

Total current liabilities

     1,051        1,384   

Long-term debt

     3,447        3,216   

Deferred income taxes

     603        617   

Other long-term liabilities

     94        73   
  

 

 

   

 

 

 

Total liabilities

     5,195        5,290   
  

 

 

   

 

 

 

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

     793        777   

Accumulated other comprehensive loss

     (61     (78

Retained earnings

     5,771        5,339   

Treasury stock, at cost, 64.1 million and 57.8 million shares

     (3,247     (2,782
  

 

 

   

 

 

 

Total shareholders’ equity

     3,258        3,258   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 8,453      $ 8,548   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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FISERV, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

     Nine Months Ended  
     September 30,  
     2012     2011  

Cash flows from operating activities:

    

Net income

   $ 432      $ 329   

Adjustment for discontinued operations

     6        9   

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

    

Depreciation and other amortization

     143        144   

Amortization of acquisition-related intangible assets

     122        115   

Share-based compensation

     35        29   

Deferred income taxes

     (11     36   

Settlement of interest rate hedge contracts

     (88     (6

Loss on early debt extinguishment

     —          85   

Dividend from unconsolidated affiliate

     —          12   

Other non-cash items

     (20     (23

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

    

Trade accounts receivable

     24        6   

Prepaid expenses and other assets

     (48     (30

Accounts payable and other liabilities

     (16     12   

Deferred revenue

     (31     (37
  

 

 

   

 

 

 

Net cash provided by operating activities from continuing operations

     548        681   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Capital expenditures, including capitalization of software costs

     (146     (144

Payments for acquisitions of businesses, net of cash acquired

     —          (511

Dividend from unconsolidated affiliate

     —          42   

Net proceeds from sale (purchases) of investments

     27        (4

Other investing activities

     (3     —     
  

 

 

   

 

 

 

Net cash used in investing activities from continuing operations

     (122     (617
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from long-term debt

     994        1,189   

Repayments of long-term debt, including premium and costs

     (946     (1,105

Issuance of treasury stock

     80        63   

Purchases of treasury stock

     (580     (484

Other financing activities

     1        (2
  

 

 

   

 

 

 

Net cash used in financing activities from continuing operations

     (451     (339
  

 

 

   

 

 

 

Net change in cash and cash equivalents from continuing operations

     (25     (275

Net cash flows from discontinued operations

     (5     (7

Beginning balance

     337        563   
  

 

 

   

 

 

 

Ending balance

   $ 307      $ 281   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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FISERV, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Principles of Consolidation

The consolidated financial statements for the three-month and nine-month periods ended September 30, 2012 and 2011 are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the 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 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 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, 2011.

The 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

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, 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 their respective carrying values due to the short period of time to maturity. The estimated fair value of total debt was $3.7 billion at September 30, 2012 and $3.5 billion at December 31, 2011 and was estimated using discounted cash flows based on the Company’s current incremental borrowing rates or quoted prices in active markets (level 2 of the fair value hierarchy).

3. Share-Based Compensation

The Company recognized $10 million and $35 million of share-based compensation expense during the three and nine months ended September 30, 2012, respectively, and $8 million and $29 million of share-based compensation expense during the three and nine months ended September 30, 2011, respectively. The Company’s annual grant of share-based awards generally occurs in the first quarter. During the nine months ended September 30, 2012, the Company granted 1.0 million stock options and 0.4 million restricted stock units at weighted-average estimated fair values of $21.59 and $65.42, respectively. During the nine months ended September 30, 2011, the Company granted 1.0 million stock options and 0.6 million restricted stock units at weighted-average estimated fair values of $22.69 and $58.47, respectively. During the nine months ended September 30, 2012 and 2011, stock options to purchase 1.7 million shares and 1.2 million shares, respectively, were exercised.

 

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4. Shares Used in Computing Net Income Per Share

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

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
(In millions)    2012      2011      2012      2011  

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

     134.9         141.1         136.6         143.2   

Common stock equivalents

     1.7         1.5         1.7         1.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     136.6         142.6         138.3         144.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the three months ended September 30, 2012 and 2011, stock options for 0.9 million and 1.0 million shares, respectively, were excluded from the calculation of diluted weighted-average outstanding shares because their impact was anti-dilutive. For the nine months ended September 30, 2012 and 2011, stock options for 1.5 million and 0.9 million shares, respectively, were excluded from the calculation of diluted weighted-average outstanding shares because their impact was anti-dilutive.

5. Intangible Assets

Intangible assets consisted of the following:

 

     Gross                
September 30, 2012    Carrying      Accumulated      Net Book  
(In millions)    Amount      Amortization      Value  

Customer related intangible assets

   $ 1,704       $ 514       $ 1,190   

Acquired software and technology

     392         217         175   

Trade names

     114         27         87   

Capitalized software development costs

     689         424         265   

Purchased software

     333         268         65   
  

 

 

    

 

 

    

 

 

 

Total

   $ 3,232       $ 1,450       $ 1,782   
  

 

 

    

 

 

    

 

 

 

 

     Gross                
December 31, 2011    Carrying      Accumulated      Net Book  
(In millions)    Amount      Amortization      Value  

Customer related intangible assets

   $ 1,699       $ 440       $ 1,259   

Acquired software and technology

     420         204         216   

Trade names

     114         20         94   

Capitalized software development costs

     720         477         243   

Purchased software

     362         293         69   
  

 

 

    

 

 

    

 

 

 

Total

   $ 3,315       $ 1,434       $ 1,881   
  

 

 

    

 

 

    

 

 

 

The Company estimates that annual amortization expense with respect to acquired intangible assets will be approximately $160 million in 2012 through 2014, approximately $150 million in 2015 and approximately $110 million in 2016.

 

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6. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of the following:

 

     September 30,      December 31,  
(In millions)    2012      2011  

Settlement obligations

   $ 215       $ 195   

Client deposits

     136         114   

Accrued compensation and benefits

     124         157   

Trade accounts payable

     84         96   

Interest rate hedge contracts

     —           98   

Other accrued expenses

     160         176   
  

 

 

    

 

 

 

Total

   $ 719       $ 836   
  

 

 

    

 

 

 

7. Long-Term Debt

In September 2012, the Company issued $700 million aggregate principal amount of 3.5% senior notes due in October 2022. The notes pay interest semi-annually on April 1 and October 1, commencing on April 1, 2013. The interest rate applicable to these notes is 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 (i) 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, (ii) the Company’s and certain of its subsidiaries’ ability to create or assume liens, and (iii) the Company’s and certain of its subsidiaries’ ability to engage in sale and leaseback transactions. Net proceeds from the issuance of the notes were primarily used to repay a portion of the Company’s term loan due in November 2012.

In August 2012, the Company entered into a $2.0 billion Amended and Restated Credit Agreement with a syndicate of banks, replacing its existing $1.0 billion revolving credit facility, which was scheduled to expire in September 2014. Borrowings under the amended 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 facility expires on August 1, 2017 and contains various restrictions and covenants that require the Company, among other things, to (i) limit its consolidated indebtedness as of the end of each fiscal quarter to no more than three and one-half times consolidated net earnings before interest, taxes, depreciation and amortization and certain other adjustments during the period of four fiscal quarters then ended, and (ii) maintain consolidated net earnings before interest, taxes, depreciation and amortization and certain other adjustments of at least three times consolidated interest expense as of the end of each fiscal quarter for the period of four fiscal quarters then ended. As of September 30, 2012, there were no borrowings outstanding under the facility. During the first nine months of 2012, the Company was in compliance with all financial debt covenants.

At September 30, 2012 and December 31, 2011, $500 million and $925 million, respectively, of the Company’s term loan borrowings, which mature in November 2012, were classified in the consolidated balance sheets as long-term debt because the Company has the intent to refinance this debt on a long-term basis and could do so under its revolving credit facility.

8. Interest Rate Hedge Contracts

The Company maintained forward-starting interest rate swap agreements (“Forward-Starting Swaps”), designated as cash flow hedges, with a total notional value of $550 million to hedge against changes in interest rates applicable to forecasted five-year and ten-year fixed rate borrowings. Upon the issuance of senior notes in September 2012, the Company paid $88 million to settle the Forward-Starting Swaps and recognized approximately $4 million of interest expense due to hedge ineffectiveness. The remaining $84 million is recorded in accumulated other comprehensive loss, net of income taxes of $33 million, and will be recognized as interest expense over the terms of the originally forecasted interest payments.

The Company also maintained interest rate swap agreements (“Swaps”), designated as cash flow hedges, with a total notional value of $1.0 billion to hedge against changes in interest rates on floating rate term loan borrowings. The Swaps, which expired in September 2012, effectively fixed the interest rate on floating rate term loan borrowings at a weighted-average rate of approximately 5.0% prior to financing spreads and related fees. In the first nine months of 2012 and 2011, interest expense recognized due to hedge ineffectiveness on the Swaps was not significant, and no amounts were excluded from the assessment of hedge effectiveness. There were no Swaps outstanding as of September 30, 2012.

 

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Based on the amounts recorded in accumulated other comprehensive loss at September 30, 2012, the Company estimates that it will recognize approximately $14 million in interest expense during the next twelve months related to settled interest rate hedge contracts.

9. Cash Flow Information

Supplemental cash flow information was as follows:

 

     Nine Months Ended  
     September 30,  
(In millions)    2012      2011  

Interest paid

   $ 105       $ 116   

Income taxes paid

     245         151   

Treasury stock purchases settled after the balance sheet date

     6         —     

10. Business Segment Information

The Company’s operations are comprised of the Payments and Industry Products (“Payments”) segment and the Financial Institution Services (“Financial”) segment. The Payments segment primarily provides electronic bill payment and presentment services, debit and other card-based payment products and services, internet and mobile banking software and services, and other electronic payments software and services including account-to-account transfers and person-to-person payments. The businesses in this segment also provide 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 and source capture services, loan origination and servicing products, cash management and consulting services, and other products and services that support numerous types of financial transactions. Corporate and Other primarily consists of unallocated corporate expenses, amortization of acquisition-related intangible assets and intercompany eliminations.

 

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                   Corporate        
(In millions)    Payments      Financial      and Other     Total  

Three Months Ended September 30, 2012

          

Processing and services revenue

   $ 464       $ 473       $ (4   $ 933   

Product revenue

     153         40         (8     185   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenue

   $ 617       $ 513       $ (12   $ 1,118   
  

 

 

    

 

 

    

 

 

   

 

 

 

Operating income

   $ 168       $ 165       $ (66   $ 267   
  

 

 

    

 

 

    

 

 

   

 

 

 

Three Months Ended September 30, 2011

          

Processing and services revenue

   $ 439       $ 446       $ (3   $ 882   

Product revenue

     148         41         (8     181   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenue

   $ 587       $ 487       $ (11   $ 1,063   
  

 

 

    

 

 

    

 

 

   

 

 

 

Operating income

   $ 162       $ 143       $ (62   $ 243   
  

 

 

    

 

 

    

 

 

   

 

 

 

Nine Months Ended September 30, 2012

          

Processing and services revenue

   $ 1,361       $ 1,407       $ (9   $ 2,759   

Product revenue

     484         109         (26     567   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenue

   $ 1,845       $ 1,516       $ (35   $ 3,326   
  

 

 

    

 

 

    

 

 

   

 

 

 

Operating income

   $ 489       $ 479       $ (201   $ 767   
  

 

 

    

 

 

    

 

 

   

 

 

 

Nine Months Ended September 30, 2011

          

Processing and services revenue

   $ 1,287       $ 1,348       $ (7   $ 2,628   

Product revenue

     459         116         (27     548   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenue

   $ 1,746       $ 1,464       $ (34   $ 3,176   
  

 

 

    

 

 

    

 

 

   

 

 

 

Operating income

   $ 482       $ 435       $ (202   $ 715   
  

 

 

    

 

 

    

 

 

   

 

 

 

Goodwill in the Payments and Financial segments was $3.4 billion and $1.3 billion, respectively, as of September 30, 2012 and December 31, 2011.

11. 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 2011, several of the Company’s subsidiaries, which were not previously guarantor subsidiaries, were merged with and into guarantor subsidiaries. The following condensed consolidating financial information reflects this reorganization for all periods presented.

 

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CONDENSED CONSOLIDATING STATEMENT OF INCOME

THREE MONTHS ENDED SEPTEMBER 30, 2012

 

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

Revenue:

          

Processing and services

   $ —        $ 655      $ 319      $ (41   $ 933   

Product

     —          165        33        (13     185   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     —          820        352        (54     1,118   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

          

Cost of processing and services

     —          356        179        (41     494   

Cost of product

     —          145        18        (13     150   

Selling, general and administrative

     27        127        53        —          207   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     27        628        250        (54     851   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (27     192        102        —          267   

Interest expense, net

     (32     (14     (2     —          (48
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (59     178        100        —          219   

Income tax (provision) benefit

     23        (66     (37     —          (80

Income from investment in unconsolidated affiliate

     —          3        —          —          3   

Equity in earnings of consolidated affiliates

     178        —          —          (178     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     142        115        63        (178     142   

Loss from discontinued operations, net of income taxes

     (3     —          —          —          (3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 139      $ 115      $ 63      $ (178   $ 139   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 151      $ 115      $ 67      $ (182   $ 151   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CONDENSED CONSOLIDATING STATEMENT OF INCOME

THREE MONTHS ENDED SEPTEMBER 30, 2011

 

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

Revenue:

          

Processing and services

   $ —        $ 645      $ 271      $ (34   $ 882   

Product

     —          162        33        (14     181   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     —          807        304        (48     1,063   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

          

Cost of processing and services

     —          370        155        (35     490   

Cost of product

     —          134        21        (14     141   

Selling, general and administrative

     24        114        50        1        189   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     24        618        226        (48     820   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (24     189        78        —          243   

Interest expense, net

     (34     (9     (2     —          (45

Loss on early debt extinguishment

     (24     —          —          —          (24
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (82     180        76        —          174   

Income tax (provision) benefit

     39        (67     (27     —          (55

Income from investment in unconsolidated affiliate

     —          8        —          —          8   

Equity in earnings of consolidated affiliates

     170        —          —          (170     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     127        121        49        (170     127   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 127      $ 121      $ 49      $ (170   $ 127   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 95      $ 121      $ 41      $ (162   $ 95   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING STATEMENT OF INCOME

NINE MONTHS ENDED SEPTEMBER 30, 2012

 

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

Revenue:

          

Processing and services

   $ —        $ 1,965      $ 912      $ (118   $ 2,759   

Product

     —          528        83        (44     567   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     —          2,493        995        (162     3,326   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

          

Cost of processing and services

     —          1,058        536        (118     1,476   

Cost of product

     —          457        51        (44     464   

Selling, general and administrative

     76        376        167        —          619   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     76        1,891        754        (162     2,559   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (76     602        241        —          767   

Interest expense, net

     (84     (43     (2     —          (129
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (160     559        239        —          638   

Income tax (provision) benefit

     86        (206     (89     —          (209

Income from investment in unconsolidated affiliate

     —          9        —          —          9   

Equity in earnings of consolidated affiliates

     512        —          —          (512     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     438        362        150        (512     438   

Loss from discontinued operations, net of income taxes

     (6     —          —          —          (6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 432      $ 362      $ 150      $ (512   $ 432   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 449      $ 362      $ 155      $ (517   $ 449   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CONDENSED CONSOLIDATING STATEMENT OF INCOME

NINE MONTHS ENDED SEPTEMBER 30, 2011

 

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

Revenue:

          

Processing and services

   $ —        $ 1,932      $ 792      $ (96   $ 2,628   

Product

     —          505        91        (48     548   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     —          2,437        883        (144     3,176   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

          

Cost of processing and services

     —          1,086        453        (96     1,443   

Cost of product

     —          411        73        (48     436   

Selling, general and administrative

     69        365        148        —          582   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     69        1,862        674        (144     2,461   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (69     575        209        —          715   

Interest expense, net

     (115     (17     (6     —          (138

Loss on early debt extinguishment

     (85     —          —          —          (85
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (269     558        203        —          492   

Income tax (provision) benefit

     115        (208     (75     —          (168

Income from investment in unconsolidated affiliate

     —          14        —          —          14   

Equity in earnings of consolidated affiliates

     492        —          —          (492     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     338        364        128        (492     338   

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

     (9     —          2        (2     (9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 329      $ 364      $ 130      $ (494   $ 329   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 300      $ 364      $ 124      $ (488   $ 300   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING BALANCE SHEET

SEPTEMBER 30, 2012

 

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

Cash and cash equivalents

   $ 41       $ 54      $ 212      $ —        $ 307   

Trade accounts receivable, net

     —           392        251        —          643   

Prepaid expenses and other current assets

     13         195        167        —          375   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     54         641        630        —          1,325   

Investments in consolidated affiliates

     8,336         —          —          (8,336     —     

Intangible assets, net

     22         1,510        250        —          1,782   

Goodwill

     —           3,709        1,010        —          4,719   

Other long-term assets

     55         474        98        —          627   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 8,467       $ 6,334      $ 1,988      $ (8,336   $ 8,453   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY            

Total current liabilities

   $ 91       $ 611      $ 349      $ —        $ 1,051   

Long-term debt

     3,443         4        —          —          3,447   

Due to (from) consolidated affiliates

     1,020         (757     (263     —          —     

Other long-term liabilities

     655         19        23        —          697   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     5,209         (123     109        —          5,195   

Total shareholders’ equity

     3,258         6,457        1,879        (8,336     3,258   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 8,467       $ 6,334      $ 1,988      $ (8,336   $ 8,453   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

CONDENSED CONSOLIDATING BALANCE SHEET

DECEMBER 31, 2011

 

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

Cash and cash equivalents

   $ 73       $ 71      $ 193      $ —        $ 337   

Trade accounts receivable, net

     —           402        264        —          666   

Prepaid expenses and other current assets

     25         167        161        —          353   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     98         640        618        —          1,356   

Investments in consolidated affiliates

     7,864         —          —          (7,864     —     

Intangible assets, net

     15         1,597        269        —          1,881   

Goodwill

     —           3,709        1,011        —          4,720   

Other long-term assets

     28         452        111        —          591   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 8,005       $ 6,398      $ 2,009      $ (7,864   $ 8,548   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY            

Total current liabilities

   $ 397       $ 616      $ 371      $ —        $ 1,384   

Long-term debt

     3,171         2        43        —          3,216   

Due to (from) consolidated affiliates

     524         (344     (180     —          —     

Other long-term liabilities

     655         12        23        —          690   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     4,747         286        257        —          5,290   

Total shareholders’ equity

     3,258         6,112        1,752        (7,864     3,258   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 8,005       $ 6,398      $ 2,009      $ (7,864   $ 8,548   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2012

 

(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

   $ (158   $ 523      $ 183      $ —        $ 548   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Capital expenditures, including capitalization of software costs

     (3     (107     (36     —          (146

Net proceeds from sale (purchases) of investments

     —          3        24        —          27   

Other investing activities

     538        (1     —          (540     (3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     535        (105     (12     (540     (122
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

Proceeds from long-term debt

     994        —          —          —          994   

Repayments of long-term debt, including premium and costs

     (897     (4     (45     —          (946

Purchases of treasury stock

     (580     —          —          —          (580

Other financing activities

     79        (431     (107     540        81   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities from continuing operations

     (404     (435     (152     540        (451
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents from continuing operations

     (27     (17     19        —          (25

Net cash flows from discontinued operations

     (5     —          —          —          (5

Beginning balance

     73        71        193        —          337   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 41      $ 54      $ 212      $ —        $ 307   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 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

   $ (19   $ 558      $ 142      $ —        $ 681   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Capital expenditures, including capitalization of software costs

     (12     (113     (19     —          (144

Payments for acquisitions of businesses, net of cash acquired

     —          (473     (38     —          (511

Net proceeds from sale (purchases) of investments

     —          2        (6     —          (4

Other investing activities

     116        42        1        (117     42   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     104        (542     (62     (117     (617
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

Proceeds from long-term debt

     1,143        —          46        —          1,189   

Repayments of long-term debt, including premium and costs

     (1,103     (2     —          —          (1,105

Purchases of treasury stock

     (484     —          —          —          (484

Other financing activities

     61        (16     (101     117        61   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities from continuing operations

     (383     (18     (55     117        (339
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents from continuing operations

     (298     (2     25        —          (275

Net cash flows from discontinued operations

     (7     —          —          —          (7

Beginning balance

     343        68        152        —          563   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 38      $ 66      $ 177      $ —        $ 281   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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; legislative and regulatory actions in the United States and internationally, including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and related regulations; our ability to successfully integrate acquisitions 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, 2011 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 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 consolidated statements of income by comparing the results for the three and nine months ended September 30, 2012 to the comparable periods in 2011.

 

   

Liquidity and capital resources. This section provides an analysis of our cash flows and a discussion of our outstanding debt as of September 30, 2012.

Overview

Company Background

We are a leading global provider of financial services technology. We provide account processing systems, electronic payments processing products and services, internet and mobile banking systems, and related services. 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-based fees under contracts that generally have terms of three to five years, and we have had high contract renewal rates with our clients. The majority of the services we provide are necessary for our clients to operate their business and are, therefore, non-discretionary in nature.

Our operations are primarily in the United States and are comprised of the Payments and Industry Products (“Payments”) segment and the Financial Institution Services (“Financial”) segment. The Payments segment primarily provides electronic bill payment and presentment services, debit and other card-based payment products and services, internet and mobile banking software and services, and other electronic payments software and services including account-to-account transfers and person-to-person payments. Our businesses in this segment also provide 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 and source

 

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capture services, loan origination and servicing products, cash management and consulting services, and other products and services that support numerous types of financial transactions. Corporate and Other primarily consists of unallocated corporate expenses, amortization of acquisition-related intangible assets and intercompany eliminations.

In September 2011, we acquired 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 invoicing and payments, and person-to-person payments, for approximately $460 million, net of cash acquired. The acquisition of CashEdge has advanced our digital payments strategy. In the first quarter of 2011, we acquired 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 enhanced our mobile and payments capabilities, and the other acquired companies added to or enhanced specific products or services that we provide.

Enterprise Priorities

We continue to implement a series of strategic initiatives to help accomplish our mission of providing integrated technology and services solutions that 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 our products and services through innovation. Our key enterprise priorities for 2012 are: (i) to deliver improved financial performance including an increased level of high quality revenue growth; (ii) to further center the Fiserv culture on growth resulting in more clients and deeper client relationships and to secure a higher share of strategic solutions; and (iii) to provide innovative solutions that increase differentiation and enhance results for our clients.

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. While financial institutions have generally remained cautious in their information technology spending, many institutions have become increasingly focused on investing in solutions that help them win and retain customers, generate incremental revenue and enhance their operating efficiency. Examples of these solutions include our digital channels and electronic payments solutions, including mobile banking and person-to-person payments. Despite the difficult environment over the past several years, our revenue increased 5% in 2011 compared to 2010 and 5% in the first nine months of 2012 compared to the same period in 2011, and our net income per share from continuing operations was $3.40 in the full year of 2011 and $3.16 in the first nine months of 2012. We believe these financial results demonstrate the resilience of our recurring fee-based revenue model, the largely non-discretionary nature of our products and services, and mild improvement in the general condition of the financial industry. In recent years, many of our financial institution clients have finalized their discretionary spending decisions later in the year. As a result, we have seen, and expect to continue to see, a larger percentage of our annual revenue and earnings occurring in the second half of the year. We anticipate that we will benefit over the long term from the trend of financial institutions moving from in-house technology solutions to outsourced solutions.

During the past 25 years, the number of financial institutions in the United States has declined at a relatively steady rate of approximately 3% per year, primarily as a result of voluntary mergers and acquisitions. In each of the past three years, approximately 1% of all financial institutions in the United States failed or were subject to government action; however, the number of government actions and the average size of institutions impacted by such actions decreased in 2011 as compared to 2010. In 2012, the number of government actions has continued to decline as compared to 2011. Although these reductions in the number of financial institutions resulted in the loss of a small number of our clients, 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. Contract termination fees are primarily generated when an existing client with a multi-year contract is acquired by another financial institution. These fees 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 has generated, and will continue to generate, numerous new regulations that will impact the financial industry. It is too early, however, 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 Popmoney® for person-to-person payments; MobilitiTM for mobile banking and payments services; account processing, including Acumen®, 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 opportunities in the marketplace.

Results of Operations

The following table presents certain amounts included in our 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 consolidated financial statements and accompanying notes.

 

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     Three Months Ended September 30,  
                 Percentage of
Revenue (1)
    Increase (Decrease)  
(In millions)    2012     2011     2012     2011     $     %  

Revenue:

            

Processing and services

   $ 933      $ 882        83.5     83.0   $ 51        6

Product

     185        181        16.5     17.0     4        2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     1,118        1,063        100.0     100.0     55        5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

            

Cost of processing and services

     494        490        52.9     55.6     4        1

Cost of product

     150        141        81.1     77.9     9        6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

     644        631        57.6     59.4     13        2

Selling, general and administrative

     207        189        18.5     17.8     18        10
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     851        820        76.1     77.1     31        4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     267        243        23.9     22.9     24        10

Interest expense

     (48     (45     (4.3 %)      (4.2 %)      3        7

Loss on early debt extinguishment

     —          (24     —          (2.3 %)      (24     (100 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 219      $ 174        19.6     16.4   $ 45        26
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Nine Months Ended September 30,  
                 Percentage of
Revenue (1)
    Increase (Decrease)  
(In millions)    2012     2011     2012     2011     $     %  

Revenue:

            

Processing and services

   $ 2,759      $ 2,628        83.0     82.7   $ 131        5

Product

     567        548        17.0     17.3     19        3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     3,326        3,176        100.0     100.0     150        5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

            

Cost of processing and services

     1,476        1,443        53.5     54.9     33        2

Cost of product

     464        436        81.8     79.6     28        6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

     1,940        1,879        58.3     59.2     61        3

Selling, general and administrative

     619        582        18.6     18.3     37        6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     2,559        2,461        76.9     77.5     98        4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     767        715        23.1     22.5     52        7

Interest expense

     (135     (144     (4.1 %)      (4.5 %)      (9     (6 %) 

Interest and investment income

     6        6        0.2     0.2     —          —     

Loss on early debt extinguishment

     —          (85     —          (2.7 %)      (85     (100 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 638      $ 492        19.2     15.5   $ 146        30
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Total revenue:

        

2012

   $ 617      $ 513      $ (12   $ 1,118   

2011

     587        487        (11     1,063   

Revenue growth

   $ 30      $ 26      $ (1   $ 55   

Revenue growth percentage

     5     5       5

Operating income:

        

2012

   $ 168      $ 165      $ (66   $ 267   

2011

     162        143        (62     243   

Operating income growth

   $ 6      $ 22      $ (4   $ 24   

Operating income growth percentage

     4     15       10

Operating margin:

        

2012

     27.3     32.1       23.9

2011

     27.6     29.4       22.9

Operating margin growth (1)

     (0.3 %)      2.7       1.0

 

     Nine Months Ended September 30,  
(In millions)    Payments     Financial     Corporate
and Other
    Total  

Total revenue:

        

2012

   $ 1,845      $ 1,516      $ (35   $ 3,326   

2011

     1,746        1,464        (34     3,176   

Revenue growth

   $ 99      $ 52      $ (1   $ 150   

Revenue growth percentage

     6     4       5

Operating income:

        

2012

   $ 489      $ 479      $ (201   $ 767   

2011

     482        435        (202     715   

Operating income growth

   $ 7      $ 44      $ 1      $ 52   

Operating income growth percentage

     1     10       7

Operating margin:

        

2012

     26.5     31.6       23.1

2011

     27.6     29.7       22.5

Operating margin growth (1)

     (1.1 %)      1.9       0.6

 

(1) 

Represents the percentage point growth or decline in operating margin.

Total Revenue

Total revenue increased $55 million, or 5%, in the third quarter of 2012 compared to 2011 and increased $150 million, or 5%, in the first nine months of 2012 compared to 2011. Revenue growth was driven by both our Payments and Financial segments in 2012. Revenue from acquired companies contributed $11 million to revenue in the third quarter of 2012 and $41 million to revenue in the first nine months of 2012.

 

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Revenue in our Payments segment in the third quarter and first nine months of 2012 increased $30 million, or 5%, and $99 million, or 6%, respectively, compared to 2011. Revenue from acquired companies totaled $11 million and $40 million in the third quarter and first nine months of 2012, respectively, and positively impacted segment revenue growth by approximately two percentage points in each period. Revenue growth in the Payments segment during the third quarter and first nine months of 2012 was also driven by new clients and increased transaction volumes from existing clients primarily in our card services business and our digital channels business, which includes our mobile banking solution. 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 one percentage point of revenue growth in both the third quarter and the first nine months of 2012. This positive growth for the first nine months of 2012 was partially offset by lower revenue in our electronic bill payment business, driven primarily by the loss of a client that was acquired by another financial institution.

Revenue in our Financial segment during the third quarter and first nine months of 2012 increased $26 million, or 5%, and $52 million, or 4%, respectively, compared to 2011. Financial segment revenue growth during 2012 was favorably impacted by increased processing and services revenue in our account processing, lending and consulting businesses, partially offset by volume declines in our check processing business.

Total Expenses

Total expenses increased $31 million and $98 million, or 4%, in the third quarter and first nine months of 2012, respectively, as compared to 2011. Total expenses as a percentage of total revenue declined 100 basis points from 77.1% in the third quarter of 2011 to 76.1% in the third quarter of 2012 and declined 60 basis points from 77.5% in the first nine months of 2011 to 76.9% in the first nine months of 2012, favorably impacting our operating margin in both periods.

Cost of processing and services as a percentage of processing and services revenue was 52.9% in the third quarter of 2012 compared to 55.6% in the third quarter of 2011 and was 53.5% in the first nine months of 2012 compared to 54.9% in the first nine months of 2011. The improvements in cost of processing and services as a percentage of revenue were primarily driven by increased operating leverage and operating efficiencies in our recurring revenue businesses.

Cost of product as a percentage of product revenue was 81.1% in the third quarter of 2012 compared to 77.9% in the third quarter of 2011 and was 81.8% in the first nine months of 2012 compared to 79.6% in the first nine months of 2011. The increase in cost of product as a percentage of revenue in 2012 was primarily due to an increase in postage pass-through revenue and expenses in our output solutions business as well as lower software license revenue for the first nine months of 2012 as compared to 2011.

Selling, general and administrative expenses as a percentage of total revenue was 18.5% in the third quarter of 2012 compared to 17.8% in the third quarter of 2011 and was relatively consistent in the first nine months of 2012 at 18.6% compared to 18.3% in the first nine months of 2011. The increases were primarily due to higher selling, general and administrative expenses associated with our acquisition of CashEdge.

Operating Income and Operating Margin

Total operating income increased $24 million, or 10%, to $267 million in the third quarter of 2012 compared to 2011 and increased $52 million, or 7%, to $767 million in the first nine months of 2012 compared to 2011. Our total operating margin increased 100 basis points to 23.9% in the third quarter of 2012 compared to the third quarter of 2011 and increased 60 basis points to 23.1% in the first nine months of 2012 compared to the same period in 2011.

Operating income in our Payments segment increased $6 million, or 4%, in the third quarter of 2012 compared to 2011, and operating margin decreased 30 basis points to 27.3% in the third quarter of 2012 compared to 2011. In the first nine months of 2012 compared to 2011, operating income in our Payments segment increased $7 million, or 1%, and operating margin decreased 110 basis points to 26.5%. Payments segment operating margin in 2012 was negatively impacted by increased expenses associated with the development, support and integration of new products and services, including Popmoney for person-to-person payments and Mobiliti for mobile banking and payments services, lower revenue in our electronic bill payment business driven primarily by the loss of a client that was acquired by another financial institution, and higher professional services and delivery costs associated with a few large current client implementations in our internet banking business. In addition, operating margin in 2012 was negatively impacted by increased postage pass-through costs, which are included in both revenue and expenses.

 

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Operating income in our Financial segment increased $22 million, or 15%, and $44 million, or 10%, in the third quarter and first nine months of 2012, respectively, compared to 2011. Operating margin increased 270 basis points to 32.1% in the third quarter of 2012 compared to 2011 and 190 basis points to 31.6% in the first nine months of 2012 compared to 2011. The increases in operating income and improved operating margin in 2012 were primarily due to revenue growth and scale efficiencies in our account processing and lending businesses, operating efficiencies in our item processing business, increased higher margin revenue including contract termination fees, and the continued implementation of our operating effectiveness initiatives.

Interest Expense

Interest expense increased $3 million, or 7%, to $48 million in the third quarter of 2012 compared to 2011 primarily due to $4 million of expense associated with hedge ineffectiveness recognized upon the settlement of our forward-starting interest rate swap agreements (“Forward-Starting Swaps”) in September of 2012. Interest expense decreased $9 million, or 6%, to $135 million in the first nine months of 2012 compared to 2011 primarily due to lower average interest rates.

Loss on Early Debt Extinguishment

In 2011 we issued $1 billion aggregate principal amount of senior notes in a public offering and used the proceeds from this offering to repay our senior notes which were due in 2012. We recorded a pre-tax loss on early debt extinguishment for the premiums paid and other costs associated with the senior notes we repurchased of $24 million and $85 million in the third quarter and first nine months of 2011, respectively.

Income Tax Provision

Our effective income tax rate was 36.8% and 32.8% in the third quarter and first nine months of 2012, respectively, and was 31.8% and 34.2% in the third quarter and first nine months of 2011, respectively. The higher effective tax rate for the third quarter of 2012 of 36.8% compared to the prior year rate of 31.8% is primarily due to the resolutions of tax audits and the reversal of a purchase accounting income tax reserve due to a favorable resolution of a tax matter in the third quarter of 2011 which favorably impacted the prior period rate. The lower effective tax rate for the first nine months of 2012 as compared to 2011 was primarily due to increased deductions resulting from federal tax planning initiatives, including the associated discrete tax benefits. We anticipate that our full year effective tax rate will be approximately 34% in 2012 and that our effective tax rate for the fourth quarter of 2012 will be approximately 37%.

Net Income Per Share – Diluted from Continuing Operations

Net income per share-diluted from continuing operations was $1.03 and $0.89 in the third quarter of 2012 and 2011, respectively, and was $3.16 and $2.33 in the first nine months of 2012 and 2011, respectively. In the third quarter and first nine months of 2011, net income per share-diluted from continuing operations was negatively impacted by $0.11 per share and $0.37 per share, respectively, due to losses on early debt extinguishment. The amortization of acquisition-related intangible assets reduced net income per share-diluted from continuing operations by $0.19 per share and $0.17 per share in the third quarters of 2012 and 2011, respectively, and $0.56 per share and $0.51 per share for the first nine months of 2012 and 2011, respectively.

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; and (iii) to fund capital expenditures and operating lease payments. We believe these needs will be satisfied using cash flow generated by our operations, our cash and cash equivalents of $307 million at September 30, 2012 and available borrowings under our revolving credit facility.

 

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     Nine Months Ended
September 30,
    Increase (Decrease)  
(In millions)    2012     2011     $     %  

Income from continuing operations

   $ 438      $ 338      $ 100     

Depreciation and amortization

     265        259        6     

Share-based compensation

     35        29        6     

Deferred income taxes

     (11     36        (47  

Settlement of interest rate hedge contracts

     (88     (6     (82  

Loss on early debt extinguishment

     —          85        (85  

Dividend from unconsolidated affiliate

     —          12        (12  

Net changes in working capital and other

     (91     (72     (19  
  

 

 

   

 

 

   

 

 

   

Operating cash flow

   $ 548      $ 681      $ (133     (20 %) 

Capital expenditures

   $ 146      $ 144      $ 2        1

Our net cash provided by operating activities, or operating cash flow, was $548 million in the first nine months of 2012, a decrease of 20% compared with $681 million in 2011 primarily due to a payment of $88 million in the third quarter of 2012 for the settlement of Forward-Starting Swaps and due to working capital changes. Working capital was negatively impacted by an increase in payments for discretionary and incentive-based employee compensation, which were accrued for in 2011, including company 401k profit sharing contributions, and higher income tax payments in 2012 compared to 2011. 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 in the first nine months of 2012 remained relatively consistent with the same period in 2011 and were less than 5% of our total revenue in each period.

During the first nine months of 2012, we purchased $577 million of our common stock. As of September 30, 2012, we had approximately six million shares remaining under our existing authorization. Shares repurchased are generally held for issuance in connection with our equity plans.

Long-Term Debt

 

(In millions)    September 30,
2012
     December 31,
2011
 

Senior term loan

   $ 500       $ 1,100   

3.125% senior notes due 2015

     300         299   

3.125% senior notes due 2016

     600         599   

6.8% senior notes due 2017

     500         500   

4.625% senior notes due 2020

     449         449   

4.75% senior notes due 2021

     399         399   

3.5% senior notes due 2022

     697         —     

Other borrowings

     4         49   
  

 

 

    

 

 

 

Long-term debt (including current maturities)

   $ 3,449       $ 3,395   
  

 

 

    

 

 

 

At September 30, 2012, our senior notes outstanding approximated $3 billion, and our unsecured senior term loan borrowings were $500 million. 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. The senior term loan contains various restrictions and covenants substantially similar to those contained in the revolving credit facility described below. At September 30, 2012 and December 31, 2011, $500 million and $925 million, respectively, of our term loan borrowings, which mature in November 2012, were classified in the consolidated balance sheets as long-term debt because we have the intent to refinance this debt on a long-term basis and could do so under our revolving credit facility.

In September 2012, we issued $700 million aggregate principal amount of 3.5% senior notes due in October 2022. The notes pay interest semi-annually on April 1 and October 1, commencing on April 1, 2013. The interest rate applicable to these notes is subject to an increase of up to two percent in the event that our credit rating is downgraded below investment grade. The indenture governing the senior notes contains covenants that, among other matters, limit (i) our ability to consolidate or

 

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merge into, or convey, transfer or lease all or substantially all of our properties and assets to, another person, (ii) our and certain of our subsidiaries’ ability to create or assume liens, and (iii) our and certain of our subsidiaries’ ability to engage in sale and leaseback transactions. Net proceeds from the issuance of the notes were primarily used to repay a portion of our term loan due in November 2012.

In August 2012, we entered into a $2.0 billion Amended and Restated Credit Agreement with a syndicate of banks, replacing our existing $1.0 billion revolving credit facility, which was scheduled to expire in September 2014. Borrowings under the amended 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 facility expires on August 1, 2017 and contains various restrictions and covenants that require us, among other things, to (i) limit our consolidated indebtedness as of the end of each fiscal quarter to no more than three and one-half times consolidated net earnings before interest, taxes, depreciation and amortization and certain other adjustments during the period of four fiscal quarters then ended, and (ii) maintain consolidated net earnings before interest, taxes, depreciation and amortization and certain other adjustments of at least three times consolidated interest expense as of the end of each fiscal quarter for the period of four fiscal quarters then ended. As of September 30, 2012, there were no borrowings outstanding under the facility. During the first nine months of 2012, we were in compliance with all financial debt covenants.

To manage exposure to fluctuations in interest rates, we maintained Forward-Starting Swaps, designated as cash flow hedges, with a total notional value of $550 million to hedge against changes in interest rates applicable to forecasted five-year and ten-year fixed rate borrowings. Upon the issuance of senior notes in September 2012, we paid $88 million to settle the Forward-Starting Swaps and recognized approximately $4 million of interest expense due to hedge ineffectiveness. The remaining $84 million is recorded in accumulated other comprehensive loss, net of income taxes of $33 million, and will be recognized as interest expense over the terms of the originally forecasted interest payments. In addition, we maintained interest rate swap agreements (“Swaps”), designated as cash flow hedges, with a total notional value of $1.0 billion to hedge against changes in interest rates on floating rate term loan borrowings. The Swaps, which expired in September 2012, effectively fixed the interest rate on floating rate term loan borrowings at a weighted-average rate of approximately 5.0% prior to financing spreads and related fees. There were no Swaps outstanding as of September 30, 2012.

 

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, 2011 and have not materially changed since December 31, 2011.

 

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 September 30, 2012.

Changes in internal control over financial reporting

There was no change in our internal control over financial reporting that occurred during the quarter ended September 30, 2012 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 September 30, 2012:

 

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)
 

July 1-31, 2012

     —              —           8,864,590   

August 1-31, 2012

     1,869,000       $ 70.62         1,869,000         6,995,590   

September 1-30, 2012

     785,000         72.48         785,000         6,210,590   
  

 

 

       

 

 

    

Total

     2,654,000            2,654,000      
  

 

 

       

 

 

    

 

(1)

On February 22, 2012, our board of directors authorized the purchase of up to ten million shares of our common stock. This authorization does 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.

 

23


Table of Contents

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: October 31, 2012   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    Amended and Restated Credit Agreement, dated as of August 1, 2012, among Fiserv, Inc. and the financial institutions parties thereto. (1)
4.2    Tenth Supplemental Indenture, dated as of September 25, 2012, among Fiserv, Inc., the guarantors named therein and U.S. Bank National Association. (2)
31.1    Certification of the Chief Executive Officer, dated October 31, 2012
31.2    Certification of the Chief Financial Officer, dated October 31, 2012
32    Certification of the Chief Executive Officer and Chief Financial Officer, dated October 31, 2012
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

 

* Filed with this quarterly report on Form 10-Q are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Income for the three and nine months ended September 30, 2012 and 2011, (ii) the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2012 and 2011, (iii) the Consolidated Balance Sheets at September 30, 2012 and December 31, 2011, (iv) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011, and (v) Notes to Consolidated Financial Statements.
(1) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed on August 2, 2012 and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed on September 25, 2012 and incorporated herein by reference.