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 June 30, 2013

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 25, 2013, there were 130,090,406 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      17   
Item 3.   Quantitative and Qualitative Disclosures About Market Risk      25   
Item 4.   Controls and Procedures      25   
PART II—OTHER INFORMATION   
Item 1.   Legal Proceedings      26   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      26   
Item 6.   Exhibits      26   
  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
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  

Revenue:

        

Processing and services

   $ 1,015      $ 904      $ 1,981      $ 1,802   

Product

     183        183        369        382   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     1,198        1,087        2,350        2,184   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Cost of processing and services

     523        471        1,045        965   

Cost of product

     157        155        347        314   

Selling, general and administrative

     245        204        474        409   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     925        830        1,866        1,688   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     273        257        484        496   

Interest expense

     (41     (44     (82     (87

Interest and investment income

     —          6        —          6   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     232        219        402        415   

Income tax provision

     (81     (60     (139     (127

Income from investment in unconsolidated affiliate

     1        3        6        6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     152        162        269        294   

Loss from discontinued operations, net of income taxes

     (1     (1     (1     (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 151      $ 161      $ 268      $ 293   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share—basic:

        

Continuing operations

   $ 1.15      $ 1.19      $ 2.02      $ 2.13   

Discontinued operations

     (0.01     (0.01     (0.01     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1.14      $ 1.18      $ 2.02      $ 2.13   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share—diluted:

        

Continuing operations

   $ 1.13      $ 1.17      $ 2.00      $ 2.11   

Discontinued operations

     (0.01     (0.01     (0.01     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1.13      $ 1.17      $ 1.99      $ 2.10   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Basic

     132.5        136.1        133.0        137.4   

Diluted

     134.3        137.8        134.7        139.1   

See accompanying notes to consolidated financial statements.

 

1


Table of Contents

Fiserv Inc.

Consolidated Statements of Comprehensive Income

(In millions)

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  

Net income

   $ 151      $ 161      $ 268      $ 293   

Other comprehensive income (loss):

        

Fair market value adjustment on cash flow hedges, net of income taxes of $1 million, $9 million, $1 million and $7 million

     (2     (14     (2     (10

Reclassification adjustment for net realized losses on cash flow hedges included in interest expense, net of income taxes of $1 million, $5 million, $3 million and $9 million

     2        7        5        14   

Foreign currency translation

     (5     (4     (10     1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     (5     (11     (7     5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 146      $ 150      $ 261      $ 298   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

2


Table of Contents

Fiserv, Inc.

Consolidated Balance Sheets

(In millions)

(Unaudited)

 

     June 30,
2013
    December 31,
2012
 
Assets     

Cash and cash equivalents

   $ 320      $ 358   

Trade accounts receivable, net

     691        661   

Deferred income taxes

     59        42   

Prepaid expenses and other current assets

     384        349   

Assets of discontinued operations

     —          33   
  

 

 

   

 

 

 

Total current assets

     1,454        1,443   

Property and equipment, net

     255        248   

Intangible assets, net

     2,209        1,744   

Goodwill

     5,231        4,705   

Other long-term assets

     285        357   
  

 

 

   

 

 

 

Total assets

   $ 9,434      $ 8,497   
  

 

 

   

 

 

 
Liabilities and Shareholders’ Equity     

Accounts payable and accrued expenses

   $ 761      $ 721   

Current maturities of long-term debt

     2        2   

Deferred revenue

     410        379   

Liabilities of discontinued operations

     —          3   
  

 

 

   

 

 

 

Total current liabilities

     1,173        1,105   

Long-term debt

     3,951        3,228   

Deferred income taxes

     694        638   

Other long-term liabilities

     153        109   
  

 

 

   

 

 

 

Total liabilities

     5,971        5,080   
  

 

 

   

 

 

 

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

     821        804   

Accumulated other comprehensive loss

     (67     (60

Retained earnings

     6,218        5,950   

Treasury stock, at cost, 66.8 million and 64.5 million shares

     (3,511     (3,279
  

 

 

   

 

 

 

Total shareholders’ equity

     3,463        3,417   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 9,434      $ 8,497   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

3


Table of Contents

Fiserv, Inc.

Consolidated Statements of Cash Flows

(In millions)

(Unaudited)

 

     Six Months Ended
June 30,
 
     2013     2012  

Cash flows from operating activities:

    

Net income

   $ 268      $ 293   

Adjustment for discontinued operations

     1        1   

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

    

Depreciation and other amortization

     97        93   

Amortization of acquisition-related intangible assets

     103        80   

Share-based compensation

     26        25   

Deferred income taxes

     (26     (2

Non-cash impairment charge

     30        —     

Dividend from unconsolidated affiliate

     6        —     

Other non-cash items

     (12     (16

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

    

Trade accounts receivable

     13        61   

Prepaid expenses and other assets

     (45     (42

Accounts payable and other liabilities

     (40     (88

Deferred revenue

     (24     (25
  

 

 

   

 

 

 

Net cash provided by operating activities from continuing operations

     397        380   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Capital expenditures, including capitalization of software costs

     (110     (101

Payment for acquisition of business, net of cash acquired

     (16     —     

Dividend from unconsolidated affiliate

     116        —     

Net proceeds from sale of investments

     —          6   

Other investing activities

     —          (2
  

 

 

   

 

 

 

Net cash used in investing activities from continuing operations

     (10     (97
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from long-term debt

     1,210        156   

Repayments of long-term debt

     (1,444     (138

Issuance of treasury stock

     24        52   

Purchases of treasury stock

     (254     (396

Other financing activities

     7        7   
  

 

 

   

 

 

 

Net cash used in financing activities from continuing operations

     (457     (319
  

 

 

   

 

 

 

Net change in cash and cash equivalents from continuing operations

     (70     (36

Net cash flows from discontinued operations

     32        1   

Beginning balance

     358        337   
  

 

 

   

 

 

 

Ending balance

   $ 320      $ 302   
  

 

 

   

 

 

 

Discontinued operations cash flow information:

    

Net cash (used in) provided by operating activities

   $ (3   $ 2   

Net cash provided by (used in) investing activities

     35        (1
  

 

 

   

 

 

 

Net change in cash and cash equivalents from discontinued operations

     32        1   

Net cash flows to continuing operations

     (32     (1

Beginning balance—discontinued operations

     —          —     
  

 

 

   

 

 

 

Ending balance—discontinued operations

   $ —        $ —     
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

4


Table of Contents

Fiserv, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

1. Principles of Consolidation

The consolidated financial statements for the three-month and six-month periods ended June 30, 2013 and 2012 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, 2012.

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 but not control 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 consolidated 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, and accounts payable approximate their respective carrying values due to the short period of time to maturity. The estimated fair value of total debt was $4.1 billion at June 30, 2013 and $3.5 billion at December 31, 2012 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. Acquisition

On January 14, 2013, the Company acquired Open Solutions Inc. (“Open Solutions”), a provider of account processing technology for financial institutions, for a cash purchase price of $55 million. The Company also assumed approximately $960 million of debt in connection with the acquisition. This acquisition advances the Company’s go-to-market strategies by adding a number of products and services and by expanding the number of account processing clients to which the Company can provide a broad array of its add-on solutions.

 

5


Table of Contents

The preliminary allocation of purchase price recorded for Open Solutions is as follows:

 

(In millions)

      

Cash and cash equivalents

   $ 39   

Trade accounts receivable

     41   

Prepaid expenses and other current assets

     41   

Intangible assets

     571   

Goodwill

     531   

Other long-term assets

     18   

Accounts payable and other current liabilities

     (140

Long-term debt, less current maturities

     (952

Other long-term liabilities

     (94
  

 

 

 

Total cash purchase price

   $ 55   
  

 

 

 

The cash purchase price and repayment of assumed debt were funded utilizing a combination of available cash and existing availability under the Company’s revolving credit facility. The amounts attributed to goodwill and intangible assets are based on preliminary valuations and are subject to final adjustment. The preliminary purchase price allocation resulted in goodwill, included within the Financial Institution Services (“Financial”) segment, of approximately $531 million, of which $161 million is expected to be deductible for tax purposes. Such goodwill is primarily attributable to synergies with the products and services that Open Solutions provides and the anticipated value of selling the Company’s products and services to Open Solutions’ existing client base. The preliminary values allocated to intangible assets are as follows:

 

(In millions)

   Gross
Carrying
Amount
     Weighted-
Average
Useful Life
 

Customer related intangible assets

   $ 460         20 years   

Acquired software and technology

     105         7 years   

Trade name

     6         10 years   
  

 

 

    
   $ 571      
  

 

 

    

The results of operations for Open Solutions, including $76 million and $135 million of revenue, respectively, during the three and six months ended June 30, 2013, have been included within the Financial segment from the date of acquisition. As a result of the acquisition, the Company has incurred certain merger and integration costs, including a $30 million non-cash impairment charge related to the Company’s decision to replace its existing Acumen® account processing platform with DNATM, an Open Solutions account processing platform. The Acumen platform costs were recorded as capitalized software and included in the Financial segment assets. The related impairment charge was recorded in cost of product within the Corporate and Other segment in the first quarter of 2013 as this charge is excluded from the Company’s measure of the Financial segment’s operating performance.

The following unaudited supplemental pro forma information presents the Company’s results of operations as though the acquisition of Open Solutions had occurred on January 1, 2012. This information is presented for informational purposes and is not necessarily indicative of the Company’s operating results which would have occurred had the acquisition been consummated as of that date. The pro forma information presented below does not include anticipated synergies, the impact of purchase accounting adjustments or certain other expected benefits of the acquisition and should not be used as a predictive measure of our future results of operations.

 

6


Table of Contents
     (Pro Forma Unaudited)  

(In millions, except per share data)

   Three Months Ended
June 30, 2012
     Six Months Ended
June 30, 2012
 

Total revenue

   $ 1,173       $ 2,355   

Net income

   $ 164       $ 302   

Net income per share—basic

   $ 1.20       $ 2.20   

Net income per share—diluted

   $ 1.19       $ 2.17   

4. Discontinued Operations

On March 14, 2013, the Company sold its club solutions business (“Club Solutions”) for approximately $37 million in cash at closing. The assets, liabilities, results of operations and cash flows of Club Solutions, which were previously included within the Payments and Industry Products (“Payments”) segment, have been reported as discontinued operations in the accompanying consolidated financial statements for all periods presented. During 2013, Club Solutions revenue was $10 million, and the Company recognized a $2 million loss, net of income taxes, on the sale of the business. Club Solutions revenue was $11 million and $23 million, during the three and six months ended June 30, 2012, respectively. The assets of discontinued operations at December 31, 2012 primarily consist of certain intangible assets, including software, customer related intangibles and goodwill.

5. Share-Based Compensation

The Company recognized $12 million and $26 million of share-based compensation expense during the three and six months ended June 30, 2013, respectively, and $11 million and $25 million of share-based compensation expense during the three and six months ended June 30, 2012, respectively. The Company’s annual grant of share-based awards generally occurs in the first quarter. During the six months ended June 30, 2013, the Company granted 1.0 million stock options and 0.4 million restricted stock units at weighted-average estimated fair values of $25.31 and $81.24, respectively. During the six months ended June 30, 2012, the Company granted 1.0 million stock options and 0.4 million restricted stock units at weighted-average estimated fair values of $21.58 and $65.33, respectively. During the six months ended June 30, 2013 and 2012, stock options to purchase 0.4 million shares and 1.0 million shares, respectively, were exercised.

6. 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      Six Months Ended  
     June 30,      June 30,  

(In millions)

   2013      2012      2013      2012  

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

     132.5         136.1         133.0         137.4   

Common stock equivalents

     1.8         1.7         1.7         1.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     134.3         137.8         134.7         139.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the three months ended June 30, 2013 and 2012, stock options for 0.9 million and 1.7 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, 2013 and 2012, stock options for 0.7 million and 1.5 million shares, respectively, were excluded from the calculation of diluted weighted-average outstanding shares because their impact was anti-dilutive.

 

7


Table of Contents

7. Intangible Assets

Intangible assets consisted of the following:

 

(In millions)

   Gross
Carrying
Amount
     Accumulated
Amortization
     Net Book
Value
 

June 30, 2013

        

Customer related intangible assets

   $ 2,155       $ 600       $ 1,555   

Acquired software and technology

     483         255         228   

Trade names

     120         33         87   

Capitalized software development costs

     653         393         260   

Purchased software

     308         229         79   
  

 

 

    

 

 

    

 

 

 

Total

   $ 3,719       $ 1,510       $ 2,209   
  

 

 

    

 

 

    

 

 

 

(In millions)

   Gross
Carrying
Amount
     Accumulated
Amortization
     Net Book
Value
 

December 31, 2012

        

Customer related intangible assets

   $ 1,695       $ 534       $ 1,161   

Acquired software and technology

     378         222         156   

Trade names

     114         29         85   

Capitalized software development costs

     667         398         269   

Purchased software

     325         252         73   
  

 

 

    

 

 

    

 

 

 

Total

   $ 3,179       $ 1,435       $ 1,744   
  

 

 

    

 

 

    

 

 

 

The Company estimates that annual amortization expense with respect to acquired intangible assets, which include customer related intangible assets, acquired software and technology, and trade names, will be approximately $210 million in 2013, approximately $200 million in 2014, approximately $190 million in 2015, approximately $150 million in 2016 and approximately $140 million in 2017. Annual amortization expense in 2013 with respect to capitalized and purchased software is estimated to approximate $110 million.

8. Investment in Unconsolidated Affiliate

The Company owns a 49% interest in StoneRiver Group, L.P. (“StoneRiver”), which is accounted for as an equity method investment, and reports its share of StoneRiver’s net income as income from investment in unconsolidated affiliate. The Company’s investment in StoneRiver was $78 million at December 31, 2012 and was reported within other long-term assets in the consolidated balance sheet. In the second quarter of 2013, the Company received a $122 million cash dividend from StoneRiver, distributed from excess proceeds from a recent recapitalization transaction. The dividend exceeded the Company’s investment carrying amount, resulting in the reduction of its investment balance to zero, with the excess cash dividend of $38 million recorded within other long-term liabilities in the consolidated balance sheet at June 30, 2013. Although the Company does not maintain a legal obligation to fund any of the liabilities or potential operating deficits of StoneRiver, it intends to provide future financial support, based upon its continuing assessment of various factors, should the need arise. A portion, or $6 million, of the dividend represents a return on the Company’s investment and was reported as cash flows from operating activities.

 

8


Table of Contents

9. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of the following:

 

     June 30,      December 31,  

(In millions)

   2013      2012  

Trade accounts payable

   $ 58       $ 97   

Settlement obligations

     220         216   

Client deposits

     167         147   

Accrued compensation and benefits

     110         144   

Other accrued expenses

     206         117   
  

 

 

    

 

 

 

Total

   $ 761       $ 721   
  

 

 

    

 

 

 

10. Long-Term Debt

The Company maintains a $2.0 billion revolving credit facility with a syndicate of banks. Borrowings under this facility bear interest at a variable rate, 1.3% at June 30, 2013, 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. During the first six months of 2013, the Company was in compliance with all financial debt covenants. As of June 30, 2013, borrowings outstanding under the facility approximated $1.0 billion, primarily related to the funding of assumed debt from the acquisition of Open Solutions.

11. Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss, net of income taxes, consisted of the following:

 

(In millions)

   Cash Flow
Hedges
    Foreign
Currency
Translation
    Other     Total  

Balance at December 31, 2012

   $ (57   $ (1   $ (2   $ (60
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss before reclassifications

     (2     (10     —          (12

Amounts reclassified from accumulated other comprehensive loss

     5        —          —          5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive (loss) income

     3        (10     —          (7
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

   $ (54   $ (11   $ (2   $ (67
  

 

 

   

 

 

   

 

 

   

 

 

 

Based on the amounts recorded in accumulated other comprehensive loss at June 30, 2013, 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


Table of Contents

12. Cash Flow Information

Supplemental cash flow information was as follows:

 

     Six Months Ended
June 30,
 

(In millions)

   2013      2012  

Interest paid, including on assumed debt

   $ 91       $ 84   

Income taxes paid from continuing operations

     135         169   

Liabilities assumed in acquisition of business

     1,186         —     

Treasury stock purchases settled after the balance sheet date

     17         —     

13. Business Segment Information

The Company’s operations are comprised of the Payments segment and the 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. The Corporate and Other segment primarily consists of unallocated corporate expenses, amortization of acquisition-related intangible assets, intercompany eliminations and other costs that are not considered when management evaluates segment performance.

 

10


Table of Contents
                   Corporate        

(In millions)

   Payments      Financial      and Other     Total  

Three Months Ended June 30, 2013

          

Processing and services revenue

   $ 477       $ 541       $ (3   $ 1,015   

Product revenue

     149         43         (9     183   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenue

   $ 626       $ 584       $ (12   $ 1,198   
  

 

 

    

 

 

    

 

 

   

 

 

 

Operating income

   $ 179       $ 186       $ (92   $ 273   
  

 

 

    

 

 

    

 

 

   

 

 

 

Three Months Ended June 30, 2012

          

Processing and services revenue

   $ 438       $ 469       $ (3   $ 904   

Product revenue

     158         33         (8     183   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenue

   $ 596       $ 502       $ (11   $ 1,087   
  

 

 

    

 

 

    

 

 

   

 

 

 

Operating income

   $ 157       $ 163       $ (63   $ 257   
  

 

 

    

 

 

    

 

 

   

 

 

 

Six Months Ended June 30, 2013

          

Processing and services revenue

   $ 930       $ 1,057       $ (6   $ 1,981   

Product revenue

     313         76         (20     369   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenue

   $ 1,243       $ 1,133       $ (26   $ 2,350   
  

 

 

    

 

 

    

 

 

   

 

 

 

Operating income

   $ 345       $ 347       $ (208   $ 484   
  

 

 

    

 

 

    

 

 

   

 

 

 

Six Months Ended June 30, 2012

          

Processing and services revenue

   $ 873       $ 934       $ (5   $ 1,802   

Product revenue

     331         69         (18     382   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenue

   $ 1,204       $ 1,003       $ (23   $ 2,184   
  

 

 

    

 

 

    

 

 

   

 

 

 

Operating income

   $ 315       $ 314       $ (133   $ 496   
  

 

 

    

 

 

    

 

 

   

 

 

 

Goodwill in the Payments segment was $3.4 billion as of June 30, 2013 and December 31, 2012. Goodwill in the Financial segment was $1.8 billion and $1.3 billion as of June 30, 2013 and December 31, 2012, respectively.

14. 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 and senior notes. Under the indentures governing the senior notes, a guarantee of a Guarantor Subsidiary will terminate upon the following customary circumstances: the sale of such Guarantor Subsidiary if such sale complies with the indenture; if such Guarantor Subsidiary no longer guarantees certain other indebtedness of the Company, including as a result of the release of the Guarantor Subsidiaries if Standard & Poor’s and Moody’s Investors Service, Inc. increase the Company’s credit rating to A- and A3, respectively; or the defeasance or discharge of the indenture. 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. The following condensed consolidating financial information reflects the reporting of Club Solutions as a discontinued operation for all periods presented.

 

11


Table of Contents

Condensed Consolidating Statement of Income and Comprehensive Income

Three Months Ended June 30, 2013

 

(In millions)

   Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenue:

          

Processing and services

   $ —        $ 724      $ 332      $ (41   $ 1,015   

Product

     —          170        29        (16     183   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     —          894        361        (57     1,198   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

          

Cost of processing and services

     —          356        208        (41     523   

Cost of product

     —          152        21        (16     157   

Selling, general and administrative

     31        160        54        —          245   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     31        668        283        (57     925   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (31     226        78        —          273   

Interest expense, net

     (32     (5     (4     —          (41
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (63     221        74        —          232   

Income tax (provision) benefit

     26        (82     (25     —          (81

Income from investment in unconsolidated affiliate

     —          1        —          —          1   

Equity in earnings of consolidated affiliates

     189        —          —          (189     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     152        140        49        (189     152   

Loss from discontinued operations, net of income taxes

     (1     —          —          —          (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 151      $ 140      $ 49      $ (189   $ 151   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 146      $ 140      $ 44      $ (184   $ 146   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Income and Comprehensive Income

Three Months Ended June 30, 2012

 

(In millions)

   Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenue:

          

Processing and services

   $ —        $ 640      $ 309      $ (45   $ 904   

Product

     —          173        23        (13     183   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     —          813        332        (58     1,087   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

          

Cost of processing and services

     —          338        178        (45     471   

Cost of product

     —          153        15        (13     155   

Selling, general and administrative

     26        123        55        —          204   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     26        614        248        (58     830   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (26     199        84        —          257   

Interest (expense) income, net

     (25     (16     3        —          (38
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (51     183        87        —          219   

Income tax (provision) benefit

     38        (65     (33     —          (60

Income from investment in unconsolidated affiliate

     —          3        —          —          3   

Equity in earnings of consolidated affiliates

     175        —          —          (175     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     162        121        54        (175     162   

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

     (1     1        —          (1     (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 161      $ 122      $ 54      $ (176   $ 161   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 150      $ 122      $ 50      $ (172   $ 150   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

12


Table of Contents

Condensed Consolidating Statement of Income and Comprehensive Income

Six Months Ended June 30, 2013

 

(In millions)

   Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenue:

          

Processing and services

   $ —        $ 1,437      $ 625      $ (81   $ 1,981   

Product

     —          352        51        (34     369   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     —          1,789        676        (115     2,350   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

          

Cost of processing and services

     —          740        386        (81     1,045   

Cost of product

     —          339        42        (34     347   

Selling, general and administrative

     59        304        111        —          474   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     59        1,383        539        (115     1,866   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (59     406        137        —          484   

Interest expense, net

     (64     (11     (7     —          (82
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (123     395        130        —          402   

Income tax (provision) benefit

     52        (144     (47     —          (139

Income from investment in unconsolidated affiliate

     —          6        —          —          6   

Equity in earnings of consolidated affiliates

     340        —          —          (340     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     269        257        83        (340     269   

Loss from discontinued operations, net of income taxes

     (1     —          —          —          (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 268      $ 257      $ 83      $ (340   $ 268   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 261      $ 257      $ 73      $ (330   $ 261   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Income and Comprehensive Income

Six Months Ended June 30, 2012

 

(In millions)

   Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenue:

          

Processing and services

   $ —        $ 1,286      $ 593      $ (77   $ 1,802   

Product

     —          363        50        (31     382   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     —          1,649        643        (108     2,184   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

          

Cost of processing and services

     —          685        357        (77     965   

Cost of product

     —          312        33        (31     314   

Selling, general and administrative

     49        246        114        —          409   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     49        1,243        504        (108     1,688   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (49     406        139        —          496   

Interest expense, net

     (52     (29     —          —          (81
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (101     377        139        —          415   

Income tax (provision) benefit

     63        (138     (52     —          (127

Income from investment in unconsolidated affiliate

     —          6        —          —          6   

Equity in earnings of consolidated affiliates

     332        —          —          (332     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     294        245        87        (332     294   

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

     (1     2        —          (2     (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 293      $ 247      $ 87      $ (334   $ 293   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 298      $ 247      $ 88      $ (335   $ 298   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

13


Table of Contents

Condensed Consolidating Balance Sheet

June 30, 2013

 

(In millions)

   Parent
Company
     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  
Assets            

Cash and cash equivalents

   $ 32       $ 68      $ 220      $ —        $ 320   

Trade accounts receivable, net

     —           452        239        —          691   

Prepaid expenses and other current assets

     60         248        135        —          443   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     92         768        594        —          1,454   

Investments in consolidated affiliates

     9,839         —          —          (9,839     —     

Intangible assets, net

     22         1,960        227        —          2,209   

Goodwill

     —           4,171        1,060        —          5,231   

Other long-term assets

     50         387        103        —          540   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 10,003       $ 7,286      $ 1,984      $ (9,839   $ 9,434   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
Liabilities and Shareholders’ Equity            

Accounts payable and accrued expenses

   $ 109       $ 456      $ 196      $ —        $ 761   

Current maturities of long-term debt

     —           2        —          —          2   

Deferred revenue

     —           254        156        —          410   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     109         712        352        —          1,173   

Long-term debt

     3,948         3        —          —          3,951   

Due to (from) consolidated affiliates

     1,725         (1,408     (317     —          —     

Other long-term liabilities

     758         60        29        —          847   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     6,540         (633     64        —          5,971   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     3,463         7,919        1,920        (9,839     3,463   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 10,003       $ 7,286      $ 1,984      $ (9,839   $ 9,434   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

14


Table of Contents

Condensed Consolidating Balance Sheet

December 31, 2012

 

(In millions)

   Parent
Company
     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  
Assets            

Cash and cash equivalents

   $ 85       $ 66      $ 207      $ —        $ 358   

Trade accounts receivable, net

     —           403        258        —          661   

Prepaid expenses and other current assets

     45         186        160        —          391   

Assets of discontinued operations

     —           33        —          —          33   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     130         688        625        —          1,443   

Investments in consolidated affiliates

     8,498         —          —          (8,498     —     

Intangible assets, net

     22         1,479        243        —          1,744   

Goodwill

     —           3,695        1,010        —          4,705   

Other long-term assets

     55         445        105        —          605   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 8,705       $ 6,307      $ 1,983      $ (8,498   $ 8,497   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
Liabilities and Shareholders’ Equity            

Accounts payable and accrued expenses

   $ 73       $ 417      $ 231      $ —        $ 721   

Current maturities of long-term debt

     —           2        —          —          2   

Deferred revenue

     —           213        166        —          379   

Liabilities of discontinued operations

     —           3        —          —          3   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     73         635        397        —          1,105   

Long-term debt

     3,223         4        1        —          3,228   

Due to (from) consolidated affiliates

     1,295         (988     (307     —          —     

Other long-term liabilities

     697         22        28        —          747   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     5,288         (327     119        —          5,080   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     3,417         6,634        1,864        (8,498     3,417   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 8,705       $ 6,307      $ 1,983      $ (8,498   $ 8,497   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

15


Table of Contents

Condensed Consolidating Statement of Cash Flows

Six Months Ended June 30, 2013

 

(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

   $ (42   $ 324      $ 115      $ —        $ 397   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Capital expenditures, including capitalization of software costs

     (2     (79     (29     —          (110

Payment for acquisition of business, net of cash acquired

     (55     39        —          —          (16

Other investing activities

     508        120        (5     (507     116   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     451        80        (34     (507     (10
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

Proceeds from long-term debt

     1,210        —          —          —          1,210   

Repayments of long-term debt

     (1,444     —          —          —          (1,444

Issuance of treasury stock

     24        —          —          —          24   

Purchases of treasury stock

     (254     —          —          —          (254

Other financing activities

     6        (438     (68     507        7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities from continuing operations

     (458     (438     (68     507        (457
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents from continuing operations

     (49     (34     13        —          (70

Net cash flows from (to) discontinued operations

     (4     36        —          —          32   

Beginning balance

     85        66        207        —          358   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 32      $ 68      $ 220      $ —        $ 320   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Cash Flows

Six Months Ended June 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

   $ (70   $ 330      $ 120      $ —        $ 380   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Capital expenditures, including capitalization of software costs

     (3     (72     (26     —          (101

Other investing activities

     335        (2     6        (335     4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     332        (74     (20     (335     (97
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

Proceeds from long-term debt

     156        —          —          —          156   

Repayments of long-term debt

     (136     (2     —          —          (138

Issuance of treasury stock

     52        —          —          —          52   

Purchases of treasury stock

     (396     —          —          —          (396

Other financing activities

     6        (257     (77     335        7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities from continuing operations

     (318     (259     (77     335        (319
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents from continuing operations

     (56     (3     23        —          (36

Net cash flows from (to) discontinued operations

     (3     4        —          —          1   

Beginning balance

     73        71        193        —          337   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 14      $ 72      $ 216      $ —        $ 302   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

16


Table of Contents
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 future plans, 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, including Open Solutions Inc., 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, 2012 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 notes 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 six months ended June 30, 2013 to the comparable periods in 2012.

 

   

Liquidity and capital resources. This section provides an analysis of our cash flows and a discussion of our outstanding debt as of June 30, 2013.

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. We also have had high contract renewal rates with our clients. The majority of the services we provide are necessary for our clients to operate their businesses 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 capture 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, intercompany eliminations and other costs that are not considered when management evaluates segment performance. On January 14, 2013, we acquired Open Solutions Inc. (“Open Solutions”), a provider of account processing technology for financial

 

17


Table of Contents

institutions, for a cash purchase price of $55 million. We also assumed approximately $960 million of debt. With this acquisition, we added 3,300 clients, including 800 new account processing clients, as well as DNA™, a real-time, open technology account processing platform. The Open Solutions acquisition advances Fiserv’s go-to-market strategies by adding a number of products and services and by expanding the number of account processing clients to which we can provide a broad array of our add-on solutions.

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 2013 are: (i) to continue to build high-quality revenue growth and meet our earnings goals; (ii) to extend market momentum into deeper client relationships and a larger share of our strategic solutions; and (iii) to deliver innovation and integration to enhance results for our clients, with an important focus on Open Solutions.

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. In particular, 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. Financial institutions have generally remained cautious in their information technology spending as a result. These conditions have, however, created interest in solutions that help financial institutions win and retain customers, generate incremental revenue and enhance 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 3% in 2012 compared to 2011 and 8% in the first six months of 2013 compared to the same period in 2012; our net income per share from continuing operations increased to $4.30 for the full year of 2012; and our net cash provided by operating activities was $826 million for the full year 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. 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. An acquisition 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. Financial institution 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.

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; and others that we believe will increase value to our clients and enhance the capabilities of our existing solutions. In January 2013, we acquired Open Solutions, a provider of account processing technology for financial institutions, which added DNA, a real-time, open technology account processing platform. 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.

 

18


Table of Contents

Results of Operations

On March 14, 2013, the Company sold its club solutions business (“Club Solutions”). The results of operations and cash flows of Club Solutions, which were previously included within the Payments segment, have been reported as discontinued operations for all periods presented.

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.

 

19


Table of Contents
     Three Months Ended June 30,  

(In millions)

               Percentage of
Revenue (1)
    Increase (Decrease)  
     2013     2012     2013     2012     $     %  

Revenue:

            

Processing and services

   $ 1,015      $ 904        84.7     83.2   $ 111        12

Product

     183        183        15.3     16.8     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     1,198        1,087        100.0     100.0     111        10
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

            

Cost of processing and services

     523        471        51.5     52.1     52        11

Cost of product

     157        155        85.8     84.7     2        1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

     680        626        56.8     57.6     54        9

Selling, general and administrative

     245        204        20.5     18.8     41        20
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     925        830        77.2     76.4     95        11
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     273        257        22.8     23.6     16        6

Interest expense

     (41     (44     (3.4 %)      (4.0 %)      (3     (7 %) 

Interest and investment income

     —          6        —          0.6     (6     (100 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 232      $ 219        19.4     20.1   $ 13        6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Six Months Ended June 30,  

(In millions)

               Percentage of
Revenue (1)
    Increase (Decrease)  
     2013     2012     2013     2012     $     %  

Revenue:

            

Processing and services

   $ 1,981      $ 1,802        84.3     82.5   $ 179        10

Product

     369        382        15.7     17.5     (13     (3 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     2,350        2,184        100.0     100.0     166        8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

            

Cost of processing and services

     1,045        965        52.8     53.6     80        8

Cost of product

     347        314        94.0     82.2     33        11
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

     1,392        1,279        59.2     58.6     113        9

Selling, general and administrative

     474        409        20.2     18.7     65        16
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     1,866        1,688        79.4     77.3     178        11
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     484        496        20.6     22.7     (12     (2 %) 

Interest expense

     (82     (87     (3.5 %)      (4.0 %)      (5     (6 %) 

Interest and investment income

     —          6        —          0.3     (6     (100 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 402      $ 415        17.1     19.0   $ (13     (3 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

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

 

20


Table of Contents
     Three Months Ended June 30,  

(In millions)

   Payments     Financial     Corporate
and Other
    Total  

Total revenue:

        

2013

   $ 626      $ 584      $ (12   $ 1,198   

2012

     596        502        (11     1,087   

Revenue growth

   $ 30      $ 82      $ (1   $ 111   

Revenue growth percentage

     5     16       10

Operating income:

        

2013

   $ 179      $ 186      $ (92   $ 273   

2012

     157        163        (63     257   

Operating income growth

   $ 22      $ 23      $ (29   $ 16   

Operating income growth percentage

     14     14       6

Operating margin:

        

2013

     28.7     31.9       22.8

2012

     26.4     32.5       23.6

Operating margin growth (1)

     2.3     (0.6 %)        (0.8 %) 

 

     Six Months Ended June 30,  

(In millions)

   Payments     Financial     Corporate
and Other
    Total  

Total revenue:

        

2013

   $ 1,243      $ 1,133      $ (26   $ 2,350   

2012

     1,204        1,003        (23     2,184   

Revenue growth

   $ 39      $ 130      $ (3   $ 166   

Revenue growth percentage

     3     13       8

Operating income:

        

2013

   $ 345      $ 347      $ (208   $ 484   

2012

     315        314        (133     496   

Operating income growth

   $ 30      $ 33      $ (75   $ (12

Operating income growth percentage

     10     11       (2 %) 

Operating margin:

        

2013

     27.8     30.6       20.6

2012

     26.2     31.3       22.7

Operating margin growth (1)

     1.6     (0.7 %)        (2.1 %) 

 

(1) 

Represents the percentage point growth or decline in operating margin.

 

21


Table of Contents

Total Revenue

Total revenue increased $111 million, or 10%, in the second quarter of 2013 compared to 2012 and increased $166 million, or 8%, in the first six months of 2013 compared to 2012. Revenue growth was driven by both our Payments and Financial segments in 2013. Acquired revenue contributed $76 million of total revenue to the Financial segment in the second quarter of 2013 and $135 million in the first six months of 2013.

Revenue in our Payments segment during the second quarter and first six months of 2013 increased $30 million, or 5%, and $39 million, or 3%, respectively, compared to 2012. Payments segment revenue growth was primarily driven by our recurring revenue businesses as processing and services revenue increased $39 million, or 9%, and $57 million, or 7%, in the second quarter and first six months of 2013, respectively, over the prior year periods. This growth was primarily due to new clients and increased transaction volumes from existing clients in our card services business, biller solutions business, and digital channels business, which includes our online and mobile banking solutions, as well as growth in the second quarter associated with our bill payment business. Payments segment revenue growth was partially offset by approximately two percentage points and one percentage point in the second quarter and the first six months of 2013, respectively, due to lower postage pass-through revenue and a discount on a renewal of a bill payment contract.

Revenue in our Financial segment during the second quarter and first six months of 2013 increased $82 million, or 16%, and $130 million, or 13%, compared to 2012, driven by the acquisition of Open Solutions. Excluding the Open Solutions acquisition, revenue growth in the first six months of 2013 was flat compared to the prior year primarily due to the migration of an account processing client to its parent company’s account processing platform, which negatively impacted revenue growth by approximately two percentage points.

Total Expenses

Total expenses increased $95 million and $178 million, respectively, or 11%, in each of the second quarter and first six months of 2013 compared to 2012. Total expenses as a percentage of total revenue increased 80 basis points from 76.4% in the second quarter of 2012 to 77.2% in the second quarter of 2013 and increased 210 basis points from 77.3% in the first six months of 2012 to 79.4% in the first six months of 2013 due to merger and integration expenses totaling $16 million and $56 million in the second quarter and first six months of 2013, respectively, resulting from the acquisition of Open Solutions, which negatively impacted our operating margin by approximately 130 basis points and 240 basis points in the respective periods.

Cost of processing and services as a percentage of processing and services revenue decreased slightly to 51.5% in the second quarter of 2013 as compared to 52.1% in the second quarter of 2012 and to 52.8% in the first six months of 2013 as compared to 53.6% in the first six months of 2012. Cost of processing and services as a percentage of revenue was favorably impacted by increased operating leverage in our recurring revenue businesses.

Cost of product as a percentage of product revenue in the second quarter of 2013 increased slightly to 85.8% from 84.7% in the second quarter of 2012. Cost of product as a percentage of product revenue for the first six months of 2012 was 94.0% as compared to 82.2% in the first six months of 2012. The increase in cost of product as a percentage of product revenue in 2013 was primarily due to a $30 million non-cash impairment charge in the first quarter related to the replacement of our Acumen account processing platform with DNA, an Open Solutions account processing platform.

Selling, general and administrative expense as a percentage of total revenue was 20.5% in the second quarter of 2013 compared to 18.8% in the second quarter of 2012 and was 20.2% in the first six months of 2013 compared to 18.7% in the first six months of 2012. The increase in selling, general and administrative expense as a percentage of total revenue was primarily due to higher acquired intangible amortization and transaction expenses attributed to our acquisition of Open Solutions.

Operating Income and Operating Margin

Total operating income increased $16 million, or 6%, in the second quarter of 2013 compared to 2012 and decreased $12 million, or 2%, in the first six months of 2013 compared to 2012. Our total operating margin decreased 80 basis points to 22.8% in the second quarter of 2013 compared to the second quarter of 2012 and decreased 210 basis points to 20.6% in the first six months of 2013 compared to the same period in 2012. The decreases in operating margin are primarily due to our Corporate and Other segment, in which our operating loss increased $29 million in the second quarter of 2013 and $75 million in the first six months of 2013 compared

 

22


Table of Contents

to the same periods in 2012, negatively impacting our operating margin by approximately 240 basis points and 320 basis points, respectively. The increases in the Corporate and Other segment’s operating losses were primarily attributable to merger and integration expenses totaling $16 million and $56 million in the second quarter and first six months of 2013, respectively, resulting from the acquisition of Open Solutions, including a $30 million non-cash impairment charge in the first quarter related to the replacement of our Acumen account processing platform with DNA. In addition, amortization expense, related to Open Solutions acquired intangible assets, increased $15 million and $23 million in the second quarter and first six months of 2013, respectively.

Operating income increased 14% in each of our Payments and Financial segments in the second quarter of 2013 as compared to the second quarter of 2012 and increased 10% and 11%, respectively, in the first six months of 2013 as compared to 2012.

Operating income in our Payments segment increased $22 million, or 14%, in the second quarter of 2013 as compared to 2012, and operating margin increased 230 basis points to 28.7% in the second quarter of 2013 compared to 2012. In the first six months of 2013 compared to 2012, operating income in the Payments segment increased $30 million, or 10%, and operating margin increased 160 basis points to 27.8%. The increases in operating income and margin in 2013 were primarily due to revenue growth and scale efficiencies in our card services and digital channels businesses, partially offset by the negative impact of a discount on a renewal of a bill payment contract.

Operating income in our Financial segment increased $23 million, or 14%, and $33 million, or 11%, in the second quarter and first six months of 2013, respectively, compared to 2012. Operating margin decreased 60 basis points to 31.9% in the second quarter of 2013 compared to 2012 and 70 basis points to 30.6% in the first six months of 2013 compared to 2012. The decreases in operating margin were primarily due to the migration of an account processing client to its parent company’s account processing platform and the impact of the Open Solutions acquisition.

Interest Expense

Interest expense decreased $3 million, or 7%, to $41 million in the second quarter of 2013 compared to 2012 and decreased $5 million, or 6%, to $82 million in the first six months of 2013 compared to 2012. The decrease was primarily due to lower average interest rates in 2013 compared to 2012, partially offset by additional debt assumed in connection with the acquisition of Open Solutions.

Interest and Investment Income

Interest and investment income decreased $6 million in the second quarter and first six months of 2013 as compared to 2012 due to a gain recognized on a sale of an investment in the prior year period.

Income Tax Provision

Our effective income tax rates for continuing operations were 35.0% and 34.6% in the second quarter and first six months of 2013, respectively, and were 27.5% and 30.6% in the second quarter and first six months of 2012, respectively. The lower effective tax rates in 2012 were primarily due to increased deductions resulting from federal tax planning initiatives including the associated discrete tax benefits.

Net Income Per Share – Diluted from Continuing Operations

Net income per share-diluted from continuing operations was $1.13 and $1.17 in the second quarter of 2013 and 2012, respectively, and was $2.00 and $2.11 in the first six months of 2013 and 2012, respectively. Amortization of acquisition-related intangible assets reduced net income per share-diluted from continuing operations by $0.27 per share and $0.19 per share in the second quarters of 2013 and 2012, respectively, and $0.50 per share and $0.37 per share for the first six months of 2013 and 2012, respectively. In addition, net income per share was negatively impacted by merger and integration costs in the second quarter and first six months of 2013 by $0.08 per share and $0.27 per share, respectively.

 

23


Table of Contents

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 $320 million at June 30, 2013 and available borrowings under our revolving credit facility.

 

      Six Months Ended
June 30,
    Increase
(Decrease)
 

(In millions)

   2013     2012     $     %  

Income from continuing operations

   $ 269      $ 294      $ (25  

Depreciation and amortization

     200        173        27     

Share-based compensation

     26        25        1     

Deferred income taxes

     (26     (2     (24  

Non-cash impairment charge

     30        —          30     

Dividend from unconsolidated affiliate

     6        —          6     

Net changes in working capital and other

     (108     (110     2     
  

 

 

   

 

 

   

 

 

   

Operating cash flow

   $ 397      $ 380      $ 17        4
  

 

 

   

 

 

   

 

 

   

 

 

 

Capital expenditures

   $ 110      $ 101      $ 9            9
  

 

 

   

 

 

   

 

 

   

 

 

 

Our net cash provided by operating activities, or operating cash flow, was $397 million in the first six months of 2013, an increase of 4% compared with $380 million in 2012. This increase was primarily due to lower tax payments in the first six months of 2013 as compared to the prior year, offset by payments for merger and integration costs and assumed liabilities on the opening balance sheet resulting from the acquisition of Open Solutions. 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 six months of 2013 increased by $9 million, or 9%, compared to the same period in 2012, and were approximately 5% of our total revenue in each period.

On January 14, 2013, we acquired Open Solutions for a cash purchase price of $16 million, net of cash acquired. In the second quarter of 2013, we received a $122 million cash dividend from StoneRiver Group, L.P., a joint venture in which we own a 49% interest. A portion, or $6 million, of the dividend represents a return on our investment and was reported as cash flows from operating activities. Additionally, during the first six months of 2013, we purchased $254 million of our common stock. As of June 30, 2013, we had approximately 2.4 million shares remaining under our current share repurchase authorization. Shares repurchased are generally held for issuance in connection with our equity plans.

 

24


Table of Contents

Long-Term Debt

 

     June 30,      December 31,  

(In millions)

   2013      2012  

Revolving credit facility

   $ 1,004       $ 280   

3.125% senior notes due 2015

     300         300   

3.125% senior notes due 2016

     600         600   

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         697   

Other borrowings

     4         5   
  

 

 

    

 

 

 

Long-term debt (including current maturities)

   $ 3,953       $ 3,230   
  

 

 

    

 

 

 

At June 30, 2013, our long-term debt consisted primarily of $2.95 billion of senior notes and $1.0 billion in borrowings under the revolving credit facility. Interest on our senior notes is paid semi-annually. During the first six months of 2013, we were in compliance with all financial debt covenants.

Revolving Credit Facility

We maintain a $2.0 billion revolving credit facility with a syndicate of banks. Borrowings under this facility bear interest at a variable rate, 1.3% at June 30, 2013, 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 June 30, 2013, borrowings outstanding under the facility approximated $1.0 billion, primarily related to the funding of assumed debt from the acquisition of Open Solutions.

 

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, 2012 and have not materially changed since December 31, 2012.

 

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, 2013.

Changes in internal control over financial reporting

During the quarter ended June 30, 2013, we continued, as part of our ongoing integration activities related to our acquisition of Open Solutions, to incorporate our process-level and company-wide controls and procedures into this recently acquired business. We also continued to implement a billing module within our SAP enterprise resource planning (“ERP”) system, which we expect to further integrate our systems and improve the overall efficiency of our billing and collection processes. We expect the implementation of this module to continue in phases over the next few years, which we believe will reduce implementation risk. The design and documentation of our internal control processes and procedures related to billing will be appropriately modified to supplement

 

25


Table of Contents

existing internal controls over financial reporting. As with any new technology, this module, and the internal controls over financial reporting included in the related processes, will be tested for effectiveness prior to and concurrent with the implementation. We believe the implementation of the billing module within our ERP system will further strengthen the related internal controls due to enhanced automation and integration of processes. There were no other changes in internal control over financial reporting that occurred during the quarter ended June 30, 2013 that have materially affected, or are 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, 2013:

 

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, 2013

     34,000       $ 84.89         34,000         4,722,000   

May 1-31, 2013

     950,000         89.03         950,000         3,772,000   

June 1-30, 2013

     1,347,000         86.84         1,347,000         2,425,000   
  

 

 

       

 

 

    

Total

     2,331,000            2,331,000      
  

 

 

       

 

 

    

 

(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.

 

26


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: July 31, 2013     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

10.1    Amended and Restated Fiserv, Inc. 2007 Omnibus Incentive Plan (1)
10.2    Key Executive Employment and Severance Agreement, dated June 4, 2013, between Fiserv, Inc. and Michael P. Gianoni (2)
10.3    Non-Employee Director Compensation Schedule
31.1    Certification of the Chief Executive Officer, dated July 31, 2013
31.2    Certification of the Chief Financial Officer, dated July 31, 2013
32    Certification of the Chief Executive Officer and Chief Financial Officer, dated July 31, 2013
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 six months ended June 30, 2013 and 2012, (ii) the Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2013 and 2012, (iii) the Consolidated Balance Sheets at June 30, 2013 and December 31, 2012, (iv) the Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012, and (v) Notes to Consolidated Financial Statements.
(1) 

Previously filed as Annex A to the Company’s definitive proxy statement on Schedule 14A filed on April 12, 2013 (File No. 0-14948) and incorporated herein by reference.

(2) 

Form of agreement previously filed as an exhibit to the Company’s Current Report on Form 8-K filed on December 23, 2008 (File No. 0-14948) and incorporated herein by reference.