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 March 31, 2014

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 April 24, 2014, there were 249,228,029 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      20   

Item 4.

  Controls and Procedures      20   

PART II—OTHER INFORMATION

  

Item 1.

  Legal Proceedings      21   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      21   

Item 6.

  Exhibits      21   
  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  
     March 31,  
     2014     2013  

Revenue:

    

Processing and services

   $ 1,027      $ 966   

Product

     207        186   
  

 

 

   

 

 

 

Total revenue

     1,234        1,152   
  

 

 

   

 

 

 

Expenses:

    

Cost of processing and services

     541        522   

Cost of product

     180        190   

Selling, general and administrative

     242        229   
  

 

 

   

 

 

 

Total expenses

     963        941   
  

 

 

   

 

 

 

Operating income

     271        211   

Interest expense

     (41     (41
  

 

 

   

 

 

 

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

     230        170   

Income tax provision

     (66     (58

Income from investment in unconsolidated affiliate

     4        5   
  

 

 

   

 

 

 

Income from continuing operations

     168        117   

Income (loss) from discontinued operations, net of income taxes

     —          —     
  

 

 

   

 

 

 

Net income

   $ 168      $ 117   
  

 

 

   

 

 

 

Net income (loss) per share—basic:

    

Continuing operations

   $ 0.66      $ 0.44   

Discontinued operations

     —          —     
  

 

 

   

 

 

 

Total

   $ 0.66      $ 0.44   
  

 

 

   

 

 

 

Net income (loss) per share—diluted:

    

Continuing operations

   $ 0.65      $ 0.43   

Discontinued operations

     —          —     
  

 

 

   

 

 

 

Total

   $ 0.65      $ 0.43   
  

 

 

   

 

 

 

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

    

Basic

     254.4        266.8   

Diluted

     258.6        270.3   

See accompanying notes to consolidated financial statements.

 

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Fiserv, Inc.

Consolidated Statements of Comprehensive Income

(In millions)

(Unaudited)

 

     Three Months Ended  
     March 31,  
     2014      2013  

Net income

   $ 168       $ 117   

Other comprehensive income (loss):

     

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

     2         —     

Reclassification adjustment for net realized losses on cash flow hedges included in interest expense, net of income taxes of $1 million and $2 million

     2         3   

Foreign currency translation

     2         (5
  

 

 

    

 

 

 

Total other comprehensive income (loss)

     6         (2
  

 

 

    

 

 

 

Comprehensive income

   $ 174       $ 115   
  

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

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Fiserv, Inc.

Consolidated Balance Sheets

(In millions)

(Unaudited)

 

     March 31,
2014
    December 31,
2013
 
Assets     

Cash and cash equivalents

   $ 307      $ 400   

Trade accounts receivable, net

     752        751   

Deferred income taxes

     52        55   

Prepaid expenses and other current assets

     436        366   
  

 

 

   

 

 

 

Total current assets

     1,547        1,572   

Property and equipment, net

     284        266   

Intangible assets, net

     2,101        2,142   

Goodwill

     5,215        5,216   

Other long-term assets

     326        317   
  

 

 

   

 

 

 

Total assets

   $ 9,473      $ 9,513   
  

 

 

   

 

 

 
Liabilities and Shareholders’ Equity     

Accounts payable and accrued expenses

   $ 884      $ 756   

Current maturities of long-term debt

     92        92   

Deferred revenue

     462        484   
  

 

 

   

 

 

 

Total current liabilities

     1,438        1,332   

Long-term debt

     3,756        3,756   

Deferred income taxes

     717        713   

Other long-term liabilities

     119        127   
  

 

 

   

 

 

 

Total liabilities

     6,030        5,928   
  

 

 

   

 

 

 

Commitments and contingencies

    

Shareholders’ equity:

    

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

     —          —     

Common stock, $0.01 par value: 900.0 million shares authorized; 395.7 million shares issued

     4        4   

Additional paid-in capital

     852        844   

Accumulated other comprehensive loss

     (54     (60

Retained earnings

     6,766        6,598   

Treasury stock, at cost, 144.1 million and 139.0 million shares

     (4,125     (3,801
  

 

 

   

 

 

 

Total shareholders’ equity

     3,443        3,585   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 9,473      $ 9,513   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Fiserv, Inc.

Consolidated Statements of Cash Flows

(In millions)

(Unaudited)

 

     Three Months Ended  
     March 31,  
     2014     2013  

Cash flows from operating activities:

    

Net income

   $ 168      $ 117   

Adjustment for discontinued operations

     —          —     

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

    

Depreciation and other amortization

     48        49   

Amortization of acquisition-related intangible assets

     52        48   

Share-based compensation

     15        14   

Deferred income taxes

     1        (7

Income from investment in unconsolidated affiliate

     (4     (5

Non-cash impairment charge

     —          30   

Other non-cash items

     (9     (5

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

    

Trade accounts receivable

     (1     27   

Prepaid expenses and other assets

     (3     (32

Accounts payable and other liabilities

     44        (4

Deferred revenue

     (19     (10
  

 

 

   

 

 

 

Net cash provided by operating activities from continuing operations

     292        222   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Capital expenditures, including capitalization of software costs

     (70     (58

Payment for acquisition of business, net of cash acquired

     —          (16
  

 

 

   

 

 

 

Net cash used in investing activities from continuing operations

     (70     (74
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Debt proceeds

     62        1,011   

Debt repayments

     (62     (1,149

Issuance of treasury stock

     12        13   

Purchases of treasury stock

     (335     (67

Other financing activities

     8        4   
  

 

 

   

 

 

 

Net cash used in financing activities from continuing operations

     (315     (188
  

 

 

   

 

 

 

Net change in cash and cash equivalents from continuing operations

     (93     (40

Net cash flows from discontinued operations

     —          38   

Beginning balance

     400        358   
  

 

 

   

 

 

 

Ending balance

   $ 307      $ 356   
  

 

 

   

 

 

 

Discontinued operations cash flow information:

    

Net cash provided by operating activities

   $ —        $ 3   

Net cash provided by investing activities

     —          35   
  

 

 

   

 

 

 

Net change in cash and cash equivalents from discontinued operations

     —          38   

Net cash flows to continuing operations

     —          (38

Beginning balance—discontinued operations

     —          —     
  

 

 

   

 

 

 

Ending balance—discontinued operations

   $ —        $ —     
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Fiserv, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

1. Basis of Presentation

The consolidated financial statements for the three-month periods ended March 31, 2014 and 2013 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, 2013.

Principles of Consolidation

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.

Stock Split

On November 20, 2013, the Company’s Board of Directors declared a two-for-one stock split of the Company’s common stock and a proportionate increase in the number of its authorized shares of common stock. The additional shares were distributed on December 16, 2013 to shareholders of record at the close of business on December 2, 2013. The Company’s common stock began trading at the split-adjusted price on December 17, 2013. All share and per share amounts are retroactively presented on a split-adjusted basis.

2. Recent Accounting Pronouncement

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”). ASU 2014-08 changes the criteria for determining which disposals can be presented as discontinued operations and modifies the related disclosure requirements. Under the amendments in ASU 2014-08, only those disposals that represent a strategic shift that has (or will have) a major effect on the Company’s operations and financial results will be reported as discontinued operations in the financial statements. ASU 2014-08 will be effective prospectively for annual and interim periods after December 15, 2014, with early adoption permitted.

3. Fair Value Measurements

The Company applies fair value accounting for all assets and liabilities that are recognized or disclosed at fair value in its 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 $4.0 billion at March 31, 2014 and $3.9 billion at December 31, 2013 and was estimated using discounted cash flows based on quoted prices in active markets (level 2 of the fair value hierarchy) or the Company’s current incremental borrowing rates (level 3 of the fair value hierarchy).

 

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4. 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 and the assumption of approximately $960 million of debt. This acquisition, included within the Financial Institution Services (“Financial”) segment, advanced 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 its broad array of add-on products and services.

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. During 2013, the Company finalized the purchase price allocation for Open Solutions, resulting in customer related intangible assets of $460 million, acquired software and technology of $105 million, goodwill of $517 million, long-term debt of $958 million, and various other identifiable assets and liabilities. As a result of the acquisition, the Company has incurred merger and integration costs, including a $30 million non-cash impairment charge during the three months ended March 31, 2013 related to the Company’s decision to replace its Acumen® account processing system with DNATM, an Open Solutions account processing system.

5. 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 $43 million and $39 million at March 31, 2014 and December 31, 2013, respectively, and was reported within other long-term assets in the consolidated balance sheets.

6. Share-Based Compensation

The Company recognized $15 million and $14 million of share-based compensation expense during the three months ended March 31, 2014 and 2013, respectively. The Company’s annual grant of share-based awards generally occurs in the first quarter. During the three months ended March 31, 2014, the Company granted 1.3 million stock options and 0.4 million restricted stock units at weighted-average estimated fair values of $18.77 and $56.98, respectively. During the three months ended March 31, 2013, the Company granted 1.8 million stock options and 0.8 million restricted stock units at weighted-average estimated fair values of $12.58 and $40.37, respectively. During each of the three-month periods ended March 31, 2014 and 2013, stock options to purchase 0.5 million shares were exercised.

7. 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  
     March 31,  

(In millions)

   2014      2013  

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

     254.4         266.8   

Common stock equivalents

     4.2         3.5   
  

 

 

    

 

 

 

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

     258.6         270.3   
  

 

 

    

 

 

 

For the three months ended March 31, 2014 and 2013, stock options for 0.7 million and 1.1 million shares, respectively, were excluded from the calculation of diluted weighted-average outstanding shares because their impact was anti-dilutive.

 

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8. Intangible Assets

Intangible assets consisted of the following:

 

                      
     Gross                

(In millions)

   Carrying      Accumulated      Net Book  
March 31, 2014    Amount      Amortization      Value  

Customer related intangible assets

   $ 2,155       $ 701       $ 1,454   

Acquired software and technology

     493         305         188   

Trade names

     120         41         79   

Capitalized software development costs

     626         324         302   

Purchased software

     252         174         78   
  

 

 

    

 

 

    

 

 

 

Total

   $ 3,646       $ 1,545       $ 2,101   
  

 

 

    

 

 

    

 

 

 
                      
     Gross                

(In millions)

   Carrying      Accumulated      Net Book  
December 31, 2013    Amount      Amortization      Value  

Customer related intangible assets

   $ 2,155       $ 667       $ 1,488   

Acquired software and technology

     493         289         204   

Trade names

     120         39         81   

Capitalized software development costs

     635         348         287   

Purchased software

     277         195         82   
  

 

 

    

 

 

    

 

 

 

Total

   $ 3,680       $ 1,538       $ 2,142   
  

 

 

    

 

 

    

 

 

 

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 $200 million in 2014, $190 million in 2015, $150 million in 2016 and $140 million in 2017 and 2018. Annual amortization expense in 2014 with respect to capitalized and purchased software is estimated to approximate $110 million.

9. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of the following:

 

     March 31,      December 31,  

(In millions)

   2014      2013  

Trade accounts payable

   $ 61       $ 67   

Settlement obligations

     275         184   

Client deposits

     203         190   

Accrued compensation and benefits

     112         165   

Other accrued expenses

     233         150   
  

 

 

    

 

 

 

Total

   $ 884       $ 756   
  

 

 

    

 

 

 

10. Income Taxes

The Company’s effective income tax rate for continuing operations was 28.5% and 34.2% for the three months ended March 31, 2014 and 2013, respectively. The lower effective tax rate for the three months ended March 31, 2014 was primarily attributed to the favorable resolution of tax matters. The resolution of these tax matters decreased the Company’s unrecognized tax benefits from $60 million at December 31, 2013 to $42 million at March 31, 2014. At March 31, 2014, unrecognized tax benefits of $31 million, net of federal and state benefits, would affect the effective income tax rate from continuing operations if recognized.

 

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11. Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive loss by component, net of income taxes, consisted of the following:

 

(In millions)

   Cash Flow
Hedges
    Foreign
Currency
Translation
    Other     Total  

Balance at December 31, 2013

   $ (49   $ (9   $ (2   $ (60

Other comprehensive income before reclassifications

     2        2        —          4   

Amounts reclassified from accumulated other comprehensive loss

     2        —          —          2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income

     4        2        —          6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2014

   $ (45   $ (7   $ (2   $ (54
  

 

 

   

 

 

   

 

 

   

 

 

 

(In millions)

   Cash Flow
Hedges
    Foreign
Currency
Translation
    Other     Total  

Balance at December 31, 2012

   $ (57   $ (1   $ (2   $ (60

Other comprehensive loss before reclassifications

     —          (5     —          (5

Amounts reclassified from accumulated other comprehensive loss

     3        —          —          3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive (loss) income

     3        (5     —          (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2013

   $ (54   $ (6   $ (2   $ (62
  

 

 

   

 

 

   

 

 

   

 

 

 

Based on the amounts recorded in accumulated other comprehensive loss at March 31, 2014, 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.

The Company has entered into foreign currency forward exchange contracts, which have been designated as cash flow hedges, to hedge foreign currency exposure to the Indian Rupee. As of March 31, 2014 and December 31, 2013, the notional amount of these derivatives was approximately $41 million and $53 million, respectively, and the fair value totaling approximately $2 million and $(1) million, respectively, was recorded in the consolidated balance sheets in current assets at March 31, 2014 and in current liabilities at December 31, 2013.

12. Cash Flow Information

Supplemental cash flow information was as follows:

 

     Three Months Ended  
     March 31,  

(In millions)

   2014      2013  

Interest paid, including on assumed debt

   $ 4       $ 23   

Income taxes paid from continuing operations

     12         11   

Treasury stock purchases settled after the balance sheet date

     25         —     

Liabilities assumed in acquisition of business

     —           1,186   

On March 14, 2013, the Company sold its club solutions business (“Club Solutions”) for approximately $35 million in cash. The proceeds from the sale and cash flows of Club Solutions have been reported as discontinued operations in the accompanying consolidated statement of cash flows for the three months ended March 31, 2013.

 

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13. Business Segment Information

The Company’s operations are comprised of the Payments and Industry Products (“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.

 

                   Corporate        

(In millions)

   Payments      Financial      and Other     Total  

Three Months Ended March 31, 2014

          

Processing and services revenue

   $ 491       $ 539       $ (3   $ 1,027   

Product revenue

     182         36         (11     207   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenue

   $ 673       $ 575       $ (14   $ 1,234   
  

 

 

    

 

 

    

 

 

   

 

 

 

Operating income

   $ 180       $ 185       $ (94   $ 271   
  

 

 

    

 

 

    

 

 

   

 

 

 

Three Months Ended March 31, 2013

          

Processing and services revenue

   $ 453       $ 516       $ (3   $ 966   

Product revenue

     164         33         (11     186   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenue

   $ 617       $ 549       $ (14   $ 1,152   
  

 

 

    

 

 

    

 

 

   

 

 

 

Operating income

   $ 166       $ 161       $ (116   $ 211   
  

 

 

    

 

 

    

 

 

   

 

 

 

Goodwill in the Payments and Financial segments was $3.4 billion and $1.8 billion, respectively, as of March 31, 2014 and December 31, 2013.

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, senior notes and term loan. 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 Ratings Services 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.

 

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Condensed Consolidating Statement of Income and Comprehensive Income

Three Months Ended March 31, 2014

 

(In millions)

  Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenue:

         

Processing and services

  $ —        $ 755      $ 315      $ (43   $ 1,027   

Product

    —          205        21        (19     207   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    —          960        336        (62     1,234   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

         

Cost of processing and services

    —          396        188        (43     541   

Cost of product

    —          174        25        (19     180   

Selling, general and administrative

    20        165        57        —          242   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    20        735        270        (62     963   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (20     225        66        —          271   

Interest expense

    (32     (7     (2     —          (41
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    (52     218        64        —          230   

Income tax (provision) benefit

    37        (80     (23     —          (66

Income from investment in unconsolidated affiliate

    —          4        —          —          4   

Equity in earnings of consolidated affiliates

    183        —          —          (183     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    168        142        41        (183     168   

Income (loss) from discontinued operations, net of income taxes

    —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 168      $ 142      $ 41      $ (183   $ 168   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

  $ 174      $ 142      $ 43      $ (185   $ 174   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Income and Comprehensive Income

Three Months Ended March 31, 2013

 

(In millions)

  Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenue:

         

Processing and services

  $ —        $ 665      $ 341      $ (40   $ 966   

Product

    —          179        25        (18     186   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    —          844        366        (58     1,152   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

         

Cost of processing and services

    —          355        207        (40     522   

Cost of product

    —          185        23        (18     190   

Selling, general and administrative

    28        126        75        —          229   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    28        666        305        (58     941   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (28     178        61        —          211   

Interest expense

    (32     (8     (1     —          (41
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    (60     170        60        —          170   

Income tax (provision) benefit

    26        (62     (22     —          (58

Income from investment in unconsolidated affiliate

    —          5        —          —          5   

Equity in earnings of consolidated affiliates

    151        —          —          (151     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    117        113        38        (151     117   

Income (loss) from discontinued operations, net of income taxes

    —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 117      $ 113      $ 38      $ (151   $ 117   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

  $ 115      $ 113      $ 33      $ (146   $ 115   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidating Balance Sheet

March 31, 2014

 

(In millions)

  Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  
Assets          

Cash and cash equivalents

  $ 30      $ 91      $ 186      $ —        $ 307   

Trade accounts receivable, net

    —          475        277        —          752   

Prepaid expenses and other current assets

    59        246        183        —          488   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    89        812        646        —          1,547   

Investments in consolidated affiliates

    10,303        —          —          (10,303     —     

Intangible assets, net

    23        1,826        252        —          2,101   

Goodwill

    —          4,154        1,061        —          5,215   

Other long-term assets

    41        475        94        —          610   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 10,456      $ 7,267      $ 2,053      $ (10,303   $ 9,473   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Liabilities and Shareholders’ Equity          

Accounts payable and accrued expenses

  $ 155      $ 505      $ 224      $ —        $ 884   

Current maturities of long-term debt

    90        2        —          —          92   

Deferred revenue

    —          283        179        —          462   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    245        790        403        —          1,438   

Long-term debt

    3,755        1        —          —          3,756   

Due to (from) consolidated affiliates

    2,247        (1,737     (510     —          —     

Other long-term liabilities

    766        26        44        —          836   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    7,013        (920     (63     —          6,030   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

    3,443        8,187        2,116        (10,303     3,443   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

  $ 10,456      $ 7,267      $ 2,053      $ (10,303   $ 9,473   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Condensed Consolidating Balance Sheet

December 31, 2013

 

(In millions)

  Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  
Assets          

Cash and cash equivalents

  $ 139      $ 76      $ 185      $ —        $ 400   

Trade accounts receivable, net

    —          465        286        —          751   

Prepaid expenses and other current assets

    81        195        145        —          421   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    220        736        616        —          1,572   

Investments in consolidated affiliates

    10,122        —          —          (10,122     —     

Intangible assets, net

    22        1,866        254        —          2,142   

Goodwill

    —          4,150        1,066        —          5,216   

Other long-term assets

    33        448        102        —          583   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 10,397      $ 7,200      $ 2,038      $ (10,122   $ 9,513   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Liabilities and Shareholders’ Equity          

Accounts payable and accrued expenses

  $ 87      $ 463      $ 206      $ —        $ 756   

Current maturities of long-term debt

    90        2        —          —          92   

Deferred revenue

    —          292        192        —          484   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    177        757        398        —          1,332   

Long-term debt

    3,754        2        —          —          3,756   

Due to (from) consolidated affiliates

    2,108        (1,683     (425     —          —     

Other long-term liabilities

    773        25        42        —          840   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    6,812        (899     15        —          5,928   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

    3,585        8,099        2,023        (10,122     3,585   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

  $ 10,397      $ 7,200      $ 2,038      $ (10,122   $ 9,513   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Cash Flows

Three Months Ended March 31, 2014

 

(In millions)

  Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash flows from operating activities:

         

Net cash provided by operating activities from continuing operations

  $ 59      $ 166      $ 67      $ —        $ 292   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

         

Capital expenditures, including capitalization of software costs

    (2     (48     (20     —          (70

Other investing activities

    149        —          —          (149     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    147        (48     (20     (149     (70
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

         

Debt proceeds

    62        —          —          —          62   

Debt repayments

    (62     —          —          —          (62

Issuance of treasury stock

    12        —          —          —          12   

Purchases of treasury stock

    (335     —          —          —          (335

Other financing activities

    8        (103     (46     149        8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities from continuing operations

    (315     (103     (46     149        (315
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents from continuing operations

    (109     15        1        —          (93

Beginning balance

    139        76        185        —          400   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 30      $ 91      $ 186      $ —        $ 307   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Condensed Consolidating Statement of Cash Flows

Three Months Ended March 31, 2013

 

(In millions)

  Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash flows from operating activities:

         

Net cash provided by operating activities from continuing operations

  $ 61      $ 136      $ 25      $ —        $ 222   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

         

Capital expenditures, including capitalization of software costs

    —          (43     (15     —          (58

Payment for acquisition of business, net of cash acquired

    —          —          (16     —          (16

Other investing activities

    124        3        11        (138     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    124        (40     (20     (138     (74
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

         

Debt proceeds

    1,011        —          —          —          1,011   

Debt repayments

    (1,149     —          —          —          (1,149

Issuance of treasury stock

    13        —          —          —          13   

Purchases of treasury stock

    (67     —          —          —          (67

Other financing activities

    4        (137     (1     138        4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities from continuing operations

    (188     (137     (1     138        (188
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents from continuing operations

    (3     (41     4        —          (40

Net cash flows from discontinued operations

    2        36        —          —          38   

Beginning balance

    85        66        207        —          358   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 84      $ 61      $ 211      $ —        $ 356   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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 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 of market and economic conditions on the financial services industry; the capacity of our technology to keep pace with a rapidly evolving marketplace; pricing and other actions by competitors; the effect of legislative and regulatory actions in the United States and internationally; our ability to comply with government regulations; the impact of a security breach or operational failure on our business; our ability to successfully integrate acquisitions into our operations; the impact of our strategic initiatives; and other factors identified in our Annual Report on Form 10-K for the year ended December 31, 2013 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 months ended March 31, 2014 to the comparable period in 2013.

 

    Liquidity and capital resources. This section provides an analysis of our cash flows and a discussion of our outstanding debt as of March 31, 2014.

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 14,500 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.

 

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Table of Contents

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 November 20, 2013, our Board of Directors declared a two-for-one stock split of our common stock and a proportionate increase in the number of our authorized shares of common stock. The additional shares were distributed on December 16, 2013 to shareholders of record at the close of business on December 2, 2013. Our common stock began trading at the split-adjusted price on December 17, 2013. All share and per share amounts are retroactively presented on a split-adjusted basis.

On January 14, 2013, we acquired Open Solutions Inc. (“Open Solutions”), a provider of account processing technology for financial institutions, for a cash purchase price of $55 million and the assumption of approximately $960 million of debt. With this acquisition, we added DNA™, a real-time, open architecture account processing system, along with 3,300 existing Open Solutions clients. This acquisition advanced our 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 our broad array of add-on products and services.

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 2014 are: (i) to continue to build high-quality revenue growth while meeting our earnings goals; (ii) to extend market momentum to deepen client relationships with a larger share of our strategic solutions; and (iii) to deliver innovation and integration which enhances 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. 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, our financial results have continued to improve with increases in revenue, net income per share from continuing operations and net cash provided by operating activities in the first three months of 2014 as compared to the same period of 2013 and for the full year 2013 compared to 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 system, or elects to move to one of our systems, and negatively impacts us when a competing system 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 and its DNA account processing system. 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.

 

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Table of Contents

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.

 

     Three Months Ended March 31,  
                 Percentage of              

(In millions)

               Revenue (1)     Increase (Decrease)  
     2014     2013     2014     2013     $     %  

Revenue:

            

Processing and services

   $ 1,027      $ 966        83.2     83.9   $ 61        6

Product

     207        186        16.8     16.1     21        11
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     1,234        1,152        100.0     100.0     82        7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

            

Cost of processing and services

     541        522        52.7     54.0     19        4

Cost of product

     180        190        87.0     102.2     (10     (5 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

     721        712        58.4     61.8     9        1

Selling, general and administrative

     242        229        19.6     19.9     13        6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     963        941        78.1     81.7     22        2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     271        211        21.9     18.3     60        28

Interest expense

     (41     (41     (3.3 %)      (3.6 %)      —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 230      $ 170        18.6     14.8   $ 60        35
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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.

 

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     Three Months Ended March 31,  
                 Corporate        

(In millions)

   Payments     Financial     and Other     Total  

Total revenue:

        

2014

   $ 673      $ 575      $ (14   $ 1,234   

2013

     617        549        (14     1,152   

Revenue growth

   $ 56      $ 26      $ —        $ 82   

Revenue growth percentage

     9     5       7

Operating income:

        

2014

   $ 180      $ 185      $ (94   $ 271   

2013

     166        161        (116     211   

Operating income growth

   $ 14      $ 24      $ 22      $ 60   

Operating income growth percentage

     8     15       28

Operating margin:

        

2014

     26.8     32.1       21.9

2013

     26.8     29.3       18.3

Operating margin growth (1)

     —          2.8       3.6

 

(1)  Represents the percentage point growth or decline in operating margin.

Total Revenue

Total revenue increased $82 million, or 7%, in the first quarter of 2014 compared to 2013, driven by revenue growth of 9% and 5% in our Payments and Financial segments, respectively. Revenue from acquired companies contributed $9 million to total revenue in the first quarter of 2014.

Revenue in our Payments segment increased $56 million, or 9%, during the first quarter of 2014 compared to 2013. Payments segment revenue growth during 2014 was primarily driven by our recurring revenue businesses as processing and services revenue increased $38 million, or 8%, over the prior year period. This growth was primarily due to new clients and increased transaction volumes from existing clients in our card services and bill payment businesses, as well as in our digital channels business, which includes our online and mobile banking solutions. Higher product revenue from increased volumes in our output solutions business, a portion of which is postage pass-through revenue that is included in both product revenue and cost of product, also contributed to overall segment revenue growth.

Revenue in our Financial segment increased $26 million, or 5%, during the first quarter of 2014 compared to 2013. Open Solutions acquired revenue of $8 million, along with increased processing and services revenue in our account processing businesses and higher contract termination fee revenue, favorably impacted segment revenue growth in the first quarter of 2014 over the prior year period.

Total Expenses

Total expenses increased $22 million, or 2%, during the first quarter of 2014 compared to 2013. Total expenses as a percentage of total revenue decreased 360 basis points from 81.7% in the first quarter of 2013 to 78.1% in the first quarter of 2014, positively impacting our operating margin. The decrease in total expenses as a percentage of revenue in 2014 was primarily due to higher merger and integration expenses incurred during the first quarter of 2013 resulting from the Open Solutions acquisition.

 

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Cost of processing and services as a percentage of processing and services revenue decreased to 52.7% in the first quarter of 2014 as compared to 54.0% in the first quarter of 2013. The first quarter of 2014 was positively impacted by increased operating leverage in our recurring revenue businesses, as well as an increase in contract termination fees as compared to 2013.

Cost of product as a percentage of product revenue was 87.0% in the first quarter of 2014 compared to 102.2% in the first quarter of 2013. The decrease in cost of product as a percentage of product revenue in 2014 was primarily due to a $30 million non-cash impairment charge in the first quarter of 2013 related to the replacement of our Acumen® account processing system with DNA, an Open Solutions account processing system.

Selling, general and administrative expenses increased $13 million, or 6%, in the first quarter of 2014 compared to 2013. Selling, general and administrative expense as a percentage of total revenue was relatively consistent at 19.6% in the first quarter of 2014 compared to 19.9% in the first quarter of 2013.

Operating Income and Operating Margin

Total operating income increased $60 million, or 28%, in the first quarter of 2014 compared to the first quarter of 2013, and total operating margin increased 360 basis points to 21.9% in the first quarter of 2014. The improvement in operating margin was primarily driven by lower merger and integration expenses in our Corporate and Other segment associated with the Open Solutions acquisition, including a $30 million non-cash impairment charge, which reduced the total operating margin in the first quarter of 2013 by 260 basis points.

Operating income in our Payments segment increased $14 million, or 8%, in the first quarter of 2014 as compared to 2013, and operating margin was consistent at 26.8% in both the first quarter of 2014 and 2013. Increases in operating income and margin in the first quarter of 2014 primarily due to revenue growth and scale efficiencies in our card services, bill payment and digital channels businesses were partially offset by increased expenses associated with investments in our biller solutions business. In addition, operating margin in the first quarter of 2014 was negatively impacted by approximately 30 basis points due to increased postage pass-through costs in our output solutions business, which are included in both revenue and expenses.

Operating income in our Financial segment increased $24 million, or 15%, and operating margin increased 280 basis points to 32.1% in the first quarter of 2014 as compared to 2013. The increase in operating margin in 2014 was primarily due to scale efficiencies, operational effectiveness initiatives, including Open Solutions synergies, and higher contract termination fee revenue in our account processing businesses.

Interest Expense

Interest expense was consistent in the first quarter of 2014 compared to the first quarter of 2013 at $41 million. A decline in average outstanding debt during the first quarter of 2014 was offset by slightly higher variable interest rates as compared to the first quarter of 2013.

Income Tax Provision

Our effective income tax rate for continuing operations was 28.5% and 34.2% in the first quarter of 2014 and 2013, respectively. The lower effective tax in the first quarter of 2014 compared to 2013 was primarily attributed to the favorable resolution of tax matters. We anticipate that our full year effective tax rate will be approximately 35% in 2014.

Net Income Per Share – Diluted from Continuing Operations

Net income per share-diluted from continuing operations was $0.65 in the first quarter of 2014 and $0.43 in the first quarter of 2013. Amortization of acquisition-related intangible assets reduced net income per share-diluted from continuing operations by $0.13 per share and $0.12 per share in the first quarter of 2014 and 2013, respectively. In addition, net income per share-diluted was negatively impacted by merger and integration costs in the first quarter of 2013 by $0.10 per share due to the acquisition of Open Solutions.

 

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Liquidity and Capital Resources

General

Our primary liquidity needs are: (i) to fund normal operating expenses; (ii) to meet the interest and principal requirements of our outstanding indebtedness; 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 March 31, 2014 and available borrowings under our revolving credit facility. The following table presents our operating cash flow and capital expenditure amounts for the three months ended March 31, 2014 and 2013, respectively.

 

     Three Months Ended              
     March 31,     Increase (Decrease)  

(In millions)

   2014     2013     $     %  

Income from continuing operations

   $ 168      $ 117      $ 51     

Depreciation and amortization

     100        97        3     

Share-based compensation

     15        14        1     

Deferred income taxes

     1        (7     8     

Income from investment in unconsoliated affiliate

     (4     (5     1     

Non-cash impairment charge

     —          30        (30  

Net changes in working capital and other

     12        (24     36     
  

 

 

   

 

 

   

 

 

   

Operating cash flow

   $ 292      $ 222      $ 70        32
  

 

 

   

 

 

   

 

 

   

 

 

 

Capital expenditures

   $ 70      $ 58      $ 12        21
  

 

 

   

 

 

   

 

 

   

 

 

 

Our net cash provided by operating activities, or operating cash flow, was $292 million in the first quarter of 2014, an increase of 32% compared with $222 million in 2013. This increase in the first quarter of 2014 was primarily due to increased earnings and favorable working capital changes as compared to the prior year period. Working capital was negatively impacted in 2013 by an increase in payments related to merger and integration costs and assumed liabilities 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 quarter of 2014 increased by $12 million, compared to the same period in 2013, and were approximately 5% of our total revenue in each period.

During the first quarter of 2014, we purchased $335 million of our common stock. As of March 31, 2014, we had approximately 12.4 million shares remaining under our current share authorization. Shares repurchased are generally held for issuance in connection with our equity plans.

Indebtedness

 

     March 31,      December 31,  

(In millions)

   2014      2013  

Term loan

   $ 900       $ 900   

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   

Revolving credit facility

     —           —     

Other borrowings

     3         3   
  

 

 

    

 

 

 

Total debt (including current maturities)

   $ 3,848       $ 3,848   
  

 

 

    

 

 

 

 

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At March 31, 2014, our debt consisted primarily of $2.95 billion of senior notes and $900 million of term loan borrowings. Interest on our senior notes is paid semi-annually. During the first three months of 2014, we were in compliance with all financial debt covenants.

Variable Rate Debt

We maintain a $900 million term loan and a $2.0 billion revolving credit agreement with a syndicate of banks. Both the term loan and outstanding borrowings under the revolving credit facility bear interest at a variable rate based on LIBOR or the bank’s base rate, plus a specified margin based on our long-term debt rating in effect from time to time. Scheduled principal payments on the term loan of $90 million are due on the last business day of December of each year, commencing on December 31, 2014, with the remaining principal balance of $540 million due at maturity in October 2018. There are no significant commitment fees and no compensating balance requirements on the revolving credit facility, which expires on October 25, 2018. The term loan and revolving credit facility contain various, substantially similar 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 March 31, 2014, there were no borrowings outstanding under the revolving credit facility, and the weighted average variable interest rate on the term loan borrowings was 1.4%.

Other

Access to capital markets impacts our cost of capital, our ability to refinance maturing debt and our ability to fund future acquisitions. Our ability to access capital on favorable terms depends on a number of factors, including general market conditions, interest rates, credit ratings on our debt securities, perception of our potential future earnings and the market price of our common stock. As of March 31, 2014, we had a corporate credit rating of Baa2 with a stable outlook from Moody’s Investors Service, Inc. and BBB with a stable outlook from Standard & Poor’s Ratings Services on our senior unsecured debt securities.

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, 2013 and have not materially changed since December 31, 2013.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), our management, with the participation of our chief executive officer and chief financial officer, evaluated the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2014.

Changes in internal control over financial reporting

During the quarter ended March 31, 2014, we 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 remainder of the year, 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 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 March 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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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 March 31, 2014:

 

Period

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

January 1-31, 2014

     1,260,000       $ 57.58         1,260,000         17,257,000   

February 1-28, 2014

     2,521,000         56.58         2,521,000         14,736,000   

March 1-31, 2014

     2,350,000         57.97         2,350,000         12,386,000   
  

 

 

       

 

 

    

Total

     6,131,000            6,131,000      
  

 

 

       

 

 

    

 

(1)  On August 5, 2013, our board of directors authorized the purchase of up to 20.0 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.

 

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SIGNATURES

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

 

        FISERV, INC.
Date: April 30, 2014     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

  31.1    Certification of the Chief Executive Officer, dated April 30, 2014
  31.2    Certification of the Chief Financial Officer, dated April 30, 2014
  32    Certification of the Chief Executive Officer and Chief Financial Officer, dated April 30, 2014
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 months ended March 31, 2014 and 2013, (ii) the Consolidated Statements of Comprehensive Income for the three months ended March 31, 2014 and 2013, (iii) the Consolidated Balance Sheets at March 31, 2014 and December 31, 2013, (iv) the Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013, and (v) Notes to Consolidated Financial Statements.