Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2011

OR

 

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

For the transition period from                     to                     

Commission File Number 0-14948

 

 

FISERV, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

WISCONSIN   39-1506125

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I. R. S. Employer

Identification No.)

 

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

(262) 879-5000

(Registrant’s Telephone Number, Including Area Code)

 

 

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

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

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

 

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

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

As of October 28, 2011, there were 140,859,018 shares of common stock, $.01 par value, of the registrant outstanding.

 

 

 


Table of Contents

INDEX

 

         Page  

PART I—FINANCIAL INFORMATION

  

Item 1.

  Financial Statements   
 

Condensed Consolidated Statements of Income

     1   
 

Condensed Consolidated Balance Sheets

     2   
 

Condensed Consolidated Statements of Cash Flows

     3   
 

Notes to Condensed Consolidated Financial Statements

     4   

Item 2.

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

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      22   

Item 4.

  Controls and Procedures      23   

PART II—OTHER INFORMATION

  

Item 1.

  Legal Proceedings      23   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      23   

Item 6.

  Exhibits      23   
  Signatures   
  Exhibit Index   


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FISERV, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In millions, except per share data)

(Unaudited)

 

      Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Revenue:

        

Processing and services

   $ 882      $ 858      $ 2,628      $ 2,545   

Product

     181        167        548        510   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     1,063        1,025        3,176        3,055   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Cost of processing and services

     490        461        1,443        1,380   

Cost of product

     141        128        436        393   

Selling, general and administrative

     189        185        582        542   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     820        774        2,461        2,315   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     243        251        715        740   

Interest expense, net

     (45     (49     (138     (140

Loss on early debt extinguishment

     (24     —          (85     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     174        202        492        600   

Income tax provision

     (55     (73     (168     (224

Income from investment in unconsolidated affiliate

     8        5        14        11   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     127        134        338        387   

Loss from discontinued operations, net of income taxes

     —          (2     (9     (7
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 127      $ 132      $ 329      $ 380   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share—basic:

        

Continuing operations

   $ 0.90      $ 0.90      $ 2.36      $ 2.56   

Discontinued operations

     —          (0.02     (0.07     (0.05
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 0.90      $ 0.88      $ 2.30      $ 2.51   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share—diluted:

        

Continuing operations

   $ 0.89      $ 0.89      $ 2.33      $ 2.54   

Discontinued operations

     —          (0.02     (0.07     (0.05
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 0.89      $ 0.87      $ 2.27      $ 2.49   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Basic

     141.1        149.7        143.2        151.2   

Diluted

     142.6        150.9        144.8        152.4   

See accompanying notes to condensed consolidated financial statements.

 

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FISERV, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

 

      September 30,
2011
    December 31,
2010
 
ASSETS     

Cash and cash equivalents

   $ 281      $ 563   

Trade accounts receivable, net

     579        572   

Deferred income taxes

     47        37   

Prepaid expenses and other current assets

     304        245   
  

 

 

   

 

 

 

Total current assets

     1,211        1,417   

Property and equipment, net

     262        267   

Intangible assets, net

     1,950        1,879   

Goodwill

     4,709        4,377   

Other long-term assets

     319        341   
  

 

 

   

 

 

 

Total assets

   $ 8,451      $ 8,281   
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Accounts payable and accrued expenses

   $ 717      $ 537   

Current maturities of long-term debt

     4        3   

Deferred revenue

     321        351   
  

 

 

   

 

 

 

Total current liabilities

     1,042        891   

Long-term debt

     3,514        3,353   

Deferred income taxes

     644        627   

Other long-term liabilities

     99        181   
  

 

 

   

 

 

 

Total liabilities

     5,299        5,052   
  

 

 

   

 

 

 

Commitments and contingencies

    

Shareholders’ equity:

    

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

     —          —     

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

     2        2   

Additional paid-in capital

     767        750   

Accumulated other comprehensive loss

     (79     (50

Retained earnings

     5,196        4,867   

Treasury stock, at cost, 57.1 million and 51.0 million shares

     (2,734     (2,340
  

 

 

   

 

 

 

Total shareholders’ equity

     3,152        3,229   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 8,451      $ 8,281   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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FISERV, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

      Nine Months Ended
September 30,
 
     2011     2010  

Cash flows from operating activities:

    

Net income

   $ 329      $ 380   

Adjustment for discontinued operations

     9        7   

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

    

Depreciation and other amortization

     144        142   

Amortization of acquisition-related intangible assets

     115        110   

Share-based compensation

     29        29   

Deferred income taxes

     36        21   

Loss on early debt extinguishment

     85        —     

Dividend from unconsolidated affiliate

     12        —     

Settlement of interest rate hedge contracts

     (6     —     

Other non-cash items

     (23     (18

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

    

Trade accounts receivable

     6        17   

Prepaid expenses and other assets

     (30     (5

Accounts payable and other liabilities

     12        (22

Deferred revenue

     (37     (7
  

 

 

   

 

 

 

Net cash provided by operating activities from continuing operations

     681        654   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Capital expenditures, including capitalization of software costs

     (144     (129

Payments for acquisitions of businesses, net of cash acquired

     (511     (9

Dividend from unconsolidated affiliate

     42        —     

Other investing activities

     (4     (4
  

 

 

   

 

 

 

Net cash used in investing activities from continuing operations

     (617     (142
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from long-term debt

     1,044        748   

Repayments of long-term debt, including premium and costs

     (1,080     (682

Proceeds from revolving credit facility, net

     120        —     

Issuance of common stock and treasury stock

     63        41   

Purchases of treasury stock

     (484     (254

Other financing activities

     (2     (8
  

 

 

   

 

 

 

Net cash used in financing activities from continuing operations

     (339     (155
  

 

 

   

 

 

 

Net change in cash and cash equivalents from continuing operations

     (275     357   

Net cash flows from discontinued operations

     (7     23   

Beginning balance

     563        363   
  

 

 

   

 

 

 

Ending balance

   $ 281      $ 743   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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FISERV, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Principles of Consolidation

The condensed consolidated financial statements for the three-month and nine-month periods ended September 30, 2011 and 2010 are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the condensed consolidated financial statements have been included. Such adjustments consisted of normal recurring items. Interim results are not necessarily indicative of results for a full year. The condensed consolidated financial statements and accompanying notes are presented as permitted by Form 10-Q and do not contain certain information included in the annual consolidated financial statements and accompanying notes of Fiserv, Inc. (the “Company”). These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

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

2. Acquisitions

On September 13, 2011, the Company acquired CashEdge Inc. (“CashEdge”), a leading provider of consumer and business payments solutions such as account-to-account transfer, account opening and funding, data aggregation, small business invoicing and payments, and person-to-person payments, for approximately $460 million, net of cash acquired. The acquisition of CashEdge is expected to advance the Company’s digital payments strategies. The preliminary purchase price allocation resulted in technology and customer intangible assets totaling approximately $130 million, goodwill of approximately $320 million, and other identifiable net assets of approximately $10 million. The amounts allocated to goodwill and intangible assets were based on preliminary valuations and are subject to final adjustment. The goodwill recognized in this transaction is not expected to be deductible for tax purposes and is primarily attributed to anticipated revenue and earnings growth associated with the products and services that CashEdge provides and the anticipated value of selling CashEdge’s products and services into the Company’s large existing client base.

In the first quarter of 2011, the Company acquired Mobile Commerce Ltd. (“M-Com”), an international mobile banking and payments provider, and two other companies for an aggregate purchase price of approximately $50 million, net of cash acquired. M-Com enhances the Company’s mobile and payments capabilities, and the other acquired companies add to or enhance specific products or services that the Company already provides. The purchase price allocations for these acquisitions resulted in technology and customer intangible assets of approximately $40 million. The remaining purchase price was primarily allocated to goodwill.

The results of operations for all acquired businesses have been included in the accompanying condensed consolidated statements of income from the dates of acquisition. Pro forma information for the Company’s acquisitions during 2011 is not provided because they did not have a material effect on the Company’s consolidated results of operations.

3. Fair Value Measurements

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

The fair values of cash equivalents, trade accounts receivable, settlement assets and obligations, accounts payable and accrued expenses approximate the carrying values due to the short period of time to maturity. The fair values of interest rate hedge contracts are described in Note 11 and were based on valuation models using inputs which are available through third party dealers and are related to market price risk, such as the LIBOR interest rate curve, credit risk and time value. The fair value of the Company’s total debt was $3.6 billion and $3.5 billion at September 30, 2011 and December 31, 2010, respectively, and was estimated using discounted cash flows based on the Company’s current incremental borrowing rates or quoted prices in active markets.

 

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4. Share-Based Compensation

The Company recognized $8 million and $29 million of share-based compensation expense during the three and nine months ended September 30, 2011, respectively, and $9 million and $29 million of share-based compensation expense during the three and nine months ended September 30, 2010, respectively. The Company’s annual grant of share-based awards generally occurs in the first quarter. During the nine months ended September 30, 2011, the Company granted 1.0 million stock options and 0.6 million restricted stock units at weighted-average estimated fair values of $22.69 and $58.47, respectively. During the nine months ended September 30, 2010, the Company granted 1.1 million stock options and 0.4 million restricted stock units at weighted-average estimated fair values of $17.46 and $47.81, respectively. During the nine months ended September 30, 2011 and 2010, stock options to purchase 1.2 million shares and 1.1 million shares, respectively, were exercised.

5. Shares Used in Computing Net Income Per Share

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
(In millions)    2011      2010      2011      2010  

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

     141.1         149.7         143.2         151.2   

Common stock equivalents

     1.5         1.2         1.6         1.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     142.6         150.9         144.8         152.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the three months ended September 30, 2011 and 2010, stock options for 1.0 million and 2.9 million shares, respectively, were excluded from the calculation of diluted weighted-average outstanding shares because their impact was anti-dilutive. For the nine months ended September 30, 2011 and 2010, stock options for 0.9 million and 2.9 million shares, respectively, were excluded from the calculation of diluted weighted-average outstanding shares because their impact was anti-dilutive.

6. Comprehensive Income

Comprehensive income was as follows:

 

      Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
(In millions)    2011     2010     2011     2010  

Net income

   $ 127      $ 132      $ 329      $ 380   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Fair market value adjustments on cash flow hedges

     (32     (9     (47     (24

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

     8        9        24        25   

Foreign currency translation and other

     (8     7        (6     (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (32     7        (29     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 95      $ 139      $ 300      $ 380   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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7. Intangible Assets

Intangible assets consisted of the following:

 

September 30, 2011
(In millions)
   Gross
Carrying
Amount
     Accumulated
Amortization
     Net Book
Value
 

Customer related intangible assets

   $ 1,732       $ 415       $ 1,317   

Acquired software and technology

     419         189         230   

Trade names

     114         19         95   

Capitalized software development costs

     739         498         241   

Purchased software

     361         294         67   
  

 

 

    

 

 

    

 

 

 

Total

   $ 3,365       $ 1,415       $ 1,950   
  

 

 

    

 

 

    

 

 

 

 

December 31, 2010
(In millions)
   Gross
Carrying
Amount
     Accumulated
Amortization
     Net Book
Value
 

Customer related intangible assets

   $ 1,639       $ 343       $ 1,296   

Acquired software and technology

     339         152         187   

Trade names

     114         14         100   

Capitalized software development costs

     730         512         218   

Purchased software

     377         299         78   
  

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

 

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

8. Investment in Unconsolidated Affiliate

In the third quarter of 2011, the Company received a $54 million cash dividend from StoneRiver Group, L.P. (“StoneRiver”), in which the Company owns a 49% interest. The dividend was recorded as a reduction in the Company’s investment in StoneRiver. A portion of the dividend, $12 million, represented a return on the Company’s investment and was reported in cash flows from operating activities. The Company’s investment in StoneRiver was $117 million and $156 million at September 30, 2011 and December 31, 2010, respectively, and was reported within other long-term assets in the consolidated balance sheets.

 

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9. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of the following at September 30, 2011 and December 31, 2010:

 

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

Trade accounts payable

   $ 95       $ 92   

Settlement obligations (1)

     170         119   

Accrued compensation and benefits

     115         126   

Interest rate hedge contracts (2)

     103         —     

Client deposits

     81         63   

Other accrued expenses

     153         137   
  

 

 

    

 

 

 

Total

   $ 717       $ 537   
  

 

 

    

 

 

 

 

(1)

Settlement assets, which are recorded in prepaid expenses and other current assets, were $162 million and $114 million at September 30, 2011 and December 31, 2010, respectively.

(2)

The Company’s interest rate hedge contracts described in Note 11 expire in September 2012. Accordingly, the fair value of such instruments is reported as a current liability at September 30, 2011. At December 31, 2010, a long-term liability of $76 million was recorded related to the fair value of these instruments.

10. Long-Term Debt

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

In June 2011, the Company purchased $700 million aggregate principal amount of its 6.125% senior notes due in November 2012 in a tender offer for $754 million, and in July 2011, the Company redeemed the remaining $300 million aggregate principal amount of these notes for $322 million. The Company recorded a pre-tax loss on early debt extinguishment for premiums paid and other costs associated with these transactions of $61 million and $24 million in the second and third quarters of 2011, respectively.

As of September 30, 2011, the Company had $120 million of outstanding borrowings under its $1.0 billion revolving credit facility at an interest rate of 1.7%. The facility expires in September 2014. As of September 30, 2011, the Company issued letters of credit totaling $28 million under this facility and had available borrowings of $852 million.

11. Interest Rate Hedge Contracts

The Company maintains interest rate swap agreements (“Swaps”) with total notional values of $1.0 billion at September 30, 2011 and December 31, 2010 to hedge against changes in interest rates and forward-starting interest rate swap agreements (“Forward-Starting Swaps”) with total notional values of $550 million and $200 million at September 30, 2011 and December 31, 2010, respectively, to hedge against changes in interest rates applicable to forecasted fixed rate borrowings. The Swaps and Forward-Starting Swaps expire in September 2012 and have been designated by the Company as cash flow hedges. The Swaps effectively fix the interest rates on floating rate term loan borrowings at a weighted-average rate of approximately 5.0%, prior to financing spreads and related fees. The Forward-Starting Swaps effectively fix the benchmark interest rate on forecasted five-year and ten-year borrowings at weighted-average rates of approximately 3.2% and 3.9%,

 

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respectively. The fair values of the Swaps and Forward-Starting Swaps totaled $103 million at September 30, 2011 and were recorded in current liabilities and in accumulated other comprehensive loss, net of income taxes, in the consolidated balance sheet. At December 31, 2010, the fair values of the Swaps and Forward-Starting Swaps totaled $65 million and were recorded as a $76 million long-term liability and an $11 million long-term asset, respectively. The components of other comprehensive income pertaining to interest rate hedge contracts are presented in Note 6. In the first nine months of 2011 and 2010, interest expense recognized due to hedge ineffectiveness was not significant, and no amounts were excluded from the assessments of hedge effectiveness. Based on the amounts recorded in accumulated other comprehensive loss at September 30, 2011, the Company estimates that it will recognize approximately $45 million in interest expense during the next twelve months related to interest rate hedge contracts.

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

12. Cash Flow Information

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

 

     Nine Months Ended
September 30,
 
(In millions)    2011      2010  

Interest paid

   $ 116       $ 111   

Income taxes paid

     151         190   

13. Business Segment Information

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

 

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(In millions)    Payments      Financial      Corporate
and Other
    Total  

Three Months Ended September 30, 2011

          

Processing and services revenue

   $ 439       $ 446       $ (3   $ 882   

Product revenue

     148         41         (8     181   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenue

   $ 587       $ 487       $ (11   $ 1,063   
  

 

 

    

 

 

    

 

 

   

 

 

 

Operating income

   $ 162       $ 143       $ (62   $ 243   
  

 

 

    

 

 

    

 

 

   

 

 

 

Three Months Ended September 30, 2010

          

Processing and services revenue

   $ 413       $ 445       $ —        $ 858   

Product revenue

     135         41         (9     167   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenue

   $ 548       $ 486       $ (9   $ 1,025   
  

 

 

    

 

 

    

 

 

   

 

 

 

Operating income

   $ 159       $ 143       $ (51   $ 251   
  

 

 

    

 

 

    

 

 

   

 

 

 

Nine Months Ended September 30, 2011

          

Processing and services revenue

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

Product revenue

     459         116         (27     548   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenue

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

 

 

    

 

 

    

 

 

   

 

 

 

Operating income

   $ 482       $ 435       $ (202   $ 715   
  

 

 

    

 

 

    

 

 

   

 

 

 

Nine Months Ended September 30, 2010

          

Processing and services revenue

   $ 1,216       $ 1,327       $ 2      $ 2,545   

Product revenue

     411         118         (19     510   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenue

   $ 1,627       $ 1,445       $ (17   $ 3,055   
  

 

 

    

 

 

    

 

 

   

 

 

 

Operating income

   $ 458       $ 430       $ (148   $ 740   
  

 

 

    

 

 

    

 

 

   

 

 

 

Goodwill in the Payments and Financial segments was $3.4 billion and $1.3 billion, respectively, as of September 30, 2011 and was $3.1 billion and $1.3 billion, respectively, as of December 31, 2010. The increase in goodwill in the Payments segment during 2011 is primarily the result of the acquisitions described in Note 2. In September 2011, the Financial Accounting Standards Board issued guidance permitting entities to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. This new guidance is effective for the Company on January 1, 2012, and the adoption of this guidance is not expected to impact the Company’s financial position or results of operations.

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 term loan, and senior notes. The following condensed consolidating financial information is presented on the equity method and reflects summarized financial information for: (a) the Company; (b) the Guarantor Subsidiaries on a combined basis; and (c) the Company’s non-guarantor subsidiaries on a combined basis. In the fourth quarter of 2010, one of the Company’s subsidiaries, which was not previously a guarantor subsidiary, was merged with and into a guarantor subsidiary. The following condensed consolidating financial information reflects this merger for all periods presented.

 

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CONDENSED CONSOLIDATING STATEMENT OF INCOME

THREE MONTHS ENDED SEPTEMBER 30, 2011

 

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

Revenue:

          

Processing and services

   $ —        $ 636      $ 280      $ (34   $ 882   

Product

     —          160        35        (14     181   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     —          796        315        (48     1,063   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

          

Cost of processing and services

     —          361        164        (35     490   

Cost of product

     —          132        23        (14     141   

Selling, general and administrative

     24        114        50        1        189   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     24        607        237        (48     820   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (24     189        78        —          243   

Interest expense, net

     (34     (9     (2     —          (45

Loss on early debt extinguishment

     (24     —          —          —          (24
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (82     180        76        —          174   

Income tax (provision) benefit

     39        (66     (28     —          (55

Income from investment in unconsolidated affiliate

     —          8        —          —          8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (43     122        48        —          127   

Equity in earnings of consolidated affiliates

     170        —          —          (170     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 127      $ 122      $ 48      $ (170   $ 127   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CONDENSED CONSOLIDATING STATEMENT OF INCOME

THREE MONTHS ENDED SEPTEMBER 30, 2010

 

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

Revenue:

          

Processing and services

   $ —        $ 658      $ 227      $ (27   $ 858   

Product

     —          145        33        (11     167   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     —          803        260        (38     1,025   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

          

Cost of processing and services

     5        359        124        (27     461   

Cost of product

     1        115        23        (11     128   

Selling, general and administrative

     27        110        49        (1     185   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     33        584        196        (39     774   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (33     219        64        1        251   

Interest expense, net

     (40     (7     (2     —          (49
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (73     212        62        1        202   

Income tax (provision) benefit

     32        (81     (24     —          (73

Income from investment in unconsolidated affiliate

     —          5        —          —          5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (41     136        38        1        134   

Equity in earnings of consolidated affiliates

     175        —          —          (175     —     

Loss from discontinued operations, net of income taxes

     (2     —          —          —          (2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 132      $ 136      $ 38      $ (174   $ 132   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING STATEMENT OF INCOME

NINE MONTHS ENDED SEPTEMBER 30, 2011

 

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

Revenue:

          

Processing and services

   $ —        $ 1,903      $ 821      $ (96   $ 2,628   

Product

     —          498        98        (48     548   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     —          2,401        919        (144     3,176   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

          

Cost of processing and services

     —          1,063        476        (96     1,443   

Cost of product

     —          408        76        (48     436   

Selling, general and administrative

     69        361        152        —          582   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     69        1,832        704        (144     2,461   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (69     569        215        —          715   

Interest expense, net

     (115     (17     (6     —          (138

Loss on early debt extinguishment

     (85     —          —          —          (85
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (269     552        209        —          492   

Income tax (provision) benefit

     115        (205     (78     —          (168

Income from investment in unconsolidated affiliate

     —          14        —          —          14   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (154     361        131        —          338   

Equity in earnings of consolidated affiliates

     494        —          —          (494     —     

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

     (11     —          2        —          (9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 329      $ 361      $ 133      $ (494   $ 329   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CONDENSED CONSOLIDATING STATEMENT OF INCOME

NINE MONTHS ENDED SEPTEMBER 30, 2010

 

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

Revenue:

          

Processing and services

   $ —        $ 1,852      $ 763      $ (70   $ 2,545   

Product

     —          442        92        (24     510   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     —          2,294        855        (94     3,055   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

          

Cost of processing and services

     6        1,004        441        (71     1,380   

Cost of product

     1        347        67        (22     393   

Selling, general and administrative

     69        330        144        (1     542   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     76        1,681        652        (94     2,315   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (76     613        203        —          740   

Interest expense, net

     (38     (95     (7     —          (140
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (114     518        196        —          600   

Income tax (provision) benefit

     49        (198     (75     —          (224

Income from investment in unconsolidated affiliate

     —          11        —          —          11   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (65     331        121        —          387   

Equity in earnings of consolidated affiliates

     450        —          —          (450     —     

Loss from discontinued operations, net of income taxes

     (5     —          (2     —          (7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 380      $ 331      $ 119      $ (450   $ 380   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING BALANCE SHEET

SEPTEMBER 30, 2011

 

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

ASSETS

           

Cash and cash equivalents

   $ 38       $ 62      $ 181      $ —        $ 281   

Trade accounts receivable, net

     —           369        210        —          579   

Prepaid expenses and other current assets

     49         147        155        —          351   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     87         578        546        —          1,211   

Investments in consolidated affiliates

     7,849         —          —          (7,849     —     

Goodwill and intangible assets, net

     14         5,346        1,299        —          6,659   

Other long-term assets

     27         443        111        —          581   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 7,977       $ 6,367      $ 1,956      $ (7,849   $ 8,451   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

           

Total current liabilities

   $ 186       $ 522      $ 334      $ —        $ 1,042   

Long-term debt

     3,466         3        45        —          3,514   

Due to (from) consolidated affiliates

     492         (198     (294     —          —     

Other long-term liabilities

     681         39        23        —          743   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     4,825         366        108        —          5,299   

Total shareholders’ equity

     3,152         6,001        1,848        (7,849     3,152   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 7,977       $ 6,367      $ 1,956      $ (7,849   $ 8,451   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

CONDENSED CONSOLIDATING BALANCE SHEET

DECEMBER 31, 2010

 

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

ASSETS

          

Cash and cash equivalents

   $ 343      $ 68      $ 152      $ —        $ 563   

Trade accounts receivable, net

     (2     374        200        —          572   

Prepaid expenses and other current assets

     40        130        112        —          282   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     381        572        464        —          1,417   

Investments in consolidated affiliates

     7,387        —          —          (7,387     —     

Goodwill and intangible assets, net

     7        5,405        844        —          6,256   

Other long-term assets

     38        470        100        —          608   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

          

Total current liabilities

   $ 87      $ 490      $ 314      $ —        $ 891   

Long-term debt

     3,347        6        —          —          3,353   

Due to (from) consolidated affiliates

     396        (152     (244     —          —     

Other long-term liabilities

     754        39        15        —          808   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     4,584        383        85        —          5,052   

Total shareholders’ equity

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2011

 

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

Cash flows from operating activities:

          

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

   $ (19   $ 550      $ 150      $ —        $ 681   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Capital expenditures, including capitalization of software costs

     (12     (111     (21     —          (144

Payment for acquisitions of businesses, net of cash acquired

     —          (473     (38     —          (511

Other investing activities

     116        44        (5     (117     38   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     104        (540     (64     (117     (617
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

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

     40        (2     46        —          84   

Purchases of treasury stock

     (484     —          —          —          (484

Other financing activities

     61        (14     (103     117        61   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities from continuing operations

     (383     (16     (57     117        (339
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents from continuing operations

     (298     (6     29        —          (275

Net cash flows from discontinued operations

     (7     —          —          —          (7

Beginning balance

     343        68        152        —          563   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 38      $ 62      $ 181      $ —        $ 281   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2010

 

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

Cash flows from operating activities:

          

Net cash provided by operating activities from continuing operations

   $ 20      $ 473      $ 161      $ —        $ 654   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Capital expenditures, including capitalization of software costs

     (3     (101     (25     —          (129

Other investing activities

     486        —          2        (501     (13
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     483        (101     (23     (501     (142
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

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

     68        (2     —          —          66   

Purchases of treasury stock

     (254     —          —          —          (254

Other financing activities

     30        (365     (133     501        33   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities from continuing operations

     (156     (367     (133     501        (155
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents from continuing operations

     347        5        5        —          357   

Net cash flows from discontinued operations

     23        —          —          —          23   

Beginning balance

     55        169        139        —          363   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 425      $ 174      $ 144      $ —        $ 743   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Forward-Looking Statements

This quarterly report contains “forward-looking statements” intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include those that express a plan, belief, expectation, estimation, anticipation, intent, contingency, future development or similar expression, and can generally be identified as forward-looking because they include words such as “believes,” “anticipates,” “expects,” “could,” “should” or words of similar meaning. Statements that describe our objectives or goals are also forward-looking statements. The forward-looking statements in this report involve significant risks and uncertainties, and a number of factors, both foreseen and unforeseen, that could cause actual results to differ materially from our current expectations. The factors that may affect our results include, among others: the impact on our business of the current state of the economy, including the risk of reduction in revenue resulting from decreased spending on the products and services we offer or from the elimination of existing or potential clients due to consolidation or financial failures in the financial services industry; legislative and regulatory actions in the United States, including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and related regulations, and internationally; our ability to successfully integrate recent acquisitions into our operations; changes in client demand for our products or services; pricing or other actions by competitors; the impact of our strategic initiatives; our ability to comply with government regulations, including privacy regulations; and other factors identified in our Annual Report on Form 10-K for the year ended December 31, 2010 and in other documents that we file with the Securities and Exchange Commission. You should consider these factors carefully in evaluating forward-looking statements and are cautioned not to place undue reliance on such statements, which speak only as of the date of this report. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this report.

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

 

   

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

 

   

Results of operations. This section contains an analysis of our results of operations presented in the accompanying unaudited condensed consolidated statements of income by comparing the results for the three and nine months ended September 30, 2011 to the comparable periods in 2010.

 

   

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

Overview

Company Background

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

Our operations are primarily in the United States and are comprised of the Payments and Industry Products (“Payments”) segment, the Financial Institution Services (“Financial”) segment, and the Corporate and Other segment. The Payments segment primarily provides electronic bill payment and presentment services and debit and other card-based payment products and services to meet the electronic transaction processing needs of the financial services industry. The businesses in

 

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this segment also provide Internet banking, investment account processing services for separately managed accounts, card and print personalization services, and fraud and risk management products and services. The Financial segment provides banks, thrifts and credit unions with account processing services, item processing services, loan origination and servicing products, cash management and consulting services, and other products and services that support numerous types of financial transactions. The Corporate and Other segment primarily consists of unallocated corporate expenses, amortization of acquisition-related intangible assets and intercompany eliminations.

In September 2011, we acquired CashEdge Inc. (“CashEdge”), a leading provider of consumer and business payments solutions such as account-to-account transfer, account opening and funding, data aggregation, small business invoicing and payments, and person-to-person payments, for approximately $460 million, net of cash acquired. The acquisition of CashEdge is expected to advance our digital payments strategies.

In the first quarter of 2011, we acquired Mobile Commerce Ltd. (“M-Com”), an international mobile banking and payments provider, and two other companies for an aggregate purchase price of approximately $50 million. M-Com enhances our mobile channel and payments capabilities, and the other acquired companies add to or enhance specific products or services that we already provide.

Enterprise Priorities

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

Industry Trends

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

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

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

 

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Business Developments

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

 

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Results of Operations

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

 

     Three Months Ended September 30,  
           Percentage of
Revenue (1)
    Increase (Decrease)  
(In millions)    2011     2010     2011     2010     $     %  

Revenue:

            

Processing and services

   $ 882      $ 858        83.0     83.7   $ 24        3

Product

     181        167        17.0     16.3     14        8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     1,063        1,025        100.0     100.0     38        4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

            

Cost of processing and services

     490        461        55.6     53.7     29        6

Cost of product

     141        128        77.9     76.6     13        10
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

     631        589        59.4     57.5     42        7

Selling, general and administrative

     189        185        17.8     18.0     4        2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     820        774        77.1     75.5     46        6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     243        251        22.9     24.4     (8     (3 %) 

Interest expense, net

     (45     (49     (4.2 %)      (4.8 %)      (4     (8 %) 

Loss on early debt extinguishment

     (24     —          (2.3 %)      —          24        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 174      $ 202        16.4     19.7   $ (28     (14 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Nine Months Ended September 30,  
                 Percentage of
Revenue (1)
    Increase (Decrease)  
(In millions)    2011     2010     2011     2010     $     %  

Revenue:

            

Processing and services

   $ 2,628      $ 2,545        82.7     83.3   $ 83        3

Product

     548        510        17.3     16.7     38        7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     3,176        3,055        100.0     100.0     121        4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

            

Cost of processing and services

     1,443        1,380        54.9     54.2     63        5

Cost of product

     436        393        79.6     77.1     43        11
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

     1,879        1,773        59.2     58.0     106        6

Selling, general and administrative

     582        542        18.3     17.7     40        7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     2,461        2,315        77.5     75.8     146        6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     715        740        22.5     24.2     (25     (3 %) 

Interest expense, net

     (138     (140     (4.3 %)      (4.6 %)      (2     (1 %) 

Loss on early debt extinguishment

     (85     —          (2.7 %)      —          85        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 492      $ 600        15.5     19.6   $ (108     (18 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

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

 

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Total Revenue

 

     Three Months Ended September 30,  

(In millions)

   Payments     Financial      Corporate
and Other
    Total  

Total revenue:

         

2011

   $ 587      $ 487       $ (11   $ 1,063   

2010

     548        486         (9     1,025   

Revenue growth

   $ 39      $ 1       $ (2   $ 38   

Revenue growth percentage

     7     —             4

 

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

Total revenue:

        

2011

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

2010

     1,627        1,445        (17     3,055   

Revenue growth

   $ 119      $ 19      $ (17   $ 121   

Revenue growth percentage

     7     1       4

Total revenue increased $38 million, or 4%, in the third quarter of 2011 compared to 2010 and increased $121 million, or 4%, in the first nine months of 2011 compared to 2010. Revenue growth in 2011 was driven primarily by improved growth in our Payments segment. Revenue from acquired companies contributed $5 million to revenue in the third quarter of 2011 and $12 million to revenue in the first nine months of 2011.

Total revenue in our Payments segment during the third quarter and first nine months of 2011 increased $39 million, or 7%, and $119 million, or 7%, respectively, compared to 2010. Revenue from acquired companies totaled $4 million and $10 million in the third quarter and first nine months of 2011, respectively. Payments segment revenue growth during 2011 was driven primarily by new clients and increased transaction volumes from existing clients in our electronic payments businesses, including our electronic banking and card services businesses. In addition, higher postage pass-through revenue, which is included in both product revenue and cost of product, in our output solutions business contributed approximately two percentage points of growth in this segment during the first nine months of 2011.

Total revenue in our Financial segment during the third quarter of 2011 was consistent with the third quarter of 2010, and total revenue in the first nine months of 2011 increased $19 million, or 1%, compared to 2010. Revenue growth in our Financial segment during 2011 was favorably impacted by increased processing and services revenue in our bank and credit union account processing businesses, partially offset by continued volume declines in our check processing business. In addition, lower software license and contract termination fee revenue negatively impacted revenue growth in this segment by approximately one percentage point during the first nine months of 2011.

Total Expenses

Total expenses increased $46 million, or 6%, in the third quarter of 2011 compared to 2010 and increased $146 million, or 6%, in the first nine months of 2011 compared to 2010. Total expenses as a percentage of total revenue were 77.1% and 75.5% in the third quarter of 2011 and 2010, respectively, and were 77.5% and 75.8% in the first nine months of 2011 and 2010, respectively.

Cost of processing and services as a percentage of processing and services revenue was 55.6% and 53.7% in the third quarter of 2011 and 2010, respectively, and 54.9% and 54.2% in the first nine months of 2011 and 2010, respectively. Cost of processing and services as a percentage of processing and services revenue in the three and nine months ended September 30, 2011 was negatively impacted by increased expenses associated with the development and support of new and existing products and services.

 

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Cost of product as a percentage of product revenue increased from 76.6% and 77.1% in the third quarter and first nine months of 2010, respectively, to 77.9% and 79.6% in the third quarter and first nine months of 2011, respectively. The increase in cost of product as a percentage of product revenue was due primarily to an increase in postage pass-through revenue and expenses in our output solutions business.

Selling, general and administrative expenses increased $4 million, or 2%, in the third quarter of 2011 compared to 2010 and increased $40 million, or 7%, in the first nine months of 2011 compared to 2010. The increase in selling, general and administrative expenses in the first nine months of 2011 compared to 2010 was primarily due to $18 million of employee severance expenses recognized in the first quarter of 2011, higher merger, integration and legal costs in 2011 totaling $18 million, and a $5 million gain on the sale of a facility which reduced expenses in the first quarter of 2010.

Operating Income and Operating Margin

 

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

Operating income:

        

2011

   $ 162      $ 143      $ (62   $ 243   

2010

     159        143        (51     251   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income growth (decline)

   $ 3      $ —        $ (11   $ (8

Operating income growth (decline) percentage

     2     —            (3 %) 

Operating margin:

        

2011

     27.6     29.4       22.9

2010

     29.0     29.5       24.4

Operating margin decline (1)

     (1.4 %)      (0.1 %)        (1.5 %) 

 

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

Operating income:

        

2011

   $ 482      $ 435      $ (202   $ 715   

2010

     458        430        (148     740   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income growth (decline)

   $ 24      $ 5      $ (54   $ (25

Operating income growth (decline) percentage

     5     1       (3 %) 

Operating margin:

        

2011

     27.6     29.7       22.5

2010

     28.2     29.8       24.2

Operating margin decline (1)

     (0.6 %)      (0.1 %)        (1.7 %) 

 

(1) 

Represents the percentage point decline in operating margin.

Total operating income of $243 million in the third quarter of 2011 decreased $8 million, or 3%, from the third quarter of 2010, and total operating income of $715 million in the first nine months of 2011 decreased $25 million, or 3%, compared to 2010. Operating income in our Payments and Financial segments increased 5% and 1%, respectively, and the operating loss in our Corporate and Other segment increased $54 million in the first nine months of 2011 compared to 2010. Our operating margin decreased 150 basis points and 170 basis points to 22.9% and 22.5% in the third quarter and first nine months of 2011, respectively, primarily due to increased operating losses in our Corporate and Other segment.

 

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Operating income in our Payments segment increased $3 million, or 2%, in the third quarter of 2011 compared to 2010. Operating margin decreased 140 basis points to 27.6% in the third quarter of 2011 compared to 29.0% in the third quarter of 2010. In the first nine months of 2011, operating income in our Payments segment increased $24 million, or 5%, and operating margin decreased 60 basis points to 27.6% compared to 2010. Operating margins in 2011were favorably impacted by increased operating leverage and scale efficiencies in our electronic payments businesses and negatively impacted by increased expenses associated with the development and support of new and existing products and services and an increase in postage pass-through costs, which are included in both revenue and expenses.

Operating income in our Financial segment during the third quarter of 2011 was consistent with the third quarter of 2010, and operating income in the first nine months of 2011 increased $5 million, or 1%, compared to 2010. Operating margin decreased 10 basis points to 29.4% in the third quarter of 2011 compared to 2010 and decreased 10 basis points to 29.7% in the first nine months of 2011 compared to 2010. Operating income and operating margins in 2011 were positively impacted by revenue growth and scale efficiencies in our account processing businesses and were negatively impacted by a decrease in higher margin software license and contract termination fee revenue and by increased expenses in support of our new Acumen account processing platform.

The operating loss in our Corporate and Other segment increased $11 million and $54 million in the third quarter and first nine months of 2011, respectively, compared to 2010. The increase in the third quarter of 2011 was due primarily to higher merger and integration related costs including costs associated with our acquisition of CashEdge. In the first nine months of 2011, the increase was due primarily to employee severance costs of $18 million in the first quarter of 2011, higher merger, integration and legal expenses totaling $21 million, a $5 million increase in amortization of acquisition-related intangible assets, and a $5 million gain on the sale of a facility recorded in the first quarter of 2010.

Interest Expense, Net

Interest expense decreased $4 million, or 8%, in the third quarter of 2011 compared to 2010 and decreased $2 million, or 1%, in the first nine months of 2011 compared to 2010. The decrease in the third quarter of 2011 was primarily due to decreases in average outstanding borrowings and interest rates in 2011 compared to 2010.

Loss on Early Debt Extinguishment

In June 2011, we purchased $700 million aggregate principal amount of our 6.125% senior notes due in November 2012 in a tender offer for $754 million, and in July 2011, we redeemed the remaining $300 million aggregate principal amount of these notes for $322 million. We recorded a pre-tax loss on early debt extinguishment for the premiums paid and other costs associated with these transactions of $61 million and $24 million in the second and third quarters of 2011, respectively.

Income Tax Provision

Our effective income tax rate was 31.8% and 34.2% in the third quarter and first nine months of 2011, respectively, and 35.8% and 37.3% in the third quarter and first nine months of 2010, respectively. The lower effective tax rates in 2011 were primarily due to the resolution of tax audits, increased research and development credits and changes in state tax laws. The benefit related to the research and development credit was not included in the determination of our effective tax rate for the nine month period ended September 30, 2010 because it was enacted in the fourth quarter of 2010.

Income from Investment in Unconsolidated Affiliate

Our 49% share of the income of StoneRiver Group, L.P. (“StoneRiver”) was $8 million and $5 million in the third quarter of 2011 and 2010, respectively, and $14 million and $11 million in the nine months ended September 30, 2011 and 2010, respectively. The increases in income during 2011 were primarily due to a gain on the sale of a business recognized by StoneRiver of which our share was $3 million.

 

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Net Income Per Share – Diluted from Continuing Operations

Net income per share-diluted from continuing operations was $0.89 in the third quarter of 2011 and 2010 and was $2.33 and $2.54 in the first nine months of 2011 and 2010, respectively. Net income per share-diluted from continuing operations in the third quarter and first nine months of 2011 was negatively impacted by $0.11 per share and $0.37 per share, respectively, due to losses on early debt extinguishment. In addition, net income per share-diluted from continuing operations in the first nine months of 2011 was negatively impacted by $0.08 per share due to employee severance expenses in the first quarter of 2011. The amortization of acquisition-related intangible assets reduced net income per share-diluted from continuing operations by $0.17 per share and $0.15 per share in the third quarter of 2011 and 2010, respectively, and $0.51 per share and $0.45 per share in the first nine months of 2011 and 2010, respectively.

Liquidity and Capital Resources

General

Our primary liquidity needs are: (i) to fund normal operating expenses; (ii) to meet the interest and principal requirements of our outstanding indebtedness; and (iii) to fund capital expenditures and operating lease payments. We believe these needs will be satisfied using cash flow generated by our operations, our cash and cash equivalents of $281 million at September 30, 2011, and available borrowings under our revolving credit facility of $852 million at September 30, 2011.

 

     Nine Months Ended              
     September 30,     Increase (Decrease)  
(In millions)    2011     2010     $     %  

Income from continuing operations

   $ 338      $ 387      $ (49  

Depreciation and amortization

     259        252        7     

Share-based compensation

     29        29        —       

Loss on early debt extinguishment

     85        —          85     

Dividend from unconsolidated affiliate

     12        —          12     

Net changes in working capital and other

     (42     (14     (28  
  

 

 

   

 

 

   

 

 

   

Operating cash flow

   $ 681      $ 654      $ 27        4

Capital expenditures

   $ 144      $ 129      $ 15        12

Our net cash provided by operating activities from continuing operations, or operating cash flow, was $681 million in the first nine months of 2011, an increase of 4% compared with $654 million in 2010. Our current policy is to use our operating cash flow primarily to repay debt and fund capital expenditures, acquisitions and share repurchases, rather than to pay dividends. Capital expenditures increased $15 million in the first nine months of 2011, compared to 2010, and were less than 5% of our total revenue in the first nine months of 2011 and 2010. The increase in capital expenditures was primarily due to equipment purchases associated with a new data center.

In 2011, we acquired CashEdge, M-Com, and two other companies for an aggregate purchase price of $511 million, net of cash acquired. During the first nine months of 2011, we purchased $484 million of our common stock. As of September 30, 2011, we had approximately 5.7 million shares remaining under our existing authorization. Shares repurchased are generally held for issuance in connection with our equity plans. During the third quarter of 2011, we received a $54 million cash dividend from StoneRiver, in which we own a 49% interest. The portion of this dividend that represented a return on our investment, $12 million, is reported in cash flows from operating activities.

 

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Long-Term Debt

 

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

Revolving credit facility

   $ 120       $ —     

Senior term loan

     1,100         1,100   

6.125% senior notes due 2012

     —           999   

3.125% senior notes due 2015

     299         299   

3.125% senior notes due 2016

     600         —     

6.8% senior notes due 2017

     500         500   

4.625% senior notes due 2020

     449         449   

4.75% senior notes due 2021

     399         —     

Other borrowings

     51         9   
  

 

 

    

 

 

 

Long-term debt (including current maturities)

   $ 3,518       $ 3,356   
  

 

 

    

 

 

 

In June 2011, we issued senior notes due in 2016 and 2021 for a total of $1.0 billion with a weighted-average interest rate of 3.8% and used the proceeds to repay our senior notes due in 2012. In June 2011, we purchased $700 million aggregate principal amount of our 6.125% senior notes due in November 2012 in a tender offer for $754 million, and in July 2011, we redeemed the remaining $300 million aggregate principal amount of these notes for $322 million. We recorded a pre-tax loss on early debt extinguishment for the premiums paid and other costs associated with these transactions of $61 million and $24 million in the second and third quarters of 2011, respectively. In September 2011, we funded the $460 million purchase price for our acquisition of CashEdge with existing cash and a portion with borrowings under our revolving credit facility of which $120 million was outstanding at September 30, 2011.

At September 30, 2011, our senior notes outstanding totaled $2.25 billion and our unsecured senior term loan borrowings were $1.1 billion. Interest on our senior notes is paid semi-annually. The unsecured senior term loan bears interest at a variable rate based on LIBOR plus a specified margin or the bank’s base rate and matures in November 2012. The term loan facility contains various restrictions and covenants substantially similar to those contained in the revolving credit facility described below.

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

We maintain a $1.0 billion revolving credit facility with a syndicate of banks. Borrowings under this facility bear interest (1.7% at September 30, 2011) at a variable rate based on LIBOR plus a specified margin or the bank’s base rate. There are no significant commitment fees and no compensating balance requirements. The revolving credit facility contains various restrictions and covenants that require us, among other things, to (i) limit our consolidated indebtedness to no more than three and one-half times consolidated net earnings before interest, taxes, depreciation and amortization and certain other adjustments and (ii) maintain consolidated net earnings before interest, taxes, depreciation and amortization and certain other adjustments of at least three times consolidated interest expense. The facility expires in September 2014. As of September 30, 2011, there were outstanding borrowings of $120 million and letters of credit totaling $28 million outstanding under the facility, and we had available borrowings of $852 million. During the first nine months of 2011, we were in compliance with all financial debt covenants, including those contained in our senior term loan and our senior notes.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The quantitative and qualitative disclosures about market risk required by this item are incorporated by reference to Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2010 and have not materially changed since December 31, 2010.

 

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), our management, with the participation of our chief executive officer and chief financial officer, evaluated the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2011.

Changes in internal control over financial reporting

There was no change in our internal control over financial reporting that occurred during the quarter ended September 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

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

 

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

The table below sets forth information with respect to purchases made by or on behalf of the company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act) of shares of our common stock during the quarter ended September 30, 2011:

 

Period

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

July 1-31, 2011

     —         $ —           —           6,654,665   

August 1-31, 2011

     941,093         53.63         941,093         5,713,572   

September 1-30, 2011

     —           —           —           5,713,572   
  

 

 

       

 

 

    

Total

     941,093            941,093      
  

 

 

       

 

 

    

 

(1) 

On May 25, 2011, we announced that our board of directors authorized the purchase of up to 7.5 million shares of our common stock. This repurchase 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: November 2, 2011     By:   /s/ Thomas J. Hirsch        
     

Thomas J. Hirsch

Executive Vice President,

Chief Financial Officer,

Treasurer and Assistant Secretary

 

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Exhibit Index

 

Exhibit
Number

  

Exhibit Description

31.1    Certification of the Chief Executive Officer, dated November 2, 2011
31.2    Certification of the Chief Financial Officer, dated November 2, 2011
32    Certification of the Chief Executive Officer and Chief Financial Officer, dated November 2, 2011
101.INS*    XBRL Instance Document
101.SCH*    XBRL Taxonomy Extension Schema Document
101.CAL*    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*    XBRL Taxonomy Extension Label Linkbase Document
101.PRE*    XBRL Taxonomy Extension Presentation Linkbase Document

 

* Furnished with this quarterly report on Form 10-Q are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2011 and 2010, (ii) the Condensed Consolidated Balance Sheets at September 30, 2011 and December 31, 2010, (iii) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010, and (iv) Notes to Condensed Consolidated Financial Statements.